UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-K

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

                     For the fiscal year ended June 30, 2003

                                       OR

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

           For the transition period from ___________ to _____________

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

                        Commission File Number: 333-60991

             Delaware                                        74-288316
 (State or other jurisdiction of                         (I.R.S. Employer
  incorporation or organization)                        Identification No.)


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

                        Commission File Number: 333-60989

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


                              1815 East Main Street
                              Chattanooga, TN 37404
                                 (423) 624-3301
     (Address, including zip code and telephone number, including area code,
                        of principal executive offices)


           Securities Registered Pursuant to Section 12(b) of the Act:
                                      None.


           Securities Registered Pursuant to Section 12(g) of the Act:
                                      None.


<PAGE>


Indicate  by check mark  whether  the  registrants  (1) have  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) have been subject to such
filing requirements for the past 90 days. (X) Yes ( ) No

Indicate  by check mark if  disclosure  of  delinquent  filers is not  contained
herein,  and will not be contained,  to the best of registrants'  knowledge,  in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. (X)

Indicate  by check mark  whether  the  registrant  is an  accelerated  filer (as
defined by Exchange Act Rule 12b-2). ( ) Yes (X) No

As of  September  17, 2003,  1,000 shares of common stock of AKI Holding  Corp.,
$0.01 par value, were outstanding and 1,000 shares of common stock of AKI, Inc.,
$0.01 par value, were outstanding.

The  aggregate  market  value  of  the  voting  and  non-voting  stock  held  by
non-affiliates was zero as of December 31, 2002.

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

                      DOCUMENTS INCORPORATED BY REFERENCE:

                                      None.


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     As used within this report, the term "Company" refers to AKI Holding Corp.,
a Delaware  corporation,  and its subsidiaries,  including AKI, Inc., a Delaware
corporation ("AKI"). The term "Holding" refers solely to AKI Holding Corp.

                                     PART I

     Part I is  presented  with  respect  to both  registrants  submitting  this
filing, Holding and AKI.

ITEM 1.       BUSINESS

General

     Our Company is a leading global marketer and  manufacturer of multi-sensory
marketing,  interactive  advertising  and sampling  systems that utilize various
technologies that engage the senses of touch, sight and olfactory. Our marketing
vehicles  and  sampling  systems are widely  recognized  in the fine  fragrance,
cosmetics  and personal  care  industries,  as well as other  consumer  products
industries including the household products and food and beverage industries. We
offer  an  extensive  portfolio  of  proprietary,  patented  and  patent-pending
technologies that can be incorporated  into various marketing  programs designed
to reach the consumer at home or  in-store,  such as magazine  inserts,  catalog
inserts,  remittance  envelopes,  statement enclosures,  blow-ins,  direct mail,
direct        sell        and         point-of-sale         materials        and
gift-with-purchase/purchase-with-purchase programs.

     We are a fully  integrated  multi-sensory  marketing and sampling  company,
conducting our business under the Arcade  Marketing name. We believe that we are
well  positioned  to provide  complete,  interactive  advertising  and  sampling
programs to our customers, including creative content and product sample systems
and distribution.

     We believe product  sampling is one of the most effective,  widely used and
fastest growing forms of promotional activity.  Product sampling is particularly
crucial to the fragrance and cosmetics industries where consumers  traditionally
"try  before they buy" due to the highly  personal  nature of the  products.  We
believe that our introduction in 1979 of the  ScentStrip(R)  Sampler,  the first
pull-apart,  microencapsulated scent sampling system,  transformed the fragrance
sampling  industry.  With the creation of a  multi-sensory  marketing  program -
combining  advertising  with a  sampling  system  -  marketers  are  afforded  a
cost-effective  means to reach consumers in their homes on a mass scale. We have
a diverse  portfolio of  alternative  scent sampling  systems,  all designed for
cost-effective  mass distribution,  and we continue to be a leading innovator in
sampling system technologies.

     In  recent  years,  we  have  expanded  our  sampling  system  business  by
developing and acquiring new  technologies  in the olfactory and beauty sampling
system categories. Although product sampling is critical to the success of these
markets,  sampling programs for these products historically have been too costly
for mass  production  and  incapable  of  efficiently  being  incorporated  into
magazines,  catalogs,  direct  mail  and  other  printed  vehicles.  Many of our
innovative sampling systems are designed to fill the needs of these marketers by
providing a


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cost-effective  means of reaching  consumers in their homes on a mass scale with
quality  renditions  of skincare  products,  foundation,  lipstick  and cosmetic
powders.  Management  believes that our innovative sampling systems have altered
the economics and efficiencies of product sampling in the cosmetics market.

     In December 1997, DLJ Merchant  Banking Partners II, L.P. and other related
investors (collectively,  "DLJMBII") and certain members of our prior management
organized AHC I Acquisition Corp., a Delaware  corporation  ("AHC"),  to acquire
all of the outstanding  equity interests of AKI. Holding was formed as a holding
company  in 1998 and its only  significant  asset is the  capital  stock of AKI.
Holding conducts all of its business through AKI. As of August 31, 2003, DLJMBII
owned approximately 98.8% of the outstanding common stock of AHC.

     On November 6, 2000,  Credit  Suisse Group  completed the merger of Diamond
Restructuring Corp., an indirect wholly owned subsidiary of Credit Suisse Group,
with and into Donaldson,  Lufkin & Jenrette,  Inc.  ("DLJ").  As a result of the
merger,  DLJ is now an indirect  subsidiary of Credit Suisse First Boston,  Inc.
("CSFB").  All  references  to DLJ in this  annual  report on Form 10-K refer to
entities now controlled by or affiliated with CSFB.

     On September 15, 1999, we acquired all of the issued and outstanding shares
of capital stock of RetCom Holdings Ltd. ("RetCom"), a Delaware corporation, and
refinanced  $4.5  million  indebtedness  of  RetCom  and its  subsidiaries.  The
acquired  businesses  of RetCom  and its  subsidiaries  include a  portfolio  of
proprietary,  patented  and  patent-pending  sampling  systems  catering  to the
fragrance, cosmetics and personal care industries, as well as microencapsulation
products  and   processes.   Such  sampling   systems   include   MicroSilk(TM),
MicroDot(TM)  and  AromaLacquer(TM).  The  acquired  businesses  also  include a
creative service division that engages in marketing communications and catalogs.

     On December 18, 2001, we acquired, through a newly formed subsidiary,  IST,
Corp., 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 acquired business offers proprietary,  patented
and  patent-pending  sampling  systems  including  the  ShadeSeal(R)  family  of
products primarily for lipstick and powder sampling,  BeautiPak(TM) for sampling
certain  lipstick  products,  LiqiSeal(TM) for sampling skin care and foundation
products  in a  unique  clear  packette,  PowdaScent(TM)  for  the  sampling  of
fragrance products and SelectaShade(TM)  which is a unique beauty tool for shade
selection for foundation.

Products

     We offer a broad  and  diversified  portfolio  of  innovative,  interactive
sampling  systems and  advertising  formats  for the  fragrance,  cosmetics  and
personal  care  markets as well as other  consumer  products  markets  including
household  products and food and beverage  markets.  Our major  technologies are
described  below,  including  a  description  of the patent  protection  of each
product  technology.  Each of our sample  systems is generally  sold to the same
category of manufacturers of the product being advertised.


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Olfactory Sampling Systems

     Our diverse portfolio of fragrance  sampling systems,  which uses a variety
of  proprietary  chemistries  and  processes,  historically  has  represented  a
significant portion of our annual sales. While  ScentStrip(R)  continues to be a
widely used  technology for sampling  products for the fine fragrance  industry,
management  believes that our new and recently  acquired  sampling  systems have
enabled us to maintain a  competitive  advantage  and affirm our  position as an
innovator in the sampling industry. In recent years, our products have been used
in many major new fine fragrance  launches that have utilized  sampling systems.
Almost all of these  sampling  systems  have been  designed to meet U.S.  Postal
Service approval for subscription magazine periodical rates.

o    ScentStrip(R):  A proprietary technology introduced by our Company in 1979,
     ScentStrip(R)  is  microencapsulated  essential oil  deposited  between two
     layers of paper which "snap" open to release a quality fragrance rendition.
     ScentStrip(R)  can deliver  quality  aroma  renditions  of fine  fragrance,
     personal care, sun care and consumer  products.  ScentStrip(R) is available
     in many  formats,  including  magazine  and  catalogue  inserts,  blow-ins,
     enclosures  and  remittance  envelopes,  among others,  all of which can be
     customized to include multiple fragrances in ScentStrip(R) form.

o    ScentStrip(R)  Plus:  Combines the  traditional  ScentStrip(R)  format with
     perfume "pearls" in a proprietary technology wherein fine microencapsulated
     essential oil is deposited  between two layers of paper that "snap" open to
     deliver an olfactory  sample and wearable  on-skin  trial when "pearls" are
     touched.

o    MicroDot(TM):  A proprietary technology,  uses microencapsulated  fragrance
     oil,  delivered  in  ultra-fine  capsule size form,  deposited  between two
     layers of paper  which  pull apart to deliver  superior  on-skin  fragrance
     trial.  The technology is available as a stand alone  product,  as pressure
     sensitive labels or as pressure sensitive labels on perforated sheets.

o    PowdaScent(TM):  A patented  technology in which an encapsulated  fragrance
     oil, in a printable form, is hygienically  sealed between a board stock and
     a see-thru layer of transparent  film. This  transparent  film displays the
     encapsulated  fragrance which can be produced in any size, shape and color.
     Once peeled  open,  and the capsules  are  touched,  an aroma  rendition is
     delivered.

o    AromaLacquer(TM):  A proprietary  scented  varnish that delivers a superior
     aroma rendition of nearly any fragrance,  personal care,  household,  food,
     beverage,  pharmaceutical  or novelty  product.  When rubbed or  scratched,
     AromaLacquer(TM) releases the aroma rendition.

o    AromaTouch(TM):   A  proprietary  scented  microencapsulated  coating  that
     delivers a superior aroma rendition of nearly any fragrance, personal care,
     household,    food,   beverage,    pharmaceutical   or   novelty   product.
     AromaTouch(TM)  is  printable  to paper or plastic  substrates  and is most
     popular  for  use  on  product   packaging.   When  rubbed  or   scratched,
     AromaTouch(TM) releases the aroma rendition.


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o    Microfragrance(R) Scratch `n Sniff:  Microfragrance capsules are applied to
     paper or stickers which affix to nearly any surface, delivering an accurate
     aroma  rendition of any product  where scent is part of the message such as
     flowers,  shampoos,  etc. When the sampling  system is scratched,  capsules
     release a quality aroma rendition.  Through a strategic  relationship  with
     the 3M Company,  the product is also  available  applied to the familiar 3M
     Post-it(R) Notes to deliver an aroma rendition of almost any scent.

o    DiscCover(R): A peel-and-reveal,  non-encapsulated patented sampling system
     label that opens and reseals, delivering a quality aroma rendition up to 25
     times. This technology is color-printable, affixable to nearly any surface,
     including  plastic  and  glass,  and can be die-cut in nearly any shape and
     size.  This technology  keeps fragrance  locked-in until "lift off" with no
     pre-release  and is used not only to market fine fragrances but is becoming
     popular in the delivery of quality  aroma in the  marketing of a variety of
     personal care products and food and beverage products.

o    DiscCover(R)More:   This  patented   sampling  system  offers  all  of  the
     attributes  of the  original  DiscCover(R)  technology  enhanced to offer a
     single, wearable, on-skin trial of the fragrance.

o    ScentSeal(R):  A  patented,  pouch-like,  pressure  sensitive  format  that
     incorporates  a product  rendition  deposited  between  two  layers of foil
     laminate. When pulled open, ScentSeal(R) reveals a moist, alcohol-based gel
     applicable to skin for  wearable-trial.  ScentSeal(R)  can contain  quality
     fragrance,  fragrance  ancillary or personal care product  renditions.  The
     product offers  customers the  opportunity to deliver moist,  on-skin trial
     via its "wet  delivery  system" and is  available  in many shapes and sizes
     compatible with brand image and creative design.

o    LiquaTouch(R):  This patented  technology  delivers a rendition of finished
     fragrance  product (e.g.,  eau de parfum,  eau de toilette or after shave),
     any liquid  treatment or personal care product and contains an  applicator.
     LiquaTouch(R)  is  hermetically  sealed with no pre-release  and delivers a
     spill proof trial of any alcohol formulated  fragrance product. The product
     is available in a single or dual chamber  pressure-sensitive format and has
     been  approved  by  the  U.S.  Postal  Service  for  subscription  magazine
     periodical rates. LiquaTouch(R) is also available in a stand-alone version,
     which is a cost-effective alternative to fragrance vials.

Beauty Sampling Systems

     Our  portfolio  also  includes   non-fragrance  sampling  system  products,
primarily for the beauty industry,  which represent a growing  percentage of our
sales.  These sampling  systems are utilized to sample cosmetics and beauty care
products including foundation,  creams and lotions, lipstick and powders. Almost
all of these  sampling  systems have been designed to meet U.S.  Postal  Service
approval for subscription magazine periodical rates.


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o    BeautiSeal(R): A proprietary,  patented technology is a sampling system for
     quality  renditions of creams,  lotion or gel products  which are deposited
     between  the  foil  layers  of  a  heat-sealed,  pressure  sensitive  well.
     BeautiSeal(R)  is hermetically  sealed,  designed to withstand  significant
     pressure  and is  approved  by the U.S.  Postal  Service  for  subscription
     magazine  periodical rates.  BeautiSeal(R) can contain renditions of liquid
     foundation,  as well as creams, lotions and gel treatment and personal care
     products such as moisturizers,  eye treatments, body, hand and foot lotions
     and hair  gel,  among  others.  BeautiSeal(R)  is ideal  for  magazine  and
     catalogue inserts,  bind-in cards,  direct mailers,  brochures and in-store
     handout and regimen cards.

o    ActiSeal(TM):  A  patented  technology,  with  characteristics  similar  to
     BeautiSeal(R)  , which is peeled open to reveal two  adjacent  wells,  each
     well  containing  a formula  component  which are  blended  together by the
     consumer upon application.

o    LiqiSeal(TM): A patented clear top packette which can be utilized to sample
     liquid,  cream,  lotion or gel products.  The patented  clear  laminate has
     unique barrier  characteristics  which allow it to pass stringent stability
     tests.  The  product  sample can  contain  makeup,  hair  care,  skin care,
     fragranced ancillaries and body care, among other products.

o    PowdaTouch(R):  A  proprietary,  patented  technology is a sampling  system
     wherein cosmetic powder is deposited  between two layers of paper,  die-cut
     with a tab that lifts up to reveal the powder rendition area. PowdaTouch(R)
     can contain quality renditions of eye shadow,  powder blush, face powder or
     bronzer.  PowdaTouch(R)  is  ideal  for  magazine  and  catalogue  inserts,
     blow-ins,  and  bind-in  cards  among  others and is approved by the Postal
     Service for subscription magazine periodical rates.

o    ShadeSeal(R):  This  patented  technology  is used to sample  renditions of
     cosmetic  powders or lip  products.  The  product  rendition  is  deposited
     between two  substrates  which pull apart to offer a trial  sample  while a
     transparent  "window"  displays the shade.  This product can be utilized in
     many different  formats to accommodate  either multiple shades or a variety
     of  cosmetic   products   including  both   long-lasting  and  conventional
     lipsticks.

o    LipSeal(R):   A  patented  technology  with   characteristics   similar  to
     BeautiSeal(R)  this product  provides a sampling  system wherein a lipstick
     rendition is deposited  into the well of a  pressure-sensitive  format that
     easily  pulls  apart to offer  user-friendly,  hygienic  trial.  LipSeal(R)
     offers  trial of any  lipstick  shade,  finish and texture in any  lipstick
     formula, including long-lasting formulas.

o    BeautiPak(TM):  A proprietary  "windowed"  sampling system for a variety of
     lipstick  formulations.  Product is sealed into one well of a  thermoformed
     "tray" while a second well contains a flocked lipstick applicator.

o    BeautiTouch(R)   Multi-Well  Sampler:  This  proprietary  technology  is  a
     sampling system for cream, lotion, lipstick or gel product renditions which
     are  deposited   into


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     individually-sealed,  foil laminate "pouches".  Heat-sealed "pouches" which
     share a common  backing  easily  pull  apart to provide  trial of  multiple
     shades  or  formulas.   BeautiTouch(R)   offers   ideal,   multiple   shade
     demonstration by delivering trial of 8, 10, 12 or more foundation shades on
     a single carrier with no cross-contamination.

o    SelectaShade(TM):  A proprietary  beauty tool used to determine  foundation
     shades that precisely match consumers' skin tones.  This transparent  strip
     of polyester  film is printed with special inks that  replicate  foundation
     shades exactly.  When  SelectaShade(TM) is placed against face or hand, the
     shade that best  matches  the users own skin will become  invisible  on the
     chart to give each consumer an accurate shade match.

Other Products & Services

o    Arcade  Direct:  This full  service  division of our Company  offers a full
     range of creative  services to our  customers in the cosmetic and fragrance
     industry,  and has  established  a niche  presence  in  various  industries
     including retail and specialty stores, fashion catalogues,  buying offices,
     direct marketers,  hotels and spas. This dedicated division offers complete
     turnkey  marketing  and creative  services up to and  including  electronic
     production.

o    Arcade Product Technologies:  This division employs proprietary chemistries
     to  manufacture  and  market  microencapsulated  ingredients  used  in  the
     formulation  of various  personal care  products.  Fragrance  oil,  whether
     customer-supplied  or selected from our Company's  extensive aroma library,
     can be encapsulated using these proprietary  systems and supplied in powder
     form, resulting in a scent that can be renewed as the capsules are sheared.
     In addition,  the  technologies  can be used to encapsulate a wide range of
     cosmetic  formulation  materials which provide  consumers with  additional,
     longer-lasting  benefits due to ingredients  that  re-release over time and
     which enhance texture, application and overall product stability.

o    Arcade Consumer  Communications:  This division  specializes in electronic,
     multi-media,  multi-sensory  devices  primarily  for use at  point-of-sale.
     Technologies  offered  in this  division  focus  on  interaction  with  the
     consumer  including the dispensing of samples.  Such  interaction  promotes
     sales at the point of sale.

Formats

         Mail Formats

     We  produce a wide and  versatile  range of  formats  approved  by the U.S.
Postal  Service  for  subscription  magazine  periodical  rates and which can be
incorporated  into  almost any print  media.  The most  common  formats  for our
products are described below.


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     Magazine Inserts:  Magazine inserts are available in half-, full-, two- and
four-page  formats,  can be  die-cut,  can  contain  nearly all of our  sampling
systems and are the most commonly produced among our sampling formats.

     Catalog  Inserts:  Full color formats can be produced in a variety of sizes
and inserted into retail or mail order catalogs. Catalog inserts can be produced
with or without an  attached  envelope,  provided  to  facilitate  the return of
merchandise  order forms to the store. We have the ability to create and produce
special  formats,  to custom imprint with store  information  and to incorporate
most of our sampling systems.

     Remittance Envelopes:  Remittance envelopes,  which are inserted into store
statement mailings, can be customized with a store logo and can be produced with
or without  sampling  systems.  We believe  that we are the only  company in the
sampling industry that can produce  remittance  envelopes  in-house.  Remittance
envelope production,  which is a highly customized service business,  reinforces
our position as a fully integrated enterprise.

     Statement Enclosures: Statement enclosures are available in various formats
and sizes.  Fragrance  statement  enclosures may contain a single scent in their
fold,  one or two scents under the  fragrance  panel,  or they may be die-cut so
that the fragrance can be sampled by removing the desired die shape.  Enclosures
are normally  imprinted  with store logo and product  pricing  information.  The
six-inch format is our design and has become the leading industry format.

     Blow-ins:  Blow-ins,  which are  available  in all formats  and sizes,  can
accommodate  nearly all of our sampling  systems and are loosely inserted (blown
in) rather than bound into store catalogues, newspapers and magazines.

     Direct Mail:  Full color,  direct mail formats can be produced in a variety
of sizes,  weights and designs,  including  single,  double and triple folds, as
well as standard and oversized postcards.  Direct mailers can be customized with
store or  manufacturer  logo and can  accommodate  virtually all of our sampling
technologies.

         Other Formats

     Direct  Sell:  Many of our  Company's  sampling  systems are widely used in
direct  sales  campaigns.  Beauty  companies,  whose  treatment,   cosmetic  and
fragrance products are sold directly to the consumer by representatives, use our
sampling technologies to promote their product offerings.

     Point-of-Sale Materials: We have made significant advances in replacing and
expanding  current methods of in-store cosmetic and fragrance  sampling.  Due to
the lower cost and design  flexibility of our products,  marketers have expanded
the number  and type of  in-store  vehicles.  Working  in  partnership  with our
customers,  new  and  creative  formats  have  been  developed.   These  formats
incorporate many of our sampling systems and items such as postcards,  stickers,
wristbands, bookmarks and CD inserts. Many of our other technologies,  including
LiquaTouch(R),  BeautiSeal(R),  BeautiPak(TM),   BeautiTouch(R),   MicroDot(TM),
LiqiSeal(TM),  ShadeSeal(R) and  PowdaTouch(R)


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are becoming more widely accepted for  point-of-sale  handouts as an alternative
to more traditional sampling methods and for salable unit doses.

     Gift-with-Purchase/Purchase-with-Purchase  Programs:  Many of our fragrance
and cosmetic  customers promote new product offerings with our sampling systems.
LiquaTouch(R)  stand  alones and  DiscCover(R)More  offer  single,  long-lasting
wearable  fragrance  trial  samples.  BeautiPak(TM)  gives the  consumer  a full
application  of a  lipstick  formula or shade and  LiquiSeal(TM)  can be used to
offer a full application of up to four foundation or treatment product samples.


Intellectual Property

     We  currently  hold  patents  covering the  proprietary  processes  used to
produce  many of our  products  in both the  United  States  and abroad and have
submitted  applications  for  many  of  our  manufacturing  processes.  We  have
trademarks registered in the United States and we have also filed and registered
trademarks  in over 15 countries  around the world,  including  countries in the
European Union, Australia, Japan and Brazil.

     We have ongoing research  efforts and expect to seek additional  patents in
the future  covering  results  of our  research.  We cannot  assure you that any
pending patent applications filed by our Company:

o    will result in patents  being  issued or that any patents now or  hereafter
     owned by our  Company  will  afford  protection  against  competitors  with
     similar technology;

o    will not be infringed upon or designed around by others; or

o    will not be challenged by others or held to be invalid or unenforceable.

     In addition,  many of our  manufacturing  processes  are not covered by any
patent or  patent  application.  As a  result,  our  business  may be  adversely
affected by competitors who  independently  develop  technologies  substantially
equivalent to those employed by our Company.

Customers

     We sell our products to prestige and mass cosmetic,  fragrance and consumer
products  companies,  department  stores,  home shopping retailers and specialty
retailers including Avon Products, Inc., Unilever plc, Chanel, Inc., Coty, Inc.,
L'Oreal S.A.,  Elizabeth Arden, Estee Lauder,  Inc., Mary Kay, Victoria's Secret
Beauty and The Procter & Gamble  Company.  Our top ten  customers  accounted for
approximately  71% of sales in fiscal  2003.  Estee Lauder and Mary Kay were the
only  customers  that  accounted for 10% or more of net sales in fiscal 2003. We
believe that our technical  expertise,  manufacturing  reliability  and customer
support  capabilities have enabled us to develop strong  relationships  with our
customers.  We employ sales and  marketing  personnel  who possess the requisite
technical backgrounds to communicate effectively with both prospective customers
and  our   manufacturing   personnel.   Historically,   we  have  had  long-term
relationships with our major customers.


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Sales and Marketing

     Our sales and  marketing  efforts are  organized  geographically.  The U.S.
sales group is supervised by our Senior Vice President of U.S. Sales,  while our
European sales executives are based in Paris, France and London, England and are
managed by an executive based in Paris,  France. We also have representatives in
Australia,  Brazil,  Canada, Mexico and Japan. Each sales executive is dedicated
to a certain number of identified  customers.  In addition,  these sales efforts
are supported by production managers/customer service representatives, which are
based in  Chattanooga,  Tennessee,  Baltimore,  Maryland  and Paris,  France.  A
portion  of  the  compensation   for  sales  executives  is  commission   and/or
bonus-based.

     Our marketing  activities  include direct contact with senior executives in
the  cosmetic  and  fragrance  industry,  major  support of industry  events and
extensive  joint  marketing  programs  with  magazines,  retailers and fragrance
houses.  We also receive press coverage in industry trade  publications,  attend
industry  seminars,  advertise  in trade  publications  and sponsor  promotional
pieces.  In addition,  we focus our sales efforts toward three principal  groups
within our  customers'  organizations  that  management  believes  influence our
customers' purchasing decisions:

o    marketing,  which  selects the sampling  system  technology  and  typically
     controls the promotional budget;

o    product  development,  which  approves our sampling  system  rendition  and
     conducts stability testing; and

o    purchasing, which buys the sampling system pieces and controls quality.

     Management believes that as the pressure for creativity increases with each
new product  introduction,  cosmetic and fragrance  marketers  are  increasingly
looking for their vendors to contribute to the overall  strategy-building effort
to introduce a new product.  Our  executives  routinely  introduce  new sampling
system formats and ideas based on our technologies to the marketing  departments
of our customers.  Our in-house creative and marketing know-how,  as well as our
complete product line of sampling  technologies  provides customers with maximum
flexibility in designing promotional programs.

Manufacturing

     Our manufacturing  processes are highly technical and largely  proprietary.
Our sampling systems must meet demanding  performance  specifications  regarding
fidelity to the product being  sampled,  shelf life,  resistance to pressure and
temperature  variations  and  various  other  requirements.   Our  manufacturing
processes are composed of one or more of the following:

o    formulating  cosmetic  and  fragrance  product  renditions  in our in-house
     laboratories;

o    printing advertising pages and other media;


                                       9


<PAGE>


o    manufacturing  the sampling  product,  which consists of either applying an
     encapsulated  slurry onto paper or producing  sampling  labels that contain
     fragrance or other cosmetic product renditions; and

o    affixing our label products onto a preprinted advertising carrier.

     ISO 9001  Registration:  During 2001, the  International  Organization  for
Standardization awarded three of the Company's manufacturing facilities with ISO
9001 registration.  These facilities produce many of the Company's  proprietary,
patented and patent-pending  products,  as well as several of our other sampling
systems.  The  registration  was  awarded  following  an  extensive  examination
incorporating  20 elements that outline the  requirements  for  documenting  and
implementing  our Company's  overall  philosophy as it pertains to quality,  its
policies,  systems and  procedures.  The ISO standards  serve as guidelines  for
businesses  interested in assuring that their processes  result in products that
reflect the highest level of quality. The ISO 9001 section of the series applies
to organizations that design, develop, produce, install and service products.

     Management  believes that our formulation  capabilities are the best in the
cosmetics and fragrance  sampling  industry.  The formulation  process is highly
complex  because we strive to replicate  the  fragrance of a product in a bottle
containing an alcohol solution.  Formulation  approval is an interactive process
between  our  Company  and  our  customers.  We have  more  than  125  different
proprietary    formulations   that   we   utilize   in   replicating   different
characteristics of over 500 fragrances to obtain a customer-approved  rendition.
A number of these  formulations are patented and the majority of the formulation
process is based on unique and proprietary methods. Formulation of the fragrance
and cosmetic product  rendition is performed under very strict tolerances and in
complete   conformity  to  the  formula  that  the  customer  has  pre-approved.
Formulation is conducted in our specially designed  formulation  laboratories by
trained specialists.

     The artwork for substantially all printed pieces is typically  furnished by
the customer or its advertising agency. Our digital prepress department utilizes
state-of-the-art  technology  to receive  customer-supplied  computer  disks and
transfers this material  directly to our printing plates. We have the capability
to produce high quality printed materials, including the covers of major fashion
magazines, in connection with fragrance sampling systems.

     Our formulated offset paper samplers  (ScentStrip(R),  ScentStrip(R)  Plus,
PowdaTouch(R)) are produced in our primary facility in Chattanooga, Tennessee in
a  continuous  in-line  operation.  Our  formulated  letterpress  or flexo label
samplers   (DiscCover(R),    BeautiSeal(R),    LipSeal(R),   LiquaTouch(R)   and
ScentSeal(R) ) are produced on specially modified label and finishing  equipment
in our second Chattanooga facility while the Microfragrance(R)  Scratch `n Sniff
operation  is  conducted  in a third  facility in  Chattanooga,  Tennessee.  Our
specialized   screen   printing   manufacturing   process  which   produces  our
ShadeSeal(R)  and  PowdaScent(TM)  technologies  takes place in our  facility in
Baltimore,  Maryland.  In addition  BeautiPak(TM)  our proprietary  thermoformed
technology  for  sampling  lipstick  and  LiqiSeal(TM)  our  patented  clear top
packette to sampler  liquid,  cream,  lotion or gel products are produced in our
Baltimore,  Maryland  facility.  At each  facility,  a 24-hour  quality  control
function and hourly  accountability  provide significant


                                       10


<PAGE>


value  to our  customers'  product  development  personnel,  who  are  typically
responsible for sample system  quality.  In addition to the patents pending on a
number of our manufacturing processes, we use a number of proprietary techniques
in producing label samplers. Similar to the formulated paper operation, sampling
quality control  personnel  evaluate all sample systems by roll and provide full
accountability for our production.

     We also have  agreements  with  North  American,  European  and  Australian
printers and label manufacturers that we contract with to produce some materials
for our  customers.  These  arrangements  are  typically  utilized  when foreign
distribution is required or demand exceeds our internal capacity.  Each of these
arrangements is protected by non-competition agreements.

     Both our Chattanooga and Baltimore operations have been awarded The Procter
& Gamble Triple Pinnacle  Award,  which is presented to companies as recognition
for having met certain quality requirements and having demonstrated  outstanding
quality  assurance.  Both  operations are also registered with the Food and Drug
Administration  for the packaging of regulated cosmetic products and we maintain
environmentally  controlled cGMP (current good manufacturing practice) compliant
facilities.

Sources and Availability of Raw Materials

     Generally,  the raw materials used by our Company in the  manufacturing  of
our products have been readily  available from numerous  suppliers and have been
purchased by our Company at prices that we believe are competitive. However, our
encapsulated  paper products  utilize specific grades of paper which we purchase
primarily   from  one   manufacturer.   These  paper  products  are  subject  to
comprehensive  evaluation and  certification by us for quality,  consistency and
fit.  Some of our  laminates  are  purchased  from single  sources under certain
specifications.   We  have  not  experienced  any  significant  material  supply
shortages in the past, nor are any anticipated.

Competition

     Our competitors,  some of whom have substantially greater capital resources
than our Company, are actively engaged in manufacturing  products similar to, or
in  competition  with,  our products.  Competition  in our markets is based upon
product  quality,  product  technologies,   customer  relationships,  price  and
customer  service.  Our  principal  competitors  in the  printed  fragrance  and
cosmetic samplers market are the fragrance  division of Vertis,  Inc.,  Orlandi,
Inc., Delta Graphics,  Inc., Nord'est,  Marietta Corp., Klocke,  RotaScent GmbH,
Manka Creations and Appliquesence.  We also compete with numerous  manufacturers
of  miniatures,  vials,  packets,  sachets,  blister packs and scratch and sniff
products.  In addition,  some cosmetics  companies produce sampling products for
their own cosmetic  products.  We also compete with numerous other marketing and
advertising venues for marketing dollars our customers allocate to various types
of advertising,  marketing and promotional efforts such as print, television and
in-store promotions.


                                       11


<PAGE>


Environmental and Safety Regulation

     Our operations are subject to extensive  laws and  regulations  relating to
the storage, handling, emission,  transportation and discharge of materials into
the environment  and the  maintenance of safe  conditions in the workplace.  Our
policy is to comply with all legal  requirements  of  applicable  environmental,
health  and  safety  laws and  regulations.  We  believe  that we are in general
compliance  with such  requirements  and have  adequate  professional  staff and
systems in place to remain in  compliance,  although  there can be no assurances
that this is the case. We consider  costs for  environmental  compliance to be a
normal cost of doing business and include such costs in pricing decisions.

Employees

     As of August 31, 2003, we employed 481 persons,  which  included 278 hourly
and 203 salaried and management  personnel.  A substantial number of our zhourly
employees are  represented by the Graphics  Communications  International  Union
(GCIU) local 197-M.  Management  considers  our  relations  with the union to be
good.  However,  the labor contract with our union expired by its terms on March
31, 2003. Since that time, members of the union have continued to work under the
terms we have proposed for a new contract. We continue to work with the union to
execute a new contract containing those terms.


                                       12


<PAGE>


                                  RISK FACTORS

Our substantial  indebtedness and restrictive  covenants imposed by the terms of
our  indebtedness  could  adversely  affect  our cash flow and  prevent  us from
fulfilling our obligations under our notes.

     We have substantial  indebtedness and debt service obligations.  As of June
30, 2003, Holding and AKI had total  consolidated  indebtedness of approximately
$121.6 million.  As of August 31, 2003, AKI had  outstanding  borrowings of $8.1
million under its term loan with Heller Financial, Inc., $18.6 million under its
revolving credit agreement with Heller Financial,  Inc. and $0.4 million under a
promissory note with AHC. In addition, as of such date, additional borrowings of
up to  approximately  $1.1  million  were  available  under the  revolving  loan
commitment  of the  credit  agreement,  subject  to  specified  conditions.  The
indenture governing AKI's 10 1/2% Senior Notes due 2008 and the credit agreement
permit our Company and its restricted subsidiaries, as defined in the indenture,
in  each  case,  to  incur   additional   indebtedness   if  we  meet  specified
requirements.

     The level of our indebtedness  could have negative  consequences to holders
of the notes, including, but not limited to, the following:

o    a  substantial  portion of cash flow from  operations  must be dedicated to
     debt service and will not be available for other purposes;

o    additional  debt  financing  in the future  for  working  capital,  capital
     expenditures or acquisitions may be limited;

o    our level of indebtedness could limit flexibility in reacting to changes in
     the operating environment and economic conditions generally;

o    our  level  of   indebtedness   could  restrict  our  ability  to  increase
     manufacturing capacity;

o    we may face  difficulties in satisfying our obligations with respect to our
     indebtedness; and

o    a portion of our  borrowings  bear interest at variable  rates of interest,
     which could result in higher  interest  expense in the event of an increase
     in market interest rates.

     The indenture and the credit agreement  contain covenants that, among other
things, limit the ability of our Company and its restricted subsidiaries to:

o    pay dividends or make certain restricted payments;

o    incur additional indebtedness and issue preferred stock;

o    create liens;

o    incur dividend and other payment restrictions affecting subsidiaries;


                                       13


<PAGE>


o    enter into mergers,  consolidations or sales of all or substantially all of
     the assets of our Company;

o    enter into certain transactions with affiliates; and

o    sell certain assets.

     In  addition,  the  credit  agreement  requires  us to  maintain  specified
financial ratios and satisfy specified financial condition tests. Our ability to
meet those  financial  ratios  and tests can be  affected  by events  beyond our
control,  and there can be no  assurance  that we will meet  those  tests in the
future.

To service our  indebtedness  we will require a significant  amount of cash. Our
ability to generate cash depends on many factors beyond our control.

     The ability of our Company to pay  principal  and interest on the notes and
to satisfy our other debt  obligations  will depend upon AKI's future  operating
performance.  AKI's future operating  performance will be affected by prevailing
economic conditions and financial, business and other factors, which factors may
be beyond our control. We anticipate that our operating cash flow, together with
available borrowings under the credit agreement,  will be sufficient to meet our
operating  expenses  and to service  our debt  requirements  as they become due.
However,  if we are unable to service  our  indebtedness,  we may be required to
take action such as reducing or delaying capital  expenditures,  selling assets,
restructuring  or refinancing  our  indebtedness  or seeking  additional  equity
capital. There can be no assurance that any of these remedies can be effected on
satisfactory  terms,  if at all.  If we are  unable to  maintain  the  specified
financial  ratios or generate  sufficient  cash flow or  otherwise  obtain funds
necessary to make required  payments,  we would be in default under the terms of
our  indebtedness,  which  would  permit  the  holders of such  indebtedness  to
accelerate the maturity of the indebtedness.

An investor's  right to receive  payments on the notes is junior to our existing
and future secured indebtedness.

     Under the terms of our credit agreement, Heller Financial, Inc., the lender
under the credit agreement,  has a security interest in substantially all of the
current  and  future  assets of AKI.  In the event of  default  under the credit
agreement,  whether as a result of the failure to comply with a payment or other
covenant,  a  cross-default  or otherwise,  the lender will have a prior secured
claim on the capital stock of AKI and our encumbered  assets.  As a result,  our
encumbered  assets would be available to pay obligations on the notes only after
borrowings  under the credit agreement and any other secured  indebtedness  have
been paid in full. If the lender should attempt to foreclose on its  collateral,
our financial condition would be materially  adversely affected and the value of
the notes  could be  eliminated.  As of August  31,  2003,  AKI had  outstanding
borrowings under the credit agreement consisting of a $8.1 million term loan and
a $18.6 million revolving loan and could borrow an additional $1.1 million under
the  revolving  loan  commitment of the credit  agreement,  subject to specified
conditions.


                                       14


<PAGE>


Our results of operations could be adversely affected if the U.S. Postal Service
reclassifies our sampling systems or the sampling products of our competitors.

     Most of our  sampling  systems  are  approved  by the U.S.  Postal  Service
("USPS") for inclusion in subscription  magazines  mailed at periodical  postage
rates. The USPS approved sampling systems have a significant cost advantage over
other competing sampling products, such as miniatures, vials, packettes, sachets
and blister  packs,  because  these  competing  products  cause an increase from
periodical  postage  rates to the higher  third-class  rates for the  magazine's
entire  circulation.   Subscription   magazine  sampling  inserts  delivered  to
consumers  through the USPS accounted for  approximately 22% of our net sales in
fiscal  2003.  There can be no  assurance  that the USPS will not approve  other
competing types of sampling  systems for use in subscription  magazines  without
requiring a postal surcharge,  or that the USPS will not reclassify our sampling
systems  such that they would incur a postal  surcharge.  Any such action by the
USPS could have a  material  adverse  effect on our  results of  operations  and
financial condition.

We rely on a small number of customers for a large portion of our revenues.

     Our top ten customers by sales revenue  accounted for  approximately 71% of
our net sales in fiscal 2003. None of our customers, other than Estee Lauder and
Mary Kay,  accounted  for 10% or more of net sales in fiscal  2003.  Although we
have long-established  relationships with most of our major customers, we do not
have long-term  contracts with any of our customers.  We may be required by some
customers  to qualify our  manufacturing  operations  under  specified  supplier
standards.  There can be no assurance  that we will be able to qualify under any
supplier  standards or that our  customers  will  continue to purchase  sampling
systems from us if our manufacturing operations are not so qualified. An adverse
change in our relationship with significant customers, including Estee Lauder or
Mary Kay, would have a material  adverse effect on our results of operations and
financial condition.

Our ability to compete with other companies depends,  in part, on our ability to
meet customer needs on a cost-effective and timely basis.

     Our  competitors,   some  of  whom  have  substantially  greater  financial
resources  than our Company,  are  actively  engaged in  manufacturing  products
similar to those of our  Company.  Our  principal  competitors  in the  cosmetic
sampling market are the fragrance division of Vertis,  Inc., Orlandi Inc., Delta
Graphics,  Nord'est,  Marietta Corp., Klocke, Rotocon, Ascent and Appliquesence.
We also compete with numerous  manufacturers  of miniatures,  vials,  packettes,
sachets,  blister  packs and scratch and sniff  products.  In addition,  certain
cosmetic companies produce sampling products for their own cosmetic products. We
also compete with numerous other marketing and advertising  venues for marketing
dollars our customers  allocate to various types of  advertising,  marketing and
promotional  efforts  such  as  print,   television  and  in-store   promotions.
Competition  in our market is  primarily  based  upon  price,  product  quality,
product  technologies,  customer  relationships and customer service. The future
success of our business will depend in large part upon our ability to market and
manufacture  products and services that meet customer needs on a  cost-effective
and timely basis.  There can be no assurance  that capital will be available for
these purposes,  that  investments in new technology will result in


                                       15


<PAGE>


commercially  viable products or that we will be successful in generating  sales
on commercially favorable terms, if at all.

We must protect our intellectual property to be successful.

     Our success,  competitive  position and revenues will depend, in part, upon
our ability to protect our proprietary and patented  technologies and to operate
without infringing on the proprietary rights of others. Although we have certain
patents  and  have  filed,   and  expect  to  continue  to  file,  other  patent
applications,  there can be no assurance that our issued patents are enforceable
or that our patent  applications  will mature into issued  patents.  The expense
involved in litigation  regarding patent  protection or a challenge  thereto has
been and could be  significant  and we cannot  estimate  any future  expense.  A
portion of our  manufacturing  processes are not covered by any patent or patent
application.  As a result, our business may be adversely affected by competitors
who  independently  develop  technologies   substantially  equivalent  to  those
employed by us.

Our  business is affected by the  advertising  budgets of our  customers  and is
cyclical and seasonal in nature.

     The advertising and marketing  budgets of our customers,  and therefore our
revenues,  are susceptible to prevailing  economic cycles and market  conditions
that affect  advertising  and marketing  expenditures,  the  performance  of the
products of our customers in the  marketplace and other related  factors.  There
can be no assurance  that  reductions  in  advertising  spending will not occur,
which  could have a material  adverse  effect on our results of  operations  and
financial condition.

     In addition,  our sales and operating results have  historically  reflected
seasonal  variations.  These seasonal  variations are based on the timing of our
customers'  advertising and marketing  campaigns,  which have traditionally been
concentrated  prior to the Christmas and spring holiday seasons.  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.  If we  fail to  adequately  plan  for  our  seasonal
fluctuations, our business may be adversely affected.

Our results of operations and financial  condition may be adversely  affected by
an increase in raw material prices or a decrease in raw material supply.

     Paper is the primary raw material  utilized by our Company in producing our
sampling systems. Paper costs represented approximately 18% of our cost of goods
sold in each of fiscal 2003 and 2002 and 28% of our cost of goods sold in fiscal
2001.  Significant increases in paper costs could have a material adverse effect
on our results of operations  and financial  condition to the extent that we are
unable  to price  our  products  to  reflect  such  increases.  There  can be no
assurance that our customers  would accept such price increases or the extent to
which such price  increases  would impact their decision to utilize our sampling
systems.


                                       16


<PAGE>


     Substantially  all of our ScentStrip(R)  sampling systems,  which accounted
for approximately  39% of our net sales in fiscal 2003,  utilize specific grades
of paper that are subject to  comprehensive  evaluation and  certification by us
for quality, consistency and fit. These grades of paper are produced exclusively
for us by one domestic  supplier.  We do not have a purchase  agreement with the
supplier and are not aware of any other  suppliers of these  specific  grades of
paper. Although our products can be manufactured using other grades of paper, we
believe that the  specific  grades  currently  used provide us with an advantage
over our  competitors.  We  continue  to  research  methods of  replicating  the
advantages  of these  specific  grades of paper with other  available  grades of
paper.  Until alternative  methods are developed,  a loss of our supply of paper
and the resulting  competitive advantage could have a material adverse effect on
our results of  operations  and  financial  condition  to the extent that we are
unable to obtain such paper elsewhere.

     Certain of our label sampling  systems,  which accounted for  approximately
26% of our net  sales in  fiscal  2003,  utilize  component  materials  that are
sourced from one qualified vendor. Although alternative sources are being sought
for  the  component  materials,  there  can be no  assurance  that  we  will  be
successful in locating  another vendor. A loss of supply of materials could have
a material  adverse effect on our results of operations and financial  condition
to the extent we are unable to obtain materials elsewhere.

We receive a portion of our revenue from foreign  countries  which is subject to
foreign laws and regulations and political and economic events.

     Approximately 24% of our net sales in fiscal 2003 was generated outside the
United  States.  Foreign  operations are subject to risks inherent in conducting
business  abroad,   including,   among  others,  exposure  to  foreign  currency
fluctuations  and  devaluations or  restrictions on money supplies,  foreign and
domestic export law and regulations,  price controls,  taxation, tariffs, import
restrictions and other political and economic events beyond our control. We have
not experienced any material  effects of these risks as of yet, but there can be
no assurance that they will not have such an effect in the future.

We are controlled by DLJMBII whose  interests may conflict with the interests of
the holders of the notes.

     DLJMBII  has the  power to elect a  majority  of the  directors  of AHC and
generally exercises significant control over the business,  policies and affairs
of AHC, Holding,  AKI and its subsidiaries through its ownership of AHC. DLJMBII
currently owns approximately  98.8% of AHC's outstanding  common stock.  DLJMBII
may have  interests  that could be in conflict  with those of the holders of the
notes and may take actions that adversely affect the interests of the holders of
the notes.

Our business may be adversely affected by a labor dispute.

     As of August 31, 2003,  approximately  47% of our employees  worked under a
collective bargaining agreement that expired on March 31, 2003. Since that time,
members of the union have continued to work under the terms we have proposed for
a new  contract.  There  can be no


                                       17


<PAGE>


assurance  that  the  union  will  execute  a  collective  bargaining  agreement
containing our proposed  terms.  A prolonged  labor dispute (which may include a
work stoppage) could have a material  adverse effect on our business,  financial
condition and results of operations.

ITEM 2.       PROPERTIES

     We own land and  buildings  in  Chattanooga,  Tennessee,  that are used for
production,  administration  and warehousing.  Our executive offices and primary
facility  at 1815  East Main  Street  are  located  on 2.55  acres and  encloses
approximately  67,900 square feet. A second facility housing product development
and  additional  manufacturing  areas at 1600 East Main Street is located  three
blocks away on 2.49 acres and encloses approximately 36,700 square feet. We have
a third  facility at 3501 St. Elmo Avenue in  Chattanooga,  Tennessee,  which is
used for production and warehousing. This facility is located on 1.875 acres and
encloses approximately 29,500 square feet.

     We lease buildings in Baltimore, Maryland, that are used for production and
warehousing.   The  production   facility  at  7600  Energy   Parkway   encloses
approximately  50,000  square feet and its lease  expires in August,  2004.  The
warehouse facility at 7525 Perryman Court encloses  approximately  13,000 square
feet and its lease  expires in May, 2004 with options to renew the lease for two
additional one year periods.

     We also  lease  sales  offices  in New York,  New York,  Paris,  France and
London, England.

ITEM 3.       LEGAL PROCEEDINGS

     We do not believe that there are any pending  legal  proceedings  that,  if
adversely  determined,  would have a material  adverse  effect on our  financial
condition or results of operations, taken as a whole.

ITEM 4.       SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     None.


                                       18


<PAGE>


                                     PART II

ITEM 5.      MARKET FOR REGISTRANT COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     There is no established public trading market for Holding's or AKI's common
stock.  As of August 31,  2003,  AHC was the sole holder of record of  Holding's
common  stock and Holding was the sole holder of record of AKI's  common  stock.
Generally,  neither Holding nor AKI pays dividends on its shares of common stock
and  neither  expects  to pay  dividends  on its  shares of common  stock in the
foreseeable  future. The notes and the credit agreement contain  restrictions on
AKI's ability to pay dividends on its common stock.


                                       19


<PAGE>


ITEM 6.       SELECTED FINANCIAL DATA

     The selected historical  consolidated  financial data presented below as of
June 30,  2003,  2002,  2001,  2000 and 1999 and the years ended June 30,  2003,
2002,  2001,  2000 and 1999 have been derived from the  historical  consolidated
financial  statements of our company.  The  information  contained in this table
should be read in conjunction with "Item 7. Management's Discussion and Analysis
of  Financial  Condition  and  Results  of  Operations,"  and  our  Consolidated
Financial Statements and the notes thereto included elsewhere in this report.


<TABLE>
<CAPTION>


                                    June 30,        June 30,       June 30,       June 30,        June 30,
   (dollars in thousands)             2003            2002           2001           2000            1999
                                      ----            ----           ----           ----            ----
<S>                                <C>            <C>             <C>            <C>            <C>
   Statement of Operations Data:
   Net sales                       $ 115,308      $ 120,893       $ 115,395      $  99,811      $  87,169
   Cost of goods sold                 73,883         73,888          71,336         61,552         56,401
                                   ---------      ---------       ---------      ---------      ---------
   Gross profit                       41,425         47,005          44,059         38,259         30,768
   Selling, general and
     administrative expenses          17,971         18,943          18,199         16,980         14,500
   Amortization of goodwill            1,143          6,451           5,757          5,336          4,606
   Gain from settlement, net               -           (992)              -           (858)             -
                                   ---------      ---------       ---------       --------      ---------
   Income from operations             22,311         22,603          20,103         16,801         11,662
   Interest expense, net              14,355         15,633          16,911         17,401         16,740
   Management fees                       325            250             250            250            250
   (Gain) loss from early
     retirement of debt (1)              871         (3,941)         (3,302)        (1,787)             -
   Other, net                             33              -               -              -            128
   Income tax expense (benefit)        2,260          5,924           4,735          2,294           (340)
                                   ---------      ---------       ---------      ---------      ---------
     Net income (loss)             $   4,467      $   4,737       $   1,509      $  (1,357)     $  (5,116)
                                   =========      =========       =========      =========      =========

   Balance Sheet Data (at end
   of period):
   Cash and cash equivalents       $   1,470      $   1,875       $   4,654      $   1,158      $   7,015
   Working capital                    13,832         11,571          10,169         13,759         14,853
   Total assets (2)                  218,702        226,279         214,184        223,274        210,386
   Total debt                        121,635        131,661         127,939        145,722        146,688
   Total stockholder's equity         75,245         69,897          64,769         58,834         49,797

   Other Data:
   Capital expenditures            $   2,345      $   1,338       $   3,015      $   2,782      $   2,856
   Ratio of earnings to fixed
   charges (3)                          1.5x           1.7x            1.4x           1.1x            ---

</TABLE>

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

(1)  Extraordinary gains from previous years have been reclassed to conform with
     current year presentation, in accordance with the provisions of SFAS 145.
(2)  Total  assets at June 30, 2002 have been  restated to conform  with current
     year presentation.
(3)  For  purposes  of  calculating  the  ratio of  earnings  to fixed  charges,
     "earnings"  represent income (loss) before income taxes plus fixed charges.
     "Fixed charges" consist of interest on all indebtedness and amortization of
     deferred  financing  costs.  Earnings  were not  sufficient  to cover fixed
     charges by $5,456 for the year ended June 30, 1999.


                                       20


<PAGE>


ITEM 7.       MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
              RESULTS OF OPERATIONS

General

     Our  sales are  primarily  derived  from the sale of  sampling  systems  to
cosmetics,  fragrance and consumer products companies.  Substantially all of our
sales are made directly to our 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 our
customers  generally  do  not  enter  into  long-term  contracts,  we  have  had
long-standing relationships with the majority of our customer base.

The Acquisition

     DLJMBII and certain members of our prior management  organized AHC I Merger
Corp. for purposes of acquiring Arcade Holding Corporation,  our predecessor. On
December 15, 1997, the merger  corporation  acquired all of the equity interests
of the predecessor corporation (the "Acquisition") for $205.7 million (including
related fees, expenses and cash for working capital). Included in the total cost
of the Acquisition were  approximately  $6.2 million in non-cash costs comprised
of (1) the assumption of a promissory note issued by the predecessor corporation
in connection with the 1995 acquisition of Scent Seal, Inc., and certain capital
lease  obligations and (2) the exchange of stock options to acquire common stock
in the predecessor corporation by the predecessor  corporation's chief executive
officer for an option to acquire preferred stock in AHC.

     To provide the $199.5  million of cash  necessary to fund the  Acquisition,
including  the  equity  purchase  price  and the  retirement  of all  previously
existing  preferred stock and debt of the  predecessor  corporation not assumed,
(1) the merger  corporation  issued $123.5 million of its Senior Increasing Rate
Notes to Scratch & Sniff  Funding,  Inc.,  an affiliate of DLJMBII,  and (2) AHC
received $76.0 million from debt and equity  (common and preferred)  financings,
including  equity  investments  by  certain   stockholders  of  the  predecessor
corporation,  which  was  contributed  to the  merger  corporation.  Immediately
following  the  Acquisition,  the merger  corporation  merged  with and into the
predecessor  corporation  and the combined entity assumed the name AKI, Inc. AHC
then contributed $1 of cash and all of its ownership  interest in AKI to Holding
for 1,000 shares of Holding's common stock.

     The merger  corporation's  senior  increasing rate notes were  subsequently
repaid on June 25, 1998 from the proceeds of AKI's issuance of $115.0 million of
AKI's notes and from a capital  contribution  from  Holding.  On June 25,  1998,
Holding  issued and sold its  debentures  totaling  $50.0  million in  aggregate
principal  amount at maturity for gross proceeds of $26.0 million,  the majority
of which were used to fund Holding's  equity  contribution  to AKI. All of these
debentures have been repurchased by the Company as of June 30, 2003.

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


                                       21


<PAGE>


3M Acquisition

     On June 22,  1998,  we  acquired  the  fragrance  sampling  business of the
Industrial and Consumer  Products division of Minnesota Mining and Manufacturing
Company (3M) for $7.3 million in cash and the  assumption of a liability of $0.2
million to one of the customers of the business.  We financed the 3M acquisition
with borrowings under the credit  agreement.  These borrowings were subsequently
repaid.

RetCom Acquisition

     On September 15, 1999, we acquired all of the issued and outstanding shares
of capital stock of RetCom at a purchase  price of  approximately  $12.5 million
and refinanced  working capital  indebtedness of  approximately  $4.5 million of
RetCom and its subsidiaries.  The purchase price and refinancing of indebtedness
were financed by borrowings under the credit agreement.

Color Prelude Acquisition

     On December 18, 2001,  we acquired  the CP business for $19.4  million.  We
financed the CP acquisition with borrowings under our credit agreement.

Results of Operations

Fiscal Year Ended June 30, 2003 Compared to Fiscal Year Ended June 30, 2002

     Net Sales. Net sales for the fiscal year ended June 30, 2003 decreased $5.6
million, or 4.6%, to $115.3 million as compared to $120.9 million for the fiscal
year ended June 30, 2002.  The decrease in net sales was primarily  attributable
to a decrease in sales of sampling technologies for advertising and marketing of
domestic cosmetic products and international fragrance products partially offset
by an  increase  in the  sales of  sampling  technologies  for  advertising  and
marketing of domestic consumer products and international  cosmetic products and
favorable foreign exchange rates.

     Gross  Profit.  Gross  profit  for the  fiscal  year  ended  June 30,  2003
decreased $5.6 million,  or 11.9%, to $41.4 million as compared to $47.0 million
for fiscal year ended June 30, 2002.  Gross profit as a percentage  of net sales
decreased  to 35.9% in the fiscal  year ended June 30,  2003,  from 38.9% in the
fiscal year ended June 30,  2002.  The decrease in gross profit and gross profit
as a percentage  of net sales is  primarily  due to the decrease in sales volume
and changes in product mix and increased fixed costs associated with a full-year
operation of CP partially offset by favorable foreign exchange rates.

     Selling,  General  and  Administrative   Expenses.   Selling,  general  and
administrative  expenses for the fiscal year ended June 30, 2003  decreased $0.9
million,  or 4.8% to $18.0  million as compared to $18.9  million for the fiscal
year ended June 30,  2002.  Selling,  general and  administrative  expenses as a
percent of net sales was 15.6% in the fiscal years ended June 30, 2003 and 2002.
The  decrease  in  selling,  general and  administrative  expenses is  primarily


                                       22


<PAGE>


related to a decrease in legal fees and incentive compensation expense partially
offset by increased expenses associated with a full-year operation of CP.

     Amortization  of  Goodwill.  Amortization  of goodwill  for the fiscal year
ended June 30, 2003 decreased $4.8 million,  or 100%, to $0, as compared to $4.8
million for the fiscal year ended June 30, 2002. The decrease in amortization of
goodwill  resulted from the adoption of FASB  Statement of Financial  Accounting
Standards No. 142,  "Goodwill  and Other  Intangible  Assets".  We completed our
initial and first annual tests of the carrying  value of goodwill which resulted
in no impairment.

     Income from  Operations.  Income from  operations for the fiscal year ended
June 30, 2003 decreased  $0.3 million,  or 1.3%, to $22.3 million as compared to
$22.6 million for the fiscal year ended June 30, 2002. Income from operations as
a percentage  of net sales  increased to 19.3% in the fiscal year ended June 30,
2003 from 18.7% in the fiscal year ended June 30,  2002.  The increase 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 fiscal year ended June 30, 2003
decreased $1.2 million,  or 7.7% to $14.4 million,  as compared to $15.6 million
for the fiscal year ended June 30, 2002. Interest expense as a percentage of net
sales  decreased  to 12.5% in the fiscal  year ended June 30, 2003 from 12.9% in
the fiscal year ended June 30, 2002. The decrease in interest expense, including
the amortization of deferred  financing costs, is primarily due to a decrease in
interest expense related to retired Senior Discount Debentures  partially offset
by a full year of interest  payable on the term loan incurred in connection with
the CP acquisition.

     Interest  expense for AKI for the fiscal year ended June 30, 2003 increased
$0.2 million,  or 1.6%, to $12.7  million,  as compared to $12.5 million for the
fiscal year ended June 30, 2002.  Interest  expense as a percentage of net sales
increased  to 11.0% in the fiscal  year  ended  June 30,  2003 from 10.3% in the
fiscal year ended June 30, 2002. The increase in interest expense, including the
amortization  of deferred  financing  costs,  is primarily due to a full year of
interest   payable  on  the  term  loan  incurred  in  connection  with  the  CP
acquisition.

     Gain / Loss from Early  Retirement of Debt. A loss from early retirement of
debt of $0.9  million for the fiscal year ended June 30, 2003 and a gain of $3.9
million for the fiscal year ended June 30, 2002  resulted  from the  purchase of
Senior Discount Debentures. The purchased securities were subsequently retired.

     Income Tax  Expense.  The income tax expense for the fiscal year ended June
30, 2003  decreased $3.6 million to $2.3 million as compared to $5.9 million for
the fiscal year ended June 30,  2002.  The  decrease  is due to the  decrease in
income before income taxes and non-deductible  expenses  principally as a result
of the factors described above and the loss from early retirement of debt.


                                       23


<PAGE>


     Income  tax  expense  for AKI for the  fiscal  year  ended  June  30,  2003
decreased  $2.3  million to $3.4  million as  compared  to $5.7  million for the
fiscal year ended June 30,  2002.  The decrease is due to the decrease in income
before income taxes and non-deductible  expenses  principally as a result of the
factors described above.

Fiscal Year Ended June 30, 2002 Compared to Fiscal Year Ended June 30, 2001

     Net Sales. Net sales for the fiscal year ended June 30, 2002 increased $5.5
million, or 4.8%, to $120.9 million as compared to $115.4 million for the fiscal
year ended June 30, 2001.  The increase  was  attributable  to sales of sampling
technologies  for advertising and marketing of cosmetics by CP, partially offset
by  decreases  in volume of core  product  sales of  sampling  technologies  for
advertising  and  marketing of  fragrance,  cosmetic and consumer  products.  We
believe the decline in core product sales is  predominately  attributable to the
weak economic  conditions in the United States,  particularly in the advertising
industry. We cannot predict if this trend will worsen or when sales may increase
in the  future.  Sales of the CP products in the fiscal year ended June 30, 2002
totaled $24.0 million, a significant increase compared to CP's historical levels
due to sales related to a new sampling  technology and the major introduction of
new  products  by Mary Kay.  We do not  believe  that  sales  increases  of this
magnitude will continue long-term.

     Gross  Profit.  Gross  profit  for the  fiscal  year  ended  June 30,  2002
increased  $2.9 million,  or 6.6%, to $47.0 million as compared to $44.1 million
for fiscal year ended June 30, 2001.  Gross profit as a percentage  of net sales
increased  to 38.9% in the fiscal  year ended June 30,  2002,  from 38.2% in the
fiscal year ended June 30,  2001.  The increase in gross profit and gross profit
as a percentage  of net sales is  primarily  due to the increase in sales volume
and to a lessor extent manufacturing  scheduling  efficiencies,  reduced premium
labor and certain material costs.

     Selling,  General  and  Administrative   Expenses.   Selling,  general  and
administrative  expenses for the fiscal year ended June 30, 2002  increased $0.7
million,  or 3.9% to $18.9  million as compared to $18.2  million for the fiscal
year ended June 30, 2001.  The increase in selling,  general and  administrative
expenses was primarily due to increased expenses related to the CP operation and
acquisition,  an increase in legal fees related to a patent infringement lawsuit
brought by AKI, an estimated loss on office lease  abandonment  and an estimated
loss to settle a foreign value added tax audit partially offset by a decrease in
personnel in fiscal year 2002,  a decrease in sales  commissions  and  incentive
bonuses  and  foreign  exchange   transaction   gains.   Selling,   general  and
administrative  expenses  as a percent  of net sales  decreased  to 15.6% in the
fiscal  year  ended June 30,  2002 from 15.8% in the fiscal  year ended June 30,
2001.

     Income from  Operations.  Income from  operations for the fiscal year ended
June 30, 2002 increased $2.5 million,  or 12.4%, to $22.6 million as compared to
$20.1 million for the fiscal year ended June 30, 2001. Income from operations as
a percentage  of net sales  increased to 18.7% in the fiscal year ended June 30,
2002 from 17.4% in the fiscal year ended June 30, 2001,  principally as a result
of the factors  described above and the net settlement of the RCC purchase price
dispute.


                                       24


<PAGE>


     Interest Expense.  Interest expense for the fiscal year ended June 30, 2002
decreased $1.3 million,  or 7.7% to $15.6 million,  as compared to $16.9 million
for the fiscal year ended June 30, 2001. Interest expense as a percentage of net
sales  decreased  to 12.9% in the fiscal  year ended June 30, 2002 from 14.6% in
the fiscal year ended June 30, 2001. 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 and lower interest
rates  under  the  revolving  loan  and the  promissory  note  to a  stockholder
partially  offset by the additional term loan incurred in connection with the CP
acquisition.

     Interest  expense for AKI for the fiscal year ended June 30, 2002 decreased
$0.7 million,  or 5.3%, to $12.5  million,  as compared to $13.2 million for the
fiscal year ended June 30, 2001.  Interest  expense as a percentage of net sales
decreased  to 10.3% in the fiscal  year  ended  June 30,  2002 from 11.4% in the
fiscal year ended June 30, 2001. 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  and lower  interest  rates under the revolving loan and the
promissory  note to an affiliate  partially  offset by the additional  term loan
incurred in connection with the CP acquisition.

     Gain from early retirement of debt. A gain from early retirement of debt of
$3.9  million for the fiscal  year ended June 30, 2002 and $3.3  million for the
fiscal year ended June 30, 2001  resulted  from the purchase of Senior  Discount
Debentures in fiscal year 2002 and from the purchase and subsequent contribution
in fiscal 2001 of Senior Discount  Debentures by AHC, and the purchase of Senior
Notes in fiscal 2001. The purchased and contributed securities were subsequently
retired.

     A gain from early  retirement  of debt for AKI of $0.7 for the fiscal  year
ended June 30,  2001  resulted  from the  purchase in fiscal year 2001 of Senior
Notes. The purchased securities were subsequently retired.

     Income Tax  Expense.  The income tax expense for the fiscal year ended June
30, 2002  increased $1.3 million to $4.7 million as compared to $3.4 million for
the fiscal year ended June 30,  2001.  The  increase  is due to the  increase in
income before income taxes and extraordinary gain.

     Income  tax  expense  for AKI for the  fiscal  year  ended  June  30,  2002
increased  $1.0  million to $5.7  million as  compared  to $4.7  million for the
fiscal year ended June 30,  2001.  The increase is due to the increase in income
before income taxes and extraordinary gain.


                                       25


<PAGE>


Commitments and Contingencies

     The following  table  summarizes  our  contractural  obligations  and other
contingencies as of June 30, 2003:

<TABLE>
<CAPTION>

                                                           Payments due by fiscal year
                                 --------------------------------------------------------------------------------
                                     2004         2005         2006         2007         2008       Thereafter        Total
                                     ----         ----         ----         ----         ----       ----------        -----

<S>                              <C>           <C>          <C>          <C>          <C>           <C>            <C>
Debt obligations:
    Principal.................   $     1,875   $     2,125  $     2,625  $     1,500  $   108,510   $         -    $   116,635
    Interest*.................        11,616        11,498       11,363       11,203       11,019             -         56,699
Standby letter of credit......             -             -           87            -            -           291            378
Operating leases..............         1,375         1,051        1,017          809          656         2,217          7,125
Minimum royalties**...........         1,190         1,190        1,190        1,190        1,190         5,416         11,366
Unconditional raw material
purchase obligations..........         8,461             -            -            -            -             -          8,461
Other long-term obligations...           750           750            -            -            -             -          1,500
                                 -----------   -----------  -----------  -----------  -----------   -----------    -----------

      Total...................   $    25,267   $    16,614  $    16,282  $    14,702  $   121,375   $     7,924    $   202,164
                                 ===========   ===========  ===========  ===========  ===========   ===========    ===========

</TABLE>


       *    Interest for floating rate obligations has been calculated using the
            rates in effect as of June 30, 2003.
       **   Minimum royalties which are subject to CPI adjustment have been
            calculated based on the CPI as of June 30, 3003.


Liquidity and Capital Resources

     We have substantial  indebtedness and significant debt service obligations.
As of June 30, 2003, we had consolidated  indebtedness in an aggregate amount of
$121.6 million  (excluding  trade  payables,  accrued  liabilities  and deferred
taxes), which is a direct obligation of AKI relating to its notes, term loan and
revolving  credit  line.  At June 30,  2003,  AKI had $21.8  million  in accrued
liabilities (including trade payables,  accrued liabilities,  deferred taxes and
other  liabilities).  As of August 31, 2003, AKI had  outstanding  borrowings of
$8.1 million  under the term loan of the credit  agreement,  $18.6 million under
the revolving loan  commitment of the credit  agreement and $0.4 million under a
promissory note with AHC.

     Borrowings  under the revolving credit line are limited to a maximum amount
equal to $20.0 million.  At June 30, 2003 and August 31, 2003, AKI had borrowing
availability  of  approximately  $9.7  million and $1.1  million,  respectively,
subject  to a  borrowing  base  calculation  and the  achievement  of  specified
financial ratios and compliance with specified conditions. The interest rate for
borrowings  under the credit agreement are determined from time to time based on
our choice of  formulas,  plus a margin.  The credit  agreement  will  mature on
December 31, 2006.


                                       26


<PAGE>


     The indenture  governing the notes and the credit  agreement  permit AKI to
incur additional  indebtedness,  subject to specified limitations.  In addition,
the indenture contains restrictive covenants that, among other things, limit the
ability of AKI to: (i) pay dividends or make certain restricted  payments;  (ii)
incur additional  indebtedness  and issue preferred  stock;  (iii) create liens;
(iv) incur dividend and other payment restrictions affecting  subsidiaries;  (v)
enter into mergers,  consolidations  or sales of all or substantially all of the
assets of our company; (vi) enter into certain transactions with affiliates; and
(vii) sell certain assets. The Company was in compliance with all such covenants
as of June 30, 2003.

     AKI's principal  liquidity  requirements are for operating working capital,
debt  service  requirements  and fees under the notes and the credit  agreement.
Historically,   we  have  funded  our  capital,   debt  service  and   operating
requirements  with a combination  of net cash provided by operating  activities,
which  was  $14.2   million  and  $13.8   million  for  fiscal  2003  and  2002,
respectively,  together with borrowings under revolving credit  facilities.  Net
cash provided by operating activities during fiscal 2003 resulted primarily from
net income  before  depreciation  and  amortization  and a decrease in inventory
levels, net of CP acquisition, partially offset by increased accounts receivable
and a decrease in accounts payable and accrued expenses.

     We define  Adjusted  EBITDA  (also  referred  to as  EBITDA  in our  credit
agreement) as net income or loss plus income taxes,  interest expense, loss from
early  retirement of debt,  depreciation,  amortization  and impairment  loss of
goodwill and  amortization of other  intangibles less gain from early retirement
of debt. Adjusted EBITDA is not a measure of financial or operating performance,
cash flow or liquidity  under  generally  accepted  accounting  principles,  and
should  not be used by itself or in the place of net  income,  cash  flows  from
operating  activities  or other income or cash flow  statement  data prepared in
accordance  with  generally  accepted  accounting  principles  as a financial or
liquidity measure.

     We use Adjusted EBITDA to manage and evaluate our business operations.  Our
management  evaluates  Adjusted  EBITDA  because it  excludes  certain  cash and
non-cash  items that are either beyond our immediate  control or that we believe
are not  characteristic of our underlying  business  operation for the period in
which they are recorded, or both. We believe the presentation of Adjusted EBITDA
is relevant because Adjusted EBITDA is a measurement that we and our lenders use
to comply with our debt  covenants  and establish our interest rate on a portion
of our  debt.  Investors  should  be aware  that  the way by which we  calculate
Adjusted EBITDA may not be comparable with similarly  titled measures  presented
by other  companies and  comparisons of such amounts could be misleading  unless
all companies and analysts calculate such measures in the same manner.


                                       27


<PAGE>


     The  calculation  of adjusted  EBITDA for the years ended June 30, 2003 and
2002 for Holding and AKI is as follows (dollars in millions):


<TABLE>
<CAPTION>

                                                      Holding                                      AKI
                                        -------------------------------------      ------------------------------------
                                           2003         2002         2001             2003        2002         2001
                                           ----         ----         ----             ----        ----         ----

<S>                                       <C>          <C>          <C>              <C>         <C>          <C>
Net income.......................         $    4.4     $    4.7     $    1.5         $    5.8    $    4.1     $    2.4

Income tax expense...............              2.3          5.9          4.7              3.5         5.7          4.9
Interest expense.................             14.4         15.6         16.9             12.7        12.5         13.2
Depreciation and amortization
     of goodwill and other
     intangibles.................              7.3         12.1         10.1              7.3        12.1         10.1
Loss (gain) from early
     retirement of debt..........              0.9         (3.9)        (3.3)              --          --         (0.7)
                                          --------     --------     --------         --------    --------     --------

Adjusted EBITDA..................         $   29.3     $   34.4     $   29.9         $   29.3    $   34.4     $   29.9
                                          ========     ========     ========         ========    ========     ========

</TABLE>


     In  fiscal  2003  and  fiscal  2002,   we  had  capital   expenditures   of
approximately  $2.3  million  and  $1.3  million,  respectively.  These  capital
expenditures   consisted   primarily  of  the  purchase   and   maintenance   of
manufacturing equipment and furniture and fixtures and maintaining and upgrading
our computer systems.

     On September 15, 1999, we acquired all of the issued and outstanding shares
of capital stock of RetCom at a purchase  price of  approximately  $12.5 million
and refinanced  working capital  indebtedness of  approximately  $4.5 million of
RetCom and its subsidiaries.  The purchase price and refinancing of indebtedness
were  financed  by  borrowings  under the credit  agreement.  In fiscal  2002 we
received  $1.0  million as a result of the  purchase  price  reduction  from the
sellers of RetCom.

     On December 18, 2001,  we acquired  the CP business for $19.4  million.  We
financed the CP acquisition with borrowings under our 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.

     At June 30, 2003, AHC had outstanding  $62.7 million of floating rate notes
which bear  interest at  approximately  16% per annum and mature on December 15,
2009, and  approximately  $114.7 million of Senior  Preferred Stock which accrue
dividends at 15% per annum and must be redeemed by December  15, 2012.  Interest
on the notes and dividends on the senior  preferred stock may be settled through
the  issuance  of  additional  floating  rate notes and senior  preferred  stock
through  maturity  or  redemption,  respectively.  The  floating  rate notes are
general,  unsecured obligations of AHC and are not obligations of, or guaranteed
by  Holding,  AKI or any of its  subsidiaries.  AHC is a holding  company and is
dependent upon the cash flows of its subsidiaries and the payment to it of funds
by its subsidiaries.


                                       28


<PAGE>


     During the year ended June 30, 2003, Holding purchased,  with proceeds from
distributions  from AKI, its 13.5% Senior  Discount  Debentures due 2009 with an
accreted value of $17.5 million for $18.0 million.  The purchase caused there to
be no  outstanding  Debentures  for  Holding  as of such  date.  AKI  funded the
distribution through borrowings under its credit agreement.

     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.
Substantially  all of the  proceeds  were used in fiscal 2001 and 2000 to reduce
outstanding  indebtedness  of Holding and AKI.  The balance of the  proceeds may
become available to us to reduce  outstanding  indebtedness of Holding or AKI or
for  working  capital  or other  general  corporate  purposes,  but  there is no
obligation on the part of AHC to make any of these funds available.

     Capital  expenditures for the fiscal year ending June 30, 2004 are budgeted
to be between  approximately $3.0 million and $4.0 million.  Based on borrowings
outstanding  (other than pursuant to the revolving credit  agreement) as of June
30, 2003 and borrowings  outstanding  under the revolving credit agreement as of
August 31, 2003,  we expect total cash  payments for debt service in fiscal 2004
to be  approximately  $14.1  million,  consisting  of $1.9  million in term loan
principal  payments,  $10.9  million in interest  payments on the Notes and $1.3
million in interest and fees under the credit agreement.  We also expect to make
royalty payments of approximately $1.2 million during fiscal 2004.

     We believe  that,  in the absence of future  acquisitions,  cash flows from
existing operations and available borrowings will be sufficient to fund budgeted
capital  expenditures,  working capital  requirements and interest and principal
payments on our indebtedness,  including the Notes for fiscal 2004. In the event
we consummate any additional acquisitions, we may seek additional debt or equity
financings subject to compliance with the terms of the indenture.

     At June 30, 2003,  AKI's  consolidated  cash and cash  equivalents  and net
working capital were $1.5 million and $10.6 million, respectively,  representing
a decrease in cash and cash  equivalents  of $0.4  million and a decrease in net
working capital of $1.0 million from June 30, 2002. Account receivables, net, at
June 30, 2003  decreased  10.1% or $2.4  million  over the June 30, 2002 amount,
primarily due to a decrease in fourth quarter sales.

Seasonality

     Our  sales of  sampling  technologies  for  advertising  and  marketing  of
fragrance  products  have  historically  reflected  seasonal  variations.   Such
seasonal  variations  are  based on the  timing  of our  customers'  advertising
campaigns, which have traditionally been concentrated prior to the Christmas and
spring  holiday  seasons.  As a result,  a higher  level of sales are  generally
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  allocate  our  resources  to manage  our
manufacturing  capacity,  which  often  operates  at full  capacity  during peak
seasonal  demand  periods.  The severity of our seasonal  sales  variations  has
decreased   over  time  as  we  have   developed  and  acquired  other  sampling
technologies  for advertising  and marketing of cosmetic and consumer  products.


                                       29


<PAGE>


Recently Issued Accounting Standards

     Financial  Accounting  Standards  Board  ("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 was applied at the beginning of our
2003 fiscal  year.  The  adoption of SFAS 142  eliminated  the  amortization  of
goodwill,  approximately  $4.8 million in fiscal 2002,  while  requiring  annual
tests for  impairment of goodwill.  The Company  completed its initial and first
annual tests of the carrying value of goodwill which resulted in no impairment.

     FASB  Statement of Financial  Accounting  Standards No. 145  "Rescission of
FASB  Statements  No. 4, 44, and 64,  Amendment  of FASB  Statement  No. 13, and
Technical  Corrections"  ("SFAS  145")  was  issued  in  April  2002.  The  most
significant aspects of this  pronouncement,  with respect to the Company, is the
elimination of SFAS No. 4, "Reporting  Gains and Losses from  Extinguishment  of
Debt".  As a result of the  elimination  of SFAS No. 4,  gains and  losses  from
extinguishment  of debt are classified as extraordinary  items only if they meet
the criteria in APB No. 30,  "Reporting the Results of Operations - Discontinued
Events and  Extraordinary  Items".  SFAS No. 145,  which the Company  adopted in
fiscal 2003,  requires  early  retirements of debt to be included in income from
continuing  operations.  Gains and losses on early  retirement of debt that were
classified as extraordinary items in prior periods that do not meet the criteria
in APB No. 30 for classification as an extraordinary item were reclassified.  In
fiscal 2002 the Company reported an approximate $2.7 million  extraordinary gain
from early retirement of debt, net of tax.

     FASB  Statement  of  Financial  Standards  No.  146  "Accounting  for Costs
Associated  with Exit or Disposal  Activities"  ("SFAS  146") was issued in June
2002. SFAS 146 addresses financial accounting and reporting for costs associated
with exit or disposal activities and nullifies Emerging Issues Task Force (EITF)
Issue No. 94-3, Liability  Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity.  SFAS 146 requires  that a liability  for a
cost  associated  with an exit or disposal  activity be recognized  and measured
initially  at fair  value  only  when the  liability  is  incurred.  SFAS 146 is
effective for exit or disposal  activities that are initiated after December 31,
2002. The Company does not anticipate that the provisions of this statement will
have a  material  impact  on  the  Company's  reported  results  of  operations,
financial positions or cash flows.

     FASB   Interpretation   No.  45  "Guarantor's   Accounting  and  Disclosure
Requirements for Guarantees,  Including  Indirect  Guarantees of Indebtedness of
Others"  ("FIN  45") was  issued in  November  2002.  FIN 45  elaborates  on the
disclosures  to be made by a  guarantor  in its  interim  and  annual  financial
statements about its obligations under certain guarantees that it has issued. It
also requires the guarantor to recognize,  at the inception of the guarantee,  a
liability for the fair value of obligation  undertaken in issuing the guarantee.
The disclosure requirements are effective for quarters ending after December 15,
2002 and the liability  recognition is in effect for guarantees  initiated after
December 31, 2002. The Company does not  anticipate  that the provisions of this
statement  will have a  material  impact on the  Company's  reported  results of
operations,  financial  positions  or cash  flows.


                                       30


<PAGE>


     FASB  Interpretation  No. 46 "Consolidation of Variable Interest  Entities"
("FIN  46") was issued in January  2003.  FIN 46  requires  an  investor  with a
majority of the variable  interests  in a variable  interest  entity  ("VIE") to
consolidate  the entity and also  requires  majority  and  significant  variable
interest investors to provide certain  disclosures.  A VIE is an entity in which
the  equity  investor  does  not  have a  controlling  interest,  or the  equity
investment  risk is  insufficient  to finance the  entity's  activities  without
receiving additional  subordinated financial support from the other parties. For
arrangements  entered  into with VIEs  created  prior to January 31,  2003,  the
provisions  of FIN 46 are  required to be adopted at the  beginning of the first
interim or annual  period  beginning  after June 15, 2002.  The Company does not
anticipate  that the  provisions  of this  interpretation  will have a  material
impact on the Company's  reported results of operations,  financial  position or
cash flows.

Critical Accounting Policies

     We have  chosen  accounting  policies  that we believe are  appropriate  to
accurately and fairly report our operating results and financial  position,  and
we apply those  accounting  policies in a  consistent  manner.  The  significant
accounting  policies  are  summarized  in Note 2 to the  consolidated  financial
statements.

     The  preparation  of financial  statements  in  conformity  with  generally
accepted  accounting  principles requires that we make estimates and assumptions
that affect the reported amounts of assets, liabilities,  revenues and expenses.
These  estimates  and  assumptions  are based on  historical  and other  factors
believed to be reasonable under the  circumstances.  We evaluate these estimates
and assumptions on an ongoing basis and may retain outside professional advisors
to assist in our evaluation.  We believe the following  accounting  policies are
the most  critical  because  they  involve the most  significant  judgments  and
estimates used in preparation of our consolidated financial statements:

o    Allowance  for doubtful  accounts.  We maintain an  allowance  for doubtful
     receivables for estimated  losses resulting from the inability of our trade
     customers to make required  payments.  We provide an allowance for specific
     customer  accounts where  collection is doubtful and also provide a general
     allowance for other accounts  based on historical  collection and write-off
     experience.  Judgment is necessary  and if the  financial  condition of our
     customers were to worsen, additional allowances may be required.

o    Inventories.   Our   inventories,   which  consist  of  raw  materials  and
     work-in-process,  are  valued  at the  lower of cost or  market  value.  We
     evaluate all of our raw material inventory for slow moving product based on
     recent usage, projections of future demand and market conditions. For those
     units in inventory that are so  identified,  we estimate their market value
     based on current  realization trends. If the projected net realizable value
     is less than cost,  we provide a  provision  to reflect  the lower value of
     that inventory.  This methodology  recognizes projected inventory losses at
     the time such losses are evident.


                                       31


<PAGE>


o    Intangible  assets.  When we  acquire  other  companies  or  businesses  we
     allocate the purchase price, including expenses and assumed liabilities, to
     the  assets  and  liabilities  acquired  including  intangible  assets  and
     goodwill.  We  estimate  the  useful  lives  of the  intangible  assets  by
     factoring in the  characteristics of the related products such as: existing
     sales  contracts,  patent  protection,  estimated  future  introductions of
     competing products and other issues. The factors that drive the estimate of
     the life of the asset are inherently uncertain.

o    Long-lived  assets. We review our property,  intangible assets and goodwill
     for possible impairment whenever events or circumstances  indicate that the
     carrying  amount  of an  asset  may  not be  recoverable.  Assumptions  and
     estimates  used in the  evaluation  of  impairment  may affect the carrying
     value of long-lived  assets,  which could result in  impairment  charges in
     future periods.  Such assumptions  include projections of future cash flows
     and, in some cases,  the current fair value of the asset. In addition,  our
     depreciation and amortization  policies reflect  judgments on the estimated
     useful lives of assets.

o    Revenue  recognition.  We  recognize  revenue when the risks and rewards of
     ownership are assumed by the buyer.  This generally occurs upon delivery of
     product to the buyer.

o    Deferred  income tax assets.  We have recorded  deferred  income tax assets
     related to the  temporary  differences  between the tax bases and financial
     reporting  bases of assets and  liabilities.  An  adjustment  to income tax
     expense  would be  required  in a future  period if we  determine  that the
     amount of deferred tax assets to be realized  differs from the net recorded
     amount.

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: (1) economic conditions in general and
in our specific market areas;  (2) the significant  indebtedness of our company;
(3) changes in operating  strategy or  development  plans;  (4) the  competitive
environment  in the  sampling  industry  in general and in our  specific  market
areas;  (5) changes in prevailing  interest rates;  (6) changes in or failure to
comply with postal  regulations or other federal,  state and/or local government
regulations;  (7)  changes  in cost of goods and  services;  (8)  changes in our
capital  expenditure  plans;  (9) the  ability to attract  and retain  qualified
personnel;  (10) inflation; (11) liability and other claims asserted against us;
(12) labor disturbances 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


                                       32


<PAGE>


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  any  forward-looking  statements.  We  disclaim  any
obligations  to update any  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 7A.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

     In fiscal 2003, we generated  approximately 24% of our sales from customers
outside  the  United  States,  principally  in Europe.  International  sales are
generated  primarily  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 June 30,  2003,  there  were no  forward
exchange contracts outstanding.

ITEM 8.       FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     Reference  is  made to the  Consolidated  Financial  Statements  of each of
Holding and AKI, the related notes and the Report of Independent Accountants for
each of Holding and AKI commencing at page F-1 of this report,  which  financial
statements, notes and reports are incorporated by reference into this report.

ITEM 9.      CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE

     None.


                                       33


<PAGE>


ITEM 9A.  CONTROLS AND PROCEDURES

     (a) Evaluation of Disclosure  Controls and Procedures.  Our chief executive
officer and chief  financial  officer have  evaluated the  effectiveness  of the
design and operation of our  disclosure  controls and  procedures (as defined in
Exchange Act Rule 13a-14(c)) as of the end of the period covered by this report.
Based on that  evaluation,  the chief  executive  officer  and  chief  financial
officer have  concluded as of the end of the period  covered by this report that
our disclosure controls and procedures are effective.

     (b)  Changes in  Internal  Controls.  There  have not been any  significant
changes in our internal  controls or in other  factors that could  significantly
affect these controls during the period covered by this report.


                                       34


<PAGE>


                                    PART III

ITEM 10.      EXECUTIVE OFFICERS AND DIRECTORS OF REGISTRANT

     The  following  table sets forth  certain  information  with respect to the
directors and executive officers of Holding as of September 1, 2003.

Name                       Age         Position
----                       ---         --------
David M. Wittels *          39         Chairman of the Board and Director
William J. Fox *            47         President, Chief Executive Officer and
                                       Director
Kenneth A. Budde            54         Senior Vice President, Chief Financial
                                       Officer and Secretary
A. Bruce Prashker           41         Senior Vice President and Assistant
                                       Secretary
Hugh R. Kirkpatrick         66         Director
David A. Durkin *           34         Director
Douglas B. Fox              55         Director

----------------------
* Member of Executive Committee


     David M.  Wittels  was  elected as Chairman of the Board in August 2003 and
has served as a director of Holding since  December 1997. Mr. Wittels has been a
Managing  Director of DLJ Merchant  Banking since January 2001 and has served in
various  capacities  with DLJ  Merchant  Banking  for the past five  years.  Mr.
Wittels also serves as a director of Mueller Holdings  (N.A.),  Inc., Ziff Davis
Holdings, Inc., Advanstar, Inc. and Advanstar Communications Inc.

     William J. Fox has  served as  President,  Chief  Executive  Officer  and a
Director of Holding and as Chairman, President and Chief Executive Officer and a
Director of AKI, Inc. since February 1999. Mr. Fox was President,  Strategic and
Corporate  Development of Revlon  Worldwide,  Senior Executive Vice President of
Revlon, Inc. and Revlon Consumer Products  Corporation  ("RCPC")  (collectively,
"Revlon")  and Chief  Executive  Officer,  Revlon  Technologies,  a division  of
Revlon,  from January 1998 through January 1999. He was Executive Vice President
from 1991 through January 1997 and Senior  Executive Vice President from January
1997  through  January 1999 and Chief  Financial  Officer of Revlon from 1991 to
1997.  Mr. Fox served as a director from November 1995 of Revlon,  Inc. and from
September  1994 of RCPC,  until April  1999.  He was Senior  Vice  President  of
MacAndrews and Forbes Holding Inc., the indirect majority shareholder of Revlon,
from August 1990 through January 1999. Mr. Fox is also  Co-Chairman of the Board
and a Director of Loehmann's  Holdings,  Inc., a Director of MM Companies,  Inc.
and a Director of Liquid  Audio,  Inc. He also serves on the  Advisory  Board of
Barrington Companies Investors, LLC.

     Kenneth  A. Budde has served as Chief  Financial  Officer of Holding  since
November  1994.  From October 1988 to June 1994,  Mr. Budde served as Controller
and Chief Financial Officer of Southwestern  Publishing Company.  Prior to that,
Mr. Budde spent 12 years with KPMG Peat Marwick.


                                       35


<PAGE>


     A. Bruce  Prashker  has served as Senior Vice  President  of Holding  since
April 2000. Prior to joining the Company, Mr. Prashker was Managing Principal of
the Capital  Markets  Company  N.V.  from April 1999  through  April  2000.  Mr.
Prashker served as Vice President & Controller of the International  Division of
RCPC from January 1996 through April 1999,  Vice  President and Chief  Financial
Officer of the Licensing  Division of RCPC from August 1994 through January 1996
and held various other  executive  positions at RCPC and  MacAndrews  and Forbes
Holding Inc. from April 1990 through August 1994.

     Hugh R.  Kirkpatrick  has served as a director of Holding  since June 1998.
Mr. Kirkpatrick is a former director of International Flavors & Fragrances, Inc.
where he served as Senior Vice  President  and  President,  Worldwide  Fragrance
Division, from 1991 through his retirement in 1996.

     David A.  Durkin has served as a director  of Holding  since May 2002.  Mr.
Durkin has been a Vice  President of DLJ Merchant  Banking since 2000.  Prior to
that,  he served as a Vice  President in the  Leveraged  Finance Group and other
roles in the Investment Banking  Department of DLJ Securities  Corporation since
1996. Mr. Durkin also serves as a director of Seabulk International, Inc.

     Douglas  B.  Fox has  served  as a  director  of the  Corporation  and as a
director of Holding since August 2003.  Mr. Fox is a management  consultant  and
private  investor.  Since May 2001, he has served as the Chief Executive Officer
of  Renaissance  Brands  LLC.  Prior to that,  he was Senior Vice  President  of
Marketing  and Strategy for Compaq  Computer  Corporation  from July 2000 to May
2001 and Chief  Marketing  Officer and Senior Vice  President of  Marketing  for
International Paper Co. from April 1997 to December 1999. Mr. Fox also serves on
the board of directors of Bowne & Co., Inc., Ziff-Davis Media Inc. and Advanstar
Communications Inc.

Compensation of Directors

     Except for Mr. Hugh Kirkpatrick, who receives an annual fee of $20,000, and
Mr.  Douglas Fox,  who  receives an annual fee of $50,000,  directors of Holding
will not receive  compensation for services  rendered but will be reimbursed for
out-of-pocket  expenses  incurred by them in connection with their travel to and
attendance at board meetings and committees of the board.  Mr.  Kirkpatrick also
received a grant of an option to purchase  5,000 shares of common stock of AHC I
in fiscal 2000.


                                       36


<PAGE>


ITEM 11.      EXECUTIVE COMPENSATION

     The  following  table sets  forth  certain  information  for the three most
recently  completed  fiscal years with respect to the  compensation of our chief
executive officer and our other most highly compensated executive officers whose
total annual  compensation  exceeded $100,000.  We refer to these individuals as
our named executive officers.


                           Summary Compensation Table

<TABLE>
<CAPTION>
                                                                                             Long Term
                                                       Annual Compensation                  Compensation
                                                       -------------------                  ------------

                                              Fiscal                                         Securities             All Other
        Name and Principal Position            Year        Salary          Bonus         Underlying Options      Compensation(1)
        ---------------------------            ----        ------          -----         ------------------      ---------------

<S>                                            <C>     <C>             <C>                       <C>                 <C>
William J. Fox                                 2003    $   788,175     $     491,217                --               11,091
   President and Chief Executive               2002        775,000         1,190,724                --                8,545
      Officer                                  2001        700,000         1,125,000                --                8,545

Kenneth A. Budde                               2003        220,500            90,074             8,000                8,000
   Chief Financial Officer                     2002        210,000           121,653                --                6,800
                                               2001        190,000           135,000                --                6,800

A. Bruce Prashker                              2003        215,300            75,000                --                8,000
  Senior Vice President                        2002        205,000            77,613                --                6,800
                                               2001        190,000            90,000                --                4,787


</TABLE>


(1)  Represents  amounts  contributed on behalf of the named executive to 401(k)
     retirement  savings plan and amounts paid for  supplemental  life insurance
     premiums.



Option Grants in Last Fiscal Year

     The following table sets forth information  regarding stock options granted
during  fiscal  2003 to each of the  executive  officers  named in the  "Summary
Compensation  Table" above,  including the potential  realizable  value over the
term of the options, based on assumed rates of stock appreciation of 5% and 10%,
compounded  annually.  These  assumed  rates  are  mandated  by the rules of the
Securities  and Exchange  Commission and do not represent our estimate of future
stock price performance.  Actual gains, if any, on stock option exercises,  will
be dependent on the future performance of our common stock.


                                       37


<PAGE>


                        Options Grant in Last Fiscal Year

<TABLE>
<CAPTION>

                                                                                          Potential Realizable
                                                                                            Value at Assumed
                                                                                          Annual Rates of Stock
                                                                                         Price Appreciation for
                                              Individual Grants                                Option Term
                        -------------------------------------------------------------    ------------------------
                           Number of       Percent of
                          Securities      Options/SARs
                          Underlying       Granted to       Exercise
                         Options/SARs     Employees in       Price       Expiration
         Name             Granted (#)      Fiscal Year     ($/Share)        Date            5% ($)       10% ($)
         ----             -----------      -----------     ---------        ----            ------       -------

<S>                          <C>              <C>              <C>       <C>                 <C>          <C>
Kenneth A. Budde             8,000            8.33%            1.00      November 7,         5,031        12,750
   Chief Financial                                                          2012
   Officer

</TABLE>


Fiscal Year End Option Values

     The following  table sets forth  information  about the number and value of
options held by the named executive  officers as of June 30, 2003. The values of
the  in-the-money  options have been  calculated on the basis of $1.00 per share
fair  market  value of our  common  stock as of that  date  less the  applicable
exercise price.


                             Year End Option Values

<TABLE>
<CAPTION>

                                            Number of securities
                                           underlying unexercised             Value of unexercised in-the-
                                          options at June 30, 2003           money options at June 30, 2003
                                      ---------------------------------    -------------------------------


                 Name                    Exercisable    Unexercisable       Exercisable    Unexercisable
                 ----                    -----------    -------------       -----------    -------------

<S>                                         <C>             <C>                  <C>              <C>
William J. Fox                              888,000            --                --               --
   President, Chief Executive Officer
   And Director

Kenneth A. Budde                            162,000         6,000                --               --
   Chief Financial Officer

A. Bruce Prashker                            50,000            --                --               --
  Senior Vice President

</TABLE>


Equity-Based Compensation

     AHC adopted the 1998 Stock Option Plan for  employees  and directors of AHC
and any parent or subsidiary  corporation  of AHC. The  objectives of the option
plan are (1) to retain the  services  of persons  holding key  positions  and to
secure the  services of persons  capable of filling  such  positions  and (2) to
provide  persons  responsible  for the future  growth of AHC an  opportunity  to
acquire  a  proprietary  interest  in our  Company  and thus  create in such key
employees an increased  interest in and a greater concern for the welfare of our
Company.


                                       38


<PAGE>


     The  option  plan  authorizes  the  issuance  of  options  to acquire up to
1,650,000  shares of common stock of AHC. The option plan is administered by the
board of directors or a compensation  committee to be designated by the board of
directors. Pursuant to the option plan, AHC may grant options, including options
that become exercisable as performance standards determined by the committee are
met,  to key  employees  and  directors  of AHC and  any  parent  or  subsidiary
corporation.  The terms of any grant will be determined by the committee and set
forth in a separate grant  agreement.  The exercise price will be at least equal
to the fair  market  value per share of AHC  common  stock on the date of grant,
provided that the exercise price shall not be less than $1.00 per share. Options
may be  exercisable  for  up to ten  years.  The  committee  has  the  right  to
accelerate  the right to  exercise  any option  granted  under the  option  plan
without  effecting the expiration date thereof.  Upon the occurrence of a change
in control  (as  defined in the option  plan) of AHC,  each  option  may, at the
discretion of the  committee,  be terminated  upon notice to the holder and each
such holder will receive, in respect of each share of AHC common stock for which
such option is then exercisable,  an amount equal to the excess of the then fair
market  value of such  share of AHC  common  stock  over the per share  exercise
price.

     AHC granted  96,000  options for shares of capital stock in fiscal 2003 and
no options for shares of capital  stock of AHC were  exercised  in fiscal  2003.
These options vest over a four year period.

Employment Agreements

Fox Agreement

     On January 27, 1999,  William J. Fox entered into an  employment  agreement
with us effective  February 1, 1999,  which was amended  effective July 1, 2001.
The agreement  initially ended on February 1, 2002, the third anniversary of the
effective  date,  subject to  extension  for one  additional  day each day after
February  1,  2000,   unless  either  party  provides   notice  not  to  extend.
Accordingly, as of September 1, 2003 the agreement ends on September 1, 2005.

     Mr.  Fox's  base  salary  is  $810,000  and he is  eligible  to  receive  a
performance-based  bonus of between  50% to 100% or between  100% to 200% of his
base salary upon achievement of targeted goals, and other incentive payments.

     Pursuant to the terms of his employment agreement, Mr. Fox received options
to acquire 5% of AHC's issued and outstanding  common stock on a pro forma fully
diluted basis, subject to anti-dilution  protection.  These options will vest at
specified  dates and upon the occurrence of specified  conditions.  In addition,
upon a change in control  (as  defined in the  employment  agreement),  all time
vested options vest and all performance  vested options vest if the DLJ Entities
(as defined in the  employment  agreement)  achieve  certain levels of return on
their equity investments.

     If Mr. Fox's employment is terminated by us without cause or by Mr. Fox for
good reason,  we will pay Mr. Fox two times his base salary,  50% of such amount
on termination of employment and 50% paid in equal monthly  installments  over a
six-month  period following the date of termination.  However,  in the event Mr.
Fox's  employment  is  terminated  by us  without


                                       39


<PAGE>


cause or by Mr.  Fox for good  reason,  in either  case  within  sixteen  months
following  a change of control,  Mr. Fox is  entitled to an amount  equal to two
times the highest aggregate base salary and performance-based  bonus amount paid
to him in any of the three  calendar  years prior to the  effective  date of any
change of control,  50% of such amount on termination of employment and 50% paid
in equal  monthly  installments  over a six-month  period  following the date of
termination.  In addition, Mr. Fox will receive a pro-rata bonus for the year of
termination  if he would  have been  entitled  to such a bonus  had he  remained
employed during the year of  termination.  If such  termination  occurs within 6
months of a time where a tranche of time-vested  options would otherwise  become
exercisable, then a pro-rata portion of such tranche will become exercisable.

     The  employment  agreement  contains  confidentiality,  noncompetition  and
nonsolicitation   provisions.  The  restricted  period  for  the  noncompetition
provisions upon  termination of employment is two years if Mr. Fox's  employment
is terminated by us without cause or by us for good reason,  and one year if Mr.
Fox's employment is terminated for any other reason.

Budde Agreement

     Mr. Budde is presently  retained as chief financial  officer pursuant to an
employment  agreement that provides for an annual base salary of $230,000 and he
is eligible to receive a performance-based  bonus of 60% of his base salary upon
achievement  of  targeted  goals and up to 100% of his base  salary  for  higher
performance.  The term of the employment agreement with Mr. Budde, which expires
on June 30, 2004, automatically renews for additional twelve-month terms, unless
either party elects otherwise. If Mr. Budde is terminated by us without cause or
if we elect not to renew Mr. Budde's employment, we will pay Mr. Budde an amount
equal  to his base  salary  over a  twelve-month  period  following  the date of
termination.

Prashker Agreement

     Mr.  Prashker is presently  retained as senior vice  president at an annual
salary base of  $230,000.  Mr.  Prashker  has a salary  continuation  agreement,
whereby,  if Mr. Prashker is terminated by us without cause within one year of a
change of control,  Mr.  Prashker  is  entitled  to an amount  equal to his base
salary over a twelve-month period following the date of termination.

Compensation Committee Interlocks and Insider Participation

     None of AHC,  Holding or AKI had a  compensation  committee  during  fiscal
2003. Members of our executive  committee of our board of directors,  other than
Mr. Fox, participated in deliberations  regarding compensation to be paid to Mr.
Fox. Mr. Fox determined the compensation to be paid to other executive officers,
in consultation with the executive committee of our board of directors.

Report  of the  Executive  Committee  of the  Board of  Directors  on  Executive
Compensation

     The  following  is a report  of the  executive  committee  of the  board of
directors,  which  functions  as  the  compensation  committee,  describing  the
compensation  policies  applicable to our executive  officers  during the fiscal
year ended June 30, 2003.  The committee is  responsible  for  establishing  and
monitoring our general compensation  policies and compensation plans, as well


                                       40



<PAGE>


as the  specific  compensation  levels  for  executive  officers.  It also makes
determinations concerning the granting of awards under our stock plans.

     For the fiscal  year ended  June 30,  2003,  the  process  utilized  by the
committee in determining executive  compensation levels was based on performance
related results,  contract  increases to consumer price index and the subjective
judgment of the  committee.  Among the factors  considered by the committee were
the  recommendations  of  the  chief  executive  officer  with  respect  to  the
compensation  of our key executive  officers.  However,  the committee  made the
final compensation decisions concerning those officers.

General Compensation Policy

     Our  compensation  policy is designated to attract and retain qualified key
executives  critical to our growth and long-term success. It is the objective of
the committee to have a portion of each executive's compensation contingent upon
our financial performance as well as upon the individual's personal performance.
Accordingly, each executive officer's compensation package is comprised of three
elements:  (i) base salary which reflects individual  performance and expertise,
(ii)  variable  bonus  awards  payable  in cash and ties to the  achievement  of
certain performance goals that the board establishes from time to time and (iii)
long-term  stock-based  incentive  awards which are designed to  strengthen  the
mutuality of interests between the executive officers and our stockholders.

     The summary below describes in more detail the factors which we consider in
establishing  each of the three primary  components of the compensation  package
provided to the executive officers.

Base Salary

     The  level of base  salary  is  established  primarily  on the basis of the
individual's  qualifications  and relevant  experience,  the strategic goals for
which he or she has  responsibility,  the compensation levels at companies which
compete with us for business and executive  talent and the incentives  necessary
to attract and retain  qualified  management.  Base salary may be adjusted  each
year to take  into  account  the  individual's  performance  and to  maintain  a
competitive salary structure.

Cash-Based Incentive Compensation

     Cash bonuses are awarded to  executive  officers  based upon a  performance
based plan measured by their success in achieving  designated  individual  goals
and our success in achieving specific Company-wide EBITDA goals.

Long-Term Incentive Compensation

     We have utilized our stock option plan to provide  executives and other key
employees with incentives to maximize long-term  shareholder value. Awards under
this  plan  take the form of stock  options  designed  to give the  recipient  a
significant  equity  stake in the Company and thereby  closely  align his or her
interests  with those of our  stockholders.  Factors  considered  in making such
awards  include  the   individual's   position,   his  or  her  performance  and
responsibilities


                                       41


<PAGE>


as well as industry  practices and standards.  Long-term  incentives  granted in
prior  years  and  existing  level  of  stock  ownership  are  also  taken  into
consideration.

     Each option grant allows the executive  officer to acquire shares of common
stock at a fixed price per share (the  greater of the fair  market  value on the
date of grant or $1.00) over a specified  period of time (up to ten years).  The
number of awards  granted  to  individual  executives  is based on  demonstrated
performance and independent survey data reflecting  competitive market practice.
Accordingly, the award grant will provide a return to the executive officer only
if he or she remains in our  service,  and then only if the market  price of the
common stock appreciates over the award term.

Compensation of the Chief Executive Officer

     William Fox was appointed our chief executive  officer in January 1999. The
committee determined Mr. Fox's base salary after evaluating a number of factors,
including Mr. Fox's then current salary, salaries of chief executive officers of
other  companies of similar size in the  industry and Mr. Fox's  performance  in
general.  Mr. Fox's base salary in 2003 rose to $788,715  from $775,000 in 2002.
We paid Mr. Fox a cash bonus of $491,217 for fiscal  2003,  in  comparison  to a
cash bonus of $1,190,724 for fiscal 2002.

Deductibility of Executive Compensation

     The committee has  considered  the impact of Section 162(m) of the Internal
Revenue Code adopted under the Omnibus Budget  Reconciliation Act of 1993, which
section  disallows a deduction for any publicly held  corporation for individual
compensation  exceeding $1 million in any taxable  year for the chief  executive
officer and four other most highly compensated executive officers, respectively,
unless such  compensation  meets the  requirements  for the  "performance-based"
exception to Section  162(m).  It is the committee's  policy to qualify,  to the
extent reasonable,  our executive officers' compensation for deductibility under
applicable tax law.  However,  we may from time to time pay  compensation to our
executive officers that may not be deductible.

Executive Committee of the Board of Directors,

David Wittels
David Durkin
William Fox (with respect to matters other than Chief Executive Officer
             Compensation)


                                       42


<PAGE>


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
         RELATED STOCKHOLDER MATTERS

     All of AKI's issued and outstanding capital stock is owned by Holding.  All
of Holding's issued and outstanding capital stock is owned by AHC. The following
table sets forth  certain  information  as of September 12, 2003 with respect to
the  beneficial  ownership  of AHC common stock by (1) owners of more than 5% of
such AHC common stock, (2) each director and named executive  officer of Holding
and (3) all directors and executive officers of Holding, as a group.

<TABLE>
<CAPTION>

                                                                                     Shares           Percentage of
                                                                                  Beneficially   Outstanding AHC Common
                               Beneficial Owner                                      Owned                Stock
                               ----------------                                      -----                -----

<S>                                                                                <C>                    <C>
DLJ Merchant Banking Partners, II, L.P. and affiliated entities (1)                15,921,111             98.8%

William J. Fox (2)                                                                    888,000              5.2%

Hugh R. Kirpatrick (2)                                                                  5,000                 *

David A. Durkin (3)                                                                         -                 -

David M. Wittels (3)                                                                        -                 -

Douglas B. Fox                                                                              -                 -

Kenneth A. Budde (2)                                                                  162,000              1.0%

A. Bruce Prashker (2)                                                                  50,000                 *

All directors and executive officers as a group (2)                                 1,105,000              6.4%

</TABLE>

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

*    Less than one percent.

(1)  Consists of shares held directly by the following affiliated investors: DLJ
     Merchant  Banking  Partners II, L.P; DLJ Merchant Banking Partners II-A, LP
     ("DLJMBII-A);  DLJ Offshore Partners II, C.V. ("Offshore Partners II"); DLJ
     Diversified  Partners,  L.P.  ("Diversified  Partners");   DLJ  Diversified
     Partners-A,  L.P ("Diversified  Partners-A");  DLJMB Funding II, Inc. ("DLJ
     Funding II"); DLJ Millennium Partners,  L.P. ("Millennium  Partners");  DLJ
     Millennium Partners-A,  L.P, ("Millennium  Partners-A");  DLJ EAB Partners,
     L.P ("EAB Partners"); UK Investment Plan 1997 Partners ("UK Partners"); and
     DLJ First ESC L.P ("First ESC"). The address of each of DLJMBII, DLJMBII-A,
     Diversified  Partners,  Diversified  Partners-A,  DLJ Funding II, Scratch &
     Sniff, Millennium Partners,  Millennium Partners-A,  EAB Partners and First
     ESC is Eleven  Madison  Avenue,  New York,  New York 10010.  The address of
     Offshore  Partners  II is  John  B.  Gorsiraweg  14,  Willemstad,  Curacao,
     Netherlands  Antilles.  The  address of UK  Partners  is 2121 Avenue of the
     Stars,  Fox Plaza,  Suite 3000,  Los Angeles,  California  90067.  Does not
     include  18,000  shares of AHC Common Stock held  directly by the Scratch &
     Sniff Funding, Inc., an affiliate of DLJMBII.

(2)  Includes shares of common stock issuable upon the exercise of stock options
     exercisable within 60 days of September 12, 2003.

(3)  Mr. Wittels is an officer of DLJ Merchant Banking, an affiliate of DLJMBII.
     Share  data shown for such  individuals  excludes  shares  shown as held by
     DLJMBII or its affiliates, as to which such individuals disclaim beneficial
     ownership.  The  address  of each of Messrs.  Durkin and  Wittels is Eleven
     Madison Avenue, New York, New York 10010.


                                       43


<PAGE>


Equity Compensation Plan Information

     The table below sets forth information  relating to our compensation  plans
as of June 30, 2003:

<TABLE>
<CAPTION>

                                                                                              Number of securities
                                                                                              remaining available
                                        Number of securities                                  for future issuance
                                         to be issued upon          Weighted-average              under equity
                                           exercises of            exercises price of          compensation plans
                                        outstanding options,      outstanding options,       (excluding securities
                                        warrants and rights        warrants and rights      reflected in column (a))
            Plan Category                       (a)                        (b)                         (c)
------------------------------------ -------------------------- --------------------------- --------------------------

<C>                                              <C>                   <C>                                <C>
1998 Stock Option Plan........                   1,532,250             $       1.00                       117,750

Total.........................                   1,532,250                     1.00                       117,750

</TABLE>


ITEM 13.      RELATED PARTY TRANSACTIONS

Transactions with DLJMBII and their Affiliates

     Mr.  Wittels,  who is a director  of AKI and an  officer  and  director  of
Holding and AHC, is an officer of DLJ Merchant  Banking.  DLJ Merchant  Banking,
together with DLJMBII,  beneficially own, in the aggregate,  approximately 98.8%
of the outstanding common stock of AHC.

     Pursuant to an agreement  between  Credit  Suisse First Boston  Corporation
("CSFB") and AHC, CSFB receives an annual fee of $400,000 ($250,000 for the year
ended  December 31, 2002) for acting as the exclusive  financial and  investment
banking advisor until December 31, 2003 and shall be extended  automatically for
successive terms of one year unless otherwise  terminated by either party within
60 days prior to the  expiration  of the  agreement.  Our  Company has agreed to
indemnify CSFB in connection with its actions as our financial advisor.

Stockholders Agreement

     In connection with the acquisition of our Company, AHC, DLJMBII and certain
investors in our Company prior to the  acquisition  entered into a  stockholders
agreement,  dated as of December 15, 1997,  that sets forth  certain  rights and
restrictions  relating to the ownership of the capital  stock of AHC  (including
securities  exercisable for or convertible or exchangeable into capital stock of
AHC) and agreements  among the parties  thereto as to the governance of AHC and,
indirectly, Holding and AKI.

     Pursuant  to the  stockholders  agreement,  the board of  directors  of AHC
consists of six  members,  of which four may  currently be nominated by DLJMBII.
The Chief Executive Officer of our Company is also to be a member of the board.


                                       44


<PAGE>


     The stockholders agreement contains (1) certain restrictions on the ability
of each holder of capital stock of AHC to transfer any capital stock of AHC, (2)
certain  preemptive  rights to the  holders of capital  stock of AHC,  (3) "drag
along"  rights to DLJMBII to require the  remaining  holders of capital stock of
AHC to sell a percentage  of their  ownership  and (4) "tag along" rights to the
holders of capital stock of AHC,  other than  DLJMBII,  with respect to sales of
capital stock of AHC by DLJMBII.

     DLJMBII  is  entitled  to demand and piggy back  registration  rights  with
regard to the shares of capital stock of AHC that it owns.

Stockholder Note

     Our Company has a promissory  note payable to AHC which allows us to borrow
up to $10 million at such  interest  rates and maturity  dates as agreed upon by
the Company and AHC. Interest paid to AHC in connection with the promissory note
totaled approximately $20,000, $14,000 and $320,000 for the years ended June 30,
2003, 2002 and 2001, respectively.

Transactions with Loehmann's, Inc.

     In fiscal 2003 and 2002 we  performed  marketing  and design  services  for
Loehmann's, Inc. totaling approximately $86,000 and $47,000,  respectively.  Mr.
Fox,  our  President  and  Chief  Executive  Officer,  is also on the  Board  of
Directors  of  Loehmann's,  Inc.  We  believe  that  our  services  provided  to
Loehmann's, Inc. are on terms no less favorable than could have been provided to
an unaffiliated third party.

ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

Audit Fees

     The  Company  retained  PricewaterhouseCoopers  LLP  ("PWC")  to audit  our
consolidated  financial  statements  for fiscal 2003. We understand the need for
PWC to  maintain  objectivity  and  independence  in its audit of our  financial
statements.   To  minimize   relationships  that  could  appear  to  impair  the
objectivity of PWC, our board of directors has restricted the non-audit services
that PWC may provide to us primarily to tax services and audit related  services
and determined  that we would obtain  non-audit  services from PWC only when the
services offered by PWC are more effective or economical than services available
from  other  service  providers,   and,  to  the  extent  possible,  only  after
competitive bidding. These determinations are among the key practices adopted by
the board of directors effective June 30, 2002.

     The board has also adopted  policies and procedures for  pre-approving  all
non-audit  work  performed  by PWC after July 1, 2003.  Specifically,  the board
pre-approved the use of PWC for the following  categories of non-audit  service:
merger and acquisition due diligence and audit services; tax services;  internal
control reviews;  employee benefit plan audits;  and reviews and procedures that
the Company  requests  PWC to  undertake  to provide  assurances  on matters not
required by laws or regulations.


                                       45


<PAGE>


     The   following   summary   discloses   all   of   the   fees   billed   by
PricewaterhouseCoopers  LLP during fiscal 2003 and fiscal 2002 for the following
services:

                                                2003                 2002
                                                ----                 ----

      Audit fees......................     $       144           $       131
      Audit-related fees..............               1                   130
      Tax fees........................             178                   108
      All other fees..................               -                     -
                                           -----------           -----------

      Total...........................     $       323           $       369
                                           ===========           ===========


     In the above  table,  in  accordance  with new SEC  definitions  and rules,
"audit  fees" are fees the Company  paid PWC for  professional  services for the
audit of our consolidated financial statements, included in Form 10-K and review
of  financial  statements  included  in Form  10-Qs,  or for  services  that are
normally  provided by the accountant in connection with statutory and regulatory
filings  or  engagements;  "audit-related  fees"  are  fees  billed  by PWC  for
assurance and related services that are reasonably related to the performance of
the audit or review of our  financial  statements;  "tax  fees" are fees for tax
compliance,  tax advice, and tax planning;  and "all other fees" are fees billed
by PWC to us for any services not included in the first three categories.


                                       46


<PAGE>


                                     PART IV


ITEM 15.      EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

      (a) 1. Financial Statements.

             The financial  statements listed on the  accompanying index to such
             financial statements are filed as part of this report.

          2. Financial Statement Schedule.

             None.

          3. Exhibits and Exhibit Index.



3.1   Certificate of Incorporation of Holding. (1)

3.2   Certificate of Incorporation of AKI. (2)

3.3   Bylaws of Holding. (1)

3.4   Bylaws of AKI. (2)

4.1   Indenture dated as of June 25, 1998 between  Holding and State Street Bank
      and Trust Company, as Trustee. (1)

4.2   Indenture  dated as of June 25,  1998  between AKI and IBJ Schroder  Trust
      Company, as Trustee. (2)

4.3   Form of 13 1/2% Senior  Discount  Debentures due July 1, 2009 (included in
      Exhibit 4.1).

4.4   Form of  10 1/2% Senior  Discount  Notes  due July  1,  2008  (included in
      Exhibit 4.2).

10.1  Registration  Rights  Agreement of  Holding,  dated as of  June  25,  1998
      betweem Holding and DLJMBII. (1)

10.2  Registration  Rights Agreement of AKI, dated as of June 25, 1998,  between
      AKI and DLJMBII. (2)

10.3  AHC Stock Option Plan. (1)

10.4  Employment Agreement  dated as of  February  1, 1999  between  Holding and
      William J. Fox. (3) +

10.5  Amendment to Employment Agreement  dated as of September 17, 2001  between
      Holding and William J. Fox. (4) +

10.6  Salary Continuation Agreement  dated as of  October 1, 2001 between Arcade
      Marketing, Inc. and Bruce Prashker. (5) +

10.7  Employment Agreement dated as of July 1, 2000 between  Holding and Kenneth
      A. Budde. (6) +


                                       47


<PAGE>


10.8  Amended  and  Restated  Credit  Agreement  dated  as of December  8,  2001
      beween the Company and Heller Financial, Inc. (7)

10.9  Financial  Advisory  Agreement dated as of December  12, 1997  between AHC
      and DLJ. (1)

12.1  Computation of Ratio of Earnings to Fixed Charges. *

21.1  Subsidiaries of Holding. *

31.1  Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *

31.2  Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *

31.3  Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *

31.4  Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *

32.1  Certification pursuant to 18 U.S.C. Section 1350,  as adopted  pursuant to
      section 906 of the Sarbanes-Oxley Act of 2002. *

32.2  Certification pursuant to 18 U.S.C. Section 1350,  as adopted  pursuant to
      section 906 of the Sarbanes-Oxley Act of 2002. *

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

(1)   Incorporated by reference from Registrant's Registration Statement on Form
      S-4, File No.  333-60991 filed with the Securities and Exchange Commission
      on August 7, 1998.

(2)   Incorporated by reference from Registrant's Registration Statement on Form
      S-4, File No.  333-60989 filed with the Securities and Exchange Commission
      on August 7, 1998.

(3)   Incorporated  by reference  from  Registrant's Current  Report on Form 8-K
      filed with the Securities and Exchange Commission on February 4, 1999.

(4)   Incorporated  by reference  from  Registrant's Annual  Report on Form 10-K
      filed with the Securities and Exchange Commission on September 18, 2001.

(5)   Incorporated by reference from  Registrant's Quarterly Report on Form 10-Q
      filed with the Securities and Exchange Commission on November 9, 2001.

(6)   Incorporated  by reference  from  Registrant's Annual  Report on Form 10-K
      filed with the Securities and Exchange Commission on September 28, 2000.

(7)   Incorporated by reference from  Registrant's Report on Form 8-K filed with
      the Securities and Exchange Commission on December 26, 2001.

*     Filed herewith

+     Compensatory Contract


      (b) Reports on Form 8-K.

          No  reports on  Form 8-K  were filed  during  the  three  months ended
          June 30, 2002.


                                       48


<PAGE>


                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, AKI Holding Corp. has duly caused this report to be signed
on its behalf by the  undersigned,  thereunto duly authorized on the 24th day of
September, 2003.

                                       AKI HOLDING CORP.

                                           (Registrant)


                                       By: /S/ William J. Fox
                                           -----------------------
                                           William J. Fox
                                           President and Chief Executive Officer

     Each person whose signature  appears below hereby  appoints  William J. Fox
and  Kenneth  A.  Budde,  or any of  them,  as such  person's  true  and  lawful
attorney-in-fact,  with full power of  substitution or  resubstitution  for such
person and in such person's name, place and stead, in any and all capacities, to
sign on such person's  behalf,  individually  and in each capacity stated below,
any and all amendments to this Report on Form 10-K,  with all exhibits  thereto,
and other  documents in connection  therewith,  with the Securities and Exchange
Commission, granting unto said attorneys-in-fact, full power and authority to do
and perform  each and every act and thing  requisite  or necessary to be done in
and about the  premises,  as fully to all  intents  and  purposes as such person
might or could do in  person,  hereby  ratifying  and  confirming  all that said
attorneys-in-fact,  or their substitute or substitutes, may lawfully do or cause
to be done by virtue hereof.

     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report has been signed by the following  persons in the capacities  indicated on
the 24th day of September, 2003.

       SIGNATURE                                     TITLE
       ---------                                     -----

/S/ David M. Wittels                    Chairman and Director
-------------------------
David M. Wittels


/S/ William J. Fox                      President, Chief Executive Officer and
-------------------------               Director (Principal Executive Officer)
William J. Fox


/S/ Kenneth A. Budde                    Senior Vice President, Chief Financial
-------------------------               Officer and Secretary (Principal
Kenneth A. Budde                        Financial and Accounting Officer)


/S/ David A. Durkin                     Director
-------------------------
David A. Durkin


                                       49


<PAGE>


/S/ Douglas B. Fox                      Director
-------------------------
Douglas B. Fox


/S/ Hugh R. Kirkpatrick                 Director
-------------------------
Hugh R. Kirkpatrick


                                       50


<PAGE>


                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934,  AKI, Inc. has duly caused this report to be signed on its
behalf  by  the  undersigned,  thereunto  duly  authorized  on the  24th  day of
September, 2003.

                                       AKI, INC.

                                           (Registrant)


                                       By: /S/ William J. Fox
                                           -----------------------
                                           William J. Fox
                                           President, Chief Executive Officer
                                           and Chairman

     Each person whose signature  appears below hereby  appoints  William J. Fox
and  Kenneth  A.  Budde,  or any of  them,  as such  person's  true  and  lawful
attorney-in-fact,  with full power of  substitution or  resubstitution  for such
person and in such person's name, place and stead, in any and all capacities, to
sign on such person's  behalf,  individually  and in each capacity stated below,
any and all amendments to this Report on Form 10-K,  with all exhibits  thereto,
and other  documents in connection  therewith,  with the Securities and Exchange
Commission, granting unto said attorneys-in-fact, full power and authority to do
and perform  each and every act and thing  requisite  or necessary to be done in
and about the  premises,  as fully to all  intents  and  purposes as such person
might or could do in  person,  hereby  ratifying  and  confirming  all that said
attorneys-in-fact,  or their substitute or substitutes, may lawfully do or cause
to be done by virtue hereof.

     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report has been signed by the following  persons in the capacities  indicated on
the 24th day of September, 2003.

       SIGNATURE                                     TITLE
       ---------                                     -----

/S/ William J. Fox                      President, Chief Executive Officer,
-------------------------               Chairman and Director (Principal
William J. Fox                          Executive Officer)


/S/ Kenneth A. Budde                    Senior Vice President, Chief Financial
-------------------------               Officer and Secretary (Principal
Kenneth A. Budde                        Financial and Accounting Officer)


/S/ David A. Durkin                     Director
-------------------------
David A. Durkin


/S/ Douglas B. Fox                      Director
-------------------------
Douglas B. Fox


                                       51


<PAGE>


/S/ Hugh R. Kirkpatrick                 Director
-------------------------
Hugh R. Kirkpatrick


/S/ David M. Wittels                    Director
-------------------------
David M. Wittels


                                       52


<PAGE>


SUPPLEMENTAL  INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT.

     No annual  report or proxy  material  has been or is expected to be sent to
security holders of the registrants.


                                       53


<PAGE>


                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED FINANCIAL STATEMENTS OF AKI HOLDING CORP.:

     Report of Independent Auditors.......................................   F-2

     Consolidated Balance Sheets at June 30, 2003 and 2002................   F-3

     Consolidated Statements of Operations for the years ended
         June 30, 2003, 2002 and 2001 ....................................   F-4

     Consolidated Statements of Stockholder's Equity
         for the years ended June 30, 2003, 2002 and 2001 ................   F-5

     Consolidated Statements of Cash Flows for the years ended
         June 30, 2003, 2002 and 2001 ....................................   F-6

     Notes to Consolidated Financial Statements...........................   F-7

CONSOLIDATED FINANCIAL STATEMENTS OF AKI, INC.:

     Report of Independent Auditors.......................................  F-24

     Consolidated Balance Sheets at June 30, 2003 and 2002 ...............  F-25

     Consolidated Statements of Operations for the years ended
         June 30, 2003, 2002 and 2001 ....................................  F-26

     Consolidated Statements of Stockholder's Equity
         for the years ended June 30, 2003, 2002 and 2001 ................  F-27

     Consolidated Statements of Cash Flows for the years ended
         June 30, 2003, 2002 and 2001 ....................................  F-28

     Notes to Consolidated Financial Statements...........................  F-29


                                      F-1


<PAGE>


                         REPORT OF INDEPENDENT AUDITORS


To the Board of Directors and Stockholder of
  AKI Holding Corp. and Subsidiaries

     In our  opinion,  the  accompanying  consolidated  balance  sheets  and the
related  consolidated  statements of operations,  stockholder's  equity and cash
flows present fairly, in all material  respects,  the financial  position of AKI
Holding Corp.  and  Subsidiaries  at June 30, 2003 and 2002,  and the results of
their  operations and their cash flows for each of the three years in the period
ended June 30, 2003 in conformity with generally accepted accounting  principles
in  the  United  States  of  America.   These   financial   statements  are  the
responsibility  of management;  our  responsibility  is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements  in  accordance  with auditing  standards  generally  accepted in the
United  States of America,  which  require that we plan and perform the audit to
obtain reasonable  assurance about whether the financial  statements are free of
material  misstatement.  An audit includes examining,  on a test basis, evidence
supporting the amounts and  disclosures in the financial  statements,  assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for our opinion.

     As  discussed  in  Note 2 to the  consolidated  financial  statements,  the
Company changed its accounting policy for goodwill amortization in fiscal 2003.





PricewaterhouseCoopers LLP
Knoxville, Tennessee
August 5, 2003


                                      F-2


<PAGE>


                       AKI HOLDING CORP. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
             (in thousands, except share and per share information)


<TABLE>
<CAPTION>

                                                                                              June 30,
                                                                                    ----------------------------
                                                                                       2003              2002
                                                                                       ----              ----

<S>                                                                                 <C>              <C>
ASSETS
Current assets
Cash and cash equivalents..............................................             $     1,470      $     1,875
Accounts receivable, net...............................................                  20,267           23,537
Inventory, net.........................................................                   7,265            8,014
Income tax receivable..................................................                   4,166                -
Prepaid expenses.......................................................                     671              667
Deferred income taxes..................................................                     808              977
                                                                                    -----------      -----------
      Total current assets.............................................                  34,647           35,070

Property, plant and equipment, net.....................................                  16,584           19,616
Goodwill, net .........................................................                 152,994          153,277
Other intangible assets, net...........................................                  11,307           13,142
Deferred charges, net..................................................                   3,032            4,059
Deferred income taxes..................................................                       -              692
Other assets...........................................................                     138              164
                                                                                    -----------      -----------
      Total assets.....................................................             $   218,702      $   226,020
                                                                                    ===========      ===========

LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Current portion of long-term debt......................................             $     1,875      $     1,375
Accounts payable, trade................................................                   5,444            5,826
Accrued income taxes...................................................                       -            2,007
Accrued compensation...................................................                   4,333            5,338
Accrued interest.......................................................                   5,502            5,570
Accrued expenses.......................................................                   3,661            3,383
                                                                                    -----------      -----------
      Total current liabilities........................................                  20,815           23,499

Revolving credit line..................................................                  10,000            2,750
Term loan..............................................................                   6,250            8,125
Senior notes...........................................................                 103,510          103,510
Senior discount debentures.............................................                       -           15,901
Deferred income taxes..................................................                   1,142                -
Other non-current liabilities..........................................                   1,740            2,338
                                                                                    -----------      -----------
      Total liabilities................................................                 143,457          156,123

Commitments and contingencies

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....................................................                  (3,116)          (7,583)
Accumulated other comprehensive income (loss)..........................                     435             (446)
Carryover basis adjustment.............................................                 (15,730)         (15,730)
                                                                                    -----------      -----------
      Total stockholder's equity.......................................                  75,245           69,897
                                                                                    -----------      -----------

      Total liabilities and stockholder's equity.......................             $   218,702      $   226,020
                                                                                    ===========      ===========

</TABLE>


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


                                      F-3


<PAGE>


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

<TABLE>
<CAPTION>

                                                                                      Year Ended June 30,
                                                                           ----------------------------------------
                                                                              2003           2002           2001
                                                                              ----           ----           ----

<S>                                                                        <C>            <C>             <C>
Net sales.....................................................             $ 115,308      $ 120,893       $ 115,395
Cost of goods sold............................................                73,883         73,888          71,336
                                                                           ---------      ---------       ---------

     Gross profit.............................................                41,425         47,005          44,059

Selling, general and administrative expenses .................                17,971         18,943          18,199
Amortization of goodwill......................................                     -          4,806           4,806
Amortization of other intangible assets.......................                 1,143          1,645             951
Gain from settlement of purchase price dispute, net...........                     -           (992)              -
                                                                           ---------      ---------       ---------

     Income from operations...................................                22,311         22,603          20,103

Other expenses (income):
   Interest expense...........................................                14,355         15,633          16,911
   Management fees to affiliate...............................                   325            250             250
   (Gain) loss from early retirement of debt..................                   871         (3,941)         (3,302)
   Loss from sale and disposal of fixed assets................                    33              -               -
                                                                           ---------      ---------       ---------

     Income before income taxes...............................                 6,727         10,661           6,244

Income tax expense............................................                 2,260          5,924           4,735
                                                                           ---------      ---------       ---------

     Net income...............................................             $   4,467      $   4,737       $   1,509
                                                                           =========      =========       =========

</TABLE>


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


                                      F-4


<PAGE>


                       AKI HOLDING CORP. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
                    (in thousands, except share information)


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


<S>                                   <C>     <C>       <C>           <C>              <C>             <C>             <C>
Balances, June 30, 2000..........     1,000   $    -    $  88,935     $  (13,829)      $    (542)      $   (15,730)    $  58,834
Equity contribution by AHC I
  Acquisition Corp...............         -        -        4,721              -               -                 -         4,721
Net income.......................         -        -            -          1,509               -                 -         1,509
Other comprehensive loss, net
  of tax:
   Foreign currency translation
     adjustment..................         -        -            -              -            (295)                -          (295)
                                                                                                                        --------
Comprehensive income.............                                                                                          1,214
                                      -----   ------    ---------     ----------       ---------       -----------      --------

Balances, June 30, 2001..........     1,000        -       93,656        (12,320)           (837)          (15,730)       64,769
Net income.......................         -        -            -          4,737               -                 -         4,737
Other comprehensive loss, net
  of tax:
   Foreign currency translation
     adjustment..................         -        -            -              -             391                 -           391
                                                                                                                        --------
Comprehensive income.............                                                                                          5,128
                                      -----   ------    ---------     ----------       ---------       -----------      --------

Balances, June 30, 2002..........     1,000        -       93,656         (7,583)           (446)          (15,730)       69,897
Net income.......................         -        -            -          4,467               -                 -         4,467
Other comprehensive loss, net
  of tax:
   Foreign currency translation
     adjustment..................         -        -            -              -             881                 -           881
                                                                                                                        --------
Comprehensive income.............                                                                                          5,348
                                      -----   ------    ---------     ----------       ---------       -----------      --------

Balances, June 30, 2003..........     1,000   $    -    $  93,656     $   (3,116)      $     435       $   (15,730)     $ 75,245
                                      =====   ======    =========     ==========       =========       ===========      ========


</TABLE>


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


                                      F-5


<PAGE>


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


<TABLE>
<CAPTION>

                                                                                      Year Ended June 30,
                                                                        --------------------------------------------
                                                                           2003              2002             2001
                                                                           ----              ----             ----
<S>                                                                    <C>               <C>              <C>
Cash flows from operating activities:
   Net income ................................................         $   4,467         $   4,737        $   1,509
   Adjustment to reconcile net income to net cash
    provided by operating activities:
     Depreciation and amortization of goodwill and other
       intangibles............................................             7,331            12,096           10,119
     Amortization of debt discount............................             1,640             3,029            3,610
     Amortization of loan closing costs.......................               646               693              808
     Deferred income taxes....................................             2,003              (918)            (712)
     Loss (gain) from early retirement of debt................               871            (3,941)          (3,446)
     Other....................................................               592               472              (84)
     Changes in operating assets and liabilities:
       Accounts receivable....................................             3,270            (3,177)           4,364
       Inventory..............................................               749               690            1,427
       Prepaid expenses, deferred charges and other assets....                (4)             (131)            (400)
       Accounts payable and accrued expenses..................            (1,177)             (118)           1,077
       Income taxes...........................................            (6,173)              365            1,332
                                                                       ---------         ---------        ---------

       Net cash provided by operating activities..............            14,215            13,797           19,604
                                                                       ---------         ---------        ---------

Cash flows from investing activities:
   Purchases of equipment.....................................            (2,345)          (1,338)           (3,015)
   Payments for acquisitions, net of cash acquired............                 -          (19,422)                -
   Patents....................................................              (119)             (79)             (137)
                                                                       ---------        ---------         ---------

         Net cash used in investing activities................            (2,464)         (20,839)           (3,152)
                                                                       ---------        ---------         ---------

Cash flows from financing activities:
   Payments under capital leases for equipment................                 -             (503)             (846)
   Repayments of long-term debt...............................           (18,031)          (6,805)           (3,110)
   Net proceeds (repayments) on revolving loan................             7,250            2,750            (9,000)
   Proceeds (repayments) on term loan, net of repayment
     of $500 in 2002..........................................            (1,375)           9,500                 -
   Payments of loan closing costs.............................                 -             (679)                -
                                                                       ---------        ---------         ---------

     Net cash provided by (used in) financing activities......           (12,156)           4,263           (12,956)
                                                                       ---------        ---------         ---------

Net increase (decrease) in cash and cash equivalents..........              (405)          (2,779)            3,496
Cash and cash equivalents, beginning of period................             1,875            4,654             1,158
                                                                       ---------        ---------         ---------
Cash and cash equivalents, end of period......................         $   1,470        $   1,875         $   4,654
                                                                       =========        =========         =========

Supplemental information:
   Cash paid during the period for:
      Interest to stockholder and affiliate...................         $      21        $      14         $     320
      Interest, other.........................................            11,950           11,600            12,233
      Income taxes............................................             6,616            6,857             4,115

Significant non-cash activities:
   Contribution of equity and retirement of senior discount
     debentures and senior notes..............................         $       -        $       -         $   4,721

</TABLE>


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


                                      F-6


<PAGE>


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

1.   ORGANIZATION AND BUSINESS

          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.  As more fully  described in
     Note 3,  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 (the  "Acquisition").  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 AKI, Inc. and Subsidiaries  ("AKI").  Subsequent to
     the  Acquisition,  AHC  contributed  $1 of cash  and  all of its  ownership
     interest in AKI to AKI Holding Corp.  ("Holding,"  the  "Successor"  or the
     "Company") for all of the outstanding equity of Holding.  AKI is 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 and Baltimore,  Maryland facilities and distributes
     its  products  in Europe  through  its  French  subsidiary,  Arcade  Europe
     S.A.R.L.

          Unless otherwise indicated, all references to years refer to AKI's and
     Holding's fiscal year, June 30.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Principles of Consolidation

          The  accompanying   consolidated   financial  statements  include  the
     accounts of the Company and its wholly owned subsidiaries.  All significant
     intercompany transactions have been eliminated.

     Reclassification

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

     Cash and Cash Equivalents

          For purposes of the consolidated statements of cash flows, the Company
     considers all highly liquid  investments with an original maturity of three
     months or less at the time of purchase to be cash equivalents.

     Concentration of Credit Risk

          The Company  maintains  its cash in bank deposit  accounts  which,  at
     times, may exceed federally insured limits. The Company has not experienced
     any losses in such accounts;  in addition,  the Company  believes it is not
     exposed to any significant  credit risk on cash and cash  equivalents.  The
     Company  grants  credit  terms in the  normal  course  of  business  to its
     customers and as part of its ongoing  procedures,  the Company monitors the
     credit worthiness of its customers. The Company does not believe that it is
     subject to any unusual  credit risk beyond the normal credit risk attendant
     in its business.

          Two  customers  accounted  for 29.7% and 31.3% of net sales during the
     years ended June 30, 2003 and June 30,  2002,  respectively.  One  customer
     accounted for 14.9% of net sales during the year ended June 30, 2001.


                                      F-7


<PAGE>


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

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

     Concentration of Purchasing

          Products  accounting  for a  significant  portion of the Company's net
     sales utilize  specific  grades of paper that are produced  exclusively for
     the Company by one domestic supplier or specific  component  materials that
     are sourced from one qualified supplier. The Company does not have purchase
     agreements with their suppliers.  These products can be manufactured  using
     other grades of paper; however, the Company believes the specific grades of
     paper  utilized by the Company  provide the Company with an advantage  over
     its  competitors.   The  Company  is  currently   researching   methods  of
     replicating  the  advantages of these  specific  grades of paper with other
     grades of paper available from multiple  suppliers and alternate  component
     materials  from  multiple  suppliers.  Until such methods are developed and
     alternative  sources located,  a loss of supply of these specific materials
     and the  resulting  competitive  advantage  could cause a possible  loss of
     sales, which could adversely affect operating results.

     Revenue Recognition and Accounts Receivable

          Product sales are recognized at the time risk of ownership  transfers,
     net of estimated  discounts.  Accounts  receivable  is accounted for net of
     allowances  for  doubtful   accounts.   Under   arrangements  with  certain
     customers, custom product which is stored for future delivery is recognized
     as revenue when title and risk of ownership has passed to the customer.

     Shipping and Handling Costs

          The costs  associated  with  shipping  and  handling are included as a
     component of cost of goods sold.

     Inventory

          Paper  inventory  is stated  at the lower of cost or market  using the
     last-in,  first-out (LIFO) method;  all other inventories are stated at the
     lower of cost or market using the first-in, first-out (FIFO) method.

     Property, Plant and Equipment

          Property,  plant and equipment are stated at cost.  Expenditures  that
     extend the  economic  lives or improve  the  efficiency  of  equipment  are
     capitalized. The costs of maintenance and repairs are expensed as incurred.
     Upon retirement or disposal, the related cost and accumulated  depreciation
     are removed from the respective accounts and any gain or loss is recorded.

          Depreciation is computed using the  straight-line  method based on the
     estimated  useful lives of the assets as indicated in Note 6 for  financial
     reporting  purposes and  accelerated  methods for tax  purposes.  Leasehold
     improvements  are depreciated  over the shorter of their  estimated  useful
     lives or the lease term.

     Goodwill

          The aggregate purchase price of business acquisitions was allocated to
     the  assets  and  liabilities  of the  acquired  companies  based  on their
     respective fair values as of the acquisition dates. Goodwill represents the
     excess purchase price paid over the fair value of net  identifiable  assets
     acquired. The cost and accumulated


                                      F-8


<PAGE>


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

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

     amortization  of  goodwill  was  $173,153  and $20,159 at June 30, 2003 and
     $173,436 and $20,159 at June 30, 2002,  respectively.  In  accordance  with
     SFAS 142 goodwill is no longer being  amortized.  The  following  pro forma
     amounts  reflect  goodwill  amortization  and net  income had SFAS 142 been
     implemented at the beginning of fiscal 2001:

<TABLE>
<CAPTION>

                                                            2003              2002               2001
                                                            ----              ----               ----

<S>                                                     <C>               <C>                <C>
           Net income as reported...............        $     4,467       $     4,737        $     1,509
           Goodwill amortization................                  -             4,806              4,806
                                                        -----------       -----------        -----------

           Pro forma net income.................        $     4,467       $     9,543        $     6,315
                                                        ===========       ===========        ===========

</TABLE>


          Management annually tests the carrying value of its goodwill and other
     long-lived assets which have resulted in no impairment.

     Stock Based Compensation

          The Company  has  elected to account for its stock based  compensation
     with  employees  under the intrinsic  value method as permitted  under SFAS
     123.  Under the  intrinsic  value  method,  because  the stock price of the
     Company's  employee stock options  equaled the fair value of the underlying
     stock on the date of grant, no compensation expense was recognized.  If the
     Company had elected to  recognize  compensation  expense  based on the fair
     value of the  options  at grant  date as  prescribed  by SFAS 123,  the net
     income for the years ended June 30, 2003,  2002 and 2001 would have been as
     follows:

<TABLE>
<CAPTION>

                                                            2003              2002               2001
                                                            ----              ----               ----

<S>                                                     <C>               <C>                <C>
           Net income as reported...............        $     4,467       $     4,737        $     1,509
           Stock based compensation expense.....                 35               105                105
                                                        -----------       -----------        -----------

           Pro forma net income.................        $     4,435       $     4,632        $     1,404
                                                        ===========       ===========        ===========

</TABLE>


     Deferred Charges

          Deferred charges are primarily  comprised of debt issuance costs which
     are being amortized  using the effective  interest method over the terms of
     the related debt. Such costs are included in the accompanying  consolidated
     balance sheets, net of accumulated amortization.


                                      F-9


<PAGE>


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

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

     Other Intangible Assets

          Other intangible assets include patents, customer lists, covenants not
     to compete and other  intangible  assets and are being amortized over their
     estimated lives using the straight-line method. The following table details
     the components of other intangible assets:

<TABLE>
<CAPTION>

                                                                        June 30,
                                 ------------------------------------------------------------------------------------
                                                  2003                                        2002
                                 ----------------------------------------    ----------------------------------------
                                              Accumulated                                  Accumulated
                                   Costs      Amortization       Net            Costs      Amortization      Net
                                   -----      ------------       ---            -----      ------------      ---

<S>                               <C>          <C>            <C>             <C>           <C>            <C>
    Patents...................    $  8,433     $   1,286      $   7,147       $  8,314      $     476      $   7,838
    Customer lists............       7,289         3,645          3,644          7,289          2,916          4,373
    Covenants not to compete..       1,375         1,010            365          1,375            735            640
    Other.....................         694           543            151            694            403            291
                                  --------     ---------      ---------       --------      ---------      ---------
                                  $ 17,791     $   6,484      $  11,307       $ 17,672      $   4,530      $  13,142
                                  ========     =========      =========       ========      =========      =========

</TABLE>

          Future amortization of other intangible assets is as follows:

                                    2004.................... $   1,951
                                    2005....................     1,603
                                    2006....................     1,563
                                    2007....................     1,551
                                    2008....................     1,537
                                    Thereafter..............     3,102
                                                             ---------
                                                             $  11,307
                                                             =========

     Fair Value of Financial Instruments

          SFAS  No.   107,   "Disclosures   About  Fair   Values  of   Financial
     Instruments,"  requires  the  disclosure  of the fair  value  of  financial
     instruments,  for assets and  liabilities  recognized and not recognized on
     the balance sheet,  for which it is practicable to estimate fair value. The
     fair value of the Company's  Senior Notes, as determined from quoted market
     prices,  was  $106,098  at June 30, 2003  compared  to a carrying  value of
     $103,510.   The  carrying   value  of  all  other   financial   instruments
     approximated fair value at June 30, 2003.

     Foreign Currency Transactions

          Gains and (losses) on foreign currency transactions have been included
     in the determination of net income in accordance with SFAS No. 52, "Foreign
     Currency  Translation."  Foreign  currency  gains and (losses)  amounted to
     ($44),  $301 and ($403) for the years ended June 30,  2003,  2002 and 2001,
     respectively.


                                      F-10


<PAGE>


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

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

     Research and Development Expenses

          Research and development  expenditures are charged to selling, general
     and   administrative   expenses  in  the  period  incurred.   Research  and
     development expenses totaled $2,135,  $1,766 and $1,591 for the years ended
     June 30, 2003, 2002 and 2001, respectively.

     Income Taxes

          Income taxes are provided in  accordance  with  Statement of Financial
     Accounting  Standards No. 109,  "Accounting for Income Taxes." Accordingly,
     deferred tax assets and liabilities are recognized at the applicable income
     tax rates  based upon  future tax  consequences  of  temporary  differences
     between  the  tax  bases  and  financial  reporting  bases  of  assets  and
     liabilities  using  enacted  tax  rates in effect in the years in which the
     differences  are expected to reverse.  Deferred tax assets are reduced,  if
     necessary,  by the  amount of any tax  benefits  that,  based on  available
     evidence, are not expected to be realized.

     Use of Estimates

          The  preparation of financial  statements in conformity with generally
     accepted  accounting  principles  requires management to make estimates and
     assumptions  that affect the reported amounts of assets and liabilities and
     disclosures  of  contingent  assets  and  liabilities  at the  date  of the
     financial  statements  and the  reported  amounts of revenues  and expenses
     during the reporting period.  Management makes significant estimates in the
     areas of accounts  receivable,  inventory,  intangible  assets,  long-lived
     assets and  deferred  income tax.  Actual  results  could differ from those
     estimates.

     Recently Issued Accounting Standards

          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 was applied at the beginning of our 2003 fiscal year.
     The  adoption  of  SFAS  142  eliminated  the   amortization  of  goodwill,
     approximately  $4,800 in fiscal  2002,  while  requiring  annual  tests for
     impairment of goodwill.  The Company completed its initial and first annual
     tests of the carrying value of goodwill which resulted in no impairment.

          FASB Statement of Financial  Accounting  Standards No. 145 "Rescission
     of FASB  Statements No. 4, 44, and 64,  Amendment of FASB Statement No. 13,
     and Technical  Corrections" ("SFAS 145") was issued in April 2002. The most
     significant aspects of this pronouncement,  with respect to the Company, is
     the  elimination  of  SFAS  No.  4,   "Reporting   Gains  and  Losses  from
     Extinguishment  of  Debt".  As a result of the  elimination  of SFAS No. 4,
     gains  and  losses  from   extinguishment   of  debt  are   classified   as
     extraordinary  items  only  if  they  meet  the  criteria  in APB  No.  30,
     "Reporting   the  Results  of   Operations   -   Discontinued   Events  and
     Extraordinary  Items".  SFAS No. 145,  which the Company  adopted in fiscal
     2003,  requires  early  retirements  of debt to be  included in income from
     continuing  operations.  Gains and losses on early  retirement of debt that
     were  classified as  extraordinary  items in prior periods that do not meet
     the criteria in APB No. 30 for classification as an


                                      F-11


<PAGE>


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

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

     extraordinary item were  reclassified.  In fiscal 2002 the Company reported
     an approximate $2,700 extraordinary gain from early retirement of debt, net
     of tax.

          FASB Statement of Financial  Accounting  Standards No. 146 "Accounting
     for Costs  Associated  with Exit or Disposal  Activities"  ("SFAS 146") was
     issued in June 2002. SFAS 146 addresses financial  accounting and reporting
     for costs  associated  with exit or disposal  activities and nullifies EITF
     Issues No. 94-3,  Liability  Recognition for Certain  Employee  Termination
     Benefits  and Other Costs to Exit an  Activity.  SFAS 146  requires  that a
     liability  for a cost  associated  with  an exit or  disposal  activity  be
     recognized and measured  initially at fair value only when the liability is
     incurred.  SFAS 146 is effective for exit or disposal  activities  that are
     initiated after December 31, 2002. The Company does not anticipate that the
     provisions of this statement  will have a material  impact on the Company's
     reported results of operations, financial positions or cash flows.

          FASB  Interpretation  No. 45  "Guarantor's  Accounting  and Disclosure
     Requirements for Guarantees,  Including Indirect Guarantees of Indebtedness
     of Others" ("FIN 45") was issued in November 2002. Fin 45 elaborates on the
     disclosure  to be made by a guarantor  in its interim and annual  financial
     statements  about its  obligations  under  certain  guarantees  that it has
     issued.  It also requires the  guarantor to recognize,  at the inception of
     the guarantee,  a liability for the fair value of obligation  undertaken in
     issuing the  guarantee.  The  disclosure  requirements  are  effective  for
     quarters ending after December 15, 2002 and the liability recognition is in
     effect for guarantees  initiated  after December 31, 2002. The Company does
     not  anticipate  that the provisions of this statement will have a material
     impact on the Company's reported results of operations, financial positions
     or cash flows.

          FASB   Interpretation  No.  46  "Consolidation  of  Variable  Interest
     Entities"  ("FIN  46") was  issued in  January  2003.  FIN 46  requires  an
     investor with a majority of the variable  interests in a variable  interest
     entity  ("VIE") to  consolidate  the entity and also requires  majority and
     significant variable interest investors to provide certain  disclosures.  A
     VIE is an entity in which the equity  investor  does not have a controlling
     interest,  or the equity  investment  risk is  insufficient  to finance the
     entity's  activities without receiving  additional  subordinated  financial
     support from the other  parties.  For  arrangements  entered into with VIEs
     created prior to January 31, 2003, the provisions of FIN 46 are required to
     be adopted at the beginning of the first interim or annual period beginning
     after June 15, 2002. The Company does not anticipate that the provisions of
     this  interpretation  will have a material impact on the Company's reported
     results of operations, financial position or cash flows.

3.   SIGNIFICANT ACQUISITIONS

          On December 18,  2001,  the Company  acquired  the business  including
     certain  assets and assumed  certain  liabilities  of Color  Prelude,  Inc.
     ("CP")  for  $19,423  including  direct  acquisition  costs  of  $540.  The
     acquisition  was accounted  for using the purchase  method of accounting in
     accordance with Statement of Financial Accounting Standards (SFAS) No. 141,
     "Business  Combinations".  The  purchase  price has been  allocated  to the
     assets and liabilities  acquired using estimated fair values at the date of
     acquisition and resulted in assigning value to goodwill totaling $407 which
     will not be amortized in accordance with Statement of Financial


                                      F-12


<PAGE>


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

3.   SIGNIFICANT ACQUISITIONS (Continued)

     Accounting Standards (SFAS) No. 142 "Goodwill and Other Intangible Assets".
     The following shows the allocation of the purchase price:

                  Cash...........................................   $         1
                  Other current assets...........................         5,680
                  Property, plant and equipment..................         7,695
                  Patents........................................         7,750
                  Other intangible assets........................         1,069
                  Goodwill.......................................           407
                                                                    -----------
                  Total allocation to assets.....................   $    22,602
                                                                    ===========

                  Current liabilities............................   $     3,179
                                                                    ===========

          Patents  are  being  amortized  over  a  ten  year  period  and  other
     intangible assets are being amortized over periods ranging from one to four
     years.

          The results of the acquired  operations  are included in the financial
     statements  since the date of acquisition.  The following pro forma results
     include cost savings and other effects of the planned  integration  and are
     not necessarily  indicative of the results which would have occurred if the
     business  combination had been in effect on the dates indicated.  Pro forma
     results  had CP been  acquired  at the  beginning  of  fiscal  2001  are as
     follows:

                                                         2002           2001
                                                         ----           ----
                                                      (unaudited)    (unaudited)

                  Revenue........................   $   127,226     $   129,122
                  Net income.....................         4,696           2,307

          In April 2002 the Company  settled a dispute with the former owners of
     RetCom Holdings Ltd. In connection with the settlement the Company received
     approximately $1,000 and has included this settlement amount net of related
     expenses in income from operations.

4.   ACCOUNTS RECEIVABLE

          The following table details the components of accounts receivable:

                                                                June 30,
                                                      -------------------------
                                                          2003           2002
                                                          ----           ----

         Trade accounts receivable..................  $   20,633     $   23,824
         Allowance for doubtful accounts............        (557)          (608)
                                                      ----------     ----------
                                                          20,076         23,216
         Other accounts receivable..................         191            321
                                                      ----------     ----------
                                                      $   20,267     $   23,537
                                                      ==========     ==========


                                      F-13


<PAGE>


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

5.   INVENTORY

          The following table details the components of inventory:

                                                                June 30,
                                                      -------------------------
                                                          2003           2002
                                                          ----           ----
         Raw materials
           Paper....................................  $    1,740     $    2,180
           Other raw materials......................       2,353          4,216
                                                      ----------     ----------
              Total raw materials...................       4,093          6,396
         Work in process............................       3,857          2,468
         Reserve for obsolescence...................        (685)          (850)
                                                      ----------     ----------

         Total inventory............................  $    7,265     $    8,014
                                                      ==========     ==========

          The difference between the carrying value of paper inventory using the
     FIFO method as compared to the LIFO method was not  significant at June 30,
     2003 or June 30, 2002.

6.   PROPERTY, PLANT AND EQUIPMENT

          The  following  table details the  components  of property,  plant and
     equipment as well as their estimated useful lives:

                                                                June 30,
                                         Estimated      -----------------------
                                       Useful Lives       2003           2002
                                       ------------       ----           ----

         Land.......................                    $    258      $    258
         Building...................   7 - 15 years        2,999         2,690
         Leasehold improvements.....   1 -  3 years          717           353
         Machinery and equipment....   5 -  7 years       33,240        32,000
         Furniture and fixtures.....   3 -  5 years        4,141         3,609
         Construction in progress...                          31           255
                                                        --------      --------
                                                          41,386        39,165
         Accumulated depreciation...                     (24,802)      (19,549)
                                                        --------      --------
                                                        $ 16,584      $ 19,616
                                                        ========      ========


          Depreciation  expense  amounted  to $5,360,  $5,197 and $4,341 for the
     years ended June 30, 2003, 2002 and 2001, respectively.

7.   CREDIT AGREEMENT

          On December  18,  2001,  the Company  amended and  restated its Credit
     Agreement.  The Credit  Agreement  provides  for a $10,000  term loan which
     matures on December 31, 2006 with varying quarterly principal payments and,
     under certain  circumstances,  payments of "excess cash flow" as defined in
     the Credit  Agreement.  Interest on amounts  borrowed  accrue at a floating
     rate based upon either prime or LIBOR (the weighted  average  interest rate
     on the outstanding balance under the term loan was 4.56% at June 30, 2003).
     The weighted average


                                      F-14


<PAGE>


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

7.   CREDIT AGREEMENT (Continued)

     interest rate on the outstanding  balance under the term loan was 5.78% for
     the year ending June 30, 2003. Future minimum principal  payments under the
     term loan are as follows:

                  2004................  $     1,875
                  2005................        2,125
                  2006................        2,625
                  2007................        1,500
                                        -----------
                                        $     8,125
                                        ===========

          The Credit  Agreement also provides for a revolving loan commitment up
     to a maximum of $20,000 and expires on 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.  As  of  June  30,  2003,  the  Company's  borrowing  base  was
     approximately  $24,088.  Interest on amounts  borrowed accrue at a floating
     rate based upon either prime or LIBOR (the weighted  average  interest rate
     on the  outstanding  balance under the revolving loan was 6.0% and 6.49% at
     June 30, 2003 and 2002,  respectively).  The weighted average interest rate
     on the  outstanding  balance under the revolving loan was 6.14%,  6.45% and
     9.58% for the years ended June 30, 2003, 2002 and 2001, respectively.

          The Company is required to pay  commitment  fees on the unused portion
     of the revolving loan commitment at a rate of approximately 0.5% per annum.
     In  addition,  the  Company  is  required  to pay fees equal to 2.5% of the
     average daily outstanding amount of lender guarantees. The Company had $291
     of lender guarantees  outstanding at June 30, 2003. These fees totaled $76,
     $65 and $59 for the years ended June 30, 2003, 2002 and 2001, respectively.
     The  Credit  Agreement  contains  certain  financial  covenants  and  other
     restrictions   including   restrictions  on  additional   indebtedness  and
     restrictions on the payment of dividends.  As of June 30, 2003, the Company
     was in compliance with all debt covenants.

8.   LOANS PAYABLE TO STOCKHOLDER

          In May 2000, the Company signed a promissory note payable to AHC which
     allows the Company to borrow up to $10,000 at such  interest  rates and due
     as agreed  upon by the  Company  and AHC.  At June 30,  2003 no amount  was
     outstanding  under the promissory note.  Interest paid to AHC in connection
     with the promissory note totaled $21, $14 and $320 for the years ended June
     30, 2003, 2002 and 2001, respectively.

9.   SENIOR NOTES

          On June 25,  1998,  AKI  completed a private  placement of $115,000 of
     Senior Notes (the "Senior  Notes") which mature on July 1, 2008. The Senior
     Notes are general  unsecured  obligations of AKI and bear interest at 10.5%
     per annum, payable  semi-annually on January 1 and July 1. The placement of
     the Senior  Notes  yielded AKI net  proceeds of  $110,158  after  deducting
     offering expenses of $4,842,  including $3,450 of underwriting fees paid to
     an affiliate of the  stockholder.  The Senior Notes are  redeemable  at the
     option of the Company,  in whole or part, at any time after July 1, 2003 at
     a price of up to 105.25% of the outstanding  principal balance plus accrued
     and unpaid interest.  The Senior Notes contain certain covenants  including
     restrictions  on the declaration and payment of dividends by AKI to Holding
     and limitations on the incurrence of additional  indebtedness.  On December
     22,  1998,  AKI  completed  the  registration  of its Senior Notes with the
     Securities


                                      F-15


<PAGE>


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

9.   SENIOR NOTES (Continued)

     and Exchange  Commission.  During fiscal 2001, AKI purchased  $4,000 of the
     Senior Notes for $3,110 and  recognized a gain of  approximately  $748. The
     purchased notes were subsequently retired.

10.  SENIOR DISCOUNT DEBENTURES

          On June 25,  1998,  Holding  completed a private  placement  of Senior
     Discount Debentures (the "Debentures") with a stated value of $50,000.  The
     Debentures were general unsecured  obligations of Holding to mature on July
     1, 2009. The  Debentures  were not required to accrue or pay interest until
     July 1, 2003 and were issued with an original issuance discount of $24,038.
     The placement of the Debentures yielded the Company net proceeds of $24,699
     after  deducting   offering   expenses  of  $1,263,   including  $1,038  of
     underwriting  fees paid to an  affiliate of the  stockholder.  The original
     issuance  discount of $24,038 on the  Debentures  was being  accreted  from
     issuance  through July 1, 2003 at an effective rate of 13.5% per annum. The
     unamortized  balance of the original  issuance  discount was $2,219 at June
     30, 2002.  During  fiscal 2003,  Holding  purchased,  with  proceeds from a
     distribution from AKI, the remaining outstanding Senior Discount Debentures
     with a carrying  value of $17,541  for  $18,032  and  recognized  a loss of
     approximately  $871. During fiscal 2002, Holding  purchased,  with proceeds
     from a distribution  from AKI, Senior  Discount  Debentures with a carrying
     value of $11,054 for $6,804 and recognized a gain of approximately  $3,941.
     The purchased Debentures were subsequently retired. During fiscal 2001, AHC
     purchased  Senior  Discount  Debentures with a carrying value of $7,547 for
     $4,721,  resulting  in the  Company  recognizing  a gain  of  approximately
     $3,302.  The Debentures,  purchased by AHC, were contributed to Holding and
     subsequently retired.

11.  INITIAL CAPITALIZATION

          In conjunction  with the  Acquisition,  AHC issued $30,000 of Floating
     Rate Notes,  $50,279 of Mandatorily  Redeemable Senior Preferred Stock (the
     "Senior Preferred Stock") and $1,111 of its Common Stock. The Floating Rate
     Notes were issued with an original  issuance  discount of $5,389.  Interest
     was  payable  quarterly  and  could be  settled  through  the  issuance  of
     additional  Floating  Rate Notes  through  December 15, 2009,  the maturity
     date, at the  discretion of AHC. The original  issuance  discount of $5,389
     was being  amortized  using the effective  interest method over the life of
     the  Floating  Rate  Notes.  On  November  1, 1999 AHC issued  Amended  and
     Restated  Notes  totaling  $35,500 in exchange for the Floating Rate Notes.
     The Amended and Restated Notes bear a fixed interest rate of  approximately
     16% per annum and mature on  December  15, 2009 and provide for the payment
     of stipulated  early redemption  premiums.  In connection with the exchange
     the  unamortized  original  issue  discount was expensed by AHC. The Senior
     Preferred  Stock accretes in value at 15% per annum and must be redeemed by
     December 15,  2012.  The Amended and  Restated  Notes and Senior  Preferred
     Stock are general unsecured obligations of AHC.

          The cash proceeds from the issuance of the Floating Rate Notes, Senior
     Preferred Stock and Common Stock of approximately $76,000 and a Mandatorily
     Redeemable  Senior Preferred Stock Option of $2,363 were contributed by AHC
     to AKI in exchange for 1,000 shares of AKI's Common  Stock.  Subsequent  to
     the  capitalization  of AKI,  AHC  contributed  $1 of  cash  and all of its
     ownership  interest in AKI to Holding for all of the outstanding  equity of
     Holding.


                                      F-16


<PAGE>


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

11.  INITIAL CAPITALIZATION (Continued)

          AHC has no other operations other than the Company.  Absent additional
     financing  by AHC,  the  Company's  operations  represent  the only current
     source  of  funds   available  to  service  the  Floating  Rate  Notes  and
     Mandatorily  Redeemable Senior Preferred Stock; however, the Company is not
     obligated  to pay or  otherwise  guarantee  the  Floating  Rate  Notes  and
     Mandatorily Redeemable Senior Preferred Stock.

12.  COMMITMENTS AND CONTINGENCIES

     Operating Leases

          Equipment and office,  warehouse and production  space under operating
     leases expire at various dates. Rent expense was $1,293,  $559 and $538 for
     the years ended June 30, 2003, 2002 and 2001, respectively.  Future minimum
     lease payments under the leases are as follows:

                                    2004..........   $   1,375
                                    2005..........       1,051
                                    2006..........       1,017
                                    2007..........         809
                                    2008..........         656
                                    Thereafter....       2,217
                                                     ---------
                                                     $   7,125
                                                     =========

     Royalty Agreements

          Royalty agreements are maintained for certain technologies used in the
     manufacture of certain products.  Under the terms of one royalty agreement,
     payments are required  based on a percentage of net sales of those products
     manufactured  with the specific  technology,  or a minimum of $500 per year
     adjusted for changes in the CPI. This agreement  expires the earlier of (1)
     when a total of $11,800 in cumulative royalty payments has been paid or (2)
     December  31, 2004 unless  renewed by the Company for  successive  one-year
     periods.  The Company expensed $653, $500 and $500 under this agreement for
     the years ended June 30, 2003, 2002 and 2001, respectively. The Company has
     paid $6,576 in cumulative  royalty  payments under this  agreement  through
     June 30, 2003.

          Under the terms of another  agreement,  royalty  payments are required
     based on the  number  of  products  sold that  were  manufactured  with the
     specific licensed technology, or a minimum payment of $625 per year through
     the  expiration of the agreement in 2012.  The Company  expensed $625 under
     this agreement for each of the three years ended June 30, 2003.

     Employment Agreements

          The Company has employment  and salary  continuation  agreements  with
     certain executive  officers with terms through June 30, 2004 and 2005. Such
     agreements  provide for base salaries totaling $1,270 per year. One officer
     has an  incentive  bonus of up to 200% of base  salary  which is payable if
     certain  financial  and  management  goals are attained  and certain  other
     incentive  payments.  The  employment  agreements  also  provide  severance
     benefits of up to two years of base salary if the  officers'  services  are
     terminated under certain conditions and one officer's  agreement  provides,
     in the event of termination resulting from a change of control,


                                      F-17


<PAGE>


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

12.  COMMITMENTS AND CONTINGENCIES (Continued)

     a  severance  benefit  of two times his  highest  aggregate  amount of base
     salary and bonus in any of the three  calendar years prior to the effective
     date of termination.

     Litigation

          The Company is a party to litigation arising in the ordinary course of
     business  which,  in the  opinion of  management,  will not have a material
     adverse effect on the Company's financial condition,  results of operations
     or cash flows.

     Printing Services Agreement

          In connection with the RetCom acquisition, AKI entered into a Printing
     Services  Agreement,  which  expires  December  31,  2004,  with  a  former
     shareholder of RetCom.  The Printing  Services  Agreement  requires  annual
     purchases  of printing  services  totaling  $5,000 with a 15% charge on the
     amount of any  shortfall.  The  present  value of the costs  related to the
     estimated  shortfall over the life of the Printing  Services  Agreement was
     recorded as a liability in the RetCom  purchase  accounting.  The liability
     balance at June 30, 2003 was approximately $2,163.

13.  RETIREMENT PLANS

          A 401(k)  defined  contribution  plan (the "Plan") is  maintained  for
     substantially all full-time salaried employees and certain non-union hourly
     employees.  Applicable  employees  who have six months of service  and have
     attained  age 21 are eligible to  participate  in the Plan.  Employees  may
     elect  to  contribute  a  percentage  of  their  earnings  to the  Plan  in
     accordance with limits  prescribed by law. The Company makes  contributions
     to the Plan by  matching a  percentage  of  employee  contributions.  Costs
     associated  with the Plan totaled  $424,  $323 and $294 for the years ended
     June 30, 2003, 2002 and 2001, respectively.

          Certain  hourly  employees are covered under a  multiemployer  defined
     benefit plan administered under a collective  bargaining  agreement.  Costs
     (determined by union  contract)  under the defined  benefit plan were $245,
     $221  and  $233  for  the  years  ended  June  30,  2003,  2002  and  2001,
     respectively.

14.  INCOME TAXES

          The Company is included in the consolidated  federal income tax return
     filed by AHC.  Income  taxes  related to the  Company are  determined  on a
     separate entity basis.  The Company files separate state income tax returns
     and  calculates its state tax provision on a separate  company  basis.  Any
     income taxes payable or receivable by the consolidated group are settled or
     received by AKI.


                                      F-18


<PAGE>


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

14.  INCOME TAXES (Continued)

          For financial reporting purposes,  income before income taxes includes
     the following components:

                                                      Year Ended June 30,
                                             -----------------------------------
                                                2003         2002         2001
                                                ----         ----         ----

         Income before income taxes:
           United States.................    $  5,026     $  8,519     $  4,783
           Foreign.......................       1,701        2,142        1,461
                                             --------     --------     --------

                                             $  6,727     $ 10,661     $  6,244
                                             ========     ========     ========


          Significant components of the provision (benefit) for income taxes are
     as follows:

                                                     Year Ended June 30,
                                            -----------------------------------
                                               2003         2002         2001
                                               ----         ----         ----

         Current expense:
           Federal.......................   $   (701)    $  4,838     $  4,208
           Foreign.......................        613        1,042          526
           State.........................        345          962          278
                                            --------     --------     --------
                                                 257        6,842        5,012
                                            --------     --------     --------
         Deferred expense (benefit):

           Federal.......................      1,965         (832)        (611)
           Foreign.......................          -            -            -
           State.........................         38          (86)         334
                                            --------     --------     --------
                                               2,003         (918)        (277)
                                            --------     --------     --------

                                            $  2,260     $  5,924     $  4,735
                                            ========     ========     ========


          The  significant  components of deferred tax assets  (liabilities)  at
     June 30, 2003 and 2002, were as follows:


<TABLE>
<CAPTION>
                                                                              June 30,
                                                       --------------------------------------------------------
                                                                2003                            2002
                                                                ----                            ----
                                                       Current     Noncurrent           Current    Noncurrent
                                                       -------     ----------           -------    ----------

<S>                                                    <C>           <C>                <C>          <C>
         Deferred income tax assets:
           Accrued expenses........................    $     376     $      -           $     483    $   1,923
           Allowance for doubtful accounts.........          213            -                 216            -
           Reserve for inventory obsolescence......          219            -                 278            -
           Amortization of intangibles.............            -          879                   -          773
                                                       ---------     --------           ---------    ---------
                                                             808          879                 977        2,696

         Deferred income tax liability:
             Property, plant and equipment.........            -       (2,021)                  -       (2,004)
                                                       ---------     --------           ---------    ---------

                Deferred tax assets (liabilities)..    $     808     $ (1,142)          $     977    $     692
                                                       =========     ========           =========    =========

</TABLE>


                                      F-19


<PAGE>


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

14.  INCOME TAXES (Continued)

          The income tax provision recognized by the Company for the years ended
     June 30, 2003, 2002 and 2001 differs from the amount determined by applying
     the applicable U.S. statutory federal income tax rate to pretax income as a
     result of the following:

<TABLE>
<CAPTION>

                                                                               Year Ended June 30,
                                                                  --------------------------------------------
                                                                     2003             2002              2001
                                                                     ----             ----              ----

<S>                                                               <C>               <C>              <C>
         Computed tax provision at the
           statutory rate.................................        $   2,287         $  3,625         $   2,123
         State income tax provision, net of
           federal effect.................................              253              570               397
         Nondeductible expenses...........................               32            1,511             2,036
         Extraterritorial income exclusion................              (86)               -                 -
         Other, net.......................................             (226)             218               179
                                                                  ---------         --------         ---------

                                                                  $   2,260         $  5,924         $   4,735
                                                                  =========         ========         =========

</TABLE>


15.  STOCK OPTIONS

          Subsequent to the Acquisition,  AHC adopted the 1998 Stock Option Plan
     ("Option  Plan") for certain  employees and directors of AHC and any parent
     or subsidiary of AHC. The Option Plan authorizes the issuance of options to
     acquire up to 1,650,000  shares of AHC Common Stock. The Board of Directors
     determines the terms of each individual  options grant.  The exercise price
     for each  grant is  required  to be set at least  equal to the fair  market
     value per share of AHC provided  that the exercise  price shall not be less
     than $1.00 per share.  Options vest over periods  ranging from one to eight
     years.  Certain  options are  eligible  for  accelerated  vesting  based on
     targeted EBITDA.  EBITDA is net income or loss plus income taxes,  interest
     expense,  management  fees,  loss from early  retirement of debt, loss from
     sale and disposal of fixed assts, depreciation, amortization and impairment
     loss of goodwill  and  amortization  of other  intangibles  less gains from
     early retirement of debt and settlement of purchase price dispute.  Options
     may be exercisable for up to ten years.

          A summary of AHC stock option activity and related information for the
     years ended June 30, 2003, 2002 and 2001 follows:

<TABLE>
<CAPTION>

                                              2003                            2002                         2001
                                     ------------------------       -------------------------     ------------------------
                                                  Weighted                        Weighted                     Weighted
                                                   Average                         Average                      Average
                                                  Exercise                        Exercise                     Exercise
                                      Options       Price             Options       Price          Options       Price
                                      -------       -----             -------       -----          -------       -----

<S>                                  <C>            <C>             <C>             <C>           <C>            <C>
Outstanding, beginning of year.....  1,469,050      $  1.00         1,464,850       $  1.00       1,509,450      $  1.00
     Granted.......................     96,000         1.00            21,000          1.00          35,500         1.00
     Exercised.....................          -           -                  -            -                -            -
     Forfeited.....................    (32,800)        1.00           (16,800)         1.00         (80,100)        1.00
                                     ---------      -------         ---------       -------       ---------      -------

Outstanding, end of year...........  1,532,250      $  1.00         1,469,050       $  1.00       1,464,850      $  1.00
                                     =========      =======         =========       =======       =========      =======

Exercisable, end of year...........  1,436,073      $  1.00         1,106,343       $  1.00         640,793      $  1.00
                                     =========      =======         =========       =======       =========      =======

Weighted average remaining
contractual life...................         6.7 years                      7.5 years                     8.5 years

</TABLE>


                                      F-20


<PAGE>


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

16.  RELATED PARTY TRANSACTIONS

          The Company made  payments to an  affiliate of DLJMBII for  management
     fees of $325,  $250 and $250 for the years  ended June 30,  2003,  2002 and
     2001, respectively.

17.  GEOGRAPHIC INFORMATION

          The following table  illustrates  geographic  information for revenues
     and long-lived  assets.  Revenues are attributed to countries  based on the
     receipt of sales orders and long-lived assets are based upon the country of
     domicile.

<TABLE>
<CAPTION>

                                                              United
        Net sales:                                            States              France                 Total
                                                              ------              ------                 -----

<S>                                                     <C>                   <C>                   <C>
        Year ended June 30, 2001...............         $      96,845         $      18,550         $     115,395
        Year ended June 30, 2002...............               103,138                17,755               120,893
        Year ended June 30, 2003...............                99,757                15,551               115,308

        Long-lived assets:

        Year ended June 30, 2001...............         $     183,848         $          70         $     183,918
        Year ended June 30, 2002...............               190,868                    82               190,950
        Year ended June 30, 2003...............               183,949                   106               184,055

</TABLE>


18.  CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS

          The following  condensed  balance sheets at June 30, 2003 and June 30,
     2002 and condensed statements of operations,  stockholder's equity and cash
     flows for the years ended June 30, 2003,  2002 and 2001 for Holding  should
     be read in conjunction with the consolidated financial statements and notes
     thereto.

                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                           June 30,
                                                                                ----------------------------
                                                                                    2003             2002
                                                                                    ----             ----
<S>                                                                             <C>              <C>
     Assets
     Investment in subsidiaries........................................         $   87,385       $   99,583
     Income tax receivable.............................................              3,155               46
     Deferred charges..................................................                  -              422
     Deferred income taxes.............................................                  -            1,923
                                                                                ----------       ----------
       Total assets....................................................         $   90,540       $  101,974
                                                                                ==========       ==========

     Liabilities
     Senior discount debentures........................................         $        -       $   15,901
                                                                                ----------       ----------
       Total liabilities...............................................                  -           15,901
                                                                                ----------       ----------

     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...............................................             (3,116)          (7,583)
                                                                                ----------       ----------
       Total stockholder's equity......................................             90,540           86,073
                                                                                ----------       ----------

       Total liabilities and stockholder's equity......................         $   90,540       $  101,974
                                                                                ==========       ==========

</TABLE>


                                      F-21


<PAGE>


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

18.  CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS (Continued)

                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>

                                                                                    Year Ended June 30,
                                                                      ------------------------------------------
                                                                          2003            2002            2001
                                                                          ----            ----            ----

<S>                                                                   <C>             <C>             <C>
     Equity in net income of subsidiaries.........................    $    5,833      $    4,151      $    2,439
     Interest expense, net........................................        (1,681)         (3,105)         (3,699)
     Gain (loss) from early retirement of debt....................          (871)          3,941           2,554
                                                                      ----------      ----------      ----------

       Income before income taxes.................................         3,281           4,987           1,294

     Income tax expense (benefit).................................        (1,186)            250            (215)
                                                                      ----------      ----------      ----------

         Net income...............................................    $    4,467      $    4,737      $    1,509
                                                                      ==========      ==========      ==========

</TABLE>


                        STATEMENT OF 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..........      1,000    $     -    $    88,935     $  (13,829)    $    75,106
     Equity contribution by AHC I
       Acquisition Corp...............          -          -          4,721              -           4,721
     Net income.......................          -          -              -          1,509           1,509
                                          -------    -------    -----------     ----------     -----------

     Balances, June 30, 2001..........      1,000          -         93,656        (12,320)         81,336
     Net income.......................          -          -              -          4,737           4,737
                                          -------    -------    -----------     ----------     -----------

     Balances, June 30, 2002..........      1,000          -         93,656         (7,583)         86,073
     Net income.......................          -          -              -          4,467           4,467
                                          -------    -------    -----------     ----------     -----------

     Balances, June 30, 2003..........      1,000    $     -    $    93,656     $   (3,116)    $    90,540
                                          =======    =======    ===========     ==========     ===========

</TABLE>


                                      F-22


<PAGE>


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

18. CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS (Continued)

                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

                                                                                      Year Ended June 30,
                                                                             ------------------------------------
                                                                                 2003         2002         2001
                                                                                 ----         ----         ----
<S>                                                                          <C>          <C>          <C>
     Cash flows from operating activities:
       Net income........................................................    $   4,467    $   4,737    $   1,509
       Adjustments to reconcile net income (loss) to
        net cash provided by (used in) operating activities:
         Net change in investment in subsidiaries........................       (5,833)      (4,151)      (2,439)
         Amortization of original issuance discount......................        1,640        3,029        3,610
         Amortization of loan closing costs..............................           41           76           89
         Deferred income taxes...........................................        1,923          415         (325)
         (Gain) loss from early retirement of debt.......................          871       (3,941)      (2,554)
         Changes in operating assets and liabilities:
           Income taxes..................................................       (3,109)        (165)         110
                                                                             ---------    ---------     --------
              Net cash provided by (used in) operating activities........            -            -            -
                                                                             ---------    ---------     --------

     Cash flows from financing activities:
       Repayments of long-term debt......................................      (18,031)      (6,805)           -
       Distribution from subsidiary......................................       18,031        6,805            -
                                                                             ---------    ---------     --------
         Net cash provided by (used in) financing activities.............            -            -            -
                                                                             ---------    ---------     --------

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

</TABLE>


19.  UNAUDITED QUARTERLY RESULTS OF OPERATIONS

          The  following  is a summary  of the  unaudited  quarterly  results of
     operations for Fiscal 2003 and Fiscal 2002.


<TABLE>
<CAPTION>

                                  Quarter Ended     Quarter Ended    Quarter Ended     Quarter Ended
                                  September 30,      December 31,       March 31,         June 30,
     Fiscal 2003                      2002              2002              2003              2003           Total
                                      ----              ----              ----              ----           ------

<S>                                 <C>              <C>               <C>              <C>               <C>
     Net sales................      $ 30,400         $  31,644         $  28,954        $  24,310         $ 115,308
     Gross profit.............        11,885            10,940            10,405            8,195            41,425
     Income from operations...         6,935             5,914             5,632            3,830            22,311
     Interest expense, net....         3,738             3,675             3,565            3,377            14,355
     Net income (loss)........         1,887             1,491             1,169              (80)            4,467


                                  Quarter Ended     Quarter Ended    Quarter Ended     Quarter Ended
                                  September 30,      December 31,       March 31,         June 30,
     Fiscal 2002                      2001              2001              2002              2002           Total
                                      ----              ----              ----              ----           ------

     Net sales................      $ 27,381         $  22,329         $  35,472        $  35,711         $ 120,893
     Gross profit.............        10,667             6,400            15,115           14,823            47,005
     Income from operations...         5,026               361             8,418            8,798            22,603
     Interest expense, net....         3,871             3,865             4,182            3,715            15,633
     Net income (loss)........           146            (2,697)            2,029            5,259             4,737

</TABLE>


                                      F-23


<PAGE>


                         REPORT OF INDEPENDENT AUDITORS


To the Board of Directors and Stockholder of
  AKI, Inc. and Subsidiaries

     In our  opinion,  the  accompanying  consolidated  balance  sheets  and the
related  consolidated  statements of operations,  stockholder's  equity and cash
flows present fairly, in all material  respects,  the financial position of AKI,
Inc.  and  Subsidiaries  at June 30,  2003 and  2002  and the  results  of their
operations  and their cash flows for each of the three years in the period ended
June 30, 2003in conformity with generally accepted accounting  principles in the
United States of America.  These financial  statements are the responsibility of
management;  our  responsibility  is to express  an  opinion on these  financial
statements  based on our audits.  We conducted our audits of these statements in
accordance with auditing  standards  generally  accepted in the United States of
America,  which require that we plan and perform the audit to obtain  reasonable
assurance   about  whether  the  financial   statements  are  free  of  material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the  amounts  and  disclosures  in  the  financial  statements,   assessing  the
accounting  principles  used and significant  estimates made by management,  and
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for our opinion.

     As  discussed  in  Note 2 to the  consolidated  financial  statements,  the
Company changed its accounting policy for goodwill amortization in fiscal 2003.



PricewaterhouseCoopers LLP
Knoxville, Tennessee
August 5, 2003


                                      F-24


<PAGE>


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

<TABLE>
<CAPTION>

                                                                                              June 30,
                                                                                    ----------------------------
                                                                                       2003              2002
                                                                                       ----              ----

<S>                                                                                 <C>              <C>
ASSETS
Current assets
Cash and cash equivalents..............................................             $     1,470      $     1,875
Accounts receivable, net...............................................                  20,267           23,537
Inventory, net.........................................................                   7,265            8,014
Income tax receivable..................................................                   1,011                -
Prepaid expenses.......................................................                     671              667
Deferred income taxes..................................................                     808              977
                                                                                    -----------      -----------
      Total current assets.............................................                  31,492           35,070

Property, plant and equipment, net.....................................                  16,584           19,616
Goodwill, net .........................................................                 152,994          153,277
Other intangible assets, net...........................................                  11,307           13,142
Deferred charges, net..................................................                   3,032            3,637
Other assets...........................................................                     138              164
                                                                                    -----------      -----------
      Total assets.....................................................             $   215,547      $   224,906
                                                                                    ===========      ===========


LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Current portion of long-term debt......................................             $     1,875      $     1,375
Accounts payable, trade................................................                   5,444            5,826
Accrued income taxes...................................................                       -            2,053
Accrued compensation...................................................                   4,333            5,338
Accrued interest.......................................................                   5,502            5,570
Accrued expenses.......................................................                   3,661            3,383
                                                                                    -----------      -----------
      Total current liabilities........................................                  20,815           23,545

Revolving credit line..................................................                  10,000            2,750
Term loan..............................................................                   6,250            8,125
Senior notes...........................................................                 103,510          103,510
Deferred income taxes..................................................                   1,142            1,231
Other non-current liabilities..........................................                   1,740            2,338
                                                                                    -----------      -----------
      Total liabilities................................................                 143,457          141,499

Commitments and contingencies

Stockholder's equity
Common stock, $0.01 par, 100,000 shares authorized; 1,000
    shares issued and outstanding......................................                       -                -
Additional paid-in capital.............................................                  82,512          100,543
Retained earnings (accumulated deficit)................................                   4,873             (960)
Accumulated other comprehensive income (loss)..........................                     435             (446)
Carryover basis adjustment.............................................                 (15,730)         (15,730)
                                                                                    -----------      -----------
      Total stockholder's equity.......................................                  72,090           83,407
                                                                                    -----------      -----------

      Total liabilities and stockholder's equity.......................             $   215,547      $   224,906
                                                                                    ===========      ===========

</TABLE>


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


                                      F-25


<PAGE>


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

<TABLE>
<CAPTION>

                                                                                      Year Ended June 30,
                                                                           ----------------------------------------
                                                                              2003           2002           2001
                                                                              ----           ----           ----

<S>                                                                        <C>            <C>             <C>
Net sales.....................................................             $ 115,308      $ 120,893       $ 115,395
Cost of goods sold............................................                73,883         73,888          71,336
                                                                           ---------      ---------       ---------

   Gross profit...............................................                41,425         47,005          44,059

Selling, general and administrative expenses..................                17,971         18,943          18,199
Amortization of goodwill......................................                     -          4,806           4,806
Amortization of other intangible assets.......................                 1,143          1,645             951
Gain from settlement of purchase price dispute, net...........                     -           (992)              -
                                                                           ---------      ---------       ---------

   Income from operations.....................................                22,311         22,603          20,103

Other expenses (income):
   Interest expense...........................................                12,674         12,528          13,212
   Management fees to affiliate...............................                   325            250             250
   Gain from early retirement of debt.........................                     -              -            (748)
   Loss from sale and disposal of fixed assets................                    33              -               -
                                                                           ---------      ---------       ---------

     Income before income taxes...............................                 9,279          9,825           7,389

Income tax expense ...........................................                 3,446          5,674           4,950
                                                                           ---------      ---------       ---------

       Net income.............................................             $   5,833      $   4,151       $   2,439
                                                                           =========      =========       =========

</TABLE>


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


                                      F-25


<PAGE>


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


<TABLE>
<CAPTION>

                                                                        Retained         Other         Accumulated
                                                       Additional       Earnings     Comprehensive      Carryover
                                      Common Stock       Paid-in      (Accumulated       Income           Basis
                                     Shares   Amount     Capital        Deficit)         (Loss)         Adjustment      Total
                                     ------   ------     -------        --------         ------         ----------      -----


<S>                                   <C>     <C>       <C>           <C>              <C>             <C>             <C>
Balances, June 30, 2000..........     1,000   $    -    $ 107,348     $   (7,550)      $    (542)      $   (15,730)    $  83,526
Net income.......................         -        -            -          2,439               -                 -         2,439
Other comprehensive loss, net
  of tax:
   Foreign currency translation
     adjustment..................         -        -            -              -            (295)                -          (295)
                                                                                                                       ---------
Comprehensive income.............                                                                                          2,144
                                      -----   ------    ---------     ----------       ---------       -----------     ---------

Balances, June 30, 2001..........     1,000        -      107,348         (5,111)           (837)          (15,730)       85,670
Distribution to AKI Holding Corp.                  -       (6,805)             -               -                 -        (6,805)
Net income.......................         -        -            -          4,151               -                 -         4,151
Other comprehensive loss, net
  of tax:
   Foreign currency translation
     adjustment..................         -        -            -              -             391                 -           391
                                                                                                                       ---------
Comprehensive income.............                                                                                          4,542
                                      -----   ------    ---------     ----------       ---------       -----------     ---------

Balances, June 30, 2002..........     1,000        -      100,543           (960)           (446)          (15,730)       83,407
Distribution to AKI Holding Corp.                  -      (18,031)             -               -                 -       (18,031)
Net income.......................         -        -            -          5,833               -                 -         5,833
Other comprehensive loss, net
  of tax:
   Foreign currency translation
     adjustment..................         -        -            -              -             881                 -           881
                                                                                                                       ---------
Comprehensive income.............                                                                                          6,714
                                      -----   ------    ---------     ----------       ---------       -----------     ---------

Balances, June 30, 2003..........     1,000   $    -    $  82,512     $    4,873       $     435       $   (15,730)    $  72,090
                                      =====   ======    =========     ==========       =========       ===========     =========

</TABLE>


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


                                      F-27


<PAGE>


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

<TABLE>
<CAPTION>

                                                                                      Year Ended June 30,
                                                                        --------------------------------------------
                                                                           2003              2002             2001
                                                                           ----              ----             ----

<S>                                                                    <C>               <C>              <C>
Cash flows from operating activities:
   Net income.................................................         $   5,833         $   4,151        $   2,439
   Adjustment to reconcile net income to net cash provided
    by operating activities:
     Depreciation and amortization of goodwill and
       other intangibles......................................             7,331            12,096           10,119
     Amortization of loan closing costs.......................               605               617              719
     Deferred income taxes....................................                80            (1,333)            (387)
     Gain from early retirement of debt.......................                 -                 -             (892)
     Other....................................................               592               472              (84)
     Changes in operating assets and liabilities:
       Accounts receivable....................................             3,270            (3,177)           4,364
       Inventory..............................................               749               690            1,427
       Prepaid expenses, deferred charges and other assets....                (4)             (131)            (400)
       Accounts payable and accrued expenses..................            (1,177)             (118)           1,077
       Income taxes...........................................            (3,064)              530            1,222
                                                                       ---------         ---------        ---------

         Net cash provided by operating activities............            14,215            13,797           19,604
                                                                       ---------         ---------        ---------

Cash flows from investing activities:
   Purchases of equipment.....................................            (2,345)           (1,338)          (3,015)
   Payments for acquisitions, net of cash acquired............                 -           (19,422)               -
   Patents....................................................              (119)              (79)            (137)
                                                                       ---------         ---------        ---------

         Net cash used in investing activities................            (2,464)          (20,839)          (3,152)
                                                                       ---------         ---------        ---------

Cash flows from financing activities:
   Payments under capital leases for equipment................                 -              (503)            (846)
   Repayments of long-term debt...............................                 -                 -           (3,110)
   Net proceeds (repayments) on revolving loan................             7,250             2,750           (9,000)
   Proceeds (repayments) on term loan, net of repayment of
     $500 in 2002.............................................            (1,375)            9,500                -
   Payments of loan closing costs.............................                 -              (679)               -
   Distribution to parent.....................................           (18,031)           (6,805)               -
                                                                       ---------         ---------        ---------

         Net cash provided by (used in) financing activities..           (12,156)            4,263          (12,956)
                                                                       ---------         ---------        ---------

   Net increase (decrease) in cash and cash equivalents.......              (405)           (2,779)           3,496
   Cash and cash equivalents, beginning of period.............             1,875             4,654            1,158
                                                                       ---------         ---------        ---------
   Cash and cash equivalents, end of period...................         $   1,470         $   1,875        $   4,654
                                                                       =========         =========        =========


   Supplemental information:
     Cash paid during the period for:
       Interest to stockholder................................         $      21         $      14        $     320
       Interest, other........................................            11,950            11,600           12,233
       Income taxes...........................................             6,616             6,857            4,115


</TABLE>


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


                                      F-28


<PAGE>


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

1.   ORGANIZATION AND BUSINESS

          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.  As more fully  described in
     Note 3,  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 (the  "Acquisition").  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 AKI, Inc. and Subsidiaries  ("AKI," the "Successor"
     or the  "Company").  Subsequent to the  Acquisition,  AHC contributed $1 of
     cash and all of its  ownership  interest in AKI to AKI Holding  Corporation
     ("Holding") for all of the outstanding equity of Holding. AKI is 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 and Baltimore,  Maryland facilities and distributes
     its  products  in Europe  through  its  French  subsidiary,  Arcade  Europe
     S.A.R.L.

          Unless  otherwise  indicated,  all  references to years refer to AKI's
     fiscal year, June 30.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Principles of Consolidation

          The  accompanying   consolidated   financial  statements  include  the
     accounts of the Company and its wholly owned subsidiaries.  All significant
     intercompany transactions have been eliminated.

     Reclassification

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

     Cash and Cash Equivalents

          For purposes of the consolidated statements of cash flows, the Company
     considers all highly liquid  investments with an original maturity of three
     months or less at the time of purchase to be cash equivalents.

     Concentration of Credit Risk

          The Company  maintains  its cash in bank deposit  accounts  which,  at
     times, may exceed federally insured limits. The Company has not experienced
     any losses in such accounts;  in addition,  the Company  believes it is not
     exposed to any significant  credit risk on cash and cash  equivalents.  The
     Company  grants  credit  terms in the  normal  course  of  business  to its
     customers and as part of its ongoing  procedures,  the Company monitors the
     credit worthiness of its customers. The Company does not believe that it is
     subject to any unusual  credit risk beyond the normal credit risk attendant
     in its business.

          Two  customers  accounted  for 29.7% and 31.3% of net sales during the
     years ended June 30, 2003 and June 30,  2002,  respectively.  One  customer
     accounted for 14.9% of net sales during the year ended June 30, 2001.


                                      F-29


<PAGE>


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

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

     Concentration of Purchasing

          Products  accounting  for a  significant  portion of the Company's net
     sales utilize  specific  grades of paper that are produced  exclusively for
     the Company by one domestic supplier or specific  component  materials that
     are sourced from one qualified supplier. The Company does not have purchase
     agreements with their suppliers.  These products can be manufactured  using
     other grades of paper; however, the Company believes the specific grades of
     paper  utilized by the Company  provide the Company with an advantage  over
     its  competitors.   The  Company  is  currently   researching   methods  of
     replicating  the  advantages of these  specific  grades of paper with other
     grades of paper available from multiple suppliers and alternative component
     materials  from  multiple  suppliers.  Until such methods are  developed or
     alternative  sources located,  a loss of supply of these specific grades of
     paper and the resulting  competitive  advantage could cause a possible loss
     of sales, which could adversely affect operating results.

     Revenue Recognition and Accounts Receivable

          Product sales are recognized at the time risk of ownership  transfers,
     net of estimated  discounts.  Accounts  receivable  is accounted for net of
     allowances  for  doubtful   accounts.   Under   arrangements  with  certain
     customers, custom product which is stored for future delivery is recognized
     as revenue when title and risk of ownership has passed to the customer.

     Shipping and Handling Costs

          The costs  associated  with  shipping  and  handling are included as a
     component of cost of goods sold.

     Inventory

          Paper  inventory  is stated  at the lower of cost or market  using the
     last-in,  first-out (LIFO) method;  all other inventories are stated at the
     lower of cost or market using the first-in, first-out (FIFO) method.

     Property, Plant and Equipment

          Property,  plant and equipment are stated at cost.  Expenditures  that
     extend the  economic  lives or improve  the  efficiency  of  equipment  are
     capitalized. The costs of maintenance and repairs are expensed as incurred.
     Upon retirement or disposal, the related cost and accumulated  depreciation
     are removed from the respective accounts and any gain or loss is recorded.

          Depreciation is computed using the  straight-line  method based on the
     estimated  useful lives of the assets as indicated in Note 6 for  financial
     reporting  purposes and  accelerated  methods for tax  purposes.  Leasehold
     improvements  are depreciated  over the shorter of their  estimated  useful
     lives or the lease term.

     Goodwill

          The aggregate purchase price of business acquisitions was allocated to
     the  assets  and  liabilities  of the  acquired  companies  based  on their
     respective fair values as of the acquisition dates. Goodwill represents the
     excess purchase price paid over the fair value of net  identifiable  assets
     acquired. The cost and accumulated


                                      F-30


<PAGE>


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

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

     amortization  of  goodwill  was  $173,153  and $20,159 at June 30, 2003 and
     $173,436 and $20,159 at June 30, 2002,  respectively.  In  accordance  with
     SFAS 142 goodwill is no longer being  amortized.  The  following  pro forma
     amounts  reflect  goodwill  amortization  and net  income had SFAS 142 been
     implemented at the beginning of fiscal 2001:

<TABLE>
<CAPTION>

                                                            2003              2002               2001
                                                            ----              ----               ----

<S>                                                     <C>               <C>                <C>
           Net income as reported...............        $     5,833       $     4,151        $     2,439
           Goodwill amortization................                  -             4,806              4,806
                                                        -----------       -----------        -----------

           Pro forma net income.................        $     5,833       $     8,957        $     7,245
                                                        ===========       ===========        ===========

</TABLE>


          Management annually tests the carrying value of its goodwill and other
     long-lived assets which have resulted in no impairment.

     Stock Based Compensation

          The Company  has  elected to account for its stock based  compensation
     with  employees  under the intrinsic  value method as permitted  under SFAS
     123.  Under the  intrinsic  value  method,  because  the stock price of the
     Company's  employee stock options  equaled the fair value of the underlying
     stock on the date of grant, no compensation expense was recognized.  If the
     Company had elected to  recognize  compensation  expense  based on the fair
     value of the  options  at grant  date as  prescribed  by SFAS 123,  the net
     income for the years ended June 30, 2003,  2002 and 2001 would have been as
     follows:

<TABLE>
<CAPTION>

                                                            2003              2002               2001
                                                            ----              ----               ----

<S>                                                     <C>               <C>                <C>
           Net income as reported...............        $     5,833       $     4,151        $     2,439
           Stock based compensation expense.....                 35               105                105
                                                        -----------       -----------        -----------

           Pro forma net income.................        $     5,798       $     4,046        $     2,334
                                                        ===========       ===========        ===========

</TABLE>


     Deferred Charges

          Deferred charges are primarily  comprised of debt issuance costs which
     are being amortized  using the effective  interest method over the terms of
     the related debt. Such costs are included in the accompanying  consolidated
     balance sheets, net of accumulated amortization.


                                      F-31


<PAGE>


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

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

     Other Intangible Assets

          Other intangible assets include patents, customer lists, covenants not
     to compete and other  intangible  assets and are being amortized over their
     estimated lives using the straight-line method. The following table details
     the components of other intangible assets:

<TABLE>
<CAPTION>

                                                                        June 30,
                                 ------------------------------------------------------------------------------------
                                                  2003                                        2002
                                 ----------------------------------------    ----------------------------------------
                                              Accumulated                                  Accumulated
                                   Costs      Amortization       Net            Costs      Amortization      Net
                                   -----      ------------       ---            -----      ------------      ---

<S>                               <C>          <C>            <C>             <C>           <C>            <C>
    Patents...................    $  8,433     $   1,286      $   7,147       $  8,314      $     476      $   7,838
    Customer lists............       7,289         3,645          3,644          7,289          2,916          4,373
    Covenants not to compete..       1,375         1,010            365          1,375            735            640
    Other.....................         694           543            151            694            403            291
                                  --------     ---------      ---------       --------      ---------      ---------
                                  $ 17,791     $   6,484      $  11,307       $ 17,672      $   4,530      $  13,142
                                 =========     =========      =========      =========      =========      =========

</TABLE>


          Future amortization of other intangible assets is as follows:

                                    2004.................... $   1,951
                                    2005....................     1,603
                                    2006....................     1,563
                                    2007....................     1,551
                                    2008....................     1,537
                                    Thereafter..............     3,102
                                                             ---------
                                                             $  11,307
                                                             =========

     Fair Value of Financial Instruments

          SFAS  No.   107,   "Disclosures   About  Fair   Values  of   Financial
     Instruments,"  requires  the  disclosure  of the fair  value  of  financial
     instruments,  for assets and  liabilities  recognized and not recognized on
     the balance sheet,  for which it is practicable to estimate fair value. The
     fair value of the Company's  Senior Notes, as determined from quoted market
     prices,  was  $106,098 at June 30,  2003,  compared to a carrying  value of
     $103,510.   The  carrying   value  of  all  other   financial   instruments
     approximated fair value at June 30, 2003.

     Foreign Currency Transactions

          Gains and (losses) on foreign currency transactions have been included
     in the determination of net income in accordance with SFAS No. 52, "Foreign
     Currency  Translation."  Foreign  currency  gains and (losses)  amounted to
     ($44),  $301 and ($403) for the years ended June 30,  2003,  2002 and 2001,
     respectively.


                                      F-32


<PAGE>


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

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

     Research and Development Expenses

          Research and development  expenditures are charged to selling, general
     and   administrative   expenses  in  the  period  incurred.   Research  and
     development expenses totaled $2,135,  $1,766 and $1,591 for the years ended
     June 30, 2003, 2002 and 2001, respectively.

     Income Taxes

          Income taxes are provided in  accordance  with  Statement of Financial
     Accounting  Standards No. 109,  "Accounting for Income Taxes." Accordingly,
     deferred tax assets and liabilities are recognized at the applicable income
     tax rates  based upon  future tax  consequences  of  temporary  differences
     between  the  tax  bases  and  financial  reporting  bases  of  assets  and
     liabilities  using  enacted  tax  rates in effect in the years in which the
     differences  are expected to reverse.  Deferred tax assets are reduced,  if
     necessary,  by the  amount of any tax  benefits  that,  based on  available
     evidence, are not expected to be realized.

     Use of Estimates

          The  preparation of financial  statements in conformity with generally
     accepted  accounting  principles  requires management to make estimates and
     assumptions  that affect the reported amounts of assets and liabilities and
     disclosures  of  contingent  assets  and  liabilities  at the  date  of the
     financial  statements  and the  reported  amounts of revenues  and expenses
     during the reporting period.  Management makes significant estimates in the
     areas of accounts  receivable,  inventory,  intangible  assets,  long-lived
     assets and  deferred  income tax.  Actual  results  could differ from those
     estimates.

     Recently Issued Accounting Standards

          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 was applied at the beginning of our 2003 fiscal year.
     The  adoption  of  SFAS  142  eliminated  the   amortization  of  goodwill,
     approximately  $4,800 in fiscal  2002,  while  requiring  annual  tests for
     impairment of goodwill.  The Company completes its initial and first annual
     tests of the carrying value of goodwill which resulted in no impairment.

          FASB Statement of Financial  Accounting  Standards No. 145 "Rescission
     of FASB  Statements No. 4, 44, and 64,  Amendment of FASB Statement No. 13,
     and Technical  Corrections" ("SFAS 145") was issued in April 2002. The most
     significant aspects of this pronouncement,  with respect to the Company, is
     the  elimination  of  SFAS  No.  4,   "Reporting   Gains  and  Losses  from
     Extinguishment  of  Debt".  As a result of the  elimination  of SFAS No. 4,
     gains  and  losses  from   extinguishment   of  debt  are   classified   as
     extraordinary  items  only  if  they  meet  the  criteria  in APB  No.  30,
     "Reporting   the  Results  of   Operations   -   Discontinued   Events  and
     Extraordinary  Items".  SFAS No. 145,  which the Company  adopted in fiscal
     2003,  requires  early  retirement  of debt to be  included  in income from
     continuing  operations.  Gains and losses on early  retirement of debt that
     were classified


                                      F-33


<PAGE>


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

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

     as  extraordinary  items in prior  periods that do not meet the criteria in
     APB No. 30 for  classification  as an extraordinary  items in prior periods
     that do not  meet  the  criteria  in APB No.  30 for  classification  as an
     extraordinary item were  reclassified.  In fiscal 2002 the Company reported
     an approximate  $2.7 million  extraordinary  gain from early  retirement of
     debt, net of tax.

          FASB Statement of Financial  Accounting  Standards No. 146 "Accounting
     for Costs  Associated  with Exit or Disposal  Activities"  ("SFAS 146") was
     issued in June 2002. SFAS 146 addresses financial  accounting and reporting
     for costs  associated  with exit or disposal  activities and nullifies EITF
     Issue No. 94-3,  Liability  Recognition  for Certain  Employee  Termination
     Benefits  and Other Costs to Exit an  Activity.  SFAS 146  requires  that a
     liability  for a cost  associated  with  an exit or  disposal  activity  be
     recognized and measured  initially at fair value only when the liability is
     incurred.  SFAS 146 is effective for exit or disposal  activities  that are
     initiated after December 31, 2002. The Company does not anticipate that the
     provisions of this statement  will have a material  impact on the Company's
     reported results of operations, financial positions or cash flows.

          FASB  Interpretation  No. 45  "Guarantor's  Accounting  and Disclosure
     Requirements for Guarantees,  Including Indirect Guarantees of Indebtedness
     of Others" ("FIN 45") was issued in November 2002. FIN 45 elaborates on the
     disclosures  to be made by a guarantor in its interim and annual  financial
     statements  about its  obligations  under  certain  guarantees  that it has
     issued.  It also requires the  guarantor to recognize,  at the inception of
     the guarantee,  a liability for the fair value of obligation  undertaken in
     issuing the  guarantee.  The  disclosure  requirements  are  effective  for
     quarters ending after December 15, 2002 and the liability recognition is in
     effect for guarantees  initiated  after December 31, 2002. The Company does
     not  anticipate  that the provisions of this statement will have a material
     impact on the Company's reported results of operations, financial positions
     or cash flows.

          FASB   Interpretation  No.  46  "Consolidation  of  Variable  Interest
     Entities"  ("FIN  46") was  issued in  January  2003.  FIN 46  requires  an
     investor  with a majority of the variable  interest in a variable  interest
     entity  ("VIE") to  consolidate  the entity and also requires  majority and
     significant variable interest investors to provide certain  disclosures.  A
     VIE is an entity in which the equity  investor  does not have a controlling
     interest,  or the equity  investment  risk is  insufficient  to finance the
     entity's  activities without receiving  additional  subordinated  financial
     support from the other  parties.  For  arrangements  entered into with VIEs
     created prior to January 31, 2003, the provisions of FIN 46 are required to
     be adopted at the beginning of the first interim or annual period beginning
     after June 15, 2002. The Company does not anticipate that the provisions of
     this  interpretation  will have a material impact on the Company's reported
     results of operations, financial position or cash flows.

3.   SIGNIFICANT ACQUISITIONS

          On December 18,  2001,  the Company  acquired  the business  including
     certain  assets and assumed  certain  liabilities  of Color  Prelude,  Inc.
     ("CP")  for  $19,423  including  direct  acquisition  costs  of  $540.  The
     acquisition  was accounted  for using the purchase  method of accounting in
     accordance with Statement of Financial Accounting Standards (SFAS) No. 141,
     "Business  Combinations".  The  purchase  price has been  allocated  to the
     assets and liabilities  acquired using estimated fair values at the date of
     acquisition and resulted in assigning


                                      F-34


<PAGE>


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

3.   SIGNIFICANT ACQUISITIONS (Continued)

     value to goodwill  totaling  $407 which will not be amortized in accordance
     with Statement of Financial  Accounting  Standards (SFAS) No. 142 "Goodwill
     and Other  Intangible  Assets".  The following  shows the allocation of the
     purchase price:

                  Cash...........................................   $         1
                  Other current assets...........................         5,680
                  Property, plant and equipment..................         7,695
                  Patents........................................         7,750
                  Other intangible assets........................         1,069
                  Goodwill.......................................           407
                                                                    -----------
                  Total allocation to assets.....................   $    22,602
                                                                    ===========

                  Current liabilities............................   $     3,179
                                                                    ===========

          Patents  are  being  amortized  over  a  ten  year  period  and  other
     intangible assets are being amortized over periods ranging from one to four
     years.

          The results of the acquired  operations  are included in the financial
     statements  since the date of acquisition.  The following pro forma results
     include cost savings and other effects of the planned  integration  and are
     not necessarily  indicative of the results which would have occurred if the
     business  combination had been in effect on the dates indicated.  Pro forma
     results  had CP been  acquired  at the  beginning  of  fiscal  2001  are as
     follows:


                                                         2002           2001
                                                         ----           ----

                                                      (unaudited)    (unaudited)

                  Revenue........................   $   127,226     $   129,122
                  Net income ....................         4,110           3,237

          In April 2002 the Company  settled a dispute with the former owners of
     RetCom Holdings Ltd. In connection with the settlement the Company received
     approximately $1,000 and has included this settlement amount net of related
     expenses in income from operations.


                                      F-35


<PAGE>


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

4.   ACCOUNTS RECEIVABLE

          The following table details the components of accounts receivable:

                                                                June 30,
                                                      -------------------------
                                                          2003           2002
                                                          ----           ----

         Trade accounts receivable..................  $   20,633     $   23,824
         Allowance for doubtful accounts............        (557)          (608)
                                                      ----------     ----------
                                                          20,076         23,216
         Other accounts receivable..................         191            321
                                                      ----------     ----------

                                                      $   20,267     $   23,537
                                                      ==========     ==========

5.   INVENTORY

          The following table details the components of inventory:

                                                                June 30,
                                                      -------------------------
                                                          2003           2002
                                                          ----           ----
         Raw materials
           Paper....................................  $    1,740     $    2,180
           Other raw materials......................       2,353          4,216
                                                      ----------     ----------
              Total raw materials...................       4,093          6,396
         Work in process............................       3,857          2,468
         Reserve for obsolescence...................        (685)          (850)
                                                      ----------     ----------

         Total inventory............................  $    7,265     $    8,014
                                                      ==========     ==========


          The difference between the carrying value of paper inventory using the
     FIFO method as compared to the LIFO method was not  significant at June 30,
     2003 or June 30, 2002.

6.   PROPERTY, PLANT AND EQUIPMENT

          The  following  table details the  components  of property,  plant and
     equipment as well as their estimated useful lives:

                                                                June 30,
                                         Estimated      -----------------------
                                       Useful Lives       2003           2002
                                       ------------       ----           ----

         Land.......................                    $    258      $    258
         Buildings..................   7 - 15 years        2,999         2,690
         Leasehold improvements.....   1 -  3 years          717           353
         Machinery and equipment....   5 -  7 years       33,240        32,000
         Furniture and fixtures.....   3 -  5 years        4,141         3,609
         Construction in progress...                          31           255
                                                        --------      --------
                                                          41,386        39,165
         Accumulated depreciation...                     (24,802)      (19,549)
                                                        --------      --------
                                                        $ 16,584      $  19,616
                                                        ========      =========

          Depreciation  expense  amounted  to $5,360,  $5,197 and $4,341 for the
     years ended June 30, 2003, 2002 and 2001, respectively.


                                      F-36


<PAGE>


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

7.   CREDIT AGREEMENT

          On December  18,  2001,  the Company  amended and  restated its Credit
     Agreement.  The Credit  Agreement  provides  for a $10,000  term loan which
     matures on December 31, 2006 with varying quarterly principal payments and,
     under certain  circumstances,  payments of "excess cash flow" as defined in
     the Credit  Agreement.  Interest on amounts  borrowed  accrue at a floating
     rate based upon either prime or LIBOR (the weighted  average  interest rate
     on the outstanding balance under the term loan was 4.56% at June 30, 2003).
     The weighted  average  interest rate on the  outstanding  balance under the
     term loan was 5.78%  for the year  ending  June 30,  2003.  Future  minimum
     principal payments under the term loan are as follows:



                  2004................  $     1,875
                  2005................        2,125
                  2006................        2,625
                  2007................        1,500
                                        -----------
                                        $     8,125
                                        ===========

          The Credit  Agreement also provides for a revolving loan commitment up
     to a maximum of $20,000 and expires on 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.  As  of  June  30,  2003,  the  Company's  borrowing  base  was
     approximately  $24,088.  Interest on amounts  borrowed accrue at a floating
     rate based upon either prime or LIBOR (the weighted  average  interest rate
     on the  outstanding  balance under the revolving loan was 6.0% and 6.49% at
     June 30, 2003 and 2002,  respectively).  The weighted average interest rate
     on the  outstanding  balance under the revolving loan was 6.14%,  6.45% and
     9.58% for the years ended June 30, 2003, 2002 and 2001, respectively.

          The Company is required to pay  commitment  fees on the unused portion
     of the revolving loan commitment at a rate of approximately 0.5% per annum.
     In  addition,  the  Company  is  required  to pay fees equal to 2.5% of the
     average daily outstanding amount of lender guarantees. The Company had $291
     of lender guarantees  outstanding at June 30, 2003. These fees totaled $76,
     $65 and $59 for the years ended June 30, 2003, 2002 and 2001, respectively.
     The  Credit  Agreement  contains  certain  financial  covenants  and  other
     restrictions   including   restrictions  on  additional   indebtedness  and
     restrictions on the payment of dividends.  As of June 30, 2003, the Company
     was in compliance with all debt covenants.

8.   LOANS PAYABLE TO STOCKHOLDER

          In May 2000, the Company signed a promissory note payable to AHC which
     allows the Company to borrow up to $10,000 at such  interest  rates and due
     as agreed  upon by the Company  and AHC.  At June 30,  2003,  no amount was
     outstanding  under the promissory note.  Interest paid to AHC in connection
     with the promissory note totaled $21, $14 and $320 for the years ended June
     30, 2003, 2002 and 2001, respectively.

9.   SENIOR NOTES

          On June 25,  1998,  the  Company  completed  a  private  placement  of
     $115,000 of Senior Notes (the "Senior Notes") which mature on July 1, 2008.
     The Senior Notes are general unsecured  obligations of the Company and bear
     interest at 10.5% per annum, payable semi-annually on January 1 and July 1.
     The placement of the Senior


                                      F-37


<PAGE>


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

9.   SENIOR NOTES (Continued)

     Notes yielded the Company net proceeds of $110,158 after deducting offering
     expenses  of  $4,842,  including  $3,450  of  underwriting  fees paid to an
     affiliate of the stockholder. The Senior Notes are redeemable at the option
     of the Company, in whole or part, at any time after July 1, 2003 at a price
     of up to 105.25% of the  outstanding  principal  balance  plus  accrued and
     unpaid  interest.  The Senior Notes  contain  certain  covenants  including
     restrictions  on the declaration and payment of dividends by the Company to
     Holding and  limitations on the incurrence of additional  indebtedness.  On
     December 22, 1998,  the Company  completed the  registration  of its Senior
     Notes with the Securities and Exchange Commission.  During fiscal 2001, the
     Company  purchased  $4,000 of the Senior Notes for $3,110 and  recognized a
     gain of approximately $748. The purchased notes were subsequently retired.

10.  INITIAL CAPITALIZATION

          In conjunction  with the  Acquisition,  AHC issued $30,000 of Floating
     Rate Notes,  $50,279 of Mandatorily  Redeemable Senior Preferred Stock (the
     "Senior Preferred Stock") and $1,111 of its Common Stock. The Floating Rate
     Notes were issued with an original  issuance  discount of $5,389.  Interest
     was  payable  quarterly  and  could be  settled  through  the  issuance  of
     additional  Floating  Rate Notes  through  December 15, 2009,  the maturity
     date, at the  discretion of AHC. The original  issuance  discount of $5,389
     was being  amortized  using the effective  interest method over the life of
     the  Floating  Rate  Notes.  On  November  1, 1999 AHC issued  Amended  and
     Restated  Notes  totaling  $35,500 in exchange for the Floating Rate Notes.
     The Amended and Restated Notes bear a fixed interest rate of  approximately
     16% per annum and mature on  December  15, 2009 and provide for the payment
     of stipulated  early redemption  premiums.  In connection with the exchange
     the  unamortized  original  issue  discount was expensed by AHC. The Senior
     Preferred  Stock accretes in value at 15% per annum and must be redeemed by
     December 15,  2012.  The Amended and  Restated  Notes and Senior  Preferred
     Stock are general unsecured obligations of AHC.

          The cash proceeds from the issuance of the Floating Rate Notes, Senior
     Preferred  Stock and Common  Stock of  approximately  $76,000  and a Senior
     Preferred Stock option of $2,363 were  contributed by AHC to the Company in
     exchange for 1,000 shares of the Company's Common Stock.  Subsequent to the
     initial  capitalization of the Company,  AHC contributed $1 of cash and all
     of its  ownership  interest  in  the  Company  to  Holding  for  all of the
     outstanding equity of Holding.

          AHC and  Holding  have no other  operations  other  than the  Company.
     Absent  additional  financing by AHC or Holding,  the Company's  operations
     represent  the only  current  source  of funds  available  to  service  the
     Floating Rate Notes,  Senior Preferred Stock and Debentures;  however,  the
     Company is not  obligated to pay or otherwise  guarantee  the Floating Rate
     Notes, Senior Preferred Stock and Debentures.


                                      F-38


<PAGE>


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

11.  COMMITMENTS AND CONTINGENCIES

     Operating Leases

          Equipment and office,  warehouse and production  space under operating
     leases expire at various dates. Rent expense was $1,293,  $559 and $538 for
     the years ended June 30, 2003, 2002 and 2001, respectively.  Future minimum
     lease payments under the leases are as follows:

                                    2004.........  $     1,375
                                    2005.........        1,051
                                    2006.........        1,017
                                    2007.........          809
                                    2008.........          656
                                    Thereafter...        2,217
                                                   -----------
                                                   $     7,125
                                                   ===========


     Royalty Agreements

          Royalty agreements are maintained for certain technologies used in the
     manufacture of certain products.  Under the terms of one royalty agreement,
     payments are required  based on a percentage of net sales of those products
     manufactured  with the specific  technology,  or a minimum of $500 per year
     adjusted for changes in the CPI. This agreement  expires the earlier of (1)
     when a total of $11,800 in cumulative royalty payments has been paid or (2)
     December  31, 2004 unless  renewed by the Company for  successive  one-year
     periods.  The Company expensed $653, $500 and $500 under this agreement for
     the years ended June 30, 2003, 2002 and 2001, respectively. The Company has
     paid $6,576 in cumulative  royalty  payments under this  agreement  through
     June 30, 2003.

          Under the terms of another  agreement,  royalty  payments are required
     based on the  number  of  products  sold that  were  manufactured  with the
     specific licensed technology, or a minimum payment of $625 per year through
     the  expiration of the agreement in 2012.  The Company  expensed $625 under
     this agreement for each of the three years ended June 30, 2003.

     Employee Agreements

          The Company has employment  and salary  continuation  agreements  with
     certain executive  officers with terms through June 30, 2004 and 2005. Such
     agreements  provide for base salaries totaling $1,270 per year. One officer
     has an  incentive  bonus of up to 200% of base  salary  which is payable if
     certain  financial  and  management  goals are attained  and certain  other
     incentive  payments.  The  employment  agreements  also  provide  severance
     benefits of up to two years of base salary if the  officers'  services  are
     terminated under certain conditions and one officer's  agreement  provides,
     in the event of termination resulting from a change of control, a severance
     benefit of two times his highest  aggregate amount of base salary and bonus
     in any of  the  three  calendar  years  prior  to  the  effective  date  of
     termination.


                                      F-39


<PAGE>


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

11.  COMMITMENTS AND CONTINGENCIES (Continued)

     Litigation

          The Company is a party to litigation arising in the ordinary course of
     business,  which in the  opinion  of  management,  will not have a material
     adverse effect on the Company's financial condition,  results of operations
     or cash flows.

     Printing Services Agreement

          In connection with the RetCom acquisition, AKI entered into a Printing
     Services  Agreement,  which  expires  December  31,  2004,  with  a  former
     shareholder of RetCom.  The Printing  Services  Agreement  requires  annual
     purchases  of printing  services  totaling  $5,000 with a 15% charge on the
     amount of any  shortfall.  The  present  value of the costs  related to the
     estimated  shortfall over the life of the Printing  Services  Agreement was
     recorded as a liability in the RetCom  purchase  accounting.  The liability
     balance at June 30, 2003 was approximately $2,163.

12.  RETIREMENT PLANS

          A 401(k)  defined  contribution  plan (the "Plan") is  maintained  for
     substantially all full-time salaried employees and certain non-union hourly
     employees.  Applicable  employees  who have six months of service  and have
     attained  age 21 are eligible to  participate  in the Plan.  Employees  may
     elect  to  contribute  a  percentage  of  their  earnings  to the  Plan  in
     accordance with limits  prescribed by law. The Company makes  contributions
     to the Plan by  matching a  percentage  of  employee  contributions.  Costs
     associated  with the Plan totaled  $424,  $323 and $294 for the years ended
     June 30, 2003, 2002 and 2001, respectively.

          Certain  hourly  employees are covered under a  multiemployer  defined
     benefit plan administered under a collective  bargaining  agreement.  Costs
     (determined by union  contract)  under the defined  benefit plan were $245,
     $221  and  $233  for  the  years  ended  June  30,  2003,  2002  and  2001,
     respectively.

13.  INCOME TAXES

          The Company is included in the consolidated  federal income tax return
     filed by AHC.  Income  taxes  related to the  Company are  determined  on a
     separate entity basis.  The Company files separate state income tax returns
     and  calculates its state tax provision on a separate  company  basis.  Any
     income taxes payable or receivable by the consolidated group are settled or
     received by the Company.


                                      F-40


<PAGE>


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

13.  INCOME TAXES (Continued)

          For financial reporting purposes, income before income taxes includes
     the following components:

                                                      Year Ended June 30,
                                             -----------------------------------
                                                2003         2002         2001
                                                ----         ----         ----

         Income before income taxes:
           United States.................    $  7,578     $  7,683     $  5,928
           Foreign.......................       1,701        2,142        1,461
                                             --------     --------     --------

                                             $  9,279     $  9,825     $  7,389
                                             ========     ========     ========


          Significant components of the provision (benefit) for income taxes are
     as follows:

                                                      Year Ended June 30,
                                             ----------------------------------
                                                2003         2002         2001
                                                ----         ----         ----

         Current expense:
           Federal.......................    $  2,408     $  5,003     $  4,533
           Foreign.......................         613        1,042          526
           State.........................         345          962          278
                                             --------     --------     --------
                                                3,366        7,007        5,337
                                             --------     --------     --------

         Deferred expense (benefit):
           Federal.......................          42       (1,247)        (721)
           Foreign.......................           -            -            -
           State.........................          38          (86)         334
                                             --------     --------     --------
                                                   80       (1,333)        (387)
                                             --------     --------     --------

                                             $  3,446     $  5,674     $  4,950
                                             ========     ========     ========


          The significant components of deferred tax assets and (liabilities) at
     June 30, 2003 and 2002, were as follows:


<TABLE>
<CAPTION>

                                                                               June 30,
                                                       --------------------------------------------------------
                                                                2003                            2002
                                                                ----                            ----
                                                       Current     Noncurrent           Current    Noncurrent
                                                       -------     ----------           -------    ----------

<S>                                                    <C>           <C>                <C>          <C>
         Deferred income tax assets:
           Accrued expenses........................    $     376     $      -           $     483    $       -
           Allowance for doubtful accounts.........          213            -                 216            -
           Reserve for inventory obsolescence......          219            -                 278            -
           Amortization of intangibles.............            -          879                   -          773
                                                       ---------     --------           ---------    ---------
                                                             808          879                 977          773
         Deferred income tax liability:
           Property, plant and equipment...........            -       (2,021)                  -       (2,004)
                                                       ---------     --------           ---------    ---------

                Deferred tax assets (liabilities)..    $     808     $ (1,142)          $     977    $  (1,231)
                                                       =========     ========           =========    =========


</TABLE>


                                      F-41


<PAGE>


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

13.  INCOME TAXES (Continued)

          The income tax provision recognized by the Company for the years ended
     June 30, 2003, 2002 and 2001 differs from the amount determined by applying
     the applicable U.S. statutory federal income tax rate to pretax income as a
     result of the following:

<TABLE>
<CAPTION>

                                                                               Year Ended June 30,
                                                                  --------------------------------------------
                                                                     2003             2002              2001
                                                                     ----             ----              ----

<S>                                                               <C>               <C>              <C>
         Computed tax provision at the
           statutory rate.................................        $   3,155         $   3,439        $   2,586
         State income tax provision, net of
           federal effect.................................              253               570              397
         Net nondeductible expenses.......................               32             1,373            1,952
         Extraterritorial income exclusion................              (86)                -                -
         Other, net.......................................               92               292               15
                                                                  ---------         ---------        ---------

                                                                  $   3,446         $   5,674        $   4,950
                                                                  =========         =========        =========

</TABLE>


14.  STOCK OPTIONS

          Subsequent to the Acquisition,  AHC adopted the 1998 Stock Option Plan
     ("Option  Plan") for certain  employees and directors of AHC and any parent
     or subsidiary of AHC. The Option Plan authorizes the issuance of options to
     acquire up to 1,650,000  shares of AHC Common Stock. The Board of Directors
     determines the terms of each individual  options grant.  The exercise price
     for each  grant is  required  to be set at least  equal to the fair  market
     value per share of AHC provided  that the exercise  price shall not be less
     than $1.00 per share.  Options vest over periods  ranging from one to eight
     years.  Certain  options are  eligible  for  accelerated  vesting  based on
     targeted EBITDA.  EBITDA is net income or loss plus income taxes,  interest
     expense,  management  fees,  loss from early  retirement of debt, loss from
     sale  and  disposal  of  fixed  assets,   depreciation,   amortization  and
     impairment  loss of goodwill and  amortization  of other  intangibles  less
     gains  from early  retirement  of debt and  settlement  of  purchase  price
     dispute. Options may be exercisable for up to ten years.

          A summary of AHC stock option activity and related information for the
     years ended June 30, 2003, 2002 and 2001 follows:


<TABLE>
<CAPTION>

                                              2003                            2002                         2001
                                     ------------------------       -------------------------     ------------------------
                                                  Weighted                        Weighted                     Weighted
                                                   Average                         Average                      Average
                                                  Exercise                        Exercise                     Exercise
                                      Options       Price             Options       Price          Options       Price
                                      -------       -----             -------       -----          -------       -----

<S>                                  <C>            <C>             <C>             <C>           <C>            <C>
Outstanding, beginning of year.....  1,469,050      $  1.00         1,464,850       $  1.00       1,509,450      $  1.00
     Granted.......................     96,000         1.00            21,000          1.00          35,500         1.00
     Exercised.....................          -           -                  -            -                -            -
     Forfeited.....................    (32,800)        1.00           (16,800)         1.00         (80,100)        1.00
                                     ---------      -------         ---------       -------       ---------      -------

Outstanding, end of year...........  1,532,250      $  1.00         1,469,050       $  1.00       1,464,850      $  1.00
                                     =========      =======         =========       =======       =========      =======

Exercisable, end of year...........  1,436,073      $  1.00         1,106,343       $  1.00         640,793      $  1.00
                                     =========      =======         =========       =======       =========      =======

Weighted average remaining
contractual life...................         6.7 years                      7.5 years                     8.5 years

</TABLE>


                                      F-42


<PAGE>


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

15.  RELATED PARTY TRANSACTIONS

          The Company made  payments to an  affiliate of DLJMBII for  management
     fees of $325 for the year ended June 30,  2003 and $250 for the years ended
     June 30, 2002 and June 30, 2001.

16.  GEOGRAPHIC INFORMATION

          The following table  illustrates  geographic  information for revenues
     and long-lived  assets.  Revenues are attributed to countries  based on the
     receipt of sales orders and long-lived assets are based upon the country of
     domicile.

<TABLE>
<CAPTION>

                                                           United
        Net sales:                                         States                France                Total
                                                           ------                ------                -----

<S>                                                     <C>                   <C>                   <C>
        Year ended June 30, 2001...............         $      96,845         $      18,550         $     115,395
        Year ended June 30, 2002...............               103,138                17,755               120,893
        Year ended June 30, 2003...............                99,757                15,551               115,308

        Long-lived assets:

        Year ended June 30, 2001...............         $     183,042         $          70         $     183,112
        Year ended June 30, 2002...............               189,754                    82               189,836
        Year ended June 30, 2003...............               183,949                   106               184,055

</TABLE>


17.  UNAUDITED QUARTERLY RESULTS OF OPERATIONS

     The following is a summary of the unaudited quarterly results of operations
     for Fiscal 2003 and Fiscal 2002.


<TABLE>
<CAPTION>

                                  Quarter Ended     Quarter Ended    Quarter Ended     Quarter Ended
                                  September 30,      December 31,       March 31,         June 30,
     Fiscal 2003                      2002              2002             2003              2003             Total
                                      ----              ----             ----              ----             -----

<S>                                 <C>              <C>               <C>              <C>               <C>
     Net sales................      $ 30,400         $  31,644         $  28,954        $  24,310         $ 115,308
     Gross profit.............        11,885            10,940            10,405            8,195            41,425
     Income from operations...         6,935             5,914             5,632            3,830            22,311
     Interest expense, net....         3,188             3,220             3,184            3,082            12,674
     Net income (loss)........         2,257             1,633             1,437              506             5,833


                                  Quarter Ended     Quarter Ended    Quarter Ended     Quarter Ended
                                  September 30,      December 31,       March 31,         June 30,
     Fiscal 2002                      2001              2001             2002              2002             Total
                                      ----              ----             ----              ----             -----

     Net sales................      $ 27,381         $  22,329         $  35,472        $  35,711         $ 120,893
     Gross profit.............        10,667             6,400            15,115           14,823            47,005
     Income from operations...         5,026               361             8,418            8,798            22,603
     Interest expense, net....         3,044             3,038             3,306            3,140            12,528
     Net income (loss)........           702            (2,140)            2,616            2,973             4,151

</TABLE>


                                      F-43