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, 2003

                                       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: 333-60989

                                    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

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

As of January 31,  2004,  1,000 shares of common  stock of AKI,  Inc.,  $.01 par
value, were outstanding.


<PAGE>


                           AKI, INC. AND SUBSIDIARIES

                               INDEX TO FORM 10-Q


Part I.  FINANCIAL INFORMATION

         Item 1.  Financial Statements (unaudited)

                  AKI, Inc. and Subsidiaries

                         Consolidated Condensed Balance Sheets

                         -  December 31, 2003
                         -  June 30, 2003

                         Consolidated Condensed Statements of Operations

                         - Three months ended December 31, 2003
                         - Three months ended December 31, 2002
                         - Six months ended December 31, 2003
                         - Six months ended December 31, 2002

                         Consolidated Condensed Statements of Changes in
                         Stockholder's Equity

                         - Six months ended December 31, 2003

                         Consolidated Condensed Statements of Cash Flows

                         - Six months ended December 31, 2003
                         - Six months ended December 31, 2002

                         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 1.  Legal Proceedings

         Item 6.  Exhibits and Reports on Form 8-K


<PAGE>


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

<TABLE>
<CAPTION>

                                                                                December 31,          June 30,
                                                                                    2003                2003
                                                                                -------------      -------------
                                                                                 (unaudited)         (unaudited)

<S>                                                                             <C>                <C>
ASSETS
Current assets
Cash and cash equivalents..................................................     $       2,352      $       1,470
Accounts receivable, net...................................................            20,588             20,267
Inventory..................................................................             8,931              7,265
Income tax receivable......................................................                95              1,011
Prepaid expenses...........................................................             1,568                671
Deferred income taxes......................................................               808                808
                                                                                -------------      -------------

   Total current assets....................................................            34,342             31,492

Property, plant and equipment, net.........................................            14,489             16,584
Goodwill ..................................................................           152,994            152,994
Other intangible assets, net...............................................            10,406             11,307
Deferred charges, net......................................................             2,704              3,032
Other assets...............................................................               140                138
                                                                                -------------      -------------

   Total assets............................................................     $     215,075      $     215,547
                                                                                =============      =============

LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Current portion of long-term debt..........................................     $       2,000      $       1,875
Accounts payable, trade....................................................             5,679              5,444
Accrued compensation.......................................................             3,985              4,333
Accrued interest...........................................................             5,551              5,502
Accrued expenses...........................................................             3,480              3,661
                                                                                -------------      -------------

   Total current liabilities...............................................            20,695             20,815

Revolving credit line......................................................             3,437             10,000
Term loan..................................................................             5,250              6,250
Senior notes...............................................................           103,510            103,510
Promissory note to affiliate...............................................               375                  -
Deferred income taxes......................................................               793              1,142
Other non-current liabilities..............................................             1,150              1,740
                                                                                -------------      -------------

   Total liabilities.......................................................           135,210            143,457

Stockholder's equity
Common stock, $0.01 par 100,000 shares authorized;
   1,000 shares issued and outstanding.....................................                 -                  -
Additional paid-in capital.................................................            85,667             82,512
Retained earnings..........................................................             9,031              4,873
Accumulated other comprehensive income ....................................               897                435
Carryover basis adjustment.................................................           (15,730)           (15,730)
                                                                                -------------      -------------

   Total stockholder's equity..............................................            79,865             72,090
                                                                                -------------      -------------

   Total liabilities and stockholder's equity..............................     $     215,075      $     215,547
                                                                                =============      =============

</TABLE>


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


<PAGE>


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


<TABLE>
<CAPTION>

                                                         Three months ended                        Six months ended
                                                -------------------------------------    -------------------------------------
                                                December 31, 2003   December 31, 2002    December 31, 2003   December 31, 2002
                                                -----------------   -----------------    -----------------   -----------------
                                                   (unaudited)         (unaudited)          (unaudited)         (unaudited)

<S>                                                 <C>                 <C>                  <C>                 <C>
Net sales......................................     $  32,616           $  31,644            $  69,874           $  62,044
Cost of goods sold.............................        22,283              20,704               45,818              39,219
                                                    ---------           ---------            ---------           ---------

   Gross profit................................        10,333              10,940               24,056              22,825

Selling, general and administrative expenses...         5,379               4,740               10,064               9,404
Amortization of other intangibles..............           286                 286                  572                 572
                                                    ---------           ---------            ---------           ---------

   Income from operations......................         4,668               5,914               13,420              12,849

Other expenses:
   Interest expense............................         3,238               3,220                6,452               6,408
   Management fees and other, net..............           100                  62                  200                 125
                                                    ---------           ---------            ---------           ---------

   Income before income taxes..................         1,330               2,632                6,768               6,316

Income tax expense.............................           503                 999                2,610               2,426
                                                    ---------           ---------            ---------           ---------

   Net income..................................     $     827           $   1,633            $   4,158           $   3,890
                                                    =========           =========            =========           =========


</TABLE>


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


<PAGE>


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


<TABLE>
<CAPTION>

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

<S>                                           <C>      <C>         <C>          <C>           <C>         <C>           <C>
Balances, June 30, 2003 (unaudited).......    1,000    $      -    $   82,512   $    4,873    $    435    $  (15,730)   $   72,090

Capital contribution from AKI Holding
    Corp..................................                              3,155                                                3,155

Net income (unaudited)....................                                           4,158                                   4,158

Other comprehensive loss, net of tax:
   Foreign currency translation
     adjustment (unaudited)...............                                                         462                         462
                                                                                                                        ----------

Comprehensive income (unaudited)..........                                                                                   4,620
                                            --------   --------    ----------   ----------    --------    ----------    ----------

Balances, December 31, 2003 (unaudited)...     1,000   $      -    $   85,667   $    9,031    $    897    $  (15,730)   $   79,865
                                            ========   ========    ==========   ==========    ========    ==========    ==========


</TABLE>


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


<PAGE>



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

<TABLE>
<CAPTION>

                                                                                                  Six months ended
                                                                                     -----------------------------------------
                                                                                     December 31, 2003       December 31, 2002
                                                                                     -----------------       -----------------
                                                                                        (unaudited)             (unaudited)

<S>                                                                                     <C>                     <C>
Cash flows from operating activities
   Net income................................................................           $     4,158             $     3,890
   Adjustments to reconcile net income to net cash  provided by
   operating activities:
     Depreciation and amortization of other intangibles......................                 3,692                   3,724
     Amortization of debt issuance cost......................................                   328                     282
     Deferred income taxes...................................................                  (349)                   (321)
     Other...................................................................                  (130)                   (326)
     Changes in operating assets and liabilities:
       Accounts receivable...................................................                  (321)                  4,460
       Inventory.............................................................                (1,666)                    535
       Prepaid expenses, deferred charges and other assets...................                  (897)                   (537)
       Accounts payable and accrued expenses.................................                  (245)                 (3,609)
       Income taxes..........................................................                   916                  (3,247)
                                                                                        -----------             -----------

         Net cash  provided by operating activities..........................                 5,486                   4,851
                                                                                        -----------             -----------

Cash flows from  investing activities
   Purchases of equipment....................................................                  (621)                 (1,297)
   Patents...................................................................                   (75)                    (71)
                                                                                        -----------             -----------

         Net cash used in investing activities...............................                  (696)                 (1,368)
                                                                                        -----------             -----------

Cash flows from  financing activities
   Net repayments on revolving loan..........................................                (6,563)                   (250)
   Net repayments on term loan...............................................                  (875)                   (500)
   Net proceeds from promissory note to affiliate............................                   375                     355
   Capital contribution from parent..........................................                 3,155                       -
   Distribution to parent....................................................                     -                  (3,192)
                                                                                        -----------             -----------

         Net cash used in financing activities...............................                (3,908)                 (3,587)
                                                                                        -----------             -----------

Net increase (decrease) in cash and cash equivalents.........................                   882                    (104)
Cash and cash equivalents, beginning of period...............................                 1,470                   1,875
                                                                                        -----------             -----------

Cash and cash equivalents, end of period.....................................           $     2,352             $     1,771
                                                                                        ===========             ===========


Supplemental information
   Net cash paid (received) during the period for:
     Interest................................................................           $     5,986             $     5,980
     Income taxes............................................................                  (893)                  6,092


</TABLE>


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


<PAGE>


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

1.   BASIS OF PRESENTATION

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

          AKI is  engaged in  multi-sensory,  interactive  marketing  activities
     primarily  from the sale of printed  advertising  materials  with  sampling
     systems and other  sampling  products to fragrance,  cosmetics and consumer
     products  companies,  and  creative  services.  Products  are  produced and
     distributed from Chattanooga,  Tennessee and Baltimore, Maryland facilities
     and  distributed  in Europe  through its French  subsidiary,  Arcade Europe
     S.A.R.L.

     Recently Issued Accounting Standards

          In  December  2002,  the FASB issued  SFAS No.  148,  "Accounting  for
     Stock-Based  Compensation - Transition  and  Disclosure"  ("SFAS 148"),  an
     amendment of FASB Statement No. 123. SFAS 148 amends SFAS 123,  "Accounting
     for Stock-Based Compensation", to provide alternative methods of transition
     for a  voluntary  change  to  the  fair  value  method  of  accounting  for
     stock-based  employee  compensation.  In  addition,  SFAS  148  amends  the
     disclosure  requirements  of SFAS 123 to require  prominent  disclosures in
     both annual and interim  financial  statements.  Certain of the  disclosure
     modifications  are  required for fiscal  years and interim  periods  ending
     after December 15, 2002 and are included in the notes to these consolidated
     condensed financial statements.

          FASB   Interpretation  No.  46  "Consolidation  of  Variable  Interest
     Entities"  ("FIN  46") was  issued in  January  2003.  FIN 46  requires  an
     investor with a majority of the variable  interests in a variable  interest
     entity  ("VIE") to  consolidate  the entity and also requires  majority and
     significant variable interest investors to provide certain  disclosures.  A
     VIE is an entity in which the equity  investors  do not have a  controlling
     interest,  or the equity  investment at risk is insufficient to finance the
     entity's  activities without receiving  additional  subordinated  financial
     support from the other  parties.  In December  2003,  FIN 46(R) was issued,
     which delays until the period ending March 31, 2004, the application of the
     provisions  of FIN 46 for VIEs  created  prior to  January  31,  2003.  The
     Company is currently  reviewing its investments  and other  arrangements to
     determine whether any of its investee  companies are VIEs. The Company does
     not expect to identify any significant VIEs that would be consolidated, but
     may be required  to make  additional  disclosures.  The  Company's  maximum
     exposure related to any investment that may be determined to be in a VIE is
     limited to the amount  invested.  The  provisions  of FIN 46 are  effective
     immediately for all  arrangements  entered into with new VIEs created after
     January 31,  2003.  The Company  has not  invested in any new VIEs  created
     after January 31, 2003.

          In April 2003,  the FASB issued SFAS No. 149,  "Amendment of Statement
     133 on Derivative  Instruments and Hedging  Activities"  ("SFAS 149"). SFAS
     149 amended and clarified accounting for derivative instruments,  including
     certain derivative instruments embedded in other contracts, and for hedging
     activities  under SFAS 133,  "Accounting  for  Derivative  Instruments  and
     Hedging  Activities"  ("SFAS  133").  SFAS 149 amended  SFAS 133  regarding
     implementation  issues  raised  in  relation  to  the  application  of  the
     definition  of a  derivative,  particularly  regarding  the  meaning  of an
     "underlying"  and  the   characteristics  of  a  derivative  that  contains
     financing  components.  The  amendments  set  forth  in  SFAS  149  improve
     financial   reporting  by  requiring   that   contracts   with   comparable
     characteristics  be  accounted  for  similarly.  In  particular,  SFAS  149
     clarifies  under  what   circumstances  a  contract  with  an  initial  net
     investment  meets the  characteristic  of a derivative as discussed in SFAS
     133. In  addition,  it  clarifies  when a  derivative  contains a financing
     component that warrants  special  reporting in the statement of cash flows.
     SFAS 149 was effective for  contracts  entered into or modified  after June
     30,  2003.  The  Company's  adoption  of this  statement  will not have any
     significant  impact on the  Company's  financial  condition  or  results of
     operations.


<PAGE>


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

1.   BASIS OF PRESENTATION (continued)

          In May 2003,  the FASB issued SFAS No.  150,  "Accounting  for Certain
     Financial  Instruments with Characteristics of both Liabilities and Equity"
     ("SFAS 150").  SFAS 150 establishes  standards for how an issuer classifies
     and measures certain  financial  instruments with  characteristics  of both
     liabilities  and equity.  It requires  that an issuer  classify a financial
     instrument  that is within  its scope as a  liability  (or an asset in some
     circumstances).  Many of those  instruments  were previously  classified as
     equity.  SFAS 150 was  developed  in response to concerns  expressed  about
     issuers'  classification in the statement of financial  position of certain
     financial  instruments  that have  characteristics  of both liabilities and
     equity,  but that have been presented  either entirely as equity or between
     the liabilities  section and the equity section of the balance sheet.  SFAS
     150 was effective for financial  instruments entered into or modified after
     May 31, 2003,  and  otherwise  was  effective at the beginning of the first
     interim period  beginning  after June 15, 2003. SFAS 150 did not affect the
     Company's  balance  sheet  presentation  of its debt and  equity  financial
     instruments.

     Interim financial statements

          The interim consolidated  condensed balance sheet at December 31, 2003
     and the interim  consolidated  condensed  statements of operations  for the
     three  and six  months  ended  December  31,  2003 and  2002,  the  interim
     consolidated  condensed  statements  of cash flows for the six months ended
     December 31, 2003 and 2002 and the interim consolidated condensed statement
     of changes in  stockholder's  equity for the six months ended  December 31,
     2003 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, 2003 consolidated  condensed balance sheet was derived from the audited
     balance  sheet  for the year  then  ended.  In  management's  opinion,  the
     unaudited interim consolidated condensed financial statements were prepared
     following the same policies and procedures  used in the  preparation of the
     audited financial statements and all adjustments, consisting only of normal
     recurring adjustments to fairly present the financial position,  results of
     operations  and  cash  flows  with  respect  to  the  interim  consolidated
     condensed  financial  statements,   have  been  included.  The  results  of
     operations for the interim  periods are not  necessarily  indicative of the
     results for the entire year. The interim  consolidated  condensed financial
     statements should be read in conjunction with the financial  statements and
     notes thereto for the year ended June 30, 2003 as filed on Form 10-K.

     Stock Based Compensation

          The Company  has  elected to account for its stock based  compensation
     with employees  under the intrinsic  value method of Accounting  Principles
     Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees",  as
     permitted under SFAS No. 123,  "Accounting  for Stock-Based  Compensation".
     Under the intrinsic value method,  because the stock price of the Company's
     employee stock options  equaled the fair value of the  underlying  stock on
     the date of grant,  no  compensation  expense was  recognized.  The Company
     adopted  the  disclosure   provision  of  SFAS  No.  148,  "Accounting  for
     Stock-Based Compensation - Transition and Disclosure", an amendment of SFAS
     No. 123,  effective for interim periods  beginning after December 15, 2002.
     If the Company had elected to recognize  compensation  expense based on the
     fair value of the options at grant date as  prescribed by SFAS 123, the net
     income would have been as follows:


<PAGE>


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

1.   BASIS OF PRESENTATION (continued)


<TABLE>
<CAPTION>

                                                        Three Months Ended             Six Months Ended
                                                          December 31,                   December 31,
                                                    ------------------------       ------------------------
                                                       2003           2002            2003           2002
                                                       ----           ----            ----           ----

<S>                                                 <C>            <C>             <C>            <C>
       Net income, as reported..................    $     827      $   1,633       $   4,158      $   3,890

       Deduct:  Total stock-based employee
       compensation expense determined
       under fair value based method for all
       awards, net of related tax effects.......            8              9              16             18
                                                    ---------      ---------       ---------      ---------

       Pro forma net income.....................    $     819      $   1,624       $   4,142      $   3,872
                                                    =========      =========       =========      =========

</TABLE>


2.   INVENTORY

          The following table details the components of inventory:


<TABLE>
<CAPTION>

                                               December 31, 2003         June 30, 2003
                                               -----------------         -------------
                                                   (unaudited)            (unaudited)
<S>                                                <C>                    <C>
        Raw materials
            Paper..........................        $     1,676            $     1,740
            Other raw materials............              4,418                  2,353
                                                   -----------            -----------
                Total raw materials........              6,094                  4,093
        Work in process....................              3,653                  3,857
        Reserve for obsolescence...........               (816)                  (685)
                                                   ------------           -----------

        Total inventory....................        $     8,931            $     7,265
                                                   ===========            ===========


</TABLE>


3.   COMPREHENSIVE INCOME

          Comprehensive  income consists of net income,  plus certain changes in
     assets and liabilities  that are not included in net income but are instead
     reported  within  a  separate  component  of  shareholders'   equity  under
     generally  accepted  accounting  principles.  The  Company's  comprehensive
     income was as follows:

<TABLE>
<CAPTION>

                                                         Three Months Ended             Six Months Ended
                                                           December 31,                   December 31,
                                                     ------------------------       ------------------------
                                                        2003          2002             2003           2002
                                                        ----          ----             ----           ----

<S>                                                  <C>            <C>             <C>            <C>
       Net income.................................   $     827      $   1,633       $   4,158      $   3,890

       Other comprehensive income (loss),
       net of tax:
           Foreign currency translation
           adjustments............................         659             (7)            462            366
                                                     ---------      ---------       ---------      ---------

       Comprehensive income.......................   $   1,486      $   1,626       $   4,620      $   4,256
                                                     =========      =========       =========      =========

</TABLE>


<PAGE>


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


4.   CONTINGENCIES

          The  Beautiful  Bouquet  Company,  Ltd.  (the  "Licensor")  filed suit
     against the Company  alleging  breaches  of a Patent and  Know-How  License
     agreement,  as amended (the "License Agreement").  The Licensor alleges the
     Company  committed a number of  breaches,  including a breach of  fiduciary
     duty owed to the Licensor,  and is seeking to recover unspecified  amounts.
     The Company  believes  that it did not breach any  provision of the License
     Agreement, and intends to vigorously defend against such claims.


<PAGE>


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

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 other sampling  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 and promotional  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, 2003 Compared to Three Months
                             Ended December 31, 2002

     Net Sales. Net sales for the three months ended December 31, 2003 increased
$1.0 million,  or 3.2%, to $32.6  million,  as compared to $31.6 million for the
three months ended  December 31, 2002.  The increase in net sales was  primarily
attributable  to increased  sales of sampling  technologies  for advertising and
marketing of domestic fragrance products and international cosmetic products and
impact of foreign  exchange rates.  The increased sales were partially offset by
decreased  sales of sampling  technologies  for  advertising  and  marketing  of
domestic cosmetic products and international fragrance products.

     Gross  Profit.  Gross profit for the three  months ended  December 31, 2003
decreased $0.6 million,  or 5.5%, to $10.3 million, as compared to $10.9 million
for three months ended  December 31, 2002.  Gross profit as a percentage  of net
sales decreased to 31.6% in the three months ended December 31, 2003, from 34.5%
in the three  months ended  December 31, 2002.  The decrease in gross profit and
the decrease in gross  profit as a percentage  of net sales is due to changes in
product and format mix and  reduction  in prices of certain  fragrance  sampling
products in response to competitive pressures.

     Selling,  General  and  Administrative   Expenses.   Selling,  general  and
administrative  expenses for the three months ended  December 31, 2003 increased
$0.7,  or 14.9%,  to $5.4  million,  as compared  to $4.7  million for the three
months ended December 31, 2002. Selling,  general and administrative expenses as
a percent of net sales increased to 16.6% in the three months ended December 31,
2003,  from 14.9% in the three months ended  December 31, 2002.  The increase in
selling,  general  and  administrative  expenses  and the  increase  in selling,
general and  administrative  expenses as a percent of net sales is primarily due
to foreign exchange rates,  foreign exchange losses,  increased  consulting fees
and loss on sublease of former office space.

     Income from  Operations.  Income from operations for the three months ended
December 31, 2003 decreased $1.2 million, or 20.3%, to $4.7 million, as compared
to $5.9  million for the three  months  ended  December  31,  2002.  Income from
operations as a percentage  of net sales  decreased to 14.4% in the three months
ended December 31, 2003, from 18.7% in the three months ended December 31, 2002.
The  decrease  in  income  from  operations  and  income  from  operations  as a
percentage  of net sales is  principally  the  result of the  factors  described
above.

     Interest  Expense.  Interest  expense (which  includes the  amortization of
deferred  financing costs) for the three months ended December 31, 2003 was $3.2
million consistent with the $3.2 million for the three months ended December 31,
2002.  Outstanding borrowings and related interest rates during the three months
ended December 31, 2003 and 2002 were relatively consistent.

     Income Tax Expense.  Income tax expense for the three months ended December
31, 2003 decreased $0.5 million to $0.5 million.  Our effective tax rate was 39%
in the three months ended December 31, 2003 and 2002.


<PAGE>


            Six Months Ended December 31, 2003 Compared to Six Months
                            Ended December 31, 2002

     Net Sales.  Net sales for the six months ended  December 31, 2003 increased
$7.9 million,  or 12.7%, to $69.9 million,  as compared to $62.0 million for the
six months  ended  December 31,  2002.  The increase in net sales was  primarily
attributable  to increased  sales of sampling  technologies  for advertising and
marketing of domestic  fragrance and consumer products,  international  cosmetic
products and impact of foreign  exchange  rates.  The increases  were  partially
offset by decreased sales of sampling technologies for advertising and marketing
of domestic cosmetic products and international fragrance products.

     Gross  Profit.  Gross  profit for the six months  ended  December  31, 2003
increased $1.3 million,  or 5.7%, to $24.1 million, as compared to $22.8 million
for six months  ended  December 31,  2002.  Gross profit as a percentage  of net
sales  decreased to 34.5% in the six months ended December 31, 2003,  from 36.8%
in the six months  ended  December  31,  2002..  The increase in gross profit is
primarily due to the increase in sales volume. The decrease in gross profit as a
percentage  of net sales is due to increased  premium  labor  costs,  changes in
product and format mix and  reduction  in prices of certain  fragrance  sampling
products in response to competitive pressures.

     Selling,  General  and  Administrative   Expenses.   Selling,  general  and
administrative  expenses  for the six months ended  December 31, 2003  increased
$0.7, or 7.5%, to $10.1 million,  as compared to $9.4 million for the six months
ended  December 31, 2002.  The increase in selling,  general and  administrative
expenses is primarily due to foreign exchange rates,  increased consulting fees,
increased  office  rent and loss on sublease of former  office  space.  Selling,
general and administrative expenses as a percent of net sales decreased to 14.5%
in the six months ended  December  31, 2003,  from 15.2% in the six months ended
December 31, 2002 primarily because these costs are largely fixed.

     Income from  Operations.  Income from  operations  for the six months ended
December 31, 2003 increased $0.6 million, or 4.7%, to $13.4 million, as compared
to $12.8  million  for the six months  ended  December  31,  2002.  Income  from
operations  as a  percentage  of net sales  decreased to 19.2% in the six months
ended  December 31, 2003,  from 20.7% in the six months ended December 31, 2002.
The increase in income from operations and decrease in income from operations as
a percentage  of net sales is  principally  the result of the factors  described
above.

     Interest  Expense.  Interest  expense (which  includes the  amortization of
deferred  financing  costs) for the six months ended December 31, 2003 increased
$0.1 million,  or 1.6%, to $6.5 million, as compared to $6.4 million for the six
months ended  December 31, 2002.  Outstanding  borrowings  and related  interest
rates  during the six months ended  December  31, 2003 and 2002 were  relatively
consistent.

     Income Tax Expense.  Income tax expense for the six months  ended  December
31, 2003 increased $0.2 million to $2.6 million.  Our effective tax rate was 39%
in the six months ended December 31, 2003 and 2002.


Liquidity and Capital Resources

     We have substantial  indebtedness and significant debt service obligations.
As of December 31, 2003, we had consolidated indebtedness in an aggregate amount
of $114.6 million (excluding trade payables, accrued liabilities, deferred taxes
and other non-current  liabilities)  relating to our notes, term loan, revolving
loan and promissory note to affiliate.  Borrowings at December 31, 2003 included
$3.4 million under the  revolving  loan and $7.3 million under the term loan and
$0.4 million on the  promissory  note to affiliate.  At December 31, 2003 we had
$16.3 million  available under the revolving loan. At December 31, 2003, we also
had  $20.6  million  in  additional  outstanding  liabilities  (including  trade
payables,   accrued   liabilities,   deferred   taxes  and   other   non-current
liabilities).

     Our 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,  2003,  cash  totaling  $5.5  million was  provided  by  operating
activities  resulting from net income before depreciation and amortization and a
decrease in income tax receivable, partially offset by an increase in inventory,
prepaid insurance and foreign value added tax


<PAGE>


receivable.  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.

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

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

     The  calculation  of  Adjusted  EBITDA  for AKI is as follows  (dollars  in
millions):

<TABLE>
<CAPTION>

                                                 Three Months Ended                  Six Months Ended
                                                    December 31,                       December 31,
                                            -----------------------------      -----------------------------
                                                2003             2002              2003             2002
                                                ----             ----              ----             ----

<S>                                         <C>               <C>              <C>               <C>
   Net income........................       $       0.8       $       1.6      $       4.2       $       3.9

   Income tax expense................               0.5               1.0              2.6               2.4
   Interest expense..................               3.2               3.2              6.4               6.4
   Depreciation and amortization
      of other intangibles...........               1.9               1.9              3.7               3.7
                                            -----------       -----------      -----------       -----------

   Adjusted EBITDA...................       $       6.4       $       7.7      $      16.9       $      16.4
                                            ===========       ===========      ===========       ===========


</TABLE>


     In the six  months  ended  December  31,  2003  and  2002,  we had  capital
expenditures of approximately $0.6 million and $1.3 million, respectively. These
capital  expenditures  consisted  primarily  of the  purchase  of  manufacturing
equipment and upgrading our computer systems.

     We may from time to time evaluate 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.

     Capital  expenditures  for the  twelve  months  ending  June  30,  2004 are
currently  estimated  to be between  $5.0  million  and $5.5  million.  Based on
borrowings  outstanding  as of December 31, 2003,  we expect total cash payments
for debt service for the twelve months ending June 30, 2004 to be  approximately
$14.2 million,  consisting of $1.9 million in principal  payments under the term
loan,  $10.9  million  in  interest  payments  on the Notes and $1.4  million in
interest  and fees under the credit  agreement.  We also expect to make  royalty
payments of approximately  $1.2 million during the twelve months ending June 30,
2004.


<PAGE>


     At  December  31,  2003,  AKI's cash and cash  equivalents  and net working
capital  were $2.4  million and $13.6  million,  respectively,  representing  an
increase  in cash and cash  equivalents  of $0.9  million and an increase in net
working  capital of $2.9  million  from June 30,  2003.  The increase in working
capital is primarily due to the increase in cash and cash equivalents, inventory
and prepaid expenses.


Seasonality

     Our  sales of  sampling  technologies  for  advertising  and  marketing  of
fragrance  products  have  historically  reflected  seasonal  variations.   Such
seasonal  variations  are  based on the  timing  of our  customers'  advertising
campaigns, which have traditionally been concentrated prior to the Christmas and
spring  holiday  seasons.  As a result,  a higher  level of sales are  generally
reflected in our first and third fiscal quarters ended September 30 and March 31
when sales from such  advertising  campaigns are principally  recognized.  These
seasonal  fluctuations  require  us to  allocate  our  resources  to manage  our
manufacturing  capacity,  which  often  operates  at full  capacity  during peak
seasonal  demand  periods.  The severity of our seasonal  sales  variations  has
decreased   over  time  as  we  have   developed  and  acquired  other  sampling
technologies for advertising and marketing of cosmetic and consumer products.


Contingencies

     The Beautiful Bouquet Company, Ltd. (the "Licensor") filed suit against the
Company alleging breaches of a Patent and Know-How License agreement, as amended
(the "License  Agreement").  The Licensor alleges the Company committed a number
of breaches,  including a breach of fiduciary duty owed to the Licensor,  and is
seeking to recover unspecified amounts.

     The Company  believes  that it did not breach any  provision of the License
Agreement,  and intends to vigorously  defend  against its claims.  However,  if
Licensor were to prevail in this lawsuit,  the  Company's  financial  condition,
results of operations and cash flows could be materially adversely affected.


Recently Issued Accounting Standards

     In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition  and  Disclosure"  ("SFAS 148"),  an amendment of FASB
Statement  No.  123.  SFAS 148  amends  SFAS 123,  "Accounting  for  Stock-Based
Compensation",  to provide  alternative  methods of  transition  for a voluntary
change  to  the  fair  value  method  of  accounting  for  stock-based  employee
compensation.  In addition,  SFAS 148 amends the disclosure requirements of SFAS
123 to  require  prominent  disclosures  in both  annual and  interim  financial
statements.  Certain of the  disclosure  modifications  are  required for fiscal
years and interim periods ending after December 15, 2002 and are included in the
notes to these consolidated condensed financial statements.

     FASB  Interpretation  No. 46 "Consolidation of Variable Interest  Entities"
("FIN  46") was issued in January  2003.  FIN 46  requires  an  investor  with a
majority of the variable  interests  in a variable  interest  entity  ("VIE") to
consolidate  the entity and also  requires  majority  and  significant  variable
interest investors to provide certain  disclosures.  A VIE is an entity in which
the  equity  investors  do  not  have a  controlling  interest,  or  the  equity
investment at risk is  insufficient to finance the entity's  activities  without
receiving additional  subordinated  financial support from the other parties. In
December 2003, FIN 46(R) was issued,  which delays until the period ending March
31, 2004, the  application of the provisions of FIN 46 for VIEs created prior to
January 31, 2003. The Company is currently  reviewing its  investments and other
arrangements  to determine  whether any of its investee  companies are VIEs. The
Company  does  not  expect  to  identify  any  significant  VIEs  that  would be
consolidated,  but may be required to make additional disclosures. The Company's
maximum exposure related to any investment that may be determined to be in a VIE
is  limited to the  amount  invested.  The  provisions  of FIN 46 are  effective
immediately  for all  arrangements  entered  into  with new VIEs  created  after
January 31, 2003.  The Company has not  invested in any new VIEs  created  after
January 31, 2003.


<PAGE>


     In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative  Instruments and Hedging  Activities"  ("SFAS 149"). SFAS 149 amended
and  clarified   accounting  for  derivative   instruments,   including  certain
derivative  instruments embedded in other contracts,  and for hedging activities
under SFAS 133,  "Accounting for Derivative  Instruments and Hedging Activities"
("SFAS 133"). SFAS 149 amended SFAS 133 regarding  implementation  issues raised
in relation to the  application of the definition of a derivative,  particularly
regarding the meaning of an "underlying" and the characteristics of a derivative
that contains financing components. The amendments set forth in SFAS 149 improve
financial reporting by requiring that contracts with comparable  characteristics
be  accounted  for  similarly.  In  particular,  SFAS 149  clarifies  under what
circumstances a contract with an initial net investment meets the characteristic
of a  derivative  as discussed  in SFAS 133. In  addition,  it clarifies  when a
derivative contains a financing component that warrants special reporting in the
statement of cash flows.  SFAS 149 was effective  for contracts  entered into or
modified after June 30, 2003. The Company's  adoption of this statement will not
have any significant impact on the Company's  financial  condition or results of
operations.

     In May  2003,  the  FASB  issued  SFAS No.  150,  "Accounting  for  Certain
Financial  Instruments  with  Characteristics  of both  Liabilities  and Equity"
("SFAS 150").  SFAS 150 establishes  standards for how an issuer  classifies and
measures certain financial  instruments with characteristics of both liabilities
and equity.  It requires that an issuer classify a financial  instrument that is
within its scope as a  liability  (or an asset in some  circumstances).  Many of
those instruments were previously  classified as equity.  SFAS 150 was developed
in response to concerns expressed about issuers' classification in the statement
of financial position of certain financial instruments that have characteristics
of both liabilities and equity,  but that have been presented either entirely as
equity or between the liabilities  section and the equity section of the balance
sheet. SFAS 150 was effective for financial instruments entered into or modified
after May 31, 2003,  and  otherwise  was effective at the beginning of the first
interim  period  beginning  after  June 15,  2003.  SFAS 150 did not  affect the
Company's   balance  sheet   presentation  of  its  debt  and  equity  financial
instruments.


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 26, 2003.

     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.


<PAGE>


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We  generate  approximately  24% 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, 2003,  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 the end of the period covered
by this quarterly report. Based on that evaluation,  the chief executive officer
and chief  financial  officer have concluded as of the end of the period covered
by this  report  that the  Company's  disclosure  controls  and  procedures  are
effective.

     (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.


<PAGE>


                            PART II OTHER INFORMATION


ITEM 1.  LEGAL PROCEEDINGS

     See Item 1 of Part II of our  previous  quarterly  report  on Form 10-Q for
discussion of litigation that has been commenced against us regarding allegation
of breaches of an agreement.

     We are not  currently  a party to any other legal  proceedings  the adverse
outcome of which,  individually  or in the  aggregate,  we believe  could have a
material  adverse  effect  on our  business,  financial  condition,  results  of
operations or cash flows.


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

         (a) Exhibits

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

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

             32.1  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


<PAGE>


                                   SIGNATURES

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



                                    AKI, INC.

Date:  February 6, 2004             By:  /s/ Kenneth A. Budde
                                         -----------------------------------
                                         Kenneth A. Budde
                                         Senior Vice President &
                                           Chief Financial Officer
                                           (Principal Financial and Accounting
                                           Officer)