The following discussion 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. The Private Securities Litigation Reform Act of 1995, or the Reform Act, contains certain safe harbors regarding forward-looking statements. Forward-looking statements include, but are not limited to, statements regarding future events, our plans and expectations and financial projections and are generally identified by the words "may," "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," "could," "would," and similar expressions. Because these forward-looking statements are subject to a number of risks and uncertainties, our actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed elsewhere in this Form 10-Q, in our Annual Report on Form 10-K filed on April 14, 2009 and in other documents we file from time to time with the Securities and Exchange Commission. Unless the context otherwise requires, the terms "we," the "Company," "us," or "Apollo" refers to Apollo Solar Energy, Inc. and our wholly-owned subsidiaries and variable interest entities.

Overview

We are a vertically integrated miner and refiner of tellurium (Te) and high-purity tellurium-based metals for specific segments of the electronic materials market. Our main expertise is in the production of Te-based compounds used to produce thin-film solar cells, cell modules and solar electronic products. The tellurium used in our products is primarily sourced from our wholly-owned Dashuigou mine located in Sichuan Province, People's Republic of China, or the PRC. In addition we source tellurium from another mine in Shimian, Majiagou, PRC, through a series of variable interest entity agreements, or VIE Agreements, with Sichuan Xinju Mineral Resources Development Corporation and certain of its shareholders holding 51.6619% of its voting stock, which shareholders are our direct or indirect employees. Under the terms of the VIE Agreements, we have been granted the exclusive exploration and mining rights to these two mines in accordance with a license granted by the government of the PRC, which extends through January, 2013, subject to potential renewal thereafter.

Currently, tellurium is produced as a product in the process of processing copper and other metals. As a result, costs are high. We believe that the Dashuigou and Majiagou mines are the only two known deposits in the world in which tellurium, one of the rarest metallic elements on Earth, is the primary commodity of economic interest. By the end of 2010, we plan to obtain approximately 60% to 70% of the tellurium necessary for our products from these mines and believe this ability to be a significant competitive advantage because the cost of tellurium sourced from our own mines will be substantially lower than that purchased from an outside third party. We source the rest of the tellurium from third-party suppliers that we have established good business relationships with over the past few years. By vertically integrating our processes, we believe we are able to achieve significant operating efficiencies and produce high-quality products that offer cost and quality benefits to our customers. Currently, we are able to procure raw materials from the Dashuigou and Majiagou mines at a significant discount to prevailing market price.

Our operations are currently based in a 330,000 square foot facility in Chengdu, Sichuan Province, PRC. This newly built modern facility has the capacity to produce more than 300 tons of high-purity photovoltaic cell materials and 42 other types of electronic materials. Future expansion of this facility in vacant land leased to the Company will have a capacity to produce up to an additional 350 tons of high-purity photovoltaic cell materials.

We believe we are unique in that we are both a miner and refiner of our tellurium-based products with primary refining capabilities as provided by Sichuan Xinju Mineral Resources Development Corporation pursuant to the VIE Agreements, and secondary refining capabilities directly through the Company. Our primary refining capabilities are such that we can treat metal concentrates (containing, for example, as little as 50% of the metals of interest), and extract and refine the metals of interest so that they can be fed to our secondary refining operations, where we attain a higher level of purity. Because we mine the raw material, and perform both refining functions, both directly and through our VIE arrangement, we consider ourselves a supplier with uniquely integrated capabilities. Our end-products are tellurium, cadmium, zinc and related compounds of 99.999% (five nines, or 5N) purity or above. Our products are critical precursors in a number of electronic applications, including the rapidly-expanding thin-film photovoltaic (PV) market.

Our Variable Interest Entity Agreements

As illustrated in the diagram below, we entered into various exclusive contractual arrangements on April 10, 2009 with Sichuan Xinju Mineral Resources Development Corporation, or the VIE, and certain of its shareholders who are our direct or indirect employees and who collectively own 51.6619% of the VIE. Among other things, these agreements granted to our wholly-owned subsidiary a first option to purchase the exploration rights related to the Dashuigou area mine and the mining rights related to that certain tellurium and bismuth mine in Shimian Majiagou (which rights are collectively referred to in this report as the Mining Business). Additionally, the VIE and certain of its shareholders who collectively own 51.6619% of the VIE granted to our wholly-owned subsidiary an exclusive right to purchase all of the products produced from the Mining Business for a specified period of time. As a result, we consolidate the financial results of the VIE related to the Mining Business pursuant to FASB Interpretation No. 46R, "Consolidation of Variable Interest Entities."

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(1) Agreements that provide us with effective control over Sichuan Xinju Mineral Resources Development Co. Ltd., or the VIE, include a purchase option agreement, a business operations agreement and an exclusive technical and consulting agreement.

The agreements between the VIE and our other affiliated entities or persons are summarized below:

· First Option Exclusive Acquiring Agreement, between Sichuan Xinlong Tellurium Industry & Technique Co., Ltd., Sichuan Xinju Mineral Resources Development Co., Ltd., Renyi Hou and Ling Yong, which grants to our wholly-owned subsidiary a first option to purchase the Mining Business at such time as the purchase becomes advisable, permissible and in our best interest.

· Exclusive Sales Agreement, between Sichuan Xinlong Tellurium Industry & Technique Co., Ltd. and Sichuan Xinju Mineral Resources Development Co., Ltd., which grant to our wholly-owned subsidiary the exclusive right to buy all of the output of the Mining Business.

· Business Operation Agreement, between Sichuan Xinlong Tellurium Industry & Technique Co., Ltd., Sichuan Xinju Mineral Resources Development Co., Ltd., Renyi Hou and Ling Yong, which imposes certain restrictions and obligations on the VIE and certain of its shareholders to support the VIE arrangement, including refraining from competing with our business and modifying the business operations of the VIE without the prior consent of our wholly-owned subsidiary.

Exclusive Technical and Consulting Agreement, between Sichuan Xinlong Tellurium Industry & Technique Co., Ltd. and Sichuan Xinju Mineral Resources Development Co., Ltd., which requires the VIE to provide certain technical and consulting services exclusively to our wholly-owned subsidiary in connection with the Mining Business. Our wholly-owned subsidiary agrees to provide up to $6.0 million in investing funding to the VIE in connection with its operation of the Mining Business, on such terms as the parties shall agree from time to time.

Critical Accounting Policies, Estimates and Assumptions

Management's discussion and analysis of results of operations and financial condition are based upon our consolidated financial statements. These statements have been prepared in accordance with accounting principles generally accepted in the United States of America. These principles require management to make certain estimates and assumptions that affect amounts reported and disclosed in the financial statements and related notes. The most significant estimates and assumptions include valuation of inventories, provisions for income taxes, allowance for doubtful accounts, and the recoverability of the long-lived assets. Actual results could differ from these estimates. Periodically, we review all significant estimates and assumptions affecting the financial statements and record the effect of any necessary adjustments.

The following critical accounting policies rely upon assumptions and estimates and were used in the preparation of our consolidated financial statements:

Revenue recognition

Revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, and no other significant obligations exist and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as advances from customers.

Currency Reporting

Amounts reported are stated in U.S. Dollars, unless stated otherwise. Our functional currency is the Renminbi, or RMB, the currency of the PRC. Foreign currency transactions (outside the PRC) are translated into RMB according to the prevailing exchange rate at the transaction dates. Assets and liabilities denominated in foreign currencies at the balance sheet dates are translated into RMB at period-end exchange rates. For the purpose of preparing the consolidated financial statements, our consolidated balance sheets have been translated into U.S. dollars at the current exchange rates as of the end of the respective periods and the consolidated statements of income have been translated into U.S. dollars at the weighted average exchange rates during the periods the transactions were recognized. The resulting translation gain adjustments are recorded as other comprehensive income in the statements of income and comprehensive income and as a separate component of statements of stockholders' equity.

Accounts Receivable

Accounts receivable consist of trade receivables resulting from sales of products during the normal course of business. As of September 30, 2009, three customers accounted for 39%, 28% and 16%, respectively, of the total accounts receivable outstanding. For the nine months ended September 30, 2009 and the year ended December 31, 2008, allowance for uncollectible amounts were approximately $29,822 and $14,657, respectively.

Inventories

Inventories are composed of raw materials and packing materials for manufacturing, work in process, and finished goods. Inventories are valued at the lower of cost or market with cost determined on the weighted average method.

Results of Operations

The following table sets forth certain information from our condensed
consolidated statements of income and comprehensive income for the three and
nine months ended September 30, 2009 and 2008 (unaudited):

                                                                               Three months                                                           Nine months
                                                                            Ended September 30,                                                    Ended September 30,
                                                                  2009                              2008                               2009                               2008

Sales                                               $                     2,289,669    $                       892,400     $                    6,280,044  $                        3,937,573

Cost of sales                                                            (1,624,416)                          (716,163)                      (4,723,694)                           (2,814,875)

Gross profit                                                                 665,253                          176,237                           1,556,350                            1,122,698

Operating Expenses
General and adminstrative expenses                                            726,982                           249,682                         1,978,936                              611,189
Stock based compensation                                                      178,686                                 -                           551,947                                    -
Selling expenses                                                               28,491                            65,526                           150,208                              224,150
Research and development                                                       29,370                            28,755                            79,332                               74,044
Total Operating Expenses                                                      963,529                           343,962                         2,760,423                              909,382

Operating Income (loss)                                                     (298,276)                         (167,726)                       (1,204,073)                              213,316

Interest Income (expenses)                                                  (114,109)                          (53,126)                         (303,213)                             (42,423)
Other income (expenses)                                                      (51,189)                             7,894                          (51,189)                                7,894

Income (loss) before income taxes                                           (463,574)                         (212,958)                       (1,558,475)                              178,786

Provision for income taxes                                                     22,371                             1,500                            45,859                              160,217

Net Income (loss)                                   $                       (485,945)  $                      (214,458)    $                  (1,604,334)  $                          18,569


Percentages:

Sales                                                                            100%                              100%                              100%                                 100%

Cost of sales                                                                     71%                               80%                               75%                                  71%

Gross profit                                                                      29%                               20%                               25%                                  29%

Operating Expenses
General and adminstrative expenses                                                32%                               28%                               32%                                  16%
Stock based compensation                                                           8%                                0%                                9%                                   0%
Selling expenses                                                                   1%                                7%                                2%                                   6%
Research and development                                                           1%                                3%                                1%                                   2%
Total Operating Expenses                                                          42%                               38%                               44%                                  24%

Operating Income (loss)                                                          -13%                              -18%                              -19%                                   5%

Interest Income (expenses)                                                        -5%                               -6%                               -5%                                  -1%
Other income (expenses)                                                           -2%                                1%                               -1%                                   0%

Income (loss) before income taxes                                                -20%                              -23%                              -25%                                   4%

Provision for income taxes                                                         1%                                0%                                1%                                   4%

Net Income (loss)                                                                -21%                              -24%                              -26%                                   0%

Three Months Ended September 30, 2009 and 2008

Sales

Sales for the three months ended September 30, 2009 was $2,289,669, compared to the sales of $892,400 in the same period in 2008. This increase of 156.6% was primarily attributable to our successful sales and marketing campaigns, improved product quality, and increases of orders from major customers. In 2007, we began shipment of tellurium to First Solar, the biggest CdTe-based thin film PV producer in the world. In 2008, First Solar became our largest customer, and remained our largest customer during the third quarter of 2009. However, our sales during the third quarter of 2009 were below our planned target due to the global financial crisis. A significant number of our customers did not place order as planned. As such, our business volume was reduced.

Cost of sales

Cost of sales for the three months ended September 30, 2009 was $1,624,416, compared to the cost of sales of $716,163 for the three months ended September 30, 2008. This increase in the dollar amount equaled 126.8% and was consistent with the increase in sales for the three months ended September 30, 2009.

Gross profit

Gross profit for the three months ended September 30, 2009 was $665,253, compared to the gross profit of $176,237 for the three months ended September 30, 2008. This represented an increase of $489,016, or 277.5%, over the same period of 2008. The gross profit margin for the three months ended September 30, 2009 was 29.1%, compared to that of 19.7% in the same period of 2008. Two primary factors contributed to the increase in gross profit margin. First, the costs of our tellurium were reduced as our processing techniques improved. Second, we had ongoing orders from customers that allowed us to continually operate our production facilities without interruptions that cause inefficiencies.

Selling and marketing expenses

For the three months ended September 30, 2009, selling and marketing expenses were $28,491, compared to $65,526 for the same period ended September 30, 2008. This represents a decrease of 56.5%. During the three months ended September 30, 2008, we employed an in-house sales team of eight people targeting the Chinese and North American markets. Most of the sales and marketing expenses from that period were traveling, lodging and entertainment related. In contrast, we have not run any advertisement campaigns in 2009, and instead have only maintained an in-house sales team of eight people. In February 2009, we signed an agreement to appoint CERAC as our exclusive agent to distribute our products in North America, excluding First Solar. This outsourcing of services saved us a significant amount of marketing cost for the second quarter of 2009 when we target the North American market. The exclusive agreement was reduced to a non-exclusive general distributor agreement in September 2009, as guaranteed sales volume fell short.

General and administrative expenses

We incurred general and administrative expenses of $726,982 for the three months ended September 30, 2009, when compared to that of $249,682 in the same period of 2008, representing an increase of 191.2%. The increase was primarily due to the growth in size and revenue of our Company, and the expenses we incurred as a public company. After our reverse merger in October 2008, we incurred significant amounts of audit fees, legal fees and financial advisory fees. We also expanded our accounting/finance department. Additional administrative staff was also added to support our listing functions.

Stock based Compensation expenses

Stock based compensation expenses in the amount of $178,686 was incurred in the three months ended September 30, 2009; this expense did not exist in the same period of 2008. We granted certain stock options to our CFO and our four independent directors between December 2008 and March 2009. A total of 830,000 options were granted. Stock based compensation expenses was a non-cash item.

Research and development expenses

For the three months ended September 30, 2009, we incurred R&D expenses of $29,370, compared to $28,755 for the three months ended September 30, 2008. This represents an increase of 2.1%. In the second quarter of 2009 we reduced headcount of the R&D department but in the third quarter we re-filled the vacancy. We are committed to the improvement of product quality and the development of new products. We will continue to invest in R&D to ensure our products are of high quality and remain competitive.

Net income/loss

For the three months ended September 30, 2009 we had a net loss of $485,945, compared to net loss of $169,528 for the three months ended September 30, 2008. The main reason for the increase in net loss in the three months ended September 30, 2009 was an increase in costs, primarily in administrative costs representing professional fees. Included in the net loss for the three months ended September 30, 2009 was non-cash stock based compensation of $178,686, which was a non-cash item.

Nine Months Ended September 30, 2009 and 2008

Sales

Sales for the nine months ended September 30, 2009 was $6,280,044, compared to the sales of $3,937,573 in the same period in 2008. This increase of 59.5% was primarily attributable to our successful sales and marketing campaigns, improved product quality, and stable orders from our larger customers. In 2007, we began shipment of tellurium to First Solar, the biggest CdTe-based thin film PV producer in the world. In 2008, First Solar became our largest customer, and remained our largest customer during the third quarter of 2009. However, our sales during the first nine months of 2009 was below our planned target due to the global financial crisis. A significant number of our customers requested did not place order as planned. As such, our business volume was also reduced.

Cost of sales

Cost of sales for the nine months ended September 30, 2009 was $4,723,694, compared to the cost of sales of $2,814,875 for the period ended September 30, 2008. This increase in the dollar amount equaled 67.8% and was primarily due to the increase in revenue for the six months ended June 30, 2009. Additionally, the costs of materials used in our products during the first quarter of 2009 were higher than those in the same period of 2008.

Gross profit

Gross profit for the nine months ended September 30, 2009 was $1,556,350, compared to the gross profit of $1,122,698 for the same period ended September 30, 2008. This represented an increase of $433,652, or 38.6%, over the same period of 2008. The gross profit margin for the nine months ended September 30, 2009 was 24.8%, compared to that of 28.5% in the same period of 2008. Three primary factors contributed to the decrease in gross profit margin. First, we experienced an increase in the price of most of the feedstock we purchased from third party suppliers worldwide, especially that of tellurium. The price of tellurium feedstock increased more than 100% in 2008 over the price in 2007, and remained at this higher level for the first half of the year, before coming back down in the third quarter of 2009. We were not able to pass through the increase in cost to our customers. As a significant amount of our revenue was generated from the sale of high purity tellurium, our margin was impacted adversely. The situation began to improve towards the end of the first quarter of 2009 and continued to improve into the second and third quarters of 2009 as we increase our internal tellurium production and decrease our purchase from third parties. Second, labor costs began to increase significantly in the PRC in 2008 and continuing through the second quarter of 2009, and thus increased our cost. Labor cost began to stabilize in the third quarter of 2009. Third, the product mix we sold in the first nine months of 2009 changed as compared to the product mix we sold during the same period in 2008. Specifically, we sold fewer other high purity metals (which ordinarily command very high margins) in the first nine months of 2009 due to the global financial crisis. Consequently, the reduction in sales in these types of products impacted our gross margin adversely.

Selling and marketing expenses

For the nine months ended September 30, 2009, selling and marketing expenses were $150,208, compared to $224,150 for the same period ended September 30, 2008. This represents a decrease of 33.0%. During the nine months ended September 30, 2008, we employed an in-house sales team of eight people targeting the Chinese and North American markets. Most of the sales and marketing expenses from that period were traveling, lodging and entertainment related. In contrast, we have not run any advertisement campaigns in 2009, but still maintain an in-house sales team of eight people. In February 2009, we signed an agreement to appoint CERAC as our exclusive agent to distribute our products in North America, excluding First Solar. Sales and marketing costs for the North American market were therefore lower. The exclusive agreement was modified to a non-exclusive general distributor agreement in September 2009, as guaranteed sales volume fell short.

General and administrative expenses

We incurred general and administrative expenses of $1,978,936 for the nine months ended September 30, 2009, when compared to that of $611,189 in the same period of 2008, representing an increase of 233.8%. The increase was primarily due to the growth in size and revenue of our Company, and the expenses we incurred as a public company. After our reverse merger in October 2008, we incurred significant amount of audit fees, legal fees and financial advisory fees. We also expanded our accounting/finance department. Additional administrative staff was also added to support our listing functions and the reverse merger process. In August 2008, our new factory was completed and significant depreciation began to be incurred.

Stock based Compensation expenses

Stock based compensation expenses in the amount of $551,947 was incurred in the nine months ended September 30, 2009; this expense did not exist in the same period of 2008. We granted certain stock options to our CFO and our four independent directors between December 2008 and March 2009. A total of 830,000 . . .