**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, 2007****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 x No o





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):





Large
      Accelerated Filer o Accelerated
      Filer x Non-Accelerated
      Filer 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:  49,247,103 shares of common
      stock, par value $0.001 per share, outstanding on August 2, 2007.












**TABLE
      OF CONTENTS**





Introductory
                CommentsPART I —
            
            FINANCIAL
                INFORMATIONItem 1.
                Financial Statements
            4Item 2. 
                Management’s Discussion and Analysis of Financial Condition and Results of
                Operations
            29Item 3. 
                Quantitative and Qualitative Disclosures About Market Risk
            45Item 4.
                Controls and Procedures
            46PART II —
            
            OTHER
                INFORMATIONItem 1. 
                Legal Proceedings
            48Item 1A. 
                Risk Factors
            49Item 2. 
                Unregistered Sales of Equity Securities and Use of
                Proceeds
            50Item 3. 
                Defaults Upon Senior Securities
            50Item 4. 
                Submission of Matters to a Vote of Security Holders
            50Item 5. 
                Other Information
            50Item 6. 
                Exhibits
            51




i




**Introductory
      Comment — 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.; “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.




**Introductory
      Comment — 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 and Section 21E of
      the
      Securities Exchange Act of 1934. 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
                  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;
  —
              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 manage the expansion of our business operations
                  effectively;
  —
              our
                  ability to fund our operations and manage our substantial short-term
                  indebtedness;
  —
              uncertainties
                  with respect to the PRC legal and regulatory
                  environment;
  —
              our
                  ability to maintain cost
                  leadership;
  —
              our
                  ability to acquire land use rights to our facilities;
                  and
  —
              other
                  risks identified in this Report.


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 filed with the SEC, including without limitation our
      Annual Report on Form 10-K for the fiscal year ended September 30, 2006. 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.




2




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.




3




**PART
        I — FINANCIAL INFORMATION**
 
 **Item 1. 
        Financial Statements**
  **China
        BAK Battery** **,
        Inc. and subsidiaries**
 **Condensed
        interim consolidated balance sheets**
 **As
        of September 30, 2006 and June 30, 2007**
  (In
        U.S.
        dollars)







*Note*
            
            *September
                30,*
              *2006*
            
            *June
                30,*
              *2007*(Unaudited)**Assets***Current
                assets*Cash
                and cash equivalents
            
            
            
            
            $
            21,099,555
            
            $
            8,944,922Pledged
                deposits
            
            
            2
            
            
            12,971,989
            
            
            3,528,577Trade
                accounts receivable, net
            
            
            3
            
            
            64,332,171
            
            
            52,367,191Inventories
            
            
            4
            
            
            47,388,936
            
            
            62,491,161Prepayments
                and other receivables
            
            
            
            
            
            1,134,770
            
            
            1,843,760Total
                current assets
            
            
            
            
            
            146,927,421
            
            
            129,175,611Property,
                plant and equipment, net
            
            
            5
            
            
            109,406,116
            
            
            138,264,887Lease
                prepayments, net
            
            
            
            
            
            3,161,477
            
            
            17,725,435Intangible
                assets, net
            
            
            
            
            
            74,682
            
            
            94,723Deferred
                tax assets
            
            
            
            
            
            85,598
            
            
            78,310Total
                assets
            
            
            
            
            $
            259,655,294
            
            $
            285,338,966




See
      accompanying notes to the condensed interim consolidated financial
      statements.





4


**China
        BAK Battery, Inc. and subsidiaries**
 **Condensed
        interim consolidated balance sheets**
 **As
        of September 30, 2006 and June 30, 2007 (continued)**
 (In
        U.S.
        dollars)





*September
                30,*
            
            *June
                30,**Note*
            
            *2006*
            
            *2007*(Unaudited)**Liabilities***Current
                liabilities*Short-term
                bank loans
            
            
            6
            
            $
            67,899,908
            
            $
            67,625,238Accounts
                and bills payable
            
            
            
            
            
            48,316,250
            
            
            48,517,020Accrued
                expenses and other payables
            
            
            
            
            
            25,880,985
            
            
            17,766,876Share-based
                payment liabilities
            
            
            
            
            
            3,625,165
            
            
            -Total
                current liabilities
            
            
            
            
            
            145,722,308
            
            
            133,909,134Long-term
                bank loans
            
            
            7
            
            
            —
            
            
            26,262,228Deferred
                tax liabilities
            
            
            
            
            
            304,957
            
            
            320,848Total
                liabilities
            
            
            
            
            
            146,027,265
            
            
            160,492,210Commitments
                and contingencies
            
            
            10**Shareholders’
                equity**Ordinary
                shares US$ 0.001 par value; 100,000,000 authorized; 48,885,896 and
                48,893,396 issued and outstanding as of September 30, 2006 and June
                30,
                2007 respectively
            
            
            
            
            
            48,886
            
            
            48,893Additional
                paid-in-capital
            
            
            
            
            
            68,126,689
            
            
            73,376,215Statutory
                reserves
            
            
            
            
            
            5,791,718
            
            
            6,394,058Retained
                earnings
            
            
            
            
            
            36,212,357
            
            
            36,942,773Accumulated
                      other comprehensive income
            
            
            
            
            
            3,448,379
            
            
            8,084,817Total
                shareholders’ equity
            
            
            
            
            
            113,628,029
            
            
            124,846,756Total
                liabilities and shareholders’ equity
            
            
            
            
            $
            259,655,294
            
            $
            285,338,966




See
      accompanying notes to the condensed interim consolidated financial
      statements.




5


**China
        BAK Battery, Inc. and subsidiaries**
 **Condensed
        interim consolidated statements of income**
 **and
        comprehensive income**
 **For
        the three months ended June 30, 2006 and 2007**
 (Unaudited)
 (In
        U.S.
        dollars)




*Three
                months ended June 30,**2006*
            
            *2007*Net
                revenues
            
            $
            33,397,236
            
            $
            29,477,296Cost
                of revenues
            
            
            (24,898,674
            )
            
            (24,414,599
            )Gross
                profit
            
            
            8,498,562
            
            
            5,062,697Operating
                expenses:Research
                and development costs
            
            
            (477,429
            )
            
            (1,118,458
            )Sales
                and marketing expenses
            
            
            (1,040,694
            )
            
            (1,164,936
            )General
                and administrative expenses
            
            
            (1,962,106
            )
            
            (4,188,751
            )Total
                operating expenses
            
            
            (3,480,229
            )
            
            (6,472,145
            )Operating
                income / (loss)
            
            
            5,018,333
            
            
            (1,409,448
            )Finance
                costs, net
            
            
            (297,226
            )
            
            (1,069,902
            )Other
                expenses
            
            
            (966
            )
            
            (90,479
            )Income
                / (loss) before income taxes
            
            
            4,720,141
            
            
            (2,569,829
            )Income
                taxes
            
            
            (42,938
            )
            
            (119,894
            )Net
                income / (loss)
            
            $
            4,677,203
            
            $
            (2,689,723
            )Other
                comprehensive income-
                Foreign currency translation adjustment
            
            
            363,270
            
            
            1,941,966Comprehensive
                income / (loss)
            
            $
            5,040,473
            
            $
            (747,757
            )Net
                income / (loss) per share:-Basic
            
            $
            0.10
            
            $
            (0.05
            )-Diluted
            
            $
            0.09
            
            $
            (0.05
            )Weighted
                average number of ordinary shares:-Basic
            
            
            48,878,396
            
            
            48,893,396-Diluted
            
            
            49,275,493
            
            
            48,893,396




See
      accompanying notes to the condensed interim consolidated financial
      statements. ****





6


**China
        BAK Battery, Inc. and subsidiaries**
 **Condensed
        interim consolidated statements of income**
 **and
        comprehensive income**
 **For
        the nine months ended June 30, 2006 and 2007**
 (Unaudited)
 (In
        U.S.
        dollars)


*Nine
                months ended June 30,**Note*
            **
            *2006*
            **
            *2007*Net
                revenues
            
            
            12
            
            $
            97,720,714
            
            $
            102,088,295Cost
                of revenues
            
            
            
            
            
            (69,903,949
            )
            
            (82,682,721
            )Gross
                profit
            
            
            
            
            
            27,816,765
            
            
            19,405,574Operating
                expenses:Research
                and development costs
            
            
            
            
            
            (1,436,314
            )
            
            (2,683,815
            )Sales
                and marketing expenses
            
            
            
            
            
            (3,541,845
            )
            
            (3,271,849
            )General
                and administrative expenses
            
            
            
            
            
            (6,151,115
            )
            
            (9,301,400
            )Total
                operating expenses
            
            
            
            
            
            (11,129,274
            )
            
            (15,257,064
            )Operating
                income
            
            
            
            
            
            16,687,491
            
            
            4,148,510Finance
                costs, net
            
            
            
            
            
            (993,037
            )
            
            (3,134,562
            )Gain
                on trading securities
            
            
            
            
            
            279,260
            
            
            -Other
                (expenses) / income
            
            
            
            
            
            (38,865
            )
            
            601,460Income
                before income taxes
            
            
            
            
            
            15,934,849
            
            
            1,615,408Income
                taxes
            
            
            
            
            
            (511,612
            )
            
            (282,652
            )Net
                income
            
            
            
            
            $
            15,423,237
            
            $
            1,332,756Other
                comprehensive income-
                Foreign currency translation adjustment
            
            
            
            
            
            1,250,400
            
            
            4,636,438Comprehensive
                income
            
            
            
            
            $
            16,673,637
            
            $
            5,969,194Net
                income per share:-Basic
            
            
            9
            
            $
            0.32
            
            $
            0.03-Diluted
            
            
            9
            
            $
            0.31
            
            $
            0.03Weighted
                average number of ordinary shares:-Basic
            
            
            9
            
            
            48,878,396
            
            
            48,889,564-Diluted
            
            
            9
            
            
            49,167,445
            
            
            49,282,763




See
      accompanying notes to the condensed interim consolidated financial
      statements.





7


**China
        BAK Battery, Inc. and subsidiaries**
 **Condensed
        interim consolidated statements of shareholders’ equity**
 **For
        the nine months ended June 30, 2006 and 2007**
 (Unaudited)
 (In
        U.S.
        dollars)




Accumulated
            
            TotalOrdinary
                shares
            
            Additional
            
            
            
            
            
            other
            
            share-Number
                of
            
            
            
            paid
            
            Statutory
            
            Retained
            
            comprehensive
            
            holders’shares
            
            amount
            
            -in-capital
            
            reserves
            
            earnings
            
            income
            
            equityBalance
                as of October 1, 2005
            
            
            48,878,396
            
            
            48,878
            
            
            67,415,501
            
            
            3,034,141
            
            
            18,805,368
            
            
            1,005,255
            
            
            90,309,143Net
                income
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            15,423,237
            
            
            —
            
            
            15,423,237Share-based
                compensation for employee stock awards
            
            
            —
            
            
            —
            
            
            2,012,245
            
            
            —
            
            
            —
            
            
            —
            
            
            2,012,245Appropriation
                to statutory reserves
            
            
            —
            
            
            —
            
            
            —
            
            
            1,791,435
            
            
            (1,791,435
            )
            
            —
            
            
            —Foreign
                currency translation adjustment
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            1,250,400
            
            
            1,250,400Balance
                as of June 30, 2006
            
            
            48,878,396
            
            $
            48,878
            
            $
            69,427,746
            
            $
            4,825,576
            
            $
            32,437,170
            
            $
            2,255,655
            
            $
            108,995,025Balance
                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
            
            
            —
            
            
            1,332,756Issuance
                of 914,994 shares of restricted stock and reclassification of
                liability-classified awards
            
            
            —
            
            
            —
            
            
            3,679,934
            
            
            —
            
            
            —
            
            
            —
            
            
            3,679,934Share-based
                compensation for employee stock options awards
            
            
            —
            
            
            —
            
            
            485,553
            
            
            —
            
            
            —
            
            
            —
            
            
            485,553Share-based
                compensation for common stock granted to employees and non-employee
                directors
            
            
            —
            
            
            —
            
            
            1,084,046
            
            
            —
            
            
            —
            
            
            —
            
            
            1,084,046Issuance
                of common stock to non-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 June30,
                2007
            
            
            48,893,396
            
            $
            48,893
            
            $
            73,376,215
            
            $
            6,394,058
            
            $
            36,942,773
            
            $
            8,084,817
            
            $
            124,846,756






See
      accompanying notes to the condensed interim consolidated financial
      statements.





8


**China
        BAK Battery, Inc. and subsidiaries**
 **Condensed
        interim consolidated statements of cash flows**
 **For
        the three months ended June 30, 2006 and 2007**
 (Unaudited)
 (In
        U.S.
        dollars)




*Three
                months ended June 30,**2006*
            
            *2007***Cash
                flow from operating activities**Net
                income / (loss)
            
            $
            4,677,203
            
            $
            (2,689,723
            )Adjustments
                to reconcile net income/ (loss) to net cash (used in) / provided
                by
                operating activities:Depreciation
                and amortization
            
            
            1,621,328
            
            
            2,336,980Bad
                debt expense
            
            
            53,796
            
            
            1,731,276Share-based
                compensation
            
            
            595,984
            
            
            756,085Deferred
                income taxes
            
            
            (15,976
            )
            
            24,981Changes
                in operating assets and liabilities:Trade
                accounts receivable
            
            
            643,443
            
            
            3,287,479Inventories
            
            
            (6,693,208
            )
            
            (7,024,960
            )Prepayments
                and other receivables
            
            
            1,228,460
            
            
            (338,478
            )Accounts
                and bills payable
            
            
            (2,047,753
            )
            
            4,728,869Accrued
                expenses and other payables
            
            
            (424,437
            )
            
            (491,754
            )Net
                cash (used in) / provided by operating activities
            
            
            (361,160
            )
            
            2,320,754**Cash
                flow from investing activities**Purchases
                of property, plant and equipment
            
            
            (17,702,246
            )
            
            (15,714,291
            )Payment
                of lease prepayment
            
            
            —
            
            
            (707,482
            )Purchases
                of intangible assets
            
            
            (18,343
            )
            
            (29,026
            )Net
                cash used in investing activities
            
            $
            (17,720,589
            )
            $
            (16,450,799
            )





See
      accompanying notes to the condensed interim consolidated financial
      statements.




9


**China
        BAK Battery, Inc. and subsidiaries**
 **Condensed
        interim consolidated statements of cash flows**
 **For
        the three months ended June, 2006 and 2007 (continued)**
 (Unaudited)
 (In
        U.S.
        dollars)




*Three
                months ended June 30,**2006*
            
            *2007***Cash
                flow from financing activities**Proceeds
                from borrowings
            
            $
            30,194,912
            
            $
            36,210,422Repayment
                of borrowings
            
            
            (20,515,234
            )
            
            (33,656,822
            )Decrease
                in pledged deposits
            
            
            6,288,046
            
            
            5,596,713Net
                cash provided by financing activities
            
            
            15,967,724
            
            
            8,150,313**Effect
                of exchange rate changes on cash and cash
                equivalents**
            
            
            **523,367**
            
            
            **85,070****Net
                decrease in cash and cash equivalents**
            
            
            **(1,590,658**
            **)**
            
            **(5,894,662**
            **)****Cash
                and cash equivalents at the beginning of period**
            
            
            **7,922,814**
            
            
            **14,839,584****Cash
                and cash equivalents at the end of period**
            
            **$**
            **6,332,156**
            
            **$**
            **8,944,922****Supplemental
                disclosure of cash flow information:**Cash
                received during the period for:Bills
                receivable discounted to bank
            
            $
            607,608
            
            $
            3,416,680Cash
                paid during the period for:Income
                taxes
            
            $
            476,831
            
            $
            290,102Interest,
                net of amounts capitalized
            
            $
            641,831
            
            $
            936,599




See
      accompanying notes to the condensed interim consolidated financial
      statements. ****


10


**China
        BAK Battery, Inc. and subsidiaries**
 **Condensed
        interim consolidated statements of cash flows**
 **For
        the nine months ended June 30, 2006 and 2007**
 (Unaudited)
 (In
        U.S.
        dollars)




*Nine
                months ended June 30,**2006*
            
            *2007***Cash
                flow from operating activities**Net
                income
            
            $
            15,423,237
            
            $
            1,332,756Adjustments
                to reconcile net income to net cash (used in) / provided by operating
                activities:Depreciation
                and amortization
            
            
            4,296,487
            
            
            6,594,196Bad
                debt expense
            
            
            731,447
            
            
            1,365,795Share-based
                compensation
            
            
            2,012,245
            
            
            1,624,368Deferred
                income taxes
            
            
            (6,615
            )
            
            14,442Changes
                in operating assets and liabilities:Trade
                accounts receivable
            
            
            (13,775,711
            )
            
            12,894,883Inventories
            
            
            (30,913,329
            )
            
            (13,015,222
            )Prepayments
                and other receivables
            
            
            483,310
            
            
            (192,971
            )Accounts
                and bills payable
            
            
            12,171,109
            
            
            (2,073,291
            )Accrued
                expenses and other payables
            
            
            1,225,619
            
            
            (874,693
            )Net
                cash (used in) / provided by operating activities
            
            
            (8,352,201
            )
            
            7,670,262**Cash
                flow from investing activities**Purchases
                of property, plant and equipment
            
            
            (32,664,516
            )
            
            (38,600,700
            )Payment
                of lease prepayment
            
            
            —
            
            
            (14,371,819
            )Purchases
                of intangible assets
            
            
            (20,664
            )
            
            (33,785
            )Net
                cash used in investing activities
            
            $
            (32,685,180
            )
            $
            (53,006,304
            )





See
      accompanying notes to the condensed interim consolidated financial
      statements.





11


**China
        BAK Battery, Inc. and subsidiaries**
 **Condensed
        interim consolidated statements of cash flows**
 **For
        the nine months ended June 30, 2006 and 2007 (continued)**
 (Unaudited)
 (In
        U.S.
        dollars)


**


*Nine
                months ended June 30,**2006*
            
            *2007***Cash
                flow from financing activities**Proceeds
                from borrowings
            
            $
            60,379,121
            
            $
            101,960,584Repayment
                of borrowings
            
            
            (47,334,249
            )
            
            (79,049,307
            )Decrease
                in pledged deposits
            
            
            435,337
            
            
            9,746,262Amounts
                received from related parties
            
            
            271,873
            
            
            —Net
                cash provided by financing activities
            
            
            13,752,082
            
            
            32,657,539**Effect
                of exchange rate changes on cash and cash
                equivalents**
            
            
            **561,671**
            
            
            **523,870****Net
                decrease in cash and cash equivalents**
            
            
            **(26,723,628**
            **)**
            
            **(12,154,633**
            **)****Cash
                and cash equivalents at the beginning of period**
            
            
            **33,055,784**
            
            
            **21,099,555****Cash
                and cash equivalents at the end of period**
            
            **$**
            **6,332,156**
            
            $
            **8,944,922****Supplemental
                disclosure of cash flow information:**Cash
                received during the period for:Bills
                receivable discounted to bank
            
            $
            13,972,340
            
            $
            5,982,945Proceeds
                from disposal of trading securities
            
            $
            3,981,274
            
            $
            —Cash
                paid during the period for:Income
                taxes
            
            $
            196,487
            
            $
            290,102Interest,
                net of amounts capitalized
            
            $
            1,333,725
            
            $
            3,136,549Purchases
                of trading securities
            
            $
            3,702,014
            
            $
            —





See
      accompanying notes to the condensed interim consolidated financial
      statements.


12


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


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


**For
      the nine months ended June 30, 2006 and 2007**


(Unaudited)


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





*Principal
      Activities*





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





The
      shares of the Company have been traded in the over-the-counter market through
      the Over-the-Counter Electronic Bulletin Board since 2005. On May 31, 2006,
      the
      Company obtained approval to list its common stock on the National Association
      of Securities Dealers Automated Quotations stock market, and trading commenced
      that same date under the symbol "CBAK".





*Basis
      of Presentation and Organization*





As
      of
      June 30, 2007, the Company’s subsidiaries consist of: i) BAK International
      Limited (“BAK International”), a wholly owned limited liability company
      incorporated in Hong Kong on December 29, 2003 as BATCO International Limited,
      which changed its name to BAK International Limited on November 3, 2004; ii)
      Shenzhen BAK Battery Co., Ltd. (“Shenzhen BAK”), a wholly owned limited
      liability company established on August 3, 2001 in the People’s Republic of
      China (“PRC”); iii) BAK Electronics (Shenzhen) Co., Ltd. (“BAK Electronics”), a
      wholly owned limited liability company established on August 15, 2005 in the
      PRC; iv) BAK International (Tianjin) Ltd. (“BAK Tianjin”), a wholly owned
      limited liability company established on December 12, 2006 in the PRC; and
      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, which is
      principally engaged in research and development.





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 $99,990,000. Pursuant to BAK Tianjin’s articles of association and
      relevant PRC regulations, BAK International is required to contribute
      $20,000,000 to BAK Tianjin as capital (representing 20% of BAK Tianjin’s
      registered capital) before March 11, 2007. The remaining $79,990,000 shall
      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 supply. As of June 30,
      2007, BAK International had not contributed the $20,000,000 capital to BAK
      Tianjin yet and is in the course of negotiating with the relevant government
      bureau for an extension of the applicable contribution period.





BAK
      International, a non-operating holding company that had substantially the same
      shareholders as Shenzhen BAK, entered into a share swap transaction with
      Shenzhen BAK on November 6, 2004 for the purpose of the subsequent reverse
      acquisition of the interest of China BAK as described below. Pursuant to the
      terms of the transaction, the parties exchanged all outstanding shares of their
      capital stock for US$11.5 million in cash, and as a result, BAK International
      became the parent company of Shenzhen BAK. Certain shareholders of Shenzhen
      BAK,
      representing ownership interests of approximately 1.85%, elected not to acquire
      shares in BAK International. The non-participating shareholders of Shenzhen
      BAK
      sold their right to acquire their proportional ownership interests in BAK
      International for cash, and the proportionate interests in BAK International
      to
      which the non-participating shareholders were entitled were acquired by the
      transferees. After the share swap transaction between BAK International and
      the
      shareholders of Shenzhen BAK was complete, 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 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 purchases. Consequently, the
      share purchases between BAK International and the shareholders of Shenzhen
      BAK
      have been accounted for as a reverse acquisition of Shenzhen BAK with no
      adjustment to the historical basis of the assets and liabilities of Shenzhen
      BAK, and the operations were consolidated as though the transactions occurred
      as
      of the beginning of the first accounting period presented in the accompanying
      consolidated financial statements.





13


**China
        BAK Battery, Inc. and subsidiaries**
 **Notes
        to the condensed interim consolidated financial statements**
 **For
        the nine months ended June 30, 2006 and 2007**
 (Unaudited)


On
      January 20, 2005, 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, of which 50% are 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 is not at least US$12,000,000, and the
      remaining 50% are to be released to investors in the private placement if
      audited net income of the Company for the fiscal year ended September 30, 2006
      is 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 (the “Escrow
      Arrangement”).





The
      Escrow Arrangement regarding the shares placed by Mr. Xiangqian Li in an escrow
      account and the subsequent potential release of those shares based on the
      fulfillment of certain performance thresholds constitutes a compensatory plan
      to
      Mr. Xiangqian Li. A compensation charge should be recorded in the financial
      statements of the Company should these performance thresholds be achieved and
      shares released to Mr. Xiangqian Li. However, as the Company did not meet the
      performance threshold for the years ended September 30, 2005 and 2006 after
      consideration of the related compensation charge, the Company has determined
      that the threshold has not been achieved and 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 had undertaken on
      August 21, 2006, to return those shares to the escrow agent for the distribution
      to the relevant investors. The remaining 1,089,775 shares of Mr. Xiangqian
      Li
      relating to the 2006 performance threshold had been transferred to the relevant
      investors as of December 31, 2006.





Also
      on
      January 20, 2005, the Company completed a share swap transaction with the
      shareholders of BAK International. The swap 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 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), 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. The accompanying consolidated financial statements reflect the
      capital-raising transaction of the Company as if the transaction occurred as
      of
      the beginning of the first period presented.





The
      Company’s condensed interim consolidated financial statements have been prepared
      in accordance with generally accepted accounting principles in the United States
      of America (“US GAAP”).





14


**China
        BAK Battery, Inc. and subsidiaries**
 **Notes
        to the condensed interim consolidated financial statements**
 **For
        the nine months ended June 30, 2006 and 2007**
 (Unaudited)


The
      interim results of operations are not necessarily indicative of the results
      to
      be expected for the fiscal year ending September 30, 2007. The Company’s
      consolidated balance sheet as of September 30, 2006 has been taken from the
      Company’s audited 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
      period presented. The Company’s accounting policies and certain other
      disclosures are set forth in the notes to the condensed interim consolidated
      financial statements contained in the Company’s Annual Report on Form 10-K for
      the year ended September 30, 2006. 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 period. 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 (“PRC GAAP”), in Hong Kong or in Canada, the accounting
      standards used in the places of their domicile. The accompanying condensed
      interim consolidated financial statements reflect necessary adjustments not
      recorded in the books of account of the Company's subsidiaries to present them
      in conformity with US GAAP.





***Recently
      Issued Accounting Standards***





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





In
      July
      2006, the Financial Accounting Standards Board (“FASB”) issued FASB
      Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes-an
      Interpretation of FASB Statement No. 109,” or FIN 48, 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
      become effective for the Company on October 1, 2007, with the cumulative effect
      of the change in accounting principle, if any, recorded as an adjustment to
      opening retained earnings. The Company is currently evaluating the impact of
      adopting FIN 48 on its consolidated financial statements.





*SFAS
      157, Fair Value Measurements*





In
      September 2006, the FASB issued Statement of Financial Accounting
      Standards ** (“SFAS”)
      No. 157, “Fair Value Measurements,” or SFAS 157, which defines fair value,
      establishes a framework for measuring fair value in U.S. GAAP, 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 Company is currently evaluating the impact of
      adopting SFAS 157 on its consolidated financial statements.





*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 Statement of Financial Accounting Standards
      (“SFAS”) 159, “The Fair Value Option for Financial Assets and Financial
      Liabilities - Including an Amendment of FASB Statement No. 115,” or SFAS 159.
      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 Company’s fiscal year beginning on October 1,
      2008. The Company’s management is in the process of evaluating this guidance and
      therefore has not yet determined the impact that SFAS 159 will have on its
      financial statements upon adoption.





15


**China
        BAK Battery, Inc. and subsidiaries**
 **Notes
        to the condensed interim consolidated financial statements**
 **For
        the nine months ended June 30, 2006 and 2007**
 (Unaudited)




*SAB 108*





In
      September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) ** No.
      108,
      or SAB 108, which provides guidance on the process of quantifying financial
      statement misstatements. In SAB 108, the SEC staff establishes an approach
      that
      requires quantification of financial statement errors, under both the
      iron-curtain and the roll-over methods, based on the effects of the error on
      each of our financial statements and the related financial statement
      disclosures. SAB 108 is generally effective for annual financial statements
      in
      the first fiscal year ending after November 15, 2006. The transition provisions
      of SAB 108 permits existing public companies to record the cumulative effect
      in
      the first year ending after November 15, 2006 by recording correcting
      adjustments to the carrying values of assets and liabilities as of the beginning
      of that year with the offsetting adjustment recorded to the opening balance
      of
      retained earnings. We do not expect that the adoption of SAB 108 would have
      a
      material effect on our consolidated financial statements.





**2** **Pledged
      Deposits**





Pledged deposits as of September 30, 2006 and June 30, 2007 consist of the
      following:





*September 30,*
              *2006*
            
            *June
                30,*
              *2007*Pledged
                deposits with banks for bills payable
            
            $
            12,971,989
            
            $
            3,528,577




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




Trade accounts receivable as of September 30, 2006 and June 30, 2007 consist
      of
      the following:





*September 30,*
              *2006*
            
            *June
                30,*
              *2007*Trade
                accounts receivable
            
            $
            56,197,229
            
            $
            49,363,710Less:
                Allowance for doubtful accounts
            
            
            (1,063,285
            )
            
            (2,527,369
            )55,133,944
            
            
            46,836,341Bills
                receivable
            
            
            9,198,227
            
            
            5,530,850$
            64,332,171
            
            $
            52,367,191




16


**China
        BAK Battery, Inc. and subsidiaries**
 **Notes
        to the condensed interim consolidated financial statements**
 **For
        the nine months ended June 30, 2006 and 2007**
 (Unaudited)


An
      analysis of the allowance for doubtful accounts for the nine months ended June
      30, 2006 and 2007 is as follows:





*Nine
                months ended June 30,**2006*
            
            *2007*Balance
                at beginning of period
            
            $
            1,593,538
            
            $
            1,063,285Addition
                of bad debt expense, net
            
            
            640,738
            
            
            1,395,011Foreign
                exchange adjustment
            
            
            18,925
            
            
            69,073Balance
                at end of period
            
            $
            2,253,201
            
            $
            2,527,369





**4** **Inventories**





Inventories
      as of September 30, 2006 and June 30, 2007 consist of the
      following:





*September*30,
              *2006*
            
            *June*
                30,
              *2007*Raw
                materials
            
            $
            20,693,915
            
            $
            16,080,253Work-in-progress
            
            
            5,686,328
            
            
            8,816,764Finished
                goods
            
            
            21,008,693
            
            
            37,594,144$
            47,388,936
            
            $
            62,491,161




Part
      of
      the Company’s inventories with carrying value of US$10,115,442 and US$19,696,671
      as of September 30, 2006 and June 30, 2007, respectively, was pledged as
      collateral under certain loan agreements (see Note 6).





**5** **Property,
      Plant and Equipment, net**





Property, plant and equipment as of September 30, 2006 and June 30, 2007 consist
      of the following:




*September*30,
              *2006*
            
            *June*30,
              *2007*Buildings
            
            $
            63,508,910
            
            $
            69,399,581Machinery
                and equipment
            
            
            30,658,968
            
            
            48,996,268Office
                equipment
            
            
            750,115
            
            
            974,480Motor
                vehicles
            
            
            1,018,042
            
            
            1,120,00395,936,035
            
            
            120,490,332Accumulated
                depreciation and amortization
            
            
            (9,925,557
            )
            
            (16,829,862
            )Construction
                in progress
            
            
            23,395,638
            
            
            17,686,433Prepayment
                for acquisition of property, plant and equipment
            
            
            —
            
            
            17,917,984$
            109,406,116
            
            $
            138,942,369




17


**China
        BAK Battery, Inc. and subsidiaries**
 **Notes
        to the condensed interim consolidated financial statements**
 **For
        the nine months ended June 30, 2006 and 2007**
 (Unaudited)


*(i)* Depreciation
      and amortization expense for the nine months ended June 30, 2006 and 2007 is
      included in the consolidated statements of income and comprehensive income
      as
      follows:





***Nine
                months ended June 30,****2006*
            
            *2007*Cost
                of revenues
            
            $
            3,162,862
            
            $
            4,660,914Research
                and development costs
            
            
            189,101
            
            
            214,808Sales
                and marketing expenses
            
            
            379,691
            
            
            442,281General
                and administrative expenses
            
            
            330,619
            
            
            1,075,218$
            4,062,273
            
            $
            6,393,221




*(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, 2006 and 2007, the Company capitalized interest
      of
      approximately $390,642 and $242,396, respectively, to the cost of construction
      in progress.




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





As
      of
      September 30, 2006 and June 30, 2007, machinery and equipment with net book
      value of $6,253,302 and $23,441,159 of the Company were pledged as collateral
      under certain loan arrangements (see Notes 6 and 7).





**6** **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,*
              *2006*
            
            *June*30,
              *2007*Inventories
                (Note 4)
            
            $
            10,115,442
            
            $
            19,696,671Machinery
                and equipment, net (Note 5)
            
            
            6,253,302
            
            
            10,156,311$
            16,368,744
            
            $
            29,852,982





As
      of
      September 30, 2006 and June 30, 2007, the Company had several short-term bank
      loans with aggregate outstanding balances of $67,899,908 and $67,625,238
      respectively. The loans were primarily obtained for general working capital,
      carried interest rates ranging from 5.022% to 6.57% per annum, and had maturity
      dates ranging from 6 to 12 months. Each loan is guaranteed by Mr. Xiangqian
      Li,
      Chairman of the Company, who did not receive any compensation for acting as
      guarantor.




18


**China
        BAK Battery, Inc. and subsidiaries**
 **Notes
        to the condensed interim consolidated financial statements**
 **For
        the nine months ended June 30, 2006 and 2007**
 (Unaudited)




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. As of June 30, 2007, the Company is in
      compliance with all of these requirements.




**7** **Long-term
      Bank Loans**





As
      of
      June 30, 2007, the Company had long-term bank loans of $26,262,228. The amount
      of $13,131,114 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 for three- to five-year long-term loans which is
      currently 6.48% per annum. The long-term bank loan is repayable in three
      instalments of $3,939,334 on November 20, 2008, $3,939,334 on November 20,
      2009
      and $5,252,446 on December 26, 2010. Another $13,131,114 was borrowed under
      a
      five-year long-term loan credit facility from Shenzhen Eastern Branch,
      Agricultural Bank of China, bearing interest at 90% of the benchmark rate of
      the
      People’s Bank of China for three- to five-year long-term loans, including a
      borrowed amount of $5,242,446 with a current interest rate of 5.832% and
      repayable on January 25, 2012 and another borrowed amount of $7,878,668 with
      a
      current interest rate of 6.237%, payable in three instalments of $6,565,557
      on
      January 25, 2011, $5,252,446 on January 25, 2012 and $1,313,111 on February
      27,
      2012, respectively.





The
      long-term bank loan with China Development Bank is guaranteed by Mr. Xiangqian
      Li, Chairman of the Company, and is secured by the buildings and land use rights
      of the Company’s Research and Development Test Center which will be constructed
      in Shenzhen, PRC after obtaining the required land use rights for the location
      of the facility, and certain shares of the Company owned by Mr. Xiangqian
      Li.





The
      long-term bank loan with Agricultural Bank of China is guaranteed by Mr.
      Xiangqian Li, Chairman of the Company, and is secured by pledged machinery
      and
      equipment valued at $13,284,848 as of June 30, 2007 (see note 5).





Mr.
      Xiangqian Li did not receive any compensation for acting as guarantor for the
      above long-term bank loans.





**8** **Share-based
      Compensation**





The
      Company grants share options to officers and employees as a reward for services
      and restricted ordinary shares to its non-employee directors.





**Employee
      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.




19


**China
        BAK Battery, Inc. and subsidiaries**
 **Notes
        to the condensed interim consolidated financial statements**
 **For
        the nine months ended June 30, 2006 and 2007**
 (Unaudited)




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:





Numbers
                of Share
            
            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.”





A
      summary
      of share option plan activity for the nine months ended June 30, 2007 is
      presented below:





*Number
                of shares*
            
            *Weighted average
                exercise price*
              *per**shares*
            
            *Weighted average
                remaining contractual term*Outstanding
                as of October 1, 2006
            
            
            400,000
            
            $
            6.25Granted
            
            
            —
            
            
            —Exercised
            
            
            —
            
            
            —Forfeited
            
            
            —
            
            
            —Cancelled
            
            
            —
            
            
            —Outstanding
                as of June 30, 2007
            
            
            400,000
            
            $
            6.25
            
            
            4
                yearsExercisable
                as of June 30, 2007
            
            
            —
            
            
            —
            
            
            —





The
      weighted-average grant-date fair value of options granted during 2005 was $3.67
      per share. The Company recorded non-cash share-based compensation expense of
      $437,098 for the nine months ended June 30, 2007 in respect of share options
      granted in 2005, which was allocated to general and administrative expenses
      and
      research and development costs, respectively.





The
      fair
      value of the above option awards was estimated on the date of grant using a
      Black-Scholes Option Valuation Model that uses the assumptions noted in the
      following table. The expected volatility was based on the historical
      volatilities of the Company’s listed common stock in the United States. The
      Company uses historical data to estimate employee termination within the
      valuation model. The expected life of options granted is the period between
      the
      option grant date and the expected exercise date which is the mid-point of
      the
      exercisable date and the expiry date, which represents the period of time that
      options granted are expected to be outstanding. Since the share options once
      exercised will primarily trade in the U.S. capital market, the risk-free rate
      for periods within the contractual term of the share option is based on the
      U.S.
      Treasury yield curve in effect at the time of grant.




20


**China
        BAK Battery, Inc. and subsidiaries**
 **Notes
        to the condensed interim consolidated financial statements**
 **For
        the nine months ended June 30, 2006 and 2007**
 (Unaudited)




Expected
                volatility
            
            
            59.85
            %Expected
                dividends
            
            
            NilExpected
                life
            
            
            6
                yearsRisk-free
                interest rate
            
            
            4.13
            %





As
      of
      June 30, 2007, there were unrecognized compensation costs of approximately
      $225,000 related to non-vested share options. These costs are expected to be
      recognized over the remaining vesting period.





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 the each
      employee’s agreement respectively.





A
      summary
      of share option plan activity for the nine months ended June 30, 2007 is
      presented below:





*Number
                of shares*
            
            *Weighted average*
              *exercise
                price*
              *per
                share*
            
            *Weighted average*
              *remaining
                contractual term*Outstanding
                as of October 1, 2006
            
            
            —
            
            $
            —Granted
                on June 25, 2007
            
            
            1,501,000
            
            
            3.28Exercised
            
            
            —
            
            
            —Forfeited
            
            
            —
            
            
            —Cancelled
            
            
            —
            
            
            —Outstanding
                as of June 30, 2007
            
            
            1,501,000
            
            $
            3.28
            
            
            5
                yearsExercisable
                as of June 30, 2007
            
            
            10,000
            
            $
            3.35
            
            
            3
                years





The
      weighted-average grant-date fair value of options granted during 2007 was $2.15
      per share. The Company recorded non-cash share-based compensation expense of
      $48,455 for the nine months ended June 30, 2007 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 a Black-Scholes Option Valuation Model that uses the
      assumptions noted in the following table. The expected volatility was based
      on
      the historical volatilities of the Company’s listed common stock in the United
      States. The Company uses historical data to estimate employee termination within
      the valuation model. The expected life of options granted is the period between
      the option grant date and the expected exercise date which is the mid-point
      of
      the exercisable date and the expiry date, which represents the period of time
      that options granted are expected to be outstanding. Since the share options
      once exercised will primarily trade in the U.S. capital market, the risk-free
      rate for periods within the contractual term of the share option is based on
      the
      U.S. Treasury yield curve in effect at the time of grant.




21


**China
        BAK Battery, Inc. and subsidiaries**
 **Notes
        to the condensed interim consolidated financial statements**
 **For
        the nine months ended June 30, 2006 and 2007**
 (Unaudited)




Expected
                volatility
            
            
            69.44
            %Expected
                dividends
            
            
            NilExpected
                life
            
            
            4
                - 10 yearsRisk-free
                interest rate
            
            
            5.09
            %





As
      of
      June 30, 2007, there were unrecognized compensation costs of approximately
      $3,176,000 related to above non-vested share options. These costs are expected
      to be recognized over the remaining vesting period.




**Employee
      Restricted Stock Award**





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 the officer of the Company to authorize 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 classified
      as
      liability-classified awards as of September 30, 2006.





Subsequent
      to September 28, 2006, certain employees who were entitled to the Replacement
      Awards terminated their employment with the Company. The related potential
      restricted stock grants of these employees were forfeited with the previously
      recognized compensation cost of $181,290 credited to sales and marketing
      expenses and general and administrative expenses.





The
      Company has estimated the fair value of the Replacement Awards to be $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.
      $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.




22


**China
        BAK Battery, Inc. and subsidiaries**
 **Notes
        to the condensed interim consolidated financial statements**
 **For
        the nine months ended June 30, 2006 and 2007**
 (Unaudited)


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 $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 $236,059 for the period from October 1, 2006 to December
      26, 2006 in respect of the liability-classified award, and $31,186 for the
      period from December 26, 2006 to December 31, 2006 in respect of the
      equity-classified award.





The
      Company recognized shared-based compensation expense of $1,196,374 for the
      period from January 1, 2007 to June 30, 2007 in respect of the equity-classified
      award, which was allocated to cost of revenues, sales and marketing expenses,
      general and administrative expenses and research and development costs,
      respectively. The restricted stock grant of certain employees who resigned
      during the period from January 1, 2007 to June 30, 2007 were forfeited with
      the
      previously recognized compensation cost of $96,392 credited to cost of
      revenues.





A
      summary
      of the restricted stock grant activity for the nine months ended June 30, 2007
      is presented below:




*Number
                of*
              *shares*
            
            *Weighted average
                exercise price*
              *per
                share*Non-vested
                as of October 1, 2006
            
            
            —
            
            $
            —Granted
                on December 26, 2006
            
            
            914,994
            
            
            6.25Vested
            
            
            —
            
            
            —Forfeited
            
            
            23,899
            
            
            6.25Non-vested
                as of June 30, 2007
            
            
            891,095
            
            $
            6.25




As
      such
      stock-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, 2007.





As
      of
      June 30, 2007, there were unrecognized compensation costs of approximately
      $856,000 related to the restricted stock granted. These costs are expected
      to be
      recognized over the vesting period.




**Compensation
      Plan for Non-employee Directors**




On
      May
      12, 2006, the Board of Directors adopted the China BAK Battery, Inc.
      Compensation Plan for Non-employee Directors (the “Plan 2006”). The Plan 2006
      authorizes the issuance of 5,000 restricted shares of the Company’s common stock
      to each of the three eligible directors in addition to their annual retainer
      fee. Such restricted shares entitle the relevant non-employee directors to
      all
      rights of ordinary share ownership except that the shares may not be sold,
      transferred, pledged, exchanged or otherwise disposed of during the vesting
      period.




23


**China
        BAK Battery, Inc. and subsidiaries**
 **Notes
        to the condensed interim consolidated financial statements**
 **For
        the nine months ended June 30, 2006 and 2007**
 (Unaudited)


On
      May
      12, 2006, the Company granted 5,000 restricted shares to each of the three
      newly
      elected independent directors with a fair value of $11.5 per share pursuant
      to
      the Plan 2006. 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
      instalments on the last day of each subsequent quarter or in three equal
      quarterly instalments on the last day of each calendar quarter beginning on
      the
      last day of the first full calendar quarter after the grant date.





As
      of
      June 30, 2007, there was not any unrecognized stock-based compensation
      associated with these restricted shares granted to non-employee directors.
      Each
      25% of the restricted shares were issued as fully paid ordinary shares to the
      three independent directors on July 19, 2006, August 16, 2006, January 8, 2007
      and March 28, 2007, respectively.




On
      June
      25, 2007, the Plan 2006 also authorized the issuance of 5,000 restricted shares
      of the Company’s common stock to each of the two new eligible directors in
      addition to their annual retainer fee. Such restricted shares entitle the
      relevant non-employee directors to all rights of ordinary share ownership except
      that the shares may not be sold, transferred, pledged, exchanged or otherwise
      disposed of during the vesting period.





On
      June
      25, 2007, the Company granted 5,000 restricted shares to each of the two newly
      elected independent directors with a fair value of $3.35 per share pursuant
      to
      the Plan 2006. 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
      instalments on the last day of each subsequent quarter or in three equal
      quarterly instalments on the last day of each calendar quarter beginning on
      the
      last day of the first full calendar quarter after the grant date.





As
      of
      June 30, 2007, the Company had unrecognized stock-based compensation of
      approximately $24,328 associated with these restricted shares granted to
      non-employee directors. As of June 30, 2007, the first 25% of the restricted
      shares had not yet been issued to the two independent directors.





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 for non-employee directors for the nine months
      ended June 30, 2007.





**9** **Net
      Income per Share**





The
      calculation of basic net income per share is based on the net income for the
      nine months ended June 30, 2007 attributable to equity shareholders of
      $1,332,756 (nine months ended June 30, 2006: $15,423,237) and the weighted
      average number of ordinary shares of 48,889,564 in issue during the nine months
      ended June 30, 2007 (nine months ended June 30, 2006: 48,878,396).




24


**China
        BAK Battery, Inc. and subsidiaries**
 **Notes
        to the condensed interim consolidated financial statements**
 **For
        the nine months ended June 30, 2006 and 2007**
 (Unaudited)


The
      calculation of diluted net income per share is based on the net income for
      the
      nine months ended June 30, 2007 attributable to equity shareholders of
      $1,332,756 (nine months ended June 30, 2006: $15,423,237) and the weighted
      average number of ordinary shares of 49,282,763 in issue during the nine months
      ended June 30, 2007 (nine months ended June 30, 2006: 49,167,445) after
      adjusting for the number of 393,199 dilutive potential 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. 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.





**10** **Commitments
      and Contingencies**





*(i)* *Capital
      Commitments*





As
      of
      September 30, 2006 and June 30, 2007, the Company had the following capital
      commitments:





*September 30,*
              *2006*
            
            *June
                30,*
              *2007*For
                construction of buildings
            
            $
            557,883
            
            $
            —For
                purchases of equipment
            
            
            12,184,346
            
            
            6,497,804$
            12,742,229
            
            $
            6,497,804




(a)  A
      new
      subsidiary, BAK Tianjin, was incorporated in Tianjin city, the PRC on December
      12, 2006. BAK Tianjin plans to develop a production plant. As of June 30, 2007,
      the Company is in the process of evaluating the development plan and the
      budgeted development costs have yet to be determined.





(b)  The
      Company plans to construct a new Research and Development Test Center in
      Shenzhen. As of June 30, 2007, the Company is in the process of evaluating
      the
      development plan and the budgeted development costs have yet to be
      determined.





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





According
      to the relevant PRC laws and regulations, a land use right 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
      are
      obtained.





The
      Company has not yet obtained the land use right certificate relating to the
      premises occupied by the Company, BAK Industrial Park. However, the Company
      obtained approvals for project-planning and construction from the government
      of
      Shenzhen on June 20, 2007 and is in the process of applying to obtain the land
      use right certificate.





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




25


**China
        BAK Battery, Inc. and subsidiaries**
 **Notes
        to the condensed interim consolidated financial statements**
 **For
        the nine months ended June 30, 2006 and 2007**
 (Unaudited)


The
      Company is not able to insure its manufacturing facilities since it has not
      yet
      received its land use right certificate. The Company intends to procure such
      insurance once it has received the certificate.





*(iii)* *Guarantees*





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





*September 30,*
              *2006*
            
            *June
                30,*
              *2007*Guaranteed
                for Shenzhen Tongli Hi-tech Co. Ltd. - a non-related party
            
            $
            2,528,861
            
            $
            1,969,667Guaranteed
                for Shenzhen Kuichong Zhenda Industrial Co. Ltd. - a non-related
                party
            
            
            1,264,430
            
            
            -$
            3,793,291
            
            $
            1,969,667




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 of the above guarantees were
      recognized as of June 30, 2007.





*(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, 2006 and June 30,
      2007 are summarized as follows:




*September 30,*
              *2006*
            
            *June
                30,*
              *2007*Bank
                acceptance bills
            
            $
            1,972,303
            
            $
            2,922,219Commercial
                acceptance bills
            
            
            5,013,466
            
            
            —$
            6,985,769
            
            $
            2,922,219




26


**China
        BAK Battery, Inc. and subsidiaries**
 **Notes
        to the condensed interim consolidated financial statements**
 **For
        the nine months ended June 30, 2006 and 2007**
 (Unaudited)


*(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 has an agreement with A123Systems, Inc., under which the
      Company agrees to manufacture products for A123Systems, Inc. according to the
      specifications furnished by, and using the finished electrodes and other
      materials consigned by, A123Systems, Inc. to the Company. The plaintiffs alleged
      that by manufacturing rechargeable lithium cells for one of the Company’s
      customers, A123Systems, Inc., for use in DeWalt 36-volt cordless power tools
      manufactured by Black & Decker Corporation, the Company has infringed two
      U.S. patents owned by and exclusively licensed to the plaintiffs. The plaintiffs
      seek injunctive relief and damages in an unspecified amount. If the court issues
      an adverse decision, the Company may be required to pay the plaintiffs
      substantial monetary damages, terminate the Company’s existing production of
      rechargeable lithium cells manufactured for A123Systems, Inc., or pay royalties
      to continue 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.





Furthermore,
      if A123Systems, Inc. is found liable for the infringement, it may not be able
      to
      continue its cooperation with the Company at all or on terms and conditions
      acceptable to the Company, which in turn would adversely affect the Company’s
      ability to execute its strategy to expand its production of cells for power
      tools and capture high-margin businesses. Accordingly, the Company’s revenues
      and business prospects would be materially adversely affected.





**11** **Significant
      Concentrations**





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





The
      Company had one customer that individually comprised 10% or more of net revenue
      for the nine months ended June 30, 2006 and 2007, as follows:





*Nine
                months ended June 30,**2006*
            
            *2007*%
            
            
            
            
            
            %A123Systems,
                Inc.
            
            $
            2,731,272
            
            
            3
            
            $
            17,427,337
            
            
            18




Approximately
      1% and 2.1% of gross trade accounts receivable was due from A123Systems, Inc.
      at
      September 30, 2006
      and June 30, 2007, respectively. A termination in relationship with or a
      reduction in orders from this customer could have a material impact on the
      Company’s results of operations and financial condition.




**(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, 2006 and June 30, 2007, 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.




27
 **China
          BAK Battery, Inc. and subsidiaries**
 **Notes
          to the condensed interim consolidated financial statements**
 **For
          the nine months ended June 30, 2006 and 2007**
 (Unaudited)




**12** **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, aluminum-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, 2006 and 2007 were as follows:





*Net
      revenues by product:*





*Nine
                months ended June 30,**2006*
            
            *2007*%
            
            
            
            %Steel-case
                Cell
            
            $
            45,522,441
            
            
            46.58
            
            $
            27,882,363
            
            
            27.31Aluminium-case
                cell
            
            
            33,514,728
            
            
            34.30
            
            
            43,786,621
            
            
            42.89High-power
                  lithium-phosphate cell
            
            
            9,955,746
            
            
            10.20
            
            
            17,411,172
            
            
            17.06Battery
                pack
            
            
            8,244,078
            
            
            8.42
            
            
            8,201,389
            
            
            8.03Cylindrical
                cell
            
            
            96,943
            
            
            0.10
            
            
            2,257,865
            
            
            2.21Polymer
                cell
            
            
            386,778
            
            
            0.40
            
            
            2,548,885
            
            
            2.50$
            97,720,714
            
            
            100.00
            
            $
            102,088,295
            
            
            100.00


*Net
      revenues by geographic area:*




*Nine
                months ended June 30,**2006*
            
            *2007*%
            
            
            
            %PRC
                Mainland
            
            $
            69,279,802
            
            
            70.90
            
            $
            71,246,211
            
            
            69.79United
                States of America
            
            
            9,938,022
            
            
            10.17
            
            
            17,760,368
            
            
            17.40Hong
                Kong, China
            
            
            9,250,688
            
            
            9.47
            
            
            4,516,920
            
            
            4.42The
                Republic of Turkey
            
            
            5,089,720
            
            
            5.21
            
            
            4,333,223
            
            
            4.24Others
            
            
            4,162,482
            
            
            4.25
            
            
            4,231,573
            
            
            4.15$
            97,720,714
            
            
            100.00
            
            $
            102,088,295
            
            
            100.00





28




**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. Except for the historical information contained herein, 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.




**Overview**




Overall,
      during the first three quarters of fiscal 2007, we have continued to see
      consistent sales performance of our polymer cells, as well as development of
      our
      laptop cylindrical business. We have also made progress in expanding our
      manufacturing capability into first tier OEM capabilities, and in working
      through the qualification processes of targeted first tier OEMs. However, we
      continue to face pressure due to increased costs of raw materials, particularly
      lithium cobalt dioxide, and higher overhead related to expanding our
      manufacturing capabilities. This has resulted in lower profit margins for the
      three and nine months ended June 30, 2007, as compared to the same periods
      in
      fiscal 2006.




In
      the
      near-term, we anticipate that we will continue to experience pressure due to
      pricing pressure and overhead costs, including the costs of raw materials as
      well as the costs of our 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 material suppliers to the extent
      there are viable alternatives and to expand our use of alternative raw
      materials. We have also restructured our operations in an effort to streamline
      corporate recourses and improve internal efficiency, with a particular focus
      on
      manufacturing and sales.




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.




**Our
      Business**





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




—
            cellular
                phones — customer segments include OEM and replacement battery
                manufacturers;—
            notebook
                computers;—
            cordless
                power tools; and—
            portable
                consumer electronics, such as digital media devices, portable media
                players, and personal digital assistants, or
                PDAs.




We
      conduct all of our operations in China, in close proximity to China’s
      electronics manufacturing base and its rapidly growing market.




29




Historically,
      we have primarily manufactured prismatic lithium-ion cells for the cellular
      phone replacement battery market and original equipment manufacturer, or 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 cellular phone
      battery replacement market and OEM markets.




Since
      2005, we have expanded our product offerings by adding three product lines,
      which have become our new resources for future growth:




—
            High-power,
                lithium-phosphate cells for use in cordless power tools. We began
                commercial production of lithium-phosphate cells in October 2005
                for use
                in cordless power tools of Black & Decker, a leading power tools
                manufacturer.—
            Lithium
                polymer cells for use in ultra-portable electronic devices, such
                as
                high-end cellular phones, Bluetooth headsets, digital media players
                and
                digital audio players. We began commercial production of lithium
                polymer
                cells in September 2005.—
            Cylindrical
                lithium-ion cells for use in notebook computers. We began trial production
                of cylindrical cells in April 2006 and began commercial production
                in June
                2006. Prior to this, we had been producing a limited number of cylindrical
                cells using primarily a manual manufacturing process. These cylindrical
                cells were primarily sold for use on portable DVD players. In March
                2007,
                our cylindrical lithium-ion cells met the safety standards for use
                in
                mining lamps set by the Quality Supervision and Testing Center of
                the
                Chemical and Physical Power Sources of the Ministry of Information
                Industry.




**Pricing
      Pressure**




Portable
      electronic devices such as cellular phones and notebook computers are subject
      to
      declines in average selling prices from time to time due to evolving
      technologies, industry standards and consumer preferences. As a result,
      manufacturers of these electronic devices expect us, as a supplier, to cut
      our
      costs and lower the price of our products, particularly when they place
      substantial orders with us. Our ability to maintain our cost-effectiveness
      will
      be critical to our future success in an increasingly price-sensitive market.
      We
      seek to achieve this by ramping up our production capacity to give us greater
      economies of scale through a higher bargaining power to secure a supply of
      materials and equipment at a lower cost, and a larger base for spreading out
      our
      fixed cost allocation. We believe this will provide incremental long-term growth
      opportunities, but in the short-term, will also require us to incur substantial
      capital expenditures.





**Seasonality
      of Operating Results**




Our
      revenues are now affected by seasonal variations in customer demand. We expect
      to experience seasonal lows in the demand for our products during the months
      of
      April to July, reflecting our customers’ decreased purchases. On the other hand,
      we will generally experience seasonal peaks during the months of September
      to
      March, primarily as a result of increased purchases from our customers during
      the holiday season, except that the months of February and October tend to
      be
      seasonally low sales months due to plant closures for the Chinese New Year
      and
      national holidays in the PRC.




30


**Financial
      Statement Presentation**





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,****2007**
            
            **2006**
            
            **2007**
            
            **2006****(in
                thousands)**Prismatic
                cellsSteel-case
                cells
            
            $
            5,261
            
            $
            12,271
            
            $
            27,882
            
            $
            45,522Aluminum-case
                cells
            
            
            14,721
            
            
            10,467
            
            
            43,786
            
            
            33,515Battery
                packs
            
            
            4,488
            
            
            2,951
            
            
            8,203
            
            
            8,244Cylindrical
                cells
            
            
            975
            
            
            62
            
            
            2,258
            
            
            97High-power
                lithium-phosphate cells
            
            
            3,137
            
            
            7,447
            
            
            17,411
            
            
            9,956Lithium
                polymer cells
            
            
            895
            
            
            199
            
            
            2,548
            
            
            387Total
            
            $
            29,477
            
            $
            33,397
            
            $
            102,088
            
            $
            97,721




*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 return
      data.





Our
      net
      revenues have increased during the nine months ended June 30, 2007, because
      of
      increased shipments as we ramped up our production capacity to meet customer
      demands for our products.




*Cost
      of Revenues* . 
      Cost of revenues consists primarily of material 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.




Because
      the average unit costs of the products increased significantly during the nine
      months ended June 30, 2007, as the purchase cost of lithium cobalt dioxide
      increased, our gross profit, as a percentage of net revenues, decreased from
      28.5% for the nine months ended June 30, 2006, to 19.0% for the same period
      of
      fiscal 2007.




*Research
      and Development Costs* . 
      Research and development costs primarily are comprised of remuneration for
      R&D staff, 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, advertising cost, depreciation, 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.




31




*General
      and Administrative* . 
      General and administrative expenses consist primarily of employee remuneration,
      share-based compensation, professional fees, insurance, benefits, general office
      expenses, depreciation, liquidated damage charge and bad debt
      expenses.




*Gain
      on Trading Securities* . 
      Gain on trading securities represents realized gain from open market purchases
      and sales of certain shares listed on the Hong Kong Stock Exchange. These
      transactions were concluded by BAK International Limited, our Hong Kong
      subsidiary.  As of June 30, 2007, we do not hold any equity or debt
      securities on hand for trading purposes.  We do not anticipate investment
      in trading securities to form an ongoing part of our treasury
      function.




*Other
      Income / (Expenses).* Other income for the nine months ended June 30, 2007 mainly consists of
      government subsidy given as recognition of our contribution to the economic
      development of the area.  No present or future obligation will arise from
      the receipt of such amount.




*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 15% enterprise income tax. Further, according to PRC laws and regulations,
      foreign invested manufacturing enterprises are entitled to, starting from their
      first profitable year, a two-year exemption from enterprise income tax followed
      by a three-year 50% reduction in its enterprise income tax rate. 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
      of
      7.5% for the following three years from its first 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 is subject to the enterprise income tax rate of 7.5%. BAK
      Electronics, established in August 2005, is eligible for the same preferential
      tax treatment applicable to Shenzhen BAK and currently is in the tax holiday
      and
      fully exempt from any enterprise income tax.




In
      addition, due to the additional capital invested in Shenzhen BAK in both 2005
      and 2006, Shenzhen BAK was granted a lower income tax rate of 3.309% and 3.82%
      in calendar year 2005 and 2006 respectively.




Furthermore,
      to encourage foreign investors to introduce advanced technologies to China,
      the
      PRC government has offered additional tax incentives to enterprises that are
      classified as a foreign invested enterprise with advanced technologies.
      According to an official notice issued by the Shenzhen Municipal Trade and
      Industry Bureau, Shenzhen BAK received such designation in August 2005. As
      a
      result, as long as Shenzhen BAK maintains this designation, it may apply to
      the
      tax authority to extend the reduction in its enterprise income tax rate for
      another three years, until December 31, 2009.




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 will be effective on January 1, 2008. According to the new
      corporate income tax law, the applicable income tax rate for our operating
      subsidiaries is subject to change. As the implementation detail has not yet
      been
      announced, we cannot be sure of the potential impact of such new corporate
      income tax law on our financial position and operating results.




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 estimated profits tax at
      the
      rate of 22%. However, because it does not have any assessable income derived
      from or arising in Canada, it has not paid any Canada estimated profits
      tax.




32




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 rates were 3.2% and 17.5% for the nine months ended June 30,
      2006
      and 2007, respectively.




**Results
      of Operations**




***For
      the three months ended June 30, 2007 as compared to the three months ended
      June
      30, 2006.***




**Three****Months****Ended**
              **June
                30,****2007**
            
            **2006**
            
            **$
                Change**
            
            **%
                Change****(In
                thousands, except percentages)**Statement
                of Operations dataRevenues
            
            $
            29,477
            
            $
            33,397
            
            $
            (3,920
            )
            
            (11.7
            )%Cost
                of revenues
            
            
            24,415
            
            
            24,899
            
            
            (484
            )
            
            (1.9
            )Gross
                profit
            
            
            5,062
            
            
            8,498
            
            
            (3,436
            )
            
            (40.4
            )Operation
                expenses:Research
                and development costs
            
            
            1,118
            
            
            477
            
            
            641
            
            
            134.4Sales
                and marketing expenses
            
            
            1,165
            
            
            1,041
            
            
            124
            
            
            11.9General
                and administrative expenses
            
            
            4,189
            
            
            1,962
            
            
            2,227
            
            
            113.5Total
                operating expenses
            
            
            6,472
            
            
            3,480
            
            
            2,992
            
            
            86.0Operating
                income / (loss)
            
            
            (1,410
            )
            
            5,018
            
            
            (6,428
            )
            
            (128.1
            )Finance
                costs, net
            
            
            1,070
            
            
            297
            
            
            773
            
            
            260.3Other
                expenses
            
            
            90
            
            
            1
            
            
            89
            
            
            8900Income
                taxes
            
            
            120
            
            
            43
            
            
            77
            
            
            179.1Net
                income / (loss)
            
            $
            (2,690
            )
            $
            4,677
            
            $
            (7,367
            )
            
            (157.5
            )%




*Revenues.* Revenues
      decreased to $29.5 million for the three months ended June 30, 2007 as
      compared to $33.4 million for same period of the prior year, a decrease of
      $3.9
      million or 11.7%.




•
            
            Revenues
                from the sales of steel-case cells decreased to $5.3 million in the
                three
                months ended June 30, 2007 from $12.3 million in the same period in
                2006, a decrease of $7.0 million or 57.1%, due to a decrease in sales
                volume by 46.7% primarily attributable to an increasingly competitive
                market.




•
            
            Revenues
                from the sales of aluminum-case cells increased to $14.7 million
                in the
                three months ended June 30, 2007 from $10.5 million in the same
                period in 2006, an increase of $4.3 million or 40.7%, due to an increase
                in sales volume by 25.4% driven by increased sales to OEM market
                in the
                PRC and an increase in average selling price by 12.2% as the result
                of the
                change of type of the aluminum-case
                cells.




•
            
            Revenues
                from sales of battery packs increased to $4.5 million in the three
                months
                ended June 30, 2007 from $3.0 million in the same period in 2006, an
                increase of $1.5 million or 52.0%, due to an increase in sales volume
                of
                58.6% driven by increased sales to the OEM market in the PRC and
                offset by
                a decrease in average selling price by
                4.1%.




33




•
            
            Revenues
                from the sales of high-power lithium-ion cells decreased to $3.1
                million
                in the three months ended June 30, 2007 from $7.4 million in the same
                period in 2006, a decrease of $4.3 million or 57.9%, due to a decrease
                in
                sales volume by 36.6% driven by decreased export sales.





•
            
            We
                also sold $895,000 of lithium polymer cells and $975,000 of cylindrical
                cells in the three months ended June 30, 2007, compared to $199,000
                of
                lithium polymer cells and $62,000 of cylindrical cells in the same
                period
                in 2006, due to the new capacity and increased
                demand.





*Cost
      of Revenues* .
      Cost of
      revenues decreased to $24.4 million for the three months ended June 30,
      2007 as compared to $24.9 million for the same period in 2006, a decrease of
      $484,000 or 1.9%, due primarily to the decrease in sales volume offset by
      increased purchase cost of lithium cobalt dioxide and increased depreciation
      charges with the completion of two new production lines.




As
      a
      result of the decrease in our revenues, which was disproportionate to the
      decrease in our cost of revenues, gross profit for the three months ended
      June 30, 2007 was $5.1 million or 17.2% of revenues as compared to gross
      profit of $8.5 million or 25.4% of revenues for the same period in
      2006.




*Research
      and Development Costs* .
      Research and development costs increased to $1.1 million for the three months
      ended June 30, 2007 as compared to $477,000 for the same period in 2006, an
      increase of $641,000 or 134.4%. Share-based compensation included in research
      and development costs was $290,000 for the three months ended June 30,
      2007, an increase of $159,000 compared with the same period in 2006. On
      September 28, 2006, options to purchase a total of 1,400,000 shares of common
      stock were cancelled and on December 26, 2006, a total of 914,994 shares of
      restricted stock were granted as replacement awards. Pursuant to SFAS 123R,
      we
      also measured the employee share-based compensation of the replacement awards
      at
      grant-date fair value on December 26, 2006 and recognized the value over the
      remaining vesting period. Research and development material expenses increased
      by $248,000 in connection with research projects in progress in BAK Canada
      during the three months ended June 30, 2007 while no such expenses were incurred
      in the same period in 2006. Salaries related to research increased to $389,000
      from $273,000 for the same period of the prior year, an increase of $116,000,
      primarily because additional research professionals have been
      hired.




*Sales
      and Marketing Expenses* .
      Sales
      and marketing expenses increased to $1.2 million for the three-month period
      ended June 30, 2007 as compared to $1.0 million for the same period in
      2006, an increase of $124,000 or 11.9%. As a percentage of revenues, sales
      and
      marketing expenses increased to 4.0% for the three months ended June 30,
      2007, from 3.1% for the same period in 2006. Packing expenses increased by
      $168,000 as the result of increased cost of packing materials.




*General
      and Administrative Expenses* .
      General
      and administrative expenses increased to $4.2 million, or 14.2% of revenues,
      for
      the three months ended June 30, 2007 as compared to $2.0 million, or 5.9%
      of revenues, for the same period in 2006, an increase of $2.2 million or 113.5%.
      Salaries increased by $330,000 as a result of an increase in average salaries
      and of the number of employees as part of our expansion. Depreciation charged
      also increased by $253,000 due to the completion of additional facilities in
      our
      industrial park. Bad debt expenses increased by $1,677,000 primarily due to
      a
      provision charged against a customer after we had assessed the collection of
      accounts receivables from this customer during the third quarter of
      2007.




*Operating
      Income (Loss)* .
      As a
      result of the above, operating loss totaled $1.4 million for the three months
      ended June 30, 2007 as compared to operating income of $5.0 million for the
      same period of the prior year, a decrease of $6.4 million or 128.1%. As a
      percentage of revenues, operating loss was 4.8% for the three months ended
      June 30, 2006 as compared to an operating income of 15.0% for the same
      period of the prior year.





*Finance
      Costs, Net* .
      Finance
      costs, net increased to $1.1 million for the three-month period ended
      June 30, 2007 as compared to $297,000 for the same period of the prior
      year, an increase of $773,000 or 260.3%. We had $67.6 million in short-term
      bank
      loans and $26.2 million in long-term bank loans as of June 30, 2007 as
      compared to $53.2 million outstanding as of June 30, 2006.




*Other
      Expenses* .
      Other
      expenses were $90,000 for the three months ended June 30, 2007, as compared
      to $1,000 for the same period in 2006.




*Net
      Income / (loss)* .
      As a
      result of the foregoing, we had a net loss of $2.7 million for the three months
      ended June 30, 2007 as compared to a net income of $4.7 million for the same
      period in 2006.




34




***For
      the nine months ended June 30, 2007 as compared to the nine months ended June
      30, 2006.*** ****




**Nine
                months****Ended**
              **June
                30,****2007**
            
            **2006**
            
            **$
                Change**
            
            **%
                Change****(In
                thousands, except percentages)**Statement
                of Operations dataRevenues
            
            $
            102,088
            
            $
            97,721
            
            $
            4,367
            
            
            4.5
            %Cost
                of revenues
            
            
            82,682
            
            
            69,904
            
            
            12,778
            
            
            18.3Gross
                profit
            
            
            19,406
            
            
            27,817
            
            
            (8,411
            )
            
            (30.2
            )Operation
                expenses:Research
                and development costs
            
            
            2,684
            
            
            1,436
            
            
            1,248
            
            
            86.9Sales
                and marketing expenses
            
            
            3,272
            
            
            3,542
            
            
            (270
            )
            
            (7.6
            )General
                and administrative expenses
            
            
            9,301
            
            
            6,152
            
            
            3,149
            
            
            51.2Total
                operating expenses
            
            
            15,257
            
            
            11,130
            
            
            4,127
            
            
            37.1Operating
                income
            
            
            4,149
            
            
            16,687
            
            
            (12,538
            )
            
            (75.1
            )Finance
                costs, net
            
            
            3,134
            
            
            993
            
            
            2,141
            
            
            215.6Other
                (income) / expenses
            
            
            (601
            )
            
            39
            
            
            (640
            )
            
            (1641.0
            )Gain
                on trading securities
            
            
            —
            
            
            (280
            )
            
            280
            
            
            100Income
                taxes
            
            
            283
            
            
            512
            
            
            (229
            )
            
            (44.7
            )Net
                income
            
            $
            1,333
            
            $
            15,423
            
            $
            (14,090
            )
            
            (91.4
            )%




***Comparison
      of the nine months ended June 30, 2007 as compared to the nine months ended
      June 30, 2006.***




*Revenues* . ** Revenues
      increased to $ 102.1 million for the nine months ended June 30, 2007 as
      compared to $97.7 million for same period of the prior year, an increase of
      $4.4
      million or 4.5%.




•
            
            Revenues
                from the sales of steel-case cells decreased to $27.9 million in
                the nine
                months ended June 30, 2007 from $45.5 million in the same period in
                2006, a decrease of $17.6 million or 38.8%, due to a decrease in
                sales
                volume by 31.6% primarily attributable to an increasingly competitive
                market.




•
            
            Revenues
                from the sales of aluminum-case cells increased to $43.8 million
                in the
                nine months ended June 30, 2007 from $33.5 million in the same period
                in 2006, an increase of $10.3 million or 30.6%, due to an increase
                in
                sales volume by 25.7% driven by increased sales to the OEM market
                in the
                PRC and an increase in average selling price by 4% as the result
                of the
                change of type of the aluminum-case
                cells.




•
            
            Revenues
                from sales of battery packs were $8.20 million in the nine months
                ended
                June 30, 2007, the same as in the same period in
                2006.




•
            
            Revenues
                from the sales of high-power lithium-ion cells increased to $17.4
                million
                in the nine months ended June 30, 2007 from $10.0 million in the same
                period in 2006, an increase of $7.4 million or 74.5%, due to an increase
                in sales volume of 100.9% driven by decreased export sales.





•
            
            We
                also sold $2.5 million of lithium polymer cells and $2.3 million
                of
                cylindrical cells in the nine months ended June 30, 2007, compared
                to
                $387,000 of lithium polymer cells and $96,000 of cylindrical cells
                due to
                our new production line.




35




*Cost
      of Revenues* .
      Cost of
      revenues increased to $82.7 million for the nine months ended June 30,
      2007, as compared to $69.9 million for the same period in 2006, an increase
      of
      $12.8 million or 18.3%. The increase in cost of revenues was mainly attributable
      to a significant increase in the purchase cost of lithium cobalt dioxide and
      significantly increased depreciation charges with the completion of two new
      production lines.





As
      a
      result, gross profit for the nine months ended June 30, 2007 was $19.4
      million or 19.0% of revenues as compared to gross profit of $27.8 million or
      28.5% of revenues for the same period in 2006.




*Research
      and Development Costs* .
      Research and development costs increased to $2.7 million for the nine months
      ended June 30, 2007 as compared to $1.4 million for the same period in
      2006. Share-based compensation included in research and development expenses
      was
      $720,000 for the nine months ended June 30, 2007, an increase of $101,000
      compared with the same period in 2006. On September 28, 2006, options to
      purchase a total of 1,400,000 shares of common stock were cancelled and on
      December 26, 2006, a total of 914,994 shares of restricted stock were granted
      as
      replacement awards. Pursuant to SFAS 123R, we also measured the employee
      share-based compensation at grant-date fair value as of December 26, 2006 and
      recognized over the remained vesting period. Research and development material
      expenses increased by $458,000 due to certain new research projects of BAK
      Canada. Salaries related to research increased to $914,000 from $445,000 for
      the
      same period of the prior year, an increase of $469,000, primarily due to our
      hiring of additional research professionals.




*Sales
      and Marketing Expenses* .
      Sales
      and marketing expenses decreased to $3.3 million for the nine-month period
      ended
      June 30, 2007 as compared to $3.5 million for the same period in 2006, a
      decrease of $270,000 or 7.6%. As a percentage of revenues, sales and marketing
      expenses have decreased slightly to 3.2% for the nine months ended June 30,
      2007, from 3.6% for the same period in 2006. Share-based compensation was
      $161,000 for the nine months ended June 30, 2007, a decrease of $119,000,
      due to the above-mentioned measurement of the fair value of the restricted
      stock
      replacement awards at their grant-date of December 26, 2006. Salaries decreased
      by $165,000 as the result of decreased headcount in our packing departments.




*General
      and Administrative Expenses* .
      General
      and administrative expenses increased to $9.3 million, or 9.1% of revenues,
      for
      the nine months ended June 30, 2007 as compared to $6.2 million, or 6.3% of
      revenues, for the same period in 2006, an increase of $3.1 million or 51.2%.
      Salaries increased by $854,000 as a result of an increase of average salaries
      and an increased headcount. Depreciation charges increased by $745,000 due
      to
      the completion of additional facilities in our industrial park. Bad debt
      expenses increased by $634,000 primarily due to a provision charged for one
      customer after we had assessed the collection of accounts receivables from
      this
      customer during the third quarter of 2007.




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. We subsequently filed Form S-1 for these
      shareholders. 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 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 therefore
      recognized in general and administrative expenses an amount of $760,000 as
      liquidated damages for the nine months ended June 30, 2007. There was no
      comparable expense in the same period of 2006.




*Operating
      Income* .
      As a
      result of the above, operating income totaled $4.1 million for the nine months
      ended June 30, 2007 as compared to operating income of $16.7 million for
      the same period of the prior year, a decrease of $12.5 million or 75.1%. As
      a
      percentage of revenues, operating income was 4.1% for the nine months ended
      June 30, 2007 as compared to 17.1% for the same period of the prior year.




36




*Finance
      Costs, Net* .
      Finance
      costs, net, increased to $3.1 million for the nine-month period ended
      June 30, 2007 as compared to $993,000 for the same period of the prior
      year, an increase of $2.1 million or 215.6%. We had $67.6 million in short
      term
      loans and $26.3 million in long term loans as of June 30, 2007 as compared
      to $53.2 million outstanding as of June 30, 2006.




*Other
      (Income) / Expenses.* Other
      income was $601,000 for the nine-month period ended June 30, 2007, as
      compared to other expenses of $39,000 for the same period of 2006. Other income
      for the nine months ended June 30, 2007 mainly consists of a government subsidy
      given as recognition of our contribution to the economic development of the
      area, partially offset by certain expenses, which include the value of certain
      scrap materials that have been discarded. No present or future obligation will
      arise from the receipt of such government subsidy. There was no comparable
      income in the same period of the prior year **




*Gain
      on Trading Securities.* We
      recognized income of $280,000 from BAK International’s short-term investment in
      trading securities during the nine months ended June 30, 2006. There was no
      such
      trading gain during the nine months ended June 30, 2007.




*Net
      Income.* As
      a
      result of the foregoing, we decreased our net income to $1.3 million for the
      nine months ended June 30, 2007 from $15.4 million for the same period of the
      prior year.





**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, 2007, we had cash and cash equivalents of $8.9 million, as compared
      to $21.1 million as of September 30, 2006. In addition, we had pledged deposits
      amounting to $3.5 and $13.0 million at June 30, 2007 and September 30, 2006,
      respectively. Typically, banks will require borrowers to maintain deposits
      of
      approximately 20% to 100% of the outstanding bills payable.




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




**Nine
                months Ended June 30,****2007**
            
            **2006****(in
                thousands)**Net
                cash provided by / (used in) operating activities
            
            
            7,670
            
            
            (8,352
            )Net
                cash used in investing activities
            
            
            (53,006
            )
            
            (32,685
            )Net
                cash provided by financing activities
            
            
            32,657
            
            
            13,752Effect
                of exchange rate changes on cash and cash equivalents
            
            
            524
            
            
            561Net
                decrease in cash and cash equivalent
            
            
            (12,155
            )
            
            (26,724
            )Cash
                and cash equivalents at the beginning of period
            
            
            21,100
            
            
            33,056Cash
                and cash equivalents at the end of period
            
            
            8,945
            
            
            6,332




***Operating
      Activities***




Net
      cash
      provided by operating activities was $7.7 million in the nine months ended
      June 30, 2007 compared with net cash used in operating activities of
      $8.4 million in the same period in 2006. The improvement of $16.0 million in
      operating activities was mainly attributable to better control of trade accounts
      receivable.




***Investing
      Activities***




Net
      cash
      used in investing activities increased from $32.7 million in the nine months
      ended June 30, 2006 to $53.0 million in the same period in 2007. The
      net cash used in investing activities during the period ended June 30, 2007
      was
      mainly used for purchases of equipment for a new automated cylindrical cell
      production line, a new automated prismatic cell production line and a lease
      payment in Tianjin.




37




***Financing
      Activities***




Net
        cash
        provided by financing activities was $13.8 million in the nine months ended
        June
        30, 2006 compared to $32.7 million in the same period in 2007. This was mainly
        attributable to (i) a $9.9 million increase in net proceeds from
        borrowings due to more loans being secured for working capital and
        construction of new production lines in the nine months ended June 30, 2007,
        and
        (ii) a $9.3 million decrease in cash deposits at banks as collateral in the
        nine
        months ended June 30, 2007.




As
      of
      June 30, 2007, the principal amounts 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
            
            $
            78,787
            
            $
            26,147Shenzhen
                Development Bank
            
            
            19,697
            
            
            —Shenzhen
                Commercial Bank
            
            
            26,262
            
            
            6,566China
                CITIC Bank
            
            
            26,262
            
            
            15,895China
                Construction Bank
            
            
            19,697
            
            
            —Bank
                of China
            
            
            65,655
            
            
            45,177CITIC
                Ka Wah Bank Limited
            
            
            6,000
            
            
            —Subtotal—short—term
                credit facilities
            
            $
            242,360
            
            $
            93,785**Long—term
                credit facilities:**Agricultural
                Bank of China
            
            
            26,262
            
            
            13,131China
                Development Bank
            
            
            13,131
            
            
            13,131Subtotal—long—term
                credit facilities
            
            
            39,393
            
            
            26,262**Lines
                of Credit:**Agricultural
                Bank of China
            
            
            
            
            
            112Bank
                of China
            
            
            
            
            
            483Shenzhen
                Merchant Bank
            
            
            
            
            
            1,146Subtotal—lines
                of credit
            
            
            
            
            
            1,741Total
                Principal Outstanding
            
            
            
            
            $
            121,788





There
      are
      no restrictions for our above unused credit facilities.




The
      above
      principal outstanding amounts under credit facilities and lines of credit
      included short-term bank loans of $67.6 million, bills payable of $27.9 million
      and long-term bank loans of $26.3 million.




38


For
        the
        purpose of presentation, the movement in bills payable balances is included
        in
        operating activities and in investing activities in the statements of cash
        flows
        according to their nature.
 
 During
        the three months ended June 30, 2007, we repaid three short-term bank loans
        totaling $33.6 million, and entered into three new short-term bank loan
        agreements totaling $27.6 million. The three new short-term bank loan agreements
        provide for monthly interest payments at annual interest rates from 5.751%
        to
        6.57%, with principal repayments at maturities during the second calendar
        quarter of 2008. These debt arrangements are generally guaranteed by Mr.
        Xiangqian Li, our chairman, president, and chief executive officer. The three
        repaid loan agreements were with Shenzhen Development Bank, Shenzhen Commercial
        Bank, and Agricultural Bank, and the three new short-term bank loan agreements
        are with Shenzhen Eastern Branch, Agricultural Bank of China, China CITIC
        Bank,
        and Shenzhen Commercial Bank
 
 On
        June
        20, 2007, we renewed our comprehensive credit facility agreement with Shenzhen
        Longgang Branch, Shenzhen Development Bank to provide a maximum loan amount
        of
        RMB 150 million (approximately $19.7 million). The loan may be drawn at any
        time
        over the one-year period beginning June 20, 2007. This credit facility agreement
        is guaranteed by BAK International and Mr. Xiangqian Li, and is also secured
        by
        $19.7 million of inventory and $10.2 million of machinery and equipment.
        As of
        June 30, 2007, we had no borrowings under this credit facility
        agreement.
 
 On
        June
        8, 2007, we renewed our comprehensive credit facility agreement with Shenzhen
        Eastern Branch, Agricultural Bank of China to provide a maximum loan amount
        of
        RMB 800 million (approximately $105.1 million), including RMB 600 million
        (approximately $78.8 million) one-year term credit facilities and RMB 200
        million (approximately $26.3 million) five-year term credit facilities. Loans
        may be drawn under this renewed credit facility agreement beginning June
        8, 2007
        through May 23, 2008, with the term of the loan established at the time such
        loan is drawn, except as to funds borrowed under the loan agreement dated
        November 23, 2006, which may be drawn at any time within five years of the
        effective date of the loan agreement, and which will mature in five years
        after
        such funds are drawn. The credit facility agreement is guaranteed by BAK
        International and Mr. Xiangqian Li. As of June 30, 2007, we had outstanding
        under this credit facility agreement a $24.3 million one-year term loan due
        in
        the third calendar quarter of 2007 and the second calendar quarter of 2008,
        bearing interest at 5.022% and 6.57% per annum, and $1.8 million bills payable.
        As of June 30, 2007, we also had a $13.1 million five-year term loan under
        this
        facility, which included a borrowed amount of $5,242,446 with a current interest
        rate of 5.832% and repayable on January 25, 2012 and another borrowed amount
        of
        $7,878,668 with a current interest rate of 6.237%, payable in three instalments
        of $6,565,557 on January 25, 2011, $5,252,446 on January 25, 2012 and $1,313,111
        on February 27, 2012, respectively. The $13.1 million five-year term loan
        carries a floating interest rate of 90% of the People’s Bank of China benchmark
        rate, and is secured by pledged machinery and equipment valued at $13.4 million
        as of June 30, 2007.
 
 On
        May
        15, 2007, we renewed our comprehensive credit facility agreement with Shenzhen
        Shuibei Branch, Shenzhen Commercial Bank to provide a maximum loan amount
        of RMB
        200 million (approximately $26.2 million), an increase of 100 million
        (approximately $13.1 million) as compared to the original credit facility
        agreement. The loan may be drawn at any time over the one-year period beginning
        May 15, 2007. As of June 30, 2007, we had borrowed $6.6 million under this
        credit facility agreement. This credit facility agreement is guaranteed by
        BAK
        International and Mr. Xiangqian Li.
  On
        February 14, 2007, Shenzhen BAK renewed the Comprehensive Credit Facility
        Agreement of Maximum Amount with Dapeng Branch, China Construction Bank.
        We may
        borrow up to RMB 150 million ($19.7 million) under this Comprehensive
        Credit Facility Agreement, which will expire on February 14, 2008. As of
        June
        30, 2007, we had no borrowings under this Comprehensive Credit Facility
        Agreement. On March 14, 2007, Shenzhen BAK renewed the Comprehensive Credit
        Facility Agreement of Maximum Amount with Shenzhen Branch, China CITIC Bank.
        We
        may borrow up to RMB 200 million ($26.3 million) under this Comprehensive
        Credit
        Facility Agreement, which will expire on March 14, 2008. As of June 30, 2007,
        we
        had borrowed $13.1 million loan and $2.8 million bills payable under this
        Comprehensive Credit Facility Agreement.
  39
  On
        December 26, 2006, Shenzhen BAK entered into a four-year long-term loan
        agreement of $13.1 million with Shenzhen Branch, China Development Bank.
        The
        long-term loan is payable in three installments as follows:
  RMB
        30
        million on November 20, 2008;
  RMB
        30
        million on November 20, 2009; and
  RMB
        40
        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. Xiangqian Li. We borrowed the full $13.1 million under
        this loan agreement on December 27, 2006.
 
 We
        had a
        negative working capital (current assets less current liabilities excluding
        share-based payment liabilities) of $4.7 million as of June 30, 2007, as
        compared to working capital of $4.8 million as of September 30, 2006, a decrease
        of $9.5 million. This decrease was primarily attributable to a lease prepayment
        of $13.7 million for acquisition of land use rights in Tianjin. We had
        short-term bank loans maturing in less than one year of $67.6 million as
        of June
        30, 2007, as compared to $67.9 million as of September 30, 2006, a decrease
        of
        $0.3 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 available
        under existing credit facilities is insufficient to meet our requirements,
        we
        may seek to sell debt securities or borrow from lending institutions. We
        can
        make no assurances that financing will be available in the amounts we need
        or on
        terms acceptable to us, if at all. The sale of additional equity securities,
        including convertible debt securities, would dilute our shareholders. The
        incurrence of debt would divert cash for working capital and capital
        expenditures to service debt obligations and could result in operating and
        financial covenants that restrict our operations and our ability to pay
        dividends to our shareholders. If we are unable to obtain additional equity
        or
        debt financing as required, our business operations and prospects may
        suffer.
  **Capital
        Expenditures**
 
 We
        made
        capital expenditures of $53.0 and $32.7 million in the nine months ended
        June
        30, 2007 and 2006, respectively. Our capital expenditures were used primarily
        to
        purchase plant and equipment to expand our production capacity and to make
        a
        lease prepayment. The table below sets forth the breakdown of our capital
        expenditures by use for the periods indicated.
 
 **Nine
                  months Ended June 30,****2007**
              
              **2006****(in
                  thousands)**Construction
                  costs
              
              $
              13,944,720
              
              $
              10,678,643Lease
                  prepayment
              
              $
              14,371,819
              
              $
              —Purchase
                  of equipment
              
              $
              24,689,765
              
              $
              22,006,537Total
                  capital expenditures
              
              $
              53,006,304
              
              $
              32,685,180
  40
  We
        estimate that our total capital expenditures in fiscal 2007 will reach
        approximately $60.0 million, primarily to purchase manufacturing equipment
        for
        the expansion of our production lines.
  We
        have
        completed 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. Of that space,
        approximately 111,000 square meters are 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.
  We
        do not
        hold the land use right to the tract of property on which we have constructed
        our manufacturing facilities and other related 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. On June 20, 2007, we obtained the approvals for project planning
        and
        construction of the government of Shenzhen.
  We
        are
        constructing and have completed part of the construction of our facilities
        with
        the approval of the local government of Kuichong Township of Longgang District
        of Shenzhen, which we understand does not have the authority to grant us
        the
        land use rights certificate. Under our agreement with the Kuichong Township
        government, we have to pay for a 50-year land use rights certificate at an
        agreed unit price, which in the aggregate amounted to $4.0 million as of
        September 30, 2004 and $3.3 million as of September 30, 2006, following an
        adjustment of the site area after a land survey. Out of the $3.3 million,
        $0.3
        million has been paid to the Kuichong Township government. The Shenzhen
        municipal government has approved the grant of a land use rights certificate,
        which we are currently in the process of obtaining. In the meantime, we have
        recognized a net payable purchase price of $3.0 million for the land use
        rights
        on the assumption that it will be on the same terms as those agreed with
        the
        Kuichong Township government.
 
 As
        of
        June 30, 2007, we had paid the lease prepayment amount of $707,000 million
        for
        acquisition of land use rights in Shenzhen for a new Research and Development
        Test Centre and the application for the land use rights certificate was in
        process.
 
 As
        of
        June 30, 2007, we had fully paid the lease prepayment amount of $13.7 million
        for 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, 2007:
  **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
              
              
              67,625
              
              
              67,625
              
              
              —
              
              
              —
              
              
              —Bills
                  payable
              
              
              27,900
              
              
              27,900
              
              
              —
              
              
              —
              
              
              —Long-term
                  bank loans
              
              
              26,262
              
              
              —
              
              
              7,879
              
              
              18,383
              
              
              —Land
                  use rights payable
              
              
              3,148
              
              
              3,148Capital
                  commitments
              
              
              6,498
              
              
              6,498
              
              
              —
              
              
              —
              
              
              —Future
                  interest payment on short-term bank loans
              
              
              1,862
              
              
              1,862
              
              
              —
              
              
              —
              
              
              —Future
                  interest payment on long-term bank loans
              
              
              7,359
              
              
              3,567
              
              
              2,759
              
              
              1,033
              
              
              —Total
              
              
              140,654
              
              
              110,600
              
              
              10,638
              
              
              19,416
              
              
              —
  41
  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, 2007.
  **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 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 liabilities arising from these guarantees and considered they
        are
        immaterial to the consolidated financial statements. Therefore, no liabilities
        in respect of the guarantees were recognized as of June 30, 2007. On June
        30,
        2007, we provided a guarantee for a non-related party – Shenzhen
        Tongli
        Hi-tech Co. Ltd. of one-year outstanding discounted bills with the Shenzhen
        Longgang Branch, Shenzhen Development Bank with a maturity of September 27,
        2009. The maximum amount of our exposure for this and previous guarantees
        was
        $2.0 million and $3.8 million at June 30, 2007 and September 30, 2006,
        respectively.
 
 **Critical
        Accounting Policies**
  Our
        consolidated financial information has been prepared in accordance with U.S.
        GAAP, which requires us to make judgments, estimates and assumptions that
        affect
        (1) the reported amounts of our assets and liabilities, (2) the disclosure
        of
        our contingent assets and liabilities at the end of each fiscal period and
        (3)
        the reported amounts of revenues and expenses during each fiscal period.
        We
        continually evaluate these estimates based on our own historical experience,
        knowledge and assessment of current business and other conditions, our
        expectations regarding the future based on available information and reasonable
        assumptions, which together form our basis for making judgments about matters
        that are not readily apparent from other sources. Since the use of estimates
        is
        an integral component of the financial reporting process, our actual results
        could differ from those estimates. Some of our accounting policies require
        a
        higher degree of judgment than others in their application.
  When
        reviewing our financial statements, the following also should 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.
  42
  ***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 September
        30,
        2006 and June 30, 2007, the carrying amount of property, plant and equipment,
        net was $109.4 million and $138.3 million, respectively. We assess the
        recoverability of property, plant and equipment to be held and used by a
        comparison of the carrying amount of an asset or group of assets to the future
        net undiscounted cash flows expected to be generated by the asset or group
        of
        assets. If such assets are considered impaired, the impairment recognized
        is
        measured as the amount by which the carrying amount of the assets exceeds
        the
        fair value of the assets.
  A
        prolonged general economic downturn and, specifically, a continued downturn
        in
        the battery cell industry as well as other market factors could intensify
        competitive pricing pressure, create an imbalance of industry supply and
        demand,
        or otherwise diminish volumes or profits. Such events, combined with changes
        in
        interest rates, could adversely affect our estimates of future net cash flows
        to
        be generated by our long-lived assets. Consequently, it is possible that
        our
        future operating results could be materially and adversely affected by
        additional impairment charges related to the recoverability of our long-lived
        assets.
 
 ***Inventory
        Obsolescence***
  We
        review
        our inventory for potential impairment on a quarterly or more frequent basis
        as
        deemed necessary. Such review includes, but is not limited to, reviewing
        the
        levels of inventory versus customer requirements and obsolescence. The review
        and evaluation also considers the potential sale of impaired inventory at
        lower
        than market prices. At each balance sheet date, we identify inventories that
        are
        worth less than cost and write them down to their net realizable value and
        the
        difference is charged to our cost of revenues of that period. Though management
        considers such write-down of inventories adequate and proper, changes in
        sales
        volumes due to unexpected economic or competitive conditions are among the
        factors that could materially affect the adequacy of such write
        down.
  ***Allowance
        for Doubtful Accounts***
  The
        allowance for doubtful accounts is our best estimate of the amount of probable
        credit losses in our accounts receivable. We determine the allowance based
        on
        historical write-off experience, customer specific facts and economic
        conditions. Bad debt expense is included in the general and administrative
        expenses. We review outstanding account balances individually for
        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 September 30, 2006 and June 30, 2007, we had not
        charged off any balances as we had yet to exhaust all means of collection.
  ***Stock-Based
        Compensation***
  We
        have
        adopted the alternate intrinsic value method recognition provision of SFAS
        123.
        Pursuant to the requirements of SFAS 123, we have disclosed in our annual
        financial statements for the year ended September 30, 2005 the pro forma
        effect
        of application of the preferred fair value method recognition provision.
        Further, effective October 1, 2005, 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.
  43
  Pursuant
        to SFAS 123R, we have recognized compensation costs of $1,567,000 in relation
        to
        stock-based award to our employees and non-employee directors in the nine
        months
        ended June 30, 2007 as an increase in operating costs.
  **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,” or FIN 48, 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 become effective for us on October 1, 2007, with the cumulative
        effect of the change in accounting principle, if any, recorded as an adjustment
        to opening retained earnings. We are currently evaluating the impact of adoption
        of FIN 48 on our consolidated financial statements.
  In
        September 2006, the FASB issued SFAS 157, “Fair Value Measurements,” or SFAS
        157, which defines fair value, establishes a framework for measuring fair
        value
        in U.S. GAAP, 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. We are currently evaluating
        the impact of adopting SFAS 157 on our consolidated financial
        statements.
  In
        February 2007, FASB issued SFAS 159, “The Fair Value Option for Financial Assets
        and Financial Liabilities - Including an Amendment of FASB Statement No.
        115,”
or SFAS 159. 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 our fiscal year
        beginning on October 1, 2008. Our management is in the process of evaluating
        this guidance and therefore has not yet determined the impact that SFAS 159
        will
        have on our financial statements upon adoption.
  In
        September 2006, the SEC issued SAB 108, which provides guidance on the process
        of quantifying financial statement misstatements. In SAB 108, the SEC staff
        establishes an approach that requires quantification of financial statement
        errors, under both the iron-curtain and the roll-over methods, based on the
        effects of the error on each of our financial statements and the related
        financial statement disclosures. SAB 108 is generally effective for annual
        financial statements in the first fiscal year ending after November 15, 2006.
        The transition provisions of SAB 108 permits existing public companies to
        record
        the cumulative effect in the first year ending after November 15, 2006 by
        recording correcting adjustments to the carrying values of assets and
        liabilities as of the beginning of that year with the offsetting adjustment
        recorded to the opening balance of retained earnings. We do not expect that
        the
        adoption of SAB 108 would have a material effect on our consolidated financial
        statements.
  **Exchange
        Rates**
  The
        financial records of Shenzhen BAK and BAK Electronics are maintained in
        Renminbi. In order to prepare our financial statements, we have translated
        amounts in Renminbi 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 Renminbi 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.
 
 44
  The
        exchange rates used to translate amounts in Renminbi into U.S. dollars in
        connection with the preparation of our financial statements were as
        follows:
  **RMB
                  per U.S. Dollar****2007**
              
              **2006**Balance
                  sheet items as of June 30
              
              
              7.6155
              
              
              7.9956Amounts
                  included in the statement of income and comprehensive income, statement
                  of
                  changes in stockholders’ equity and statement of cash flows for nine
                  months ended June 30
              
              
              7.76910
              
              
              8.04914Balance
                  sheet items as of September 30
              
              
              N/A
              
              
              7.9087
  Renminbi
        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**
  **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 six to twelve months for short-term
        bank loans and interest rates are subject to change upon renewal. There were
        no
        material changes in interest rates for short-term bank loans renewed during
        the
        three and nine months ended June 30, 2007.
  We
        have a
        long term bank loan of $13.1 million maturing on December 26, 2010 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 $26 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. As of June 30, 2007, we had borrowed
        $13.1 million under this loan agreement. This loan comprises $5,242,446 borrowed
        in the first calendar quarter of 2007 bearing interest at 5.832% per annum
        and
        repayable on January 25, 2012, and $7,878,668 borrowed in the second calendar
        quarter of 2007 bearing interest at 6.237% per annum and repayable in three
        installments of $6,565,557 on January 25, 2011, $5,252,446 on January 25,
        2012,
        and $1,313,111 on February 27, 2012, respectively.
 
 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, 2007, would
        decrease net income before provision for income taxes by $704,000 or 43.6%
        for
        the nine months ended June 30, 2007. 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.
  45
  **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 69.7% of our revenues and 94.5% of
        our
        costs and expenses for the nine months ended June 30, 2007 are denominated
        in
        RMB, with the balance denominated in U.S. dollars. Approximately 98.8% of
        our
        assets except for cash were denominated in RMB as of June 30, 2007. 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 $6.0 million based on our outstanding revenues, costs and expenses, assets
        and liabilities denominated in RMB as of June 30, 2007. As of June 30, 2007,
        our
        accumulated other comprehensive income was $8.1 million. We have not entered
        into any hedging transactions in an effort to reduce our exposure to foreign
        exchange risk.
  **Item 4. 
        Controls and Procedures.******
  ***Disclosure
        Controls and Procedures***
  As
        required by Rule 13a-15 under the Securities 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, 2007. 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 Securities Exchange Act is recorded,
        processed, summarized and reported within the time periods specified in the
        rules and forms of the SEC and that such information is accumulated and
        communicated to our management, including our chief executive officer and
        chief
        financial officer, as appropriate, to allow timely decisions regarding required
        disclosure. In designing and evaluating our disclosure controls and procedures,
        management recognizes that any controls and procedures, no matter how well
        designed and operated, can provide only reasonable assurance of achieving
        the
        desired control objectives, and management is required to apply its judgment
        in
        evaluating and implementing possible controls and procedures.
  Management
        conducted its evaluation of disclosure controls and procedures under the
        supervision of our chief executive officer and our chief financial officer.
        Based upon, and as of the date of this evaluation, our chief executive officer
        and chief financial officer, concluded that our disclosure controls and
        procedures were not effective, because of the material weaknesses described
        in
        Item 9A. “Controls and Procedures” of our Annual Report on Form 10-K for the
        fiscal year ended September 30, 2006 (the “2006 Form 10-K”). Management believes
        that appropriate measures have been implemented to remediate these weaknesses,
        although some measures have not yet been in place long enough to be adequately
        tested. Investors are directed to Item 9A of the 2006 Form 10-K for the
        description of these weaknesses.
  **Remediation
        Measures of Material Weaknesses**
  To
        remediate the first five material weaknesses reported in Item 9A. “Controls and
        Procedures — Management’s Report on Internal Control over Financial Reporting”
in our 2006 Form 10-K, we have implemented the measures described below.
        We will
        continue to evaluate the effectiveness of such measures, and may in the future
        implement additional measures, as necessary, to remediate such
        weaknesses.
  1.  We
        hired and trained personnel to ensure that we will have sufficient personnel
        with knowledge, experience and training in the application of U.S. GAAP
        commensurate with our financial reporting requirements. These measures include
        the following:
  —
              We
                  hired a U.S. accountant in May 2006 with relevant accounting experience,
                  skills and knowledge in the preparation of financial statements
                  under the
                  requirements of U.S. GAAP and financial reporting disclosure under
                  the
                  requirement of SEC rules;
  —
              We
                  trained our accounting personnel in the application of U.S. GAAP
                  commensurate with our financial reporting requirements, which include:
                  (a)
                  basic accounting personnel participated in training programs concerning
                  general accounting policies and principles provided by the governmental
                  agencies and professional accounting firms; (b) key accounting
                  personnel,
                  including the U.S. accountant, finance manager, finance controller
                  and
                  chief financial officer, participated in special training programs
                  (in
                  addition to the training of general accounting policies and principles
                  described in item (a) above) provided by professional accounting
                  firms
                  retained by us concerning the difference between U.S. GAAP and
                  the
                  accounting principles generally accepted in the People’s Republic of
                  China, SEC rules and recent developments in accounting policies,
                  with
                  particular attention to the areas where errors in the preparation
                  and
                  disclosure of our financial statements were previously
                  identified.
  46
  2.  We
        engaged outside consultants, with relevant accounting experience, skills
        and
        knowledge, working under the supervision and direction of our management,
        to
        supplement our existing accounting personnel on U.S. GAAP; and
  3.  We
        retained and intend to continue to retain the services of outside U.S.
        counselors to advise us on the SEC disclosure requirements.
  During
        fiscal 2006 and the first three quarters of fiscal 2007, management implemented
        the above measures, which were designed to remediate the first five material
        weaknesses described in Item 9A. “Controls and Procedures — Management’s Report
        on Internal Control over Financial Reporting” in our 2006 Form 10-K. However,
        such measures have not yet been in place long enough to be adequately tested.
        Following the completion of testing, management will evaluate whether the
        material weaknesses have been successfully remediated.
  To
        remediate the last two material weaknesses described in Item 9A. “Controls and
        Procedures — Management’s Report on Internal Control over Financial Reporting”
in our 2006 Form 10-K, we have implemented the measures described below.
        We will
        continue to evaluate the effectiveness of such measures, and may in the future
        implement additional measures, as necessary, to remediate such
        weaknesses.
  4.  We
        implemented procedures to ensure construction in progress projects are recorded
        based on the expenditures actually incurred on a quarterly basis and are
        reviewed accordingly, including:
  —
              Engaging
                  an independent construction surveyor company to supervise the progress
                  of
                  the construction projects and report the expenditures actually
                  incurred in
                  the form of project progress reports to us on a quarterly
                  basis;
  —
              Requiring
                  our construction manager to review and approve the project progress
                  reports and the finance department records regarding construction
                  in
                  progress based on the approved project progress reports on a quarterly
                  basis; and
  —
              Requiring
                  the finance manager to review the accounting entry as well as the
                  approved
                  project progress reports.
  5.  We
        implemented procedures to ensure construction in progress is transferred
        to
        property, plant, and equipment in order to commence depreciation of the asset
        when it is ready for intended use and is reviewed accordingly,
        including:
  —
              Finance
                  department transfers construction in progress to cost of property,
                  plant
                  and equipment when it is ready for its intended use, at which time
                  depreciation charges commence thereon; the criteria used to determine
                  when
                  an asset is ready for intended use are based on policies that are
                  consistent with U.S. GAAP;
  —
              Independent
                  construction surveyors are retained to assist management in the
                  determination of readiness for construction projects that meet
                  certain
                  minimum criteria;
  —
              Finance
                  manager reviews the accounting entry and time of transfer;
                  and
  —
              Estimated
                  unbilled costs and costs to complete assets that have been determined
                  to
                  be ready for their intended use are based on relevant historical
                  cost and
                  budget information by authorized personnel within the finance
                  department.
  47
  Management
        successfully completed implementation of these measures during fiscal year
        2006
        and the first three quarters of fiscal year 2007 and believes that the
        implementation of such measures, which were designed to remediate those two
        material weaknesses, will provide sufficient basis to conclude as to the
        absence
        of these material weaknesses at such time that formal testing is completed.
        As
        such testing of the operation of the implemented measures has been completed
        as
        of June 30, 2007, we had sufficient evidence to conclude that the material
        weaknesses had been successfully remediated.
  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 Controls over Financial Reporting***
  Other
        than the remediation measures described above, there were no changes in our
        internal controls over financial reporting after June 30, 2007 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 business financial position, or result 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 have an agreement with A123Systems, Inc., under which we agree to manufacture
        products for A123Systems, Inc. according to the specifications furnished
        by, and
        using the finished electrodes and other materials consigned by, A123Systems,
        Inc. to us. The plaintiffs alleged that by manufacturing rechargeable lithium
        cells for one of our customers, A123Systems, Inc., 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, terminate our existing production of rechargeable
        lithium cells manufactured for A123Systems, Inc., or pay royalties to continue
        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.
  Furthermore,
        if A123Systems, Inc. is found liable for the infringement, it may not be
        able to
        continue its cooperation with us at all or on terms and conditions acceptable
        to
        us, which in turn would adversely affect our ability to execute our strategy
        to
        expand our production of cells for power tools and capture high-margin
        businesses. Accordingly, our revenues and business prospects would be materially
        adversely affected.
  *Liquidated
        Damages.* 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.
 
 48
  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 Annual Report on Form 10-K for the fiscal year ended September 30, 2006,
        and
        in our Quarterly Report on Form 10-Q for the quarter ended December 31, 2006,
        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 Form 10-Q for the quarter ended December
        31, 2006, 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 Form 10-Q for the quarter ended December 31, 2006, 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 Form 10-Q for
        the
        quarter ended December 31, 2006; however, future filings will reflect the
        foregoing information. No liquidated damages have been paid as of the filing
        date of this Report.
  **Item 1A. 
        Risk Factors.******
  See
        Item
        1A. “Risk Factors” included in our 2006 Form 10-K.
  *Implementation
        of the PRC’s new corporate income tax law may adversely affect us.* 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 will be effective on January 1, 2008. According to the new
        corporate income tax law, the applicable income tax rate for our operating
        subsidiaries is subject to change. As the implementation detail has not yet
        been
        announced, we cannot be sure of the potential impact of such new corporate
        income tax law on our financial position and operating results.
  49
  *Changes
        in PRC property rights law may affect our interests in our properties.* The
        new
        PRC Law on Property Rights was approved by the Fifth Session of the Tenth
        National People's Congress on 16 March 2007, and will come into effect on
        1
        October 2007.  The Property Rights Law is the first piece of Mainland PRC
        legislation that comprehensively regulates the different types of rights
        which
        can be created or acquired over tangible property. We are currently evaluating
        the impact of the Property Rights Law.
 
 **Item 2. 
        Unregistered Sales of Equity Securities and Use of
        Proceeds.**
  None.
  **Item 3. Defaults
        Upon Senior Securities.******
  None.
  **Item 4. Submission
        of Matters to a Vote of Security Holders.**
  None.
  **Item 5. Other
        Information.******
  *Renewal
        of Credit Facilities* .
        On May
        15, 2007, we renewed our comprehensive credit facility agreement with Shenzhen
        Shuibei Branch, Shenzhen Commercial Bank to provide a maximum loan amount
        of RMB
        200 million (approximately $26.3 million), an increase of 100 million
        (approximately $13.1 million) as compared to the original credit facility
        agreement. The loan may be drawn at any time over the one-year period beginning
        May 15, 2007. This credit facility agreement is guaranteed by BAK International
        and Mr. Xiangqian Li, our chairman, president and chief executive officer.
        A
        summary of the terms of this credit facility and related guaranties are included
        as Exhibits 10.8 through 10.10 to this Report and are hereby incorporated
        by
        reference herein.
 
 On
        June
        8, 2007, we renewed our comprehensive credit facility agreement with Shenzhen
        Eastern Branch, Agricultural Bank of China to provide a maximum loan amount
        of
        RMB 800 million (approximately $105.1 million) including RMB 600 million
        (approximately $78.8 million) one-year term credit facilities and RMB 200
        million (approximately $26.3 million) five-year term credit facilities. Loans
        may be drawn under this renewed credit facility agreement beginning June
        8, 2007
        through May 23, 2008, with the term of the loan established at the time such
        loan is drawn, except as to funds borrowed under the loan agreement dated
        November 23, 2006, which may be drawn at any time within five years of the
        effective date of the loan agreement, and which will mature in five years
        after
        such funds are drawn. The credit facility agreement is guaranteed by BAK
        International and Mr. Xiangqian Li. As of June 30, 2007, we had outstanding
        under this credit facility agreement a $24.3 million one-year term loan due
        in
        the third calendar quarter of 2007 and the second calendar quarter of 2008,
        bearing interest at 5.022% and 6.57% per annum, and $1.8 million bills payable,
        and a $13.1 million five-year term loan due in the first calendar quarter
        of
        2011 and 2012. The $13.1 million five-year term loan carries a floating interest
        rate of 90% of the People’s Bank of China benchmark rate, and is secured by
        pledged machinery and equipment valued at $13.4 million as of June 30, 2007.
        A
        summary of the terms of this credit facility and the related guaranty are
        included as Exhibits 10.1 and 10.2 to this Report and are hereby incorporated
        by
        reference herein.
 
 On
        June
        20, 2007, we renewed our comprehensive credit facility agreement with Shenzhen
        Longgang Branch, Shenzhen Development Bank to provide a maximum loan amount
        of
        RMB 150 million (approximately $19.7 million). The loan may be drawn at any
        time
        over the one-year period beginning June 20, 2007. This credit facility agreement
        is guaranteed by BAK International and Mr. Xiangqian Li, and is also secured
        by
        $19.7 million of inventory and $10.2 million of machinery and equipment.
        Summaries of the terms of this credit facility and related guaranties are
        included as Exhibits 10.4 through 10.7 to this Report and are hereby
        incorporated by reference herein.
 
 We
        intend
        to use the loans drawn under these comprehensive credit facilities for the
        purchase of machinery and equipment and for further business development
        activities.
 
 50
  In
        addition, during the three months ended June 30, 2007, we repaid three
        short-term bank loans totaling $33.6 million, and entered into three new
        short-term bank loan agreements totaling $27.6 million. The new short-term
        bank
        loan agreements provide for monthly interest payments at annual interest
        rates
        from 5.751% to 6.57%, with principal repayments at maturities during the
        second
        calendar quarter of 2008. These debt arrangements are generally guaranteed
        by
        Mr. Xiangqian Li. The new agreements are with Eastern Branch, Agricultural
        Bank
        of China, China CITIC Bank, and Shenzhen Commercial Bank. A summary of the
        loan
        agreement with Eastern Branch, Agricultural Bank of China is included as
        Exhibit
        10.3. The loan certificates under which the other two new loan agreements
        were
        made are included as Exhibits 10.11, 10.12, and 10.13 to this Report and
        are 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 China BAK Battery, Inc.’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 Quarterly Report on Form 10-Q for the quarter ended June 30,
                  2006).10.1
              
              Summary
                  of Comprehensive Credit Facility Agreement of Maximum Amount entered
                  into
                  between Shenzhen BAK Battery Co., Ltd. and Shenzhen Eastern Branch,
                  Agricultural Bank of China on June 8, 2007.10.2
              
              Guaranty
                  Contract of Maximum Amount entered into among BAK International
                  Limited,
                  Li Xiangqian, and Shenzhen Eastern Branch, Agricultural Bank of
                  China on
                  June 8, 2007.10.3
              
              Summary
                  of Loan Agreement entered into by and between Shenzhen BAK Battery
                  Co.,
                  Ltd. and Eastern Branch, Agricultural Bank of China on June 22,
                  2007.10.4
              
              Summary
                  of Comprehensive Credit Facility Agreement entered into between
                  Shenzhen
                  BAK Battery Co., Ltd. and Longgang Branch, Shenzhen Development
                  Bank,
                  dated June 20, 2007.10.5
              
              Guaranty
                  Contract of Maximum Amount Pledge entered into between Li Xiangqian
                  and
                  Longgang Branch, Shenzhen Development Bank on June 20, 2007.10.6
              
              Guaranty
                  Contract of Maximum Amount entered into between BAK International
                  Limited
                  and Longgang Branch, Shenzhen Development Bank on June 21,
                  2007.10.7
              
              Guaranty
                  Contract of Maximum Amount entered into between Li Xiangqian and
                  Longgang
                  Branch, Shenzhen Development Bank on June 20, 2007.10.8
              
              Summary
                  of Comprehensive Credit Facility Agreement entered into between
                  Shenzhen
                  BAK Battery Co., Ltd. and Shuibei Branch, Shenzhen Commercial Bank
                  on May
                  15, 2007.10.9
              
              Individual
                  Guaranty Contract of Maximum Amount entered into between Li Xiangqian
                  and
                  Shuibei Division, Shenzhen Commercial Bank on May 15, 2007.10.10
              
              Guaranty
                  Contract of Maximum Amount entered into between BAK International
                  Limited
                  and Shuibei Division, Shenzhen Commercial Bank on May 15,
                  2007.10.11
              
              Loan
                  Certificate between Shenzhen BAK Battery Co., Ltd and China CITIC
                  Bank on
                  April 16, 2007.10.12
              
              Loan Certificate between Shenzhen BAK Battery
                  Co., Ltd
                  and China CITIC Bank on April 18, 2007.10.13
              
              Loan
                  Certificate between Shenzhen BAK Battery Co., Ltd and Shenzhen
                  Commercial
                  Bank on June 20, 2007.31.1
              
              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.
 
 51
  **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 7, 2007
              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)
  52