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 March 31, 2004

                                       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 April 30, 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

                        - March 31, 2004
                        - June 30, 2003

                        Consolidated Condensed Statements of Operations

                        - Three months ended March 31, 2004
                        - Three months ended March 31, 2003
                        - Nine months ended March 31, 2004
                        - Nine months ended March 31, 2003

                        Consolidated Condensed Statements of Changes in
                        Stockholder's Equity

                        - Nine months ended March 31, 2004

                        Consolidated Condensed Statements of Cash Flows

                        - Nine months ended March 31, 2004
                        - Nine months ended March 31, 2003

                        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>

                                                                                  March 31,           June 30,
                                                                                    2004                2003
                                                                                -------------      -------------
                                                                                 (unaudited)         (unaudited)

<S>                                                                             <C>                <C>
ASSETS
Current assets
Cash and cash equivalents..................................................     $       3,647      $       1,470
Accounts receivable, net...................................................            25,577             20,267
Inventory..................................................................             9,112              7,265
Income tax receivable......................................................                 -              1,011
Prepaid expenses...........................................................             1,232                671
Deferred income taxes......................................................               808                808
                                                                                -------------      -------------

   Total current assets....................................................            40,376             31,492

Property, plant and equipment, net.........................................            13,412             16,584
Goodwill ..................................................................           152,994            152,994
Other intangible assets, net...............................................             9,958             11,307
Deferred charges, net......................................................             2,564              3,032
Other assets...............................................................               148                138
                                                                                -------------      -------------

   Total assets............................................................     $     219,452      $     215,547
                                                                                =============      =============

LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Current portion of long-term debt..........................................     $       2,063      $       1,875
Accounts payable, trade....................................................             6,542              5,444
Accrued income taxes.......................................................             1,132                  -
Accrued compensation.......................................................             4,139              4,333
Accrued interest...........................................................             2,836              5,502
Accrued expenses...........................................................             4,804              3,661
                                                                                -------------      -------------

   Total current liabilities...............................................            21,516             20,815

Revolving credit line......................................................             4,800             10,000
Term loan..................................................................             4,687              6,250
Senior notes...............................................................           103,510            103,510
Promissory note to affiliate...............................................               375                  -
Deferred income taxes......................................................               619              1,142
Other non-current liabilities..............................................             1,111              1,740
                                                                                -------------      -------------

   Total liabilities.......................................................           136,618            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..........................................................            11,713              4,873
Accumulated other comprehensive income ....................................             1,184                435
Carryover basis adjustment.................................................           (15,730)           (15,730)
                                                                                -------------      -------------

   Total stockholder's equity..............................................            82,834             72,090
                                                                                -------------      -------------

   Total liabilities and stockholder's equity..............................     $     219,452      $     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                    Nine months ended
                                                   ---------------------------------    ---------------------------------
                                                   March 31, 2004     March 31, 2003    March 31, 2004     March 31, 2003
                                                   --------------     --------------    --------------     --------------
                                                     (unaudited)       (unaudited)        (unaudited)        (unaudited)

<S>                                                   <C>               <C>                <C>                <C>
Net sales......................................       $  35,803         $  28,954          $ 105,677          $  90,998
Cost of goods sold.............................          22,171            18,549             67,989             57,768
                                                      ---------         ---------          ---------          ---------

   Gross profit................................          13,632            10,405             37,688             33,230

Selling, general and administrative expenses...           5,731             4,488             15,795             13,892
Amortization of other intangibles..............             285               285                857                857
                                                      ---------         ---------          ---------          ---------

   Income from operations......................           7,616             5,632             21,036             18,481

Other expenses:
   Interest expense............................           3,149             3,184              9,601              9,592
   Management fees and other, net..............              97               100                297                225
                                                      ---------         ---------          ---------          ---------

   Income before income taxes..................           4,370             2,348             11,138              8,664

Income tax expense.............................           1,688               911              4,298              3,337
                                                      ---------         ---------          ---------          ---------

   Net income..................................       $   2,682         $   1,437          $   6,840          $   5,327
                                                      =========         =========          =========          =========


</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)..................                                            6,840                                     6,840

Other comprehensive income, net of tax:
   Foreign currency translation
     adjustment (unaudited).............                                                            749                         749
                                                                                                                          ---------

Comprehensive income (unaudited)........                                                                                      7,589
                                              -----     -----     ---------     ---------      --------     ----------    ---------

Balances, March 31, 2004 (unaudited)....      1,000     $   -     $  85,667     $  11,713      $  1,184     $  (15,730)   $  82,834
                                              =====     =====     =========     =========      ========     ==========    =========


</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>

                                                                                          Nine months ended
                                                                               --------------------------------------
                                                                               March 31, 2004          March 31, 2003
                                                                               --------------          --------------
                                                                                (unaudited)             (unaudited)

<S>                                                                             <C>                     <C>
Cash flows from operating activities
   Net income..........................................................         $     6,840             $     5,327
   Adjustments to reconcile net income to net cash  provided by
   operating activities:
     Depreciation and amortization of other intangibles................               5,549                   5,579
     Amortization of debt issuance cost................................                 493                     487
     Deferred income taxes.............................................                 523)                   (481)
     Other.............................................................                 110                     119
     Changes in operating assets and liabilities:
       Accounts receivable.............................................              (5,310)                  1,966
       Inventory.......................................................              (1,847)                     73
       Prepaid expenses, deferred charges and other assets.............                (561)                   (167)
       Accounts payable and accrued expenses...........................                (619)                 (6,312)
       Income taxes....................................................               2,143                  (2,452)
                                                                                -----------             -----------

         Net cash provided by operating activities.....................               6,275                   4,139
                                                                                -----------             -----------

Cash flows from investing activities
   Purchases of equipment..............................................                (912)                 (1,904)
   Patents.............................................................                (116)                    (95)
                                                                                -----------             -----------

         Net cash used in investing activities.........................              (1,028)                 (1,999)
                                                                                -----------             -----------

Cash flows from  financing activities
   Net proceeds (repayments) on revolving loan.........................              (5,200)                  6,150
   Net repayments on term loan.........................................              (1,375)                   (938)
   Net proceeds from promissory note to affiliate......................                 375                     355
   Capital contribution from parent....................................               3,155                       -
   Payments of loan closing costs......................................                 (25)                    (44)
   Distribution to parent..............................................                   -                  (8,285)
                                                                                -----------             -----------

         Net cash used in financing activities.........................              (3,070)                 (2,762)
                                                                                -----------             -----------

Net increase (decrease) in cash and cash equivalents...................               2,177                    (622)
Cash and cash equivalents, beginning of period.........................               1,470                   1,875
                                                                                -----------             -----------

Cash and cash equivalents, end of period...............................         $     3,647             $     1,253
                                                                                ===========             ===========


Supplemental information
  Net cash paid during the period for:
     Interest..........................................................         $    11,632             $    11,496
     Income taxes......................................................               2,974                   6,421


</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

          On January 1, 2004,  AKI adopted FASB  Interpretation  No. 46 (revised
     December,  2003),  "Consolidation of Variable Interest Entities," (FIN 46R)
     which  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. FIN 46R
     requires consolidation where there is a controlling financial interest in a
     variable  interest  entity or where the variable  interest  entity does not
     have sufficient equity at risk to finance its activities without additional
     subordinated  financial support from other parties. The adoption of FIN 46R
     had no  impact  on AKI's  results  of  operations,  financial  position  or
     statements of cash flows.


     Interim financial statements

          The interim consolidated condensed balance sheet at March 31, 2004 and
     the interim  consolidated  condensed statements of operations for the three
     and nine months  ended March 31,  2004 and 2003,  the interim  consolidated
     condensed statements of cash flows for the nine months ended March 31, 2004
     and 2003 and the interim  consolidated  condensed  statement  of changes in
     stockholder's  equity  for  the  nine  months  ended  March  31,  2004  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.


<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)

     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:

<TABLE>
<CAPTION>

                                                      Three Months Ended              Nine Months Ended
                                                          March 31,                       March 31,
                                                          ---------                       ---------
                                                     2004            2003            2004           2003
                                                     ----            ----            ----           ----

<S>                                                <C>            <C>             <C>            <C>
       Net income, as reported................     $   2,682      $   1,437       $   6,840      $   5,327

       Deduct:  Total stock-based employee
       compensation expense determined
       under fair value based method for all
       awards, net of related tax effects.....             7              8              23             26
                                                   ---------      ---------       ---------      ---------

       Pro forma net income...................     $   2,675      $   1,429       $   6,817      $   5,301
                                                   =========      =========       =========      =========


</TABLE>


2.   INVENTORY

          The following table details the components of inventory:

<TABLE>
<CAPTION>

                                                          March 31, 2004         June 30, 2003
                                                          --------------         -------------
                                                            (unaudited)            (unaudited)
<S>                                                         <C>                    <C>
              Raw materials
                  Paper..........................           $     3,028            $     1,740
                  Other raw materials............                 3,640                  2,353
                                                            -----------            -----------
                      Total raw materials........                 6,668                  4,093
              Work in process....................                 3,320                  3,857
              Reserve for obsolescence...........                  (876)                  (685)
                                                            -----------            -----------

              Total inventory....................           $     9,112            $     7,265
                                                            ===========            ===========

</TABLE>


<PAGE>


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

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            Nine Months Ended
                                                               March 31,                    March 31,
                                                               ---------                    ---------
                                                           2004           2003          2004           2003
                                                           ----           ----          ----           ----

<S>                                                     <C>            <C>           <C>            <C>
       Net income.................................      $   2,682      $   1,437     $   6,840      $   5,327

       Other comprehensive income, net of tax:
           Foreign currency translation
           adjustments............................            287            392           749            758
                                                        ---------      ---------     ---------      ---------

       Comprehensive income.......................      $   2,969      $   1,829     $   7,589      $   6,085
                                                        =========      =========     =========      =========


</TABLE>


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 we  generally do not enter
     into  long-term  contracts  with  our  customers,   we  have  long-standing
     relationships with the majority of our customer base.

     Results of Operations

           Three Months Ended March 31, 2004 Compared to Three Months
                              Ended March 31, 2003

          Net  Sales.  Net sales  for the  three  months  ended  March 31,  2004
     increased $6.8 million,  or 23.4%,  to $35.8 million,  as compared to $29.0
     million for the three  months  ended March 31,  2003.  The  increase in net
     sales  was   primarily   attributable   to  increased   sales  of  sampling
     technologies  for  advertising  and  marketing  of domestic  fragrance  and
     cosmetic products and international cosmetic products and impact of foreign
     exchange rates.

          Gross  Profit.  Gross profit for the three months ended March 31, 2004
     increased $3.2 million,  or 30.8%,  to $13.6 million,  as compared to $10.4
     million  for the three  months  ended  March 31,  2003.  Gross  profit as a
     percentage of net sales  increased to 38.0% in the three months ended March
     31, 2004, from 35.9% in the three months ended March 31, 2003. The increase
     in gross profit and the  increase in gross  profit as a  percentage  of net
     sales is due to the  increase  in sales  volume and  changes in product and
     format mix partially offset by the 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 March 31, 2004 increased
     $1.2 million,  or 26.7%,  to $5.7 million,  as compared to $4.5 million for
     the three months ended March 31, 2003. Selling,  general and administrative
     expenses as a percent of net sales  increased  to 15.9% in the three months
     ended March 31, 2004,  from 15.5% in the three months ended March 31, 2003.
     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 increases  in  incentive  compensation  and
     consulting fees and the impact of foreign exchange rates.

          Income from  Operations.  Income from  operations for the three months
     ended March 31, 2004 increased $2.0 million,  or 35.7%, to $7.6 million, as
     compared to $5.6 million for the three months ended March 31, 2003.  Income
     from  operations  as a  percentage  of net sales  increased to 21.2% in the
     three  months  ended March 31,  2004,  from 19.3% in the three months ended
     March 31,  2003.  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 (which includes the amortization of
     deferred  financing  costs)  for the three  months  ended  March  31,  2004
     decreased  $0.1  million,  or 3.1%,  to $3.1  million,  as compared to $3.2
     million for the three months ended March 31, 2003.  Outstanding  borrowings
     and related interest rates during the three months ended March 31, 2004 and
     2003 were relatively consistent.

          Income Tax  Expense.  Income tax  expense for the three  months  ended
     March 31, 2004  increased  $0.8 million to $1.7 million.  Our effective tax
     rate was 39% in the three months ended March 31, 2004 and 2003.


<PAGE>


            Nine Months Ended March 31, 2004 Compared to Nine Months
                              Ended March 31, 2003

          Net  Sales.  Net  sales  for the nine  months  ended  March  31,  2004
     increased $14.7 million,  or 16.2%, to $105.7 million, as compared to $91.0
     million for the nine months ended March 31, 2003. 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. These
     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 nine months ended March 31, 2004
     increased $4.5 million,  or 13.6%,  to $37.7 million,  as compared to $33.2
     million  for the nine  months  ended  March  31,  2003.  Gross  profit as a
     percentage  of net sales  decreased to 35.7% in the nine months ended March
     31, 2004,  from 36.5% in the nine months ended March 31, 2003. 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 and outsourcing  costs during peak production  periods,
     changes in product  and format mix and the  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 nine months ended March 31, 2004 increased
     $1.9, or 13.7%, to $15.8 million, as compared to $13.9 million for the nine
     months  ended  March  31,  2003.  The  increase  in  selling,  general  and
     administrative   expenses  is  primarily  due  to  increases  in  incentive
     compensation  and consulting fees and the impact of foreign exchange rates.
     Selling,  general  and  administrative  expenses  as a percent of net sales
     decreased to 14.9% in the nine months  ended March 31, 2004,  from 15.3% in
     the nine  months  ended March 31, 2003  primarily  because  these costs are
     largely fixed.

          Income from  Operations.  Income from  operations  for the nine months
     ended March 31, 2004 increased $2.5 million, or 13.5%, to $21.0 million, as
     compared to $18.5 million for the nine months ended March 31, 2003.  Income
     from operations as a percentage of net sales decreased to 19.9% in the nine
     months ended March 31, 2004,  from 20.3% in the nine months ended March 31,
     2003.  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 nine months ended March 31, 2004 was $9.6
     million  consistent  with the $9.6  million for the nine months ended March
     31, 2003. Outstanding borrowings and related interest rates during the nine
     months ended March 31, 2004 and 2002 were relatively consistent.

          Income Tax Expense. Income tax expense for the nine months ended March
     31, 2004 increased $1.0 million to $4.3 million. Our effective tax rate was
     39% in the nine months ended March 31, 2004 and 2003.


     Liquidity and Capital Resources

          We  have   substantial   indebtedness  and  significant  debt  service
     obligations.  As of March 31, 2004, we had consolidated  indebtedness in an
     aggregate  amount of $115.4  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 March 31, 2004 included $4.8 million under the revolving loan
     and $6.8 million under the term loan and $0.4 million on a promissory  note
     held by an  affiliate.  At March 31,  2004 we had $14.9  million  available
     under the  revolving  loan. At March 31, 2004, we also had $21.5 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  held  by an
     affiliate.  During the nine months ended March 31, 2004, cash totaling $6.3
     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  accounts  receivable,
     inventory, prepaid insurance and foreign value added tax receivable. During
     the nine months  ended  March 31,  2003,  cash  totaling  $4.1  million was


<PAGE>


     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,
     accrued interest 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                  Nine Months Ended
                                                      March 31,                          March 31,
                                                      ---------                          ---------
                                                2004             2003              2004             2003
                                                ----             ----              ----             ----

<S>                                           <C>              <C>               <C>              <C>
   Net income........................         $    2.7         $    1.4          $    6.8         $    5.3

   Income tax expense................              1.7              0.9               4.3              3.4
   Interest expense..................              3.1              3.2               9.6              9.6
   Depreciation and amortization
      of other intangibles...........              1.8              1.9               5.5              5.6
                                              --------         --------          --------         --------

   Adjusted EBITDA...................         $    9.3         $    7.4          $   26.2         $   23.9
                                              ========         ========          ========         ========


</TABLE>


          In the nine  months  ended  March 31,  2004 and 2003,  we had  capital
     expenditures of approximately $0.9 million and $1.9 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 $1.0 million and $1.5 million.  Based on
     borrowings  outstanding as of March 31, 2004, we expect total cash payments
     for  debt  service  for  the  twelve  months  ending  June  30,  2004 to be
     approximately  $14.0  million,  consisting  of $1.9  million  in  principal
     payments  under the term loan,  $10.9  million in interest  payments on the
     Notes and $1.2 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 March 31,  2004,  AKI's cash and cash  equivalents  and net working
     capital were $3.6 million and $18.9 million, respectively,  representing an
     increase in cash and cash  equivalents  of $2.2  million and an increase in
     net working  capital of $8.2 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

          On January 1, 2004,  AKI adopted FASB  Interpretation  No. 46 (revised
     December,  2003),  "Consolidation of Variable Interest Entities," (FIN 46R)
     which  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. FIN 46R
     requires consolidation where there is a controlling financial interest in a
     variable  interest  entity or where the variable  interest  entity does not
     have sufficient equity at risk to finance its activities without additional
     subordinated  financial support from other parties. The adoption of FIN 46R
     had no  impact  on AKI's  results  of  operations,  financial  position  or
     statements of cash flows.


     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 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


<PAGE>


     the section  entitled "Risk Factors" in the Company's annual report on Form
     10K filed with the  Securities  and Exchange  Commission  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 obligation to update any such
     factors or to publicly announce any revisions to any of the forward-looking
     statements contained in this document.


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
     March 31, 2004, there were no forward exchange contracts outstanding.


ITEM 4.  CONTROLS AND PROCEDURES

          (a) Evaluation of Disclosure  Controls and  Procedures.  Our principal
     executive and financial officers have evaluated our disclosure controls and
     procedures  and,  based  on such  evaluation,  have  determined  that  such
     disclosure controls and procedures were effective as of March 31, 2004, the
     end of the period covered by the Quarterly Report on Form 10-Q.

          (b)  Changes in Internal  Controls.  During our fiscal  quarter  ended
     March 31, 2004, no change  occurred in our internal  control over financial
     reporting that materially  affected,  or is reasonably likely to materially
     affect, our internal control over financial reporting.


<PAGE>


                            PART II OTHER INFORMATION


ITEM 1.  LEGAL PROCEEDINGS

          See Item 1 of Part II of our  quarterly  report  on Form  10-Q for the
     period ended  September 30, 2003 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

             10.1   Second Amendment to Amended and Restated Credit Agreement
                    dated as of March 17, 2004 between the Company and Heller
                    Financial, Inc.

             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:  May 7, 2004                   By: /s/ Kenneth A. Budde
                                              ---------------------------------
                                              Kenneth A. Budde
                                              Senior Vice President &
                                                Chief Financial Officer
                                                (Principal Financial and
                                                Accounting Officer)