UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

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

For the Year ended December 31, 2004

Commission File No. 333-51839

DAY INTERNATIONAL GROUP, INC.

State of Incorporation:Delaware

IRS Employer Identification No.:31-1436349

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

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

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. Yes þ Noo

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.þ

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

DOCUMENTS INCORPORATED BY REFERENCE – None

Except as otherwise stated or unless the context otherwise requires, references to the “Company” or “Day” include Day International Group, Inc., a Delaware corporation that is the Registrant, and each of its subsidiaries. The Company’s address is P.O. Box 338, 130 West Second Street, Dayton, Ohio 45401-0338, and its telephone number is (937) 224-4000. The Company’s periodic reports filed with the Securities and Exchange Commission (“SEC”) are available at the SEC’s website (www.sec.gov).

Except as otherwise stated, the information contained in this report is given as of December 31, 2004, the end of the Company’s latest fiscal year.

Safe Harbor Statement; Industry Data

This Annual Report contains forward-looking statements within the meaning of the Securities Act of 1933. These are subject to certain risks and uncertainties, including those identified below, which could affect the Company’s actual results and cause such results to differ materially from those expressed in forward-looking statements. The words “believe,” “anticipate,” “expect,” “intend,” “will likely result,” “will continue,” and similar expressions identify forward-looking statements.

Factors that could cause actual results to differ materially from the forward-looking statements include but are not limited to (i) the effect of leverage, including the limitations imposed by the Company’s various debt instruments; (ii) risks related to significant operations in international countries, including the translation of operating results to the U.S. dollar; (iii) the timely development and market acceptance of new products; (iv) the effect of competitive products and pricing; (v) the effect of changing general and industry specific economic conditions; (vi) the effect of environmental regulations; and (vii) the potential for technology obsolescence.

While made in good faith and with a reasonable basis based on information currently available to the Company’s management, there is no assurance that any such forward-looking statements will be achieved or accomplished. The Company is under no obligation to update any forward-looking statements to the extent it becomes aware that they are not achieved or likely to be achieved for any reason.

Market data used throughout this report was obtained from internal company surveys and industry publications. Industry publications generally indicate that the information contained therein has been obtained from sources believed to be reliable, but the accuracy and completeness of such information is not guaranteed. The Company has not independently verified any of such market data. Similarly, internal company surveys, while believed by the Company to be reliable, have not been verified by any independent sources.

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Table of Contents

PART I

ITEM 1. BUSINESS

Company Background

The Company is one of the world’s leading producers of precision-engineered products, specializing in the design and customization of consumable image-transfer products for the graphic arts (printing) industry and consumable fiber handling products for the textile yarn spinning industry. The Company consists of two segments: the Image Transfer segment and the Textile Products segment. The Image Transfer segment consists of the Transfer Media division, the Chemical Products division and the Flexographic Products division. The Transfer Media division is the world’s largest designer, manufacturer and marketer of high-quality printing blankets and sleeves for use in offset printing and a leading designer and manufacturer of consumable sleeves for digital press applications. The Company estimates that in 2004 it had the number one market share in offset-printing blankets and sleeves in North America and worldwide. The Chemical Products division is a leading worldwide supplier of pressroom chemicals to the printing industry and also manufactures the Kompac brand of automatic dampening systems for printing presses. The Flexographic Products division is one of the world’s largest manufacturers and marketers of sleeves for use in flexographic printing. As a result of the acquisition of Network Distribution International (“NDI”) on November 24, 2003, the Image Transfer Segment is the largest converter of offset blankets in the United States and is a leading distributor of a broad range of pressroom chemicals and various ancillary products used in the pressroom. The Textile Products segment is one of the world’s largest manufacturers and marketers of precision engineered rubber cots, aprons and other fabricated rubber fiber handling components sold to the yarn spinning and glass-forming industries worldwide.

Affiliates of GSC Partners and SG Capital Partners LLC own substantially all of the common stock of the Company, with the Company’s management holding the balance of the common stock.

See the Notes to the Consolidated Financial Statements for more information on business segments and geographic areas.

Image Transfer

The Image Transfer segment specializes in selling consumable products to the graphic arts (printing) industry, primarily those used in offset printing. Offset is the primary printing process for long-run, high-speed applications, such as the printing of magazines, annual reports, catalogs, direct mail and newspapers. Flexographic and digital printing processes are currently used primarily in short-run, lower speed applications, such as for printing brochures and packaging material. The Company believes that applications for image transfer products within flexographic and digital printing processes will increase significantly and that advances in digital technologies will complement offset printing processes and will provide additional opportunities for consumable products. It is generally expected that the demand for these processes will grow rapidly and that they will be used for an increasing amount of printing jobs. If these other technologies develop so that they compete effectively with offset printing in the high-speed, long-run segment of the printing industry, and such technologies are widely adopted, the business of Image Transfer could be adversely affected. There can be no assurance that the Company

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will be able to develop products effectively for these technologies or to maintain its market leadership if such processes replace offset printing to any significant extent. The Company manufactures certain consumables for the digital printing market and, in conjunction with the original equipment manufacturers (“OEMs”), continues to develop additional products such as blankets, sleeves and belts for new printing machine technologies. Due to the large number of offset printing presses installed and the relative cost-effectiveness of the offset printing process, management expects that the offset process will continue to be the method of choice for long high-quality low-cost runs. Products designed for use in offset printing generate the majority of the sales of Image Transfer.

Transfer Media

Offset printing blankets are highly engineered products manufactured to narrow tolerances and precise specifications. They are composed of multiple layers of fabric, rubber and adhesives that determine performance features on the printing press and overall quality of the printing job. Offset printing sleeves are highly engineered “tubular” blankets that operate at speeds 20% to 30% faster than those of standard presses. Blankets and sleeves accept ink from cylindrical printing plates and transfer it to a broad range of paper stocks and other substrates. Blankets and sleeves are a major determinant of the quality of the image resolution and consistency of the printed material, as they are required to perform consistently over a broad range of press speeds and printing pressures with a wide variety of papers, inks and other chemicals. Blankets and sleeves are consumable and are replaced at regular intervals depending on the process used and printing requirements. Due to the importance of blankets and sleeves in determining the overall quality of the printing job, and because their cost typically represents less than 1% of the cost of the printed page, price is only one of the factors in the end-user’s purchase decision.

Chemical Products

Chemical Products manufactures two categories of products: pressroom chemicals and dampening systems. Chemical Products manufactures over 100 different pressroom chemicals, which can be classified into the following categories: (i) roller and blanket washes, which are used to remove ink and glaze from the surface of the rollers and blankets on the printing press; (ii) fountain solutions, which are used to prevent ink from migrating to non-print areas of the printing plate; (iii) anti-setoff powders, which are used by sheet fed and letter press printers to prevent ink from transferring from the top of one sheet to the bottom of the next; (iv) lithographic chemicals and specialties; (v) silicones, which are used in heatset web offset to provide support in certain printing processes; and (vi) coatings. Chemical Products’ products can be grouped into standard and custom products. Product lines are formulated to meet specific customer requirements. For example, high volume printing operations, such as major daily newspapers and commercial heatset web, often require custom fountain solutions.

Flexographic Products

The Company manufactures products for flexographic printing including fiberglass-based plate mounting sleeves, bridge mandrels, sleeves for coating applications, ready-to-image products and various support products. The Company’s traditional flexographic sleeves are constructed with a unique compressible technology that allows for greater flexibility in the printing of packaging materials, such as

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plastic or cardboard. In addition, the compressible sleeve offers the flexographic printer significant time and cost improvements over the traditional method of affixing a photopolymer plate to the metal cylinder.

Products

The Company manufactures a full line of high-quality, name brand printing blankets and sleeves to both web-fed (continuous roll) and sheet-fed (individual sheet) offset printers under the “Day,” “David M,” and “IPT” brands. In addition, through NDI, it offers certain name-brand blankets produced by competitors. The Company’s printing blankets and sleeves are used to print magazines, advertising material, business forms, packaging, newspapers and other printed material. As a result of the superior quality, reliability and value of the Company’s printing blankets and sleeves and its customer service, the Company is able to command premium prices for its products.

The Company’s leading printing blankets are the 9500 dayGraphica^®, 4000 dayGraphica^®, 3000 Patriot^®, Durazone^®, 3610 dayGraphica^®, 8500 AccuDot^®, QuantaLith^® Gold and QuantaLith^® Blue lines, which produce high-quality images, particularly on high-speed printing presses. The Company is the sole manufacturer of tubular, seamless printing sleeves for use on Goss International Corporation’s (formerly Heidelberg Web Systems) “gapless” web offset presses.

The Company produces consumable products for digital printing presses. Sales of these products are expected to grow as digital printing presses are sold that utilize these products. The Company is evaluating the production of other prototypes for new short-run color printing processes in conjunction with leading OEMs.

Transfer Media also manufactures and sells two lines of specialty products consisting of (i) pre-inked porous rolls for use in business machines, automated bank teller machines, ticket machines and credit card imprinters and (ii) cast urethane mats used by the box board corrugating industry as a backing material in cutting operations. The Company also sells printing accessories such as cylinder packing papers and aluminum bars for mounting blankets onto press cylinders. In addition, the Company sells custom rubber compounds to several wire coaters in Europe.

Chemical Products has developed products that speed wash-up, color changes and blanket and roller maintenance. All are formulated to reduce downtime and improve productivity. Roller and blanket washes are used to remove ink and glaze from the surface of the rollers and blankets on the printing press. Chemical Products makes over 25 washes, grouped into five different categories: premium, environmental, general purpose, fast drying and specialty. Chemical Products is a market leader in the area of environmentally friendly washes.

Chemical Products has created a family of fountain solutions, which are used to prevent ink from migrating to non-print areas of the printing plate, to cover all requirements from high-speed web printing presses down to small offset duplicating printing presses. The fountain solutions and fountain additives are adjusted for water condition and properly balanced and fortified to improve print quality and press productivity. Chemical Products has created a line of alcohol-free fountain solutions formulated to eliminate the use of isopropyl alcohol from the process, thus improving the pressroom environment.

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Antisetoff powders are used extensively by sheetfed, offset and letterpress printers to prevent ink from transferring from the top of one sheet to the bottom of the next. Chemical Products offers an extensive range of silicone and conventional antisetoff powders to meet all industry requirements.

Lithographic chemicals and specialties include a wide range of products (including deglazers, additives, plate cleaners, aerosols) formulated to meet the evolving needs of the printing industry.

Silicones are used in heatset web offset printing to provide slip to the sheet as it passes over the former board. Chemical Products offers an extensive line of conventional silicones, as well as new technology silicones.

Chemical Products also manufactures the patented Kompac Dampening System and other mechanical devices for offset printing presses. Chemical Products manufactures six different Kompac Dampening Systems models to fit more than eight different presses, both for new and retrofit applications. Kompac Dampening Systems consume other products manufactured by Chemical Products, such as fountain solutions.

Flexographic Products manufactures a wide array of sleeves used in the flexographic printing process under the Rotec name. Rotec gained industry prominence in 1993 with the introduction of the compressible sleeve, a product innovation enabling flexographic printers to achieve higher levels of print quality. The base technology for the flexographic sleeve has the potential for use in other printing segments as well (e.g., gravure and offset), which may expand the market segments for sleeve technology. The Company has entered into an exclusive agreement with E. I. du Pont de Nemours and Company to develop and manufacture an “in-the-round” sleeve under the Cyrel^® brand name for flexographic presses. The Company will manufacture sleeves with a seamless photopolymer plate using DuPont’s proprietary Cyrel photopolymer technology.

Sales and Distribution

Image Transfer has adopted an integrated approach to product development, marketing, sales and distribution. The Company’s sales professionals, located throughout the world, develop and cultivate strong customer relationships and possess superior technical expertise. In certain regions, independent sales representatives and distributors complement the Company’s sales force.

Image Transfer’s sales force calls directly on end-users and promotes the quality and technical features of the Company’s products to pressroom foremen, purchasing agents, plant managers and press operators. Depending on the market and product, the end-users can then order directly from the Company or through authorized converters or dealers. Image Transfer distributes a majority of its products through its own converting operation (NDI) as well as through a large network of independent converters, who buy and cut printing blanket rolls to customized orders, and dealers and sub-dealers who buy finished products, store inventory and hold receivables. Converters are value-added dealers who typically purchase rolls of uncut printing blankets from the Company and then cut, finish and package the blankets for sale to dealers or end-users. The Company believes that it has one of the most effective networks of converters and dealers in the industry. While the Company distributes a substantial portion of its products directly to end-users, the sales force supports and works closely with independent converters and dealers through joint calling efforts on end-users and training programs. In addition, sales and technical associates work directly with large end-users to identify the printing

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blankets and sleeves that best suit a printer’s particular needs and to formulate solutions to complex printing problems. NDI distributes products manufactured by the Company, as well as other blanket manufacturers.

Textile Products

The Textile Products segment manufactures highly engineered rubber rollers, known as cots, and flexible belts, known as aprons, for utilization on yarn spinning machinery, which produces yarn used in the apparel, home furnishing, carpet and industrial fabric industries. In addition, the Company manufactures consumable aprons used to apply sizing to fiberglass filament during the glass-forming process. As a result of continuing technological improvements in automated high-speed spinning frames, customers continue to demand cots and aprons of higher quality and greater flexibility to meet their specialized needs and are typically willing to pay a premium for cots and aprons that meet their value equation. The Company is known as a leader in technological innovation and quality and has the broadest line of spinning cots and aprons of any global cots and aprons manufacturer.

Products

The Company offers its customers both general purpose and specialty cots and aprons recognized in the global marketplace under the DAYtex^® and Accotex^® brand names, with over 4,000 different SKUs. General-purpose cots and aprons include a full line of products designed for “short staple” fibers (such as cotton) and “long staple” fibers (such as wool), while specialty cots and aprons include glass-forming aprons, cordless aprons and drawing cots. The Company provides high-quality, precision-engineered products that deliver superior value to its customers. As a result, Textile Products has been an industry leader in quality and performance, allowing the Company to command premium pricing for its products.

Because of changes in the spinning process, increasing machine speeds and other rigorous process demands, spinning industry suppliers are constantly challenged to improve the precision, quality and consistency of their products. The Company continues to introduce highly engineered cots and aprons targeted to the texturing, high-speed ring and air-jet spinning markets and to the quickly growing compact spinning market. Products such as aluminum-lined cots provide improved rigidity and tolerance and have been widely accepted in the marketplace. Cots and aprons for these applications face ever-increasing performance and durability demands and DAYtex and Accotex products have been acknowledged as being technical leaders in these applications.

Other products and services include ribbons (take-up roll covering), various other accessories and reconditioning services.

Textile Products’ product development has allowed the Company to diversify into new markets. The Company’s glass-forming aprons are used to make glass fiber from liquid glass, and texturizing aprons are used to finish certain types of synthetic filaments. Textile Products also manufactures and markets rubber shrinkage belts for use in fabric pre-shrinking processes, such as those used for denim, as well as rubber-covered industrial rollers for textile and other industrial applications.

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Sales and Distribution

The Company believes that the quality, technical proficiency and experience of its Textile Products sales force distinguishes its marketing efforts from those of competitors. Textile Products’ sales professionals have extensive knowledge of the spinning and weaving process. The sales force, located throughout the world (including Europe, China and the United States), markets its products directly to end-users, primarily textile mills, and original equipment manufacturers. In certain regions, independent sales representatives complement the Company’s sales force.

Raw Materials

Rubber polymers are a key component in most of the products of Transfer Media and Textile Products. The Chemical Products division purchases approximately 200 different raw materials from a variety of key national suppliers, and holds supply agreements with many of them. However, no single supplier accounts for more than 10% of total raw material costs. The largest raw material component for Chemical Products is petroleum distillates, such as aliphatics and aromatics. Raw material purchases accounted for approximately 50% of cost of goods sold for the Company’s products during 2004, 2003 and 2002. Various fabrics and rubber represented approximately 30% of all raw materials purchased in each of 2004, 2003 and 2002. The Company has developed contingency plans to address supply line disruptions, including identifying alternative sources and maintaining a safety stock of critical raw materials.

The Company is exposed to fluctuations in petroleum prices on certain raw material costs and historically has been able to pass on price increases to customers.

The Company purchases its raw material requirements from a number of suppliers on a purchase order basis, and the Company believes that there are sufficient sources of supply for the foreseeable future.

Research and Development

The research and development staff is focused on current product and process improvement efforts, as well as development of new consumables for future Image Transfer and Textile Products processes. The Company’s active patents have been important to its existing product line, and increased emphasis is being placed on new product technologies. Active efforts to obtain additional patents are underway on a variety of technologies, including certain process patents.

In addition to its extensive patent and trademark portfolio, the Company has a variety of working agreements with key partners in the image transfer business. These agreements and other efforts with original equipment manufacturers may stimulate proprietary processes and additional patent applications. In 2004, Heidelberger Druckmaschinen AG sold their web offset press business to Goss International Corporation and their 50%-ownership in Nexpress Solutions LLC to Eastman Kodak Co. The Company has long-standing relationships with both of these companies and expects these relationships to continue.

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Competition

The Company competes with a number of manufacturers in the image transfer and textile components industries, with the main competitive factors being quality, performance, service and price. The Company competes with a number of manufacturers of offset printing blankets, including Reeves International, Incorporated (“Reeves”), Polyfibron Technologies, Inc. (“Polyfibron”), a subsidiary of MacDermid, and Kinyosha Printing Company, Ltd. Chemical Products competes with a number of manufacturers of pressroom chemicals, of which the principal competitors are Anchor Chemical Company, Rycoline, Inc. (acquired by Sun Chemical Corporation in 2004) and Printers’ Service (PRISCO). In the United States, NDI competes with several distributors, many of which are customers of the Company. Rotec’s principal competitors are Rossini S.p.A., Polywest Kunststofftechnik, and Axcyl Inc., a subsidiary of Polyfibron. Accel Graphics, a division of Parmarco Technologies Inc., is the only main competitor to the Kompac line.

In Textile Products, the Company competes with manufacturers such as Hokushin Corporation, Yamauchi Corp. and Berkol, a division of Huber+Suhner AG.

Some of the Company’s competitors may have greater financial and other resources than the Company and may consequently have more operating flexibility and a greater ability to expand production capacity and increase research and development expenditures.

International Operations

The Company’s principal international manufacturing facilities are located in Dundee, Scotland (Transfer Media), Ahaus, Germany (Flexographic Products), Manchester, England (Chemical Products) and Münster, Germany (Textile Products). In addition, the Company maintains facilities in Australia, Brazil, Czech Republic, China/Hong Kong, France, Germany, Italy, Malaysia, Mexico and Russia.

The Company manufactures and markets its products worldwide through several international subsidiaries and independent agents. The Company’s worldwide operations are subject to the risks normally associated with international operations including, but not limited to, the disruption of markets, changes in export or import laws, restrictions on currency exchanges, and the modification or introduction of other governmental policies with potentially adverse effects.

Approximately 48% of the Company’s 2004 sales were derived from products sold to customers outside the United States. This has decreased from 53% in 2003 and 49% in 2002, primarily as a result of the acquisition of NDI at the end of 2003 with substantially all of NDI’s sales generated in the United Sates. The U.S. dollar value of these revenues varies with currency exchange rate fluctuations, and the Company may be exposed to gains or losses based upon such fluctuations. Significant increases in the value of the U.S. dollar relative to foreign currencies could have an adverse effect on the Company’s ability to meet interest and principal obligations on its U.S. dollar-denominated debt. The Company periodically enters into forward foreign exchange contracts to protect it against a portion of such foreign exchange movements.

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Environmental Matters

The Company’s facilities in the United States are subject to federal, state and local environmental laws and regulations, including those governing discharges to the air and water, the handling and disposal of solid and hazardous wastes, and the remediation of contamination associated with releases of hazardous substances. International facilities are subject to their respective countries’ federal and local environmental requirements, as well as the environmental requirements promulgated by the European Union, where applicable. The Company has made, and will continue to make, expenditures to comply with current and future environmental requirements. Environmental requirements are becoming increasingly stringent, and therefore the Company’s expenditures for environmental compliance may increase in the future.

Based on environmental assessments conducted by independent environmental consultants, the Company believes that its operations are currently in compliance with environmental laws and regulations, except as would not be expected to have a material adverse effect on the Company. However, there can be no assurances that environmental requirements will not change in the future or that the Company will not incur significant costs in the future to comply with such requirements. In addition, the Company’s operations involve the handling of toluene and other hazardous substances, and if a release of hazardous substances occurs on or from the Company’s facilities, the Company may be required to pay the cost of remedying any condition caused by such release, the amount of which could be material.

On July 11, 2002, the United States Environmental Protection Agency issued the proposed Maximum Achievable Control Technology (“MACT”) standard for the Printing source category. This MACT standard is applicable to sources located at the Company’s U.S. operations. The MACT requirements were placed into effect on March 15, 2003. The primary effect of this rule will be to require implementation of additional air emission monitoring systems at the Company’s U.S. facilities. These rules will require certain modifications to the plant facilities over the next two years that will total approximately $2.0 million for U.S. operations.

Associates

The Company currently employs approximately 1,470 full-time associates worldwide, of which approximately 770 are employed in the United States and Canada. The Company’s associates in Dundee, Scotland, and Münster, Germany, are represented by labor unions. In January 2004, the labor union in Dundee entered into a new three-year collective bargaining agreement with the Company, expiring on December 31, 2006. The labor union in Münster has entered into collective bargaining agreements with the Company pertaining to general working conditions and to salaries and wages. The agreement as to general working conditions expires December 31, 2006, and the agreement as to salaries and wages expires June 30, 2005. None of the Company’s U.S. associates are covered by a collective bargaining agreement. To encourage productivity improvements, a portion of each associate’s total compensation is tied to a performance bonus. The Company considers its employee relations to be good.

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ITEM 2. PROPERTIES

As noted below, the Company operates state-of-the-art, manufacturing facilities strategically located throughout the world. The Company believes that it has sufficient capacity at its manufacturing facilities to meet its production needs for the foreseeable future, and further believes that all its sales worldwide can be sourced through these facilities. A majority of the Company’s manufacturing facilities are ISO certified. The Company’s significant facilities are listed below:

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ITEM 3. LEGAL PROCEEDINGS

From time to time, the Company is involved in various legal proceedings arising in the ordinary course of business. None of the matters in which the Company is currently involved, either individually or in the aggregate, is expected to have a material adverse effect on the Company’s business or financial condition.

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

A special meeting of the holders of the 12-1/4% Senior Exchangeable Preferred Stock due 2010 (the “Exchangeable Preferred Stock”) was held on October 29, 2004. At the meeting two directors were elected in accordance with the terms of the Certificate of Designation of the Exchangeable Preferred Stock that allow for the election of two directors by the holders of Exchangeable Preferred Stock, voting as one class, if the dividends on the Exchangeable Preferred Stock are in arrears and unpaid (and in the case of dividends payable after March 15, 2003, are not paid in cash) for four consecutive quarterly periods. The results of the election are as follows:

Each of the following director’s term of office continued after the meeting: William C. Ferguson, Matthew C. Kaufman, Neal Moszkowski, Philip Raygorodetsky, Christopher A. White, and Dennis R. Wolters.

PART II

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

As of March 1, 2005, there were 19 holders of record of shares of Common Stock. Sale or transfer of the Common Stock is subject to the terms of a Stockholders Agreement that all stockholders have signed. There is no established trading market for the Common Stock. The Company has never paid or declared a cash dividend on the Common Stock.

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ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth summary financial data of the Company for each of the five fiscal years in the period ended December 31, 2004.

(a)	Effective July 1, 2003, the Company adopted SFAS No. 150 and recorded dividends on the redeemable preferred stock as interest expense subsequent to adoption. Preferred stock dividends included in interest expense were $23,156 in 2004 and $10,336 for the period from July 1, 2003 through December 31, 2003.
(b)	The Company acquired NDI as of November 24, 2003. The statement of operations data includes the results of this acquisition from the date of acquisition.

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

The following should be read in conjunction with “Selected Financial Data” and “Financial Statements and Supplementary Data” and notes thereto included elsewhere in this report.

On November 24, 2003, Network Distribution International (“NDI”) was acquired. Its results of operations are included in the Company’s consolidated results of operations for the period subsequent to the acquisition. Accordingly, the results of operations for historical as well as future periods may not be comparable to prior periods.

Comparison of Results of Operations

Year Ended December 31, 2004, compared to Year Ended December 31, 2003

Net sales increased $73.7 million (25.5%) to $362.7 million, primarily as a result of sales from businesses acquired in 2003, higher sales volumes in the United States and Europe and favorable changes in foreign currency rates. Sales in 2004 include $44.4 million of sales from businesses acquired in 2003. Sales in 2004 were positively affected by increased sales volumes of $9.6 million in the United States, increased sales volume of $3.1 million in Europe and $13.4 million of favorable changes in foreign currency rates used to translate international sales into U.S. dollars. Image Transfer’s sales increased $73.1 million (30.4%) to $313.7 million. Image Transfer’s sales were positively affected by sales from business acquisitions in 2003 of $44.4 million, increased sales volumes of $9.3 million in the United States, increased sales volumes of $5.4 million in Europe and $10.8 million as a result of the effect of changes in foreign currency rates. The higher U.S. Image Transfer sales volume was primarily as a result of higher sales volumes in blankets, offset sleeves, flexographic sleeves and digital products. European sales volume increased primarily from growth of chemical products in the United Kingdom and Germany, transfer media products in Germany and flexographic products. Textile Products’ sales increased $0.6 million (1.2%) to $49.0 million, primarily as a result of slightly higher sales volume in the United States of $0.3 million and by favorable foreign currency rate changes of $2.6 million, offset by lower sales volume in Europe of $2.3 million. European Textile Products’ sales volumes were lower in 2004 compared to 2003, primarily as a result of lower demand from original equipment manufacturers (“OEMs”), in line with the OEMs own reduced level of business activity. OEM sales in 2004 continued at a relatively strong level, but were not at the unusually high level of 2003. Lower demand from textile mills in Europe also contributed to the shortfall.

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Gross profit increased $27.5 million (26.2%) to $132.7 million. Foreign currency rate changes increased gross profit by $5.2 million. As a percentage of net sales, gross profit increased to 36.6% for 2004, compared to 36.4% for 2003. The improvement in gross profit as a percentage of sales is a result of improved manufacturing performances offset by the effect of the NDI acquisition in 2003, as that business historically had lower gross profit percentages than Day’s other businesses.

Selling, general and administrative expense (“SG&A”) increased $17.4 million (27.4%) to $80.9 million, primarily as a result of SG&A associated with businesses acquired of $8.9 million and changes in foreign currency rates. Changes in foreign currency rates increased SG&A costs by $2.8 million compared to 2003. SG&A costs also increased as a result of higher insurance costs and higher selling and distribution costs resulting from higher sales levels. As a percentage of net sales, SG&A increased slightly to 22.3% from 22.0%.

Operating profit increased $10.9 million (27.3%) to $50.7 million. As a percentage of net sales, operating profit increased to 14.0% for 2004, from 13.8% for 2003. Image Transfer’s operating profit increased $8.6 million (20.6%) to $50.3 million, primarily as a result of higher sales volumes. As a percentage of net sales, Image Transfer’s operating profit decreased to 16.0% for 2004, from 16.7% in 2003. The decline in operating margin as a percentage of sales is a result of substantially lower operating margins on NDI’s distribution business than Day’s historical margins on manufactured products offset by improved manufacturing performances. Textile Products’ operating profit increased $2.4 million (55.6%) to $6.6 million. As a percentage of net sales, Textile Products’ operating profit increased to 13.5% for 2004, from 8.8% in 2003. Lower selling and administrative costs in the United States and improved manufacturing performance in Europe favorably affected Textile Products’ operating profit in 2004 compared to 2003.

Other (income) expense was $(2.8) million and $3.0 million for 2004 and 2003. The other (income) expense is primarily due to foreign currency transaction (gains) losses incurred in the normal course of international subsidiaries conducting business in other than their functional currencies as well as a result of intercompany financing arrangements. Other (income) expense includes a loss of $1.8 million in 2004 on the mark-to-market of the euro-denominated Tranche A Term Loan and a gain of $0.4 million on the sale of fixed assets. Other expense in 2003 included a loss of $3.2 million on the mark-to-market of the euro-denominated Tranche A Term Loan, a loss of $1.1 million from the sale of the South African business, and a gain of $0.9 million from the sale of excess land in Mauldin, South Carolina.

The effective tax rate was 219.6% in 2004. The Company recorded income tax expense on a loss before income taxes in 2003. The effective tax rate is affected by the adoption of SFAS No. 150 and the non-deductible preferred stock dividends now reflected as interest expense. The effective tax rate in 2004 is further affected by foreign-sourced dividends and income taxable in the United States and non-deductible expenses.

In 2004, the American Jobs Creation Act of 2004 (the “Jobs Act”) was enacted. The Jobs Act provides a deduction with respect to U.S. manufacturing activities, allows for tax-favored repatriation of offshore earnings and makes numerous changes to various tax rules. The Company’s ability to take advantage of certain provisions of the Jobs Act is limited because of the U.S. net operating loss carryforward position of the Company and because of various restrictions in the Company’s debt agreements. For these

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reasons, the Company does not believe that the Jobs Act will have a material effect on the Company’s tax expense or cash flows over the next several years.

In 2004, the FASB issued SFAS No. 123 (Revised), Share-based Payments. This Statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. This Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. This Statement eliminates the alternative to use APB Opinion 25’s intrinsic value method of accounting that was provided in Statement 123 as originally issued. Under APB Opinion 25, issuing stock options to employees generally resulted in recognition of no compensation cost. This Statement requires entities to recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards. This statement will have no effect on the cash flows of the Company, or the Company’s compliance with its debt covenants. Net income (loss) after the adoption will be affected by the stock option expense that was previously only disclosed. The Company has elected to adopt this Statement effective January 1, 2005. Pre-tax stock option expense is estimated to be $1.2 million for the year ending December 31, 2005.

In 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This statement established standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. This statement requires that the Company’s redeemable preferred stock be recorded in the same manner as long-term debt. The Company adopted the statement as of July 1, 2003. Therefore, since the third quarter of 2003, the Company has reflected the redeemable preferred stock as long-term debt and accrued dividends are shown as interest expense. The adoption of this statement had no effect on the net loss available to common shareholders, cash flows of the Company or the Company’s compliance with its debt covenants.

Year Ended December 31, 2003, compared to Year Ended December 31, 2002

Net sales increased $29.0 million (11.2%) to $289.0 million, primarily as a result of favorable changes in foreign currency rates and higher sales volumes in Europe. Sales in 2003 include $6.6 million of incremental sales subsequent to the date of acquisitions. Sales in 2003 were positively affected by $17.0 million of favorable changes in foreign currency rates used to translate international sales into U.S. dollars and increased sales volumes of $2.3 million in the United States and $4.0 million in Europe. Image Transfer’s sales increased $28.9 million (13.7%) to $240.5 million. Image Transfer’s sales were positively affected by sales from business acquisitions in 2003 of $6.6 million, $12.2 million as a result of the effect of changes in foreign currency rates and increased sales volumes of $5.9 million in the United States and $5.0 million in Europe. The higher U.S. Image Transfer sales volume was primarily as a result of higher sales volumes across substantially all product lines. Europe sales volume increased primarily from market share gains in the chemical products business in the United Kingdom and Germany. Textile Products’ sales increased $0.1 million (0.2%) to $48.4 million. Foreign currency rate changes positively affected Textile Products’ sales by $4.7 million. Textile Products’ sales decreased as a result of decreased volume of $3.6 million in the United States and $1.0 million in Europe and export markets. The lower U.S. Textile Products sales volume is primarily due to reduced demand in the U.S. textile industry as a result of weak consumer demand for textile and apparel products coupled with increased imports of low cost goods from Asia and South America. The ongoing restructuring of the U.S. textile manufacturing industry has resulted in further consolidation and closure of yarn spinning

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mills as well as weaving facilities. Weak sales have forced textile manufacturers to cut expenses and reduce inventories, which have had a direct effect on reducing Textile Products’ sales.

Gross profit increased $9.6 million (10.1%) to $105.2 million. Foreign currency rate changes increased gross profit by $6.0 million. As a percentage of net sales, gross profit decreased slightly to 36.4% for the year ended December 31, 2003, from 36.7% for the comparable period in 2002.

Selling, general & administrative expenses increased $8.0 million (14.5%) to $63.5 million primarily as a result of foreign currency rate changes. As a percentage of net sales, SG&A increased to 22.0% from 21.3% for the comparable period in 2002. Changes in foreign currency rates increased SG&A costs by $3.5 million in 2003. SG&A costs also increased as a result of higher insurance costs and higher selling and distribution costs from higher sales levels, as well as SG&A costs related to businesses acquired in 2003.

A pre-tax charge of $0.5 million was recorded in the first quarter of 2001 for severance and termination costs to relocate the Textile Products operations from its Asheville, North Carolina, facility to its Greenville, South Carolina, facility. During the first quarter of 2002, the Company reversed $0.1 million of the reserve. Additionally, pre-tax charges of $0.3 million have been recorded in 2002 for relocation of machinery and equipment and write-off of abandoned assets. As of December 31, 2002, the relocation plan was complete.

During the fourth quarter of 2001, the Company ceased operations at its Transfer Media facility in Longwood, Florida. A pre-tax charge of $3.0 million was recorded in 2001 for severance costs for 55 associates, write-off of abandoned assets and costs related to closing the facility. During the second quarter of 2002, final severance payments were paid to all associates and the remaining reserve of $0.1 million for severance costs was reversed.

Operating profit increased $1.7 million to $39.9 million. As a percentage of net sales, operating profit was 13.8% for the year ended December 31, 2003, compared to 14.7% in 2002. Image Transfer’s operating profit increased $4.2 million (11.2%) to $41.7 million, primarily as a result of higher sales volumes. As a percentage of net sales, Image Transfer’s operating profit decreased to 17.4% for the year ended December 31, 2003, compared to 17.7% in 2002, primarily as a result of higher development costs for new products. Textile Products’ operating profit decreased $2.2 million (34.5%) to $4.3 million. As a percentage of net sales, Textile Products’ operating profit was 8.8% for the year ended December 31, 2003, compared to 13.5% in 2002. Textile Products’ operating profit was adversely affected by under absorbed fixed overhead costs resulting from lower U.S. production volumes and by costs related to write-off of non-productive equipment.

Other expense was $3.0 million in 2003, compared to other income of $1.9 million in 2002. The other (income) expense is primarily due to foreign currency transaction (gains) losses incurred in the normal course of international subsidiaries conducting business in other than their functional currencies as well as a result of intercompany financing arrangements. Other expense in 2003 includes a loss of $3.2 million on the mark-to-market of the euro-denominated Tranche A Term Loan, a loss of $1.1 million from the sale of the South African business and a gain of $0.9 million from the sale of excess land in Mauldin, South Carolina.

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The Company recorded income tax expense on a loss before income taxes in 2003. The effective tax rate for 2003 is affected by the adoption of SFAS No. 150 and the non-deductible preferred stock dividends now reflected as interest expense. The effective tax rate is further affected by foreign-sourced dividends and income taxable in the United States and non-deductible expenses. The effective tax rate for 2002 was 40.0%.

As of January 1, 2002, the Company adopted SFAS Nos. 141, Business Combinations and 142, Goodwill and Other Intangible Assets and ceased recording amortization of goodwill of approximately $3.7 million per year and recognized pre-tax income of $1.0 million for the cumulative effect of the change in accounting principle for the amount of the unamortized deferred credit related to the excess over cost arising from the acquisition of the textile products operations of Armstrong World Industries, Inc.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This statement established standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. This statement requires that the Company’s redeemable preferred stock be recorded in the same manner as long-term debt. The Company adopted the statement as of July 1, 2003. Therefore, since the third quarter of 2003, the Company has reflected the redeemable preferred stock as long-term debt and accrued dividends are shown as interest expense. The adoption of this statement had no effect on the net loss available to common shareholders, cash flows of the Company or the Company’s compliance with its debt covenants.

Risks Associated with International Operations

The Company conducts a significant amount of business and has operating and sales facilities in countries outside the United States. As a result, the Company is subject to business risks inherent in non-U.S. activities, including political uncertainty, import and export limitations, exchange controls and currency fluctuations. The Company believes risks related to its international operations are mitigated due to the political and economic stability of the countries in which its largest international operations are located, the stand-alone nature of the operations, the Company’s limited net asset exposure, forward foreign exchange contract practices and pricing flexibility. Thus, while changes in foreign currency values do affect earnings, the longer-term economic effect of these changes should not have a material adverse effect on the Company’s financial condition, results of operations or liquidity.

Certain of the Company’s international subsidiaries make purchases and sales in designated currencies other than their functional currency. As a result, they are subject to transaction exposures that arise from foreign exchange movements between the date that the foreign currency transaction is recorded and the date it is consummated. In addition, the Company has intercompany loans outstanding with certain international subsidiaries in their local currencies, exposing it to the effect of changes in exchange rates at loan issue and loan repayment dates. The Company periodically enters into forward foreign exchange contracts to protect it against such foreign exchange movements. The contract value of these foreign exchange contracts was $9.5 million and $15.9 million at December 31, 2004 and 2003. These contracts generally have terms of three to twelve months. At December 31, 2004 and 2003, the Company had outstanding €20.4 million and €25.8 million of term loans issued under the Senior Secured Credit Facility. The Company has issued euro-denominated debt in order to protect the Company’s investments in Europe from fluctuations in the euro compared to the U.S. dollar. Foreign currency gains (losses),

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included in other (expense) income-net, were $2.5 million in 2004, $(2.6) million in 2003 and $1.3 million in 2002. Based on the Company’s overall foreign currency exchange rate exposure at December 31, 2004, a 10% adverse change in foreign currency exchange rates would result in a hypothetical estimated loss in earnings of approximately $2.9 million. If the forward contracts and the euro-denominated Tranche A Term Loan were aggregated with the Company’s other exposures, a 10% adverse change in foreign currency exchange rates would result in a hypothetical estimated loss in earnings of $0.7 million.

Interest Rate Risks

The Company is subject to market risk from exposure to changes in the interest rates based on its financing activities. The Company utilizes a mix of debt maturities along with both fixed- and variable-rate debt to manage its exposure to changes in interest rates and to minimize interest expense. During 2003, the Company entered into a $25 million interest rate swap to swap a portion of the Company’s variable rate debt to fixed rates. The swap expires in September 2006. The Company does not expect changes in interest rates to have a material effect on income or cash flows in 2005, although there can be no assurance that interest rates will not materially change.

Commodity Risks

Rubber polymers and fabrics are key components in most of the Transfer Media and Textile products. The Company is exposed to changes in the costs of these components. Chemical Products is exposed to changes in the cost of certain petroleum-based components. The largest raw material component in Pressroom Chemicals’ products is petroleum distillates, such as aliphatics and aromatics. When commodity prices increase, the Company has historically passed on increases to its customers to maintain its profit margins. Conversely, when commodity prices decline, the Company generally lowers its sales prices to meet competitive pressures. Because the Company has historically been able to raise sales prices to offset higher costs, management believes that a 10% change in the cost of its components could have a short-term effect until sales price increases take effect, but overall would not have a material effect on income or cash flows for a fiscal year.

Liquidity and Capital Resources

The Company has historically generated sufficient funds from its operations to fund its working capital and capital expenditure requirements.

The Company’s expenditures for plant, property and equipment were $10.4 million in 2004, $6.9 million in 2003 and $8.3 million in 2002. The Company believes that capital expenditures of $9.0 million to $12.0 million annually over the next several years will be sufficient to maintain its leading market position. The Company expects to fund these capital expenditures from cash flow from operations.

The Company is highly leveraged. At December 31, 2004, the Company’s aggregate indebtedness is $252.4 million and the aggregate liquidation preferences of the Exchangeable Preferred Stock is $79.4 million and the Convertible Preferred Stock is $91.4 million. The Exchangeable Preferred Stock may be exchanged for Exchange Debentures subject to certain conditions. See Note G of the Notes to the Consolidated Financial Statements.

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The Senior Secured Credit Facility is repayable as follows: $4.5 million in 2005, $6.7 million in 2006, $10.8 million in 2007, $35.8 million in 2008 and $79.2 million in 2009. Prepayments on the Term Loans are applied pro rata to all maturities. If the Company does not refinance the 9 1/2% Senior Subordinated Notes prior to September 15, 2007, then any amounts outstanding under the Senior Credit Facility will be immediately due and payable. The Senior Secured Credit Facility is secured by the assets of the Company and its domestic subsidiaries, as well as 65% of the stock of each international subsidiary. As of December 31, 2004, the Company had $18.9 million available under the Revolving Credit Facility.

The level of the Company’s indebtedness could have important consequences including: (i) a substantial portion of the Company’s cash flow from operations must be dedicated to debt service and will not be available for other purposes; (ii) the Company’s ability to obtain additional debt or other financing in the future for working capital, capital expenditures, research and development or acquisitions may be limited; (iii) the Company’s level of indebtedness could limit its flexibility in reacting to changes in its industries and economic conditions generally.

The Company’s ability to pay principal and interest on its debt obligations and dividends on the Exchangeable Preferred Stock and the Convertible Preferred Stock will depend upon its future operating performance, which will be affected by prevailing economic conditions and financial, business and other factors, certain of which are beyond its control, as well as the availability of revolving credit borrowings under the Revolving Credit Facility or a successor facility. The Company anticipates that its operating cash flow, together with borrowings under the Revolving Credit Facility, will be sufficient to meet its operating expenses and capital expenditures and to service its debt requirements as they become due. However, there can be no assurance that the Company’s cash flow, availability under the Revolving Credit Facility and other capital resources will be sufficient for payment of principal and interest on its indebtedness, for the payment of periodic cash dividends on the Exchangeable Preferred Stock or the Convertible Preferred Stock, for any redemption of the Exchangeable Preferred Stock or the Convertible Preferred Stock for cash, or if the Exchange Debentures have been issued, the payment of principal of or cash interest on the Exchange Debentures. If the Company’s cash flow, availability under the Revolving Credit Facility and other capital resources are insufficient to fund the Company’s debt service obligations, the Company may be forced to reduce or delay capital expenditures, to sell assets, to restructure or refinance its indebtedness, or to seek additional equity capital. There can be no assurance that any of such measures could be implemented on satisfactory terms, or if implemented, would be successful or would permit the Company to meet its debt service obligations.

The Senior Secured Credit Facility, the 2008 Indenture and the certificates of designation for the Preferred Stocks contain a number of significant covenants that restrict the operations of the Company. For example, under the Senior Secured Credit Facility, the Company is required to comply with specified financial ratios and tests, including minimum fixed charges coverage ratio, maximum leverage ratio, senior leverage ratio and interest coverage ratio. There can be no assurance that the Company will be able to comply with any such covenants or restrictions in the future. The Company’s ability to comply with such covenants and restrictions may be affected by events beyond its control, including prevailing economic, financial and industry conditions. The breach of any such covenants or restrictions could result in a default under the Senior Secured Credit Facility and/or the 2008 Indenture that would permit the lenders to declare all amounts outstanding to be immediately due and payable, together with accrued and unpaid interest, and the commitments of the lenders under the Revolving Credit Facility to make further extensions of credit could be terminated.

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The occurrence of certain events that would constitute a Change of Control may result in a default, or otherwise require repayment of indebtedness, under the Senior Secured Credit Facility and the 2008 Indenture, and redemption of the Exchangeable Preferred Stock and the Convertible Preferred Stock or, in the case of the Exchange Debentures, repayment of indebtedness under the Exchange Debentures. In addition, the Senior Secured Credit Facility prohibits the repayment of indebtedness under the 2008 Indenture by the Company in such an event, unless and until such time as the indebtedness under the Senior Secured Credit Facility is repaid in full. The Company’s failure to make such repayments in such instances would result in a default under the Senior Secured Credit Facility. The inability to repay the indebtedness under the Senior Secured Credit Facility, if accelerated, would also constitute an event of default under the 2008 Indenture, which could have materially adverse consequences to the Company and to the holders of the Notes under the 2008 Indenture. Future indebtedness of the Company may also contain restrictions or repayment requirements with respect to certain events or transactions that could constitute a Change of Control. In the event of a Change of Control, there can be no assurance that the Company would have sufficient assets to satisfy all of its obligations under the Senior Secured Credit Facility or the 2008 Indenture, the Exchangeable Preferred Stock or the Exchange Debentures, as the case may be, or with respect to the Convertible Preferred Stock.

The Company does not have transactions, arrangements or relationships with special-purpose entities and the Company does not have any off-balance-sheet debt except as disclosed in the notes to the consolidated financial statements.

In 2001 the Company suspended its U.K. pension plan and intends to settle the remaining obligation in 2005. As of December 31, 2004, the settlement will require an additional contribution of approximately $2.9 million and will result in a pre-tax settlement loss of approximately $0.7 million. These amounts are subject to change as a result of the final determination of the amount of the obligation and the value of the plan assets at the date of the settlement.

Environmental Expenditures

The Company has made, and will continue to make, expenditures to comply with current and future requirements of environmental laws and regulations. The Company estimates that in 2004, 2003 and 2002 it spent $0.1 million, $0.1 million and $0.2 million in capital expenditures for solvent recovery, wastewater treatment, air monitoring and related projects to comply with environmental requirements.

On July 11, 2002, the United States Environmental Protection Agency issued the proposed Maximum Achievable Control Technology (“MACT”) standard for the Printing source category. This MACT standard is applicable to sources located at the Company’s U.S. operations. The MACT requirements were placed into effect on March 15, 2003. The primary effect of this rule will be to require implementation of additional air emission monitoring systems at the Company’s U.S. facilities. These rules will require certain modifications to the plant facilities over the next two years that will total approximately $2.0 million for U.S. operations. Capital expenditures relating to environmental matters are anticipated to be approximately $1 million in 2005.

Based on environmental assessments conducted by independent environmental consultants, the Company believes that its operations are currently in compliance with environmental laws and regulations, except as would not be expected to have a material adverse effect on the Company.

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However, there can be no assurances that environmental requirements will not change in the future or that the Company will not incur significant costs in the future to comply with such requirements. In addition, the Company’s operations involve the handling of solvents and other hazardous substances, and if a release of hazardous substances occurs on or from the Company’s facilities, the Company may be required to pay the cost of remedying any condition caused by such release, the amount of which could be material.

Critical Accounting Policies

The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The more significant estimates include: accounts receivable allowances, inventory valuation, recoverability of long-lived assets, retirement and other postretirement benefits, and the realization of deferred tax assets. We use the following methods and assumptions in determining our estimates:

Accounts Receivable Allowances–Reserves for product returns are calculated based upon historical experience. Allowances for doubtful accounts are determined by applying historical experience with consideration given to the condition of the economy and evaluation of specific accounts. Other allowances are calculated based on negotiated agreements with customers.

Inventory Valuation– Inventories are stated at the lower of cost or market using the first-in, first-out (FIFO) method. Reserves for obsolete and slow-moving inventory are determined based on the lower of cost or market method. Market value is determined based on management’s estimate of selling price less selling costs.

Recoverability of Long-lived Assets–Recoverability of goodwill is tested at least annually in accordance with SFAS No. 142 using the present value of estimated future cash flows. Other long-lived assets are reviewed for impairment annually or whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with SFAS No. 144 by determining whether the amortization of the assets over their remaining lives can be recovered through projected undiscounted cash flows. Future cash flows are forecasted based on management’s estimates of future events and could be materially different from actual cash flows.

Retirement and Other Postretirement Benefits–Retirement and other postretirement benefit costs and obligations are dependent on assumptions used in calculating such amounts. These assumptions include discount rates, health care cost trend rates, benefits earned, interest cost, expected return on plan assets, mortality rates and other factors. In accordance with accounting principles generally accepted in the United States, actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, generally affect recognized expense and the recorded obligation in future periods. While management believes that the assumptions used are appropriate, differences in actual experience or changes in assumptions may affect the Company’s retirement and other postretirement obligations and future expense. See Notes M and N to the Consolidated Financial Statements for further detail on the assumptions used.

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Realization of Deferred Tax Assets–Realization of net operating loss carryforwards and other deferred tax assets is determined in accordance with the appropriate accounting guidance in SFAS No. 109. Realization of the deferred tax assets is periodically evaluated using expected future reversals of existing temporary differences, future taxable income resulting principally from the characterization of cash flow from international subsidiaries as dividends taxable in the United States and the effects of lower interest expense from lower outstanding debt levels as debt service requirements are met.

For further information regarding our accounting policies, see Note B to the Consolidated Financial Statements.

Contractual Obligations

The Company enters into various contractual obligations throughout the year. Presented below are the contractual obligations of the Company as of December 31, 2004, and the time period in which payments under the obligations are due. Disclosures related to long-term debt, capital lease obligations and operating lease obligations are included in the footnotes to the consolidated financial statements of the company. Disclosures regarding the amounts due under purchase obligations for capital expenditures are also included below. A purchase obligation is defined as an agreement to purchase goods or services that is enforceable and legally binding on the company and that specifies all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Purchase obligations related to normal and recurring purchase orders are not included, as the Company does not enter into long-term agreements that would represent purchase obligations. Any short-term purchase order that might meet the definition of purchase obligation is only entered into for a reasonable period of time for quantities to be used within normal operating conditions.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See information in Item 7.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Consolidated Financial Statements

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Day International Group, Inc.:

We have audited the accompanying consolidated balance sheets of Day International Group, Inc. and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for each of the three years in the period ended December 31, 2004. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Day International Group, Inc. and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.

As discussed in Note E, in 2002 the Company changed its method of accounting for goodwill in accordance with Statement of Financial Accounting Standards Nos. 141, Business Combinations and 142, Goodwill and Other Intangible Assets.

As discussed in Note G, in 2003 the Company changed its method of accounting for redeemable preferred stock in accordance with Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.

ERNST & YOUNG LLP

Dayton, Ohio
March 24, 2005

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DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
(Amounts in thousands, except share and per share amounts)

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

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

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DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(In thousands)

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

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DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Dollar amounts in thousands)

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

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DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(In thousands)

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

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DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Dollar amounts in thousands)

A. NATURE OF OPERATIONS, BASIS OF PRESENTATION

Day International Group, Inc. and subsidiaries is one of the world’s leading producers and distributors of precision-engineered products, specializing in the design and customization of consumable image-transfer products for the graphic arts (printing) industry and consumable fiber handling products for the textile industry. The Image Transfer segment designs, manufactures and distributes high-quality printing blankets, sleeves, pressroom chemicals and automatic dampening systems used primarily in the offset, flexographic and digital printing industries. The Textile Products segment manufactures and markets precision engineered rubber cots and aprons sold to textile yarn spinners and other engineered rubber products sold to diverse markets. Sales are made through Day’s sales organization, distributors and representatives.

On November 24, 2003, the Company acquired Network Distribution International (“NDI”). The total purchase price for NDI was $32,203, paid in cash. NDI is a converter of offset blankets and reseller of ancillary consumable products to the printing industry, primarily in the United States. NDI supplies printers with a broad range of printing blankets, pressroom chemicals, supplies and equipment. Results of operations of NDI are included in the Company’s consolidated results of operations for the period subsequent to the acquisition.

B. SIGNIFICANT ACCOUNTING PRINCIPLES

Principles of Consolidation–The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions and balances have been eliminated.

Cash and Cash Equivalents–Cash and cash equivalents include all highly liquid investments with an original purchased maturity of three months or less.

Inventories–Inventories are stated at the lower of cost or market using the first-in, first-out (FIFO) method. Reserves for obsolete and slow-moving inventory are determined based on the lower of cost or market method. Market value is determined based on management’s estimate of selling price less selling costs.

Property, Plant and Equipment–Property, plant and equipment are stated at cost. Depreciation is computed using the straight-line method over their estimated useful lives. Buildings and improvements are depreciated over 10 to 40 years and machinery and equipment are depreciated over 5 to 10 years.

Goodwill and Other Intangibles–Goodwill represents the excess of cost over the fair value of the net assets acquired and is evaluated for impairment based on the requirements as proscribed in Statement of Financial Accounting Standards (“SFAS”) No. 142. The Company assesses the recoverability of other long-lived assets, including other intangibles, by determining whether the amortization of the respective balances over their remaining lives can be recovered through projected undiscounted cash flows.

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Deferred financing costs are being amortized using an effective interest rate method over the lives of the related debt. Intangibles are being amortized using the straight-line method.

Stock-Based Compensation–As permitted by SFAS No. 123, Accounting for Stock-Based Compensation, the Company applies the intrinsic value method of recognition and measurement under Accounting Principles Board Opinion No. 25 to its stock options and warrants. No compensation expense related to employee stock options or warrants issued to directors is reflected in net income (loss). The following table illustrates the effect on net income (loss) if compensation cost for stock options and warrants had been determined based on their fair values at the grant date, consistent with the method prescribed by SFAS No. 123:

Revenue Recognition–Day recognizes revenue when product is shipped, except for product shipped on consignment. Revenue for consignment sales is recognized when the customer uses the product. Reserves for product returns, based upon historical experience, and other allowances, calculated based on negotiated agreements with customers, are recognized at the time of the recording of the sale. Allowances for doubtful accounts are determined by applying historical experience with consideration given to the condition of the economy and evaluation of specific accounts and are recorded in selling, general and administrative costs.

Foreign Currency Translation–The functional currency is the local currency of Day’s respective international subsidiaries. Accordingly, foreign currency assets and liabilities are translated into U.S. dollars at the period end exchange rates. Foreign currency revenues and expenses are translated at the average exchange rates for the period. Translation gains and losses are recorded in accumulated other comprehensive income (loss). Transaction gains and losses are recorded in other expense (income) in the consolidated statements of operations.

Concentration of Credit Risk–The Company’s receivables are from a diverse group of customers in the printing and textile industries and such receivables are generally unsecured. No single customer accounts for more than 10% of net sales.

Foreign Exchange Contracts–The Company and its international subsidiaries make purchases and sales in foreign currencies and are subject to transaction exposures that arise from foreign exchange rate movements between the date that the foreign currency transaction is recorded and the date it is consummated. In addition, the Company has intercompany loans outstanding with certain international subsidiaries in their local currencies, exposing it to the effect of changes in exchange rates at loan issue and loan repayment dates. Day periodically enters into forward foreign exchange contracts, with terms generally of 3 to 12 months, to protect itself against such foreign currency movements. These contracts are recorded at fair value with the change in fair value recorded as other expense (income) as an offset to the (income) expense recognized from the remeasurement of the hedged foreign-currency denominated asset or liability. Hedges of forecasted transactions are recorded as cash flow hedges and are reclassified to earnings when the hedged transaction is completed. The contract value of foreign exchange contracts was

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$9,476 and $15,865 at December 31, 2004 and 2003. The fair value of these contracts is a payable of $219 and $736 at December 31, 2004 and 2003. Day is exposed to credit-related losses in the event of nonperformance by counterparties to the forward contracts. The counterparties are expected to meet their obligations given their credit ratings; therefore Day does not obtain collateral for these instruments.

Interest Rate Swap Agreement– The Company is a party to a $25,000 interest rate swap used to swap a portion of the Company’s variable rate debt to fixed rates. The swap expires in September 2006. The Company has accounted for this swap as a cash flow hedge and recognizes the gain or loss related to future periods in other comprehensive income (loss).

Fair Value of Financial Instruments–The carrying value of the Company’s variable rate Credit Agreement approximates fair value. The fair market value and carrying amount of the 9¹/2% Senior Subordinated Debt was $115,700 and $114,866 at December 31, 2004, based on quoted market prices. The fair market value and carrying amount of the 9¹/2% Senior Subordinated Debt was $108,100 and $114,825 at December 31, 2003, based on quoted market prices. The fair value of the 12¹/4% Exchangeable Preferred Stock was $38,400 and $31,700 at December 31, 2004 and 2003, based on quoted market prices. The fair value of the 18% Convertible Preferred Stock could not be determined as the securities are closely held and are not actively traded. See Note G for further information about the Convertible Preferred Stock. The fair value of the interest rate swap was a receivable of $195 at December 31, 2004, and a payable of $284 at December 31, 2003 based on quoted market prices. At December 31, 2004 and 2003, the carrying amounts of all other assets and liabilities that qualify as financial instruments approximated their fair value.

Research and Development–Research and development costs are expensed as incurred.

Distribution–Distribution costs of $11,503, $9,617 and $8,241 for the years ended December 31, 2004, 2003 and 2002 are included in selling, general and administrative costs.

Advertising–Advertising costs are expensed as incurred.

Management Estimates–The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

C. ACCOUNTS RECEIVABLE

Changes in the allowance for doubtful accounts for the years ended December 31, 2004, 2003 and 2002 consist of:

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D. INVENTORIES

Inventories as of December 31, 2004 and 2003 consists of:

E. GOODWILL AND INTANGIBLE ASSETS

In July 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS Nos. 141, Business Combinations and 142, Goodwill and Other Intangible Assets. These statements prohibit amortization of goodwill for periods beginning after December 15, 2001. Instead an annual review of the recoverability of goodwill and intangible assets is required. As of January 1, 2002, the Company adopted these statements and recognized pre-tax income of $1,010 for the cumulative effect of the change in accounting principle for the amount of the unamortized deferred credit related to the excess over cost arising from the acquisition of the textile products operations of Armstrong World Industries, Inc. (“TPO”) in 1999.

The following is detail of goodwill for the years ended December 31, 2004, 2003 and 2002:

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The following is detail of intangible assets as of December 31, 2004 and 2003:

Estimated amortization expense for the next five years is as follows: $4,010 in 2005, $3,217 in 2006, $3,217 in 2007, $1,965 in 2008 and $1,017 in 2009.

F. LONG-TERM AND SUBORDINATED LONG-TERM DEBT

Long-term and subordinated long-term debt as of December 31, 2004 and 2003 consists of:

     SENIOR SECURED CREDIT FACILITY

In 2004, the Company issued $126,473 of Tranche D Term Loans under the $185,000 Senior Secured Credit Facility to refinance the previously outstanding Tranche B and Tranche C Term Loans. The Tranche D Term Loans have terms identical to the refinanced Tranche B and Tranche C Term Loans, except that interest rates have been lowered 100 basis points and are now based on the banks’ base rate plus 2.50% or the LIBOR rate plus 3.50%. No change in the final maturity date was made. In

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accordance with EITF 96-19, Debtor’s Accounting for a Modification or Exchange of Debt Instruments, there was not a substantial difference between the debt instruments, thus no extinguishment of debt is recognized. Remaining unamortized deferred financing fees and debt discount from the Tranche B and C Term Loans have been added to the financing fees paid to the debtors and will be amortized over the term of the Tranche D Term Loan.

The Second Amended and Restated $185,000 Senior Secured Credit Agreement consists of a $20,000 5-year Revolving Credit Facility, a Tranche A €26,577 ($30,000 equivalent at issuance) 5-year Term Loan and a Tranche D $126,473 6-year Term Loan. The Revolving Credit Facility includes a $10,000 letter of credit subfacility ($125 of letters of credit were outstanding at December 31, 2004 to support a letter of credit for purchase commitments) and a $2,000 swing line loan subfacility. The Tranche D Term Loan expires September 16, 2009, and the Tranche A Term Loan and the Revolving Credit Facility expire September 16, 2008. If the Company does not refinance the 9¹/2% Senior Subordinated Notes by September 15, 2007, then any amounts outstanding under the Senior Credit Facility will be immediately due and payable.

At December 31, 2004, interest on the Tranche A Term Loan was based on the bank’s LIBOR rate plus 3.50% (5.62%); interest on the Tranche D Term Loan was based on the bank’s LIBOR rate plus 3.50% (5.66%); and interest on the revolving line of credit was based on the banks’ base rate plus 2.50% (7.75%). Interest rates on LIBOR borrowings are fixed for one, two, three or six month periods at the Company’s discretion. The weighted average interest rate on the Senior Secured Credit Facility (and the old Senior Secured Credit Facility) for the years ended December 31, 2004, 2003 and 2002 was 5.91%, 5.50% and 5.37%.

At December 31, 2004, $18,850 was available under the Senior Secured Credit Facility. The Senior Secured Credit Facility requires a commitment fee of 0.5% a year on the unused portion of the revolving line of credit. The Senior Secured Credit Facility contains various financial covenants, including minimum fixed charges coverage ratio, maximum leverage ratio, maximum senior debt ratio and interest coverage ratio, and other covenants which place limits on, among other things, asset sales, dividends and distributions of the Company’s or its subsidiaries’ capital stock, the purchase, redemption, acquisition of capital stock of the Company or its affiliates or any subsidiaries, and the incurrence of certain additional indebtedness. No violations of these covenants occurred during the year ended December 31, 2004.

In 2003, the Company issued $165,000 of senior secured debt under the $185,000 Senior Secured Credit Facility to refinance its $100,000 11 1/8% Senior Notes, repay its then outstanding $24,850 term loan and $10,750 revolving credit facility and to finance the acquisition of NDI. The Company redeemed the 11 1/8% Senior Notes at a call price of $101,236. In the third quarter of 2003, the Company recorded a loss of $542 on the write-off of the remaining deferred financing fees related to the existing credit agreement and recorded an additional loss of $2,241 in the fourth quarter of 2003 on the remaining deferred financing fees related to the 11 1/8% Senior Notes and the call premium.

     9 1/2% SENIOR SUBORDINATED NOTES

The Company has outstanding $115,000 face amount of 9 1/2% Senior Subordinated Notes due March 15, 2008 (the “Notes”). The Notes are subordinate to the Senior Secured Credit Facility.

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Interest on the Notes is payable semi-annually. The Notes contain various financial and other covenants which place limits on, among other things, asset sales, dividends and distributions of the Company’s or its subsidiaries’ capital stock, the purchase, redemption, acquisition of capital stock of the Company or its affiliates or any subsidiaries, and the incurrence of certain additional indebtedness. Upon a change in control, the Notes can be put back to the Company at 101% of their face value.

The Company may, at its option, redeem the Notes, in whole or in part, for cash, at 103.167% until March 14, 2005, 101.583% thereafter until March 14, 2006 and 100.0% thereafter, together with all accrued and unpaid interest to the date of redemption.

The Company’s wholly-owned subsidiary, Day International, Inc., and the other United States subsidiaries have guaranteed the Senior Secured Credit Facility and the Notes. The Senior Secured Credit Facility is secured by the assets of the Company and its United States subsidiaries, as well as 65% of the stock of each international subsidiary.

Principal payments on long-term debt for the next five years are payable as follows: $4,576 in 2005, $6,819 in 2006, $10,927 in 2007, $150,973 in 2008 and $79,352 in 2009.

G. REDEEMABLE PREFERRED STOCK

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This statement established standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. This statement requires that the Company’s redeemable preferred stock be recorded in the same manner as long-term debt. The Company adopted the statement as of July 1, 2003. Therefore, since the third quarter of 2003, the Company has reflected the redeemable preferred stock as a liability and accrued dividends as interest expense. The adoption of this statement had no effect on the cash flows of the Company, net loss available to common shareholders or the Company’s compliance with its debt covenants.

     12 1/4% SENIOR EXCHANGEABLE PREFERRED STOCK

The Company has outstanding $79,432 and $70,404 liquidation preference of 12 1/4% Senior Exchangeable Preferred Stock (“Exchangeable Preferred Stock”) at December 31, 2004 and 2003. All dividends are payable quarterly in arrears on March 15, June 15, September 15 and December 15 of each year. On and before March 15, 2003, the Company paid dividends in additional fully-paid and non-assessable shares of Exchangeable Preferred Stock having an aggregate liquidation preference equal to the amount of such dividends. After March 15, 2003, dividends must be paid in cash and if not paid for four consecutive quarters, then the holders of the Exchangeable Preferred Stock have the right to elect two directors to the Board of Directors until the dividends in arrears have been paid. During the fourth quarter of 2004, the Exchangeable Preferred Stockholders elected two directors to the Board of Directors. Certain restrictions in the Company’s Senior Secured Credit Agreement and Notes limit the ability to pay cash dividends. The Company has not paid dividends after March 15, 2003 and does not anticipate that the restrictions on payment of cash dividends will change in the near term to allow the dividends to be paid. Dividends-in-arrears are $15,043 as of December 31, 2004 and are included in the redeemable preferred stock balance. On any scheduled dividend payment date, the Company may, at its

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option, but subject to certain conditions, exchange all of the shares of the Exchangeable Preferred Stock for the Company’s 12 1/4% Subordinated Exchange Debentures Due 2010 (the “Exchange Debentures”).

The Company will be required, subject to certain conditions, to redeem all of the Exchangeable Preferred Stock or the Exchange Debentures as the case may be, on March 15, 2010. The Company may, at its option, redeem the Exchangeable Preferred Stock or the Exchange Debentures, in whole or in part, for cash, at 104.083% thereafter until March 14, 2005, 102.042% thereafter until March 14, 2006 and 100.0% thereafter, together with, in the case of the Exchangeable Preferred Stock, all accumulated and unpaid dividends to the date of redemption, or in the case of the Exchange Debentures, all accrued and unpaid interest to the date of redemption. Upon the occurrence of a change in control, the Company would be required to make an offer to purchase the Exchangeable Preferred Stock or the Exchange Debentures, for cash, at a price equal to 101% of the liquidation preference or aggregate principal amount (as the case may be) thereof, together with, in the case of the Exchangeable Preferred Stock, all accumulated and unpaid dividends to the date of purchase, or in the case of the Exchange Debentures, all accrued and unpaid interest to the date of purchase.

     18% CONVERTIBLE CUMULATIVE PREFERRED STOCK

At December 31, 2004 and 2003, the Company has outstanding $91,382 and $77,442 liquidation preference of 18% Convertible Cumulative Preferred Stock (“Preference Stock”) with a mandatory redemption date of June 30, 2010. The Preference Stock ranks junior to the Company’s 12 1/4% Senior Exchangeable Preferred Stock and ranks senior to any subsequently issued preferred stock. All dividends are payable quarterly in arrears on March 30, June 30, September 30 and December 30 of each year. Holders of the Preference Stock are entitled to receive an annual dividend rate of 18% plus approximately 24% of the aggregate value of each dividend (if any) declared and paid on the Company’s common stock. If not paid quarterly in cash, annually, accumulated and unpaid dividends are to be added to the basis of the stock.

The Company may redeem any or all of the shares of the Preference Stock for consideration equal to the Base Redemption Amount. The Base Redemption Amount is an amount equal to up to 1,500 shares of Common Stock issuable upon the exercise of future warrants plus the greater of the liquidation preference of the Preference Stock or the value of 7,348.7 shares of the Company’s Common Stock, as adjusted for dilutive issuances.

Upon the occurrence of a change of control and subject to the Holders of all of the Company’s Senior Securities having exercised their right to be prepaid and/or to put their securities to the Company upon such Change of Control, each Holder of Preference Stock may require the Company to redeem, on or after the 92nd day after the prepayment or redemption of the Company’s Senior Securities in whole, all or any part of such Holder’s Preference Stock at 102% of the redemption price of such securities. The redemption price of the Preference Stock is the Base Redemption Amount described above.

If, on any Redemption Date which occurs after an initial public offering of the Company’s Common Stock, the value of the Preference Stock as converted into Common Stock exceeds the liquidation preference of the Preference Stock, the Company may elect, in lieu of paying cash on the redemption of such Preference Stock, to convert some or all of the Preference Stock into 7,348.7 shares of the Company’s Common Stock, as adjusted for dilutive issuances, subject to certain limitations.

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H. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The components of accumulated other comprehensive income (loss) as of December 31, 2004 and 2003, consists of:

I. INCOME TAXES

Significant components of deferred tax assets (liabilities) as of December 31, 2004 and 2003, are as follows:

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Income tax expense consists of the following for the years ended December 31, 2003, 2002 and 2001:

The income tax expense differs from the United States statutory rate for the years ended December 31, 2004, 2003 and 2002, as a result of the following:

During 2002, it was determined that the Company’s foreign source income taxable in the United States for 2001 was less than previously estimated. The effect of this change in estimate was to decrease the 2002 income tax expense by $1,930.

Income (loss) before income taxes includes $20,466, $16,464 and $16,131 of income from international operations for the years ended December 31, 2004, 2003 and 2002. Day has not provided for deferred taxes on the undistributed earnings of international subsidiaries because the earnings are deemed permanently reinvested. Undistributed earnings of Day’s foreign subsidiaries amounted to approximately $35,000 as of December 31, 2004. The unrecognized deferred tax liability on these earnings has not been calculated due to the complexities associated with the hypothetical calculation. It is anticipated that Day will continue to annually remit a substantial portion of prospective earnings of certain international subsidiaries in the form of taxable dividends. The U.S. tax consequences of those dividends will be recorded when such dividends are paid. Since the Company intends to remit earnings from its international subsidiaries only on a prospective basis, the APB No. 23 exception will continue to apply to the international subsidiaries earnings accumulated through December 31, 2003 and for earnings that the Company does not expect to remit as dividends. The Company has United States net operating loss carryforwards of $41,593 expiring from 2019 through 2023 to be used in future periods.

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J. BUSINESS SEGMENTS

The Company produces precision-engineered products, specializing in the design and customization of consumable image-transfer products for the graphic arts (printing) industry and consumable fiber handling products for the textile industry. The Image Transfer segment designs, manufactures and markets high-quality printing blankets and sleeves, pressroom chemicals and automatic dampening systems used primarily in the offset, flexographic and digital printing industries. The Textile Products segment manufactures and markets precision engineered rubber cots and aprons sold to textile yarn spinners and other engineered rubber products sold to diverse markets.

The accounting policies of the segments are the same as those described in Note B–Significant Accounting Policies. Segment performance is evaluated based on operating profit results compared to the annual operating plan. Intersegment sales and transfers are not material.

The Company manages the two segments as separate strategic business units. They are managed separately because each business unit requires different manufacturing processes, technology and marketing strategies.