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, 2000

                                       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 February 12, 2001, 1,000 shares of common stock of AKI Holding Corp., $.01
par value,  were outstanding and 1,000 shares of common stock of AKI, Inc., $.01
par value, were outstanding.

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


<PAGE>







                       AKI HOLDING CORP. AND SUBSIDIARIES

                               INDEX TO FORM 10-Q

Part I.  FINANCIAL INFORMATION

         Item 1.  Financial Statements

                  AKI Holding Corp. and Subsidiaries

                  Consolidated Condensed Balance Sheet

                  - December 31, 2000 (unaudited)
                  - June 30, 2000 (unaudited)

                  Consolidated Condensed Statements of Operations

                  - Three months ended December 31, 2000 (unaudited)
                  - Three months ended December 31, 1999 (unaudited)
                  - Six months ended December 31, 2000 (unaudited)
                  - Six months ended December 31, 1999 (unaudited)

                  Consolidated Condensed Statement of Changes in
                  Stockholder's Equity

                  - Six months ended December 31, 2000 (unaudited)

                  Consolidated Condensed Statements of Cash Flows

                  - Six months ended December 31, 2000 (unaudited)
                  - Six months ended December 31, 1999 (unaudited)

                  Notes to Consolidated Condensed Financial Statements


<PAGE>


         Item 1.  Financial Statements (continued)

                  AKI, Inc. and Subsidiaries

                  Consolidated Condensed Balance Sheet

                  - December 31, 2000 (unaudited)
                  - June 30, 2000 (unaudited)

                  Consolidated Condensed Statements of Operations

                  - Three months ended December 31, 2000 (unaudited)
                  - Three months ended December 31, 1999 (unaudited)
                  - Six months ended December 31, 2000 (unaudited)
                  - Six months ended December 31, 1999 (unaudited)

                  Consolidated Condensed Statement of Changes in
                  Stockholder's Equity

                  - Six months ended December 31, 2000 (unaudited)

                  Consolidated Condensed Statements of Cash Flows

                  - Six months ended December 31, 2000 (unaudited)
                  - Six months ended December 31, 1999 (unaudited)

                  Notes to Consolidated Condensed Financial Statements

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

Part II. OTHER INFORMATION

         Item 6.  Exhibits and Reports on Form 8-K



<PAGE>


                       AKI HOLDING CORP. AND SUBSIDIARIES
             (A WHOLLY-OWNED SUBSIDIARY OF AHC I ACQUISITION CORP.)
                      CONSOLIDATED CONDENSED BALANCE SHEETS
                (dollars in thousands, except share information)
<TABLE>
<CAPTION>
                                                                                DECEMBER 31,          JUNE 30,
                                                                                    2000                2000
                                                                                -------------      -------------
                                                                                 (unaudited)         (unaudited)

<S>                                                                             <C>                <C>
ASSETS

CURRENT ASSETS
Cash and cash equivalents..................................................     $         500      $       1,158
Accounts receivable, net...................................................            23,418             21,522
Inventory..................................................................             7,001              7,757
Prepaid expenses...........................................................               469                 92
Deferred income taxes......................................................               396                396
                                                                                -------------      -------------

   TOTAL CURRENT ASSETS....................................................            31,784             30,925

Property, plant and equipment, net.........................................            17,047             17,097
Goodwill, net..............................................................           160,069            162,472
Other intangible assets, net...............................................             6,702              7,174
Deferred charges, net......................................................             4,891              5,461
Deferred income taxes......................................................               498                720
Other assets...............................................................                89                 88
                                                                                -------------      -------------

   TOTAL ASSETS............................................................     $     221,080      $     223,937
                                                                                =============      =============

LIABILITIES AND STOCKHOLDER'S EQUITY

CURRENT LIABILITIES
Current portion of capital lease obligations...............................     $         515      $         847
Accounts payable, trade....................................................             2,546              3,565
Accrued income taxes.......................................................             2,143                724
Accrued compensation.......................................................             3,294              3,965
Accrued interest...........................................................             5,514              5,695
Accrued expenses...........................................................             2,175              2,370
                                                                                -------------      -------------

   TOTAL CURRENT LIABILITIES...............................................            16,187             17,166

Long-term portion of capital lease obligations.............................                 -                502
Revolving credit line......................................................             7,550              9,000
Senior notes...............................................................           103,510            107,510
Senior discount debentures.................................................            27,528             27,863
Promissory note to stockholder.............................................             3,661                  -
Deferred income taxes......................................................               141                663
Other non-current liabilities..............................................             2,509              2,399
                                                                                -------------      -------------

   TOTAL LIABILITIES.......................................................           161,086            165,103

STOCKHOLDER'S EQUITY
Common stock, $0.01 par 1,000 shares authorized;
    1,000 shares issued and outstanding....................................                 -                  -
Additional paid-in capital.................................................            90,194             88,935
Accumulated deficit........................................................           (13,513)           (13,829)
Accumulated other comprehensive loss.......................................              (957)              (542)
Carryover basis adjustment.................................................           (15,730)           (15,730)
                                                                                -------------      -------------

   TOTAL STOCKHOLDER'S EQUITY..............................................            59,994             58,834
                                                                                -------------      -------------


   TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY..............................     $     221,080      $     223,937
                                                                                =============      =============
</TABLE>









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


<PAGE>


                       AKI HOLDING CORP. AND SUBSIDIARIES
             (A WHOLLY-OWNED SUBSIDIARY OF AHC I ACQUISITION CORP.)
                 CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
                             (dollars in thousands)
<TABLE>
<CAPTION>


                                                             THREE MONTHS ENDED                      SIX MONTHS ENDED
                                                             ------------------                      ----------------
                                                   DECEMBER 31, 2000   DECEMBER 31, 1999    DECEMBER 31, 2000   DECEMBER 31, 1999
                                                   -----------------   -----------------    -----------------   -----------------
                                                      (unaudited)         (unaudited)          (unaudited)         (unaudited)

<S>                                                   <C>                 <C>                  <C>                 <C>
Net sales...................................          $  25,459           $  20,508            $  57,089           $  48,887
Cost of goods sold..........................             16,972              13,288               35,797              29,080
                                                      ---------           ---------            ---------           ---------

   Gross profit.............................              8,487               7,220               21,292              19,807

Selling, general and administrative expenses              4,415               4,497                8,933               8,655
Amortization of goodwill and other
  intangibles...............................              1,446               1,391                2,865               2,555
Gain from settlement of litigation, net.....                  -                (870)                   -                (870)
                                                      ---------           ---------            ---------           ---------

   Income from operations...................              2,626               2,202                9,494               9,467

Other expenses:
   Interest expense to stockholder..........                 68                   -                  181                   -
   Interest expense other, net..............              4,176               4,295                8,467               8,667
   Management fees and other, net...........                 63                  62                  125                 125
                                                      ---------           ---------            ---------           ---------

   Income (loss) before income taxes and
     extraordinary gain.....................             (1,681)             (2,155)                 721                 675

Income tax expense (benefit)................               (110)               (645)               1,355                 904
                                                      ---------           ---------            ---------           ---------

   Loss before extraordinary gain...........             (1,571)             (1,510)                (634)               (229)

Extraordinary gain from early retirement of
   debt, net of tax.........................                950                 846                  950                 846
                                                      ---------           ---------            ---------           ---------

   Net income (loss)........................          $    (621)          $    (664)           $     316           $     617
                                                      =========           =========            =========           =========
</TABLE>

























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


<PAGE>



                       AKI HOLDING CORP. AND SUBSIDIARIES
             (A WHOLLY-OWNED SUBSIDIARY OF AHC I ACQUISITION CORP.)
       CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
                (dollars in thousands, except share information)

<TABLE>
<CAPTION>

                                                                                             ACCUMULATED
                                                                  ADDITIONAL                    OTHER        CARRYOVER
                                               COMMON STOCK        PAID-IN     ACCUMULATED  COMPREHENSIVE      BASIS
                                             SHARES   DOLLARS      CAPITAL       DEFICIT         LOSS        ADJUSTMENT     TOTAL
                                             ------   -------      -------       -------         ----        ----------     -----

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

Equity contribution by AHC I
   Acquisiton Corp. (unaudited)........                               1,259                                                  1,259

Net income (unaudited).................                                              316                                       316

Other comprehensive income, net of tax:
   Foreign currency translation
     adjustment (unaudited)............                                                          (415)                        (415)
                                                                                                                          --------

Comprehensive income (unaudited).......                                                                                        (99)
                                            -------   -------     ---------    ---------     --------        ---------    --------

BALANCES, DECEMBER 31, 2000 (unaudited)      1,000    $  --       $  90,194    $ (13,513)    $   (957)       $ (15,730)   $ 59,994
                                            =======   =======     =========    =========     ========        =========    ========

</TABLE>


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



<PAGE>



                       AKI HOLDING CORP. AND SUBSIDIARIES
             (A WHOLLY-OWNED SUBSIDIARY OF AHC I ACQUISITION CORP.)
                 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
                             (dollars in thousands)

<TABLE>
<CAPTION>



                                                                                                     SIX MONTHS ENDED
                                                                                                     ----------------
                                                                                          DECEMBER 31, 2000    DECEMBER 31, 1999
                                                                                          -----------------    -----------------
                                                                                             (unaudited)          (unaudited)

<S>                                                                                          <C>                 <C>
CASH FLOWS FROM OPERATING ACTIVITIES

   Net income...................................................................             $       316         $       617
   Adjustments to reconcile net income to net cash used in operating activities:
     Depreciation and amortization of goodwill and other intangibles............                   5,036               4,734
     Amortization of debt discount..............................................                   1,817               1,876
     Amortization of debt issuance costs........................................                     342                 401
     Deferred income taxes......................................................                    (615)              1,192
     Gain from early retirement of debt.........................................                    (950)               (846)
     Other......................................................................                    (305)                (19)
     Changes in operating assets and liabilities:
       Accounts receivable......................................................                  (1,896)              1,167
       Inventory................................................................                     756                 (90)
       Prepaid expenses, deferred charges and other assets......................                    (377)                213
       Accounts payable and accrued expenses....................................                  (2,065)             (4,150)
       Income taxes.............................................................                   1,128                 (32)
                                                                                             -----------         -----------

         Net cash provided by operating activities..............................                   3,187               5,063
                                                                                             -----------         -----------

CASH FLOWS FROM INVESTING ACTIVITIES

   Purchases of equipment.......................................................                  (2,112)             (1,125)
   Payments for acquisitions, net of cash acquired..............................                       -             (16,162)
                                                                                             -----------         -----------

         Net cash used in investing activities..................................                  (2,112)            (17,287)
                                                                                             -----------         -----------

CASH FLOWS FROM FINANCING ACTIVITIES

   Payments under capital leases for equipment..................................                    (834)               (336)
   Repurchase of long-term debt.................................................                  (3,110)                  -
   Net proceeds (repayments) on line of credit..................................                  (1,450)              6,100
   Net proceeds from promissory note to stockholder.............................                   3,661                   -
                                                                                             -----------         -----------

         Net cash provided by (used in) financing activities....................                  (1,733)              5,764
                                                                                             -----------         -----------

Net (decrease) in cash and cash equivalents.....................................                    (658)             (6,460)
Cash and cash equivalents, beginning of period..................................                   1,158               7,015
                                                                                             -----------         -----------

Cash and cash equivalents, end of period........................................             $       500         $       555
                                                                                             ===========         ===========

SUPPLEMENTAL INFORMATION
 Cash paid during the period for:
     Interest, other............................................................             $     6,388         $     6,177
     Interest to stockholder....................................................                     174                   -
     Income taxes...............................................................                     866                  47

SIGNIFICANT NON-CASH ACTIVITIES
   Contribution of equity and retirement of senior discount debentures
     and senior notes...........................................................             $     1,259         $     8,071

</TABLE>





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


<PAGE>




                       AKI HOLDING CORP. AND SUBSIDIARIES
             (A WHOLLY OWNED SUBSIDIARY OF AHC I ACQUISITION CORP.)
              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                (dollars in thousands, except share information)

1.   BASIS OF PRESENTATION

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

     INTERIM FINANCIAL STATEMENTS

         The interim  consolidated  condensed balance sheet at December 31, 2000
     and the interim  consolidated  condensed  statements of operations  for the
     three  and six  months  ended  December  31,  2000 and  1999,  the  interim
     consolidated  condensed  statements  of cash flows for the six months ended
     December 31, 2000 and 1999 and the interim consolidated condensed statement
     of changes in  stockholder's  equity for the six months ended  December 31,
     2000 are unaudited, and certain information and footnote disclosure related
     thereto,   normally  included  in  the  financial  statements  prepared  in
     accordance  with  generally  accepted  accounting  principles,   have  been
     omitted.  The June 30, 2000 consolidated balance sheet was derived from the
     Company's  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
     preparation  of the  audited  financial  statements  and  all  adjustments,
     consisting  only of normal  recurring  adjustments  to fairly  present  the
     financial  position,  results of operations  and cash flows with respect to
     the  interim  consolidated   condensed  financial  statements,   have  been
     included.  The  results  of  operations  for the  interim  periods  are not
     necessarily indicative of the results for the entire year.

2.   INVENTORY

         The following table details the components of inventory:

                                            DECEMBER 31, 2000     JUNE 30, 2000
                                            -----------------     -------------
                                               (unaudited)          (unaudited)
              Raw materials
                  Paper...................     $     2,477          $    3,944
                  Other raw materials.....           2,496               2,541
                                               -----------          ----------

              Total raw materials.........           4,973               6,485
              Work in process.............           2,028               1,272
                                               -----------          ----------

              Net inventory...............     $     7,001          $    7,757
                                               ===========          ==========







<PAGE>


                       AKI HOLDING CORP. AND SUBSIDIARIES
             (A WHOLLY OWNED SUBSIDIARY OF AHC I ACQUISITION CORP.)
              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                (dollars in thousands, except share information)

3.   RETIREMENT OF DEBT

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

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

4.   PROMISSORY NOTE TO STOCKHOLDER

         In May 2000, the Company signed a promissory  note payable to AHC which
     allows the Company to borrow up to $10 million at such  interest  rates and
     due as agreed upon by the Company and AHC. At December 31, 2000, $3,661 was
     outstanding bearing interest at prime and is due December 31, 2002.

5.   DERIVATIVE INSTRUMENTS

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

         The Company  purchases  and sells its products in a number of countries
     throughout  the world and, as a result,  is exposed to movements in certain
     foreign  currency  exchange  rates.  The primary  purpose of the  Company's
     foreign currency hedging activities is to manage the short-term  volatility
     associated with foreign  currency  purchases and sales in the normal course
     of  business.  The Company  primarily  utilizes  foreign  currency  forward
     exchange  contracts with  maturities of less than six months,  which do not
     meet hedge  accounting  criteria.  The fair value of these  instruments  at
     December 31, 2000 was not material and the net impact of the related  gains
     and losses were not material.

6.   CONDENSED HOLDING COMPANY ONLY FINANCIAL STATEMENTS

         The following  condensed  balance  sheets at December 31, 2000 and June
     30, 2000 and condensed  statements of operations,  changes in stockholder's
     equity and cash flows for the six months  ended  December 31, 2000 and 1999
     for Holding have been prepared on the equity basis of accounting and should
     be read in conjunction with the consolidated statements and notes thereto.


<PAGE>


                       AKI HOLDING CORP. AND SUBSIDIARIES
             (A WHOLLY OWNED SUBSIDIARY OF AHC I ACQUISITION CORP.)
              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                (dollars in thousands, except share information)

6.   CONDENSED HOLDING COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED)


                                  BALANCE SHEET
<TABLE>
<CAPTION>

                                                                     DECEMBER 31, 2000       JUNE 30, 2000
                                                                     -----------------       -------------
                                                                        (unaudited)           (unaudited)

<S>                                                                    <C>                   <C>
     ASSETS

     Investment in subsidiaries...............................         $   100,873           $    99,798
     Deferred charges.........................................               1,038                 1,167
     Deferred income taxes....................................               2,721                 2,427
                                                                       -----------           -----------

         TOTAL ASSETS.........................................         $   104,632           $   103,392
                                                                       ===========           ===========

     LIABILITIES

     Accrued income taxes.....................................         $       423           $       423
     Senior discount debentures...............................              27,528                27,863
                                                                       -----------           -----------

         TOTAL LIABILITIES....................................              27,951                28,286
                                                                       -----------           -----------

     STOCKHOLDER'S EQUITY

     Common Stock, $0.01 par value, 1,000 shares authorized;
       1,000 shares issued and outstanding....................                   -                     -
     Additional paid-in capital...............................              90,194                88,935
     Accumulated deficit......................................             (13,513)              (13,829)
                                                                       -----------           -----------

         TOTAL STOCKHOLDER'S EQUITY...........................              76,681                75,106
                                                                       -----------           -----------

         TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY...........         $   104,632           $   103,392
                                                                       ===========           ===========
</TABLE>




                             STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>

                                                                                SIX MONTHS ENDED
                                                                                ----------------
                                                                     DECEMBER 31, 2000     DECEMBER 31, 1999
                                                                     -----------------     -----------------
                                                                        (unaudited)           (unaudited)

<S>                                                                    <C>                   <C>
     Equity in net income of subsidiaries.....................         $     1,075           $     1,256
     Interest expense.........................................               1,862                 1,926
                                                                       -----------           -----------

         Loss before income taxes and extraordinary gain......                (787)                 (670)

     Income tax benefit.......................................                (609)                 (628)
                                                                       -----------           -----------

         Loss before extraordinary gain.......................                (178)                  (42)

     Extraordinary gain from early retirement of debt.........                 494                   659
                                                                       -----------           -----------

         Net income ..........................................         $       316           $       617
                                                                       ===========           ===========
</TABLE>



<PAGE>


                       AKI HOLDING CORP. AND SUBSIDIARIES
             (A WHOLLY OWNED SUBSIDIARY OF AHC I ACQUISITION CORP.)
              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                (dollars in thousands, except share information)

6.   CONDENSED HOLDING COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED)


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

                                                                                ADDITIONAL
                                                          COMMON STOCK           PAID-IN       ACCUMULATED
                                                       SHARES       AMOUNT       CAPITAL         DEFICIT          TOTAL
                                                       ------       ------       -------         -------          -----
<S>                                                      <C>      <C>           <C>            <C>            <C>
     BALANCES, JUNE 30, 2000 (unaudited)...........      1,000    $       -     $   88,935     $   (13,829)   $    75,106

     Equity contribution by AHC I Acquisition Corp.
       (unaudited).................................                                  1,259                          1,259

     Net income (unaudited)........................                                                    316            316
                                                     ---------    ---------     ----------     -----------    -----------

     BALANCES, DECEMBER 31, 2000 (unaudited).......      1,000    $       -     $   90,194     $   (13,513)   $    76,681
                                                     =========    =========     ==========     ===========    ===========
</TABLE>




                             STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>

                                                                                SIX MONTHS ENDED
                                                                                ----------------
                                                                     DECEMBER 31, 2000     DECEMBER 31, 1999
                                                                     -----------------     -----------------
                                                                        (unaudited)           (unaudited)

<S>                                                                    <C>                   <C>
     CASH FLOWS FROM OPERATING ACTIVITIES

       Net income.............................................         $       316           $       617
         Adjustments to reconcile net income to net cash
           provided by (used in) operating activities:........
              Net change in investment in subsidiaries........              (1,075)               (1,256)
              Amortization of debt discount...................               1,817                 1,876
              Amortization of debt issuance costs.............                  45                    50
              Deferred income taxes...........................                (609)                 (628)
              Gain from early retirement of debt..............                (494)                 (659)
                                                                       -----------           -----------

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

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

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

     SIGNIFICANT NON-CASH ACTIVITIES
       Contribution of equity and retirement of senior
         discount debentures and senior notes.................         $     1,259           $     8,071
       Investment in subsidiaries.............................                   -                (3,996)

</TABLE>


<PAGE>



                           AKI, INC., AND SUBSIDIARIES
                (A WHOLLY-OWNED SUBSIDIARY OF AKI HOLDING CORP.)
                      CONSOLIDATED CONDENSED BALANCE SHEETS
                (dollars in thousands, except share information)

<TABLE>
<CAPTION>
                                                                                DECEMBER 31,          JUNE 30,
                                                                                    2000                2000
                                                                                -------------      -------------
                                                                                 (unaudited)         (unaudited)

<S>                                                                             <C>                <C>
ASSETS

CURRENT ASSETS
Cash and cash equivalents..................................................     $         500      $       1,158
Accounts receivable, net...................................................            23,418             21,522
Inventory..................................................................             7,001              7,757
Prepaid expenses...........................................................               469                 92
Deferred income taxes......................................................               396                396
                                                                                -------------      -------------

   TOTAL CURRENT ASSETS....................................................            31,784             30,925

Property, plant and equipment, net.........................................            17,047             17,097
Goodwill, net..............................................................           160,069            162,472
Other intangible assets, net...............................................             6,702              7,174
Deferred charges, net  ....................................................             3,853              4,294
Deferred income taxes......................................................               498                720
Other assets...............................................................                89                 88
                                                                                -------------     --------------

   TOTAL ASSETS............................................................     $     220,042     $      222,770
                                                                                =============     ==============

LIABILITIES AND STOCKHOLDER'S EQUITY

CURRENT LIABILITIES
Current portion of capital lease obligations...............................     $         515     $          847
Accounts payable, trade....................................................             2,546              3,565
Accrued income taxes.......................................................             1,720                301
Accrued compensation.......................................................             3,294              3,965
Accrued interest...........................................................             5,514              5,695
Accrued expenses...........................................................             2,175              2,370
                                                                                -------------     --------------

   TOTAL CURRENT LIABILITIES...............................................            15,764             16,743

Long-term portion of capital lease obligations.............................                 -                502
Revolving credit line......................................................             7,550              9,000
Senior notes...............................................................           103,510            107,510
Promissory note to affiliate...............................................             3,661                  -
Deferred income taxes......................................................             2,862              3,090
Other non-current liabilities..............................................             2,509              2,399
                                                                                -------------     --------------

   TOTAL LIABILITIES.......................................................           135,856            139,244

STOCKHOLDER'S EQUITY
Common stock, $0.01 par 100,000 shares authorized;
   1,000 shares issued and outstanding.....................................                 -                  -
Additional paid-in capital.................................................           107,348            107,348
Accumulated deficit........................................................            (6,475)            (7,550)
Accumulated other comprehensive loss.......................................              (957)              (542)
Carryover basis adjustment.................................................           (15,730)           (15,730)
                                                                                -------------     --------------

   TOTAL STOCKHOLDER'S EQUITY..............................................            84,186             83,526
                                                                                -------------     --------------

   TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY..............................     $     220,042     $      222,770
                                                                                =============     ==============
</TABLE>








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


<PAGE>


                           AKI, INC., AND SUBSIDIARIES
                (A WHOLLY-OWNED SUBSIDIARY OF AKI HOLDING CORP.)
                 CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
                             (dollars in thousands)

<TABLE>
<CAPTION>


                                                             THREE MONTHS ENDED                      SIX MONTHS ENDED
                                                             ------------------                      ----------------
                                                   DECEMBER 31, 2000   DECEMBER 31, 1999    DECEMBER 31, 2000   DECEMBER 31, 1999
                                                   -----------------   -----------------    -----------------   -----------------
                                                      (unaudited)         (unaudited)          (unaudited)         (unaudited)

<S>                                                   <C>                 <C>                  <C>                 <C>
Net sales...................................          $  25,459           $  20,508            $  57,089           $  48,887
Cost of goods sold..........................             16,972              13,288               35,797              29,080
                                                      ---------           ---------            ---------           ---------

   Gross profit.............................              8,487               7,220               21,292              19,807

Selling, general and administrative expenses              4,415               4,497                8,933               8,655
Amortization of goodwill and other
  intangibles...............................              1,446               1,391                2,865               2,555
Gain from settlement of litigation, net.....                  -                (870)                   -                (870)
                                                      ---------           ---------            ---------           ---------

   Income from operations...................              2,626               2,202                9,494               9,467

Other expenses:
   Interest expense to affiliate............                 68                   -                  181                   -
   Interest expense other, net..............              3,276               3,393                6,605               6,741
   Management fees and other, net...........                 63                  62                  125                 125
                                                      ---------           ---------            ---------           ---------

   Income (loss) before income taxes and
     extraordinary gain.....................               (781)             (1,253)               2,583               2,601

Income tax expense (benefit)................                184                (353)               1,964               1,532
                                                      ---------           ---------            ---------           ---------

   Income (loss) before extraordinary gain..               (965)               (900)                 619               1,069

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

   Net income (loss)........................          $    (509)          $    (713)           $   1,075           $   1,256
                                                      =========           =========            =========           =========

</TABLE>
























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


<PAGE>



                           AKI, INC., AND SUBSIDIARIES
                (A WHOLLY-OWNED SUBSIDIARY OF AKI HOLDING CORP.)
      CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
                (dollars in thousands, except share information)

<TABLE>
<CAPTION>

                                                                                           ACCUMULATED
                                                                ADDITIONAL                    OTHER        CARRYOVER
                                             COMMON STOCK        PAID-IN     ACCUMULATED  COMPREHENSIVE      BASIS
                                           SHARES   DOLLARS      CAPITAL       DEFICIT         LOSS        ADJUSTMENT     TOTAL
                                           ------   -------      -------       -------         ----        ----------     -----

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

Net income (unaudited).................                                          1,075                                     1,075

Other comprehensive income, net of tax:
   Foreign currency translation
     adjustment (unaudited)............                                                        (415)                        (415)
                                                                                                                        --------

Comprehensive income (unaudited).......                                                                                      660
                                          --------  -------     ---------    ---------     --------        ---------    --------

BALANCES, DECEMBER 31, 2000 (unaudited)    1,000    $  --       $ 107,348    $  (6,475)    $   (957)       $ (15,730)   $ 84,186
                                          ========  =======     =========    =========     ========        =========    ========
</TABLE>


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


<PAGE>



                           AKI, INC., AND SUBSIDIARIES
                (A WHOLLY-OWNED SUBSIDIARY OF AKI HOLDING CORP.)
                 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
                             (dollars in thousands)


<TABLE>
<CAPTION>


                                                                                           SIX MONTHS ENDED
                                                                                           ----------------
                                                                              DECEMBER 31, 2000       DECEMBER 31, 1999
                                                                              -----------------       -----------------
                                                                                 (unaudited)             (unaudited)

<S>                                                                             <C>                    <C>
CASH FLOWS FROM OPERATING ACTIVITIES

   Net income .........................................................         $     1,075            $     1,256
   Adjustments to reconcile net income to net cash provided by
     operating activities:
     Depreciation and amortization of goodwill and other intangibles...               5,036                  4,734
     Amortization of debt issuance cost................................                 297                    351
     Deferred income taxes.............................................                  (6)                 1,820
     Gain from early retirement of debt................................                (456)                  (187)
     Other.............................................................                (305)                   (19)
     Changes in operating assets and liabilities:
       Accounts receivable.............................................              (1,896)                 1,167
       Inventory.......................................................                 756                    (90)
       Prepaid expenses, deferred charges and other assets.............                (377)                   213
       Accounts payable and accrued expenses...........................              (2,065)                (4,150)
       Income taxes....................................................               1,128                    (32)
                                                                                -----------            -----------

         Net cash provided by operating activities.....................               3,187                  5,063
                                                                                -----------            -----------

CASH FLOWS FROM INVESTING ACTIVITIES

   Purchases of equipment..............................................              (2,112)                (1,125)
   Payments for acquisitions, net of cash acquired.....................                   -                (16,162)
                                                                                -----------            -----------

         Net cash used in investing activities.........................              (2,112)               (17,287)
                                                                                -----------            -----------

CASH FLOWS FROM FINANCING ACTIVITIES

   Payments under capital leases for equipment.........................                (834)                  (336)
   Repurchase of long-term debt........................................              (3,110)                     -
   Net proceeds (repayments) on line of credit.........................              (1,450)                 6,100
   Net proceeds from promissory note to affiliate......................               3,661                      -
                                                                                -----------            -----------

         Net cash provided by (used in) financing activities...........              (1,733)                 5,764
                                                                                -----------            -----------

Net (decrease) in cash and cash equivalents............................                (658)                (6,460)
Cash and cash equivalents, beginning of period.........................               1,158                  7,015
                                                                                -----------            -----------

Cash and cash equivalents, end of period...............................         $       500            $       555
                                                                                ===========            ===========


SUPPLEMENTAL INFORMATION
 Cash paid during the period for:
     Interest, other...................................................         $     6,388            $     6,177
     Interest to affiliate.............................................                 174                      -
     Income taxes......................................................                 866                     47

SIGNIFICANT NON-CASH ACTIVITIES
   Contribution of equity and retirement of senior notes...............         $         -            $     3,996


</TABLE>





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


<PAGE>




                           AKI, INC., AND SUBSIDIARIES
                (A WHOLLY-OWNED SUBSIDIARY OF AKI HOLDING CORP.)
              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                (dollars in thousands, except share information)

1.   BASIS OF PRESENTATION

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

     INTERIM FINANCIAL STATEMENTS

         The interim  consolidated  condensed balance sheet at December 31, 2000
     and the interim  consolidated  condensed  statements of operations  for the
     three  and six  months  ended  December  31,  2000 and  1999,  the  interim
     consolidated  condensed  statements  of cash flows for the six months ended
     December 31, 2000 and 1999 and the interim consolidated condensed statement
     of changes in  stockholder's  equity for the six months ended  December 31,
     2000 are unaudited, and certain information and footnote disclosure related
     thereto,   normally  included  in  the  financial  statements  prepared  in
     accordance  with  generally  accepted  accounting  principles,   have  been
     omitted.  The June 30, 2000 consolidated balance sheet was derived from the
     Company's  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
     preparation  of the  audited  financial  statements  and  all  adjustments,
     consisting  only of normal  recurring  adjustments  to fairly  present  the
     financial  position,  results of operations  and cash flows with respect to
     the  interim  consolidated   condensed  financial  statements,   have  been
     included.  The  results  of  operations  for the  interim  periods  are not
     necessarily indicative of the results for the entire year.

2.   INVENTORY

         The following table details the components of inventory:

                                            DECEMBER 31, 2000     JUNE 30, 2000
                                            -----------------     -------------
                                               (unaudited)          (unaudited)
              Raw materials
                  Paper...................     $     2,477          $    3,944
                  Other raw materials.....           2,496               2,541
                                               -----------          ----------

              Total raw materials.........           4,973               6,485
              Work in process.............           2,028               1,272
                                               -----------          ----------

              Net inventory...............     $     7,001          $    7,757
                                               ===========          ==========




<PAGE>


                           AKI, INC., AND SUBSIDIARIES
                (A WHOLLY-OWNED SUBSIDIARY OF AKI HOLDING CORP.)
              NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                (dollars in thousands, except share information)


3.   RETIREMENT OF DEBT

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

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

4.   PROMISSORY NOTE TO AFFILIATE

         In May 2000, the Company signed a promissory  note payable to AHC which
     allows the Company to borrow up to $10 million at such  interest  rates and
     due as agreed upon by the Company and AHC. At December 31, 2000, $3,661 was
     outstanding bearing interest at prime and is due December 31, 2002.

5.   DERIVATIVE INSTRUMENTS

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

         The Company  purchases  and sells its products in a number of countries
     throughout  the world and, as a result,  is exposed to movements in certain
     foreign  currency  exchange  rates.  The primary  purpose of the  Company's
     foreign currency hedging activities is to manage the short-term  volatility
     associated with foreign  currency  purchases and sales in the normal course
     of  business.  The Company  primarily  utilizes  foreign  currency  forward
     exchange  contracts with  maturities of less than six months,  which do not
     meet hedge  accounting  criteria.  The fair value of these  instruments  at
     December 31, 2000 was not material and the net impact of the related  gains
     and losses were not material.


<PAGE>



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

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

GENERAL

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

RETCOM HOLDINGS LTD. ACQUISITION

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

 RESULTS OF OPERATIONS

      THREE MONTHS ENDED DECEMBER 31, 2000 COMPARED TO THREE MONTHS ENDED
                                DECEMBER 31, 1999

         NET SALES.  Net sales for the three  months  ended  December  31,  2000
increased $5.0 million, or 24.4%, to $25.5 million, as compared to $20.5 million
for the three months  ended  December  31,  1999.  The  increase  was  primarily
attributable  to  increases  in volume of domestic  and  international  sales of
sampling  technologies  to existing  customers for  advertising and marketing of
fragrances,  partially  offset  by  decreases  in volume  of  domestic  sales of
sampling  technologies  for  advertising and marketing of cosmetics and consumer
products and foreign exchange rates.

         GROSS PROFIT. Gross profit for the three months ended December 31, 2000
increased $1.3 million,  or 18.1%, to $8.5 million,  as compared to $7.2 million
for three months ended  December 31, 1999.  Gross profit as a percentage  of net
sales decreased to 33.3% in the three months ended December 31, 2000, from 35.1%
in the three months ended  December 31, 1999.  The decrease in gross profit as a
percentage  of net sales is  primarily  due to  increased  raw  material  costs,
additional  premium  labor costs,  product  mix,  increased  overhead  costs and
foreign  exchange rates. The increase in raw material costs was primarily due to
an increase in paper commodity prices,  which management  expects will remain at
current levels for the remainder of the fiscal year ending June 30, 2001.

         SELLING,  GENERAL AND  ADMINISTRATIVE  EXPENSES.  Selling,  general and
administrative  expenses for the three months ended  December 31, 2000 decreased
$0.1  million,  or 2.2%,  to $4.4  million,  as compared to $4.5 million for the
three  months  ended  December 31,  1999.  Selling,  general and  administrative
expenses as a percent of net sales  decreased to 17.3% in the three months ended
December  31,  2000,  from 22.0% in the three  months  ended  December 31, 1999,
primarily due to the increase in net sales.

         INCOME FROM  OPERATIONS.  Income from  operations  for the three months
ended December 31, 2000 increased $0.4 million,  or 18.2%,  to $2.6 million,  as
compared to $2.2 million for the three months  ended  December 31, 1999.  Income
from  operations  as a percentage  of net sales  decreased to 10.2% in the three
months ended  December 31, 2000,  from 10.7% in the three months ended  December
31, 1999, principally as a result of the factors described above.
<PAGE>

         INTEREST EXPENSE.  Interest expense for the three months ended December
31, 2000 decreased $0.1 million,  or 2.3%, to $4.2 million,  as compared to $4.3
million for the three months ended  December  31,  1999.  Interest  expense as a
percentage  of net sales  decreased to 16.5% in the three months ended  December
31, 2000,  from 21.0% in the three months ended  December 31, 1999. The decrease
in interest expense,  including the amortization of deferred financing costs, is
primarily due to the  repurchased  and retired  Senior  Discount  Debentures and
Senior Notes.

         Interest  expense for AKI for the three months ended  December 31, 2000
decreased  $0.1 million,  or 2.9%, to $3.3 million,  as compared to $3.4 million
for the three months ended December 31, 1999.  Interest  expense as a percentage
of net sales  decreased to 12.9% in the three  months  ended  December 31, 2000,
from 16.6% in the three months ended December 31, 1999. The decrease in interest
expense,  including the  amortization of deferred  financing costs, is primarily
due to the repurchased and retired Senior Notes.

         INCOME TAX BENEFIT AND EXPENSE. Income tax benefit for the three months
ended December 31, 2000 decreased $0.5 million to $0.1 million, as compared to a
benefit of $0.6  million for the three  months  ended  December  31,  1999.  The
Company's  effective tax rate, after  consideration of  non-deductible  goodwill
amortization  and non-taxable  gain from settlement of litigation,  was 23.0% in
the three  months ended  December 31, 2000,  and 35.6% in the three months ended
December 31, 1999.

         Income tax expense for AKI for the three months ended December 31, 2000
increased $0.6 million to $0.2 million, as compared to a benefit of $0.4 million
for the three months ended December 31, 1999.  AKI's  effective tax rate,  after
consideration  of  non-deductible  goodwill  amortization,  was 39% in the three
months ended December 31, 2000 and 1999.

         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 and $0.8 million for the three months ended  December 31, 1999
resulted  from the  purchase  and  subsequent  contribution  of Senior Notes and
Senior Discount Debentures by AHC I Acquisition Corp. The contributed securities
were subsequently retired.

         Extraordinary  gain  from  early  retirement  of  debt  for AKI of $0.5
million for the three  months  ended  December 31, 2000 and $0.2 million for the
three  months  ended  December  31, 1999  resulted  from the purchase in 2000 of
Senior  Notes  by AKI  and  in  1999  the  purchase  of  Senior  Notes  by AHC I
Acquisition Corp. and subsequent contribution by AKI Holding Corp. The purchased
and contributed securities were subsequently retired.

         EBITDA.  EBITDA for the three months ended  December 31, 2000 increased
$1.4 million,  or 36.8%,  to $5.2  million,  as compared to $3.8 million for the
three months ended  December 31,  1999.  The increase  principally  reflects the
increase in gross profit  discussed  above.  EBITDA as a percentage of net sales
was 20.4%  and  18.5% in the three  months  ended  December  31,  2000 and 1999,
respectively.   EBITDA  is  income  from   operations  plus   depreciation   and
amortization of goodwill and other  intangibles less net gain from settlement of
litigation.

         SIX MONTHS ENDED DECEMBER 31, 2000 COMPARED TO SIX MONTHS ENDED
                                DECEMBER 31, 1999

         NET  SALES.  Net sales  for the six  months  ended  December  31,  2000
increased $8.2 million,  or 16.8%, to $57.1 million as compared to $48.9 million
for the  six  months  ended  December  31,  1999.  The  increase  was  primarily
attributable  to  increases  in  domestic  and  international  sales of sampling
technologies  for  advertising  and marketing of fragrance  products,  partially
offset by decreases in domestic sales of sampling  technologies  for advertising
and marketing of cosmetics.

         GROSS PROFIT.  Gross profit for the six months ended  December 31, 2000
increased  $1.5 million,  or 7.6%, to $21.3 million as compared to $19.8 million
for six months  ended  December 31,  1999.  Gross profit as a percentage  of net
sales  decreased to 37.3% in the six months ended December 31, 2000,  from 40.5%
in the six months ended  December  31,  1999.  The decrease in gross profit as a
percentage  of net sales is primarily  attributable  to  increased  raw material
costs, additional premium labor costs, product mix, increased overhead costs and
foreign exchange rates.
<PAGE>

         SELLING,  GENERAL AND  ADMINISTRATIVE  EXPENSES.  Selling,  general and
administrative  expenses  for the six months ended  December 31, 2000  increased
$0.2  million,  or 2.3%, to $8.9 million as compared to $8.7 million for the six
months  ended  December  31,  1999.   The  increase  in  selling,   general  and
administrative  expenses  was  primarily  due to increased  staffing  levels and
compensation.  Selling,  general and administrative expenses as a percent of net
sales decreased to 15.6% in the six months ended December 31, 2000 from 17.8% in
the six months ended  December 31,  1999,  primarily  due to the increase in net
sales.

         INCOME FROM OPERATIONS. Income from operations for the six months ended
December 31, 2000 and 1999 was $9.5  million.  Income from  operations  for 1999
included  a net  gain of $0.9  million  resulting  from a  favorable  litigation
settlement with the sellers of Arcade Holding Corp.  Income from operations as a
percentage of net sales  decreased to 16.6% in the six months ended December 31,
2000, from 19.4% in six months ended December 31, 1999,  principally as a result
of the factors described above.

         INTEREST  EXPENSE.  Interest  expense for the six months ended December
31, 2000 decreased $0.1 million,  or 1.1%, to $8.6 million,  as compared to $8.7
million  for the six months  ended  December  31,  1999.  Interest  expense as a
percentage of net sales  decreased to 15.1% in the six months ended December 31,
2000 from 17.8% in the six months  ended  December  31,  1999.  The  decrease in
interest  expense,  including the  amortization of deferred  financing costs, is
primarily due to a decrease in interest  expense  related to the repurchased and
retired  Senior  Discount  Debentures and Senior Notes,  partially  offset by an
increase  in  interest  expense  related  to use  of the  credit  line  and  the
promissory  note to AHC I  Acquisition  Corp.  for  working  capital and the RHL
acquisition.

         Interest  expense for AKI for the six months  ended  December  31, 2000
increased  $0.1 million,  or 1.5%, to $6.8 million,  as compared to $6.7 million
for the six months ended December 31, 1999.  Interest expense as a percentage of
net sales  decreased  to 11.9% in the six months ended  December 31, 2000,  from
13.7% in the six months  ended  December  31,  1999.  The  increase  in interest
expense,  including the  amortization of deferred  financing costs, is primarily
due to use of the credit line and the promissory note to AHC I Acquisition Corp.
for working capital and the RHL  acquisition,  partially offset by a decrease in
interest expense related to the repurchased and retired Senior Notes.

         INCOME  TAX  EXPENSE.  Income  tax  expense  for the six  months  ended
December 31, 2000 increased $0.5 million to $1.4 million. The increase is due to
the increase in income before income taxes and extraordinary gain as a result of
the  factors   described  above.   The  Company's   effective  tax  rate,  after
consideration of non-deductible  goodwill amortization and non-taxable gain from
settlement of  litigation,  was 43.4% in the six months ended  December 31, 2000
and 45.3% in the six months ended December 31, 1999.

         Income tax expense for AKI for the six months  ended  December 31, 2000
increased  $0.5 million to $2.0 million.  The increase is due to the increase in
income  before  income taxes and  extraordinary  gain as a result of the factors
described above. AKI's effective tax rate, after consideration of non-deductible
goodwill  amortization and non-taxable  gain from settlement of litigation,  was
39.0% in the six months ended December 31, 2000 and 1999.

         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 and $0.8  million for the six months ended  December 31, 1999  resulted
from the  purchase  and  subsequent  contribution  of Senior  Notes  and  Senior
Discount  Debentures by AHC I Acquisition Corp. The contributed  securities were
subsequently retired.

         Extraordinary  gain  from  early  retirement  of  debt  for AKI of $0.5
million for the six months ended  December 31, 2000 and $0.2 million for the six
months  ended  December  31, 1999  resulted  from the purchase in 2000 of Senior
Notes by AKI and in 1999 the purchase of Senior Notes by AHC I Acquisition Corp.
and  the  subsequent  contribution  by  AKI  Holding  Corp.  The  purchased  and
contributed securities were subsequently retired.

         EBITDA.  EBITDA for the six months ended  December  31, 2000  increased
$1.2 million, or 9.0%, to $14.5 million as compared to $13.3 million for the six
months ended December 31, 1999. The increase  principally  reflects the increase
in gross profit discussed  above.  EBITDA as a percentage of net sales was 25.4%
and 27.2% in the six  months  ended  December  31,  2000 and 1999  respectively.
EBITDA is income from operations plus  depreciation and amortization of goodwill
and other intangibles less net gain from settlement of litigation.
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

     Our company has  substantial  indebtedness  and  significant  debt  service
obligations.  As of December 31, 2000, our company had consolidated indebtedness
in an aggregate  amount of $142.8 million  (excluding  trade  payables,  accrued
liabilities,  deferred taxes and other  non-current  liabilities),  of which (1)
approximately  $27.5 million was a direct  obligation of Holding relating to its
debentures and (2)  approximately  $115.3 million was a direct obligation of AKI
relating to its notes,  revolving credit line,  promissory note to affiliate and
capital leases.  Borrowings at December 31, 2000 included $7.6 million under the
revolving  credit  agreement that was incurred to finance the acquisition of RHL
and provide working capital and $3.7 million on the promissory note to affiliate
that was used to reduce other  existing  debt.  At December 31, 2000 our company
had available $12.4 million under the revolving  credit  agreement.  At December
31,  2000,  AKI also had $20.6  million in  additional  outstanding  liabilities
(including  trade  payables,  accrued  liabilities,  deferred  taxes  and  other
non-current liabilities).

     In May 2000,  AKI signed a  promissory  note  payable to AHC I  Acquisition
Corp. ("AHC"), the sole stockholder of Holding, which allows AKI to borrow up to
$10  million at such  interest  rates and due as agreed  upon by AKI and AHC. At
December 31, 2000,  $3.7 million was  outstanding  under the promissory  note at
prime and is due December 31, 2002.  Proceeds from the promissory note were used
to reduce other  existing  debt.  AKI does not currently  anticipate  borrowings
under the promissory note will exceed this amount.

     Holding's   principal   liquidity   requirements   are  for  debt   service
requirements under the debentures.  AKI's principal  liquidity  requirements are
for debt service requirements and fees under the notes and the credit agreement.
Historically,  our company has funded its capital,  debt  service and  operating
requirements  with a combination  of net cash provided by operating  activities,
together with  borrowings  under  revolving  credit  facilities.  During the 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.  During the six months  ended  December 31, 1999,
cash totaling $5.1 million was provided by operating  activities  resulting from
net income  before  depreciation  and  amortization  and  decreases  in accounts
receivable and inventory  offset  partially by decreases in accounts payable and
accrued expenses.

     In the six months ended December 31, 2000 and 1999, our company had capital
expenditures of approximately $2.1 million and $1.1 million, respectively. These
capital  expenditures  consisted  primarily  of the  purchase  of  manufacturing
equipment, furniture and fixtures and upgrading our computer systems.

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

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

     In  September  1999,  AHC  consummated  a private  placement  to DLJMBII of
15,000,000 shares of its common stock at a purchase price of $1.00 per share. As
of December 31, 2000,  AHC had purchased  $11.8 million of Holding Corp.  Senior
Discount  Debentures and $7.5 million of AKI, Inc. Senior Notes.  The debentures
and notes were contributed to Holding Corp. and subsequently retired.

     As of December 31,  2000,  AKI  purchased  and retired $4.0 million of AKI,
Inc. Senior Notes.

     Capital  expenditures for the six months ending June 30, 2001 are currently
estimated to be approximately $1.5 million.  Based on borrowings  outstanding as
of December 31, 2000,  our company  expects total cash payments for debt service
for the six  months  ending  June 30,  2001 to be  approximately  $6.2  million,
consisting  of $5.4 million in interest  payments on the notes,  $0.1 million in
capital lease obligations, $0.6 million in interest and fees under the
<PAGE>

credit  agreement  and  $0.1  million  in  interest  on the  promissory  note to
stockholder and affiliate.  Our company also expects to make royalty payments of
approximately $0.3 million during the six months ending June 30, 2001.

     At December 31, 2000,  Holding's cash and cash  equivalents and net working
capital  were $0.5  million  and $15.6  million,  respectively,  representing  a
decrease  in cash and cash  equivalents  of $0.7  million and an increase in net
working capital of $1.8 million from June 30, 2000. Account receivables, net, at
December 31, 2000  increased 8.8% or $1.9 million over the June 30, 2000 amount,
primarily due to increased sales.

SEASONALITY

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

RECENTLY ISSUED ACCOUNTING STANDARDS

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

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

FORWARD-LOOKING STATEMENTS

     The  information   provided  in  this  document  contains   forward-looking
statements that involve a number of risks and uncertainties. A number of factors
could  cause  actual  results,  performance  or  achievements  of our company or
industry results to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking  statements.  These
factors  include,  but are not limited to: the  competitive  environment  in the
sampling industry in general and in our company's specific market areas; changes
in prevailing interest rates; inflation;  changes in cost of goods and services;
economic  conditions  in general and in our  company's  specific  market  areas;
changes in or failure to comply with postal regulations or other federal,  state
and/or local government regulations; liability and other claims asserted against
our company;  changes in operating strategy or development plans; the ability to
attract and retain  qualified  personnel;  the  significant  indebtedness of our
company; labor disturbances; changes in our company's capital expenditure plans;
and other factors.

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

such forward-looking statements. Our company disclaims any obligations to update
any such factors or to publicly  announce the results of any revisions to any of
the  forward-looking  statements  contained in this  document to reflect  future
events or developments.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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

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

     Our company  periodically  enters into forward  foreign  currency  exchange
contracts to hedge certain exposures  related to selected  transactions that are
relatively  certain  as to both  timing and amount and to hedge a portion of the
production costs expected to be denominated in foreign  currencies.  The purpose
of entering into these hedge  transactions  is to minimize the impact of foreign
currency  fluctuations  on the results of operations  and cash flows.  Gains and
losses on the hedging activities are recognized  concurrently with the gains and
losses from the  underlying  transactions.  At December 31, 2000,  there were no
forward exchange contracts outstanding.

                            PART II OTHER INFORMATION

ITEM 6.           EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits

        10.1     Fifth Amendment to Credit Agreement
        10.2     Sixth Amendment to Credit Agreement

(b)  Reports on Form 8-K

         None


<PAGE>


                                   SIGNATURES

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

                                           AKI HOLDING CORP.

Date:  February 13, 2001                   By:      /S/ KENNETH A. BUDDE
                                           -----------------------------------
                                                    Kenneth A. Budde
                                                    Senior Vice President &
                                                    Chief Financial Officer

                                           AKI, INC.

Date:  February 13, 2001                   By:      /S/ KENNETH A. BUDDE
                                           -----------------------------------
                                                    Kenneth A. Budde
                                                    Senior Vice President &
                                                    Chief Financial Officer