---

UNITED STATES 
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

[X]    QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: December 31, 2009

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

For the transition period from ____________ to _____________

Commission File No. 001-32898

CHINA BAK BATTERY, INC.(Exact Name of Registrant as Specified in Its Charter)

|Nevada                          | 88-0442833         
|------------------------------- | -------------------
|(State or other jurisdiction of | (I.R.S. Employer   
|incorporation or organization)  | Identification No.)

BAK Industrial Park 
No. 1 BAK Street 
Kuichong Town, Longgang District 
Shenzhen, Peoples Republic of China 518119
(Address of principal executive offices, Zip Code)

(86-755) 8977-0093
(Registrants telephone number, including area code)

_____________________________________________________ 
(Former name, former address and former fiscal year, if changed since last
report)

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

Indicate by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§
232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files).  
Yes [  ]    No [  ]

Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of "large accelerated filer," "accelerated filer" and
"smaller reporting company" in Rule 12b-2 of the Exchange Act.

|Large Accelerated Filer [  ]                                            | Accelerated Filer [X]         
|----------------------------------------------------------------------- | ------------------------------
|Non-Accelerated Filer [  ](Do not check if a smaller reporting company) | Smaller reporting company [  ]

Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act).   Yes [  ]    
No [X]

The number of shares outstanding of each of the issuers classes of common
stock, as of February 8, 2010 is as follows:

Class
      of Securities
      Shares OutstandingCommon Stock, $0.001 par value
      63,601,276


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TABLE OF CONTENTS

PART I FINANCIAL INFORMATION

|Item 1. | Financial Statements                                                                        | F-1
|------- | ------------------------------------------------------------------------------------------- | ---
|Item 2. | Managements Discussion and Analysis of
      Financial Condition and Results of Operations | 1  
|Item 3. | Quantitative and
      Qualitative Disclosures About Market Risk                            | 18 
|Item 4. | Controls and Procedures                                                                     | 19 

PART II OTHER INFORMATION

|Item 1.  | Legal Proceedings                                                 | 21
|-------- | ----------------------------------------------------------------- | --
|Item 1A. | Risk Factors                                                      | 24
|Item 2.  | Unregistered Sales of
      Equity Securities and Use of Proceeds | 24
|Item 3.  | Defaults Upon Senior Securities                                   | 24
|Item 4.  | Submission of Matters to
      a Vote of Security Holders         | 24
|Item 5.  | Other Information                                                 | 24
|Item 6.  | Exhibits                                                          | 24

---

Introductory Comments

Terminology

Throughout this Report, the terms we, us or our refers to
China BAK Battery, Inc. and its subsidiaries on a consolidated basis; BAK
International refers to our Hong Kong subsidiary, BAK International Limited;
BAK Tianjin refers to our PRC subsidiary, BAK International (Tianjin) Ltd.;
Shenzhen BAK refers to our PRC subsidiary, Shenzhen BAK Battery Co., Ltd.;
BAK Electronics refers to our PRC subsidiary, BAK Electronics (Shenzhen) Co.,
Ltd.; BAK Canada refers to our Canadian subsidiary, BAK Battery Canada Ltd.;
BAK Europe refers to our German subsidiary, BAK Europe GmbH; BAK India
refers to our Indian subsidiary, BAK Telecom India Private Limited; China or
PRC refers to the Peoples Republic of China, excluding for the purposes of
this Report only, Taiwan, Hong Kong and Macau; RMB or Renminbi refers to the
legal currency of China; and $ or U.S. dollars refers to the legal currency
of the United States of America.

Forward-Looking Statements

Statements contained in this Report include forward-looking
statements within the meaning of such term in 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. Forward-looking
statements involve known and unknown risks, uncertainties and other factors
which could cause actual financial or operating results, performances or
achievements expressed or implied by such forward-looking statements not to
occur or be realized. Forward-looking statements made in this Report generally
are based on our best estimates of future results, performances or achievements,
predicated upon current conditions and the most recent results of the companies
involved and their respective industries. Forward-looking statements may be
identified by the use of forward-looking terminology such as may, will,
could, should, project, expect, believe, estimate, anticipate,
intend, continue, potential, opportunity or similar terms, variations of
those terms or the negative of those terms or other variations of those terms or
comparable words or expressions. Potential risks and uncertainties include,
among other things, such factors as:

- our anticipated growth strategies and our ability to manage the expansion
  of our business operations effectively;
- our limited operating history in developing, manufacturing and selling of
  lithium-based rechargeable battery cells;
- general economic conditions, including the current global recession and
  recent financial crisis;
- our future business development, results of operations and financial
  condition;
- our ability to diversify our product offering and capture new market
  opportunities;
- our dependence on the growth in demand for the portable electronic devices
  that are powered by our products;
- our ability to maintain or increase our market share in the competitive
  markets in which we do business;
- our ability to keep up with rapidly changing technologies and evolving
  industry standards, including our ability to achieve technological advances;
- our ability to obtain original equipment manufacturer, or OEM,
  qualifications from brand names;
- our ability to maintain an efficient cost structure;
- our ability to remediate any material weaknesses in our internal control
  over financial reporting;

i

---

- our ability to secure raw materials in the future and to manage the costs
  of raw materials or to secure alternative or substitute raw materials;
- our ability to source our needs for skilled labor, machinery and raw
  materials economically;
- our ability to maintain our land use rights and acquire property ownership
  rights to our PRC-based facilities;
- our ability to fund our operations and manage our substantial short-term
  indebtedness;
- uncertainties with respect to the PRC legal and regulatory environment;
  and
- other risks identified in this Report and in our other reports filed with
  the U.S. Securities and Exchange Commission, or SEC.

Additional disclosures regarding factors that could cause our
results and performance to differ from results or performance anticipated by
this Report are discussed in other reports that we file with the SEC, including
without limitation our Annual Report on Form 10-K for the fiscal year ended
September 30, 2009, or the 2009 Form 10-K. Readers are urged to carefully review
and consider the various disclosures made by us in this Report and our other
filings with the SEC. These reports attempt to advise interested parties of the
risks and factors that may affect our business, financial condition and results
of operations and prospects. The forward-looking statements made in this Report
speak only as of the date hereof and we disclaim any obligation to provide
updates, revisions or amendments to any forward-looking statements to reflect
changes in our expectations or future events.

Where You Can Find Additional Information

We file annual, quarterly and other reports, proxy statements
and other information with the SEC. You may obtain and copy any document we file
with the SEC at the SECs public reference room at 100 F Street, NE, Room 1580,
Washington, D.C. 20549. You may obtain information on the operation of the SECs
public reference facilities by calling the SEC at 1-800-SEC-0330. You can
request copies of these documents, upon payment of a duplicating fee, by writing
to the SEC at its principal office at 100 F Street, NE, Room 1580, Washington,
D.C. 20549-1004. The SEC maintains an Internet website at http://www.sec.gov
that contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC. Our SEC filings,
including exhibits filed therewith, are accessible through the Internet at that
website.

You may also request a copy of our SEC filings, at no cost to
you, by writing or telephoning us at: BAK Industrial Park, No. 1 BAK Street,
Kuichong Town, Longgang District, Shenzhen, Peoples Republic of China,
attention Corporate Secretary, telephone 011 (86-755) 8977-0093. We will not
send exhibits to the documents, unless the exhibits are specifically requested
and you pay our fee for duplication and delivery.

ii

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PART IFINANCIAL INFORMATION

Item 1. Financial Statements.

China BAK Battery, Inc. and subsidiaries Condensed
interim consolidated balance sheets As of September 30, 2009 and December
31, 2009

(In US$)

|                                   |  |        |  |   | September 30, |  |   | December 31, | 
|---------------------------------- |  | ------ |  | - | ------------- |  | - | ------------ | 
|                                   |  | *Note* |  |   | 2009          |  |   | 2009         | 
|                                   |  |        |  |   |               |  |   | (Unaudited)  | 
|Assets                             |  |        |  |   |               |  |   |              | 
|Current assets                     |  |        |  |   |               |  |   |              | 
|Cash and cash equivalents          |  |        |  | $ | 30,678,352    |  | $ | 18,302,923   | 
|Pledged deposits                   |  | 2      |  |   | 31,115,109    |  |   | 19,040,467   | 
|Trade accounts receivable, net     |  | 3      |  |   | 83,291,698    |  |   | 74,079,860   | 
|Inventories                        |  | 4      |  |   | 65,535,384    |  |   | 79,390,715   | 
|Prepayments and other receivables  |  | 5      |  |   | 4,632,424     |  |   | 12,820,393   | 
|Assets held for sale               |  |        |  |   | 803,648       |  |   | 803,565      | 
|Deferred tax assets                |  |        |  |   | 3,894,703     |  |   | 5,411,125    | 
|                                   |  |        |  |   |               |  |   |              | 
|Total current assets               |  |        |  |   | 219,951,318   |  |   | 209,849,048  | 
|                                   |  |        |  |   |               |  |   |              | 
|Property, plant and equipment, net |  | 6      |  |   | 219,684,994   |  |   | 218,585,765  | 
|Lease prepayments, net             |  |        |  |   | 32,165,629    |  |   | 31,885,686   | 
|Intangible assets, net             |  |        |  |   | 239,487       |  |   | 224,334      | 
|Deferred tax assets                |  |        |  |   | 42,911        |  |   | 50,554       | 
|                                   |  |        |  |   |               |  |   |              | 
|Total assets                       |  |        |  | $ | 472,084,339   |  | $ | 460,595,387  | 

See accompanying notes to the condensed interim consolidated
financial statements.

F-1

---

China BAK Battery, Inc. and subsidiaries Condensed
interim consolidated balance sheets As of September 30, 2009 and December
31, 2009 (continued)(In US$)

|                                                                                                                                                 |  |        |  |   | September 30, |   |   | December 31, |  
|------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------ |  | - | ------------- | - | - | ------------ | -
|                                                                                                                                                 |  | *Note* |  |   | 2009          |   |   | 2009         |  
|                                                                                                                                                 |  |        |  |   |               |   |   | (Unaudited)  |  
|Liabilities                                                                                                                                      |  |        |  |   |               |   |   |              |  
|Current liabilities                                                                                                                              |  |        |  |   |               |   |   |              |  
|Short-term bank loans                                                                                                                            |  | 7      |  | $ | 139,159,380   |   | $ | 125,044,458  |  
|Current maturities of long-term bank loans                                                                                                       |  | 8      |  |   | 16,114,146    |   |   | 17,577,267   |  
|Accounts and bills payable                                                                                                                       |  |        |  |   | 92,571,516    |   |   | 88,562,555   |  
|Accrued expenses and other payables                                                                                                              |  |        |  |   | 18,425,271    |   |   | 16,074,958   |  
|                                                                                                                                                 |  |        |  |   |               |   |   |              |  
|Total current liabilities                                                                                                                        |  |        |  |   | 266,270,313   |   |   | 247,259,238  |  
|                                                                                                                                                 |  |        |  |   |               |   |   |              |  
|Long-term bank loans, less current maturities                                                                                                    |  | 8      |  |   | 39,552,906    |   |   | 29,295,444   |  
|Deferred revenue                                                                                                                                 |  |        |  |   | 7,441,806     |   |   | 7,382,452    |  
|Other long-term payables                                                                                                                         |  |        |  |   | 1,940,217     |   |   | 2,487,842    |  
|Deferred tax liabilities                                                                                                                         |  |        |  |   | 278,227       |   |   | 307,924      |  
|                                                                                                                                                 |  |        |  |   |               |   |   |              |  
|Total liabilities                                                                                                                                |  |        |  |   | 315,483,469   |   |   | 286,732,900  |  
|                                                                                                                                                 |  |        |  |   |               |   |   |              |  
|Commitments and contingencies                                                                                                                    |  | 12     |  |   |               |   |   |              |  
|                                                                                                                                                 |  |        |  |   |               |   |   |              |  
|Shareholders equity                                                                                                                             |  |        |  |   |               |   |   |              |  
|Shares of common stock US$ 0.001 par value;                                                                                                      |  |        |  |   |               |   |   |              |  
|100,000,000 authorized; 57,737,481 and
      63,601,276 issued and outstanding as of September 30, 2009 and December
      31, 2009 respectively |  |        |  |   | 57,738        |   |   | 63,601       |  
|Donated shares                                                                                                                                   |  |        |  |   | 14,101,689    |   |   | 14,101,689   |  
|Additional paid-in capital                                                                                                                       |  |        |  |   | 101,161,455   |   |   | 121,916,882  |  
|Statutory reserves                                                                                                                               |  |        |  |   | 7,227,195     |   |   | 7,314,565    |  
|Retained earnings                                                                                                                                |  |        |  |   | 13,328,115    |   |   | 9,848,418    |  
|Accumulated other comprehensive income                                                                                                           |  |        |  |   | 24,791,288    |   |   | 24,683,942   |  
|                                                                                                                                                 |  |        |  |   | 160,667,480   |   |   | 177,929,097  |  
|Less:
      Treasury shares                                                                                                                      |  |        |  |   | (4,066,610    | ) |   | (4,066,610   | )
|                                                                                                                                                 |  |        |  |   |               |   |   |              |  
|Total shareholders equity                                                                                                                       |  |        |  |   | 156,600,870   |   |   | 173,862,487  |  
|                                                                                                                                                 |  |        |  |   |               |   |   |              |  
|Total liabilities and shareholders equity                                                                                                       |  |        |  | $ | 472,084,339   |   | $ | 460,595,387  |  

See accompanying notes to the condensed interim consolidated
financial statements.

F-2

---

China BAK Battery, Inc. and subsidiaries Condensed
interim consolidated statements of operations and comprehensive loss For the
three months ended December 31, 2008 and 2009(Unaudited) (In US$)

|                                                         |   | Three months ended December 31, |  
|-------------------------------------------------------- | - | ------------------------------- | -
|                                                         |   | 2008                            |  
|                                                         |   |                                 |  
|Net revenues                                             | $ | 68,089,737                      |  
|Cost of revenues                                         |   | (57,496,519                     | )
|Gross profit                                             |   | 10,593,218                      |  
|Operating expenses:                                      |   |                                 |  
|Research and development expenses                        |   | (1,417,540                      | )
|Sales and
      marketing expenses                       |   | (1,599,652                      | )
|General and administrative expenses                      |   | (6,759,676                      | )
|Total operating
      expenses                           |   | (9,776,868                      | )
|Operating income / (loss)                                |   | 816,350                         |  
|Finance costs, net                                       |   | (2,839,561                      | )
|Government grant income                                  |   | 101,945                         |  
|Other income                                             |   | 6,357                           |  
|Loss before income taxes                                 |   | (1,914,909                      | )
|Income tax benefit                                       |   | 176,161                         |  
|Net loss                                                 | $ | (1,738,748                      | )
|Other comprehensive income / (loss)                      |   |                                 |  
|-
      Foreign currency translation adjustment          |   | 160,111                         |  
|Comprehensive loss                                       | $ | (1,578,637                      | )
|                                                         |   |                                 |  
|Net loss per share:                                      |   |                                 |  
|-
      Basic                                            | $ | (0.03                           | )
|- Diluted                                                | $ | (0.03                           | )
|Weighted average number of shares of
      common stock: |   |                                 |  
|- Basic                                                  |   | 56,958,386                      |  
|-
      Diluted                                          |   | 56,958,386                      |  

See accompanying notes to the condensed interim consolidated
financial statements.

F-3

---

China BAK Battery, Inc. and subsidiariesCondensed
interim consolidated statements of shareholders equity For the three months
ended December 31, 2008 and 2009(Unaudited)

AccumulatedShares of common stock
    
    
    
    
    
    Additional
    
    
    
    
    
    
    
    
    other
    
    
    Treasury shares
    
    
    TotalNumber of
    
    
    
    
    
    Donated
    
    
    paid-in
    
    
    Statutory
    
    
    Retained
    
    
    comprehensive
    
    
    Number of
    
    
    
    
    
    shareholdersshares
    
    
    Amount
    
    
    shares
    
    
    capital
    
    
    reserves
    
    
    earnings
    
    
    income
    
    
    shares
    
    
    Amount
    
    
    equityBalance as of October 1, 2008
    
    57,676,481
    
    $
    57,677
    
    $
    14,101,689
    
    $
    97,286,286
    
    $
    6,917,943
    
    $
    27,628,860
    
    $
    25,146,155
    
    
    (721,030
    )
    $
    (4,066,610
    )
    $
    167,072,000Net loss
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (1,738,748
    )
    
    -
    
    
    -
    
    
    -
    
    
    (1,738,748
    )Share-based compensation for employee stock
      awards
    
    -
    
    
    -
    
    
    -
    
    
    817,528
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    817,528Issuance of common stock to non- employee
      directors
    
    3,750
    
    
    4
    
    
    -
    
    
    (4
    )
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -Appropriation to statutory reserves
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    309,252
    
    
    (309,252
    )
    
    -
    
    
    -
    
    
    -
    
    
    -Foreign currency translation adjustment
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    160,111
    
    
    -
    
    
    -
    
    
    160,111Balance as of December 31, 2008
    
    57,680,231
    
    $
    57,681
    
    $
    14,101,689
    
    $
    98,103,810
    
    $
    7,227,195
    
    $
    25,580,860
    
    $
    25,306,266
    
    
    (721,030
    )
    $
    (4,066,610
    )
    $
    166,310,891Balance as of October 1, 2009
    
    57,737,481
    
    $
    57,738
    
    $
    14,101,689
    
    $
    101,161,455
    
    $
    7,227,195
    
    $
    13,328,115
    
    $
    24,791,288
    
    
    (721,030
    )
    $
    (4,066,610
    )
    $
    156,600,870Net loss
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (3,392,327
    )
    
    -
    
    
    -
    
    
    -
    
    
    (3,392,327
    )Share-based compensation for employee stock
      awards
    
    -
    
    
    -
    
    
    -
    
    
    1,145,210
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    1,145,210Exercise of stock options awards
    
    70,045
    
    
    70
    
    
    -
    
    
    226,526
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    226,596Issuance of common stock to non- employee
      directors
    
    3,750
    
    
    3
    
    
    -
    
    
    (3
    )
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -Issuance of new common stock
    
    5,790,000
    
    
    5,790
    
    
    -
    
    
    19,383,694
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    19,389,484Appropriation to statutory reserves
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    87,370
    
    
    (87,370
    )
    
    -
    
    
    -
    
    
    -
    
    
    -Foreign currency translation adjustment
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (107,346
    )
    
    -
    
    
    -
    
    
    (107,346
    )Balance as of December 31, 2009
    
    63,601,276
    
    $
    63,601
    
    $
    14,101,689
    
    $
    121,916,882
    
    $
    7,314,565
    
    $
    9,848,418
    
    $
    24,683,942
    
    
    (721,030
    )
    $
    (4,066,610
    )
    $
    173,862,487


See accompanying notes to the condensed interim consolidated
financial statements.

F-4

---

China BAK Battery, Inc. and subsidiaries Condensed
interim consolidated statements of cash flows For the three months ended
December 31, 2008 and 2009(Unaudited) (In US$)

|                                                                                                  |   | Three months ended December 31, |  
|------------------------------------------------------------------------------------------------- | - | ------------------------------- | -
|                                                                                                  |   | 2008                            |  
|Cash flow from operating
      activities                                                         |   |                                 |  
|Net loss                                                                                          | $ | (1,738,748                      | )
|Adjustments to reconcile net loss to
      net cash provided by / (used in) operating activities: |   |                                 |  
|Depreciation and
      amortization                                                               |   | 3,626,880                       |  
|Provision for doubtful debts                                                                      |   | 2,347,075                       |  
|Recovery of
      obsolete inventories                                                            |   | (550,134                        | )
|Share-based compensation                                                                          |   | 817,528                         |  
|Deferred income
      taxes                                                                       |   | (271,075                        | )
|Deferred revenue                                                                                  |   | (58,488                         | )
|Exchange loss /
      (gain)                                                                      |   | 703,970                         |  
|                                                                                                  |   |                                 |  
|Changes in operating assets and liabilities:                                                      |   |                                 |  
|Trade accounts receivable                                                                         |   | (955,974                        | )
|Inventories                                                                                       |   | 1,278,563                       |  
|Prepayments and other receivables                                                                 |   | (7,859,286                      | )
|Accounts and bills
      payable                                                                  |   | 20,175,048                      |  
|Accrued expenses and other payables                                                               |   | 3,662,613                       |  
|                                                                                                  |   |                                 |  
|Net cash provided by / (used in)
      operating activities                                       |   | 21,177,972                      |  
|                                                                                                  |   |                                 |  
|Cash flow from investing
      activities                                                         |   |                                 |  
|                                                                                                  |   |                                 |  
|Purchases of property, plant and
      equipment                                                  |   | (19,528,325                     | )
|Payment of lease prepayments                                                                      |   | (465,858                        | )
|Purchases of intangible assets                                                                    |   | (58,000                         | )
|                                                                                                  |   |                                 |  
|Net cash used in investing
      activities                                                       | $ | (20,052,183                     | )

See accompanying notes to the condensed interim consolidated
financial statements.

F-5

---

China BAK Battery, Inc. and subsidiaries Condensed
interim consolidated statements of cash flows For the three months ended
December 31, 2008 and 2009 (continued)(Unaudited) (In US$)

|                                                                   |   | Three months ended December 31, |  
|------------------------------------------------------------------ | - | ------------------------------- | -
|                                                                   |   | 2008                            |  
|Cash flow from financing
      activities                          |   |                                 |  
|Proceeds from borrowings                                           | $ | 84,076,947                      |  
|Repayment of borrowings                                            |   | (81,883,636                     | )
|(Increase) / decrease in pledged deposits                          |   | (1,663,288                      | )
|Proceeds from issuance of capital
      stock, net                 |   | -                               |  
|Net cash provided by financing activities                          |   | 530,023                         |  
|Effect of exchange rate changes
      on cash and cash equivalents |   | (153,472                        | )
|Net increase / (decrease) in cash and cash
      equivalents       |   | 1,502,340                       |  
|Cash and cash equivalents at the
      beginning of period         |   | 35,706,834                      |  
|Cash and cash equivalents at the end of
      period               | $ | 37,209,174                      |  
|Supplemental disclosure of cash
      flow information:            |   |                                 |  
|Cash received during the period for:                               |   |                                 |  
|Bills receivable discounted to banks                               | $ | 1,688,989                       |  
|Cash paid during the period for:                                   |   |                                 |  
|Income taxes                                                       | $ | -                               |  
|Interest, net of amounts capitalized                               | $ | 2,762,298                       |  

See accompanying notes to the condensed interim consolidated
financial statements.

F-6

---

China BAK Battery, Inc. and subsidiariesNotes to
the condensed interim consolidated financial statements For the three months
ended December 31, 2008 and 2009(Unaudited)

|1. | Principal Activities, Basis of Presentation and Organization
|-- | ------------------------------------------------------------

Principal Activities

China BAK Battery, Inc. (China BAK)
is a corporation formed in the State of Nevada on October 4, 1999 as Medina
Copy, Inc. The Company changed its name to Medina Coffee, Inc. on October 6,
1999 and subsequently changed its name to China BAK Battery, Inc. on February
14, 2005. China BAK and its subsidiaries (hereinafter, collectively referred to
as the Company) are principally engaged in the manufacture, commercialization
and distribution of a wide variety of standard and customized lithium ion (known
as "Li-ion" or "Li-ion cell") rechargeable batteries for use in cellular
telephones, as well as various other portable electronic applications, including
high-power handset telephones, laptop computers, power tools, digital cameras,
video camcorders, MP3 players, electric bicycles, hybrid/electric motors, and
general industrial applications.

The shares of the Company traded in the
over-the-counter market through the Over-the-Counter Bulletin Board from 2005
until May 31, 2006, when the Company obtained approval to list its common stock
on The NASDAQ Global Market, and trading commenced that same date under the
symbol "CBAK".

Basis of Presentation and
Organization

As of December 31, 2009, the Companys
subsidiaries consisted of: i) BAK International Limited (BAK International), a
wholly owned limited liability company incorporated in Hong Kong on December 29,
2003 as BATCO International Limited, which changed its name to BAK International
Limited on November 3, 2004; ii) Shenzhen BAK Battery Co., Ltd. (Shenzhen
BAK), a wholly owned limited liability company established on August 3, 2001 in
the Peoples Republic of China (PRC); iii) BAK Electronics (Shenzhen) Co.,
Ltd. (BAK Electronics), a wholly owned limited liability company established
on August 15, 2005 in the PRC; iv) BAK International (Tianjin) Ltd. (BAK
Tianjin), a wholly owned limited liability company established on December 12,
2006 in the PRC; v) BAK Battery Canada Ltd. (BAK Canada), a wholly owned
limited liability company established on December 20, 2006 in Canada as BAK
Canada Battery Ltd., which changed its name to BAK Battery Canada Ltd. on
December 22, 2006; vi) BAK Europe GmbH (BAK Europe), a wholly owned limited
liability company established in Germany on November 28, 2007; and vii) BAK
Telecom India Private Limited (BAK India), a wholly owned limited liability
company established in India on August 14, 2008. BAK International beneficially
owns 100% of BAK India partly through a nominee agreement with one of its
employees.

BAK Tianjin was established in Tianjin
Technology Industrial District on December 12, 2006 as a wholly owned subsidiary
of BAK International with registered capital of US$99,990,000. Pursuant to BAK
Tianjins articles of association and relevant PRC regulations, BAK
International was required to contribute US$20,000,000 to BAK Tianjin as capital
(representing 20% of BAK Tianjins registered capital) before March 11, 2007. An
extension from the Business Administration Bureau of Beichen District, Tianjin,
was obtained to make this contribution no later than December 11, 2007. On
November 16, 2007, BAK International contributed approximately US$20,000,000
capital to BAK Tianjin. The remaining US$79,990,000 was originally required to
be fully contributed no later than December 11, 2008 and an extension from the
Business Administration Bureau of Beichen District, Tianjin, was obtained to
make this contribution no later than December 11, 2009. On November 16, 2009,
BAK International contributed approximately US$9,000,000 capital to BAK Tianjin
and as of November 16, 2009, the total contribution from BAK International was
US$29,000,000. The Company is discussing with the authorities to further extend
the deadline of making the capital contribution and no action has been taken by
the authorities. BAK Tianjin is principally engaged in the manufacture of
advanced lithium ion batteries for use in cordless power tools and other
applications.

Pursuant to Shenzhen BAKs articles of
association and relevant PRC regulations, BAK International was required to
contribute about US$5.72 million to Shenzhen BAK as capital (representing 7% of
Shenzhen BAKs registered capital) no later than October 2008. On May 5, 2009,
an approval from Shenzhen Bureau of Trade and Industry was obtained to reduce
the required registered capital to US$76,877,480, which had been fully paid up,
and on June 22, 2009, an updated business license of Shenzhen BAK from the
Business Administration Bureau of Shenzhen was obtained. On December 25, 2009,
BAK International contributed approximately US$10,122,520 capital to Shenzhen
BAK and as of December 31, 2009, the total contribution from BAK International
and Shenzhen BAKs registered capital was US$87,000,000.

F-7

---

China BAK Battery, Inc. and subsidiariesNotes to
the condensed interim consolidated financial statements For the three months
ended December 31, 2008 and 2009 (continued)(Unaudited)

|1. | Principal Activities, Basis of Presentation and Organization
      (continued)
|-- | ------------------------------------------------------------------------------

Basis of Presentation and
Organization (continued)

On November 6, 2004, BAK International,
a non-operating holding company that had substantially the same shareholders as
Shenzhen BAK, entered into a share swap transaction with the shareholders of
Shenzhen BAK for the purpose of the subsequent reverse acquisition of the
Company as described below. Pursuant to the terms of the share swap transaction,
BAK International acquired all of the outstanding shares of Shenzhen BAK for
US$11.5 million in cash, while the shareholders of Shenzhen BAK acquired
substantially all of the outstanding shares of BAK International for US$11.5
million in cash. As a result, Shenzhen BAK became a wholly-owned subsidiary of
BAK International. After the share swap transaction was completed, there were
31,225,642 shares of BAK International stock outstanding, exactly the same as
the number of shares of capital stock of Shenzhen BAK that had been outstanding
immediately prior to the share swap, and the shareholders of BAK International
were substantially the same as the shareholders of Shenzhen BAK prior to the
share swap. Consequently, the share swap transaction between BAK International
and the shareholders of Shenzhen BAK was accounted for as a reverse acquisition
of Shenzhen BAK with no adjustment to the historical basis of the assets and
liabilities of Shenzhen BAK.

On January 20, 2005, the Company
completed a share swap transaction with the shareholders of BAK International.
The share swap transaction, also referred to as the reverse acquisition of the
Company, was consummated under Nevada law pursuant to the terms of a Securities
Exchange Agreement entered by and among China BAK, BAK International and the
shareholders of BAK International on January 20, 2005. Pursuant to the
Securities Exchange Agreement, the Company issued 39,826,075 shares of common
stock, par value US$0.001 per share, to the shareholders of BAK International
(including 31,225,642 shares to the original shareholders and 8,600,433 shares
to new investors who had purchased shares in the private placement described
below), representing approximately 97.2% of the Companys post-exchange issued
and outstanding common stock, in exchange for 100% of the outstanding capital
stock of BAK International.

The share swap transaction has been
accounted for as a capital-raising transaction of the Company whereby the
historical financial statements and operations of Shenzhen BAK are consolidated
using historical carrying amounts. The 1,152,458 shares of China BAK outstanding
prior to the stock exchange transaction were accounted for at the net book value
at the time of the transaction, which was a deficit of US$1,672.

Also on January 20, 2005, immediately
prior to consummating the share swap transaction, BAK International executed a
private placement of its common stock with unrelated investors whereby it issued
an aggregate of 8,600,433 shares of common stock for gross proceeds of
US$17,000,000. In conjunction with this financing, Mr. Xiangqian Li, the
Chairman and Chief Executive Officer of the Company, agreed to place 2,179,550
shares of the Company's common stock owned by him into an escrow account
pursuant to an Escrow Agreement dated January 20, 2005 (the Escrow Agreement).
Pursuant to the Escrow Agreement, 50% of the escrowed shares were to be released
to the investors in the private placement if audited net income of the Company
for the fiscal year ended September 30, 2005 was not at least US$12,000,000, and
the remaining 50% were to be released to investors in the private placement if
audited net income of the Company for the fiscal year ended September 30, 2006
was not at least US$27,000,000. If the audited net income of the Company for the
fiscal years ended September 30, 2005 and 2006 reached the above-mentioned
targets, the 2,179,550 shares would be released to Mr. Xiangqian Li in the
amount of 50% upon reaching the 2005 target and the remaining 50% upon reaching
the 2006 target.

Under  accounting
principles generally accepted in the United States of America (US GAAP), escrow agreements such
as the one established by Mr. Xiangqian Li generally constitute compensation if,
following attainment of a performance threshold, shares are returned to a
company officer. The Company determined that without consideration of the
compensation charge, the performance thresholds for the year ended September 30,
2005 would be achieved. However, after consideration of a related compensation
charge, the Company determined that such thresholds would not have been
achieved. The Company also determined that, even without consideration of a
compensation charge, the performance thresholds for the year ended September 30,
2006 would not be achieved. No compensation charge was recorded by the Company
for the years ended September 30, 2005 and 2006.

F-8

---

China BAK Battery, Inc. and subsidiariesNotes to
the condensed interim consolidated financial statements For the three months
ended December 31, 2008 and 2009 (continued)(Unaudited)

|1. | Principal Activities, Basis of Presentation and Organization
      (continued)
|-- | ------------------------------------------------------------------------------

Basis of Presentation and
Organization (continued)

While the 1,089,775 escrow shares
relating to the 2005 performance threshold were previously released to Mr.
Xiangqian Li, Mr. Xiangqian Li executed a further undertaking on August 21, 2006
to return those shares to the escrow agent for the distribution to the relevant
investors. However, such shares were not returned to the escrow agent, but,
pursuant to a Delivery of Make Good Shares, Settlement and Release Agreement
between the Company, BAK International and Mr. Li entered into on October 22,
2007 (the Li Settlement Agreement), such shares were ultimately delivered to
the Company as described below. Because the Company failed to satisfy the
performance threshold for the fiscal year ended September 30, 2006, the
remaining 1,089,775 escrow shares relating to the fiscal year 2006 performance
threshold were released to the relevant investors. As Mr. Li has not retained
any of the shares placed into escrow, and as the investors party to the Escrow
Agreement are only shareholders of the Company and do not have and are not
expected to have any other relationship to the Company, the Company has not
recorded a compensation charge for the years ended September 30, 2005 and 2006.

At the time the escrow shares relating
to the 2006 performance threshold were transferred to the investors in fiscal
year 2007, the Company should have recognized a credit to donated shares and a
debit to additional paid-in capital, both of which are elements of shareholders
equity. This entry is not material because total shares of common stock issued
and outstanding, total shareholders equity and total assets do not change; nor
is there any impact on income or earnings per share. Therefore, previously filed
consolidated financial statements for the fiscal year ended September 30, 2007
will not be restated. This share transfer has been reflected in these financial
statements by reclassifying the balances of certain items as of October 1, 2007.
The balances of donated shares and additional paid-in capital as of October 1,
2007 were credited and debited by US$7,955,358 respectively.

In November 2007, Mr. Xiangqian Li
delivered the 1,089,775 shares related to the 2005 performance threshold to BAK
International pursuant to the Li Settlement Agreement; BAK International in turn
delivered the shares to the Company. Such shares (other than those issued to
investors pursuant to the 2008 Settlement Agreements, as described below) are
now held by the Company. Upon receipt of these shares, the Company and BAK
International released all claims and causes of action against Mr. Xiangqian Li
regarding the shares, and Mr. Xiangqian Li released all claims and causes of
action against the Company and BAK International regarding the shares. Under the
terms of the Li Settlement Agreement, the Company commenced negotiations with
the investors who participated in the Companys January 2005 private placement
in order to achieve a complete settlement of BAK Internationals obligations
(and the Companys obligations to the extent it has any) under the applicable
agreements with such investors.

Beginning on March 13, 2008, the
Company has entered into settlement agreements (the 2008 Settlement
Agreements) with certain investors in the January 2005 private placement.

Pursuant to the 2008 Settlement
Agreements, the Company and the settling investors have agreed, without any
admission of liability, to a settlement and mutual release from all claims
relating to the January 2005 private placement, including all claims relating to
the escrow shares related to the 2005 performance threshold that had been placed
into escrow by Mr. Xiangqian Li, as well as all claims, including claims for
liquidated damages relating to registration rights granted in connection with
the January 2005 private placement. Under the 2008 Settlement Agreement, the
Company has made settlement payments to each of the settling investors of the
number of shares of the Companys common stock equivalent to 50% of the number
of the escrow shares related to the 2005 performance threshold these investors
had claimed; aggregate settlement payments as of December 31, 2009 amounted to
368,745 shares. Share payments to date have been made in reliance upon the
exemptions from registration provided by Section 4(2) and/or other applicable
provisions of the Securities Act of 1933, as amended. In accordance with the
2008 Settlement Agreements, the Company filed a registration statement covering
the resale of such shares which was declared effective by the SEC on June 26,
2008.

The Companys condensed interim
consolidated financial statements have been prepared in accordance with US GAAP.

F-9

---

China BAK Battery, Inc. and subsidiariesNotes to
the condensed interim consolidated financial statements For the three months
ended December 31, 2008 and 2009 (continued)(Unaudited)

|1. | Principal Activities, Basis of Presentation and Organization
      (continued)
|-- | ------------------------------------------------------------------------------

Basis of Presentation and
Organization (continued)

The interim results of operations are
not necessarily indicative of the results to be expected for the fiscal year
ending September 30, 2010. The Companys consolidated balance sheet as of
September 30, 2009 has been taken from the Companys audited consolidated
balance sheet as of that date. All other financial statements contained herein
are unaudited and, in the opinion of management, contain all adjustments
(consisting only of normal recurring accruals) necessary for a fair presentation
of financial position, results of operations and cash flows for the periods
presented. The Companys accounting policies and certain other disclosure are
set forth in the notes to the consolidated financial statements contained in the
Companys Annual Report on Form 10-K for the year ended September 30, 2009.
These financial statements should be read in conjunction with the Companys
audited consolidated financial statements and notes thereto.

The preparation of financial statements
in conformity with US GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates. This basis of accounting
differs in certain material respects from that used for the preparation of the
books of account of the Companys principal subsidiaries, which are prepared in
accordance with the accounting principles and the relevant financial regulations
applicable to enterprises with limited liabilities established in the PRC, Hong
Kong, India, Canada or Germany, the accounting standards used in the places of
their domicile. The accompanying condensed interim consolidated financial
statements reflect necessary adjustments not recorded in the books of account of
the Company's subsidiaries to present them in conformity with US GAAP.

Recently Issued Accounting
Standards

In December 2007, the Financial
Accounting Standards Board (the FASB) issued Accounting Standards Codification
(ASC) Topic 810, Consolidation, which establishes accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. The guidance applies to the Companys financial
statements starting in its fiscal year beginning on October 1, 2009. The
adoption of ASC Topic 810 has no material impact on the Companys financial
statements.

In December 2007, the FASB issued ASC
Topic 805, Business Combinations, which establishes principles and
requirements for how the acquirer of a business recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
and any noncontrolling interest in the acquiree. The statement also provides
guidance for recognizing and measuring the goodwill acquired in the business
combination and determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination. ASC Topic 805 is required to be adopted by the Company for
business acquisitions for which the acquisition date is on or after October 1,
2009. The adoption of ASC Topic 805 has no material impact on the Companys
financial statements.

In March 2008, the FASB issued ASC
Topic 815, Derivatives and Hedging, which is intended to improve financial
reporting about derivative instruments and hedging activities by requiring
enhanced disclosures to enable investors to better understand their effects on
an entitys financial position, financial performance, and cash flows. It is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, with early application encouraged. The
adoption of ASC Topic 815 has no material impact on the Companys financial
statements.

In April 2008, the FASB issued ASC
Topic 350, Intangibles-Goodwill and Other, which amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets
(SFAS No. 142). ASC Topic 350 is intended to improve the consistency between
the useful life of an intangible asset determined under SFAS No. 142 and the
period of expected cash flows used to measure the fair value of the asset under
SFAS No. 141(Revised) and other U.S. GAAP. ASC Topic 350 is effective for fiscal
years beginning after December 15, 2008 and is effective for the Companys
fiscal year beginning on October 1, 2009. Early adoption is prohibited. The
adoption of ASC Topic 350 has no material impact on the Companys financial
statements.

F-10

---

China BAK Battery, Inc. and subsidiariesNotes to
the condensed interim consolidated financial statements For the three months
ended December 31, 2008 and 2009 (continued)(Unaudited)

|1. | Principal Activities, Basis of Presentation and Organization
      (continued)
|-- | ------------------------------------------------------------------------------

Recently Issued Accounting Standards
(continued)

In April 2009, the FASB issued ASC
Topic 805, Business Combinations, which amends the provisions in SFAS No. 141
(Revised) for the initial recognition and measurement, subsequent measurement
and accounting, and disclosures for assets and liabilities arising from
contingencies in business combinations. ASC Topic 805 eliminates the distinction
between contractual and non-contractual contingencies, including the initial
recognition and measurement criteria in SFAS No. 141 (Revised) and instead
carries forward most of the provisions in SFAS No. 141 for acquired
contingencies. ASC Topic 805 is effective for contingent assets and contingent
liabilities arising from business combinations whose acquisition dates are on or
after December 15, 2008. The adoption of ASC Topic 805 has no material impact on
the Companys financial statements.

In June 2009, the FASB issued ASC Topic
860, Transfers and Servicing, which improves the relevance, representational
faithfulness, and comparability of the information that a reporting entity
provides in its financial statements about a transfer of financial assets; the
effects of a transfer on its financial position, financial performance, and cash
flows; and a transferors continuing involvement, if any, in transferred
financial assets. ASC Topic 860 is effective as of the beginning of each
reporting entitys first annual reporting period that begins after November 15,
2009, for interim periods within that first annual reporting period and for
interim and annual reporting periods thereafter. The adoption of ASC Topic 860
is not expected to have a material impact on the Companys financial statements.

In June 2009, the FASB issued ASC Topic
810, Consolidation, which amends FASB Interpretation No. 46 (revised December
2003) to address the elimination of the concept of a qualifying special purpose
entity. ASC Topic 810 also replaces the quantitative-based risks and rewards
calculation for determining which enterprise has a controlling financial
interest in a variable interest entity with an approach focused on identifying
which enterprise has the power to direct the activities of a variable interest
entity and the obligation to absorb losses of the entity or the right to receive
benefits from the entity. Additionally, ASC Topic 810 provides more timely and
useful information about an enterprises involvement with a variable interest
entity. ASC Topic 810 shall be effective as of the beginning of each reporting
entitys first annual reporting period that begins after November 15, 2009, for
interim periods within that first annual reporting period, and for interim and
annual reporting periods thereafter. Earlier application is prohibited. The
adoption of ASC Topic 810 is not expected to have a material impact on the
Companys financial statements.

In August 2009, the FASB issued ASU
2009-05, Fair Value Measurements and Disclosures (Topic 820)  Measuring
Liabilities at Fair Value, or ASU 2009-05. ASU 2009-05 provides additional
guidance for measuring the fair value of liabilities and clarifies that the
quoted price for the identical liability, when traded as an asset in an active
market, is a Level 1 measurement, providing there are no adjustments to the
quoted price. Alternatively, when no quoted price is available, ASU 2009-05
affirms the use of other valuation techniques outlined in SFAS No. 157. ASU
2009-05 is effective for the first interim or annual reporting period beginning
after its issuance. The adoption of ASU 2009-05 has no material impact on the
Companys financial statements.

In September 2009, the FASB issued ASU
2009-12, Fair Value Measurements and Disclosures (Topic 820)  Investments in
Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent),
or ASU 2009-12. ASU 2009-12 amends SFAS No. 157 to permit a reporting entity to
measure the fair value of certain investments on the basis of the net asset
value per share of the investment (or its equivalent). ASU 2009-12 also requires
new disclosures, by major category of investments, about the attributes of
investments within the scope of this amendment to the Codification. ASU 2009-12
is effective for interim and annual periods ending after December 15, 2009.
Early adoption is permitted. The adoption of ASU 2009-12 has no material impact
on the Companys financial statements.

In October 2009, the FASB issued ASU
2009-13, Revenue Recognition (Topic 605)  Multiple-Deliverable Revenue
Arrangements, or ASU 2009-13. ASU 2009-13 requires companies to allocate
revenue in multiple-element arrangements based on an elements estimated selling
price if vendor-specific or other third party evidence of value is not
available. ASU 2009-13 is to be applied on a prospective basis for revenue
arrangements entered into or materially modified in fiscal years beginning on or
after June 15, 2010, with earlier application permitted. The Company is
currently evaluating the impact of the adoption of ASU 2009-13 on its financial
statements.

F-11

---

China BAK Battery, Inc. and subsidiariesNotes to
the condensed interim consolidated financial statements For the three months
ended December 31, 2008 and 2009 (continued)(Unaudited)

|1. | Principal Activities, Basis of Presentation and Organization
      (continued)
|-- | ------------------------------------------------------------------------------

Recently Issued Accounting Standards
(continued)

In January 2010, the FASB issued ASU
2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving
Disclosures about Fair Value Measurements, or ASU 2010-06. This ASU requires
some new disclosures and clarifies some existing disclosure requirements about
fair value measurement as set forth in Codification Subtopic 820-10. The FASBs
objective is to improve these disclosures and, thus, increase the transparency
in financial reporting. Specifically, ASU 2010-06 amends Codification Subtopic
820- 10 to now require:

- A reporting entity should disclose separately the amounts of significant
  transfers in and out of Level 1 and Level 2 fair value measurements and
  describe the reasons for the transfers; and
- In the reconciliation for fair value measurements using significant
  unobservable inputs, a reporting entity should present separately information
  about purchases, sales, issuances, and settlements.

In addition, ASU 2010-06 clarifies the
requirements of the following existing disclosures:

- For purposes of reporting fair value measurement for each class of assets
  and liabilities, a reporting entity needs to use judgment in determining the
  appropriate classes of assets and liabilities; and
- A reporting entity should provide disclosures about the valuation
  techniques and inputs used to measure fair value for both recurring and
  nonrecurring fair value measurements.

ASU 2010-06 is effective for interim
and annual reporting periods beginning after December 15, 2009, except for the
disclosures about purchases, sales, issuances, and settlements in the roll
forward of activity in Level 3 fair value measurements. Those disclosures are
effective for fiscal years beginning after December 15, 2010, and for interim
periods within those fiscal years. Early application is permitted. The Company
is currently evaluating the impact of the adoption of ASU 2010-06 on its
financial statements.

|2 | Pledged Deposits
|- | ----------------

Pledged deposits as of September 30,
2009 and December 31, 2009 consisted of the following:

| |                                  |   | September 30, |  |   | December 31, | 
| | -------------------------------- | - | ------------- |  | - | ------------ | 
| |                                  |   | 2009          |  |   | 2009         | 
| | Pledged deposits with banks for: |   |               |  |   |              | 
| | Construction
      payable       | $ | 893,603       |  | $ | 893,511      | 
| | Short-term bank loans (Note 7)   |   | 7,137,307     |  |   | 7,781,983    | 
| | Bills payable                    |   | 23,084,199    |  |   | 10,364,973   | 
| |                                  | $ | 31,115,109    |  | $ | 19,040,467   | 

Deposits pledged for construction
payable are generally released when the relevant construction projects are
completed.

|3 | Trade Accounts Receivable, net
|- | ------------------------------

Trade accounts receivable as of
September 30, 2009 and December 31, 2009 consisted of the following:

| |                                       |   | September 30, |   |   | December 31, |  
| | ------------------------------------- | - | ------------- | - | - | ------------ | -
| |                                       |   | 2009          |   |   | 2009         |  
| |                                       |   |               |   |   |              |  
| | Trade accounts receivable             | $ | 84,133,865    |   | $ | 80,743,843   |  
| | Less: Allowance for doubtful accounts |   | (13,081,331   | ) |   | (17,807,818  | )
| |                                       |   | 71,052,534    |   |   | 62,936,025   |  
| | Bills receivable                      |   | 12,239,164    |   |   | 11,143,835   |  
| |                                       | $ | 83,291,698    |   | $ | 74,079,860   |  

F-12

---

China BAK Battery, Inc. and subsidiariesNotes to
the condensed interim consolidated financial statements For the three months
ended December 31, 2008 and 2009 (continued)(Unaudited)

|3 | Trade Accounts Receivable, net (continued)
|- | ------------------------------------------

An analysis of the allowance for
doubtful accounts for the three months ended December 31, 2008 and 2009 is as
follows:

| |                                   |   | Three months ended December 31, | 
| | --------------------------------- | - | ------------------------------- | 
| |                                   |   | 2008                            | 
| |                                   |   |                                 | 
| | Balance at beginning of period    | $ | 5,351,244                       | 
| | Addition of bad debt expense, net |   | 2,349,508                       | 
| | Foreign exchange adjustment       |   | 2,388                           | 
| |                                   |   |                                 | 
| | Balance at end of period          | $ | 7,703,140                       | 

|4 | Inventories
|- | -----------

Inventories as of September 30, 2009
and December 31, 2009 consisted of the following:

| |                                    |   | September 30, |   |   | December 31, |  
| | ---------------------------------- | - | ------------- | - | - | ------------ | -
| |                                    |   | 2009          |   |   | 2009         |  
| |                                    |   |               |   |   |              |  
| | Raw materials                      | $ | 18,476,929    |   | $ | 22,098,438   |  
| | Work-in-progress                   |   | 10,488,114    |   |   | 10,771,926   |  
| | Finished goods                     |   | 40,217,837    |   |   | 49,887,202   |  
| |                                    |   | 69,182,880    |   |   | 82,757,566   |  
| |                                    |   |               |   |   |              |  
| | Provision for obsolete inventories |   | (3,647,496    | ) |   | (3,366,851   | )
| |                                    |   |               |   |   |              |  
| |                                    | $ | 65,535,384    |   | $ | 79,390,715   |  

Part of the Companys inventories with
carrying value of US$21,973,836 and US$21,971,583 as of September 30, 2009 and
December 31, 2009, respectively, was pledged as collateral under certain loan
agreements (see Note 7).

|5 | Prepayments and Other Receivables
|- | ---------------------------------

Prepayments and other receivables as of
September 30, 2009 and December 31, 2009 consisted of the following:

| |                                                |   | September 30, |   |   | December 31, |  
| | ---------------------------------------------- | - | ------------- | - | - | ------------ | -
| |                                                |   | 2009          |   |   | 2009         |  
| |                                                |   |               |   |   |              |  
| | Prepayments for raw materials and
      others | $ | 1,437,115     |   | $ | 8,390,671    |  
| | Other receivables                              |   | 3,202,149     |   |   | 4,445,347    |  
| | Less: Allowance for doubtful
      accounts    |   | (6,840        | ) |   | (15,625      | )
| |                                                |   |               |   |   |              |  
| |                                                | $ | 4,632,424     |   | $ | 12,820,393   |  

F-13

---

China BAK Battery, Inc. and subsidiariesNotes to
the condensed interim consolidated financial statements For the three months
ended December 31, 2008 and 2009 (continued)(Unaudited)

|6 | Property, Plant and Equipment, net
|- | ----------------------------------

Property, plant and equipment as of
September 30, 2009 and December 31, 2009 consisted of the following:

| |                                                                   |   | September 30, |   |   | December 31, |  
| | ----------------------------------------------------------------- | - | ------------- | - | - | ------------ | -
| |                                                                   |   | 2009          |   |   | 2009         |  
| | Buildings                                                         | $ | 100,280,425   |   | $ | 101,853,857  |  
| | Machinery and equipment                                           |   | 123,796,485   |   |   | 126,018,114  |  
| | Office equipment                                                  |   | 1,802,825     |   |   | 1,893,518    |  
| | Motor vehicles                                                    |   | 1,168,575     |   |   | 1,163,974    |  
| |                                                                   |   | 227,048,310   |   |   | 230,929,463  |  
| | Accumulated depreciation                                          |   | (42,709,026   | ) |   | (46,605,316  | )
| | Construction in progress                                          |   | 27,959,855    |   |   | 31,062,733   |  
| | Prepayment for acquisition of property, plant and
      equipment |   | 7,385,855     |   |   | 3,198,885    |  
| |                                                                   | $ | 219,684,994   |   | $ | 218,585,765  |  

(i) Depreciation expense for the
three months ended December 31, 2008 and 2009 is included in the condensed
interim consolidated statements of operations and comprehensive loss as follows:

| |                                     |   | Three months ended December 31, | 
| | ----------------------------------- | - | ------------------------------- | 
| |                                     |   | 2008                            | 
| | Cost of revenues                    | $ | 2,730,039                       | 
| | Research and development expenses   |   | 133,000                         | 
| | Sales and marketing expenses        |   | 133,532                         | 
| | General and administrative expenses |   | 444,186                         | 
| |                                     | $ | 3,440,757                       | 

(ii) Construction in Progress

Construction in progress mainly
comprises capital expenditures for construction of the Companys new corporate
campus, including offices, factories and staff dormitories.

For the three months ended December
31, 2008 and 2009, the Company capitalized interest of  US$175,298
and US$181,057 to the cost of construction in progress.

(iii) Pledged Property, Plant and
Equipment

As of September 30, 2009 and December
31, 2009, machinery and equipment with net book value of US$67,873,955 and
US$65,968,067 of the Company were pledged as collateral under certain loan
arrangements (see Notes 7 and 8).

F-14

---

China BAK Battery, Inc. and subsidiariesNotes to
the condensed interim consolidated financial statements For the three months
ended December 31, 2008 and 2009 (continued)(Unaudited)

|7 | Short-term Bank Loans
|- | ---------------------

The Company obtained several short-term
loan facilities from financial institutions in the PRC. In addition to the
pledge of land use rights certificates by Shenzhen BAK as disclosed below, these
facilities were secured by the Companys assets with the following carrying
values:

| |                                             |   | September 30, |  |   | December 31, | 
| | ------------------------------------------- | - | ------------- |  | - | ------------ | 
| |                                             |   | 2009          |  |   | 2009         | 
| | Pledged deposits (Note 2)                   | $ | 7,137,307     |  | $ | 7,781,983    | 
| | Inventories (Note 4)                        |   | 21,973,836    |  |   | 21,971,583   | 
| | Machinery and equipment, net (Note
      6) |   | 33,174,263    |  |   | 32,172,361   | 
| |                                             | $ | 62,285,406    |  | $ | 61,925,927   | 

As of September 30, 2009 and December
31, 2009, the Company had several short-term bank loans with aggregate
outstanding balances of US$139,159,380 and US$125,044,458, respectively. The
loans were primarily obtained for general working capital, carried interest
rates ranging from 0.30% to 5.31% per annum, and had maturity dates ranging from
6 to 12 months. Each loan is guaranteed by Mr. Xiangqian Li, who did not receive
any compensation for acting as guarantor.

As of December 31, 2009, the Company
had pledged the land use rights certificate in relation to the land on which
Shenzhen BAKs corporate campus had been constructed for short-term bank loans
amounting to US$58,590,889 borrowed from Shenzhen Eastern Branch, Agricultural
Bank of China. As of December 31, 2009, the aggregate net book value of the
buildings and land use rights in relation to the land use rights certificate was
US$105,289,483.

|8 | Long-term Bank Loans
|- | --------------------

As of September 30, 2009 and December
31, 2009, the Company had long-term bank loans of US$55,667,052 and
US$46,872,711, respectively. As of December 31, 2009, US$5,859,089 was borrowed
under a four-year long-term loan credit facility from China Development Bank,
bearing interest at the benchmark rate of the Peoples Bank of China (PBOC)
for three-year to five-year long-term loans, which is currently 5.76% per annum.
This long-term bank loan is repayable on December 26, 2010.

Three other long-term loans totaled an
aggregate borrowed amount of US$21,971,583 as of December 31, 2009. These loans
were borrowed under a five-year long-term loan credit facility from Shenzhen
Eastern Branch, Agricultural Bank of China, and carry interest at 90% of the
benchmark rate of the PBOC for three-year to five-year long-term loans. The
first loan of US$5,859,089 currently carries interest at 5.184% per annum and is
repayable on January 25, 2012. The second loan of US$11,718,177 currently
carries annual interest of 5.184% and is repayable in three installments of
US$2,929,544 on January 25, 2010, US$7,323,861 on January 25, 2011 and
US$1,464,772 on January 25, 2012, respectively. The third loan of US$4,394,317
currently carries annual interest of 5.76% and is repayable on January 25, 2010.

Another loan of US$19,042,039 as of
December 31, 2009 was borrowed under a four-year long-term loan credit facility
from Tianjin Branch, Agricultural Bank of China and carries interest at the
benchmark rate of the PBOC for three-year to five-year long-term loans, which is
currently 5.76% per annum. This loan is repayable in three installments of
US$4,394,317 on December 26, 2010, US$7,323,861 on December 26, 2011, and
US$7,323,861 on May 26, 2012.

The long-term bank loan with China
Development Bank is: (i) guaranteed by Mr. Xiangqian Li; (ii) secured by certain
shares of the Company owned by Mr. Xiangqian Li; and (iii) to be secured by the
property ownership and land use rights certificate relating to the land on which
the Companys Research and Development Test Centre is to be constructed and the
facilities to be constructed thereon. As of December 31, 2009, the Company had
obtained the relevant land use rights certificate and was in the process of
negotiating with the relevant government bureau for the requisite approval to
pledge it as described.

F-15

---

China BAK Battery, Inc. and subsidiariesNotes to
the condensed interim consolidated financial statementsFor the three
months ended December 31, 2008 and 2009 (continued)(Unaudited)

|8 | Long-term Bank Loans
(continued)
|- | --------------------------------

The long-term bank loan with Shenzhen
Eastern Branch, Agricultural Bank of China is: (i) guaranteed by Mr. Xiangqian
Li; (ii) secured by the Companys machinery and equipment with carrying values
of US$33,795,706 as of December 31, 2009 (see Note 6); and (iii) secured by the
property ownership certificate and land use rights certificate in relation to
the land on which Shenzhen BAKs corporate campus had been constructed and any
machinery and equipment purchased and used in the campus subsequent to such
construction.

The long-term bank loan with Tianjin
Branch, Agricultural Bank of China is secured by the machinery and equipment
purchased for the automated high-power lithium-phosphate cells production line
in Tianjin. As of December 31, 2009, construction of the automated high-power
lithium-phosphate cells production line was in progress.

Mr. Xiangqian Li did not receive any
compensation for pledging his shares in the Company or acting as guarantor for
the above long-term bank loans.

The aggregate maturities of long-term
bank loans as of December 31, 2009 are as follows:

|Fiscal years ending on December
      31, |   |            | 
|----------------------------------------- | - | ---------- | 
|2010                                      | $ | 17,577,267 | 
|2011                                      |   | 14,647,722 | 
|2012                                      |   | 14,647,722 | 
|                                          | $ | 46,872,711 | 



|9 | Share-based Compensation
|- | ------------------------

The Company grants share options to
officers and employees and restricted shares of common stock to its non-employee
directors as rewards for their services.

Stock Option Plan

In May 2005, the Board of Directors
adopted the China BAK Battery, Inc. 2005 Stock Option Plan (the Plan). The
Plan originally authorized the issuance of up to 4,000,000 shares of the
Companys common stock, pursuant to stock options granted under the Plan, or as
grants of restricted stock. The exercise price of options granted pursuant to
the Plan must be at least equal to the fair market value of the Companys common
stock at the date of the grant. Fair market value is determined at the
discretion of the designated committee on the basis of reported sales prices for
the Companys common stock over a ten business day period ending on the grant
date. The Plan will terminate on May 16, 2055. On July 28, 2008, the Companys
stockholders approved certain amendments to the Plan, including an amendment
increasing the total number of shares available for issuance under the Plan to
8,000,000.

Pursuant to the Plan, the Company
granted options to purchase 2,000,000 shares of common stock with an exercise
price of US$6.25 per share on May 16, 2005. In accordance with the vesting
provisions of the grants, the options became vested and exercisable under the
following schedule:

|                 |  | Percentage of  |  | Initial        
|---------------- |  | -------------- |  | ---------------
|Number of Shares |  | Options Issued |  | Vesting Date   
|800,000          |  | 40%            |  | July 1, 2007   
|600,000          |  | 30%            |  | January 1, 2008
|600,000          |  | 30%            |  | July 1, 2008   
|2,000,000        |  | 100%           |  |                

F-16

---

China BAK Battery, Inc. and subsidiariesNotes to
the condensed interim consolidated financial statementsFor the three
months ended December 31, 2008 and 2009 (continued)(Unaudited)

|9 | Share-based Compensation
  (continued)
|- | --------------------------------------

Subsequent to the grant date, options to purchase 200,000
shares of common stock were forfeited because the optionees terminated their
employment with the Company. In addition, on September 28, 2006, options to
purchase a total of 1,400,000 shares of common stock were cancelled pursuant to
the Termination and Release Agreements signed on that day.

A summary of share option plan activity
for these options during the three months ended December 31, 2009 is presented
below:

|                                          |  |           |  |   |                |  |  | Weighted        |  |   |           | 
|----------------------------------------- |  | --------- |  | - | -------------- |  |  | --------------- |  | - | --------- | 
|                                          |  |           |  |   | Weighted       |  |  | average         |  |   |           | 
|                                          |  |           |  |   | average        |  |  | remaining       |  |   | Aggregate | 
|                                          |  | Number of |  |   | exercise price |  |  | contractual     |  |   | intrinsic | 
|                                          |  | shares    |  |   | per share      |  |  | term            |  |   | value (1) | 
|                                          |  |           |  |   |                |  |  |                 |  |   |           | 
|Outstanding as
      of October 1, 2009   |  | 200,000   |  | $ | 6.25           |  |  |                 |  |   |           | 
|Exercised                                 |  | -         |  |   | -              |  |  |                 |  |   |           | 
|Forfeited                                 |  | -         |  |   | -              |  |  |                 |  |   |           | 
|Cancelled                                 |  | -         |  |   | -              |  |  |                 |  |   |           | 
|Outstanding as
      of December 31, 2009 |  | 200,000   |  | $ | 6.25           |  |  | 1.3 years       |  | $ | -         | 
|Exercisable as of December 31,
      2009 |  | 200,000   |  | $ | 6.25           |  |  | 1.3
      years |  | $ | -         | 

(1) Aggregate intrinsic value
represents the value of the Companys closing stock price on December 31, 2009
(US$2.78) in excess of the exercise price multiplied by the number of options
outstanding or exercisable.

The weighted-average grant-date fair
value of options granted during 2005 was US$3.67 per share. No non-cash
share-based compensation expense was recognized in respect of these share
options for the three months ended December 31, 2008 and 2009.

The fair value of the above option
awards was estimated on the date of grant using the Black-Scholes Option
Valuation Model together with the following assumptions:

|Expected
      volatility |  | 59.85         | %
|------------------------- |  | ------------- | -
|Expected dividends        |  | Nil           |  
|Expected life             |  | 6
      years |  
|Risk-free interest rate   |  | 4.13          | %

As of December 31, 2009, there were no
unrecognized compensation costs related to non-vested share options.

Pursuant to the Plan, the Company also
granted options to purchase 1,501,500 shares of the Companys common stock with
a weighted-average exercise price of US$3.28 per share on June 25, 2007. In
accordance with the vesting provisions of the grants, the options will become
vested and exercisable during the period from June 30, 2007 to February 9, 2012
according to each employees respective agreement.

F-17

---

China BAK Battery, Inc. and subsidiariesNotes to
the condensed interim consolidated financial statementsFor the three
months ended December 31, 2008 and 2009 (continued)(Unaudited)

|9 | Share-based Compensation
  (continued)
|- | --------------------------------------

A summary of share option plan activity
for these options during the three months ended December 31, 2009 is presented
below:

|                                          |  |           |  |   | Weighted         |  |  | Weighted average |  |   |                           | 
|----------------------------------------- |  | --------- |  | - | ---------------- |  |  | ---------------- |  | - | ------------------------- | 
|                                          |  | Number of |  |   | average exercise |  |  | remaining        |  |   | Aggregate
      intrinsic | 
|                                          |  | Shares    |  |   | price per share  |  |  | contractual term |  |   | value (1)                 | 
|                                          |  |           |  |   |                  |  |  |                  |  |   |                           | 
|Outstanding as
      of October 1, 2009   |  | 1,070,500 |  | $ | 3.29             |  |  |                  |  |   |                           | 
|Exercised                                 |  | 65,000    |  |   | 3.27             |  |  |                  |  |   |                           | 
|Forfeited                                 |  | -         |  |   | -                |  |  |                  |  |   |                           | 
|Cancelled                                 |  | -         |  |   | -                |  |  |                  |  |   |                           | 
|Outstanding as
      of December 31, 2009 |  | 1,005,500 |  | $ | 3.29             |  |  | 3.6 years        |  | $ | -                         | 
|Exercisable as of December 31,
      2009 |  | 665,500   |  | $ | 3.29             |  |  | 3.0 years        |  | $ | -                         | 

(1) Aggregate intrinsic value
represents the value of the Companys closing stock price on December 31, 2009
(US$2.78) in excess of the exercise price multiplied by the number of options
outstanding or exercisable.

The weighted-average grant-date fair
value of options granted during 2007 was US$2.15 per share. The Company recorded
non-cash share-based compensation expense of US$183,829 and US$58,002 for the
three months ended December 31, 2008 and 2009 respectively, in respect of share
options granted in 2007, which was allocated to cost of revenues, sales and
marketing expenses, general and administrative expenses and research and
development expenses respectively.

The fair value of the above option
awards granted on June 25, 2007 was estimated on the date of grant using the
Black-Scholes Option Valuation Model that uses the following assumptions:

|Expected volatility     |  | 69.44        | %
|----------------------- |  | ------------ | -
|Expected dividends      |  | Nil          |  
|Expected life           |  | 4 - 10 years |  
|Risk-free interest rate |  | 5.09         | %

As of December 31, 2009, there were
unrecognized compensation costs of US$212,821 related to the above non-vested
share options. These costs are expected to be recognized over a weighted average
period of 1.3 years.

Pursuant to the Plan, the Company also
granted options to purchase 360,000 shares of common stock with an exercise
price of US$4.30 per share on January 28, 2008. In accordance with the vesting
provisions of the grants, the options will become vested and exercisable during
the period from April 28, 2008 to January 28, 2011 according to each employees
respective agreement.

F-18

---

China BAK Battery, Inc. and subsidiariesNotes to
the condensed interim consolidated financial statementsFor the three
months ended December 31, 2008 and 2009 (continued)(Unaudited)

|9 | Share-based Compensation
  (continued)
|- | --------------------------------------

A summary of share option plan activity
for these options during the three months ended December 31, 2009 is presented
below:

|                                          |  |           |  |   | Weighted         |  |  | Weighted average |  |   |                           | 
|----------------------------------------- |  | --------- |  | - | ---------------- |  |  | ---------------- |  | - | ------------------------- | 
|                                          |  | Number of |  |   | average exercise |  |  | remaining        |  |   | Aggregate
      intrinsic | 
|                                          |  | Shares    |  |   | price per share  |  |  | contractual term |  |   | value (1)                 | 
|                                          |  |           |  |   |                  |  |  |                  |  |   |                           | 
|Outstanding as
      of October 1, 2009   |  | 360,000   |  | $ | 4.30             |  |  |                  |  |   |                           | 
|Exercised                                 |  | -         |  |   | -                |  |  |                  |  |   |                           | 
|Forfeited                                 |  | -         |  |   | -                |  |  |                  |  |   |                           | 
|Cancelled                                 |  | -         |  |   | -                |  |  |                  |  |   |                           | 
|Outstanding as
      of December 31, 2009 |  | 360,000   |  | $ | 4.30             |  |  | 3.0 years        |  | $ | -                         | 
|Exercisable as of December 31,
      2009 |  | 210,000   |  | $ | 4.30             |  |  | 3.0 years        |  | $ | -                         | 

(1) Aggregate intrinsic value
represents the value of the Companys closing stock price on December 31, 2009
(US$2.78) in excess of the exercise price multiplied by the number of options
outstanding or exercisable.

The weighted average grant-date fair
value of options granted on January 28, 2008 was US$3.59 per share. The Company
recorded non-cash share-based compensation expense of US$148,989 and US$60,183
for the three months ended December 31, 2008 and 2009, respectively, in
respect of share options granted on January 28, 2008, which was allocated to
general and administrative expenses and research and development expenses
respectively.

The fair value of the above option
awards granted on January 28, 2008 was estimated on the date of grant using the
Black-Scholes Option Valuation Model that uses the following assumptions.

|Expected volatility     |  | 120.23  | %
|----------------------- |  | ------- | -
|Expected dividends      |  | Nil     |  
|Expected life           |  | 5 years |  
|Risk-free interest rate |  | 3.59    | %

As of December 31, 2009, there were
unrecognized compensation costs of US$115,321 related to the above
non-vested share options. These costs are expected to be recognized over a
weighted average period of 0.6 years.

On May 29, 2008, the Compensation
Committee of the Companys Board of Directors recommended and approved the grant
of options to purchase 1,080,000 shares of the Companys common stock to Mr.
Xiangqian Li and options to purchase 170,000 shares to five other employees,
with an exercise price of US$4.18 per share. In accordance with the vesting
provisions of the grants, the options will become vested and exercisable during
the period from September 30, 2008 to May 29, 2012 according to each employees
respective agreement.

F-19

---

China BAK Battery, Inc. and subsidiariesNotes to
the condensed interim consolidated financial statementsFor the three
months ended December 31, 2008 and 2009 (continued)(Unaudited)

|9 | Share-based Compensation
  (continued)
|- | --------------------------------------

A summary of share option plan activity for these options
during the three months ended December 31, 2009 is presented below:

|                                          |  |           |  |   |                |  |  | Weighted        |  |   |           | 
|----------------------------------------- |  | --------- |  | - | -------------- |  |  | --------------- |  | - | --------- | 
|                                          |  |           |  |   | Weighted       |  |  | average         |  |   |           | 
|                                          |  |           |  |   | average        |  |  | remaining       |  |   | Aggregate | 
|                                          |  | Number of |  |   | exercise price |  |  | contractual     |  |   | intrinsic | 
|                                          |  | shares    |  |   | per share      |  |  | term            |  |   | value (1) | 
|                                          |  |           |  |   |                |  |  |                 |  |   |           | 
|Outstanding as
      of October 1, 2009   |  | 1,250,000 |  | $ | 4.18           |  |  |                 |  |   |           | 
|Exercised                                 |  | -         |  |   | -              |  |  |                 |  |   |           | 
|Forfeited                                 |  | -         |  |   | -              |  |  |                 |  |   |           | 
|Cancelled                                 |  | -         |  |   | -              |  |  |                 |  |   |           | 
|Outstanding as
      of December 31, 2009 |  | 1,250,000 |  | $ | 4.18           |  |  | 3.4 years       |  | $ | -         | 
|Exercisable as of December 31,
      2009 |  | 582,500   |  | $ | 4.18           |  |  | 3.4
      years |  | $ | -         | 

(1) Aggregate intrinsic value
represents the value of the Companys closing stock price on December 31, 2009
(US$2.78) in excess of the exercise price multiplied by the number of options
outstanding or exercisable.

The weighted average grant-date fair
value of options granted on May 29, 2008 was US$2.36 per share. The Company
recorded non-cash share-based compensation expense of US$462,688 and US$195,063
for the three months ended December 31, 2008 and 2009 respectively, in respect
of share options granted on May 29, 2008, which was allocated to general and
administrative expenses and research and development expenses respectively.

The fair value of the above option
awards granted on May 29, 2008 was estimated on the date of grant using the
Black-Scholes Option Valuation Model that uses the following assumptions.

|Expected volatility     |  | 59.48   | %
|----------------------- |  | ------- | -
|Expected dividends      |  | Nil     |  
|Expected life           |  | 5 years |  
|Risk-free interest rate |  | 4.01    | %

As of December 31, 2009, there were
unrecognized compensation costs of US$551,508 related to the above non-vested
share options. These costs are expected to be recognized over a weighted average
period of 1.2 years.

On June 22, 2009, the Compensation
Committee of the Companys Board of Directors recommended and approved the grant
of options to purchase 1,928,200 shares of the Companys common stock to certain
key employees, officers and consultants with an exercise price of US$2.81 per
share. In accordance with the vesting provisions of the grants, the options will
become vested and exercisable over five years in twenty equal quarterly
installments on the first day of each fiscal quarter beginning on October 1,
2009.

F-20

---

China BAK Battery, Inc. and subsidiariesNotes to
the condensed interim consolidated financial statementsFor the three
months ended December 31, 2008 and 2009 (continued)(Unaudited)

|9 | Share-based Compensation
  (continued)
|- | --------------------------------------

A summary of share option plan activity
for these options during the three months ended December 31, 2009 is presented
below:

|                                          |  |           |  |   | Weighted         |  |  | Weighted average |  |   |                           | 
|----------------------------------------- |  | --------- |  | - | ---------------- |  |  | ---------------- |  | - | ------------------------- | 
|                                          |  | Number of |  |   | average exercise |  |  | remaining        |  |   | Aggregate
      intrinsic | 
|                                          |  | Shares    |  |   | price per share  |  |  | contractual term |  |   | value (1)                 | 
|                                          |  |           |  |   |                  |  |  |                  |  |   |                           | 
|Outstanding as
      of October 1, 2009   |  | 1,928,200 |  | $ | 2.81             |  |  |                  |  |   |                           | 
|Exercised                                 |  | 5,045     |  |   | 2.81             |  |  |                  |  |   |                           | 
|Forfeited                                 |  | 13,000    |  |   | 2.81             |  |  |                  |  |   |                           | 
|Cancelled                                 |  | -         |  |   | -                |  |  |                  |  |   |                           | 
|Outstanding as
      of December 31, 2009 |  | 1,910,155 |  | $ | 2.81             |  |  | 6.5 years        |  | $ | -                         | 
|Exercisable as of December 31,
      2009 |  | 90,715    |  | $ | 2.81             |  |  | 6.5 years        |  | $ | -                         | 

(1) Aggregate intrinsic value
represents the value of the Companys closing stock price on December 31, 2009
(US$2.78) in excess of the exercise price multiplied by the number of options
outstanding or exercisable.

The weighted average grant-date fair
value of options granted on June 22, 2009 was US$2.46 per share. The Company
recorded non-cash share-based compensation expense of US$614,860 for the three
months ended December 31, 2009, in respect of share options granted on June 22,
2009, which was allocated to general and administrative expenses and research
and development expenses respectively.

The fair value of the above option
awards granted on June 22, 2009 was estimated on the date of grant using the
Black-Scholes Option Valuation Model that uses the following assumptions.

|Expected
      volatility |  | 111.03        | %
|------------------------- |  | ------------- | -
|Expected dividends        |  | Nil           |  
|Expected life             |  | 7
      years |  
|Risk-free interest rate   |  | 3.69          | %

As of December 31, 2009, there were
unrecognized compensation costs of US$3,228,870 related to the
above non-vested share options. These costs are expected to be recognized over a
weighted average period of 2.6 years.

On June 26, 2009, the Compensation
Committee of the Companys Board of Directors recommended and approved the grant
of options to purchase 75,000 shares of the Companys common stock to certain
key management with an exercise price of US$3.24 per share. In accordance with
the vesting provisions of the grants, the options will become vested and
exercisable over five years in twenty equal quarterly installments on the first
day of each fiscal quarter beginning on October 1, 2009.

F-21

---

China BAK Battery, Inc. and subsidiariesNotes to
the condensed interim consolidated financial statementsFor the three
months ended December 31, 2008 and 2009 (continued)(Unaudited)

|9 | Share-based Compensation
  (continued)
|- | --------------------------------------

A summary of share option plan activity
for these options during the three months ended December 31, 2009 is presented
below:

|                                          |  |           |  |   | Weighted         |  |  | Weighted average |  |   |                           | 
|----------------------------------------- |  | --------- |  | - | ---------------- |  |  | ---------------- |  | - | ------------------------- | 
|                                          |  | Number of |  |   | average exercise |  |  | remaining        |  |   | Aggregate
      intrinsic | 
|                                          |  | Shares    |  |   | price per share  |  |  | contractual term |  |   | value (1)                 | 
|                                          |  |           |  |   |                  |  |  |                  |  |   |                           | 
|Outstanding as
      of October 1, 2009   |  | 75,000    |  | $ | 3.24             |  |  |                  |  |   |                           | 
|Exercised                                 |  | -         |  |   | -                |  |  |                  |  |   |                           | 
|Forfeited                                 |  | -         |  |   | -                |  |  |                  |  |   |                           | 
|Cancelled                                 |  | -         |  |   | -                |  |  |                  |  |   |                           | 
|Outstanding as
      of December 31, 2009 |  | 75,000    |  | $ | 3.24             |  |  | 6.5 years        |  | $ | -                         | 
|Exercisable as of December 31,
      2009 |  | 3,750     |  | $ | 3.24             |  |  | 6.5 years        |  | $ | -                         | 

(1) Aggregate intrinsic value
represents the value of the Companys closing stock price on December 31, 2009
(US$2.78) in excess of the exercise price multiplied by the number of options
outstanding or exercisable.

The weighted average grant-date fair
value of options granted on June 26, 2009 was US$2.86 per share. The Company
recorded non-cash share-based compensation expense of US$27,374 for the three
months ended December 31, 2009, in respect of share options granted on June 26,
2009, which was allocated to research and development expenses.

The fair value of the above option
awards granted on June 26, 2009 was estimated on the date of grant using the
Black-Scholes Option Valuation Model that uses the following assumptions.

|Expected
      volatility |  | 111.58        | %
|------------------------- |  | ------------- | -
|Expected dividends        |  | Nil           |  
|Expected life             |  | 7
      years |  
|Risk-free interest rate   |  | 3.51          | %

As of December 31, 2009, there were
unrecognized compensation costs of  US$147,826 related to the above
non-vested share options. These costs are expected to be recognized over a
weighted average period of 2.6 years.

Pursuant to the Plan, and in accordance
with the China BAK Battery, Inc. Compensation Plan for Non-Employee Directors,
the Company also granted 5,000 restricted shares to each of the existing elected
independent directors with a fair value of US$4.56 per share on August 6, 2008.
The eligible directors shall vest in their rights under the restricted shares
according to the following schedule:

(i) 25% of the restricted shares
granted will immediately vest on the grant date; and

(ii) The remaining 75% of the
restricted shares will vest in three equal quarterly installments on the last
day of each subsequent quarter or in three equal quarterly installments on the
last day of each calendar quarter beginning on the last day of the first full
calendar quarter after the grant date.

F-22

---

China BAK Battery, Inc. and subsidiariesNotes to
the condensed interim consolidated financial statementsFor the three
months ended December 31, 2008 and 2009 (continued)(Unaudited)

|9 | Share-based Compensation
  (continued)
|- | --------------------------------------

The Company recorded non-cash
share-based compensation expense of US$22,022 for the three months ended
December 31, 2008, in respect of the restricted shares granted in August 2008,
which was allocated to general and administrative expenses. No non-cash
share-based compensation expense was recognized for the three months ended
December 31, 2009.

As of December 31, 2009, there were no
unrecognized stock-based compensation costs associated with these restricted
shares granted to non-employee directors. All of the restricted shares were
issued as fully paid shares of common stock to the Companys three independent
directors on August 6, 2008, October 20, 2008, March 2, 2009 and April 2, 2009,
respectively.

Pursuant to the Plan, the Compensation
Committee of the Companys Board of Directors recommended and approved the grant
of 500,000 restricted shares to Chief Executive Officer, Mr. Xiangqian Li with a
fair value of US$2.81 per share on June 22, 2009. In accordance with the vesting
schedule of the grant, the restricted shares will vest in twenty equal quarterly
installments on the first day of each fiscal quarter beginning on October 1,
2009.

The Company recorded non-cash
share-based compensation expense of US$179,682 for the three months ended
December 31, 2009, in respect of the restricted shares granted in June 22, 2009,
which was allocated to general and administrative expenses.

As of December 31, 2009, there were
unrecognized stock-based compensation costs of US$961,118 associated with these
restricted shares granted to Mr. Xiangqian Li. These costs are expected to be
recognized over a weighted-average period of 2.6 years.

Pursuant to the Plan, and in accordance
with the China BAK Battery, Inc. Compensation Plan for Non-Employee Directors,
the Company also granted 5,000 restricted shares to each of the existing elected
independent directors with a fair value of US$3.24 per share on June 26, 2009.
The eligible directors shall vest in their rights under the restricted shares
according to the following schedule:

(i) 25% of the restricted shares
granted will immediately vest on the grant date; and

(ii) The remaining 75% of the
restricted shares will vest in three equal quarterly installments on the last
day of each subsequent quarter or in three equal quarterly installments on the
last day of each calendar quarter beginning on the last day of the first full
calendar quarter after the grant date.

The Company recorded non-cash
share-based compensation expense of US$10,046 for the three months ended
December 31, 2009, in respect of the restricted shares granted in June 2009,
which was allocated to general and administrative expenses.

As of December 31, 2009, there were
unrecognized stock-based compensation costs of US$3,794 associated with these
restricted shares granted to non-employee directors. The first and second 25% of
the restricted shares were already issued as fully paid shares of common stock
to the Companys three independent directors on July 24, 2009 and November 16,
2009, respectively.

As the Company itself is an investment
holding company which is not expected to generate operating profits to realize
the tax benefits arising from its net operating loss carried forward, no income
tax benefits were recognized for such stock-based compensation cost under the
Stock Option Plan for the three months ended December 31, 2008 and 2009.

F-23

---

China BAK Battery, Inc. and subsidiariesNotes to
the condensed interim consolidated financial statementsFor the three
months ended December 31, 2008 and 2009 (continued)(Unaudited)

|10 | Net Loss per Share
|-- | ------------------

The calculation of basic net loss per
share is based on the net loss for the three months ended December 31, 2009
attributable to equity shareholders of $3,392,327 (Three months ended December
31, 2008: $1,738,748) and the weighted average number of shares of common stock
of 61,107,713 issued and outstanding during the three months ended December 31,
2009 (Three months ended December 31, 2008: 56,958,386).

The effects of 3,100,000 shares of
stock options and 7,500 shares of restricted stock outstanding during the three
months ended or as of December 31, 2008 were all anti-dilutive and the effects
of 4,460,655 shares of stock options, 507,500 shares of restricted stock and
1,447,500 warrants outstanding during the three months ended or as of December
31, 2009 were all anti-dilutive. As such, basic and diluted net loss per share
for the three months ended December 31, 2008 and 2009 are the same.

|11 | Fair Value of Financial
  Instruments
|-- | -------------------------------------

The fair value of a financial
instrument is the amount at which the instrument could be exchanged in a current
transaction between willing parties. The carrying amounts of financial assets
and liabilities, such as cash and cash equivalents, pledged deposits, trade
accounts receivable, other receivables, assets held for sale, short-term bank
loans, long-term bank loans, accounts and bills payable and other payables,
approximate their fair values because of the short maturity of these instruments
and market rates of interest.

|12 | Commitments and
Contingencies
|-- | -----------------------------



|(i) | Capital Commitments
|--- | -------------------

As of September 30, 2009 and December
31, 2009, the Company had the following contracted capital commitments:

|                                    |   | September
      30, |  |   | December
      31, | 
|----------------------------------- | - | ------------------- |  | - | ------------------ | 
|                                    |   | 2009                |  |   | 2009               | 
|For construction
      of buildings | $ | 5,950,310           |  | $ | 5,957,292          | 
|For purchases of equipment          |   | 3,590,812           |  |   | 4,371,762          | 
|                                    | $ | 9,541,122           |  | $ | 10,329,054         | 



|(ii) | Property ownership and land use rights
      certificates
|---- | ---------------------------------------------------------

According to the relevant PRC laws and
regulations, a land use rights certificate, along with government approvals for
land planning, project planning and construction, needs to be obtained before
construction of a building is commenced. A property ownership certificate shall
be granted by the government upon application under the condition that the
aforementioned certificate and government approvals have been obtained.

The Company did not obtain the land use
right certificate and approvals for project-planning and construction relating
to the premises occupied by the Company, BAK Industrial Park, before
construction of the buildings was commenced. On July 3, 2009, the Company had
obtained the approval for project-planning and construction from the local
government of Shenzhen. As of December 31, 2009, the Company has obtained the
aforementioned land use rights certificate and government approvals and was in
the process of negotiating with the relevant government for the application and
acquisition of the appropriate property ownership certificate.

Management believes that the Company will ultimately be granted
a property ownership certificate, and that there should be no legal barriers for
the Company to obtain a property ownership certificate for the premises
presently occupied by the Company in BAK Industrial Park. However, in the event
that the Company fails to obtain the property ownership certificate relating to
BAK Industrial Park, there is a risk that the building constructed will need to
be vacated as illegitimate constructions and the Company might be subject to
penalties and fines. However, management believes that this possibility, while
present, is remote.

F-24

---

China BAK Battery, Inc. and subsidiariesNotes to
the condensed interim consolidated financial statementsFor the three
months ended December 31, 2008 and 2009 (continued)(Unaudited)

|12   | Commitments and Contingencies
      (continued)                      
|---- | ---------------------------------------------------------------------
|     |                                                                      
|(ii) | Property ownership and land use rights
      certificates (continued)

Pursuant to the land use rights
certificate relating to the Companys Tianjin facility, the Tianjin government
had requested that the Company complete the construction of the Tianjin facility
before September 30, 2008. As of December 31, 2009, the Company was in the
process of negotiating with the relevant government bureau for the extension of
the completion date. If the Company fails to obtain the approval for the
extension of the completion date from the relevant government bureau, there is a
risk that the land use rights certificate relating to the Companys Tianjin
facility will become invalid. However, management believes that this
possibility, while present, is remote.

Pursuant to the property ownership and
land use rights certificate that the Company obtained relating to the Research
and Development Test Centre to be constructed in Shenzhen, the Company must
complete at least 25% of the construction of the Research and Development Test
Centre by September 30, 2008. On November 11, 2008 and May 27, 2009, the Company
has signed two supplement agreements with Shenzhen government to increase the
dimensions of the Research and Development Test Centre. According to the
supplement agreements, the Company is required to complete the construction by
May 6, 2011. According to the property ownership and land use rights
certificate, such rights may not be pledged without the approval of the relevant
government office. The Company is required to pledge its property ownership and
land use rights certificate in relation to the Research and Development Test
Centre to China Development Bank according to the loan agreement entered into
with it. As of December 31, 2009, the Company was in the process of negotiating
with the relevant government for the requisite approval.

The Company is not able to insure its
manufacturing facilities since it has not yet received its property ownership
certificates for these facilities. The Company intends to procure such insurance
once it has received the certificates.

On December 15, 2008, the Company
purchased insurance for its manufacturing facilities at BAK Industrial Park in
Shenzhen, China. Under the insurance policy entered into with Ping An Property
& Casualty Insurance Company of China, Ltd, the insured amount for our
manufacturing facilities at BAK Industrial Park is RMB585,373,070 (approximately
$85.8 million) for the period from November 26, 2008 to August 25, 2010.

The Company is not able to insure its
Research and Development Test Centre to be constructed in Shenzhen, China, until
it receives the required property ownership and land use rights certificates.
Upon receipt of such certificates, the Company intends to procure such
insurance. As discussed above, the Company has obtained the land use rights
certificate to the land relating to these facilities. The application for a
property ownership certificate is in process with respect to the Companys
facilities in Tianjin.

F-25

---

China BAK Battery, Inc. and subsidiariesNotes to
the condensed interim consolidated financial statementsFor the three
months ended December 31, 2008 and 2009 (continued)(Unaudited)

|12    | Commitments and Contingencies
      (continued)
|----- | -----------------------------------------------
|      |                                                
|(iii) | Guarantees                                     

In order to secure the supplies of
certain raw materials and equipment and upon the request of suppliers, the
Company has given guarantees to certain suppliers which are summarized as
follows:

|                                                                                                     |   | September
      30, |  |   | December
      31, | 
|---------------------------------------------------------------------------------------------------- | - | ------------------- |  | - | ------------------ | 
|                                                                                                     |   | 2009                |  |   | 2009               | 
|                                                                                                     |   |                     |  |   |                    | 
|Guaranteed for
      Shenzhen Tongli Hi-tech Co. Ltd. - a non-related party                          | $ | 2,197,384           |  | $ | 2,929,544          | 
|Guaranteed for Hunan Reshine New
      Material Ltd. - a non-related party                           |   | 5,859,690           |  |   | 8,788,633          | 
|Guaranteed for
      Nanjing Special Metal Equipment Co. Ltd. - a
      non-related party            |   | 7,324,612           |  |   | 4,394,316          | 
|Guaranteed for Siping Juyuan
      Hanyang Plate Heat Exchanger Co. Ltd. - a non-related
      party |   | 4,394,767           |  |   | 2,929,544          | 
|Guaranteed for
      Shenzhen B&G Technology Development Co. Ltd. - a
      non-related party        |   | 8,789,535           |  |   | 8,788,633          | 
|                                                                                                     | $ | 28,565,988          |  | $ | 27,830,670         | 

Management has assessed the fair value
of the obligation arising from the above financial guarantees and considered it
immaterial to the condensed interim consolidated financial statements.
Therefore, no obligations in respect of the above guarantees were recognized as
of December 31, 2009.

|(iv) | Outstanding Discounted Bills and Transferred
      Bills
|---- | --------------------------------------------------------

From time to time, the Company factors
bills receivable to banks and endorses the bank acceptance bills received to its
suppliers, vendors or other parties for settlement of its liabilities to these
creditors. At the time of the factoring and transfer, all rights and privileges
of holding the receivables are transferred to the banks and the creditors. The
Company removes the assets from its books and records a corresponding expense
for the amount of the discount. The Company remains contingently liable on the
amount outstanding in the event the bill issuer defaults.

The Company's outstanding discounted
and transferred bills as of September 30, 2009 and December 31, 2009 are
summarized as follows:

|                      |   | September
      30, |  |   | December
      31, | 
|--------------------- | - | ------------------- |  | - | ------------------ | 
|                      |   | 2009                |  |   | 2009               | 
|                      |   |                     |  |   |                    | 
|Commercial bills      | $ | 439,477             |  | $ | -                  | 
|Bank acceptance bills |   | 13,469,235          |  |   | 12,098,748         | 
|                      | $ | 13,908,712          |  | $ | 12,098,748         | 

F-26

---

China BAK Battery, Inc. and subsidiariesNotes to
the condensed interim consolidated financial statementsFor the three
months ended December 31, 2008 and 2009 (continued)(Unaudited)

|12  | Commitments and Contingencies
      (continued)
|--- | -----------------------------------------------
|    |                                                
|(v) | Litigation and claims                          

On September 12, 2006, Hydro-Quebec, a
Canadian company, and the Board of Regents of the University of Texas System
brought a federal patent infringement suit in the United States District Court
for the Northern District of Texas against the Company. The plaintiffs alleged
that by manufacturing rechargeable lithium cells for A123Systems for use in
DeWalt 36-volt cordless power tools manufactured by Black & Decker, the
Company has infringed two U.S. patents owned by and exclusively licensed to the
plaintiffs. The plaintiffs seek injunctive relief and damages in an unspecified
amount. A123Systems, Black & Decker Corporation and Black & Decker
(U.S.) Inc. have also been named as co-defendants in this lawsuit. The court has
not ruled on this lawsuit. The Company understands that this lawsuit is a
countersuit against A123Systems, which filed a claim against Hydro-Quebec in the
United States District Court of Massachusetts in April 2006. In that suit,
A123Systems sought declaratory relief that the two said U.S. patents are invalid
and that A123Systems is not infringing either of these two patents.

Following the filing of the lawsuit,
the United States Patent and Trademark Office reexamined the patents. The
patents were re-issued with substantial modification of the patent claims. The
plaintiffs have advised that, in their view, the lawsuit continues to be viable
against the defendants, including China BAK. The plaintiffs' position has not
been tested. Currently pending is the plaintiffs motion to amend their
complaint to take the USPTO action into account.

If the court were to issue an adverse
decision, the Company could face a substantial monetary damages award. While
such an adverse decision could also prohibit the Company from future production
of rechargeable lithium cells manufactured for A123Systems or may require the
Company to pay royalties to engage in any such production, the Company has no
plans to pursue production of batteries for A123. The court has not issued any
substantive decisions in the litigation and there has been no substantive
pretrial discovery. As a result, at this time, the Company is unable to express
a view on the extent of any possible award of damages that might be rendered in
the litigation.

|13  | Significant Concentrations         
|--- | -----------------------------------
|    |                                    
|(a) | Customers and Credit Concentrations

No customer individually comprised 10%
or more of net revenue for the three months ended December 31, 2008 and 2009.

|(b) | Credit Risk
|--- | -----------

Financial instruments that potentially
subject the Company to a significant concentration of credit risk consist
primarily of cash and cash equivalents and pledged deposits. As of September 30,
2009 and December 31, 2009, substantially all of the Companys cash and cash
equivalents and pledged deposits were held by major financial institutions
located in the PRC, which management believes are of high credit quality.

F-27

---

China BAK Battery, Inc. and subsidiariesNotes to
the condensed interim consolidated financial statementsFor the three
months ended December 31, 2008 and 2009 (continued)(Unaudited)

|14 | Segment Information
|-- | -------------------

The Company currently engages in the
manufacture, commercialization and distribution of a wide variety of standard
and customized lithium ion rechargeable batteries for use in a wide array of
applications. During the three months ended December 31, 2009, the Company
manufactured six types of Li-ion rechargeable batteries: aluminum-case cell,
battery pack, steel-case cell, cylindrical cell, polymer cell and high-power
lithium-phosphate cell. The Company's products are sold to packing plants
operated by third parties primarily for use in mobile phones and other
electronic devices. Net revenues for the three months ended December 31, 2008
and 2009 were as follows:

Net revenues by product:

|                                         |   | Three months ended December 31, | 
|---------------------------------------- | - | ------------------------------- | 
|                                         |   | 2008                            | 
|                                         |   |                                 | 
|                                         |   |                                 | 
|Aluminum-case
      cell                 | $ | 37,281,796                      | 
|Battery pack                             |   | 5,407,878                       | 
|Steel-case cell                          |   | 3,091,956                       | 
|Cylindrical cells                        |   | 18,384,187                      | 
|Lithium polymer
      cells              |   | 3,923,920                       | 
|High-power lithium-phosphate
      cells |   | -                               | 
|                                         | $ | 68,089,737                      | 

Net revenues by geographic area:

|                         |   | Three months ended December 31, | 
|------------------------ | - | ------------------------------- | 
|                         |   | 2008                            | 
|                         |   |                                 | 
|                         |   |                                 | 
|PRC Mainland             | $ | 42,996,294                      | 
|PRC Taiwan               |   | 14,958,344                      | 
|India                    |   | 2,151,286                       | 
|United States of America |   | 22,883                          | 
|Hong Kong, China         |   | 6,997,200                       | 
|Others                   |   | 963,730                         | 
|                         | $ | 68,089,737                      | 

Substantially all of the Companys long-lived assets are
located in the PRC.

|15 | Subsequent Events
|-- | -----------------

The Company has evaluated all
subsequent events through February 9, 2010, the date these financial statements
were issued, and determined that there were no subsequent events or transactions
that required recognition or disclosure in the financial statements.

F-28

---

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

Overview

Although the business climate in China is recovering, the
global economic environment remains weak. During the first quarter of fiscal
year 2010, we generated $50.2 million in net revenues, down 12.7% from $57.6
million in the last quarter of 2009 and down 26.2% from $68.1 million in the
first quarter of 2009. The decrease in net revenues was due to slower sales of
cylindrical battery cells caused by fierce market competition on price.

In the first quarter of fiscal year 2010, we continued to
implement our aggressive cost management program to reduce costs and expenses
and enhance our quality control. As a result, our gross margin rose to 19.0% .
We also have been focusing on developing new revenue sources in our domestic
market and abroad. We won a $27.0 million bid to supply cell phone batteries
directly to ZTE Corporation in the first half of 2010, and BAK Tianjin won its
first major contract for high power batteries for electric buses.

We anticipate operating challenges due to the difficult
business environment. These challenges may cause our revenues and gross margin
to stop increasing. In response, we plan to continue to improve yield rate and
to seek cost-saving methods of reducing material costs with the goal of
maintaining our manufacturing cost advantage.

We have access to $234.7 million in short-term credit
facilities and $46.9 million in long-term credit facilities. As of December 31,
2009, the principal outstanding amounts on these facilities included short-term
bank loans of $125.0 million, long-term bank loans of $17.6 million maturing
within one year and long-term bank loans of $29.3 million maturing after one
year. At the same time our bills payable totaled $48.9 million, leaving $79.7
million of short-term funds available for additional cash needs. In addition, on
July 10, 2008, our $60.0 million shelf registration statement was declared
effective by the SEC, pursuant to which we have raised $36.6 million in gross
proceeds from sales of common stock and issued common stock warrants exercisable
for up to $21.6 million in additional gross proceeds. As $16.0 million of these
warrants were not exercised before their expiration, we may raise up to an
additional $17.8 million in gross proceeds from future equity financings under
this shelf registration statement.

Our Business

We are one of the largest manufacturers of lithium-ion battery
cells in the world, as measured by production output. We produce battery cells
that are the principal component of rechargeable batteries commonly used to
power the following applications:

- cellular phonescustomer segments include OEM customers and replacement
  battery manufacturers;
- notebook computers;
- portable consumer electronics, such as digital cameras, portable media
  players, portable gaming devices, and personal digital assistants, or PDAs;
  and
- other applications, such as cordless power tools, mining lamps, light
  electric vehicles, uninterruptible power supplies, and hybrid electric
  vehicles.

Historically, we have primarily manufactured prismatic
lithium-ion cells for the cellular phone replacement battery market and the OEM
market. We conduct all of our operations in China, in close proximity to Chinas
electronics manufacturing base and its rapidly growing market, and have
distribution offices in Taiwan, India, Germany, and the United States where our
sales representatives market and sell our products and also provide after-sale
service. Our products are packed into batteries by third-party battery pack
manufacturers in accordance with the specifications of manufacturers of portable
electronic applications. At the request of our customers that order prismatic
battery packs, we also engage battery pack manufacturers to assemble our
prismatic cells into batteries for a fee and then sell battery packs to these
customers both for the replacement and OEM markets.

1

---

Financial Statement Presentation

Net revenues. Our net revenues represent the
invoiced value of our products sold, net of value added taxes, or VAT, sales
returns, trade discounts and allowances. We are subject to VAT, which is levied
on most of our products at the rate of 17.0% on the invoiced value of our
products. Provision for sales returns are recorded as a reduction of revenue in
the same period that revenue is recognized. The provision for sales returns
represents our best estimate of the amount of goods that will be returned from
our customers based on historical sales returns data.

Cost of Revenues. Cost of revenues consists
primarily of material costs, employee remuneration for staff engaged in
production activity, equity-based compensation, depreciation and related
expenses that are directly attributable to the production of products. Cost of
revenues also includes write-downs of inventory to lower of cost or market. Cost
of revenues from the sales of battery packs includes the fees we pay to pack
manufacturers for assembling our prismatic cells into battery packs.

Research and Development Expenses. Research and
development expenses are primarily comprised of remuneration for R&D staff,
equity-based compensation, depreciation and maintenance expenses relating to
R&D equipment, and R&D material costs.

Sales and Marketing Expenses. Sales and
marketing expenses consist primarily of remuneration for staff involved in
selling and marketing efforts, including staff engaged in the packaging of goods
for shipment, advertising cost, depreciation, equity-based compensation and
travel and entertainment expenses. We do not pay slotting fees to retail
companies for displaying our products, engage in cooperative advertising
programs, participate in buy-down programs or similar arrangements. No material
estimates are required by management to determine our actual marketing or
advertising costs for any period.

General and Administrative Expenses. General and
administrative expenses consist primarily of employee remuneration, equity-based
compensation, professional fees, insurance, benefits, general office expenses,
depreciation, liquidated damages, and bad debt expenses.

Finance Costs, Net. Finance costs consist
primarily of interest income, interest on bank loans, net of capitalized
interest, and bank charges.

Government Grant Income / (Other Income) / Other
Expenses. Income from government grants consisted primarily of grant
funds awarded to Shenzhen BAK as consideration for its contributions to the
Shenzhen areas economy and as subsidies for land-use rights at BAK Industrial
Park. No present or future obligations arise from the receipt of these funds.

Income Taxes. Under PRC income tax laws and
regulations, before January 1, 2008, a foreign-invested enterprise, or FIE, was
generally subject to an enterprise income tax rate of 33.0%, which included a
30% state income tax and a 3.0% local income tax. However, from at least
calendar year 2002 through calendar year 2007, an enterprise recognized as a
Manufacturing Enterprise Located in Special Economic Zone under PRC tax laws
was entitled to a preferential income tax rate of 15%. Moreover, a
foreign-invested manufacturing enterprise, starting from its first profitable
calendar year after offset of accumulated tax losses, was entitled to a two-year
exemption from enterprise income tax followed by a three-year 50% reduction in
its enterprise income tax rate, also referred to herein as the tax holiday. An
enterprise qualified for such treatment may receive a further tax rate reduction
related to the size of qualified capital contributions received. In addition,
from at least calendar year 2002 through calendar year 2007, an enterprise
qualified as an advanced technology enterprise under PRC tax law was also
entitled to a 50% reduction of income taxes.

On March 16, 2007, the National Peoples Congress of the PRC
determined to adopt the new corporate income tax law, or the New CIT Law. The
New CIT Law unifies the application scope, tax rate, tax deduction and
preferential policy for both domestic enterprises and FIEs. The New CIT Law
became effective on January 1, 2008. According to the New CIT Law, the
applicable income tax rate for Shenzhen BAK, BAK Electronics and BAK Tianjin
will be 25% after their preferential tax holidays and the transition period have
ended. During the transition period, tax rates for subject entities was 18% for the calendar year 2008, and is
expected to be 20%, 22%, and 24% for the calendar years 2009, 2010, and 2011,
respectively, before the application of applicable tax holidays or other tax
preferences.

2

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Shenzhen BAK and BAK Electronics are both registered and
operate in Shenzhen, the PRC, and are each recognized as Manufacturing
Enterprise Located in Special Economic Zone. As a result, they have been
entitled to a preferential enterprise income tax rate of 15%. In accordance with
the relevant income tax laws, the profits of Shenzhen BAK and BAK Electronics
were fully exempted from income tax for two years from the first profitable
calendar year of operations after offset of accumulated taxable losses, followed
by a 50% exemption for the immediate next three calendar years.

The tax holiday of Shenzhen BAK commenced in 2002, the first
calendar year in which Shenzhen BAK had assessable profit, and ended on December
31, 2006. In addition, due to additional capital contributed by BAK
International to Shenzhen BAK in both 2005 and 2006 and Shenzhen BAKs
qualification as an advanced technology enterprise in 2007 and 2008, Shenzhen
BAK was granted a preferential income tax rate of 7.5%, 11.8% and 12.6% for
calendar years 2007, 2008 and 2009, respectively. In accordance with the
transition period of the New CIT Law and before considering the above-mentioned
tax concessions, Shenzhen BAKs income tax rate for calendar years 2010 and 2011
are expected to be 22% and 24%, respectively, and starting in calendar year
2012, it is expected to be subject to an income tax rate of 25%. Therefore,
Shenzhen BAKs income tax rates after consideration of its tax concessions are
expected to be 15% for both calendar years 2010 and 2011and starting in calendar
year 2012, it is expected to be subject to an income tax rate of 25%.

For BAK Electronics, established in August 2005, the same tax
holiday was in effect for calendar years 2006 and 2007, making BAK Electronics
fully exempt from any enterprise income tax. Following the tax holiday, a
three-year 50% reduction in BAK Electronics enterprise income tax rate
commenced. Pursuant to the transition period of the New CIT Law, BAK
Electronics income tax rates for calendar years 2009, 2010 and 2011 were
expected to be 20%, 22% and 24%, respectively, and starting in calendar year
2012 it was expected to be subject to an income tax rate of 25%. Taking the 50%
reduction into account, BAK Electronics income tax rates are now expected to be
10%, 11% and 24% for calendar years 2009, 2010 and 2011, respectively, with no
change in its expected 2012 tax rate of 25%. BAK Electronics did not incur any
enterprise income tax for the calendar year 2009 due to the current tax losses
carried forward from calendar year 2008.

Shenzhen BAK and BAK Electronics received in aggregate a tax
benefit of $9,000 pursuant to their tax holiday and preferential tax rate for
the three months ended December 31, 2009, or $0.0001 per basic share.

BAK Tianjin is currently paying no enterprise income tax due to
cumulative tax losses.

Our Canadian, German, Indian, and Hong Kong subsidiariesBAK
Canada, BAK Europe, BAK India, and BAK Internationalare subject to profits
taxes in their respective countries at rates of 38%, 25%, 30%, and 16.5%
respectively. However, because they do not have any assessable income derived
from or arising in those countries, they have not paid any such tax.

Our effective tax benefit rate was 27.3% for the three months
ended December 31, 2009 and our effective tax benefit rate was 9.2% for the
three months ended December 31, 2008.

Pursuant to the Provisional Regulation of China on Value Added
Tax and its implementing rules, all entities and individuals that are engaged in
the sale of goods, the provision of repairs and replacement services and the
importation of goods in China are generally required to pay VAT at a rate of
17.0% of the gross sales proceeds received, less any deductible VAT already paid
or borne by the taxpayer. Further, when exporting goods, the exporter is
entitled to some or all of the refund of VAT that it has already paid or borne.
Our imported raw materials that are used for manufacturing export products and
are deposited in bonded warehouses are exempt from import VAT.

Results of Operations

Comparison of Three Months Ended December 31, 2009 and
December 31, 2008

The following table sets forth key components of our results of
operations for the periods indicated, both in dollars and as a percentage of our
revenue. All amounts, other than percentages, are in thousands of U.S.
dollars.

3

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|                                          |   | Three
      Months Ended |   |   |        |   |   |          |  
|----------------------------------------- | - | ------------------------ | - | - | ------ | - | - | -------- | -
|                                          |   | December 31,             |   |   |        |   |   |          |  
|                                          |   | 2009                     |   |   | 2008   |   |   | $ Change |  
|Statement of
      operations data:       |   |                          |   |   |        |   |   |          |  
|Net revenues                              | $ | 50,228                   |   | $ | 68,090 |   | $ | (17,862  | )
|Cost of revenues                          |   | 40,668                   |   |   | 57,497 |   |   | (16,829  | )
|Gross profit                              |   | 9,560                    |   |   | 10,593 |   |   | (1,033   | )
|Operating
      expenses:                 |   |                          |   |   |        |   |   |          |  
|Research and
      development expenses   |   | 1,768                    |   |   | 1,418  |   |   | 350      |  
|Sales and marketing expenses              |   | 2,028                    |   |   | 1,600  |   |   | 428      |  
|General and
      administrative expenses |   | 8,637                    |   |   | 6,759  |   |   | 1,878    |  
|Total operating
      expenses            |   | 12,433                   |   |   | 9,777  |   |   | 2,656    |  
|Operating (loss) / income                 |   | (2,873                   | ) |   | 816    |   |   | (3,689   | )
|Finance costs,
      net                  |   | 2,153                    |   |   | 2,839  |   |   | (686     | )
|Government grant income                   |   | 355                      |   |   | 102    |   |   | 253      |  
|Other income                              |   | 7                        |   |   | 6      |   |   | 1        |  
|Income tax benefit                        |   | 1,272                    |   |   | 176    |   |   | 1,096    |  
|Net loss                                  | $ | (3,392                   | ) | $ | (1,739 | ) | $ | (1,653   | )

Net Revenues. Net revenues decreased to $50.2
million for the three months ended December 31, 2009 as compared to $68.1
million for the same period of the prior year, a decrease of $17.9 million or
26.2% . The following sets forth the breakdown of our net revenues by battery
cell type for the periods indicated.

|                                         |   | Three
      Months Ended | 
|---------------------------------------- | - | ------------------------ | 
|                                         |   | December 31,             | 
|                                         |   | 2009                     | 
|                                         |   | (in
      thousands)     | 
|Prismatic cells                          |   |                          | 
|Aluminum-case cells                      | $ | 27,863                   | 
|Battery packs                            |   | 10,920                   | 
|Steel-case cells                         |   | -                        | 
|Cylindrical
      cells                  |   | 8,114                    | 
|Lithium polymer cells                    |   | 3,168                    | 
|High-power
      lithium-phosphate cells |   | 163                      | 
|Total                                    | $ | 50,228                   | 

- Net revenues from sales of aluminum-case cells decreased to $27.9 million
  in the three months ended December 31, 2009, from $37.3 million in the same
  period in fiscal year 2008, a decrease of $9.5 million or 25.3%, resulting
  from a decrease in our average selling price of 12.6% and sales volume of
  13.8% driven by decreased sales to the OEM market in the PRC.

4

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- Net revenues from sales of battery packs increased to $10.9 million in the
  three months ended December 31, 2009, from $5.4 million in the same period in
  fiscal year 2008, an increase of $5.6 million or 101.9%. This resulted from an
  increase in sales volume of 129.3% due to increased export sales, offset by a
  10.3% decrease in average selling price.
- We sold $3.1 million in steel-case cells for the three months ended
  December 31, 2008 as compared to no sales for the three months ended December
  31, 2009. This change was primarily attributable to our long- term strategic
  reduction and suspension of steel-case cell production in January 2009 which
  was designed to increase our production capacity of aluminum-case cells for
  sale to the OEM market and to take advantage of the greater sales prospects
  and lower costs of aluminum-case cells.
- Net revenues from sales of cylindrical cells decreased to $8.1 million in
  the three months ended December 31, 2009, from $18.4 million in the same
  period in fiscal year 2008, a decrease of $10.3 million or 55.9%, due to a
  decrease in our average selling prices of 25.5% driven by fierce market
  competition on price and sales volume of 40.7% driven by decreased sales to
  laptop manufacturers.
- We sold $3.2 million in lithium polymer cells in the three months ended
  December 31, 2009, compared to $3.9 million in lithium polymer cells in the
  same period in fiscal year 2008, a decrease of $852,000 or 21.2%, resulting
  from decreases of 10.1% in our average selling price and 12.4% in sales
  volume.
- We also sold approximately $163,000 in high-power lithium-phosphate cells
  in the three months ended December 31, 2009, as compared to no sales of this
  battery cell type in the same period of fiscal year 2008, due to our sale of
  sample products used in electric bicycles, power tools, uninterruptible power
  supplies, and other applications from our Tianjin facility.

Cost of Revenues. Cost of revenues decreased to
$40.7 million for the three months ended December 31, 2009, as compared to $57.5
million for the same period in fiscal year 2008, a decrease of $16.8 million or
29.3% . The decrease in cost of revenues correlates to a decrease in sales
volume over the three months ended December 31, 2009.

As a result, gross profit for the three months ended December
31, 2009 was $9.6 million or 19.0% of net revenues as compared to gross profit
of $10.6 million or 15.6% of net revenues for the same period in fiscal year
2008. Our increase in gross profit as a percentage of net revenues was primarily
due to the greater proportion of sales of battery packs with higher gross margin
during the three months ended December 31, 2009.

Research and Development Costs. Research and
development costs increased to $1.8 million for the three months ended December
31, 2009, as compared to $1.4 million for the same period in fiscal year 2008,
an increase of $350,000 or 24.7%, due to salaries related to R&D staff
increased by $254,000 primarily due to hiring more research experts during the
three months ended December 31, 2009.

Sales and Marketing Expenses. Sales and marketing
expenses increased to $2.0 million for the three months ended December 31, 2009,
as compared to $1.6 million for the same period in fiscal year 2008, an increase
of $428,000 or 26.8% . Equity-based compensation included in sales and marketing
expenses increased by $140,000 due to compensation charges applied to the grant
of stock options to employees in our sales department on June 22, 2009. As a
percentage of revenues, sales and marketing expenses have increased to 4.0% for
the three months ended December 31, 2009 from 2.3% for the same period in 2008,
due to the significant decrease in revenues from sales.

General and Administrative Expenses. General and
administrative expenses increased to $8.6 million, or 17.2% of revenues, for the
three months ended December 31, 2009, as compared to $6.8 million or 9.9% of
revenues, for the same period in fiscal year 2008, an increase of $1.9 million
or 27.8% . Bad debt expenses increased by $2.4 million due to the provision
charged after we had assessed the collection of accounts receivables from
customers during the three months ended December 31, 2009.

In addition, we became liable for liquidated damages to certain
shareholders whose shares were included in a resale registration statement on
Form S-3 that we filed pursuant to a registration rights agreement that we
entered into with such shareholders in relation to a private placement that we
closed in November 2007. The SEC did not declare this registration statement effective by a certain date, and under
the November 2007 registration rights agreement, the included selling
shareholders became eligible for liquidated damages of approximately $561,000 as
of December 31, 2008. Please see Part I, Item 3. Legal Proceedings  Liquidated
Damages Pursuant to November 2007 Registration Rights Agreement for a further
description of these liquidated damages. We therefore recognized in general and
administrative expenses an amount of approximately $561,000 for the liquidated
damages for the three months ended December 31, 2008.

5

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On August 26, 2008, we conducted a registered direct offering
of 4,102,564 shares of common stock, at an offering price of $3.90 per share, in
which the investors also received warrants to purchase up to 4,102,564 shares of
common stock at an exercise price of $3.90 per share. With one exception, all of
the investors that participated in our November 2007 private placement, or
affiliates of them, participated in our August 2008 registered direct offering.
We reduced each of these investors (or each such investors participating
affiliates) purchase price by an amount that was at least equal to the amount
that we determined that we were liable for as liquidated damages to such
investor (or its participating affiliate). As of December 31, 2009, the
remaining investor had waived any and all rights relating to liquidated damages
pursuant to the November 2007 registration rights agreement. As of December 31,
2009, no liquidated damages were recognized as general and administrative
expenses. Pursuant to the settlements described above, we do not believe that we
were liable for any amounts under this agreement.

As described under Part I, Item 3. Legal Proceedings  Make
Good Settlements we have entered into settlement agreements pursuant to which
we have issued shares to certain shareholders that purchased shares in a January
20, 2005 private placement transaction in settlement of claims related to the
private placement, including claims for liquidated damages. Pursuant to the
settlement agreements, the claims of each shareholder are released as of the
applicable release date which occurred on June 26, 2008, the date the resale
registration statement we filed relating to resales by the settling shareholders
of the shares issued pursuant to the settlement agreement was declared effective
by the SEC. We expect such settlements may result in gains in one or more future
periods in accordance with their waivers of claims to liquidated damages.

Operating Income / (Loss). As a result of the
above, operating loss totaled $2.9 million for the three months ended December
31, 2009, as compared to operating income of $816,000 for the same period of the
prior year, a decrease of $3.7 million or 452.1% .

Finance Costs, Net. Finance costs, net, decreased
to $2.2 million for the three months ended December 31, 2009, as compared to
$2.8 million for the same period of the prior fiscal year, a decrease of
$686,000 or 24.2% . We have $125.0 million in short-term bank loans maturing in
less than one year, $17.6 million in long-term bank loans maturing within one
year, and $29.3 million in other long-term bank loans maturing in more than one
year, outstanding as of December 31, 2009, as compared to $112.1 million in
short-term bank loans maturing in less than one year, $13.2 million in long-term
bank loans maturing within one year, and $46.9 million in other long-term bank
loans maturing in more than one year, outstanding as of December 31, 2008. The
decrease in net finance costs is mainly attributable to a significant decrease
in the average bank loan interest rates on both our short-term and long-term
bank loans.

Government Grant Income / Other Income / (Other
Expenses).We had deferred revenue from government grant income of
$355,000and other income of $7,000for the three-month period
ended December 31, 2009, as compared to government grant income of $102,000 and
other income of $6,000 for the same period of the prior fiscal year. The
government grants income for the three months ended December 31, 2009 mainly
consisted of subsidies to pay for the land use rights to our corporate campus at
BAK Industrial Park and government grant funds to subsidize a new
high-technology project in the calendar year 2009. Government grants income for
the three months ended December 31, 2008 mainly consisted of receipt of grant
funds to subsidize the interest expenses incurred by the Company in prior years
for research and development activities, to reward Shenzhen BAK for its
contributions to the Shenzhen economy, and to subsidize the payment for land use
rights of BAK Industrial Park. No present or future obligation will arise from
the receipt of such income.

Income Tax Benefits. Income tax benefits were
$1.3 million for the three months ended December 31, 2009, as compared to income
tax benefits of $176,000 for the same period of 2008. The change was the result
of an increase in our deferred tax provision during the quarter ended December
31, 2009.

6

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Net Loss. As a result of the foregoing, we had a
net loss of $3.4 million for the three months ended December 31, 2009 compared
to $1.7 million for the same period of 2008.

Liquidity and Capital Resources

We have historically financed our liquidity requirements from a
variety of sources, including short-term bank loans, long-term bank loans and
bills payable under bank credit agreements, sale of bills receivable and
issuance of capital stock. As of December 31, 2009, we had cash and cash
equivalents of $18.3 million, as compared to $30.7 million as of September 30,
2009. In addition, we had pledged deposits amounting to $19.0 million and $31.1
million as of December 31, 2009 and September 30, 2009, respectively. Typically,
our banks require their borrowers to maintain deposits of approximately 10% to
100% of the outstanding loan balances and bills payable. The individual bank
loans have maturities ranging from six to twelve months which coincides with the
periods the cash remains pledged to the banks.

We had access to $234.7 million in short-term credit facilities
and $46.9 million in long-term credit facilities as of December 31, 2009. As of
December 31, 2009, the principal outstanding amounts included short-term bank
loans of $125.0 million, long-term bank loans of $17.6 million maturing within
one year, and long-term bank loans of $29.3 million maturing in over one year,
and bills payable of $48.9 million, leaving $79.7 million of short-term funds
available for additional cash needs. In addition, on July 10, 2008, our $60.0
million shelf registration statement was declared effective by the SEC, pursuant
to which we have raised $36.6 million in gross revenue from common stock
purchases and issued common stock warrants exercisable for up to $21.6 million
in additional gross proceeds. As $16.0 million of these warrants were not
exercised before their expiration, we may raise up to an additional $17.8
million in gross proceeds from future equity financings under this shelf
registration statement.

The following table sets forth a summary of our cash flows for
the periods indicated:

|                                                                   |   | Three months Ended December 31, |  
|------------------------------------------------------------------ | - | ------------------------------- | -
|                                                                   |   | 2009                            |  
|                                                                   |   | (in thousands)                  |  
|Net cash (used in) / provided by operating
      activities        | $ | (17,373                         | )
|Net cash used in investing activities                              |   | (3,906                          | )
|Net cash provided by financing activities                          |   | 8,911                           |  
|Effect of exchange rate changes on cash and cash
      equivalents |   | (7                              | )
|Net (decrease) / increase in cash and cash
      equivalents       |   | (12,375                         | )
|Cash and cash equivalents at the beginning of period               |   | 30,678                          |  
|Cash and cash equivalents at the end of
      period               |   | 18,303                          |  

Operating Activities

Net cash used in operating activities was $17.4 millionin the three months ended December 31, 2009, compared to $21.1 million of
net cash provided by operating activities in the same period in fiscal year
2008. The decrease of $38.6 million in operating activities was mainly
attributable to an increase in prepayments to our lithium cobalt dioxide
suppliers. We purchased more lithium cobalt dioxide, the main raw material in
our products, in anticipation of the higher future cost of lithium cobalt
dioxide. We also increased our inventory of aluminum-case cells and cylindrical
cells as of December 31, 2009 in the expectation of increased sales in the
coming months.

Investing Activities

Net cash used in investing activities decreased from $20.1
million in the three months ended December 31, 2008, to $3.9 million in the same
period in fiscal year 2009. The net cash used in investing activities during the
period ended December 31, 2009 was mainly used for procurement of machinery and
equipment for cylindrical cell line and prismatic cell production line.

Financing Activities

7

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Net cash provided by financing activities was $8.9 millionin the three months ended December 31, 2009, compared to net cash provided
by financing activities of $530,000 in the same period in 2008. This was mainly
attributable to (i) net proceeds of $19.4 million from a private placement of
our common stock completed in October 2009, (ii) a $227,000 increase in net
proceeds from our issuance of capital stock pursuant to exercises of certain
stock options in the three months ended December 31, 2009, (iii) a $12.1 million
decrease in cash deposits at banks as collateral in the three months ended
December 31, 2009, and (iv) decreased borrowings, net of repayments, of $22.8
million in the three months ended December 31, 2009.

As of December 31, 2009, the principal amounts outstanding
under our credit facilities and lines of credit were as follows:

|                                                        |   |                |  |   | Amount Borrowed      | 
|------------------------------------------------------- | - | -------------- |  | - | -------------------- | 
|                                                        |   | Maximum Amount |  |   | (Includes bank loans | 
|                                                        |   | Available      |  |   | and bills payable)   | 
|                                                        |   | (in thousands) | 
|Short-term credit facilities:                           |   |                |  |   |                      | 
|Agricultural Bank of China                              | $ | 58,591         |  | $ | 58,591               | 
|Shenzhen Development Bank                               |   | 29,295         |  |   | 2,930                | 
|China CITIC Bank                                        |   | 21,972         |  |   | 18,502               | 
|Bank of China                                           |   | 65,915         |  |   | 60,383               | 
|China Everbright Bank                                   |   | 14,648         |  |   | 4,351                | 
|Bank of Communications                                  |   | 29,295         |  |   | 7,324                | 
|Tianjin Branch, Bank of Dalian                          |   | 5,859          |  |   | 2,929                | 
|Industrial Bank                                         |   | 9,155          |  |   | -                    | 
|                                                        |   |                |  |   |                      | 
|SubtotalShort-term credit facilities                   | $ | 234,730        |  | $ | 155,010              | 
|                                                        |   |                |  |   |                      | 
|Long-term credit facilities:                            |   |                |  |   |                      | 
|Agricultural Bank of China                              |   | 21,972         |  |   | 21,972               | 
|China Development Bank                                  |   | 5,859          |  |   | 5,859                | 
|Agricultural Bank of China, Tianjin Jinxin
      Branch |   | 19,042         |  |   | 19,042               | 
|                                                        |   |                |  |   |                      | 
|SubtotalLong-term credit facilities                    | $ | 46,873         |  | $ | 46,873               | 
|                                                        |   |                |  |   |                      | 
|Lines of Credit:                                        |   |                |  |   |                      | 
|Agricultural Bank of China                              |   |                |  |   | 4,207                | 
|Ningbo Bank                                             |   |                |  |   | 3,617                | 
|Bank of China                                           |   |                |  |   | 8,049                | 
|Shanghai Pudong Development Bank                        |   |                |  |   | 3,026                | 
|                                                        |   |                |  |   |                      | 
|SubtotalLines of credit                                |   |                |  | $ | 18,899               | 
|                                                        |   |                |  |   |                      | 
|                                                        |   |                |  |   |                      | 
|Total Principal Outstanding                             | $ | 281,603        |  | $ | 220,782              | 

The above principal outstanding amounts under credit facilities
and lines of credit included short-term bank loans of $125.0 million, long-term
bank loans of $17.6 million maturing within one year and long-term bank loans of
$29.3million maturing in over one year, and bills payable of $48.9
million.

For the purpose of presentation, the effect of increases in
bills payable balances is included in operating activities in the statements of
cash flows.

During the three months ended December 31, 2009, we entered
into four new comprehensive credit facility agreements for a maximum loan amount
of $102.9 million, repaid two loans totaling $14.6 million, and entered into
seven new short-term bank loan agreements totaling $40.9 million. The four new
credit facilities are with Shenzhen

8

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Hi-Tech District Branch, Industrial Bank (Industrial Bank),
Shenzhen Development Bank, Longgang Branch (Shenzhen Development Bank),
Agricultural Bank  Shenzhen Branch (Agricultural Bank) and Tianjin Branch,
Bank of Dalian (Bank of Dalian). The seven new short-term loan agreements
include one loan agreement with Shenzhen Development Bank, totaling $2.9
million, one loan agreement with Bank of Dalian, totaling $2.9 million, one loan
agreement with Shanghai Pudong Development Bank, totaling $1.5 million, one loan
agreement with Bank of China, totaling $0.6 million, and three loan agreements
with Agricultural Bank of China, Shenzhen Eastern Branch (Agricultural Bank 
Shenzhen Branch), totaling $33.0 million. The material financing terms of these
loans are described below.

On April 26, 2009, we entered into a comprehensive credit
facility agreement with Bank of Communications to provide a maximum loan amount
of RMB 200 million (approximately $29.3 million). This credit facility agreement
is guaranteed by BAK Tianjin and Mr. Xiangqian Li. Loans may be drawn at any
time from March 25, 2009 to March 25, 2010. As of December 31, 2009, we had
borrowed approximately $7.3millionunder a loan agreement dated
June 23, 2009, bearing fixed interest of 4.779%, and which is repayable on June
23, 2010.

On September 28, 2009, we entered into a guaranty contract with
Shanghai Pudong Development Bank to provide guaranty for the loans drawn from
September 28, 2009 to August 31, 2010, and the maximum amount for all loans will
be less than RMB 30 million (approximately $4.4 million). As of December 31,
2009, we had borrowed approximately $1.5 million under a loan agreement dated
October 9, 2009 bearing fixed interest of 5.31%, which is repayable on October
8, 2010, and $1.5 million of notes payable outside any credit facility.

On November 27, 2009, we entered into a comprehensive credit
facility agreement with Bank of Dalian for a maximum loan amount of RMB 40
million (approximately $5.9 million). If we increase paid-up capital by $20
million, then an additional RMB 10 million of credit facilities would be
available. If we pay up 50% of our total registered capital, an another
additional RMB 10 million of credit facilities would be available. If we pay up
all our registered capital, the total amount of available credit under this
facility would be RMB 80 million (approximately $11.8 million). This credit
facility agreement is guaranteed by Shenzhen BAK and Mr. Xiangqian Li. Loans may
be drawn at any time from November 27, 2009 to November 26, 2010. As of December
31, 2009, we had borrowed approximately $2.9million under a loan
agreement dated November 27, 2009 bearing annual interest of 5.31%, adjusted
monthly, and which is repayable on November 26, 2010 under this credit facility
agreement.

On December 25, 2009, we entered into a comprehensive credit
facility agreement with Industrial Bank for a maximum loan amount of RMB 62.5
million (approximately $9.2 million). This credit facility agreement is
guaranteed by BAK International, BAK Tianjin and Mr. Xiangqian Li. Loans may be
drawn at any time from December 31, 2009 to December 31, 2010. As of December
31, 2009, we had no borrowings under this credit facility agreement.

As of December 31, 2009, we had also borrowed $3.6 million of
notes payable outside any credit facility.

On January 21, 2009, we entered into a comprehensive credit
facility agreement with Shenzhen Nanshan Branch, China Everbright Bank (China
Everbright Bank) to provide a maximum loan amount of RMB 100 million
(approximately $14.6 million). Loans may be drawn at any time from March 30,
2009 to March 30, 2010. As of December 31, 2009, we had borrowed $4.4 million of
notes payable under this facility.

On December 31, 2009, we renewed our comprehensive credit
facility agreement with Shenzhen Development Bank to provide a maximum loan
amount of RMB 200 million (approximately $29.3 million). Loans may be drawn at
any time over the one-year period beginning December 31, 2009 and will be due
based on each loan agreement. This credit facility agreement is guaranteed by
BAK International, BAK Tianjin and Mr. Xiangqian Li, and is also secured by
$22.0 million of inventory and $5.0 million of machinery and equipment. As of
December 31, 2009, we had borrowed approximately $2.9 million under a loan
agreement dated December 31, 2009 under this credit facility agreement, bearing
a floating interest rate equal to 95% of the PBOCs benchmark rate on the date
of the loan agreement and adjusted quarterly, and which was repayable on
December 31, 2010.

9

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On November 26, 2009, we renewed our comprehensive credit
facility agreement with Agricultural Bank  Shenzhen Branch to provide a maximum
loan amount of RMB 550 million (approximately $80.6 million), including RMB 400
million (approximately $58.6 million) of one-year term credit facilities and RMB
150 million (approximately $22.0 million) of five-year term credit facilities.
This comprehensive credit facility agreement renewed a predecessor credit facility agreement between
Shenzhen BAK and Agricultural Bank  Shenzhen Branch dated November 27, 2008 and
governs all loans that were subject to the predecessor agreement at the time of
the renewal. New loans may be drawn under this credit facility from November 26,
2009 through November 22, 2010, with the term of the loan established at the
time each new loan is drawn, except as to funds borrowed under a loan agreement
between Shenzhen BAK and Agricultural Bank  Shenzhen Branch dated November 23,
2006 and effective December 18, 2006, or under the 2006 Loan Agreement, which
may be drawn at any time within five years of December 18, 2006, and which will
mature five years after such funds are drawn. Pursuant to the comprehensive
credit facility, Shenzhen BAK must obtain prior approval from Agricultural Bank
 Shenzhen Branch to renew long-term loans that are subject to this credit
facility. In addition, Shenzhen BAK undertook to ensure that the percentage of
certain business conducted with Agricultural Bank  Shenzhen Branch relative to
such business it conducts with all financial institutions combined be at least
equal to the percentage of its indebtedness to Agricultural Bank  Shenzhen
Branch relative to its indebtedness to all financial institutions combined (the
Percentages Undertaking). The business referred to in the preceding sentence
refers to the volume of transactional payments that are drawn from Shenzhen
BAKs accounts with Agricultural Bank  Shenzhen Branch or applicable financial
institutions and the amount of foreign currencies deposited with Agricultural
Bank  Shenzhen Branch or applicable financial institutions. Shenzhen BAK also
undertook not to issue any dividends without the written consent of Agricultural
Bank  Shenzhen Branch prior to the expiration of all loans under this credit
facility (this undertaking and the Percentages Undertaking are collectively
referred to as the Undertakings). The obligations of Shenzhen BAK under this
comprehensive credit facility are guaranteed by Mr. Xiangqian Li, BAK Tianjin,
and BAK International. Shenzhen BAKs obligations under this credit facility
agreement are also guaranteed by Shenzhen BAKs pledge of the property ownership
and land use rights certificates relating to its manufacturing and other
facilities in Shenzhen, PRC, known as BAK Industrial Park. In the event that
Shenzhen BAK breaches any of the Undertakings or any guarantying party breaches
any of its guaranty obligations, Agricultural Bank  Shenzhen Branch may, in
addition to exercising any other applicable remedies under the applicable
agreements, accelerate repayment of all loan amounts governed by this credit
facility.

As of December 31, 2009, we had six outstanding short-term
loans under the comprehensive credit facility with Agricultural Bank  Shenzhen
Branch totaling approximately $58.6 million, carrying annual interest at 4.86%,
4.617% and 5.31%, adjusted quarterly. The first loan, of approximately $11.0
million, currently carries annual interest of 5.31% and is due on January 5,
2010. The second loan, of approximately $7.3 million, currently carries annual
interest at 4.617% and is due on January 21, 2010. The third loan, of
approximately $7.3 million, currently carries annual interest at 4.617% and is
due on January 22, 2010. The fourth loan, of approximately $13.2 million,
currently carries annual interest at 4.86% and is due on May 17, 2010. The fifth
loan, of approximately $8.8 million, currently carries annual interest at 4.86%
and is due on May 19, 2010. The sixth loan, of approximately $11.0 million,
currently carries annual interest at 4.86% and is due on May 21, 2010. Each of
the loan agreements specifically provides for acceleration of repayment of the
loan under certain conditions, as well as other penalties and remedies. We also
had borrowed three short-term loans separate from our credit agreement with
Agricultural Bank  Shenzhen Bank totaling $4.0 million, carrying annual
interest at 0.29643% and 0.34786% . The first loan, of approximately $0.32
million, carries annual interest of 0.29643% and is repayable on May 26, 2010.
The second loan, of approximately $0.68 million, carries annual interest of
0.41286% and is repayable on June 21, 2010. The third loan, of approximately
$3.0 million, carries annual interest of 0.34786% and is repayable on June 25,
2010.

As of December 31, 2009, we also had three five-year term loans
totaling approximately $22.0 million under the Agricultural Bank  Shenzhen
Branch comprehensive credit facility carrying interest at 90% of the benchmark
rate of the PBOC for three-year to five-year long-term loans. The first loan, of
approximately $5.9 million, currently carries annual interest of 5.184% and is
due on January 25, 2012. The second loan, of approximately $11.7 million,
currently carries annual interest of 5.184% and is due in three installments of
approximately $2.9 million on January 25, 2010, approximately $7.3 million on
January 25, 2011, and approximately $1.5 million on January 25, 2012,
respectively. The third loan, originally totaling approximately $8.8 million,
currently carries annual interest of 5.76% and was structured to be repaid in
two installments. The first installment of approximately $4.4 million was due on
January 25, 2009, and was repaid on January 20, 2009. The second installment of
approximately $4.4 million is due on January 25, 2010. These five-year term
loans are specifically: (i) guaranteed by Mr. Xiangqian Li; (ii) secured by
Shenzhen BAKs machinery and equipment with carrying values of approximately
$34.8 million as of September 30, 2009; and (iii) secured by the property
ownership and land use rights certificates with an aggregate net book value of
$104.5 million as of September 30, 2009 in relation to the land on which
Shenzhen BAKs corporate campus had been constructed and any machinery and
equipment purchased and used at the campus subsequent to such construction.

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On May 26, 2008, we entered into a four-year, long-term loan
agreement of RMB 160 million (approximately $23.4 million) with Agricultural
Bank of China, Tianjin Branch (Agricultural Bank  Tianjin Branch). This loan
agreement is secured by the machinery and equipment purchased for the automated
high-power lithium-phosphate cells production line at our Tianjin facility. As
of December 31, 2009, we had borrowed $19.0 million under this loan agreement,
payable in four installments: (i) RMB 30 million (approximately $4.4 million) on
December 26, 2009, which has been repaid; (ii) RMB 30 million (approximately
$4.4 million) on December 26, 2010; (iii) RMB 50 million (approximately $7.3
million) on December 26, 2011; and (iv) RMB 50 million (approximately $7.3
million) on May 26, 2012. The first installment was repaid by the deadline.

On February 13, 2009, we renewed a credit facility with China
CITIC Bank. This credit facility was guaranteed by BAK International and Mr.
Xiangqian Li. We were permitted to borrow up to RMB 150 million ($22.0 million)
under this credit facility, which matures on February 12, 2010. As of December
31, 2009, we had borrowed $14.6 million under two loans at the fixed annual
interest rate of 5.31% and $3.9 million of notes payable under this credit
facility totaling approximately $18.5 million. The first loan, of approximately
$7.3 million is repayable on February 25, 2010. The second loan, of
approximately $7.3 million, carried annual interest of 5.31% prior to May 21,
2009. As of May 21, 2009, pursuant to a supplement agreement modifying the
interest rate, this loan carries an annual interest rate of 4.779% . It is
repayable on March 6, 2010.

On March 4, 2009, we renewed our credit facility agreement with
Bank of China to provide a maximum loan amount of RMB 450 million (approximately
$65.9 million). This credit facility was guaranteed by BAK International and Mr.
Xiangqian Li, and is also secured by machinery and equipment with carrying
values of approximately $28.2 million as of December 31, 2009. As of December
31, 2009, we had borrowed $29.3 million under three loans carrying annual
interest at 5.31% and 4.779%, and $31.1 million of notes payable under this
credit facility agreement. The first loan, of approximately $14.6 million,
carries annual interest of 5.31% and is repayable on March 13, 2010. The second
loan, of approximately $7.3 million, carries annual interest of 5.31% and
matures on March 30, 2010. The third loan, of approximately $7.3 million,
carries annual interest of 4.779% and is repayable on June 2, 2010. We had also
borrowed $3.8 million of short-term bank loans and $4.2 million of notes payable
separate from the credit facility.

On December 26, 2006, we entered into a four-year long-term
loan agreement of RMB 100 million (approximately $14.6 million) with Shenzhen
Branch, China Development Bank, or China Development Bank. The long-term loan is
or was repayable in three installments as follows: RMB 30 million (approximately
$4.4 million) on November 20, 2008, which has been repaid; RMB 30 million
(approximately $4.4 million) on November 20, 2009, which has been repaid; and
RMB 40 million (approximately $5.8 million) on December 26, 2010. The long-term
loan carries an annual interest rate of 5.76% . The long-term loan is secured by
Shenzhen BAKs pledge of its new Research and Development Test Centre, which is
to be constructed in Shenzhen, China. We have committed to pledge the property
ownership and land use rights certificates relating to this property as security
after the requisite government approval is obtained, pursuant to the loan
agreement. According to the property ownership and land use rights certificate
that we obtained in relation to this facility, such land may not be pledged
without the approval of the relevant government office. As of December 31, 2009,
we had not obtained the requisite approval, and were in the process of
negotiating with the relevant government bureau for such approval. For further
discussion regarding the status of property ownership rights relating to this
facility, please see Managements Discussion and Analysis of Financial
Condition and Results of Operations  Capital Expenditures. The obligations of
Shenzhen BAK under this loan agreement are guaranteed by Mr. Xiangqian Li. We
had borrowed $5.9 million under this loan agreement as of December 31, 2009.

We had negative working capital of $37.4 million as of December
31, 2009, as compared to negative working capital of $46.3 million as of
September 30, 2009. This increase was primarily attributable to a decrease in
short-term bank loans. We had short-term bank loans maturing in less than one
year of $125.0 million and long-term bank loans maturing within one year of
$17.6 million as of December 31, 2009, or a total of $142.6 million of loans
maturing within one year, as compared to a total of $125.3 millionof
such loans as of December 31, 2008, an increase of $17.3 million. We had
long-term bank loans maturing in over one year of $29.3 million as of December
31, 2009, as compared to $39.6 million of such loans as of September 30, 2009, a
decrease of $10.3 million.

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We believe that our current cash and cash equivalents and
anticipated cash flow from operations will be sufficient to meet our anticipated
cash needs, including our cash needs for working capital and capital
expenditures for at least the next 12 months. We may, however, require
additional cash due to changing business conditions or other future
developments, including any investments or acquisitions we may decide to pursue.
If our existing cash and amount available under existing credit facilities is
insufficient to meet our requirements, we may seek to sell additional equity
securities, debt securities or borrow from lending institutions. We can make no
assurances that financing will be available in the amounts we need or on terms
acceptable to us, if at all. The sale of additional equity securities, including
convertible debt securities, would dilute the interests of our current
shareholders. The incurrence of debt would divert cash for working capital and
capital expenditures to service debt obligations and could result in operating
and financial covenants that restrict our operations and our ability to pay
dividends to our shareholders. If we are unable to obtain additional equity or
debt financing as required, our business operations and prospects may
suffer.

Capital Expenditures

We made capital expenditures of $3.9 million and 20.1 million
in the three months ended December 31, 2009 and 2008, respectively. Our capital
expenditures were used primarily to purchase plant and equipment to expand our
production capacity.

The following table sets forth the breakdown of our capital
expenditures by use for the periods indicated.

|                           |   | Three months ended December 31, | 
|-------------------------- | - | ------------------------------- | 
|                           |   | 2009                            | 
|                           |   | (in thousands)                  | 
|Construction costs         | $ | 192                             | 
|Lease payments             |   | -                               | 
|Purchase of equipment      |   | 3,714                           | 
|                           |   |                                 | 
|Total capital expenditures | $ | 3,906                           | 

We estimate that our total capital expenditures in fiscal year
2010 will reach approximately $40.0 million, to purchase manufacturing equipment
for the expansion of our production lines and for the construction of our
Research and Development Test Centre at our Shenzhen facility.

We have completed the construction and put into use facilities
measuring 218,178 square meters comprised of manufacturing facilities,
warehousing and packaging facilities, dormitory space, dining halls and
administrative offices at the BAK Industrial Park in Shenzhen. Of that space,
approximately 81,411 square meters are manufacturing facilities. We have also
completed the construction and put into use facilities measuring 65,127 square
meters comprised of manufacturing facilities, dormitory space, dining halls and
other facilities in Tianjin. Of that space, approximately 44,129 square meters
are manufacturing facilities. The primary reasons for our continuing investments
in the facilities in Tianjin are to realize the benefits of our prior investment
in these facilities, to position the Company to capitalize on our knowledge of
and experience with established markets for lithium-phosphate technology, such
as electric bicycles, cordless power tools, and mining lamps, and to penetrate
emerging consuming markets for this technology, such as light electric vehicles
and hybrid electric vehicles. The first trial shipment of its lithium-phosphate
cells was used in electric bicycles, cordless power tools, uninterruptible power
supplies and mining lamps. We have received positive market feedback to these
samples. We expect interest in light electric vehicles and hybrid electric
vehicles to increase demand for our rechargeable lithium-based batteries
substantially. We have been engaged in the research and development of
lithium-phosphate cells specifically for use in light electric vehicles and
hybrid electric vehicles. As indicated above, our Tianjin facility is the nexus
for all such research and development.

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According to the relevant PRC laws and regulations, a land use
right certificate, along with government approvals for land planning, project
planning, and construction must be obtained before the construction of any
building is commenced. An ownership certificate will be granted by the
government upon application under the condition that the aforementioned
certificate and government approvals are obtained. We recently obtained the land
use right to the tract of property on which we have constructed and on which we
plan further construction of our manufacturing facilities and other related
facilities in Shenzhen. While we have been constructing and have completed a
substantial part of the construction of our facilities with the approval of the
local government of Kuichong Township of Longgang District of Shenzhen, we
understand it did not have the authority to grant us the land use rights
certificate. However, the Company obtained approval for project planning and
construction from the government of Shenzhen on June 20, 2007. Under an
agreement with the government of Shenzhen for the acquisition of the land use
rights to BAK Industrial Park dated June 29, 2007, effective June 2008, the
government agreed to provide us with the land use rights certificate relating to
BAK Industrial Park on the condition that the Company would pay it an additional
$11,819,841. According to a notice received from the government of Shenzhen on
June 6, 2008, the Company obtained government grants of $7,889,991 to subsidize
this additional payment. As of September 30, 2008, the Company had fully paid
the remaining cost of $3,929,850 and had obtained the land use rights
certificate for BAK Industrial Park.

We have insurance for our manufacturing facilities for Shenzhen
BAK Battery Co., Ltd located in BAK Industrial Park and our manufacturing
facilities at our Tianjin facility. However, we are not able to insure our new
Research and Development Test Centre to be constructed in Shenzhen, China, until
we receive the required certificate of property ownership. Upon receipt of the
certificate of property ownership, we intend to procure such insurance. The
applications for the related certificates of property ownership rights are in
process with respect to our facilities at BAK Industrial Park and Tianjin (see
discussion of our Research and Development Test Centre below). As we have been
granted the land use rights certificate to the premises presently occupied by
the Company in BAK Industrial Park, there should be no legal barriers for us to
obtain a property ownership certificate for this property. However, it is
possible that the Shenzhen government may determine that even with our land use
rights certificate, the buildings constructed at BAK Industrial Park were still
constructed without the proper authority and must be vacated as illegitimate
constructions, and we might be subject to penalties and fines. However, we
believe that this possibility, while present, is remote.

As of September 30, 2007, we had fully paid the lease
prepayment amount of $14.1 million for the acquisition of land use rights
regarding our Tianjin facility. As of September 30, 2008, we had obtained the
relevant land use rights certificate to this facility. As of December 31, 2009,
we were in the process of obtaining the relevant property ownership rights
certificate to this facility. Pursuant to our land use rights certificate
relating to our Tianjin facility, the Tianjin government had originally
requested that we complete construction of the Tianjin facility before September
30, 2008. As of September 30, 2008, we had not done so. Notwithstanding this
requirement, we have obtained an extension from the Business Administration
Bureau of Beichen District, Tianjin, to make the remaining contribution of the
registered capital by December 11, 2009, which we have interpreted as an
extension of the completion date of construction to this date. As of December
31, 2009, we are in discussions with the authorities regarding an extension of
this deadline and no action has been taken by the authorities.

As of September 30, 2007, we had paid the lease prepayment
amount of $717,000 for the acquisition of land use rights for a new Research and
Development Test Centre to be constructed in Shenzhen, China. As of September
30, 2008, we had obtained the relevant property ownership and land use rights
certificate. Pursuant to the property ownership and land use rights certificate,
we are required to complete at least 25% of the construction of the new Research
and Development Test Centre facility by September 30, 2008. As of September 30,
2008, we had not done so. Notwithstanding this requirement, the Shenzhen
government has agreed to increase the dimensions of the Research and Development
Test Centre and signed two supplemental agreements with us. According to the
supplemental agreements, we are required to complete the construction by May 6,
2011. In addition, according to the property ownership and land use rights
certificate, such land may not be pledged without the approval of the relevant
government office. We are required to pledge our property ownership and land use
rights certificate in relation to the new Research and Development Test Centre
to China Development Bank pursuant to the loan agreement entered into with it.
As of December 31, 2009, we were in the process of negotiating with the relevant
government bureau for the requisite approval. In addition, the so-named
property ownership and land use rights certificate relating to this facility
that we were issued lacks certain terms relating to property ownership rights,
which appears to indicate that the granting government has so far only granted
us the relevant land use rights. As a result, this certificate may not be
adequate evidence of our property ownership rights to this property. We
anticipate that the government will re-grant this certificate with adequate
property ownership indicia after we have satisfied the above construction
requirement and followed certain procedures.

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Contractual Obligations and Commercial Commitments

Please refer to Part II, Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations  Contractual
Obligations and Commercial Commitments in the 2009 Form 10-K for a discussion
of our contractual obligations and commercial commitments as of September 30,
2009. There were no material changes outside the ordinary course of our business
in our contractual obligations and commercial commitments for the quarter ended
December 31, 2009.

Off-Balance Sheet Transactions

In the ordinary course of business practices in China, we enter
into transactions with banks or other lenders where we guarantee the debt of
other parties. These parties may be related to or unrelated to us. Conversely,
our debt with lenders may also be guaranteed by other parties which may be
related or unrelated to us.

Under U.S. GAAP, these transactions may not be recorded on our
balance sheet or may be recorded in amounts different than the full contract or
notional amount of the transaction. Our primary off-balance sheet arrangements
would result from our loan guaranties in which Shenzhen BAK, BAK International,
BAK Tianjin, and/or Mr. Xiangqian Li, our director, Chairman, President, and
Chief Executive Officer, would provide contractual assurance of the debt, or
guarantee the timely re-payment of principal and interest of the guaranteed
party. Neither Shenzhen BAK, BAK International, BAK Tianjin, nor Mr. Xiangqian
Li received, nor is entitled to receive, any consideration for the
above-referenced guarantees, and we are not independently obligated to indemnify
any of those guarantors for any amounts paid by them pursuant to any guarantee.

Typically, no fees are received for this service. Thus, in
those transactions, Shenzhen BAK would have a contingent obligation related to
the guarantee of payment in the event the underlying loan is in default.

Transactions described above require accounting treatment under
ASC Topic 460 Guarantees. Under that standard, we would be required to
recognize the fair value of guarantees issued or modified after December 31,
2002, for non-contingent guarantee obligations, and also a liability for
contingent guarantee obligations based on the probability that the guaranteed
party will not perform under the contractual terms of the guaranty
agreement.

We have assessed the contingent liabilities arising from the
above-described guarantees and have considered them immaterial to the
consolidated financial statements. Therefore, no liabilities in respect of the
guarantees were recognized as of December 31, 2009. As of December 31, 2009, we
provided a guarantee for a non-related party, Nanjing Special Metal Equipment
Co., Ltd., of one-year short-term bank loans with Evergrowing Bank with a
maturity of August 6, 2010. We also provided the guarantees for four other
non-related parties, Hunan Reshine New Material Ltd, Shenzhen Tongli Hi-tech Co.
Ltd., Shenzhen B&G Technology Development Co. Ltd., and Siping Juyuan
Hanyang Plate Heat Exchanger Co. Ltd. The maximum amount of our exposure for
these guarantees was $27.8 million and $28.6 million at December 31, 2009 and
September 30, 2009, respectively.

Critical Accounting Policies

Our consolidated financial information has been prepared in
accordance with U.S. GAAP, which requires us to make judgments, estimates and
assumptions that affect (1) the reported amounts of our assets and liabilities,
(2) the disclosure of our contingent assets and liabilities at the end of each
fiscal period and (3) the reported amounts of revenues and expenses during each
fiscal period. We continually evaluate these estimates based on our own
historical experience, knowledge and assessment of current business and other
conditions, our expectations regarding the future based on available information
and reasonable assumptions, which together form our basis for making judgments
about matters that are not readily apparent from other sources. Since the use of
estimates is an integral component of the financial reporting process, our
actual results could differ from those estimates. Some of our accounting
policies require a higher degree of judgment than others in their
application.

When reviewing our financial statements, the following should
also be considered: (1) our selection of critical accounting policies, (2) the
judgment and other uncertainties affecting the application of those policies,
and (3) the sensitivity of reported results to changes in conditions and
assumptions. We believe the following accounting policies involve the most
significant judgment and estimates used in the preparation of our financial
statements.

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Recoverability of Long-Lived Assets

Our business is capital intensive and has required, and will
continue to require, significant investments in property, plant and equipment.
As of December 31, 2009 and September 30, 2009, the carrying amount of property,
plant and equipment, net was $218.6 million and $219.7 million, respectively. We
assess the recoverability of property, plant and equipment to be held and used
by a comparison of the carrying amount of an asset or group of assets to the
future net undiscounted cash flows expected to be generated by the asset or
group of assets. If such assets are considered impaired, the impairment
recognized is measured as the amount by which the carrying amount of the assets
exceeds the fair value of the assets.

A prolonged general economic downturn and, specifically, a
continued downturn in the battery cell industry as well as other market factors
could intensify competitive pricing pressure, create an imbalance of industry
supply and demand, or otherwise diminish volumes or profits. Such events,
combined with changes in interest rates, could adversely affect our estimates of
future net cash flows to be generated by our long-lived assets. Consequently, it
is possible that our future operating results could be materially and adversely
affected by additional impairment charges related to the recoverability of our
long-lived assets.

Inventory Obsolescence

We review our inventory for potential impairment on a quarterly
or more frequent basis as deemed necessary. Such review includes, but is not
limited to, reviewing the levels of inventory versus customer requirements and
obsolescence. The review and evaluation also considers the potential sale of
impaired inventory at lower than market prices. At each balance sheet date, we
identify inventories that are worth less than cost and write them down to their
net realizable value and the difference is charged to our cost of revenues of
that period. Though management considers such write-down of inventories adequate
and proper, changes in sales volumes due to unexpected economic or competitive
conditions are among the factors that could materially affect the adequacy of
such write down.

Allowance for Doubtful Accounts

The allowance for doubtful accounts is our best estimate of the
amount of probable credit losses in our accounts receivable. We determine the
allowance based on historical write-off experience, customer specific facts and
economic conditions. Bad debt expense is included in the general and
administrative expenses. We review outstanding account balances individually for
collectability. Account balances are charged off against the allowance after all
means of collection have been exhausted and the potential for recovery is
considered remote. As of December 31, 2009 and September 30, 2009, we had not
charged off any balances as we had yet to exhaust all means of collection.

Equity-Based Compensation

We adopted the provisions of ASC Topic 718 Compensation 
Stock Compensation, which requires the use of the fair value method of
accounting for share-based compensation. Under the fair value based method,
compensation cost related to employee stock options or similar equity
instruments is measured at the grant date based on the value of the award and is
recognized over the service period, which is usually the vesting period. ASC
Topic 718 also requires measurement of cost of a liability-classified award
based on its current fair value. The fair value of the liability-classified
award will be subsequently remeasured at each reporting date through the
settlement date. Change in fair value during the requisite service period will
be recognized as compensation cost over that period.

We determine fair value using the Black-Scholes model. Under
this model, certain assumptions, including the risk-free interest rate, the
expected life of the options and the estimated fair value of our ordinary shares
and the expected volatility, are required to determine the fair value of the
options. If different assumptions had been used, the fair value of the options
would have been different from the amount we computed and recorded, which would
have resulted in either an increase or decrease in the compensation expense.

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Pursuant to ASC Topic 718, we have recognized compensation
costs of $1.1 million in relation to stock-based awards to our employees and
non-employee directors for the three months ended December 31, 2009, as an
increase in both the operating costs and shareholders equity.

Changes in Accounting Standards

In December 2007, the Financial Accounting Standards Board (the
FASB) issued Accounting Standards Codification (ASC) Topic 810,
Consolidation, which establishes accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. The guidance applies to the Companys financial statements starting
in its fiscal year beginning on October 1, 2009. The adoption of ASC Topic 810
has no material impact on our financial statements.

In December 2007, the FASB issued ASC Topic 805, Business
Combinations, which establishes principles and requirements for how the
acquirer of a business recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree. The statement also provides guidance for recognizing
and measuring the goodwill acquired in the business combination and determines
what information to disclose to enable users of the financial statements to
evaluate the nature and financial effects of the business combination. ASC Topic
805 is required to be adopted by the Company for business acquisitions for which
the acquisition date is on or after October 1, 2009. The adoption of ASC Topic
805 has no material impact on our financial statements.

In March 2008, the FASB issued ASC Topic 815, Derivatives and
Hedging, which is intended to improve financial reporting about derivative
instruments and hedging activities by requiring enhanced disclosures to enable
investors to better understand their effects on an entitys financial position,
financial performance, and cash flows. It is effective for financial statements
issued for fiscal years and interim periods beginning after November 15, 2008,
with early application encouraged. The adoption of ASC Topic 815 has no material
impact on our financial statements.

In April 2008, the FASB issued ASC Topic 350,
Intangibles-Goodwill and Other, which amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS No.
142). ASC Topic 350 is intended to improve the consistency between the useful
life of an intangible asset determined under SFAS No. 142 and the period of
expected cash flows used to measure the fair value of the asset under SFAS No.
141(Revised) and other U.S. GAAP. ASC Topic 350 is effective for fiscal years
beginning after December 15, 2008 and is effective for the Companys fiscal year
beginning on October 1, 2009. Early adoption is prohibited. The adoption of ASC
Topic 350 has no material impact on our financial statements.

In April 2009, the FASB issued ASC Topic 805, Business
Combinations, which amends the provisions in SFAS No. 141 (Revised) for the
initial recognition and measurement, subsequent measurement and accounting, and
disclosures for assets and liabilities arising from contingencies in business
combinations. ASC Topic 805 eliminates the distinction between contractual and
non-contractual contingencies, including the initial recognition and measurement
criteria in SFAS No. 141 (Revised) and instead carries forward most of the
provisions in SFAS No. 141 for acquired contingencies. ASC Topic 805 is
effective for contingent assets and contingent liabilities arising from business
combinations whose acquisition dates are on or after December 15, 2008. The
adoption of ASC Topic 805 has no material impact on our financial statements.

In June 2009, the FASB issued ASC Topic 860, Transfers and
Servicing, which improves the relevance, representational faithfulness, and
comparability of the information that a reporting entity provides in its
financial statements about a transfer of financial assets; the effects of a
transfer on its financial position, financial performance, and cash flows; and a
transferors continuing involvement, if any, in transferred financial assets.
ASC Topic 860 is effective as of the beginning of each reporting entitys first
annual reporting period that begins after November 15, 2009, for interim periods
within that first annual reporting period and for interim and annual reporting
periods thereafter. The adoption of ASC Topic 860 is not expected to have a
material impact on our financial statements.

16

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In June 2009, the FASB issued ASC Topic 810, Consolidation,
which amends FASB Interpretation No. 46 (revised December 2003) to address the
elimination of the concept of a qualifying special purpose entity. ASC Topic 810
also replaces the quantitative-based risks and rewards calculation for
determining which enterprise has a controlling financial interest in a variable
interest entity with an approach focused on identifying which enterprise has the
power to direct the activities of a variable interest entity and the obligation
to absorb losses of the entity or the right to receive benefits from the entity.
Additionally, ASC Topic 810 provides more timely and useful information about an
enterprises involvement with a variable interest entity. ASC Topic 810 shall be
effective as of the beginning of each reporting entitys first annual reporting
period that begins after November 15, 2009, for interim periods within that
first annual reporting period, and for interim and annual reporting periods
thereafter. Earlier application is prohibited. The adoption of ASC Topic 810 is
not expected to have a material impact on our financial statements.

In August 2009, the FASB issued ASU 2009-05, Fair Value
Measurements and Disclosures (Topic 820)  Measuring Liabilities at Fair Value,
or ASU 2009-05. ASU 2009-05 provides additional guidance for measuring the fair
value of liabilities and clarifies that the quoted price for the identical
liability, when traded as an asset in an active market, is a Level 1
measurement, providing there are no adjustments to the quoted price.
Alternatively, when no quoted price is available, ASU 2009-05 affirms the use of
other valuation techniques outlined in SFAS No. 157. ASU 2009-05 is effective
for the first interim or annual reporting period beginning after its issuance.
The adoption of ASU 2009-05 has no material impact on our financial statements.

In September 2009, the FASB issued ASU 2009-12, Fair Value
Measurements and Disclosures (Topic 820)  Investments in Certain Entities That
Calculate Net Asset Value per Share (or Its Equivalent), or ASU 2009-12. ASU
2009-12 amends SFAS No. 157 to permit a reporting entity to measure the fair
value of certain investments on the basis of the net asset value per share of
the investment (or its equivalent). ASU 2009-12 also requires new disclosures,
by major category of investments, about the attributes of investments within the
scope of this amendment to the Codification. ASU 2009-12 is effective for
interim and annual periods ending after December 15, 2009. Early adoption is
permitted. The adoption of ASU 2009-12 has no material impact on our financial
statements.

In October 2009, the FASB issued ASU 2009-13, Revenue
Recognition (Topic 605)  Multiple-Deliverable Revenue Arrangements, or ASU
2009-13. ASU 2009-13 requires companies to allocate revenue in multiple-element
arrangements based on an elements estimated selling price if vendor-specific or
other third party evidence of value is not available. ASU 2009-13 is to be
applied on a prospective basis for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15, 2010, with
earlier application permitted. We are currently evaluating the impact of the
adoption of ASU 2009-13 on our financial statements.

In January 2010, the FASB issued ASU 2010-06, Fair Value
Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value
Measurements, or ASU 2010-06. This ASU requires some new disclosures and
clarifies some existing disclosure requirements about fair value measurement as
set forth in Codification Subtopic 820-10. The FASBs objective is to improve
these disclosures and, thus, increase the transparency in financial reporting.
Specifically, ASU 2010-06 amends Codification Subtopic 820-10 to now require:

- A reporting entity should disclose separately the amounts of significant
  transfers in and out of Level 1 and Level 2 fair value measurements and
  describe the reasons for the transfers; and
- In the reconciliation for fair value measurements using significant
  unobservable inputs, a reporting entity should present separately information
  about purchases, sales, issuances, and settlements.

In addition, ASU 2010-06 clarifies the requirements of the
following existing disclosures:

- For purposes of reporting fair value measurement for each class of assets
  and liabilities, a reporting entity needs to use judgment in determining the
  appropriate classes of assets and liabilities; and
- A reporting entity should provide disclosures about the valuation
  techniques and inputs used to measure fair value for both recurring and
  nonrecurring fair value measurements.

ASU 2010-06 is effective for interim and annual reporting
periods beginning after December 15, 2009, except for the disclosures about
purchases, sales, issuances, and settlements in the roll forward of activity in
Level 3 fair value measurements. Those disclosures are effective for fiscal
years beginning after December 15, 2010, and for interim periods within those
fiscal years. Early application is permitted. We are currently evaluating the
impact of the adoption of ASU 2010-06 on our financial statements.

17

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Exchange Rates

The financial records of Shenzhen BAK, BAK Electronics and BAK
Tianjin are maintained in RMB. In order to prepare our financial statements, we
have translated amounts in RMB into amounts in U.S. dollars. The amounts of our
assets and liabilities on our balance sheets are translated using the closing
exchange rate as of the date of the balance sheet. Revenues, expenses, gains and
losses are translated using the average exchange rate prevailing during the
period covered by such financial statements. Adjustments resulting from the
translation, if any, are included in our cumulative other comprehensive income /
(loss) in our stockholders equity section of our balance sheet. All other
amounts that were originally booked in RMB and translated into U.S. dollars were
translated using the closing exchange rate on the date of recognition.
Consequently, the exchange rates at which the amounts in those comparisons were
computed varied from year to year.

The exchange rates used to translate amounts in RMB into U.S.
dollars in connection with the preparation of our financial statements were as
follows:

|                                                                                                                                                                                                      |  | RMB per U.S. Dollar | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------- | 
|                                                                                                                                                                                                      |  | 2009                | 
|Balance sheet items as of December 31                                                                                                                                                                 |  | 6.8270              | 
|Amounts included in the statement of operations and
      comprehensive income, statement of changes in stockholders equity and
      statement  of cash flows for the nine months ended December 31 |  | 6.8274              | 
|Balance sheet items as of September 30                                                                                                                                                                |  | 6.8263              | 

Item 3. Quantitative and Qualitative Disclosures
      About Market Risk.

Interest Rate Risk

We are exposed to interest rate risk primarily with respect to
our short-term bank loans and long-term bank loans. Although the interest rates,
which are based on the banks prime rates with respect to our short-term loans
are fixed for the terms of the loans, the terms are typically three to twelve
months for short-term bank loans and interest rates are subject to change upon
renewal. There were no material changes in interest rates for short-term bank
loans renewed during the three months ended December 31, 2009.

Please refer to Item 2 Managements Discussion and Analysis of
Financial Condition and Results of Operations  Liquidity and Capital Resources
 Financing Activities for a discussion of our credit facilities and loan
agreements.

A hypothetical 1.0% increase in the annual interest rates for
all of our credit facilities under which we had outstanding borrowings at
December 31, 2009, would increase net loss before provision for income taxes by
approximately $1.7 million or 36.9% for the three months ended December 31,
2009. Management monitors the banks prime rates in conjunction with our cash
requirements to determine the appropriate level of debt balances relative to
other sources of funds. We have not entered into any hedging transactions in an
effort to reduce our exposure to interest rate risk.

Foreign Exchange Risk

Although our reporting currency is the U.S. dollar, the
financial records of our operating subsidiaries are maintained in their local
currency, the RMB, which is our functional currency. Approximately 71.0% of our
revenues and 96.0% of our costs and expenses for the three months ended December
31, 2009 are denominated in RMB, with the balance denominated in U.S. dollars.
Approximately 99.8% of our assets except for cash were denominated in RMB as of
December 31, 2009. As a result, we are exposed to foreign exchange risk as our
revenues and results of operations may be affected by fluctuations in the
exchange rate between U.S. dollars and RMB. If the RMB depreciates against the
U.S. dollar, the value of our RMB revenues, earnings and assets as expressed in
our U.S. dollar financial statements will decline. Assets and liabilities of our
operating subsidiaries are translated into U.S. dollars at the exchange rate at the balance sheet date, their
equity accounts are translated at historical exchange rates, and their income
and expenses items are translated using the average rate for the period. Any
resulting exchange differences are recorded in accumulated other comprehensive
income or loss. An average appreciation (depreciation) of the RMB against the
U.S. dollar of 5% would increase (decrease) our comprehensive income by $11.0
million based on our outstanding revenues, costs and expenses, assets, and
liabilities denominated in RMB as of December 31, 2009. As of December 31, 2009,
our accumulated other comprehensive income was $24.7 million. We have not
entered into any hedging transactions in an effort to reduce our exposure to
foreign exchange risk.

18

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Inflation Risk

Inflationary factors such as increases in the cost of our
products and overhead costs may adversely affect our operating results. Although
we do not believe that inflation has had a material impact on our financial
position or results of operations to date, a high rate of inflation in the
future may have an adverse effect on our ability to maintain current levels of
gross margin and selling and general and administrative expenses as a percentage
of net revenues if the selling prices of our products do not increase with these
increased costs.

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

As required by Rule 13a-15 under the Exchange Act, our
management has carried out an evaluation, with the participation and under the
supervision of our chief executive officer and chief financial officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures as of December 31, 2009. Disclosure controls and procedures refer to
controls and other procedures designed to ensure that information required to be
disclosed in the reports we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
rules and forms of the SEC and that such information is accumulated and
communicated to our management, including our chief executive officer and chief
financial officer, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating our disclosure controls and procedures,
management recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and management is required to apply its judgment in
evaluating and implementing possible controls and procedures.

Management conducted its evaluation of disclosure controls and
procedures under the supervision of our chief executive officer and our chief
financial officer. Based upon, and as of the date of this evaluation, our chief
executive officer and chief financial officer concluded that our disclosure
controls and procedures were not effective, because of the material weaknesses
described in Item 9A. Controls and Procedures of the 2009 Form 10-K, which we
are still in the process of remediating. Investors are directed to Item 9A of
the 2009 Form 10-K for the description of these weaknesses.

Remediation Measures for Material Weaknesses

We are continuing to remediate the material weaknesses
described in our 2009 Form 10-K and implemented the new measures described below
in our ongoing efforts to address these internal control deficiencies.

We further developed policies and procedures governing the
hiring and training of personnel to better assure sufficient personnel with the
requisite knowledge, experience and training in the application of generally
accepted accounting principles commensurate with our financial reporting and
U.S. GAAP requirements. We utilized qualified accounting advisors and
supervisors to ensure that our staff has adequate professional knowledge and
monitored the need for additional or better-qualified staff. In addition, we
utilized appropriate training programs on accounting principles and procedures
to better ensure the adequacy of our accounting and finance personnel.

We continued to develop our corporate culture toward
emphasizing the importance of internal controls and to ensure that all personnel
involved in maintaining proper internal controls recognize the importance of
strictly adhering to accounting principles generally accepted in the United
States of America.

19

---

We continued to provide additional training to the Companys
internal auditor on appropriate controls and procedures necessary to document
and evaluate our internal control procedures. In addition, one of our employees
has assumed the full-time position of Director of Internal Audit, and has been,
and will continue to be, responsible for compliance with internal controls.

We further enhanced the self-assessment of our internal control
over financial reporting by increasing our periodic independent testing, which
would evaluate the adequacy of the design and effectiveness of our internal
control procedures.

We also implemented procedures to maintain effective control
over the accounting for construction in progress assets and the determination of
depreciation expense when the assets are ready for their intended use, including
the following:

- We provided additional training to finance managers to review any
  applicable accounting entry and time of transfer;
- We further trained our finance department to transfer construction in
  progress to cost of property, plant and equipment when it is ready for its
  intended use, at which time depreciation charges shall commence thereon. The
  criteria used to determine when an asset is ready for intended use are based
  on policies that are consistent with U.S. GAAP.

We believe that we are taking the steps necessary for
remediation of the remaining material weaknesses identified above, and we will
continue to monitor the effectiveness of these steps and to make any changes
that our management deems appropriate.

Changes in Internal Control over Financial
Reporting

Other than the remediation measures described above, there were
no changes in our internal controls over financial reporting after December 31,
2009 that have materially affected, or are reasonably likely to materially
affect our internal control over financial reporting.

20

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PART II

OTHER INFORMATION

Item 1. Legal Proceedings.

Patent Litigation

On September 12, 2006, Hydro-Quebec, a Canadian company, and
the Board of Regents of the University of Texas System brought a federal patent
infringement suit in the United States District Court for the Northern District
of Texas against us. We had an agreement with A123Systems, which, as amended on
August 18, 2005, terminated in accordance with its terms on August 30, 2007,
under which we had agreed to manufacture products for A123Systems according to
the specifications furnished by, and using the finished electrodes and other
materials consigned by, A123Systems to us. The plaintiffs alleged that, by
manufacturing rechargeable lithium cells for A123Systems for use in DeWalt
36-volt cordless power tools manufactured by Black & Decker Corporation, we
had infringed two U.S. patents owned by and exclusively licensed to the
plaintiffs. The plaintiffs seek injunctive relief and damages in an unspecified
amount. A123Systems, Black & Decker Corporation and Black & Decker
(U.S.) Inc. have also been named as co-defendants in this lawsuit. The court has
not ruled on this lawsuit. The Company understands that this lawsuit is a
countersuit against A123Systems, which filed a claim against Hydro-Quebec in the
United States District Court of Massachusetts in April 2006. In that suit,
A123Systems sought declaratory relief that the two said U.S. patents are invalid
and that A123Systems is not infringing either of these two patents.

Following the filing of the lawsuit, the United States Patent
and Trademark Office reexamined the patents. The patents were re-issued with
substantial modification of the patent claims. The plaintiffs have advised that,
in their view, the lawsuit continues to be viable against the defendants,
including China BAK. The plaintiffs' position has not been tested. Currently
pending is the plaintiffs' motion to amend their complaint to take the USPTO
action into account.

If the court were to issue an adverse decision, the Company
could face a substantial monetary damages award. While such an adverse decision
could also prohibit the Company from future production of rechargeable lithium
cells manufactured for A123Systems or may require the Company to pay royalties
to engage in any such production, the Company has no plans to pursue production
of batteries for A123. The court has not issued any substantive decisions in the
litigation and there has been no substantive pretrial discovery. As a result, at
this time, the Company is unable to express a view on the extent of any possible
award of damages that might be rendered in the litigation.

Liquidated Damages Pursuant to September 2005
Registration Rights Agreement

We are liable for liquidated damages to certain shareholders
whose shares were included in a resale registration statement on Form SB-2 that
we filed pursuant to a registration rights agreement that we entered into with
such shareholders in September 2005. Under the registration rights agreement,
among other things, (a) if a registration statement filed pursuant thereto
ceases to be effective after its effective date to cover the resale of the
shares for more than 30 trading days or (b) if for any reason we are required to
file an additional registration statement covering such shares, and we do not
file such additional registration statement within 45 days after the time we
first know, or reasonably should have known, that such registration statement
would be required to be filed, then, while the relevant shares could not be put
back to us, we would be liable to pay partial liquidated damages to those
selling shareholders equal to 1.0% of the aggregate investment amount paid by
those selling shareholders for the shares, and on each monthly anniversary
thereafter, unless the event is cured by such date, an additional 1.5% on
(except with respect to the first such event) a daily pro-rata basis.

21

---

On August 15, 2006, the SEC declared effective a post-effective
amendment we filed on August 4, 2006 to terminate the effectiveness of the
resale registration statement on Form SB-2 that included the resale of the
shares held by those selling shareholders. Accordingly, as we were no longer
eligible to file on Form SB-2, we were required to file an additional
registration statement within 45 days after the termination of the effectiveness
of the Form SB-2. On October 11, 2006, we filed a registration statement on Form
S-1 that covers resale of the shares held by those shareholders, which was
declared to be effective on October 19, 2006. Following the termination of the Form SB-2, our failure to file an additional registration
statement within the period provided under the registration rights agreement
triggered, for the first time, an obligation to pay liquidated damages to the
selling shareholders of 1% of the aggregate investment amount paid by them for
the shares, or $241,232, based on the formula specified in the registration
rights agreement. Because the Form S-1 was filed by the one-month anniversary of
the applicable filing date, the event was cured and no additional liquidated
damages were incurred. We previously reported in our 2006 Form 10-K, and in our
Quarterly Report on Form 10-Q for the quarter ended December 31, 2006 (the
12/31/06 Form 10-Q), that liquidated damages totaling $487,946 were due from
us in respect of such event based on an incorrect interpretation of the
liquidated damages due under the registration rights agreement. Among other
things, the amount was calculated on a pro rata daily basis although the event,
the first under the registration rights agreement, was cured by its one-month
anniversary date.

In addition, on December 8, 2006, we filed our 2006 Form 10-K.
After the filing of the 2006 Form 10-K, our previously filed registration
statement on Form S-1 was no longer available for resale by the selling
shareholders whose shares were included in such Form S-1. A post-effective
amendment to the Form S-1 covering resale by the selling shareholders was
declared effective by the SEC on March 23, 2007. Our failure to have the
post-effective amendment declared effective within the 30-trading-day time
period provided under the registration rights agreement (i.e., by January 25,
2007), triggered, for the second time, an obligation to pay liquidated damages
to the selling shareholders. We estimate that we are liable to those selling
shareholders for liquidated damages related to this second event in the amount
of approximately $810,000, such that the total current estimated liquidated
damages relating to both events amounts to approximately $1.0 million.

As reported in our 2006 Form 10-K and our 12/31/06 Form 10-Q,
we previously recorded charges in our statement of income and comprehensive
income of $290,575 for the year ended September 30, 2006, and $197,371 for the
quarter ended December 31, 2006, based on the original incorrect interpretation
of the calculation of liquidated damages. Accordingly, the amounts recorded in
excess of $241,232 (i.e., $246,714) have been applied to offset the charge
related to the liquidated damages incurred related to the second event in the
second fiscal quarter of 2007, and we have recorded an additional charge in the
second fiscal quarter of 2007 relating to the additional liquidated damages
incurred of $563,000. We have assessed the impact of the foregoing on the
financial statements included in our 2006 Form 10-K and our 12/31/06 Form 10-Q,
and have determined that the impact is not material. Accordingly, we do not
intend to restate the financial information included in the 2006 Form 10-K or
the 12/31/06 Form 10-Q; however, future filings will reflect the foregoing
information. No liquidated damages have been paid pursuant to the registration
rights agreement that we entered into in September 2005 as of the filing date of
this Report.

22

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Liquidated Damages Pursuant to November 2007 Registration
Rights Agreement

Prior to the three months ended December 31, 2009, we were
initially liable for liquidated damages to a shareholder whose shares were
required to be included in a resale registration statement on Form S-3 that we
filed pursuant to a registration rights agreement that we entered into with this
shareholder and certain other investors in November 2007. Under the registration
rights agreement, among other things, if a registration statement filed pursuant
thereto has not been declared effective by the SEC by the 100th calendar day
after the closing of our private placement on November 9, 2007, or the
Effectiveness Deadline, then we would be liable to pay partial liquidated
damages to each investor of (a) 1.5% of the aggregate purchase price paid by
such investor for the shares it purchased in our November 2007 private placement
on the one-month anniversary of the Effectiveness Deadline; (b) an additional
1.5% of the aggregate purchase price paid by such investor every thirtieth day
thereafter (prorated for periods totaling less than thirty days) until the
earliest of the effectiveness of the registration statement, the ten-month
anniversary of the Effectiveness Deadline, and the time that we are no longer
required to keep such resale registration statement effective because either the
investors have sold all of their shares or the investors may sell their shares
pursuant to Rule 144 without volume limitations; and (c) 0.5% of the aggregate
purchase price paid by each investor for the shares it purchased in our November
2007 private placement on the ten-month anniversary of the Effectiveness
Deadline and every thirtieth day thereafter (pro-rated for periods totaling less
than thirty days), until the earlier of the effectiveness of the registration
statement and the time that we are no longer required to keep such resale
registration statement effective because either the investors have sold all of
their shares or the investors may sell their shares pursuant to Rule 144 without
volume limitations. Such liquidated damages would bear interest at the rate of
1% per month (prorated for partial months) until paid in full.

On December 21, 2007, pursuant to the registration rights
agreement, we filed a registration statement on Form S-3, which was declared
effective by the SEC on May 7, 2008. The lateness of this filing triggered
liquidated damages consistent with the formula described above. On August 26,
2008, we conducted a registered direct offering of 4,102,564 shares of common
stock, at an offering price of $3.90 per share, in which the investors also
received warrants to purchase up to 4,102,564 shares of common stock at an
exercise price of $3.90 per share. With one exception, all of the investors that
participated in our November 2007 private placement, or affiliates of them,
participated in our August 2008 registered direct offering. We reduced each of
these investors (or each such investors participating affiliates) purchase
price by an amount that was at least equal to the amount that we determined that
we were liable for as liquidated damages to such investor (or its participating
affiliate). As of June 30, 2009, the remaining investor had waived any and all
rights relating to liquidated damages pursuant to the November 2007 registration
rights agreement. As of December 31, 2009, approximately $159,000 of liquidated
damages remained outstanding for accounting purposes. Pursuant to the
settlements described above, however, we do not believe that we are actually
liable for this amount.

Make-Good Settlements

Beginning on March 13, 2008, we have entered into settlement
agreements with certain investors in the January 20, 2005, private placement
completed by the Company. Pursuant to the settlement agreements, we and such
investors have agreed, without any admission of liability, to a settlement and
mutual releases from all claims relating to the January 20, 2005 private
placement, including all claims relating to 1,089,775 make good shares of our
common stock that had been placed into escrow by Xiangqian Li, our chairman and
chief executive officer, in connection with the January 20, 2005, private
placement, as well as all claims, including claims for liquidated damages,
relating to registration rights granted in connection with the January 20, 2005,
private placement. Pursuant to the settlement agreements, we have made
settlement payments to each of the settling investors of a number of shares of
common stock equal to 50% of the number of make good shares such investor had
claimed. Aggregate settlement payments amounted to 368,745 shares as of December
31, 2009, all of which were issued in the fiscal year ended September 30, 2008.
Share payments to date have been made in reliance upon the exemptions from
registration provided by Section 4(2) and/or other applicable provisions of the
Securities Act. In accordance with the settlement agreements, we filed a
registration statement covering the resale of such shares, which was declared
effective by the SEC on June 26, 2008.

In accordance with the Delivery of Make Good Shares, Settlement
and Release Agreement entered into with Mr. Li on October 22, 2007 (the Li
Settlement Agreement), we may continue to negotiate with the investors who participated in the January 20, 2005, private placement in
order to achieve a complete settlement of our obligations under the applicable
agreements with such investors.

23

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Item 1A. Risk Factors.

See Part I, Item 1A. Risk Factors included in
      our 2009 Form 10-K.

Item 2. Unregistered Sales of Equity Securities and
      Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Submission of Matters to a Vote of Security
      Holders.

None.

Item 5. Other Information.

None.

Item 6. Exhibits.

The following exhibits are filed as part of this report or
incorporated by reference:

|Exhibit No. |  | Description                                                                                                                                                                                                       
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|            |  |                                                                                                                                                                                                                   
|3.1         |  | Articles of Incorporation of the Registrant
      (incorporated by reference to Exhibit 3.1 to the Registrants Annual
      Report on Form 10-K for the fiscal year ended September 30, 2006).                   
|            |  |                                                                                                                                                                                                                   
|3.2         |  | Bylaws of the Registrant (incorporated by
      reference to Exhibit 3.2 to the Registrants Annual Report on Form 10-K
      for the fiscal year ended September 30, 2007).                                      
|            |  |                                                                                                                                                                                                                   
|31.1        |  | Certifications of Principal Executive Officer
      filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                               
|            |  |                                                                                                                                                                                                                   
|31.2        |  | Certifications of Principal Financial Officer
      filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                               
|            |  |                                                                                                                                                                                                                   
|32.1        |  | Chief Executive Officer and Chief Financial
      Officer Certifications furnished pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002                                                                
|            |  |                                                                                                                                                                                                                   
|99.1        |  | Comprehensive Credit Facility Agreement of
      Maximum Amount by and between Shenzhen BAK Battery Co., Ltd. and Shenzhen
      Hi-Tech District Branch, Industrial Bank Co. Ltd., dated December 25,
      2009.
|            |  |                                                                                                                                                                                                                   
|99.2        |  | Summary of Guaranty Contract of Maximum Amount
      by and between Xiangqian Li and Shenzhen Hi-Tech District Branch,
      Industrial Bank Co. Ltd., dated December 15, 2009.                                   
|            |  |                                                                                                                                                                                                                   
|99.3        |  | Summary of Guaranty Contract of Maximum Amount
      by and between BAK International Limited and Shenzhen Hi-Tech District
      Branch, Industrial Bank Co. Ltd., dated December 25, 2009.                      
|            |  |                                                                                                                                                                                                                   
|99.4        |  | Summary of Guaranty Contract of Maximum Amount
      by and between BAK International (Tianjin) Ltd. and Shenzhen Hi-Tech
      District Branch, Industrial Bank Co. Ltd., dated December 25, 2009.               
|            |  |                                                                                                                                                                                                                   
|99.5        |  | Comprehensive Credit Facility Agreement of
      Maximum Amount by and between Shenzhen BAK Battery Co., Ltd. and Shenzhen
      Eastern Branch, Agricultural Bank of China, dated November 26, 2009.             

24

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|Exhibit No. |  | Description                                                                                                                                                                                                                                    
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|            |  |                                                                                                                                                                                                                                                
|99.6        |  | Summary of Loan Agreement by and between
      Shenzhen BAK Battery Co., Ltd. and Shenzhen Eastern Branch, Agricultural
      Bank of China, dated November 18, 2009.                                                                          
|            |  |                                                                                                                                                                                                                                                
|99.7        |  | Summary of Loan Agreement by and between
      Shenzhen BAK Battery Co., Ltd. and Shenzhen Eastern Branch, Agricultural
      Bank of China, dated November 20, 2009.                                                                          
|            |  |                                                                                                                                                                                                                                                
|99.8        |  | Summary of Loan Agreement by and between
      Shenzhen BAK Battery Co., Ltd. and Shenzhen Eastern Branch, Agricultural
      Bank of China, dated November 24, 2009.                                                                          
|            |  |                                                                                                                                                                                                                                                
|99.9        |  | Summary of Guaranty Contract of Maximum Amount
      by and between Xiangqian Li, BAK International Limited, BAK International
      (Tianjin) Limited, and Shenzhen Eastern Branch, Agricultural Bank of
      China, dated November 26, 2009.
|            |  |                                                                                                                                                                                                                                                
|99.10       |  | Summary of Mortgage Contract of Maximum Amount
      by and between Shenzhen BAK Battery Co., Ltd. and Shenzhen Eastern Branch,
      Agricultural Bank of China, dated November 26, 2009.                                                     
|            |  |                                                                                                                                                                                                                                                
|99.11       |  | Comprehensive Credit Facility Agreement of
      Maximum Amount by and between Shenzhen BAK Battery Co., Ltd. and Shenzhen
      Longgang Branch,  Bank of China, dated December 21, 2009.                                                     
|            |  |                                                                                                                                                                                                                                                
|99.12       |  | Summary of Loan Agreement by and between
      Shenzhen BAK Battery Co., Ltd. and Shenzhen Longgang Branch, Shenzhen
      Development Bank, dated November 6, 2009.                                                                           
|            |  |                                                                                                                                                                                                                                                
|99.13       |  | Summary of Loan Agreement by and between
      Shenzhen BAK Battery Co., Ltd. and Shenzhen Longgang Branch, Shenzhen
      Development Bank Co., Ltd., dated December 31, 2009.                                                                
|            |  |                                                                                                                                                                                                                                                
|99.14       |  | Summary of Guaranty Contract of Maximum Amount
      by and between BAK International Limited and Longgang Branch, Shenzhen
      Development Bank, dated December 21, 2009.                                                                   
|            |  |                                                                                                                                                                                                                                                
|99.15       |  | Summary of Guaranty Contract of Maximum Amount
      by and between Xiangqian Li and Longgang Branch, Shenzhen Development
      Bank, dated December 21, 2009.                                                                                
|            |  |                                                                                                                                                                                                                                                
|99.16       |  | Summary of Mortgage Contract of Maximum Amount
      by and between Shenzhen BAK Battery Co., Ltd. and Longgang Branch,
      Shenzhen Development Bank Co., Ltd., dated December 21, 2009.                                                    
|            |  |                                                                                                                                                                                                                                                
|99.17       |  | Summary of Comprehensive Credit Facility
      Agreement of Maximum Amount Entered into by and between BAK International
      (Tianjin) Limited and Tianjin Branch, Bank of Dalian, dated November 27,
      2009.                            
|            |  |                                                                                                                                                                                                                                                
|99.18       |  | Summary of Loan Agreement
      by and between BAK International (Tianjin) Limited and
      Tianjin Branch, Bank of Dalian, dated November 27, 2009.                                                                                          
|            |  |                                                                                                                                                                                                                                                
|99.19       |  | Summary of
    Guaranty Contract of Maximum Amount by and between Shenzhen BAK Battery Co.,
    Ltd., Xiangqian Li and Tianjin Branch, Bank of Dalian, dated November 27,
    2009.                                                            
|            |  |                                                                                                                                                                                                                                                
|99.20       |  | Summary of Loan Agreement by and between BAK
      International (Tianjin) Limited and Tianjin Branch, Shanghai Pudong
      Development Bank, dated October 9, 2009.                                                                          
|            |  |                                                                                                                                                                                                                                                
|99.21       |  | Summary of Guaranty Contract of Maximum Amount
      by and between Shenzhen BAK Battery Co., Ltd. and Tianjin Branch, Shanghai
      Pudong Development Bank, dated September 28, 2009.                                                       

25

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SIGNATURES

In accordance with Section 13 or
15(d) of the Exchange Act, the registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

|Date: February 9, 2010 | CHINA BAK BATTERY, INC.
|---------------------- | -----------------------
|                       |                        
|                       | By:                    
|                       |                        
|                       |                        
|                       |                        
|                       | By:                    
|                       |                        
|                       |                        
|                       |                        



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