Summary of DUOYUAN PRINTING, INC.

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
This quarterly report on Form 10-Q for the quarter ended September 30, 2009 contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Generally, the words "believe," "anticipate," "may," "will," "should," "expect," "intend," "estimate," "predict," "continue," and similar expressions or the negative thereof or comparable terminology are intended to identify forward-looking statements which include, but are not limited to, statements concerning expectations of us and our directors and officers regarding, among other things, working capital requirements, financing requirements, business prospects, trends affecting us and other statements of expectations, beliefs, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. Such statements are subject to certain risks and uncertainties, including the matters set forth in this quarterly report on Form 10-Q or other reports or documents we file with the Securities and Exchange Commission, or the SEC, from time to time, which could cause actual results or outcomes to differ materially from those projected. Undue reliance should not be placed on these forward-looking statements which speak only as of the date hereof. We do not ordinarily make projections of our future operating results and undertake no obligation (and expressly disclaim any obligation) to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Readers should carefully review this document and the other documents filed by us with the SEC. In addition, the forward-looking statements in this quarterly report on Form 10-Q for the quarter ended September 30, 2009 involve known and unknown risks, uncertainties and other factors that could cause the actual results, performance or achievements of us to differ materially from those expressed in or implied by the forward-looking statements contained herein. Please see the "Risk Factors" in Item 1A of Part II of this quarterly report on Form 10-Q. General Overview
Corporate History
We are a leading offset printing equipment supplier in China, headquartered in Beijing. We design, manufacture and sell offset printing equipment used in the offset printing process. The offset printing process includes the following three stages: (1) "pre-press," which is the transfer of images to printing plates; (2) "press," which is the transfer of images from printing plates to another media, such as paper; and (3) "post-press," which is the last step of the offset printing process that includes cutting, folding, binding, collating and packaging. We manufacture one product under the pre-press product category (a computer-to-plate system, or CTP system) and sixteen products across four product lines under the press product category (single color small format presses, single color large format presses, multicolor small format presses and multicolor large format presses). We plan to begin commercial production and sale of certain post-press products, including cold-set corrugated paper machine, which makes corrugated cardboard paper, by the end of 2010. In addition, we plan to begin commercial production and sale of two other post-press products, namely an automatic booklet maker and automatic paper cutter, for which we have developed prototypes, in 2011. Through our technical innovation and precision engineering, we offer a broad range of quality and durable offset printing equipment at competitive prices. With over 85 distributors in over 65 cities and 28 provinces, we have one of the largest distribution networks for offset printing equipment suppliers in China. We believe our extensive network allows us to be closer to our end-user customers and enables us to be more responsive to local market demand.
We are organized under the law of the State of Wyoming. On October 6, 2006, we closed an equity transfer agreement with Duoyuan Investments Limited, or Duoyuan Investments, pursuant to which we acquired Duoyuan Digital Press Technology Industries (China) Co., Ltd., or Duoyuan China, and commenced our present line of offset printing equipment business. We conduct all of our business through our principal operating subsidiary, Duoyuan China, and its two manufacturing subsidiaries, Langfang Duoyuan Digital Technology Co., Ltd., or Langfang Duoyuan, and Hunan Duoyuan Printing Machinery Co., Ltd., or Hunan Duoyuan. Duoyuan China's principal business activities include marketing and sale of our offset printing equipment, technical support to our distributors, as well as overall strategic planning and management of our business. Langfang Duoyuan's principal business activities include the manufacturing of our CTP system, and two of our press products, namely our single color small format presses and multicolor small format presses. Hunan Duoyuan's principal business activities include the manufacturing of two of our press products, namely our single color large format presses and multicolor large format presses. Our majority shareholder is Duoyuan Investments, which is a British Virgin Islands company wholly owned by Wenhua Guo, our chairman of the board and chief executive officer.
On November 2, 2006, we closed the transactions contemplated by a securities purchase agreement by and between us and certain investors, and issued an aggregate of 6,132,622 shares of our common stock to certain investors for an aggregate purchase price of $23.5 million. This private placement was made pursuant to the exemption from the registration provisions of the Securities Act provided by Section 4(2) of the Securities Act, and Rule 506 of Regulation D promulgated thereunder, for issuances not involving a public offering. In November 2009, we completed our initial public offering of 6,455,918 common shares, including 5,500,000 common shares offered by us and 955,918 common shares offered by the selling shareholders, at an initial public offering price of $8.50 per common share. Our shares are listed on the New York Stock Exchange under the symbol "DYP."

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Changes in PRC Tax Regulations
Our Chinese subsidiaries have enjoyed significant tax preferential treatments. These preferential tax treatments were applicable to foreign-invested manufacturing enterprises scheduled to operate for a period of not less than ten years in accordance with the Foreign Invested Enterprise Income Tax Law, or FIE Income Tax Law, which was effective until December 31, 2007. The additional tax that would otherwise be payable without such preferential tax treatments totaled $7.9 million for the year ended June 30, 2008 and $4.3 million for the year ended June 30, 2009. The additional tax that would otherwise be payable without such preferential tax treatments totaled $1.0 million for the three months ended September 30, 2009.
As a result of recent changes in the FIE Income Tax Law, we expect that our tax expenses in the future will be significantly higher. In addition, as explained below, some of the tax preferences we previously received were granted by local governments and not supported by relevant state laws and regulations. As a result, our Chinese subsidiaries may be ordered by relevant authorities to refund these tax benefits. In addition, as a result of the changes in Chinese tax laws, our historical operating results will not be indicative of our operating results for future periods.
Revenue by Product Categories
Our revenue is reported net of value-added taxes, or VAT, that are levied on our products. As of September 30, 2009, all of our products were subject to a VAT at a rate of 17% of the gross sales price. We also offer sales rebates as an incentive for large purchase orders. These sales rebates are recorded as a reduction of our revenue.
We derive all of our revenue from the sale of our offset printing equipment to distributors in China. We sell products in the pre-press and press product categories of offset printing equipment with substantially all our revenue being derived from the sale of our press printing equipment. Pre-press printing equipment comprised approximately 2.8% of our revenue and press printing equipment comprised approximately 97.2% of our revenue for the three months ended September 30, 2009, as adjusted for sales rebates. For the three months ended September 30, 2009, within the press product category of printing equipment, we derived 88.2% of our revenue from the sale of our multicolor (small and large format) presses, before adjustment for sales rebates. Our multicolor (small and large format) presses were our best selling products for the three months ended September 30, 2009. For the three months ended September 30, 2009, our multicolor large format presses accounted for approximately 61.6% of our revenue and our multicolor small format presses accounted for approximately 26.6% of our revenue, before adjustment for sales rebates.
The following table provides a breakdown of our revenue, by product category:

                                            Three Months Ended September 30
                                            2008                       2009
                                                   % of                       % of
                                       $         revenue          $         revenue
                                                 (dollars in thousands)

        Pre-press
        Computer-to-plate systems   $    821          3.1 %    $    925          2.8 %

        Press
        Single color small-format        879          3.4 %         999          3.0 %
        Single color large-format      2,599          9.9 %       2,459          7.4 %
        Multicolor small-format        6,812         26.0 %       8,852         26.6 %
        Multicolor large-format       15,851         60.5 %      20,525         61.6 %

Adjustments (783 ) (2.9 %) (465 ) (1.4 %)

Total Revenue $ 26,179 100.0 % $ 33,295 100.0 %

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Sales to distributors in China account for all of our revenue. We use an extensive distribution network to reach a broad end-user customer base. We generally make sales on a purchase order and short-term agreement basis. We do not have long-term volume purchase contracts with any of our distributors. No single distributor accounted for more than 4% of our revenue during the three months ended September 30, 2009.
Adjustments to revenue accounted for 1.4% for the three months ended September 30, 2009, for sales rebates paid to distributors as part of our incentive program that rewards those distributors who meet or exceed their sales targets in the prior year. We provide sales rebates, or discounts of 2% to 6%, to distributors who place large purchase orders with us. The greater the dollar amount of the purchase order, the higher the percentage rebate we offer to our distributors. These sales rebates are paid at the end of each calendar year. We intend to continue this incentive program. Raw Material Costs
Our principal raw materials are steel, iron and electronic components. We produce a substantial majority of our key components in-house at our Hunan Duoyuan facility. We purchase all other raw materials and components from Chinese suppliers. The relatively low operation, labor and raw material costs in China have historically allowed us to decrease our cost of revenue as we increase purchase volumes and make improvements in manufacturing processes. We expect raw material costs to remain relatively unchanged for the remainder of 2009, because of existing supply agreements. However, once global economic conditions improved and our existing supply agreements expire, we expect our raw material costs will increase.
As we focus on manufacturing more advanced products and new product lines, we may find it necessary to use more expensive raw materials and components. We plan to mitigate future increases in raw material and component costs by using more common resources across our product lines, increasing in-house manufacturing of our key components and adopting more uniform manufacturing and assembly practices. In addition, to minimize and control raw material waste and increase production efficiency, we continue to make investments to improve and further automate our manufacturing process. Results of Operations
The following table sets forth selected data from our consolidated statements of income for the periods indicated as a percentage of revenue:

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                                                            Three Months Ended September 30,
                                                         2008                               2009
                                                                 % of                                % of
                                                 $              revenue               $            revenue
                                                                 (dollars in thousands)
Revenues, net                                   26,179              100.0 %          33,295           100.0 %
Cost of revenues                                12,331               47.1            15,788            47.4

Gross profit                                    13,848               52.9            17,507            52.6
Research and development expenses                  694                2.7               364             1.1
Selling expenses                                 2,547                9.7             3,157             9.5
General and administrative expenses                932                3.6             1,490             4.5

Income from operations                           9,675               36.9            12,496            37.5
Change in fair value of derivative
instruments                                         55                0.2               111             0.3
Other income (expense), net
Non-operating expenses                              (1 )              0.0                 -               -
Interest expense                                  (212 )             (0.8 )            (234 )          (0.7 )
Interest income and other income                    34                0.1                31             0.1

Other expense, net                                (179 )             (0.7 )            (203 )          (0.6 )
Income before provision for income taxes
and noncontrolling interest                      9,551               36.4            12,404            37.2
Provision for income taxes                         927                3.5             2,409             7.2

Net income                                       8,624               32.9             9,995            30.0
Less: Net income attributable to
noncontrolling interest                            109                0.4               158             0.5

Net income attributable to Duoyuan
Printing, Inc.                                   8,515               32.5             9,837            29.5
Other comprehensive income
Foreign currency translation gain                  256                1.0               183             0.6

Comprehensive income attributable to
Duoyuan Printing, Inc.                           8,771               33.5 %          10,020            30.1 %

Comparison of Three Months Ended September 30, 2008 and September 30, 2009 Revenue
Our revenue increased by $7.1 million, or 27.2%, from $26.2 million for the three months ended September 30, 2008 to $33.3 million for the three months ended September 30, 2009, primarily as a result of an increase in the volume of products sold during this period. Revenue for our pre-press printing equipment increased by $0.1 million, or 12.7%, from $0.8 million for the three months ended September 30, 2008 to $0.9 million for the three months ended September 30, 2009. In addition, revenue for our press printing equipment for the three months ended September 30, 2009 increased by $6.7 million, or 25.6%, when compared to the three months ended September 30, 2008. This increase in revenue was mainly attributable to an increase in the volume of our multicolor presses sold during this period.
Pre-press Printing Equipment
CTP system. Revenue of our CTP system increased by $0.1 million, or 12.7%, from $0.8 million for the three months ended September 30, 2008 to $0.9 million for the three months ended September 30, 2009. The increase in revenue for our CTP system was a direct result of our increased marketing activities. During the three months ended September 30, 2009, we promoted our CTP system through ten exhibitions and trade shows compared to eight exhibitions and trade shows during the 4 months ended September 30, 2008.

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Press Printing Equipment
Revenue from the sale of our press printing equipment increased by $6.7 million, or 25.6%, from $26.1 million during the three months ended September 30, 2008 to $32.8 million for the three months ended September 30, 2009, before adjustment for sales rebates. This increase was primarily due to an increase in demand for our multicolor (small and large format) presses.
Single color small format press. Revenue for our single color small format presses increased by $0.1 million, or 13.6%, from $0.9 million during the three months ended September 30, 2008 to $1.0 million during the three months ended September 30, 2009, before adjustment for sales rebates. Overall, we sold more number of single color small format presses during the three months ended September 30, 2009 when compared to the three months ended September 20, 2008 as we increased promotion of our new single color small format press, Model DY56T, which was introduced in April 2009. However, the increase from the sale of this new model was offset by the decrease in sale of our other single color small format presses due to increase in competition.
Single color large format press. Revenue for our single color large format presses decreased by $0.1 million, or 5.4%, from $2.6 million during the three months ended September 30, 2008 to $2.5 million during the three months ended September 30, 2009, before adjustment for sales rebates. Although overall we sold more single color large format presses in terms of number of units, our revenue decreased because we sold more units with lower sales price during the three months ended September 30, 2009 when compared to the three months ended September 30, 2008.
Multicolor small format press. Revenue for our multicolor small format presses increased by $2.0 million, or 30.0%, from $6.8 million during the three months ended September 30, 2008 to $8.8 million during the three months ended September 30, 2009, before adjustment for sales rebates. We believe the increased demand for our multicolor small format press was partially a result of our increased marketing activities. We promoted our multicolor small format press through nine additional exhibitions and trade shows during the three months ended September 30, 2009 when compared to three months ended September 30, 2008. Specifically, we increased promotion of model DY456, mostly used by commercial printers that print books, magazines, corporate brochures, product catalogues, labels and small packages. Furthermore, we introduced a new model, DY552, in September 2009 which generated additional revenue of $1.5 million for us.
Multicolor large format press. Revenue for our multicolor large format presses increased by $4.7 million, or 29.5%, from $15.9 million during the three months ended September 30, 2008 to $20.5 million during the three months ended September 30, 2009, before adjustment for sales rebates. We believe the increased demand for our multicolor large format presses was partially a result of our increased marketing activities. In the three months ended September 30, 2009, we participated in 26 exhibitions and trade shows, an increase of 14 exhibitions and trade shows when compared with the three months ended September 30, 2008. We increased the sale of our new multicolor large format presses, model DY474II and model PZ-4660AL, which were introduced in November 2008 and February 2009, respectively. We increased the promotion of these new models through exhibitions and trade shows. Also, demand for these products increased as the end-user customers became more familiar with its functionality. The overall increase in revenue from these two models was $10.6 million. Revenue from the sale of these models was offset by the decrease in revenue from the sale of our existing models, DY474 and PZ-4660.

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Cost of Revenue
Our cost of revenue can vary significantly from quarter to quarter, but generally it is in proportion of number of products we sell in any given quarter. We typically incur higher costs in the first and second quarters of each fiscal year primarily due to the increase in the volume of our products sold.
Our cost of revenue increased by $3.5 million, or 28.0%, from $12.3 million for the three months ended September 30, 2008 to $15.8 million for the three months ended September 30, 2009. This increase was primarily due to an increase in the volume of our products sold during this period, particularly sales of our multicolor presses. This increase in sales contributed to the increase in consumption of raw materials and components across our pre-press and press product categories as our revenue increased by 27.2% from the three months ended September 30, 2009 to the three months ended September 30, 2008. As a percentage of revenue, our cost of revenue increased 0.3% from 47.1% for the three months ended September 30, 2008 to 47.4% for the three months ended September 30, 2009. The increase was mainly due to the increase in our depreciation expense as we have invested substantial amount of capital expenditures in the prior years. Gross Profit
As a result of the factors above, our gross profit increased by $3.7 million, or 26.4%, from $13.8 million for the three months ended September 30, 2008 to $17.5 million for the three months ended September 30, 2009. However, our gross profit margins decreased 0.3% from 52.9% for the three months ended September 30, 2008 to 52.6% for the three months ended September 30, 2009. The decrease in our gross profit margins during this period was due to the increase in our depreciation expense as we have expended substantial amounts of capital expenditures in the prior years.
Selling Expenses
Our selling expenses increased by $0.7 million, or 23.9%, from $2.5 million for the three months ended September 30, 2008 to $3.2 million for the three months ended September 30, 2009. This increase was primarily due to an increase in salary expense to our sales professionals and an increase in advertising costs. As a percentage of revenue, our selling expenses decreased 0.2% from 9.7% for the three months ended September 30, 2008 to 9.5% for the three months ended September 30, 2009. This decrease was mainly due to our increased sales volume, which created economies of scale, reducing our per unit selling expenses. General and Administrative Expenses
General and administrative expenses increased by $0.6 million, or 59.9%, from $0.9 million for the three months ended September 30, 2008 to $1.5 million for the three months ended September 30, 2009. This increase was mainly due to increases in professional fees, bad debt reserve and real estate taxes. Our professional fees increased mainly due to engagement of an outside consultant for our Sarbanes & Oxley (SOX) Section 404 compliance. We have also incurred legal fees related to the proxy for our annual shareholders' meeting. We also increased our reserve for bad debts as our accounts receivable balance has increased.
As a percentage of revenue, general and administrative expenses increased 0.9% from 3.6% for the three months ended September 30, 2008 to 4.5% for the three months ended September 30, 2009.
Research and Development Expenses
Our research and development expenses decreased by $0.3 million, or 47.6%, from $0.7 million for the three months ended September 30, 2008 to $0.4 million for the three months ended September 30, 2009. For the three months ended September 30, 2009, our research and development efforts were mainly focused on developing plans for future new products as well as improving existing press products. For the three months ended September 30, 2008, we spent additional funds for material costs related to the development of three new press products. As a percentage of revenue, research and development expenses decreased 1.6% from 2.7% for the three months ended September 30, 2008 to 1.1% for the three months ended September 30, 2009.
Income from Operations
Our income from operations increased by $2.8 million, or 29.1%, from $9.7 million for the three months ended September 30, 2008 to $12.5 million for the three months ended September 30, 2009.

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The increase was mainly due to the increased multicolor press sales, which generated higher revenue for us.
Other Income (Expenses)
Our other expenses stayed constant at $0.2 million for the three months ended September 30, 2008 and for the three months ended September 30, 2009. We had interest expense of $0.2 million from our short-term borrowing during the three months ended September 30, 2009.
Noncontrolling Interest
Our noncontrolling interest increased by $0.05 million, or 45.0%, from $0.11 million for the three months ended September 30, 2008 to $0.16 million for the three months ended September 30, 2009. The increase in noncontrolling interest is mainly due to the increase of net income in Langfang Duoyuan and Hunan Duoyuan.
Provision for Income Taxes
Our provision for income taxes increased by $1.5 million, or 159.9%, from $0.9 million for the three months ended September 30, 2008 to $2.4 million for the three months ended September 30, 2009. This increase was primarily due to the increase in our revenue by 27.2% over the same period and the increase in income tax rate for Duoyuan China. The income tax rate for Duoyuan China in 2008 was 12.5%. Beginning on January 1, 2009, the income tax rate for Duoyuan China increased to 25.0% as a result of the expiration of preferential tax treatments granted to Duoyuan China in prior years. Our effective tax rates were 9.7% for the three months ended September 30, 2008 and 19.4% for the three months ended September 30, 2009.
Duoyuan China began paying income tax in January 1, 2006. The income tax rate for Duoyuan China prior to January 1, 2008 was 16.5% and the income tax rate for Duoyuan China from January 1, 2008 to December 31, 2008 was 12.5%. Beginning January 1, 2009, the income tax rate for Duoyuan China increased to 25.0%. Langfang Duoyuan began paying income tax in January 1, 2008 at a rate of 25.0%. Pursuant to the tax preferential treatment granted by the local government, Hunan Duoyuan is tax exempt through 2009. Net Income
As a result of the foregoing, our net income attributable to Duoyuan Printing, Inc. increased by $1.3 million, or 15.5%, from $8.5 million for the three months ended September 30, 2008 to $9.8 million for the three months ended September 30, 2009. As a percentage of revenue, our net income attributable to Duoyuan Printing, Inc. decreased 3.0% from 32.5% for the three months ended . . .