FORM 10-Q

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

                  For the quarterly period ended March 31, 2001

                                       OR

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

           For the transition period from ___________ to _____________

                        Commission File Number: 333-60991

                                AKI HOLDING CORP.
             (Exact name of registrant as specified in its charter)

                    Delaware                            74-2883163
        (State or other jurisdiction of              (I.R.S. Employer
         incorporation or organization)             Identification No.)

                        Commission File Number: 333-60989

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

                    Delaware                            13-3785856
        (State or other jurisdiction of              (I.R.S. Employer
         incorporation or organization)             Identification No.)

               1815 East Main Street
                 Chattanooga, TN                          37404
      (Address of principal executive offices)         (Zip Code)

                                 (423) 624-3301
              (Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days (X) Yes ( ) No

As of May 14, 2001, 1,000 shares of common stock of AKI Holding Corp.,  $.01 par
value,  were outstanding and 1,000 shares of common stock of AKI, Inc., $.01 par
value, were outstanding.

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



<PAGE>



                       AKI HOLDING CORP. AND SUBSIDIARIES

                               INDEX TO FORM 10-Q


Part I.  FINANCIAL INFORMATION

         Item 1.  Financial Statements (unaudited)

                  AKI Holding Corp. and Subsidiaries

                       Consolidated Condensed Balance Sheet

                       -    March 31, 2001
                       -    June 30, 2000

                       Consolidated Condensed Statements of Operations

                       -    Three months ended March 31, 2001
                       -    Three months ended March 31, 2000
                       -    Nine months ended March 31, 2001
                       -    Nine months ended March 31, 2000

                       Consolidated Condensed Statement of Changes in
                       Stockholder's Equity

                       -    Nine months ended March 31, 2001

                       Consolidated Condensed Statements of Cash Flows

                       -    Nine months ended March 31, 2001
                       -    Nine months ended March 31, 2000

                       Notes to Consolidated Condensed Financial Statements



<PAGE>



         Item 1.  Financial Statements (unaudited) (continued)

                  AKI, Inc. and Subsidiaries

                       Consolidated Condensed Balance Sheet

                       -    March 31, 2001
                       -    June 30, 2000

                       Consolidated Condensed Statements of Operations

                       -    Three months ended March 31, 2001
                       -    Three months ended March 31, 2000
                       -    Nine months ended March 31, 2001
                       -    Nine months ended March 31, 2000

                       Consolidated Condensed Statement of Changes in
                       Stockholder's Equity

                       -    Nine months ended March 31, 2001

                       Consolidated Condensed Statements of Cash Flows

                       -    Nine months ended March 31, 2001
                       -    Nine months ended March 31, 2000

                       Notes to Consolidated Condensed Financial Statements


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

Part II. OTHER INFORMATION

         Item 6.  Exhibits and Reports on Form 8-K



<PAGE>



                       AKI HOLDING CORP. AND SUBSIDIARIES
             (a wholly-owned subsidiary of AHC I Acquisition Corp.)
                      CONSOLIDATED CONDENSED BALANCE SHEETS
                (dollars in thousands, except share information)

<TABLE>
<CAPTION>

                                                                                  March 31,           June 30,
                                                                                    2001                2000
                                                                                -------------      -------------
                                                                                 (unaudited)        (unaudited)

<S>                                                                             <C>                <C>
ASSETS
Current assets
Cash and cash equivalents..................................................     $       2,046      $       1,158
Accounts receivable, net...................................................            30,330             21,522
Inventory..................................................................             7,311              7,757
Prepaid expenses...........................................................               472                 92
Deferred income taxes......................................................               396                396
                                                                                -------------      -------------

   Total current assets....................................................            40,555             30,925

Property, plant and equipment, net.........................................            16,290             17,097
Goodwill, net..............................................................           158,867            162,472
Other intangible assets, net...............................................             6,455              7,174
Deferred charges, net......................................................             4,679              5,461
Deferred income taxes......................................................               340                720
Other assets...............................................................                91                 88
                                                                                -------------      -------------

   Total assets............................................................     $     227,277      $     223,937
                                                                                =============      =============

LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Current portion of capital lease obligations...............................     $         509      $         847
Accounts payable, trade....................................................             3,906              3,565
Accrued income taxes.......................................................             1,793                310
Accrued compensation.......................................................             4,683              3,965
Accrued interest...........................................................             2,850              5,695
Accrued expenses...........................................................             2,412              2,370
                                                                                -------------      -------------

   Total current liabilities...............................................            16,153             16,752

Long-term portion of capital lease obligations.............................                 -                502
Revolving credit line......................................................            12,125              9,000
Senior notes...............................................................           103,510            107,510
Senior discount debentures.................................................            26,901             27,863
Promissory note to stockholder.............................................             2,904                  -
Deferred income taxes......................................................               240              1,077
Other non-current liabilities..............................................             2,561              2,399
                                                                                -------------      -------------

   Total liabilities.......................................................           164,394            165,103

Stockholder's equity
Common stock, $0.01 par 1,000 shares authorized;
    1,000 shares issued and outstanding....................................                 -                  -
Additional paid-in capital.................................................            91,006             88,935
Accumulated deficit........................................................           (11,801)           (13,829)
Accumulated other comprehensive loss.......................................              (592)              (542)
Carryover basis adjustment.................................................           (15,730)           (15,730)
                                                                                -------------      -------------

   Total stockholder's equity..............................................            62,883             58,834
                                                                                -------------      -------------


   Total liabilities and stockholder's equity..............................     $     227,277      $     223,937
                                                                                =============      =============


</TABLE>


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



<PAGE>



                       AKI HOLDING CORP. AND SUBSIDIARIES
             (a wholly-owned subsidiary of AHC I Acquisition Corp.)
                 CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
                             (dollars in thousands)


<TABLE>
<CAPTION>


                                                                 Three months ended                    Nine months ended
                                                                 ------------------                    -----------------
                                                         March 31, 2001     March 31, 2000    March 31, 2001     March 31, 2000
                                                         --------------     --------------    --------------     --------------
                                                           (unaudited)        (unaudited)       (unaudited)        (unaudited)

<S>                                                         <C>                <C>               <C>                <C>
Net sales.........................................          $  32,601          $  25,433         $  89,690          $  74,320
Cost of goods sold................................             18,836             15,492            54,633             44,572
                                                            ---------          ---------         ---------          ---------

   Gross profit...................................             13,765              9,941            35,057             29,748

Selling, general and administrative expenses......              5,021              3,630            13,954             12,285
Amortization of goodwill and other intangibles....              1,446              1,373             4,311              3,928
Gain from settlement of litigation, net...........                  -                 12                 -               (858)
                                                            ---------          ---------         ---------          ---------

   Income from operations.........................              7,298              4,926            16,792             14,393

Other expenses:
   Interest expense to stockholder................                 91                  -               272                  -
   Interest expense other, net....................              4,178              4,382            12,645             13,049
   Management fees and other, net.................                 63                 62               188                187
                                                            ---------          ---------         ---------          ---------

   Income before income taxes and extraordinary
   gain...........................................              2,966                482             3,687              1,157

Income tax expense................................              1,665                714             3,020              1,618
                                                            ---------          ---------         ---------          ---------

   Income (loss) before extraordinary gain........              1,301               (232)              667               (461)

Extraordinary gain from early retirement of
debt, net of tax..................................                411                  2             1,361                848
                                                            ---------          ---------         ---------          ---------

   Net income (loss)..............................          $   1,712          $    (230)        $   2,028          $     387
                                                            =========          =========         =========          =========



</TABLE>








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



<PAGE>



                       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, except share information)

<TABLE>
<CAPTION>

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


<S>                                        <C>     <C>         <C>           <C>             <C>           <C>            <C>
Balances, June 30, 2000 (unaudited)....    1,000   $    -      $  88,935     $  (13,829)     $   (542)     $  (15,730)    $ 58,834

Equity contribution by AHC I
   Acquisition Corp. (unaudited).......                            2,071                                                     2,071

Net income (unaudited).................                                           2,028                                      2,028

Other comprehensive income, net of tax:
   Foreign currency translation
     adjustment (unaudited)............                                                           (50)                         (50)
                                                                                                                          --------

Comprehensive income (unaudited).......                                                                                      1,978
                                         --------  ---------   ---------     ----------      --------      ----------     --------

Balances, March 31, 2001 (unaudited)...    1,000   $    -      $  91,006     $  (11,801)     $   (592)     $  (15,730)    $ 62,883
                                         ========  =========   =========     ==========      ========      ==========     ========



</TABLE>












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



<PAGE>



                       AKI HOLDING CORP. AND SUBSIDIARIES
             (a wholly-owned subsidiary of AHC I Acquisition Corp.)
                 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
                             (dollars in thousands)


<TABLE>
<CAPTION>



                                                                                                   Nine months ended
                                                                                                   -----------------
                                                                                          March 31, 2001        March 31, 2000
                                                                                          --------------        --------------
                                                                                            (unaudited)           (unaudited)

<S>                                                                                        <C>                   <C>
Cash flows from operating activities
   Net income....................................................................          $     2,028           $       387
   Adjustments to reconcile net income to net cash used in operating activities:
     Depreciation and amortization of goodwill and other intangibles.............                7,568                 7,188
     Amortization of debt discount...............................................                2,732                 2,760
     Amortization of debt issuance costs.........................................                  497                   573
     Deferred income taxes.......................................................                 (879)                  867
     Gain from early retirement of debt..........................................               (1,361)                 (848)
     Other.......................................................................                  108                  (133)
     Changes in operating assets and liabilities:
       Accounts receivable.......................................................               (8,808)               (3,731)
       Inventory.................................................................                  446                (3,018)
       Prepaid expenses, deferred charges and other assets.......................                 (380)                  397
       Accounts payable and accrued expenses.....................................               (1,744)               (6,474)
       Income taxes..............................................................                1,038                   (32)
                                                                                           -----------           -----------

         Net cash provided by (used in) operating activities.....................                1,245                (2,064)
                                                                                           -----------           -----------

Cash flows from investing activities
   Purchases of equipment........................................................               (2,436)               (2,300)
   Payments for acquisitions, net of cash acquired...............................                    -               (16,162)
                                                                                           -----------           -----------

         Net cash used in investing activities...................................               (2,436)              (18,462)
                                                                                           -----------           -----------

Cash flows from financing activities
   Payments under capital leases for equipment...................................                 (840)                 (510)
   Repurchase of long-term debt..................................................               (3,110)                    -
   Net proceeds on line of credit................................................                3,125                14,200
   Net proceeds from promissory note to stockholder..............................                2,904                     -
                                                                                           -----------           -----------

         Net cash provided by financing activities...............................                2,079                13,690
                                                                                           -----------           -----------

Net increase (decrease) in cash and cash equivalents.............................                  888                (6,836)
Cash and cash equivalents, beginning of period...................................                1,158                 7,015
                                                                                           -----------           -----------

Cash and cash equivalents, end of period.........................................          $     2,046           $       179
                                                                                           ===========           ===========

Supplemental information
   Cash paid during the period for:
     Interest, other.............................................................          $    12,125           $    12,724
     Interest to stockholder.....................................................                  230                     -
     Income taxes................................................................                2,836                 1,157

Significant non-cash activities
   Contribution of equity and retirement of senior discount debentures
     and senior notes............................................................          $     2,071           $     8,080


</TABLE>




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



<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

          Arcade Holding  Corporation (the  "Predecessor") was organized for the
     purpose  of  acquiring  all the  issued and  outstanding  capital  stock of
     Arcade,  Inc. ("Arcade") on November 4, 1993. Arcade is principally engaged
     in interactive  printed  advertising  for  fragrance,  cosmetics as well as
     other  consumer  products  companies  and has a  specialty  in the  design,
     production and  distribution of sampling  systems.  Arcade  distributes its
     product from its  Chattanooga,  Tennessee  facilities  as well as in Europe
     through its French subsidiary,  Arcade Europe S.A.R.L. DLJ Merchant Banking
     Partners II, L.P. and certain related investors  (collectively,  "DLJMBII")
     and certain  members of the Predecessor  organized AHC I Acquisition  Corp.
     ("AHC") and AHC I Merger Corp.  ("Merger  Corp.") for purposes of acquiring
     the  Predecessor.  On December 15, 1997,  Merger Corp.  acquired all of the
     equity  interests  of the  Predecessor  and then  merged  with and into the
     Predecessor  and the  combined  entity  assumed the name of AKI,  Inc.  and
     Subsidiaries ("AKI"). Subsequent to the acquisition, AHC contributed $1 and
     all of its ownership  interest in AKI to AKI Holding Corp.  ("Holding") for
     all of the outstanding equity of Holding.

     Interim financial statements

          The interim consolidated condensed balance sheet at March 31, 2001 and
     the interim  consolidated  condensed statements of operations for the three
     and nine months  ended March 31,  2001 and 2000,  the interim  consolidated
     condensed statements of cash flows for the nine months ended March 31, 2001
     and 2000 and the interim  consolidated  condensed  statement  of changes in
     stockholder's  equity  for  the  nine  months  ended  March  31,  2001  are
     unaudited, and certain information and footnote disclosure related thereto,
     normally  included in  financial  statements  prepared in  accordance  with
     generally accepted accounting  principles,  have been omitted. The June 30,
     2000  consolidated  condensed  balance  sheet was derived  from the audited
     balance  sheet  for the year  then  ended.  In  management's  opinion,  the
     unaudited interim consolidated condensed financial statements were prepared
     following the same policies and procedures  used in the  preparation of the
     audited financial statements and all adjustments, consisting only of normal
     recurring adjustments to fairly present the financial position,  results of
     operations  and  cash  flows  with  respect  to  the  interim  consolidated
     condensed  financial  statements,   have  been  included.  The  results  of
     operations for the interim  periods are not  necessarily  indicative of the
     results for the entire year.

     Reclassification

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

2.   INVENTORY

     The following table details the components of inventory:

                                               March 31, 2001     June 30, 2000
                                               --------------     -------------
                                                (unaudited)        (unaudited)
            Raw materials
                Paper......................      $     2,661        $    3,944
                Other raw materials........            2,307             2,541
                                                 -----------        ----------

                    Total raw materials....            4,968             6,485
            Work in process................            2,543             1,472
                                                 -----------        ----------

                Total inventory............            7,511             7,957
            Reserve for obsolescence.......             (200)             (200)
                                                 -----------        ----------

                Net inventory..............      $     7,311        $    7,757
                                                 ===========        ==========



<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.       RETIREMENT OF DEBT

               In fiscal 2001, AHC purchased  $5,180 of Holding Senior  Discount
          Debentures for $2,071 and AKI purchased $4,000 of AKI Senior Notes for
          $3,110.  The debentures were contributed to Holding and the debentures
          and notes were subsequently retired.

               In fiscal 2000, AHC purchased  $8,770 of Holding Senior  Discount
          Debentures  for $4,084 and $7,490 of AKI Senior Notes for $6,486.  The
          debentures  and notes were  contributed  to Holding  and  subsequently
          retired.

4.       PROMISSORY NOTE TO STOCKHOLDER

               In May 2000, the Company signed a promissory note payable to AHC,
          which allows the Company to borrow up to $10 million at such  interest
          rates  and due as agreed  upon by the  Company  and AHC.  At March 31,
          2001,  $2,904 was  outstanding  under  this  promissory  note  bearing
          interest at prime and is due December 31, 2002.

5.       DERIVATIVE INSTRUMENTS

               Effective July 1, 2000, the Company adopted Financial  Accounting
          Standard No. 133  "Accounting  for Derivative  Instruments and Hedging
          Activities"   ("FAS  133"),  as  amended,   which  requires  that  all
          derivative  instruments be reported on the balance sheet at fair value
          and establishes  criteria for designation and effectiveness of hedging
          relationships. The cumulative effect of adopting FAS 133 as of July 1,
          2000 was not material to the Company's financial statements.

               The  Company  purchases  and  sells its  products  in a number of
          countries  throughout  the world  and,  as a  result,  is  exposed  to
          movements in certain  foreign  currency  exchange  rates.  The primary
          purpose of the Company's  foreign  currency  hedging  activities is to
          manage the  short-term  volatility  associated  with foreign  currency
          purchases  and sales in the normal  course of  business.  The  Company
          primarily  utilizes foreign  currency forward exchange  contracts with
          maturities of less than six months, which do not meet hedge accounting
          criteria.  The fair value of these  instruments  at March 31, 2001 was
          not material  and the net impact of the related  gains and losses were
          not material.

6.        CONDENSED HOLDING COMPANY ONLY FINANCIAL STATEMENTS

               The following condensed balance sheets at March 31, 2001 and June
          30,  2000  and  condensed   statements  of   operations,   changes  in
          stockholder's  equity and cash flows for the nine  months  ended March
          31, 2001 and 2000 for Holding  have been  prepared on the equity basis
          of accounting and should be read in conjunction  with the consolidated
          statements and notes thereto.



<PAGE>



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

       6. CONDENSED HOLDING COMPANY ONLY FINANCIAL STATEMENTS (Continued)


                                  BALANCE SHEET
<TABLE>
<CAPTION>

                                                                      March 31, 2001         June 30, 2000
                                                                      --------------         -------------
                                                                        (unaudited)           (unaudited)

<S>                                                                    <C>                   <C>
     Assets
     Investment in subsidiaries...............................         $   102,805           $    99,798
     Deferred charges.........................................                 958                 1,167
     Deferred income taxes....................................               2,507                 2,013
                                                                       -----------           -----------

         Total assets.........................................         $   106,270           $   102,978
                                                                       ===========           ===========

     Liabilities
     Accrued income taxes.....................................         $       164           $         9
     Senior discount debentures...............................              26,901                27,863
                                                                       -----------           -----------

         Total liabilities....................................              27,065                27,872
                                                                       -----------           -----------

     Stockholder's equity
     Common Stock, $0.01 par value, 1,000 shares authorized
       1,000 shares issued and outstanding....................                   -                     -
     Additional paid-in capital...............................              91,006                88,935
     Accumulated deficit......................................             (11,801)              (13,829)
                                                                       -----------           -----------

         Total stockholder's equity...........................              79,205                75,106
                                                                       -----------           -----------

         Total liabilities and stockholder's equity...........         $   106,270           $   102,978
                                                                       ===========           ===========

</TABLE>



                             STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>

                                                                                    Nine months ended
                                                                                    -----------------
                                                                          March 31, 2001        March 31, 2000
                                                                          --------------        --------------
                                                                            (unaudited)           (unaudited)

<S>                                                                        <C>                   <C>
     Equity in net income of subsidiaries..........................        $     3,007           $     1,632
     Interest expense..............................................              2,800                 2,829
                                                                           -----------           -----------

         Income (loss) before income taxes and extraordinary gain..                207                (1,197)

     Income tax benefit............................................               (916)                 (923)
                                                                           -----------           -----------

         Income (loss) before extraordinary gain...................              1,123                  (274)

     Extraordinary gain from early retirement of debt, net of tax..                905                   661
                                                                           -----------           -----------

         Net income ...............................................        $     2,028           $       387
                                                                           ===========           ===========

</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)

6.   CONDENSED HOLDING COMPANY ONLY FINANCIAL STATEMENTS (Continued)


                  STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>

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

<S>                                                         <C>        <C>         <C>            <C>            <C>
     Balances, June 30, 2000 (unaudited).............       1,000      $    -      $   88,935     $  (13,829)    $  75,106

     Equity contribution by AHC I Acquisition Corp.
          (unaudited)................................                                   2,071                        2,071

     Net income (unaudited)..........................                                                  2,028         2,028
                                                          -------      -------     ----------     ----------     ---------

     Balances, March 31, 2001 (unaudited)............       1,000      $    -      $   91,006     $  (11,801)    $  79,205
                                                          =======      =======     ==========     ==========     =========

</TABLE>



                             STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>

                                                                                            Nine months ended
                                                                                            -----------------
                                                                                  March 31, 2001        March 31, 2000
                                                                                  --------------        --------------
                                                                                    (unaudited)           (unaudited)

<S>                                                                                 <C>                   <C>
     Cash flows from operating activities
       Net income.....................................................              $     2,028           $       387
         Adjustments to reconcile net income to net cash provided by
           (used in) operating activities:
              Net change in investment in subsidiaries................                   (3,007)               (1,632)
              Amortization of debt discount...........................                    2,732                 2,760
              Amortization of debt issuance costs.....................                       68                    70
              Deferred income taxes...................................                     (916)                 (924)
              Gain from early retirement of debt......................                     (905)                 (661)
                                                                                    -----------           -----------

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

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

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

     Significant non-cash activities
       Contribution of equity and retirement of senior discount
         debentures and senior notes.................................               $     2,071           $     8,080
       Investment in subsidiaries....................................                         -                 3,996

</TABLE>



<PAGE>



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

<TABLE>
<CAPTION>
                                                                                  March 31,           June 30,
                                                                                    2001                2000
                                                                                -------------      -------------
                                                                                 (unaudited)         (unaudited)

<S>                                                                             <C>                <C>
ASSETS
Current assets
Cash and cash equivalents..................................................     $       2,046      $       1,158
Accounts receivable, net...................................................            30,330             21,522
Inventory..................................................................             7,311              7,757
Prepaid expenses...........................................................               472                 92
Deferred income taxes......................................................               396                396
                                                                                -------------      -------------

   Total current assets....................................................            40,555             30,925

Property, plant and equipment, net.........................................            16,290             17,097
Goodwill, net..............................................................           158,867            162,472
Other intangible assets, net...............................................             6,455              7,174
Deferred charges, net  ....................................................             3,721              4,294
Deferred income taxes......................................................               340                720
Other assets...............................................................                91                 88
                                                                                -------------      -------------

   Total assets............................................................     $     226,319      $     222,770
                                                                                =============      =============

LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Current portion of capital lease obligations...............................     $         509      $         847
Accounts payable, trade....................................................             3,906              3,565
Accrued income taxes.......................................................             1,629                301
Accrued compensation.......................................................             4,683              3,965
Accrued interest...........................................................             2,850              5,695
Accrued expenses...........................................................             2,412              2,370
                                                                                -------------      -------------

   Total current liabilities...............................................            15,989             16,743

Long-term portion of capital lease obligations.............................                 -                502
Revolving credit line......................................................            12,125              9,000
Senior notes...............................................................           103,510            107,510
Promissory note to affiliate...............................................             2,904                  -
Deferred income taxes......................................................             2,747              3,090
Other non-current liabilities..............................................             2,561              2,399
                                                                                -------------      -------------

   Total liabilities.......................................................           139,836            139,244

Stockholder's equity
Common stock, $0.01 par 100,000 shares authorized;
   1,000 shares issued and outstanding.....................................                 -                  -
Additional paid-in capital.................................................           107,348            107,348
Accumulated deficit........................................................            (4,543)            (7,550)
Accumulated other comprehensive loss.......................................              (592)              (542)
Carryover basis adjustment.................................................           (15,730)           (15,730)
                                                                                --------------     -------------

   Total stockholder's equity..............................................            86,483             83,526
                                                                                -------------      -------------

   Total liabilities and stockholder's equity..............................     $     226,319      $     222,770
                                                                                =============      =============



</TABLE>







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



<PAGE>



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

<TABLE>
<CAPTION>

                                                                 Three months ended                    Nine months ended
                                                                 ------------------                    -----------------
                                                         March 31, 2001     March 31,2000     March 31, 2001     March 31, 2000
                                                         --------------     -------------     --------------     --------------
                                                           (unaudited)        (unaudited)       (unaudited)        (unaudited)

<S>                                                         <C>                <C>               <C>                <C>
Net sales.........................................          $  32,601          $  25,433         $  89,690          $  74,320
Cost of goods sold................................             18,836             15,492            54,633             44,572
                                                            ---------          ---------         ---------          ---------

   Gross profit...................................             13,765              9,941            35,057             29,748

Selling, general and administrative expenses......              5,021              3,631            13,954             12,286
Amortization of goodwill and other intangibles....              1,446              1,373             4,311              3,928
Gain from settlement of litigation, net...........                  -                 12                 -               (858)
                                                            ---------          ---------         ---------          ---------

   Income from operations.........................              7,298              4,925            16,792             14,392

Other expenses:
   Interest expense to affiliate..................                 91                  -               272                  -
   Interest expense other, net....................              3,240              3,479             9,845             10,220
   Management fees and other, net.................                 63                 62               188                187
                                                            ---------          ---------         ---------          ---------

   Income before income taxes and extraordinary
   gain...........................................              3,904              1,384             6,487              3,985

Income tax expense................................              1,972              1,008             3,936              2,540
                                                            ---------          ---------         ---------          ---------

   Income before extraordinary gain...............              1,932                376             2,551              1,445

Extraordinary gain from early retirement of
debt, net of tax..................................                  -                  -               456                187
                                                            ---------          ---------         ---------          ---------

   Net income.....................................          $   1,932          $     376         $   3,007          $   1,632
                                                            =========          =========         =========          =========

</TABLE>













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



<PAGE>



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


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


<S>                                        <C>     <C>         <C>           <C>             <C>           <C>            <C>
Balances, June 30, 2000 (unaudited)....    1,000   $     -     $  107,348    $  (7,550)      $   (542)     $  (15,730)    $ 83,526

Net income (unaudited).................                                          3,007                                       3,007

Other comprehensive income, net of tax:
   Foreign currency translation
     adjustment (unaudited)............                                                           (50)                         (50)
                                                                                                                          --------

Comprehensive income (unaudited).......                                                                                      2,957
                                         --------  ---------   ----------    ---------       --------      ----------     --------

Balances, March 31, 2001 (unaudited)...    1,000   $     -     $  107,348    $  (4,543)      $   (592)     $  (15,730)    $ 86,483
                                         ========  =========   ==========    =========       ========      ==========     ========



</TABLE>

















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



<PAGE>



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


<TABLE>
<CAPTION>


                                                                                                   Nine months ended
                                                                                                   -----------------
                                                                                          March 31, 2001        March 31, 2000
                                                                                          --------------        --------------
                                                                                            (unaudited)           (unaudited)

<S>                                                                                        <C>                   <C>
Cash flows from operating activities
   Net income ...................................................................          $     3,007           $     1,632
   Adjustments to reconcile net income to net cash provided by
     operating activities:
     Depreciation and amortization of goodwill and other intangibles.............                7,568                 7,188
     Amortization of debt issuance cost..........................................                  429                   503
     Deferred income taxes.......................................................                   37                 1,790
     Gain from early retirement of debt..........................................                 (456)                 (187)
     Other.......................................................................                  108                  (133)
     Changes in operating assets and liabilities:
       Accounts receivable.......................................................               (8,808)               (3,731)
       Inventory.................................................................                  446                (3,018)
       Prepaid expenses, deferred charges and other assets.......................                 (380)                  398
       Accounts payable and accrued expenses.....................................               (1,744)               (6,474)
       Income taxes..............................................................                1,038                   (32)
                                                                                           -----------           -----------

         Net cash provided by (used in) operating activities.....................                1,245                (2,064)
                                                                                           -----------           ------------

Cash flows from investing activities
   Purchases of equipment........................................................               (2,436)               (2,300)
   Payments for acquisitions, net of cash acquired...............................                    -               (16,162)
                                                                                           -----------           -----------

         Net cash used in investing activities...................................               (2,436)              (18,462)
                                                                                           -----------           -----------

Cash flows from financing activities
   Payments under capital leases for equipment...................................                 (840)                 (510)
   Repurchase of long-term debt..................................................               (3,110)                    -
   Net proceeds on line of credit................................................                3,125                14,200
   Net proceeds from promissory note to affiliate................................                2,904                     -
                                                                                           -----------           -----------

         Net cash provided by financing activities...............................                2,079                13,690
                                                                                           -----------           -----------

Net increase (decrease) in cash and cash equivalents.............................                  888                (6,836)
Cash and cash equivalents, beginning of period...................................                1,158                 7,015
                                                                                           -----------           -----------

Cash and cash equivalents, end of period.........................................          $     2,046           $       179
                                                                                           ===========           ===========


Supplemental information
   Cash paid during the period for:
     Interest, other.............................................................          $    12,125           $    12,724
     Interest to affiliate.......................................................                  230                     -
     Income taxes................................................................                2,836                 1,157

Significant non-cash activities
   Contribution of equity and retirement of senior notes.........................          $         -           $     3,996



</TABLE>




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



<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

               Arcade Holding  Corporation (the "Predecessor") was organized for
          the purpose of acquiring all the issued and outstanding  capital stock
          of Arcade,  Inc. ("Arcade") on November 4, 1993. Arcade is principally
          engaged in interactive printed advertising for fragrance, cosmetics as
          well as other consumer  products  companies and has a specialty in the
          design,  production  and  distribution  of  sampling  systems.  Arcade
          distributes its product from its Chattanooga,  Tennessee facilities as
          well  as in  Europe  through  its  French  subsidiary,  Arcade  Europe
          S.A.R.L.  DLJ Merchant  Banking  Partners II, L.P. and certain related
          investors  (collectively,   "DLJMBII")  and  certain  members  of  the
          Predecessor organized AHC I Acquisition Corp. ("AHC") and AHC I Merger
          Corp.  ("Merger Corp.") for purposes of acquiring the Predecessor.  On
          December 15, 1997,  Merger Corp.  acquired all of the equity interests
          of the  Predecessor  and then merged with and into the Predecessor and
          the combined  entity  assumed the name of AKI,  Inc. and  Subsidiaries
          ("AKI"). Subsequent to the acquisition,  AHC contributed $1 and all of
          its ownership interest in AKI to AKI Holding Corp. ("Holding") for all
          of the outstanding equity of Holding.

          Interim financial statements

               The interim  consolidated  condensed  balance  sheet at March 31,
          2001 and the interim  consolidated  condensed statements of operations
          for the three and nine  months  ended  March  31,  2001 and 2000,  the
          interim  consolidated  condensed statements of cash flows for the nine
          months  ended  March 31,  2001 and 2000 and the  interim  consolidated
          condensed  statement of changes in  stockholder's  equity for the nine
          months ended March 31, 2001 are unaudited, and certain information and
          footnote  disclosure  related thereto,  normally included in financial
          statements  prepared in accordance with generally accepted  accounting
          principles,   have  been  omitted.  The  June  30,  2000  consolidated
          condensed balance sheet was derived from the audited balance sheet for
          the year then ended. In management's  opinion,  the unaudited  interim
          consolidated  condensed  financial  statements were prepared following
          the  same  policies  and  procedures  used in the  preparation  of the
          audited financial  statements and all adjustments,  consisting only of
          normal recurring adjustments to fairly present the financial position,
          results  of  operations  and cash flows  with  respect to the  interim
          consolidated  condensed financial statements,  have been included. The
          results of  operations  for the interim  periods  are not  necessarily
          indicative of the results for the entire year.

2.       INVENTORY

         The following table details the components of inventory:

                                               March 31, 2001     June 30, 2000
                                               --------------     -------------
                                                (unaudited)        (unaudited)
              Raw materials
                  Paper....................      $     2,661        $    3,944
                  Other raw materials......            2,307             2,541
                                                 -----------        ----------

                      Total raw materials..            4,968             6,485
              Work in process..............            2,543             1,472
                                                 -----------        ----------

                  Total inventory..........            7,511             7,957
              Reserve for obsolescence.....             (200)             (200)
                                                 -----------        ----------

                  Net inventory............      $     7,311        $    7,757
                                                 ===========        ==========



<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)


3.       RETIREMENT OF DEBT

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

               In fiscal  2000,  AHC  purchased  $7,490 of AKI Senior  Notes for
          $6,486. The notes were contributed to Holding and Holding  contributed
          the notes to AKI. The notes were subsequently retired.

4.       PROMISSORY NOTE TO AFFILIATE

               In May 2000, the Company signed a promissory note payable to AHC,
          which allows the Company to borrow up to $10 million at such  interest
          rates  and due as agreed  upon by the  Company  and AHC.  At March 31,
          2001,  $2,904 was  outstanding  under  this  promissory  note  bearing
          interest at prime and is due December 31, 2002.

5.        DERIVATIVE INSTRUMENTS

               Effective July 1, 2000, the Company adopted Financial  Accounting
          Standard No. 133  "Accounting  for Derivative  Instruments and Hedging
          Activities"   ("FAS  133"),  as  amended,   which  requires  that  all
          derivative  instruments be reported on the balance sheet at fair value
          and establishes  criteria for designation and effectiveness of hedging
          relationships. The cumulative effect of adopting FAS 133 as of July 1,
          2000 was not material to the Company's financial statements.

               The  Company  purchases  and  sells its  products  in a number of
          countries  throughout  the world  and,  as a  result,  is  exposed  to
          movements in certain  foreign  currency  exchange  rates.  The primary
          purpose of the Company's  foreign  currency  hedging  activities is to
          manage the  short-term  volatility  associated  with foreign  currency
          purchases  and sales in the normal  course of  business.  The  Company
          primarily  utilizes foreign  currency forward exchange  contracts with
          maturities of less than six months, which do not meet hedge accounting
          criteria.  The fair value of these  instruments  at March 31, 2001 was
          not material  and the net impact of the related  gains and losses were
          not material.



<PAGE>



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

     Item 2 is presented with respect to both AKI Holding Corp. and AKI, Inc. As
used  within Item 2, the term  "Company"  refers to AKI  Holding  Corp.  and its
subsidiaries  including  AKI, Inc.  ("AKI"),  the term  "Holding"  refers to AKI
Holding  Corp.   and  the  term  "RHL"  refers  to  Retcom   Holdings  Ltd.  and
subsidiaries.

General

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

Retcom Holdings Ltd. Acquisition

     On September 15, 1999, we acquired all of the issued and outstanding shares
of capital  stock of RHL at a purchase  price of  approximately  $12 million and
refinanced RHL's working capital  indebtedness of approximately $5 million.  The
purchase price and refinancing of RHL's indebtedness were financed by borrowings
under a revolving credit line with Heller Financial, Inc.

Results of Operations

 Three Months Ended March 31, 2001 Compared to Three Months Ended March 31, 2000

     Net Sales.  Net sales for the three months  ended March 31, 2001  increased
$7.2 million,  or 28.3%, to $32.6 million,  as compared to $25.4 million for the
three  months  ended March 31,  2000.  The  increase in net sales was  primarily
attributable  to  increases  in volume  and  favorable  product  pricing  mix of
domestic and international sales of sampling  technologies to existing customers
for advertising and marketing of fragrances and cosmetics products.

     Gross  Profit.  Gross  profit for the three  months  ended  March 31,  2001
increased $3.9 million,  or 39.4%, to $13.8 million, as compared to $9.9 million
for three months ended March 31, 2000. Gross profit as a percentage of net sales
increased to 42.3% in the three  months ended March 31, 2001,  from 39.0% in the
three months ended March 31, 2000.  The increase in gross profit as a percentage
of net sales is  primarily  due to  product  volume  and  pricing  mix offset by
increased  raw material  costs,  additional  premium  labor costs and  increased
overhead  costs.  The increase in raw  material  costs was  primarily  due to an
increase in paper commodity prices.

     Selling,  General  and  Administrative   Expenses.   Selling,  general  and
administrative expenses for the three months ended March 31, 2001 increased $1.4
million,  or 38.9%,  to $5.0 million,  as compared to $3.6 million for the three
months ended March 31, 2000. Selling,  general and administrative  expenses as a
percent of net sales  increased  to 15.3% in the three  months  ended  March 31,
2001,  from 14.2% in the three  months  ended March 31,  2000.  The  increase in
selling,  general and  administrative  expenses and the increase as a percent of
net sales was primarily due to increased sales commissions and incentive bonuses
primarily  as a result of the  increase in sales  volume and other  quantitative
incentive measures.

     Income from  Operations.  Income from operations for the three months ended
March 31, 2001 increased $2.4 million, or 49.0%, to $7.3 million, as compared to
$4.9 million for the three months ended March 31, 2000.  Income from  operations
as a percentage of net sales  increased to 22.4% in the three months ended March
31, 2001, from 19.3% in the three months ended March 31, 2000,  principally as a
result of the factors described above.

     Interest  Expense.  Interest  expense for the three  months ended March 31,
2001  decreased  $0.1 million,  or 2.3%,  to $4.3  million,  as compared to $4.4
million for the three months ended March 31, 2000. Interest expense as a



<PAGE>



percentage  of net sales  decreased to 13.2% in the three months ended March 31,
2001,  from 17.3% in the three  months  ended March 31,  2000.  The  decrease in
interest  expense,  including the  amortization of deferred  financing costs, is
primarily due to the  repurchased  and retired  Senior  Discount  Debentures and
Senior Notes.

     Interest  expense  for  AKI for the  three  months  ended  March  31,  2001
decreased  $0.2 million,  or 5.7%, to $3.3 million,  as compared to $3.5 million
for the three months ended March 31, 2000.  Interest  expense as a percentage of
net sales  decreased to 10.1% in the three  months  ended March 31,  2001,  from
13.8% in the three  months  ended  March 31,  2000.  The  decrease  in  interest
expense,  including the  amortization of deferred  financing costs, is primarily
due to the repurchased and retired Senior Notes.

     Income Tax Expense. Income tax expense for the three months ended March 31,
2001 increased $1.0 million to $1.7 million.  The Company's  effective tax rate,
after consideration of non-deductible goodwill amortization and non-taxable gain
from  settlement  of  litigation,  was 39.9% in the three months ended March 31,
2001, and 42.7% in the three months ended March 31, 2000.

     Income  tax  expense  for AKI for the three  months  ended  March 31,  2001
increased  $1.0  million  to $2.0  million.  AKI's  effective  tax  rate,  after
consideration  of  non-deductible  goodwill  amortization,  was 39% in the three
months ended March 31, 2001 and 2000.

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

     EBITDA.  EBITDA for the three  months ended March 31, 2001  increased  $2.4
million,  or 32.4%,  to $9.8 million,  as compared to $7.4 million for the three
months ended March 31, 2000.  The  increase in EBITDA  principally  reflects the
increase in gross profit  partially  offset by the increase in selling,  general
and administrative expenses discussed above. EBITDA as a percentage of net sales
was  30.1%  and  29.1% in the  three  months  ended  March  31,  2001 and  2000,
respectively.   EBITDA  is  income  from   operations  plus   depreciation   and
amortization of goodwill and other  intangibles less net gain from settlement of
litigation.

  Nine Months Ended March 31, 2001 Compared to Nine Months Ended March 31, 2000

     Net Sales.  Net sales for the nine months  ended  March 31, 2001  increased
$15.4 million,  or 20.7%,  to $89.7 million as compared to $74.3 million for the
nine  months  ended March 31,  2000.  The  increase  in net sales was  primarily
attributable to volume and favorable  pricing mix in domestic and  international
sales of sampling  technologies  for  advertising  and  marketing  of  fragrance
products,  partially offset by the unfavorable  effect of a stronger U.S. dollar
against primarily the French Franc.

     Gross  Profit.  Gross  profit  for the nine  months  ended  March 31,  2001
increased $5.4 million,  or 18.2%, to $35.1 million as compared to $29.7 million
for the nine months  ended March 31, 2000.  Gross profit as a percentage  of net
sales  decreased to 39.1% in the nine months ended March 31, 2001, from 40.0% in
the nine  months  ended  March  31,  2000.  The  decrease  in gross  profit as a
percentage  of net sales is primarily  attributable  to  increased  raw material
costs,  additional  premium labor costs,  increased  overhead  costs and foreign
exchange rates offset by product mix and increased selling prices.

     Selling,  General  and  Administrative   Expenses.   Selling,  general  and
administrative  expenses for the nine months ended March 31, 2001 increased $1.7
million,  or 13.8%,  to $14.0  million as compared to $12.3 million for the nine
months ended March 31, 2000. The increase in selling, general and administrative
expenses  was  primarily  due to  increased  staffing  levels and  compensation,
including  increased sales  commissions and incentive bonuses as a result of the
increase in sales volume and other  quantitative  incentive  measures.  Selling,
general and administrative expenses as a percent of net sales decreased to 15.6%
in the nine months  ended  March 31,  2001 from 16.6% in the nine  months  ended
March 31, 2000, primarily due to the increase in net sales.

     Income from  Operations.  Income from  operations for the nine months ended
March 31, 2001 increased $2.4 million,  or 16.7%, to $16.8 million,  as compared
to $14.4  million  for the  nine  months  ended  March  31,  2000.  Income  from
operations  for  2000  included  a net  gain of $0.9  million  resulting  from a
favorable litigation settlement



<PAGE>



with the sellers of Arcade Holding Corp.  Income from operations as a percentage
of net sales  decreased to 18.7% in the nine months  ended March 31, 2001,  from
19.4% in the nine months  ended March 31, 2000,  principally  as a result of the
factors described above.

     Interest Expense. Interest expense for the nine months ended March 31, 2001
decreased $0.1 million,  or 0.8%, to $12.9 million, as compared to $13.0 million
for the nine months ended March 31, 2000.  Interest  expense as a percentage  of
net sales  decreased to 14.4% in the nine months ended March 31, 2001 from 17.5%
in the nine  months  ended March 31,  2000.  The  decrease in interest  expense,
including the  amortization of deferred  financing  costs, is primarily due to a
decrease in  interest  expense  related to the  repurchased  and retired  Senior
Discount  Debentures  and  Senior  Notes,  partially  offset by an  increase  in
interest  expense  related to use of the credit line and the promissory  note to
AHC I Acquisition Corp. for working capital and the RHL acquisition.

     Interest expense for AKI for the nine months ended March 31, 2001 decreased
$0.1 million,  or 1.0%, to $10.1  million,  as compared to $10.2 million for the
nine months ended March 31, 2000.  Interest expense as a percentage of net sales
decreased to 11.3% in the nine months  ended March 31,  2001,  from 13.7% in the
nine months ended March 31, 2000.  The decrease in interest  expense,  including
the amortization of deferred  financing costs, is primarily due to a decrease in
interest expense related to the repurchased and retired Senior Notes,  partially
offset by use of the  revolving  credit  line and the  promissory  note to AHC I
Acquisition Corp. for working capital and the RHL acquisition.

     Income Tax Expense.  Income tax expense for the nine months ended March 31,
2001 increased $1.4 million to $3.0 million. The increase is due to the increase
in income before income taxes and extraordinary  gain as a result of the factors
described  above.  The Company's  effective  tax rate,  after  consideration  of
non-deductible  goodwill  amortization  and non-taxable  gain from settlement of
litigation,  was 41.4% in the nine months  ended March 31, 2001 and 44.0% in the
nine months ended March 31, 2000.

     Income  tax  expense  for AKI for the nine  months  ended  March  31,  2001
increased  $1.4 million to $3.9 million.  The increase is due to the increase in
income  before  income taxes and  extraordinary  gain as a result of the factors
described above. AKI's effective tax rate, after consideration of non-deductible
goodwill  amortization and non-taxable  gain from settlement of litigation,  was
39.0% in the nine months ended March 31, 2001 and 2000.

     Extraordinary  Gain from Early Retirement of Debt.  Extraordinary gain from
early  retirement  of debt of $1.4  million for the nine months  ended March 31,
2001 and $0.8 million for the nine months ended March 31, 2000 resulted from the
purchase  and  subsequent  contribution  of  Senior  Notes and  Senior  Discount
Debentures  by  AHC  I  Acquisition   Corp.  The  contributed   securities  were
subsequently retired.

     Extraordinary  gain from early  retirement  of debt for AKI of $0.5 million
for the nine months  ended  March 31, 2001 and $0.2  million for the nine months
ended March 31, 2000  resulted  from the  purchase in fiscal year 2001 of Senior
Notes by AKI and the  purchase  in fiscal  year  2000 of  Senior  Notes by AHC I
Acquisition  Corp.  and the  subsequent  contribution  by AKI Holding Corp.  The
purchased and contributed securities were subsequently retired.

     EBITDA.  EBITDA for the nine months  ended March 31,  2001  increased  $3.7
million,  or 17.9%,  to $24.4  million as compared to $20.7 million for the nine
months ended March 31, 2000.  The  increase in EBITDA  principally  reflects the
increase in gross profit  partially  offset by the increase in selling,  general
and administrative expenses discussed above. EBITDA as a percentage of net sales
was  27.2%  and  27.9%  in the nine  months  ended  March  31,  2001  and  2000,
respectively.   EBITDA  is  income  from   operations  plus   depreciation   and
amortization of goodwill and other  intangibles less net gain from settlement of
litigation.

Liquidity and Capital Resources

     Our company has  substantial  indebtedness  and  significant  debt  service
obligations.  As of March 31, 2001, our company had consolidated indebtedness in
an  aggregate  amount of  $145.9  million  (excluding  trade  payables,  accrued
liabilities,  deferred  taxes  and  other  non-current  liabilities),  of  which
approximately  $26.9 million was a direct  obligation of Holding relating to its
debentures  and  approximately  $119.0  million was a direct  obligation  of AKI
relating to its notes,  revolving credit line,  promissory note to affiliate and
capital  leases.  Borrowings at March 31, 2001 included  $12.1 million under the
revolving credit line that was incurred to finance the acquisition of RHL



<PAGE>



and provide working capital and $2.9 million on the promissory note to affiliate
that was used to reduce other  existing  debt. At March 31, 2001 our company had
$7.9 million  available under the revolving  credit line. At March 31, 2001, AKI
also had $20.7 million in additional  outstanding  liabilities  (including trade
payables,   accrued   liabilities,   deferred   taxes  and   other   non-current
liabilities).

     In May 2000,  AKI signed a  promissory  note  payable to AHC I  Acquisition
Corp. ("AHC"), the sole stockholder of Holding, which allows AKI to borrow up to
$10  million at such  interest  rates and due as agreed  upon by AKI and AHC. At
March 31, 2001, $2.9 million was outstanding  under the promissory note at prime
and is due December 31, 2002.  Proceeds  from the  promissory  note were used to
reduce other existing debt. AKI does not currently  anticipate  borrowings under
the promissory note will exceed this amount.

     Holding's   principal   liquidity   requirements   are  for  debt   service
requirements under the debentures.  AKI's principal  liquidity  requirements are
for debt  service  requirements  and fees under the notes and the  credit  line.
Historically,  our company has funded its capital,  debt  service and  operating
requirements  with a combination  of net cash provided by operating  activities,
together with borrowings  under  revolving  credit  facilities.  During the nine
months  ended  March 31,  2001,  cash  totaling  $1.2  million  was  provided by
operating   activities   resulting  from  net  income  before  depreciation  and
amortization  and an increase  in accrued  income  tax,  partially  offset by an
increase in accounts  receivable  and decreases in accounts  payable and accrued
expenses.  During the nine  months  ended March 31,  2000,  cash  totaling  $2.1
million  was used by  operating  activities  primarily  due to the  increase  in
accounts receivable and inventory and a decrease in accounts payable and accrued
expenses.

     In the nine months  ended March 31, 2001 and 2000,  our company had capital
expenditures of approximately $2.4 million and $2.3 million, respectively. These
capital  expenditures  consisted  primarily  of the  purchase  of  manufacturing
equipment and upgrading our computer systems.

     On September 15, 1999, we acquired all of the issued and outstanding shares
of capital stock of RHL at a purchase price of  approximately  $12.2 million and
refinanced RHL's working capital  indebtedness of approximately $5 million.  The
purchase price and refinancing of indebtedness were financed by borrowings under
the revolving credit line, a portion of which was subsequently  repaid with cash
flows from operating activities.

     Our  company  may  from  time  to  time   evaluate   additional   potential
acquisitions.  There can be no assurance that additional capital sources will be
available  to our  company  to fund  additional  acquisitions  on terms that our
company finds acceptable, or at all.

     In September  1999,  AHC  consummated  a private  placement to DLJ Merchant
Banking Partners II, L.P. of 15,000,000 shares of its common stock at a purchase
price of $1.00 per share.  As of March 31, 2001, AHC had purchased $13.9 million
of Holding Senior Discount  Debentures and $7.5 million of AKI Senior Notes. The
debentures and notes were contributed to Holding and subsequently retired.

     As of March 31, 2001,  AKI purchased and retired $4.0 million of AKI Senior
Notes.

     Capital  expenditures  for the  three  months  ending  June  30,  2001  are
currently  estimated  to be  approximately  $0.7  million.  Based on  borrowings
outstanding  as of March 31, 2001,  our company  expects total cash payments for
debt service for the three months ending June 30, 2001 to be approximately  $0.3
million,  consisting  of $0.2 million in interest  and fees under the  revolving
credit  line and $0.1  million in interest on the  promissory  note to AHC.  Our
company  also  expects to make royalty  payments of  approximately  $0.2 million
during the three months ending June 30, 2001.

     At March 31,  2001,  Holding's  cash and cash  equivalents  and net working
capital  were $2.0  million and $24.4  million,  respectively,  representing  an
increase  in cash and cash  equivalents  of $0.8  million and an increase in net
working capital of $10.6 million from June 30, 2000. Account  receivables,  net,
at March 31, 2001 increased 40.9% or $8.8 million over the June 30, 2000 amount,
primarily due to increased sales volume and the seasonality of those sales.



<PAGE>



Seasonality

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

Recently Issued Accounting Standards

     In December  1999,  the  Securities  and Exchange  Commission  issued Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial  Statements" ("SAB
101"),   which  provides  the  Staff's  views  on  applying  generally  accepted
accounting  principles to revenue recognition issues. SAB 101, as amended by SAB
101A and SAB 101B,  outlines the criteria that must be met to recognize  revenue
and provide guidance for disclosures  related to revenue  recognition  policies.
The Company must  implement any  applicable  provisions of SAB 101 no later than
the fourth quarter of the fiscal year ending June 30, 2001. We do not anticipate
that the  adoption  of SAB 101 will  have a  material  impact  on the  Company's
consolidated financial statements and will continue to analyze the impact of SAB
101.

     In September  2000,  the Emerging  Issues Task Force reached a consensus on
Issue 00-10,  "Accounting  for Shipping  and  Handling  Fees and Costs"  ("Issue
00-10").  Issue 00-10 requires that all amounts  billed to customers  related to
shipping  and handling  should be  classified  as revenues.  Issue 00-10 will be
effective  for the  Company no later than the fourth  quarter of the fiscal year
ending June 30, 2001. The Company is currently  assessing the effect, if any, on
its financial statements of implementing Issue 00-10.

Forward-Looking Statements

     The  information   provided  in  this  document  contains   forward-looking
statements that involve a number of risks and uncertainties. A number of factors
could  cause  actual  results,  performance  or  achievements  of our company or
industry results to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking  statements.  These
factors  include,  but are not limited to: the  competitive  environment  in the
sampling industry in general and in our company's specific market areas; changes
in prevailing interest rates; inflation;  changes in cost of goods and services;
economic  conditions  in general and in our  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
our company;  changes in operating strategy or development plans; the ability to
attract and retain qualified personnel; our company's significant  indebtedness;
labor  disturbances;  changes in our 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 such word,  or other
variations  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.   Our  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  in  this
document to reflect future events or developments.



<PAGE>



ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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

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

     Our company  periodically  enters into forward  foreign  currency  exchange
contracts to hedge certain exposures  related to selected  transactions that are
relatively  certain  as to both  timing and amount and to hedge a portion of the
production costs expected to be denominated in foreign  currencies.  The purpose
of entering into these hedge  transactions  is to minimize the impact of foreign
currency  fluctuations  on the results of operations  and cash flows.  Gains and
losses on the hedging activities are recognized  concurrently with the gains and
losses  from the  underlying  transactions.  At March 31,  2001,  there  were no
forward exchange contracts outstanding.






                            PART II OTHER INFORMATION

ITEM 6.           EXHIBITS AND REPORTS ON FORM 8-K

(a)      Exhibits

         None


(b)      Reports on Form 8-K

         None



<PAGE>



                                   SIGNATURES

     Pursuant to the  requirements  of the Securities  Exchange Act of 1934, the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.


                                         AKI HOLDING CORP.

Date:  May 14, 2001                      By:      /s/ Kenneth A. Budde
                                         -----------------------------------
                                                  Kenneth A. Budde
                                                  Senior Vice President &
                                                  Chief Financial Officer

                                         AKI, INC.

Date:  May 14, 2001                      By:      /s/ Kenneth A. Budde
                                         -----------------------------------
                                                  Kenneth A. Budde
                                                  Senior Vice President &
                                                  Chief Financial Officer


<PAGE>