PageTable PART I FINANCIAL INFORMATION Item 1. Financial Statements: Condensed Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002 3 Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2003 and 2002 4 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2003 and 2002 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 20 Item 3. Quantitative and Qualitative Disclosures About Market Risk 25 Item 4. Controls and Procedures 26 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 27 Signature 27Contents

~~2003~~UNITED ~~2002~~STATES SECURITIES ASSETS Cash and cash equivalents $ 1,741 $ 996 Accounts receivable (less allowance for doubtful accounts of $2,741 and $2,735) 35,141 32,782 Inventories (Note B) 38,755 34,851 Other current assets 7,172 6,064 ----------- --------- Total current assets 82,809 74,693 Property, plant and equipment, net of accumulated depreciation of $45,152 and $37,817 74,692 74,319 Goodwill 129,075 127,080 Intangible assets (net of accumulated amortization of $42,907 and $39,462) 25,056 26,696 Cash held for retirement of debt (Note C) 97,971 Other assets 20,319 17,089 ----------- --------- TOTAL ASSETS $ 429,922 $ 319,877 =========== ========= LIABILITIES AND ~~STOCKHOLDERS'~~EXCHANGE ~~EQUITY (DEFICIT) Accounts payable $ 5~~COMMISSION WASHINGTON,~~203~~ $ 8,228 Current maturities of long-term debt 15,207 12,597 Other current liabilities 26,541 22,334 ----------- --------- Total current liabilities 46,951 43,159 Long-term and subordinated long-term debt (Note D.C). 335,922 239,548 Other long-term liabilities 32,148 29,974 Redeemable preferred stock (Note D) 141,236 126,646 STOCKHOLDERS' EQUITY (DEFICIT): Common shares 1 1 Contra-equity associated with the assumption of majority shareholder's bridge loan (68,772) (68,772) Retained earnings (deficit) (58,837) (49,139) Accumulated other comprehensive income (loss) 1,273 (1,540) ----------- --------- Total stockholders' equity (deficit) (126,335) (119,450) ----------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 429,922 $ 319,877 =========== =========20549 ________________________

~~THREE~~FORM ~~MONTHS NINE MONTHS 2003 2002 2003 2002 NET SALES $ 70,054 $ 66,901 $ 209,012 $ 192,121 COST OF GOODS SOLD 45,050 42,521 134,543 121,841~~ 10--------- --------- ----------- ---------- GROSS PROFIT 25,004 24,380 74,469 70,280 SELLING, GENERAL AND ADMINISTRATIVE 15,241 14,372 45,209 40,750 RESTRUCTURING COSTS (Note I) 118 AMORTIZATION OF INTANGIBLES 205 208 612 609 MANAGEMENT FEES 250 250 750 750 --------- --------- ----------- ---------- OPERATING PROFIT 9,308 9,550 27,898 28,053 OTHER EXPENSES: Interest expense: Long-term debt (including amortization of deferred financing costs and discount of $606, $587, $1,780 and $1,771 and loss on extinguishment of debt of $542 and $542 in 2003) 7,260 6,760 20,414 20,233 Redeemable preferred stock dividends (including amortization of discount and issuance costs of $47 and $47) (Note D) 4,923 4,923 Other (income) expense--net (225) (63) (537) (509) --------- --------- ----------- ---------- INCOME (LOSS) BEFORE INCOME TAXES (2,650) 2,853 3,098 8,329 INCOME TAX EXPENSE 901 1,180 3,128 3,329 --------- --------- ----------- ---------- INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (3,551) 1,673 (30) 5,000 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (NET OF TAX EXPENSE OF $394) (Note K) 616 --------- --------- ----------- ---------- NET INCOME (LOSS) (3,551) 1,673 (30) 5,616 PREFERRED STOCK DIVIDENDS (4,211) (9,574) (12,475) AMORTIZATION OF PREFERRED STOCK DISCOUNT AND ISSUANCE COSTS (47) (94) (141) --------- --------- ----------- ---------- NET LOSS AVAILABLE TO COMMON SHAREHOLDERS $ (3,551) $ (2,585) $ (9,698) $ (7,000) ========= ========= =========== ==========Q

~~2003~~QUARTERLY ~~2002~~REPORT ~~CASH~~PURSUANT ~~FLOWS~~TO ~~FROM~~SECTION ~~OPERATING~~13 ~~ACTIVITIES:~~OR ~~Net income~~ 15(~~loss~~d) $OF ~~(30)~~THE $SECURITIESEXCHANGE ~~5,616~~ACT Adjustments to reconcile net income (loss) to net cash provided by operating activities: Cumulative effect of change in accounting principle (616) Interest expense: Redeemable preferred stock dividends 4,923 Loss on extinguishment of debt 542 Depreciation and amortization 11,890 10,934 Deferred income taxes (3,151) (622) Foreign currency (gain) loss (1,017) (10) Undistributed earnings of investee (264) Non-cash loss on disposal of fixed assets 774 157 Change in operating assets and liabilities (3,124) (2,505) ---------- ---------- Net cash provided by operating activities 10,807 12,690 CASH FLOWS FROM INVESTING ACTIVITIES: Cash paid for acquisition (1,952) Capital expenditures (5,456) (5,623) Cash held for retirement of debt (97,971) Proceeds from sale of property 939 ---------- ---------- Net cash used in investing activities (104,440) (5,623) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of debt 133,950 Payment of deferred financing fees (3,537) Payments on long-term debt (31,197) (9,580) Net borrowings (payments) on revolving credit facility (4,950) 3,150 ---------- ---------- Net cash provided by (used in) financing activities 94,266 (6,430) EFFECT OF EXCHANGE RATE CHANGES ON CASH 112 (518) ---------- ---------- Net increase (decrease) in cash and cash equivalents 745 119 Cash and cash equivalents at beginning of period 996 609 ---------- ---------- Cash and cash equivalents at end of period $ 1,741 $ 728 ========== ========== NON-CASH TRANSACTIONS: Preferred stock dividends $ 7,278 $ 12,475 ========== ==========1934

~~2003~~For ~~2002~~the ~~Finished~~Quarterly ~~goods~~Period $ended 22June 30,~~898~~ ~~$ 20,510 Work in process 5,031 4,935 Raw materials 10,826 9,406 -------- -------- $ 38,755 $ 34,851 ======== ========~~2004

~~THREE~~Commission ~~MONTHS~~File ~~NINE MONTHS 2003 2002 2003 2002 Third party sales: Image Transfer $ 58,424 $ 54,054 $ 171,546 $ 156,226 Textile Products 11,630 12,847 37,466 35,895~~ No. 33-------- -------- --------- --------- Total $ 70,054 $ 66,901 $ 209,012 $ 192,121 ======== ======== ========= ========= Segment operating profit: Image Transfer $ 9,914 $ 9,039 $ 28,561 $ 27,670 Textile Products 1,028 1,986 4,009 4,949 -------- -------- --------- --------- Total $ 10,942 $ 11,025 $ 32,570 $ 32,619 ======== ======== ========= =========93644

~~THREE~~DAY ~~MONTHS~~INTERNATIONAL ~~NINE MONTHS 2003 2002 2003 2002 Segment operating profit $ 10~~GROUP,~~942~~ $INC. 130 ~~11,025~~West $Second 32Street Dayton,~~570~~ $Ohio ~~32,619 APB #16 depreciation and amortization~~ 45402 (~~1,044~~937) ~~(892) (2,893) (2,703) Non~~ 224-allocated corporate expenses (135) (125) (417) (386) Restructuring costs (118) Amortization of intangibles (205) (208) (612) (609) Management fees (250) (250) (750) (750) -------- -------- -------- -------- Total operating profit $ 9,308 $ 9,550 $ 27,898 $ 28,053 ======== ======== ======== ========4000

~~TEXTILE~~State ~~IMAGE PRODUCTS TRANSFER Balance at December 31, 2001 $ 392 $ 1,508 Reversal~~ of ~~reserve (103) Charges against the reserve for~~Incorporation: Severance costs (193) (549) Facility shutdown (417) -------- -------- Balance at March 31, 2002 96 542 Reversal of reserve (45) Charges against the reserve for: Severance costs (46) (160) Facility shutdown (32) -------- -------- Balance at June 30, 2002 50 305 Charges against the reserve for: Severance costs (50) (80) Facility shutdown (21) -------- -------- Balance at September 30, 2002 $ $ 204 ======== ========Delaware

~~THREE~~IRS ~~MONTHS~~Employer ~~NINE MONTHS 2003 2002 2003 2002 Net income (loss)-as reported $ (3,551) $ 1,673 $ (30) $ 5,616 Less-stock-based compensation expense determined using fair value based method in SFAS~~ Identification No. ~~123 (203) (316) (619) (948)~~ :31-~~------- ------- ------- ------- Pro forma net income (loss) $ (3,754) $ 1,357 $ (649) $ 4,668 ======== ======= ======= =======~~1436349

~~DAY~~Securities ~~DAY~~Registered ~~INTER-~~Pursuant ~~INTER-~~to ~~NATIONAL, NON- NATIONAL INC. GUARANTOR GROUP, INC. (GUARANTOR) SUBSIDIARIES ELIMINATIONS CONSOLIDATED ASSETS Cash and cash equivalents $ 597 $ (597) $ 1,741 $ $ 1,741 Accounts receivable-net~~ Section 12~~,742~~ 22,399 35,141 Inventories 18,891 19,864 38,755 Other current assets 5,116 2,056 7,172 --------- --------- --------- ---------- --------- TOTAL CURRENT ASSETS 597 36,152 46,060 82,809 Intercompany 349,774 (~~4,306~~b) ~~10,429 (355,897) Property, plant and equipment, net 46,067 28,625 74,692 Investment in subsidiaries (34,375) 42,300 (3,682) (4,243) Cash held for retirement~~ of ~~debt~~the ~~97,971~~Act: 97,971 Intangible and other assets 155,125 19,325 174,450 --------- --------- --------- ---------- --------- TOTAL ASSETS $ 413,967 $ 275,338 $ 100,757 $ (360,140) $ 429,922 ========= ========= ========= ========== ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Accounts payable $ $ 2,148 $ 3,055 $ $ 5,203 Current maturities of long-term debt 15,111 96 15,207 Other current liabilities 4,178 8,418 13,945 26,541 --------- --------- --------- ---------- --------- TOTAL CURRENT LIABILITIES 19,289 10,566 17,096 46,951 Intercompany 45,115 303,326 (3,577) (344,864) Long-term and subordinated long-term debt 334,662 1,260 335,922 Other long-term liabilities 22,535 9,613 32,148 Redeemable preferred stock 141,236 141,236 Total stockholders' equity (deficit) (126,335) (61,089) 76,365 (15,276) (126,335) --------- --------- --------- ---------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 413,967 $ 275,338 $ 100,757 $ (360,140) $ 429,922 ========= ========= ========= ========== =========None

~~DAY~~Securities ~~DAY~~Registered ~~INTER-~~Pursuant ~~INTER-~~to ~~NATIONAL,~~Section 12 ~~NON- NATIONAL INC. GUARANTOR GROUP, INC.~~ (~~GUARANTOR~~g) SUBSIDIARIES ELIMINATIONS CONSOLIDATED ASSETS Cash and cash equivalents $ 496 $ (496) $ 996 $ $ 996 Accounts receivable-net 11,365 21,417 32,782 Inventories 19,165 15,686 34,851 Other current assets 4,754 1,310 6,064 --------- --------- --------- --------- --------- TOTAL CURRENT ASSETS 496 34,788 39,409 74,693 Intercompany 250,883 (13,166) 13,644 (251,361) Property, plant and equipment, net 48,256 26,063 74,319 Investment in subsidiaries (39,309) 35,588 (4,918) 8,639 Intangible and other assets 153,258 17,607 170,865 --------- --------- --------- --------- --------- TOTAL ASSETS $ 212,070 $ 258,724 $ 91,805 $(242,722) $ 319,877 ========= ========= ========= ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Accounts payable $ $ 3,593 $ 4,635 $ $ 8,228 Current maturities of ~~long-term~~the ~~debt~~Act: 12,511 86 12,597 Other current liabilities 4,196 6,318 11,820 22,334 --------- --------- --------- --------- --------- TOTAL CURRENT LIABILITIES 16,707 9,911 16,541 43,159 Intercompany (50,205) 295,916 11,110 (256,821) Long-term and subordinated long-term debt 238,372 1,176 239,548 Other long-term liabilities 21,639 8,335 29,974 Redeemable preferred stock 126,646 126,646 Total stockholders' equity (deficit) (119,450) (68,742) 54,643 14,099 (119,450) --------- --------- --------- --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 212,070 $ 258,724 $ 91,805 $(242,722) $ 319,877 ========= ========= ========= ========= =========None

~~DAY~~Indicate ~~DAY~~by ~~INTER-~~check ~~INTER-~~mark ~~NATIONAL~~whether ~~NON-~~the ~~NATIONAL~~registrant ~~INC. GUARANTOR GROUP, INC.~~ (~~GUARANTOR~~1) has ~~SUBSIDIARIES~~filed ~~ELIMINATIONS~~all ~~CONSOLIDATED~~reports required ~~Net~~to ~~sales~~be $filed $by ~~38,084 $ 31,970 $ $ 70,054 Cost of goods sold 24,200 20,850 45,050 -------- -------- -------- -------- -------- Gross profit~~ Section 13~~,884~~ ~~11,120~~or ~~25,004 Selling, general and administrative 9 8,311 6,921~~ 15~~,241 Amortization of intangibles 205 205 Management fees 250 250 -------- -------- -------- -------- -------- Operating profit~~ (~~loss~~d) ~~(9)~~of ~~5,118~~the ~~4,199~~Securities ~~9,308~~Exchange ~~Other~~Act ~~expenses (income): Equity in (earnings)~~ of 1934 ~~subsidiaries~~during ~~(1,378)~~the ~~(2,700)~~preceding ~~4,078 Interest expense 4,923 7,257 3~~ 12~~,183~~ months ~~Other~~ (~~income)~~or ~~expense~~for 12such ~~(237)~~shorter ~~(225)~~period ~~--------~~that ~~--------~~the registrant ~~--------~~was ~~--------~~required ~~--------~~to ~~Income~~file ~~(loss)~~such ~~before income taxes (3,554~~reports) ~~549 4~~,~~433~~ ~~(4,078)~~and (2~~,650~~) has ~~Income~~been ~~tax~~subject ~~expense~~to ~~(benefit)~~such filing ~~(3)~~requirements ~~(829)~~for ~~1,733~~the ~~901~~past ~~--------~~90 days. ~~-------- -------- -------- -------- Net income (loss) $ (3,551) $ 1,378 $ 2,700 $ (4,078) $ (3,551) ======== ======== ======== ======== ========~~Yes x No o

~~DAY~~Indicate ~~DAY~~by ~~INTER-~~check ~~INTER-~~mark ~~NATIONAL~~whether ~~NON-~~the ~~NATIONAL~~registrant ~~INC.~~is ~~GUARANTOR~~an ~~GROUP,~~accelerated ~~INC.~~filer (~~GUARANTOR)~~as defined SUBSIDIARIES ELIMINATIONS CONSOLIDATED Net sales $ $ 38,462 $ 28,439 $ $ 66,901 Cost of goods sold 24,348 18,173 42,521 --------- --------- --------- -------- -------- Gross profit 14,114 10,266 24,380 Selling, general and administrative 1 8,364 6,007 14,372 Amortization of intangibles 208 208 Management fees 250 250 --------- --------- --------- -------- -------- Operating profit (loss) (1) 5,292 4,259 9,550 Other expenses (income): Equity in ~~(earnings) of subsidiaries (1,673) (2,379) 4,052 Interest expense 6,699 61 6,760 Other (income) expense (1) (281) 219 (63)~~ Rule 12b-~~-------- --------- --------- -------- -------- Income before income taxes 1,673 1,253 3,979 (4,052)~~ 2~~,853~~ ~~Income~~of ~~tax~~the ~~expense~~Exchange ~~(benefit~~Act). ~~(420) 1,600 1,180 --------- --------- --------- -------- -------- Net income $ 1,673 $ 1,673 $ 2,379 $ (4,052) $ 1,673 ========= ========= ========= ======== ========~~Yes o No x

~~DAY~~There ~~DAY~~were ~~INTER- INTER- NATIONAL NON- NATIONAL INC. GUARANTOR GROUP~~23,323 ~~INC.~~Common ~~(GUARANTOR)~~Shares ~~SUBSIDIARIES~~of ~~ELIMINATIONS~~the ~~CONSOLIDATED Net sales $ $ 109~~Company,~~892~~ $0.01 ~~99,120~~per $share $par ~~209~~value,~~012~~ outstanding ~~Cost~~as of goods sold 70,852 63,691 134,543 --------- --------- --------- --------- --------- Gross profit 39,040 35,429 74,469 Selling, general and administrative 68 25,468 19,673 45,209 Amortization of intangibles 612 612 Management fees 750 750 --------- --------- --------- --------- --------- Operating profit (loss) (68) 12,210 15,756 27,898 Other expenses (income): Equity in (earnings) of subsidiaries (4,934) (8,691) 13,625 Interest expense 4,923 20,335 79 25,337 Other (income) expense (August 1~~) (1~~,~~981)~~ 1,445 (537) --------- --------- --------- --------- --------- Income (loss) before income taxes (56) 2,547 14,232 (13,625) 3,098 Income tax expense (benefit) (26) (2,387) 5,541 3,128 --------- --------- --------- --------- --------- Net income (loss) $ (30) $ 4,934 $ 8,691 $ (13,625) $ (30) ========= ========= ========= ========= =========2004.

DAY ~~DAY~~INTERNATIONAL ~~INTER- INTER- NATIONAL NON- NATIONAL INC. GUARANTOR~~ GROUP, INC. (GUARANTOR) SUBSIDIARIES ELIMINATIONS CONSOLIDATED Net sales $ $ 111,596 $ 80,525 $ $ 192,121 Cost of goods sold 70,798 51,043 121,841 --------- --------- --------- --------- --------- Gross profit 40,798 29,482 70,280 Selling, general and administrative 55 24,442 16,253 40,750 Restructuring costs 118 118 Amortization of intangibles 609 609 Management fees 750 750 --------- --------- --------- --------- --------- Operating profit (loss) (55) 14,879 13,229 28,053 Other expenses (income): Equity in (earnings) loss of subsidiaries (5,648) (8,344) 13,992 Interest expense 20,171 62 20,233 Other (income) expense (2) (1,534) 1,027 (509) --------- --------- --------- --------- --------- Income before income taxes 5,595 4,586 12,140 (13,992) 8,329 Income tax expense (benefit) (21) (1,062) 4,412 3,329 --------- --------- --------- --------- --------- Income before cumulative effect of change in accounting principles 5,616 5,648 7,728 (13,992) 5,000 Cumulative effect of change in accounting principles 616 616 --------- --------- --------- --------- --------- Net income $ 5,616 $ 5,648 $ 8,344 $ (13,992) $ 5,616 ========= ========= ========= ========= ========= INDEX

DAY DAY INTER- INTER- NATIONAL NON- NATIONAL INC. GUARANTOR GROUP, INC. (GUARANTOR) SUBSIDIARIES ELIMINATIONS CONSOLIDATED Cash Flows From Operating Activities: Net income (loss) $ (30) $ 4,934 $ 8,691 $ (13,625) $ (30) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Interest expense: Redeemable preferred stock dividends 4,923 4,923 Loss on extinguishment of debt 542 542 Depreciation and amortization 9,341 2,549 11,890 Equity in (earnings) loss of subsidiaries (4,934) (8,691) 13,625 Deferred income taxes and other (2,848) (303) (3,151) Foreign currency (gain) loss (1,814) 797 (1,017) Net (gain) loss on disposal of fixed assets 113 661 774 Changes in operating assets and liabilities (18) 3,806 (6,912) (3,124) --------- --------- --------- --------- --------- Net cash provided by (used in) operating activities (59) 5,383 5,483 10,807 Cash Flows From Investing Activities: Cash paid for acquisition (1,952) (1,952) Capital expenditures (2,725) (2,731) (5,456) Cash held for retirement of debt (97,971) (97,971) Proceeds from sale of property 939 939 --------- --------- --------- --------- --------- Net cash used in investing activities (97,971) (3,738) (2,731) (104,440) Cash Flows From Financing Activities: Proceeds from issuance of debt 133,950 133,950 Payment of deferred financing fees (3,537) (3,537) Payments on long-term debt (31,150) (47) (31,197) Net borrowings (payments) on revolving credit facility (4,950) (4,950) --------- --------- --------- --------- --------- Net cash provided by (used in) financing activities 97,850 (3,537) (47) 94,266 Intercompany transfers and dividends 281 1,791 (2,072) Effects of exchange rates on cash 112 112 --------- --------- --------- --------- --------- Net increase (decrease) in cash and cash equivalents 101 (101) 745 745 Cash and cash equivalents at beginning of period 496 (496) 996 996 --------- --------- --------- --------- --------- Cash and cash equivalents at end of period $ 597 $ (597) $ 1,741 $ $ 1,741 ========= ========= ========= ========= =========


		Page

PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements:

	Condensed Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003		3

	Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2004 and 2003		4

	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and 2003		5

	Notes to Condensed Consolidated Financial Statements		6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		19

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		24

Item 4.	Controls and Procedures		25

PART II	OTHER INFORMATION

Item 6.	Exhibits and Reports on Form 8-K		26

Signature			26
EX-31.1 CERTIFICATION CEO
EX-31.2 CERTIFICATION CFO
EX-32.1 SECTION 1350 CERTIFICATION CEO
EX-32.2 SECTION 1350 CERTIFICATION CFO

DAY DAY INTER- INTER- NATIONAL NON- NATIONAL INC. GUARANTOR GROUP, INC. (GUARANTOR) SUBSIDIARIES ELIMINATIONS CONSOLIDATED Cash Flows From Operating Activities: Net income $ 5,616 $ 5,648 $ 8,344 $ (13,992) $ 5,616 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Cumulative effect of change in accounting principles (616) (616) Depreciation and amortization 8,934 2,000 10,934 Equity in (earnings) loss of subsidiaries (5,648) (8,344) 13,992 Deferred income taxes and other (588) (34) (622) Foreign currency (gain) loss (160) 150 (10) Undistributed earnings of investee (264) (264) Non-cash restructuring charge 157 157 Changes in operating assets and liabilities (183) 1,531 (3,853) (2,505) --------- --------- --------- --------- --------- Net cash provided by (used in) operating activities (215) 6,914 5,991 12,690 Cash Flows From Investing Activities: Capital expenditures (3,375) (2,248) (5,623) --------- --------- --------- --------- --------- Net cash used in investing activities (3,375) (2,248) (5,623) Cash Flows From Financing Activities: Payments on term loan (9,450) (130) (9,580) Net borrowings on credit facilities 3,150 3,150 --------- --------- --------- --------- --------- Net cash used in financing activities (6,300) (130) (6,430) Intercompany transfers and dividends 6,625 (3,649) (2,976) Effects of exchange rates on cash (518) (518) --------- --------- --------- --------- --------- Net increase (decrease) in cash and cash equivalents 110 (110) 119 119 Cash and cash equivalents at beginning of period 702 (702) 609 609 --------- --------- --------- --------- --------- Cash and cash equivalents at end of period $ 812 $ (812) $ 728 $ $ 728 ========= ========= ========= ========= =========

THREETable MONTHS NINE MONTHS 2003 2002 2003 2002 $ % $ % $ % $ % Net sales 70.1 100.0 66.9 100.0 209.0 100.0 192.1 100.0 Costs of goods sold 45.1 64.3 42.5 63.6 134.5 64.4 121.8 63.4 ------ ------- ------- ------ ------ ------- ------- ------ Gross profit 25.0 35.7 24.4 36.4 74.5 35.6 70.3 36.6 Selling, general and administrative expense 15.2 21.8 14.4 21.5 45.2 21.6 40.7 21.2 Restructuring costs 0.1 0.1 Amortization of intangibles 0.2 0.3 0.2 0.3 0.6 0.3 0.6 0.3 Management fees 0.3 0.3 0.2 0.3 0.8 0.4 0.8 0.4 ------ ------- ------- ------ ------ ------- ------- ------ Operating profit 9.3 13.3 9.6 14.3 27.9 13.3 28.1 14.6 ====== ======= ======= ====== ====== ======= ======= ======Contents

PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2004 AND DECEMBER 31, 2003
(In thousands)


	2004			2003
ASSETS
Cash and cash equivalents	$	1,331		$	726
Accounts receivable (less allowance for doubtful accounts of $3,431 and $3,407)		48,075			44,687
Inventories (Note B)		51,806			48,652
Other current assets		13,087			12,881

Total current assets		114,299			106,946
Property, plant and equipment, net of accumulated depreciation of $54,858 and $49,529		70,699			74,167
Goodwill		142,470			142,580
Intangible assets (net of accumulated amortization of $37,696 and $35,306)		21,339			23,223
Other assets		20,460			24,624

TOTAL ASSETS	$	369,267		$	371,540

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Accounts payable	$	10,046		$	7,563
Current maturities of long-term debt		4,016			3,489
Other current liabilities		30,778			29,421

Total current liabilities		44,840			40,473
Long-term and subordinated long-term debt		265,777			276,331
Other long-term liabilities		34,580			35,811
Redeemable preferred stock (Note D)		157,839			146,649
STOCKHOLDERS’ EQUITY (DEFICIT):
Common shares		1			1
Contra-equity associated with the assumption of majority shareholder’s bridge loan		(68,673	)		(68,772	)
Retained earnings (deficit)		(69,581	)		(65,180	)
Accumulated other comprehensive loss		4,484			6,227

Total stockholders’ equity (deficit)		(133,769	)		(127,724	)

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)	$	369,267		$	371,540

See notes to condensed consolidated financial statements.

DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(In thousands)


	Three Months						Six Months
	2004			2003			2004			2003
NET SALES	$	88,807		$	70,139		$	178,520		$	138,958
COST OF GOODS SOLD		56,692			45,356			113,074			89,493

GROSS PROFIT		32,115			24,783			65,446			49,465
SELLING, GENERAL AND ADMINISTRATIVE		19,853			15,419			39,953			29,968
AMORTIZATION OF INTANGIBLES		8			206			17			407
MANAGEMENT FEES		250			250			500			500

OPERATING PROFIT		12,004			8,908			24,976			18,590
OTHER EXPENSES:
Interest expense:
Long-term debt (including amortization of deferred financing costs and discount of $436, $587, $863 and $1,174)		5,646			6,629			11,282			13,154
Redeemable preferred stock dividends (including amortization of discount and issuance costs of $47 and $94)		5,628						11,190
Other (income) expense		(663	)		465			(1,541	)		(312	)

INCOME BEFORE INCOME TAXES		1,393			1,814			4,045			5,748
INCOME TAX EXPENSE		3,779			742			8,446			2,227

NET INCOME (LOSS)		(2,386	)		1,072			(4,401	)		3,521
ACCUMULATING PREFERRED STOCK DIVIDENDS (Note D)					(4,816	)					(9,574	)
AMORTIZATION OF PREFERRED STOCK ISSUANCE COSTS					(47	)					(94	)

NET LOSS AVAILABLE TO COMMON SHAREHOLDERS	$	(2,386	)	$	(3,791	)	$	(4,401	)	$	(6,147	)

See notes to condensed consolidated financial statements.

DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2004 AND 2003


	2004			2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(4,401	)	$	3,521
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		7,402			7,938
Interest expense—redeemable preferred stock dividends		11,190
Deferred income taxes		3,619			(2,031	)
Equity in earnings of investees		(148	)
Foreign currency (gain) loss		(907	)		(1,119	)
(Gain) loss on disposal of fixed assets		(128	)		774
Change in operating assets and liabilities		(3,413	)		(1,656	)

Net cash provided by operating activities		13,214			7,427
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions		(1,346	)		(1,000	)
Capital expenditures		(3,126	)		(4,312	)
Proceeds from sale of property		1,410			939

Net cash used in investing activities		(3,062	)		(4,373	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options		25
Payment of deferred financing costs		(633	)
Payments on term loans		(8,927	)		(6,347	)
Net (payments on) proceeds from revolving credit facility		50			3,650

Net cash provided by (used in) financing activities		(9,485	)		(2,697	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH		(62	)		82

Net increase (decrease) in cash and cash equivalents		605			439
Cash and cash equivalents at beginning of period		726			996

Cash and cash equivalents at end of period	$	1,331		$	1,435

NON-CASH TRANSACTIONS:
Preferred stock dividend				$	1,901

Amortization of preferred stock discount				$	94

Short-term note payable for acquisition				$	952

See notes to condensed consolidated financial statements.

DAY INTERNATIONAL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)

A. BASIS OF PRESENTATION

The balance sheet as of December 31, 2003, is condensed financial information derived from the audited balance sheet. The interim financial statements are unaudited. The consolidated financial statements of Day International Group, Inc. have been prepared in accordance with accounting principles generally accepted in the United States and, in the opinion of management, reflect all adjustments (consisting of normal recurring accruals) necessary for a fair presentation in accordance with accounting principles generally accepted in the United States for the periods presented. The consolidated results of operations and cash flows for the interim periods presented are not necessarily indicative of the results for the full year.

B. INVENTORIES

Inventories as of June 30, 2004 and December 31, 2003, consist of:


	2004		2003
Finished goods	$	25,688	$	24,917
Work in process		5,182		5,453
Raw materials		20,936		18,282

	$	51,806	$	48,652

C. LONG-TERM DEBT

On June 2, 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 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 will be added to the financing fees paid to the debtors and amortized over the term of the Tranche D Term Loan.

D. REDEEMABLE PREFERRED STOCK

The Company’s 121/4% Senior Exchangeable Preferred Stock require that dividends must be paid in cash after March 15, 2003. The Company has not paid cash dividends after March 15, 2003, because of certain restrictions in the Company’s Senior Secured Credit Agreement and Notes Indentures limiting the ability to pay cash dividends. If not paid for four consecutive quarters, 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. All dividends through March 15, 2003, have been in the form of additional fully-paid and non-assessable shares of Exchangeable Preferred Stock. Dividends-in-arrears are $10,417 as of June 30, 2004, which are included in the redeemable preferred stock balance.

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 has no effect on the cash flows of the Company, net loss available to common shareholders or the Company’s compliance with its debt covenants.

E. INCOME TAXES

The Company’s effective income tax rate for 2004 is significantly different from the statutory rates in effect as a result of the adoption of SFAS No. 150 and the inclusion of the dividends on the redeemable preferred stock in income (loss) before income taxes. The non-deductible preferred stock dividends cause a significant difference between book income and taxable income subsequent to the adoption of SFAS No. 150. In addition, the effective rate is affected by dividends from non-U.S. subsidiaries taxable in the United States.

F. 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.

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.


	Three Months				Six Months
	2004		2003		2004		2003
Third party sales:
Image Transfer	$	75,963	$	57,523	$	152,966	$	113,122
Textile Products		12,844		12,616		25,554		25,836

Total	$	88,807	$	70,139	$	178,520	$	138,958

Segment operating profit:
Image Transfer	$	11,808	$	9,082	$	24,366	$	18,647
Textile Products		1,601		1,427		3,403		2,981

Total	$	13,409	$	10,509	$	27,769	$	21,628

The following is a reconciliation of the segment operating profit reported above to the amount reported in the consolidated financial statements:


	Three Months						Six Months
	2004			2003			2004			2003
Segment operating profit	$	13,409		$	10,509		$	27,769		$	21,628
APB No. 16 depreciation and amortization		(999	)		(1,007	)		(1,998	)		(1,849	)
Non-allocated corporate expenses		(148	)		(138	)		(278	)		(282	)
Amortization of intangibles		(8	)		(206	)		(17	)		(407	)
Management fees		(250	)		(250	)		(500	)		(500	)

Total operating profit	$	12,004		$	8,908		$	24,976		$	18,590

G. COMPREHENSIVE INCOME (LOSS)

Total comprehensive income (loss) is comprised of net income (loss), net currency translation gains and losses and net unrealized gains and losses on cash flow hedges. Total comprehensive income (loss) for the three months ended June 30, 2004 and 2003 was $(3,865) and $3,325. Total comprehensive income (loss) for the six months ended June 30, 2004 and 2003 was $(6,144) and $6,071.

H. CONTINGENCIES

Claims have been made against the Company for the costs of environmental remedial measures taken or to be taken. Reserves for such liabilities have been established and no insurance recoveries have been anticipated in the determination of the reserves. In management’s opinion, the aforementioned claims will be resolved without material adverse effect on the consolidated results of operations, financial position or cash flows of the Company.

I. 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 all outstanding and unvested stock option and warrants had been determined based on their fair values at the grant date, consistent with the method prescribed by SFAS No. 123:


	Three Months						Six Months
	2004			2003			2004			2003
Net income (loss)–as reported	$	(2,386	)	$	1,072		$	(4,401	)	$	3,521
Less–stock-based compensation expense determined using fair value based method in SFAS No. 123		(195	)		(208	)		(390	)		(416	)

Pro forma net income (loss)	$	(2,581	)	$	864		$	(4,791	)	$	3,105

J. RETIREMENT AND OTHER POSTRETIREMENT BENEFITS

A summary of the components of net periodic pension cost for the defined benefit retirement plans is as follows:


	Three Months						Six Months
	2004			2003			2004			2003
Service cost	$	92		$	82		$	187		$	159
Interest cost		192			173			389			341
Expected return on plan assets		(84	)		(81	)		(170	)		(162	)
Actuarial loss recognized		9			168			19			334

Net periodic pension costs	$	209		$	342		$	425		$	672

A summary of the components of net periodic postretirement benefit cost for the postretirement health care and life insurance benefits plans is as follows:


	Three Months					Six Months
	2004			2003		2004			2003
Service cost	$	275		$	207	$	550		$	414
Interest cost		212			221		424			442
Amortization of prior service cost		(160	)				(320	)
Actuarial loss recognized		59			66		118			132

Net periodic postretirement benefit costs	$	386		$	494	$	772		$	988

On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) was enacted. The Act expands Medicare primarily by adding a prescription drug benefit for Medicare-eligible individuals beginning in 2006, as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to the Medicare

benefit. Pursuant to guidance provided in FASB Staff Position SFAS No. 106-2, the Company has chosen to defer recognition of the Act, and, accordingly, postretirement benefit obligations and net periodic postretirement benefit cost do not reflect any potential effect of the legislation associated with the subsidy because the employer is unable to conclude whether the benefits provided by the plan are actuarially equivalent to Medicare Part D under the Act. In addition, specific authoritative guidance on the accounting for certain aspects of the Act has not yet been determined and that guidance, when issued, could require the Company to change previously reported information. The Company believes that the impact of the legislation will not be material to the results of operations or financial position of the Company.

K. SUPPLEMENTAL CONSOLIDATING INFORMATION

The Company has outstanding $115,000, 91/2% Senior Subordinated Notes (the “Notes”). The Company has no assets or operations other than its wholly-owned investment in Day International, Inc. (“Day International” or “Guarantor”). Day International and the wholly-owned United States subsidiaries have provided full and unconditional guarantees of the Notes. The wholly-owned international subsidiaries of Day International are not guarantors with respect to the Notes and do not have any credit arrangements senior to the Notes. The only intercompany eliminations are the normal intercompany eliminations with regard to intercompany sales and the Company’s investment in the wholly-owned non-guarantor subsidiaries. Intercompany notes are in place, which effectively transfers the interest expense from the Company to Day International. The following are the supplemental combining condensed balance sheets as of June 30, 2004 and December 31, 2003, and the supplemental combining condensed statements of operations and cash flows for the three and six months ended June 30, 2004 and 2003, with the investments in the subsidiaries accounted for using the equity method. Separate complete financial statements of the Guarantor are not presented because management has determined that they are not material to the investors.

DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED BALANCE SHEET
JUNE 30, 2004


	DAY
	Inter-						Non-
	national			Guarantor			Guarantor
	Group, Inc.			Subsidiaries			Subsidiaries			Eliminations			Consolidated
ASSETS
Cash and cash equivalents	$	500		$	(337	)	$	1,168		$			$	1,331
Accounts receivable—net					23,137			24,938						48,075
Inventories					30,553			21,253						51,806
Other current assets					6,981			6,106						13,087

TOTAL CURRENT ASSETS		500			60,334			53,465						114,299
Intercompany		268,411			(580	)		781			(268,612	)
Property, plant and equipment, net					42,804			27,895						70,699
Investment in subsidiaries		(28,551	)		59,401			(12,535	)		(18,315	)
Intangible and other assets					164,658			19,611						184,269

TOTAL ASSETS	$	240,360		$	326,617		$	89,217		$	(286,927	)	$	369,267

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Accounts payable	$			$	4,078		$	5,968		$			$	10,046
Current maturities of long-term debt		3,912			4			100						4,016
Other current liabilities		3,234			11,260			16,284						30,778

TOTAL CURRENT LIABILITIES		7,146			15,342			22,352						44,840
Intercompany		(55,355	)		311,673			(4,213	)		(252,105	)
Long-term and subordinated long-term debt		264,499			14			1,264						265,777
Other long-term liabilities					24,528			10,052						34,580
Redeemable preferred stock		157,839												157,839
Total stockholders’ equity (deficit)		(133,769	)		(24,940	)		59,762			(34,822	)		(133,769	)

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)	$	240,360		$	326,617		$	89,217		$	(286,927	)	$	369,267

DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET
DECEMBER 31, 2003


	DAY
	Inter-						Non-
	national			Guarantor			Guarantor
	Group, Inc.			Subsidiaries			Subsidiaries			Eliminations			Consolidated
ASSETS
Cash and cash equivalents	$	742		$	(742	)	$	726		$			$	726
Accounts receivable — net					22,280			22,407						44,687
Inventories					28,104			20,548						48,652
Other assets					7,186			5,695						12,881

TOTAL CURRENT ASSETS		742			56,828			49,376						106,946
Intercompany		278,389			(811	)		1,012			(278,590	)
Property, plant and equipment — net					44,329			29,838						74,167
Investment in subsidiaries		(35,348	)		44,173			(3,682	)		(5,143	)
Intangible and other assets					169,969			20,458						190,427

TOTAL ASSETS	$	243,783		$	314,488		$	97,002		$	(283,733	)	$	371,540

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Accounts payable	$			$	3,415		$	4,148		$			$	7,563
Current maturities of long-term debt		3,376			4			109						3,489
Accrued associate related costs and other expenses		3,229			13,171			13,021						29,421

TOTAL CURRENT LIABILITIES		6,605			16,590			17,278						40,473
Intercompany		(56,760	)		330,798			(16,552	)		(257,486	)
Long-term and subordinated long-term debt		275,013			16			1,302						276,331
Other long-term liabilities					24,111			11,700						35,811
Redeemable preferred stock		146,649												146,649
Total stockholders’ equity (deficit)		(127,724	)		(57,027	)		83,274			(26,247	)		(127,724	)

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)	$	243,783		$	314,488		$	97,002		$	(283,733	)	$	371,540

DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2004


	DAY
	Inter-						Non-
	national			Guarantor			Guarantor
	Group, Inc.			Subsidiaries			Subsidiaries		Eliminations			Consolidated
Net sales	$			$	53,194		$	35,613	$			$	88,807
Cost of goods sold					33,978			22,714					56,692

Gross profit					19,216			12,899					32,115
Selling, general and administrative		16			12,514			7,323					19,853
Amortization of intangibles					8								8
Management fees					250								250

Operating profit (loss)		(16	)		6,444			5,576					12,004
Other expenses (income):
Equity in (earnings) loss of subsidiaries		(3,251	)		(3,018	)				6,269
Interest expense		5,628			5,635			11					11,274
Other (income) expense		(1	)		(1,208	)		546					(663	)

Income (loss) before income taxes		(2,392	)		5,035			5,019		(6,269	)		1,393
Income tax expense (benefit)		(6	)		1,784			2,001					3,779

Net income (loss)	$	(2,386	)	$	3,251		$	3,018	$	(6,269	)	$	(2,386	)

DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2003


	DAY
	Inter-						Non-
	national			Guarantor			Guarantor
	Group, Inc.			Subsidiaries			Subsidiaries		Eliminations			Consolidated
Net sales	$			$	36,095		$	34,044	$				$	70,139
Cost of goods sold					23,249			22,107						45,356

Gross profit					12,846			11,937						24,783
Selling, general and administrative		14			8,671			6,734						15,419
Amortization of intangibles					206									206
Management fees					250									250

Operating profit (loss)		(14	)		3,719			5,203						8,908
Other expenses (income):
Equity in (earnings) of subsidiaries		(1,080	)		(2,652	)				3,732
Interest expense					6,587			42						6,629
Other (income) expense		(1	)		(326	)		792						465

Income before income taxes		1,067			110			4,369		(3,732	)			1,814
Income tax expense (benefit)		(5	)		(970	)		1,717						742

Net income	$	1,072		$	1,080		$	2,652	$	(3,732	)		$	1,072

DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2004


	DAY
	Inter-						Non-
	national			Guarantor			Guarantor
	Group, Inc.			Subsidiaries			Subsidiaries		Eliminations			Consolidated
Net sales	$			$	106,143		$	72,377	$			$	178,520
Cost of goods sold					67,454			45,620					113,074

Gross profit					38,689			26,757					65,446
Selling, general and administrative		17			25,243			14,693					39,953
Amortization of intangibles					17								17
Management fees					500								500

Operating profit (loss)		(17	)		12,929			12,064					24,976
Other expenses (income):
Equity in (earnings) of subsidiaries		(6,797	)		(6,362	)				13,159
Interest expense		11,190			11,266			16					22,472
Other (income) expense		(4	)		(3,339	)		1,802					(1,541	)

Income (loss) before income taxes		(4,406	)		11,364			10,246		(13,159	)		4,045
Income tax expense (benefit)		(5	)		4,567			3,884					8,446

Net income (loss)	$	(4,401	)	$	6,797		$	6,362	$	(13,159	)	$	(4,401	)

DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2003


	DAY
	Inter-						Non-
	national			Guarantor			Guarantor
	Group, Inc.			Subsidiaries			Subsidiaries		Eliminations			Consolidated
Net sales	$			$	71,808		$	67,150	$			$	138,958
Cost of goods sold					46,652			42,841					89,493

Gross profit					25,156			24,309					49,465
Selling, general and administrative		59			17,157			12,752					29,968
Amortization of intangibles					407								407
Management fees					500								500

Operating profit (loss)		(59	)		7,092			11,557					18,590
Other expenses (income):
Equity in (earnings) of subsidiaries		(3,556	)		(5,991	)				9,547
Interest expense					13,078			76					13,154
Other (income) expense		(1	)		(1,993	)		1,682					(312	)

Income before income taxes		3,498			1,998			9,799		(9,547	)		5,748
Income tax expense (benefit)		(23	)		(1,558	)		3,808					2,227

Net income	$	3,521		$	3,556		$	5,991	$	(9,547	)	$	3,521

DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2004


	DAY
	Inter-						Non-
	national			Guarantor			Guarantor
	Group, Inc.			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Cash Flows From Operating Activities:
Net income (loss)	$	(4,401	)	$	6,797		$	6,362		$	(13,159	)	$	(4,401	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization					5,275			2,127						7,402
Interest expense—redeemable preferred stock		11,190												11,190
Equity in earnings of subsidiaries		(6,797	)		(6,362	)					13,159
Deferred income taxes and other					4,912			(1,293	)					3,619
Equity in earnings of investees					(148	)								(148	)
Foreign currency (gain) loss					(1,602	)		695						(907	)
(Gain) loss on disposal of fixed assets					300			(428	)					(128	)
Changes in operating assets and liabilities		4			(1,192	)		(2,225	)					(3,413	)

Net cash provided by (used in) operating activities		(4	)		7,980			5,238						13,214
Cash Flows From Investing Activities:
Cash paid for acquisitions					(1,346	)								(1,346	)
Capital expenditures					(1,602	)		(1,524	)					(3,126	)
Proceeds from sale of property								1,410						1,410

Net cash used in investing activities					(2,948	)		(114	)					(3,062	)
Cash Flows From Financing Activities:
Proceeds from exercise of stock options		25												25
Payment of deferred financing fees					(633	)								(633	)
Payments on term loans		(8,925	)		(2	)								(8,927	)
Net proceeds from credit facilities		50												50

Net cash provided by (used in) financing activities		(8,850	)		(635	)								(9,485	)
Intercompany transfers and dividends		8,612			(3,992	)		(4,620	)
Effects of exchange rates on cash								(62	)					(62	)

Net increase (decrease) in cash and cash equivalents		(242	)		405			442						605
Cash and cash equivalents at beginning of period		742			(742	)		726						726

Cash and cash equivalents at end of period	$	500		$	(337	)	$	1,168		$			$	1,331

DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2003


	DAY
	Inter-						Non-
	national			Guarantor			Guarantor
	Group, Inc.			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Cash Flows From Operating Activities:
Net income	$	3,521		$	3,556		$	5,991		$	(9,547	)	$	3,521
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization					6,284			1,654						7,938
Equity in earnings of subsidiaries		(3,556	)		(5,991	)					9,547
Deferred income taxes and other					(1,779	)		(252	)					(2,031	)
Foreign currency (gain) loss					(1,927	)		808						(1,119	)
Net (gain) loss on disposal of assets					114			660						774
Changes in operating assets and liabilities		96			3,232			(4,984	)					(1,656	)

Net cash provided by operating activities		61			3,489			3,877						7,427
Cash Flows From Investing Activities:
Cash paid for acquisition					(1,000	)								(1,000	)
Capital expenditures					(2,025	)		(2,287	)					(4,312	)
Proceeds from sale of property					939									939

Net cash used in investing activities					(2,086	)		(2,287	)					(4,373	)
Cash Flows From Financing Activities:
Payments on term loan		(6,300	)					(47	)					(6,347	)
Net proceeds from revolving credit facility		3,650												3,650

Net cash provided by (used in) financing activities		(2,650	)					(47	)					(2,697	)
Intercompany transfers and dividends		2,342			(1,156	)		(1,186	)
Effects of exchange rates on cash								82						82

Net increase (decrease) in cash and cash equivalents		(247	)		247			439						439
Cash and cash equivalents at beginning of period		496			(496	)		996						996

Cash and cash equivalents at end of period	$	249		$	(249	)	$	1,435		$			$	1,435

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Safe Harbor Statement

This Quarterly 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 foreign countries, including the translation of operating results to the U.S. dollar; (iii) the timely development and market acceptance of new products; (iv) the impact of competitive products and pricing; (v) the effect of changing general and industry specific economic conditions; (vi) the impact 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.

Basis of Presentation

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.

The following table sets forth selected financial information in millions of dollars and as a percentage of net sales:


	Three Months								Six Months
	2004				2003				2004				2003
	$		%		$		%		$		%		$		%
Net sales		88.8		100.0		70.1		100.0		178.5		100.0		139.0		100.0
Costs of goods sold		56.7		63.8		45.3		64.7		113.1		63.3		89.5		64.4

Gross profit		32.1		36.2		24.8		35.3		65.4		36.7		49.5		35.6
Selling, general and administrative expense		19.8		22.4		15.4		22.0		39.9		22.4		30.0		21.5
Amortization of intangibles		0.0		0.0		0.2		0.3		0.0		0.0		0.4		0.3
Management fees		0.3		0.3		0.3		0.3		0.5		0.3		0.5		0.4

Operating profit		12.0		13.5		8.9		12.7		25.0		14.0		18.6		13.4

Comparison of Results of Operations

Three Months Ended June 30, 2004, Compared to Three Months Ended June 30, 2003

Net sales increased $18.7 million (26.6%) to $88.8 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 $12.4 million of sales from businesses acquired in 2003. Sales in 2004 were positively affected by increased sales volumes of $2.8 million in the United States, increased sales volume of $0.1 million in Europe and $2.4 million of favorable changes in foreign currency rates used to translate international sales into U.S. dollars. Image Transfer’s sales increased $18.5 million (32.1%) to $76.0 million. Image Transfer’s sales were positively affected by increased sales volumes of $15.1 million in the United States and $0.5 million in Europe and $2.0 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 sales from business acquisitions in 2003 of $12.4 million and from higher sales volumes across substantially all product lines. European sales volume increased primarily from growth in the chemical products business in the United Kingdom and Germany. Textile Products’ sales increased $0.2 million (1.8%) to $12.8 million, primarily as a result of slightly higher sales volume in the United States of $0.1 million and by favorable foreign currency rate changes of $0.4 million and offset by lower sales volume in Europe of $0.3 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”) and lower sales to Middle East markets.

Gross profit increased $7.3 million (29.6%) to $32.1 million. Foreign currency rate changes increased gross profit by $0.9 million. As a percentage of net sales, gross profit increased to 36.2% for the three months ended June 30, 2004, compared to 35.3% for the three months ended June 30, 2003. The improvement in gross profit as a percentage of sales is a result of improved manufacturing performances offset by the effect of the acquisitions in 2003, as those businesses have historically had lower gross margin percentages than Day’s businesses.

Selling, general and administrative expense (“SG&A”) increased $4.4 million (28.8%) to $19.8 million, primarily as a result of SG&A associated with NDI of $2.6 million and changes in foreign currency rates. As a percentage of net sales, SG&A increased to 22.4% from 22.0%. Changes in foreign currency rates increased SG&A costs by $0.5 million compared to 2003. SG&A costs also increased as a result of higher insurance costs and higher selling and distribution costs from higher sales levels.

Operating profit increased $3.1 million (34.8%) to $12.0 million. As a percentage of net sales, operating profit increased to 13.5% for the three months ended June 30, 2004, from 12.7% for the comparable period in 2003. Image Transfer’s operating profit increased $2.7 million (30.0%) to $11.8 million, primarily as a result of higher sales volumes. As a percentage of net sales, Image Transfer’s operating profit decreased to 15.5% for the three months ended June 30, 2004, from 15.8% in 2003. Operating margins on NDI’s distribution business are substantially lower than Day’s historical margins on manufactured products. Textile Products’ operating profit increased $0.2 million (12.2%) to $1.6 million. As a percentage of net sales, Textile Products’ operating profit increased to 12.5% for the three months

ended June 30, 2004, from 11.3% in 2003. Lower selling and administrative costs in the United States favorably affected Textile Products’ operating profit in 2004 compared to 2003.

Other (income) expense was $(0.7) million and $0.5 million for the three months ended June 30, 2004 and 2003. The other (income) expense is primarily due to foreign currency transaction (gains) losses incurred in the normal course of international subsidiaries doing business in other than their functional currency as well as a result of intercompany financing arrangements. Other (income) expense in 2004 includes a gain of $0.4 million on the mark-to-market of the euro-denominated Tranche A Term Loan.

The effective tax rate was 271.3% and 40.9% in 2004 and 2003. The effective tax rate for 2004 is affected by the adoption of SFAS No. 150 and the non-deductible preferred stock dividends now reflected as interest expense. Adjusted for the preferred stock dividends, the effective tax rate would be 53.8% in 2004. The effective tax rate is further affected by foreign-sourced dividends and income taxable in the United States and non-deductible expenses.

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 has no effect on the net loss available to common shareholders, cash flows of the Company or the Company’s compliance with its debt covenants.

Six Months Ended June 30, 2003, Compared to Six Months Ended June 30, 2002

Net sales increased $39.6 million (28.5%) to $178.5 million, primarily as a result of sales from businesses acquired in 2003, favorable changes in foreign currency rates and higher sales volumes in the United States. Sales in 2004 include $25.6 million of sales from businesses acquired in 2003. Sales in 2004 were positively affected by increased sales volumes of $5.3 million in the United States and $7.3 million of favorable changes in foreign currency rates used to translate international sales into U.S. dollars. Image Transfer’s sales increased $39.8 million (35.2%) to $153.0 million. Image Transfer’s sales were positively affected by increased sales volumes of $31.2 million in the United States and $1.5 million in Europe and $5.9 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 sales from business acquisitions in 2003 of $25.6 million and from higher sales volumes across substantially all product lines. European sales volume increased primarily from growth in the chemical products business in the United Kingdom and Germany. Textile Products’ sales decreased $0.3 million (1.1%) to $25.6 million, primarily as a result of lower sales volume in the United States of $0.4 million and in Europe of $1.4 million offset by favorable foreign currency rate changes of $1.5 million. The lower U.S. Textile Products sales volume is due to reduced demand in the U.S. textile industry, mostly a result of 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 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. European Textile Products’ sales volumes were lower in 2004 compared to 2003, primarily as a result of lower sales to 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.

Gross profit increased $16.0 million (32.3%) to $65.4 million. Foreign currency rate changes increased gross profit by $2.8 million. As a percentage of net sales, gross profit increased to 36.7% for the six months ended June 30, 2004, compared to 35.6% for the six months ended June 30, 2003.

Selling, general and administrative expense (“SG&A”) increased $10.0 million (33.3%) to $39.9 million, primarily as a result of SG&A associated with NDI of $5.0 million and changes in foreign currency rates. As a percentage of net sales, SG&A increased to 22.4% from 21.6%. Changes in foreign currency rates increased SG&A costs by $1.5 million in the first half of 2004 compared to the first half of 2003. SG&A costs also increased as a result of higher insurance costs and higher selling and distribution costs from higher sales levels.

Operating profit increased $6.4 million (34.4%) to $25.0 million. As a percentage of net sales, operating profit increased to 14.0% for the six months ended June 30, 2004, from 13.4% for the comparable period in 2003. Image Transfer’s operating profit increased $5.7 million (30.7%) to $24.4 million, primarily as a result of higher sales volumes. As a percentage of net sales, Image Transfer’s operating profit decreased to 15.9% for the six months ended June 30, 2004, from 16.5% in 2003. Operating margins on NDI’s distribution business are substantially lower than Day’s historical margins on manufactured products. Textile Products’ operating profit increased $0.4 million (14.2%) to $3.4 million. As a percentage of net sales, Textile Products’ operating profit increased to 13.3% for the six months ended June 30, 2004, from 11.5% in 2003. Lower selling and administrative costs in the United States favorably affected textile Products’ operating profit in 2004 compared to 2003.

Other (income) expense was $(1.5) million and $(0.3) million for the six months ended June 30, 2004 and 2003. The other (income) expense is primarily due to foreign currency transaction (gains) losses incurred in the normal course of international subsidiaries doing business in other than their functional currency as well as a result of intercompany financing arrangements. Other (income) expense in 2004 includes a gain of $1.1 million on the mark-to-market of the euro-denominated Tranche A Term Loan and $0.4 million gain on the sale of fixed assets. Other income in 2003 includes a loss of $1.1 million from the sale of the South African business, a gain of $0.9 million from the sale of excess land in Mauldin, South Carolina and a loss of $0.5 million on the sale and disposal of equipment from the Longwood, Florida, facility.

The effective tax rate was 208.8% and 38.7% in 2004 and 2003. The effective tax rate for 2004 is affected by the adoption of SFAS No. 150 and the non-deductible preferred stock dividends now reflected as interest expense. Adjusted for the preferred stock dividends, the effective tax rate would be

55.4% in 2004. The effective tax rate is further affected by foreign-sourced dividends and income taxable in the United States and non-deductible expenses.

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 has no effect on the net loss available to common shareholders, cash flows of the Company or the Company’s compliance with its debt covenants.

Liquidity and Capital Resources

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

Capital expenditures were $3.1 million and $4.3 million for the six months ended June 30, 2004 and 2003.

On June 2, 2004, the Company issued $126.5 million of Tranche D Term Loans under the $185.0 million Senior Secured Credit Facility to refinance the outstanding Tranche B and Tranche C Term Loans. The Tranche D Term Loans have terms identical to the outstanding 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 changes in maturity dates were made.

As of June 30, 2004, there was $0.5 million outstanding under the Revolving Credit Facility and the Company had $18.6 million available under the Revolving Credit Facility. The Company’s aggregate indebtedness at June 30, 2004, is $269.8 million and the aggregate liquidation preferences of the Exchangeable Preferred Stock is $74.8 million and the Convertible Preferred Stock is $84.2 million. The Company is highly leveraged. The Company’s ability to operate its business, service its debt requirements and reduce its total debt 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. See the Company’s Annual Report on Form 10-K for a more extensive discussion of liquidity and capital resources.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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 consolidated 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 $8.1 million at June 30, 2004 and $15.9 million at December 31, 2003. The fair value of these contracts is a payable of $0.2 million at June 30, 2004 and $0.7 million at December 31, 2003. These contracts generally expire within three to twelve months. At June 30, 2004, the Company has outstanding €24.0 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 transaction (gains) losses, included in other (income) expense, were $(0.5) million and $(0.6) million for the three months ended June 30, 2004 and 2003 and $(0.9) million and $(1.4) million for the six months ended June 30, 2004 and 2003.

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 fair value of the interest rate swap was a receivable of $0.1 million at June 30, 2004 and a payable of $0.3 million at December 31, 2003. The Company does not expect changes in interest rates to have a material effect on income or cash flows in 2004, 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 Image Transfer and Textile products. The Company is exposed to changes in the costs of these components. Pressroom Chemicals 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 significantly higher costs, management believes that a 10% change in the cost of its components could have a short-term impact until sales price increases take effect, but overall would not have a material effect on income or cash flows for a longer term.

ITEM 4. CONTROLS AND PROCEDURES

The Company maintains a system of internal accounting controls designed to provide reasonable assurance that transactions are properly recorded and summarized so that reliable financial records and reports can be prepared and assets safeguarded. In addition, a system of disclosure controls is maintained to ensure that information required to be disclosed is recorded, processed, summarized and reported in a timely manner to management responsible for the preparation and reporting of the Company’s financial information.

Management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, assesses the internal control and disclosure control systems as being effective as they encompass material matters for the three months ended June 30, 2004. To the best of management’s knowledge, there were no changes in the internal control and disclosure control systems during the quarter ended June 30, 2004, that would materially affect the control systems.

PART II OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K


a.		Exhibits

(31)		Rule 13a-14(a)/15d-14(a) Certifications
		31.1 Chief Executive Officer Certification
		31.2 Chief Financial Officer Certification

(32)		Section 1350 Certifications
		32.1 Chief Executive Officer Certification
		32.2 Chief Financial Officer Certification

b.		Reports on Form 8-K

		On June 7, 2004, the Company filed a Form 8-K reporting under Item 5 that it had refinanced a portion of its outstanding long-term debt.

Signature

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


				Day International Group, Inc.

				(Registrant)

		Date: August 6, 2004		/s/ Thomas J. Koenig

				Thomas J. Koenig
				Vice President and
				Chief Financial Officer
				(Principal Financial Officer)

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Filing Compare · DAY INTERNATIONAL GROUP INC