**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 March 31, 2008****OR**o
            **Transition
                Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
                of 1934****For
                the transition period from _________ to
                _________**





**Commission
      File Number: 001-32898**







**China
      BAK Battery, Inc.**


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







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





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





**(86 755) 897-70093**


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







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





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





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





Indicate
      the number of shares outstanding of each of the issuer’s classes of common
      stock, as of the latest practicable date:  53,227,387 shares of common
      stock, par value $0.001 per share, outstanding on May 9, 2008.










**TABLE
      OF CONTENTS**


Introductory
      Comments





PART I —
            FINANCIAL
                INFORMATION
            F-1Item 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
            17Item 4.
                Controls and Procedures
            17PART II —
            OTHER
                INFORMATION
            18Item 1. 
                Legal Proceedings
            18Item 1A. 
                Risk Factors
            20Item 2. 
                Unregistered Sales of Equity Securities and Use of
                Proceeds
            20Item 3. 
                Defaults Upon Senior Securities
            20Item 4. 
                Submission of Matters to a Vote of Security Holders
            20Item 5. 
                Other Information
            20Item 6. 
                Exhibits
            21


i




**Introductory
      Comments**





***Terminology***





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





***Forward-Looking
      Statements***





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





—
            our
                anticipated growth strategies and our ability to manage the expansion
                of
                our business operations effectively;—
            our
                future business development, results of operations and financial
                condition;—
            our
                ability to fund our operations and manage our substantial short-term
                indebtedness;—
            our
                ability to maintain or increase our market share in the competitive
                markets in which we do business;—
            our
                limited operating history in developing, manufacturing and selling
                of
                lithium-based rechargeable battery cells;—
            our
                ability to keep up with rapidly changing technologies and evolving
                industry standards, including our ability to achieve technological
                advances;—
            our
                dependence on the growth in demand for the portable electronic devices
                that are powered by our products;—
            our
                ability to diversify our product offering and capture new market
                opportunities;—
            our
                ability to obtain original equipment manufacturer (“OEM”) qualifications
                from brand names;—
            our
                ability to source our needs for skilled labor, machinery and raw
                materials
                economically;—
            our
                ability to secure raw materials in the future and to manage the costs
                of
                raw materials or to secure alternative or substitute raw
                materials;—
            uncertainties
                with respect to the PRC legal and regulatory
                environment;—
            our
                ability to remediate any material weaknesses in our internal control
                over
                financial reporting;


ii





—
            our
                ability to maintain cost leadership;—
            our
                ability to acquire land use rights to our facilities;
                and—
            other
                risks identified in this Report and in our other reports filed with
                the
                SEC.





Additional
      disclosures regarding factors that could cause our results and performance
      to
      differ from results or performance anticipated by this Report are discussed
      in
      other reports that we filed with the SEC, including without limitation our
      Annual Report on Form 10-K for the fiscal year ended September 30, 2007. Readers
      are urged to carefully review and consider the various disclosures made by
      us in
      this Report and our other filings with the SEC. These reports attempt to advise
      interested parties of the risks and factors that may affect our business,
      financial condition and results of operations and prospects. The forward-looking
      statements made in this Report speak only as of the date hereof and we disclaim
      any obligation to provide updates, revisions or amendments to any
      forward-looking statements to reflect changes in our expectations or future
      events.





***Where
      You Can Find Additional Information***





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





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


iii


**PART
      I — FINANCIAL INFORMATION**


**Item 1. 
      Financial Statements**




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


**Condensed
      interim consolidated balance sheets**


**As
      of September 30, 2007 and March 31, 2008**




(In
      U.S.
      dollars)





*September 30,*
            
            *March 31,**Note*
            
            *2007*
            
            *2008*(Audited)
            
            (Unaudited)**Assets***Current
                assets*Cash
                and cash equivalents
            
            
            
            
            $
            14,196,513
            
            $
            36,883,488Pledged
                deposits
            
            
            2
            
            
            4,594,727
            
            
            4,357,431Trade
                accounts receivable, net
            
            
            3
            
            
            63,150,872
            
            
            78,933,868Inventories
            
            
            4
            
            
            59,827,232
            
            
            68,161,763Prepayments
                and other receivables
            
            
            5
            
            
            1,656,494
            
            
            7,993,240Deferred
                tax assets
            
            
            
            
            
            502,916
            
            
            795,384Total
                current assets
            
            
            
            
            
            143,928,754
            
            
            197,125,174Property,
                plant and equipment, net
            
            
            6
            
            
            145,123,022
            
            
            167,906,273Lease
                prepayments, net
            
            
            
            
            
            17,884,436
            
            
            18,959,498Intangible
                assets, net
            
            
            
            
            
            121,038
            
            
            142,435Deferred
                tax assets
            
            
            
            
            
            171,774
            
            
            -Total
                assets
            
            
            
            
            $
            307,229,024
            
            $
            384,133,380





See
      accompanying notes to the condensed interim consolidated financial
      statements.


F-1




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


**Condensed
      interim consolidated balance sheets**


**As
      of September 30, 2007 and March 31, 2008 (continued)**




(In
      U.S.
      dollars)




*September 30,*
            
            *March 31,**Note*
            
            *2007*
            
            *2008*(Audited)
            
            (Unaudited)**Liabilities***Current
                liabilities*Short-term
                bank loans
            
            
            7
            
            $
            89,870,586
            
            $
            116,825,759Current
                maturities of long-term bank loans
            
            
            8
            
            
            -
            
            
            8,548,226Accounts
                and bills payable
            
            
            
            
            
            45,588,583
            
            
            63,235,749Accrued
                expenses and other payables
            
            
            
            
            
            15,467,192
            
            
            18,483,165Total
                current liabilities
            
            
            
            
            
            150,926,361
            
            
            207,092,899Long-term
                bank loans, less current maturities
            
            
            8
            
            
            29,291,154
            
            
            31,343,496Deferred
                tax liabilities
            
            
            
            
            
            279,597
            
            
            292,197Total
                liabilities
            
            
            
            
            
            180,497,112
            
            
            238,728,592Commitments
                and contingencies
            
            
            11**Shareholders’
                equity**Ordinary
                shares
                US$ 0.001 par value; 100,000,000 authorized; 49,250,853 and 53,223,633
                issued and outstanding as of September 30, 2007 and March 31, 2008
                respectively
            
            
            
            
            
            49,251
            
            
            53,223Donated
                shares
            
            
            
            
            
            7,955,358
            
            
            14,101,689Additional
                paid-in capital
            
            
            
            
            
            66,355,151
            
            
            80,704,832Statutory
                reserves
            
            
            
            
            
            6,426,977
            
            
            6,516,559Retained
                earnings
            
            
            
            
            
            36,060,426
            
            
            28,846,552Accumulated
                other comprehensive income
            
            
            
            
            
            9,884,749
            
            
            20,018,583126,731,912
            
            
            150,241,438Less:
                Treasury shares
            
            
            
            
            
            -
            
            
            (4,836,650
            )Total
                shareholders’ equity
            
            
            
            
            
            126,731,912
            
            
            145,404,788Total
                liabilities and shareholders’ equity
            
            
            
            
            $
            307,229,024
            
            $
            384,133,380





See
      accompanying notes to the condensed interim consolidated financial
      statements.




F-2




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


**Condensed
      interim consolidated statements of operations**


**and
      comprehensive income**


**For
      the three months ended March 31, 2007 and 2008**


(Unaudited)


(In
      U.S.
      dollars)





*Three months ended March 31,**2007*
            
            *2008*Net
                revenues
            
            $
            29,528,846
            
            $
            51,335,511Cost
                of revenues
            
            
            (23,382,523
            )
            
            (47,420,664
            )Gross
                profit
            
            
            6,146,323
            
            
            3,914,847Operating
                expenses:Research
                and development costs
            
            
            (928,443
            )
            
            (1,390,180
            )Sales
                and marketing expenses
            
            
            (1,064,497
            )
            
            (1,403,033
            )General
                and administrative expenses
            
            
            (2,151,675
            )
            
            (4,822,795
            )Total
                operating expenses
            
            
            (4,144,615
            )
            
            (7,616,008
            )Operating
                income / (loss)
            
            
            2,001,708
            
            
            (3,701,161
            )Finance
                costs, net
            
            
            (1,163,828
            )
            
            (2,418,802
            )Government
                grant income
            
            
            -
            
            
            137,020Other
                expense
            
            
            (240,135
            )
            
            (81,475
            )Income
                / (loss) before income taxes
            
            
            597,745
            
            
            (6,064,418
            )Income
                taxes
            
            
            (158,018
            )
            
            (119,339
            )Net
                income / (loss)
            
            $
            439,727
            
            $
            (6,183,757
            )Other
                comprehensive income-
                Foreign currency translation adjustment
            
            
            1,149,688
            
            
            6,364,241Comprehensive
                income
            
            $
            1,589,415
            
            $
            180,484Net
                income/(loss) per share:-Basic
            
            $
            0.01
            
            $
            (0.12
            )-Diluted
            
            $
            0.01
            
            $
            (0.12
            )Weighted
                average number of ordinary shares:-Basic
            
            
            48,889,438
            
            
            52,132,918-Diluted
            
            
            49,419,102
            
            
            52,132,918





See
      accompanying notes to the condensed interim consolidated financial
      statements.


F-3





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


**Condensed
      interim consolidated statements of operations**


**and
      comprehensive income**


**For
      the six months ended March 31, 2007 and 2008**


(Unaudited)


(In
      U.S.
      dollars)





*Six months ended March 31,**Note*
            
            *2007*
            
            *2008*Net
                revenues
            
            
            13
            
            $
            72,610,999
            
            $
            104,122,986Cost
                of revenues
            
            
            
            
            
            (58,268,122
            )
            
            (93,102,409
            )Gross
                profit
            
            
            
            
            
            14,342,877
            
            
            11,020,577Operating
                expenses:Research
                and development costs
            
            
            
            
            
            (1,565,357
            )
            
            (2,709,343
            )Sales
                and marketing expenses
            
            
            
            
            
            (2,106,913
            )
            
            (2,750,910
            )General
                and administrative expenses
            
            
            
            
            
            (5,112,649
            )
            
            (9,060,830
            )Total
                operating expenses
            
            
            
            
            
            (8,784,919
            )
            
            (14,521,083
            )Operating
                income / (loss)
            
            
            
            
            
            5,557,958
            
            
            (3,500,506
            )Finance
                costs, net
            
            
            
            
            
            (2,064,660
            )
            
            (4,642,279
            )Government
                grant income
            
            
            
            
            
            762,267
            
            
            1,038,364Other
                expense
            
            
            
            
            
            (70,328
            )
            
            (39,591
            )Income
                / (loss) before income taxes
            
            
            
            
            
            4,185,237
            
            
            (7,144,012
            )Income
                taxes
            
            
            
            
            
            (162,758
            )
            
            19,720Net
                income / (loss)
            
            
            
            
            $
            4,022,479
            
            $
            (7,124,292
            )Other
                comprehensive income-
                Foreign currency translation adjustment
            
            
            
            
            
            2,694,472
            
            
            10,133,834Comprehensive
                income
            
            
            
            
            $
            6,716,951
            
            $
            3,009,542Net
                income/(loss) per share:
            
            
            10-Basic
            
            
            
            
            $
            0.08
            
            $
            (0.14
            )-Diluted
            
            
            
            
            $
            0.08
            
            $
            (0.14
            )Weighted
                average number of ordinary shares:-Basic
            
            
            
            
            
            48,887,647
            
            
            51,229,322-Diluted
            
            
            
            
            
            49,074,049
            
            
            51,229,322





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 six months ended March 31, 2007 and 2008**


(Unaudited)




Accumulated
              
              
              
              
              
              TotalOrdinary shares
              
              
              
              
              
              
              
              
              
              other
              
              Treasury shares
              
              share-Number
                  of
              
              
              
              Donated
              
              Additional
              
              Statutory
              
              Retained
              
              comprehensive
              
              Number
                  of
              
              
              
              holders’shares
              
              Amount
              
              shares
              
              paid-in capital
              
              reserves
              
              earnings
              
              income
              
              shares
              
              Amount
              
              equityBalance
                  as of October 1, 2006
              
              
              48,885,896
              
              $
              48,886
              
              $
              -
              
              $
              68,126,689
              
              $
              5,791,718
              
              $
              36,212,357
              
              $
              3,448,379
              
              
              -
              
              $
              -
              
              $
              113,628,029Net
                  income
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              4,022,479
              
              
              -
              
              
              -
              
              
              -
              
              
              4,022,4792006
                  escrow shares donated by Mr. Xiangqian Li and released to
                  investors
              
              
              -
              
              
              -
              
              
              7,955,358
              
              
              (7,955,358
              )
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Share-based
                  compensation for employee stock option awards
              
              
              -
              
              
              -
              
              
              -
              
              
              291,398
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              291,398Issuance
                  of 914,994 shares of restricted stocks and reclassification of
                  liability-classified awards
              
              
              -
              
              
              -
              
              
              -
              
              
              3,679,934
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              3,679,934Share-based
                  compensation for common stock granted to employees and non-employee
                  directors
              
              
              -
              
              
              -
              
              
              -
              
              
              522,116
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              522,116Issuance
                  of common stock to non-employee directors
              
              
              7,500
              
              
              7
              
              
              -
              
              
              (7
              )
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Appropriation
                  to statutory reserves
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              681,904
              
              
              (681,904
              )
              
              -
              
              
              -
              
              
              -
              
              
              -Foreign
                  currency translation adjustment
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              2,694,472
              
              
              -
              
              
              -
              
              
              2,694,472Balance
                  as of March 31, 2007
              
              
              48,893,396
              
              $
              48,893
              
              $
              7,955,358
              
              $
              64,664,772
              
              $
              6,473,622
              
              $
              39,552,932
              
              $
              6,142,851
              
              
              -
              
              $
              -
              
              $
              124,838,428Balance
                  as of October 1, 2007
              
              
              49,250,853
              
              $
              49,251
              
              $
              7,955,358
              
              $
              66,355,151
              
              $
              6,426,977
              
              $
              36,060,426
              
              $
              9,884,749
              
              
              -
              
              $
              -
              
              $
              126,731,9122005
                  escrow shares donated by Mr. Xiangqian Li
              
              
              -
              
              
              -
              
              
              6,146,331
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (1,089,775
              )
              
              (6,146,331
              )
              
              -2005
                  escrow shares settlement
              
              
              -
              
              
              -
              
              
              -
              
              
              (1,309,681
              )
              
              -
              
              
              -
              
              
              -
              
              
              232,213
              
              
              1,309,681
              
              
              -Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (7,124,292
              )
              
              -
              
              
              -
              
              
              -
              
              
              (7,124,292
              )Share-based
                  compensation for employee stock awards
              
              
              -
              
              
              -
              
              
              -
              
              
              1,657,387
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,657,387Exercise
                  of stock options awards
              
              
              200,000
              
              
              200
              
              
              -
              
              
              1,249,800
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              1,250,000Issuance
                  of common stock to employees
              
              
              265,280
              
              
              265
              
              
              -
              
              
              (265
              )
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Issuance
                  of common stock to non-employee directors
              
              
              7,500
              
              
              7
              
              
              -
              
              
              (7
              )
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Issuance
                  of new common stock
              
              
              3,500,000
              
              
              3,500
              
              
              -
              
              
              12,752,447
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              12,755,947Appropriation
                  to statutory reserves
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              89,582
              
              
              (89,582
              )
              
              -
              
              
              -
              
              
              -
              
              
              -Foreign
                  currency translation adjustment
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              10,133,834
              
              
              -
              
              
              -
              
              
              10,133,834Balance
                  as of March 31, 2008
              
              
              53,223,633
              
              $
              53,223
              
              $
              14,101,689
              
              $
              80,704,832
              
              $
              6,516,559
              
              $
              28,846,552
              
              $
              20,018,583
              
              
              (857,562
              )
              $
              (4,836,650
              )
              $
              145,404,788
 
 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 March 31, 2007 and 2008**


(Unaudited)


(In
      U.S.
      dollars)




*Three
                months ended March 31,**2007*
            
            *2008***Cash
                flow from operating activities**Net
                income / (loss)
            
            $
            439,727
            
            $
            (6,183,757
            )Adjustments
                to reconcile net income/(loss) to net cash provided by / (used in)
                operating activities:Depreciation
                and amortization
            
            
            2,211,399
            
            
            3,235,624(Recovery)
                / addition of bad debt expense
            
            
            (850,888
            )
            
            165,691Provision
                for obsolete inventories
            
            
            -
            
            
            16,215Share-based
                compensation
            
            
            605,828
            
            
            815,053Deferred
                income taxes
            
            
            59,864
            
            
            118,302Loss
                of disposal of property, plant and equipment
            
            
            -
            
            
            189,694Exchange
                loss
            
            
            -
            
            
            770,949Changes
                in operating assets and liabilities:Trade
                accounts receivable
            
            
            12,805,112
            
            
            (4,872,518
            )Inventories
            
            
            (9,744,361
            )
            
            (2,912,677
            )Prepayments
                and other receivables
            
            
            (107,265
            )
            
            5,623,293Accounts
                and bills payable
            
            
            4,960,036
            
            
            1,727,379Accrued
                expenses and other payables
            
            
            (2,874,543
            )
            
            (217,032
            )Net
                cash provided by / (used in) operating activities
            
            
            7,504,909
            
            
            (1,523,784
            )**Cash
                flow from investing activities**Purchases
                of property, plant and equipment
            
            
            (10,333,935
            )
            
            (7,386,168
            )Payment
                of lease prepayment
            
            
            (13,024,026
            )
            
            -Purchases
                of intangible assets
            
            
            -
            
            
            (43,634
            )Proceeds
                from disposal of property, plant and equipment
            
            
            -
            
            
            321,353Net
                cash used in investing activities
            
            $
            (23,357,961
            )
            $
            (7,108,449
            )





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 March 31, 2007 and 2008 (continued)**


(Unaudited)


(In
      U.S.
      dollars)




*Three
                months ended March 31,**2007*
            
            *2008***Cash
                flow from financing activities**Proceeds
                from borrowings
            
            $
            37,347,228
            
            $
            10,416,572Repayment
                of borrowings
            
            
            (32,970,443
            )
            
            (492,636
            )Decrease
                / (increase) in pledged deposits
            
            
            570,892
            
            
            (329,463
            )Net
                cash provided by financing activities
            
            
            4,947,677
            
            
            9,594,473**Effect
                of exchange rate changes on cash and cash
                equivalents**
            
            
            **381,379**
            
            
            **2,396,789****Net
                (decrease) / increase in cash and cash
                equivalents**
            
            
            **(10,523,996**
            **)**
            
            **3,359,029****Cash
                and cash equivalents at the beginning of period**
            
            
            **25,363,580**
            
            
            **33,524,459****Cash
                and cash equivalents at the end of period**
            
            **$**
            **14,839,584**
            
            **$**
            **36,883,488****Supplemental
                disclosure of cash flow information:**Cash
                received during the period for:Bills
                receivable discounted to bank
            
            $
            2,566,265
            
            $
            2,980,249Cash
                paid during the period for:Income
                taxes
            
            $
            27,832
            
            $
            -Interest,
                net of amounts capitalized
            
            $
            1,320,032
            
            $
            2,425,156**Non-cash
                movements affecting financing transactions:**2005
                escrow shares settlement
            
            $
            -
            
            $
            1,309,681





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 six months ended March 31, 2007 and 2008**


(Unaudited)


(In
      U.S.
      dollars)




*Six
                months ended March 31,**2007*
            
            *2008***Cash
                flow from operating activities**Net
                income / (loss)
            
            $
            4,022,479
            
            $
            (7,124,292
            )Adjustments
                to reconcile net income/(loss) to net cash provided by / (used in)
                operating activities:Depreciation
                and amortization
            
            
            4,257,216
            
            
            6,017,921(Recovery)
                / addition of bad debt expense
            
            
            (365,481
            )
            
            1,367,967Provision
                for obsolete inventories
            
            
            -
            
            
            95,432Share-based
                compensation
            
            
            868,283
            
            
            1,657,387Deferred
                income taxes
            
            
            (10,539
            )
            
            (77,335
            )Loss
                of disposal of property, plant and equipment
            
            
            -
            
            
            189,694Exchange
                loss
            
            
            -
            
            
            770,949Changes
                in operating assets and liabilities:Trade
                accounts receivable
            
            
            9,607,403
            
            
            (12,031,766
            )Inventories
            
            
            (5,990,262
            )
            
            (4,032,481
            )Prepayments
                and other receivables
            
            
            145,507
            
            
            (5,990,481
            )Accounts
                and bills payable
            
            
            (6,802,159
            )
            
            12,150,528Accrued
                expenses and other payables
            
            
            (382,939
            )
            
            794,927Net
                cash provided by / (used in) operating activities
            
            
            5,349,508
            
            
            (6,211,550
            )**Cash
                flow from investing activities**Purchases
                of property, plant and equipment
            
            
            (22,886,409
            )
            
            (16,544,890
            )Payment
                of lease prepayment
            
            
            (13,664,337
            )
            
            (20,983
            )Purchases
                of intangible assets
            
            
            (4,759
            )
            
            (75,036
            )Proceeds
                from disposal of property, plant and equipment
            
            
            -
            
            
            321,353Net
                cash used in investing activities
            
            $
            (36,555,505
            )
            $
            (16,319,556
            )





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 six months ended March 31, 2007 and 2008 (continued)**


(Unaudited)


(In
      U.S.
      dollars)




*Six
                months ended March 31,**2007*
            
            *2008***Cash
                flow from financing activities**Proceeds
                from borrowings
            
            $
            65,750,162
            
            $
            55,493,135Repayment
                of borrowings
            
            
            (45,392,485
            )
            
            (27,404,017
            )Decrease
                in pledged deposits
            
            
            4,149,549
            
            
            32,514Proceeds
                from issuance of capital stock
            
            
            -
            
            
            14,005,947Net
                cash provided by financing activities
            
            
            24,507,226
            
            
            42,127,579**Effect
                of exchange rate changes on cash and cash
                equivalents**
            
            
            **438,800**
            
            
            **3,090,502****Net
                (decrease) / increase in cash and cash
                equivalents**
            
            
            **(6,259,971**
            **)**
            
            **22,686,975****Cash
                and cash equivalents at the beginning of period**
            
            
            **21,099,555**
            
            
            **14,196,513****Cash
                and cash equivalents at the end of period**
            
            **$**
            **14,839,584**
            
            **$**
            **36,883,488****Supplemental
                disclosure of cash flow information:**Cash
                received during the period for:Bills
                receivable discounted to bank
            
            $
            2,566,265
            
            $
            4,863,976Cash
                paid during the period for:Income
                taxes
            
            $
            27,832
            
            $
            45,376Interest,
                net of amounts capitalized
            
            $
            2,199,950
            
            $
            4,912,532**Non-cash
                movements affecting financing transactions:**2006
                escrow shares donated by Mr. Xiangqian Li and released to investors
            
            $
            7,955,358
            
            $
            -2005
                escrow shares donated by Mr. Xiangqian Li
            
            $
            -
            
            $
            6,146,3312005
                escrow shares settlement
            
            $
            -
            
            $
            1,309,681





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 six months ended March 31, 2007 and 2008***




(Unaudited)




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





*Principal
      Activities*





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





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





*Basis
      of Presentation and Organization*





As
      of
      March 31, 2008, the Company’s subsidiaries consist of: i) BAK International
      Limited (“BAK International”), a wholly owned limited liability company
      incorporated in Hong Kong on March 29, 2003 as BATCO International Limited,
      which changed its name to BAK International Limited on November 3, 2004; ii)
      Shenzhen BAK Battery Co., Ltd. (“Shenzhen BAK”), a wholly owned limited
      liability company established on August 3, 2001 in the People’s Republic of
      China (“PRC”); iii) BAK Electronics (Shenzhen) Co., Ltd. (“BAK Electronics”), a
      wholly owned limited liability company established on August 15, 2005 in the
      PRC; iv) BAK International (Tianjin) Ltd. (“BAK Tianjin”), a wholly owned
      limited liability company established on December 12, 2006 in the PRC; v) BAK
      Battery Canada Ltd. (“BAK Canada”), a wholly owned limited liability company
      established on December 20, 2006 in Canada as BAK Canada Battery Ltd., which
      changed its name to BAK Battery Canada Ltd. on December 22, 2006; and vi) BAK
      Europe GmbH (“BAK Europe”), a wholly owned limited liability company established
      in Germany on November 28, 2007.





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




F-10





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


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


***For
      the six months ended March 31, 2007 and 2008
      (continued)***




(Unaudited)




*Basis
      of Presentation and Organization (continued)*





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





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





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





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





F-11




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


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


***For
      the six months ended March 31, 2007 and 2008
      (continued)***




(Unaudited)




*Basis
      of Presentation and Organization (continued)*





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





While
      the
      1,089,775 escrow shares relating to the 2005 performance threshold were
      previously released to Mr. Xiangqian Li, Mr. Xiangqian Li executed a further
      undertaking on August 21, 2006 to return those shares to the escrow agent for
      the distribution to the relevant investors. However, such shares were not
      returned to the escrow agent, but, pursuant to the Settlement Agreement
      described below, are being held by the Company. 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. Xiangqian
      Li has not retained any of the shares placed into escrow, and as the investors
      party to the Escrow Agreement are only shareholders of the Company and do not
      have and are not expected to have any other relationship to the Company, the
      Company has not recorded a compensation charge for the years ended September
      30,
      2005 and 2006.





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





In
      November 2007, Mr. Xiangqian Li delivered the 1,089,775 shares related to the
      2005 performance threshold to BAK International pursuant to the Settlement
      Agreement; BAK International in turn delivered the shares to the Company. Such
      shares are now held by the Company as treasury shares. Upon receipt of these
      shares, the Company and BAK International released all claims and causes of
      action against Mr. Xiangqian Li regarding the shares, and Mr. Xiangqian Li
      released all claims and causes of action against the Company and BAK
      International regarding the shares. Under the terms of the Settlement Agreement,
      the Company is obligated to commence 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 Agreement”) with certain investors in the January 2005 private
      placement.




F-12




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


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


***For
      the six months ended March 31, 2007 and 2008
      (continued)***




(Unaudited)




*Basis
      of Presentation and Organization (continued)*





Pursuant
      to the 2008 Settlement Agreement, the Company and the 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 will make 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 March 31,
      2008
      amounted to 232,213 shares. Share payments to date have been made, and the
      Company intends to make any future payments of shares pursuant to the settlement
      agreements to be entered into with the remaining investors, 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. The Company has also
      undertaken pursuant to the settlement agreements to file a registration
      statement covering resales of such shares.





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





The
      interim results of operations are not necessarily indicative of the results
      to
      be expected for the fiscal year ending September 30, 2008. The Company’s
      consolidated balance sheet as of September 30, 2007 has been taken from the
      Company’s audited consolidated balance sheet as of the date. All other financial
      statements contained herein are unaudited and, in the opinion of management,
      contain all adjustments (consisting only of normal recurring accruals) necessary
      for a fair presentation of financial position, results of operations and cash
      flows for the period presented. The Company’s accounting policies and certain
      other disclosure are set forth in the notes to the consolidated financial
      statements contained in the Company’s Annual Report on Form 10-K for the year
      ended September 30, 2007. These financial statements should be read in
      conjunction with the Company’s audited consolidated financial statements and
      notes thereto.





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




F-13


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


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


***For
      the six months ended March 31, 2007 and 2008
      (continued)***




(Unaudited)




***Recently
      Issued Accounting Standards***





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





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





*SFAS
      157 “Fair Value Measurements”*





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





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





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





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





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





F-14


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


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


***For
      the six months ended March 31, 2007 and 2008
      (continued)***




(Unaudited)




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





*SFAS
      141(Revised) “Business Combinations”*





In
      December 2007, the FASB issued SFAS No. 141 (Revised) “Business Combinations”.
      SFAS 141 (Revised) establishes principles and requirements for how the acquirer
      of a business recognizes and measures in its financial statements the
      identifiable assets acquired, the liabilities assumed, and any noncontrolling
      interest in the acquiree. The statement also provides guidance for recognizing
      and measuring the goodwill acquired in the business combination and determines
      what information to disclose to enable users of the financial statements to
      evaluate the nature and financial effects of the business combination. The
      guidance will become effective for the fiscal year beginning after December
      15,
      2008. The management is in the process of evaluating the impact SFAS 141
      (Revised) will have on the Company’s financial statements upon
      adoption.





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





In
      March
      2008, the FASB issued SFAS No. 161 “Disclosures about Derivative
      Instruments and Hedging Activities”. SFAS 161 is intended to improve financial
      reporting about derivative instruments and hedging activities by requiring
      enhanced disclosures to enable investors to better understand their effects
      on
      an entity’s financial position, financial performance, and cash flows. It is
      effective for financial statements issued for fiscal years and interim periods
      beginning after November 15, 2008, with early application encouraged. The
      management is in the process of evaluating the impact SFAS 161 will have on
      the
      Company’s financial statements upon adoption.





**2**
            **Pledged
                Deposits**





Pledged
      deposits as of September 30, 2007 and March 31, 2008 consist of the
      following:





*September
                30,*
            
            *March
                31,**2007*
            
            *2008*Pledged
                deposits with banks for bills payable
            
            $
            4,594,727
            
            
            4,357,431





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




Trade
      accounts receivable as of September 30, 2007 and March 31, 2008 consist of
      the
      following:





*September
                30,*
            
            *March
                31,**2007*
            
            *2008*Trade
                accounts receivable
            
            $
            57,928,281
            
            $
            69,670,241Less:
                Allowance for doubtful accounts
            
            
            (3,021,617
            )
            
            (4,658,522
            )54,906,664
            
            
            65,011,719Bills
                receivable
            
            
            8,244,208
            
            
            13,922,149$
            63,150,872
            
            $
            78,933,868





F-15





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


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


***For
      the six months ended March 31, 2007 and 2008
      (continued)***




(Unaudited)




**3**
            **Trade
                Accounts Receivable, net
                (continued)**





An
      analysis of the allowance for doubtful accounts for the six months ended March
      31, 2007 and 2008 is as follows:





*Six
                months ended March 31,**2007*
            
            *2008*Balance
                at beginning of period
            
            $
            1,063,285
            
            $
            3,021,617(Recovery)
                / addition of bad debt expense, net
            
            
            (334,611
            )
            
            1,370,667Foreign
                exchange adjustment
            
            
            22,822
            
            
            266,238Balance
                at end of period
            
            $
            751,496
            
            $
            4,658,522





**4**
            **Inventories**





Inventories
      as of September 30, 2007 and March 31, 2008 consist of the
      following:





*September
                30,*
            
            *March
                31,**2007*
            
            *2008*Raw
                materials
            
            $
            15,245,732
            
            $
            20,397,411Work-in-progress
            
            
            5,698,017
            
            
            10,892,833Finished
                goods
            
            
            40,776,958
            
            
            38,996,89361,720,707
            
            
            70,287,137Provision
                for obsolete inventories
            
            
            (1,893,475
            )
            
            (2,125,374
            )$
            59,827,232
            
            $
            68,161,763





Part
      of
      the inventories with carrying value of US$19,971,241 and US$21,370,565 as of
      September 30, 2007 and March 31, 2008, respectively, was pledged as collateral
      under certain loan agreements (see Note 7).





**5**
            **Prepayments
                and Other Receivables**





Prepayments
      and other receivables as of September 30, 2007 and March 31, 2008 consist of
      the
      following:





*September
                30,*
            
            *March
                31,**2007*
            
            *2008*Prepayments
                for raw materials and others
            
            $
            925,187
            
            $
            5,431,537Other
                receivables
            
            
            740,088
            
            
            2,568,292Less:
                Allowance for doubtful accounts
            
            
            (8,781
            )
            
            (6,589
            )$
            1,656,494
            
            $
            7,993,240





F-16




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


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


***For
      the six months ended March 31, 2007 and 2008
      (continued)***




(Unaudited)




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





Property,
      plant and equipment as of September 30, 2007 and March 31, 2008 consist of
      the
      following:





*September
                30,*
            
            *March
                31,**2007*
            
            *2008*Buildings
            
            $
            70,380,985
            
            $
            91,901,939Machinery
                and equipment
            
            
            59,405,092
            
            
            75,257,467Office
                equipment
            
            
            1,088,032
            
            
            1,368,918Motor
                vehicles
            
            
            1,135,616
            
            
            951,467132,009,725
            
            
            169,479,791Accumulated
                depreciation
            
            
            (19,301,165
            )
            
            (26,332,777
            )Construction
                in progress
            
            
            12,578,715
            
            
            1,395,658Prepayment
                for acquisition of property, plant and equipment
            
            
            19,835,747
            
            
            23,363,601$
            145,123,022
            
            $
            167,906,273




*(i)*
            Depreciation
                expense for the six months ended March 31, 2007 and 2008 is included
                in
                the consolidated statements of operations and comprehensive income
                as
                follows:




*Six
                months ended March 31,**2007*
            
            *2008*Cost
                of revenues
            
            $
            3,008,251
            
            $
            4,389,058Research
                and development costs
            
            
            140,815
            
            
            294,225Sales
                and marketing expenses
            
            
            294,470
            
            
            330,761General
                and administrative expenses
            
            
            812,060
            
            
            793,779$
            4,255,596
            
            $
            5,807,823




*(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
      six months ended March 31, 2007 and 2008, the Company capitalized interest
      of
      approximately US$113,884 and US$ 1 79,349,
      respectively, to the cost of construction in progress.




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





As
      of
      September 30, 2007 and March 31, 2008, machinery and equipment with net book
      value of US$34,090,267 and US$29,387,608 of the Company were pledged as
      collateral under certain loan arrangements (see Notes 7 and 8).





F-17




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


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


***For
      the six months ended March 31, 2007 and 2008
      (continued)***




(Unaudited)




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





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





*September
                30,*
            
            *March
                31,**2007*
            
            *2008*Inventories
                (Note 4)
            
            $
            19,971,241
            
            $
            21,370,565Machinery
                and equipment, net (Note 6)
            
            
            18,299,368
            
            
            16,064,058$
            38,270,609
            
            $
            37,434,623




As
      of
      September 30, 2007 and March 31, 2008, the Company had several short-term bank
      loans with aggregate outstanding balances of US$89,870,586 and US$116,825,759
      respectively. The loans were primarily obtained for general working capital,
      carried interest rates ranging from 5.751% to 8.217% 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.





The
      Company also committed to pledge the property ownership and land use rights
      certificate to be obtained in relation to the land on which the Company’s
      corporate campus had been constructed for short-term bank loans amounting to
      US$25,644,000 borrowed from Shenzhen Eastern Branch, Agricultural Bank of China.
      The aggregate net book value of the buildings and land use right in relation
      to
      the property ownership and land use rights certificate as of March 31, 2008
      was
      US$91,565,685.





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





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





As
      of
      September 30, 2007 and March 31, 2008, the Company had long-term bank loans
      of
      US$29,291,154 and US$39,891,722, respectively. The loan amount of US$14,247,044
      as of March 31, 2008 was borrowed under a four-year long-term loan credit
      facility from China Development Bank, bearing interest at the benchmark rate
      of
      the People’s Bank of China (the “PBOC”) for three-year to five-year long-term
      loans which is currently 6.48% per annum. The long-term bank loan is repayable
      in three instalments of US$4,274,113 on November 20, 2008, US$4,274,113 on
      November 20, 2009 and US$5,698,818 on December 26, 2010.





The
      other
      three loans with aggregate amount of US$25,644,678 as of March 31, 2008 were
      borrowed under a five-year long-term loan credit facility from Shenzhen Eastern
      Branch, Agricultural Bank of China and carry interest at 90% of the benchmark
      rate of the PBOC for three-year to five-year long-term loans. The loan of
      US$5,698,817 currently carries interest at 5.832% per annum is repayable on
      January 25, 2012. The second loan of US$11,397,635 with current annual interest
      rate of 6.237% is repayable in three instalments of US$2,849,409 on January
      25,
      2010, US$7,123,522 on January 25, 2011 and US$1,424,704 on January 25, 2012
      respectively. The third loan of US$8,548,226 with current annual interest rate
      of 7.65% is repayable in two instalments of US$4,274,113 on January 25, 2009
      and
      US$4,274,113 on January 25, 2010.


F-18




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


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


***For
      the six months ended March 31, 2007 and 2008
      (continued)***




(Unaudited)




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





The
      long-term bank loan with China Development Bank is: (i) guaranteed by Mr.
      Xiangqian Li; (ii) secured by certain shares of the Company owned by Mr.
      Xiangqian Li; and (iii) secured by the property ownership and land use rights
      certificate of the Company’s Research and Development Test Centre and the future
      facilities to be constructed thereon.





The
      long-term bank loan with 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$13,323,550 as of March 31, 2008 (Note 6); and (iii)
      secured by the property ownership and land use rights certificate to be obtained
      in relation to the land on which the Company’s corporate campus had been
      constructed and the future machinery and equipment to be purchased and used
      in
      the campus.





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




The
      aggregate maturities of long-term bank loans as of March 31, 2008 are as
      follows:







Fiscal
                years ending on March 31,2009
            
            $
            8,548,2262010
            
            
            11,397,6352011
            
            
            12,822,3402012
            
            
            7,123,521$
            39,891,722





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





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





**Stock
      Option Plan**




In
      May
      2005, the Board of Directors adopted the China BAK Battery, Inc. 2005 Stock
      Option Plan (the “Plan”). The Plan authorizes the issuance of up to 4,000,000
      shares of the Company’s common stock. The exercise price of the options granted,
      pursuant to the Plan, must be at least equal to the fair market value of the
      Company’s common stock at the date of the grant. The Plan will terminate on May
      16, 2055.





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





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




F-19




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


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


***For
      the six months ended March 31, 2007 and 2008
      (continued)***




(Unaudited)




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




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





A
      summary
      of share option plan activity for the six months ended March 31, 2008 is
      presented below:





Number of
              shares
            
            Weighted
              average
              exercise
              price per
              share
            
            Weighted
              average
              remaining
              contractual
              term
            
            Aggregate
              intrinsicvalue
              (1)Outstanding as of October 1, 2007
            
            
            400,000
            
            $
            6.25Granted
            
            
            -
            
            
            -Exercised
            
            
            200,000
            
            
            6.25Forfeited
            
            
            -
            
            
            -Cancelled
            
            
            -
            
            
            -Outstanding
                as of March 31, 2008
            
            
            200,000
            
            $
            6.25
            
            
            4
                years
            
            $
            -Exercisable
                as of March 31, 2008
            
            
            140,000
            
            $
            6.25
            
            
            4
                years
            
            $
            -





(1)
            Aggregate
                intrinsic value represents the value of the Company’s closing stock price
                on March 31, 2008 (US$3.77) in excess of the exercise price multiplied
                by
                the number of options outstanding or
                exercisable.





The
      weighted-average grant-date fair value of options granted during 2005 was
      US$3.67 per share. The Company recorded non-cash share-based compensation
      expense of US$56,000 for the six months ended March 31, 2008 in respect of
      these
      share options granted in 2005. The expense of 2008 was recorded in research
      and
      development costs.





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




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




F-20




***China
        BAK Battery, Inc. and subsidiaries***
 ***Notes
        to the condensed interim consolidated financial
        statements***
 ***For
        the six months ended March 31, 2007 and 2008
        (continued)***
  (Unaudited)
  **9**
              **Share-based
                  Compensation (continued)**
 
 As
        of
        March 31, 2008, there were unrecognized compensation costs of approximately
        US$17,000 related to non-vested share options. These costs are expected to
        be
        recognized over a weighted average period of 0.25 year.
 
 Pursuant
        to the Plan, the Company also issued 1,501,500 options with a weighted-average
        exercise price of US$3.28 per share on June 25, 2007. In accordance with
        the
        vesting provisions of the grants, the options will become vested and exercisable
        during the period from June 30, 2007 to February 9, 2012 according to each
        of
        the employee’s agreements respectively.
 
 A
        summary
        of share option plan activity for the six months ended March 31, 2008 is
        presented below:
 
 Number of
                Shares
              
              Weighted
                average
                exercise
                price per
                share
              
              Weighted
                average
                remaining
                contractual
                term
              
              Aggregate
                intrinsicvalue(1)Outstanding
                  as of October 1, 2007
              
              
              1,418,500
              
              $
              3.28Exercised
              
              
              -
              
              
              -Forfeited
              
              
              6,500
              
              
              3.28Cancelled
              
              
              -
              
              
              -Outstanding
                  as of March 31, 2008
              
              
              1,412,000
              
              $
              3.28
              
              
              6
                  years
              
              $
              691,880Exercisable
                  as of March 31, 2008
              
              
              40,000
              
              $
              3.35
              
              
              5
                  years
              
              $
              16,800
  (1) Aggregate
        intrinsic value represents the value of the Company’s closing stock price on
        March 31, 2008 (US$3.77) 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$925,000 for the six months ended March 31, 2008 in respect
        of
        share options granted in 2007, which was allocated to cost of revenues, sales
        and marketing expenses, general and administrative expenses and research
        and
        development costs respectively.
 
 The
        fair
        value of the above option awards granted on June 25, 2007 was estimated on
        the
        date of grant using the Black-Scholes Option Valuation Model that uses the
        following assumptions.
  Expected
                  volatility
              
              
              69.44%Expected
                  dividends
              
              
              NilExpected
                  life
              
              
              4
                  - 10 yearsRisk-free
                  interest rate
              
              
              5.09%
 
 As
        of
        March 31, 2008, there were unrecognized compensation costs of US$1,587,000
        related to the above non-vested share options. These costs are expected to
        be
        recognized over a weighted average period of 1.7 years.
  F-21
  ***China
        BAK Battery, Inc. and subsidiaries***
 ***Notes
        to the condensed interim consolidated financial
        statements***
 ***For
        the six months ended March 31, 2007 and 2008
        (continued)***
  (Unaudited)
  **9**
              **Share-based
                  Compensation (continued)**
 
 Pursuant
        to the Plan, the Company also issued 360,000 options with an exercise price
        of
        US$4.30 per share on January 28, 2008. In accordance with the vesting provisions
        of the grants, the options will become vested and exercisable during the
        period
        from April 28, 2008 to January 28, 2011 according to each of the employee’s
        agreements respectively.
 
 A
        summary
        of share option plan activity for the six months ended March 31, 2008 is
        presented below:
 
 Number
                  of
                Shares
              
              Weighted
                average
                exercise
                price
                  pershare
              
              Weighted
                averageremainingcontractualterm
              
              Aggregate
                intrinsic
                value
                  (1)Outstanding
                  as of October 1, 2007
              
              
              -
              
              
              -Granted
                  on January 28, 2008
              
              
              360,000
              
              
              4.30Exercised
              
              
              -
              
              
              -Forfeited
              
              
              -
              
              
              -Cancelled
              
              
              -
              
              
              -Outstanding
                  as of March 31, 2008
              
              
              360,000
              
              $
              4.30
              
              
              3
                  years
              
              $
              -Exercisable
                  as of March 31, 2008
              
              
              -
              
              $
              -
              
              
              -
              
              $
              -
 (1) Aggregate
        intrinsic value represents the value of the Company’s closing stock price on
        March 31, 2008 (US$3.77) 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$231,000 for the six months ended March 31, 2008 in respect
        of
        share options granted in 2008, which was allocated to general and administrative
        expenses and research and development costs respectively.
 
 The
        fair
        value of the above option awards granted on January 28, 2008 was estimated
        on
        the date of grant using the Black-Scholes Option Valuation Model that uses
        the
        following assumptions.
  Expected
                  volatility
              
              
              120.23%Expected
                  dividends
              
              
              NilExpected
                  life
              
              
              5
                  yearsRisk-free
                  interest rate
              
              
              3.59%
 
 As
        of
        March 31, 2008, there were unrecognized compensation costs of US$1,063,000
        related to the above non-vested share options. These costs are expected to
        be
        recognized over a weighted average period of 1.5 years.
  F-22
  ***China
        BAK Battery, Inc. and subsidiaries***
 ***Notes
        to the condensed interim consolidated financial
        statements***
 ***For
        the six months ended March 31, 2007 and 2008
        (continued)***
  (Unaudited)
  **9**
              **Share-based
                  Compensation (continued)**
 
 Pursuant
        to the Plan, the Company also granted 5,000 restricted shares to each of
        the two
        newly elected independent directors with a fair value of US$3.35 per share
        on
        June 25, 2007 and granted 5,000 restricted shares to one of the existing
        independent directors with a fair value of US$4.33 per share on July 17,
        2007.
 
 The
        eligible directors shall vest in their rights under the restricted shares
        according to the following schedule:
  (i)
              25%
                  of the restricted shares granted will immediately vest on the grant
                  date;
                  and
  (ii)
              The
                  remaining 75% of the restricted shares will vest in three equal
                  quarterly
                  instalments on the last day of each subsequent quarter or in three
                  equal
                  quarterly instalments on the last day of each calendar quarter
                  beginning
                  on the last day of the first full calendar quarter after the grant
                  date.
 
 The
        Company recorded non-cash share-based compensation expenses of US$17,000
        in
        respect of the restricted shares granted in June and July 2007, which were
        recorded in general and administrative expenses.
 
 As
        of
        March 31, 2008, there was no unrecognized stock-based compensation associated
        with these restricted shares granted to non-employee directors. The first,
        second and third 25% of the restricted shares were already issued as fully
        paid
        ordinary shares to the three independent directors on August 23, 2007, October
        25, 2007 and January 14, 2008 respectively.
 
 As
        the
        Company itself is an investment holding company which is not expected to
        generate operating profits to realize the tax benefits arising from its net
        operating loss carried forward, no income tax benefits were recognized for
        such
        stock-based compensation cost under stock option plan for the six months
        ended
        March 31, 2008.
 
 **Employee
        Restricted Stock Awards**
 
 On
        September 22, 2006, the Compensation Committee approved the form of Termination
        and Release Agreement covering the cancellation of 1,400,000 shares of stock
        options granted to the optionees who are residents of the PRC. The Compensation
        Committee also consented to adopt the terms and provisions for 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 the officer of the Company to authorize delivery of the restricted
        shares to the employees. On September 28, 2006, options to purchase a total
        of
        1,400,000 shares of common stock were cancelled pursuant to the Termination
        and
        Release Agreements signed on that day. The Replacement Awards were classified
        as
        liability-classified awards as of September 30, 2006.
 
 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%
  F-23
  ***China
        BAK Battery, Inc. and subsidiaries***
 ***Notes
        to the condensed interim consolidated financial
        statements***
 ***For
        the six months ended March 31, 2007 and 2008
        (continued)***
  (Unaudited)
  **9**
              **Share-based
                  Compensation (continued)**
 
 On
        December 26, 2006, pursuant to the restricted stock grant agreements signed
        between the Company’s officers and the relevant optionees and based on the
        closing market price of the Company’s listed common stock on that date, i.e.
        US$6.25 per share, a total of 914,994 shares of restricted stock were granted
        as
        Replacement Awards to the employees who gave up their stock options and
        continued to be employed by the Company on that date. Fair value of the
        Replacement Awards granted to each optionee approximated that of the employee’s
        terminated stock options. The Compensation Committee ratified the grants
        on
        January 15, 2007.
 
 Prior
        to
        vesting, the shares of restricted stock granted to each employee pursuant
        to the
        Replacement Awards are subject to restrictions on transferability and will
        be
        forfeited if the grantee’s employment with the Company is terminated. In
        accordance with the vesting provisions of the grants, the shares of restricted
        stock will become vested and shall no longer be subject to forfeiture under
        the
        following schedule:
 
 Number of Shares
              
              Percentage of Options Issued
              
              Initial Vesting Date365,998
              
              
              40
              %
              
              July
                  1, 2007274,498
              
              
              30
              %
              
              January
                  1, 2008274,498
              
              
              30
              %
              
              July
                  1, 2008914,994
              
              
              100
              %
 
 Upon
        the
        grant of restricted stock, the Company has reclassified share-based payment
        liabilities of US$3,679,934 to shareholders’ equity. The restricted stock grant
        is treated as equity-classified awards and the unrecognized compensation
        costs
        will be recognized over the vesting period. The Company recognized share-based
        compensation expense of US$428,000 for the six months ended March 31, 2008
        in
        respect of the equity-classified award. These share-based compensation costs
        were allocated to cost of revenues, sales and marketing expenses, general
        and
        administrative expenses and research and development costs respectively.
 
 A
        summary
        of the restricted stock grant activity for the six months ended March 31,
        2008
        is presented below:
  *Weighted average**Number of*
              
              *exercise price**shares*
              
              *per share*Non-vested
                  as of October 1, 2007
              
              
              530,560
              
              $
              6.25Vested
              
              
              265,280
              
              
              6.25Forfeited
              
              
              -
              
              
              -Non-vested
                  as of March 31, 2008
              
              
              265,280
              
              $
              6.25
 
 As
        such
        share-based compensation is not deductible for income tax purpose in the
        PRC, no
        income tax benefits were recognized in this respect for the six months ended
        March 31, 2008.
  As
        of
        March 31, 2008, there were unrecognized compensation costs of US$133,000
        related
        to the restricted stock granted. These costs are expected to be recognized
        over
        a weighted average period of 0.25 years.
  F-24
  ***China
        BAK Battery, Inc. and subsidiaries***
 ***Notes
        to the condensed interim consolidated financial
        statements***
 ***For
        the six months ended March 31, 2007 and 2008
        (continued)***
  (Unaudited)
  **10**
              **Net
                  Income / (Loss) per Share**
 
 The
        calculation of basic net loss per share is based on the net loss for the
        six
        months ended March 31, 2008 attributable to equity shareholders of US$7,124,292
        (Net income for the six months ended March 31, 2007: US$4,022,479) and the
        weighted average number of ordinary shares (excluding the treasury shares)
        of
        51,229,322 in issue during the six months ended March 31, 2008 (six months
        ended
        March 31, 2007: 48,887,647).
 
 The
        effects of stock option, restricted stock and warrants outstanding during
        the
        six months ended and as of March 31, 2008 were all anti-dilutive. As such,
        basic
        and diluted net loss per share for the six months ended March 31, 2008 are
        the
        same.
 
 The
        calculation of diluted net income per share for the six months ended March
        31,
        2007 is based on the net income attributable to equity shareholders for the
        period of US$4,022,479 and the weighted average number of ordinary shares
        of
        49,074,049 in issue during the six months ended March 31, 2007 after adjusting
        for the number of 186,402 dilutive potential ordinary shares. Restricted
        stock
        granted to employees and to non-employee directors are included in the
        computation of diluted net income per share for the six months ended March
        31,
        2007. The share warrants granted to external financial advisors and stock
        options granted to employees are excluded from the computation of diluted
        net
        income per share as the warrant and stock options were both
        anti-dilutive.
 
 **11**
              **Commitments
                  and Contingencies**
 
 *(i)*
              *Capital
                  Commitments*
 
 As
        of
        September 30, 2007 and March 31, 2008, the Company had the following capital
        commitments:
 
 *September
                  30,*
              **
              *March
                  31,*
              ****
              **
              *2007*
              **
              *2008*For
                  construction of buildings
              
              $
              -
              
              $
              15,705,605For
                  purchases of equipment
              
              
              12,312,763
              
              
              8,023,428$
              12,312,763
              
              $
              23,729,033
  As
        of
        March 31, 2008, BAK Tianjin had plans to purchase equipment of
        US$5,426,048.
 
 *(ii)*
              *Land
                  Use Rights and Property Ownership
                  Certificate*
 
 According
        to the relevant PRC laws and regulations, a land use rights certificate,
        along
        with government approvals for land planning, project planning and construction,
        needs to be obtained before construction of a building is commenced. A property
        ownership certificate shall be granted by the government upon application
        under
        the condition that the aforementioned certificate and government approvals
        have
        been obtained.
 
 The
        Company has not yet obtained the land use rights certificate relating to
        the
        premises occupied by the Company, BAK Industrial Park. However, the Company
        had
        obtained the approvals for project planning and construction from the government
        of Shenzhen on June 20, 2007 and is in the process of applying for the land
        use
        right certificate.
  F-25
  ***China
        BAK Battery, Inc. and subsidiaries***
 ***Notes
        to the condensed interim consolidated financial
        statements***
 ***For
        the six months ended March 31, 2007 and 2008
        (continued)***
  (Unaudited)
  **11**
              **Commitments
                  and Contingencies
                  (continued)**
 
 Management
        believes that the Company will ultimately be granted a land use rights
        certificate, and that there should be no legal barriers for the Company to
        obtain a property ownership certificate for the premises presently occupied
        by
        the Company in BAK Industrial Park. However, in the event that the Company
        fails
        to obtain the land use rights certificate relating to BAK Industrial Park,
        there
        is a risk that the buildings constructed will need to be vacated as illegitimate
        constructions and the Company might be subject to penalties and fines. However,
        management believes that this possibility, while present, is
        remote.
 
 The
        Company is not able to insure its manufacturing facilities since it has not
        yet
        received its land use rights certificate. The Company intends to procure
        such
        insurance once it has received the certificate.
 
 *(iii)*
              *Guarantees*
 
 In
        order
        to secure the supplies of certain raw materials and upon the request of
        suppliers, the Company has given guarantees to certain suppliers which are
        summarized as follows:
 *September 30,*
                  *2007*
                
                *March
                    31,*
                  *2008*Guaranteed
                    for Hunan Reshine New Material Ltd. - a non-related party
                
                $
                5,325,664
                
                $
                5,698,817Guaranteed
                    for Shenzhen Tongli Hi-tech Co. Ltd. - a non-related party
                
                
                -
                
                
                2,849,409Guaranteed
                    for Shenzhen B&G Technology Development Co. Ltd. - a non-related
                    party
                
                
                -
                
                
                3,561,761Guaranteed
                    for Nanjing Special Metal Equipment Co. Ltd. - a non-related
                    party
                
                
                1,331,416
                
                
                1,424,704$
                6,657,080
                
                $
                13,534,691
 
 Management
        has assessed the fair value of the obligation arising from the above financial
        guarantees and considered it is immaterial to the consolidated financial
        statements. Therefore, no obligations in respect of the above guarantees
        were
        recognized as of March 31, 2008.
 
 *(iv)*
              *Outstanding
                  Discounted Bills*
 
 From
        time
        to time, the Company factors bills receivable to banks. At the time of the
        factoring, all rights and privileges of holding the receivables are transferred
        to the banks. The Company removes the asset from its books and records a
        corresponding expense for the amount of the discount. The Company remains
        contingently liable on the amount outstanding in the event the bill issuer
        defaults.
 
 The
        Company's outstanding discounted bills as of September 30, 2007 and March
        31,
        2008 are summarized as follows:
 
 *September 30,*
              
              *March 31,**2007*
              
              *2008*Bank
                  acceptance bills
              
              $
              17,851,850
              
              $
              19,544,109
  F-26
  ***China
        BAK Battery, Inc. and subsidiaries***
 ***Notes
        to the condensed interim consolidated financial
        statements***
 ***For
        the six months ended March 31, 2007 and 2008
        (continued)***
  **** (Unaudited)
  **11**
              **Commitments
                  and Contingencies
                  (continued)**
 
 *(v)*
              *Litigation
                  and claims*
 
 On
        September 12, 2006, Hydro-Quebec, a Canadian company, and the Board of Regents
        of the University of Texas System brought a federal patent infringement suit
        in
        the United States District Court for the Northern District of Texas against
        the
        Company. The Company had an agreement with A123 Systems, Inc. (“A123Systems”),
        which, as amended on August 18, 2005, terminated in accordance with its terms
        on
        August 30, 2007, under which the Company had agreed to manufacture products
        for
        A123Systems according to the specifications furnished by, and using the finished
        electrodes and other materials consigned by, A123Systems to the Company.
        The
        plaintiffs alleged that, by manufacturing rechargeable lithium cells for
        A123Systems for use in DeWalt 36-volt cordless power tools manufactured by
        Black
& Decker Corporation, the Company had infringed two U.S. patents owned by
        and exclusively licensed to the plaintiffs. The plaintiffs seek injunctive
        relief and damages in an unspecified amount. If the court issues an adverse
        decision, the Company may be required to pay the plaintiffs substantial monetary
        damages, and the Company may be prohibited from future production of
        rechargeable lithium cells manufactured for A123Systems or be required to
        pay
        royalties to engage in any such production. The court has not yet issued
        a
        decision on this matter and the Company is unable to quantify the extent
        of any
        possible award of damages that might become payable by the Company.
 
 **12**
              **Significant
                  Concentrations**
 
 **(a)**
              **Customers
                  and Credit Concentrations**
 
 The
        Company had one customer that comprised 10% or more of net revenue for the
        six
        months ended March 31, 2007 as follows:
 
 A123Systems
              
              $
              14,284,447
              
              
              20
              %
 
 No
        customer individually comprised 10% or more of net revenue for the six months
        ended March 31, 2008.
 
 On
        August
        30, 2007, the Company’s agreement with A123Systems terminated in accordance with
        its terms. The Company believes the termination of this business relationship
        has no material impact on the Company’s results of operations and financial
        condition. As of September 30, 2007, approximately 3% of gross trade accounts
        receivable was due from A123Systems The Company did not have balance of gross
        trade accounts receivable due from this customer as of March 31, 2008.
 
 **(b)**
              **Credit
                  Risk**
 
 Financial
        instruments that potentially subject the Company to significant concentration
        of
        credit risk consist primarily of cash and cash equivalents and pledged deposits.
        As of September 30, 2007 and March 31, 2008, substantially all of the Company’s
        cash and cash equivalents and pledged deposits were held by major financial
        institutions located in the PRC, which management believes are of high credit
        quality.
  F-27
  ***China
        BAK Battery, Inc. and subsidiaries***
 ***Notes
        to the condensed interim consolidated financial
        statements***
 ***For
        the six months ended March 31, 2007 and 2008
        (continued)***
  (Unaudited)
  **13**
              **Segment
                  Information**
 
 The
        Company currently engages in the manufacture, commercialization and distribution
        of a wide variety of standard and customized lithium ion rechargeable batteries
        for use in a wide array of applications. The Company manufactures six types
        of
        Li-ion rechargeable batteries: steel-case cell, aluminium-case cell, battery
        pack, cylindrical cell, polymer cell and high-power lithium-phosphate cell.
        The
        Company's products are sold to packing plants operated by third parties
        primarily for use in mobile phones and other electronic devices. Net revenues
        for the six months ended March 31, 2007 and 2008 were as follows:
 
 *Net
        revenues by product:*
  *Six months ended March 31,**2007*
              
              *2008*%
              
              %Steel-case
                  cell
              
              $
              22,621,050
              
              
              31.15
              
              $
              15,634,552
              
              
              15.02Aluminium-case
                  cell
              
              
              29,064,760
              
              
              40.03
              
              
              60,339,800
              
              
              57.95High-power
                        lithium-phosphate cell
              
              
              14,274,214
              
              
              19.66
              
              
              -
              
              
              -Battery
                  pack
              
              
              3,714,597
              
              
              5.12
              
              
              11,572,242
              
              
              11.11Cylindrical
                  cell
              
              
              1,282,896
              
              
              1.76
              
              
              9,277,903
              
              
              8.91Polymer
                  cell
              
              
              1,653,482
              
              
              2.28
              
              
              7,298,489
              
              
              7.01$
              72,610,999
              
              
              100.00
              
              $
              104,122,986
              
              
              100.00
 
 *Net
        revenues by geographic area:*
  *Six
                  months ended March 31,**2007*
              
              *2008*%
              
              %PRC
                  Mainland
              
              $
              48,466,021
              
              
              66.75
              
              $
              86,529,740
              
              
              83.11United
                  States of America
              
              
              14,343,586
              
              
              19.75
              
              
              66,245
              
              
              0.06Hong
                  Kong, China
              
              
              3,536,344
              
              
              4.87
              
              
              3,574,347
              
              
              3.43India
              
              
              748,789
              
              
              1.03
              
              
              2,745,353
              
              
              2.64Others
              
              
              5,516,259
              
              
              7.60
              
              
              11,207,301
              
              
              10.76$
              72,610,999
              
              
              100.00
              
              $
              104,122,986
              
              
              100.00
  F-28
  **Item 2. 
        Management’s Discussion and Analysis of Financial Condition and Results of
        Operations**
 
 The
        following discussion should be read in conjunction with the condensed interim
        consolidated financial statements and notes included in Item 1 of Part I of
        this Report. This Report contains forward-looking statements that involve
        risks
        and uncertainties. Our actual results may differ materially from those indicated
        by such forward-looking statements. See “Introductory Comments — Forward-Looking
        Statements” above.
 
 **Overview**
 
 During
        the second quarter of fiscal year 2008, we continued to generate net revenues
        well in excess of prior year periods, amounting to $51.3 million in the second
        quarter of fiscal year 2008, comparable to our net revenues of $52.8
        million in the first quarter of fiscal year 2008 and 74% greater than our
        net revenues of $29.5 million in the second quarter of fiscal year 2007.
        The substantial increase in net revenues over the net revenue generated in
        the
        same period of last year was primarily due to the significant increase in
        revenues from aluminum case cells, battery packs, and cylindrical cells,
        for
        increases of approximately $18.4 million, $5.3 million, and $6.3 million,
        or
        155%, 405%, and 1,467%, respectively. These increases were partially offset
        by a
        decrease in revenues from steel case cells in line with our strategic transition
        from replacement market production to OEM market manufacturing. Our strong
        cylindrical sales were largely a result of increased sales to the laptop
        computer market. We also continued to make progress in expanding our
        manufacturing capability into first-tier OEM capabilities, and in working
        through the qualification processes of targeted first-tier OEMs. Our
        achievements during the second quarter of fiscal year 2008 include the
        following:
 
 —
              We
                  entered into settlements and mutual releases of all claims with
                  certain
                  investors relating to the private placement that we completed on
                  January
                  20, 2005, without any admission of liability, including several
                  of the
                  largest investors in such private placement, and conducted negotiations
                  with other investors in our January 2005 private placement for
                  the purpose
                  of entering into similar settlements and mutual releases, putting
                  a
                  potentially distracting matter behind us;—
              We
                  achieved near-record revenue in a quarter that included the long
                  holiday
                  of the Chinese Lunar New Year, as aluminum case cells and battery
                  packs
                  sales to Chinese customers for our OEM products continued to
                  increase;—
              We
                  increased our sales for the laptop computer market, resulting in
                  a
                  significant increase in revenues from cylindrical cells of approximately
                  $4.1 million, or 161% from last quarter, and an increase of approximately
                  $6.3 million, or 1,467% from the same quarter of last
                  year;—
              Our
                  product mix continued to improve, with cylindrical cells accounting
                  for
                  13.1% of total revenues as compared to 4.9% in the last quarter
                  and 1.4%
                  in the same quarter of the prior year; and—
              We
                  continued to gain major customers for our cylindrical cell products,
                  including Taiwanese notebook computer battery manufacturer
                  Simplo;
 
 Despite
        our strong net revenues, we continue to face pressure due to increased costs
        of
        raw materials, particularly lithium cobalt dioxide, the main raw material
        in our
        products, and higher overhead related to the expansion of our manufacturing
        capabilities in fiscal years 2007 and 2008. This resulted in a reduction of
        $2.2 million in our gross profits, from $6.1 million in the second quarter
        of
        fiscal year 2007 to $3.9 million in the second quarter of fiscal
        year 2008, and a net loss for the quarter ended March 31, 2008, of $6.2
        million, as compared to net income of $0.4 million for the same period in
        fiscal
        year 2007, as our increased costs cannot be fully reflected in increased
        prices.
 
 In
        the
        near-term, we anticipate that we will continue to experience pressure due
        to
        increased costs, including the costs of raw materials and overhead, as well
        as
        the costs of additional anticipated capital improvements as we transition
        from
        predominantly a replacement market to global first tier OEM capabilities.
        In
        response to this challenge, while we believe that we remain among the low
        cost
        manufacturers in the industry, we are seeking to reduce the purchase costs
        of
        raw materials and other unit costs of production while pursuing opportunities
        to
        raise selling prices where it would benefit our financial results. In addition,
        we are seeking to identify alternative raw materials suppliers to the extent
        there are viable alternatives and to expand our use of alternative raw
        materials. Among other things, we have successfully developed the technology
        to
        use substitute materials to reduce the amount of lithium cobalt dioxide used
        in
        the manufacture of lithium-based cells. Lithium cobalt dioxide is the most
        expensive ingredient currently required to make lithium-based cells because
        cobalt is not renewable. We have also restructured our operations in an effort
        to streamline corporate resources and improve internal efficiency, with a
        particular focus on manufacturing and sales.
 
 From
        a
        long-term perspective, we believe that our investment in building our first
        tier
        OEM capabilities and increasing our production capacity will ultimately improve
        our profitability and competitiveness as increased volume absorbs the higher
        fixed overhead costs of the investment in applicable equipment and
        infrastructure once we have completed the qualification processes of applicable
        first tier OEM companies. Toward that end, our batteries have passed all
        safety,
        reliability and performance tests by Hewlett-Packard Company (“HP”) designated
        battery pack manufacturers, a significant step in our efforts, pursuant to
        our
        non-binding Letter of Intent with HP, to reach a definitive agreement to
        supply
        lithium ion battery cells to HP.
  1
  To
        help
        us finance and expand our operations, we have access to $236.9 million in
        short-term credit facilities and $42.7 million in long-term credit facilities.
        As of March 31, 2008, the principal outstanding amounts under our credit
        facilities included short-term bank loans of $116.8 million, long-term bank
        loans of $8.5 million maturing within one year and long-term bank loans of
        $31.3
        million maturing in over one year, and bills payable of $30.4 million, leaving
        $92.4 million of short-term funds and $2.8 million of long-term
        funds available for additional cash needs.
 
 **Our
        Business**
 
 We
        are
        one of the largest manufacturers of lithium-ion battery cells in the world,
        as
        measured by production output. We produce battery cells that are the principal
        component of rechargeable batteries commonly used to power the following
        applications:
 
 —
              cellular
                  phones—customer segments include OEM customers and replacement battery
                  manufacturers;—
              notebook
                  computers;—
              portable
                  consumer electronics, such as digital cameras, portable media players,
                  portable gaming devices and personal digital assistants, or PDAs;
                  and—
              other
                  applications, such as miner's
                  lamps.
 
 We
        conduct all of our operations in China, in close proximity to China’s
        electronics manufacturing base and its rapidly growing market. Historically,
        we
        have primarily manufactured prismatic lithium-ion cells for the cellular
        phone
        replacement battery market and the OEM market. Our products are packed into
        batteries by third-party battery pack manufacturers in accordance with the
        specifications of manufacturers of portable electronic applications. At the
        request of our customers that order prismatic battery packs, we also engage
        pack
        battery manufacturers to assemble our prismatic cells into batteries for
        a fee
        and then sell battery packs to these customers both for the replacement and
        OEM
        markets.
 
 **Financial
        Statement Presentation**
 
 *Net
        revenues* .
        Our net
        revenues represent the invoiced value of our products sold, net of value
        added
        taxes, or VAT, sales returns, trade discounts and allowances. We are subject
        to
        VAT, which is levied on most of our products at the rate of 17% on the invoiced
        value of our products. Provision for sales returns are recorded as a reduction
        of revenue in the same period that revenue is recognized. The provision for
        sales returns represents our best estimate of the amount of goods that will
        be
        returned from our customers based on historical sales returns data.
 
 The
        following table sets forth the breakdown of our net revenues by battery cell
        type for the periods indicated:
  **Three Months Ended**
                **March 31,**
              
              **Six Months Ended**
                **March 31,****2008**
              
              **2007**
              
              **2008**
              
              **2007****(in
                  thousands)**Prismatic
                  cellsSteel-case
                  cells
              
              $
              5,878
              
              $
              7,590
              
              $
              15,635
              
              $
              22,621Aluminum-case
                  cells
              
              
              30,280
              
              
              11,862
              
              
              60,340
              
              
              29,065Battery
                  packs
              
              
              6,572
              
              
              1,301
              
              
              11,572
              
              
              3,715Cylindrical
                  cells
              
              
              6,709
              
              
              428
              
              
              9,278
              
              
              1,283High-power
                  lithium-phosphate cells
              
              
              —
              
              
              7,875
              
              
              —
              
              
              14,274Lithium
                  polymer cells
              
              
              1,897
              
              
              473
              
              
              7,298
              
              
              1,653Total
              
              $
              51,336
              
              $
              29,529
              
              $
              104,123
              
              $
              72,611
  2
  Our
        net
        revenues have increased during the three months ended March 31, 2008, in
        part
        because of increased shipments as we ramped up our production capacity to
        meet
        an increase in customer demand for our products.
 
 *Cost
        of Revenues* .
        Cost of
        revenues consists primarily of materials costs, employee remuneration for
        staff
        engaged in production activity, share-based compensation, depreciation and
        related expenses that are directly attributable to the production of products.
        Cost of revenues also includes write-downs of inventory to lower of cost
        or
        market.
  The
        cost
        of raw materials for aluminum-case cells is generally higher than that of
        steel-case cells. Cost of revenues from the sales of battery packs also includes
        the fees we pay to pack manufacturers for assembling our prismatic cells
        into
        battery packs.
 
 The
        average unit costs of our products was higher in the three months ended March
        31, 2008, as compared to the three months ended March 31, 2007, mainly because
        the purchase cost of lithium cobalt dioxide increased. **** Lithium
        cobalt dioxide is the main material in our products, rechargeable lithium
        batteries. In addition, we saw some increase in costs relating to overhead,
        other raw materials, transportation, labor, and other business costs. As
        a
        result, our gross profit, as a percentage of net revenues, decreased from
        20.8%
        for the three months ended March 31, 2007 to 7.6% for the three months ended
        March 31, 2008, and we recognized a net loss of $6.2 million in the three
        months
        ended March 31, 2008, as compared to net income of $0.4 million in the same
        period last year. We expect that the price of lithium cobalt dioxide, which
        increased approximately 30% during the fiscal year ended September 30, 2008,
        from the prior year’s price, will fluctuate but that the overall trend will be
        for the price to continue to increase over time. **** To
        the
        extent that we are not able to fully reflect these increased costs in our
        prices
        or use alternative less costly materials, our gross profit, as a percentage
        of
        net revenues, may decrease.
 
 *Research
        and Development Costs* .
        Research and development costs primarily comprise remuneration for R&D staff
        including share-based compensation, depreciation and maintenance expenses
        relating to R&D equipment and R&D material costs.
 
 *Sales
        and Marketing* .
        Sales
        and marketing expenses consist primarily of remuneration for staff involved
        in
        selling and marketing efforts, including staff engaged in the packaging of
        goods
        for shipment, as well as advertising cost, depreciation, sales and marketing
        staff share-based compensation and travel and entertainment expenses. We
        do not
        pay slotting fees to retail companies for displaying our products, engage
        in
        cooperative advertising programs, participate in buy-down programs or similar
        arrangements. No material estimates are required by management to determine
        our
        actual marketing or advertising costs for any period.
 
 *General
        and Administrative* .
        General
        and administrative expenses consist primarily of employee remuneration including
        share-based compensation (other than for research and development and sales
        and
        marketing staff), professional fees, insurance, benefits, general office
        expenses, depreciation, liquidated damage charge and bad debt
        expenses.
 
 *Government
        Grant Income / Other Income.* Other
        income for the three months ended March 31, 2008 mainly consisted of government
        grant funds to subsidize the interest expenses incurred by the Company 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. No present or future obligation will
        arise
        from the receipt of such amount.
 
 *Finance
        Costs, Net* .
        Finance
        costs consist primarily of interest income, interest on bank loans net of
        capitalized interest and bank charges.
 
 *Income
        Taxes* .
        Under
        applicable income tax laws and regulations, an enterprise located in Shenzhen,
        including the district where our operations are located, is subject to a
        25%
        enterprise income tax. Further, according to PRC laws and regulations, foreign
        invested manufacturing enterprises, starting from their first profitable
        year,
        are entitled to a two-year exemption from enterprise income tax followed
        by a
        three-year 50% reduction in its enterprise income tax rate. Two of our PRC
        subsidiaries, Shenzhen BAK and BAK Electronics are each entitled to a two-year
        exemption from enterprise income tax and a reduced enterprise income tax
        rate
        for the three years following its second profitable year. As such, for the first
        two calendar years ended December 31, 2003, Shenzhen BAK was exempted from
        any
        enterprise income tax. Between January 1, 2004 and December 31, 2006, Shenzhen
        BAK was subject to an enterprise income tax rate of 7.5%. In addition, due
        to
        the additional capital invested in Shenzhen BAK in both 2005 and 2006, Shenzhen
        BAK was granted a preferential income tax rate of 3.309% and 3.82% in calendar
        years 2005 and 2006. BAK Electronics, established in August 2005, is eligible
        for the same preferential tax treatment previously applicable to Shenzhen
        BAK
        and was in the tax holiday and fully exempt from any enterprise income tax
        for
        the calendar years 2006 and 2007. Between January 1, 2008 and December 31,
        2010,
        the tax rate of BAK Electronics is subject to further notice from the Shenzhen
        Tax Bureau. Beginning January 1, 2011, BAK Electronics will be subject to
        the
        full corporate income tax rate which, in accordance with the PRC’s new corporate
        income tax law discussed below, will be 25%. BAK Tianjin is currently exempt
        from any enterprise income tax due to cumulative tax losses. Shenzhen BAK
        and
        BAK Electronics received in aggregate a tax benefit of $181,000 pursuant
        to the
        tax holiday for the six months ended March 31, 2008, or $0.003 per basic
        share.
  In
        addition, Shenzhen BAK was granted an income tax rate of 7.5% in calendar
        year
        2007. Its income tax rate for the calendar year 2008 was still pending notice
        from the Shenzhen Tax Bureau as of March 31, 2008.
  3
  On
        March
        16, 2007, the National People’s Congress of the PRC determined to adopt a new
        corporate income tax law in its fifth plenary session. The new corporate
        income
        tax law unifies the application scope, tax rate, tax deduction and preferential
        policy for both domestic and foreign-invested enterprises. The new corporate
        income tax law became effective on January 1, 2008. According to the new
        corporate income tax law, the applicable income tax rate for our operating
        subsidiaries will be 25% after their preferential tax holidays have
        ended.
 
 Our
        company is subject to U.S. tax at the statutory rate of 35%. We have not
        made
        provisions for any U.S. tax because we have determined that we have no U.S.
        taxable income.
 
 Our
        Canada subsidiary, BAK Canada, is subject to Canada profits tax at the rate
        of
        36.1%. However, because it does not have any assessable income derived from
        or
        arising in Canada, it has not paid any Canada profits tax.
 
 Our
        German subsidiary, BAK Europe, is subject to Germany’s profits tax at the rate
        of 25%. However, because it does not have any assessable income derived from
        or
        arising in Germany, it has not paid any German profits tax.
 
 Our
        Hong
        Kong subsidiary, BAK International, is subject to Hong Kong profits tax at
        the
        rate of 17.5%. However, because it does not have any assessable income derived
        from or arising in Hong Kong, it has not paid any Hong Kong profits tax.
 
 Our
        effective tax rate was 3.9% for the six months ended March 31, 2007 and our
        effective tax benefit rate was 0.3% for the six months ended March 31, 2008.
 
 **Results
        of Operations**
 
 ***Results
        of operations for the three months ended March 31, 2008 as compared to the
        three
        months ended March 31, 2007.***
  **Three****Months****Ended**
                **March 31,****2008**
              
              **2007**
              
              **$ Change**
              
              **% Change****(In thousands, except percentages)**Statement
                  of Operations dataRevenues
              
              $
              51,336
              
              $
              29,529
              
              $
              21,807
              
              
              73.8
              %Cost
                  of revenues
              
              
              47,421
              
              
              23,383
              
              
              24,038
              
              
              102.8Gross
                  profit
              
              
              3,915
              
              
              6,146
              
              
              (2,231
              )
              
              (36.3
              )Operation
                  expenses:Research
                  and development costs
              
              
              1,390
              
              
              928
              
              
              462
              
              
              49.8Sales
                  and marketing expenses
              
              
              1,403
              
              
              1,064
              
              
              339
              
              
              31.9General
                  and administrative expenses
              
              
              4,823
              
              
              2,152
              
              
              2,671
              
              
              124.1Total
                  operating expenses
              
              
              7,616
              
              
              4,144
              
              
              3,472
              
              
              83.8Operating
                  income/ (loss)
              
              
              (3,701
              )
              
              2,002
              
              
              (5,703
              )
              
              (284.9
              )Finance
                  costs, net
              
              
              2,418
              
              
              1,164
              
              
              1,254
              
              
              107.7Government
                  grant income
              
              
              137
              
              
              -
              
              
              137
              
              
              N/AOther
                  expenses
              
              
              82
              
              
              240
              
              
              (158
              )
              
              (65.8
              )Income
                  taxes
              
              
              119
              
              
              158
              
              
              (39
              )
              
              (24.7
              )Net
                  income / (loss)
              
              $
              (6,183
              )
              $
              440
              
              $
              (6,623
              )
              
              (1,505.2
              )%
 
 *Net
        Revenues* . 
        Net revenues increased to $51.3 million for the three months ended March
        31,
        2008 as compared to $29.5 million for the same period of the prior year,
        an
        increase of $21.8 million or 73.8%.
  4
  ●
              Net
                  revenues from sales of aluminum-case cells increased to $30.3 million
                  in
                  the three months ended March 31, 2008, from $11.9 million in the
                  same
                  period in fiscal year 2007, an increase of $18.4 million or 155.3%,
                  due to an increase in sales volume of 141.5% driven by increased
                  sales to
                  the OEM market in the PRC.●
              Net
                  revenues from sales of steel-case cells decreased to $5.9 million
                  in the
                  three months ended March 31, 2008, from $7.6 million in the same
                  period in
                  fiscal year 2007, a decrease of $1.7 million or 22.6%.This
                  decrease was due to reduced sales volume of 21.9%, which was primarily
                  attributable to our strategic reduction of steel-case cell production
                  to
                  increase our aluminum-case cell production capacity in connection
                  with our
                  transition from the secondary market to the OEM market and to take
                  advantage of the greater benefits and lower costs of aluminum-case
                  cells.
                  During the three months ended March 31, 2008, the price and profit
                  margin
                  of steel-case cells were lower than those of aluminum-case cells
                  and
                  market demand for aluminum-case cells was stronger than for steel-case
                  cells. As a result, we expect to continue to increase our production
                  of
                  aluminum-case cells and decrease our production of steel-case cells.
                  We
                  expect that our revenue will be positively impacted by this
                  shift.
 
 ●
              Net
                  revenues from sales of battery packs increased to $6.6 million
                  in the
                  three months ended March 31, 2008, from $1.3 million in the same
                  period in
                  fiscal year 2007, an increase of $5.3 million or 404.9%, due to an
                  increase in sales volume of 227.0% and an increase in our average
                  selling
                  price of 54.4% driven by increased sales to the OEM market in the
                  PRC.●
              Net
                  revenues from sales of cylindrical cells increased to $6.7 million
                  in the
                  three months ended March 31, 2008, from $428,000 in the same period
                  in
                  fiscal year 2007, an increase of $6.3 million, due to an increase in
                  sales volume of 866.9% and an increase in our average selling price
                  of
                  62.1% driven by increased sales to laptop manufacturers.●
              We
                  also sold $1.9 million of lithium polymer cells in the three months
                  ended
                  March 31, 2008, compared to $473,000 of lithium polymer cells in
                  the same
                  period in 2007, due to our ability to satisfy additional demand
                  with our
                  new production line.●
              We
                  had no sales of high-power lithium-ion cells in the three months
                  ended
                  March 31, 2008, compared to $7.9 million in the same period in
                  2007, due
                  primarily to the termination in August 2007 of our manufacturing
                  agreement
                  with A123 Systems, Inc. (“A123Systems”). Currently, we are actively
                  seeking new applications for our high-power lithium-ion cells,
                  such as
                  miner’s lamps, electric bicycles and hybrid electric
                  vehicles.
  *Cost
        of Revenues* . 
        Cost of revenues increased to $47.4 million for the three months ended March
        31,
        2008, as compared to $23.4 million for the same period in fiscal year 2007,
        an increase of $24.0 million or 102.8%. The increase in cost of revenues
        was
        mainly attributable to a significant increase in the purchase cost of the
        main
        raw material in our products, lithium cobalt dioxide.
 
 As
        a
        result, gross profit for the three months ended March 31, 2008 was $3.9 million
        or 7.6% of net revenues as compared to gross profit of $6.1 million or 20.8%
        of
        net revenues for the same period in fiscal year 2007. The decrease in gross
        profit as a percentage of net revenues was primarily due to a significant
        increase in the purchase cost of the main raw material in our products, lithium
        cobalt dioxide.
  *Research
        and Development Costs* . 
        Research and development costs increased to $1.4 million for the three months
        ended March 31, 2008, as compared to $928,000 for the same period in fiscal
        year 2007. Salaries related to R&D staff increased to $499,000 from
        $299,000 for the same period of the prior year, an increase of $200,000,
        primarily due to our hiring of additional R&D professionals. Share-based
        compensation included in R&D costs increased by $93,000 due to new stock
        options granted to the employees in our R&D department on June 25, 2007 and
        January 28, 2008. Depreciation charges increased by $38,000 mainly related
        to
        certain R&D equipment held by BAK Canada.
  *Sales
        and Marketing Expenses* . 
        Sales and marketing expenses increased to $1.4 million for the three months
        ended March 31, 2008, as compared to $1.1 million for the same period in
        fiscal
        year 2007, an increase of $339,000 or 31.8%, primarily due to increased
        salaries of $147,000 and packing expenses of $137,000 in line with increased
        sales. Share-based compensation included in sales and marketing expenses
        decreased by $65,000. As a percentage of net revenues, sales and marketing
        expenses have decreased to 2.7% for the three months ended March 31, 2008,
        from
        3.6% for the same period in fiscal year 2007.
  *General
        and Administrative Expenses* . 
        General and administrative expenses increased to $4.8 million, or 9.4% of
        revenues, for the three months ended March 31, 2008, as compared to $2.2
        million, or 7.3% of revenues, for the same period in fiscal year 2007, an
        increase of $2.7 million or 124.1%. Share-based compensation included in
        general
        and marketing expenses increased by $137,000 due to new stock options granted
        to
        the employees in our general administration department on June 25, 2007 and
        January 28, 2008. Bad debt expenses for the three months ended March 31,
        2008
        were $166,000, compared with the recovery of bad debt expense of $851,000
        for
        the same period in fiscal year 2007, an increase of $1.0 million primarily
        due to the provision charged in line with increased sales after we had assessed
        the collection of accounts receivables from customers during the three months
        ended March 31, 2008. We also recognized an exchange loss of $771,000 for
        the
        three months ended March 31, 2008, compared with $206,000 for the same period
        in
        fiscal year 2007.
  5
  We
        are
        liable for liquidated damages to certain shareholders whose shares were included
        in a resale registration statement on Form SB-2 that we filed pursuant to
        a
        registration rights agreement that we entered into with such shareholders
        in
        September 2005. On August 15, 2006, the SEC declared effective a post-effective
        amendment that we had filed on August 4, 2006, terminating the effectiveness
        of
        a resale registration statement on Form SB-2 that had been filed pursuant
        to a
        registration rights agreement with certain shareholders to register the resale
        of shares held by those shareholders. In addition, on December 19, 2007,
        we
        filed our Form 10-K for our fiscal year ended September 30, 2007 (the “2007 Form
        10-K”). After the filing of the 2007 Form 10-K, our previously filed
        registration statement on Form S-1 was no longer available for resales by
        the
        selling shareholders whose shares were included in such Form S-1. Under the
        registration rights agreement, those selling shareholders became eligible
        for
        liquidated damages relating to the above two events totaling approximately
        $1
        million from us. We recognized approximately $563,000 in liquidated damages
        relating to our second fiscal quarter of 2007. Please see Part II, Item 1.
        “Legal Proceedings — Liquidated
        Damages Pursuant to September 2005 Registration Rights Agreement” for a further
        description of these liquidated damages and related accounting
        treatment.
 
 In
        addition, we are liable for liquidated damages to certain shareholders whose
        shares were included in a resale registration statement on Form S-3 that
        we
        filed pursuant to a registration rights agreement that we entered into with
        such
        shareholders in relation to a private placement that we 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 $293,475
        as of March 31, 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 $293,475 for
        the
        liquidated damages for the three months ended March 31, 2008, as compared
        to
        approximately $563,000 for the same period in 2007.
 
 As
        described under Part II, Item 1. “Legal Proceedings — Make Good Settlements” we
        have entered into settlement agreements pursuant to which we have issued
        shares
        to the shareholders that purchased shares in the November 2007 transaction
        in
        settlement of claims related to the private placement, including claims for
        liquidated damages. Pursuant to the settlement agreements, the claims of
        each
        shareholder are released as of the applicable “release date” which occurs on the
        earliest of (a) the effectiveness of a resale registration statement relating
        to
        resales by the settling shareholders of the shares issued pursuant to the
        settlement agreement; (b) the ability of the settling shareholders to sell
        such
        shares pursuant to Rule 144 under the Securities Act free of volume limitations
        and (c) such time as all of the shares received by the investor pursuant
        to the
        settlement agreement have been sold by the investor. We expect such settlements
        to result in gains in one or more future periods in accordance with their
        waivers of claims to liquidated damages.
  *Operating
        Income / (loss)* . 
        As a result of the above, operating loss totaled $3.7 million for the three
        months ended March 31, 2008, as compared to operating income of $2.0 million
        for
        the same period of the prior year, a decrease of $5.7 million or
        284.9%.
  *Finance
        Costs, Net* . 
        Finance costs, net, increased to $2.4 million for the three months ended
        March
        31, 2008, as compared to $1.2 million for the same period of the prior fiscal
        year, an increase of $1.3 million or 107.8%. We have $116.8 million in
        short-term bank loans maturing in less than one year, $8.5 million in long-term
        bank loans maturing within one year, and $31.3 million in other long-term
        bank
        loans maturing in more than one year, outstanding as of March 31, 2008, as
        compared to $71.8 million in short-term bank loans maturing in less than
        one
        year and $18.1 million in long-term bank loans maturing in more than one
        year,
        outstanding as of March 31, 2007. The increase in net finance costs is also
        attributable to the increase in the average bank loan interest rates on both
        our
        short-term and long-term bank loans and the increase in the outstanding
        principal amounts of both our short-term and long-term bank loans.
  *Government
        Grant income / Other Expenses* . 
        We had government grant income of $137,000 and other expenses of $81,000
        for the
        three month period ended March 31, 2008. Government grant income for the
        three
        months ended March 31, 2008 mainly represented the receipt of grant funds
        from
        the Chinese government to subsidize the interest expenses incurred by the
        Company 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.
 
 *Income
        tax expenses* . 
        Income tax expenses decreased to $119,000 for the three months ended March
        31,
        2008, as compared to $158,000 for the same period of 2007. The decrease was
        the
        result of a decrease in profit before tax and deferred tax provision during
        the
        quarter ended March 31, 2008.
  6
  *Net
        Income / (loss)* . 
        As a result of the foregoing, we had a net loss of $6.2 million for the three
        months ended March 31, 2008 compared to a net income of $440,000 for the
        same
        period of 2007.
 
 ***Results
        of operations for the six months ended March 31, 2008 as compared to the
        six
        months ended March*** **** ***31,
        2007***
  **Six****Months****Ended**
                **March 31,****2008**
              
              **2007**
              
              **$ Change**
              
              **% Change****(In thousands, except percentages)**Statement
                  of Operations dataRevenues
              
              $
              104,123
              
              $
              72,611
              
              $
              31,512
              
              
              43.4
              %Cost
                  of revenues
              
              
              93,103
              
              
              58,268
              
              
              34,835
              
              
              59.8Gross
                  profit
              
              
              11,020
              
              
              14,343
              
              
              (3,323
              )
              
              (23.2
              )Operation
                  expenses:Research
                  and development costs
              
              
              2,709
              
              
              1,565
              
              
              1,144
              
              
              73.1Sales
                  and marketing expenses
              
              
              2,751
              
              
              2,107
              
              
              644
              
              
              30.6General
                  and administrative expenses
              
              
              9,061
              
              
              5,113
              
              
              3,948
              
              
              77.2Total
                  operating expenses
              
              
              14,521
              
              
              8,785
              
              
              5,736
              
              
              65.3Operating
                  income / (loss)
              
              
              (3,501
              )
              
              5,558
              
              
              (9,059
              )
              
              (163.0
              )Finance
                  costs, net
              
              
              4,642
              
              
              2,065
              
              
              2,577
              
              
              124.8Government
                  grant income
              
              
              1,039
              
              
              762
              
              
              277
              
              
              36.4Other
                  expense
              
              
              40
              
              
              70
              
              
              (30
              )
              
              (42.9
              )Income
                  taxes / (benefit)
              
              
              (20
              )
              
              163
              
              
              (183
              )
              
              (112.3
              )Net
                  income / (loss)
              
              $
              (7,124
              )
              $
              4,022
              
              $
              (11,146
              )
              
              (277.1
              )
 
 *Net
        Revenues* . 
        Net revenues increased to $104.1 million for the six months ended March 31,
        2008, as compared to $72.6 million for same period of the prior fiscal year,
        an
        increase of $31.5 million or 43.4%.
 
 ●
              Net
                  revenues from sales of aluminum-case cells increased to $60.3 million
                  in
                  the six months ended March 31, 2008, from $29.1 million in the
                  same period
                  in fiscal year 2007, an increase of $31.2 million or 107.6%, due to
                  an increase in sales volume of 82.9% driven by increased sales
                  to the OEM
                  market in the PRC and an increase in the average selling price
                  by 13.5% as
                  the result of the change of type of the aluminum-case cells.●
              Net
                  revenues from sales of steel-case cells decreased to $15.6 million
                  in the
                  six months ended March 31, 2008, from $22.6 million in the same
                  period in
                  fiscal year 2007, a decrease of $7.0 million or 30.9%.This
                  decrease was due to reduced sales volume of 28.7%, which was primarily
                  attributable to our strategic reduction of steel-case cell production
                  to
                  increase our aluminum-case cell production capacity in connection
                  with our
                  transition from the secondary market to the OEM market and to take
                  advantage of the greater benefits and lower costs of aluminum-case
                  cells.****During
                  the six months ended March 31, 2008, the price and profit margin
                  of
                  steel-case cells were lower than those of aluminum-case cells and
                  market
                  demand for aluminum-case cells was stronger than for steel-case
                  cells. As
                  a result, we expect to continue to increase our production of
                  aluminum-case cells and decrease our production of steel-case cells.
                  We
                  expect that our revenue will be positively impacted by this
                  shift.
 
 ●
              Net
                  revenues from sales of battery packs increased to $11.6 million
                  in the six
                  months ended March 31, 2008, from $3.7 million in the same period
                  in
                  fiscal year 2007, an increase of $7.9 million or 211.5%, due to an
                  increase in sales volume of 97.9% and an increase in our average
                  selling
                  price of 57.4% driven by increased sales to the OEM market in the
                  PRC.
  7
 
 ●
              Net
                  revenues from sales of cylindrical cells increased to $9.3 million
                  in the
                  six months ended March 31, 2008, from $1.3 million in the same
                  period in
                  fiscal year 2007, an increase of $8.0 million or 623.2%, due to an
                  increase in sales volume of 450.6% and an increase in our average
                  selling
                  price of 31.3% driven by increased sales in exports.●
              We
                  also sold $7.3 million of lithium polymer cells in the six months
                  ended
                  March 31, 2008, compared to $1.7 million of lithium polymer cells
                  in the
                  same period in 2007, due to our ability to satisfy additional demand
                  with
                  our new production line.●
              We
                  had no sales of high-power lithium-ion cells in the six months
                  ended March
                  31, 2008, compared to $14.3 million in the same period in 2007,
                  due
                  primarily to the termination in August 2007 of our manufacturing
                  agreement
                  with A123Systems. Currently, we are actively seeking new applications
                  for
                  our high-power lithium-ion cells, such as miner’s lamps, electric bicycles
                  and hybrid electric vehicles.
  *Cost
        of Revenues* . 
        Cost of revenues increased to $93.1 million for the six months ended March
        31,
        2008, as compared to $58.3 million for the same period in fiscal year 2007,
        an increase of $34.8 million or 59.8%. The increase in cost of revenues was
        mainly due to a significant increase in the purchase cost of the main raw
        material in our products, lithium cobalt dioxide.
  As
        a
        result, gross profit for the six months ended March 31, 2008, was $11.0 million
        or 10.6% of net revenues as compared to gross profit of $14.3 million or
        19.8%
        of net revenues for the same period in fiscal year 2007. The decrease in
        gross profit as a percentage of net revenues was primarily due to a significant
        increase in the purchase cost of the main raw material in our products, lithium
        cobalt dioxide.
  *Research
        and Development Costs* . 
        Research and development costs increased to $2.7 million for the six months
        ended March 31, 2008, as compared to $1.6 million for the same period in
        fiscal
        year 2007. Share-based compensation included in research and development
        costs increased by $239,000 due to new stock options granted to the employees
        in
        our R&D department on June 25, 2007 and January 28, 2008. Salaries related
        to R&D staff increased to $875,000 from $526,000 for the same period of the
        prior fiscal year, an increase of $349,000, primarily due to our hiring of
        additional R&D professionals. R&D material costs increased to $532,000
        from $367,000 for the same period of the prior fiscal year, an increase of
        $165,000, primarily as a result of certain new research projects of BAK
        Canada.
 
 *Sales
        and Marketing Expenses* . 
        Sales and marketing expenses increased to $2.8 million for the six months
        ended
        March 31, 2008, as compared to $2.1 million for the same period in fiscal
        year 2007, a decrease of $644,000 or 30.6%. Share-based compensation
        included in sales and marketing expenses increased by $56,000 due to new
        stock
        options granted to the employees in our sales department on June 25, 2007.
        Salaries increased by $203,000 as the result of salary raises granted to
        existing sales and marketing staff. Packing expenses increased by $204,000
        in
        line with increased sales. As a percentage of net revenues, sales and marketing
        expenses have decreased to 2.6% for the six months ended March 31, 2008,
        from
        2.9% for the same period in fiscal year 2007.
  *General
        and Administrative Expenses* . 
        General and administrative expenses increased to $9.1 million, or 8.7% of
        revenues, for the six months ended March 31, 2008, as compared to $5.1 million,
        or 7.0% of revenues, for the same period in fiscal year 2007, an increase
        of $3.9 million or 77.2%. Salaries increased by $178,000 as a result of salary
        raises. Share-based compensation included in general and marketing expenses
        increased by $404,000 due to new stock options granted to the employees in
        our
        general administration department on June 25, 2007 and January 28, 2008.
        Bad
        debt expenses increased by $1.7 million due to the provision charged in line
        with increased sales after we had assessed the collection of accounts
        receivables from customers during the six months ended March 31, 2008. We
        recognized exchange loss of $771,000 for the six months ended March 31, 2008,
        compared with $206,000 for the same period in fiscal
        year 2007.
 
 We
        are
        liable for liquidated damages to certain shareholders whose shares were included
        in a resale registration statement on Form SB-2 that we filed pursuant to
        a
        registration rights agreement that we entered into with such shareholders
        in
        September 2005. On August 15, 2006, the SEC declared effective a post-effective
        amendment that we had filed on August 4, 2006, terminating the effectiveness
        of
        a resale registration statement on Form SB-2 that had been filed pursuant
        to a
        registration rights agreement with certain shareholders to register the resale
        of shares held by those shareholders. In addition, on December 19, 2007,
        we
        filed our 2007 Form 10-K. After the filing of the 2007 Form 10-K, our previously
        filed registration statement on Form S-1 was no longer available for resales
        by
        the selling shareholders whose shares were included in such Form S-1. Under
        the
        registration rights agreement, those selling shareholders became eligible
        for
        liquidated damages relating to the above two events totaling approximately
        $1.0
        million from us. We recognized approximately $760,000 in liquidated damages
        relating to the six months ended March 31, 2008. Please see Part II, Item
        1.
“Legal Proceedings — Liquidated
        Damages Pursuant to September 2005 Registration Rights Agreement” for a further
        description of these liquidated damages and related accounting
        treatment.
  8
  In
        addition, we are liable for liquidated damages to certain shareholders whose
        shares were included in a resale registration statement on Form S-3 that
        we
        filed pursuant to a registration rights agreement that we entered into with
        such
        shareholders in relation to a private placement that we 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 $293,475
        as of March 31, 2008 .
        Please
        see Part II, Item 1. “Legal Proceedings — Liquidated
        Damages Pursuant to November 2007 Registration Rights Agreement” for a further
        description of the liquidated damages. We
        therefore recognized in general and administrative expenses an amount of $293,475 for
        the
        liquidated damages for the six months ended March 31, 2008, as compared to
        approximately $760,000 for the same period in 2007.
 
 As
        described under Part II, Item 1. “Legal Proceedings — Make Good Settlements” we
        have entered into settlement agreements pursuant to which we have issued
        shares
        to the shareholders that purchased shares in the November 2007 transaction
        in
        settlement of claims related to the private placement, including claims for
        liquidated damages. Pursuant to the settlement agreements, the claims of
        each
        shareholder are released as of the applicable “release date” which occurs on the
        earliest of (a) the effectiveness of a resale registration statement relating
        to
        resales by the settling shareholders of the shares issued pursuant to the
        settlement agreement; (b) the ability of the settling shareholders to sell
        such
        shares pursuant to Rule 144 under the Securities Act free of volume limitations
        and (c) such time as all of the shares received by the investor pursuant
        to the
        settlement agreement have been sold by the investor. We expect such settlements
        to result in gains in one or more future periods in accordance with their
        waivers of claims to liquidated damages.
 
 *Operating
        Income/(loss)* . 
        As a result of the above, operating loss totaled $3.5 million for the six
        months
        ended March 31, 2008, as compared to operating income of $5.6 million for
        the
        same period of the prior fiscal year, a decrease of $9.1 million or 163.0%.
  *Finance
        Costs, Net* . 
        Finance costs, net, increased to $4.6 million for the six months ended March
        31,
        2008, as compared to $2.1 million for the same period of the prior fiscal
        year,
        an increase of $2.6 million or 124.8%. We have $116.8 million in short-term
        bank
        loans maturing in less than one year, $8.5 million in long-term bank loans
        maturing within one year, and $31.3 million in long-term bank loans maturing
        in
        more than one year, outstanding as of March 31, 2008, as compared to $71.8
        million in short-term bank loans maturing in less than one year and $18.1
        million in long-term bank loans maturing in more than one year, outstanding
        as
        of March 31, 2007. The increase in net finance costs is also attributable
        to the
        increase in the average bank loan interest rates on both our short-term and
        long-term bank loans and the increase in the outstanding principal amounts
        of
        both our short-term and long-term bank loans.
  *Government
        Grant Income* . 
        Government grant income was $1.0 million for the six months ended March 31,
        2008, as compared to government grant income of $762,000 for the same period
        of
        fiscal year 2007. Government grant income for the six months ended March
        31, 2008 mainly consisted of government grant funds to subsidize the interest
        expenses incurred by the Company 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. No present or future obligation will arise from the receipt of
        such
        income.
  *Income
        tax expenses / (benefits)* . 
        Income tax benefit were $20,000 for the six months ended March 31, 2008,
        as
        compared to income tax expense of $163,000 for the same period of fiscal
        year 2007. The decrease was the result of a decrease profit before tax and
        deferred tax provision during the six months ended March 31, 2008.
 
 *Net
        Income / (Loss)* . 
        As a result of the foregoing, we had a net loss of $7.1 million for the six
        months ended March 31, 2008, as compared to a net income of $4.0 million
        for the
        same period in 2007.
  **Liquidity
        and Capital Resources**
  We
        have
        historically financed our liquidity requirements from a variety of sources,
        including short-term bank loans and bills payable under bank credit agreements,
        long term bank loans, sale of bills receivable and issuance of capital stock.
        As
        of March 31, 2008, we had cash and cash equivalents of $36.9 million, as
        compared to $14.2 million as of September 30, 2007. In addition, we had pledged
        deposits amounting to $4.4 million and $4.6 million at March 31, 2008 and
        September 30, 2007, respectively. Typically, banks will require borrowers
        to
        maintain deposits ranging from approximately 20% to 100% of the outstanding
        loan
        balances and bills payable. The individual short term bank loans have maturities
        ranging from six to twelve months which coincides with the periods the cash
        remains pledged to the banks.
  9


The
        following table sets forth a summary of our cash flows for the periods
        indicated:
  **Six Months Ended March 31,****2008**
              
              **2007****(in
                  thousands)**Net
                  cash (used in) / provided by operating activities
              
              
              (6,212
              )
              
              5,350Net
                  cash used in investing activities
              
              
              (16,320
              )
              
              (36,556
              )Net
                  cash provided by financing activities
              
              
              42,128
              
              
              24,507Effect
                  of exchange rate changes on cash and cash equivalents
              
              
              3,091
              
              
              439Net
                  increase / (decrease) in cash and cash equivalent
              
              
              22,687
              
              
              (6,260
              )Cash
                  and cash equivalents at the beginning of period
              
              
              14,196
              
              
              21,100Cash
                  and cash equivalents at the end of period
              
              
              36,883
              
              
              14,840
 
 **Operating
        Activities**
  Net
        cash
        used in operating activities was $6.2 million in the six months ended March
        31,
        2008, compared to net cash provided by operating activities of $5.4 million
        in
        the same period in fiscal year 2007. The decrease of $11.6 million in operating
        activities was mainly attributable to increased prepayments to certain raw
        materials suppliers to increase our purchases of the main raw materials in
        our
        products, lithium cobalt dioxide, in anticipation of a future increase in
        its
        cost.
  **Investing
        Activities**
  Net
        cash
        used in investing activities decreased from $36.6 million in the six months
        ended March 31, 2007, to $16.3 million in the same period in fiscal year
        2008.
        The net cash used in investing activities during the period ended March 31,
        2008, was mainly used for purchases of equipment for a new automated cylindrical
        cell production line and a new automated prismatic cell production
        line.
 
 **Financing
        Activities**
  Net
        cash
        provided by financing activities was $42.1 million in the six months ended
        March
        31, 2008, compared to $24.5 million in the same period in 2007. This was
        mainly
        attributable to (i) net proceeds of $12.8 million from a private placement
        of
        our common stock completed in November 2007, (ii) a $1.2 million increase
        in net
        proceeds from our issuance of capital stock in the six months ended March
        31,
        2008, (iii) a $4.1 million decrease in cash deposits at banks as collateral
        in
        the six months ended March 31, 2008 and (iv) additional borrowings, net of
        repayments, of $7.7 million.
  As
        of
        March 31, 2008, the principal outstanding under our credit facilities and
        lines
        of credit were as follows:
  **Maximum**
                **Amount**
                **Available**
              
              **Amount**
                **Borrowed****(in
                  thousands)****Short-term
                  credit facilities:**Agricultural
                  Bank of China
              
              $
              85,482
              
              $
              26,316Shenzhen
                  Development Bank
              
              
              21,371
              
              
              21,371Shenzhen
                  Ping An Bank
              
              
              28,494
              
              
              21,371China
                  CITIC Bank
              
              
              28,494
              
              
              30,002Bank
                  of China
              
              
              64,112
              
              
              38,290Industrial
                  Bank
              
              
              8,904
              
              
              7,124Subtotal—short-term
                  credit facilities
              
              $
              236,857
              
              $
              144,474**Long-term
                  credit facilities:**Agricultural
                  Bank of China
              
              
              28,494
              
              
              25,645China
                  Development Bank
              
              
              14,247
              
              
              14,247Subtotal—long-term
                  credit facilities
              
              
              42,741
              
              
              39,892**Lines
                  of Credit:**Bank
                  of China
              
              
              
              
              
              2,785Subtotal—lines
                  of credit
              
              
              
              
              
              2,785Total
                  Principal Outstanding
              
              
              
              
              $
              187,151
  10
 
 There
        are
        no restrictions for our above unused credit facilities.
  The
        above
        principal outstanding amounts under credit facilities included short-term
        bank
        loans of $116.8 million, bills payable of $30.4 million and long-term bank
        loans
        of $39.9 million. ****
  For
        the
        purpose of presentation, the movement in bills payable balances is included
        in
        operating activities in the statements of cash flows due to their
        nature.
  We
        refinanced our short-term bank loans during the three months ended March
        31,
        2008 at annual interest rates of 5.751% to 8.217%, payable monthly, and for
        terms of six to twelve months. These debt arrangements are generally guaranteed
        by Mr. Xiangqian Li, our chairman, president, and chief executive officer.
        Pursuant to the refinancing, we pledged $21.4 million of inventory and $16.1
        million of equipment and machinery as security for our comprehensive credit
        facility with Agricultural Bank of China and Shenzhen Development Bank as
        of
        March 31, 2008. We also committed to pledge the property ownership and land
        use
        rights certificate to be obtained in relation to the land on which our corporate
        campus had been constructed for short-term bank loans amounting to $25,644,000
        borrowed from Shenzhen Eastern Branch, Agricultural Bank of China. The aggregate
        net book value of the buildings and land use right in relation to the property
        ownership and land use rights certificate as of March 31, 2008 was $91.6
        million.
  During
        the three months ended March 31, 2008, we entered into two new short-term
        bank
        loan agreements totaling $12.8 million. The two new short-term bank loan
        agreements provide for monthly interest payments at annual interest rates
        from
        7.47% to 8.217%, with principal repayments at maturities during the first
        calendar quarter of 2009. These loan agreements are guaranteed by Mr. Li.
  On
        March
        24, 2008, we entered into a Comprehensive Credit Facility Agreement with
        Shenzhen Branch, Industrial Bank. This Credit Facility is guaranteed by Mr.
        Xiangqian Li. We may borrow up to RMB 62.5 million ($8.9 million) under this
        Comprehensive Credit Facility Agreement, which will mature on March 25, 2009.
        As
        of March 31, 2008, we had borrowed $7.1 million under this Comprehensive
        Credit
        Facility Agreement.
  On
        November 23, 2006, Shenzhen BAK entered into a $28.5 million long-term loan
        agreement with Shenzhen Eastern Branch, Agricultural Bank of China, which
        became
        effective on December 18, 2006. The long-term loan may be drawn at any time
        within five years of the effective date of the loan agreement, and will mature
        in five years after it is drawn. The long-term loan when drawn will carry
        a
        floating interest rate of 90% of the People’s Bank of China benchmark rate. The
        long-term loan is secured by pledged machinery and equipment valued at $13.3
        million as of March 31, 2008, and by the property ownership and land use
        rights
        certificate to be obtained in relation to the land on which our corporate
        campus
        had been constructed and the future machinery and equipment to be purchased
        and
        used in the campus. Shenzhen BAK’s obligations under the loan agreement are
        guaranteed by Mr. Xiangqian Li. As of March 31, 2008, we had borrowed $25.6
        million under this loan agreement. The loan of $5,698,817 has an interest
        rate
        of 5.832% per annum, and is repayable on January 25, 2012. The second loan
        of
        $11,397,635 has an interest rate of 6.237% per annum, and is repayable in
        three
        installments of $2,849,409 on January 25, 2010, $7,123,522 on January 25,
        2011,
        and $1,424,704 on January 25, 2012, respectively. The third loan of $8,548,226
        has an interest rate of 7.65% per annum, and is repayable in two installments
        of
        $4,274,113 on January 25, 2009 and $4,274,113 on January 25, 2010, respectively.
 
 On
        December 26, 2006, Shenzhen BAK entered into a four-year long-term loan
        agreement of $14.3 million with Shenzhen Branch, China Development Bank.
        The
        long-term loan is payable in three installments as follows:
  RMB
        30
        million ($4.3 million) on November 20, 2008;
  RMB
        30
        million ($4.3 million) on November 20, 2009; and
  RMB
        40
        million ($5.7 million) on December 26, 2010.
  11
  The
        long-term loan carries an annual interest rate equal to the benchmark rate
        of
        the People’s Bank of China for three- to five-year long-term loans, which is
        currently 6.48% per annum. The long-term loan is secured by Shenzhen BAK’s
        pledge of its new Research and Development Test Center, which is to be
        constructed in Shenzhen, China, after Shenzhen BAK obtains the required land
        use
        rights for the location of the facility; such land use rights will also be
        pledged as security. **** The
        obligations of Shenzhen BAK under the loan agreement are guaranteed by Mr.
        Li
        and also secured by certain shares of the Company owned by Mr. Li. We borrowed
        the full $14.2 million under this loan agreement on December 27, 2006.
 
 We
        had
        negative working capital of $10.0 million as of March 31, 2008, as compared
        to
        negative working capital of $7.0 million as of September 30, 2007. We had
        short-term bank loans maturing in less than one year of $116.8 million and
        long-term bank loans maturing within one year of $8.5 million as of March
        31,
        2008, for a total of $125.3 million of loans maturing within one year, as
        compared to a total of $89.9 million of such loans as of September 30, 2007,
        an
        increase of $35.4 million. We had long-term bank loans maturing in over one
        year
        of $31.3 million as of March 31, 2008, as compared to $29.3 million of such
        loans as of September 30, 2007, an increase of $2.0 million.
  We
        believe that our current cash and cash equivalents and anticipated cash flow
        from operations will be sufficient to meet our anticipated cash needs, including
        our cash needs for working capital and capital expenditures for at least
        the
        next 12 months. We may, however, require additional cash due to changing
        business conditions or other future developments, including any investments
        or
        acquisitions we may decide to pursue. If our existing cash and amount available
        under existing credit facilities is insufficient to meet our requirements,
        we
        may seek to sell debt securities or borrow from lending institutions. We
        can
        make no assurances that financing will be available in the amounts we need
        or on
        terms acceptable to us, if at all. The sale of additional equity securities,
        including convertible debt securities, would dilute our shareholders. The
        incurrence of debt would divert cash for working capital and capital
        expenditures to service debt obligations and could result in operating and
        financial covenants that restrict our operations and our ability to pay
        dividends to our shareholders. If we are unable to obtain additional equity
        or
        debt financing as required, our business operations and prospects may
        suffer.
  **Capital
        Expenditures**
  We
        made
        capital expenditures of $16.3 million and $36.6 million in the six months
        ended
        March 31, 2008 and 2007, respectively. Our capital expenditures were used
        primarily to purchase plant and equipment to expand our production capacity
        and
        construction of new factories in Tianjin. The following table sets forth
        the
        breakdown of our capital expenditures by use for the periods
        indicated :
  **Six Months Ended March 31,****2008**
              
              **2007****(in
                  thousands)**Construction
                  costs
              
              $
              5,602
              
              $
              23,808Purchase
                  of equipment
              
              $
              10,718
              
              $
              12,748Total
                  capital expenditures
              
              $
              16,320
              
              $
              36,556
  We
        estimate that our total capital expenditures in fiscal year 2008 will reach
        approximately $60.7 million, primarily to purchase manufacturing equipment
        for
        the expansion of our production lines and construction of new factories in
        Tianjin and our new Research and Development Test Centre in
        Shenzhen.
 
 We
        are
        continuing the construction of 185,993 square meters of new facilities comprised
        of manufacturing facilities, warehousing and packaging facilities, dormitory
        space and administrative offices at the BAK Industrial Park in Shenzhen.
        Such
        construction is estimated to be completed at the end of calendar year 2008.
        Of
        that space, approximately 111,000 square meters are to be new manufacturing
        facilities. We have completed construction and put into use an additional
        administrative area, production facility, four manufacturing facilities,
        a
        warehouse and packaging facility, three dormitories and two dining halls.
        At
        present, we have no significant payment obligations related to these
        facilities.
  According
        to the relevant PRC laws and regulations, a land use right certificate, along
        with government approvals for land planning, project planning, and construction
        must be obtained before the construction of any building is commenced. An
        ownership certificate will be granted by the government upon application
        under
        the condition that the aforementioned certificate and government approvals
        are
        obtained. Currently, we do not hold the land use right to the tract of property
        on which we have constructed and on which we plan further construction of
        our
        manufacturing facilities and other related facilities in Shenzhen. While
        w e
        are
        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 does not have the authority
        to
        grant us the land use rights certificate. Under our agreement with the Kuichong
        Township government, we must pay for a 50-year land use rights certificate
        at an
        agreed unit price, which in the aggregate amounted to $4.0 million as of
        September 30, 2004 and $3.5 million as of September 30, 2007, following an
        adjustment of the site area after a land survey and foreign exchange adjustment.
        Out of the $3.5 million, $3.0 million has been paid to the Kuichong Township
        government. The Shenzhen municipal government has approved the grant of a
        land
        use rights certificate, which we are currently in the process of obtaining.
        In
        the meantime, we have recognized a net payable purchase price of $566,000
        for
        the land use rights on the assumption that it will be on the same terms as
        those
        agreed with the Kuichong Township government.
  12
 
 As
        of March 31, 2008, we had fully paid the lease prepayment amount of $14.1
        million for the acquisition of land use rights in Tianjin and the application
        for the land use rights certificate was in process.
 
 The
        following table sets forth our contractual obligations and commercial
        commitments as of March 31, 2008:
  **Payment Due by Period****Total**
              
              **Less than**
                **1 Year**
              
              **1-3 Years**
              
              **3-5 Years**
              
              **More than**
                **5 Years****(in
                  thousands)**Short-term
                  bank loans
              
              
              116,825,758
              
              
              116,825,758
              
              
              -
              
              
              -
              
              
              -Bills
                  payable
              
              
              30,432,605
              
              
              30,432,605
              
              
              -
              
              
              -
              
              
              -Long-term
                  bank loans
              
              
              39,891,722
              
              
              8,548,226
              
              
              17,096,452
              
              
              14,247,044
              
              
              -Land
                  use rights payable
              
              
              566
              
              
              566
              
              
              -
              
              
              -
              
              
              -Capital
                  commitments
              
              
              23,729,033
              
              
              23,729,033
              
              
              -
              
              
              -
              
              
              -Future
                  interest payment on short-term bank loans
              
              
              4,634,183
              
              
              4,634,183
              
              
              -
              
              
              -
              
              
              -Future
                  interest payment on long-term bank loans
              
              
              5,382,308
              
              
              1,742,107
              
              
              3,145,416
              
              
              494,785
              
              
              -Total
              
              
              220,896,175
              
              
              185,912,478
              
              
              20,241,868
              
              
              14,741,829
              
              
              -
  Other
        than the contractual obligations and commercial commitments set forth above,
        we
        did not have any other long-term debt obligations, operating lease obligations,
        capital commitments, purchase obligations or other long-term liabilities
        as of
        March 31, 2008.
  **Off-Balance
        Sheet Transactions**
 
 In
        the
        ordinary course of business practices in China, we enter into transactions
        with
        banks or other lenders where we guarantee the debt of other parties. These
        parties may be related to or unrelated to us. Conversely, our debt with lenders
        may also be guaranteed by other parties which may be related or unrelated
        to
        us.
 
 Under
        U.S. GAAP, these transactions may not be recorded on our balance sheet or
        may be
        recorded in amounts different than the full contract or notional amount of
        the
        transaction. Our primary off balance sheet arrangements would result from
        our
        loan guaranties in which Shenzhen BAK would provide contractual assurance
        of the
        debt, or guarantee the timely re-payment of principal and interest of the
        guaranteed party.
 
 Typically,
        no fees are received for this service. Thus, in those transactions, Shenzhen
        BAK
        would have a contingent obligation related to the guarantee of payment in
        the
        event the underlying loan is in default.
 
 Transactions
        described above require accounting treatment under FASB Interpretation 45,
        “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including
        Indirect Guarantees of Indebtedness of Others,” or FIN 45. Under that standard,
        we would be required to recognize the fair value of guarantees issued or
        modified after December 31, 2002, for non-contingent guarantee obligations,
        and
        also a liability for contingent guarantee obligations based on the probability
        that the guaranteed party will not perform under the contractual terms of
        the
        guaranty agreement.
 
 We
        have
        assessed the contingent liabilities arising from the above-described guarantees
        and have considered them immaterial to the consolidated financial statements.
        Therefore, no liabilities in respect of the guarantees were recognized as
        of
        March 31, 2008. As of March 31, 2008, we provided a guarantee for a non-related
        party, Nanjing Special Metal Equipment Co., Ltd., of one-year short-term
        bank
        loans with Evergrowing Bank with a maturity of August 6, 2010. We also provided
        the guarantees for three other non-related parties, Hunan Reshine New Material
        Ltd, Shenzhen Tongli Hi-tech Co. Ltd. and Shenzhen B&G Technology
        Development Co. Ltd. The maximum amount of our exposure for these guarantees
        was
        $13.5 million and $6.7 million at March 31, 2008, and September 30, 2007,
        respectively.
  13
 
 **Interest
        Rate Risk**
 
 We
        are
        exposed to interest rate risk primarily with respect to our short-term bank
        loans and long-term bank loans. Although the interest rates, which are based
        on
        the banks’ prime rates with respect to our short-term loans are fixed for the
        terms of the loans, the terms are typically six to twelve months for short-term
        bank loans and interest rates are subject to change upon renewal. There were
        no
        material changes in interest rates for short-term bank loans renewed during
        the
        three months ended March 31, 2008.
  We
        have a
        long-term bank loan of $13.7 million maturing on December 26, 2010 with Shenzhen
        Branch, China Development Bank with three installments payable under which
        we
        have outstanding borrowings; the interest rate we pay on this long term loan
        is
        benchmark rate of the People’s Bank of China for three- to five- year long-term
        loans. In addition, we have a RMB 200 million (approximately $28.5 million)
        long-term loan agreement with Shenzhen Eastern Branch, Agricultural Bank
        of
        China, which became effective on December 18, 2006. The long-term loan may
        be
        drawn at any time within five years from the effective date of the agreement
        and
        will mature five years after it is drawn. The term loan, when drawn, will
        carry
        a floating interest rate of 90% of The People’s Bank of China benchmark rate for
        three-year to five-year long-term loans. As of March 31, 2008, we had borrowed
        $25.6 million under this loan agreement. This loan comprises a borrowed amount
        of $4.3 million with a current interest rate of 5.832% and repayable on January
        25, 2012; a borrowed amount of $1.4 million with a current interest rate
        of
        5.832% and repayable on January 25, 2012; a borrowed amount of $11.4 million
        with a current interest rate of 6.237%, repayable in three installments of
        $2.8
        million on January 25, 2010, $7.1 million on January 25, 2011, and $1.5 million
        on January 25, 2012, respectively; and a borrowed amount of $8.5 million
        with a
        current interest rate of 7.65%, repayable in two installments of $4.2 million
        on
        January 25, 2009 and $4.3 million on January 25, 2010, respectively.
 
 A
        hypothetical 1.0% increase in the annual interest rates for all of our credit
        facilities under which we had outstanding borrowings at March 31, 2008, would
        decrease net income before provision for income taxes by approximately $783,000
        or 10.9% for the six months ended March 31, 2008. Management monitors the
        banks’
prime rates in conjunction with our cash requirements to determine the
        appropriate level of debt balances relative to other sources of funds. We
        have
        not entered into any hedging transactions in an effort to reduce our exposure
        to
        interest rate risk.
 
 **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 83.1% of our revenues and 96.9% of
        our
        costs and expenses for the six months ended March 31, 2008 are denominated
        in
        RMB, with the balance denominated in U.S. dollars. Approximately 99.7% of
        our
        assets except for cash were denominated in RMB as of March 31, 2008. As a
        result, we are exposed to foreign exchange risk as our revenues and results
        of
        operations may be affected by fluctuations in the exchange rate between U.S.
        dollars and RMB. If the RMB depreciates against the U.S. dollar, the value
        of
        our RMB revenues, earnings and assets as expressed in our U.S. dollar financial
        statements will decline. Assets and liabilities of our operating subsidiaries
        are translated into U.S. dollars at the exchange rate at the balance sheet
        date,
        their equity accounts are translated at historical exchange rate and their
        income and expenses items are translated using the average rate for the period.
        Any resulting exchange differences are recorded in accumulated other
        comprehensive income or loss. An average appreciation (depreciation) of the
        RMB
        against the U.S. dollar of 5% would increase (decrease) our comprehensive
        income
        by $7.9 million based on our outstanding revenues, costs and expenses, assets
        and liabilities denominated in RMB as of March 31, 2008. As of March 31,
        2008,
        our accumulated other comprehensive income was $10.1 million. We have not
        entered into any hedging transactions in an effort to reduce our exposure
        to
        foreign exchange risk.
 
 **Critical
        Accounting Policies**
 
 Our
        consolidated financial information has been prepared in accordance with U.S.
        GAAP, which requires us to make judgments, estimates and assumptions that
        affect
        (1) the reported amounts of our assets and liabilities, (2) the disclosure
        of
        our contingent assets and liabilities at the end of each fiscal period and
        (3)
        the reported amounts of revenues and expenses during each fiscal period.
        We
        continually evaluate these estimates based on our own historical experience,
        knowledge and assessment of current business and other conditions, our
        expectations regarding the future based on available information and reasonable
        assumptions, which together form our basis for making judgments about matters
        that are not readily apparent from other sources. Since the use of estimates
        is
        an integral component of the financial reporting process, our actual results
        could differ from those estimates. Some of our accounting policies require
        a
        higher degree of judgment than others in their application.
 
 When
        reviewing our financial statements, the following should also be considered:
        (1)
        our selection of critical accounting policies, (2) the judgment and other
        uncertainties affecting the application of those policies, and (3) the
        sensitivity of reported results to changes in conditions and assumptions.
        We
        believe the following accounting policies involve the most significant judgment
        and estimates used in the preparation of our financial
        statements.
  14
  ***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 March 31,
        2008,
        and September 30, 2007, the carrying amount of property, plant and equipment,
        net was $167.9 million and $145.1 million, respectively. We assess the
        recoverability of property, plant and equipment to be held and used by a
        comparison of the carrying amount of an asset or group of assets to the future
        net undiscounted cash flows expected to be generated by the asset or group
        of
        assets. If such assets are considered impaired, the impairment recognized
        is
        measured as the amount by which the carrying amount of the assets exceeds
        the
        fair value of the assets.
 
 A
        prolonged general economic downturn and, specifically, a continued downturn
        in
        the battery cell industry as well as other market factors could intensify
        competitive pricing pressure, create an imbalance of industry supply and
        demand,
        or otherwise diminish volumes or profits. Such events, combined with changes
        in
        interest rates, could adversely affect our estimates of future net cash flows
        to
        be generated by our long-lived assets. Consequently, it is possible that
        our
        future operating results could be materially and adversely affected by
        additional impairment charges related to the recoverability of our long-lived
        assets.
 
 ***Inventory
        Obsolescence***
 
 We
        review
        our inventory for potential impairment on a quarterly or more frequent basis
        as
        deemed necessary. Such review includes, but is not limited to, reviewing
        the
        levels of inventory versus customer requirements and obsolescence. The review
        and evaluation also considers the potential sale of impaired inventory at
        lower
        than market prices. At each balance sheet date, we identify inventories that
        are
        worth less than cost and write them down to their net realizable value and
        the
        difference is charged to our cost of revenues of that period. Though management
        considers such write-down of inventories adequate and proper, changes in
        sales
        volumes due to unexpected economic or competitive conditions are among the
        factors that could materially affect the adequacy of such write
        down.
 
 ***Allowance
        for Doubtful Accounts***
 
 The
        allowance for doubtful accounts is our best estimate of the amount of probable
        credit losses in our accounts receivable. We determine the allowance based
        on
        historical write-off experience, customer specific facts and economic
        conditions. Bad debt expense is included in the general and administrative
        expenses. We review outstanding account balances individually for
        collectibility. Account balances are charged off against the allowance after
        all
        means of collection have been exhausted and the potential for recovery is
        considered remote. As of March 31, 2008, and September 30, 2007, we had not
        charged off any balances as we had yet to exhaust all means of
        collection.
 
 ***Stock-Based
        Compensation***
 
 We
        adopted the provisions of SFAS 123R, which requires the use of the fair value
        method of accounting for share-based compensation. Under the fair value based
        method, compensation cost related to employee stock options or similar equity
        instruments is measured at the grant date based on the value of the award
        and is
        recognized over the service period, which is usually the vesting period.
        SFAS
        123R also requires measurement of cost of a liability-classified award based
        on
        its current fair value. The fair value of the liability-classified award
        will be
        subsequently remeasured at each reporting date through the settlement date.
        Change in fair value during the requisite service period will be recognized
        as
        compensation cost over that period.
 
 We
        determine fair value using the Black-Scholes model. Under this model, certain
        assumptions, including the risk-free interest rate, the expected life of
        the
        options and the estimated fair value of our ordinary shares and the expected
        volatility, are required to determine the fair value of the options. If
        different assumptions had been used, the fair value of the options would
        have
        been different from the amount we computed and recorded, which would have
        resulted in either an increase or decrease in the compensation
        expense.
 
 Pursuant
        to SFAS 123R, we have recognized compensation costs of $1.7 million in relation
        to stock-based award to our employees and non-employee directors in the six
        months ended March 31, 2008, as an increase in both the operating costs and
        shareholder’s equity.
 
 **Changes
        in Accounting Standards**
 
 In
        July
        2006, the FASB issued FIN 48 “Accounting for Uncertainty in Income Taxes-an
        Interpretation of FASB Statement No. 109” which clarifies the accounting for
        uncertainty in tax positions. This Interpretation requires that we recognize
        in
        its consolidated financial statements the impact of a tax position if that
        position is more likely than not of being sustained on audit, based on the
        technical merits of the position. The provisions of FIN 48 became effective
        for
        us on October 1, 2007. The adoption of FIN 48 has no material impact on the
        Company’s financial statements.
  15
 
 In
        September 2006, the FASB issued SFAS 157, “Fair Value Measurements”, which
        defines fair value, establishes a framework for measuring fair value in
        generally accepted accounting principles and expands disclosures about fair
        value measurements. SFAS 157 applies under other accounting pronouncements
        that
        require or permit fair value measurements, where fair value is the relevant
        measurement attribute. The standard does not require any new fair value
        measurements. SFAS 157 is effective for financial statements issued for fiscal
        years beginning after November 15, 2007, and interim periods within those
        fiscal
        years. The management is in the process of evaluating the impact SFAS 157
        will
        have on the Company’s financial statements upon adoption.
 
 In
        February 2007, FASB issued SFAS No. 159, “The Fair Value Option for Financial
        Assets and Financial Liabilities - Including an Amendment of FASB Statement
        No.
        115,” SFAS No. 159 permits entities to choose to measure many financial
        instruments and certain other items at fair value. Entities that elect the
        fair
        value option will report unrealized gains and losses in earnings at each
        subsequent reporting date. The fair value option may be elected on an
        instrument-by-instrument basis, with a few exceptions. SFAS No. 159 also
        establishes presentation and disclosure requirements to facilitate comparisons
        between entities that choose different measurement attributes for similar
        assets
        and liabilities. The requirements of SFAS No. 159 are effective for our fiscal
        year beginning on October 1, 2008. The management is in the process of
        evaluating the impact SFAS 159 will have on the Company’s financial statements
        upon adoption.
 
 In
        December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests in
        Consolidated Financial Statements-an amendment of ARB No. 51”. SFAS 160
        establishes accounting and reporting standards for the noncontrolling interest
        in a subsidiary and for the deconsolidation of a subsidiary. The guidance
        will
        become effective for the fiscal year beginning after December 15, 2008. The
        management is in the process of evaluating the impact SFAS 160 will have
        on the
        Company’s financial statements upon adoption.
 
 In
        December 2007, the FASB issued SFAS No. 141 (Revised) “Business Combinations.”
SFAS 141 (Revised) establishes principles and requirements for how the acquirer
        of a business recognizes and measures in its financial statements the
        identifiable assets acquired, the liabilities assumed, and any noncontrolling
        interest in the acquiree. The statement also provides guidance for recognizing
        and measuring the goodwill acquired in the business combination and determines
        what information to disclose to enable users of the financial statements
        to
        evaluate the nature and financial effects of the business combination. The
        guidance will become effective for the fiscal year beginning after December
        15,
        2008. The management is in the process of evaluating the impact SFAS 141
        (Revised) will have on the Company’s financial statements upon
        adoption.
 
 In
        March
        2008, the FASB issued SFAS No. 161 “Disclosures about Derivative
        Instruments and Hedging Activities”. SFAS 161 is intended to improve financial
        reporting about derivative instruments and hedging activities by requiring
        enhanced disclosures to enable investors to better understand their effects
        on
        an entity’s financial position, financial performance, and cash flows. It is
        effective for financial statements issued for fiscal years and interim periods
        beginning after November 15, 2008, with early application encouraged. The
        management is in the process of evaluating the impact SFAS 161 will have
        on the
        Company’s financial statements upon adoption.
 
 **Exchange
        Rates**
 
 The
        financial records of Shenzhen BAK, BAK Electronics and BAK Tianjin are
        maintained in RMB. In order to prepare our financial statements, we have
        translated amounts in RMB into amounts in U.S. dollars. The amounts of our
        assets and liabilities on our balance sheets are translated using the closing
        exchange rate as of the date of the balance sheet. Revenues, expenses, gains
        and
        losses are translated using the average exchange rate prevailing during the
        period covered by such financial statements. Adjustments resulting from the
        translation, if any, are included in our cumulative other comprehensive income
        (loss) in our stockholders’ equity section of our balance sheet. All other
        amounts that were originally booked in RMB and translated into U.S. dollars
        were
        translated using the closing exchange rate on the date of recognition.
        Consequently, the exchange rates at which the amounts in those comparisons
        were
        computed varied from year to year.
  The
        exchange rates used to translate amounts in RMB into U.S. dollars in connection
        with the preparation of our financial statements were as follows:
 
 **RMB per U.S. Dollar****2008**
              
              **2007**Balance
                  sheet items as of March 31
              
              
              7.0190
              
              
              7.7342Amounts
                  included in the statement of income and comprehensive income, statement
                  of
                  changes in stockholders’ equity and statement of cash flows for the six
                  months ended March 31
              
              
              7.2982
              
              
              7.7612Balance
                  sheet items as of September 30
              
              
              N/A
              
              
              7.5108
  16
 
 RMB
        is
        not readily convertible into U.S. dollars in the foreign exchange markets.
        The
        foreign exchange rate between the RMB and the U.S. dollar had been stable
        at
        approximately RMB 8.28 to $1.00 for the last few years. On July 21, 2005,
        the
        Central Bank of China announced that it would allow the RMB to move to a
        flexible exchange rate with a maximum daily variance against the U.S. dollar
        of
        0.3%. No provision has been made in the accompanying financial statements
        for
        the change in currency policy, nor has any determination been made as to
        the
        potential impact this may have on our future operations. As a result, the
        stated
        exchange rates may not accurately reflect the amount in U.S. dollars into
        which
        RMB could be actually converted at the date or during the periods reflected
        in
        the foregoing table.
 
 **Item
        3.  Quantitative and Qualitative Disclosures About Market Risk**
 
 The
        information required by this item is discussed in Item 2. “Management’s
        Discussion and Analysis of Financial Condition and Results of Operations
—
Interest Rate Risk” and “— Foreign Exchange Risk.”
 
 **Item 4. 
        Controls and Procedures.**
 
 ***Disclosure
        Controls and Procedures***
 
 As
        required by Rule 13a-15 under the Securities Exchange Act, our management
        has
        carried out an evaluation, with the participation and under the supervision
        of
        our chief executive officer and chief financial officer, of the effectiveness
        of
        the design and operation of our disclosure controls and procedures as of
        March
        31, 2008. Disclosure controls and procedures refer to controls and other
        procedures designed to ensure that information required to be disclosed in
        the
        reports we file or submit under the Securities Exchange Act is recorded,
        processed, summarized and reported within the time periods specified in the
        rules and forms of the SEC and that such information is accumulated and
        communicated to our management, including our chief executive officer and
        chief
        financial officer, as appropriate, to allow timely decisions regarding required
        disclosure. In designing and evaluating our disclosure controls and procedures,
        management recognizes that any controls and procedures, no matter how well
        designed and operated, can provide only reasonable assurance of achieving
        the
        desired control objectives, and management is required to apply its judgment
        in
        evaluating and implementing possible controls and procedures.
 
 Management
        conducted its evaluation of disclosure controls and procedures under the
        supervision of our chief executive officer and our chief financial officer.
        Based upon, and as of the date of this evaluation, our chief executive officer
        and chief financial officer concluded that our disclosure controls and
        procedures were not effective, because of the material weaknesses described
        in
        Item 9A. “Controls and Procedures” of our Annual Report on Form 10-K for the
        fiscal year ended September 30, 2007 (the “2007 Form 10-K”), which we are still
        in the process of remediating. Investors are directed to Item 9A of the 2007
        Form 10-K for the description of these weaknesses.
 
 ***Remediation
        Measures for Material Weaknesses***
 
 We
        have
        begun to take steps to remediate the material weaknesses described in our
        2007
        Form 10-K, and plan to implement the new measures described below in our
        ongoing
        efforts to address these internal control deficiencies:
 
 ●
              We
                  further enhanced the self-assessment of our internal control over
                  financial reporting by increasing our periodic independent testing,
                  which
                  would evaluate the adequacy of the design and effectiveness of
                  our
                  internal control procedures.●
              We
                  plan to further develop policies and procedures governing the hiring
                  and
                  training of personnel to better assure sufficient personnel with
                  the
                  requisite knowledge, experience and training in the application
                  of
                  generally accepted accounting principles commensurate with our
                  financial
                  reporting and U.S. GAAP requirements. We plan to utilize qualified
                  accounting advisors and supervisors to ensure that our staff has
                  adequate
                  professional knowledge and to monitor the need for additional or
                  better-qualified staff. In addition, we plan to utilize appropriate
                  training programs on accounting principles and procedures to better
                  ensure
                  the adequacy of our accounting and finance
                  personnel.
 
 ●
              We
                  plan to continue 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 accepted in the United
                  States
                  of America.●
              We
                  plan 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 will be
                  responsible for compliance with internal
                  controls.
  We
        believe that we are taking the steps necessary for remediation of the remaining
        material weaknesses identified above, and we will continue to monitor the
        effectiveness of these steps and to make any changes that our management
        deems
        appropriate.
  17
 
 ***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 March 31, 2008 that have
        materially affected, or are reasonably likely to materially affect our internal
        control over financial reporting.
 
 **PART
        II — OTHER INFORMATION**
 **Item 1. 
        Legal Proceedings.**
 
 Except
        as
        described below, we are not a party to any legal proceedings, nor are we
        aware
        of any threatened or contemplated proceedings which are expected to result
        in a
        material adverse effect on our financial position, or results of
        operation.
 
 *Patent
        Litigation* .
        On
        September 12, 2006, Hydro-Quebec, a Canadian company, and the Board of Regents
        of the University of Texas System brought a federal patent infringement suit
        in
        the United States District Court for the Northern District of Texas against
        us.
        We had an agreement with A123Systems, which, as amended on August 18, 2005,
        terminated in accordance with its terms on August 30, 2007, under which we
        had
        agreed to manufacture products for A123Systems according to the specifications
        furnished by, and using the finished electrodes and other materials consigned
        by, A123Systems to us. The plaintiffs alleged that, by manufacturing
        rechargeable lithium cells for A123Systems for use in DeWalt 36-volt cordless
        power tools manufactured by Black & Decker Corporation, we had infringed two
        U.S. patents owned by and exclusively licensed to the plaintiffs. The plaintiffs
        seek injunctive relief and damages in an unspecified amount. If the court
        issues
        an adverse decision, we may be required to pay the plaintiffs substantial
        monetary damages, and we may be prohibited from future production of
        rechargeable lithium cells manufactured for A123Systems or be required to
        pay
        royalties to engage in any such production. The court has not yet issued
        a
        decision on this matter and we are unable to quantify the extent of any possible
        award of damages that might become payable by us.
 
 *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
        (the
“2006 Form 10-K”), and in our Quarterly Report on Form 10-Q for the quarter
        ended December 31, 2006 (the “12/31/06 Form 10-Q”), that liquidated damages
        totaling $487,946 were due from us in respect of such event based on an
        incorrect interpretation of the liquidated damages due under the registration
        rights agreement. Among other things, the amount was calculated on a pro
        rata
        daily basis although the event, the first under the registration rights
        agreement, was cured by its one-month anniversary date.
 
 In
        addition, on December 8, 2006, we filed our 2006 Form 10-K. After the filing
        of
        the 2006 Form 10-K, our previously filed registration statement on Form S-1
        was
        no longer available for resale by the selling shareholders whose shares were
        included in such Form S-1. A post-effective amendment to the Form S-1 covering
        resale by the selling shareholders was declared effective by the SEC on March
        23, 2007. Our failure to have the post-effective amendment declared effective
        within the 30-trading-day time period provided under the registration rights
        agreement (i.e., by January 25, 2007), triggered, for the second time, an
        obligation to pay liquidated damages to the selling shareholders. We estimate
        that we are liable to those selling shareholders for liquidated damages related
        to this second event in the amount of approximately $810,000, such that the
        total current estimated liquidated damages relating to both events amounts
        to
        approximately $1 million.
  18
 
 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. As
        described under “— Make Good Settlements” we have entered into settlement
        agreements pursuant to which we have issued shares to certain of these
        shareholders in settlement of claims related to the private placement, including
        claims for liquidated damages. Pursuant to the settlement agreements, the
        claims
        of each shareholder are released as of the applicable “release date” which
        occurs on the earliest of (a) the effectiveness of a resale registration
        statement relating to resales by the settling shareholders of the shares
        issued
        pursuant to the settlement agreement; (b) the ability of the settling
        shareholders to sell such shares pursuant to Rule 144 under the Securities
        Act
        free of volume limitations and (c) such time as all of the shares received
        by
        the investor pursuant to the settlement agreement have been sold by the
        investor.
 
 The
        discussion above relating to the September 2005 registration rights agreement
        is
        qualified by reference to the provisions of such agreement. A copy of the
        form
        of such agreement is attached as Exhibit 10.2 to our Current Report on Form
        8-K
        filed with the SEC on September 14, 2005, and is incorporated herein by
        reference.
 
 *Liquidated
        Damages Pursuant to November 2007 Registration Rights Agreement* .
        We may
        be liable for liquidated damages to certain shareholders whose shares were
        included in a resale registration statement on Form S-3 that we filed pursuant
        to a registration rights agreement that we entered into with such shareholders
        in November 2007. Under the registration rights agreement, among other things,
        if a registration statement filed pursuant thereto is not
        declared effective by the SEC by 100th calendar day after the closing of
        our
        private placement on November 9, 2007, or the “Effectiveness Deadline”, then we
        would be liable to pay partial liquidated damages to each such investor of
        (a)
        1.5% of the aggregate purchase price paid by such investor for the shares
        it
        purchased in our November 2007 private placement on the one month anniversary
        of
        the Effectiveness Deadline; (b) an additional 1.5% of the aggregate purchase
        price paid by such investor every thirtieth day thereafter (pro rated for
        periods totaling less than thirty days) until the earliest of the effectiveness
        of the registration statement, the ten-month anniversary of the Effectiveness
        Deadline and the time that we are no longer required to keep such resale
        registration statement effective because either such shareholders have sold
        all
        of their shares or such shareholders may sell their shares pursuant to Rule
        144
        without volume limitations; and (c) 0.5% of the aggregate purchase price
        paid by
        such investor for the shares it purchased in our November 2007 private placement
        on each of the following dates: the ten-month anniversary of the Effectiveness
        Deadline and every thirtieth day thereafter (pro rated for periods totaling
        less
        than thirty days), until the earlier of the effectiveness of the registration
        statement and the time that we are no longer required to keep such resale
        registration statement effective because either such shareholders have sold
        all
        of their shares or such shareholders may sell their shares pursuant to Rule
        144
        without volume limitations.
 
 On
        December 21, 2007, pursuant to the registration rights agreement, we filed
        a
        registration statement on Form S-3, which was declared effective by the SEC
        on
        May 7, 2008. As a result, we estimate that liquidated damages incurred under
        the
        November 2007 registration rights agreement for the quarter ended March 31,
        2008
        to have totaled $293,475. No liquidated damages have been paid pursuant to
        the
        November 2007 registration rights agreement as of the filing date of this
        Report. The discussion above relating to the November 2007 registration rights
        agreement is qualified by reference to the provisions of such agreement,
        a copy
        of which is attached as Exhibit 4.1 to our Current Report on Form 8-K filed
        with
        the SEC on November 6, 2007, and is incorporated herein by
        reference.
 
 *Make-Good
        Settlements* .
        Beginning on March
        13,
        2008, the Company, along with its wholly-owned subsidiary BAK International
        (together with the Company, “CBAK”), have entered into settlement agreements
        with certain investors in the January 20, 2005, private placement completed
        by
        the Company. Pursuant to the settlement agreements, CBAK 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 the Company’s common
        stock that had been placed into escrow by Xiangqian Li, the Company’s 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. Under the settlement agreements, the Company will make
        settlement payments to each of the settling investors of a number of shares
        of
        common stock of the Company equal to 50% of the number of “make good shares”
such investor had claimed; aggregate settlement payments amounted to 232,213
        shares as of March 31, 2008. Share payments to date have been made, and the
        Company intends to make any future payments of shares pursuant to the
        settlement agreements to be entered into with the remaining investors, 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. The
        Company has also undertaken pursuant to the settlement agreements to file
        a
        registration statement covering resales of such shares.
  19
 
 In
        accordance with the Delivery of Make Good Shares, Settlement and Release
        Agreement entered into with Mr. Li on October 22, 2007 (the “Li Settlement
        Agreement”), the Company continues to negotiate with the investors who
        participated in the January 20, 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.
 
 This
        description of the investor settlement agreements and the Li Settlement
        Agreement is qualified by reference to the provisions of such agreements.
        A copy
        of the form of settlement agreement is attached as an exhibit to our Current
        Report on Form 8-K filed with the SEC on March 31, 2008, and is incorporated
        herein by reference. A copy of the Li Settlement Agreement is attached as
        an
        exhibit to our Current Report on Form 8-K filed with the SEC on November
        6,
        2007, and is incorporated herein by reference.
 
 **Item 1A. 
        Risk Factors.**
 
 See
        Item
        1A. “Risk Factors” included in our 2007 Form 10-K.
 
 **Item 2. 
        Unregistered Sales of Equity Securities and Use of
        Proceeds.**
 
 From
        March 13, 2008 to March 31, 2008, the Company entered into a number of
        Settlement Agreements pursuant to which the Company agreed to issue to certain
        accredited investors an aggregate of 232,213 shares of the Company’s common
        stock. Pursuant to the settlement agreements, CBAK 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 the Company’s common
        stock that had been placed into escrow by Xiangqian Li, the Company’s 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. Under the settlement agreements, the Company will make
        settlement payments to each of the settling investors of a number of shares
        of
        common stock of the Company equal to 50% of the number of “make good shares”
such investor had claimed; aggregate settlement payments to date amount to
        232,213 shares. See Part II, Item 1. “Legal Proceedings — Make Good Settlements”
above.
 
 The
        above-referenced securities have been or will be issued pursuant to the
        exemption from registration provided by Section 4(2) of the Securities Act
        of
        1933, as amended (the “Securities Act”) for the offer and sale of
        securities not involving a public offering, and/or other applicable
        provisions of the Securities Act. The investors who received the securities
        agreed that (a) they were acquiring the securities for their own account
        for
        investment and not for the account of any other person and not with a view
        to or
        for any distribution within the meaning of the Securities Act and (b) they
        would
        not sell or otherwise transfer the purchased securities unless in compliance
        with state and federal securities laws. Each of the Investors represented
        that
        they are accredited investors as defined in Rule 501(a) under the Securities
        Act.
 
 **Item 3. Defaults
        Upon Senior Securities.**
 
 None.
 
 **Item 4. Submission
        of Matters to a Vote of Security Holders.**
 
 None.
 
 **Item 5. Other
        Information.**
 
 As
        previously disclosed in our Current Report on Form 8-K filed on March 31,
        2008,
        from March 13, 2008 to March 31, 2008, the Company entered into a number
        of
        Settlement Agreements pursuant to which the Company agreed to issue to certain
        accredited investors an aggregate of 232,213 shares of the Company’s common
        stock. Pursuant to the settlement agreements, CBAK 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 the Company’s common
        stock that had been placed into escrow by Xiangqian Li, the Company’s 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. Under the settlement agreements, the Company will make
        settlement payments to each of the settling investors of a number of shares
        of
        common stock of the Company equal to 50% of the number of “make good shares”
such investor had claimed; aggregate settlement payments to date amount to
        232,213 shares.
  20
 
 The
        above-referenced securities have been or will be issued pursuant to the
        exemption from registration provided by Section 4(2) of the Securities Act
        of
        1933, as amended (the “Securities Act”) for the offer and sale of
        securities not involving a public offering, and/or other applicable
        provisions of the Securities Act. The investors who received the securities
        agreed that (a) they were acquiring the securities for their own account
        for
        investment and not for the account of any other person and not with a view
        to or
        for any distribution within the meaning of the Securities Act and (b) they
        would
        not sell or otherwise transfer the purchased securities unless in compliance
        with state and federal securities laws. Each of the Investors represented
        that
        they are accredited investors as defined in Rule 501(a) under the Securities
        Act.
 
 Copies
        of
        the forms of the above-referenced settlement agreements are attached hereto
        as
        Exhibits 10.1 to 10.3.
 
 We
        refinanced our short-term bank loans during the three months ended March
        31,
        2008 at annual interest rates of 5.751% to 8.217%, payable monthly, and for
        terms of six to twelve months. These debt arrangements are generally guaranteed
        by Mr. Xiangqian Li, our chairman, president, and chief executive officer.
        Pursuant to the refinancing, we pledged $21.3 million of inventory and $16.1
        million of equipment and machinery as security for our comprehensive credit
        facility with Agricultural Bank of China and Shenzhen Development Bank as
        of
        March 31, 2008. We also committed to pledge the property ownership and land
        use
        rights certificate to be obtained in relation to the land on which our corporate
        campus had been constructed for short-term bank loans amounting to $25,644,000
        borrowed from Shenzhen Eastern Branch, Agricultural Bank of China. The aggregate
        net book value of the buildings and land use right in relation to the property
        ownership and land use rights certificate as of March 31, 2008 was $91.6
        million. These loan agreements are guaranteed by Mr. Xiangqian Li.
  On
        March
        25, 2008 and March 27, 2008 we entered into a new short-term bank loan agreement
        with Shenzhen Hi-tech Industrial Park Branch, Industrial Bank Co., Ltd. and
        Shenzhen Branch, Bank of China, respectively, totaling $12.8 million. The
        two
        new short-term bank loan agreements provide for monthly interest payments
        at
        annual interest rates from 7.47% to 8.217%, with principal repayments at
        maturities during the first calendar quarter of 2009. These loan agreements
        are
        guaranteed by Mr. Xiangqian Li. Summaries of the loan agreements and the
        related
        guaranty are attached hereto as Exhibits 10.5, 10.6, 10.7, and
        10.8.
  On
        March
        25, 2008, we entered into a Comprehensive Credit Facility Agreement with
        Shenzhen Hi-tech Industrial Park Branch, Industrial Bank Co., Ltd. This Credit
        Facility is guaranteed by Mr. Xiangqian Li. We may borrow up to RMB 62.5
        million
        ($8.9 million) under this Comprehensive Credit Facility Agreement, which
        will
        expire on March 25, 2009. As of March 31, 2008, we had borrowed $7.1 million
        loan under this Comprehensive Credit Facility Agreement. A summary of the
        Comprehensive Credit Facility Agreement is attached hereto as Exhibit
        10.4.
  **Item 6. 
        Exhibits.**
 
 **Number**
              
              **Description**3.1
              
              Articles
                  of Incorporation of the Registrant (incorporated by reference to
                  Exhibit
                  3.1 to the Registrant’s Annual Report on Form 10-K for the fiscal year
                  ended September 30, 2006).3.2
              
              Bylaws
                  of the Registrant (incorporated by reference to Exhibit 3.2 to
                  the
                  Registrant’s Annual Report on Form 10-K for the fiscal year ended
                  September 30, 2007).10.1
              
              Form
                  of Settlement Agreement between the Registrant and Chinamerica
                  Fund, LP,
                  dated March 13, 2008.10.2
              
              Form
                  of Settlement Agreement between the Registrant and The Pinnacle
                  Fund,
                  L.P., dated March 21, 2008.10.3
              
              Form
                  of Settlement Agreement between the Registrant and certain investors
                  (incorporated by reference to Exhibit 10.1 to the Registrant’s Current
                  Report on Form 8-K, filed with the SEC on March 31,
                  2008).10.4
              
              Summary
                  of Comprehensive Credit Facility Agreement, by and between Shenzhen
                  BAK
                  Battery Co., Ltd and Shenzhen Hi-tech Industrial Park Branch, Industrial
                  Bank Co., Ltd, dated March 25, 2008.10.5
              
              Summary
                  of Guaranty Contract of Maximum Amount, by and between Mr. Xiangqian
                  Li
                  and Shenzhen Hi-tech Industrial Park Branch, Industrial Bank Co.,
                  Ltd on
                  March 24, 2008.
  21
 
 10.6
              
              Summary
                  of Loan Agreement, by and between Shenzhen BAK Battery Co., Ltd.
                  and
                  Shenzhen Hi-tech Industrial Park Branch, Industrial Bank Co., Ltd,
                  dated
                  March 25, 2008.10.7
              
              Loan
                  certificate with Shenzhen Hi-tech Industrial Park Branch, Industrial
                  Bank
                  Co., Ltd, dated March 25, 2008.10.8
              
              Loan
                  certificate with Shenzhen Branch, Bank of China, dated March 27,
                  2008.
 
 31.1
              
              Chief
                  Executive Officer Certification furnished pursuant to Section 302
                  of the
                  Sarbanes-Oxley Act of 2002.31.2
              
              Chief
                  Financial Officer Certification furnished pursuant to Section 302
                  of the
                  Sarbanes-Oxley Act of 2002.32.1
              
              Chief
                  Executive Officer and Chief Financial Officer Certifications furnished
                  pursuant to Section 906 of the Sarbanes-Oxley Act of
                  2002.
  22
 
 **SIGNATURES**
 
 Pursuant
        to the requirements of the Securities Exchange Act of 1934, the registrant
        has
        duly caused this report to be signed on its behalf by the undersigned thereunto
        duly authorized.
 
 Date:
                  May 12, 2008
              CHINA
                  BAK BATTERY, INC.By:
              /s/
                  Xiangqian LiXiangqian
                  Li, Chief Executive Officer(Principal
                  Executive Officer)
  By:
              /s/ Tony
                  ShenTony
                  Shen, Chief Financial Officer(Principal
                  Financial Officer and Principal
                Accounting
                  Officer)
  23