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, 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 January 31, 2002, 1,000 shares of common stock of AKI Holding Corp.,  $.01
par value,  were outstanding and 1,000 shares of common stock of AKI, Inc., $.01
par value, were outstanding.

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


<PAGE>


                       AKI HOLDING CORP. AND SUBSIDIARIES

                               INDEX TO FORM 10-Q


Part I.  FINANCIAL INFORMATION

         Item 1.  Financial Statements (unaudited)

                  AKI Holding Corp. and Subsidiaries

                      Consolidated Condensed Balance Sheet

                      -  December 31, 2001
                      -  June 30, 2001

                      Consolidated Condensed Statements of Operations

                      -  Three months ended December 31, 2001
                      -  Three months ended December 31, 2000
                      -  Six months ended December 31, 2001
                      -  Six months ended December 31, 2000

                      Consolidated Condensed Statement of Changes in
                      Stockholder's Equity

                      -  Six months ended December 31, 2001

                      Consolidated Condensed Statements of Cash Flows

                      -  Six months ended December 31, 2001
                      -  Six months ended December 31, 2000

                      Notes to Consolidated Condensed Financial Statements


<PAGE>


         Item 1.  Financial Statements (unaudited) (continued)

                  AKI, Inc. and Subsidiaries

                      Consolidated Condensed Balance Sheet

                      -  December 31, 2001
                      -  June 30, 2001

                      Consolidated Condensed Statements of Operations

                      -  Three months ended December 31, 2001
                      -  Three months ended December 31, 2000
                      -  Six months ended December 31, 2001
                      -  Six months ended December 31, 2000

                      Consolidated Condensed Statement of Changes in
                      Stockholder's Equity

                      -  Six months ended December 31, 2001

                      Consolidated Condensed Statements of Cash Flows

                      -  Six months ended December 31, 2001
                      -  Six months ended December 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
                      CONSOLIDATED CONDENSED BALANCE SHEETS
         (dollars in thousands, except share and per share information)

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

<S>                                                                             <C>                <C>
ASSETS
Current assets
Cash and cash equivalents..................................................     $       1,894      $       4,654
Accounts receivable, net...................................................            19,930             18,020
Inventory..................................................................             8,434              6,330
Income tax refund receivable...............................................             1,247                  -
Prepaid expenses...........................................................               494                492
Deferred income taxes......................................................               770                770
                                                                                -------------      -------------

   Total current assets....................................................            32,769             30,266

Property, plant and equipment, net.........................................            21,788             15,778
Goodwill, net..............................................................           161,170            157,334
Other intangible assets, net...............................................             9,216              6,337
Deferred charges, net......................................................             4,651              4,381
Deferred income taxes......................................................               737                  -
Other assets...............................................................               116                 88
                                                                                -------------      -------------

   Total assets............................................................     $     230,447      $     214,184
                                                                                =============      =============

LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Current portion of capital lease obligations...............................     $           -      $         503
Current portion of long-term debt..........................................             1,000                  -
Accounts payable, trade....................................................             4,637              3,886
Accrued income taxes.......................................................                 -              1,642
Accrued compensation.......................................................             4,404              4,715
Accrued interest...........................................................             5,491              5,443
Accrued expenses...........................................................             4,681              3,908
                                                                                -------------      -------------

   Total current liabilities...............................................            20,213             20,097

Revolving loan.............................................................             7,700                  -
Term loan..................................................................             9,000                  -
Senior notes...............................................................           103,510            103,510
Senior discount debentures.................................................            25,540             23,926
Deferred income taxes......................................................                 -                 19
Other non-current liabilities..............................................             1,968              1,863
                                                                                -------------      -------------

   Total liabilities.......................................................           167,931            149,415

Stockholder's equity
Common stock, $0.01 par 1,000 shares authorized;
    1,000 shares issued and outstanding....................................                 -                  -
Additional paid-in capital.................................................            93,656             93,656
Accumulated deficit........................................................           (14,871)           (12,320)
Accumulated other comprehensive loss.......................................              (539)              (837)
Carryover basis adjustment.................................................           (15,730)           (15,730)
                                                                                --------------     -------------

   Total stockholder's equity..............................................            62,516             64,769
                                                                                -------------      -------------


   Total liabilities and stockholder's equity..............................     $     230,447      $     214,184
                                                                                =============      =============

</TABLE>


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


<PAGE>


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


<TABLE>
<CAPTION>


                                                              Three months ended                        Six months ended
                                                    -------------------------------------     -------------------------------------
                                                    December 31, 2001   December 31, 2000     December 31, 2001   December 31, 2000
                                                    -----------------   -----------------     -----------------   -----------------
                                                       (unaudited)         (unaudited)           (unaudited)         (unaudited)

<S>                                                     <C>                 <C>                   <C>                 <C>
Net sales.......................................        $  22,329           $  26,180             $  49,710           $  58,533
Cost of goods sold..............................           15,929              17,693                32,643              37,241
                                                        ---------           ---------             ---------           ---------

   Gross profit.................................            6,400               8,487                17,067              21,292

Selling, general and administrative expenses....            4,569               4,415                 8,764               8,933
Amortization of goodwill and other intangibles..            1,470               1,446                 2,916               2,865
                                                        ---------           ---------             ---------           ---------

   Income from operations.......................              361               2,626                 5,387               9,494

Other expenses:
   Interest expense to stockholder..............                4                  68                     8                 181
   Interest expense other, net..................            3,861               4,176                 7,728               8,467
   Management fees and other, net...............               62                  63                   125                 125
                                                        ---------           ---------             ---------           ---------

   Income (loss) before income taxes and
     extraordinary gain.........................           (3,566)             (1,681)               (2,474)                721

Income tax expense (benefit)....................             (869)               (110)                   77               1,355
                                                        ---------           ---------             ---------           ---------

   Loss before extraordinary gain...............           (2,697)             (1,571)               (2,551)               (634)

Extraordinary gain from early retirement of
   debt, net of tax.............................                -                 950                     -                 950
                                                        ---------           ---------             ---------           ---------

   Net income (loss)............................        $  (2,697)          $    (621)            $  (2,551)          $     316
                                                        =========           =========             =========           =========


</TABLE>



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


<PAGE>


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


<TABLE>
<CAPTION>

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

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

Net loss (unaudited)......................                                        (2,551)                                   (2,551)

Other comprehensive income, net of tax:
   Foreign currency translation
     adjustment (unaudited)...............                                                         298                         298
                                                                                                                         ---------

Comprehensive loss (unaudited)............                                                                                  (2,253)
                                            ------   -------    ----------     ---------      --------      ----------   ---------

Balances, December 31, 2001 (unaudited)...   1,000   $   -      $   93,656     $ (14,871)     $   (539)     $  (15,730)  $  62,516
                                            ======   =======    ==========     =========      ========      ==========   =========


</TABLE>


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


<PAGE>


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


<TABLE>
<CAPTION>


                                                                                           Six months ended
                                                                                 ---------------------------------------
                                                                                 December 31, 2001     December 31, 2000
                                                                                 -----------------     -----------------
                                                                                    (unaudited)           (unaudited)

<S>                                                                                 <C>                   <C>
Cash flows from operating activities
   Net income (loss)....................................................            $    (2,551)          $       316
   Adjustments to reconcile net income (loss) to net cash provided by
   operating activities:
     Depreciation and amortization of goodwill and other intangibles....                  5,258                 5,036
     Amortization of debt discount......................................                  1,614                 1,817
     Amortization of debt issuance costs................................                    335                   342
     Deferred income taxes..............................................                   (756)                 (615)
     Gain from early retirement of debt.................................                      -                  (950)
     Other..............................................................                    403                  (305)
     Changes in operating assets and liabilities:
       Accounts receivable..............................................                  1,325                (1,896)
       Inventory........................................................                    320                   756
       Prepaid expenses, deferred charges and other assets..............                     43                  (377)
       Accounts payable and accrued expenses............................                 (2,885)               (2,065)
       Income taxes.....................................................                 (2,889)                1,128
                                                                                    -----------           -----------

         Net cash provided by operating activities......................                    217                 3,187
                                                                                    -----------           -----------

Cash flows from  investing activities
   Purchases of equipment...............................................                   (470)               (2,112)
   Patents..............................................................                    (46)                    -
   Payments for acquisition, net of cash acquired.......................                (19,053)                    -
                                                                                    -----------           -----------

         Net cash used in investing activities..........................                (19,569)               (2,112)
                                                                                    -----------           -----------

Cash flows from financing activities
   Payments under capital leases .......................................                   (503)                 (834)
   Repurchase of long-term debt.........................................                      -                (3,110)
   Net proceeds (repayments) on revolving loan..........................                  7,700                (1,450)
   Net proceeds on term loan............................................                 10,000                     -
   Payments of loan closing costs.......................................                   (605)                    -
   Net proceeds from promissory note to stockholder.....................                      -                 3,661
                                                                                    -----------           -----------

         Net cash provided by (used in) financing activities............                 16,592                (1,733)
                                                                                    -----------           -----------

Net decrease in cash and cash equivalents...............................                 (2,760)                 (658)
Cash and cash equivalents, beginning of period..........................                  4,654                 1,158
                                                                                    -----------           -----------

Cash and cash equivalents, end of period................................            $     1,894           $       500
                                                                                    ===========           ===========

Supplemental information
   Cash paid during the period for:
     Interest, other....................................................            $     5,609           $     6,388
     Interest to stockholder............................................                      8                   174
     Income taxes.......................................................                  3,763                   866

Significant non-cash activities
   Contribution of equity and retirement of senior discount debentures..            $         -           $     1,259


</TABLE>


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


<PAGE>


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


1.   BASIS OF PRESENTATION

          AKI, Inc. ("AKI") is the successor to Arcade Holding  Corporation (the
     "Predecessor"),  which was acquired by AHC I Acquisition,  Corp. ("AHC") in
     December  1997.  AHC was  organized for the purpose of acquiring all of the
     equity interests of the Predecessor and subsequent to such acquisition, AHC
     contributed  $1 and all of its  ownership  interest  to AKI  Holding  Corp.
     ("Holding") for all of the outstanding equity of Holding.  Accordingly, AKI
     is a wholly owned subsidiary of Holding, which is a wholly owned subsidiary
     of AHC.

          AKI is engaged in interactive  multi-sensory  advertising for consumer
     product  companies  and  has a  specialty  in the  design,  production  and
     distribution  of  sampling  systems  from its  Chattanooga,  Tennessee  and
     Baltimore,  Maryland  facilities  and  distributes  its  products in Europe
     through its French subsidiary, Arcade Europe S.A.R.L.

     Acquisition of Color Prelude business

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

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

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


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

<TABLE>
<CAPTION>

                                                           Three months ended             Six months ended
                                                              December 31,                  December 31,
                                                              ------------                  -----------
                                                           2001           2000            2001           2000
                                                           ----           ----            ----           ----

<S>                                                     <C>            <C>             <C>            <C>
Revenue............................................     $ 26,215       $ 29,990        $ 56,043       $ 64,958
Income (loss) before extraordinary items...........       (2,446)        (1,339)         (2,592)          (643)
Net income (loss)..................................       (2,446)          (389)         (2,592)           307


</TABLE>


     Interim financial statements

          The interim consolidated  condensed balance sheet at December 31, 2001
     and the interim  consolidated  condensed  statements of operations  for the
     three  and six  months  ended  December  31,  2001 and  2000,  the  interim
     consolidated  condensed  statements  of cash flows for the six months ended
     December 31, 2001 and 2000


<PAGE>


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

1.   BASIS OF PRESENTATION (continued)

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

     Reclassification

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

2.   INVENTORY

          The following table details the components of inventory:

                                             December 31, 2001    June 30, 2001
                                             -----------------    -------------
                                                (unaudited)        (unaudited)
      Raw materials
          Paper..........................        $    2,490         $    1,796
          Other raw materials............             4,069              2,697
                                                 ----------         ----------
              Total raw materials........             6,559              4,493
      Work in process....................             1,875              1,837
                                                 ----------         ----------

      Total inventory....................        $    8,434         $    6,330
                                                 ==========         ==========

3.   RETIREMENT OF DEBT

          In fiscal  2001,  AHC  purchased  $3,070 of  Holding  Senior  Discount
     Debentures  and AKI  purchased  $4,000 of AKI  Senior  Notes for $1,259 and
     $3,110,  respectively.  The debentures were  contributed to Holding and the
     debentures and notes were subsequently retired.

4.   AMENDED AND RESTATED CREDIT AGREEMENT

          On December  18, 2001,  AKI amended and restated its credit  agreement
     with Heller Financial,  Inc.  ("restated credit  agreement").  The restated
     credit agreement  provides for: (1) a $10.0 million term loan which matures
     on  December  31,  2006  with  varying  quarterly  principal   installments
     beginning  March  31,  2002 and (2) a  revolving  loan  commitment  up to a
     maximum of $20.0 million which expires  December 31, 2006.  Borrowings  are
     limited to a borrowing base  consisting of accounts  receivable,  inventory
     and  property,  plant  and  equipment  which  serve as  collateral  for the
     borrowings.  Interest on amounts borrowed under the term loan and revolving
     loan accrue at a floating  rate based upon either prime or LIBOR as elected
     by the  Company.  The initial rate of interest  under the  restated  credit
     agreement  was 125  basis  points  higher  than  the  interest  rate of the
     previous credit  agreement.  The Company is required to pay commitment fees
     on the unused portion of the revolving loan commitment.


<PAGE>


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

5.   DERIVATIVE INSTRUMENTS

          Effective July 1, 2000, AKI 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 AKI's
     financial statements.

          AKI  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 AKI'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.  AKI primarily  utilizes  foreign  currency  forward  exchange
     contracts with maturities of less than six months,  which do not meet hedge
     accounting  criteria.  At December 31, 2001 there were no forward  exchange
     contracts outstanding.

6.   CONDENSED HOLDING COMPANY ONLY FINANCIAL STATEMENTS

          The following  condensed  balance sheets at December 31, 2001 and June
     30, 2001 and condensed  statements of operations,  changes in stockholder's
     equity and cash flows for the six months  ended  December 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
              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
         (dollars in thousands, except share and per share information)

6.   CONDENSED HOLDING COMPANY ONLY FINANCIAL STATEMENTS (Continued)


                                  BALANCE SHEET
<TABLE>
<CAPTION>

                                                                     December 31, 2001       June 30, 2001
                                                                     -----------------       -------------
                                                                        (unaudited)           (unaudited)

<S>                                                                    <C>                   <C>
     Assets
     Investment in subsidiaries...............................         $   100,799           $   102,237
     Deferred charges.........................................                 766                   806
     Deferred income taxes....................................               2,879                 2,338
                                                                       -----------           -----------

         Total assets.........................................         $   104,444           $   105,381
                                                                       ===========           ===========

     Liabilities
     Accrued income taxes.....................................         $       119           $       119
     Senior discount debentures...............................              25,540                23,926
                                                                       -----------           -----------

         Total liabilities....................................              25,659                24,045
                                                                       -----------           -----------

     Stockholder's equity
     Common Stock, $0.01 par value, 1,000 shares authorized
       1,000 shares issued and outstanding....................                   -                     -
     Additional paid-in capital...............................              93,656                93,656
     Accumulated deficit......................................             (14,871)              (12,320)
                                                                       -----------           -----------

         Total stockholder's equity...........................              78,785                81,336
                                                                       -----------           -----------

         Total liabilities and stockholder's equity...........         $   104,444           $   105,381
                                                                       ===========           ===========


</TABLE>



                             STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>

                                                                                Six months ended
                                                                     ---------------------------------------
                                                                     December 31, 2001     December 31, 2000
                                                                     -----------------     -----------------
                                                                        (unaudited)           (unaudited)

<S>                                                                    <C>                   <C>
     Equity in net income (loss) of subsidiaries..............         $    (1,438)          $     1,075
     Interest expense.........................................               1,654                 1,862
                                                                       -----------           -----------

         Loss before income taxes and extraordinary gain......              (3,092)                 (787)

     Income tax benefit.......................................                (541)                 (609)
                                                                       -----------           -----------

         Loss before extraordinary gain.......................              (2,551)                 (178)

     Extraordinary gain from early retirement of debt.........                   -                   494
                                                                       -----------           -----------

         Net income (loss) ...................................         $    (2,551)          $       316
                                                                       ===========           ===========


</TABLE>


<PAGE>


                       AKI HOLDING CORP. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
         (dollars in thousands, except share and per 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, 2001 (unaudited)...........     1,000    $     -      $   93,656     $   (12,320)   $    81,336

     Net loss (unaudited)..........................                                               (2,551)        (2,551)
                                                      -------    --------     ----------     -----------    -----------

     Balances, December 31, 2001 (unaudited).......     1,000    $     -      $   93,656     $   (14,871)   $   (78,785)
                                                      =======    ========     ==========     ===========    ===========

</TABLE>


                             STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>

                                                                                            Six months ended
                                                                               -----------------------------------------
                                                                               December 31, 2001       December 31, 2000
                                                                               -----------------       -----------------
                                                                                  (unaudited)             (unaudited)

<S>                                                                              <C>                     <C>
     Cash flows from operating activities
       Net income (loss)................................................         $    (2,551)            $       316
         Adjustments to reconcile net income to net cash provided by
           (used in) operating activities:
              Net change in investment in subsidiaries..................               1,438                  (1,075)
              Amortization of debt discount.............................               1,614                   1,817
              Amortization of debt issuance costs.......................                  40                      45
              Deferred income taxes.....................................                (541)                   (609)
              Gain from early retirement of debt........................                   -                    (494)
                                                                                 -----------             -----------

               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.....................................................         $         -             $     1,259



</TABLE>


<PAGE>


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

<TABLE>
<CAPTION>

                                                                                December 31,          June 30,
                                                                                    2001                2001
                                                                                -------------      -------------
                                                                                 (unaudited)         (unaudited)

<S>                                                                             <C>                <C>
ASSETS
Current assets
Cash and cash equivalents..................................................     $       1,894      $       4,654
Accounts receivable, net...................................................            19,930             18,020
Inventory..................................................................             8,434              6,330
Income tax refund receivable...............................................             1,366                  -
Prepaid expenses...........................................................               494                492
Deferred income taxes......................................................               770                770
                                                                                -------------      -------------

   Total current assets....................................................            32,888             30,266

Property, plant and equipment, net.........................................            21,788             15,778
Goodwill, net..............................................................           161,170            157,334
Other intangible assets, net...............................................             9,216              6,337
Deferred charges, net......................................................             3,885              3,575
Other assets...............................................................               116                 88
                                                                                -------------      -------------

   Total assets............................................................     $     229,063      $     213,378
                                                                                =============      =============

LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Current portion of capital lease obligations...............................     $           -      $         503
Current portion of long-term debt..........................................             1,000                  -
Accounts payable, trade....................................................             4,637              3,886
Accrued income taxes.......................................................                 -              1,523
Accrued compensation.......................................................             4,404              4,715
Accrued interest...........................................................             5,491              5,443
Accrued expenses...........................................................             4,681              3,908
                                                                                -------------      -------------

   Total current liabilities...............................................            20,213             19,978

Revolving loan.............................................................             7,700                  -
Term loan..................................................................             9,000                  -
Senior notes...............................................................           103,510            103,510
Deferred income taxes......................................................             2,142              2,357
Other non-current liabilities..............................................             1,968              1,863
                                                                                -------------      -------------

   Total liabilities.......................................................           144,533            127,708

Stockholder's equity
Common stock, $0.01 par 100,000 shares authorized;
   1,000 shares issued and outstanding.....................................                 -                  -
Additional paid-in capital.................................................           107,348            107,348
Accumulated deficit........................................................            (6,549)            (5,111)
Accumulated other comprehensive loss.......................................              (539)              (837)
Carryover basis adjustment.................................................           (15,730)           (15,730)
                                                                                --------------     -------------

   Total stockholder's equity..............................................            84,530             85,670
                                                                                -------------      -------------

   Total liabilities and stockholder's equity..............................     $     229,063      $     213,378
                                                                                =============      =============


</TABLE>


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


<PAGE>


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


<TABLE>
<CAPTION>


                                                              Three months ended                        Six months ended
                                                    -------------------------------------     -------------------------------------
                                                    December 31, 2001   December 31, 2000     December 31, 2001   December 31, 2000
                                                    -----------------   -----------------     -----------------   -----------------
                                                       (unaudited)         (unaudited)           (unaudited)         (unaudited)

<S>                                                     <C>                 <C>                   <C>                 <C>
Net sales.......................................        $  22,329           $  26,180             $  49,710           $  58,533
Cost of goods sold..............................           15,929              17,693                32,643              37,241
                                                        ---------           ---------             ---------           ---------

   Gross profit.................................            6,400               8,487                17,067              21,292

Selling, general and administrative expenses....            4,569               4,415                 8,764               8,933
Amortization of goodwill and other intangibles..            1,470               1,446                 2,916               2,865
                                                        ---------           ---------             ---------           ---------

   Income from operations.......................              361               2,626                 5,387               9,494

Other expenses:
   Interest expense to affiliate................                4                  68                     8                 181
   Interest expense other, net..................            3,034               3,276                 6,074               6,605
   Management fees and other, net...............               62                  63                   125                 125
                                                        ---------           ---------             ---------           ---------

   Income (loss) before income taxes and
     extraordinary gain.........................           (2,739)               (781)                 (820)              2,583

Income tax expense (benefit)....................             (599)                184                   618               1,964
                                                       ----------           ---------             ---------           ---------

   Income (loss) before extraordinary gain......           (2,140)               (965)               (1,438)                619

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

   Net income (loss)............................        $  (2,140)          $    (509)            $  (1,438)          $   1,075
                                                        =========           =========             =========           =========


</TABLE>


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


<PAGE>


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


<TABLE>
<CAPTION>

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

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

Net loss (unaudited)......................                                       (1,438)                                    (1,438)
Other comprehensive income, net of tax:
   Foreign currency translation
     adjustment (unaudited)...............                                                         298                         298
                                                                                                                         ---------

Comprehensive loss (unaudited)............                                                                                  (1,140)
                                            ------   -------    -----------    --------       --------      ----------   ---------

Balances, December 31, 2001 (unaudited)...   1,000   $   -      $   107,348    $ (6,549)      $   (539)     $  (15,730)  $  84,530
                                            ======   =======    ===========    ========       ========      ==========   =========


</TABLE>


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


<PAGE>


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


<TABLE>
<CAPTION>

                                                                                           Six months ended
                                                                                 ---------------------------------------
                                                                                 December 31, 2001     December 31, 2000
                                                                                 -----------------     -----------------
                                                                                    (unaudited)           (unaudited)

<S>                                                                                 <C>                   <C>
Cash flows from operating activities
   Net income (loss)....................................................            $    (1,438)          $     1,075
   Adjustments to reconcile net income (loss) to net cash provided by
   operating activities:
     Depreciation and amortization of goodwill and other intangibles....                  5,258                 5,036
     Amortization of debt issuance cost.................................                    295                   297
     Deferred income taxes..............................................                   (215)                   (6)
     Gain from early retirement of debt.................................                      -                  (456)
     Other..............................................................                    403                  (305)
     Changes in operating assets and liabilities:
       Accounts receivable..............................................                  1,325                (1,896)
       Inventory........................................................                    320                   756
       Prepaid expenses, deferred charges and other assets..............                     43                  (377)
       Accounts payable and accrued expenses............................                 (2,885)               (2,065)
       Income taxes.....................................................                 (2,889)                1,128
                                                                                    -----------           -----------

         Net cash provided by operating activities......................                    217                 3,187
                                                                                    -----------           -----------

Cash flows from  investing activities
   Purchases of equipment...............................................                   (470)               (2,112)
   Patents..............................................................                    (46)                    -
   Payments for acquisition, net of cash acquired.......................                (19,053)                    -
                                                                                    -----------           -----------

         Net cash used in investing activities..........................                (19,569)               (2,112)
                                                                                    -----------           -----------

Cash flows from  financing activities
   Payments under capital leases........................................                   (503)                 (834)
   Repurchase of long-term debt.........................................                      -                (3,110)
   Net proceeds (repayments) on revolving loan..........................                  7,700                (1,450)
   Net proceeds on term loan............................................                 10,000                     -
   Payments of loan closing costs.......................................                   (605)                    -
   Net proceeds from promissory note to affiliate.......................                      -                 3,661
                                                                                    -----------           -----------

         Net cash provided by (used in) financing activities............                 16,592                (1,733)
                                                                                    -----------           -----------

Net decrease in cash and cash equivalents...............................                 (2,760)                 (658)
Cash and cash equivalents, beginning of period..........................                  4,654                 1,158
                                                                                    -----------           -----------

Cash and cash equivalents, end of period................................            $     1,894           $       500
                                                                                    ===========           ===========


Supplemental information
   Cash paid during the period for:
     Interest, other....................................................            $     5,609           $     6,388
     Interest to affiliate..............................................                      8                   174
     Income taxes.......................................................                  3,763                   866


</TABLE>

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


<PAGE>


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


1.   BASIS OF PRESENTATION

          AKI, Inc. ("AKI") is the successor to Arcade Holding  Corporation (the
     "Predecessor"),  which was acquired by AHC I Acquisition,  Corp. ("AHC") in
     December  1997.  AHC was  organized for the purpose of acquiring all of the
     equity interests of the Predecessor and subsequent to such acquisition, AHC
     contributed  $1 and all of its  ownership  interest  to AKI  Holding  Corp.
     ("Holding") for all of the outstanding equity of Holding.  Accordingly, AKI
     is a wholly owned subsidiary of Holding, which is a wholly owned subsidiary
     of AHC.

          AKI is engaged in interactive  multi-sensory  advertising for consumer
     product  companies  and  has a  specialty  in the  design,  production  and
     distribution  of  sampling  systems  from its  Chattanooga,  Tennessee  and
     Baltimore,  Maryland  facilities  and  distributes  its  products in Europe
     through its French subsidiary, Arcade Europe S.A.R.L.

     Acquisition of Color Prelude business

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

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

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


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

<TABLE>
<CAPTION>
                                                           Three months ended             Six months ended
                                                              December 31,                  December 31,
                                                              ------------                  -----------

                                                           2001           2000            2001           2000
                                                           ----           ----            ----           ----

<S>                                                     <C>            <C>             <C>            <C>
Revenue............................................     $ 26,215       $ 29,990        $ 56,043       $ 64,958
Income (loss) before extraordinary items...........       (1,889)          (733)         (1,479)           610
Net income (loss)..................................       (1,889)          (277)         (1,479)         1,066


</TABLE>


     Interim financial statements

          The interim consolidated  condensed balance sheet at December 31, 2001
     and the interim  consolidated  condensed  statements of operations  for the
     three  and six  months  ended  December  31,  2001 and  2000,  the  interim
     consolidated  condensed  statements  of cash flows for the six months ended
     December 31, 2001 and 2000


<PAGE>


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


1.   BASIS OF PRESENTATION (continued)

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

     Reclassification

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

2.   INVENTORY

          The following table details the components of inventory:

                                             December 31, 2001    June 30, 2001
                                             -----------------    -------------
                                                (unaudited)        (unaudited)
      Raw materials
          Paper..........................        $    2,490         $    1,796
          Other raw materials............             4,069              2,697
                                                 ----------         ----------
              Total raw materials........             6,559              4,493
       Work in process....................            1,875              1,837
                                                 ----------         ----------

       Total inventory....................       $    8,434         $    6,330
                                                 ==========         ==========

3.   RETIREMENT OF DEBT

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

4.   AMENDED AND RESTATED CREDIT AGREEMENT

          On December  18, 2001,  AKI amended and restated its credit  agreement
     with Heller Financial,  Inc.  ("restated credit  agreement").  The restated
     credit agreement  provides for: (1) a $10.0 million term loan which matures
     on  December  31,  2006  with  varying  quarterly  principal   installments
     beginning  March  31,  2002 and (2) a  revolving  loan  commitment  up to a
     maximum of $20.0 million which expires  December 31, 2006.  Borrowings  are
     limited to a borrowing base  consisting of accounts  receivable,  inventory
     and  property,  plant  and  equipment  which  serve as  collateral  for the
     borrowings.  Interest on amounts borrowed under the term loan and revolving
     loan accrue at a floating  rate based upon either prime or LIBOR as elected
     by the  Company.  The initial rate of interest  under the  restated  credit
     agreement  was 125  basis  points  higher  than  the  interest  rate of the
     previous credit  agreement.  The Company is required to pay commitment fees
     on the unused portion of the revolving loan commitment.


<PAGE>


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

5.   DERIVATIVE INSTRUMENTS

          Effective July 1, 2000, AKI 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 AKI's
     financial statements.

          AKI  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 AKI'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.  AKI primarily  utilizes  foreign  currency  forward  exchange
     contracts with maturities of less than six months,  which do not meet hedge
     accounting  criteria.  At December 31, 2001 there were no forward  exchange
     contracts outstanding.


<PAGE>


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

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

General

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

Results of Operations

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

     Net Sales. Net sales for the three months ended December 31, 2001 decreased
$3.9 million,  or 14.9%, to $22.3 million,  as compared to $26.2 million for the
three months ended  December 31, 2000.  The decrease in net sales was  primarily
attributable  to decreases in volume of domestic sales of sampling  technologies
for  advertising  and  marketing of  fragrance,  cosmetic and consumer  products
partially offset by sales of sampling technologies for advertising and marketing
of  cosmetics by CP. We believe the decline of domestic  sales is  predominately
attributable to the weak economic conditions in the United States,  particularly
in the advertising  industry.  We expect the significant decline in sales of our
core products, experienced in our second fiscal quarter, to continue through the
remainder  of our fiscal  year.  We cannot  predict if this trend will worsen or
when sales may increase in the future. We believe,  however, that the continuing
decline  in core  product  sales  may be  partially  offset  by  sales of the CP
products.

     Gross  Profit.  Gross profit for the three  months ended  December 31, 2001
decreased $2.1 million,  or 24.7%, to $6.4 million,  as compared to $8.5 million
for three months ended  December 31, 2000.  Gross profit as a percentage  of net
sales decreased to 28.7% in the three months ended December 31, 2001, from 32.4%
in the three  months ended  December 31, 2000.  The decrease in gross profit and
gross profit as a percentage of net sales is  substantially  due to the decrease
in sales volume and changes in product mix partially  offset by reduced  premium
labor and paper costs.

     Selling,  General  and  Administrative   Expenses.   Selling,  general  and
administrative  expenses for the three months ended  December 31, 2001 increased
$0.2  million,  or 4.6%,  to $4.6  million,  as compared to $4.4 million for the
three  months  ended  December 31,  2000.  Selling,  general and  administrative
expenses as a percent of net sales  increased to 20.6% in the three months ended
December 30, 2001,  from 16.8% in the three months ended  December 31, 2000. The
increase in selling,  general and administrative expenses is primarily due to an
increase in legal fees related to a patent  infringement  lawsuit brought by AKI
and a bonus compensation payment related to the CP acquisition.  These increased
expenses were partially offset by a decrease in sales commissions.  The increase
in selling,  general and  administrative  expenses as a percent of net sales was
primarily due to the decrease in net sales described above.

     Income from  Operations.  Income from operations for the three months ended
December 31, 2001 decreased $2.2 million, or 84.6%, to $0.4 million, as compared
to $2.6  million for the three  months  ended  December  31,  2000.  Income from
operations  as a percentage  of net sales  decreased to 1.8% in the three months
ended December 30, 2001,  from 9.9% in the three months ended December 31, 2000.
The  decrease  in  income  from  operations  and  income  from  operations  as a
percentage  of net sales is  principally  the  result of the  factors  described
above.


<PAGE>


     Interest Expense.  Interest expense for the three months ended December 31,
2001  decreased  $0.3 million,  or 7.1%,  to $3.9  million,  as compared to $4.2
million for the three months ended  December  31,  2000.  Interest  expense as a
percentage  of net sales  increased to 17.5% in the three months ended  December
30, 2001,  from 16.0% in the three months ended  December 31, 2000. The decrease
in interest expense,  including the amortization of deferred financing costs, is
primarily due to repurchased and retired Senior  Discount  Debentures and Senior
Notes,  reduced average  borrowings  under the revolving loan and the promissory
note to a stockholder.

     Interest  expense  for AKI for the three  months  ended  December  31, 2001
decreased  $0.3 million,  or 9.1%, to $3.0 million,  as compared to $3.3 million
for the three months ended December 31, 2000.  Interest  expense as a percentage
of net sales  increased to 13.5% in the three  months  ended  December 31, 2001,
from 12.6% in the three months ended December 31, 2000. The decrease in interest
expense,  including the  amortization of deferred  financing costs, is primarily
due to repurchased  and retired  Senior Notes,  and reduced  average  borrowings
under the revolving loan and a promissory note to an affiliate.

     Income Tax Benefit.  Income tax benefit for the three months ended December
31, 2001  increased  $0.8 million to $0.9 million.  The Company's  effective tax
rate, after consideration of non-deductible goodwill amortization,  was 38.5% in
the three  months ended  December 31, 2001,  and 23.0% in the three months ended
December 31, 2000.

     Income tax benefit for AKI for the three  months  ended  December  31, 2001
increased  $0.8  million  to $0.6  million.  AKI's  effective  tax  rate,  after
consideration  of  non-deductible  goodwill  amortization,  was 39% in the three
months ended December 31, 2001 and 2000.

     Extraordinary  Gain from Early Retirement of Debt.  Extraordinary gain from
early retirement of debt of $1.0 million for the three months ended December 31,
2000 resulted from the purchase and subsequent  contribution  of Senior Discount
Debentures  by  AHC  I  Acquisition   Corp.  The  contributed   securities  were
subsequently retired.

     Extraordinary  gain from early  retirement  of debt for AKI of $0.5 million
for the three  months  ended  December  31, 2000  resulted  from the purchase of
Senior Notes by AKI. The purchased securities were subsequently retired.

     EBITDA.  EBITDA for the three months ended December 31, 2001 decreased $2.1
million,  or 41.2%,  to $3.0 million,  as compared to $5.1 million for the three
months ended December 31, 2000. The decrease in EBITDA principally  reflects the
decrease in gross profit and the increase in selling, general and administrative
expenses  discussed  above.  EBITDA as a  percentage  of net sales was 13.5% and
19.5% in the three months ended December 31, 2001 and 2000, respectively. EBITDA
is income from operations  plus  depreciation  and  amortization of goodwill and
other intangibles.

            Six Months Ended December 31, 2001 Compared to Six Months
                             Ended December 31, 2000

     Net Sales.  Net sales for the six months ended  December 31, 2001 decreased
$8.8  million,  or 15.0%,  to $49.7 million as compared to $58.5 million for the
six months ended December 31, 2000. The decrease was primarily  attributable  to
decreases in volume of domestic sales of sampling  technologies  for advertising
and marketing of fragrance,  cosmetic and consumer products, partially offset by
sales of sampling technologies for advertising and marketing of cosmetics by CP.
We believe the decline in domestic sales is  predominately  attributable  to the
weak economic  conditions in the United States,  particularly in the advertising
industry.  We expect  the  significant  decline  in sales of our core  products,
experienced  in our first and second fiscal  quarters,  to continue  through the
remainder  of our fiscal  year.  We cannot  predict if this trend will worsen or
when sales may increase in the future. We believe,  however, that the continuing
decline  in core  product  sales  may be  partially  offset  by  sales of the CP
products.

     Gross  Profit.  Gross  profit for the six months  ended  December  31, 2001
decreased $4.2 million,  or 19.7%, to $17.1 million as compared to $21.3 million
for six months  ended  December 31,  2000.  Gross profit as a percentage  of net
sales  decreased to 34.4% in the six months ended December 31, 2001,  from 36.4%
in the six months  ended  December  31,  2000.  The decrease in gross profit and
gross profit as a percentage of net sales is


<PAGE>


substantially  due to the  decrease  in sales  volume and changes in product mix
partially offset by reduced premium labor and paper costs.

     Selling,  General  and  Administrative   Expenses.   Selling,  general  and
administrative  expenses  for the six months ended  December 31, 2001  decreased
$0.1  million,  or 1.1%, to $8.8 million as compared to $8.9 million for the six
months  ended  December  31,  2000.   The  decrease  in  selling,   general  and
administrative  expenses was  primarily  due to a one-time  severance  charge in
2000,  a  decrease  in  personnel  in 2001 and a decrease  in sales  commissions
partially  offset by an increase in legal fees related to a patent  infringement
lawsuit  brought  by AKI  and a bonus  compensation  payment  related  to the CP
acquisition.  Selling,  general and administrative  expenses as a percent of net
sales increased to 17.7% in the six months ended December 31, 2001 from 15.2% in
the six months ended  December 31,  2000,  primarily  due to the decrease in net
sales.

     Income from  Operations.  Income from  operations  for the six months ended
December 31, 2001 decreased $4.1 million, or 43.2%, to $5.4 million, as compared
to $9.5  million  for the six  months  ended  December  31,  2000.  Income  from
operations  as a  percentage  of net sales  decreased to 10.9% in the six months
ended  December 31, 2001,  from 16.2% in six months ended December 31, 2000. The
decrease in income from operations and income from operations as a percentage of
net sales is principally the result of the factors described above.

     Interest  Expense.  Interest  expense for the six months ended December 31,
2001  decreased  $0.9 million,  or 10.5%,  to $7.7 million,  as compared to $8.6
million  for the six months  ended  December  31,  2000.  Interest  expense as a
percentage of net sales  increased to 15.5% in the six months ended December 31,
2001 from 14.7% in the six months  ended  December  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  and  reduced  average
borrowings under the revolving loan and the promissory note to a stockholder.

     Interest  expense  for AKI  for the six  months  ended  December  31,  2001
decreased $0.7 million,  or 10.3%, to $6.1 million,  as compared to $6.8 million
for the six months ended December 31, 2000.  Interest expense as a percentage of
net sales  increased  to 12.3% in the six months ended  December 31, 2001,  from
11.6% in the six months  ended  December  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 and reduced  average  borrowings  under the  revolving  loan and a
promissory note to an affiliate.

     Income Tax Expense.  Income tax expense for the six months  ended  December
31, 2001  decreased  $1.3 million to $0.1 million.  The Company's  effective tax
rate, after consideration of non-deductible goodwill amortization,  was 53.1% in
the six  months  ended  December  31,  2001 and  43.4% in the six  months  ended
December 31, 2000.

     Income tax  expense  for AKI for the six months  ended  December  31,  2001
decreased  $1.4  million  to $0.6  million.  AKI's  effective  tax  rate,  after
consideration  of  non-deductible  goodwill  amortization,  was 39.0% in the six
months ended December 31, 2001 and 2000.

     Extraordinary  Gain from Early Retirement of Debt.  Extraordinary gain from
early  retirement of debt of $1.0 million for the six months ended  December 31,
2000 resulted from the purchase and subsequent  contribution  of Senior Discount
Debentures  by  AHC  I  Acquisition   Corp.  The  contributed   securities  were
subsequently retired.

     Extraordinary  gain from early  retirement  of debt for AKI of $0.5 million
for the six months ended  December 31, 2000 resulted from the purchase of Senior
Notes by AKI. The purchased securities were subsequently retired.

     EBITDA.  EBITDA for the six months ended  December 31, 2001  decreased $3.9
million,  or 26.9%,  to $10.6  million as compared to $14.5  million for the six
months ended December 31, 2000. The decrease in EBITDA principally  reflects the
decrease in gross profit  partially  offset by the decrease in selling,  general
and administrative expenses discussed above. EBITDA as a percentage of net sales
was  21.3%  and  24.8%  in the six  months  ended  December  31,  2001  and 2000
respectively.   EBITDA  is  income  from   operations  plus   depreciation   and
amortization of goodwill and other intangibles.


<PAGE>


Liquidity and Capital Resources

     We have substantial  indebtedness and significant debt service obligations.
As of December 31, 2001, we had consolidated indebtedness in an aggregate amount
of $146.7 million (excluding trade payables, accrued liabilities, deferred taxes
and other non-current  liabilities),  of which approximately $25.5 million was a
direct obligation of Holding relating to its debentures and approximately $121.2
million was a direct  obligation  of AKI  relating  to its notes,  term loan and
revolving loan.  Borrowings at December 31, 2001 included $7.7 million under the
revolving  loan and $10.0  million  under the term  loan that were  incurred  to
acquire  CP. At  December  31,  2001 we had $12.3  million  available  under the
revolving  loan. At December 31, 2001,  AKI also had $23.3 million in additional
outstanding liabilities (including trade payables, accrued liabilities, deferred
taxes and other non-current liabilities).

     Holding's   principal   liquidity   requirements   are  for  debt   service
requirements under the debentures.  AKI's principal  liquidity  requirements are
for debt service  requirements and fees under the notes, term loan and revolving
loan.  Historically,  we have funded our  capital,  debt  service and  operating
requirements  with a combination  of net cash provided by operating  activities,
together  with  borrowings  under  the  revolving  loan and  promissory  note to
affiliate.  During the six months ended  December 31, 2001,  cash  totaling $0.2
million was provided by operating  activities  resulting  from net income before
depreciation and amortization and a decrease in accounts  receivable,  partially
offset by decreases in accounts  payable and accrued expenses and accrued income
taxes. During the six months ended December 31, 2000, cash totaling $3.2 million
was  provided  by  operating   activities   resulting  from  net  income  before
depreciation  and  amortization,  a decrease  in  inventory  and an  increase in
accrued income tax,  partially offset by an increase in accounts  receivable and
decreases in accounts payable and accrued expenses.

     On December  18, 2001 we amended and  restated  our credit  agreement  with
Heller  Financial,  Inc.  ("restated  credit  agreement").  The restated  credit
agreement  provides for: (1) a $10.0 million term loan which matures on December
31, 2006 with varying quarterly principal  installments beginning March 31, 2002
and (2) a  revolving  loan  commitment  up to a maximum of $20.0  million  which
expires December 31, 2006. Borrowings are limited to a borrowing base consisting
of accounts receivable,  inventory and property, plant and equipment which serve
as collateral for the  borrowings.  Interest on amounts  borrowed under the term
loan and  revolving  loan accrue at a floating  rate based upon either  prime or
LIBOR.  The initial rate of interest under the restated credit agreement was 125
basis points higher than the interest rate of the previous credit agreement. The
Company  is  required  to pay  commitment  fees  on the  unused  portion  of the
revolving loan commitment.

     In the six  months  ended  December  31,  2001  and  2000,  we had  capital
expenditures of approximately $0.5 million and $2.1 million, respectively. These
capital  expenditures  consisted  primarily  of the  purchase  of  manufacturing
equipment and upgrading our computer systems.

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

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

     As of December 31, 2001,  AKI had purchased and retired $4.0 million of AKI
Senior Notes originally issued in 1998.

     Capital  expenditures for the six months ending June 30, 2002 are currently
estimated to be approximately $2.0 million.  Based on borrowings  outstanding as
of December 31, 2001, we expect total cash payments for debt service for the six
months ending June 30, 2002 to be approximately $6.5 million, consisting of $5.4
million in interest  payments of the notes,  $0.5 million in principal  payments
under the term loan,  $0.3 million in interest  payments under the term loan and
$0.3 million in interest and fees under the  revolving  loan.  We also expect to
make royalty payments of approximately $0.3 million during the six months ending
June 30, 2002.


<PAGE>


     At December 31, 2001,  Holding's cash and cash  equivalents and net working
capital  were $1.9  million  and $12.6  million,  respectively,  representing  a
decrease  in cash and cash  equivalents  of $2.8  million and an increase in net
working capital of $2.4 million from June 30, 2001. Account receivables, net, at
December 31, 2001 increased  10.6% or $1.9 million over the June 30, 2001 amount
as a result of the CP acquisition.

Seasonality

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

Recently Issued Accounting Standards

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

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

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

Forward-Looking Statements

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

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


<PAGE>


the results of any revisions to any of the forward-looking  statements contained
in this document to reflect future events or developments.



ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We  generate  approximately  21% of our sales from  customers  outside  the
United States,  principally in Europe.  International sales are made mostly from
our foreign  subsidiary  located in France and are primarily  denominated in the
local currency.  Our foreign subsidiary also incurs the majority of its expenses
in the local currency and uses the local currency as its functional currency.

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

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

               On  December  26,  2001,  AKI  Holding  Corp.  filed  a Form  8-K
               reporting the acquisition of substantially  all of the assets and
               the assumption of certain liabilities of Color Prelude, Inc.


<PAGE>


                                   SIGNATURES

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


                                  AKI HOLDING CORP.

Date:  February 14, 2002          By:      /s/ Kenneth A. Budde
                                           -----------------------------------
                                           Kenneth A. Budde
                                           Senior Vice President &
                                              Chief Financial Officer
                                              (Principal Financial and
                                              Accounting Officer)

                                  AKI, INC.

Date:  February 14, 2002          By:      /s/ Kenneth A. Budde
                                           -----------------------------------
                                           Kenneth A. Budde
                                           Senior Vice President &
                                              Chief Financial Officer
                                              (Principal Financial and
                                              Accounting Officer)


<PAGE>