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FORM 10-Q

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

For the quarterly period ended December 31, 2002

OR

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

For the transition period from ___________ to _____________

Commission File Number: 333-60991

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

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

Commission File Number: 333-60989

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

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

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

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

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

As of January 31, 2003, 1,000 shares of common stock of AKI Holding Corp., $.01
par value, were outstanding and 1,000 shares of common stock of AKI, Inc., $.01
par value, were outstanding.

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





AKI HOLDING CORP. AND SUBSIDIARIES

INDEX TO FORM 10-Q


Part I. FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

AKI Holding Corp. and Subsidiaries

Consolidated Condensed Balance Sheet

- December 31, 2002
- June 30, 2002

Consolidated Condensed Statements of Operations

- Three months ended December 31, 2002
- Three months ended December 31, 2001
- Six months ended December 31, 2002
- Six months ended December 31, 2001

Consolidated Condensed Statement of Changes in
Stockholder's Equity

- Six months ended December 31, 2002

Consolidated Condensed Statements of Cash Flows

- Six months ended December 31, 2002
- Six months ended December 31, 2001

Notes to Consolidated Condensed Financial Statements





Item 1. Financial Statements (unaudited) (continued)

AKI, Inc. and Subsidiaries

Consolidated Condensed Balance Sheet

- December 31, 2002
- June 30, 2002

Consolidated Condensed Statements of Operations

- Three months ended December 31, 2002
- Three months ended December 31, 2001
- Six months ended December 31, 2002
- Six months ended December 31, 2001

Consolidated Condensed Statement of Changes in
Stockholder's Equity

- Six months ended December 31, 2002

Consolidated Condensed Statements of Cash Flows

- Six months ended December 31, 2002
- Six months ended December 31, 2001

Notes to Consolidated Condensed Financial Statements


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

Item 3. Quantitative and Qualitative Discussions About Market Risk

Item 4. Controls and Procedures

Part II. OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security Holder's

Item 6. Exhibits and Reports on Form 8-K





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





December 31, June 30,
2002 2002
------------- -------------
(unaudited) (unaudited)


ASSETS
Current assets
Cash and cash equivalents.................................................. $ 1,771 $ 1,875
Accounts receivable, net................................................... 19,336 23,796
Inventory.................................................................. 7,479 8,014
Prepaid expenses........................................................... 1,204 667
Income tax receivable...................................................... 1,720 -
Deferred income taxes...................................................... 977 977
------------- -------------

Total current assets.................................................... 32,487 35,329

Property, plant and equipment, net......................................... 18,165 19,616
Goodwill, net.............................................................. 153,277 153,277
Other intangible assets, net............................................... 12,237 13,142
Deferred charges, net...................................................... 3,668 4,059
Deferred income taxes...................................................... 882 692
Other assets............................................................... 174 164
------------- -------------

Total assets............................................................ $ 220,890 $ 226,279
============= =============

LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Current portion of long-term debt.......................................... $ 1,750 $ 1,375
Accounts payable, trade.................................................... 3,976 5,826
Accrued income taxes....................................................... - 2,007
Accrued compensation....................................................... 3,394 5,338
Accrued interest........................................................... 5,573 5,570
Accrued expenses........................................................... 3,824 3,642
------------- -------------

Total current liabilities............................................... 18,517 23,758

Revolving credit line...................................................... 2,500 2,750
Term loan.................................................................. 7,250 8,125
Senior notes............................................................... 103,510 103,510
Promissory note to affiliate............................................... 355 -
Senior discount debentures................................................. 13,461 15,901
Other non-current liabilities.............................................. 1,656 2,338
------------- -------------

Total liabilities....................................................... 147,249 156,382

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........................................................ (4,205) (7,583)
Accumulated other comprehensive loss....................................... (80) (446)
Carryover basis adjustment................................................. (15,730) (15,730)
------------- -------------

Total stockholder's equity.............................................. 73,641 69,897
------------- -------------


Total liabilities and stockholder's equity.............................. $ 220,890 $ 226,279
============= =============





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





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





Three months ended Six months ended
-------------------------------------- --------------------------------------
December 31, 2002 December 31, 2001 December 31, 2002 December 31, 2001
----------------- ----------------- ----------------- -----------------
(unaudited) (unaudited) (unaudited) (unaudited)


Net sales...................................... $ 31,644 $ 22,329 $ 62,044 $ 49,710
Cost of goods sold............................. 20,704 15,929 39,219 32,643
--------- --------- --------- ---------

Gross profit................................ 10,940 6,400 22,825 17,067

Selling, general and administrative expenses... 4,740 4,569 9,404 8,764
Amortization of goodwill....................... - 1,202 - 2,403
Amortization of other intangibles.............. 286 268 572 513
--------- --------- --------- ---------

Income from operations...................... 5,914 361 12,849 5,387

Other (income) expenses:
Interest expense............................ 3,675 3,865 7,413 7,736
Management fees and other, net.............. 62 62 125 125
Gain from early retirement of debt.......... (144) - (144) -
--------- --------- --------- ---------

Income (loss) before income taxes........... 2,321 (3,566) 5,455 (2,474)

Income tax expense (benefit)................... 830 (869) 2,077 77
--------- --------- --------- ---------

Net income (loss)........................... $ 1,491 $ (2,697) $ 3,378 $ (2,551)
========= ========= ========= =========





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





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





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


Balances, June 30, 2002 (unaudited)....... 1,000 $ - $ 93,656 $ (7,583) $ (446) $ (15,730) $ 69,897

Net income (unaudited).................... 3,378 3,378

Other comprehensive income, net of tax:
Foreign currency translation
adjustment (unaudited)............... 366 366
---------

Comprehensive income (unaudited).......... 3,744
----- ------- --------- --------- -------- --------- ---------

Balances, December 31, 2002 (unaudited)... 1,000 $ - $ 93,656 $ (4,205) $ (80) $ (15,730) $ 73,641
===== ======= ========= ========= ======== ========= =========





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





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




Six months ended
---------------------------------------
December 31, 2002 December 31, 2001
----------------- -----------------
(unaudited) (unaudited)


Cash flows from operating activities
Net income (loss).................................................... $ 3,378 $ (2,551)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization of goodwill and other intangibles.... 3,724 5,258
Amortization of debt discount...................................... 981 1,614
Amortization of debt issuance costs................................ 306 335
Deferred income taxes.............................................. (190) (756)
Gain from early retirement of debt................................. (144) -
Other.............................................................. (326) 403
Changes in operating assets and liabilities:
Accounts receivable.............................................. 4,460 1,325
Inventory........................................................ 535 320
Prepaid expenses, deferred charges and other assets.............. (537) 43
Accounts payable and accrued expenses............................ (3,609) (2,885)
Income taxes..................................................... (3,727) (2,889)
---------- ----------

Net cash provided by operating activities...................... 4,851 217
---------- ----------

Cash flows from investing activities
Purchases of equipment............................................... (1,297) (470)
Patents.............................................................. (71) (46)
Payments for acquisition, net of cash acquired....................... - (19,053)
---------- ----------

Net cash used in investing activities.......................... (1,368) (19,569)
---------- ----------

Cash flows from financing activities
Payments under capital leases ....................................... - (503)
Repayment of long-term debt.......................................... (3,192) -
Net proceeds (repayments) on revolving loan.......................... (250) 7,700
Net proceeds (repayments) on term loan............................... (500) 10,000
Payments of loan closing costs....................................... - (605)
Net proceeds from promissory note to stockholder..................... 355 -
---------- ----------

Net cash provided by (used in) financing activities............ (3,587) 16,592
---------- ----------

Net decrease in cash and cash equivalents............................... (104) (2,760)
Cash and cash equivalents, beginning of period.......................... 1,875 4,654
---------- ----------

Cash and cash equivalents, end of period................................ $ 1,771 $ 1,894
========== ==========

Supplemental information
Cash paid during the period for:
Interest........................................................... $ 5,980 $ 5,617
Income taxes....................................................... 6,092 3,763





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





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

1. BASIS OF PRESENTATION

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

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

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 must be applied at the beginning of an entity's
fiscal year. The adoption of SFAS 142 eliminates the amortization of
goodwill, approximately $4,800 in the fiscal year ended June 30, 2002,
while requiring an initial test and subsequent annual tests for impairment
of goodwill. The Company completed its initial test 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 should be classified as
extraordinary items only if they meet the criteria in APB No. 30,
"Reporting the Results of Operations - Discontinued Events and
Extraordinary Items". The implementation of SFAS No. 145 will require gains
or losses resulting from future early retirements of debt to be included in
other income and expenses which could materially affect income before
income taxes. In the period ended December 31, 2002 the Company reported an
approximate $144 gain from early retirement of debt. In the fiscal year
ended June 30, 2002 the Company reported an approximate $2,700
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




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

1. BASIS OF PRESENTATION (continued)

provisions of this statement will have a material impact on the Company's
reported results of operations, financial positions or cash flows.

FASB Statement of Financial Standards No. 148 "Accounting for
Stock-Based Compensation - Transition and Disclosure - an Amendment of FASB
Statement No. 123" ("SFAS 148") was issued in December 2002. FASB 148
amends FASB Statement of Financial Standards No. 123 "Accounting for
Stock-Based Compensation" ("FASB 123"), to provide alternative methods of
transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, FASB 148
amends the disclosure requirements of FASB 123 to require prominent
disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect
of the method used on reported results. The Company does not anticipate
that the provisions of this statement will have a material impact on the
reported results of operations, financial positions or cash flows.

Acquisition of Color Prelude business

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 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.

Interim financial statements

The interim consolidated condensed balance sheet at December 31, 2002
and the interim consolidated condensed statements of operations for the
three and six months ended December 31, 2002 and 2001, the interim
consolidated condensed statements of cash flows for the six months ended
December 31, 2002 and 2001 and the interim consolidated condensed statement
of changes in stockholder's equity for the six months ended December 31,
2002 are unaudited, and certain information and footnote disclosure related
thereto, normally included in financial statements prepared in accordance
with generally accepted accounting principles, have been omitted. The June
30, 2002 consolidated condensed balance sheet was derived from the audited
balance sheet for the year then ended. In management's opinion, the
unaudited interim consolidated condensed financial statements were prepared
following the same policies and procedures used in the preparation of the
audited financial statements and all adjustments, consisting only of normal
recurring adjustments to fairly





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

1. BASIS OF PRESENTATION (continued)

present the financial position, results of operations and cash flows with
respect to the interim consolidated condensed financial statements, have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire year. The interim
consolidated condensed financial statements should be read in conjunction
with the financial statements and notes thereto for the year ended June 30,
2002 as filed on Form 10-K.

Reclassification

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

2. INVENTORY

The following table details the components of inventory:





December 31, 2002 June 30, 2002
----------------- -------------
(unaudited) (unaudited)

Raw materials
Paper.......................... $ 2,044 $ 2,180
Other raw materials............ 2,873 4,216
---------- ----------
Total raw materials........ 4,917 6,396
Work in process.................... 3,205 2,468
Reserve for obsolescence........... (643) (850)
---------- ----------

Total inventory.................... $ 7,479 $ 8,014
========== ==========




3. RETIREMENT OF DEBT

On October 15, 2002, Holding purchased, with proceeds from a
distribution from AKI, it's Senior Discount Debentures with a carrying
value of $3,420 for $3,192. The distribution from AKI was funded through
borrowings under AKI's credit agreement. In accordance with SFAS 145, the
gain from early retirement of debt is included in other income.

4. AMORTIZATION OF GOODWILL

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 2002:





Three months ended Six months ended
December 31, December 31,
2002 2001 2002 2001
---- ---- ---- ----


Goodwill amortization...................... $ - $ - $ - $ -
Net income (loss).......................... 1,491 (1,495) 3,378 (148)








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

5. CONDENSED HOLDING COMPANY ONLY FINANCIAL STATEMENTS

The following condensed balance sheets at December 31, 2002 and June
30, 2002 and condensed statements of operations and cash flows for the six
months ended December 31, 2002 and 2001 and the condensed statement of
changes in stockholder's equity for the six months ended December 31, 2002
for Holding have been prepared on the equity basis of accounting and should
be read in conjunction with the consolidated statements and notes thereto.


BALANCE SHEET





December 31, 2002 June 30, 2002
----------------- -------------
(unaudited) (unaudited)


Assets
Investment in subsidiaries............................... $ 100,281 $ 99,583
Income tax receivable.................................... 526 46
Deferred charges......................................... 313 422
Deferred income taxes.................................... 1,792 1,923
----------- -----------

Total assets......................................... $ 102,912 $ 101,974
=========== ===========

Liabilities
Senior discount debentures............................... $ 13,461 $ 15,901
---------- -----------

Total liabilities.................................... 13,461 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...................................... (4,205) (7,583)
----------- -----------

Total stockholder's equity........................... 89,451 86,073
----------- -----------

Total liabilities and stockholder's equity........... $ 102,912 $ 101,974
=========== ===========





STATEMENT OF OPERATIONS





Six months ended
---------------------------------------
December 31, 2002 December 31, 2001
----------------- -----------------
(unaudited) (unaudited)


Equity in net income (loss) of subsidiaries.............. $ 3,890 $ (1,438)
Interest expense......................................... 1,005 1,654
Gain from early retirement of debt....................... 144 -
----------- -----------

Income (loss) before income taxes.................... 3,029 (3,092)

Income tax benefit....................................... (349) (541)
----------- -----------

Net income (loss).................................... $ 3,378 $ (2,551)
=========== ===========








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

5. CONDENSED HOLDING COMPANY ONLY FINANCIAL STATEMENTS (Continued)


STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY




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


Balances, June 30, 2002 (unaudited)........... 1,000 $ - $ 93,656 $ (7,583) $ 86,073

Net income (unaudited)........................ 3,378 3,378
------- --------- ---------- ----------- -----------

Balances, December 31, 2002 (unaudited)....... 1,000 $ - $ 93,656 $ (4,205) $ 89,451
======= ========= ========== =========== ===========





STATEMENT OF CASH FLOWS





Six months ended
---------------------------------------
December 31, 2002 December 31, 2001
----------------- -----------------
(unaudited) (unaudited)


Cash flows from operating activities
Net income (loss)............................................. $ 3,378 $ (2,551)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Net change in investment in subsidiaries............... (3,890) 1,438
Amortization of debt discount.......................... 981 1,614
Amortization of debt issuance costs.................... 24 40
Income tax receivable.................................. (480) -
Deferred income taxes.................................. 131 (541)
Gain from early retirement of debt..................... (144) -
----------- -----------

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

Cash flows from financing activities
Repayment of long-term debt................................... (3,192) -
Distribution from subsidiary.................................. 3,192 -
----------- -----------
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........................ $ - $ -
=========== ===========








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





December 31, June 30,
2002 2002
------------- -------------
(unaudited) (unaudited)


ASSETS
Current assets
Cash and cash equivalents.................................................. $ 1,771 $ 1,875
Accounts receivable, net................................................... 19,336 23,796
Inventory.................................................................. 7,479 8,014
Prepaid expenses........................................................... 1,204 667
Income tax receivable...................................................... 1,194 -
Deferred income taxes...................................................... 977 977
------------- -------------

Total current assets.................................................... 31,961 35,329

Property, plant and equipment, net......................................... 18,165 19,616
Goodwill, net.............................................................. 153,277 153,277
Other intangible assets, net............................................... 12,237 13,142
Deferred charges, net...................................................... 3,355 3,637
Other assets............................................................... 174 164
------------- -------------

Total assets............................................................ $ 219,169 $ 225,165
============= =============

LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Current portion of long-term debt.......................................... $ 1,750 $ 1,375
Accounts payable, trade.................................................... 3,976 5,826
Accrued income taxes....................................................... - 2,053
Accrued compensation....................................................... 3,394 5,338
Accrued interest........................................................... 5,573 5,570
Accrued expenses........................................................... 3,824 3,642
------------- -------------

Total current liabilities............................................... 18,517 23,804

Revolving credit line...................................................... 2,500 2,750
Term loan.................................................................. 7,250 8,125
Senior notes............................................................... 103,510 103,510
Promissory note to affiliate............................................... 355 -
Deferred income taxes...................................................... 910 1,231
Other non-current liabilities.............................................. 1,656 2,338
------------- -------------

Total liabilities....................................................... 134,698 141,758

Stockholder's equity
Common stock, $0.01 par 100,000 shares authorized;
1,000 shares issued and outstanding..................................... - -
Additional paid-in capital................................................. 97,351 100,543
Accumulated deficit........................................................ 2,930 (960)
Accumulated other comprehensive loss....................................... (80) (446)
Carryover basis adjustment................................................. (15,730) (15,730)
-------------- -------------

Total stockholder's equity.............................................. 84,471 83,407
------------- -------------

Total liabilities and stockholder's equity.............................. $ 219,169 $ 225,165
============= =============





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





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





Three months ended Six months ended
-------------------------------------- --------------------------------------
December 31, 2002 December 31, 2001 December 31, 2002 December 31, 2001
----------------- ----------------- ----------------- -----------------
(unaudited) (unaudited) (unaudited) (unaudited)


Net sales...................................... $ 31,644 $ 22,329 $ 62,044 $ 49,710
Cost of goods sold............................. 20,704 15,929 39,219 32,643
--------- --------- --------- ---------

Gross profit................................ 10,940 6,400 22,825 17,067

Selling, general and administrative expenses... 4,740 4,569 9,404 8,764
Amortization of goodwill....................... - 1,202 - 2,403
Amortization of other intangibles.............. 286 268 572 513
--------- --------- --------- ---------

Income from operations...................... 5,914 361 12,849 5,387

Other expenses:
Interest expense............................ 3,220 3,038 6,408 6,082
Management fees and other, net.............. 62 62 125 125
--------- --------- --------- ---------

Income (loss) before income taxes........... 2,632 (2,739) 6,316 (820)

Income tax expense (benefit)................... 999 (599) 2,426 618
--------- --------- --------- ---------

Net income (loss)........................... $ 1,633 $ (2,140) $ 3,890 $ (1,438)
========= ========= ========= =========





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





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





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


Balances, June 30, 2002 (unaudited)....... 1,000 $ - $ 100,543 $ (960) $ (446) $ (15,730) $ 83,407

Distribution to AKI Holding Corp.......... (3,192) (3,192)

Net income (unaudited).................... 3,890 3,890

Other comprehensive income, net of tax:
Foreign currency translation
adjustment (unaudited)............... 366 366
---------

Comprehensive income (unaudited).......... 4,256
----- ------- --------- --------- -------- --------- ---------

Balances, December 31, 2002 (unaudited)... 1,000 $ - $ 97,351 $ 2,930 $ (80) $ (15,730) $ 84,471
===== ======= ========= ========= ======== ========= =========





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





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





Six months ended
---------------------------------------
December 31, 2002 December 31, 2001
----------------- -----------------
(unaudited) (unaudited)


Cash flows from operating activities
Net income (loss).................................................... $ 3,890 $ (1,438)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization of goodwill and other intangibles.... 3,724 5,258
Amortization of debt issuance cost................................. 282 295
Deferred income taxes.............................................. (321) (215)
Other.............................................................. (326) 403
Changes in operating assets and liabilities:
Accounts receivable.............................................. 4,460 1,325
Inventory........................................................ 535 320
Prepaid expenses, deferred charges and other assets.............. (537) 43
Accounts payable and accrued expenses............................ (3,609) (2,885)
Income taxes..................................................... (3,247) (2,889)
---------- ----------

Net cash provided by operating activities...................... 4,851 217
---------- ----------

Cash flows from investing activities
Purchases of equipment............................................... (1,297) (470)
Patents.............................................................. (71) (46)
Payments for acquisition, net of cash acquired....................... - (19,053)
---------- ----------

Net cash used in investing activities.......................... (1,368) (19,569)
---------- ----------

Cash flows from financing activities
Payments under capital leases........................................ - (503)
Net proceeds on revolving loan....................................... (250) 7,700
Net proceeds (repayments) on term loan............................... (500) 10,000
Payments of loan closing costs....................................... - (605)
Net proceeds from promissory note to affiliate....................... 355 -
Distribution to parent............................................... (3,192) -
---------- ----------

Net cash provided by (used in) financing activities............ (3,587) 16,592
---------- ----------

Net decrease in cash and cash equivalents............................... (104) (2,760)
Cash and cash equivalents, beginning of period.......................... 1,875 4,654
---------- ----------

Cash and cash equivalents, end of period................................ $ 1,771 $ 1,894
========== ==========


Supplemental information
Cash paid during the period for:
Interest.......................................................... $ 5,980 $ 5,617
Income taxes...................................................... 6,092 3,763





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





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

1. BASIS OF PRESENTATION

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

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

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 must be applied at the beginning of an entity's
fiscal year. The adoption of SFAS 142 eliminates the amortization of
goodwill, approximately $4,800 in the fiscal year ended June 30, 2002,
while requiring an initial test and subsequent annual tests for impairment
of goodwill. The Company completed its initial test 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 should be classified as
extraordinary items only if they meet the criteria in APB No. 30,
"Reporting the Results of Operations - Discontinued Events and
Extraordinary Items". The implementation of SFAS No. 145 will require gains
or losses resulting from future early retirements of debt to be included in
other income and expenses which could materially affect income before
income taxes. In the fiscal year ended June 30, 2002 the Company reported
an approximate $2,700 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.





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

1. BASIS OF PRESENTATION (continued)

FASB Statement of Financial Standards No. 148 "Accounting for
Stock-Based Compensation - Transition and Disclosure - an Amendment of FASB
Statement No. 123" ("SFAS 148") was issued in December 2002. FASB 148
amends FASB Statement of Financial Standards No. 123 "Accounting for
Stock-Based Compensation" ("FASB 123"), to provide alternative methods of
transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, FASB 148
amends the disclosure requirements of FASB 123 to require prominent
disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect
of the method used on reported results. The Company does not anticipate
that the provisions of this statement will have a material impact on the
reported results of operations, financial positions or cash flows.

Acquisition of Color Prelude business

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 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.

Interim financial statements

The interim consolidated condensed balance sheet at December 31, 2002
and the interim consolidated condensed statements of operations for the
three and six months ended December 31, 2002 and 2001, the interim
consolidated condensed statements of cash flows for the six months ended
December 31, 2002 and 2001 and the interim consolidated condensed statement
of changes in stockholder's equity for the six months ended December 31,
2002 are unaudited, and certain information and footnote disclosure related
thereto, normally included in financial statements prepared in accordance
with generally accepted accounting principles, have been omitted. The June
30, 2002 consolidated condensed balance sheet was derived from the audited
balance sheet for the year then ended. In management's opinion, the
unaudited interim consolidated condensed financial statements were prepared
following the same policies and procedures used in the preparation of the
audited financial statements and all adjustments, consisting only of normal
recurring adjustments to fairly present the financial position, results of
operations and cash flows with respect to the interim consolidated





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

1. BASIS OF PRESENTATION (continued)

condensed financial statements, have been included. The results of
operations for the interim periods are not necessarily indicative of the
results for the entire year. The interim consolidated condensed financial
statements should be read in conjunction with the financial statements and
notes thereto for the year ended June 30, 2002 as filed on Form 10-K.

Reclassification

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

2. INVENTORY

The following table details the components of inventory:




December 31, 2002 June 30, 2002
----------------- -------------
(unaudited) (unaudited)

Raw materials
Paper.......................... $ 2,044 $ 2,180
Other raw materials............ 2,873 4,216
---------- ----------
Total raw materials........ 4,917 6,396
Work in process.................... 3,205 2,468
Reserve for obsolescence........... (643) (850)
---------- ----------

Total inventory.................... $ 7,479 $ 8,014
========== ==========





3. DISTRIBUTION

On October 15, 2002, AKI paid a distribution of $3,192 to Holding to
fund the purchase of Holding Senior Discount Debentures. The distribution
was funded through borrowings under the amended and restated credit
agreement.

4. AMORTIZATION OF GOODWILL

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 2002:





Three months ended Six months ended
December 31, December 31,
2002 2001 2002 2001
---- ---- ---- ----


Goodwill amortization...................... $ - $ - $ - $ -
Net income (loss).......................... 1,633 (938) 3,890 965








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

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

General

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

Results of Operations

Three Months Ended December 31, 2002 Compared to Three Months
Ended December 31, 2001

Net Sales. Net sales for the three months ended December 31, 2002 increased
$9.3 million, or 41.7%, to $31.6 million, as compared to $22.3 million for the
three months ended December 31, 2001. The increase in net sales was primarily
attributable to sales of sampling technologies for advertising and marketing of
cosmetics by CP and an increase in the sales of our core sampling technologies
for advertising and marketing of domestic and international cosmetic products
and domestic consumer products partially offset by a decrease in the sales of
our core sampling technologies for advertising and marketing of international
fragrance products.

Gross Profit. Gross profit for the three months ended December 31, 2002
increased $4.5 million, or 70.3%, to $10.9 million, as compared to $6.4 million
for three months ended December 31, 2001. Gross profit as a percentage of net
sales increased to 34.5% in the three months ended December 31, 2002, from 28.7%
in the three months ended December 31, 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 changes in product mix.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended December 31, 2002 increased
$0.1 million, or 2.2%, to $4.7 million, as compared to $4.6 million for the
three months ended December 31, 2001. Selling, general and administrative
expenses as a percent of net sales decreased to 14.9% in the three months ended
December 31, 2002, from 20.6% in the three months ended December 31, 2001. The
increase in selling, general and administrative expenses is primarily related to
the CP operations and an increase in sales commissions partially offset by a
decrease in legal fees and prior year non-recurring CP acquisition bonus.

Amortization of Goodwill. Amortization of goodwill for the three months
ended December 31, 2002 decreased $1.2 million, or 100%, to $0, as compared to
$1.2 million for the three months ended December 31, 2001. 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 test of the carrying value of goodwill which resulted
in no impairment.

Income from Operations. Income from operations for the three months ended
December 31, 2002 increased $5.5 million, or 1375.0%, to $5.9 million, as
compared to $0.4 million for the three months ended December 31, 2001. Income
from operations as a percentage of net sales increased to 18.7% in the three
months ended December 31, 2002, from 1.8% in the three months ended December 31,
2001. 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 three months ended December 31,
2002 decreased $0.2 million, or 5.1%, to $3.7 million, as compared to $3.9
million for the three months ended December 31, 2001. 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 interest payable on the term loan incurred in
connection with the CP acquisition and use of the revolving credit line to fund
the purchase of Senior Discount Debentures. Interest expense as a percentage of
net sales decreased to 11.7% in the three months ended December 31, 2002, from
17.5%.

Interest expense for AKI for the three months ended December 31, 2002
increased $0.2 million, or 6.7%, to $3.2 million, as compared to $3.0 million
for the three months ended December 31, 2001. The increase in interest expense,
including the amortization of deferred financing costs, is primarily due to
interest payable on the term loan incurred in connection with the CP acquisition
and use of the revolving credit line to pay a distribution to Holding to fund
the purchase of Holding Senior Discount Debentures. Interest expense as a
percentage of net sales decreased to 10.1% in the three months ended December
31, 2002, from 13.5%.

Income Tax Expense. Income tax expense for the three months ended December
31, 2002 increased $1.7 million to $0.8 million. The Company's effective tax
rate, after consideration of non-deductible goodwill amortization in 2001, was
34.9% in the three months ended December 31, 2002, and 38.5% in the three months
ended December 31, 2001.

Income tax expense for AKI for the three months ended December 31, 2002
increased $1.6 million to $1.0 million. AKI's effective tax rate, after
consideration of non-deductible goodwill amortization, was 39% in the three
months ended December 31, 2002 and 2001.

EBITDA. EBITDA for the three months ended December 31, 2002 increased $4.8
million, or 160.0%, to $7.8 million, as compared to $3.0 million for the three
months ended December 31, 2001. The increase in EBITDA principally reflects the
increase in gross profit partially offset by the increase in selling, general
and administrative expenses discussed above. EBITDA as a percentage of net sales
was 24.7% and 13.5% in the three months ended December 31, 2002 and 2001,
respectively. EBITDA is income from operations plus depreciation and
amortization of goodwill and other intangibles.

Six Months Ended December 31, 2002 Compared to Six Months
Ended December 31, 2001

Net Sales. Net sales for the six months ended December 31, 2002 increased
$12.3 million, or 24.8%, to $62.0 million as compared to $49.7 million for the
six months ended December 31, 2001. The increase in net sales was primarily
attributable to sales of sampling technologies for advertising and marketing of
cosmetics by CP and an increase in the sales of our core sampling technologies
for advertising and marketing of domestic and international cosmetic products
and domestic consumer products partially offset by a decrease in the sales of
our core sampling technologies for advertising and marketing of international
fragrance products.

Gross Profit. Gross profit for the six months ended December 31, 2002
increased $5.7 million, or 33.3%, to $22.8 million as compared to $17.1 million
for six months ended December 31, 2001. Gross profit as a percentage of net
sales increased to 36.8% in the six months ended December 31, 2002, from 34.4%
in the six months ended December 31, 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 changes in product mix.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the six months ended December 31, 2002 increased
$0.6 million, or 6.8%, to $9.4 million as compared to $8.8 million for the six
months ended December 31, 2001. Selling, general and administrative expenses as
a percent of net sales decreased to 15.2% in the six months ended December 31,
2002 from 17.7% in the six months ended December 31, 2001. The increase in
selling, general and administrative expenses is primarily related to the CP
operations and the impact of the weakened US dollar on the translation of our
European subsidiary's financial statements partially offset by a decrease in
legal fees and prior year non-recurring CP acquisition bonus.





Amortization of Goodwill. Amortization of goodwill for the six months ended
December 31, 2002 decreased $2.4 million, or 100%, to $0, as compared to $2.4
million for the six months ended December 31, 2001. 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 test of the carrying value of goodwill which resulted in no impairment.

Income from Operations. Income from operations for the six months ended
December 31, 2002 increased $7.4 million, or 137.0%, to $12.8 million, as
compared to $5.4 million for the six months ended December 31, 2001. Income from
operations as a percentage of net sales increased to 20.7% in the six months
ended December 31, 2002, from 10.9% in six months ended December 31, 2001. 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 six months ended December 31,
2002 decreased $0.3 million, or 3.9%, to $7.4 million, as compared to $7.7
million for the six months ended December 31, 2001. 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 interest payable on the term loan incurred in
connection with the CP acquisition and use of the revolving credit line to fund
the purchase of Senior Discount Debentures. Interest expense as a percentage of
net sales decreased to 11.9% in the six months ended December 31, 2002 from
15.5% in the six months ended December 31, 2001.

Interest expense for AKI for the six months ended December 31, 2002
increased $0.3 million, or 4.9%, to $6.4 million, as compared to $6.1 million
for the six months ended December 31, 2001. The increase in interest expense,
including the amortization of deferred financing costs, is primarily due to
interest payable on the term loan incurred in connection with the CP acquisition
and use of the revolving credit line to pay a distribution to Holding to fund
the purchase of Holding Senior Discount Debentures. Interest expense as a
percentage of net sales decreased to 10.3% in the six months ended December 31,
2002, from 12.3% in the six months ended December 31, 2001.

Income Tax Expense. Income tax expense for the six months ended December
31, 2002 increased $2.0 million to $2.1 million. The Company's effective tax
rate, after consideration of non-deductible goodwill amortization, was 37.2% in
the six months ended December 31, 2002 and 53.1% in the six months ended
December 31, 2001.

Income tax expense for AKI for the six months ended December 31, 2002
increased $1.8 million to $2.4 million. AKI's effective tax rate, after
consideration of non-deductible goodwill amortization, was 39.0% in the six
months ended December 31, 2002 and 2001.

EBITDA. EBITDA for the six months ended December 31, 2002 increased $6.0
million, or 56.6%, to $16.6 million as compared to $10.6 million for the six
months ended December 31, 2001. The increase in EBITDA principally reflects the
increase in gross profit partially offset by the increase in selling, general
and administrative expenses discussed above. EBITDA as a percentage of net sales
was 26.8% and 21.3% in the six months ended December 31, 2002 and 2001
respectively. EBITDA is income from operations plus depreciation and
amortization of goodwill and other intangibles.

Liquidity and Capital Resources

We have substantial indebtedness and significant debt service obligations.
As of December 31, 2002, we had consolidated indebtedness in an aggregate amount
of $128.8 million (excluding trade payables, accrued liabilities, deferred taxes
and other non-current liabilities), of which approximately $13.5 million was a
direct obligation of Holding relating to its debentures and approximately $115.3
million was a direct obligation of AKI relating to its notes, term loan,
revolving loan and promissory note to affiliate. Borrowings at December 31, 2002
included $2.5 million under the revolving loan and $9.0 million under the term
loan and $0.4 million on the promissory note to affiliate. At December 31, 2002
we had $17.2 million available under the revolving loan. At December 31, 2002,
AKI also had $18.4 million in additional outstanding liabilities (including
trade payables, accrued liabilities, deferred taxes and other non-current
liabilities).





Holding's principal liquidity requirements are for debt service
requirements under the debentures. AKI's principal liquidity requirements are
for debt service requirements and fees under the notes, term loan and revolving
loan. Historically, we have funded our capital, debt service and operating
requirements with a combination of net cash provided by operating activities,
together with borrowings under the revolving loan and promissory note to
affiliate. During the six months ended December 31, 2002, cash totaling $4.9
million was provided by operating activities resulting from net income before
depreciation and amortization and a decrease in accounts receivable, partially
offset by decreases in accounts payable, accrued compensation and accrued income
taxes. During the six months ended December 31, 2001, cash totaling $0.2 million
was provided by operating activities resulting from net income before
depreciation and amortization and a decrease in accounts receivable, partially
offset by decreases in accounts payable and accrued expenses and accrued income
taxes.

On December 18, 2001 we amended and restated our credit agreement with
Heller Financial, Inc. ("restated credit agreement"). The restated credit
agreement provides for: (1) a $10.0 million term loan which matures on December
31, 2006 with varying quarterly principal installments beginning March 31, 2002
and (2) a revolving loan commitment up to a maximum of $20.0 million which
expires December 31, 2006. Borrowings under the revolving loan commitment are
limited to a borrowing base consisting of accounts receivable, inventory and
property, plant and equipment which serve as collateral for the borrowings.
Interest on amounts borrowed under the term loan and revolving loan accrue at a
floating rate based upon either prime plus a margin of 1.75% to 2.5% (none
outstanding at December 31, 2002) or LIBOR plus a margin of 3.0% to 3.75%
(outstanding borrowings averaged 5.7% at December 31, 2002). The Company is
required to pay commitment fees on the unused portion of the revolving loan
commitment. In addition, the Company is required to pay fees equal to 2.5% of
the average daily outstanding amount of lender guarantees. On November 15, 2002
we amended our restated credit agreement with Heller Financial, Inc. The
amendment delayed mandatory prepayments of the term loan from excess cash flow
from fiscal years commencing with the year ending June 30, 2003 to fiscal years
commencing with the year ending June 30, 2004; increased the aggregate cost of
permitted restricted junior payments for the purpose of purchasing or
repurchasing our Senior Notes and Senior Discount Debentures from $10.0 million
to $25.0 million; and increased the permitted payment of a management, advisory,
consulting or other similar fee to an affiliate in the aggregate from $0.25
million to $0.4 million per year. The Company had $0.3 million of lender
guarantees outstanding at December 31, 2002.

In the six months ended December 31, 2002 and 2001, we had capital
expenditures of approximately $1.3 million and $0.5 million, respectively. These
capital expenditures consisted primarily of the purchase of manufacturing
equipment and upgrading our computer systems.

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

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

On October 15, 2002, Holding purchased, with proceeds from a distribution
from AKI, its 13.5% Senior Discount Debentures due 2009 with an accreted value
of $3.4 million for $3.2 million. AKI funded the distribution through borrowings
under its credit agreement.

Capital expenditures for the six months ending June 30, 2003 are currently
estimated to be approximately $2.7 million. Based on borrowings outstanding as
of December 31, 2002, we expect total cash payments for debt service for the six
months ending June 30, 2003 to be approximately $7.1 million, consisting of $0.9
million in principal payments under the term loan, $5.4 million in interest
payments on the notes and $0.6 million in interest and fees under the credit
agreement. We also expect to make royalty payments of approximately $0.3 million
during the six months ending June 30, 2003.

At December 31, 2002, Holding's cash and cash equivalents and net working
capital were $1.8 million and $14.0 million, respectively, representing a
decrease in cash and cash equivalents of $0.1 million and an increase in





net working capital of $2.4 million from June 30, 2002. The increase in working
capital is primarily due to the reduction of current liabilities partially
offset by a decrease in accounts receivable.

Seasonality / Cyclicality

Our sales and operating results have historically reflected seasonal
variations. Such seasonal and cyclical variations are based on the timing of our
customers' advertising campaigns and product launches, which have traditionally
been concentrated prior to the Christmas and spring holiday seasons. As a
result, generally, a higher level of sales are reflected in our first and third
fiscal quarters ended September 30 and March 31 when sales from such advertising
campaigns are principally recognized. These fluctuations require us to
accurately allocate our resources to manage our manufacturing capacity, which
often operates at full capacity during peak 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. Sales of the CP products subsequent to our acquisition
totaled $22.6 million in the six months ended June 30, 2002, 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 of this magnitude will continue in the six months
ending June 30, 2003.

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
must be applied at the beginning of an entity's fiscal year. The adoption of
SFAS 142 eliminates the amortization of goodwill, approximately $4.8 million in
fiscal 2002 and requires annual tests for impairment of goodwill.

FASB Statement of Financial Accounting Standards No. 144 "Accounting for
the Impairment of Disposal of Long-Lived Assets" ("SFAS 144") was issued in
August 2001. SFAS 144 requires that long-lived assets that are to be disposed of
by sale be measured at the lower of book value or fair value less cost to sell.
SFAS 144 is effective for financial statements issued for fiscal years beginning
after December 15, 2001. The Company does not expect a material impact in
implementing SFAS 144 on its future financial statements.

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 should be classified as extraordinary items only if they
meet the criteria in APB No. 30, "Reporting the Results of Operations -
Discontinued Events and Extraordinary Items". The implementation of SFAS No. 145
will require early retirements of debt to be included in income from continuing
operations which could materially affect our income from continuing operations.
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.

FASB Statement of Financial Standards No. 148 "Accounting for Stock-Based
Compensation - Transition and Disclosure - an Amendment of FASB Statement No.
123" ("SFAS 148") was issued in December 2002. FASB 148 amends FASB Statement of
Financial Standards No. 123 "Accounting for Stock-Based Compensation" ("FASB
123"), to provide alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based employee compensation.
In addition, FASB 148 amends the disclosure requirements of FASB 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The Company does not anticipate that the
provisions of this statement will have a material impact on the reported results
of operations, financial positions 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 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.

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 reward 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. We also advise you to read the
section entitled "Risk Factors" in the Company's annual report on Form 10K filed
with the SEC on September 24, 2002.

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


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

We periodically enter into forward foreign currency exchange contracts to
hedge certain exposures related to selected transactions that are relatively
certain as to both timing and amount and to hedge a portion of the production
costs expected to be denominated in foreign currencies. The purpose of entering
into these hedge transactions is to minimize the impact of foreign currency
fluctuations on the results of operations and cash flows. Gains and losses on
the hedging activities are recognized concurrently with the gains and losses
from the underlying transactions. At December 31, 2002, there were no forward
exchange contracts outstanding.


ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures. The Company's chief
executive officer and chief financial officer have evaluated the effectiveness
of the design and operation of the Company's disclosure controls and procedures
(as defined in Exchange Act Rule 13a-14(c)) as of a date within 90 days of the
filing date of this





quarterly report. Based on that evaluation, the chief executive officer and
chief financial officer have concluded that the Company's disclosure controls
and procedures are effective to ensure that material information relating to the
Company and the Company's consolidated subsidiaries is made known to such
officers by others within these entities, particularly during the period this
quarterly report was prepared, in order to allow timely decisions regarding
required disclosure.

(b) Changes in Internal Controls. There have not been any significant
changes in the Company's internal controls or in other factors that could
significantly affect these controls subsequent to the date of their evaluation.


PART II OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

Exhibit 4.1 First Amendment to Amended and Restated Credit
Agreement and Amended and Restated Pledge
Agreement dated as of November 15, 2002
between the Company and Heller Financial, Inc.

Exhibit 10.1 Financial Advisory Agreement

Exhibit 99.1 Certification pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002

Exhibit 99.2 Certification pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002

(b) Reports on Form 8-K

None





SIGNATURES

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

AKI HOLDING CORP.

Date: February 12, 2003 By: /s/ Kenneth A. Budde
-----------------------------------
Kenneth A. Budde
Senior Vice President &
Chief Financial Officer
(Principal Financial and Accounting
Officer)


CERTIFICATIONS

I, William J. Fox, certify that:

1. I have reviewed this quarterly report on Form 10-Q of AKI Holding Corp.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls





subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.

Date February 12, 2003


/s/ William J. Fox
- --------------------------
William J. Fox
Chief Executive Officer


I, Kenneth A. Budde, certify that:

1. I have reviewed this quarterly report on Form 10-Q of AKI Holding Corp.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.

Date February 12, 2003


/s/ Kenneth A. Budde
- --------------------------
Kenneth A. Budde
Chief Financial Officer





AKI, INC.

Date: February 12, 2003 By: /s/ Kenneth A. Budde
-----------------------------------
Kenneth A. Budde
Senior Vice President &
Chief Financial Officer
(Principal Financial and Accounting
Officer)


CERTIFICATIONS

I, William J. Fox, certify that:

1. I have reviewed this quarterly report on Form 10-Q of AKI, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.





Date February 12, 2003


/s/ William J. Fox
- --------------------------
William J. Fox
Chief Executive Officer


I, Kenneth A. Budde, certify that:

1. I have reviewed this quarterly report on Form 10-Q of AKI, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.

Date February 12, 2003


/s/ Kenneth A. Budde
- --------------------------
Kenneth A. Budde
Chief Financial Officer