**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 June 30, 2008**





**OR**





**o**
            **Transition
                Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
                of 1934**





**For
      the transition period from _________ to _________**





**Commission
      File Number: 001-32898**





**China
      BAK Battery, Inc.**


*(Exact
      name of registrant as specified in its charter)*







**Nevada**
            
            **88-0442833***(State
                or other jurisdiction of*
              *incorporation
                or organization)*
            
            *(I.R.S.
                Employer*
              *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) 897-70093**


*(Registrant’s
      telephone number, including area code)*





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 o No x





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 o
            
            Accelerated
                Filer xNon-Accelerated
                Filer  o
            (Do
                not check if a smaller reporting company)
            Smaller
                reporting company o





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





Indicate
      the number of shares outstanding of each of the issuer’s classes of common
      stock, as of the latest practicable date: 53,547,917 shares of common stock,
      par
      value $0.001 per share, outstanding on August 7, 2008.








**TABLE
      OF CONTENTS**





**Page****PART
                I FINANCIAL INFORMATION**Item
                1.
            Financial
                Statements
            F-1Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            1Item
                3.
            Quantitative
                and Qualitative Disclosures About Market Risk
            16Item
                4.
            Controls
                and Procedures
            16**PART
                II OTHER INFORMATION**Item
                1.
            Legal
                Proceedings
            17Item
                1A.
            Risk
                Factors
            19Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            19Item
                3.
            Defaults
                Upon Senior Securities
            19Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            19Item
                5.
            Other
                Information
            19Item
                6.
            Exhibits
            20







**Introductory
      Comments**





***Terminology***





Throughout
      this Report, the terms “we,” “us” and “our” refer to China BAK Battery, Inc. and
      its subsidiaries on a consolidated basis; “BAK International” refers to our Hong
      Kong subsidiary, BAK International, Ltd.; “BAK Tianjin” refers to our PRC
      subsidiary, BAK International (Tianjin) Limited; “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; “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 (the
      “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as
      amended (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
                future business development, results of operations and financial
                condition;—
            our
                ability to fund our operations and manage our substantial short-term
                indebtedness;—
            our
                ability to maintain or increase our market share in the competitive
                markets in which we do business;—
            our
                limited operating history in developing, manufacturing and selling
                of
                lithium-based rechargeable battery cells;—
            our
                ability to keep up with rapidly changing technologies and evolving
                industry standards, including our ability to achieve technological
                advances;—
            our
                dependence on the growth in demand for the portable electronic devices
                that are powered by our products;—
            our
                ability to diversify our product offering and capture new market
                opportunities;—
            our
                ability to obtain original equipment manufacturer (“OEM”) qualifications
                from brand names;—
            our
                ability to source our needs for skilled labor, machinery and raw
                materials
                economically;—
            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;—
            uncertainties
                with respect to the PRC legal and regulatory
                environment;—
            our
                ability to remediate any material weaknesses in our internal control
                over
                financial reporting;—
            our
                ability to maintain cost leadership;—
            our
                ability to acquire land use rights to our facilities;
                and


i





—
            other
                risks identified in this Report and in our other reports filed with
                the
                U.S. Securities and Exchange Commission (the
                “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, 2007. 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


**PART
      I — FINANCIAL INFORMATION**




**Item 1. 
      Financial Statements**




**China
      BAK Battery, Inc. and subsidiaries**


**Condensed
      interim consolidated balance sheets**


**As
      of September 30, 2007 and June 30, 2008**




(In
      U.S.
      dollars)





**
            **
            *September
                30,*
            **
            *June
                30,*
            ****
            **
            *Note*
            **
            *2007*
            **
            *2008*
            ****
            **
            **
            **
            (Audited)
            
            (Unaudited)**Assets***Current
                assets*Cash
                and cash equivalents
            
            
            
            
            $
            14,196,513
            
            $
            30,244,244Pledged
                deposits
            
            
            2
            
            
            4,594,727
            
            
            6,331,248Trade
                accounts receivable, net
            
            
            3
            
            
            63,150,872
            
            
            85,100,469Inventories
            
            
            4
            
            
            59,827,232
            
            
            68,191,322Prepayments
                and other receivables
            
            
            5
            
            
            1,656,494
            
            
            8,965,277Deferred
                tax assets
            
            
            
            
            
            502,916
            
            
            1,285,056Total
                current assets
            
            
            
            
            
            143,928,754
            
            
            200,117,616Property,
                plant and equipment, net
            
            
            6
            
            
            145,123,022
            
            
            182,592,676Lease
                prepayments, net
            
            
            
            
            
            17,884,436
            
            
            31,502,164Intangible
                assets, net
            
            
            
            
            
            121,038
            
            
            161,617Deferred
                tax assets
            
            
            
            
            
            171,774
            
            
            —Total
                assets
            
            
            
            
            $
            307,229,024
            
            $
            414,374,073





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, 2007 and June 30, 2008 (continued)**




(In
      U.S.
      dollars)





****
            ****
            ****
            *September
                30,*
            ******
            *June
                30,*
            ************
            ******
            *Note*
            ******
            *2007*
            ******
            *2008*
            ********
            ****
            ****
            ****
            (Audited)
            ****
            (Unaudited)**Liabilities***Current
                liabilities*Short-term
                bank loans
            
            
            7
            
            $
            89,870,586
            
            $
            111,530,667Current
                maturities of long-term bank loans
            
            
            8
            
            
            —
            
            
            8,747,503Accounts
                and bills payable
            
            
            
            
            
            45,588,583
            
            
            59,533,717Accrued
                expenses and other payables
            
            
            
            
            
            15,467,192
            
            
            22,816,579Total
                current liabilities
            
            
            
            
            
            150,926,361
            
            
            202,628,466Long-term
                bank loans, less current maturities
            
            
            8
            
            
            29,291,154
            
            
            55,400,855Deferred
                income
            
            
            
            
            
            —
            
            
            7,824,156Deferred
                tax liabilities
            
            
            
            
            
            279,597
            
            
            641,348Total
                liabilities
            
            
            
            
            
            180,497,112
            
            
            266,494,825Commitments
                and contingencies
            
            
            11**Shareholders’
                equity**Ordinary
                shares US$ 0.001 par value;100,000,000
                authorized;49,250,853
                and 53,227,387 issuedand
                outstanding as ofSeptember
                30, 2007 and June 30, 2008respectively
            
            
            
            
            
            49,251
            
            
            53,227Donated
                shares
            
            
            
            
            
            7,955,358
            
            
            14,101,689Additional
                paid-in capital
            
            
            
            
            
            66,355,151
            
            
            80,811,106Statutory
                reserves
            
            
            
            
            
            6,426,977
            
            
            6,519,638Retained
                earnings
            
            
            
            
            
            36,060,426
            
            
            26,555,312Accumulated
                other comprehensiveincome
            
            
            
            
            
            9,884,749
            
            
            23,904,886126,731,912
            
            
            151,945,858Less:
                Treasury shares
            
            
            
            
            
            -
            
            
            (4,066,610
            )Total
                shareholders’ equity
            
            
            
            
            
            126,731,912
            
            
            147,879,248Total
                liabilities and shareholders’ equity
            
            
            
            
            $
            307,229,024
            
            $
            414,374,073





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 income**


**For
      the three months ended June 30, 2007 and 2008**


(Unaudited)


(In
      U.S.
      dollars)





*Three
                months ended June 30,**2007*
            
            *2008*Net
                revenues
            
            $
            29,477,296
            
            $
            68,486,498Cost
                of revenues
            
            
            (24,414,599
            )
            
            (60,082,001
            )Gross
                profit
            
            
            5,062,697
            
            
            8,404,497Operating
                expenses:Research
                and development costs
            
            
            (1,118,458
            )
            
            (1,855,079
            )Sales
                and marketing expenses
            
            
            (1,164,936
            )
            
            (1,483,907
            )General
                and administrative expenses
            
            
            (4,188,751
            )
            
            (5,101,504
            )Total
                operating expenses
            
            
            (6,472,145
            )
            
            (8,440,490
            )Operating
                loss
            
            
            (1,409,448
            )
            
            (35,993
            )Finance
                costs, net
            
            
            (1,069,902
            )
            
            (2,735,183
            )Government
                grant income
            
            
            —
            
            
            338,682Other
                (expense) / income
            
            
            (90,479
            )
            
            113,829Loss
                before income taxes
            
            
            (2,569,829
            )
            
            (2,318,665
            )Income
                taxes
            
            
            (119,894
            )
            
            30,504Net
                loss
            
            $
            (2,689,723
            )
            $
            (2,288,161
            )Other
                comprehensive income-
                Foreign currency translation adjustment
            
            
            1,941,966
            
            
            3,886,303Comprehensive
                (loss) / income
            
            $
            (747,757
            )
            $
            1,598,142Net
                loss per share:-Basic
            
            $
            (0.05
            )
            $
            (0.04
            )-Diluted
            
            $
            (0.05
            )
            $
            (0.04
            )Weighted
                average number ofordinary
                shares:-Basic
            
            
            48,893,396
            
            
            52,382,171-Diluted
            
            
            48,893,396
            
            
            52,382,171





See
      accompanying notes to the condensed interim consolidated financial
      statements.


F-3


**China
      BAK Battery, Inc. and subsidiaries**


**Condensed
      interim consolidated statements of operations**


**and
      comprehensive income**


**For
      the nine months ended June 30, 2007 and 2008**


(Unaudited)


(In
      U.S.
      dollars)





**
            **
            *Nine
                months ended June 30,*
            ****
            **
            *Note*
            **
            *2007*
            **
            *2008*Net
                revenues
            
            
            13
            
            $
            102,088,295
            
            $
            172,609,484Cost
                of revenues
            
            
            
            
            
            (82,682,721
            )
            
            (153,184,410
            )Gross
                profit
            
            
            
            
            
            19,405,574
            
            
            19,425,074Operating
                expenses:Research
                and development costs
            
            
            
            
            
            (2,683,815
            )
            
            (4,564,422
            )Sales
                and marketing expenses
            
            
            
            
            
            (3,271,849
            )
            
            (4,234,817
            )General
                and administrative expenses
            
            
            
            
            
            (9,301,400
            )
            
            (14,162,334
            )Total
                operating expenses
            
            
            
            
            
            (15,257,064
            )
            
            (22,961,573
            )Operating
                income / (loss)
            
            
            
            
            
            4,148,510
            
            
            (3,536,499
            )Finance
                costs, net
            
            
            
            
            
            (3,134,562
            )
            
            (7,377,462
            )Government
                grant income
            
            
            
            
            
            762,267
            
            
            1,377,046Other
                (expense) / income
            
            
            
            
            
            (160,807
            )
            
            74,238Income
                / (loss) before income taxes
            
            
            
            
            
            1,615,408
            
            
            (9,462,677
            )Income
                taxes
            
            
            
            
            
            (282,652
            )
            
            50,224Net
                income / (loss)
            
            
            
            
            $
            1,332,756
            
            $
            (9,412,453
            )Other
                comprehensive income-
                Foreign currency translation adjustment
            
            
            
            
            
            4,636,438
            
            
            14,020,137Comprehensive
                income
            
            
            
            
            $
            5,969,194
            
            $
            4,607,684Net
                income / (loss) per share:
            
            
            10-Basic
            
            
            
            
            $
            0.03
            
            $
            (0.18
            )-Diluted
            
            
            
            
            $
            0.03
            
            $
            (0.18
            )Weighted
                average number ofordinary
                shares:-Basic
            
            
            
            
            
            48,889,564
            
            
            51,610,457-Diluted
            
            
            
            
            
            49,282,763
            
            
            51,610,457





See
      accompanying notes to the condensed interim consolidated financial
      statements.


F-4


**China
      BAK Battery, Inc. and subsidiaries**


**Condensed
      interim consolidated statements of shareholders’ equity**


**For
      the nine months ended June 30, 2007 and 2008**


(Unaudited)





Accumulated
            
            
            
            
            
            TotalOrdinary
                shares
            
            
            
            
            
            
            
            
            
            other
            
            Treasury
                shares
            
            share-Number
                of
            
            
            
            Donated
            
            Additional
            
            Statutory
            
            Retained
            
            comprehensive
            
            Number
                of
            
            
            
            holders’shares
            
            Amount
            
            shares
            
            paid-in capital
            
            reserves
            
            earnings
            
            income
            
            shares
            
            Amount
            
            equityBalance
                as of October 1, 2006
            
            
            48,885,896
            
            $
            48,886
            
            $
            —
            
            $
            68,126,689
            
            $
            5,791,718
            
            $
            36,212,357
            
            $
            3,448,379
            
            
            —
            
            $
            —
            
            $
            113,628,029Net
                income
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            1,332,756
            
            
            —
            
            
            —
            
            
            —
            
            
            1,332,7562006
                escrow shares donated byMr.
                Xiangqian Li and released to investors
            
            
            —
            
            
            —
            
            
            7,955,358
            
            
            (7,955,358
            )
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Share-based
                compensation foremployee
                stock option awards
            
            
            —
            
            
            —
            
            
            —
            
            
            485,553
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            485,553Issuance
                of 914,994 shares of restrictedstocks
                and reclassification ofliability-classified
                awards
            
            
            —
            
            
            —
            
            
            —
            
            
            3,679,934
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            3,679,934Share-based
                compensation forcommon
                stock granted to employeesand
                non-employee directors
            
            
            —
            
            
            —
            
            
            —
            
            
            1,084,046
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            1,084,046Issuance
                of common stock tonon-employee
                directors
            
            
            7,500
            
            
            7
            
            
            —
            
            
            (7
            )
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Appropriation
                to statutory reserves
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            602,340
            
            
            (602,340
            )
            
            —
            
            
            —
            
            
            —
            
            
            —Foreign
                currency translation adjustment
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            4,636,438
            
            
            —
            
            
            —
            
            
            4,636,438Balance
                as of June 30, 2007
            
            
            48,893,396
            
            $
            48,893
            
            $
            7,955,358
            
            $
            65,420,857
            
            $
            6,394,058
            
            $
            36,942,773
            
            $
            8,084,817
            
            
            —
            
            $
            —
            
            $
            124,846,756Balance
                as of October 1, 2007
            
            
            49,250,853
            
            $
            49,251
            
            $
            7,955,358
            
            $
            66,355,151
            
            $
            6,426,977
            
            $
            36,060,426
            
            $
            9,884,749
            
            
            —
            
            $
            —
            
            $
            126,731,9122005
                escrow shares donated byMr.
                Xiangqian Li
            
            
            —
            
            
            —
            
            
            6,146,331
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (1,089,775
            )
            
            (6,146,331
            )
            
            —2005
                escrow shares settlement
            
            
            —
            
            
            —
            
            
            —
            
            
            (2,079,721
            )
            
            —
            
            
            —
            
            
            —
            
            
            368,745
            
            
            2,079,721
            
            
            —Net
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (9,412,453
            )
            
            —
            
            
            —
            
            
            —
            
            
            (9,412,453
            )Share-based
                compensation foremployee
                stock awards
            
            
            —
            
            
            —
            
            
            —
            
            
            2,533,705
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            2,533,705Exercise
                of stock options awards
            
            
            200,000
            
            
            200
            
            
            —
            
            
            1,249,800
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            1,250,000Issuance
                of common stockto
                employees
            
            
            265,280
            
            
            265
            
            
            —
            
            
            (265
            )
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Issuance
                of common stockto
                non-employee directors
            
            
            11,254
            
            
            11
            
            
            —
            
            
            (11
            )
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Issuance
                of new common stock
            
            
            3,500,000
            
            
            3,500
            
            
            —
            
            
            12,752,447
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            12,755,947Appropriation
                to statutory reserves
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            92,661
            
            
            (92,661
            )
            
            —
            
            
            —
            
            
            —
            
            
            —Foreign
                currency translation adjustment
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            14,020,137
            
            
            —
            
            
            —
            
            
            14,020,137Balance
                as of June 30, 2008
            
            
            53,227,387
            
            $
            53,227
            
            $
            14,101,689
            
            $
            80,811,106
            
            $
            6,519,638
            
            $
            26,555,312
            
            $
            23,904,886
            
            
            (721,030
            )
            $
            (4,066,610
            )
            $
            147,879,248





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 June 30, 2007 and 2008**


(Unaudited)


(In
      U.S.
      dollars)





*Three
                months ended June 30,*
            ****
            **
            *2007*
            **
            *2008***Cash
                flow from operating activities**Net
                loss
            
            $
            (2,689,723
            )
            $
            (2,288,161
            )Adjustments
                to reconcile net loss to netcash
                provided by/(used in) operating activities:Depreciation
                and amortization
            
            
            2,336,980
            
            
            3,344,381Addition
                of bad debt expense
            
            
            1,731,276
            
            
            818,729Provision
                for obsolete inventories
            
            
            —
            
            
            18,771Share-based
                compensation
            
            
            756,085
            
            
            876,317Deferred
                income taxes
            
            
            24,981
            
            
            (124,172
            )Exchange
                loss
            
            
            —
            
            
            737,268Changes
                in operating assets and liabilities:Trade
                accounts receivable
            
            
            3,287,479
            
            
            (5,069,990
            )Inventories
            
            
            (7,024,960
            )
            
            1,433,346Prepayments
                and other receivables
            
            
            (338,478
            )
            
            (397,544
            )Accounts
                and bills payable
            
            
            4,728,869
            
            
            (3,411,264
            )Accrued
                expenses and other payables
            
            
            (491,754
            )
            
            1,117,071Net
                cash provided by / (used in) operating activities
            
            
            2,320,755
            
            
            (2,945,248
            )**Cash
                flow from investing activities**Purchases
                of property, plant and equipment
            
            
            (15,714,291
            )
            
            (14,357,988
            )Payment
                of lease prepayment
            
            
            (707,482
            )
            
            (11,124,131
            )Purchases
                of intangible assets
            
            
            (29,026
            )
            
            (26,075
            )Government
                grants received
            
            
            —
            
            
            7,469,473Net
                cash used in investing activities
            
            $
            (16,450,799
            )
            $
            (18,038,721
            )





See
      accompanying notes to the condensed interim consolidated financial
      statements.


F-6




**China
      BAK Battery, Inc. and subsidiaries**


**Condensed
      interim consolidated statements of cash flows**


**For
      the three months ended June 30, 2007 and 2008 (continued)**


(Unaudited)


(In
      U.S.
      dollars)





**
            *Three
                months ended June 30,*
            ****
            **
            *2007*
            **
            *2008***Cash
                flow from financing activities**Proceeds
                from borrowings
            
            $
            36,210,422
            
            $
            64,204,003Repayment
                of borrowings
            
            
            (33,656,822
            )
            
            (49,146,478
            )Decrease
                / (increase) in pledged deposits
            
            
            5,596,713
            
            
            (1,273,548
            )Net
                cash provided by financing activities
            
            
            8,150,313
            
            
            13,783,977**Effect
                of exchange rate changes**
            ****
            ****
            ****
            ****
            ****
            ****
            ******on
                cash and cash equivalents**
            ****
            ****
            **85,070**
            ****
            ****
            **560,748**
            ******Net
                decrease in cash and**
            ****
            ****
            ****
            ****
            ****
            ****
            ******cash
                equivalents**
            ****
            ****
            **(5,894,662**
            **)**
            ****
            **(6,639,244**
            **)****Cash
                and cash equivalents**
            ****
            ****
            ****
            ****
            ****
            ****
            ******at
                the beginning of period**
            ****
            ****
            **14,839,584**
            ****
            ****
            **36,883,488****Cash
                and cash equivalents**
            ****
            ****
            ****
            ****
            ****
            ****
            ******at
                the end of period**
            ****
            **$**
            **8,944,922**
            ****
            **$**
            **30,244,244****Supplemental
                disclosure of cash flow information:**Cash
                received during the period for:Bills
                receivable discounted to bank
            
            $
            3,416,680
            
            $
            3,478,296Cash
                paid during the period for:Income
                taxes
            
            $
            290,102
            
            $
            94,820Interest,
                net of amounts capitalized
            
            $
            936,599
            
            $
            4,952,307**Non-cash
                movements affecting financing transactions:**2005
                escrow shares settlement
            
            $
            —
            
            $
            770,040





See
      accompanying notes to the condensed interim consolidated financial
      statements.


F-7




**China
      BAK Battery, Inc. and subsidiaries**


**Condensed
      interim consolidated statements of cash flows**


**For
      the nine months ended June 30, 2007 and 2008**


(Unaudited)


(In
      U.S.
      dollars)





**
            *Nine
                months ended June 30,*
            ****
            **
            *2007*
            **
            *2008***Cash
                flow from operating activities**Net
                income / (loss)
            
            $
            1,332,756
            
            $
            (9,412,453
            )Adjustments
                to reconcile net income/(loss) to netcash
                provided by / (used in) operating activities:Depreciation
                and amortization
            
            
            6,594,196
            
            
            9,362,302Addition
                of bad debt expense
            
            
            1,365,795
            
            
            2,186,696Provision
                for obsolete inventories
            
            
            —
            
            
            114,203Share-based
                compensation
            
            
            1,624,368
            
            
            2,533,704Deferred
                income taxes
            
            
            14,442
            
            
            (201,507
            )Loss
                of disposal of property,plant
                and equipment
            
            
            —
            
            
            189,694Exchange
                loss
            
            
            —
            
            
            1,508,217Changes
                in operating assets and liabilities:Trade
                accounts receivable
            
            
            12,894,883
            
            
            (17,101,756
            )Inventories
            
            
            (13,015,222
            )
            
            (2,599,135
            )Prepayments
                and other receivables
            
            
            (192,971
            )
            
            (6,388,025
            )Accounts
                and bills payable
            
            
            (2,073,291
            )
            
            8,739,264Accrued
                expenses and other payables
            
            
            (874,693
            )
            
            1,911,998Net
                cash provided by / (used in)operating
                activities
            
            
            7,670,262
            
            
            (9,156,798
            )**Cash
                flow from investing activities**Purchases
                of property, plant and equipment
            
            
            (38,600,700
            )
            
            (30,902,878
            )Payment
                of lease prepayment
            
            
            (14,371,819
            )
            
            (11,145,114
            )Purchases
                of intangible assets
            
            
            (33,785
            )
            
            (101,111
            )Proceeds
                from disposal of property, plant and equipment
            
            
            —
            
            
            321,353Government
                grant received
            
            
            —
            
            
            7,469,473Net
                cash used in investing activities
            
            $
            (53,006,304
            )
            $
            (34,358,277
            )





See
      accompanying notes to the condensed interim consolidated financial
      statements.


F-8




**China
      BAK Battery, Inc. and subsidiaries**


**Condensed
      interim consolidated statements of cash flows**


**For
      the nine months ended June 30, 2007 and 2008 (continued)**


(Unaudited)


(In
      U.S.
      dollars)





*Nine
                months ended June 30,*
            ****
            **
            *2007*
            **
            *2008***Cash
                flow from financing activities**Proceeds
                from borrowings
            
            $
            101,960,584
            
            $
            119,697,138Repayment
                of borrowings
            
            
            (79,049,307
            )
            
            (76,550,495
            )Decrease/(increase)
                in pledged deposits
            
            
            9,746,262
            
            
            (1,241,034
            )Proceeds
                from issuance of capital stock
            
            
            —
            
            
            14,005,947Net
                cash provided by financing activities
            
            
            32,657,539
            
            
            55,911,556**Effect
                of exchange rate changes**
            ****
            ****
            ****
            ****
            ****
            ****
            ******on
                cash and cash equivalents**
            ****
            ****
            **523,870**
            ****
            ****
            **3,651,250**
            ********
            ****
            ****
            ****
            ****
            ****
            ****
            ******Net
                (decrease) / increase in cash and**
            ****
            ****
            ****
            ****
            ****
            ****
            ******cash
                equivalents**
            ****
            ****
            **(12,154,633**
            **)**
            ****
            **16,047,731**
            ******Cash
                and cash equivalents**
            ****
            ****
            ****
            ****
            ****
            ****
            ******at
                the beginning of period**
            ****
            ****
            **21,099,555**
            ****
            ****
            **14,196,513**
            ********
            ****
            ****
            ****
            ****
            ****
            ****
            ******Cash
                and cash equivalents**
            ****
            ****
            ****
            ****
            ****
            ****
            ******at
                the end of period**
            ****
            **$**
            **8,944,922**
            ****
            **$**
            **30,244,244**
            ********
            ****
            ****
            ****
            ****
            ****
            ****
            ******Supplemental
                disclosure of cash flow information:**
            ****
            ****
            ****
            ****
            ****
            ****Cash
                received during the period for:Bills
                receivable discounted to bank
            
            $
            5,982,945
            
            $
            8,342,272Cash
                paid during the period for:Income
                taxes
            
            $
            290,102
            
            $
            140,196Interest,
                net of amounts capitalized
            
            $
            3,136,549
            
            $
            7,377,463**Non-cash
                movements affecting financing transactions:**2006
                escrow shares donated by Mr. Xiangqian Liand
                release to investors
            
            $
            7,955,358
            
            $
            —2005
                escrow shares donated by Mr. Xiangqian Li
            
            $
            —
            
            $
            6,146,3312005
                escrow shares settlement
            
            $
            —
            
            $
            2,079,721





See
      accompanying notes to the condensed interim consolidated financial
      statements.


F-9


***China
      BAK Battery, Inc. and subsidiaries***


***Notes
      to the condensed interim consolidated financial
      statements***


***For
      the nine months ended June 30, 2007 and 2008***




(Unaudited)




***1.***
              ***Principal
                  Activities, Basis of Presentation and
                  Organization***





*Principal
      Activities*





China
      BAK
      Battery, Inc. (“China BAK” or the “Company") 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
      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 were 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
      June 30, 2008, the Company’s subsidiaries consist of: i) BAK International
      Limited (“BAK International”), a wholly owned limited liability company
      incorporated in Hong Kong on March 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; and vi) BAK
      Europe GmbH (“BAK Europe”), a wholly owned limited liability company established
      in Germany on November 28, 2007.





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 is required to be fully contributed no later than
      December 11, 2008. BAK Tianjin will be principally engaged in the manufacture
      of
      advanced lithium ion batteries for use in light electric vehicles and
      uninterruptible power supplies.


F-10





***China
      BAK Battery, Inc. and subsidiaries***


***Notes
      to the condensed interim consolidated financial
      statements***


***For
      the nine months ended June 30, 2007 and 2008
      (continued)***




(Unaudited)




*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 manner of 50% upon reaching the 2005 target and the
      remaining 50% upon reaching the 2006 target.


F-11


***China
      BAK Battery, Inc. and subsidiaries***


***Notes
      to the condensed interim consolidated financial
      statements***


***For
      the nine months ended June 30, 2007 and 2008
      (continued)***




(Unaudited)




*Basis
      of Presentation and Organization (continued)*





Under
      generally accepted accounting principles 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.





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 are elements of shareholders’ equity. This entry is not material because
      total ordinary shares 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, as set out in the condensed interim consolidated
      statements of shareholders’ equity and consolidated balance sheets.





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 as treasury shares.
      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 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.


F-12


***China
      BAK Battery, Inc. and subsidiaries***


***Notes
      to the condensed interim consolidated financial
      statements***


***For
      the nine months ended June 30, 2007 and 2008
      (continued)***




**** (Unaudited)




*Basis
      of Presentation and Organization (continued)*





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
      Agreements, 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 June 30, 2008
      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.





The
      interim results of operations are not necessarily indicative of the results
      to
      be expected for the fiscal year ending September 30, 2008. The Company’s
      consolidated balance sheet as of September 30, 2007 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, 2007. 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, 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.


F-13


***China
      BAK Battery, Inc. and subsidiaries***


***Notes
      to the condensed interim consolidated financial
      statements***


***For
      the nine months ended June 30, 2007 and 2008
      (continued)***




**** (Unaudited)




***Recently
      Issued Accounting Standards***





*FASB
      Interpretation No. 48 “Accounting for Uncertainty in Income Taxes-an
      Interpretation of FASB Statement No. 109”*





In
      July
      2006, the Financial Accounting Standards Board (the “FASB”) issued FASB
      Interpretation Number (“FIN”) 48 “Accounting for Uncertainty in Income Taxes-an
      Interpretation of FASB Statement No. 109” ** which
      clarifies the accounting for uncertainty in tax positions. This Interpretation
      requires that the Company recognize in its consolidated financial statements
      the
      impact of a tax position if that position is more likely than not of being
      sustained on audit, based on the technical merits of the position. The
      provisions of FIN 48 became effective for the Company on October 1, 2007. The
      adoption of FIN 48 has no material impact on the Company’s financial
      statements.





*SFAS
      157 “Fair Value Measurements”*





In
      September 2006, the FASB issued SFAS 157 “Fair Value Measurements” which defines
      fair value *,* establishes a framework for measuring fair value in generally accepted
      accounting principles, and expands disclosures about fair value measurements.
      Statement of Financial Accounting Standards (“SFAS”) 157 applies under other
      accounting pronouncements that require or permit fair value measurements, where
      fair value is the relevant measurement attribute. The standard does not require
      any new fair value measurements. SFAS 157 is effective for financial statements
      issued for fiscal years beginning after November 15, 2007, and interim periods
      within those fiscal years. The Company’s management is in the process of
      evaluating the impact SFAS 157 will have on the Company’s financial statements
      upon adoption.





*SFAS
      159 “The Fair Value Option for Financial Assets and Financial
      Liabilities-Including an Amendment of FASB Statement No. 115”*





In
      February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial
      Assets and Financial Liabilities - Including an Amendment of FASB Statement
      No.
      115.” SFAS 159 permits entities to choose to measure many financial instruments
      and certain other items at fair value. Entities that elect the fair value option
      will report unrealized gains and losses in earnings at each subsequent reporting
      date. The fair value option may be elected on an instrument-by-instrument basis,
      with a few exceptions. SFAS 159 also establishes presentation and disclosure
      requirements to facilitate comparisons between entities that choose different
      measurement attributes for similar assets and liabilities. The requirements
      of
      SFAS 159 are effective for the fiscal year beginning on October 1, 2008. The
      Company’s management is in the process of evaluating the impact SFAS 159 will
      have on the Company’s financial statements upon adoption.





*SFAS
      160 “Noncontrolling Interests in Consolidated Financial Statements-an amendment
      of ARB No. 51”*





In
      December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests in
      Consolidated Financial Statements - an amendment of ARB No. 51.” SFAS 160
      establishes accounting and reporting standards for the noncontrolling interest
      in a subsidary and for the deconsolidation of a subsidiary. The guidance will
      become effective for the fiscal year beginning after December 15, 2008. The
      Company’s management is in the process of evaluating the impact SFAS 160 will
      have on the Company’s financial statements upon adoption.





F-14





***China
      BAK Battery, Inc. and subsidiaries***


***Notes
      to the condensed interim consolidated financial
      statements***


***For
      the nine months ended June 30, 2007 and 2008
      (continued)***




**** (Unaudited)




***Recently
      Issued Accounting Standards (continued)***





*SFAS
      141(Revised) “Business Combinations”*





In
      December 2007, the FASB issued SFAS No. 141 (Revised) “Business Combinations.”
SFAS 141 (Revised) 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. The
      guidance will become effective for the fiscal year beginning after December
      15,
      2008. The Company’s management is in the process of evaluating the impact SFAS
      141 (Revised) will have on the Company’s financial statements upon
      adoption.





*SFAS
      161 “Disclosures about Derivative Instruments and Hedging
      Activities”*





In
      March
      2008, the FASB issued SFAS No. 161 “Disclosures about Derivative
      Instruments and Hedging Activities.” SFAS 161 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 adoption encouraged. The
      Company’s management is in the process of evaluating the impact SFAS 161 will
      have on the Company’s financial statements upon adoption.





*SFAS
      162 “The Hierarchy of Generally Accepted Accounting
      Principles”*




In
      May
      2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
      Accounting Principles. SFAS 162 identifies the sources of accounting principles
      and the framework for selecting the principles to be used in the preparation
      of
      financial statements of nongovernmental entities that are presented in
      conformity with GAAP. SFAS 162 directs the GAAP hierarchy to the entity, not
      the
      independent auditors, as the entity is responsible for selecting accounting
      principles for financial statements that are presented in conformity with GAAP.
      SFAS 162 is effective 60 days following the SEC's approval of the Public Company
      Accounting Oversight Board amendments to remove the GAAP hierarchy from the
      auditing standards. SFAS 162 is not expected to have a material impact on the
      Company’s financial statements.





F-15











***China
      BAK Battery, Inc. and subsidiaries***


***Notes
      to the condensed interim consolidated financial
      statements***


***For
      the nine months ended June 30, 2007 and 2008
      (continued)***




**** (Unaudited)




**2**
            **Pledged
                Deposits**





Pledged
      deposits as of September 30, 2007 and June 30, 2008 consist of the
      following:





*September
                30,*
            
            *June
                30,**2007*
            
            *2008*Pledged
                deposits with banks for bills payable
            
            $
            4,594,727
            
            $
            6,331,248





**3**
            **Trade
                Accounts Receivable, net**




Trade
      accounts receivable as of September 30, 2007 and June 30, 2008 consist of the
      following:





*September
                30,*
            
            *June
                30,**2007*
            
            *2008*Trade
                accounts receivable
            
            $
            57,928,281
            
            $
            86,937,198Less:
                Allowance for doubtful accounts
            
            
            (3,021,617
            )
            
            (5,599,823
            )54,906,664
            
            
            81,337,375Bills
                receivable
            
            
            8,244,208
            
            
            3,763,094$
            63,150,872
            
            $
            85,100,469





An
      analysis of the allowance for doubtful accounts for the nine months ended June
      30, 2007 and 2008 is as follows:





*Nine
                months ended June 30,**2007*
            
            *2008*Balance
                at beginning of period
            
            $
            1,063,285
            
            $
            3,021,617Addition
                of bad debt expense, net
            
            
            1,395,011
            
            
            2,291,114Foreign
                exchange adjustment
            
            
            69,073
            
            
            287,092Balance
                at end of period
            
            $
            2,527,369
            
            $
            5,599,823





**4**
            **Inventories**





Inventories
      as of September 30, 2007 and June 30, 2008 consist of the
      following:





*September
                30,*
            
            *June
                30,**2007*
            
            *2008*Raw
                materials
            
            $
            15,245,732
            
            $
            21,206,113Work-in-progress
            
            
            5,698,017
            
            
            11,868,673Finished
                goods
            
            
            40,776,958
            
            
            37,309,54361,720,707
            
            
            70,384,329Provision
                for obsolete inventories
            
            
            (1,893,475
            )
            
            (2,193,007
            )$
            59,827,232
            
            $
            68,191,322




F-16


***China
      BAK Battery, Inc. and subsidiaries***


***Notes
      to the condensed interim consolidated financial
      statements***


***For
      the nine months ended June 30, 2007 and 2008
      (continued)***




**** (Unaudited)




**4**
            **Inventories
                (continued)**





Part
      of
      the inventories with carrying value of US$19,971,241 and US$21,868,758 as of
      September 30, 2007 and June 30, 2008, 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, 2007 and June 30, 2008 consist of
      the
      following:





*September
                30,*
            
            *June
                30,**2007*
            
            *2008*Prepayments
                for raw materials and others
            
            $
            925,187
            
            $
            5,533,303Other
                receivables
            
            
            740,088
            
            
            3,441,005Less:
                Allowance for doubtful accounts
            
            
            (8,781
            )
            
            (9,031
            )$
            1,656,494
            
            $
            8,965,277





**6**
            **Property,
                Plant and Equipment, net**





Property,
      plant and equipment as of September 30, 2007 and June 30, 2008 consist of the
      following:





*September
                30,*
            
            *June
                30,**2007*
            
            *2008*Buildings
            
            $
            70,380,985
            
            $
            94,063,618Machinery
                and equipment
            
            
            59,405,092
            
            
            78,664,564Office
                equipment
            
            
            1,088,032
            
            
            3,438,620Motor
                vehicles
            
            
            1,135,616
            
            
            1,048,563132,009,725
            
            
            177,215,365Accumulated
                depreciation
            
            
            (19,301,165
            )
            
            (30,223,156
            )Construction
                in progress
            
            
            12,578,715
            
            
            6,482,305Prepayment
                for acquisition of property, plant and equipment
            
            
            19,835,747
            
            
            29,118,162$
            145,123,022
            
            $
            182,592,676





*(i)*
            Depreciation
                expense for the nine months ended June 30, 2007 and 2008 is included
                in
                the consolidated statements of operations and comprehensive income
                as
                follows:




*Nine
                months ended June 30,**2007*
            
            *2008*Cost
                of revenues
            
            $
            4,660,914
            
            $
            6,896,292Research
                and development costs
            
            
            214,808
            
            
            422,156Sales
                and marketing expenses
            
            
            442,281
            
            
            496,554General
                and administrative expenses
            
            
            1,075,218
            
            
            1,215,960$
            6,393,221
            
            $
            9,030,962




F-17




***China
      BAK Battery, Inc. and subsidiaries***


***Notes
      to the condensed interim consolidated financial
      statements***


***For
      the nine months ended June 30, 2007 and 2008
      (continued)***




**** (Unaudited)




**6**
            **Property,
                Plant and Equipment, net
                (continued)**




*(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
      nine months ended June 30, 2007 and 2008, the Company capitalized interest
      of
      approximately US$242,396 and US$182,180, respectively, to the cost of
      construction in progress.





*(iii)*
            *Pledged
                Property, Plant and Equipment*





As
      of
      September 30, 2007 and June 30, 2008, machinery and equipment with net book
      value of US$34,090,267 and US$37,914,932 of the Company were pledged as
      collateral under certain loan arrangements (see Notes 7 and 8).





**7**
            **Short-term
                Bank Loans**





The
      Company obtained several short-term loan facilities from financial institutions
      in the PRC. These facilities were secured by the Company’s assets with the
      following carrying values:





*September
                30,*
            
            *June
                30,**2007*
            
            *2008*Inventories
                (Note 4)
            
            $
            19,971,241
            
            $
            21,868,758Machinery
                and equipment, net (Note 6)
            
            
            18,299,368
            
            
            15,047,614$
            38,270,609
            
            $
            36,916,372





As
      of
      September 30, 2007 and June 30, 2008, the Company had several short-term bank
      loans with aggregate outstanding balances of US$89,870,586 and US$111,530,667
      respectively. The loans were primarily obtained for general working capital,
      carried interest rates ranging from 6.156% to 8.217% per annum, and had maturity
      dates ranging from 2 to 9 months. Each loan is guaranteed by Mr. Xiangqian
      Li,
      who did not receive any compensation for acting as guarantor.





The
      Company also committed to pledge the property ownership and land use rights
      certificate to be obtained in relation to the land on which the Company’s
      corporate campus had been constructed for short-term bank loans amounting to
      US$25,514,000 borrowed from Shenzhen Eastern Branch, Agricultural Bank of China.
      The aggregate net book value of the buildings and land use right in relation
      to
      the property ownership and land use rights certificate as of June 30, 2008
      was
      US$89,186,835.





The
      Company is subject to certain covenants, which require the Company to comply
      with certain financial ratios, for its loan facilities which are tested on
      a
      monthly basis. If the Company fails to meet the requirements, the outstanding
      bank loans, including interest and penalties due thereunder, will accelerate
      and
      become immediately due and payable.




F-18




***China
      BAK Battery, Inc. and subsidiaries***


***Notes
      to the condensed interim consolidated financial
      statements***


***For
      the nine months ended June 30, 2007 and 2008
      (continued)***




**** (Unaudited)




**8**
            **Long-term
                Bank Loans**





As
      of
      September 30, 2007 and June 30, 2008, the Company had long-term bank loans
      of
      US$29,291,154 and US$64,148,358, respectively. The loan amount of US$14,579,172
      as of June 30, 2008 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 (the “PBOC”) for three-year to five-year long-term
      loans which is currently 6.48% per annum. The long-term bank loan is repayable
      in three installments of US$4,373,752 on November 20, 2008, US$4,373,752 on
      November 20, 2009 and US$5,831,668 on December 26, 2010.





The
      other
      three loans with aggregate amount of US$26,242,510 as of June 30, 2008 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 loan of
      US$5,831,669 currently carries interest at 5.832% per annum is repayable on
      January 25, 2012. The second loan of US$11,663,338 with current annual interest
      rate of 6.237% is repayable in three installments of US$2,915,834 on January
      25,
      2010, US$7,289,586 on January 25, 2011 and US$1,457,918 on January 25, 2012
      respectively. The third loan of US$8,747,503 with current annual interest rate
      of 7.65% is repayable in two installments of US$4,373,751 on January 25, 2009
      and US$4,373,752 on January 25, 2010.





Another
      loan in the amount of US$23,326,676, as of June 30, 2008, was made 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 7.74% per annum. The loan is
      repayable in four installments of US$4,373,752 by the latest on December 26,
      2009, US$4,373,752 by the latest on December 26, 2010, US$7,289,586 by the
      latest on December 26, 2011 and US$7,289,586 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) secured by the property ownership and land use rights
      certificate of the Company’s Research and Development Test Centre and the future
      facilities to be constructed thereon.





The
      long-term bank loan with Shenzhen 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$22,867,318 as of June 30, 2008 (see Note
      6); and (iii) secured by the property ownership and land use rights certificate
      in relation to the land on which the Company’s corporate campus had been
      constructed and the future machinery and equipment to be purchased and used
      in
      the campus. Pursuant to a supplemental agreement entered into between the
      Company and Shenzhen Branch, Agricultural Bank of China, dated August 6, 2008,
      Shenzhen Branch, Agricultural Bank of China granted the Company an extension
      of
      the deadline to obtain the land use rights certificate for purposes of the
      loan
      agreement from July 30, 2008 to September 18, 2008. In accordance with the
      loan
      agreement, Shenzhen Branch, Agricultural Bank of China may impose an unspecified
      penalty on the Company if it does not obtain the land use rights certificate
      by
      this date.





The
      long-term bank loan with Tianjin Branch, Agricultural Bank of China is
      guaranteed by Mr. Xiangqian Li and secured by the property ownership and land
      use rights certificate in relation to the land on which the Company’s Tianjin
      campus had been constructed and the future machinery and equipment to be
      purchased and used in the campus.





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.




F-19


***China
      BAK Battery, Inc. and subsidiaries***


***Notes
      to the condensed interim consolidated financial
      statements***


***For
      the nine months ended June 30, 2007 and 2008
      (continued)***




**** (Unaudited)




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




The
      aggregate maturities of long-term bank loans as of June 30, 2008 are as
      follows:





Fiscal
                years ending on June 30,2009
            
            $
            8,747,5032010
            
            
            16,037,0902011
            
            
            17,495,0062012
            
            
            21,868,759$
            64,148,358





**9**
            **Share-based
                Compensation**





The
      Company grants share options to officers and employees and restricted ordinary
      shares to its non-employee directors as a reward for 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 authorizes the issuance of up to 4,000,000
      shares of the Company’s common stock. The exercise price of the 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. The Plan will terminate on May
      16, 2055. On July 25, 2008, the Company’s stockholders approved certain
      amendments to the Plan, including increasing the total number of shares
      available for issuance under the Plan to 8,000,000.





Pursuant
      to the Plan, the Company issued 2,000,000 options 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 will become vested and exercisable under the following
      schedule:





Number
                of Shares
            
            Percentage of Options Issued
            
            Initial
                Vesting Date800,000
            
            
            40
            %
            
            July
                1, 2007600,000
            
            
            30
            %
            
            January
                1, 2008600,000
            
            
            30
            %
            
            July
                1, 20082,000,000
            
            
            100
            %




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. Details of the cancellation of stock options
      and
      the relevant replacement awards are set out below under “Employee Restricted
      Stock Awards.” ****




F-20




***China
      BAK Battery, Inc. and subsidiaries***


***Notes
      to the condensed interim consolidated financial
      statements***


***For
      the nine months ended June 30, 2007 and 2008
      (continued)***




(Unaudited)




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





A
      summary
      of the original share option Plan activity for the nine months ended June 30,
      2008 is presented below:





Number of
              shares
            
            Weighted
              average
              exercise
              price
                per
              share
            
            Weighted
              average
              remaining
              contractual
              term
            
            Aggregate
              intrinsic
              value
                (1)Outstanding
                as of October 1, 2007
            
            
            400,000
            
            $
            6.25Granted
            
            
            —
            
            
            —Exercised
            
            
            200,000
            
            
            6.25Forfeited
            
            
            —
            
            
            —Cancelled
            
            
            —
            
            
            —Outstanding
                as of June 30, 2008
            
            
            200,000
            
            $
            6.25
            
            
            3.5
                years
            
            $
            —Exercisable
                as of June 30, 2008
            
            
            140,000
            
            $
            6.25
            
            
            3.5
                years
            
            $
            —





(1)
            Aggregate
                intrinsic value represents the value of the Company’s closing stock price
                on June 30, 2008 (US$4.71) 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. The Company recorded non-cash share-based compensation
      expense of US$74,000 for the nine months ended June 30, 2008 in respect of
      these
      share options granted in 2005. The expense of 2008 was recorded in research
      and
      development costs.





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
            
            
            NilExpected
                life
            
            
            6
                yearsRisk-free
                interest rate
            
            
            4.13
            %




As
      of
      June 30, 2008, there were no unrecognized compensation costs related to
      non-vested share options.


F-21





***China
      BAK Battery, Inc. and subsidiaries***


***Notes
      to the condensed interim consolidated financial
      statements***


***For
      the nine months ended June 30, 2007 and 2008
      (continued)***




**** (Unaudited)




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





Pursuant
      to the Plan, the Company also issued 1,501,500 options 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
      respective employee’s agreement.





A
      summary
      of share option plan activity for the nine months ended June 30, 2008 is
      presented below:





Number of
              Shares
            
            Weighted
              average
              exercise
              price
                per
              share
            
            Weighted
              average
              remaining
              contractual
              term
            
            Aggregate
              intrinsic
              value
                (1)Outstanding
                as of October 1, 2007
            
            
            1,418,500
            
            $
            3.28Exercised
            
            
            —
            
            
            —Forfeited
            
            
            38,500
            
            
            3.28Cancelled
            
            
            —
            
            
            —Outstanding
                as of June 30, 2008
            
            
            1,380,000
            
            $
            3.28
            
            
            5.5
                years
            
            $
            1,973,400Exercisable
                as of June 30, 2008
            
            
            60,000
            
            $
            3.35
            
            
            4.5
                years
            
            $
            81,600





(1)
      Aggregate intrinsic value represents the value of the Company’s closing stock
      price on June 30, 2008 (US$4.71) 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$1,391,000 for the nine months ended June 30, 2008 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 costs 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
            
            
            NilExpected
                life
            
            
            4
                - 10 yearsRisk-free
                interest rate
            
            
            5.09
            %





As
      of
      June 30, 2008, there were unrecognized compensation costs of US$1,124,000
      related to the above non-vested share options. These costs are expected to
      be
      recognized over a weighted average period of 1.5 years.





F-22





***China
      BAK Battery, Inc. and subsidiaries***


***Notes
      to the condensed interim consolidated financial
      statements***


***For
      the nine months ended June 30, 2007 and 2008
      (continued)***




(Unaudited)




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





Pursuant
      to the Plan, the Company also issued 360,000 options 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 of the employee’s
      agreement respectively.





A
      summary
      of share option plan activity for the 360,000 options for the nine months ended
      June 30, 2008 is presented below:





Number of
              Shares
            
            Weighted
              average
              exercise
              price
                per
              share
            
            Weighted
              average
              remaining
              contractual
              term
            
            Aggregate
              intrinsic
              value
                (1)Outstanding
                as of October 1, 2007
            
            
            —
            
            
            —Granted
                on January 28, 2008
            
            
            360,000
            
            
            4.30Exercised
            
            
            —
            
            
            —Forfeited
            
            
            —
            
            
            —Cancelled
            
            
            —
            
            
            —Outstanding
                as of June 30, 2008
            
            
            360,000
            
            $
            4.30
            
            
            5
                years
            
            $
            147,600Exercisable
                as of June 30, 2008
            
            
            30,000
            
            $
            4.30
            
            
            5
                years
            
            $
            12,300





(1)
      Aggregate intrinsic value represents the value of the Company’s closing stock
      price on June 30, 2008 (US$4.71) 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$491,000 for the nine months ended June 30, 2008 in respect of
      share options granted in 2008, which was allocated to general and administrative
      expenses and research and development costs 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
            
            
            NilExpected
                life
            
            
            5
                yearsRisk-free
                interest rate
            
            
            3.59
            %





As
      of
      June 30, 2008, there were unrecognized compensation costs of US$803,000 related
      to the above non-vested share options. These costs are expected to be recognized
      over a weighted average period of 1.2 years.





F-23





***China
      BAK Battery, Inc. and subsidiaries***


***Notes
      to the condensed interim consolidated financial
      statements***


***For
      the nine months ended June 30, 2007 and 2008
      (continued)***




**** (Unaudited)




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





On
      May
      29, 2008, the Compensation Committee of the Company’s Board of Directors
      recommended and approved the grant of options to purchase the Company’s common
      stock to Mr. Xiangqian Li of 1,080,000 shares and to five employees of 170,000
      shares 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 28, 2013 according to each
      of
      the proposed option agreements respectively. Issuance of the option to the
      grantees is subject to shareholder approval of the amendment of the Plan to
      increase the number of shares available for issuance thereunder. As of June
      30,
      2008, the related option agreements were not yet signed. The shareholders
      approved such amendment on July 28, 2008, and the related options agreements
      were subsequently signed.





Pursuant
      to the Plan, the Company also granted 5,000 restricted shares to each of the
      two
      newly elected independent directors with a fair value of US$3.35 per share
      on
      June 25, 2007 and granted 5,000 restricted shares to one of the existing
      independent directors with a fair value of US$4.33 per share on July 17,
      2007.





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 expenses of US$17,000 in
      respect of the restricted shares granted in June and July 2007 for the nine
      months ended June 30, 2008, which was recorded in general and administrative
      expenses.





As
      of
      June 30, 2008, there was no unrecognized stock-based compensation associated
      with these restricted shares granted to non-employee directors. The first,
      second, third and fourth 25% of the restricted shares were already issued as
      fully paid ordinary shares to the three independent directors on August 23,
      2007, October 25, 2007, January 14, 2008 and April 10, 2008 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 stock option plan for the nine months ended
      June 30, 2008.




F-24




***China
      BAK Battery, Inc. and subsidiaries***


***Notes
      to the condensed interim consolidated financial
      statements***


***For
      the nine months ended June 30, 2007 and 2008
      (continued)***




**** (Unaudited)




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




**Employee
      Restricted Stock Awards**





On
      September 22, 2006, the Compensation Committee approved the form of Termination
      and Release Agreement covering the cancellation of 1,400,000 shares of stock
      options granted to the optionees who are residents of the PRC. The Compensation
      Committee also consented to adopt the terms and provisions for Restricted Stock
      Grant Agreement covering the issuance of restricted shares, and committed to
      determine an appropriate number of shares of restricted stock that would be
      granted to these optionees under the Plan (the “Replacement Awards”) during the
      first quarter of fiscal year 2007. In addition, the Compensation Committee
      also
      approved delivery of the restricted shares to the employees. 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.
      The Replacement Awards were treated as liability-classified awards as of
      September 30, 2006.





The
      Company has estimated the fair value of the Replacement Awards to be US$4.27
      per
      share as of December 26, 2006, based on the estimated fair value of the
      cancelled options using the Black-Scholes Option Valuation Model together with
      the following assumptions.





Expected
                volatility
            
            
            89.51
            %Expected
                dividends
            
            
            NilExpected
                life
            
            
            4.4
                yearsRisk-free
                interest rate
            
            
            4.61
            %





On
      December 26, 2006, pursuant to the restricted stock grant agreements signed
      between the Company’s officers and the relevant optionees and based on the
      closing market price of the Company’s listed common stock on that date, i.e.
      US$6.25 per share, a total of 914,994 shares of restricted stock were granted
      as
      Replacement Awards to the employees who gave up their stock options and
      continued to be employed by the Company on that date. Fair value of the
      Replacement Awards granted to each optionee approximated that of the employee’s
      terminated stock options. The Compensation Committee ratified the grants on
      January 15, 2007.





Prior
      to
      vesting, the shares of restricted stock granted to each employee pursuant to
      the
      Replacement Awards are subject to restrictions on transferability and will
      be
      forfeited if the grantee’s employment with the Company is terminated. In
      accordance with the vesting provisions of the grants, the shares of restricted
      stock will become vested and shall no longer be subject to forfeiture under
      the
      following schedule:





Number of Shares
            
            Percentage of Options Issued
            
            Initial Vesting Date365,998
            
            40%
            
            July
                1, 2007274,498
            
            30%
            
            January
                1, 2008274,498
            
            30%
            
            July
                1, 2008914,994
            
            100%





Upon
      the
      grant of restricted stock, the Company has reclassified share-based payment
      liabilities of US$3,679,934 to shareholders’ equity. The restricted stock grant
      is treated as equity-classified awards and the unrecognized compensation costs
      will be recognized over the vesting period. The Company recognized share-based
      compensation expense of US$561,000 for the nine months ended June 30, 2008
      in
      respect of the equity-classified award. These share-based compensation costs
      were allocated to cost of revenues, sales and marketing expenses, general and
      administrative expenses and research and development costs respectively.





F-25




***China
      BAK Battery, Inc. and subsidiaries***


***Notes
      to the condensed interim consolidated financial
      statements***


***For
      the nine months ended June 30, 2007 and 2008
      (continued)***




**** (Unaudited)




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





A
      summary
      of the restricted stock grant activity for the nine months ended June 30, 2008
      is presented below:





*Weighted average**Number of*
            
            *exercise price**shares*
            
            *per share*Non-vested
                as of October 1, 2007
            
            
            530,560
            
            $
            6.25Vested
            
            
            265,280
            
            
            6.25Forfeited
            
            
            —
            
            
            —Non-vested
                as of June 30, 2008
            
            
            265,280
            
            $
            6.25





As
      such
      share-based compensation is not deductible for income tax purpose in the PRC,
      no
      income tax benefits were recognized in this respect for the nine months ended
      June 30, 2008.




As
      of
      June 30, 2008, there were no unrecognized compensation costs related to the
      restricted stock granted.





**10**
            **Net
                Income / (Loss) per Share**





The
      calculation of basic net loss per share is based on the net loss for the nine
      months ended June 30, 2008 attributable to equity shareholders of US$9,412,453
      (Net income for the nine months ended June 30, 2007: US$1,332,756) and the
      weighted average number of ordinary shares (excluding the treasury shares)
      of
      51,610,457 outstanding during the nine months ended June 30, 2008 (nine months
      ended June 30, 2007: 48,889,564 shares).





The
      effects of stock option, restricted stock and warrants outstanding during the
      nine months ended and as of June 30, 2008 were all anti-dilutive. As such,
      basic
      and diluted net loss per share for the nine months ended June 30, 2008 are
      the
      same.





The
      calculation of diluted net income per share for the nine months ended June
      30,
      2007 is based on the net income attributable to equity shareholders for the
      period of US$1,332,756 and the weighted average number of ordinary shares of
      49,282,763 in issue during the nine months ended June 30, 2007 after adjusting
      for the potential dilution of 393,199 ordinary shares. Restricted stock granted
      to employees and to non-employee directors are included in the computation
      of
      diluted net income per share for the nine months ended June 30, 2007. The share
      warrants granted to external financial advisors and stock options granted to
      employees are excluded from the computation of diluted net income per share
      as
      the warrant and stock options were both anti-dilutive.





F-26




***China
      BAK Battery, Inc. and subsidiaries***


***Notes
      to the condensed interim consolidated financial
      statements***


***For
      the nine months ended June 30, 2007 and 2008
      (continued)***




**** (Unaudited)




**11**
            **Commitments
                and Contingencies**





*(i)*
            *Capital
                Commitments*





As
      of
      September 30, 2007 and June 30, 2008, the Company had the following capital
      commitments:





*September 30,*
            
            *June 30,**2007*
            
            *2008*For
                construction of buildings
            
            $
            —
            
            $
            14,427,053For
                purchases of equipment
            
            
            12,312,763
            
            
            3,625,085$
            12,312,763
            
            $
            18,052,138





As
      of
      June 30, 2008, BAK Tianjin had plans to purchase equipment of
      US$3,223,120.





*(ii)*
            *Land
                Use Rights and Property Ownership
                Certificate*





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 has not yet obtained the land use rights certificate relating to the
      premises occupied by the Company, BAK Industrial Park. The Company obtained
      the
      approvals for project planning and construction from the government of Shenzhen
      on June 20, 2007.





According
      to notice from the government of Shenzhen on June 6, 2008, the Company obtained
      a government grant in the amount of US$7,794,232 to pay part of the land use
      rights, which was recorded as deferred income. As of June 30, 2008, the Company
      had fully paid the lease payment amount of US$16,061,223 required under the
      government’s lease arrangement for the acquisition of land use rights relating
      to BAK Industrial Park and the application for the land use rights certificate
      was in process.





Management
      believes that the Company will ultimately be granted a land use rights
      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 Shenzhen
      government determines that even with our land use rights certificate, the
      buildings constructed at BAK Industrial Park were still constructed without
      the
      proper authority and 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.





The
      Company is not able to insure its manufacturing facilities until it receives
      its
      land use rights certificate. Upon receipt of the land use rights certificate,
      the Company intends to procure such insurance.


F-27





***China
      BAK Battery, Inc. and subsidiaries***


***Notes
      to the condensed interim consolidated financial
      statements***


***For
      the nine months ended June 30, 2007 and 2008
      (continued)***




**** (Unaudited)




**11**
            **Commitments
                and Contingencies
                (continued)**





*(iii)*
            *Guarantees*





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





*September 30,*
            
            *June 30,**2007*
            
            *2008*Guaranteed
                to Hunan Reshine New Material Ltd. - a non-related party
            
            $
            5,325,664
            
            $
            5,831,669Guaranteed
                to Shenzhen Tongli Hi-tech Co. Ltd. - a non-related party
            
            
            —
            
            
            2,915,835Guaranteed
                to Shenzhen B&G Technology Development Co. Ltd. - a non-related
                party
            
            
            —
            
            
            3,644,793Guaranteed
                to Nanjing Special Metal Equipment Co. Ltd. - a non-related
                party
            
            
            1,331,416
            
            
            1,457,917$
            6,657,080
            
            $
            13,850,214





Management
      has assessed the fair value of the obligation arising from the above financial
      guarantees and considered it is immaterial to the consolidated financial
      statements. Therefore, no obligations in respect to the above guarantees were
      recognized as of June 30, 2008.





*(iv)*
            *Outstanding
                Discounted Bills*





From
      time
      to time, the Company factors bills receivable to banks. At the time of the
      factoring, all rights and privileges of holding the receivables are transferred
      to the banks. The Company removes the asset 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 bills as of September 30, 2007 and June 30,
      2008 are summarized as follows:




*September 30,*
            
            *June 30,**2007*
            
            *2008*Bank
                acceptance bills
            
            $
            17,851,850
            
            $
            25,288,012


F-28


***China
      BAK Battery, Inc. and subsidiaries***


***Notes
      to the condensed interim consolidated financial
      statements***


***For
      the nine months ended June 30, 2007 and 2008
      (continued)***




**** (Unaudited)




**11**
            **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 Company had an agreement with A123 Systems, Inc. (“A123Systems”),
      which, as amended on August 18, 2005, terminated in accordance with its terms
      on
      August 30, 2007. Under the terms of these agreements, the Company 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 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 Corporation, the Company 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.
      If
      the court issues an adverse decision, the Company may be required to pay the
      plaintiffs substantial monetary damages, and the Company may be prohibited
      from
      future production of rechargeable lithium cells manufactured for A123Systems
      or
      be required to pay royalties to engage in any such production. The court has
      not
      yet issued a decision on this matter and the Company is unable to quantify
      the
      extent of any possible award of damages that might become payable by the
      Company.





**12**
            **Significant
                Concentrations**





**(a)**
            **Customers
                and Credit Concentrations**





The
      Company had one customer that comprised 10% or more of net revenue for the
      nine
      months ended June 30, 2007 as follows:




Amount
            
            %A123Systems,
                Inc.
            
            $
            17,427,337
            
            
            18





No
      customer individually comprised 10% or more of net revenue for the nine months
      ended June 30, 2008.





On
      August
      30, 2007, the Company’s agreement with A123Systems terminated in accordance with
      its terms. The Company believes the termination of this business relationship
      has no material impact on the Company’s results of operations and financial
      condition. As of September 30, 2007, approximately 3% of gross trade accounts
      receivables were due from A123Systems. The Company did not have balance of
      gross
      trade accounts receivables due from this customer as of June 30, 2008.





**(b)**
            **Credit
                Risk**





Financial
      instruments that potentially subject the Company to significant concentration
      of
      credit risk consist primarily of cash and cash equivalents and pledged deposits.
      As of September 30, 2007 and June 30, 2008, 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-29




***China
      BAK Battery, Inc. and subsidiaries***


***Notes
      to the condensed interim consolidated financial
      statements***


***For
      the nine months ended June 30, 2007 and 2008
      (continued)***




**** (Unaudited)




**13**
            **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. The Company manufactures six types
      of
      Li-ion rechargeable batteries: steel-case cell, aluminium-case cell, battery
      pack, 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 nine months ended June 30, 2007 and 2008 were as follows:





*Net
      revenues by product:*





*Nine months ended June 30,**2007*
            
            *2008*%
            
            
            
            %Steel-case
                cell
            
            $
            27,882,363
            
            
            27.31
            
            $
            25,658,603
            
            
            14.87Aluminium-case
                cell
            
            
            43,786,621
            
            
            42.89
            
            
            94,115,411
            
            
            54.53High-power
                lithium-phosphate
                cell
            
            
            17,411,172
            
            
            17.06
            
            
            —
            
            
            —Battery
                pack
            
            
            8,201,389
            
            
            8.03
            
            
            20,104,778
            
            
            11.64Cylindrical
                cell
            
            
            2,257,865
            
            
            2.21
            
            
            22,907,137
            
            
            13.27Polymer
                cell
            
            
            2,548,885
            
            
            2.50
            
            
            9,823,555
            
            
            5.69$
            102,088,295
            
            
            100.00
            
            $
            172,609,484
            
            
            100.00





*Net
      revenues by geographic area:*





*Nine months ended June 30,**2007*
            
            *2008*%
            
            
            
            %PRC
                Mainland
            
            $
            71,246,211
            
            
            69.79
            
            $
            132,486,039
            
            
            76.75United
                States of America
            
            
            17,760,368
            
            
            17.40
            
            
            67,291
            
            
            0.04Hong
                Kong, China
            
            
            4,516,920
            
            
            4.42
            
            
            10,611,065
            
            
            6.15India
            
            
            —
            
            
            —
            
            
            4,158,713
            
            
            2.41Others
            
            
            8,564,796
            
            
            8.39
            
            
            25,286,376
            
            
            14.65$
            102,088,295
            
            
            100.00
            
            $
            172,609,484
            
            
            100.00


F-30


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





The
      following discussion should be read in conjunction with the condensed interim
      consolidated financial statements and notes included in Item 1 of Part I of
      this Report. This Report contains forward-looking statements that involve risks
      and uncertainties. Our actual results may differ materially from those indicated
      by such forward-looking statements. See “Introductory Comments — Forward-Looking
      Statements” above.





**Overview**





During
      the third quarter of fiscal year 2008, we achieved record net revenues of $68.5
      million, over 30% greater than our net revenues of $51.3 million in the second
      quarter of fiscal year 2008 and over 130% greater than our net revenues of
      $29.5 million in the third quarter of fiscal year 2007. The substantial
      increase in net revenues over the net revenue generated in the same period
      of
      last year was primarily due to the significant increase in revenues from
      aluminum case cells, cylindrical cells, steel case cells and battery packs,
      for
      increases of approximately $19.1 million, $12.7 million, $4.8 million and $4.0
      million, or 129.4%, 1297.9%, 90.5% and 90.2%, respectively. Our strong
      cylindrical sales were largely a result of increased sales to the laptop
      computer market. We also continued to make progress in expanding our
      manufacturing capability into first-tier OEM capabilities, and in working
      through the qualification processes of targeted first-tier OEMs. Our
      achievements during the third quarter of fiscal year 2008 include the
      following:





—
            We
                achieved our highest quarterly net revenues for fiscal year 2008
                of $68.5
                million during a historically slow quarter, and over 30% greater
                than our
                net revenues last quarter, due to continuing growth in sales of prismatic
                cells and cylindrical cells;—
            We
                reported a smaller loss and higher gross margin as compared to last
                quarter due to a higher selling price and continued cost-cutting
                efforts,
                which minimized the impact of the higher cost of raw
                materials;—
            We
                increased revenue from cylindrical cells, used in laptop computers,
                to
                $13.6 million, more than twice last quarter’s revenues, and began shipping
                cylindrical cells to a well-known Taiwan-based notebook maker, ASUS
                Tek
                Computer Inc., in May 2008; revenue from cylindrical cells now accounts
                for 20% of our total revenues;—
            We
                received final approval from the Shenzhen Municipal Government regarding
                the land use rights of BAK Industrial Park;—
            BAK
                International (Tianjin) Limited obtained a 4-year long-term loan
                of RMB
                160 million from the Agricultural Bank of China to fund the operation
                of
                our Tianjin facilities; our Tianjin facilities are expected to commerce
                operation around October 2008;—
            For
                our prismatic cells and polymer cells, we continue to attract major
                customers such as Foxconn Technology Group, the world’s largest
                multi-national manufacturing services provider, and Sandisk, the
                world's
                largest supplier of innovative flash memory data storage products;
                and—
            We
                held our 2008 annual meeting of shareholders on July 25, 2008, at
                which
                our board was elected, our independent auditor was confirmed and
                additional shares were authorized to be made available under our
                equity
                compensation plan.





In
      addition to maintaining strong net revenues, we raised our selling price and
      continued to cut costs. This resulted in an increase of $3.3 million in our
      gross profit, from $5.1 million in the third quarter of fiscal year 2007 to
      $8.4 million in the third quarter of fiscal year 2008, and a net loss for
      the quarter ended June 30, 2008, of $2.3 million, as compared to a net loss
      of
      $2.7 million for the same period in fiscal year 2007, due to a higher
      selling price and cost-cutting efforts, which minimized the impact of the higher
      cost of raw materials.





In
      the
      near-term, we anticipate that we will continue to experience pressure due to
      increased costs, including the costs of raw materials and overhead, as well
      as
      the costs of additional anticipated capital improvements as we transition from
      predominantly a replacement market to global first tier OEM capabilities. In
      response to this challenge, while we believe that we remain among the low cost
      manufacturers in the industry, we are seeking to reduce the purchase costs
      of
      raw materials and other unit costs of production while pursuing opportunities
      to
      raise selling prices where it would benefit our financial results. In addition,
      we are seeking to identify alternative raw materials suppliers to the extent
      there are viable alternatives and to expand our use of alternative raw
      materials. Among other things, we have successfully developed the technology
      to
      use substitute materials to reduce the amount of lithium cobalt dioxide used
      in
      the manufacture of lithium-based cells. Lithium cobalt dioxide is the most
      expensive ingredient currently required to make lithium-based cells because
      cobalt is not renewable. We have also restructured our operations in an effort
      to streamline corporate resources and improve internal efficiency, with a
      particular focus on manufacturing and sales.





1


From
      a
      long-term perspective, we believe that our investment in building our first
      tier
      OEM capabilities and increasing our production capacity will ultimately improve
      our profitability and competitiveness as increased volume absorbs the higher
      fixed overhead costs of the investment in applicable equipment and
      infrastructure once we have completed the qualification processes of applicable
      first tier OEM companies.





To
      help
      us finance and expand our operations, we have access to $235.1 million in
      short-term credit facilities and $67.1 million in long-term credit facilities.
      As of June 30, 2008, the principal outstanding amounts under our credit
      facilities included short-term bank loans of $111.5 million, long-term bank
      loans of $8.7 million maturing within one year and long-term bank loans of
      $55.4
      million maturing in over one year, and bills payable of $11.6 million, leaving
      $118.9 million of short-term funds and $2.9 million of long-term funds available
      for additional cash needs. In addition, on July 10, 2008, our $60 million shelf
      registration statement was declared effective by the SEC, giving us the
      potential to raise up to an aggregate of $60 million in gross proceeds from
      equity financings.





**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 miner's
                lamps.





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 and Germany where our sales
      representatives market and sell our products and also provide after-sale
      service. Historically, we have primarily manufactured prismatic lithium-ion
      cells for the cellular phone replacement battery market and the OEM market.
      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 pack battery 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.





**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% 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.





The
      following table sets forth the breakdown of our net revenues by battery cell
      type for the periods indicated:




**Three Months Ended**
              **June 30,**
            
            **Nine Months Ended**
              **June 30,****2008**
            
            **2007**
            
            **2008**
            
            **2007****(in thousands)**Prismatic cellsSteel-case
                cells
            
            $
            10,023
            
            $
            5,261
            
            $
            25,658
            
            $
            27,882Aluminum-case
                cells
            
            
            33,775
            
            
            14,721
            
            
            94,115
            
            
            43,786Battery
                packs
            
            
            8,533
            
            
            4,488
            
            
            20,105
            
            
            8,203Cylindrical
                cells
            
            
            13,629
            
            
            975
            
            
            22,907
            
            
            2,258High-power
                lithium-phosphate cells
            
            
            —
            
            
            3,137
            
            
            —
            
            
            17,411Lithium
                polymer cells
            
            
            2,526
            
            
            895
            
            
            9,824
            
            
            2,548Total
            
            $
            68,486
            
            $
            29,477
            
            $
            172,609
            
            $
            102,088





2


Our
      net
      revenues increased during the three months ended June 30, 2008, partly because
      we increased our production capacity to meet an increase in demand for our
      new
      products.





*Cost
      of Revenues* .
      Cost of
      revenues consists primarily of materials costs, employee remuneration for staff
      engaged in production activity, share-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.




The
      cost
      of raw materials for aluminum-case cells is generally higher than that of
      steel-case cells. Cost of revenues from the sales of battery packs also includes
      the fees we pay to pack manufacturers for assembling our prismatic cells into
      battery packs.





The
      average unit costs of our products was higher in the three months ended June
      30,
      2008, as compared to the three months ended June 30, 2007, mainly because the
      purchase cost of lithium cobalt dioxide increased. Lithium cobalt dioxide is
      the
      main material in our products, rechargeable lithium batteries. In addition,
      during the quarter ended June 30, 2008, there was a trend of increasing costs
      relating to overhead, other raw materials, transportation, labor and other
      business costs. As a result, our gross profit, as a percentage of net revenues,
      decreased from 17.2% for the three months ended June 30, 2007 to 12.3% for
      the
      three months ended June 30, 2008, and we recognized a net loss of $2.3 million
      in the three months ended June 30, 2008, as compared to a net loss of $2.7
      million in the same period last year. We believe that the average price of
      lithium cobalt dioxide in the three months ended June 30, 2008, which was
      approximately 60% higher than the average price of lithium cobalt dioxide in
      the
      same quarter last year, will fluctuate and may continue to increase in the
      short
      run. **** To
      the
      extent that we are not able to fully reflect these increased costs in our prices
      or use alternative less costly materials, our gross profit, as a percentage
      of
      net revenues, may decrease.





*Research
      and Development Costs* .
      Research and development costs primarily comprise remuneration for R&D
      staff, including share-based compensation, depreciation and maintenance expenses
      relating to R&D equipment and R&D material costs.





*Sales
      and Marketing* .
      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, as well as advertising cost, depreciation, sales and marketing
      staff share-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* .
      General
      and administrative expenses consist primarily of employee remuneration including
      share-based compensation (other than for research and development and sales
      and
      marketing staff), professional fees, insurance, benefits, general office
      expenses, depreciation, liquidated damage charge and bad debt
      expenses.





*Government
      Grant Income / Other Income / (Other Expenses).* Government grant income for the three months ended June 30, 2008, mainly
      consisted of grant funds from the Shenzhen Government to subsidize the payment
      of land use rights of BAK Industrial Park.





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




*Income
      Taxes* .
      Under
      applicable income tax laws and regulations, an enterprise located in Shenzhen,
      including the district where our operations are located, is subject to a 25%
      enterprise income tax. Further, according to PRC laws and regulations, foreign
      invested manufacturing enterprises, starting from their first profitable year,
      are entitled to a two-year exemption from enterprise income tax followed by
      a
      three-year 50% reduction in its enterprise income tax rate. Two of our PRC
      subsidiaries, Shenzhen BAK and BAK Electronics are each entitled to a two-year
      exemption from enterprise income tax and a reduced enterprise income tax rate
      for the three years following its second profitable year. As such, for the
      first
      two calendar years ended December 31, 2003, Shenzhen BAK was exempted from
      any
      enterprise income tax. Between January 1, 2004 and December 31, 2006, Shenzhen
      BAK was subject to an enterprise income tax rate of 7.5%. In addition, due
      to
      the additional capital invested in Shenzhen BAK in both 2005 and 2006, Shenzhen
      BAK was granted a preferential income tax rate of 3.309% and 3.82% in calendar
      years 2005 and 2006. BAK Electronics, established in August 2005, is eligible
      for the same preferential tax treatment previously applicable to Shenzhen BAK
      and was in the tax holiday and fully exempt from any enterprise income tax
      for
      the calendar years 2006 and 2007. Between January 1, 2008 and December 31,
      2010,
      the tax rate of BAK Electronics is subject to further notice from the Shenzhen
      Tax Bureau. Beginning January 1, 2011, BAK Electronics will be subject to the
      full corporate income tax rate which, in accordance with the PRC’s new corporate
      income tax law discussed below, will be 25%. BAK Tianjin is currently exempt
      from any enterprise income tax due to cumulative tax losses. Shenzhen BAK and
      BAK Electronics received in aggregate a tax benefit of $181,000 pursuant to
      the
      tax holiday for the nine months ended June 30, 2008, or $0.004 per basic
      share.




In
      addition, Shenzhen BAK was granted an income tax rate of 7.5% in calendar year
      2007. Its income tax rate for the calendar year 2008 was 18% with temporary
      notice from the Shenzhen Tax Bureau as of June 30, 2008.





3


On
      March
      16, 2007, the National People’s Congress of the PRC determined to adopt a new
      corporate income tax law in its fifth plenary session. The new corporate income
      tax law unifies the application scope, tax rate, tax deduction and preferential
      policy for both domestic and foreign-invested enterprises. The new corporate
      income tax law became effective on January 1, 2008. According to the new
      corporate income tax law, the applicable income tax rate for our operating
      subsidiaries will be 25% after their preferential tax holidays have
      ended.





Our
      company is subject to U.S. tax at the statutory rate of 35%. We have not made
      provisions for any U.S. tax because we have determined that we have no U.S.
      taxable income.





Our
      Canada subsidiary, BAK Canada, is subject to Canada profits tax at the rate
      of
      36.1%. However, because it does not have any assessable income derived from
      or
      arising in Canada, it has not paid any Canada profits tax.





Our
      German subsidiary, BAK Europe, is subject to Germany’s profits tax at the rate
      of 25%. However, because it does not have any assessable income derived from
      or
      arising in Germany, it has not paid any German profits tax.





Our
      Hong
      Kong subsidiary, BAK International, is subject to Hong Kong profits tax at
      the
      rate of 17.5%. However, because it does not have any assessable income derived
      from or arising in Hong Kong, it has not paid any Hong Kong profits
      tax.





Our
      effective tax rate was 17.5% for the nine months ended June 30, 2007 and our
      effective tax benefit rate was 0.5% for the nine months ended June 30,
      2008.




**Results
      of Operations**





***Results
      of operations for the three months ended June 30, 2008 as compared to the three
      months ended June 30, 2007.***




**Three****Months****Ended**
              **June 30,****2008**
            
            **2007**
            
            **$ Change**
            
            **% Change****(In thousands, except percentages)**Statement of Operations
                dataRevenues
            
            $
            68,486
            
            $
            29,477
            
            $
            39,009
            
            
            132.3
            %Cost
                of revenues
            
            
            60,082
            
            
            24,415
            
            
            35,667
            
            
            146.1Gross
                profit
            
            
            8,404
            
            
            5,062
            
            
            3,342
            
            
            66.0Operating
                expenses:Research
                and development costs
            
            
            1,855
            
            
            1,118
            
            
            737
            
            
            65.9Sales
                and marketing expenses
            
            
            1,484
            
            
            1,165
            
            
            319
            
            
            27.4General
                and administrative expenses
            
            
            5,101
            
            
            4,189
            
            
            912
            
            
            21.8Total
                operating expenses
            
            
            8,440
            
            
            6,472
            
            
            1,968
            
            
            30.4Operating
                loss
            
            
            (36
            )
            
            (1,410
            )
            
            1,374
            
            
            97.4Finance
                costs, net
            
            
            2,736
            
            
            1,070
            
            
            1,666
            
            
            155.7Government
                grant income
            
            
            (339
            )
            
            —
            
            
            339
            
            
            N/AOther
                expenses / (income)
            
            
            (114
            )
            
            90
            
            
            (204
            )
            
            (226.7
            )Income
                taxes / (benefit)
            
            
            (31
            )
            
            120
            
            
            (151
            )
            
            (125.8
            )Net
                loss
            
            $
            (2,288
            )
            $
            (2,690
            )
            $
            402
            
            
            14.9
            %




*Net
      Revenues* . 
      Net revenues increased to $68.5 million for the three months ended June 30,
      2008
      as compared to $29.5 million for the same period of the prior year, an increase
      of $39.0 million or 132.3%.




l
            Net
                revenues from sales of steel-case cells increased to $10.0 million
                in the
                three months ended June 30, 2008, from $5.3 million in the same period
                in
                fiscal 2007, an increase of $4.8 million or 90.5%, and was primarily
                attributable to a 27.5% increase in sales volume and a 49.4% increase
                in
                the average selling price, driven by higher
                demand.




4





l
            Net
                revenues from sales of aluminum-case cells increased to $33.8 million
                in
                the three months ended June 30, 2008, from $14.7 million in the same
                period in fiscal 2007, an increase of $19.1 million or 129.4%, due
                to a
                107.0% increase in sales volume, driven by increased sales to the
                OEM
                market in the PRC.l
            Net
                revenues from sales of battery packs increased to $8.5 million in
                the
                three months ended June 30, 2008, from $4.5 million in the same period
                in
                fiscal 2007, an increase of $4.0 million or 90.1%, due to a 56.0%
                increase
                in sales volume and a 21.9% increase in our average selling price,
                driven
                by increased sales to the OEM market in the PRC.l
            Net
                revenues from sales of cylindrical cells increased to $13.6 million
                in the
                three months ended June 30, 2008, from $1 million in the same period
                in
                fiscal year 2007, an increase of $12.6 million, due to a 780.3%
                increase in sales volume and a 58.8.1% increase in our average selling
                price, driven by increased sales to laptop
                manufacturers.l
            We
                also sold $2.5 million of lithium polymer cells in the three months
                ended
                June 30, 2008, compared to $0.9 million of lithium polymer cells
                in the
                same period in 2007, due to our ability to meet additional demand
                by
                increasing production.l
            We
                had no sales of high-power lithium-ion cells in the three months
                ended
                June 30, 2008, compared to $3.1 million in the same period in 2007,
                primarily due to the termination of our manufacturing agreement with
                A123Systems in August 2007. We are actively seeking new markets for
                our
                high-power lithium-ion cells, such as the markets for miner’s lamps,
                electric bicycles, and hybrid electric
                vehicles.




*Cost
      of Revenues* . 
      Cost of revenues increased to $60.1 million for the three months ended June
      30,
      2008, as compared to $24.4 million for the same period in fiscal 2007, an
      increase of $35.7 million or 146.1%. The increase in cost of revenues was mainly
      attributable to a significant increase in the cost of lithium cobalt dioxide,
      the main raw material in our products.




As
      a
      result, gross profit for the three months ended June 30, 2008 was $8.4 million
      or 12.3% of net revenues as compared to gross profit of $5.1 million or 17.2%
      of
      net revenues for the same period in fiscal 2007. The decrease in gross profit
      as
      a percentage of net revenues was primarily due to a significant increase in
      the
      cost of lithium cobalt dioxide, the main raw material in our
      products.




*Research
      and Development Costs* . 
      Research and development costs increased to $1.9 million for the three months
      ended June 30, 2008, as compared to $1.1 million for the same period in fiscal
      2007. Salaries related to research and development (“R&D”) staff increased
      to $657,000 from $389,000 for the same period of the prior year, an increase
      of
      $268,000, primarily due to our hiring of additional R&D professionals.
      Share-based compensation included in R&D costs increased by $102,000 due to
      new stock options granted to the employees in our R&D department on June 25,
      2007 and January 28, 2008. Depreciation charges increased by $54,000 mainly
      related to certain R&D equipment held by BAK Canada.




*Sales
      and Marketing Expenses* . 
      Sales and marketing expenses increased to $1.5 million for the three months
      ended June 30, 2008, as compared to $1.2 million for the same period in fiscal
      2007, an increase of $319,000 or 27.4%, primarily due to a $290,000 increase
      in
      salaries and a $64,000 increase in packing expenses due to increased sales.
      Share-based compensation included in sales and marketing expenses decreased
      by
      $73,000. As a percentage of net revenues, sales and marketing expenses decreased
      to 2.2% for the three months ended June 30, 2008, from 4.0% for the same period
      in fiscal year 2007.




*General
      and Administrative Expenses* . 
      General and administrative expenses increased to $5.1 million, or 7.4% of
      revenues, for the three months ended June 30, 2008, as compared to $4.2 million,
      or 14.2% of revenues, for the same period in fiscal 2007, an increase of
      $912,000 or 21.8%. Share-based compensation included in general and marketing
      expenses increased by $61,000 due to new stock options granted to the employees
      in our general administration department on June 25, 2007 and January 28, 2008.
      We also recognized an exchange loss of $785,000 for the three months ended
      June
      30, 2008, compared with $162,000 for the same period in fiscal year 2007.
      Salaries increased by $210,000 in the aggregate due to an increase in average
      salaries paid.




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. On August 15, 2006, the SEC declared effective a post-effective
      amendment that we had filed on August 4, 2006, terminating the effectiveness
      of
      a resale registration statement on Form SB-2 that had been filed pursuant to
      a
      registration rights agreement with certain shareholders to register the resale
      of shares held by those shareholders. In addition, on December 19, 2006, we
      filed our Form 10-K for our fiscal year ended September 30, 2006 (the “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 resales by the
      selling shareholders whose shares were included in such Form S-1. Under the
      registration rights agreement, those selling shareholders became eligible for
      liquidated damages relating to the above two events totaling approximately
      $1
      million from us. We recognized approximately $760,000 in liquidated damages
      relating to our third fiscal quarter of 2007. Please see Part II, Item 1. “Legal
      Proceedings — Liquidated Damages Pursuant to September 2005 Registration Rights
      Agreement” for a further description of these liquidated damages and related
      accounting treatment.





5


In
      addition, we are 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 June 30, 2008. Please see Part II, Item 1. “Legal Proceedings — Liquidated
      Damages Pursuant to November 2007 Registration Rights Agreement” for a further
      description of these liquidated damages. In our previous quarter, we recognized
      in general and administrative expenses an amount of $293,475 for the liquidated
      damages for the three months ended March 31, 2008. We therefore recognized
      in
      general and administrative expenses an amount of $267,699 for the liquidated
      damages for the three months ended June 30, 2008, as compared to approximately
      $197,000 for the same period in 2007.





As
      described under Part II, Item 1. “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
      Loss* . 
      As a result of the above, operating loss totaled $36,000 for the three months
      ended June 30, 2008, as compared to operating loss of $1.4 million for the
      same
      period of the prior year, a decrease of $1.4 million or 97.4%.




*Finance
      Costs, Net* . 
      Finance costs, net, increased to $2.7 million for the three months ended June
      30, 2008, as compared to $1.1 million for the same period of the prior fiscal
      year, an increase of $1.7 million or 155.7%. We have $111.5 million in
      short-term bank loans maturing in less than one year, $8.7 million in long-term
      bank loans maturing within one year, and $55.4 million in other long-term bank
      loans maturing in more than one year, outstanding as of June 30, 2008, as
      compared to $67.6 million in short-term bank loans maturing in less than one
      year and $26.3 million in long-term bank loans maturing in more than one year,
      outstanding as of June 30, 2007. The increase in net finance costs is also
      attributable to the increase in average bank loan interest rates on both our
      short-term and long-term bank loans and the increase in outstanding principal
      for both our short-term and long-term bank loans.




*Government
      Grant Income / Other Income / (Other Expenses).* We
      had
      government grant income of $339,000 and other income of $114,000 for the
      three-month period ended June 30, 2008, as compared to no government grant
      income and other expenses of $90,000 for the three-month period ended June
      30,
      2007. Government grant income for the three months ended June 30, 2008 mainly
      represented the receipt of grant funds from the Shenzhen Government to subsidize
      payment of land use rights for BAK Industrial Park.




*Income
      tax expenses / (benefits)* . 
      Income tax benefits were $31,000 for the three months ended June 30, 2008,
      as
      compared to income tax expenses of $120,000 for the same period of 2007. The
      decrease is attributable to a deferred tax provision for the three months ended
      June 30, 2008.




*Net
      Loss* . 
      As a result of the foregoing, we had a net loss of $2.3 million for the three
      months ended June 30, 2008 compared to a net loss of $2.7 million for the same
      period of 2007.




6


***Results
      of operations for the nine months ended June 30, 2008 as compared to the nine
      months ended June 30, 2007***




**Nine Months****Ended**
              **June 30,****2008**
            
            **2007**
            
            **$ Change**
            
            **% Change****(In thousands, except percentages)**Statement
                of Operations dataRevenues
            
            $
            172,609
            
            $
            102,088
            
            $
            70,521
            
            
            69.1
            %Cost
                of revenues
            
            
            153,184
            
            
            82,682
            
            
            70,502
            
            
            85.3Gross
                profit
            
            
            19,425
            
            
            19,406
            
            
            19
            
            
            0.1Operating
                expenses:Research
                and development costs
            
            
            4,564
            
            
            2,684
            
            
            1,880
            
            
            70.0Sales
                and marketing expenses
            
            
            4,235
            
            
            3,272
            
            
            963
            
            
            29.4General
                and administrative expenses
            
            
            14,162
            
            
            9,301
            
            
            4,861
            
            
            52.3Total
                operating expenses
            
            
            22,961
            
            
            15,257
            
            
            7,704
            
            
            50.5Operating
                income / (loss)
            
            
            (3,536
            )
            
            4,149
            
            
            (7,685
            )
            
            (185.2
            )Finance
                costs, net
            
            
            7,377
            
            
            3,134
            
            
            4,243
            
            
            135.4Government
                grant income
            
            
            (1,377
            )
            
            (762
            )
            
            (615
            )
            
            (80.7
            )Other
                (income)/expense
            
            
            (74
            )
            
            161
            
            
            (235
            )
            
            (146.0
            )Income
                taxes / (benefit)
            
            
            (50
            )
            
            283
            
            
            (333
            )
            
            (117.7
            )Net
                income / (loss)
            
            $
            (9,412
            )
            $
            1,333
            
            $
            (10,746
            )
            
            (806.2
            )%




*Net
      Revenues* . 
      Net revenues increased to $172.6 million for the nine months ended June 30,
      2008, as compared to $102.1 million for same period of the prior fiscal year,
      an
      increase of $70.5 million or 69.1%.




l
            Net
                revenues from the sales of steel-case cells decreased to $25.7 million
                in
                the nine months ended June 30, 2008, from $27.9 million in the same
                period
                in fiscal 2007, a decrease of $2.2 million or 8.0%, due to our strategic
                reduction of steel-case cell production in order to increase our
                aluminum-case cell production capacity, to facilitate our transition
                from
                the secondary market to the OEM market, and to capitalize on the
                greater
                benefits and lower costs of aluminum-case cells. During the six months
                ended June 30, 2008, the price and profit margin of steel-case cells
                were
                lower than those of aluminum-case cells, and market demand for
                aluminum-case cells was stronger than that for steel-case cells.
                As a
                result, we expect to continue to increase our production of aluminum-case
                cells and decrease our production of steel-case cells. We expect
                that this
                shift will positively impact our
                revenue.




l
            Net
                revenues from the sales of aluminum-case cells increased to $94.1
                million
                in the nine months ended June 30, 2008, from $43.8 million in the
                same
                period in fiscal 2007, an increase of $50.3 million or 114.9%, due
                to a
                90.4% increase in sales volume, driven by increased sales to the
                OEM
                market in the PRC, and a 12.9% increase in average selling price,
                attributable to the different type of the aluminum-case cells
                sold.l
            Net
                revenues from sales of battery packs increased to $20.1 million in
                the
                nine months ended June 30, 2008, from $8.20 million in the same period
                in
                fiscal 2007, an increase of $11.9 million or 145.1%, due to a 78.8%
                increase in sales volume and a 37.1% increase in average selling
                price,
                driven by increased sales to the OEM market in the PRC.l
            Net
                revenues from sales of cylindrical cells increased to $22.9 million
                in the
                nine months ended June 30, 2008, from $2.3 million in the same period
                in
                fiscal year 2007, an increase of $20.6 million or 914.5%, due to
                a 595.9%
                increase in sales volume and a 45.8% increase in average selling
                price,
                driven by increased exports.l
            We
                also sold $9.8 million of lithium polymer cells in the nine months
                ended
                June 30, 2008, compared to $2.5 million of lithium polymer cells
                in the
                same period in 2007, due to our ability to meet additional demand
                by
                increasing production.l
            We
                had no sales of high-power lithium-ion cells in the nine months ended
                June
                30, 2008, compared to $17.4 million in the same period in 2007, primarily
                due to the termination of our manufacturing agreement with A123Systems
                in
                August 2007. We are actively seeking new markets; such as the markets
                for
                miner’s lamps, electric bicycles, and hybrid electric vehicles; for our
                high-power lithium-ion cells.




*Cost
      of Revenues* . 
      Cost of revenues increased to $153.2 million for the nine months ended June
      30,
      2008, as compared to $82.7 million for the same period in fiscal 2007, an
      increase of $70.5 million or 85.3%. The increase in cost of revenues was mainly
      due to a significant increase in the cost of lithium cobalt dioxide, the main
      raw material in our products.




As
      a
      result, gross profit for the nine months ended June 30, 2008, was $19.4 million
      or 11.3% of net revenues as compared to gross profit of $19.4 million or 19.0%
      of net revenues for the same period in fiscal 2007. The decrease in gross profit
      as a percentage of net revenues was primarily due to the significant increase
      in
      the cost of lithium cobalt dioxide.




7


*Research
      and Development Costs* . 
      Research and development costs increased to $4.6 million for the nine months
      ended June 30, 2008, as compared to $2.7 million for the same period in fiscal
      2007. Salaries related to R&D staff increased to $1.6 million from $914,000
      for the same period of the prior year, an increase of $640,000, primarily due
      to
      our hiring of additional R&D professionals. Share-based compensation
      included in R&D costs increased by $319,000 due to new stock options granted
      to the employees in our R&D department on June 25, 2007 and January 28,
      2008. The cost of depreciation, mainly concerning R&D equipment at BAK
      Canada and BAK Tianjin, increased by $207,000, and the cost of research
      materials increased by $335,000.




*Sales
      and Marketing Expenses* . 
      Sales and marketing expenses increased to $4.2 million for the nine months
      ended
      June 30, 2008, as compared to $3.3 million for the same period in fiscal year
      2007, an increase of $963,000 or 29.4%, primarily due to a $493,000 increase
      in
      salaries and a $268,000 increase in packing expenses due to increased sales.
      Share-based compensation included in sales and marketing expenses decreased
      by
      $16,000. As a percentage of net revenues, sales and marketing expenses decreased
      to 2.4% for the nine months ended June 30, 2008, from 3.2 % for the same period
      in fiscal year 2007.




*General
      and Administrative Expenses* . 
      General and administrative expenses increased to $14.2 million, or 8.2% of
      revenues, for the nine months ended June 30, 2008, as compared to $9.3 million,
      or 9.1% of revenues, for the same period in fiscal year 2007, an increase of
      $4.9 million or 52.3%. Share-based compensation included in general and
      marketing expenses increased by $463,000 due to new stock options granted to
      the
      employees in our general administration department on June 25, 2007 and January
      28, 2008. We also recognized an exchange loss of $1.5 million for the nine
      months ended June 30, 2008, compared with $368,000 for the same period in fiscal
      year 2007. Salaries increased by $388,000 in the aggregate due to an increase
      in
      average salaries paid.




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. On August 15, 2006, the SEC declared effective a post-effective
      amendment that we had filed on August 4, 2006, terminating the effectiveness
      of
      a resale registration statement on Form SB-2 that had been filed pursuant to
      a
      registration rights agreement with certain shareholders to register the resale
      of shares held by those shareholders. In addition, on December 19, 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. Under
      the
      registration rights agreement, those selling shareholders became eligible for
      liquidated damages relating to the above two events totaling approximately
      $1.0
      million from us. We recognized approximately $760,000 in liquidated damages
      relating to our third fiscal quarter of 2007. Please see Part II, Item 1. “Legal
      Proceedings — Liquidated Damages Pursuant to September 2005 Registration Rights
      Agreement” for a further description of these liquidated damages and related
      accounting treatment.





In
      addition, we are 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 $561,000 as of June
      30,
      2008. Please see Part II, Item 1. “Legal Proceedings — Liquidated Damages
      Pursuant to November 2007 Registration Rights Agreement” for a further
      description of the liquidated damages. We therefore recognized in general and
      administrative expenses an amount of $561,474 for the liquidated damages for
      the
      nine months ended June 30, 2008, as compared to approximately $760,000 for
      the
      same period in 2007.





As
      described under Part II, Item 1. “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 resale 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 $3.5 million for the nine months
      ended June 30, 2008, as compared to operating income of $4.1 million for the
      same period of the prior fiscal year, a decrease of $7.7 million or 185.2%.
      As a
      percentage of net revenues, operating loss was 2.0% for the nine months ended
      June 30, 2008, as compared to 4.1% for the same period of the prior fiscal
      year.




*Finance
      Costs, Net* . 
      Finance costs, net, increased to $7.4 million for the nine months ended June
      30,
      2008, as compared to $3.1 million for the same period of the prior fiscal year,
      an increase of $4.2 million or 135.4%. We have $111.5 million in short-term
      bank
      loans maturing in less than one year, $8.7 million in long-term bank loans
      maturing within one year, and $55.4 million in other long-term bank loans
      maturing in more than one year, outstanding as of June 30, 2008, as compared
      to
      $67.6 million in short-term bank loans maturing in less than one year and $26.3
      million in long-term bank loans maturing in more than one year, outstanding
      as
      of June 30, 2007. The increase in net finance costs is also attributable to
      the
      increase in average bank loan interest rates on both our short-term and
      long-term bank loans and the increase in outstanding principal for both our
      short-term and long-term bank loans.




8


*Government
      Grant Income* . 
      Government grant income was $1.4 million for the nine months ended June 30,
      2008, as compared to government grant income of $762,000 for the same period
      of
      fiscal year 2007. Government grant income for the nine months ended June 30,
      2008 mainly consisted of government grant funds to subsidize the interest
      expenses incurred by the Company in prior years for R&D activities, to
      refund the value-added tax paid by Shenzhen BAK in prior years in light of
      Shenzhen BAK’s qualification as a new and high-technology enterprise and the
      receipt of grant funds from the Shenzhen Government to subsidize the payment
      of
      land use rights for BAK Industrial Park. No present or future obligation will
      arise from the receipt of such income.




*Income
      tax expenses / (benefits)* . 
      Income tax benefits were $50,000 for the nine months ended June 30, 2008, as
      compared to income tax expenses of $283,000 for the same period of fiscal 2007.
      The decrease is attributable to a deferred tax provision for the nine months
      ended June 30, 2008.




*Net
      Income / (Loss)* . 
      As a result of the foregoing, we had a net loss of $9.4 million for the nine
      months ended June 30, 2008, compared to a net income of $1.3 million for the
      same period of 2007.




**Liquidity
      and Capital Resources**




We
      have
      historically financed our liquidity requirements from a variety of sources,
      including short-term bank loans and bills payable under bank credit agreements,
      long term bank loans, sale of bills receivable and issuance of capital stock.
      As
      of June 30, 2008, we had cash and cash equivalents of $30.2 million, as compared
      to $14.2 million as of September 30, 2007. In addition, we had pledged deposits
      amounting to $6.3 million and $4.6 million at June 30, 2008 and September 30,
      2007, respectively. Typically, banks will require borrowers to maintain deposits
      ranging from approximately 20% to 100% of the outstanding loan balances and
      bills payable. The individual short term bank loans have maturities ranging
      from
      two to nine months which coincides with the periods the cash remains pledged
      to
      the banks.





We
      have
      access to $235.1 million in short-term credit facilities and $67.1 million
      in
      long-term credit facilities. As of June 30, 2008, the principal outstanding
      amounts under our credit facilities included short-term bank loans of $111.5
      million, long-term bank loans of $8.7 million maturing within one year and
      long-term bank loans of $55.4 million maturing in over one year, and bills
      payable of $11.6 million, leaving $118.9 million of short-term funds and $2.9
      million of long-term funds available for additional cash needs. In addition,
      on
      July 10, 2008, our $60 million shelf registration statement was declared
      effective by the SEC, giving us the potential to raise up to an aggregate of
      $60
      million in gross proceeds from equity financings.




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




**Nine Months Ended June 30,****2008**
            
            **2007****(in thousands)**Net cash (used
                in) / provided by operating activities
            
            
            (9,157
            )
            
            7,670Net
                cash used in investing activities
            
            
            (34,358
            )
            
            (53,006
            )Net
                cash provided by financing activities
            
            
            55,911
            
            
            32,657Effect
                of exchange rate changes on cash and cash equivalents
            
            
            3,651
            
            
            524Net
                increase / (decrease) in cash and cash equivalent
            
            
            16,047
            
            
            (12,155
            )Cash
                and cash equivalents at the beginning of period
            
            
            14,197
            
            
            21,100Cash
                and cash equivalents at the end of period
            
            
            30,244
            
            
            8,945





**Operating
      Activities**




Net
      cash
      used in operating activities was $9.2 million in the nine months ended June
      30,
      2008, compared to net cash provided by operating activities of $7.7 million
      in
      the same period in fiscal 2007. The increase of $16.8 million used in operating
      activities was mainly attributable to an increase in accounts receivables due
      to
      increased sales and 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.




**Investing
      Activities**




Net
      cash
      used in investing activities decreased from $53.0 million in the nine months
      ended June 30, 2007, to $34.4 million in the same period in fiscal 2008. The
      net
      cash used in investing activities during the period ended June 30, 2008, was
      mainly used for purchasing equipment for a new automated cylindrical cell
      production line and a new automated prismatic cell production line and paying
      for the land use rights of BAK Industrial Park.




9




**Financing
      Activities**




Net
      cash
      provided by financing activities was $55.9 million in the nine months ended
      June
      30, 2008, compared to $32.7 million in the same period in 2007. This was mainly
      attributable to (i) net proceeds of $12.8 million from a private placement
      of
      our common stock completed in November 2007, (ii) a $1.2 million increase in
      net
      proceeds from our issuance of capital stock in the nine months ended June 30,
      2008, (iii) a $11.0 million increase in cash deposits at banks as collateral
      in
      the nine months ended June 30, 2008 and (iv) additional borrowings, net of
      repayments, of $20.2 million.




As
      of
      June 30, 2008, the principal outstanding under our credit facilities and lines
      of credit were as follows:




**Maximum**
              **Amount**
              **Available**
            
            **Amount**
              **Borrowed****(in thousands)****Short-term credit facilities:**Agricultural
                Bank of China
            
            $
            87,475
            
            $
            25,514Shenzhen
                Development Bank
            
            
            21,869
            
            
            21,869Shenzhen
                Ping An Bank
            
            
            29,158
            
            
            14,579China
                CITIC Bank
            
            
            21,869
            
            
            14,579Bank
                of China
            
            
            65,606
            
            
            32,387Industrial
                Bank
            
            
            9,112
            
            
            7,290Subtotal—short-term
                credit facilities
            
            $
            235,089
            
            $
            116,218**Long-term
                credit facilities:**Agricultural
                Bank of China
            
            
            52,485
            
            
            49,569China
                Development Bank
            
            
            14,579
            
            
            14,579Subtotal—long-term
                credit facilities
            
            
            67,064
            
            
            64,148**Lines
                of Credit:**Agricultural
                Bank of China
            
            
            —
            
            
            2,210Bank
                of China
            
            
            —
            
            
            4,655Subtotal—lines
                of credit
            
            
            —
            
            
            6,865Total
                Principal Outstanding
            
            $
            302,153
            
            $
            187,231





There
      are
      no restrictions for our above unused credit facilities.




The
      above
      principal outstanding amounts under credit facilities included short-term bank
      loans of $111.5 million, bills payable of $11.6 million and long-term bank
      loans
      of $64.1 million.




For
      the
      purpose of presentation, the movement in bills payable balances is included
      in
      operating activities in the statements of cash flows due to their
      nature.




We
      refinanced our short-term bank loans during the three months ended June 30,
      2008
      at annual interest rates of 6.57% to 7.317%, payable monthly, and for terms
      of
      six to twelve months. These debt arrangements are generally guaranteed by Mr.
      Xiangqian Li, our chairman, president, and chief executive officer. Pursuant
      to
      the refinancing, we pledged $21.9 million of inventory and $37.9 million of
      equipment and machinery as security for our comprehensive credit facility with
      Agricultural Bank of China and Shenzhen Development Bank as of June 30, 2008.
      We
      also committed to pledge the property ownership and land use rights certificate
      in relation to the land on which our corporate campus had been constructed
      for
      short-term bank loans amounting to $25.5 million borrowed from Shenzhen Eastern
      Branch, Agricultural Bank of China. The aggregate net book value of the
      buildings and land use right in relation to the property ownership and land
      use
      rights certificate as of June 30, 2008 was $89.2 million.




10


During
      the three months ended June 30, 2008, we entered into two new short-term bank
      loan agreements totaling $40.1 million. The two new short-term bank loan
      agreements provide for monthly interest payments at annual interest rates from
      6.57% to 7.317%, with principal repayments at maturities during the second
      half
      of calendar year 2009. These loan agreements are guaranteed by Mr. Xiangqian
      Li.




On
      May
      26, 2008, BAK International (Tianjin) Limited entered into a four-year,
      long-term Loan Agreement of RMB 160 million ($23.3 million) with Tianjin Branch,
      Agricultural Bank of China. This Loan Agreement is guaranteed by Mr. Xiangqian
      Li and secured by the property ownership and land use rights certificate in
      relation to the land on which our corporate campus had been constructed and
      the
      future machinery and equipment to be purchased and used in the campus in
      Tianjin. As of June 30, 2008, we had borrowed $23.3 million under this Loan
      Agreement, payable in four installments: (i) RMB 30 million ($4.4 million)
      on
      December 26, 2009; (ii) RMB 30 million ($4.4 million) on December 26, 2010;
      (iii) RMB 50 million ($7.3 million) on December 26, 2011; and (iv) RMB 50
      million ($7.2 million) on May 26, 2012.





On
      November 23, 2006, Shenzhen BAK entered into a $28.5 million long-term loan
      agreement with Shenzhen Eastern Branch, Agricultural Bank of China, which became
      effective on December 18, 2006. The long-term loan may be drawn at any time
      within five years of the effective date of the loan agreement, and will mature
      in five years after it is drawn. The long-term loan when drawn will carry a
      floating interest rate of 90% of the People’s Bank of China benchmark rate. The
      long-term loan is secured by pledged machinery and equipment valued at $22.9
      million as of June 30, 2008, and by the property ownership and land use rights
      certificate in relation to the land on which our corporate campus had been
      constructed and the future machinery and equipment to be purchased and used
      in
      the campus. Shenzhen BAK’s obligations under the loan agreement are guaranteed
      by Mr. Xiangqian Li. As of June 30, 2008, we had borrowed a total of $26.2
      million under this loan agreement:(i) a loan of US$5,831,669, which currently
      carries interest at 5.832% per annum and is repayable on January 25, 2012,
      (ii)
      a loan of US$11,663,338, which currently carries interest at 6.237% per annum
      and is repayable in three installments of US$2,915,834 on January 25, 2010,
      US$7,289,586 on January 25, 2011, and US$1,457,918 on January 25, 2012
      respectively, and (iii) aloan of US$8,747,503 which currently carries interest
      at 7.65% per annum and is repayable in two installments of US$4,373,751 on
      January 25, 2009 and US$4,373,752 on January 25, 2010.




On
      December 26, 2006, Shenzhen BAK entered into a four-year, long-term loan
      agreement of $14.3 million with China CITIC Bank. This long-term loan of $14.3
      million is payable in three installments: (i) RMB 30 million ($4.3 million)
      on
      November 20, 2008; (ii) RMB 30 million ($4.3 million) on November 20, 2009;
      and
      (iii) RMB 40 million ($5.7 million) on December 26, 2010.




The
      long-term loan carries an annual interest rate equal to the benchmark rate
      of
      the People’s Bank of China for three- to five-year long-term loans, which is
      currently 6.48% per annum. The long-term loan is secured by Shenzhen BAK’s
      pledge of its new Research and Development Test Center, which is to be
      constructed in Shenzhen, China, after Shenzhen BAK obtains the required land
      use
      rights for the location of the facility; such land use rights will also be
      pledged as security. The obligations of Shenzhen BAK under the loan agreement
      are guaranteed by Mr. Li and also secured by certain shares of the Company
      owned
      by Mr. Li. We borrowed the full $14.2 million under this loan agreement on
      December 27, 2006.





We
      had
      negative working capital of $2.5 million as of June 30, 2008, as compared to
      negative working capital of $7.0 million as of September 30, 2007. We had
      short-term bank loans maturing in less than one year of $111.5 million and
      long-term bank loans maturing within one year of $8.7 million as of June 30,
      2008, for a total of $120.2 million of loans maturing within one year, as
      compared to a total of $89.9 million of such loans as of September 30, 2007,
      an
      increase of $30.3 million. We had long-term bank loans maturing in over one
      year
      of $55.4 million as of June 30, 2008, as compared to $29.3 million of such
      loans
      as of September 30, 2007, an increase of $26.1 million.




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 s available under existing credit facilities are insufficient to meet our requirements, we may seek to sell debt securities
      or
      borrow from lending institutions, or we may seek to sell shares of our capital
      stock. 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 our
      shareholders’ interest. 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.




11


**Capital
      Expenditures**




We
      made
      capital expenditures of $34.4 million and $53.0 million in the nine months
      ended
      June 30, 2008 and 2007, respectively. Our capital expenditures were used
      primarily to purchase plant and equipment to expand our production capacity
      and
      construction of new factories in Tianjin. The following table sets forth the
      breakdown of our capital expenditures by use for the periods
      indicated:




**Nine Months Ended June 30,****2008**
            
            **2007****(in thousands)**Construction costs
            
            $
            10,404
            
            $
            13,945Lease
                prepayment
            
            $
            11,145
            
            $
            14,372Purchase
                of equipment
            
            $
            12,809
            
            $
            24,689Total
                capital expenditures
            
            $
            34,358
            
            $
            53,006




We
      estimate that our total capital expenditures in fiscal year 2008 will reach
      approximately $50.0 million, primarily to purchase manufacturing equipment
      for
      the expansion of our production lines and construction of new facilities in
      Tianjin.




We
      are
      continuing the construction of 185,993 square meters of new facilities comprised
      of manufacturing facilities, warehousing and packaging facilities, dormitory
      space and administrative offices at the BAK Industrial Park in Shenzhen. Such
      construction is estimated to be completed at the end of calendar year 2008.
      Of
      that space, approximately 111,000 square meters are to be new manufacturing
      facilities. We have completed construction and put into use an additional
      administrative area, production facility, four manufacturing facilities, a
      warehouse and packaging facility, three dormitories and two dining halls. At
      present, we have no significant payment obligations related to these
      facilities.




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. Additionally, according to a notice the Company received from the
      government of Shenzhen on June 6, 2008, the Company obtained a government grant
      in the amount of US$7,794,232 to help pay for the land use rights. As of June
      30, 2008, the Company had fully paid the US$16,061,223 required under the
      government’s lease arrangement for the acquisition of land use rights for BAK
      Industrial Park.




As
      of
      June 30, 2008, we had fully paid the lease prepayment amount of $14.1 million
      for the acquisition of land use rights in Tianjin and the application for the
      land use rights certificate was in process.




The
      following table sets forth our contractual obligations and commercial
      commitments as of June 30, 2008:




**Payment Due by Period****Total**
            
            **Less than**
              **1 Year**
            
            **1-3 Years**
            
            **3-5 Years**
            
            **More than**
              **5 Years****(in thousands)**Short-term bank loans
            
            
            111,531
            
            
            111,531
            
            
            —
            
            
            —
            
            
            —Bills
                payable
            
            
            11,552
            
            
            11,552
            
            
            —
            
            
            —
            
            
            —Long-term
                bank loans
            
            
            64,148
            
            
            8,748
            
            
            33,532
            
            
            21,868
            
            
            —Land
                use rights payable
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Capital
                commitments
            
            
            18,052
            
            
            18,052
            
            
            —
            
            
            —
            
            
            —Future
                interest payment on short-term bank loans
            
            
            2,969
            
            
            2,969
            
            
            —
            
            
            —
            
            
            —Future
                interest payment on long-term bank loans
            
            
            11,172
            
            
            4,229
            
            
            5,550
            
            
            1,393
            
            
            —Total
            
            
            219,424
            
            
            157,081
            
            
            39,082
            
            
            23,261
            
            
            —





Other
      than the contractual obligations and commercial commitments set forth above,
      we
      did not have any other long-term debt obligations, operating lease obligations,
      capital commitments, purchase obligations or other long-term liabilities as
      of
      June 30, 2008.




12


**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 would provide contractual assurance of
      the
      debt, or guarantee the timely re-payment of principal and interest of the
      guaranteed party.





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 FASB Interpretation No.
      45,
“Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including
      Indirect Guarantees of Indebtedness of Others,” or FIN 45. 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
      June 30, 2008. As of June 30, 2008, 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 three other non-related parties, Hunan Reshine New Material
      Ltd, Shenzhen Tongli Hi-tech Co. Ltd., and Shenzhen B&G Technology
      Development Co. Ltd. The maximum amount of our exposure for these guarantees
      was
      $13.9 million and $6.7 million at June 30, 2008, and September 30, 2007,
      respectively.





**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 two to nine 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 June 30, 2008.




We
      have a
      long-term bank loan of $14.6 million maturing on December 26, 2010 with China
      CITIC Bank with three installments payable under which we have outstanding
      borrowings; the interest rate we pay on this long term loan is benchmark rate
      of
      the People’s Bank of China for three- to five- year long-term loans. In
      addition, we have a RMB 200 million (approximately $29.2 million) long-term
      loan
      agreement with Shenzhen Eastern Branch, Agricultural Bank of China, which became
      effective on December 18, 2006. The long-term loan may be drawn at any time
      within five years from the effective date of the agreement and will mature
      five
      years after it is drawn. The term loan, when drawn, will carry a floating
      interest rate of 90% of The People’s Bank of China benchmark rate for three-year
      to five-year long-term loans. As of June 30, 2008, we had borrowed a total
      of
      $26.2 million under this loan agreement: (i) a loan of US$5,831,669, which
      currently carries interest at 5.832% per annum is repayable on January 25,
      2012;
      (ii) a loan of US$11,663,338, which currently carries interest at 6.237% per
      annum and is repayable in three installments of US$2,915,834 on January 25,
      2010, US$7,289,586 on January 25, 2011 and US$1,457,918 on January 25, 2012
      respectively, and (iii) a loan of US$8,747,503 which currently carries interest
      at 7.65% per annum and is repayable in two installments of US$4,373,751 on
      January 25, 2009 and US$4,373,752 on January 25, 2010.




We
      also
      entered into a four-year, long-term Loan Agreement of RMB 160 million ($23.3
      million) with Tianjin Branch, Agricultural Bank of China on May 26, 2008. The
      long-term loan is secured by the property ownership and land use rights
      certificate in relation to the land on which our corporate campus had been
      constructed and the future machinery and equipment to be purchased and used
      in
      the campus in Tianjin. As of June 30, 2008, we had borrowed $23.3 million under
      this Loan Agreement, payable in four installments: (i) RMB 30 million ($4.4
      million) on December 26, 2009; (ii) RMB 30 million ($4.4 million) on December
      26, 2010; (iii) RMB 50 million ($7.3 million) on December 26, 2011; and (iv)
      RMB
      50 million ($7.2 million) on May 26, 2012.





A
      hypothetical 1.0% increase in the annual interest rates for all of our credit
      facilities under which we had outstanding borrowings at June 30, 2008, would
      decrease net income before provision for income taxes by approximately $1.3
      million or 13.9% for the nine months ended June 30, 2008. 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.





13


**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 76.8% of our revenues and 97.5% of our
      costs and expenses for the nine months ended June 30, 2008 are denominated
      in
      RMB, with the balance denominated in U.S. dollars. Approximately 99.9% of our
      assets except for cash were denominated in RMB as of June 30, 2008. 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 rate 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 $7.7 million based on our outstanding revenues, costs and expenses, assets
      and liabilities denominated in RMB as of June 30, 2008. As of June 30, 2008,
      our
      accumulated other comprehensive income was $23.9 million. We have not entered
      into any hedging transactions in an effort to reduce our exposure to foreign
      exchange risk.





**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.





***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 June 30, 2008,
      and September 30, 2007, the carrying amount of property, plant and equipment,
      net was $182.6 million and $145.1 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.





14


***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
      collectibility. 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 June 30, 2008, and September 30, 2007, we had not
      charged off any balances as we had yet to exhaust all means of
      collection.





***Stock-Based
      Compensation***





We
      adopted the provisions of SFAS 123R, 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. SFAS
      123R 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.





Pursuant
      to SFAS 123R, we have recognized compensation costs of $2.5 million in relation
      to stock-based awards to our employees and non-employee directors for the nine
      months ended June 30, 2008, as an increase in both the operating costs and
      shareholder’s equity.





**Changes
      in Accounting Standards**





In
      July
      2006, the FASB issued FIN 48 “Accounting for Uncertainty in Income Taxes-an
      Interpretation of FASB Statement No. 109” which clarifies the accounting for
      uncertainty in tax positions. This Interpretation requires that we recognize
      in
      our consolidated financial statements the impact of a tax position if that
      position is more likely than not of being sustained on audit, based on the
      technical merits of the position. The provisions of FIN 48 became effective
      for
      us on October 1, 2007. The adoption of FIN 48 has no material impact on the
      Company’s financial statements.




In
      September 2006, the FASB issued SFAS 157, “Fair Value Measurements”, which
      defines fair value, establishes a framework for measuring fair value under
      generally accepted accounting principles and expands disclosures about fair
      value measurements. SFAS 157 applies under other accounting pronouncements
      that
      require or permit fair value measurements, where fair value is the relevant
      measurement attribute. The standard does not require any new fair value
      measurements. SFAS 157 is effective for financial statements issued for fiscal
      years beginning after November 15, 2007, and interim periods within those fiscal
      years. The management is in the process of evaluating the impact SFAS 157 will
      have on the Company’s financial statements upon adoption.





In
      February 2007, FASB issued SFAS No. 159, “The Fair Value Option for Financial
      Assets and Financial Liabilities - Including an Amendment of FASB Statement
      No.
      115,” SFAS No. 159 permits entities to choose to measure many financial
      instruments and certain other items at fair value. Entities that elect the
      fair
      value option will report unrealized gains and losses in earnings at each
      subsequent reporting date. The fair value option may be elected on an
      instrument-by-instrument basis, with a few exceptions. SFAS No. 159 also
      establishes presentation and disclosure requirements to facilitate comparisons
      between entities that choose different measurement attributes for similar assets
      and liabilities. The requirements of SFAS No. 159 are effective for our fiscal
      year beginning on October 1, 2008. The management is in the process of
      evaluating the impact SFAS 159 will have on the Company’s financial statements
      upon adoption.





In
      December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests in
      Consolidated Financial Statements-an amendment of ARB No. 51”. SFAS 160
      establishes accounting and reporting standards for the noncontrolling interest
      in a subsidiary and for the deconsolidation of a subsidiary. The guidance will
      become effective for the fiscal year beginning after December 15, 2008. The
      management is in the process of evaluating the impact SFAS 160 will have on
      the
      Company’s financial statements upon adoption.





In
      December 2007, the FASB issued SFAS No. 141 (Revised) “Business Combinations.”
SFAS 141 (Revised) 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. The
      guidance will become effective for the fiscal year beginning after December
      15,
      2008. The management is in the process of evaluating the impact SFAS 141
      (Revised) will have on the Company’s financial statements upon
      adoption.





15


In
      March
      2008, the FASB issued SFAS No. 161 “Disclosures about Derivative Instruments and
      Hedging Activities”. SFAS 161 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 management is in the process
      of
      evaluating the impact SFAS 161 will have on the Company’s financial adoption
      upon adoption.





In
      May
      2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
      Accounting Principles. FAS 162 identifies the sources of accounting principles
      and the framework for selecting the principles to be used in the preparation
      of
      financial statements of nongovernmental entities that are presented in
      conformity with GAAP. SFAS 162 directs the GAAP hierarchy to the entity, not
      the
      independent auditors, as the entity is responsible for selecting accounting
      principles for financial statements that are presented in conformity with GAAP.
      SFAS 162 is effective 60 days following the SEC's approval of the Public Company
      Accounting Oversight Board amendments to remove the GAAP hierarchy from the
      auditing standards. SFAS 162 is not expected to have a material impact on our
      financial statements.





**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****2008**
            
            **2007**Balance sheet
                items as of June 30
            
            
            6.8591
            
            
            7.6155Amounts
                included in the statement of income and comprehensive income, statement
                of
                changes in stockholders’ equity and statement of cash flows for the nine
                months ended June 30
            
            
            7.1848
            
            
            7.7691Balance
                sheet items as of September 30
            
            
            N/A
            
            
            7.5108





RMB
      is
      not readily convertible into U.S. dollars in the foreign exchange markets.
      The
      foreign exchange rate between the RMB and the U.S. dollar had been stable at
      approximately RMB 8.28 to $1.00 for the last few years. On July 21, 2005, the
      Central Bank of China announced that it would allow the RMB to move to a
      flexible exchange rate with a maximum daily variance against the U.S. dollar
      of
      0.3%. No provision has been made in the accompanying financial statements for
      the change in currency policy, nor has any determination been made as to the
      potential impact this may have on our future operations. As a result, the stated
      exchange rates may not accurately reflect the amount in U.S. dollars into which
      RMB could be actually converted at the date or during the periods reflected
      in
      the foregoing table.





**Item
      3.  Quantitative and Qualitative Disclosures About Market
      Risk**





The
      information required by this item is discussed in Item 2. “Management’s
      Discussion and Analysis of Financial Condition and Results of Operations —
Interest Rate Risk” and “— Foreign Exchange Risk.”





**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 June 30,
      2008. 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.





16


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 our Annual Report on Form 10-K for the
      fiscal year ended September 30, 2007 (the “2007 Form 10-K”), which we are still
      in the process of remediating. Investors are directed to Item 9A of the 2007
      Form 10-K for the description of these weaknesses.





***Remediation
      Measures for Material Weaknesses***





We
      began
      to remediate the material weaknesses described in our 2007 Form 10-K and
      implemented the new measures described below in our ongoing efforts to address
      these internal control deficiencies:




·
            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
                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 plan to utilize qualified accounting
                advisors and supervisors to ensure that our staff has adequate
                professional knowledge and to monitor 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
                developed 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 accepted in the United States of
                America.





·
            We
                provided 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 will be
                responsible for compliance with internal
                controls.




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 June 30, 2008 that have
      materially affected, or are reasonably likely to materially affect our internal
      control over financial reporting.





**PART
      II — OTHER INFORMATION**


**Item 1. 
      Legal Proceedings.**




Except
      as
      described below, we are not a party to any legal proceedings, nor are we aware
      of any threatened or contemplated proceedings which are expected to result
      in a
      material adverse effect on our financial position, or results of
      operation.





*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. If the court issues
      an adverse decision, we may be required to pay the plaintiffs substantial
      monetary damages, and we may be prohibited from future production of
      rechargeable lithium cells manufactured for A123Systems or be required to pay
      royalties to engage in any such production. The court has not yet issued a
      decision on this matter and we are unable to quantify the extent of any possible
      award of damages that might become payable by us.





17


*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.




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 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.





*Liquidated
      Damages Pursuant to November 2007 Registration Rights Agreement* .
      We may
      be 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 November 2007. Under the registration rights agreement, among other things,
      if a registration statement filed pursuant thereto is not declared effective
      by
      the SEC by 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 such 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 (pro rated 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 such shareholders have sold all of their
      shares or such shareholders may sell their shares pursuant to Rule 144 without
      volume limitations; and (c) 0.5% of the aggregate purchase price paid by such
      investor for the shares it purchased in our November 2007 private placement
      on
      each of the following dates: 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 such shareholders have sold
      all
      of their shares or such shareholders may sell their shares pursuant to Rule
      144
      without volume limitations.





18


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. As a result, we estimate that liquidated damages incurred under
      the
      November 2007 registration rights agreement for the nine months ended June
      30,
      2008 to have totaled $561,174. No liquidated damages have been paid pursuant
      to
      the November 2007 registration rights agreement as of the filing date of this
      Report.





*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 June 30, 2008, of which 136,532 shares
      were issued in the fiscal quarter ended June 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 of 1933,
      as amended. 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.





**Item 1A. 
      Risk Factors.**




See
      Item
      1A. “Risk Factors” included in our 2007 Form 10-K.





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





During
      the three-month period ended June 30, 2008, the Company entered into a number
      of
      settlement agreements pursuant to which the Company issued to certain accredited
      investors an aggregate of 136,532 shares of the Company’s common stock. For a
      discussion of the terms of the settlement agreements, see Part II, Item 1.
      “Legal Proceedings — Make Good Settlements” above.





The
      above-referenced securities have been issued pursuant to the exemption from
      registration provided by Section 4(2) of the Securities Act for the offer and
      sale of securities not involving a public offering, and/or other applicable
      provisions of the Securities Act. The investors who received the securities
      agreed that (a) they were acquiring the securities for their own account for
      investment and not for the account of any other person and not with a view
      to or
      for any distribution within the meaning of the Securities Act and (b) they
      would
      not sell or otherwise transfer the purchased securities unless in compliance
      with state and federal securities laws. Each of the Investors represented that
      they are accredited investors as defined in Rule 501(a) under the Securities
      Act.





**Item 3. Defaults
      Upon Senior Securities.**




None.




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




None.




**Item 5. Other
      Information.**





On
      May
      26, 2008, BAK International (Tianjin) Limited entered into a four-year,
      long-term Loan Agreement of RMB 160 million ($23.3 million) with Tianjin Branch,
      Agricultural Bank of China. This loan agreement is guaranteed by Mr. Xiangqian
      Li and secured by the property ownership and land use rights certificate in
      relation to the land on which our corporate campus had been constructed and
      the
      future machinery and equipment to be purchased and used in the campus in
      Tianjin. As of June 30, 2008, we had borrowed $23.3 million under this Loan
      Agreement, payable in four installments: (i) RMB 30 million ($4.4 million)
      on
      December 26, 2009; (ii) RMB 30 million ($4.4 million) on December 26, 2010;
      (iii) RMB 50 million ($7.3 million) on December 26, 2011; and (iv) RMB 50
      million ($7.2 million) on May 26, 2012. A summary of the terms of this loan
      agreement is included as Exhibit 10.2 to this Report and is hereby incorporated
      by reference herein.





19


On
      November 23, 2006, Shenzhen BAK entered into a $28.5 million long-term loan
      agreement with Shenzhen Eastern Branch, Agricultural Bank of China, which became
      effective on December 18, 2006. The long-term loan may be drawn at any time
      within five years of the effective date of the loan agreement, and will mature
      in five years after it is drawn. The long-term loan when drawn will carry a
      floating interest rate of 90% of the People’s Bank of China benchmark rate. The
      long-term loan is secured by pledged machinery and equipment valued at $22.9
      million as of June 30, 2008, and by the property ownership and land use rights
      certificate in relation to the land on which our corporate campus had been
      constructed and the future machinery and equipment to be purchased and used
      in
      the campus. Shenzhen BAK’s obligations under the loan agreement are guaranteed
      by Mr. Xiangqian Li. As of June 30, 2008, we had borrowed a total of $26.2
      million under this loan agreement:(i) a loan of US$5,831,669, which currently
      carries interest at 5.832% per annum and is repayable on January 25, 2012,
      (ii)
      a loan of US$11,663,338, which currently carries interest at 6.237% per annum
      and is repayable in three installments of US$2,915,834 on January 25, 2010,
      US$7,289,586 on January 25, 2011, and US$1,457,918 on January 25, 2012
      respectively, and (iii) aloan of US$8,747,503 which currently carries interest
      at 7.65% per annum and is repayable in two installments of US$4,373,751 on
      January 25, 2009 and US$4,373,752 on January 25, 2010. A summary of the terms
      of
      this loan agreement and a related guaranty are included as Exhibits 10.3 and
      10.4 to this Report and are hereby incorporated by reference
      herein.




On
      December 26, 2006, Shenzhen BAK entered into a four-year, long-term loan
      agreement of $14.3 million with China CITIC Bank. This long-term loan of $14.3
      million is payable in three installments: (i) RMB 30 million ($4.3 million)
      on
      November 20, 2008; (ii) RMB 30 million ($4.3 million) on November 20, 2009;
      and
      (iii) RMB 40 million ($5.7 million) on December 26, 2010.




The
      long-term loan carries an annual interest rate equal to the benchmark rate
      of
      the People’s Bank of China for three- to five-year long-term loans, which is
      currently 6.48% per annum. The long-term loan is secured by Shenzhen BAK’s
      pledge of its new Research and Development Test Center, which is to be
      constructed in Shenzhen, China, after Shenzhen BAK obtains the required land
      use
      rights for the location of the facility; such land use rights will also be
      pledged as security. The obligations of Shenzhen BAK under the loan agreement
      are guaranteed by Mr. Li and also secured by certain shares of the Company
      owned
      by Mr. Li. We borrowed the full $14.2 million under this loan agreement on
      December 27, 2006. A summary of the terms of this loan agreement and elated
      guaranties are included as Exhibits 10.5 through 10.7 to this Report and are
      hereby incorporated by reference herein.




On
      July
      28, 2008, our stockholders approved an amendment to our Stock Option Plan.
      Among other things, the amendment increased the number of shares available
      for
      issuance under the Stock Option Plan from 4,000,000 shares to
      8,000,000 shares.  A copy of the amendment is filed as Exhibit 4.1 to this
      Report and is hereby incorporated by reference herein.






**Item 6. 
      Exhibits.**





**Number**
            
            **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).4.1
            
            Amendment
                No. 1 to the China BAK Battery, Inc. Stock Option Plan.10.1
            
            Form
                of Settlement Agreement between the Registrant and certain investors
                (incorporated by reference to Exhibit 10.1 to the Registrant’s Current
                Report on Form 8-K, filed with the SEC on March 31,
                2008).10.2
            
            Summary
                of Loan Agreement between BAK International (Tianjin) Limited and
                Tianjin
                Branch, Agricultural Bank of China, dated May 26,
                2008.




20




10.3
            
            Summary
                of Loan Agreement between Shenzhen BAK Battery Co., Ltd. and Shenzhen
                East
                Branch, Agricultural Bank of China, dated May 20, 2008.10.4
            
            Summary
                of Guaranty Contract of Maximum Amount between BAK International
                (Tianjin)
                Ltd. and Shenzhen Eastern Branch, Agricultural Bank of China, dated
                May
                20, 2008.10.5
            
            Summary
                of Comprehensive Credit Facility Agreement of Maximum Amount between
                Shenzhen BAK Battery Co., Ltd. and Shenzhen Branch, China CITIC Bank
                Co.,
                Ltd., dated May 9, 2008.10.6
            
            Summary
                of Guaranty Contract of Maximum Amount between BAK International
                Limited
                and Shenzhen Branch, China CITIC Bank Co., Ltd., dated May 9,
                2008.10.7
            
            Summary
                of Guaranty Contract of Maximum Amount between Xiangqian Li and Shenzhen
                Branch, China CITIC Bank Co., Ltd., dated May 9, 2008.10.8
            
            Supplemental
                  Agreement between Shenzhen BAK Battery Co., Ltd. and Shenzhen Branch,
                  Agricultural Bank of China, dated August 6, 2008.31.1
            
            Chief
                Executive Officer Certification furnished pursuant to Section 302
                of the
                Sarbanes-Oxley Act of 2002.31.2
            
            Chief
                Financial Officer Certification furnished 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.


21


**SIGNATURES**





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




Date:
                August 8, 2008
            CHINA
                BAK BATTERY, INC.By:
            /s/
                Xiangqian LiXiangqian
                Li, Chief Executive Officer(Principal
                Executive Officer)




By:
            /s/ Tony
                ShenTony
                Shen, Chief Financial Officer(Principal
                Financial Officer and Principal
              Accounting
                Officer)




22