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 September 30, 2003

                                       OR

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

           For the transition period from ___________ to _____________

                        Commission File Number: 333-60991

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

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

                        Commission File Number: 333-60989

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

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

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

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

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

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

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

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


<PAGE>


                       AKI HOLDING CORP. AND SUBSIDIARIES

                               INDEX TO FORM 10-Q


Part I.  FINANCIAL INFORMATION

         Item 1.  Financial Statements (unaudited)

                  AKI Holding Corp. and Subsidiaries

                      Consolidated Condensed Balance Sheet

                      -     September 30, 2003
                      -     June 30, 2003

                      Consolidated Condensed Statements of Operations

                      -     Three months ended September 30, 2003
                      -     Three months ended September 30, 2002

                      Consolidated Condensed Statement of Changes in
                      Stockholder's Equity

                      -     Three months ended September 30, 2003

                      Consolidated Condensed Statements of Cash Flows

                      -     Three months ended September 30, 2003
                      -     Three months ended September 30, 2002

                      Notes to Consolidated Condensed Financial Statements


<PAGE>


         Item 1.  Financial Statements (unaudited) (continued)

                  AKI, Inc. and Subsidiaries

                      Consolidated Condensed Balance Sheet

                      -     September 30, 2003
                      -     June 30, 2003

                      Consolidated Condensed Statements of Operations

                      -     Three months ended September 30, 2003
                      -     Three months ended September 30, 2002

                      Consolidated Condensed Statement of Changes in
                      Stockholder's Equity

                      -     Three months ended September 30, 2003

                      Consolidated Condensed Statements of Cash Flows

                      -     Three months ended September 30, 2003
                      -     Three months ended September 30, 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 4.  Submission of Matters to a Vote of Security Holders

         Item 6.  Exhibits and Reports on Form 8-K


<PAGE>


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


<TABLE>
<CAPTION>
                                                                                September 30,         June 30,
                                                                                    2003                2003
                                                                                -------------      -------------
                                                                                 (unaudited)         (unaudited)

<S>                                                                             <C>                <C>
ASSETS
Current assets
Cash and cash equivalents..................................................     $       5,323      $       1,470
Accounts receivable, net...................................................            29,990             20,267
Inventory..................................................................             8,766              7,265
Income tax receivable......................................................                 -              4,166
Prepaid expenses...........................................................             1,358                671
Deferred income taxes......................................................               808                808
                                                                                -------------      -------------

   Total current assets....................................................            46,245             34,647

Property, plant and equipment, net.........................................            15,472             16,584
Goodwill ..................................................................           152,994            152,994
Other intangible assets, net...............................................            10,867             11,307
Deferred charges, net......................................................             2,868              3,032
Other assets...............................................................               134                138
                                                                                -------------      -------------

   Total assets............................................................     $     228,580      $     218,702
                                                                                =============      =============

LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Current portion of long-term debt..........................................     $       1,937      $       1,875
Accounts payable, trade....................................................             8,121              5,444
Accrued income taxes.......................................................             1,469                  -
Accrued compensation.......................................................             3,019              4,333
Accrued interest...........................................................             2,972              5,502
Accrued expenses...........................................................             3,031              3,661
                                                                                -------------      -------------

   Total current liabilities...............................................            20,549             20,815

Revolving credit line......................................................            18,037             10,000
Term loan..................................................................             5,750              6,250
Senior notes...............................................................           103,510            103,510
Promissory note to affiliate...............................................               375                  -
Deferred income taxes......................................................               968              1,142
Other non-current liabilities..............................................             1,012              1,740
                                                                                -------------      -------------

   Total liabilities.......................................................           150,201            143,457

Stockholder's equity
Common stock, $0.01 par 1,000 shares authorized;
    1,000 shares issued and outstanding....................................                 -                  -
Additional paid-in capital.................................................            93,656             93,656
Retained earnings (accumulated deficit)....................................               215             (3,116)
Accumulated other comprehensive income.....................................               238                435
Carryover basis adjustment.................................................           (15,730)           (15,730)
                                                                                -------------      -------------

   Total stockholder's equity..............................................            78,379             75,245
                                                                                -------------      -------------


   Total liabilities and stockholder's equity..............................     $     228,580      $     218,702
                                                                                =============      =============


</TABLE>


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


<PAGE>


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



<TABLE>
<CAPTION>

                                                                                  Three months ended
                                                                    ---------------------------------------------
                                                                    September 30, 2003         September 30, 2002
                                                                    ------------------         ------------------
                                                                       (unaudited)                (unaudited)

<S>                                                                    <C>                        <C>
Net sales.................................................             $    37,258                $    30,400
Cost of goods sold........................................                  23,535                     18,515
                                                                       -----------                -----------

       Gross profit.......................................                  13,723                     11,885

Selling, general and administrative expenses..............                   4,685                      4,664
Amortization of other intangibles.........................                     286                        286
                                                                       -----------                -----------

       Income from operations.............................                   8,752                      6,935

Other expenses:
   Interest expense.......................................                   3,214                      3,738
   Management fees and other, net.........................                     100                         63
                                                                       -----------                -----------

       Income before income taxes.........................                   5,438                      3,134

Income tax expense........................................                   2,107                      1,247
                                                                       -----------                -----------

       Net income ........................................             $     3,331                $     1,887
                                                                       ===========                ===========


</TABLE>


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


<PAGE>


                       AKI HOLDING CORP. AND SUBSIDIARIES
       CONSOLIDATED CONDENSED STATEMENT 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   $    -     $   93,656   $   (3,116)    $   435     $  (15,730)   $  75,245

Net income (unaudited)....................                                         3,331                                   3,331

Other comprehensive loss, net of tax:
   Foreign currency translation
     adjustment (unaudited)...............                                                      (197)                       (197)
                                                                                                                       ---------

Comprehensive income (unaudited)..........                                                                                 3,134
                                              -----   ------     ----------   ----------     -------     ----------    ---------

Balances, September 30, 2003 (unaudited)..    1,000   $    -     $   93,656   $      215     $   238     $  (15,730)   $  78,379
                                              =====  =======     ==========   ==========     =======     ==========    =========


</TABLE>


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


<PAGE>


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

<TABLE>
<CAPTION>

                                                                                        Three months ended
                                                                             ----------------------------------------
                                                                             September 30, 2003    September 30, 2002
                                                                             ------------------    ------------------
                                                                                 (unaudited)           (unaudited)

<S>                                                                              <C>                   <C>
Cash flows from operating activities
   Net income........................................................            $     3,331           $     1,887
   Adjustments to reconcile net income to net cash used in
   operating activities:
     Depreciation and amortization of other intangibles..............                  1,844                 1,855
     Amortization of debt discount...................................                      -                   537
     Amortization of debt issuance costs.............................                    164                   174
     Deferred income taxes...........................................                   (174)                 (340)
     Other...........................................................                   (921)                 (336)
     Changes in operating assets and liabilities:
       Accounts receivable...........................................                 (9,723)                  235
       Inventory.....................................................                 (1,501)               (1,748)
       Prepaid expenses, deferred charges and other assets...........                   (687)                 (543)
       Accounts payable and accrued expenses.........................                 (1,799)               (5,669)
       Income taxes..................................................                  5,635                   446
                                                                                 -----------           -----------

         Net cash used in operating activities.......................                 (3,831)               (3,502)
                                                                                 -----------           -----------

Cash flows from  investing activities
   Purchases of equipment............................................                   (243)                 (828)
   Patents...........................................................                    (48)                  (32)
                                                                                 -----------           -----------

         Net cash used in investing activities.......................                   (291)                 (860)
                                                                                 -----------           -----------

Cash flows from financing activities
   Net proceeds on revolving loan....................................                  8,037                 3,925
   Net repayments on term loan.......................................                   (437)                 (250)
   Net proceeds from promissory note to stockholder..................                    375                   355
                                                                                 -----------           -----------

         Net cash provided by financing activities...................                  7,975                 4,030
                                                                                 -----------           -----------

Net increase (decrease) in cash and cash equivalents.................                  3,853                  (332)
Cash and cash equivalents, beginning of period.......................                  1,470                 1,875
                                                                                 -----------           -----------

Cash and cash equivalents, end of period.............................            $     5,323           $     1,543
                                                                                 ===========           ===========

Supplemental information
   Net cash paid (received) during the period for:
     Interest........................................................            $     5,540           $     5,706
     Income taxes....................................................                 (3,171)                1,179


</TABLE>


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


<PAGE>


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

1.   BASIS OF PRESENTATION

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

          AKI is  engaged in  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

          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.  For  arrangements  entered into with VIEs
     created prior to February 1, 2003, the provisions of FIN 46 are required to
     be adopted at the  beginning of the first  interim or annual  period ending
     after December 15, 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.

     Interim financial statements

          The interim consolidated condensed balance sheet at September 30, 2003
     and the interim  consolidated  condensed  statements of operations  for the
     three months ended  September 30, 2003 and 2002,  the interim  consolidated
     condensed statements of cash flows for the three months ended September 30,
     2003 and 2002 and the interim  consolidated  condensed statement of changes
     in  stockholder's  equity for the three months ended September 30, 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.


<PAGE>


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

1.   BASIS OF PRESENTATION (Continued)

     Stock Based Compensation

          The Company  has  elected to account for its stock based  compensation
     with  employees  under the  intrinsic  value  method of APB 25 as permitted
     under SFAS 123. Under the intrinsic  value method,  because the stock price
     of the  Company's  employee  stock  options  equaled  the fair value of the
     underlying  stock  on the  date  of  grant,  no  compensation  expense  was
     recognized.  If the Company had elected to recognize  compensation  expense
     based on the fair value of the options at grant date as  prescribed by SFAS
     123, the net income would have been as follows:

                                                       Three months ended
                                                          September 30,
                                                          -------------
                                                       2003            2002
                                                       ----            ----

     Net income, as reported.................       $   3,331       $   1,887

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

     Pro forma net income....................       $   3,323       $   1,878
                                                    =========       =========


2.   INVENTORY

          The following table details the components of inventory:

                                             September 30, 2003   June 30, 2003
                                             ------------------   -------------
                                                (unaudited)        (unaudited)
         Raw materials
             Paper..........................    $     1,926        $     1,740
             Other raw materials............          2,961              2,353
                                                -----------        -----------
                 Total raw materials........          4,887              4,093
         Work in process....................          4,586              3,857
         Reserve for obsolescence...........           (707)              (685)
                                                -----------        -----------

         Total inventory....................    $     8,766        $     7,265
                                                ===========        ===========


<PAGE>


                       AKI HOLDING CORP. 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:

                                                          Three months ended
                                                             September 30,
                                                             -------------
                                                          2003          2002
                                                          ----          ----

      Net income.................................     $   3,331     $   1,887

      Other comprehensive income (loss) , net
      of tax:
        Foreign currency translation
        adjustments..............................          (197)          373
                                                      ---------     ---------

      Comprehensive income.......................     $   3,134     $   2,260
                                                      =========     =========


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").   Under  the  License
     Agreement,  the Company licenses certain  intellectual  property related to
     one of the Company's products for which the Company is obligated to pay the
     Licensor  a royalty  based on sales of the  product  and a  minimum  annual
     royalty.  The Licensor alleges the Company  committed a number of breaches,
     including a breach of the License  Agreement and a breach of fiduciary duty
     owed to the Licensor,  and is seeking to recover  unspecified amounts under
     the  terms of the  License  Agreement  and all  amounts  due it  under  the
     Company's unjust enrichment of the Licensor's intellectual property rights.

          The Company  believes  that it has valid  defenses  to the  Licensor's
     claims, that it did not breach any provision of the License Agreement,  and
     that the License  Agreement is valid and enforceable.  The Company believes
     that Licensor 's claims are without merit, and intends to vigorously defend
     against its claims.


<PAGE>


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

5.   CONDENSED HOLDING COMPANY ONLY FINANCIAL STATEMENTS

          The following  condensed balance sheets at September 30, 2003 and June
     30, 2003 and  condensed  statements  of  operations  and cash flows for the
     three months ended September 30, 2003 and 2002 and the condensed  statement
     of changes in stockholder's equity for the three months ended September 30,
     2003 for Holding have been prepared on the equity basis of  accounting  and
     should be read in conjunction  with the  consolidated  statements and notes
     thereto.

                                  BALANCE SHEET

<TABLE>
<CAPTION>

                                                                    September 30, 2003       June 30, 2003
                                                                    ------------------       -------------
                                                                        (unaudited)           (unaudited)

<S>                                                                    <C>                   <C>
     Assets
     Investment in subsidiaries...............................         $    93,871           $    87,385
     Income tax receivable....................................                   -                 3,155
                                                                       -----------           -----------

         Total assets.........................................         $    93,871           $    90,540
                                                                       ===========           ===========

     Liabilities

         Total liabilities....................................         $         -           $         -
                                                                        ----------            ----------

     Stockholder's equity
     Common Stock, $0.01 par value, 1,000 shares authorized
       1,000 shares issued and outstanding....................                   -                     -
     Additional paid-in capital...............................              93,656                93,656
     Retained earnings (accumulated deficit)..................                 215                (3,116)
                                                                       -----------           -----------

         Total stockholder's equity...........................              93,871                90,540
                                                                       -----------           -----------

         Total liabilities and stockholder's equity...........         $    93,871           $    90,540
                                                                       ===========           ===========


</TABLE>



                             STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>

                                                                               Three months ended
                                                                    ----------------------------------------
                                                                    September 30, 2003    September 30, 2002
                                                                    ------------------    ------------------
                                                                        (unaudited)           (unaudited)

<S>                                                                    <C>                   <C>
     Equity in net income of subsidiaries.....................         $     3,331           $     2,257
     Interest expense.........................................                   -                  (550)
                                                                       -----------           -----------

         Income before income taxes...........................               3,331                 1,707

     Income tax benefit.......................................                   -                  (180)
                                                                       -----------           -----------

         Net income...........................................         $     3,331           $     1,887
                                                                       ===========           ===========


</TABLE>


<PAGE>


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

5. CONDENSED HOLDING COMPANY ONLY FINANCIAL STATEMENTS (Continued)


                  STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY

<TABLE>
<CAPTION>

                                                                                                Retained
                                                                                Additional      Earnings
                                                           Common Stock          Paid-in      (Accumulated
                                                         Shares     Amount       Capital        Deficit)         Total
                                                         ------     ------       -------        --------         -----

<S>                                                      <C>      <C>          <C>            <C>            <C>
     Balances, June 30, 2003 (unaudited)...........      1,000    $      -     $   93,656     $    (3,116)   $    90,540

     Net income (unaudited)........................                                                 3,331          3,331
                                                         -----    --------     ----------     -----------    -----------

     Balances, September 30, 2003 (unaudited)......      1,000    $      -     $   93,656     $       215    $    93,871
                                                         =====    ========     ==========     ===========    ===========


</TABLE>



                             STATEMENT OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                    Three months ended
                                                                          ----------------------------------------
                                                                          September 30, 2003    September 30, 2002
                                                                          ------------------    ------------------
                                                                              (unaudited)           (unaudited)

<S>                                                                           <C>                   <C>
     Cash flows from operating activities
       Net income....................................................         $     3,331           $     1,887
         Adjustments to reconcile net income to net cash
           provided by (used in) operating activities:
              Net change in investment in subsidiaries...............              (3,331)               (2,257)
              Amortization of debt discount..........................                   -                   537
              Amortization of debt issuance costs....................                   -                    13
              Deferred income taxes..................................                   -                  (180)
              Changes in operating assets and liabilities:
                  Income tax receivable..............................               3,155                     -
                                                                              -----------           -----------

               Net cash provided by (used in) operating activities...               3,155                     -
                                                                              -----------           -----------

     Cash flows from financing activities
       Repayment of long-term debt............................                          -                     -
       Capital contribution to subsidiary.....................                     (3,155)                    -
                                                                              -----------           -----------
           Net cash provided by (used in) financing activities                     (3,155)                    -
                                                                              -----------           -----------

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

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


</TABLE>


<PAGE>


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


<TABLE>
<CAPTION>
                                                                                September 30,         June 30,
                                                                                    2003                2003
                                                                                -------------      -------------
                                                                                 (unaudited)        (unaudited)

<S>                                                                             <C>                <C>
ASSETS
Current assets
Cash and cash equivalents..................................................     $       5,323      $       1,470
Accounts receivable, net...................................................            29,990             20,267
Inventory..................................................................             8,766              7,265
Income tax receivable......................................................                 -              1,011
Prepaid expenses...........................................................             1,358                671
Deferred income taxes......................................................               808                808
                                                                                -------------      -------------

   Total current assets....................................................            46,245             31,492

Property, plant and equipment, net.........................................            15,472             16,584
Goodwill ..................................................................           152,994            152,994
Other intangible assets, net...............................................            10,867             11,307
Deferred charges, net......................................................             2,868              3,032
Other assets...............................................................               134                138
                                                                                -------------      -------------

   Total assets............................................................     $     228,580      $     215,547
                                                                                =============      =============

LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Current portion of long-term debt..........................................     $       1,937      $       1,875
Accounts payable, trade....................................................             8,121              5,444
Accrued income taxes.......................................................             1,469                  -
Accrued compensation.......................................................             3,019              4,333
Accrued interest...........................................................             2,972              5,502
Accrued expenses...........................................................             3,031              3,661
                                                                                -------------      -------------

   Total current liabilities...............................................            20,549             20,815

Revolving credit line......................................................            18,037             10,000
Term loan..................................................................             5,750              6,250
Senior notes...............................................................           103,510            103,510
Promissory note to affiliate...............................................               375                  -
Deferred income taxes......................................................               968              1,142
Other non-current liabilities..............................................             1,012              1,740
                                                                                -------------      -------------

   Total liabilities.......................................................           150,201            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..........................................................             8,204              4,873
Accumulated other comprehensive income ....................................               238                435
Carryover basis adjustment.................................................           (15,730)           (15,730)
                                                                                --------------     -------------

   Total stockholder's equity..............................................            78,379             72,090
                                                                                -------------      -------------

   Total liabilities and stockholder's equity..............................     $     228,580      $     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
                                                                    ---------------------------------------------
                                                                    September 30, 2003         September 30, 2002
                                                                    ------------------         ------------------
                                                                       (unaudited)                (unaudited)

<S>                                                                    <C>                        <C>
Net sales.................................................             $    37,258                $    30,400
Cost of goods sold........................................                  23,535                     18,515
                                                                       -----------                 ----------

       Gross profit.......................................                  13,723                     11,885

Selling, general and administrative expenses..............                   4,685                      4,664
Amortization of other intangibles.........................                     286                        286
                                                                       -----------                 ----------

       Income from operations.............................                   8,752                      6,935

Other expenses:
   Interest expense.......................................                   3,214                      3,188
   Management fees and other, net.........................                     100                         63
                                                                       -----------                 ----------

       Income before income taxes.........................                   5,438                      3,684

Income tax expense........................................                   2,107                      1,427
                                                                       -----------                 ----------

       Net income ........................................             $     3,331                 $    2,257
                                                                       ===========                 ==========


</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)....................                                         3,331                                   3,331

Other comprehensive loss, net of tax:
   Foreign currency translation
     adjustment (unaudited)...............                                                      (197)                       (197)
                                                                                                                       ---------

Comprehensive income (unaudited)..........                                                                                 3,134
                                              -----   ------     ----------   ----------     -------     ----------    ---------

Balances, September 30, 2003 (unaudited)..    1,000   $    -     $   85,667   $    8,204     $   238     $  (15,730)   $  78,379
                                              =====   ======     ==========   ==========     =======     ==========    =========


</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>

                                                                                        Three months ended
                                                                             ----------------------------------------
                                                                             September 30, 2003    September 30, 2002
                                                                             ------------------    ------------------
                                                                                 (unaudited)           (unaudited)

<S>                                                                              <C>                   <C>
Cash flows from operating activities
   Net income........................................................            $     3,331           $     2,257
   Adjustments to reconcile net income to net cash  used in
   operating activities:
     Depreciation and amortization of other intangibles..............                  1,844                 1,855
     Amortization of debt issuance cost..............................                    164                   161
     Deferred income taxes...........................................                   (174)                 (160)
     Other...........................................................                   (921)                 (336)
     Changes in operating assets and liabilities:
       Accounts receivable...........................................                 (9,723)                  235
       Inventory.....................................................                 (1,501)               (1,748)
       Prepaid expenses, deferred charges and other assets...........                   (687)                 (543)
       Accounts payable and accrued expenses.........................                 (1,799)               (5,669)
       Income taxes..................................................                  2,480                   446
                                                                                 -----------           -----------

         Net cash  used in  operating activities.....................                 (6,986)               (3,502)
                                                                                 -----------           -----------

Cash flows from  investing activities
   Purchases of equipment............................................                   (243)                 (828)
   Patents...........................................................                    (48)                  (32)
                                                                                 -----------           -----------

         Net cash used in investing activities.......................                   (291)                 (860)
                                                                                 -----------           -----------

Cash flows from  financing activities
   Net proceeds on revolving loan....................................                  8,037                 3,925
   Net repayments on term loan.......................................                   (437)                 (250)
   Net proceeds from promissory note to affiliate....................                    375                   355
   Capital contribution from parent..................................                  3,155                     -
                                                                                 -----------           -----------

         Net cash provided by financing activities...................                 11,130                 4,030
                                                                                 -----------           -----------

Net increase (decrease) in cash and cash equivalents.................                  3,853                  (332)
Cash and cash equivalents, beginning of period.......................                  1,470                 1,875
                                                                                 -----------           -----------

Cash and cash equivalents, end of period.............................            $     5,323           $     1,543
                                                                                 ===========           ===========


Supplemental information
   Net cash paid (received) during the period for:
     Interest..........................................................          $     5,540           $     5,706
     Income taxes......................................................               (3,171)                1,179


</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

          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.  For  arrangements  entered into with VIEs
     created prior to February 1, 2003, the provisions of FIN 46 are required to
     be adopted at the  beginning of the first  interim or annual  period ending
     after December 15, 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.

     Interim financial statements

          The interim consolidated condensed balance sheet at September 30, 2003
     and the interim  consolidated  condensed  statements of operations  for the
     three months ended  September 30, 2003 and 2002,  the interim  consolidated
     condensed statements of cash flows for the three months ended September 30,
     2003 and 2002 and the interim  consolidated  condensed statement of changes
     in  stockholder's  equity for the three months ended September 30, 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.


<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 APB 25 as permitted
     under SFAS 123. Under the intrinsic  value method,  because the stock price
     of the  Company's  employee  stock  options  equaled  the fair value of the
     underlying  stock  on the  date  of  grant,  no  compensation  expense  was
     recognized.  If the Company had elected to recognize  compensation  expense
     based on the fair value of the options at grant date as  prescribed by SFAS
     123, the net income would have been as follows:

                                                       Three months ended
                                                          September 30,
                                                          -------------
                                                       2003            2002
                                                       ----            ----

      Net income, as reported................       $   3,331       $   2,257

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

      Pro forma net income...................       $   3,323       $   2,248
                                                    =========       =========


2.   INVENTORY

         The following table details the components of inventory:

                                             September 30, 2003   June 30, 2003
                                             ------------------   -------------
                                                (unaudited)        (unaudited)
         Raw materials
             Paper...........................   $     1,926        $     1,740
             Other raw materials.............         2,961              2,353
                                                -----------        -----------
                 Total raw materials.........         4,887              4,093
         Work in process.....................         4,586              3,857
         Reserve for obsolescence............          (707)              (685)
                                                -----------        -----------

         Total inventory.....................   $     8,766        $     7,265
                                                ===========        ===========


<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:

                                                          Three months ended
                                                             September 30,
                                                             -------------
                                                          2003          2002
                                                          ----          ----

      Net income.................................     $   3,331     $   2,257

      Other comprehensive income (loss), net
      of tax:
        Foreign currency translation
        adjustments..............................          (197)          373
                                                      ---------     ---------

      Comprehensive income.......................     $   3,134     $   2,630
                                                      =========     =========

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").   Under  the  License
     Agreement,  the Company licenses certain  intellectual  property related to
     one of the Company's products for which the Company is obligated to pay the
     Licensor  a royalty  based on sales of the  product  and a  minimum  annual
     royalty.  The Licensor alleges the Company  committed a number of breaches,
     including a breach of the License  Agreement and a breach of fiduciary duty
     owed to the Licensor,  and is seeking to recover  unspecified amounts under
     the  terms of the  License  Agreement  and all  amounts  due it  under  the
     Company's unjust enrichment of the Licensor's intellectual property rights.

          The Company  believes  that it has valid  defenses  to the  Licensor's
     claims, that it did not breach any provision of the License Agreement,  and
     that the License  Agreement is valid and enforceable.  The Company believes
     that Licensor 's claims are without merit, and intends to vigorously defend
     against its claims.


<PAGE>


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

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

General

     Our sales are  derived  primarily  through our  multi-sensory,  interactive
marketing  activities  primarily from the sale of printed advertising  materials
with sampling  systems and 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  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 September 30, 2003 Compared to Three Months
                            Ended September 30, 2002

     Net  Sales.  Net  sales for the  three  months  ended  September  30,  2003
increased $6.9 million, or 22.7%, to $37.3 million, as compared to $30.4 million
for the three months  ended  September  30, 2002.  The increase in net sales was
primarily   attributable  to  increased  sales  of  sampling   technologies  for
advertising and marketing of domestic cosmetic and consumer products.

     Gross  Profit.  Gross profit for the three months ended  September 30, 2003
increased $1.8 million, or 15.1%, to $13.7 million, as compared to $11.9 million
for three months ended  September 30, 2002.  Gross profit as a percentage of net
sales  decreased  to 36.7% in the three months ended  September  30, 2003,  from
39.1% in the three months ended September 30, 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 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  September 30, 2003 was $4.7
million  consistent  with the $4.7 million for the three months ended  September
30, 2002. Selling, general and administrative expenses as a percent of net sales
decreased to 12.6% in the three months ended  September 30, 2003,  from 15.5% in
the three months ended  September  30, 2002  primarily  because  these costs are
largely fixed.

     Income from  Operations.  Income from operations for the three months ended
September  30, 2003  increased  $1.9  million,  or 27.5%,  to $8.8  million,  as
compared to $6.9 million for the three months ended  September 30, 2002.  Income
from  operations  as a percentage  of net sales  increased to 23.6% in the three
months ended  September 30, 2003, from 22.7% in the three months ended September
30, 2002. The increase in income from operations and income from operations as a
percentage  of net sales is  principally  the  result of the  factors  described
above.

     Interest  Expense.  Interest  expense (which  includes the  amortization of
deferred  financing  costs)  for the  three  months  ended  September  30,  2003
decreased $0.5 million,  or 13.5%, to $3.2 million,  as compared to $3.7 million
for the three months ended September 30, 2002. The decrease in interest  expense
is primarily  due to a decrease in interest  expense  related to retired  Senior
Discount Debentures,  the remaining outstanding of which were repurchased in the
quarter  ending June 30, 2003.  Interest  expense as a  percentage  of net sales
decreased to 8.6% in the three months ended  September  30, 2003,  from 12.2% in
the three months ended September 30, 2002.


<PAGE>


     Interest  expense for AKI for the three months ended September 30, 2003 was
$3.2  million  consistent  with the $3.2  million  for the  three  months  ended
September 30, 2002.  Interest  expense as a percentage of net sales decreased to
8.6% in the three  months  ended  September  30,  2003,  from 10.5% in the three
months ended September 30, 2002.

     Income Tax Expense. Income tax expense for the three months ended September
30, 2003  increased  $0.9 million to $2.1 million.  The Company's  effective tax
rate was 39% in the three months ended September 30, 2003 and 2002.

     Income tax expense for AKI for the three  months ended  September  30, 2003
increased $0.7 million to $2.1 million.  AKI's effective tax rate was 39% in the
three months ended September 30, 2003 and 2002.


Liquidity and Capital Resources

     We have substantial  indebtedness and significant debt service obligations.
As of  September  30, 2003,  we had  consolidated  indebtedness  in an aggregate
amount  of  $129.6  million  (excluding  trade  payables,  accrued  liabilities,
deferred taxes and other non-current liabilities), of which approximately $129.6
million  was a direct  obligation  of AKI  relating  to its  notes,  term  loan,
revolving  loan and  promissory  note to affiliate.  Borrowings at September 30,
2003 included  $18.0 million under the revolving loan and $7.7 million under the
term loan and $0.4 million on the promissory note to affiliate. At September 30,
2003 we had $1.7 million  available  under the revolving  loan. At September 30,
2003, we also had $20.6 million in additional outstanding liabilities (including
trade  payables,  accrued  liabilities,  deferred  taxes and  other  non-current
liabilities).

     AKI's principal  liquidity  requirements are for debt service  requirements
and fees under the notes,  term loan and revolving loan.  Historically,  we have
funded our capital,  debt service and operating  requirements with a combination
of net cash provided by operating activities, together with borrowings under the
revolving loan and promissory  note to affiliate.  During the three months ended
September 30, 2003, cash totaling $7.0 million was used by operating  activities
primarily  due to the  increase in accounts  receivable  and  inventory  and the
decrease in accrued expenses, partially offset by net income before depreciation
and  amortization and the increase in accounts payable and income taxes payable.
During the three months ended September 30, 2002, cash totaling $3.5 million was
used by operating  activities  primarily  due to the increase in inventory and a
decrease in accrued interest,  accrued compensation and accounts payable, offset
partially by an increase in accrued expenses.

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

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


<PAGE>


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

                                                        Three months ended
                                                           September 30,
                                                           -------------
                                                       2003            2002
                                                       ----            ----

      Net income ............................       $     3.3       $     1.9

      Income tax expense.....................             2.1             1.2
      Interest expense.......................             3.2             3.7
      Depreciation and amortization of
        other intangibles....................             1.8             1.9
                                                    ---------       ---------

      Adjusted EBITDA........................       $    10.4       $     8.7
                                                    =========       =========


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

                                                        Three months ended
                                                           September 30,
                                                           -------------
                                                       2003            2002
                                                       ----            ----

      Net income...............................     $     3.3       $     2.2

      Income tax expense.......................           2.1             1.4
      Interest expense.........................           3.2             3.2
      Depreciation and amortization of
        other intangibles......................           1.8             1.9
                                                    ----------      ---------

      Adjusted EBITDA..........................     $     10.4      $     8.7
                                                    ==========      =========


     In the three  months  ended  September  30,  2003 and 2002,  we had capital
expenditures  of  approximatelyz  $0.2 million and $0.8  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  $3.0  million  and $4.0  million.  Based on
borrowings  outstanding  as of September 30, 2003, we expect total cash payments
for debt service for the twelve months ending June 30, 2004 to be  approximately
$14.1 million,  consisting of $1.9 million in principal  payments under the term
loan,  $10.9  million  in  interest  payments  on the Notes and $1.3  million in
interest  and fees under the credit  agreement.  We also expect to make  royalty
payments of approximately  $1.2 million during the twelve months ending June 30,
2004.

     At September  30,  2003,  AKI's cash and cash  equivalents  and net working
capital  were $5.3  million and $25.7  million,  respectively,  representing  an
increase  in cash and cash  equivalents  of $3.8  million and an increase in net
working  capital of $15.0  million from June 30,  2003.  The increase in working
capital is primarily due to the increase in cash and cash equivalents,  accounts
receivable and inventory.


<PAGE>


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").  Under the License  Agreement,  the Company licenses
certain intellectual property related to one of the Company's products for which
the Company is  obligated  to pay the  Licensor a royalty  based on sales of the
product and a minimum annual royalty. The Licensor alleges the Company committed
a number of breaches,  including a breach of the License  Agreement and a breach
of fiduciary  duty owed to the Licensor,  and is seeking to recover  unspecified
amounts  under the terms of the License  Agreement  and all amounts due it under
the Company's unjust enrichment of the Licensor's intellectual property rights.

     The Company  believes that it has valid defenses to the Licensor's  claims,
that it did not breach any  provision  of the  License  Agreement,  and that the
License  Agreement is valid and enforceable.  The Company believes that Licensor
's claims are  without  merit,  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

     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. For
arrangements  entered  into with VIEs  created  prior to February  1, 2003,  the
provisions  of FIN 46 are  required to be adopted at the  beginning of the first
interim  or annual  period  ending  after  December  15,  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.

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)


<PAGE>


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.


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 September 30, 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

     On October 31, 2003, The Beautiful  Bouquet  Company,  Ltd.  ("BBCo") filed
suit in the circuit  court of  Hamilton  County,  Tennessee  against the Company
alleging  breaches of a Patent and Know-How License  agreement,  as amended (the
"License Agreement").  Under the License Agreement, the Company licenses certain
intellectual  property related to the Company's  DiscCover(R)  product for which
the  Company  is  obligated  to  pay  BBCo  a  royalty  based  on  sales  of the
DiscCover(R) product and a minimum annual royalty.

     BBCo  alleges  in its  complaint  that  during  negotiations  in 1997 of an
Amendment to the License  Agreement (the "1997 Amendment") the Company committed
a number of breaches,  including a breach of the License Agreement,  a breach of
fiduciary  duty owed to BBCo,  unjust  enrichment and breach of the Amendment to
the License Agreement. BBCo seeks to recover unspecified amounts under the terms
of the original  License  Agreement  and all amounts due it under the  Company's
unjust  enrichment of BBCo's  intellectual  property rights.  In addition,  BBCo
seeks to void  and/or  rescind  the  1997  Amendment  and  restore  the  License
Agreement to its original  term,  including  its  expiration on October 21, 2003
unless the required provisions are met.

     The Company  believes that it has valid defenses to BBCo's claims,  that it
did not breach any  provision  of the  License  Agreement,  and that the License
Agreement is valid and enforceable.  The Company believes that BBCo's claims are
without merit, and intends to vigorously defend against its claims.  However, if
BBCo were to prevail in this lawsuit, the Company's financial condition, results
of operations and cash flows could be materially adversely affected.


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

     On September 9, 2003, by unanimous written consent, each of Holding and AKI
held its respective  annual meeting of stockholders to vote upon the election of
directors.  The  stockholder  in each case  voted to elect  William  Fox,  David
Wittels, High Kirkpatrick, Douglas Fox and David Durkin to serve as directors of
each of Holding and AKI until the next annual meeting or until their  successors
are elected and duly qualified.


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.*

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

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

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

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

    (b) Reports on Form 8-K

          None


<PAGE>


                                   SIGNATURES

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

                                      AKI HOLDING CORP.

Date:  November 5, 2003               By: /s/ Kenneth A. Budde
                                          -----------------------------------
                                          Kenneth A. Budde
                                          Senior Vice President &
                                            Chief Financial Officer
                                            (Principal Financial and Accounting
                                            Officer)



                                      AKI, INC.

Date:  November 5, 2003               By: /s/ Kenneth A. Budde
                                          -----------------------------------
                                          Kenneth A. Budde
                                          Senior Vice President &
                                            Chief Financial Officer
                                            (Principal Financial and Accounting
                                            Officer)