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, 2009




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




For the
transition period from ____________ to _____________




Commission
File 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)




_____________________________________________________


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





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





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).


Yes   ̈  No   ̈





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





Large
      accelerated filer  o
              Accelerated
      filer  xNon-accelerated
      filer  o(Do not check if
      a smaller reporting company)
              Smaller
      reporting company  o





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





The
number of shares outstanding of each of the issuer’s classes of common stock, as
of August 6, 2009 is as follows:




Class
      of Securities
              
              Shares
      OutstandingCommon
      Stock, $0.001 par value
              
              57,691,481









TABLE
OF CONTENTS





PART I
                                                                                  FINANCIAL INFORMATIONItem 1.
                                                                                Financial Statements
                                                                                
                                                                                F-1Item 2.
                                                                                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                                                                
                                                                                1Item 3.
                                                                                Quantitative
      and Qualitative Disclosures About Market Risk
                                                                                
                                                                                22Item 4.
                                                                                Controls
      and Procedures
                                                                                
                                                                                22PART II
                                                                                  OTHER INFORMATIONItem 1.
                                                                                Legal
      Proceedings
                                                                                
                                                                                24Item 1A.
                                                                                Risk Factors
                                                                                
                                                                                26Item 2.
                                                                                Unregistered
      Sales of Equity Securities and Use of Proceeds
                                                                                
                                                                                26Item 3.
                                                                                Defaults
      Upon Senior Securities
                                                                                
                                                                                26Item 4.
                                                                                Submission
      of Matters to a Vote of Security Holders
                                                                                
                                                                                26Item 5.
                                                                                Other
      Information
                                                                                
                                                                                27Item 6.
                                                                                Exhibits
                                                                                
                                                                                28









Introductory
Comments





Terminology





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





Forward-Looking
Statements





Statements
contained in this Report include “forward-looking statements” within the meaning
of such term in Section 27A of the Securities Act of 1933, as amended, or the
Securities Act, and Section 21E of the Securities Exchange Act of 1934, as
amended, or the Exchange Act. Forward-looking statements involve known and
unknown risks, uncertainties and other factors which could cause actual
financial or operating results, performances or achievements expressed or
implied by such forward-looking statements not to occur or be realized.
Forward-looking statements made in this Report generally are based on our best
estimates of future results, performances or achievements, predicated upon
current conditions and the most recent results of the companies involved and
their respective industries. Forward-looking statements may be identified by the
use of forward-looking terminology such as “may,” “will,” “could,” “should,”
“project,” “expect,” “believe,” “estimate,” “anticipate,” “intend,” “continue,”
“potential,” “opportunity” or similar terms, variations of those terms or the
negative of those terms or other variations of those terms or comparable words
or expressions. Potential risks and uncertainties include, among other things,
such factors as:





·
            our
      anticipated growth strategies and our ability to manage the expansion of
      our business operations
effectively;





·
            our
      limited operating history in developing, manufacturing and selling of
      lithium-based rechargeable battery
cells;





·
            general
      economic conditions, including the current global recession and financial
      crisis;





·
            our
      future business development, results of operations and financial
      condition;





·
            our
      ability to diversify our product offering and capture new market
      opportunities;





·
            our
      dependence on the growth in demand for the portable electronic devices
      that are powered by our products;





·
            our
      ability to maintain or increase our market share in the competitive
      markets in which we do business;





·
            our
      ability to keep up with rapidly changing technologies and evolving
      industry standards, including our ability to achieve technological
      advances;





·
            our
      ability to obtain original equipment manufacturer, or OEM, qualifications
      from brand names;





·
            our
      ability to maintain an efficient cost
structure;





·
            our
      ability to remediate any material weaknesses in our internal control over
      financial reporting;




i




·
            our
      ability to secure raw materials in the future and to manage the costs of
      raw materials or to secure alternative or substitute raw
      materials;





·
            our
      ability to source our needs for skilled labor, machinery and raw materials
      economically;





·
            our
      ability to maintain our land use rights and acquire property ownership
      rights to our PRC-based facilities;





·
            our
      ability to fund our operations and manage our substantial short-term
      indebtedness;





·
            uncertainties
      with respect to the PRC legal and regulatory environment;
    and





·
            other
      risks identified in this Report and in our other reports filed with the
      U.S. Securities and Exchange Commission, or
SEC.





Additional
disclosures regarding factors that could cause our results and performance to
differ from results or performance anticipated by this Report are discussed in
other reports that we file with the SEC, including without limitation our Annual
Report on Form 10-K for the fiscal year ended September 30, 2008, as amended, or
the 2008 Form 10-K. Readers are urged to carefully review and consider the
various disclosures made by us in this Report and our other filings with the
SEC. These reports attempt to advise interested parties of the risks and factors
that may affect our business, financial condition and results of operations and
prospects. The forward-looking statements made in this Report speak only as of
the date hereof and we disclaim any obligation to provide updates, revisions or
amendments to any forward-looking statements to reflect changes in our
expectations or future events.





Where
You Can Find Additional Information





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





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




ii




PART
I


FINANCIAL
INFORMATION




Item
      1.
            Financial
      Statements.




China
BAK Battery, Inc. and subsidiaries


Condensed
interim consolidated balance sheets


As
of September 30, 2008 and June 30, 2009




(In
US$)





September 30,
                    
                    
                    June 30,Note
                    
                    2008
                    
                    
                    2009(Unaudited)AssetsCurrent
      assetsCash
      and cash equivalents
                    
                    
                    
                    $
                    35,706,834
                    
                    
                    $
                    29,638,925Pledged
      deposits
                    
                    2
                    
                    
                    4,449,244
                    
                    
                    
                    29,609,374Trade
      accounts receivable, net
                    
                    3
                    
                    
                    82,740,288
                    
                    
                    
                    69,787,829Inventories
                    
                    4
                    
                    
                    67,583,060
                    
                    
                    
                    61,845,224Prepayments
      and other receivables
                    
                    5
                    
                    
                    4,462,492
                    
                    
                    
                    9,569,800Deferred
      tax assets
                    
                    
                    
                    
                    1,719,662
                    
                    
                    
                    2,875,822Total
      current assets
                    
                    
                    
                    
                    196,661,580
                    
                    
                    
                    203,326,974Property,
      plant and equipment, net
                    
                    6
                    
                    
                    195,435,212
                    
                    
                    
                    215,193,368Lease
      prepayments, net
                    
                    
                    
                    
                    31,782,129
                    
                    
                    
                    32,291,893Intangible
      assets, net
                    
                    
                    
                    
                    161,418
                    
                    
                    
                    241,594Deferred
      tax assets
                    
                    
                    
                    
                    6,543
                    
                    
                    
                    6,531Total
      assets
                    
                    
                    
                    $
                    424,046,882
                    
                    
                    $
                    451,060,360




See
accompanying notes to the condensed interim consolidated financial
statements.





F-1




China
BAK Battery, Inc. and subsidiaries


Condensed
interim consolidated balance sheets


As
of September 30, 2008 and June 30, 2009 (continued)




(In
US$)





September
      30,
                        
                        
                        June
      30,Note
                        
                        2008
                        
                        
                        2009(Unaudited)LiabilitiesCurrent
      liabilitiesShort-term
      bank loans
                        
                        7
                        
                        $
                        105,598,170
                        
                        
                        $
                        135,784,507Current
      maturities of long-term bank loans
                        
                        8
                        
                        
                        8,799,848
                        
                        
                        
                        16,103,766Accounts
      and bills payable
                        
                        
                        
                        
                        57,486,716
                        
                        
                        
                        74,043,115Accrued
      expenses and other payables
                        
                        
                        
                        
                        21,581,182
                        
                        
                        
                        19,199,790Total
      current liabilities
                        
                        
                        
                        
                        193,465,916
                        
                        
                        
                        245,131,178Long-term
      bank loans, less current maturities
                        
                        8
                        
                        
                        55,732,366
                        
                        
                        
                        39,527,427Deferred
      revenue
                        
                        
                        
                        
                        7,685,200
                        
                        
                        
                        7,495,571Other
      long-term payables
                        
                        
                        
                        
                        -
                        
                        
                        
                        2,359,934Deferred
      tax liabilities
                        
                        
                        
                        
                        91,400
                        
                        
                        
                        246,177Total
      liabilities
                        
                        
                        
                        
                        256,974,882
                        
                        
                        
                        294,760,287Commitments
      and contingencies
                        
                        11Shareholders’
      equityShares
      of common stock US$ 0.001 par value;100,000,000
      authorized; 57,676,481 and 57,687,731 issued and outstanding as of
      September 30, 2008 and June 30, 2009 respectively
                        
                        
                        
                        
                        57,677
                        
                        
                        
                        57,688Donated
      shares
                        
                        
                        
                        
                        14,101,689
                        
                        
                        
                        14,101,689Additional
      paid-in capital
                        
                        
                        
                        
                        97,286,286
                        
                        
                        
                        99,388,598Statutory
      reserves
                        
                        
                        
                        
                        6,917,943
                        
                        
                        
                        7,227,195Retained
      earnings
                        
                        
                        
                        
                        27,628,860
                        
                        
                        
                        14,687,900Accumulated
      other comprehensive income
                        
                        
                        
                        
                        25,146,155
                        
                        
                        
                        24,903,613171,138,610
                        
                        
                        
                        160,366,683Less:
      Treasury shares
                        
                        
                        
                        
                        (4,066,610)
                        
                        
                        
                        (4,066,610)Total
      shareholders’ equity
                        
                        
                        
                        
                        167,072,000
                        
                        
                        
                        156,300,073Total
      liabilities and shareholders’ equity
                        
                        
                        
                        $
                        424,046,882
                        
                        
                        $
                        451,060,360





See
accompanying notes to the condensed interim consolidated financial
statements.





F-2




China
BAK Battery, Inc. and subsidiaries


Condensed
interim consolidated statements of operations


and
comprehensive income / (loss)


For
the three months ended June 30, 2008 and 2009


(Unaudited)


(In
US$)





Three months ended June 30,2008
                      
                      
                      2009Net
      revenues
                      
                      $
                      68,486,498
                      
                      
                      $
                      44,688,608Cost
      of revenues
                      
                      
                      (60,082,001)
                      
                      
                      
                      (39,640,812)Gross
      profit
                      
                      
                      8,404,497
                      
                      
                      
                      5,047,796Operating
      expenses:Research
      and development expenses
                      
                      
                      (1,855,079)
                      
                      
                      
                      (1,472,015)Sales
      and marketing expenses
                      
                      
                      (1,483,907)
                      
                      
                      
                      (1,580,776)General
      and administrative expenses
                      
                      
                      (5,101,504)
                      
                      
                      
                      (5,551,289)Total
      operating expenses
                      
                      
                      (8,440,490)
                      
                      
                      
                      (8,604,080 )Operating
      loss
                      
                      
                      (35,993)
                      
                      
                      
                      (3,556,284 )Finance
      costs, net
                      
                      
                      (2,735,183)
                      
                      
                      
                      (1,896,552)Government
      grant income
                      
                      
                      338,682
                      
                      
                      
                      222,136Other
      income / (expense)
                      
                      
                      113,829
                      
                      
                      
                      (353,354)Loss
      before income taxes
                      
                      
                      (2,318,665)
                      
                      
                      
                      (5,584,054)Income
      tax benefit
                      
                      
                      30,504
                      
                      
                      
                      413,027Net
      loss
                      
                      $
                      (2,288,161)
                      
                      
                      $
                      (5,171,027)Other
      comprehensive income / (loss)-
      Foreign currency translation adjustment
                      
                      
                      3,886,303
                      
                      
                      
                      (141,384)Comprehensive
      income / (loss)
                      
                      $
                      1,598,142
                      
                      
                      $
                      (5,312,411)Net
      loss per share:-Basic
                      
                      $
                      (0.04)
                      
                      
                      $
                      (0.09)-Diluted
                      
                      $
                      (0.04)
                      
                      
                      $
                      (0.09)Weighted
      average number of shares of common stock:-Basic
                      
                      
                      52,382,171
                      
                      
                      
                      56,966,619-Diluted
                      
                      
                      52,382,171
                      
                      
                      
                      56,966,619




See
accompanying notes to the condensed interim consolidated financial
statements.




F-3




China
BAK Battery, Inc. and subsidiaries


Condensed
interim consolidated statements of operations


and
comprehensive income / (loss)


For
the nine months ended June 30, 2008 and 2009


(Unaudited)


(In
US$)





Nine months ended June 30,2008
                      
                      
                      2009Net
      revenues
                      
                      $
                      172,609,484
                      
                      
                      $
                      153,593,006Cost
      of revenues
                      
                      
                      (153,184,410)
                      
                      
                      
                      (134,930,310)Gross
      profit
                      
                      
                      19,425,074
                      
                      
                      
                      18,662,696Operating
      expenses:Research
      and development expenses
                      
                      
                      (4,564,422)
                      
                      
                      
                      (4,014,221)Sales
      and marketing expenses
                      
                      
                      (4,234,817)
                      
                      
                      
                      (4,334,495)General
      and administrative expenses
                      
                      
                      (14,162,334)
                      
                      
                      
                      (16,426,649)Total
      operating expenses
                      
                      
                      (22,961,573)
                      
                      
                      
                      (24,775,365)Operating
      loss
                      
                      
                      (3,536,499)
                      
                      
                      
                      (6,112,669)Finance
      costs, net
                      
                      
                      (7,377,462)
                      
                      
                      
                      (7,100,544)Government
      grant income
                      
                      
                      1,377,046
                      
                      
                      
                      392,722Other
      income / (expense)
                      
                      
                      74,238
                      
                      
                      
                      (189,197)Loss
      before income taxes
                      
                      
                      (9,462,677)
                      
                      
                      
                      (13,009,688)Income
      tax benefit
                      
                      
                      50,224
                      
                      
                      
                      377,980Net
      loss
                      
                      $
                      (9,412,453)
                      
                      
                      $
                      (12,631,708)Other
      comprehensive income / (loss)-
      Foreign currency translation adjustment
                      
                      
                      14,020,137
                      
                      
                      
                      (242,542)Comprehensive
      income / (loss)
                      
                      $
                      4,607,684
                      
                      
                      $
                      (12,874,250)Net
      loss per share:-Basic
                      
                      $
                      (0.18)
                      
                      
                      $
                      (0.22)-Diluted
                      
                      $
                      (0.18)
                      
                      
                      $
                      (0.22)Weighted
      average number of shares of common stock:-Basic
                      
                      
                      51,610,457
                      
                      
                      
                      56,961,797-Diluted
                      
                      
                      51,610,457
                      
                      
                      
                      56,961,797




See
accompanying notes to the condensed interim consolidated financial
statements.





F-4





China BAK Battery, Inc. and
subsidiaries


Condensed interim consolidated
statements of shareholders’ equity


For
the nine months ended June 30, 2008 and 2009


(Unaudited)




Shares of common
                  stock
                
                
                
                
                
                Additional
                
                
                
                
                
                
                
                
                Accumulated
                  other
                
                
                Treasury shares
                
                
                TotalNumber of
                
                
                
                
                
                Donated
                
                
                paid-in
                
                
                Statutory
                
                
                Retained
                
                
                comprehensive
                
                
                Number of
                
                
                
                
                
                shareholders’shares
                
                
                Amount
                
                
                shares
                
                
                capital
                
                
                reserves
                
                
                earnings
                
                
                income
                
                
                shares
                
                
                Amount
                
                
                equityBalance
      as of October 1, 2007
                
                
                49,250,853
                
                
                $
                49,251
                
                
                $
                7,955,358
                
                
                $
                66,355,151
                
                
                $
                6,426,977
                
                
                $
                36,060,426
                
                
                $
                9,884,749
                
                
                
                -
                
                
                $
                -
                
                
                $
                126,731,912Net
      loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (9,412,453)
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (9,412,453)2005
      escrow shares donated by
                  Mr.
      Xiangqian Li
                
                
                -
                
                
                
                -
                
                
                
                6,146,331
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (1,089,775)
                
                
                
                (6,146,331)
                
                
                
                -2005
      escrow shares  settlement
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (2,079,721)
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                368,745
                
                
                
                2,079,721
                
                
                
                -Share-based
      compensation for employee stock option awards
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                2,533,705
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                2,533,705Exercise
      of stock option awards
                
                
                200,000
                
                
                
                200
                
                
                
                -
                
                
                
                1,249,800
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,250,000Issuance
      of new common stock to employees
                
                
                265,280
                
                
                
                265
                
                
                
                -
                
                
                
                (265)
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Issuance
      of new common stock
                
                
                3,500,000
                
                
                
                3,500
                
                
                
                -
                
                
                
                12,752,447
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                12,755,947Issuance
      of common stock to non-employee directors
                
                
                11,254
                
                
                
                11
                
                
                
                -
                
                
                
                (11)
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Appropriation
      to statutory reserves
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                92,661
                
                
                
                (92,661)
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Foreign
      currency translation adjustment
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                14,020,137
                
                
                
                -
                
                
                
                -
                
                
                
                14,020,137Balance
      as of June 30, 2008
                
                
                53,227,387
                
                
                $
                53,227
                
                
                $
                14,101,689
                
                
                $
                80,811,106
                
                
                $
                6,519,638
                
                
                $
                26,555,312
                
                
                $
                23,904,886
                
                
                
                (721,030)
                
                
                $
                (4,066,610)
                
                
                $
                147,879,248Balance
      as of October 1, 2008
                
                
                57,676,481
                
                
                $
                57,677
                
                
                $
                14,101,689
                
                
                $
                97,286,286
                
                
                $
                6,917,943
                
                
                $
                27,628,860
                
                
                $
                25,146,155
                
                
                
                (721,030)
                
                
                $
                (4,066,610)
                
                
                $
                167,072,000Net
      loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (12,631,708)
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (12,631,708)Share-based
      compensation for employee stock option awards
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                2,102,323
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                2,102,323Issuance
      of common stock to non-employee directors
                
                
                11,250
                
                
                
                11
                
                
                
                -
                
                
                
                (11)
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Appropriation
      to statutory reserves
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                309,252
                
                
                
                (309,252)
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Foreign
      currency translation adjustment
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (242,542)
                
                
                
                -
                
                
                
                -
                
                
                
                (242,542)Balance
      as of June 30, 2009
                
                
                57,687,731
                
                
                $
                57,688
                
                
                $
                14,101,689
                
                
                $
                99,388,598
                
                
                $
                7,227,195
                
                
                $
                14,687,900
                
                
                $
                24,903,613
                
                
                
                (721,030)
                
                
                $
                (4,066,610)
                
                
                $
                156,300,073




See
accompanying notes to the condensed interim consolidated financial
statements.





F-5




China
BAK Battery, Inc. and subsidiaries


Condensed
interim consolidated statements of cash flows


For
the three months ended June 30, 2008 and 2009


(Unaudited)


(In
US$)




Three months ended June 30,2008
                      
                      
                      2009Cash
      flow from operating activitiesNet
      loss
                      
                      $
                      (2,288,161
                      )
                      
                      $
                      (5,171,027
                      )Adjustments
      to reconcile net loss to net cash (used in) / provided by operating
      activities:Depreciation
      and amortization
                      
                      
                      3,344,381
                      
                      
                      
                      3,982,887Provision
      for doubtful debts
                      
                      
                      818,729
                      
                      
                      
                      2,538,670Provision
      for obsolete inventories
                      
                      
                      18,771
                      
                      
                      
                      425,929Share-based
      compensation
                      
                      
                      876,317
                      
                      
                      
                      553,848Deferred
      income taxes
                      
                      
                      (124,172
                      )
                      
                      
                      (713,239
                      )Deferred
      revenue
                      
                      
                      -
                      
                      
                      
                      (58,567
                      )Exchange
      loss / (gain)
                      
                      
                      737,268
                      
                      
                      
                      (345,649
                      )Changes
      in operating assets and liabilities:Trade
      accounts receivable
                      
                      
                      (5,069,990
                      )
                      
                      
                      1,735,782Inventories
                      
                      
                      1,433,346
                      
                      
                      
                      (4,545,283
                      )Prepayments
      and other receivables
                      
                      
                      (397,544
                      )
                      
                      
                      3,140,961Accounts
      and bills payable
                      
                      
                      (3,411,264
                      )
                      
                      
                      4,015,291Accrued
      expenses and other payables
                      
                      
                      1,117,071
                      
                      
                      
                      (399,438
                      )Net
      cash (used in) / provided by operating activities
                      
                      
                      (2,945,248
                      )
                      
                      
                      5,160,165Cash
      flow from investing activitiesPurchases
      of property, plant and equipment
                      
                      
                      (14,357,988
                      )
                      
                      
                      (1,765,783
                      )Payment
      of lease prepayments
                      
                      
                      (11,124,131
                      )
                      
                      
                      -Purchases
      of intangible assets
                      
                      
                      (26,075
                      )
                      
                      
                      (49,291
                      )Government
      grants received
                      
                      
                      7,469,473
                      
                      
                      
                      -Net
      cash used in investing activities
                      
                      $
                      (18,038,721
                      )
                      
                      $
                      (1,815,074
                      )





See
accompanying notes to the condensed interim consolidated financial
statements.


F-6


China
BAK Battery, Inc. and subsidiaries


Condensed
interim consolidated statements of cash flows


For
the three months ended June 30, 2008 and 2009 (continued)


(Unaudited)


(In
US$)





Three months ended June 30,2008
                          
                          
                          2009Cash
      flow from financing activitiesProceeds
      from borrowings
                          
                          $
                          64,204,003
                          
                          
                          $
                          38,456,922Repayment
      of borrowings
                          
                          
                          (49,146,478
                          )
                          
                          
                          (19,801,349
                          )Increase
      in pledged deposits
                          
                          
                          (1,273,548
                          )
                          
                          
                          (17,656,329
                          )Net
      cash provided by financing activities
                          
                          
                          13,783,977
                          
                          
                          
                          999,244Effect
      of exchange rate changes on cash and cash equivalents
                          
                          
                          560,748
                          
                          
                          
                          (79,908
                          )Net
      (decrease) / increase in cash and cash equivalents
                          
                          
                          (6,639,244
                          )
                          
                          
                          4,264,427Cash
      and cash equivalents at the beginning of period
                          
                          
                          36,883,488
                          
                          
                          
                          25,374,498Cash
      and cash equivalents at the end of period
                          
                          $
                          30,244,244
                          
                          
                          $
                          29,638,925Supplemental
      disclosure of cash flow information:Cash
      received during the period for:Bills
      receivable discounted to banks
                          
                          $
                          3,478,296
                          
                          
                          $
                          10,244,795Cash
      paid during the period for:Income
      taxes
                          
                          $
                          94,280
                          
                          
                          $
                          530,793Interest,
      net of amounts capitalized
                          
                          $
                          4,952,307
                          
                          
                          $
                          1,417,056Non-cash
      movements affecting financing transactions:2005
      escrow shares settlement
                          
                          $
                          770,040
                          
                          
                          $
                          -





See
accompanying notes to the condensed interim consolidated financial
statements.


F-7


China
BAK Battery, Inc. and subsidiaries


Condensed
interim consolidated statements of cash flows


For
the nine months ended June 30, 2008 and 2009


(Unaudited)


(In
US$)




Nine months ended June 30,2008
                        
                        
                        2009Cash
      flow from operating activitiesNet
      loss
                        
                        $
                        (9,412,453
                        )
                        
                        $
                        (12,631,708
                        )Adjustments
      to reconcile net loss to net cash (used in) / provided by operating
      activities:Depreciation
      and amortization
                        
                        
                        9,362,302
                        
                        
                        
                        11,503,691Provision
      for doubtful debts
                        
                        
                        2,186,696
                        
                        
                        
                        5,861,135Provision
      for / (recovery of) obsolete inventories
                        
                        
                        114,203
                        
                        
                        
                        (130,790
                        )Share-based
      compensation
                        
                        
                        2,533,704
                        
                        
                        
                        2,102,323Deferred
      income taxes
                        
                        
                        (201,507
                        )
                        
                        
                        (1,003,707
                        )Deferred
      revenue
                        
                        
                        -
                        
                        
                        
                        (175,567
                        )Loss
      of disposal of property, plant and equipment
                        
                        
                        189,694
                        
                        
                        
                        -Exchange
      loss
                        
                        
                        1,508,217
                        
                        
                        
                        409,774Changes
      in operating assets and liabilities:Trade
      accounts receivable
                        
                        
                        (17,101,756
                        )
                        
                        
                        6,930,391Inventories
                        
                        
                        (2,599,135
                        )
                        
                        
                        5,749,171Prepayments
      and other receivables
                        
                        
                        (6,388,025
                        )
                        
                        
                        (5,114,724
                        )Accounts
      and bills payable
                        
                        
                        8,739,264
                        
                        
                        
                        16,871,050Accrued
      expenses and other payables
                        
                        
                        1,911,998
                        
                        
                        
                        2,241,048Net
      cash (used in) / provided by operating activities
                        
                        
                        (9,156,798
                        )
                        
                        
                        32,612,087Cash
      flow from investing activitiesPurchases
      of property, plant and equipment
                        
                        
                        (30,902,878
                        )
                        
                        
                        (33,623,698
                        )Payment
      of lease prepayments
                        
                        
                        (11,145,114
                        )
                        
                        
                        (1,076,777
                        )Purchases
      of intangible assets
                        
                        
                        (101,111
                        )
                        
                        
                        (127,955
                        )Proceeds
      from disposal of property, plant and equipment
                        
                        
                        321,353
                        
                        
                        
                        -Government
      grant received
                        
                        
                        7,469,473
                        
                        
                        
                        -Net
      cash used in investing activities
                        
                        $
                        (34,358,277
                        )
                        
                        $
                        (34,828,430
                        )





See
accompanying notes to the condensed interim consolidated financial
statements.


F-8


China
BAK Battery, Inc. and subsidiaries


Condensed
interim consolidated statements of cash flows


For
the nine months ended June 30, 2008 and 2009 (continued)


(Unaudited)


(In
US$)





Nine months ended June 30,2008
                                                  
                                                  
                                                  2009Cash
      flow from financing activitiesProceeds
      from borrowings
                                                  
                                                  $
                                                  119,697,138
                                                  
                                                  
                                                  $
                                                  173,007,057Repayment
      of borrowings
                                                  
                                                  
                                                  (76,550,495
                                                  )
                                                  
                                                  
                                                  (151,426,481
                                                  )Increase
      in pledged deposits
                                                  
                                                  
                                                  (1,241,034
                                                  )
                                                  
                                                  
                                                  (25,152,373
                                                  )Proceeds
      from issuance of capital stock, net
                                                  
                                                  
                                                  14,005,947
                                                  
                                                  
                                                  
                                                  -Net
      cash provided by / (used in) financing activities
                                                  
                                                  
                                                  55,911,556
                                                  
                                                  
                                                  
                                                  (3,571,797
                                                  )Effect
      of exchange rate changes on cash and cash equivalents
                                                  
                                                  
                                                  3,651,250
                                                  
                                                  
                                                  
                                                  (279,769
                                                  )Net
      increase / (decrease) in cash and cash equivalents
                                                  
                                                  
                                                  16,047,731
                                                  
                                                  
                                                  
                                                  (6,067,909
                                                  )Cash
      and cash equivalents at the beginning of period
                                                  
                                                  
                                                  14,196,513
                                                  
                                                  
                                                  
                                                  35,706,834Cash
      and cash equivalents at the end of period
                                                  
                                                  $
                                                  30,244,244
                                                  
                                                  
                                                  $
                                                  29,638,925Supplemental
      disclosure of cash flow information:Cash
      received during the period for:Bills
      receivable discounted to banks
                                                  
                                                  $
                                                  8,342,272
                                                  
                                                  
                                                  $
                                                  18,971,302Cash
      paid during the period for:Income
      taxes
                                                  
                                                  $
                                                  140,196
                                                  
                                                  
                                                  $
                                                  625,726Interest,
      net of amounts capitalized
                                                  
                                                  $
                                                  7,377,463
                                                  
                                                  
                                                  $
                                                  6,557,660Non-cash
      movements affecting financing transactions:2005
      escrow shares donated by Mr. Xiangqian Li
                                                  
                                                  $
                                                  6,146,331
                                                  
                                                  
                                                  $
                                                  -2005
      escrow shares settlement
                                                  
                                                  $
                                                  2,079,721
                                                  
                                                  
                                                  $
                                                  -





See
accompanying notes to the condensed interim consolidated financial
statements.


F-9


China
BAK Battery, Inc. and subsidiaries


Notes
to the condensed interim consolidated financial statements


For
the nine months ended June 30, 2008 and 2009


(Unaudited)




1.
            Principal
      Activities, Basis of Presentation and
  Organization





Principal
Activities





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





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





Basis
of Presentation and Organization





As of
June 30, 2009, the Company’s subsidiaries consisted of: i) BAK International
Limited (“BAK International”), a wholly owned limited liability company
incorporated in Hong Kong on December 29, 2003 as BATCO International Limited,
which changed its name to BAK International Limited on November 3, 2004; ii)
Shenzhen BAK Battery Co., Ltd. (“Shenzhen BAK”), a wholly owned limited
liability company established on August 3, 2001 in the People’s Republic of
China (“PRC”); iii) BAK Electronics (Shenzhen) Co., Ltd. (“BAK Electronics”), a
wholly owned limited liability company established on August 15, 2005 in the
PRC; iv) BAK International (Tianjin) Ltd. (“BAK Tianjin”), a wholly owned
limited liability company established on December 12, 2006 in the PRC; v) BAK
Battery Canada Ltd. (“BAK Canada”), a wholly owned limited liability company
established on December 20, 2006 in Canada as BAK Canada Battery Ltd., which
changed its name to BAK Battery Canada Ltd. on December 22, 2006; vi) BAK Europe
GmbH (“BAK Europe”), a wholly owned limited liability company established in
Germany on November 28, 2007; and vii) BAK Telecom India Private Limited (“BAK
India”), a wholly owned limited liability company established in India on August
14, 2008.





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





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


F-10


China
BAK Battery, Inc. and subsidiaries


Notes
to the condensed interim consolidated financial statements


For
the nine months ended June 30, 2008 and 2009 (continued)


(Unaudited)




Basis
of Presentation and Organization (continued)





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





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





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





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





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


F-11


China
BAK Battery, Inc. and subsidiaries


Notes
to the condensed interim consolidated financial statements


For
the nine months ended June 30, 2008 and 2009 (continued)


(Unaudited)





Basis
of Presentation and Organization (continued)





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





At the
time the escrow shares relating to the 2006 performance threshold were
transferred to the investors in fiscal year 2007, the Company should have
recognized a credit to donated shares and a debit to additional paid-in capital,
both of which are elements of shareholders’ equity. This entry is not material
because total shares of common stock issued and outstanding, total shareholders’
equity and total assets do not change; nor is there any impact on income or
earnings per share. Therefore, previously filed consolidated financial
statements for the fiscal year ended September 30, 2007 will not be restated.
This share transfer has been reflected in these financial statements by
reclassifying the balances of certain items as of October 1, 2007. The balances
of donated shares and additional paid-in capital as of October 1, 2007 were
credited and debited by US$7,955,358 respectively, as set out in the
consolidated statements of shareholders’ equity for the nine months ended June
30, 2008.





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





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





Pursuant
to the 2008 Settlement Agreements, the Company and the settling investors have
agreed, without any admission of liability, to a settlement and mutual release
from all claims relating to the January 2005 private placement, including all
claims relating to the escrow shares related to the 2005 performance threshold
that had been placed into escrow by Mr. Xiangqian Li, as well as all claims,
including claims for liquidated damages relating to registration rights granted
in connection with the January 2005 private placement. Under the 2008 Settlement
Agreement, the Company has made settlement payments to each of the settling
investors of the number of shares of the Company’s common stock equivalent to
50% of the number of the escrow shares related to the 2005 performance threshold
these investors had claimed; aggregate settlement payments as of June 30, 2009
amounted to 368,745 shares. Share payments to date have been made in reliance
upon the exemptions from registration provided by Section 4(2) and/or other
applicable provisions of the Securities Act of 1933, as amended. In accordance
with the 2008 Settlement Agreements, the Company filed a registration statement
covering the resale of such shares which was declared effective by the SEC on
June 26, 2008.


F-12


China
BAK Battery, Inc. and subsidiaries


Notes
to the condensed interim consolidated financial statements


For
the nine months ended June 30, 2008 and 2009 (continued)


(Unaudited)





Basis
of Presentation and Organization (continued)





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





The
interim results of operations are not necessarily indicative of the results to
be expected for the fiscal year ending September 30, 2009. The Company’s
consolidated balance sheet as of September 30, 2008 has been taken from the
Company’s audited consolidated balance sheet as of that date. All other
financial statements contained herein are unaudited and, in the opinion of
management, contain all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of financial position, results of
operations and cash flows for the periods presented. The Company’s accounting
policies and certain other disclosure are set forth in the notes to the
consolidated financial statements contained in the Company’s Annual Report on
Form 10-K for the year ended September 30, 2008. These financial statements
should be read in conjunction with the Company’s audited consolidated financial
statements and notes thereto.





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


F-13


China
BAK Battery, Inc. and subsidiaries


Notes
to the condensed interim consolidated financial statements


For
the nine months ended June 30, 2008 and 2009 (continued)


(Unaudited)




Recently Issued
Accounting Standards




FAS
No. 157 “Fair Value Measurements”





In
September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements,” or SFAS
No. 157, which defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles, and expands disclosures about
fair value measurements. SFAS No. 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 No. 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007, and interim periods
within those fiscal years.  The adoption of SFAS No. 157 has no
material impact on the Company’s financial statements.





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





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





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





In
December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests in
Consolidated Financial Statements-an amendment of ARB No. 51,” or SFAS No.
160.  SFAS No. 160 establishes accounting and reporting standards for
the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary.  The guidance will apply to the Company’s financial
statements starting in its fiscal year beginning October 1, 2009.  The
Company is in the process of evaluating the impact SFAS No. 160 will have on its
financial statements upon adoption.





SFAS
No. 141(Revised) “Business Combinations”





In
December 2007, the FASB issued SFAS No. 141 (Revised) “Business Combinations,”
or SFAS No. 141 (Revised).  SFAS No. 141 (Revised) establishes
principles and requirements for how the acquirer of a business recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree. The
statement also provides guidance for recognizing and measuring the goodwill
acquired in the business combination and determines what information to disclose
to enable users of the financial statements to evaluate the nature and financial
effects of the business combination.  The guidance will apply to the
Company starting in its fiscal year beginning October 1, 2009.  The
Company is in the process of evaluating the impact SFAS No. 141 (Revised) will
have on its financial statements upon adoption.


F-14


China
BAK Battery, Inc. and subsidiaries


Notes
to the condensed interim consolidated financial statements


For
the nine months ended June 30, 2008 and 2009 (continued)


(Unaudited)




Recently Issued
Accounting Standards (continued)





FSP
FAS No. 157-1 “Application of FASB Statement No. 157 to FASB Statement
No. 13 and Other Accounting Pronouncements That Address Fair Value
Measurements for Purposes of Lease Classification or Measurement under Statement
13”





In
February 2008, the FASB issued FASB Staff Position (“FSP”) FAS
No. 157-1 “Application of FASB Statement No. 157 to FASB Statement
No. 13 and Other Accounting Pronouncements That Address Fair Value
Measurements for Purposes of Lease Classification or Measurement under Statement
13”, or FSP FAS No. 157-1. FSP FAS No. 157-1 provides a scope exception from
Statement of Financial Accounting Standards No. 157, “Fair Value
Measurements” (“SFAS No. 157”) for the evaluation criteria on lease
classification and capital lease measurement under SFAS No. 13, “Accounting
for Leases” and other related accounting pronouncements. The Company adopted FSP
FAS No. 157-1 effective October 1, 2008. Accordingly, the provisions of
SFAS No. 157 will not be applied to lease transactions under SFAS
No.13 except when applying SFAS No. 157 to business combinations
recorded by the Company.





FSP
FAS No. 157-2 “Effective Date of FASB Statement No. 157”





In
February 2008, the FASB issued FSP FAS No. 157-2 “Effective Date of
FASB Statement No. 157”, or FSP FAS No. 157-2 which delays the effective date of
SFAS No. 157 to fiscal years beginning after November 15, 2008 for
certain nonfinancial assets and nonfinancial liabilities. FSP FAS No. 157-2 will
become effective for the Company on October 1, 2009. The Company is in the
process of evaluating the impact of applying FSP FAS No. 157-2 to nonfinancial
assets and liabilities measured on a nonrecurring basis. Examples of items to
which the deferral would apply include, but are not limited to:





-
            nonfinancial
      assets and nonfinancial liabilities that are measured at fair value in a
      business combination or other new basis event, except those that are
      remeasured at fair value in subsequent
periods;





-
            reporting
      units measured at fair value in the first step of a goodwill impairment
      test as described in SFAS No. 142, “Goodwill and Other Intangible
      Assets” (“SFAS No.142”), and nonfinancial assets and nonfinancial
      liabilities measured at fair value in the SFAS No. 142 goodwill
      impairment test, if applicable; and





-
            nonfinancial
      liabilities for exit or disposal activities initially measured at fair
      value under SFAS No. 146, “Accounting for Costs Associated with Exit
      or Disposal Activities” (“SFAS
No. 146”).





As a
result of the issuance of FSP FAS No. 157-2, the Company did not apply the
provisions of SFAS No. 157 to the nonfinancial assets and nonfinancial
liabilities within the scope of FSP FAS No. 157-2 in the fiscal year ending
September 30, 2009.


F-15


China
BAK Battery, Inc. and subsidiaries


Notes
to the condensed interim consolidated financial statements


For
the nine months ended June 30, 2008 and 2009 (continued)


(Unaudited)




Recently Issued
Accounting Standards (continued)





SFAS
No. 161 “Disclosures about Derivative Instruments and Hedging
Activities”





In March
2008, the FASB issued SFAS No. 161 “Disclosures about Derivative Instruments and
Hedging Activities,” or SFAS No. 161.  SFAS No. 161 is intended to
improve financial reporting about derivative instruments and hedging activities
by requiring enhanced disclosures to enable investors to better understand their
effects on an entity’s financial position, financial performance, and cash
flows.  It is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008, with early
application encouraged.  SFAS No. 161 is not expected to have a
material impact on the Company’s financial statements.





FSP
FAS No. 142-3 “Determination of the Useful Life of Intangible
Assets”





In
April 2008, the FASB issued FSP FAS No. 142-3 “Determination of the
Useful Life of Intangible Assets”, or FSP FAS No. 142-3. FSP FAS No. 142-3
amends the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset
under Statement of Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets (“SFAS No. 142”). FSP FAS No. 142-3 is intended to
improve the consistency between the useful life of an intangible asset
determined under SFAS No. 142 and the period of expected cash flows used to
measure the fair value of the asset under SFAS No. 141(Revised) and other U.S.
GAAP. FSP FAS No. 142-3 is effective for fiscal years beginning after
December 15, 2008 which means that it will be effective for the Company’s
fiscal year beginning October 1, 2009. Early adoption is prohibited. The
Company is currently evaluating the impact of the adoption of FSP FAS No. 142-3
on its financial statements.





FSP
FAS No. 107-1 and APB No. 28-1, “Interim Disclosures about Fair Value of
Financial Instruments.”





In April
2009, the FASB issued FSP FAS No. 107-1 and APB No. 28-1 “Interim Disclosures
about Fair Value of Financial Instruments”, or FSP FAS No. 107-1 and APB No.
28-1. FSP FAS No. 107-1 and APB No. 28-1 amends SFAS No. 107, “Disclosures
about Fair Value of Financial Instruments,” to require disclosures about
fair value of financial instruments for interim reporting periods of publicly
traded companies as well as in annual financial statements. In addition,
the FSP amends APB Opinion No. 28, “Interim Financial Reporting,” to require
those disclosures in summarized financial information at interim reporting
periods. The FSP is effective for interim periods ending after June 15,
2009, with earlier adoption permitted for periods ending after March 15,
2009. The adoption of FSP FAS No. 107-1 and APB No. 28-1 has no material effect
on the Company’s financial statements.








F-16








China
BAK Battery, Inc. and subsidiaries


Notes
to the condensed interim consolidated financial statements


For
the nine months ended June 30, 2008 and 2009 (continued)


(Unaudited)




Recently Issued
Accounting Standards (continued)





FSP
FAS No. 115-2 and FAS 124-2 “Recognition of Other-Than-Temporary
Impairments (“FSP FAS 115-2 and FAS 124-2”





In
April 2009, the FASB issued FSP FAS No. 115-2 and FAS No. 124-2
“Recognition of Other-Than-Temporary Impairments, or FSP FAS No. 115-2 and FAS
No. 124-2. FSP FAS No. 115-2 and FAS No. 124-2 amends the other-than-temporary
impairment guidance in SFAS No. 115, Accounting for Certain Investments in Debt
and Equity Securities, for debt securities and the presentation and disclosure
requirements of other-than-temporary impairments on debt and equity securities
in the financial statements. FSP FAS No. 115-2 and FAS No. 124-2 is effective
for interim and annual reporting periods ending after June 15, 2009, with
early adoption permitted for periods ending after March 15, 2009. The
adoption of FSP FAS No. 115-2 and FAS No. 124-2 has no material effect
on the Company’s financial statements.





FSP
FAS No. 157-4 “Determining Whether a Market is Not Active and a Transaction Is
Not Distressed”





In April
2009, the FASB issued FSP No. 157-4 “Determining Whether a Market is Not Active
and a Transaction Is Not Distressed”, or FSP No. 157-4. FSP No.
157-4 clarifies when markets are illiquid or that market pricing may not
actually reflect the “real” value of an asset. If a market is determined to be
inactive and market price is reflective of a distressed price then an
alternative method of pricing can be used, such as a present value technique to
estimate fair value. FSP No. 157-4 identifies factors to be considered when
determining whether or not a market is inactive. FSP No. 157-4 would be
effective for interim and annual periods ending after June 15, 2009, with
early adoption permitted for periods ending after March 15, 2009 and shall be
applied prospectively. The adoption of FSP No. 157-4 has no material
effect on the Company’s financial statements.





FSP
FAS No. 141R-1 “Accounting for Assets Acquired and Liabilities Assumed in a
Business Combination That Arise from Contingencies”





In April
2009, the FASB issued FSP No. 141R-1 “Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise
from Contingencies”, or FSP No. 141R-1. FSP No. 141R-1 amends the
provisions in SFAS No. 141 (Revised) for the initial recognition and
measurement, subsequent measurement and accounting, and disclosures for
assets and liabilities arising from contingencies in business combinations. FSP
No. 141R-1 eliminates the distinction between contractual and
non-contractual contingencies, including the initial recognition and measurement
criteria in SFAS No. 141 (Revised) and instead carries forward most of the
provisions in SFAS No. 141 for acquired contingencies. FSP No. 141R-1 is
effective for contingent assets and contingent liabilities acquired in
evaluating the impact of SFAS No. 141 (Revised). The Company is currently
evaluating the impact of the adoption of FSP No. 141R-1 on its financial
statements.





SFAS
No. 165, “Subsequent Events”





In
May 2009, the FASB issued SFAS No. 165 “Subsequent Events”, or SFAS
No. 165, which sets forth general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. SFAS No.165 is effective after June
15, 2009. The adoption of SFAS No. 165 has no material effect on the
Company’s financial statements.


F-17


China
BAK Battery, Inc. and subsidiaries


Notes
to the condensed interim consolidated financial statements


For
the nine months ended June 30, 2008 and 2009 (continued)


(Unaudited)




Recently Issued
Accounting Standards (continued)





SFAS
No. 166 “Accounting for Transfers of Financial Assets – an amendment of FASB
Statement No. 140”





In June
2009, the FASB issued SFAS No. 166 “Accounting for Transfers of Financial
Assets – an amendment of FASB Statement No. 140”, or SFAS No.
166. SFAS No. 166 improves the relevance, representational faithfulness,
and comparability of the information that a reporting entity provides in its
financial statements about a transfer of financial assets; the effects of a
transfer on its financial position, financial performance, and cash flows; and a
transferor’s continuing involvement, if any, in transferred financial
assets. SFAS No. 166 is effective as of the beginning of each reporting entity’s
first annual reporting period that begins after November 15, 2009, for
interim periods within that first annual reporting period and for interim and
annual reporting periods thereafter. The Company is currently evaluating
the impact of the adoption of SFAS No. 166 on its financial
statements.





SFAS
No. 167, “Amendments to FASB Interpretation No. 46(R)”





In
June 2009, the FASB issued SFAS No. 167 “Amendments to FASB
Interpretation No. 46(R)”, or SFAS No. 167, which amends FASB
Interpretation No. 46 (revised December 2003) to address the
elimination of the concept of a qualifying special purpose entity. SFAS No. 167
also replaces the quantitative-based risks and rewards calculation for
determining which enterprise has a controlling financial interest in a variable
interest entity with an approach focused on identifying which enterprise has the
power to direct the activities of a variable interest entity and the obligation
to absorb losses of the entity or the right to receive benefits from the entity.
Additionally, SFAS No. 167 provides more timely and useful information about an
enterprise’s involvement with a variable interest entity. SFAS No. 167 shall be
effective as of the beginning of each reporting entity’s first annual reporting
period that begins after November 15, 2009, for interim periods within that
first annual reporting period, and for interim and annual reporting periods
thereafter. Earlier application is prohibited. The Company is currently
evaluating the impact of the adoption of SFAS No. 167 on its financial
statements.





SFAS
No. 168, “The FASB Accounting Standards CodificationTM and the
Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB
Statement No. 162”





In
June 2009, the FASB issued SFAS No. 168 “The FASB Accounting Standards
CodificationTM
and the Hierarchy of Generally Accepted Accounting Principles, a replacement of
FASB Statement No. 162”, or SFAS No. 168, which establishes the FASB
Accounting Standards Codification as the source of authoritative accounting
principles recognized by the FASB to be applied in the preparation of financial
statements in conformity with generally accepted accounting principles. SFAS No.
168 explicitly recognizes rules and interpretive releases of the Securities and
Exchange Commission (“SEC”) under federal securities laws as authoritative GAAP
for SEC registrants. SFAS No. 168 will become effective for financial statements
issued for interim and annual periods ending after September 15,
2009. Adoption of SFAS No. 168 is not expected to have a material impact on
the Company’s financial statements.


F-18


China BAK Battery, Inc. and
subsidiaries


Notes
to the condensed interim consolidated financial statements


For
the nine months ended June 30, 2008 and 2009 (continued)


(Unaudited)




2
            Pledged
      Deposits





Pledged
deposits as of September 30, 2008 and June 30, 2009 consisted of the
following:





September 30,
                
                
                June 30,2008
                
                
                2009Pledged
      deposits with banks for:Construction
      payable
                
                $
                931,317
                
                
                $
                893,027Short-term
      bank loans
                
                
                -
                
                
                
                3,967,002Bills
      payable
                
                
                3,517,927
                
                
                
                24,749,345$
                4,449,244
                
                
                $
                29,609,374





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





3
            Trade
      Accounts Receivable, net




Trade
accounts receivable as of September 30, 2008 and June 30, 2009 consisted of the
following:





September 30,
                    
                    
                    June 30,2008
                    
                    
                    2009Trade
      accounts receivable
                    
                    $
                    87,974,185
                    
                    
                    $
                    75,467,582Less:
      Allowance for doubtful accounts
                    
                    
                    (5,351,244
                    )
                    
                    
                    (11,209,034
                    )82,622,941
                    
                    
                    
                    64,258,548Bills
      receivable
                    
                    
                    117,347
                    
                    
                    
                    5,529,281$
                    82,740,288
                    
                    
                    $
                    69,787,829




An
analysis of the allowance for doubtful accounts for the nine months ended June
30, 2008 and 2009 is as follows:





Nine months ended June 30,2008
                  
                  
                  2009Balance
      at beginning of period
                  
                  $
                  3,021,617
                  
                  
                  $
                  5,351,244Addition
      of bad debt expense, net
                  
                  
                  2,291,114
                  
                  
                  
                  5,863,813Foreign
      exchange adjustment
                  
                  
                  287,092
                  
                  
                  
                  (6,023
                  )Balance
      at end of period
                  
                  $
                  5,599,823
                  
                  
                  $
                  11,209,034


F-19


China
BAK Battery, Inc. and subsidiaries


Notes
to the condensed interim consolidated financial statements


For
the nine months ended June 30, 2008 and 2009 (continued)


(Unaudited)





4
            Inventories





Inventories
as of September 30, 2008 and June 30, 2009 consisted of the
following:





September 30,
                    
                    
                    June 30,2008
                    
                    
                    2009Raw
      materials
                    
                    $
                    16,671,505
                    
                    
                    $
                    17,511,114Work-in-progress
                    
                    
                    12,993,897
                    
                    
                    
                    9,490,380Finished
      goods
                    
                    
                    40,638,380
                    
                    
                    
                    37,428,64070,303,782
                    
                    
                    
                    64,430,134Provision
      for obsolete inventories
                    
                    
                    (2,720,722
                    )
                    
                    
                    (2,584,910
                    )$
                    67,583,060
                    
                    
                    $
                    61,845,224





Part of
the Company’s inventories with carrying value of US$21,999,619 and US$21,959,682
as of September 30, 2008 and June 30, 2009, respectively, was pledged as
collateral under certain loan agreements (see Note 7).





5
            Prepayments
      and Other Receivables





Prepayments
and other receivables as of September 30, 2008 and June 30, 2009 consisted of
the following:





September 30,
                      
                      
                      June 30,2008
                      
                      
                      2009Prepayments
      for raw materials and others
                      
                      $
                      866,561
                      
                      
                      $
                      5,506,651Other
      receivables
                      
                      
                      3,605,465
                      
                      
                      
                      4,069,985Less:
      Allowance for doubtful accounts
                      
                      
                      (9,534
                      )
                      
                      
                      (6,836
                      )$
                      4,462,492
                      
                      
                      $
                      9,569,800


F-20




China
BAK Battery, Inc. and subsidiaries


Notes
to the condensed interim consolidated financial statements


For
the nine months ended June 30, 2008 and 2009 (continued)


(Unaudited)


6
                Property,
      Plant and Equipment,
net





Property,
plant and equipment as of September 30, 2008 and June 30, 2009 consisted of the
following:





September 30,
                
                
                June 30,2008
                
                
                2009Buildings
                
                $
                94,062,610
                
                
                $
                94,502,623Machinery
      and equipment
                
                
                89,999,435
                
                
                
                108,333,147Office
      equipment
                
                
                1,590,015
                
                
                
                1,832,403Motor
      vehicles
                
                
                1,083,278
                
                
                
                1,107,341186,735,338
                
                
                
                205,775,514Accumulated
      depreciation
                
                
                (33,033,996)
                
                
                
                (43,927,309)Construction
      in progress
                
                
                36,116,818
                
                
                
                46,372,283Prepayment
      for acquisition of property, plant and equipment
                
                
                5,617,052
                
                
                
                6,972,880$
                195,435,212
                
                
                $
                215,193,368


(i)
                Depreciation
      expense for the nine months ended June 30, 2008 and 2009 is included in
      the condensed interim consolidated statements of operations and
      comprehensive income / (loss) as
follows:




Nine months ended June 30,2008
                
                
                2009Cost
      of revenues
                
                $
                6,896,292
                
                
                $
                8,776,477Research
      and development expenses
                
                
                422,156
                
                
                
                374,177Sales
      and marketing expenses
                
                
                496,554
                
                
                
                346,643General
      and administrative expenses
                
                
                1,215,960
                
                
                
                1,448,192$
                9,030,962
                
                
                $
                10,945,489
  (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, 2008 and 2009, the Company capitalized interest of
approximately US$182,180 and US$542,884 to the cost of construction in
progress.




(iii)
              Pledged
      Property, Plant and
Equipment





As of
September 30, 2008 and June 30, 2009, the Company’s machinery and equipment with
net book value of US$42,582,851 and US$71,840,656 respectively were pledged
as collateral under certain loan arrangements (see Notes 7 and 8).





As of
June 30, 2009, the buildings and land use rights certificate in relation to the
land on which Shenzhen BAK’s corporate campus is located with aggregate net book
value of US$102,609,619 were pledged as collateral under certain loan agreements
(See Note 7).


F-21




China
BAK Battery, Inc. and subsidiaries


Notes
to the condensed interim consolidated financial statements


For
the nine months ended June 30, 2008 and 2009 (continued)


(Unaudited)




7
                Short-term
      Bank Loans





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





September 30,
                
                
                June 30,2008
                
                
                2009Inventories
      (Note 4)
                
                $
                21,999,619
                
                
                $
                21,959,682Machinery
      and equipment, net (Note 6)
                
                
                14,058,213
                
                
                
                37,841,056$
                36,057,832
                
                
                $
                59,800,738




As of
September 30, 2008 and June 30, 2009, the Company had several short-term bank
loans with aggregate outstanding balances of US$105,598,170 and US$135,784,507,
respectively. The loans were primarily obtained for general working capital,
carried interest rates ranging from 0.30% to 5.58% per annum, and had maturity
dates ranging from 6 to 12 months. Each loan is guaranteed by Mr. Xiangqian Li,
who did not receive any compensation for acting as guarantor.





As of
June 30, 2009, the Company had pledged the land use rights certificate in
relation to the land on which Shenzhen BAK’s corporate campus had been
constructed for short-term bank loans amounting to US$58,559,152 borrowed from
Shenzhen Eastern Branch, Agricultural Bank of China. As of June 30, 2009, the
aggregate net book value of the buildings and land use rights in relation to the
land use rights certificate was US$102,609,619.


8
              Long-term
      Bank Loans





As of
September 30, 2008 and June 30, 2009, the Company had long-term bank loans of
US$64,532,214 and US$55,631,193, respectively. As of June 30, 2009,
US$10,247,851 was borrowed under a four-year long-term loan credit facility from
China Development Bank, bearing interest at the benchmark rate of the People’s
Bank of China (“PBOC”) for three-year to five-year long-term loans, which is
currently 5.76% per annum. This long-term bank loan is repayable in two
installments of US$4,391,936 on November 20, 2009 and US$5,855,915 on December
26, 2010.





Three
other long-term loans totaled an aggregate borrowed amount of US$21,959,682 as
of June 30, 2009.  These loans were borrowed under a five-year
long-term loan credit facility from Shenzhen Eastern Branch, Agricultural Bank
of China, and carry interest at 90% of the benchmark rate of the PBOC for
three-year to five-year long-term loans. The first loan of US$5,855,915
currently carries interest at 5.832% per annum and is repayable on January 25,
2012. The second loan of US$11,711,831 currently carries annual interest of
6.237% and is repayable in three installments of US$2,927,958 on January 25,
2010, US$7,319,894 on January 25, 2011 and US$1,463,979 on January 25, 2012,
respectively. The third loan of US$4,391,936 currently carries annual interest
of 7.65% and is repayable on January 25, 2010.





Another
loan of US$23,423,660 as of June 30, 2009 was borrowed under a four-year
long-term loan credit facility from Tianjin Branch, Agricultural Bank of China
and carries interest at the benchmark rate of the PBOC for three-year to
five-year long-term loans, which is currently 5.76% per annum. This loan is
repayable in four installments of US$4,391,936 on December 26, 2009,
US$4,391,936 on December 26, 2010, US$7,319,894 on December 26, 2011, and
US$7,319,894 on May 26, 2012.





The
long-term bank loan with China Development Bank is: (i) guaranteed by Mr.
Xiangqian Li; (ii) secured by certain shares of the Company owned by Mr.
Xiangqian Li; and (iii) to be secured by the property ownership and land use
rights certificates relating to the land on which the Company’s Research and
Development Test Centre is to be constructed and the facilities to be
constructed thereon. As of June 30, 2009, the Company had obtained the relevant
land use rights certificate and was in the process of negotiating with the
relevant government bureau for the requisite approval to pledge it as
described.


F-22




China
BAK Battery, Inc. and subsidiaries


Notes
to the condensed interim consolidated financial statements


For
the nine months ended June 30, 2008 and 2009 (continued)


(Unaudited)




8
                Long-term
      Bank Loans (continued)





The
long-term bank loan with Shenzhen Eastern Branch, Agricultural Bank of China is:
(i) guaranteed by Mr. Xiangqian Li; (ii) secured by the Company’s machinery and
equipment with carrying values of US$33,999,600 as of June 30, 2009 (see Note
6); and (iii) secured by the property ownership and land use rights certificates
in relation to the land on which Shenzhen BAK’s corporate campus had been
constructed (see Note 6) and any machinery and equipment purchased and
used in the campus subsequent to such construction.





The
long-term bank loan with Tianjin Branch, Agricultural Bank of China is secured
by the machinery and equipment purchased for the automated high-power
lithium-phosphate cells production line in Tianjin. As of June 30, 2009,
construction of the automated high-power lithium-phosphate cells production line
was in progress.





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





The
aggregate maturities of long-term bank loans as of June 30, 2009 are as
follows:




Fiscal
      years ending on June 30,2010
                
                $
                16,103,7662011
                
                
                17,567,7452012
                
                
                21,959,682$
                55,631,193


F-23




China
BAK Battery, Inc. and subsidiaries


Notes
to the condensed interim consolidated financial statements


For
the nine months ended June 30, 2008 and 2009 (continued)


(Unaudited)




9
                Share-based
      Compensation




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





Stock
Option Plan




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





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





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




Subsequent
to the grant date, options to purchase 200,000 shares of common stock were
forfeited because the optionees terminated their employment with the Company. In
addition, on September 28, 2006, options to purchase a total of 1,400,000 shares
of common stock were cancelled pursuant to the Termination and Release
Agreements signed on that day. Details of the cancellation of stock options and
the relevant replacement awards are set out below under “Employee Restricted
Stock Awards”.





A summary
of share option plan activity for these options during the nine months ended
June 30, 2009 is presented below:





Number of
                    shares
                  
                  Weighted
                    average
                    exercise price
                    per share
                  
                  Weighted
                    average
                    remaining
                    contractual
                    term
                  
                  Aggregate
                    intrinsic
                    value (1)Outstanding
      as of October 1, 2008
                  200,000
                  
                  $
                  6.25Exercised
                  -
                  
                  
                  -Forfeited
                  -
                  
                  
                  -Cancelled
                  -
                  
                  
                  -Outstanding
      as of June 30, 2009
                  200,000
                  
                  $
                  6.25
                  
                  1.7 years
                  
                  $
                  -Exercisable
      as of June 30, 2009
                  200,000
                  
                  $
                  6.25
                  
                  1.7 years
                  
                  $
                  -




(1)
            Aggregate
      intrinsic value represents the value of the Company’s closing stock price
      on June 30, 2009 (US$2.95) in excess of the exercise price multiplied by
      the number of options outstanding or
  exercisable.


F-24




China
BAK Battery, Inc. and subsidiaries


Notes
to the condensed interim consolidated financial statements


For
the nine months ended June 30, 2008 and 2009 (continued)


(Unaudited)




9
                Share-based
      Compensation
(continued)





The
weighted-average grant-date fair value of options granted during 2005 was
US$3.67 per share. The Company recorded non-cash share-based compensation
expense of US$74,000 for the nine months ended June 30, 2008 in respect of these
share options granted in 2005, which was allocated to research and development
expenses. No non-cash share-based compensation expense was recognized in respect
of these share options for the nine months ended June 30, 2009.





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




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





As of
June 30, 2009, there were no unrecognized compensation costs related to
non-vested share options.





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





A summary
of share option plan activity for these options during the nine months ended
June 30, 2009 is presented below:





Number of
                    Shares
                  
                  Weighted
                    average exercise
                    price per share
                  
                  Weighted average
                    remaining
                    contractual term
                  
                  Aggregate intrinsic
                    value (1)Outstanding
      as of October 1, 2008
                  1,300,000
                  
                  $
                  3.29Exercised
                  -
                  
                  
                  -Forfeited
                  130,000
                  
                  
                  3.29Cancelled
                  -
                  
                  
                  -Outstanding
      as of June 30, 2009
                  1,170,000
                  
                  $
                  3.29
                  
                  3.9 years
                  
                  $
                  -Exercisable
      as of June 30, 2009
                  442,500
                  
                  $
                  3.29
                  
                  3.3 years
                  
                  $
                  -




(1)
            Aggregate
      intrinsic value represents the value of the Company’s closing stock price
      on June 30, 2009 (US$2.95) in excess of the exercise price multiplied by
      the number of options outstanding or
  exercisable.




The
weighted-average grant-date fair value of options granted during 2007 was
US$2.15 per share. The Company recorded non-cash share-based compensation
expense of US$1,391,000 and US$579,864 for the nine months ended June 30, 2008
and 2009 respectively, in respect of share options granted in 2007, which was
allocated to cost of revenues, sales and marketing expenses, general and
administrative expenses and research and development expenses
respectively.





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




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




As of
June 30, 2009, there were unrecognized compensation costs of US$351,780 related
to the above non-vested share options. These costs are expected to be recognized
over a weighted average period of 1.2 years.


F-25


China
BAK Battery, Inc. and subsidiaries


Notes
to the condensed interim consolidated financial statements


For
the nine months ended June 30, 2008 and 2009 (continued)


(Unaudited)




9
                Share-based
      Compensation
(continued)





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





A summary
of share option plan activity for these options during the nine months ended
June 30, 2009 is presented below:





Number of
                    shares
                  
                  Weighted
                    average
                    exercise price
                    per share
                  
                  Weighted
                    average
                    remaining
                    contractual
                    term
                  
                  Aggregate
                    intrinsic
                    value (1)Outstanding
      as of October 1, 2008
                  360,000
                  
                  $
                  4.30Exercised
                  -
                  
                  
                  -Forfeited
                  -
                  
                  
                  -Cancelled
                  -
                  
                  
                  -Outstanding
      as of June 30, 2009
                  360,000
                  
                  $
                  4.30
                  
                  3.6
      years
                  
                  $
                  -Exercisable
      as of June 30, 2009
                  150,000
                  
                  $
                  4.30
                  
                  3.6
      years
                  
                  $
                  -





(1)  Aggregate
intrinsic value represents the value of the Company’s closing stock price on
June 30, 2009 (US$2.95) in excess of the exercise price multiplied by the number
of options outstanding or exercisable.





The
weighted average grant-date fair value of options granted on January 28, 2008
was US$3.59 per share. The Company recorded non-cash share-based compensation
expense of US$491,000 and US$360,465 for the nine months ended June
30, 2008 and 2009 respectively, in respect of share options granted on January
28, 2008, which was allocated to general and administrative expenses and
research and development expenses respectively.





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




Expected
      volatility
                
                
                120.23
                %Expected
      dividends
                
                NilExpected
      life
                
                5
      yearsRisk-free
      interest rate
                
                
                3.59
                %




As of
June 30, 2009, there were unrecognized compensation costs of US$252,005 related
to the above non-vested share options. These costs are expected to be recognized
over a weighted average period of 0.6 years.





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


F-26




China
BAK Battery, Inc. and subsidiaries


Notes
to the condensed interim consolidated financial statements


For
the nine months ended June 30, 2008 and 2009 (continued)


(Unaudited)




9
            Share-based
      Compensation (continued)




A summary
of share option plan activity for these options during the nine months ended
June 30, 2009 is presented below:


Number of
                            shares
                          
                          Weighted
                            average
                            exercise price
                            per share
                          
                          Weighted
                            average
                            remaining
                            contractual
                            term
                          
                          Aggregate
                            intrinsic
                            value (1)Outstanding
      as of October 1, 2008
                          
                          1,250,000
                          
                          $
                          4.18Exercised
                          
                          -
                          
                          
                          -Forfeited
                          
                          -
                          
                          
                          -Cancelled
                          
                          -
                          
                          
                          -Outstanding
      as of June 30, 2009
                          
                          1,250,000
                          
                          $
                          4.18
                          
                          3.9years
                          
                          $
                          -Exercisable
      as of June 30, 2009
                          
                          402,500
                          
                          $
                          4.18
                          
                          3.9years
                          
                          $
                          -





(1)  Aggregate
intrinsic value represents the value of the Company’s closing stock price on
June 30, 2009 (US$2.95) in excess of the exercise price multiplied by the number
of options outstanding or exercisable.





The
weighted average grant-date fair value of options granted on May 29, 2008 was
US$2.36 per share. The Company recorded non-cash share-based compensation
expense of US$1,124,098 for the nine months ended June 30, 2009, in respect of
share options granted on May 29, 2008, which was allocated to general and
administrative expenses and research and development expenses
respectively.





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





Expected
      volatility
                
                
                59.48
                %Expected
      dividends
                
                NilExpected
      life
                
                5
      yearsRisk-free
      interest rate
                
                
                4.01
                %





As of
June 30, 2009, there were unrecognized compensation costs of US$981,461 related
to the above non-vested share options. These costs are expected to be recognized
over a weighted average period of 1.3 years.





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


F-27




China
BAK Battery, Inc. and subsidiaries


Notes
to the condensed interim consolidated financial statements


For
the nine months ended June 30, 2008 and 2009 (continued)


(Unaudited)




9
            Share-based
      Compensation (continued)





A summary
of share option plan activity for these options during the nine months ended
June 30, 2009 is presented below:


Number of
                    shares
                  
                  Weighted
                    average
                    exercise price
                    per share
                  
                  Weighted
                    average
                    remaining
                    contractual
                    term
                  
                  Aggregate
                    intrinsic
                    value (1)Outstanding
      as of October 1, 2008
                  
                  -
                  
                  $
                  -Granted
      on June 22, 2009
                  
                  1,928,200
                  
                  
                  2.81Exercised
                  
                  -
                  
                  
                  -Forfeited
                  
                  -
                  
                  
                  -Cancelled
                  
                  -
                  
                  
                  -Outstanding
      as of June 30, 2009
                  
                  1,928,200
                  
                  $
                  2.81
                  
                  7.0 years
                  
                  $
                  269,948Exercisable
      as of June 30, 2009
                  
                  -
                  
                  $
                  -
                  
                  -
                  
                  $
                  -





(1)  Aggregate
intrinsic value represents the value of the Company’s closing stock price on
June 30, 2009 (US$2.95) in excess of the exercise price multiplied by the number
of options outstanding or exercisable.





The
weighted average grant-date fair value of options granted on June 22, 2009 was
US$2.46 per share. No non-cash share-based compensation expense was recognized
for the nine months ended June 30, 2009.





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





Expected
      volatility
                
                
                111.03
                %Expected
      dividends
                
                NilExpected
      life
                
                7
      yearsRisk-free
      interest rate
                
                
                3.69
                %





As of
June 30, 2009, there were unrecognized compensation costs of US$4,736,025
related to the above non-vested share options. These costs are expected to be
recognized over a weighted average period of 5.0 years.





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




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




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





The
Company recorded non-cash share-based compensation expense of US$37,896 for the
nine months ended June 30, 2009, in respect of the restricted shares granted in
August 2008, which was allocated to general and administrative
expenses.





As of
June 30, 2009, there were no unrecognized stock-based compensation costs
associated with these restricted shares granted to non-employee directors. All
of the restricted shares were issued as fully paid shares of common stock to the
Company’s three independent directors on August 6, 2008, October 20, 2008, March
2, 2009 and April 2, 2009, respectively.


F-28




China
BAK Battery, Inc. and subsidiaries


Notes
to the condensed interim consolidated financial statements


For
the nine months ended June 30, 2008 and 2009 (continued)


(Unaudited)




9
            Share-based
      Compensation (continued)





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





No
non-cash share-based compensation expense was recognized for the nine months
ended June 30, 2009.





As of
June 30, 2009, there were unrecognized stock-based compensation costs of
US$1,405,000 associated with these restricted shares granted to Mr. Xiangqian
Li. These costs are expected to be recognized over a weighted-average period of
5.0 years.





As the
Company itself is an investment holding company which is not expected to
generate operating profits to realize the tax benefits arising from its net
operating loss carried forward, no income tax benefits were recognized for such
stock-based compensation cost under the Stock Option Plan for the nine
months ended June 30, 2009.


F-29




China
BAK Battery, Inc. and subsidiaries


Notes
to the condensed interim consolidated financial statements


For
the nine months ended June 30, 2008 and 2009 (continued)


(Unaudited)





9
            Share-based
      Compensation (continued)




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 were residents of the PRC. The Compensation
Committee also consented to adopt the terms and provisions for the 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 certain officers 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.





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





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





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





Prior to
vesting, the shares of restricted stock granted to each employee pursuant to the
Replacement Awards were subject to restrictions on transferability and were to
be forfeited if the grantee’s employment with the Company was terminated. In
accordance with the vesting provisions of the grants, the shares of restricted
stock became vested and were not 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 reclassified share-based payment
liabilities of US$3,679,934 to shareholders’ equity. The restricted stock grant
is treated as equity-classified awards and the unrecognized compensation costs
were recognized over the vesting period. The Company recognized share-based
compensation expense of US$561,000 for the nine months ended June 30, 2008 in
respect of the equity-classified award. These share-based compensation costs
were allocated to cost of revenues, sales and marketing expenses, general and
administrative expenses and research and development expenses respectively. All
shares of restricted stock granted as of June 30, 2009 vested before September
30, 2008 and no non-cash share-based compensation expense was recognized for the
nine months ended June 30, 2009.





As of
June 30, 2009, there were no unrecognized compensation costs related to the
restricted stock grants.




F-30




China
BAK Battery, Inc. and subsidiaries


Notes
to the condensed interim consolidated financial statements


For
the nine months ended June 30, 2008 and 2009 (continued)


(Unaudited)




10
            Net
      Loss per Share




The
calculation of basic net loss per share is based on the net loss for the nine
months ended June 30, 2009 attributable to equity shareholders of $12,631,708
(Nine months ended June 30, 2008: $9,412,453) and the weighted average number of
shares of common stock of 56,961,797 issued and outstanding during the nine
months ended June 30, 2009 (Nine months ended June 30, 2008:
51,610,457).





The
effects of 1,940,000 shares of stock options and 265,280 shares of restricted
stock outstanding during the nine months ended or as of June 30, 2008 were all
anti-dilutive and the effects of 4,908,200 shares of stock options, 500,000
shares of restricted stock and 4,102,564 warrants outstanding during the nine
months ended or as of June 30, 2009 were all anti-dilutive. As such, basic
and diluted net loss per share for the nine months ended June 30, 2008 and 2009
are the same.




11
            Commitments
      and Contingencies





(i)
            Capital
      Commitments




As of
September 30, 2008 and June 30, 2009, the Company had the following contracted
capital commitments:





September 30,
                
                
                June
      30,2008
                
                
                2009For
      construction of buildings
                
                $
                5,957,292
                
                
                $
                290,031For
      purchases of equipment
                
                
                4,313,237
                
                
                
                5,775,091$
                10,270,529
                
                
                $
                6,065,122




F-31




China
BAK Battery, Inc. and subsidiaries


Notes
to the condensed interim consolidated financial statements


For
the nine months ended June 30, 2008 and 2009 (continued)


(Unaudited)




11
            Commitments
      and Contingencies (continued)





(ii)
            Property ownership and land
      use rights certificates




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





The
Company did not obtain the land use rights certificate and approvals for
project-planning and construction relating to the premises occupied by the
Company, BAK Industrial Park, before construction of the buildings was
commenced. As of June 30, 2009, the Company has obtained the aforementioned land
use rights certificate and government approvals and was in the process of
negotiating with the relevant government bureau for the application and
acquisition of the appropriate property ownership certificate.





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





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





Pursuant
to the land use rights certificate that the Company obtained relating to the
Research and Development Test Centre to be constructed in Shenzhen, the Company
must complete at least 25% of the construction of the new Research and
Development Test Centre by September 30, 2008. As of June 30, 2009, the Company
was in the process of negotiating with the relevant government bureau for the
extension of the completion date. According to the land use rights certificate,
such rights may not be pledged without the approval of the relevant government
bureau. The Company is required to pledge its property ownership and land use
rights certificate in relation to the new Research and Development Test Centre
to China Development Bank according to the loan agreement entered into with it.
The Company was in the process of negotiating with the relevant government
bureau for the requisite approval.




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





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


F-32




China
BAK Battery, Inc. and subsidiaries


Notes
to the condensed interim consolidated financial statements


For
the nine months ended June 30, 2008 and 2009 (continued)


(Unaudited)




11
            Commitments
      and Contingencies (continued)





(iii)
            Guarantees




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





September 30,
                                
                                
                                June
      30,2008
                                
                                
                                2009Guaranteed
      for Shenzhen Tongli Hi-tech Co. Ltd. -a
      non-related party
                                
                                $
                                2,933,282
                                
                                
                                $
                                2,927,958Guaranteed
      for Hunan Reshine New Material Ltd. -a
      non-related party
                                
                                
                                5,866,565
                                
                                
                                
                                5,855,915Guaranteed
      for Nanjing Special MetalEquipment
      Co. Ltd. - a non-related party
                                
                                
                                1,466,641
                                
                                
                                
                                1,463,979Guaranteed
      for Siping Juyuan Hanyang Plate HeatExchanger
      Co. Ltd. - a non-related party
                                
                                
                                2,933,282
                                
                                
                                
                                2,927,958Guaranteed
      for Shenzhen B&G Technology Development Co. Ltd. -a
      non-related party
                                
                                
                                3,666,603
                                
                                
                                
                                5,855,915$
                                16,866,373
                                
                                
                                $
                                19,031,725





Management
has assessed the fair value of the obligation arising from the above financial
guarantees and considered it immaterial to the condensed interim consolidated
financial statements. Therefore, no obligations in respect of the above
guarantees were recognized as of June 30, 2009.




(iv)
            Outstanding
      Discounted Bills and Transferred
Bills




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





The
Company's outstanding discounted and transferred bills as of September 30, 2008
and June 30, 2009 are summarized as follows:




September 30,
                
                
                June
      30,2008
                
                
                2009Bank
      acceptance bills
                
                $
                34,721,831
                
                
                $
                22,339,453




F-33




China
BAK Battery, Inc. and subsidiaries


Notes
to the condensed interim consolidated financial statements


For
the nine months ended June 30, 2008 and 2009 (continued)


(Unaudited)




11
            Commitments
      and Contingencies (continued)





(v)
            Litigation and
      claims




On
September 12, 2006, Hydro-Quebec, a Canadian company, and the Board of Regents
of the University of Texas System brought a federal patent infringement suit in
the United States District Court for the Northern District of Texas against the
Company. The Company had an agreement with A123 Systems, Inc. (“A123Systems”),
which, as amended on August 18, 2005, terminated in accordance with its terms on
August 30, 2007. Under the terms of these agreements, the Company had agreed to
manufacture products for A123Systems according to the specifications furnished
by, and using the finished electrodes and other materials consigned by
A123Systems to the Company. The plaintiffs alleged that, by manufacturing
rechargeable lithium cells for A123Systems for use in DeWalt 36-volt cordless
power tools manufactured by Black & Decker Corporation, the Company had
infringed two U.S. patents owned by and exclusively licensed to the plaintiffs.
The plaintiffs seek injunctive relief and damages in an unspecified amount. If
the court issues an adverse decision, the Company may be required to pay the
plaintiffs substantial monetary damages, and the Company may be prohibited from
future production of rechargeable lithium cells manufactured for A123Systems or
be required to pay royalties to engage in any such production. The court has not
yet issued a decision on this matter and the Company is unable to quantify the
extent of any possible award of damages that might become payable by the
Company.




12
            Significant
      Concentrations





(a)
            Customers and Credit
      Concentrations




No
customer individually comprised 10% or more of net revenue for the nine months
ended June 30, 2008 and 2009.


F-34




China
BAK Battery, Inc. and subsidiaries


Notes
to the condensed interim consolidated financial statements


For
the nine months ended June 30, 2008 and 2009 (continued)


(Unaudited)




12
            Significant
      Concentrations (continued)





(b)
            Credit
    Risk




Financial
instruments that potentially subject the Company to a significant concentration
of credit risk consist primarily of cash and cash equivalents and pledged
deposits. As of September 30, 2008 and June 30, 2009, substantially all of the
Company’s cash and cash equivalents and pledged deposits were held by major
financial institutions located in the PRC, which management believes are of high
credit quality.




13
            Segment
      Information




The
Company currently engages in the manufacture, commercialization and distribution
of a wide variety of standard and customized lithium ion rechargeable batteries
for use in a wide array of applications. The Company manufactures six types of
Li-ion rechargeable batteries: steel-case cell, 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, 2008 and 2009 were as follows:





Net
revenues by product:





Nine months ended June
      30,2008
                
                
                2009%
                
                
                
                
                
                %Steel-case
      cells
                
                $
                25,658,603
                
                
                
                14.87
                
                
                $
                4,909,017
                
                
                
                3.20Aluminum-case
      cells
                
                
                94,115,411
                
                
                
                54.53
                
                
                
                83,105,224
                
                
                
                54.11Battery
      packs
                
                
                20,104,778
                
                
                
                11.64
                
                
                
                15,833,139
                
                
                
                10.31Cylindrical
      cells
                
                
                22,907,137
                
                
                
                13.27
                
                
                
                40,296,656
                
                
                
                26.24Lithium
      polymer cells
                
                
                9,823,555
                
                
                
                5.69
                
                
                
                9,338,649
                
                
                
                6.08High-power
      lithium-phosphate cells
                
                
                -
                
                
                
                -
                
                
                
                110,321
                
                
                
                0.06$
                172,609,484
                
                
                
                100.00
                
                
                $
                153,593,006
                
                
                
                100.00




Net
revenues by geographic area:





Nine months ended June
      30,2008
                
                
                2009%
                
                
                
                
                
                %PRC
      Mainland
                
                $
                132,486,039
                
                
                
                76.75
                
                
                $
                96,845,692
                
                
                
                63.05PRC
      Taiwan
                
                
                23,194,842
                
                
                
                13.43
                
                
                
                33,705,347
                
                
                
                21.94India
                
                
                4,158,713
                
                
                
                2.41
                
                
                
                8,349,801
                
                
                
                5.44United
      States of America
                
                
                67,291
                
                
                
                0.04
                
                
                
                405,422
                
                
                
                0.26Hong
      Kong, China
                
                
                10,611,065
                
                
                
                6.15
                
                
                
                12,057,175
                
                
                
                7.85Others
                
                
                2,091,534
                
                
                
                1.22
                
                
                
                2,229,569
                
                
                
                1.46$
                172,609,484
                
                
                
                100.00
                
                
                $
                153,593,006
                
                
                
                100.00





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





14
            Subsequent
      events




The
Company has evaluated all subsequent events through August 6, 2009, the date
these financial statements were issued, and determined that there were no
subsequent events or transactions that required recognition or disclosure in the
financial statements.


F-35


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





Overview





Although
the business climate in China is recovering, the global economic environment
remains weak.  During the third quarter of fiscal year 2009, we
generated $44.7 million in net revenues, which is over 9.5% higher than in the
second quarter of fiscal year 2009 and 34.7% lower than our net revenues of
$68.5 million in the third quarter of fiscal year 2008. The increase in net
revenues over the net revenues generated in the second quarter of this fiscal
year was the result of improvements in the business environment in China, as
well as increased demand for different kinds of battery cells and the inflow of
revenue from new sources and customers. The substantial year-over-year decrease
in net revenues during the third fiscal quarter of 2009 as compared to the same
period of last year was generally due to the global financial crisis and
recession, which weakened demand for many of the products that our customers
sell.





In the
third quarter of fiscal year 2009, we continued to implement our aggressive cost
management program to reduce costs and expenses. We have adjusted our long-term
and short-term bank loans structure, and as a result, finance costs decreased to
their lowest levels since fiscal year 2007, $1.9 million.  We also
have been focusing on developing new revenue sources in our domestic market and
abroad.





In the
near-term, we anticipate operating challenges due to the difficult business
environment. These challenges may impede the trend of increasing our revenues
and gross margin. In response, we will continue to take cost-cutting actions
such as maintaining the suspension of our steel-case cell production to reduce
unneeded inventory and to lower our energy costs.





We also
are exploring and capitalizing on opportunities to generate additional sources
of revenue.  Our prismatic cell exports to India increased during the
third quarter of fiscal year 2009, and we are still positively seeking to
increase the market share of our prismatic cells for OEM cellular phones in
China.  Furthermore, we plan to focus more on our cylindrical cells
and polymer cells, as the market demand for these products is increasing due to
the gradual economic recovery. In addition, we are pursuing opportunities to
raise our selling prices by penetrating high-end markets, and to further reduce
the manufacturing costs and the purchase costs of raw materials.





During
the third quarter of fiscal year 2009, we initiated shipments of cylindrical
cells to an international tier-one OEM notebook manufacturer after passing its
product certification test in the March quarter of fiscal year 2009. Such
shipments, while initially small, are expected to promote our penetration into
the Notebook OEM market when North America begins its economic
recovery.





We also
sent battery cell samples made at our Tianjin facility for light electric
vehicles to customers and to manufacturing partners in China’s State High-Tech
Development Plan (also known as the National 863 program). We expect that these
initiatives will set the stage for our future growth in the new energy industry.
We believe that in the future this product will become a significant additional
revenue source as the demand for it has been increasing.





To help
us finance and expand our operations, we have access to $222.5 million in
short-term credit facilities and $55.6 million in long-term credit
facilities.  As of June 30, 2009, the principal outstanding amounts
included short-term bank loans of $135.8 million, long-term bank loans of $16.1
million maturing within one year and long-term bank loans of $39.5 million
maturing in over one year, and bills payable of $41.0 million, leaving $69.4
million of short-term funds available for additional cash needs.  In
addition, on July 10, 2008, our $60.0 million shelf registration statement was
declared effective by the SEC, pursuant to which we raised $16.0 million in
gross revenue from common stock purchases and issued common stock warrants
exercisable for up to $16.0 million in additional gross proceeds.  As
none of the warrants were exercised before their expiration, we may raise up to
an additional $44.0 million in gross proceeds from future equity financings
under this shelf registration statement.





Our
Business





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


1





·
            cellular
      phones—customer segments include OEM customers and replacement battery
      manufacturers;





·
            notebook
      computers;





·
            portable
      consumer electronics, such as digital cameras, portable media players,
      portable gaming devices, and personal digital assistants, or PDAs;
      and





·
            other
      applications, such as cordless power tools, mining lamps, light electric
      vehicles, uninterruptible power supplies, and hybrid electric
      vehicles.





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





Financial
Statement Presentation





Net
revenues.  Our net revenues represent the invoiced value of our
products sold, net of value added taxes, or VAT, sales returns, trade discounts
and allowances.  We are subject to VAT, which is levied on most of our
products at the rate of 17% on the invoiced value of our products. Provision for
sales returns are recorded as a reduction of revenue in the same period that
revenue is recognized.  The provision for sales returns represents our
best estimate of the amount of goods that will be returned from our customers
based on historical sales returns data.





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





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





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





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





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





Government Grant
Income / Other Income / Other Expenses.  Government grant
income consists of grant funds from the government of Shenzhen in China to
subsidize certain activities considered beneficial to the Shenzhen area’s
economic or social growth. Discussion regarding the reasons for these grants as
to particular periods is provided below.  No present or future
obligation arises from the receipt of such grants.


2


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





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





The Tax
Holiday of Shenzhen BAK commenced in 2002, the first calendar year in which
Shenzhen BAK had assessable profit, and ended on December 31,
2006.  In addition, due to our qualified capital contributions to
Shenzhen BAK in both 2005 and 2006 and Shenzhen BAK’s qualification as an
advanced technology enterprise in 2007 and 2008, Shenzhen BAK was granted a
preferential income tax rate of 3.309%, 3.82%, 7.5%, and 11.8% for calendar
years 2005, 2006, 2007, and 2008, respectively. In accordance with the
transition period of the new corporate income tax law, or the New CIT Law,
described below, Shenzhen BAK’s income tax rate for calendar years 2009, 2010
and 2011 is expected to be 20%, 22%, and 24%, respectively, before the
application of any applicable tax preferences. Starting in calendar year 2012,
it is expected to be subject to an income tax rate of 25%.





BAK
Electronics, established in August 2005, has been eligible for the same
preferential tax treatment previously applicable to Shenzhen BAK and was in the
Tax Holiday and fully exempt from any enterprise income tax for calendar years
2006 and 2007 followed by a three-year 50% reduction in its enterprise income
tax rate.  In addition, pursuant to the transition period of the New
CIT Law described below, and before considering the above-mentioned 50%
reduction, BAK Electronics’ income tax rate for calendar year 2008 was 18%, and
for calendar years 2009, 2010, and 2011 are expected to be 20%, 22%, and 24%,
respectively.  Therefore, BAK Electronics’ income tax rate after
consideration of its Tax Holiday was 9% for calendar year 2008, and is expected
to be 10%, 11%, and 24% for calendar years 2009, 2010, and 2011,
respectively.  Starting in calendar year 2012, it is expected to be
subject to an income tax rate of 25%.





Shenzhen
BAK and BAK Electronics received in aggregate a tax benefit of $50,000 for the
nine months ended June 30, 2009, or $0.0009 per basic share, pursuant to the
preferential tax treatment described above and the transition period of the New
CIT Law described below.





BAK
Tianjin is currently exempted from any enterprise income tax due to cumulative
tax losses.





On March
16, 2007, the National People’s Congress of the PRC adopted the New CIT
Law.  The New CIT Law unifies the application scope, tax rate, tax
deduction and preferential policy for both domestic enterprises and FIEs. The
New CIT Law became effective on January 1, 2008.  According to the New
CIT Law, the applicable income tax rate for Shenzhen BAK, BAK Electronics and
BAK Tianjin will be 25% after their preferential tax holidays and the transition
period of the New CIT Law have ended, before the application of any applicable
tax preferences.  This transition period started in 2008 and will end
in 2011.  Pursuant to the transition period, tax rates for subject
entities were 18% for calendar year 2008, and are expected to be 20%, 22%, and
24% for calendar years 2009, 2010, and 2011, respectively, before the
application of applicable tax holidays or other tax preferences.





China BAK
Battery, Inc. 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
Canadian subsidiary, BAK Canada, is subject to Canada’s profits tax at the rate
of 38%.  However, because it does not have any assessable income
derived from or arising in Canada, it has not paid any Canadian profits
tax.





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


3


Our
Indian subsidiary, BAK India, is subject to India’s profits tax at the rate of
30%.  However, because it does not have any assessable income derived
from or arising in India, it has not paid any Indian profits tax.





Our Hong
Kong subsidiary, BAK International, is subject to Hong Kong’s profits tax at the
rate of 16.5%. 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 benefit rate was 2.9% for the nine months ended June 30, 2009 and
our effective tax benefit rate was 0.5% for the nine months ended June 30,
2008.




Results
of Operations





Comparison of Three Months
Ended June 30, 2009 and June 30, 2008





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





Three Months Ended
                    June 30,2009
                  
                  
                  2008
                  
                  
                  $ Change
                  
                  
                  % ChangeStatement
      of operations data:Net
      revenues
                  
                  $
                  44,688
                  
                  
                  $
                  68,486
                  
                  
                  $
                  (23,798
                  )
                  
                  
                  (34.7
                  )Cost
      of revenues
                  
                  
                  39,640
                  
                  
                  
                  60,082
                  
                  
                  
                  (20,442
                  )
                  
                  
                  (34.0
                  )Gross
      profit
                  
                  
                  5,048
                  
                  
                  
                  8,404
                  
                  
                  
                  (3,356
                  )
                  
                  
                  (39.9
                  )Operating
      expenses:Research
      and development expenses
                  
                  
                  1,472
                  
                  
                  
                  1,855
                  
                  
                  
                  (383
                  )
                  
                  
                  (20.6
                  )Sales
      and marketing expenses
                  
                  
                  1,581
                  
                  
                  
                  1,484
                  
                  
                  
                  97
                  
                  
                  
                  6.5General
      and administrative expenses
                  
                  
                  5,551
                  
                  
                  
                  5,101
                  
                  
                  
                  450
                  
                  
                  
                  8.8Total
      operating expenses
                  
                  
                  8,604
                  
                  
                  
                  8,440
                  
                  
                  
                  164
                  
                  
                  
                  1.9Operating
      loss
                  
                  
                  (3,556
                  )
                  
                  
                  (36
                  )
                  
                  
                  (3,520
                  )
                  
                  
                  9,777.8Finance
      costs, net
                  
                  
                  1,897
                  
                  
                  
                  2,736
                  
                  
                  
                  (839
                  )
                  
                  
                  (30.7
                  )Government
      grant income
                  
                  
                  (222
                  )
                  
                  
                  (339
                  )
                  
                  
                  117
                  
                  
                  
                  (34.5
                  )Other
      expenses / (income)
                  
                  
                  353
                  
                  
                  
                  (114
                  )
                  
                  
                  467
                  
                  
                  
                  (409.6
                  )Income
      tax benefit
                  
                  
                  (413
                  )
                  
                  
                  (31
                  )
                  
                  
                  (382
                  )
                  
                  
                  1,232.3Net
      loss
                  
                  $
                  (5,171
                  )
                  
                  $
                  (2,288
                  )
                  
                  $
                  (2,883
                  )
                  
                  
                  126.0





Net
Revenues.  Net revenues decreased to $44.7 million for the three
months ended June 30, 2009 as compared to $68.5 million for the same period of
the prior year, a decrease of $23.8 million or 34.7%.  Our net
revenues were smaller for the three months ended June 30, 2009 than for the same
period of the prior year in part because of decreased customer orders as the
global financial crisis and recession adversely affected many of the markets
that our customers serve.  The following sets forth the breakdown of
our net revenues by battery cell type for the periods
indicated.


4





Three Months Ended
                  June 30,2009
                
                2008(in
      thousands)Prismatic
      cellsAluminum-case
      cells
                
                $
                22,506
                
                
                $
                33,775Steel-case
      cells
                
                
                350
                
                
                
                10,023Battery
      packs
                
                
                5,714
                
                
                
                8,533Cylindrical
      cells
                
                
                12,690
                
                
                
                13,629Lithium
      polymer cells
                
                
                3,348
                
                
                
                2,526High-power
      lithium-phosphate cells
                
                
                80
                
                
                
                -Total
                
                $
                44,688
                
                
                $
                68,486




·
            Net
      revenues from sales of aluminum-case cells decreased to $22.5 million in
      the three months ended June 30, 2009, from $33.8 million in the same
      period in fiscal year 2008, a decrease of $11.3 million or 33.4%,
      resulting from a decrease in our average selling price of 11.7% and sales
      volume of 24.6% driven by decreased sales to the OEM market in the PRC due
      to reduced customer demand and the global financial crisis and
      recession.





·
            Net
      revenues from sales of steel-case cells decreased $9.7 million or 96.5% to
      $350,000 in the three months ended June 30, 2009, from $10.0 million in
      the same period in fiscal year 2008. This revenue decrease was due to
      a decrease in sales volume of 94.0%, which was primarily attributable to
      our long-term strategic reduction, and suspension in January 2009, of
      steel-case cell production which was implemented in order to increase our
      aluminum-case cell production capacity for the OEM market and to take
      advantage of the greater sales prospects and lower costs of aluminum-case
      cells. During the three months ended June 30, 2009, the price and profit
      margin of steel-case cells were lower than those of aluminum-case cells
      and market demand for aluminum-case cells was stronger than for steel-case
      cells. We expect that our revenue will be positively impacted by this
      shift.





·
            Net
      revenues from sales of battery packs decreased to $5.7 million in the
      three months ended June 30, 2009, from $8.5 million in the same period in
      fiscal year 2008, a decrease of $2.8 million or
      33.0%.  This resulted from a decrease in sales volume of 23.6%
      and a decrease in our average selling price of 12.4% driven by decreased
      sales to the OEM market in the PRC and customer pricing pressure due to
      the global financial crisis and
recession.





·
            Net
      revenues from sales of cylindrical cells decreased to $12.7 million in the
      three months ended June 30, 2009, from $13.6 million in the same period in
      fiscal year 2008, a decrease of $939,000 or 6.9%, due to a decrease
      in our average selling prices of 20.0% driven by customer pricing pressure
      arising from the global financial crisis and recession, which offset
      increased sales volume of 16.4% which was driven by increased sales to
      laptop manufacturers.





·
            We
      sold $3.3 million of lithium polymer cells in the three months ended June
      30, 2009, compared to $2.5 million of lithium polymer cells in the same
      period in fiscal year 2008, driven by our expanded production capacity and
      volume.





·
            We
      also sold approximately $80,000 of high-power lithium-phosphate cells in
      the three months ended June 30, 2009, as compared to no sales of this
      battery cell type in the same period of fiscal year 2008, due to our sale
      of sample products used in electric bicycles, power tools, uninterruptible
      power supplies, and other applications from our Tianjin
      facility.





Cost of
Revenues.  Cost of revenues decreased to $40.0 million for the three
months ended June 30, 2009, as compared to $60.1 million for the same period in
fiscal year 2008, a decrease of $20.4 million or 34.0%. The decrease in
cost of revenues correlates to a decrease in sales volume over the three months
ended June 30, 2009.





As a
result, gross profit for the three months ended June 30, 2009 was $5.0 million
or 11.3% of net revenues as compared to gross profit of $8.4 million or 12.3% of
net revenues for the same period in fiscal year 2008. Our decrease in gross
profit as a percentage of net revenues was primarily due to the greater
proportion of sales of lithium polymer cells with lower gross margin during the
three months ended June 30, 2009.


5




Research and
Development Costs.  Research and development costs decreased to $1.5
million for the three months ended June 30, 2009, as compared to $1.9 million
for the same period in fiscal year 2008, a decrease of $383,000 or 20.6%,
due to a number of decreases in R&D-related costs over the three months
ended June 30, 2009. Salaries related to R&D staff decreased by $133,000
primarily due to reduction in headcount. Equity-based compensation included in
R&D costs decreased by $236,000 due to amortization of stock option grants
to employees in our R&D department. Depreciation charges decreased by
$16,000 and research materials charges decreased by $46,000, mainly due to the
reduction in the number of work hours during the three months ended June 30,
2009.




Sales and
Marketing Expenses.  Sales and marketing expenses increased to $1.6
million for the three months ended June 30, 2009, as compared to $1.5 million
for the same period in fiscal year 2008, a slight increase of $97,000 or
6.5%, primarily due to increased compensation of $154,000 for sales and
marketing personnel and reduced packing expenses of $12,000 which fell in line
with decreased sales. Equity-based compensation included in sales and marketing
expenses decreased by $32,000 due to amortization of stock option grants to
employees in our sales department. As a percentage of net revenues, sales and
marketing expenses increased marginally to 3.5% for the three months ended June
30, 2009, from 2.2% for the same period in fiscal year 2008, due to the decrease
in revenues from sales offset by lower overall sales expenses.




General and
Administrative Expenses.  General and administrative expenses
increased to $5.5 million, or 12.4% of revenues, for the three months ended June
30, 2009, as compared to $5.1 million, or 7.4% of revenues, for the same period
in fiscal year 2008, an increase of $450,000 or 8.8%. Equity-based
compensation included in general and marketing expenses decreased by $3,000 due
to amortization of stock option grants to employees in our general
administration department.  Bad debt expenses increased by $1.7
million due to the provision charged after we had assessed the collection of
accounts receivables from customers during the three months ended June 30, 2009.
We also recognized a currency exchange gain of $345,000 for the three months
ended June 30, 2009, compared with currency exchange loss of $737,000 for the
same period in fiscal year 2008, an increase of $1.1 million or
143.9%.





We did
not recognize in general and administrative expenses any amount for liquidated
damages for the three months ended June 30, 2009.  We were liable for
liquidated damages to certain shareholders whose shares were included in a
resale registration statement on Form S-3 that we filed pursuant to a
registration rights agreement that we entered into with such shareholders in
relation to a private placement that we conducted in November 2007. The SEC did
not declare this registration statement effective by a certain date, and under
the November 2007 registration rights agreement, the included selling
shareholders became eligible for liquidated damages of approximately $561,000 as
of June 30, 2008. Please see Part II, Item 1. “Legal Proceedings — Liquidated
Damages Pursuant to November 2007 Registration Rights Agreement” for a further
description of these liquidated damages. We therefore recognized in general and
administrative expenses an amount of approximately $561,000 for the liquidated
damages for the three months ended June 30, 2008.





Operating
Loss.  As a result of the above, operating loss totaled $3.6 million
for the three months ended June 30, 2009, as compared to $36,000 for the same
period of the prior year, an increase of $3.5 million or 9,777.8%.




Finance Costs,
Net.  Finance costs, net, decreased to $1.9 million for the three
months ended June 30, 2009, as compared to $2.7 million for the same period of
the prior fiscal year, a decrease of $839,000 or 30.7%. We have $135.8 million
in short-term bank loans maturing in less than one year, $16.1 million in
long-term bank loans maturing within one year, and $39.5 million in other
long-term bank loans maturing in more than one year, outstanding as of June 30,
2009, as compared to $111.5 million in short-term bank loans maturing in less
than one year, $8.7 million in long-term bank loans maturing within one year,
and $55.4 million in other long-term bank loans maturing in more than one year,
outstanding as of June 30, 2008. The decrease in net finance costs is mainly
attributable to a significant decrease in the average bank loan interest rates
on both our short-term and long-term bank loans.





Government Grant
Income / Other Income / (Other Expenses).We had deferred revenue
from government grant income of $222,000 and other expenses of $353,000 for the
three-month period ended June 30, 2009, as compared to government grant income
of $339,000 and other income of $114,000 for the same period of the prior fiscal
year. The government grants income for the three months ended June 30, 2009
mainly consisted of subsidies to pay for the land use rights to our corporate
campus at BAK Industrial Park and government grant funds to subsidize a new
high-technology project in the calendar year 2009.  Government grants
income for the three months ended June 30, 2008 mainly represented the receipt
of grant funds from the Shenzhen Government to subsidize payment of land use
rights for BAK Industrial Park.  No present or future obligation will
arise from the receipt of such income. Other expenses for the three months ended
June 30, 2009 mainly consisted of the loss of certain scrap materials that have
been discarded.


6





Income Tax
Benefits.  Income tax benefits were $413,000 for the three months
ended June 30, 2009, as compared to income tax benefits of $31,000 for the same
period of 2008. The change was the result of an increase in our deferred tax
provision during the quarter ended June 30, 2009.





Net
Loss.  As a result of the foregoing, we had a net loss of $5.2
million for the three months ended June 30, 2009 compared to $2.3 million for
the same period of 2008.





Comparison of Nine Months
Ended June 30, 2009 and June 30, 2008





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





Nine Months Ended
                    June 30,2009
                  
                  
                  2008
                  
                  
                  $ Change
                  
                  
                  % ChangeStatement
      of operations data:Net
      Revenues
                  
                  $
                  153,593
                  
                  
                  $
                  172,609
                  
                  
                  $
                  (19,016
                  )
                  
                  
                  (11.0
                  )Cost
      of revenues
                  
                  
                  134,930
                  
                  
                  
                  153,184
                  
                  
                  
                  (18,254
                  )
                  
                  
                  (11.9
                  )Gross
      profit
                  
                  
                  18,663
                  
                  
                  
                  19,425
                  
                  
                  
                  (762
                  )
                  
                  
                  (3.9
                  )Operating
      expenses:Research
      and development expenses
                  
                  
                  4,014
                  
                  
                  
                  4,564
                  
                  
                  
                  (550
                  )
                  
                  
                  (12.1
                  )Sales
      and marketing expenses
                  
                  
                  4,334
                  
                  
                  
                  4,235
                  
                  
                  
                  99
                  
                  
                  
                  2.3General
      and administrative expenses
                  
                  
                  16,427
                  
                  
                  
                  14,162
                  
                  
                  
                  2,265
                  
                  
                  
                  16.0Total
      operating expenses
                  
                  
                  24,775
                  
                  
                  
                  22,961
                  
                  
                  
                  1,814
                  
                  
                  
                  7.9Operating
      loss
                  
                  
                  (6,112
                  )
                  
                  
                  (3,536
                  )
                  
                  
                  (2,576
                  )
                  
                  
                  72.8Finance
      costs, net
                  
                  
                  7,101
                  
                  
                  
                  7,377
                  
                  
                  
                  (276
                  )
                  
                  
                  (3.7
                  )Government
      grant income
                  
                  
                  (392
                  )
                  
                  
                  (1,377
                  )
                  
                  
                  985
                  
                  
                  
                  (71.5
                  )Other
      expenses / (income)
                  
                  
                  189
                  
                  
                  
                  (74
                  )
                  
                  
                  263
                  
                  
                  
                  (355.4
                  )Income
      tax benefit
                  
                  
                  (378
                  )
                  
                  
                  (50
                  )
                  
                  
                  (328
                  )
                  
                  
                  656.0Net
      loss
                  
                  $
                  (12,632
                  )
                  
                  $
                  (9,412
                  )
                  
                  $
                  (3,220
                  )
                  
                  
                  34.2





Net
Revenues.  Net revenues decreased to $153.6 million for the nine
months ended June 30, 2009, as compared to $172.6 million for same period of the
prior fiscal year, a decrease of $19.0 million or 11.0%.  Our net
revenues were smaller for the nine months ended June 30, 2009 than for the same
period of the prior year in part because of decreased customer orders as the
global financial crisis and recession adversely affected many of the markets
that our customers serve. The following sets forth the breakdown of our net
revenues by battery cell type for the periods indicated.


7


Nine months
      Ended
                  June 30,2009
                
                2008(in thousands)Prismatic
      cellsAluminum-case
      cells
                
                $
                83,105
                
                
                $
                94,115Steel-case
      cells
                
                
                4,909
                
                
                
                25,658Battery
      packs
                
                
                15,833
                
                
                
                20,105Cylindrical
      cells
                
                
                40,297
                
                
                
                22,907Lithium
      polymer cells
                
                
                9,339
                
                
                
                9,824High-power
      lithium-phosphate cells
                
                
                110
                
                
                
                -Total
                
                $
                153,593
                
                
                $
                172,609





·
            Net
      revenues from sales of aluminum-case cells decreased to $83.0 million in
      the nine months ended June 30, 2009, from $94.1 million in the same period
      in fiscal year 2008, a decrease of $11.1 million or 11.7%, due to a
      15.3% decrease in sales volume driven by decreased sales to the OEM market
      in the PRC resulting from the global financial crisis and recession,
      offset by a 4.3% increase in the average selling price resulting from a
      change in the type of the aluminum-case cells
  sold.





·
            Net
      revenues from sales of steel-case cells decreased to $5.0 million in the
      nine months ended June 30, 2009, from $25.7 million in the same period in
      fiscal year 2008, a decrease of $20.7 million or 80.9%. This decrease
      was due to reduced sales volume of 80.7%, which was primarily attributable
      to our long-term strategic reduction, and suspension in January 2009, of
      steel-case cell production which was designed to increase our production
      capacity of aluminum-case cells for sale to the OEM market and to take
      advantage of the greater sales prospects and lower costs of aluminum-case
      cells. During the nine months ended June 30, 2009, the price and profit
      margin of steel-case cells were lower than those of aluminum-case cells
      and market demand for aluminum-case cells was stronger than for steel-case
      cells. As a result, we suspended our production of steel-case cells in
      January 2009. We expect that our revenue will be positively impacted by
      this shift.





·
            Net
      revenues from sales of battery packs decreased to $15.8 million in the
      nine months ended June 30, 2009, from $20.1 million in the same period in
      fiscal year 2008, a decrease of $4.3 million or 21.2%, due to a
      decrease in sales volume of 17.8% and a decrease in our average selling
      price of 4.2% driven by decreased sales to customers in the OEM market in
      the PRC which have been hurt by the global financial crisis and
      recession.





·
            Net
      revenues from sales of cylindrical cells increased to $40.3 million in the
      nine months ended June 30, 2009, from $22.9 million in the same period in
      fiscal year 2008, an increase of $17.4 million or 75.9%, due to an
      increase in sales volume of 80.0% driven by increased export sales and
      offset by a decrease in our average selling price of
  10.0%.





·
            We
      sold $9.3 million of lithium polymer cells in the nine months ended June
      30, 2009, compared to $9.8 million of lithium polymer cells in the same
      period in 2008, due to a decrease of 20.5% in sales volume offset by an
      increase of 19.6% in our average selling price as a result of a decline in
      market demand relating to the global financial crisis and
      recession.





·
            We
      also sold approximately $110,000 of high-power lithium-phosphate cells in
      the nine months ended June 30, 2009, as compared to no sales of this
      battery cell type in the same period of fiscal year 2008, due to our sale
      of samples used in electric bicycles, power tools, uninterruptible power
      supplies, and other applications from our Tianjin
  facility.





Cost of
Revenues.  Cost of revenues decreased to $135.0 million for the nine
months ended June 30, 2009, as compared to $153.2 million for the same period in
fiscal year 2008, a decrease of $18.3 million or 11.9%. The decrease in
cost of revenues correlated with a decrease in sales volume over the nine months
ended June 30, 2009.




As a
result, gross profit for the nine months ended June 30, 2009, was $18.7 million
or 12.2% of net revenues as compared to gross profit of $19.4 million or 11.3%
of net revenues for the same period in fiscal year 2008. The increase in
gross profit as a percentage of net revenues was mainly due to a significant
increase in the sales of cylindrical cells to customers in the laptop market,
and an increase in our average selling price, which together generated a higher
gross margin, during the nine months ended June 30, 2009.


8




Research and
Development Costs.  Research and development costs decreased to $4.0
million for the nine months ended June 30, 2009, as compared to $4.6 million for
the same period in fiscal year 2008, a decrease of $550,000 or 12.1%, due
to a number of decreases in R&D-related costs over the nine months ended
June 30, 2009. Equity-based compensation included in R&D costs decreased by
$493,000 due to amortization of stock option grants to employees in our R&D
department. Depreciation charges decreased by $48,000 and research materials
charges decreased by $154,000, mainly due to the reduction in workforce during
the nine months ended June 30, 2009. Salaries related to R&D staff increased
by $30,000, primarily due to additional compensation charges from severance
packages relating to reduction of headcount.





Sales and
Marketing Expenses.  Sales and marketing expenses increased to $4.3
million for the nine months ended June 30, 2009, as compared to $4.2 million for
the same period in fiscal year 2008, a slight increase of $99,000 or 2.3%.
Equity-based compensation included in sales and marketing expenses decreased by
$142,000 due to amortization of stock option grants to employees in our sales
department. As a percentage of net revenues, sales and marketing expenses have
increased to 2.8% for the nine months ended June 30, 2009, from 2.4% for the
same period in fiscal year 2008, due to the decrease in revenues from sales
offset by lower overall sales expenses.




General and
Administrative Expenses.  General and administrative expenses
increased to $16.4 million, or 10.7% of revenues, for the nine months ended June
30, 2009, as compared to $14.2 million, or 8.2% of revenues, for the same period
in fiscal year 2008, an increase of $2.3 million or 16.0%. Equity-based
compensation included in general and marketing expenses increased by $340,000
due to amortization of stock option grants to employees in our general
administration department. Bad debt expenses increased by $3.7 million due to
the provision charged after we had assessed the collection of accounts
receivables from customers during the nine months ended June 30, 2009. We
recognized exchange loss of $410,000 for the nine months ended June 30, 2009,
compared with $1.5 million for the same period in fiscal
year 2008.





During
the nine months ended June 30, 2009, we incurred liability for liquidated
damages to a shareholder whose shares were required to be included in an
effective resale registration statement on Form S-3 by a certain date pursuant
to a registration rights agreement that we entered into with this shareholder
and certain other investors in relation to a private placement that we closed in
November 2007. The SEC did not declare this registration statement effective by
the necessary date, and we therefore became liable for liquidated damages to
this shareholder and the other investors in this offering, as disclosed in our
previous reports.  As of June 30, 2009, we believe that we were not
liable for any liquidated damages relating to the November 2007 registration
rights agreement.  The above-referenced shareholder waived any claim
to liquidated damages during the fiscal quarter ended December 31,
2008.  The other investors who had been party to the November 2007
registration rights agreement, or affiliates under their control, had received
shares of our common stock in a subsequent offering at prices that had been
discounted by the full amounts that were owed to them. Please see Part II, Item
1. “Legal Proceedings — Liquidated Damages Pursuant to November 2007
Registration Rights Agreement” for a further description of these liquidated
damages. We therefore did not recognize in general and administrative expenses
any amount for liquidated damages for the nine months ended June 30, 2009,
whereas we recognized liquidated damages of approximately $561,000 as of June
30, 2008 with respect to the investors in the November 2007 private
placement.





Operating
Loss.  As a result of the above, operating loss totaled $6.1 million
for the nine months ended June 30, 2009, as compared to operating loss of $3.5
million for the same period of the prior fiscal year, an increase of $2.6
million or 72.8%.




Finance Costs,
Net.  Finance costs, net, decreased to $7.1 million for the nine
months ended June 30, 2009, as compared to $7.4 million for the same period of
the prior fiscal year, a decrease of $276,000 or 3.7%.We have $135.8 million in
short-term bank loans maturing in less than one year, $16.1 million in long-term
bank loans maturing within one year, and $39.5 million in other long-term bank
loans maturing in more than one year, outstanding as of June 30, 2009, as
compared to $111.5 million in short-term bank loans maturing in less than one
year, $8.7 million in long-term bank loans maturing within one year, and $55.4
million in other long-term bank loans maturing in more than one year,
outstanding as of June 30, 2008. The decrease in net finance costs is mainly
attributable to a decrease in the average bank loan interest rates on both our
short-term and long-term bank loans during the nine months ended June 30, 2009
and the increase in the outstanding principal amounts of both our short-term and
long-term bank loans.


9




Government Grant
Income / Other Income / (Other Expenses).  Government grant income
was $392,000 for the nine months ended June 30, 2009, as compared to government
grant income of $1.4 million for the same period of fiscal year 2008.
Government grant income for the nine months ended June 30, 2009 mainly consisted
of government grant funds which subsidized our interest expenses in prior years
for research and development activities; and to refund the value-added tax paid
by Shenzhen BAK in prior years in light of Shenzhen BAK’s qualification as a new
and high-technology enterprise; subsidies to pay for the land use rights to our
corporate campus at BAK Industrial Park; and government grant funds to subsidize
a new high-technology project in the calendar year 2009. Government grant income
for the nine months ended June 30, 2008 mainly consisted of government grant
funds to subsidize the interest expenses incurred by the Company in prior years
for R&D activities, to refund the value-added tax paid by Shenzhen BAK in
prior years in light of Shenzhen BAK’s qualification as a new and
high-technology enterprise and the receipt of grant funds from the Shenzhen
Government to subsidize the payment of land use rights for BAK Industrial Park.
No present or future obligation will arise from the receipt of such
income.




Income Tax
Benefits.  Income tax benefits were $378,000 for the nine months
ended June 30, 2009, as compared to income tax benefit of $50,000 for the same
period of fiscal year 2008. The change was the result of deferred tax
provision during the nine months ended June 30, 2009.





Net
Loss. As a result of the foregoing, we had a net loss of $12.6
million for the nine months ended June 30, 2009, as compared to $9.4 million for
the same period in 2008.




Liquidity
and Capital Resources





We have
historically financed our liquidity requirements from a variety of sources,
including equity financings through the sale of our stock, short-term bank
loans, long-term bank loans and bills payable under bank credit agreements, and
sale of bills receivable.  As of June 30, 2009, we had cash and cash
equivalents of $29.6 million, as compared to $35.7 million as of September 30,
2008.  In addition, we had pledged deposits amounting to $29.6 million
and $4.4 million as of June 30, 2009 and September 30, 2008,
respectively.  Typically, our banks require their borrowers to
maintain deposits of approximately 10% to 100% of the outstanding loan balances
and bills payable.  The individual bank loans have maturities ranging
from six to twelve months which coincides with the periods the cash remains
pledged to the banks.





We had
access to $222.5 million in short-term credit facilities and $55.6 million in
long-term credit facilities as of June 30, 2009. As of June 30, 2009, the
principal outstanding amounts included short-term bank loans of $135.8 million,
long-term bank loans of $16.1 million maturing within one year, and long-term
bank loans of $39.5 million maturing in over one year, and bills payable of
$41.0 million, leaving $69.4 million of short-term funds available for
additional cash needs. In addition, on July 10, 2008, our $60.0 million shelf
registration statement was declared effective by the SEC, pursuant to which we
raised $16.0 million in gross revenue and issued warrants exercisable for an
additional $16.0 million in gross proceeds.  As none of the warrants
were exercised before their expiration, we may raise up to an additional $44.0
million in gross proceeds from future equity financings under this shelf
registration statement.





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





Nine months Ended June 30,2009
                
                
                2008(in
      thousands)Net cash
      provided by / (used in) operating activities
                
                $
                32,612
                
                
                $
                (9,157
                )Net
      cash used in investing activities
                
                
                (34,828
                )
                
                
                (34,358
                )Net
      cash (used in) / provided by financing activities
                
                
                (3,572
                )
                
                
                55,911Effect
      of exchange rate changes on cash and cash equivalents
                
                
                (280
                )
                
                
                3,651Net
      (decrease) / increase in cash and cash equivalents
                
                
                (6,068
                )
                
                
                16,047Cash
      and cash equivalents at the beginning of period
                
                
                35,707
                
                
                
                14,197Cash
      and cash equivalents at the end of period
                
                
                29,639
                
                
                
                30,244




10





Operating
Activities




Net cash
provided by operating activities was $32.6 million in the nine months ended June
30, 2009, compared to $9.2 million of net cash used in operating activities in
the same period in fiscal year 2008. The increase of $41.8 million in operating
activities was mainly attributable to more timely collection of our trade
account receivables.




Investing
Activities




Net cash
used in investing activities increased from $34.4 million in the nine months
ended June 30, 2008, to $34.8 million in the same period in fiscal year 2009.
The net cash used in investing activities during the period ended June 30, 2009,
was mainly used for procurement of machinery and equipment for two additional
cylindrical cell lines, an additional automated prismatic cell production line
and construction of new factories in Tianjin, China.





Financing
Activities




Net cash
used in financing activities was $3.5 million in the nine months ended June 30,
2009, compared to net cash provided by financing activities of $55.9 million in
the same period in 2008. This was mainly attributable to (i) net proceeds of
$12.8 million from a private placement of our common stock completed in November
2007, (ii) a $1.2 million increase in net proceeds from our issuance of capital
stock pursuant to exercises of certain stock options issued on May 16, 2005 in
the nine months ended June 30, 2008, (iii) a $23.9 million increase in cash
deposits at banks as collateral in the nine months ended June 30, 2009, and (iv)
increased borrowings, net of repayments, of $21.5 million in the nine months
ended June 30, 2009.





As of
June 30, 2009, the principal amounts outstanding under our credit facilities and
lines of credit were as follows:




Maximum Amount
                        Available
                      
                      
                      Amount Borrowed
                        (Includes bank loans
                        and bills payable)(in thousands)Short-term
      credit facilities:Agricultural
      Bank of China
                      
                      $
                      58,559
                      
                      
                      $
                      58,559Shenzhen
      Development Bank
                      
                      
                      24,888
                      
                      
                      
                      25,089China
      CITIC Bank
                      
                      
                      21,960
                      
                      
                      
                      16,587Bank
      of China
                      
                      
                      65,879
                      
                      
                      
                      45,483China
      Everbright Bank
                      
                      
                      14,640
                      
                      
                      
                      -Bank
      of Communications
                      
                      
                      29,279
                      
                      
                      
                      7,320Shanghai
      Pudong Development Bank
                      
                      
                      7,320
                      
                      
                      
                      123Subtotal—short-term
      credit facilities
                      
                      $
                      222,525
                      
                      
                      $
                      153,161Long-term
      credit facilities:Agricultural
      Bank of China
                      
                      
                      21,960
                      
                      
                      
                      21,960China
      Development Bank
                      
                      
                      10,248
                      
                      
                      
                      10,248Agricultural
      Bank of China, Tianjin Jinxin Branch
                      
                      
                      23,423
                      
                      
                      
                      23,423Subtotal—long-term
      credit facilities
                      
                      $
                      55,631
                      
                      
                      $
                      55,631Lines
      of Credit:Agricultural
      Bank of China
                      
                      
                      
                      
                      
                      
                      4,213Ningbo
      Bank
                      
                      
                      
                      
                      
                      
                      10,987China
      CITIC Bank
                      
                      
                      
                      
                      
                      
                      6,227Bank
      of China
                      
                      
                      
                      
                      
                      
                      2,221Subtotal-lines
      of credit
                      
                      
                      
                      
                      
                      $
                      23,648Total
      Principal Outstanding
                      
                      $
                      278,156
                      
                      
                      $
                      232,440




11





The above
principal outstanding amounts under credit facilities and lines of credit
included short-term bank loans of $135.8 million, long-term bank loans of $16.1
million maturing within one year and long-term bank loans of $39.5 million
maturing in over one year, and bills payable of $41.0 million.





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





During
the three months ended June 30, 2009, we entered into a new comprehensive credit
facility agreement for a maximum loan amounts of $29.3 million, repaid two loans
totaling $14.6 million, and entered into seven new short-term bank loan
agreements totaling $33.3 million. The new credit facility is with Shenzhen
Caitian Branch, Bank of Communications (“Bank of
Communications”).  The seven new short-term loan agreements include
one loan agreement with Bank of China, Shenzhen Branch (“Bank of China”),
totaling $7.3 million, one loan agreement with Bank of Communications, totaling
$7.3 million, and five loan agreements with Agricultural Bank of China, Shenzhen
Eastern Branch (“Agricultural Bank – Shenzhen Branch”), totaling $18.7 million
We also agreed to a loan modification of an existing agreement with China CITIC
Bank.The material
financing terms of these loans are described below.





On April
26, 2009, we entered into a comprehensive credit facility agreement with Bank of
Communications to provide a maximum loan amount of RMB 200 million
(approximately $29.3 million). This credit facility agreement is guaranteed by
BAK Tianjin and Mr. Xiangqian Li. Loans may be drawn at any time from March 25,
2009 to March 25, 2010.  As of June 30, 2009, we had borrowed
approximately $7.3 million under a loan agreement dated June 23, 2009 under this
credit facility agreement, bearing fixed interest of 4.779%, and which is
repayable on June 23, 2010.





On
January 21, 2009, we entered into a comprehensive credit facility agreement with
Shenzhen Nanshan Branch, China Everbright Bank (“China Everbright Bank”) to
provide a maximum loan amount of RMB 100 million (approximately $14.7
million).  Loans may be drawn at any time from March 30, 2009 to March
30, 2010.  As of June 30, 2009, we had no outstanding loans under this
facility.





On
December 8, 2008, we renewed our comprehensive credit facility agreement with
Shenzhen Development Bank to provide a maximum loan amount of RMB 150 million
(approximately $22.0 million).  Loans may be drawn at any time over
the one-year period beginning December 8, 2008 and will be due after a period
ranging from 2 months to 1 year from the date each is borrowed.  This
credit facility agreement is guaranteed by BAK International, BAK Tianjin and
Mr. Xiangqian Li, and is also secured by $22.0 million of inventory and $5.3
million of machinery and equipment.  As of June 30, 2009, we had
borrowed approximately $22.0 million under a loan agreement dated December 16,
2008 under this credit facility agreement, bearing a floating interest rate
equal to the PBOC’s benchmark rate on the date of the loan agreement and
adjusted quarterly, and which is repayable on December 16, 2009.  We
have since repaid approximately $2.9 million of the principal of this
loan.  We borrowed approximately $2.9 million under a second loan
agreement bearing a floating interest rate equal to the PBOC’s benchmark rate on
March 9, 2009 and adjusted quarterly, and which matures on March 9,
2010.





On
November 27, 2008, we renewed our comprehensive credit facility agreement with
Agricultural Bank – Shenzhen Branch to provide a maximum loan amount of RMB 580
million (approximately $85.0 million), including RMB 400 million (approximately
$58.6 million) one-year term credit facilities and RMB 180 million
(approximately $26.4 million) five-year term credit facilities.  This
credit facility agreement renewed a predecessor credit facility agreement
between Shenzhen BAK and Agricultural Bank – Shenzhen Branch dated June 8, 2007
and governs all loans that were subject to the predecessor agreement at the time
of the renewal. New loans may be drawn under this credit facility from November
27, 2008 through November 27, 2009, with the term of the loan established at the
time each new loan is drawn, except as to funds borrowed under a loan agreement
between Shenzhen BAK and Agricultural Bank – Shenzhen Branch dated November 23,
2006 and effective December 18, 2006, or the 2006 Loan Agreement, which may be
drawn at any time within five years of December 18, 2006, and which will mature
five years after such funds are drawn.  Pursuant to this credit
facility, Shenzhen BAK must obtain prior approval from Agricultural Bank –
Shenzhen Branch to renew long-term loans subject to this credit facility. In
addition, Shenzhen BAK undertook to ensure that the percentage of certain
business conducted with Agricultural Bank – Shenzhen Branch relative to such
business it conducts with all financial institutions combined to be at least
equal to the percentage of its indebtedness to Agricultural Bank – Shenzhen
Branch relative to its indebtedness to all financial institutions combined, or
the Percentages Undertaking.  The “business” referred to in the
preceding sentence refers to the volume of transactional payments that are drawn
from Shenzhen BAK’s accounts with Agricultural Bank – Shenzhen Branch or
applicable financial institutions and the amount of foreign currencies deposited
with Agricultural Bank – Shenzhen Branch or applicable financial
institutions.  Shenzhen BAK also undertook not to issue any dividends
without the written consent of Agricultural Bank – Shenzhen Branch prior to the
expiration of all loans under this credit facility (this undertaking and the
Percentages Undertaking are collectively referred to as the
“Undertakings”).  The obligations of Shenzhen BAK under this credit
facility are guaranteed by Mr. Xiangqian Li, BAK Tianjin, and BAK International.
Shenzhen BAK’s obligations under this credit facility agreement are also
guaranteed by Shenzhen BAK’s pledge of the property ownership and land use
rights certificates relating to its manufacturing and other facilities in
Shenzhen, PRC, known as BAK Industrial Park.  In the event that
Shenzhen BAK breaches any of the Undertakings or any guarantying party breaches
any of its guaranty obligations, Agricultural Bank – Shenzhen Branch may, in
addition to exercising any other applicable remedies under the applicable
agreements, accelerate repayment of all loan amounts governed by this credit
facility.


12





As of
June 30, 2009, we had five outstanding short-term loans under this credit
facility totaling approximately $58.6 million, carrying annual interest at
4.86%, 5.58% and 5.31%, adjusted quarterly.  The first loan, of
approximately $22.0 million, currently carries annual interest of 5.58% and is
due on December 1, 2009. The second loan, of approximately $11.0 million,
currently carries annual interest at 5.58% and is due on December 14, 2009. The
third loan, of approximately $7.3 million, currently carries annual interest at
4.86% and is due on December 14, 2009. The forth loan, of approximately $7.3
million, currently carries annual interest at 4.86% and is due on December 17,
2009.  The fifth loan, of approximately $11.0 million, currently
carries annual interest at 5.31% and is due on January 5, 2010. Each of the loan
agreements specifically provide for acceleration of repayment of the loan, as
well as other penalties and remedies.  We also had borrowed three
short-term loans separate from our credit agreement totaling $4.0 million,
carrying annual interest from 0.29643% to 0.41286%. The first loan, of
approximately $0.32 million, carries annual interest of 0.29643% and is
repayable on May 26, 2010. The second loan, of approximately $0.68 million,
carries annual interest of 0.41286% and is repayable on June 21, 2010. The third
loan, of approximately $3.0 million, carries annual interest of 0.34786% and is
repayable on June 25, 2010. As of June 30, 2009, we also had three five-year
term loans totaling approximately $22.0 million under this credit facility
carrying interest at 90% of the benchmark rate of the PBOC for three-year to
five-year long-term loans. The first loan, of approximately $5.9 million,
currently carries annual interest of 5.832% and is due on January 25, 2012. The
second loan, of approximately $11.7 million, currently carries annual interest
of 6.237% and is due in three installments of approximately $2.9 million on
January 25, 2010, approximately $7.3 million on January 25, 2011, and
approximately $1.5 million on January 25, 2012, respectively. The third loan,
originally totaling approximately $8.8 million, currently carries annual
interest of 7.65% and was structured to be repaid in two installments. The first
installment of approximately $4.4 million was due on January 25, 2009, and was
repaid on January 20, 2009. The second installment of approximately $4.4 million
is due on January 25, 2010. These five-year term loans are specifically: (i)
guaranteed by Mr. Xiangqian Li; (ii) secured by Shenzhen BAK’s machinery and
equipment with carrying values of approximately $34.0 million as of June 30,
2009; and (iii) secured by the property ownership and land use rights
certificates with an aggregate net book value of $102.6 million as of June 30,
2009 in relation to the land on which Shenzhen BAK’s corporate campus had been
constructed and any machinery and equipment purchased and used at the campus
subsequent to such construction.





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





On
February 13, 2009, we renewed a credit facility with China CITIC
Bank.  This credit facility was guaranteed by BAK International and
Mr. Xiangqian Li.  We were permitted to borrow up to RMB 150 million
($22.0 million) under this credit facility, which matures on February 12, 2010.
During the fiscal quarter ended June 30, 2009, we had borrowed $14.6 million
under two loans at the fixed annual interest rate of 5.31% and $2.0 million
of notes payable under this credit facility totaling approximately $16.6
million.  The first loan, of approximately $7.3 million is repayable
on February 25, 2010.  The second loan, of approximately $7.3 million,
carried annual interest of 5.31% prior to May 21, 2009.  As of May 21,
2009, pursuant to a supplement agreement modifying the interest rate, this loan
carries an annual interest rate of 4.779% .  It is repayable on March
6, 2010.  We had also borrowed $6.2 million of notes payable separate
from the credit facility.


13





On March
4, 2009, we renewed our credit facility agreement with Bank of China to provide
a maximum loan amount of RMB 450 million (approximately $66.0 million). This
credit facility was guaranteed by BAK International and Mr. Xiangqian Li, and is
also secured by machinery and equipment with carrying values of approximately
$32.5 million as of June 30, 2009. As of June 30, 2009, we had borrowed
$29.3 million under three loans carrying annual interest at 5.31% and
4.779%, and $16.2 million of notes payable under this credit facility
agreement. The first loan, of approximately $14.6 million, carries annual
interest of 5.31% and is repayable on March 13, 2010. The second loan, of
approximately $7.3 million, carries annual interest of 5.31% and matures on
March 30, 2010. The third loan, of approximately $7.3 million, carries annual
interest of 4.779% and is repayable on June 2, 2010. We had also borrowed $2.2
million of notes payable separate from the credit facility.





On
December 26, 2006, we entered into a four-year long-term loan agreement of RMB
100 million (approximately $14.6 million) with Shenzhen Branch, China
Development Bank, or China Development Bank. The long-term loan is or was
repayable in three installments as follows: RMB 30 million (approximately $4.4
million) on November 20, 2008, which has been repaid; RMB 30 million
(approximately $4.4 million) on November 20, 2009; and RMB 40 million
(approximately $5.8 million) on December 26, 2010.  The long-term loan
carries an annual interest rate of 5.76%.  The long-term loan is
secured by Shenzhen BAK’s pledge of its new Research and Development Test
Centre, which is to be constructed in Shenzhen, China.  We have
committed to pledge the property ownership and land use rights certificates
relating to this property as security after the requisite government approval is
obtained, pursuant to the loan agreement.  According to the property
ownership and land use rights certificate that we obtained in relation to this
facility, such land may not be pledged without the approval of the relevant
government office.  As of June 30, 2009, we had not obtained the
requisite approval, and were in the process of negotiating with the relevant
government bureau for such approval.  For further discussion regarding
the status of property ownership rights relating to this facility, please see
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Capital Expenditures”.  The obligations of Shenzhen BAK
under the loan agreement are guaranteed by Mr. Xiangqian Li.  We had
borrowed $10.2 million under this loan agreement as of June 30,
2009.





We had
negative working capital of $41.8 million as of June 30, 2009, as compared to
working capital of $3.2 million as of September 30, 2008, an increase in
negative working capital of $45.0 million. This increase was primarily
attributable to longer credit terms we obtained from our suppliers and an
increase in short-term bank loans and long-term bank loans maturing within one
year.  We had short-term bank loans maturing in less than one year of
$135.8 million and long-term bank loans maturing within one year of $16.1
million as of June 30, 2009, or a total of $151.9 million of loans maturing
within one year, as compared to a total of $114.4 million of such loans as of
September 30, 2008, an increase of $37.5 million.  We had long-term
bank loans maturing in over one year of $39.5 million as of June 30, 2009, as
compared to $55.7 million of such loans as of September 30, 2008, a decrease of
$16.2 million.




We
believe that our current cash and cash equivalents, access to capital through
our bank loans, and anticipated cash flow from operations will be sufficient to
meet our anticipated cash needs, including our cash needs for working capital
and capital expenditures for at least the next 12 months. We may, however,
require additional cash due to changing business conditions or other future
developments, including any investments or acquisitions we may decide to pursue.
If our existing cash and amount available under existing credit facilities is
insufficient to meet our requirements, we may seek to sell additional equity
securities, debt securities or borrow from lending institutions. We can make no
assurances that financing will be available in the amounts we need or on terms
acceptable to us, if at all. The sale of additional equity securities, including
convertible debt securities, would dilute the interests of our current
stockholders. 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 stockholders. 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 $34.8 million and $34.4 million in the nine months ended
June 30, 2009 and 2008, respectively. Our capital expenditures were used
primarily to purchase plant and equipment to expand our production capacity and
construction of new factories in Tianjin, China.


14





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





Nine months ended June 30,2009
                
                2008(in thousands)Construction
      costs
                
                $
                6,000
                
                
                $
                10,404Lease
      payments
                
                $
                1,076
                
                
                $
                11,145Purchase
      of equipment
                
                $
                27,752
                
                
                $
                12,809Total
      capital expenditures
                
                $
                34,828
                
                
                $
                34,358





We
estimate that our total capital expenditures in fiscal year 2009 will reach
approximately $41.1 million, primarily to purchase manufacturing equipment for
the expansion of our production lines and construction of new factories in
Tianjin, and for the construction of our new Research and Development Test
Centre at our Shenzhen facility.





We have
completed construction of and put into use facilities measuring 218,178 square
meters comprised of manufacturing facilities, warehousing and packaging
facilities, dormitory space, dining halls and administrative offices at the BAK
Industrial Park facility in Shenzhen. Of that space, approximately 120,000
square meters are manufacturing facilities.





We have
also completed the construction of and put into use 17,867 square meters of
manufacturing facilities in Tianjin.  We are currently constructing
39,996 square meters of manufacturing and related facilities in Tianjin. Our
Tianjin plant houses our lithium-phosphate battery cell research and production
facilities. The primary reasons for our continuing investments in the facilities
in Tianjin are to realize the benefits of our prior investment in these
facilities, to position the Company to capitalize on our knowledge of and
experience with established markets for lithium-phosphate technology, such as
electric bicycles, cordless power tools and mining lamps, and to penetrate
emerging consuming markets for this technology, such as light electric vehicles
and hybrid electric vehicles. The first trial shipment of its lithium-phosphate
cells was used in electric bicycles, cordless power tools, uninterruptible power
supplies and mining lamps. We expect interest in light electric vehicles and
hybrid electric vehicles to increase demand for our rechargeable lithium-based
batteries substantially. We have been engaged in the research and development of
lithium-phosphate cells specifically for use in light electric vehicles and
hybrid electric vehicles. As indicated above, our Tianjin facility is the nexus
for all such research and development.





At
present, we have no significant payment obligations related to either our BAK
Industrial Park or Tianjin facilities.





According
to the relevant PRC laws and regulations, a land use rights certificate, along
with government approvals for land planning, project planning, and construction
must be obtained before the construction of any building is
commenced.  A property ownership certificate will be granted by the
government upon application under the condition that the land use rights
certificate and requisite government approvals are obtained.  We
recently obtained the land use rights certificate to the tract of property on
which we have constructed and on which we plan further construction of our
manufacturing facilities and other related facilities at BAK Industrial Park in
Shenzhen, China.  While we have been constructing and have completed a
substantial part of the construction of our facilities with the approval of the
local government of Kuichong Township of Longgang District of Shenzhen, we
understand it did not have the authority to grant us the land use rights
certificate.  However, we obtained approval for project planning and
construction from the government of Shenzhen on June 20, 2007. Under an
agreement with the government of Shenzhen for the acquisition of the land use
rights to BAK Industrial Park dated June 29, 2007, effective June 2008, the
government agreed to provide us with the land use rights certificate relating to
BAK Industrial Park on the condition that the Company would pay it an additional
$11,819,841.  According to a notice received from the government of
Shenzhen on June 6, 2008, the Company obtained government grants totaling
$7,889,991 to subsidize this additional payment.  As of June 30, 2009,
we had fully paid the remaining cost of $3,929,850 and had obtained the land use
rights certificate for BAK Industrial Park.





As we
have been granted the land use rights certificate to the premises presently
occupied by us in BAK Industrial Park, there should be no legal barrier for us
to obtain a property ownership certificate for this
property.  However, it is possible that the Shenzhen government may
determine that even with our land use rights certificate, the buildings
constructed at BAK Industrial Park were still constructed without the proper
authority and must be vacated as illegitimate constructions, and we might be
subject to penalties and fines.  However, we believe that this
possibility, while present, is remote.


15





On
December 15, 2008, we purchased insurance for our manufacturing facilities at
BAK Industrial Park in Shenzhen, China. Under the insurance policy entered into
with Ping An Property & Casualty Insurance Company of China, Ltd, the
insured amount for our manufacturing facilities at BAK Industrial Park is RMB
585,373,070 (approximately $85.8 million) for the period from November 26, 2008
to August 25, 2010.





We cannot
insure our manufacturing facilities in Tianjin or our new Research and
Development Test Centre to be constructed in Shenzhen, China, until we obtain
the required property ownership and land use rights
certificates.  Upon receipt of such certificates, we intend to procure
such insurance.  As discussed below, we have obtained the land use
rights to the land relating to these facilities.  The application for
a property ownership certificate is in process with respect to our facilities at
Tianjin (see discussion regarding our Research and Development Test Centre
below).





As of
June 30, 2009, we had fully paid the lease prepayment amount of $14.1 million
for the acquisition of land use rights regarding our facility in Tianjin,
China.  As of June 30, 2009, we had obtained the relevant land use
rights certificate to this facility, and were in the process of obtaining the
relevant property ownership certificate to this facility. Pursuant to our land
use rights certificate relating to our Tianjin facility, the Tianjin government
had requested that we complete construction of the Tianjin facility before
September 30, 2008. As of June 30, 2009, we had not done so, and were in the
process of negotiating with the relevant government bureau for the extension of
the completion date.





As of
June 30, 2009, we had paid the lease prepayment amount of $1.2 million for the
acquisition of land use rights for a new Research and Development Test Centre to
be constructed in Shenzhen, China.  As of June 30, 2009, we had
obtained a land use rights certificate relating to this
facility.  Pursuant to the land use rights certificate, we are
required to complete at least 25% of the construction of the new Research and
Development Test Centre facility by September 30, 2008.  As of June
30, 2009, we had not done so, and were in the process of negotiating with the
relevant government bureau for the extension of the completion
date.  In addition, according to the land use rights certificate, such
rights may not be pledged without the approval of the relevant government
office.  We are required to pledge our property ownership and land use
rights certificates in relation to the new Research and Development Test Centre
to China Development Bank pursuant to the loan agreement entered into with
it.  As of June 30, 2009, we were in the process of negotiating with
the relevant government bureau for the requisite approval. In addition, the
so-named “property ownership and land use rights certificate” that we were
issued relating to this facility lacks certain terms relating to property
ownership rights, which appears to indicate that the granting government has so
far only granted us the relevant land use rights.  As a result, this
certificate may not be adequate evidence of our property ownership rights to
this property. We anticipate that the government will grant us a certificate
with adequate property ownership indicia after we have satisfied the above
construction requirement and followed certain procedures.




Contractual
Obligations and Commercial Commitments





Please
refer to Part II, Item 7. “Management’s Discussion and Analysis of Financial
Condition and Results of Operations – Contractual Obligations and Commercial
Commitments” in the 2008 Form 10-K for a discussion of our contractual
obligations and commercial commitments
as of September 30, 2008.  There were no material
changes outside the ordinary course of our business in our contractual
obligations and commercial commitments for the quarter ended June 30,
2009.





Off-Balance
Sheet Transactions





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





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


16





Typically,
no fees are received for this service. Thus, in those transactions, Shenzhen
BAK, BAK International, BAK Tianjin, or Mr. Xiangqian Li, as applicable, 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 Financial Accounting
Standards Board, or FASB, Interpretation No. 45, “Guarantor’s Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others”. Under that standard, we would be required to recognize
the fair value of guarantees issued or modified after December 31, 2002, for
non-contingent guarantee obligations, and also a liability for contingent
guarantee obligations based on the probability that the guaranteed party will
not perform under the contractual terms of the guaranty agreement.





We have
assessed the contingent liabilities arising from the above-described guarantees
and have considered them immaterial to the financial
statements.  Therefore, no liabilities in respect of the guarantees
were recognized as of June 30, 2009. As of June 30, 2009, we provided a
guarantee for a non-related party, Nanjing Special Metal Equipment Co., Ltd., of
one-year short-term bank loans with Evergrowing Bank with a maturity of August
6, 2010.  We also provided the guarantees for four other non-related
parties, Hunan Reshine New Material Ltd, Shenzhen Tongli Hi-tech Co. Ltd.,
Shenzhen B&G Technology Development Co. Ltd., and Siping Juyuan Hanyang
Plate Heat Exchanger Co. Ltd.  The maximum amount of our exposure for
these guarantees was $19.0 million and $16.9 million at June 30, 2009 and
September 30, 2008, respectively.





Critical
Accounting Policies





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





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





Recoverability
of Long-Lived Assets





Our
business is capital intensive and has required, and will continue to require,
significant investments in property, plant and equipment.  As of June
30, 2009 and September 30, 2008, the carrying amount of property, plant and
equipment, net was $215.2 million and $195.4 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.


17





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 general and
administrative expenses.  We review outstanding account balances
individually for collectability.  Account balances are charged off
against the allowance after all means of collection have been exhausted and the
potential for recovery is considered remote.  As of June 30, 2009 and
September 30, 2008, we had not charged off any balances as we had yet to exhaust
all means of collection.





Equity-Based
Compensation





We
adopted the provisions of Statement of Financial Accounting Standards (“SFAS”)
No. 123 (Revised 2004),
“Share-Based Payment”,
or SFAS No. 123R, which requires the use of the fair value method of accounting
for equity-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 No. 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 shares of common stock and the
expected volatility, are required to determine the fair value of the
options.  If different assumptions had been used, the fair value of
the options would have been different from the amount we computed and recorded,
which would have resulted in either an increase or decrease in the compensation
expense.





Pursuant
to SFAS No. 123R, we have recognized compensation costs of $2.1 million in
relation to equity-based awards to our employees and non-employee directors in
the nine months ended June 30, 2009, as an increase in both the operating costs
and shareholder’s equity.





Changes
in Accounting Standards





In
September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements,” or SFAS
No. 157, which defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles, and expands disclosures about
fair value measurements. SFAS No. 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 No. 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007, and interim periods
within those fiscal years.  The adoption of SFAS No. 157 has no
material impact on our financial statements.





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


18





In
December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests in
Consolidated Financial Statements-an amendment of ARB No. 51,” or SFAS No.
160.  SFAS No. 160 establishes accounting and reporting standards for
the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary.  The guidance will apply to the Company’s financial
statements starting in its fiscal year beginning October 1, 2009.  We
are in the process of evaluating the impact SFAS No. 160 will have on our
financial statements upon adoption.





In
December 2007, the FASB issued SFAS No. 141 (Revised) “Business Combinations,”
or SFAS No. 141 (Revised).  SFAS No. 141 (Revised) establishes
principles and requirements for how the acquirer of a business recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree. The
statement also provides guidance for recognizing and measuring the goodwill
acquired in the business combination and determines what information to disclose
to enable users of the financial statements to evaluate the nature and financial
effects of the business combination.  The guidance will apply to the
Company starting in its fiscal year beginning October 1, 2009.  We are
in the process of evaluating the impact SFAS No. 141 (Revised) will have on our
financial statements upon adoption.





In
February 2008, the FASB issued FASB Staff Position (“FSP”) FAS
No. 157-1 “Application of FASB Statement No. 157 to FASB Statement
No. 13 and Other Accounting Pronouncements That Address Fair Value
Measurements for Purposes of Lease Classification or Measurement under Statement
13”, or FSP FAS No. 157-1. FSP FAS No. 157-1 provides a scope exception from
SFAS No. 157 for the evaluation criteria on lease classification and
capital lease measurement under SFAS No. 13, “Accounting for Leases” and
other related accounting pronouncements. Weadopted FSP FAS
No. 157-1 effective October 1, 2008. Accordingly, the provisions of SFAS
No. 157 will not be applied to lease transactions under SFAS No. 13 except
when applying SFAS No. 157 to business combinations recorded by
us.





In
February 2008, the FASB issued FSP FAS No. 157-2 “Effective Date of
FASB Statement No. 157”, or FSP FAS No. 157-2 which delays the effective date of
SFAS No. 157 to fiscal years beginning after November 15, 2008 for
certain nonfinancial assets and nonfinancial liabilities. FSP FAS No. 157-2 will
become effective for the Company on October 1, 2009. The Company is in the
process of evaluating the impact of applying FSP FAS No. 157-2 to nonfinancial
assets and liabilities measured on a nonrecurring basis. Examples of items to
which the deferral would apply include, but are not limited to:





-
            nonfinancial
      assets and nonfinancial liabilities that are measured at fair value in a
      business combination or other new basis event, except those that are
      remeasured at fair value in subsequent
periods;


-
            reporting
      units measured at fair value in the first step of a goodwill impairment
      test as described in SFAS No. 142, “Goodwill and Other Intangible
      Assets,” or “SFAS No.142,” and nonfinancial assets and nonfinancial
      liabilities measured at fair value in the SFAS No. 142 goodwill
      impairment test, if applicable; and


-
            nonfinancial
      liabilities for exit or disposal activities initially measured at fair
      value under SFAS No. 146, “Accounting for Costs Associated with Exit
      or Disposal Activities”.





As a
result of the issuance of FSP FAS No. 157-2, we have not applied the provisions
of SFAS No. 157 to the nonfinancial assets and nonfinancial liabilities
within the scope of FSP FAS No. 157-2 in the fiscal year ending
September 30, 2009.





In March
2008, the FASB issued SFAS No. 161 “Disclosures about Derivative Instruments and
Hedging Activities,” or SFAS No. 161.  SFAS No. 161 is intended to
improve financial reporting about derivative instruments and hedging activities
by requiring enhanced disclosures to enable investors to better understand their
effects on an entity’s financial position, financial performance, and cash
flows.  It is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008, with early
application encouraged.  SFAS No. 161 is not expected to have a
material impact on our financial statements.


19





In
April 2008, the FASB issued FSP FAS No. 142-3 “Determination of the
Useful Life of Intangible Assets”, or FSP FAS No. 142-3. FSP FAS No. 142-3
amends the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset
under Statement of Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets (“SFAS No. 142”). FSP FAS No. 142-3 is intended to
improve the consistency between the useful life of an intangible asset
determined under SFAS No. 142 and the period of expected cash flows used to
measure the fair value of the asset under SFAS No. 141(Revised) and other U.S.
GAAP. FSP FAS No. 142-3 is effective for fiscal years beginning after
December 15, 2008 which means that it will be effective for the Company’s
fiscal year beginning October 1, 2009. Early adoption is prohibited. We are
currently evaluating the impact of the adoption of FSP FAS No. 142-3 on our
financial statements.





In April
2009, the FASB issued FSP FAS No. 107-1 and APB No. 28-1 “Interim Disclosures
about Fair Value of Financial Instruments”, or FSP FAS No. 107-1 and APB No.
28-1. FSP FAS No. 107-1 and APB No. 28-1 amends SFAS No. 107, “Disclosures about
Fair Value of Financial Instruments,” to require disclosures about fair value of
financial instruments for interim reporting periods of publicly traded companies
as well as in annual financial statements. In addition, the FSP amends APB
Opinion No. 28, “Interim Financial Reporting,” to require those disclosures in
summarized financial information at interim reporting periods. The FSP is
effective for interim periods ending after June 15, 2009, with earlier adoption
permitted for periods ending after March 15, 2009. The adoption of FSP FAS No.
107-1 and APB No. 28-1 has no material effect on our financial
statements.





In
April 2009, the FASB issued FSP FAS No. 115-2 and FAS No. 124-2
“Recognition of Other-Than-Temporary Impairments, or FSP FAS No. 115-2 and FAS
No. 124-2. FSP FAS No. 115-2 and FAS No. 124-2 amends the other-than-temporary
impairment guidance in SFAS No. 115, Accounting for Certain Investments in Debt
and Equity Securities, for debt securities and the presentation and disclosure
requirements of other-than-temporary impairments on debt and equity securities
in the financial statements. FSP FAS No. 115-2 and FAS No. 124-2 is effective
for interim and annual reporting periods ending after June 15, 2009, with
early adoption permitted for periods ending after March 15, 2009. The
adoption of FSP FAS No. 115-2 and FAS No. 124-2 has no material effect on our
financial statements.





In April
2009, the FASB issued FSP No. 157-4 “Determining Whether a Market is Not Active
and a Transaction Is Not Distressed”, or FSP No. 157-4. FSP No. 157-4 clarifies
when markets are illiquid or when market pricing may not actually reflect the
“real” value of an asset. If a market is determined to be inactive and market
price is reflective of a distressed price then an alternative method of pricing
can be used, such as a present value technique to estimate fair value. FSP No.
157-4 identifies factors to be considered when determining whether or not a
market is inactive. FSP No. 157-4 would be effective for interim and annual
periods ending after June 15, 2009, with early adoption permitted for periods
ending after March 15, 2009 and shall be applied prospectively. The adoption of
FSP No. 157-4 has no material effect on our financial statements.





In April
2009, the FASB issued FSP No. 141R-1 “Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from Contingencies”, or
FSP No. 141R-1. FSP No. 141R-1 amends the provisions in SFAS No. 141 (Revised)
for the initial recognition and measurement, subsequent measurement and
accounting, and disclosures for assets and liabilities arising from
contingencies in business combinations. FSP No. 141R-1 eliminates the
distinction between contractual and non-contractual contingencies, including the
initial recognition and measurement criteria in SFAS No. 141 (Revised) and
instead carries forward most of the provisions in SFAS No. 141 for acquired
contingencies. FSP No. 141R-1 is effective for contingent assets and contingent
liabilities acquired in evaluating the impact of SFAS No. 141 (Revised). We are
currently evaluating the impact of the adoption of FSP No. 141R-1 on our
financial statements.





In
May 2009, the FASB issued SFAS No. 165 “Subsequent Events”, or SFAS
No. 165, which sets forth general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued. SFAS No.165 is effective after June
15, 2009. The adoption of SFAS No. 165 has no material effect on our
financial statements.





In June
2009, the FASB issued SFAS No. 166 “Accounting for Transfers of Financial Assets
– an amendment of FASB Statement No. 140”, or SFAS No. 166. SFAS No. 166
improves the relevance, representational faithfulness, and comparability of the
information that a reporting entity provides in its financial statements about a
transfer of financial assets; the effects of a transfer on its financial
position, financial performance, and cash flows; and a transferor’s continuing
involvement, if any, in transferred financial assets. SFAS No. 166 is effective
as of the beginning of each reporting entity’s first annual reporting period
that begins after November 15, 2009, for interim periods within that first
annual reporting period and for interim and annual reporting periods thereafter.
We are currently evaluating the impact of the adoption of SFAS No. 166 on our
financial statements.


20





In
June 2009, the FASB issued SFAS No. 167 “Amendments to FASB
Interpretation No. 46(R)”, or SFAS No. 167, which amends FASB
Interpretation No. 46 (revised December 2003) to address the
elimination of the concept of a qualifying special purpose entity. SFAS No. 167
also replaces the quantitative-based risks and rewards calculation for
determining which enterprise has a controlling financial interest in a variable
interest entity with an approach focused on identifying which enterprise has the
power to direct the activities of a variable interest entity and the obligation
to absorb losses of the entity or the right to receive benefits from the entity.
Additionally, SFAS No. 167 provides more timely and useful information about an
enterprise’s involvement with a variable interest entity. SFAS No. 167 shall be
effective as of the beginning of each reporting entity’s first annual reporting
period that begins after November 15, 2009, for interim periods within that
first annual reporting period, and for interim and annual reporting periods
thereafter. Earlier application is prohibited. We are currently evaluating
the impact of the adoption of SFAS No. 167 on our financial
statements.





In
June 2009, the FASB issued SFAS No. 168 “The FASB Accounting Standards
CodificationTM and the
Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB
Statement No. 162”, or SFAS No. 168, which establishes the FASB Accounting
Standards Codification as the source of authoritative accounting principles
recognized by the FASB to be applied in the preparation of financial statements
in conformity with generally accepted accounting principles. SFAS No. 168
explicitly recognizes rules and interpretive releases of the Securities and
Exchange Commission (“SEC”) under federal securities laws as authoritative GAAP
for SEC registrants. SFAS No. 168 will become effective for financial statements
issued for interim and annual periods ending after September 15, 2009. Adoption
of SFAS No. 168 is not expected to have a material effect on our financial
statements.





Exchange
Rates





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




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





RMB per U.S. Dollar2009
                    
                    2008Balance
      sheet items as of June 30
                    
                    
                    6.8307
                    
                    6.8591Amounts
      included in the statement of operations and comprehensive income,
      statement of changes in stockholders’ equity and statement of cash flows
      for the nine months ended June 30
                    
                    
                    6.8350
                    
                    7.1848Balance
      sheet items as of September 30
                    
                    
                    N/A
                    
                    6.8183





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


21





Item
      3.
            Quantitative
      and Qualitative Disclosures About Market
Risk.





Interest
Rate Risk





We are
exposed to interest rate risk primarily with respect to our short-term bank
loans and long-term bank loans. Although the interest rates, which are based on
the banks’ prime rates with respect to our short-term loans are fixed for the
terms of the loans, the terms are typically three to twelve months for
short-term bank loans and interest rates are subject to change upon renewal.
There were no material changes in interest rates for short-term bank loans
renewed during the three months ended June 30, 2009.





Please
refer to Item 2 “Management’s Discussion and Analysis of Financial Condition and
Results of Operations — Liquidity and Capital Resources — Financing Activities”
for a discussion of our credit facilities and loan agreements.





A
hypothetical 1.0% increase in the annual interest rates for all of our credit
facilities under which we had outstanding borrowings at June 30, 2009, would
increase net loss before provision for income taxes by approximately $5.2
million or 40.1% for the nine months ended June 30, 2009.  Management
monitors the banks’ prime rates in conjunction with our cash requirements to
determine the appropriate level of debt balances relative to other sources of
funds.  We have not entered into any hedging transactions in an effort
to reduce our exposure to interest rate risk.





Foreign
Exchange Risk





Although
our reporting currency is the U.S. dollar, the financial records of our
operating subsidiaries are maintained in their local currency, the RMB, which is
our functional currency.  Approximately 63.1% of our revenues and
97.3% of our costs and expenses for the nine months ended June 30, 2009 are
denominated in RMB, with the balance denominated in U.S.
dollars.  Approximately 99.3% of our assets except for cash were
denominated in RMB as of June 30, 2009.  As a result, we are exposed
to foreign exchange risk as our revenues and results of operations may be
affected by fluctuations in the exchange rate between U.S. dollars and
RMB.  If the RMB depreciates against the U.S. dollar, the value of our
RMB revenues, earnings and assets as expressed in our U.S. dollar financial
statements will decline.  Assets and liabilities of our operating
subsidiaries are translated into U.S. dollars at the exchange rate at the
balance sheet date, their equity accounts are translated at historical exchange
rates, and their income and expenses items are translated using the average rate
for the period.  Any resulting exchange differences are recorded in
accumulated other comprehensive income or loss.  An average
appreciation (depreciation) of the RMB against the U.S. dollar of 5% would
increase (decrease) our comprehensive income by $155,000  based on our
outstanding revenues, costs and expenses, assets, and liabilities denominated in
RMB as of June 30, 2009. As of June 30, 2009, our accumulated other
comprehensive income was $24.9 million.  We have not entered into any
hedging transactions in an effort to reduce our exposure to foreign exchange
risk.




Inflation
Risk




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




Item
      4.
            Controls
      and Procedures.





Disclosure
Controls and Procedures





As
required by Rule 13a-15 under the Exchange Act, our management has carried out
an evaluation, with the participation and under the supervision of our chief
executive officer and chief financial officer, of the effectiveness of the
design and operation of our disclosure controls and procedures as of June 30,
2009.  Disclosure controls and procedures refer to controls and other
procedures designed to ensure that information required to be disclosed in the
reports we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the rules and forms
of the SEC and that such information is accumulated and communicated to our
management, including our chief executive officer and chief financial officer,
as appropriate, to allow timely decisions regarding required
disclosure.  In designing and evaluating our disclosure controls and
procedures, management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management is required to apply
its judgment in evaluating and implementing possible controls and
procedures.


22


Management
conducted its evaluation of disclosure controls and procedures under the
supervision of our chief executive officer and our chief financial
officer.  Based upon, and as of the date of this evaluation, our chief
executive officer and chief financial officer concluded that our disclosure
controls and procedures were not effective, because of the material weaknesses
described in Item 9A. “Controls and Procedures” of the 2008 Form 10-K, which we
are still in the process of remediating.  Investors are directed to
Item 9A of the 2008 Form 10-K for the description of these
weaknesses.





Remediation
Measures for Material Weaknesses





We are
continuing to remediate the material weaknesses described in our 2008 Form 10-K
and implemented the new measures described below in our ongoing efforts to
address these internal control deficiencies.





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





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





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





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





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





·
            We
      provided additional training to finance managers to review any applicable
      accounting entry and time of
transfer;





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





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





Changes
in Internal Control over Financial Reporting





Other
than the remediation measures described above, there were no changes in our
internal controls over financial reporting after June 30, 2009 that have
materially affected, or are reasonably likely to materially affect our internal
control over financial reporting.


23





PART
II





OTHER
INFORMATION




Item
      1.
            Legal
      Proceedings.





Patent
Litigation





On
September 12, 2006, Hydro-Quebec, a Canadian company, and the Board of Regents
of the University of Texas System brought a federal patent infringement suit in
the United States District Court for the Northern District of Texas against
us.  We had an agreement with A123Systems, Inc., or A123Systems,
which, as amended on August 18, 2005, terminated in accordance with its terms on
August 30, 2007, under which we had agreed to manufacture products for
A123Systems according to the specifications furnished by, and using the finished
electrodes and other materials consigned by, A123Systems to us.  The
plaintiffs alleged that, by manufacturing rechargeable lithium cells for
A123Systems for use in DeWalt 36-volt cordless power tools manufactured by Black
& Decker Corporation, we had infringed two U.S. patents owned by and
exclusively licensed to the plaintiffs.  The plaintiffs seek
injunctive relief and damages in an unspecified amount.  If the court
issues an adverse decision, we may be required to pay the plaintiffs substantial
monetary damages, and we may be prohibited from future production of
rechargeable lithium cells manufactured for A123Systems or be required to pay
royalties to engage in any such production.  The court has not yet
issued a decision on this matter and we are unable to quantify the extent of any
possible award of damages that might become payable by us.




Liquidated Damages Pursuant to
September 2005 Registration Rights Agreement





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





On August
15, 2006, the SEC declared effective a post-effective amendment we filed on
August 4, 2006 to terminate the effectiveness of the resale registration
statement on Form SB-2 that included the resale of the shares held by those
selling shareholders.  Accordingly, as we were no longer eligible to
file on Form SB-2, we were required to file an additional registration statement
within 45 days after the termination of the effectiveness of the Form SB-2. On
October 11, 2006, we filed a registration statement on Form S-1 that covers
resale of the shares held by those shareholders, which was declared to be
effective on October 19, 2006.  Following the termination of the Form
SB-2, our failure to file an additional registration statement within the period
provided under the registration rights agreement triggered, for the first time,
an obligation to pay liquidated damages to the selling shareholders of 1% of the
aggregate investment amount paid by them for the shares, or $241,232, based on
the formula specified in the registration rights agreement.  Because
the Form S-1 was filed by the one-month anniversary of the applicable filing
date, the event was cured and no additional liquidated damages were incurred. We
previously reported in our Annual Report on Form 10-K for the fiscal year ended
September 30, 2006, or the 2006 Form 10-K, and in our Quarterly Report on Form
10-Q for the quarter ended December 31, 2006, or the 12/31/06 Form 10-Q, that
liquidated damages totaling $487,946 were due from us in respect of such event
based on an incorrect interpretation of the liquidated damages due under the
registration rights agreement.  Among other things, the amount was
calculated on a pro rata daily basis although the event, the first under the
registration rights agreement, was cured by its one-month anniversary
date.


24





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





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




Liquidated Damages Pursuant to
November 2007 Registration Rights Agreement





During
the nine months ended June 30, 2009, we were initially liable for liquidated
damages to a shareholder whose shares were required to be included in a resale
registration statement on Form S-3 that we filed pursuant to a registration
rights agreement that we entered into with this shareholder and certain other
investors in November 2007. Under the registration rights agreement, among other
things, if a registration statement filed pursuant thereto has not been declared
effective by the SEC by the 100th calendar day after the closing of our private
placement on November 9, 2007, or the Effectiveness Deadline, then we would be
liable to pay partial liquidated damages to each investor of (a) 1.5% of the
aggregate purchase price paid by such investor for the shares it purchased in
our November 2007 private placement on the one-month anniversary of the
Effectiveness Deadline; (b) an additional 1.5% of the aggregate purchase price
paid by such investor every thirtieth day thereafter (prorated for periods
totaling less than thirty days) until the earliest of the effectiveness of the
registration statement, the ten-month anniversary of the Effectiveness Deadline,
and the time that we are no longer required to keep such resale registration
statement effective because either the investors have sold all of their shares
or the investors may sell their shares pursuant to Rule 144 without volume
limitations; and (c) 0.5% of the aggregate purchase price paid by each investor
for the shares it purchased in our November 2007 private placement on the
ten-month anniversary of the Effectiveness Deadline and every thirtieth day
thereafter (pro-rated for periods totaling less than thirty days), until the
earlier of the effectiveness of the registration statement and the time that we
are no longer required to keep such resale registration statement effective
because either the investors have sold all of their shares or the investors may
sell their shares pursuant to Rule 144 without volume
limitations.  Such liquidated damages would bear interest at the rate
of 1% per month (prorated for partial months) until paid in full.





On
December 21, 2007, pursuant to the registration rights agreement, we filed a
registration statement on Form S-3, which was declared effective by the SEC on
May 7, 2008.  The lateness of this filing triggered liquidated damages
consistent with the formula described above.  On August 26, 2008, we
conducted a registered direct offering of 4,102,564 shares of common stock, at
an offering price of $3.90 per share, in which the investors also received
warrants to purchase up to 4,102,564 shares of common stock at an exercise price
of $3.90 per share.  With one exception, all of the investors that
participated in our November 2007 private placement, or persons controlling
them, participated in our August 2008 registered direct offering.  We
reduced each of these investors’ (or each such investor’s participating
affiliate’s) purchase price by an amount that was at least equal to the amount
that we determined that we were liable for as liquidated damages to such
investor (or its participating affiliate).  As of June 30, 2009, the
remaining investor had waived any and all rights relating to liquidated damages
pursuant to the November 2007 registration rights agreement.


25





Make-Good
Settlements





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





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





Item
      1A.
            Risk
      Factors.





See Part
I, Item 1A. “Risk Factors” included in our 2008 Form 10-K, and Part II, Item 1A.
“Risk Factors” included in our Quarterly Report on Form 10-Q for the fiscal
period ended December 31, 2008.





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.





On May
22, 2009, our 2009 annual meeting of stockholders was held. Proxies for the
meeting were solicited pursuant to Regulation 14A under the Securities Act of
1933, as amended. At the meeting, the matters brought for stockholder vote were:
(1) To elect five persons to the Board of Directors of the Company, each to
serve until the next annual meeting of stockholders of the Company or until such
person shall resign, be removed or otherwise leave office, and (2) To ratify the
selection by the Audit Committee of PKF as the Company’s independent registered
public accounting firm for the fiscal year ending September 30,
2009.  No other business was brought before the meeting. Stockholder
votes that were cast for, against or withheld, as well as the number of
abstentions and broker non-votes as to each director nominee were as
follows:





Name of Director
                  
                  For
                  
                  
                  WithheldXiangqian
      Li
                  
                  
                  44,575,174
                  
                  
                  
                  2,093,370Huanyu
      Mao
                  
                  
                  44,486,883
                  
                  
                  
                  2,151,661Chunzhi
      Zhang
                  
                  
                  42,319,983
                  
                  
                  
                  4,348,561Charlene
      Spoede Budd
                  
                  
                  42,300,186
                  
                  
                  
                  4,368,358Richard
      B. Goodner
                  
                  
                  42,323,058
                  
                  
                  
                  4,345,486





There
were 48,961,179 votes for, 391,827 votes against, and 43,835 abstentions cast to
ratify the selection by the Audit Committee of PKF as the Company’s independent
registered public accounting firm for the fiscal year ending September 30,
2009.


26





Item
      5.
            Other
      Information.





The
following are recent developments:





On April
26, 2009, we entered into a Comprehensive Credit Facility Agreement of Maximum
Amount with Bank of Communications to provide a maximum loan amount of RMB 200
million (approximately $29.3 million).  Loans may be drawn at any time
from March 25, 2009 to March 25, 2010.  The interest rate of any loan
drawn under this facility will be determined on a loan-by-loan
basis.  This credit facility agreement is guaranteed by us and Mr.
Xiangqian Li under separate agreements.  As of June 30, 2009, we had
borrowed approximately $7.3 million under a loan agreement dated June 23, 2009
under this credit facility agreement, bearing fixed interest of 4.779%, and
which is repayable on June 23, 2010.  In the event that we breach this
credit facility agreement, Bank of Communications may, among other things,
accelerate the repayment of any outstanding loan.  As of June 30,
2009, we had entered into one loan under this facility, dated June 22, 2009,
with a similar repayment acceleration term.  Copies of summaries of
the comprehensive credit facility agreement, loan agreement, and guaranties are
included as Exhibits 10.1 to 10.4 to this Report and are hereby incorporated by
reference herein.





We
entered into a loan agreement with Bank of China on June 2, 2009 to borrow
approximately $7.3 million under our credit facility agreement, bearing annual
interest of 4.779% and is repayable on June 2, 2010.  In the event
that we breach this loan agreement, Bank of China may, among other things,
accelerate the repayment of the loan.  A copy of a summary of this
loan agreement is included as Exhibit 10.5 to this Report and is hereby
incorporated by reference herein.





We
entered into a standalone loan agreement with Agricultural Bank – Shenzhen
Branch on May 26, 2009 to borrow approximately $7.3 million, bearing annual
interest of 0.29643% and is repayable on May 26, 2010.  In the event
that we breach this loan agreement, Agricultural Bank – Shenzhen Branch may,
among other things, accelerate the repayment of the loan.  This loan
agreement is guaranteed by our subsidiary, Shenzhen BAK Battery Co., Ltd. up to
approximately $317,000 under a separate agreement.  In the event that
we breach the guaranty, Agricultural Bank – Shenzhen Branch may impose a penalty
charge equal to 50% of the amount secured.  Copies of summaries of
this loan agreement and the related guarantee are included as Exhibits 10.6 and
10.7 to this Report and are hereby incorporated by reference
herein.





We
entered into an additional standalone loan agreement with Agricultural Bank –
Shenzhen Branch on June 15, 2009 to borrow approximately $7.3 million, bearing
annual interest of 4.86%, adjusted quarterly.  It is repayable on
December 15, 2009.  In the event that we breach this loan agreement,
Agricultural Bank – Shenzhen Branch may, among other things, accelerate the
repayment of the loan.  A copy of a summary of this loan agreement is
included as Exhibits 10.8 to this Report and is hereby incorporated by reference
herein.





We
entered into an additional standalone loan agreement with Agricultural Bank –
Shenzhen Branch on June 18, 2009 to borrow approximately $7.3 million, bearing
annual interest of 4.86%, adjusted quarterly.  It is repayable on
December 18, 2009.  In the event that we breach this loan agreement,
Agricultural Bank – Shenzhen Branch may, among other things, accelerate the
repayment of the loan.  A copy of a summary of this loan agreement is
included as Exhibits 10.9 to this Report and is hereby incorporated by reference
herein.





We
entered into an additional standalone loan agreement with Agricultural Bank –
Shenzhen Branch on June 22, 2009 to borrow approximately $676,000, bearing
annual interest of 0.41286%.  It is repayable on June 22,
2010.  In the event that we breach this loan agreement, Agricultural
Bank – Shenzhen Branch may, among other things, accelerate the repayment of the
loan.  This loan agreement is guaranteed by our subsidiary, Shenzhen
BAK Battery Co., Ltd. up to approximately $666,000 under a separate
agreement.  In the event that we breach the guaranty, Agricultural
Bank – Shenzhen Branch may impose a penalty charge equal to 30% of the amount
secured.  Copies of summaries of this loan agreement and the related
guarantee are included as Exhibits 10.10 and 10.11 to this Report and are hereby
incorporated by reference herein.





We
entered into an additional standalone loan agreement with Agricultural Bank –
Shenzhen Branch on June 26, 2009 to borrow approximately $3 million, bearing
annual interest of 0.34786%.  It is repayable on June 25,
2010.  In the event that we breach this loan agreement, Agricultural
Bank – Shenzhen Branch may, among other things, accelerate the repayment of the
loan.  This loan agreement is guaranteed by our subsidiary, Shenzhen
BAK Battery Co., Ltd. up to approximately $3 million under a separate
agreement.  In the event that we breach the guaranty, Agricultural
Bank – Shenzhen Branch may impose a penalty charge equal to 30% of the amount
secured.  Copies of summaries of this loan agreement and the related
guarantee are included as Exhibits 10.12 and 10.13 to this Report and are hereby
incorporated by reference herein.


27





We
entered into a supplemental agreement with China CITIC Bank on May 21, 2009 to
modify the interest rate of our loan agreement dated March 6, 2009 from 5.31% to
4.779%.  A copy of a summary of this supplemental agreement is
included as Exhibit 10.14 to this Report and is hereby incorporated by reference
herein.





Item
      6.
            Exhibits.





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





Exhibit No.
                                                    
                                                    Description3.1
                                                    
                                                    Articles
      of Incorporation of the Registrant (incorporated by reference to Exhibit
      3.1 to the Registrant’s Annual Report on Form 10-K for the fiscal year
      ended September 30, 2006).3.2
                                                    
                                                    Bylaws
      of the Registrant (incorporated by reference to Exhibit 3.2 to the
      Registrant’s Annual Report on Form 10-K for the fiscal year ended
      September 30, 2007).10.1
                                                    
                                                    Comprehensive
      Credit Facility Agreement of Maximum Amount by and between Shenzhen BAK
      Battery Co., Ltd. and Shenzhen Caitian Branch, Bank of Communications,
      dated April 26, 200910.2
                                                    
                                                    Summary
      of Loan Agreement by and between Shenzhen BAK Battery Co., Ltd. and
      Shenzhen Caitian Branch, Bank of Communications, dated June 22,
      200910.3
                                                    
                                                    Summary
      of Guaranty Contract of Maximum Amount by and between Xiangqian Li and
      Shenzhen Caitian Branch, Bank of Communications, dated April 26,
      200910.4
                                                    
                                                    Summary
      of Guaranty Contract of Maximum Amount by and between BAK International
      (Tianjin) Limited and Shenzhen Caitian Branch, Bank of Communications,
      dated April 26, 200910.5
                                                    
                                                    Summary
      of Loan Agreement by and between Shenzhen BAK Battery Co., Ltd. and
      Shenzhen Branch, Bank of China, dated June 2, 200910.6
                                                    
                                                    Summary
      of Loan Agreement by and between Shenzhen BAK Battery Co., Ltd. and
      Shenzhen Eastern Branch, Agricultural Bank of China, dated May 26,
      200910.7
                                                    
                                                    Summary
      of Chattel Mortgage Contract by and between Shenzhen BAK Battery Co., Ltd.
      and Shenzhen Eastern Branch, Agricultural Bank of China, dated May 26,
      200910.8
                                                    
                                                    Summary
      of Loan Agreement by and between Shenzhen BAK Battery Co., Ltd. and
      Shenzhen Eastern Branch, Agricultural Bank of China, dated June 15,
      200910.9
                                                    
                                                    Summary
      of Loan Agreement by and between Shenzhen BAK Battery Co., Ltd. and
      Shenzhen Eastern Branch, Agricultural Bank of China, dated June 18,
      200910.10
                                                    
                                                    Summary
      of Loan Agreement by and between Shenzhen BAK Battery Co., Ltd. and
      Shenzhen Eastern Branch, Agricultural Bank of China, dated June 22,
      200910.11
                                                    
                                                    Summary
      of Chattel Mortgage Contract Mortgage Contract by and between Shenzhen BAK
      Battery Co., Ltd. and Shenzhen Eastern Branch, Agricultural Bank of China,
      dated June 22, 200910.12
                                                    
                                                    Summary
      of Loan Agreement by and between Shenzhen BAK Battery Co., Ltd. and
      Shenzhen Eastern Branch, Agricultural Bank of China, dated June 26,
      200910.13
                                                    
                                                    Summary
      of Chattel Mortgage Contract by and between Shenzhen BAK Battery Co., Ltd.
      and Shenzhen Eastern Branch, Agricultural Bank of China, dated June 26,
      200910.14
                                                    
                                                    Supplemental
      Agreement by and between Shenzhen BAK Battery Co., Ltd. and Shenzhen
      Branch, China CITIC Bank Co. Ltd., dated May 21, 200931.1
                                                    
                                                    Certifications
      of Principal Executive Officer filed pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200231.2
                                                    
                                                    Certifications
      of Principal Financial Officer filed pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200232.1
                                                    
                                                    Chief
      Executive Officer and Chief Financial Officer Certifications furnished
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002




28





SIGNATURES





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





Date:
      August 7, 2009
                    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)