UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q


(Mark
One)




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




For the
quarterly period ended: December 31, 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 ParkNo.
      1 BAK StreetKuichong
      Town, Longgang DistrictShenzhen,
      People’s Republic of China
            
            518119(Address
      of principal executive offices)
            
            (Zip
      Code)







(86 755)
897-70093


(Registrant’s
telephone number, including area code)




_____________________________________________________


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





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





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




Large Accelerated
      Filer  
            Accelerated
      Filer  xNon-Accelerated
      Filer   (Do not check if a smaller reporting
      company)
            Smaller
      reporting company  




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





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




Class
      of Securities
            
            Shares
      OutstandingCommon
      Stock, $0.001 par value
            
            57,680,231













TABLE
OF CONTENTS





Introductory
Comments




PART
      IFINANCIAL
      INFORMATIONItem
      1.
              Financial
      Statements
              F-1Item
      2.
              Management’s Discussion and
      Analysis of Financial Condition and Results of
      Operations
              1Item
      3.
              Quantitative and Qualitative
      Disclosures About Market Risk
              18Item
      4.
              Controls and
      Procedures
              18PART
      IIOTHER
      INFORMATIONItem
      1.
              Legal
      Proceedings
              19Item
      1A.
              Risk
    Factors
              21Item
      2.
              Unregistered Sales of Equity
      Securities and Use of Proceeds
              22Item
      3.
              Defaults Upon Senior
      Securities
              22Item
      4.
              Submission of Matters to a Vote
      of Security Holders
              22Item
      5.
              Other
      Information
              22Item
      6.
              Exhibits
              23







Introductory
Comments





Terminology





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





Forward-Looking
Statements





Statements
contained in this Report include “forward-looking statements” within the meaning
of such term in Section 27A of the Securities Act of 1933, as amended (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
      limited operating history in developing, manufacturing and selling of
      lithium-based rechargeable battery cells;—
            general
      economic conditions, including the current global recession and financial
      crisis;—
            our
      future business development, results of operations and financial
      condition;—
            our
      ability to diversify our product offering and capture new market
      opportunities;—
            our
      dependence on the growth in demand for the portable electronic devices
      that are powered by our products;—
            our
      ability to maintain or increase our market share in the competitive
      markets in which we do business;—
            our
      ability to keep up with rapidly changing technologies and evolving
      industry standards, including our ability to achieve technological
      advances;—
            our
      ability to obtain original equipment manufacturer (“OEM”) qualifications
      from brand names;—
            our
      ability to maintain cost leadership;—
            our
      ability to remediate any material weaknesses in our internal control over
      financial reporting;—
            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;




i




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




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





Where
You Can Find Additional Information





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





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




ii




PART
I


FINANCIAL
INFORMATION




Item
      1.
            Financial
      Statements.





China
BAK Battery, Inc. and subsidiaries


Condensed
interim consolidated balance sheets


As
of September 30, 2008 and December 31, 2008




(In
US$)





September
      30,
            
            
            December
      31,Note
            
            2008
            
            
            2008(Audited)
            
            
            (Unaudited)AssetsCurrent
      assetsCash
      and cash equivalents
            
            
            
            $
            35,706,834
            
            
            $
            37,209,174Pledged
      deposits
            
            
            2
            
            
            4,449,244
            
            
            
            6,113,809Trade
      accounts receivable, net
            
            
            3
            
            
            82,740,288
            
            
            
            81,292,445Inventories
            
            
            4
            
            
            67,583,060
            
            
            
            66,811,654Prepayments
      and other receivables
            
            
            5
            
            
            4,462,492
            
            
            
            12,328,364Deferred
      tax assets
            
            
            
            
            
            1,719,662
            
            
            
            2,064,384Total
      current assets
            
            
            
            
            
            196,661,580
            
            
            
            205,819,830Property,
      plant and equipment, net
            
            
            6
            
            
            195,435,212
            
            
            
            208,494,138Lease
      prepayments, net
            
            
            
            
            
            31,782,129
            
            
            
            32,062,228Intangible
      assets, net
            
            
            
            
            
            161,418
            
            
            
            199,853Deferred
      tax assets
            
            
            
            
            
            6,543
            
            
            
            6,539Total
      assets
            
            
            
            
            $
            424,046,882
            
            
            $
            446,582,588




See
accompanying notes to the condensed interim consolidated financial
statements.




F-1


China
BAK Battery, Inc. and subsidiaries


Condensed
interim consolidated balance sheets


As
of September 30, 2008 and December 31, 2008 (continued)




(In
US$)





September
      30,
            
            
            December
      31,Note
            
            2008
            
            
            2008(Audited)
            
            
            (Unaudited)LiabilitiesCurrent
      liabilitiesShort-term
      bank loans
            7
            
            $
            105,598,170
            
            
            $
            112,128,985Current
      maturities of long-term bank loans
            8
            
            
            8,799,848
            
            
            
            13,191,645Accounts
      and bills payable
            
            
            
            57,486,716
            
            
            
            77,887,818Accrued
      expenses and other payables
            
            
            
            21,581,182
            
            
            
            20,930,097Total
      current liabilities
            
            
            
            193,465,916
            
            
            
            224,138,545Long-term
      bank loans, less current maturities
            8
            
            
            55,732,366
            
            
            
            46,903,628Deferred
      revenue
            
            
            
            7,685,200
            
            
            
            7,621,840Other
      long-term payables
            
            
            
            -
            
            
            
            1,442,288Deferred
      tax liabilities
            
            
            
            91,400
            
            
            
            165,396Total
      liabilities
            
            
            
            256,974,882
            
            
            
            280,271,697Commitments
      and contingencies
            11Shareholders’
      equityShares
      of common stock US$ 0.001 par value;100,000,000
      authorized; 57,676,481 and 57,680,231 issued and outstanding as of
      September 30, 2008 and December 31, 2008 respectively
            
            
            
            57,677
            
            
            
            57,681Donated
      shares
            
            
            
            14,101,689
            
            
            
            14,101,689Additional
      paid-in capital
            
            
            
            97,286,286
            
            
            
            98,103,810Statutory
      reserves
            
            
            
            6,917,943
            
            
            
            7,227,195Retained
      earnings
            
            
            
            27,628,860
            
            
            
            25,580,860Accumulated
      other comprehensive income
            
            
            
            25,146,155
            
            
            
            25,306,266171,138,610
            
            
            
            170,377,501Less:
      Treasury shares
            
            
            
            (4,066,610)
            
            
            
            (4,066,610)Total
      shareholders’ equity
            
            
            
            167,072,000
            
            
            
            166,310,891Total
      liabilities and shareholders’ equity
            
            
            $
            424,046,882
            
            
            $
            446,582,588





See
accompanying notes to the condensed interim consolidated financial
statements.




F-2




China
BAK Battery, Inc. and subsidiaries


Condensed
interim consolidated statements of operations


and
comprehensive income / (loss)


For
the three months ended December 31, 2007 and 2008


(Unaudited)


(In
US$)





Three
      months ended December 31,2007
            
            
            2008Net
      revenues
            
            $
            52,787,475
            
            
            $
            68,089,737Cost
      of revenues
            
            
            (45,681,745)
            
            
            
            (57,496,519)Gross
      profit
            
            
            7,105,730
            
            
            
            10,593,218Operating
      expenses:Research
      and development expenses
            
            
            (1,319,163)
            
            
            
            (1,417,540)Sales
      and marketing expenses
            
            
            (1,347,877)
            
            
            
            (1,599,652)General
      and administrative expenses
            
            
            (4,238,035)
            
            
            
            (6,759,676)Total
      operating expenses
            
            
            (6,905,075)
            
            
            
            (9,776,868)Operating
      income
            
            
            200,655
            
            
            
            816,350Finance
      costs, net
            
            
            (2,223,477)
            
            
            
            (2,839,561)Government
      grant income
            
            
            901,344
            
            
            
            101,945Other
      income
            
            
            41,884
            
            
            
            6,357Loss
      before income taxes
            
            
            (1,079,594)
            
            
            
            (1,914,909)Income
      taxes
            
            
            139,059
            
            
            
            176,161Net
      loss
            
            $
            (940,535)
            
            
            $
            (1,738,748)Other
      comprehensive income-
      Foreign currency translation adjustment
            
            
            3,769,593
            
            
            
            160,111Comprehensive
      income / (loss)
            
            $
            2,829,058
            
            
            $
            (1,578,637)Net
      loss per share:-Basic
            
            $
            (0.02)
            
            
            $
            (0.03)-Diluted
            
            $
            (0.02)
            
            
            $
            (0.03)Weighted
      average number of shares of common stock:-Basic
            
            
            51,425,323
            
            
            
            56,958,386-Diluted
            
            
            52,378,164
            
            
            
            56,958,386




See
accompanying notes to the condensed interim consolidated financial
statements.




F-3




China BAK Battery, Inc. and
subsidiaries


Condensed interim consolidated
statements of shareholders’ equity


For
the three months ended December 31, 2007 and 2008


(Unaudited)




Shares
      of common stock
            
            
            
            
            
            Additional
            
            
            
            
            
            
            
            
            Accumulater
              other
            
            
            Treasury
      shares
            
            
            TotalNumber
      of
            
            
            
            
            
            Donated
            
            
            paid-in
            
            
            Statutory
            
            
            Retained
            
            
            comprehensive
            
            
            Number
      of
            
            
            
            
            
            shareholders’shares
            
            
            Amount
            
            
            shares
            
            
            capital
            
            
            reserves
            
            
            earnings
            
            
            income
            
            
            shares
            
            
            Amount
            
            
            equityBalance
      as of October 1, 2007
            
            
            49,250,853
            
            
            $
            49,251
            
            
            $
            7,955,358
            
            
            $
            66,355,151
            
            
            $
            6,426,977
            
            
            $
            36,060,426
            
            
            $
            9,884,749
            
            
            
            -
            
            
            $
            -
            
            
            $
            126,731,912Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (940,535
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (940,535
            )2005
      escrow shares donated byMr.
      Xiangqian Li
            
            
            -
            
            
            
            -
            
            
            
            6,146,331
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (1,089,775
            )
            
            
            (6,146,331
            )
            
            
            -Share-based
      compensation foremployee
      stock option awards
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            842,334
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            842,334Exercise
      of stock options awards
            
            
            200,000
            
            
            
            200
            
            
            
            -
            
            
            
            1,249,800
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,250,000Issuance
      of new common stock
            
            
            3,500,000
            
            
            
            3,500
            
            
            
            -
            
            
            
            12,752,447
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            12,755,947Issuance
      of common stock tonon-employee directors
            
            
            3,750
            
            
            
            3
            
            
            
            -
            
            
            
            (3
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Appropriation
      to statutory reserves
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            89,582
            
            
            
            (89,582
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Foreign
      currency translation adjustment
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            3,769,593
            
            
            
            -
            
            
            
            -
            
            
            
            3,769,593Balance
      as of December 31, 2007
            
            
            52,954,603
            
            
            $
            52,954
            
            
            $
            14,101,689
            
            
            $
            81,199,729
            
            
            $
            6,516,559
            
            
            $
            35,030,309
            
            
            $
            13,654,342
            
            
            
            (1,089,775
            )
            
            $
            (6,146,331
            )
            
            $
            144,409,251Balance
      as of October 1, 2008
            
            
            57,676,481
            
            
            $
            57,677
            
            
            $
            14,101,689
            
            
            $
            97,286,286
            
            
            $
            6,917,943
            
            
            $
            27,628,860
            
            
            $
            25,146,155
            
            
            
            (721,030
            )
            
            $
            (4,066,610
            )
            
            $
            167,072,000Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (1,738,748
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (1,738,748
            )Share-based
      compensation foremployee
      stock awards
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            817,528
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            817,528Issuance
      of common stockto
      non-employee directors
            
            
            3,750
            
            
            
            4
            
            
            
            -
            
            
            
            (4
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Appropriation
      to statutory reserves
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            309,252
            
            
            
            (309,252
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Foreign
      currency translation adjustment
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            160,111
            
            
            
            -
            
            
            
            -
            
            
            
            160,111Balance
      as of December 31, 2008
            
            
            57,680,231
            
            
            $
            57,681
            
            
            $
            14,101,689
            
            
            $
            98,103,810
            
            
            $
            7,227,195
            
            
            $
            25,580,860
            
            
            $
            25,306,266
            
            
            
            (721,030
            )
            
            $
            (4,066,610
            )
            
            $
            166,310,891








See
accompanying notes to the condensed interim consolidated financial
statements.




F-4




China
BAK Battery, Inc. and subsidiaries


Condensed
interim consolidated statements of cash flows


For
the three months ended December 31, 2007 and 2008


(Unaudited)


(In
US$)




Three
      months ended December 31,2007
                
                
                2008Cash
      flow from operating activitiesNet
      loss
                
                $
                (940,535
                )
                
                $
                (1,738,748
                )Adjustments
      to reconcile net loss to net cash (used in) / provided by operating
      activities:Depreciation
      and amortization
                
                
                2,782,297
                
                
                
                3,626,880Provision
      for doubtful debts
                
                
                1,202,276
                
                
                
                2,347,075Provision
      for / (recovery of) obsolete inventories
                
                
                79,217
                
                
                
                (550,134
                )Share-based
      compensation
                
                
                842,334
                
                
                
                817,528Deferred
      income taxes
                
                
                (195,637
                )
                
                
                (271,075
                )Deferred
      revenue
                
                
                -
                
                
                
                (58,488
                )Exchange
      loss
                
                
                -
                
                
                
                703,970Changes
      in operating assets and liabilities:Trade
      accounts receivable
                
                
                (7,159,248
                )
                
                
                (955,974
                )Inventories
                
                
                (1,119,804
                )
                
                
                1,278,563Prepayments
      and other receivables
                
                
                (11,613,774
                )
                
                
                (7,859,286
                )Accounts
      and bills payable
                
                
                10,423,149
                
                
                
                20,175,048Accrued
      expenses and other payables
                
                
                1,011,959
                
                
                
                3,662,613Net
      cash (used in) / provided by operating activities
                
                
                (4,687,766
                )
                
                
                21,177,972Cash
      flow from investing activitiesPurchases
      of property, plant and equipment
                
                
                (9,158,722
                )
                
                
                (19,528,325
                )Payment
      of lease prepayments
                
                
                (20,983
                )
                
                
                (465,858
                )Purchases
      of intangible assets
                
                
                (31,402
                )
                
                
                (58,000
                )Net
      cash used in investing activities
                
                $
                (9,211,107
                )
                
                $
                (20,052,183
                )





See
accompanying notes to the condensed interim consolidated financial
statements.




F-5




China
BAK Battery, Inc. and subsidiaries


Condensed
interim consolidated statements of cash flows


For
the three months ended December 31, 2007 and 2008 (continued)


(Unaudited)


(In
US$)





Three
      months ended December 31,2007
            
            
            2008Cash
      flow from financing activitiesProceeds
      from borrowings
            
            $
            45,076,563
            
            
            $
            84,076,947Repayment
      of borrowings
            
            
            (26,911,381)
            
            
            
            (81,883,636)Decrease
      / (increase) in pledged deposits
            
            
            361,977
            
            
            
            (1,663,288)Proceeds
      from issuance of capital stock, net
            
            
            14,005,947
            
            
            
            -Net
      cash provided by financing activities
            
            
            32,533,106
            
            
            
            530,023Effect
      of exchange rate changes on cash and cash equivalents
            
            
            693,713
            
            
            
            (153,472)Net
      increase in cash and cash equivalents
            
            
            19,327,946
            
            
            
            1,502,340Cash
      and cash equivalents at the beginning of period
            
            
            14,196,513
            
            
            
            35,706,834Cash
      and cash equivalents at the end of period
            
            $
            33,524,459
            
            
            $
            37,209,174Supplemental
      disclosure of cash flow information:Cash
      received during the period for:Bills
      receivable discounted to banks
            
            $
            1,883,727
            
            
            $
            1,688,989Cash
      paid during the period for:Income
      taxes
            
            $
            45,376
            
            
            $
            -Interest,
      net of amounts capitalized
            
            $
            2,487,376
            
            
            $
            2,762,298Non-cash
      movements affecting financing transactions:2005
      escrow shares donated by Mr. Xiangqian Li
            
            $
            6,146,331
            
            
            $
            -





See
accompanying notes to the condensed interim consolidated financial
statements.




F-6


China
BAK Battery, Inc. and subsidiaries


Notes
to the condensed interim consolidated financial statements


For
the three months ended December 31, 2007 and 2008


(Unaudited)




1.
            Principal
      Activities, Basis of Presentation and
  Organization





Principal
Activities





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





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





Basis
of Presentation and Organization





As of
December 31, 2008, the Company’s subsidiaries consist of: i) BAK International
Limited (“BAK International”), a wholly owned limited liability company
incorporated in Hong Kong on December 29, 2003 as BATCO International Limited,
which changed its name to BAK International Limited on November 3, 2004; ii)
Shenzhen BAK Battery Co., Ltd. (“Shenzhen BAK”), a wholly owned limited
liability company established on August 3, 2001 in the People’s Republic of
China (“PRC”); iii) BAK Electronics (Shenzhen) Co., Ltd. (“BAK Electronics”), a
wholly owned limited liability company established on August 15, 2005 in the
PRC; iv) BAK International (Tianjin) Ltd. (“BAK Tianjin”), a wholly owned
limited liability company established on December 12, 2006 in the PRC; v) BAK
Battery Canada Ltd. (“BAK Canada”), a wholly owned limited liability company
established on December 20, 2006 in Canada as BAK Canada Battery Ltd., which
changed its name to BAK Battery Canada Ltd. on December 22, 2006; vi) BAK Europe
GmbH (“BAK Europe”), a wholly owned limited liability company established in
Germany on November 28, 2007; and vii) BAK Telecom India Private Limited (“BAK
India”), a wholly owned limited liability company established in India on August
14, 2008.





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





Pursuant
to Shenzhen BAK’s articles of association and relevant PRC regulations, BAK
International was required to contribute about US$5.72 million to Shenzhen BAK
as capital (representing 7% of Shenzhen BAK’s registered capital) no later than
October 2008. As of December 31, 2008, BAK International is in the process of
applying for a reduction in its required registered capital with the relevant
government bureau.





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.




F-7


China
BAK Battery, Inc. and subsidiaries


Notes
to the condensed interim consolidated financial statements


For
the three months ended December 31, 2007 and 2008 (continued)


(Unaudited)




Basis
of Presentation and Organization (continued)





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





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





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





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





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





At the
time the escrow shares relating to the 2006 performance threshold were
transferred to the investors in fiscal year 2007, the Company should have
recognized a credit to donated shares and a debit to additional paid-in capital,
both of which are elements of shareholders’ equity. This entry is not material
because total shares of common stock issued and outstanding, total shareholders’
equity and total assets do not change; nor is there any impact on income or
earnings per share. Therefore, previously filed consolidated financial
statements for the fiscal year ended September 30, 2007 will not be restated.
This share transfer has been reflected in these financial statements by
reclassifying the balances of certain items as of October 1, 2007. The balances
of donated shares and additional paid-in capital as of October 1, 2007 were
credited and debited by US$7,955,358 respectively, as set out in the
consolidated statements of shareholders’ equity for the three months ended
December 31, 2007.




F-8




China
BAK Battery, Inc. and subsidiaries


Notes
to the condensed interim consolidated financial statements


For
the three months ended December 31, 2007 and 2008 (continued)


(Unaudited)





Basis
of Presentation and Organization (continued)





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





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





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





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





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





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




F-9




China
BAK Battery, Inc. and subsidiaries


Notes
to the condensed interim consolidated financial statements


For
the three months ended December 31, 2007 and 2008 (continued)


(Unaudited)




Recently
Issued Accounting Standards


SFAS
No. 157 “Fair Value Measurements”





In
September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements,” or SFAS
No. 157, which defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and expands
disclosures about fair value measurements. SFAS No. 157 applies under other
accounting pronouncements that require or permit fair value measurements, where
fair value is the relevant measurement attribute. The standard does not require
any new fair value measurements. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years.  The adoption of SFAS No.
157 has no material impact on the Company’s financial statements.





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





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





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





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





SFAS
No. 141(Revised) “Business Combinations”





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





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





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





SFAS
No. 162 “The Hierarchy of Generally Accepted Accounting Principles”





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




F-10




China
BAK Battery, Inc. and subsidiaries


Notes
to the condensed interim consolidated financial statements


For
the three months ended December 31, 2007 and 2008 (continued)


(Unaudited)




2
            Pledged
      Deposits





Pledged
deposits as of September 30, 2008 and December 31, 2008 consisted of the
following:





September
      30,
            
            December
      31,2008
            
            2008Pledged
      deposits with banks for:Construction
      payable
            
            $
            931,317
            
            
            $
            894,100Bills
      payable
            
            
            3,517,927
            
            
            
            5,219,709$
            4,449,244
            
            
            $
            6,113,809





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





3
            Trade
      Accounts Receivable, net




Trade
accounts receivable as of September 30, 2008 and December 31, 2008 consisted of
the following:





September
      30,
            
            
            December
      31,2008
            
            
            2008Trade
      accounts receivable
            
            $
            87,974,185
            
            
            $
            85,815,377Less:
      Allowance for doubtful accounts
            
            
            (5,351,244
            )
            
            
            (7,703,140
            )82,622,941
            
            
            
            78,112,237Bills
      receivable
            
            
            117,347
            
            
            
            3,180,208$
            82,740,288
            
            
            $
            81,292,445




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





Three
      months ended December 31,2007
            
            
            2008Balance
      at beginning of period
            
            $
            3,021,617
            
            
            $
            5,351,244Addition
      of bad debt expense, net
            
            
            1,204,376
            
            
            
            2,349,508Foreign
      exchange adjustment
            
            
            106,270
            
            
            
            2,388Balance
      at end of period
            
            $
            4,332,263
            
            
            $
            7,703,140




F-11




China
BAK Battery, Inc. and subsidiaries


Notes
to the condensed interim consolidated financial statements


For
the three months ended December 31, 2007 and 2008 (continued)


(Unaudited)





4
            Inventories





Inventories
as of September 30, 2008 and December 31, 2008 consisted of the
following:





September
      30,
            
            
            December
      31,2008
            
            
            2008Raw
      materials
            
            $
            16,671,505
            
            
            $
            18,881,947Work-in-progress
            
            
            12,993,897
            
            
            
            8,091,784Finished
      goods
            
            
            40,638,380
            
            
            
            42,005,50870,303,782
            
            
            
            68,979,239Provision
      for obsolete inventories
            
            
            (2,720,722)
            
            
            
            (2,167,585)$
            67,583,060
            
            
            $
            66,811,654





Part of
the Company’s inventories with carrying value of US$21,999,619 and US$21,986,075
as of September 30, 2008 and December 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, 2008 and December 31, 2008 consisted
of the following:





September
      30,
            
            December
      31,2008
            
            2008Prepayments
      for raw materials and others
            
            $
            866,561
            
            
            $
            6,375,659Other
      receivables
            
            
            3,605,465
            
            
            
            5,959,783Less:
      Allowance for doubtful accounts
            
            
            (9,534
            )
            
            
            (7,078
            )$
            4,462,492
            
            
            $
            12,328,364







F-12




China
BAK Battery, Inc. and subsidiaries


Notes
to the condensed interim consolidated financial statements


For
the three months ended December 31, 2007 and 2008 (continued)


(Unaudited)





6
            Property,
      Plant and Equipment, net





Property,
plant and equipment as of September 30, 2008 and December 31, 2008 consisted of
the following:





September
      30,
            
            
            December
      31,2008
            
            
            2008Buildings
            
            $
            94,062,610
            
            
            $
            94,528,116Machinery
      and equipment
            
            
            89,999,435
            
            
            
            107,873,195Office
      equipment
            
            
            1,590,015
            
            
            
            1,700,125Motor
      vehicles
            
            
            1,083,278
            
            
            
            1,108,261186,735,338
            
            
            
            205,209,697Accumulated
      depreciation
            
            
            (33,033,996
            )
            
            
            (36,460,101
            )Construction
      in progress
            
            
            36,116,818
            
            
            
            38,750,344Prepayment
      for acquisition of property, plant and equipment
            
            
            5,617,052
            
            
            
            994,198$
            195,435,212
            
            
            $
            208,494,138




(i)
Depreciation expense for the three months ended December 31, 2007 and 2008 is
included in the condensed interim consolidated statements of operations and
comprehensive income / (loss) as follows:




Three
      months ended December 31,2007
            
            
            2008Cost
      of revenues
            
            $
            2,034,088
            
            
            $
            2,730,039Research
      and development expenses
            
            
            92,026
            
            
            
            133,000Sales
      and marketing expenses
            
            
            156,800
            
            
            
            133,532General
      and administrative expenses
            
            
            384,940
            
            
            
            444,186$
            2,667,854
            
            
            $
            3,440,757




(ii)
Construction in Progress





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




For the
three months ended December 31, 2007 and 2008, the Company capitalized interest
of approximately US$275,735 and US$175,298 to the cost of construction in
progress.








(iii)
Pledged Property, Plant and Equipment





As of
September 30, 2008 and December 31, 2008, machinery and equipment with net book
value of US$42,582,851 and US$47,554,206 of the Company were pledged as
collateral under certain loan arrangements (see Notes 7 and 8).





As of
December 31, 2008, the buildings and land use rights certificate in relation to
the land on which Shenzhen BAK’s corporate campus is located with aggregate net
book value of US$105,163,853 were pledged as collateral under certain loan
agreements (See Note 7).




F-13




China
BAK Battery, Inc. and subsidiaries


Notes
to the condensed interim consolidated financial statements


For
the three months ended December 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. In addition to the pledge of land use rights certificates by
Shenzhen BAK as disclosed below, these facilities were secured by the Company’s
assets with the following carrying values:





September
      30,
            
            
            December
      31,2008
            
            
            2008Inventories
      (Note 4)
            
            $
            21,999,619
            
            
            $
            21,986,075Machinery
      and equipment, net (Note 6)
            
            
            14,058,213
            
            
            
            12,740,800$
            36,057,832
            
            
            $
            34,726,875




As of
September 30, 2008 and December 31, 2008, the Company had several short-term
bank loans with aggregate outstanding balances of US$105,598,170 and
US$112,128,985, respectively. The loans were primarily obtained for general
working capital, carried interest rates ranging from 5.040% to 8.217% per annum,
and had maturity dates ranging from 1 to 12 months. Each loan is guaranteed by
Mr. Xiangqian Li, who did not receive any compensation for acting as
guarantor.





As of
December 31, 2008, the Company had pledged the land use rights certificate in
relation to the land on which Shenzhen BAK’s corporate campus had been
constructed for short-term bank loans amounting to US$47,636,497 borrowed from
Shenzhen Eastern Branch, Agricultural Bank of China. As of December 31, 2008,
the aggregate net book value of the buildings and land use rights in relation to
the respective land use rights certificate as of December 31, 2008 was
US$105,163,853.





8
            Long-term
      Bank Loans





As of
September 30, 2008 and December 31, 2008, the Company had long-term bank loans
of US$64,532,214 and US$60,095,273, respectively. As of December 31, 2008,
US$10,260,168 was borrowed under a four-year long-term loan credit facility from
China Development Bank, bearing interest at the benchmark rate of the People’s
Bank of China (“PBOC”) for three-year to five-year long-term loans, which is
currently 7.74% per annum. This long-term bank loan is repayable in two
installments of US$4,397,215 on November 20, 2009 and US$5,862,953 on December
26, 2010.





Three
other long-term loans totaled an aggregate borrowed amount of US$26,383,291 as
of December 31, 2008.  These loans were borrowed under a five-year
long-term loan credit facility from Shenzhen Eastern Branch, Agricultural Bank
of China, and carry interest at 90% of the benchmark rate of the PBOC for
three-year to five-year long-term loans. The first loan of US$5,862,953
currently carries interest at 5.832% per annum and is repayable on January 25,
2012. The second loan of US$11,725,908 currently carries annual interest of
6.237% and is repayable in three installments of US$2,931,477 on January 25,
2010, US$7,328,693 on January 25, 2011 and US$1,465,738 on January 25, 2012,
respectively. The third loan of US$8,794,430 currently carries annual interest
of 7.65% and is repayable in two installments of US$4,397,215 on January 25,
2009 and US$4,397,215 on January 25, 2010.





Another
loan of US$23,451,814 as of December 31, 2008, was borrowed under a four-year
long-term loan credit facility from Tianjin Branch, Agricultural Bank of China
and carries interest at the benchmark rate of the PBOC for three-year to
five-year long-term loans, which is currently 7.74% per annum. This loan is
repayable in four installments of US$4,397,215 on December 26, 2009,
US$4,397,215 on December 26, 2010, US$7,328,692 on December 26, 2011, and
US$7,328,692 on May 26, 2012.





The
long-term bank loan with China Development Bank is: (i) guaranteed by Mr.
Xiangqian Li; (ii) secured by certain shares of the Company owned by Mr.
Xiangqian Li; and (iii) to be secured by the property ownership and land use
rights certificates relating to the land on which the Company’s Research and
Development Test Centre is to be constructed and the facilities to be
constructed thereon. As of December 31, 2008, the Company had obtained the
relevant land use rights certificate and was in the process of negotiating with
the relevant government bureau for the requisite approval to pledge it as
described.




F-14




China
BAK Battery, Inc. and subsidiaries


Notes
to the condensed interim consolidated financial statements


For
the three months ended December 31, 2007 and 2008 (continued)


(Unaudited)





8
            Long-term
      Bank Loans (continued)





The
long-term bank loan with Shenzhen Eastern Branch, Agricultural Bank of China is:
(i) guaranteed by Mr. Xiangqian Li; (ii) secured by the Company’s machinery and
equipment with carrying values of US$34,813,406 as of December 31, 2008 (see
Note 6); and (iii) secured by the property ownership and land use rights
certificates in relation to the land on which Shenzhen BAK’s corporate campus
had been constructed (see Note 6)and any machinery and
equipment purchased and used in the campus subsequent to such
construction.





The
long-term bank loan with Tianjin Branch, Agricultural Bank of China is secured
by the machinery and equipment purchased for the automated high-power
lithium-phosphate cells production line in Tianjin. As of December 31, 2008,
construction of the automated high-power lithium-phosphate cells production line
was in progress.





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





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







Fiscal
      years ending on December 31,2009
            
            $
            13,191,6452010
            
            
            17,588,8602011
            
            
            14,657,3852012
            
            
            14,657,383$
            60,095,273




F-15




China
BAK Battery, Inc. and subsidiaries


Notes
to the condensed interim consolidated financial statements


For
the three months ended December 31, 2007 and 2008 (continued)


(Unaudited)





9
            Share-based
      Compensation





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





Stock
Option Plan




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





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





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




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





A summary
of share option plan activity for these options during the three months ended
December 31, 2008 is presented below:





Number of
              shares
            
            Weighted
              average
              exercise price
              per share
            
            Weighted
              average
              remaining
              contractual
              term
            
            Aggregate
              intrinsic
              value (1)Outstanding
      as of October 1, 2008
            200,000
            
            $
            6.25Exercised
            -
            
            
            -Forfeited
            -
            
            
            -Cancelled
            -
            
            
            -Outstanding
      as of December 31, 2008
            200,000
            
            $
            6.25
            
            2.3 years
            
            $
            -Exercisable
      as of December 31, 2008
            200,000
            
            $
            6.25
            
            2.3 years
            
            $
            -




(1)
            Aggregate
      intrinsic value represents the value of the Company’s closing stock price
      on December 31, 2008 (US$1.62) in excess of the exercise price multiplied
      by the number of options outstanding or
  exercisable.




F-16




China
BAK Battery, Inc. and subsidiaries


Notes
to the condensed interim consolidated financial statements


For
the three months ended December 31, 2007 and 2008 (continued)


(Unaudited)





9
            Share-based
      Compensation (continued)





The
weighted-average grant-date fair value of options granted during 2005 was
US$3.67 per share. The Company recorded non-cash share-based compensation
expense of US$38,842 for the three months ended December 31, 2007 in respect of
these share options granted in 2005, which was allocated to research and
development expenses. No non-cash share-based compensation expense was
recognized in respect of these share options for the three months ended December
31, 2008.





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




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





As of
December 31, 2008, there were no unrecognized compensation costs related to
non-vested share options.





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





A summary
of share option plan activity for these options during the three months ended
December 31, 2008 is presented below:





Number of
              Shares
            
            Weighted
              average exercise
              price per share
            
            Weighted average
              remaining
              contractual term
            
            Aggregate intrinsic
              value (1)Outstanding
      as of October 1, 2008
            1,300,000
            
            $
            3.29Exercised
            -
            
            
            -Forfeited
            -
            
            
            -Cancelled
            -
            
            
            -Outstanding
      as of December 31, 2008
            1,300,000
            
            $
            3.29
            
            4.4 years
            
            $
            -Exercisable
      as of December 31, 2008
            467,500
            
            $
            3.29
            
            3.8 years
            
            $
            -





(1)
            Aggregate
      intrinsic value represents the value of the Company’s closing stock price
      on December 31, 2008 (US$1.62) 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$496,804 and US$183,829 for the three months ended December 31,
2007 and 2008 respectively, in respect of share options granted in 2007, which
was allocated to cost of revenues, sales and marketing expenses, general and
administrative expenses and research and development expenses
respectively.





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




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




As of
December 31, 2008, there were unrecognized compensation costs of US$747,815
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-17




China
BAK Battery, Inc. and subsidiaries


Notes
to the condensed interim consolidated financial statements


For
the three months ended December 31, 2007 and 2008 (continued)


(Unaudited)





9
            Share-based
      Compensation (continued)





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





A summary
of share option plan activity for these options during the three months ended
December 31, 2008 is presented below:





Number of
              shares
            
            Weighted
              average
              exercise price
              per share
            
            Weighted
              average
              remaining
              contractual
              term
            
            Aggregate
              intrinsic
              value (1)Outstanding
      as of October 1, 2008
            360,000
            
            $
            4.30Exercised
            -
            
            
            -Forfeited
            -
            
            
            -Cancelled
            -
            
            
            -Outstanding
      as of December 31, 2008
            360,000
            
            $
            4.30
            
            4.1
      years
            
            $
            -Exercisable
      as of December 31, 2008
            90,000
            
            $
            4.30
            
            4.1
      years
            
            $
            -





(1)  Aggregate
intrinsic value represents the value of the Company’s closing stock price on
December 31, 2008 (US$1.62) in excess of the exercise price multiplied by the
number of options outstanding or exercisable.





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





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




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








As of
December 31, 2008, there were unrecognized compensation costs of approximately
US$463,000 related to the above non-vested share options. These costs are
expected to be recognized over a weighted average period of 0.8
years.





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




F-18




China
BAK Battery, Inc. and subsidiaries


Notes
to the condensed interim consolidated financial statements


For
the three months ended December 31, 2007 and 2008 (continued)


(Unaudited)




9
            Share-based
      Compensation (continued)








Number of
              shares
            
            Weighted
              average
              exercise price
              per share
            
            Weighted
              average
              remaining
              contractual
              term
            
            Aggregate
              intrinsic
              value (1)Outstanding
      as of October 1, 2008
            1,250,000
            
            $
            4.18Exercised
            -
            
            
            -Forfeited
            -
            
            
            -Cancelled
            -
            
            
            -Outstanding
      as of December 31, 2008
            1,250,000
            
            $
            4.18
            
            4.4
      years
            
            $
            -Exercisable
      as of December 31, 2008
            100,000
            
            $
            4.18
            
            4.4
      years
            
            $
            -





(1)  Aggregate
intrinsic value represents the value of the Company’s closing stock price on
December 31, 2008 (US$1.62) in excess of the exercise price multiplied by the
number of options outstanding or exercisable.





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





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





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





As of
December 31, 2008, there were unrecognized compensation costs of US$1,642,871
related to the above non-vested share options. These costs are expected to be
recognized over a weighted average period of 1.6 years.





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




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




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





The
Company recorded non-cash share-based compensation expense of US$22,022 for the
three months ended December 31, 2008, in respect of the restricted shares
granted in August 2008, which was allocated to general and administrative
expenses.





As of
December 31, 2008, the Company had unrecognized stock-based compensation of
US$15,874 associated with these restricted shares granted to non-employee
directors. These costs are expected to be recognized over a weighted-average
period of 0.4 years. The first and second 25% of the restricted shares were
issued as fully paid shares of common stock to the Company’s three independent
directors on August 6, 2008 and October 20, 2008, respectively. The remaining
50% of the restricted shares had not yet been issued to the three independent
directors as of December 31, 2008.





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




F-19




China
BAK Battery, Inc. and subsidiaries


Notes
to the condensed interim consolidated financial statements


For
the three months ended December 31, 2007 and 2008 (continued)


(Unaudited)





9
            Share-based
      Compensation (continued)





Employee
Restricted Stock Award





On
September 22, 2006, the Compensation Committee approved the form of Termination
and Release Agreement covering the cancellation of 1,400,000 shares of stock
options granted to the optionees who were residents of the PRC. The Compensation
Committee also consented to adopt the terms and provisions for the Restricted
Stock Grant Agreement covering the issuance of restricted shares, and committed
to determine an appropriate number of shares of restricted stock that would be
granted to these optionees under the Plan (the “Replacement Awards”) during the
first quarter of fiscal year 2007. In addition, the Compensation Committee also
approved certain officers of the Company to authorize delivery of the restricted
shares to the employees. On September 28, 2006, options to purchase a total of
1,400,000 shares of common stock were cancelled pursuant to the Termination and
Release Agreements signed on that day. The Replacement Awards were classified as
liability-classified awards as of September 30, 2006.





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





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





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





Prior to
vesting, the shares of restricted stock granted to each employee pursuant to the
Replacement Awards were subject to restrictions on transferability and were to
be forfeited if the grantee’s employment with the Company was terminated. In
accordance with the vesting provisions of the grants, the shares of restricted
stock became vested and were not subject to forfeiture under the following
schedule:








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





Upon the
grant of restricted stock, the Company reclassified share-based payment
liabilities of US$3,679,934 to shareholders’ equity. The restricted stock grant
is treated as equity-classified awards and the unrecognized compensation costs
were recognized over the vesting period. The Company recognized share-based
compensation expense of US$294,720 for the three months ended December 31, 2007
in respect of the equity-classified award. These share-based compensation costs
were allocated to cost of revenues, sales and marketing expenses, general and
administrative expenses and research and development expenses respectively. All
shares of restricted stock granted as of December 31, 2008 vested before
September 30, 2008 and no non-cash share-based compensation expense was
recognized for the three months ended December 31, 2008.





As of
December 31, 2008, there were no unrecognized compensation costs related to the
restricted stock grants.




F-20




China
BAK Battery, Inc. and subsidiaries


Notes
to the condensed interim consolidated financial statements


For
the three months ended December 31, 2007 and 2008 (continued)


(Unaudited)





10
            Net
      Loss per Share





The
calculation of basic net loss per share is based on the net loss for the three
months ended December 31, 2008 attributable to equity shareholders of $1,738,748
(Three months ended December 31, 2007: $940,535) and the weighted average number
of shares of common stock of 56,958,386 issued and outstanding during the three
months ended December 31, 2008 (Three months ended December 31, 2007:
51,425,323).





The
effects of stock options, restricted stock and warrants outstanding during the
three months ended and as of December 31, 2008 were all anti-dilutive. As
such, basic and diluted net loss per share for the three months ended December
31, 2008 are the same.





The
calculation of diluted net loss per share is based on the net loss for the three
months ended December 31, 2007 attributable to equity shareholders of $940,535
and the weighted average number of shares of common stock of 52,378,164 issued
and outstanding during the three months ended December 31, 2007 after adjusting
for 952,841 dilutive potential shares of common stock. Restricted stock granted
to employees and to non-employee directors are included in the computation of
diluted net loss for the three months ended December 31, 2007. The share
warrants granted to external financial advisors and stock options granted to
employees are excluded from the computation of diluted net loss per share as the
warrant and stock options were both anti-dilutive.




F-21




China
BAK Battery, Inc. and subsidiaries


Notes
to the condensed interim consolidated financial statements


For
the three months ended December 31, 2007 and 2008 (continued)


(Unaudited)





11
            Commitments
      and Contingencies





(i)
            Capital
      Commitments





As of
September 30, 2008 and December 31, 2008, the Company had the following
contracted capital commitments:





September
      30,
            
            
            December
      31,2008
            
            
            2008For
      construction of buildings
            
            $
            5,957,292
            
            
            $
            2,030,025For
      purchases of equipment
            
            
            4,313,237
            
            
            
            3,530,994$
            10,270,529
            
            
            $
            5,561,019





(ii)
            Property
      ownership and land use rights
certificates





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





The
Company did not obtain the land use rights certificate and approvals for
project-planning and construction relating to the premises occupied by the
Company, BAK Industrial Park, before construction of the buildings was
commenced. As of December 31, 2008, the Company has obtained the aforementioned
land use rights certificate and government approvals and was in the process of
negotiating with the relevant government for the application and acquisition of
the appropriate property ownership certificate.





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





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





Pursuant
to the land use rights certificate that the Company obtained relating to the
Research and Development Test Centre to be constructed in Shenzhen, the Company
must complete at least 25% of the construction of the new Research and
Development Test Centre by September 30, 2008. As of December 31, 2008, the
Company was in the process of negotiating with the relevant government bureau
for the extension of the completion date. According to the land use rights
certificate, such rights may not be pledged without the approval of the relevant
government office. The Company is required to pledge its property ownership and
land use rights in relation to the new Research and Development Test Centre to
China Development Bank according to the loan agreement entered into with it. The
Company was in the process of negotiating with the relevant government office
for the requisite approval.




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





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




F-22




China
BAK Battery, Inc. and subsidiaries


Notes
to the condensed interim consolidated financial statements


For
the three months ended December 31, 2007 and 2008 (continued)


(Unaudited)




11
            Commitments
      and Contingencies (continued)





(iii)
            Guarantees





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





September
      30,
            
            
            December
      31,2008
            
            
            2008Guaranteed
      for Shenzhen Tongli Hi-tech Co. Ltd. -a
      non-related party
            
            $
            2,933,282
            
            
            $
            2,931,477Guaranteed
      for Hunan Reshine New Material Ltd. -a
      non-related party
            
            
            5,866,565
            
            
            
            5,862,953Guaranteed
      for Nanjing Special MetalEquipment
      Co. Ltd. - a non-related party
            
            
            1,466,641
            
            
            
            1,465,738Guaranteed
      for Siping Juyuan Hanyang Plate HeatExchanger
      Co. Ltd. - a non-related party
            
            
            2,933,282
            
            
            
            2,931,477Guaranteed
      for Shenzhen B&G Technology Development Co. Ltd. -a
      non-related party
            
            
            3,666,603
            
            
            
            3,664,346$
            16,866,373
            
            
            $
            16,855,991





Management
has assessed the fair value of the obligation arising from the above financial
guarantees and considered it immaterial to the condensed interim consolidated
financial statements. Therefore, no obligations in respect of the above
guarantees were recognized as of December 31, 2008.





(iv)
            Outstanding
      Discounted Bills and Transferred
Bills





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





The
Company's outstanding discounted and transferred bills as of September 30, 2008
and December 31, 2008 are summarized as follows:




September
      30,
            
            
            December
      31,2008
            
            
            2008Bank
      acceptance bills
            
            $
            34,721,831
            
            
            $
            33,195,868




F-23




China
BAK Battery, Inc. and subsidiaries


Notes
to the condensed interim consolidated financial statements


For
the three months ended December 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 the terms of these agreements, the Company had agreed to
manufacture products for A123Systems according to the specifications furnished
by, and using the finished electrodes and other materials consigned by
A123Systems to the Company. The plaintiffs alleged that, by manufacturing
rechargeable lithium cells for A123Systems for use in DeWalt 36-volt cordless
power tools manufactured by Black & Decker Corporation, the Company had
infringed two U.S. patents owned by and exclusively licensed to the plaintiffs.
The plaintiffs seek injunctive relief and damages in an unspecified amount. If
the court issues an adverse decision, the Company may be required to pay the
plaintiffs substantial monetary damages, and the Company may be prohibited from
future production of rechargeable lithium cells manufactured for A123Systems or
be required to pay royalties to engage in any such production. The court has not
yet issued a decision on this matter and the Company is unable to quantify the
extent of any possible award of damages that might become payable by the
Company.








12
            Significant
      Concentrations





(a)
            Customers
      and Credit Concentrations





No
customer individually comprised 10% or more of net revenue for the three months
ended December 31, 2007 and 2008.




F-24




China
BAK Battery, Inc. and subsidiaries


Notes
to the condensed interim consolidated financial statements


For
the three months ended December 31, 2007 and 2008 (continued)


(Unaudited)





12
            Significant
      Concentrations (continued)





(b)
            Credit
      Risk





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





13
            Segment
      Information





The
Company currently engages in the manufacture, commercialization and distribution
of a wide variety of standard and customized lithium ion rechargeable batteries
for use in a wide array of applications. The Company manufactures six types of
Li-ion rechargeable batteries: steel-case cell, aluminum-case cell, battery
pack, cylindrical cell, polymer cell and high-power lithium-phosphate cell. The
Company’s products are sold to packing plants operated by third parties
primarily for use in mobile phones and other electronic devices. Net revenues
for the three months ended December 31, 2007 and 2008 were as
follows:





Net
revenues by product:





Three
      months ended December 31,2007
            
            
            2008%
            
            
            
            
            
            %Steel-case
      cell
            
            $
            9,756,758
            
            
            
            18.48
            
            
            $
            3,091,956
            
            
            
            4.55Aluminum-case
      cell
            
            
            30,059,952
            
            
            
            56.95
            
            
            
            37,281,796
            
            
            
            54.75Battery
      pack
            
            
            5,000,622
            
            
            
            9.47
            
            
            
            5,407,878
            
            
            
            7.94Cylindrical
      cell
            
            
            2,568,673
            
            
            
            4.87
            
            
            
            18,384,187
            
            
            
            27.00Polymer
      cell
            
            
            5,401,470
            
            
            
            10.23
            
            
            
            3,923,920
            
            
            
            5.76$
            52,787,475
            
            
            
            100.00
            
            
            $
            68,089,737
            
            
            
            100.00




Net
revenues by geographic area:





Three
      months ended December 31,2007
            
            
            2008%
            
            
            
            
            
            %PRC
      Mainland
            
            $
            45,507,991
            
            
            
            86.22
            
            
            $
            42,996,294
            
            
            
            63.15PRC
      Taiwan
            
            
            2,836,323
            
            
            
            5.37
            
            
            
            14,958,344
            
            
            
            21.97India
            
            
            1,606,362
            
            
            
            3.04
            
            
            
            2,151,286
            
            
            
            3.15United
      States of America
            
            
            65,054
            
            
            
            0.12
            
            
            
            22,883
            
            
            
            0.03Hong
      Kong, China
            
            
            1,827,494
            
            
            
            3.46
            
            
            
            6,997,200
            
            
            
            10.28Others
            
            
            944,251
            
            
            
            1.79
            
            
            
            963,730
            
            
            
            1.42$
            52,787,475
            
            
            
            100.00
            
            
            $
            68,089,737
            
            
            
            100.00





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




F-25




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





Overview





During
the first quarter of fiscal 2009, we generated $68.1 million in net revenues,
which is over 29.0% greater than our net revenues of $52.8 million in the first
quarter of fiscal year 2008.  The substantial increase in net
revenues over the net revenues generated in the same period of last year was
primarily due to the significant increase in revenues from the sale of our
aluminum case cells and cylindrical cells.  Our strong cylindrical
cell sales  largely resulted from increased sales to the laptop
computer market.  We also continued to make progress in expanding our
manufacturing capability to afford us first-tier OEM capabilities, and in
working to satisfy the qualification processes of targeted first-tier
OEMs.  Our achievements during the first quarter of fiscal
year 2009 include the following:





·
            Net
      revenue remained strong in the midst of the global financial crisis and
      recession; gross margin remained at a similar level to our previous fiscal
      quarter’s gross margin;


·
            Revenue
      from cylindrical cells, used primarily in notebook computers, continued to
      be strong, accounting for 27% of total revenue; prismatic cells revenue
      continued to grow, reflecting our further penetration into the China OEM
      cellular phone market;


·
            We
      implemented cost-cutting measures, and in combination with other
      initiatives that we took during the most recent fiscal quarter, we expect
      a reduction of quarterly general and administrative operating expenses of
      at least $1.5 million for the current and coming quarters of fiscal year
      2009 as compared to such expenses for the first quarter of this fiscal
      year;


·
            Our
      “Electric Vehicles Lithium-phosphate Power Battery Industrialization
      Project” was accepted into the PRC’s National High Technology Research and
      Development Program, or “863 Program”, by the PRC’s Ministry of Science
      and Technology.





As
reflected by our overall strong net revenues for the first quarter of fiscal
year 2009, we mitigated the potentially negative effects of the global financial
crisis and recession.  However, during this  time, the
financial crisis and recession adversely affected many of the markets that our
customers serve which consequently exposes us to potentially inferior operating
results .  For example, our polymer cell customers, which are based
mainly in the United States, suffered serious adverse effects from the financial
crisis and recession.  As a result, our polymer battery sales for the
last fiscal quarter suffered.





In the
near-term, we anticipate operating challenges due to the global financial crisis
and recession, including lower market demand, which may in turn compel us to
lower selling prices.  These challenges may impede the trend of
increasing our revenues. In response to these challenges, in the first quarter
of fiscal 2009, we initiated a number of actions to cut costs and expenses.
These included reductions in total headcount, work hours for hourly workers, and
compensation packages for salaried employees, including senior executives.
Employees were also required to take unpaid leaves and will be required to take
longer holiday leaves for the Chinese New Year. Beyond the last fiscal quarter,
we suspended our prismatic cell production for January 2009 to reduce unneeded
inventory and to lower our energy costs. All of these measures are expected to
reduce quarterly general and administrative operating expenses by at least $1.5
million for the current and coming quarters of fiscal year 2009 as compared to
such expenses for the first quarter of this fiscal year. In addition, our sales
of prismatic cells for the cellular phone market remained strong during the last
fiscal quarter, and we seek to increase the market share of our prismatic cells
for OEM cellular phones in China.  We also plan to increase our
investment in sales and marketing with regard to our polymer cells and
cylindrical cells, as these markets have been significantly negatively impacted
by the global financial crisis and recession. In addition, we are pursuing
opportunities to raise our selling prices by penetrating high-end markets, and
to further reduce the purchase costs of raw materials.





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





To help
us finance and expand our operations, we have access to $145.7 million in
short-term credit facilities and $64.5 million in long-term credit
facilities.  As of December 31, 2008, the principal outstanding
amounts under our credit facilities included short-term bank loans of $112.1
million, long-term bank loans of $13.2 million maturing within one year and
long-term bank loans of $46.9 million maturing in over one year, and bills
payable of $22.9 million, leaving $10.7 million of short-term funds and $4.4
million of long-term funds available for additional cash needs.  In
addition, on July 10, 2008, our $60.0 million shelf registration statement was
declared effective by the SEC, pursuant to which we have issued $16.0 million in
securities, giving us the potential to raise up to an additional aggregate $44.0
million in gross proceeds from future equity financings.




1





Our
Business





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





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





·
            notebook
      computers;





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





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





We
conduct all of our operations in China, in close proximity to China’s
electronics manufacturing base and its rapidly growing market, and have
distribution offices in Taiwan, India, Germany, and the United States where our
sales representatives market and sell our products and also provide after-sale
service.  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 (“VAT”), sales returns, trade discounts and
allowances.  We are subject to VAT, which is levied on most of our
products at the rate of 17% on the invoiced value of our
products.  Provision for sales returns are recorded as a reduction of
revenue in the same period that revenue is recognized.  The provision
for sales returns represents our best estimate of the amount of goods that will
be returned from our customers based on historical sales returns
data.





Cost of
Revenues.  Cost of revenues consists primarily of material
costs, employee remuneration for staff engaged in production activity,
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. Cost of revenues from the
sales of battery packs includes the fees we pay to pack manufacturers for
assembling our prismatic cells into battery packs.





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





Sales and Marketing
Expenses.  Sales and marketing expenses consist primarily of
remuneration for staff involved in selling and marketing efforts, including
staff engaged in the packaging of goods for shipment, advertising cost,
depreciation, 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
Expenses.  General and administrative expenses consist
primarily of employee remuneration, share-based compensation, professional fees,
insurance, benefits, general office expenses, depreciation, liquidated damages,
and bad debt expenses.




2





Government Grant Income / Other
Income.  Government grant income for the three months ended
December 31, 2008 mainly consisted of receipt of grant funds to subsidize the
interest expenses incurred by the Company in prior years for research and
development activities, to reward Shenzhen BAK for its contributions to the
Shenzhen area’s economy, and to subsidize the payment for land use rights of BAK
Industrial Park.  Government grant
income for the three months ended December 31, 2007 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
valued-added tax 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 arises 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 PRC income tax laws and regulations, before
January 1, 2008, a foreign-invested enterprise (“FIE”) was generally subject to
an enterprise income tax rate of 33.0%, which included a 30% state income tax
and a 3.0% local income tax.  However, from at least calendar year
2002 through calendar year 2007, an enterprise recognized as a “Manufacturing
Enterprise Located in Special Economic Zone” under PRC tax laws was entitled to
a preferential income tax rate of 15%.  Moreover, a foreign-invested
manufacturing enterprise, starting from its first profitable calendar year after
offset of accumulated tax losses, was entitled to a two-year exemption from
enterprise income tax followed by a three-year 50% reduction in its enterprise
income tax rate.  An enterprise qualified for such treatment may
receive a further tax rate reduction related to the size of qualified capital
contributions received.  In addition, from at least calendar year 2002
through calendar year 2007, an enterprise qualified as an “advanced technology
enterprise” under PRC tax law was also entitled to a 50% reduction of income
taxes.





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





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





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





Shenzhen
BAK and BAK Electronics received in aggregate a tax benefit of $50,000 pursuant
to their Tax Holiday for the three months ended December 31, 2008, or $0.0008
per basic share.





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




3





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





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





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





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





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





Our Hong
Kong subsidiary, BAK International, is subject to Hong Kong’s profits tax at the
rate of 16.5%.  However, because it does not have any assessable
income derived from or arising in Hong Kong, it has not paid any Hong Kong
profits tax.





Our
effective tax benefit rate was 12.9% and 9.2% for the three months ended
December 31, 2007 and 2008 respectively.




Results
of Operations





The
following sets forth certain income statement information for the three months
ended December 31, 2008 as compared to the three months ended December 31,
2007.  All amounts, other than percentages, are in thousands of U.S.
dollars.








Three
      Months Ended
              December
      31,2008
            
            
            2007
            
            
            $
      Change
            
            
            %
      ChangeStatement
      of operations data:Net
      revenues
            
            $
            68,090
            
            
            $
            52,787
            
            
            $
            15,303
            
            
            
            29.0Cost
      of revenues
            
            
            57,497
            
            
            
            45,681
            
            
            
            11,816
            
            
            
            25.9Gross
      profit
            
            
            10,593
            
            
            
            7,106
            
            
            
            3,487
            
            
            
            49.1Operating
      expenses:Research
      and development expenses
            
            
            1,418
            
            
            
            1,319
            
            
            
            99
            
            
            
            7.5Sales
      and marketing expenses
            
            
            1,600
            
            
            
            1,348
            
            
            
            252
            
            
            
            18.7General
      and administrative expenses
            
            
            6,759
            
            
            
            4,238
            
            
            
            2,521
            
            
            
            59.5Total
      operating expenses
            
            
            9,777
            
            
            
            6,905
            
            
            
            2,872
            
            
            
            41.6Operating
      income
            
            
            816
            
            
            
            201
            
            
            
            615
            
            
            
            306.0Finance
      costs, net
            
            
            (2,839
            )
            
            
            (2,223
            )
            
            
            (616
            )
            
            
            27.7Government
      grant income
            
            
            102
            
            
            
            901
            
            
            
            (799
            )
            
            
            (88.7
            )Other
      income
            
            
            6
            
            
            
            42
            
            
            
            (36
            )
            
            
            (85.7
            )Income
      taxes benefits
            
            
            176
            
            
            
            139
            
            
            
            37
            
            
            
            26.6Net
      loss
            
            $
            (1,739
            )
            
            $
            (940
            )
            
            $
            (799
            )
            
            
            85.0




4





Net Revenues.  Net
revenues increased to $68.1 million for the three months ended December 31, 2008
as compared to $52.8 million for the same period of the prior year, an increase
of $15.3 million or 29.0%.  Our net revenues were greater for the
fiscal quarter ended December 31, 2008 than for the same period of the prior
year in part because of increased shipments as we ramped up our production
capacity to meet increased customer orders for our products.  The
following sets forth the breakdown of our net revenues by battery cell type for
the periods indicated.





Three Months EndedDecember
    31,2008
            
            2007(in
      thousands)Prismatic
      cellsSteel-case
      cells
            
            $
            3,092
            
            
            $
            9,757Aluminum-case
      cells
            
            
            37,282
            
            
            
            30,060Battery
      packs
            
            
            5,408
            
            
            
            5,000Cylindrical
      cells
            
            
            18,384
            
            
            
            2,569Lithium
      polymer cells
            
            
            3,924
            
            
            
            5,401Total
            
            $
            68,090
            
            
            $
            52,787





·
            Net
      revenues from the sales of steel-case cells decreased to $3.1 million in
      the three months ended December 31, 2008 from $9.8 million in the same
      period of 2007, a decrease of $6.7 million or 68.3%, due to our strategic
      reduction of steel-case cell production in order to increase our
      aluminum-case cell production capacity, to facilitate our transition from
      the secondary market to the OEM market, and to capitalize on the greater
      benefits of aluminum-case cells. During the three months ended December
      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 that for steel-case cells. We started to phase out the
      production of steel-case cells during the fiscal quarter ended December
      31, 2008, so we expect revenue from steel-case cells to be minimal in
      coming quarters.





·
            Net
      revenues from the sales of aluminum-case cells increased to $37.3 million
      in the three months ended December 31, 2008 from $30.1 million in the same
      period of 2007, an increase of $7.2 million or 24.0%, due to an increase
      in sales volume of 5.0% driven by increased sales to the OEM market in the
      PRC and an increase in our average selling price by
  18.1%.





·
            Net
      revenues from sales of battery packs increased to $5.4 million in the
      three months ended December 31, 2008 from $5.0 million in the same period
      of 2007, an increase of $408,000 or 8.1%.  This increase was due
      to an increase in our average selling price of 13.8% driven by increased
      sales to the OEM market in the PRC, which offset a decrease in sales
      volume of 4.9%.





·
            Net
      revenues from the sales of cylindrical cells increased to $18.4 million in
      the three months ended December 31, 2008 from $2.6 million in the same
      period of 2007, an increase of $15.8 million or 615.7%, due to an increase
      of 471.8% in sales volume and an increase of 25.2% in average selling
      price, driven by increased sales to the laptop computer
      market.





·
            We
      also sold $3.9 million of lithium polymer cells in the three months ended
      December 31, 2008, compared to $5.4 million of lithium polymer cells in
      the same period of 2007, a decrease of $1.5 million or 27.4%, due to a
      decrease of 34.6% in sales volume offset by an increase of 10.7% in our
      average selling price as a result of a decline in market demand relating
      to the global financial crisis and
recession.




5




Cost of
Revenues.  Cost of revenues increased to $57.5 million for the
three months ended December 31, 2008, as compared to $45.7 million for the same
period of 2007, an increase of $11.8 million or 25.9%.  The increase
in cost of revenues was mainly due to an increase of sales volume.





As a
result, gross profit for the three months ended December 31, 2008 was $10.6
million or 15.6% of net revenues as compared to gross profit of $7.1 million or
13.5% of net revenues for the same period of 2007.  The increase in
gross profit as a percentage of net revenues was primarily due to the
significant increase in sales of cylindrical cells as a result of increased
sales to the laptop computer market, and an increase in our average selling
price, which together generated a higher gross margin.





Research and Development
Expenses.  Research and development expenses increased to $1.4
million for the three months ended December 31, 2008, as compared to $1.3
million for the same period of 2007, an increase of $99,000 or
7.5%.  Salaries related to R&D staff increased to $568,000 from
$377,000 for the same period of the prior year, an increase of $191,000,
primarily due to our hiring of additional R&D professionals. 
Equity-based compensation included in R&D expenses was $207,000 for the
three months ended December 31, 2008, as compared to $306,000 for the same
period of the prior year, a decrease of $99,000 or 32.4%, mainly due to stock
options granted to the employees in our R&D department on June 25, 2007,
January 28, 2008 and May 29, 2008.





Sales and Marketing
Expenses.  Sales and marketing expenses increased to $1.6
million for the three-month period ended December 31, 2008 as compared to $1.3
million for the same period of 2007,an increase of $252,000 or 18.7%, primarily
due to a $124,000 increase in salaries and a $44,000 increase in packing
expenses due to increased sales.  As a percentage of net revenues,
sales and marketing expenses decreased to 2.3% for the three months ended
December 31, 2008, from 2.6% for the same period of 2007.





General and Administrative
Expenses.  General and administrative expenses increased to
$6.8 million or 10.0% of net revenues for the three months ended December 31,
2008, as compared to $4.2 million or 8.0% of net revenues for the same period of
2007, an increase of $2.5 million or 59.5%.  Share-based compensation
included in general and administrative expenses increased by $199,000 due to new
stock options granted to the employees in our general administration department
on June 25, 2007, January 28, 2008 and May 29, 2008.  We also
recognized an exchange loss of $704,000 for the three months ended December 31,
2008.  Salaries and benefit expenses increased by $530,000 in the
aggregate due to an increase in average salaries paid.  Bad debt
expenses increased by $1.1 million primarily due to delayed collection of
accounts receivable relating to the timing of the Chinese New Year
holiday.





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





Operating
Income.  As a result of the above, operating income totaled
$816,000 for the three months ended December 31, 2008 as compared to operating
income of $201,000 for the same period of the prior year, an increase of
$615,000 or 306.0%.  As a percentage of net revenues, operating income
was 1.2% for the three months ended December 31, 2008, as compared to 0.4% for
the same period of the prior year.




6





Finance Costs,
Net.  Finance costs, net increased to $2.8 million for the
three-month period ended December 31, 2008, as compared to $2.2 million for the
same period of the prior year, an increase of $616,000 or 27.7%.  We
have $112.1 million in short-term bank loans maturing in less than one year,
$13.2 million in long-term bank loans maturing within one year, and $46.9
million in long-term bank loans maturing in more than one year, outstanding as
of December 31, 2008, as compared to $99.9 million in short-term bank loans,
$6.8 million in long-term bank loans maturing within one year, and $34.2 million
in long-term bank loans maturing in more than one year, respectively,
outstanding as of December 31, 2007. The increase in net finance costs is mainly
attributable to the increase in outstanding principal of both our short-term and
long-term bank loans.





Government Grant
Income.  Government grant income was $102,000 for the three
months ended December 31, 2008 as compared to $901,000 for the same period of
2007, a decrease of $799,000 or 88.7%.  Government grant income for
the three months ended December 31, 2008 mainly consisted of receipt of grant
funds of $32,000 to subsidize the interest expenses incurred by the Company in
prior years for research and development activities,  $12,000 to
reward Shenzhen BAK for its contributions to the Shenzhen economy, and $58,000
to subsidize the payment for land use rights of BAK Industrial Park. Government
grant income for the three months ended December 31, 2007 mainly represented
receipt of grant funds to subsidize the interest expenses we incurred in prior
years for research and development activities.  No present or future
obligation arises from the receipt of these government subsidies.




Income Tax
Benefit.  Income tax benefit was $176,000 for the three months
ended December 31, 2008, as compared to an income tax benefit of $139,000 for
the same period of 2007, an increase of $37,000 or 26.6%.  The change
was mainly due to our large net loss for the three months ended December 31,
2008.





Net Loss.  As a
result of the foregoing, we had a net loss of $1.7 million for the three months
ended December 31, 2008 as compared to a net loss of $940,000 for the same
period of 2007.





Liquidity
and Capital Resources





We have
historically financed our liquidity requirements from a variety of sources,
including short-term bank loans, long-term bank loans and bills payable under
bank credit agreements, sale of bills receivable, and issuance of capital
stock.  As of December 31, 2008, we had cash and cash equivalents of
$37.2 million, as compared to $35.7 million as of September 30,
2008.  In addition, we had pledged deposits amounting to $6.1 million
and $4.4 million as of December 31, 2008 and September 30, 2008,
respectively.  Typically, banks will require borrowers to maintain
deposits of approximately 20% to 100% of the outstanding loan balances and bills
payable.  The individual bank loans have maturities ranging from one
to twelve months which coincides with the periods the cash remains pledged to
the banks.





We had
access to $145.7 million in short-term credit facilities and $64.5 million in
long-term credit facilities as of December 31, 2008. As of December 31, 2008,
the principal outstanding amounts under our credit facilities included
short-term bank loans of $112.1 million, long-term bank loans of $13.2 million
maturing within one year and long-term bank loans of $46.9 million maturing in
over one year, and bills payable of $22.9 million, leaving $10.7 million of
short-term funds and $4.4 million of long-term funds available for additional
cash needs. In addition, on July 10, 2008, our $60.0 million shelf registration
statement was declared effective by the SEC, pursuant to which we have issued
$16.0 million in securities, giving us the potential to raise up to an
additional aggregate $44.0 million in gross proceeds from future equity
financings.





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





Three
      Months Ended
              December
      31,2008
            
            
            2007(in
      thousands)Net cash
      provided by / (used in) operating activities
            
            $
            21,178
            
            
            $
            (4,688
            )Net
      cash used in investing activities
            
            
            (20,052
            )
            
            
            (9,211
            )Net
      cash provided by financing activities
            
            
            530
            
            
            
            32,533Effect
      of exchange rate changes on cash and cash equivalents
            
            
            (154
            )
            
            
            694Net
      increase in cash and cash equivalents
            
            
            1,502
            
            
            
            19,328Cash
      and cash equivalents at the beginning of period
            
            
            35,707
            
            
            
            14,196Cash
      and cash equivalents at the end of period
            
            
            37,209
            
            
            
            33,524




7





Operating
Activities





Net cash
provided by operating activities was $21.2 million in the three months ended
December 31, 2008 compared with net cash used in operating activities of
$4.7 million in the same period of 2007. The improvement of $25.8 million in
operating activities was mainly attributable to better control of trade account
receivables collection.





Investing
Activities




Net cash
used in investing activities increased to $20.1 million in the three months
ended December 31, 2008 from $9.2 million in the same period of
2007.  The net cash used in investing activities during the period
ended December 31, 2008 was mainly used for procurement of machinery and
equipment for two additional cylindrical cell lines and an additional automated
prismatic cell production line.





Financing
Activities





Net cash
provided by financing activities was $530,000 in the three months ended December
31, 2008, compared to $32.5 million in the same period of 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 three months
ended December 31, 2007, (iii) a $2.0 million decrease in cash deposits at banks
as collateral in the three months ended December 31, 2008, and (iv) decreased
borrowings, net of repayments, of $16.0 million in the three months ended
December 31, 2008.





As
of December 31, 2008, the principal amounts outstanding under our credit
facilities and lines of credit were as follows:




Maximum
      Amount
                            Available
                          
                          
                          Amount
      Borrowed
                            (Includes
                            bank loans
                            and bills
      payable)(in thousands)Short-term
      credit facilities:Agricultural
      Bank of China
                          
                          $
                          58,630
                          
                          
                          $
                          48,045Shenzhen
      Development Bank
                          
                          
                          21,986
                          
                          
                          
                          21,986China
      CITIC Bank
                          
                          
                          21,986
                          
                          
                          
                          14,657Industrial
      Bank
                          
                          
                          9,161
                          
                          
                          
                          7,329Bank
      of China
                          
                          
                          33,946
                          
                          
                          
                          33,946Subtotal—short-term
      credit facilities
                          
                          $
                          145,709
                          
                          
                          $
                          125,963Long-term
      credit facilities:Agricultural
      Bank of China
                          
                          
                          49,835
                          
                          
                          
                          49,835China
      Development Bank
                          
                          
                          14,657
                          
                          
                          
                          10,260Subtotal—long-term
      credit facilities
                          
                          $
                          64,492
                          
                          
                          $
                          60,095Lines
      of Credit:Agricultural
      Bank of China
                          
                          
                          517
                          
                          
                          
                          517Bank
      of Communications
                          
                          
                          8,515
                          
                          
                          
                          8,515Subtotal-lines
      of credit
                          
                          $
                          9,032
                          
                          
                          $
                          9,032Total
      Principal Outstanding
                          
                          $
                          219,233
                          
                          
                          $
                          195,090




8




The above
principal outstanding amounts under credit facilities included short-term bank
loans of $112.1 million, long-term bank loans of $13.2 million maturing within
one year and long-term bank loans of $46.9 million maturing in over one year,
and bills payable of $22.9 million.





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





During
the three months ended December 31, 2008, we repaid eleven short-term bank loans
totaling $81.9  million, and entered into seven new short-term bank
loan agreements totaling $84.4 million. The seven new short-term loan agreements
include one loan agreement with Shenzhen Development Bank, Longgang Branch
(“Shenzhen Development Bank”), totaling $22.0 million, three loan agreements
with Agricultural Bank of China, Shenzhen Eastern Branch (“Agricultural Bank –
Shenzhen Branch”), totaling $47.7 million, and three loan agreements with China
CITIC Bank, Shenzhen Longgang Branch (“China CITIC Bank”), totaling $14.7
million. The terms of these loans are described below.





On
December 8, 2008, we renewed our comprehensive credit facility agreement with
Shenzhen Development Bank to provide a maximum loan amount of RMB 150 million
(approximately $22.0 million).  Loans may be drawn at any time over
the one-year period beginning December 8, 2008 and will be due after a period
ranging from 2 months to 1 year from the date each is borrowed.  This
credit facility agreement is guaranteed by BAK International, BAK Tianjin and
Mr. Xiangqian Li, and is also secured by $22.0 million of inventory and $34.8
million of machinery and equipment.  As of December 31, 2008, we had
borrowed approximately $22.0 million under a loan agreement dated December 16,
2008 under this credit facility agreement, bearing interest of 105% of the
PBOC’s benchmark rate on the date of the loan agreement and adjusted quarterly,
and which is repayable on December 16, 2009.





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




9





As of
December 31, 2008, we had three outstanding short-term loans under this credit
facility totaling approximately $47.7 million, carrying annual interest from
5.04% to 5.58%, adjusted quarterly.  The first loan, of approximately
$22.0 million, currently carries annual interest of 5.58% and is due on December
1, 2009. The second loan, of approximately $11.0 million, currently carries
annual interest at 5.58% and is due on December 15, 2009. The third loan, of
approximately $14.7 million, currently carries annual interest at 5.04% and is
due on June 15, 2009.  Each of the loan agreements specifically
provide for acceleration of repayment of the loan, as well as other penalties
and remedies.  As of December 31, 2008, we also had three five-year
term loans totaling approximately $26.4 million under this credit facility
carrying interest at 90% of the benchmark rate of the PBOC for three-year to
five-year long-term loans. The first loan, of approximately $5.9 million,
currently carries annual interest of 5.832% and is due on January 25, 2012. The
second loan, of approximately $11.7 million, currently carries annual interest
of 6.237% and is due in three installments of approximately $2.9 million on
January 25, 2010, approximately $7.3 million on January 25, 2011, and
approximately $1.5 million on January 25, 2012, respectively. The third loan, of
approximately $8.8 million, currently carries annual interest of 7.65% and is or
was due in two installments of approximately $4.4 million on January 25, 2009,
which was repaid on January 20, 2009, and approximately $4.4
million on January 25, 2010.These five-year term
loans are: (i) specifically guaranteed by Mr. Xiangqian Li; (ii) specifically
secured by Shenzhen BAK’s machinery and equipment with carrying values of
approximately $34.8 million as of December 31, 2008; and (iii) specifically
secured by the property ownership and land use rights certificates with an
aggregate net book value of $105.2 million as of December 31, 2008 in relation
to the land on which Shenzhen BAK’s corporate campus had been constructed and
any machinery and equipment purchased and used at the campus subsequent to such
construction.





On May
26, 2008, we entered into a four-year, long-term loan agreement of RMB 160
million (approximately $23.5 million) with Agricultural Bank of China, Tianjin
Branch (“Agricultural Bank – Tianjin Branch”).  This loan agreement is
secured by any machinery and equipment purchased for the automated
high-power lithium-phosphate cells production line at our Tianjin
facility.  As of December 31, 2008, we had borrowed $23.5 million
under this Loan Agreement, payable in four installments: (i) RMB 30 million
(approximately $4.4 million) on December 26, 2009; (ii) RMB 30 million
(approximately $4.4 million) on December 26, 2010; (iii) RMB 50 million
(approximately $7.3 million) on December 26, 2011; and (iv) RMB 50 million
(approximately $7.4 million) on May 26, 2012.





On May 9,
2008, we renewed a credit facility with China CITIC Bank.  This credit
facility was guaranteed by BAK International and Mr. Xiangqian Li.  We
were permitted to borrow up to RMB 150 million ($22.0 million) under this credit
facility, which matured on November 9, 2008. As of December 31, 2008, we had
outstanding three short-term loan agreements under this credit facility totaling
approximately $14.7 million at certain fixed interest rates.  The
first loan, of approximately $5.9 million, carried annual interest of 6.12%, and
was repayable on January 15, 2009.  The second loan, of approximately
$5.7 million, carried annual interest of 6.12%, and was repayable on January 17,
2009.  The third loan, of approximately $3.1 million, carried annual
interest of 6.03%, and was repayable on February 1, 2009.  Each loan
was repaid on its respective maturity date.





On March
24, 2008, we entered into a comprehensive credit facility agreement with
Shenzhen Branch, Industrial Bank (“Industrial Bank”).  This credit
facility is guaranteed by Mr. Xiangqian Li.  We may borrow up to RMB
62.5 million (approximately $9.2 million) under this credit facility, which will
mature on March 25, 2009.  As of December 31, 2008, we had borrowed
$7.3 million under this credit facility, at the annual interest rate of 6.225%,
which is repayable on March 25, 2009.





On
November 11, 2007, we renewed our credit facility agreement with Shenzhen
Branch, Bank of China (“Bank of China”), to provide a maximum loan amount of RMB
450 million (approximately $66.0 million). Loans may be drawn at any time over
the one-year period beginning November 11, 2007 and will be due after a period
ranging from 2 months to 1 year from the date each is borrowed.  The
credit facility agreement is guaranteed by Mr. Xiangqian Li, and is also secured
by $12.7 million of machinery and equipment.  As of December 31, 2008,
we had borrowed $20.5 million under three short-term loans and
$13.4 million of notes payable under this credit facility agreement. The
first loan, of approximately $5.9 million, carries annual interest of 8.217%,
and is repayable on March 27, 2009.  The second loan, of approximately
$4.4 million, carries annual interest of 8.217%, and is repayable on August 14,
2009.  The third loan, of approximately $10.2 million, carries annual
interest of 7.844%, and is repayable on August 29, 2009.




10





On
December 26, 2006, we entered into a four-year long-term loan agreement of RMB
100 million (approximately $14.7 million) with Shenzhen Branch, China
Development Bank (“China Development Bank”). The long-term loan is payable in
three installments as follows:





·
            RMB
      30 million (approximately $4.4 million) on November 20, 2008, which has
      been repaid;





·
            RMB
      30 million (approximately $4.4 million) on November 20, 2009;
      and





·
            RMB
      40 million (approximately $5.9 million) on December 26,
    2010.





The
long-term loan carries an annual interest rate of 7.740%.  The
long-term loan is secured by Shenzhen BAK’s pledge of its new Research and
Development Test Centre, which is to be constructed in Shenzhen,
China.  We have committed to pledge the property ownership and land
use rights certificates relating to this property as security after the
requisite government approval is obtained, pursuant to the loan
agreement.  According to the property ownership and land use rights
certificate that we obtained in relation to this facility, such land may not be
pledged without the approval of the relevant government office.  As of
December 31, 2008, we had not obtained the requisite approval, and were in the
process of negotiating with the relevant government bureau for such
approval.  For further discussion regarding the status of property
ownership rights relating to this facility, please see “Management’s Discussion
and Analysis of Financial Condition and Results of Operations – Capital
Expenditures”.  The obligations of Shenzhen BAK under the loan
agreement are guaranteed by Mr. Xiangqian Li.  We had borrowed $10.3
million under this loan agreement as of December 31, 2008.





We had
negative working capital of $18.3 million as of December 31, 2008, as compared
to working capital of $3.2 million as of September 30, 2008, a decrease of $21.5
million. This decrease was primarily attributable to longer credit terms we
obtained from our suppliers.  We had short-term bank loans maturing in
less than one year of $112.1 million and long-term bank loans maturing within
one year of $13.2 million as of December 31, 2008, or a total of $125.3 million
of loans maturing within one year, as compared to a total of $114.4 million of
such loans as of December 31, 2007, an increase of $10.9 million.  We
had long-term bank loans maturing in over one year of $46.9 million as of
December 31, 2008, as compared to $34.2 million of such loans as of December 31,
2007, an increase of $12.7 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 additional equity securities, debt securities or borrow from
lending institutions. We can make no assurances that financing will be available
in the amounts we need or on terms acceptable to us, if at all. The sale of
additional equity securities, including convertible debt securities, would
dilute the interests of our current shareholders. The incurrence of debt would
divert cash for working capital and capital expenditures to service debt
obligations and could result in operating and financial covenants that restrict
our operations and our ability to pay dividends to our shareholders. If we are
unable to obtain additional equity or debt financing as required, our business
operations and prospects may suffer.





Capital
Expenditures





We made
capital expenditures of $20.1 million and $9.2 million in the three months ended
December 31, 2008 and 2007, respectively.  Our capital expenditures
were used primarily to purchase plant and equipment to expand our production
capacity.  The table below sets forth the breakdown of our capital
expenditures by use for the periods indicated.





Three
      months ended December 31,2008
            
            2007(in
      thousands)Construction
      costs
            
            $
            3,627
            
            
            $
            2,740Lease
            
            $
            466
            
            
            $
            21Purchase
      of equipment
            
            $
            15,959
            
            
            $
            6,450Total
      capital expenditures
            
            $
            20,052
            
            
            $
            9,211





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




11





We
completed construction and put into use facilities measuring 218,178 square
meters comprised of manufacturing facilities, warehousing and packaging
facilities, dormitory space, dining halls and administrative offices at the BAK
Industrial Park facility in Shenzhen.  Of that space, approximately
120,000 square meters are manufacturing facilities.  We have also
completed the construction and put into use 17,867 square meters of
manufacturing facilities in Tianjin.  We are currently constructing
39,996 square meters of manufacturing and related facilities in Tianjin. At
present, we have no significant payment obligations related to these
facilities.





According
to the relevant PRC laws and regulations, a land use rights certificate, along
with government approvals for land planning, project planning, and construction
must be obtained before the construction of any building is
commenced.  A property ownership certificate will be granted by the
government upon application under the condition that the land use rights
certificate and requisite government approvals are obtained.  We
recently obtained the land use rights certificate to the tract of property on
which we have constructed and on which we plan further construction of our
manufacturing facilities and other related facilities at BAK Industrial Park in
Shenzhen, China.  While we have been constructing and have completed a
substantial part of the construction of our facilities with the approval of the
local government of Kuichong Township of Longgang District of Shenzhen, we
understand it did not have the authority to grant us the land use rights
certificate.  However, the Company obtained approval for project
planning and construction from the government of Shenzhen on June 20, 2007.
Under an agreement with the government of Shenzhen for the acquisition of the
land use rights to BAK Industrial Park dated June 29, 2007, effective June 2008,
the government agreed to provide us with the land use rights certificate
relating to BAK Industrial Park on the condition that the Company would pay it
an additional $11,819,841.  According to a notice received from the
government of Shenzhen on June 6, 2008, the Company obtained government grants
totaling $7,889,991 to subsidize this additional payment.  As of
December 31, 2008, the Company had fully paid the remaining cost of $3,929,850
and had obtained the land use rights certificate for BAK Industrial
Park.





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





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





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





As of
December 31, 2008, we had fully paid the lease prepayment amount of $14.1
million for the acquisition of land use rights regarding our Tianjin
facility.  As of December 31, 2008, we had obtained the relevant land
use rights certificate to this facility, and were in the process of obtaining
the relevant property ownership certificate to this
facility.  Pursuant to our land use rights certificate relating to our
Tianjin facility, the Tianjin government had requested that we complete
construction of the Tianjin facility before September 30, 2008. As of December
31, 2008, we had not done so, and were in the process of negotiating with the
relevant government bureau for the extension of the completion
date.




12





As of
December 31, 2008, we had paid the lease prepayment amount of $1.2 million for
the acquisition of land use rights for a new Research and Development Test
Centre to be constructed in Shenzhen, China.  As of December 31, 2008,
we had obtained a land use rights certificate relating to this
facility.  Pursuant to the land use rights certificate, we are
required to complete at least 25% of the construction of the new Research and
Development Test Centre facility by September 30, 2008.  As of
December 31, 2008, we had not done so, and were in the process of negotiating
with the relevant government bureau for the extension of the completion date. In
addition, according to the land use rights certificate, such rights may not be
pledged without the approval of the relevant government office.  We
are required to pledge our property ownership and land use rights certificates
in relation to the new Research and Development Test Centre to China Development
Bank pursuant to the loan agreement entered into with it.  As of
December 31, 2008, we were in the process of negotiating with the relevant
government bureau for the requisite approval. In addition, the so-named
“property ownership and land use rights certificate” that we were issued
relating to this facility lacks certain terms relating to property ownership
rights, which appears to indicate that the granting government has so far only
granted us the relevant land use rights.  As a result, this
certificate may not be adequate evidence of our property ownership rights to
this property.  We anticipate that the government will grant us a
certificate with adequate property ownership indicia after we have satisfied the
above construction requirement and followed certain procedures.




Contractual
Obligations and Commercial Commitments





The following table sets forth our contractual obligations and commercial commitments as of December
31, 2008:





Payment
      Due By PeriodTotal
            
            
            Less
      than 1 Year
            
            
            1-3
              Years
            
            
            3-5
              Years
            
            
            More
      than 5 Years(In
      thousands)Short-term
      bank loans
            
            $
            112,129
            
            
            $
            112,129
            
            
            
            -
            
            
            
            -
            
            
            
            -Bills
      payable
            
            
            22,898
            
            
            
            22,898
            
            
            
            -
            
            
            
            -
            
            
            
            -Long-term
      bank loans
            
            
            60,095
            
            
            
            13,192
            
            
            
            32,246
            
            
            
            14,657
            
            
            
            -Capital
      commitments
            
            
            5,561
            
            
            
            5,561
            
            
            
            -
            
            
            
            -
            
            
            
            -Future
      interest payment on short-term bank loans
            
            
            658
            
            
            
            658
            
            
            
            -
            
            
            
            -
            
            
            
            -Future
      interest payment on long-term bank loans
            
            
            12,963
            
            
            
            7,546
            
            
            
            4,810
            
            
            
            607
            
            
            
            -Total
            
            $
            214,304
            
            
            $
            161,984
            
            
            $
            37,056
            
            
            $
            15,264
            
            
            
            -





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
December 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 Financial Accounting
Standards Board (“FASB”) Interpretation No. (FIN) 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 December 31, 2008. As of December 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 four other non-related
parties, Hunan Reshine New Material Ltd, Shenzhen Tongli Hi-tech Co. Ltd.,
Shenzhen B&G Technology Development Co. Ltd., and Siping Juyuan Hanyang
Plate Heat Exchanger Co. Ltd.  The maximum amount of our exposure for
these guarantees was $16.8 million both at December 31, 2008 and September 30,
2008.




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 three to twelve months for
short-term bank loans and interest rates are subject to change upon renewal.
There were no material changes in interest rates for short-term bank loans
renewed during the three months ended December 31, 2008.





We have a
short-term bank loan of approximately $22.0 million maturing on December 16,
2009 with Shenzhen Development Bank, bearing interest of 105% of the PBOC’s
benchmark rate on the date of the loan agreement and adjusted quarterly. We have
a long-term bank loan of $14.7 million maturing on December 26, 2010 with China
Development Bank with three installments payable under which we have outstanding
borrowings; the interest rate we pay on this long term loan is the benchmark
rate of the PBOC for three- to five- year long-term loans.





We have a
RMB 200 million (approximately $29.3 million) long-term loan agreement with
Agricultural Bank – Shenzhen Branch, 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 PBOC benchmark rate for three-year to five-year long-term
loans.  We also have outstanding with Agricultural Bank – Shenzhen
Branch three short-term loans totaling approximately $47.7 million, carrying
annual interest of 5.04% to 5.58%, adjusted quarterly.  The first
loan, of approximately $22.0 million, currently carries annual interest of 5.58%
and is due on December 1, 2009. The second loan, of approximately $11.0 million,
currently carries annual interest at 5.58% and is due on December 15, 2009. The
third loan, of approximately $14.7 million, currently carries annual interest at
5.04% and is due on June 15, 2009.  As of December 31, 2008, we also
had three five-year term loans totaling approximately $26.4 million under our
credit facility agreement with Agricultural Bank – Shenzhen Branch carrying
interest at 90% of the benchmark rate of the PBOC for three-year to five-year
long-term loans. The first loan, of approximately $5.9 million, currently
carries annual interest of 5.832% and is due on January 25, 2012. The second
loan, of approximately $11.7 million, currently carries annual interest of
6.237% and is due in three installments of approximately $2.9 million on January
25, 2010, approximately $7.3 million on January 25, 2011, and approximately $1.5
million on January 25, 2012, respectively. The third loan, of approximately $8.8
million, currently carries annual interest of 7.65% and is or was repayable in
two installments of approximately $4.4 million on January 25, 2009, which was
repaid on January 20, 2009, and approximately $4.4 million on January 25,
2010.





We also
entered into a four-year, long-term loan agreement for a loan of RMB 160 million
($23.5 million) with Agricultural Bank – Tianjin Branch on May 26,
2008.  The long-term loan is secured by machinery and equipment
purchased for the automated high-power lithium-phosphate cells production line
in Tianjin. As of December 31, 2008, we had borrowed $23.5 million under this
Loan Agreement, payable in four installments: (i) RMB 30 million ($4.4 million)
on December 26, 2009; (ii) RMB 30 million ($4.4 million) on December 26, 2010;
(iii) RMB 50 million ($7.3 million) on December 26, 2011; and (iv) RMB 50
million ($7.4 million) on May 26, 2012.





As of
December 31, 2008, we had outstanding three short-term loan agreements with
China CITIC Bank under our credit facility agreement totaling approximately
$14.7 million at certain fixed interest rates.  The first loan, of
approximately $5.9 million, carried annual interest of 6.12%, and was repayable
on January 15, 2009.  The second loan, of approximately $5.7 million,
carried annual interest of 6.12%, and was repayable on January 17,
2009.  The third loan, of approximately $3.1 million, carried annual
interest of 6.03%, and was repayable on February 1, 2009.  Each loan
was repaid on its respective maturity date.





We also
have outstanding approximately $20.5 million under three short-term loans from
Bank of China. The first loan, of approximately $5.9 million, carries annual
interest of 8.217%, and is repayable on March 27, 2009.  The second
loan, of approximately $4.4 million, carries annual interest of 8.217%, and is
repayable on August 14, 2009.  The third loan, of approximately $10.2
million, carries annual interest of 7.844%, and is repayable on August 29,
2009.




14





In
addition, we have borrowed $7.3 million under a short-term loan from Industrial
Bank, at the annual interest rate of 6.225%, which is repayable on March 25,
2009.





A
hypothetical 1.0% increase in the annual interest rates for all of our credit
facilities under which we had outstanding borrowings at December 31, 2008, would
decrease net income before provision for income taxes by approximately $1.7
million or 111.1% for the three months ended December 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 63.2% of our revenues and
97.5% of our costs and expenses for the three months ended December 31, 2008 are
denominated in RMB, with the balance denominated in U.S.
dollars.  Approximately 98.7% of our assets except for cash were
denominated in RMB as of December 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
rates, and their income and expenses items are translated using the average rate
for the period.  Any resulting exchange differences are recorded in
accumulated other comprehensive income or loss.  An average
appreciation (depreciation) of the RMB against the U.S. dollar of 5% would
increase (decrease) our comprehensive income by $160,000 based on our
outstanding revenues, costs and expenses, assets, and liabilities denominated in
RMB as of December 31, 2008. As of December 31, 2008, our accumulated other
comprehensive income was $25.3 million.  We have not entered into any
hedging transactions in an effort to reduce our exposure to foreign exchange
risk.





Critical
Accounting Policies





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





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





Recoverability
of Long-Lived Assets





Our
business is capital intensive and has required, and will continue to require,
significant investments in property, plant and equipment.  As of
December 31, 2008 and September 30, 2008, the carrying amount of property, plant
and equipment, net was $208.5 million and $195.4 million,
respectively.  We assess the recoverability of property, plant and
equipment to be held and used by a comparison of the carrying amount of an asset
or group of assets to the future net undiscounted cash flows expected to be
generated by the asset or group of assets.  If such assets are
considered impaired, the impairment recognized is measured as the amount by
which the carrying amount of the assets exceeds the fair value of the
assets.




15





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 general and
administrative expenses.  We review outstanding account balances
individually for collectability.  Account balances are charged off
against the allowance after all means of collection have been exhausted and the
potential for recovery is considered remote.  As of December 31, 2008
and September 30, 2008, 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 Statement of Financial Accounting Standards (“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 shares of common stock and the
expected volatility, are required to determine the fair value of the
options.  If different assumptions had been used, the fair value of
the options would have been different from the amount we computed and recorded,
which would have resulted in either an increase or decrease in the compensation
expense.





Pursuant
to SFAS 123R, we have recognized compensation costs of $818,000 in relation to
stock-based awards to our employees and non-employee directors in the three
months ended December 31, 2008, as an increase in both the operating costs and
shareholder’s equity.





Changes
in Accounting Standards





In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”, which
defines fair value, establishes a framework for measuring fair value under
generally accepted accounting principles and expands disclosures about fair
value measurements.  SFAS No. 157 applies under other accounting
pronouncements that require or permit fair value measurements, where fair value
is the relevant measurement attribute.  The standard does not require
any new fair value measurements.  SFAS No. 157 apply to our financial
statements starting in our fiscal year beginning October 1, 2008.  The
adoption of SFAS No. 157 has no material impact on our financial
statements.




16





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 No. 159 permits entities to choose to
measure many financial instruments and certain other items at fair
value.  Entities that elect the fair value option will report
unrealized gains and losses in earnings at each subsequent reporting
date.  The fair value option may be elected on an
instrument-by-instrument basis, with a few exceptions.  SFAS No. 159
also establishes presentation and disclosure requirements to facilitate
comparisons between entities that choose different measurement attributes for
similar assets and liabilities.  The requirements of SFAS No. 159
apply to our financial statements starting in our fiscal year beginning October
1, 2008.  The adoption of SFAS No. 159 has no material impact on our
financial statements.





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





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





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





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





Exchange
Rates





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




17




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. Dollar2008
            
            
            
            2007Balance
      sheet items as of December 31
            
            
            6.8225
            
            
            
            7.3046Amounts
      included in the statement of operations and comprehensive income,
      statement of changes in stockholders’ equity and statement of cash flows
      for the three months ended December 31
            
            
            6.8390
            
            
            
            7.4318Balance
      sheet items as of September 30
            
            
            6.8183
            
            
            
            7.5108





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





Item
      3.
            Quantitative
      and Qualitative Disclosures About Market
Risk.





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





Item
      4.
            Controls
      and Procedures.





Disclosure
Controls and Procedures





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





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





Remediation
Measures for Material Weaknesses





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





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




18





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





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





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





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





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





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





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





Changes
in Internal Control over Financial Reporting





Other
than the remediation measures described above, there were no changes in our
internal controls over financial reporting after December 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.





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.




19





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





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





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





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




20





Liquidated Damages Pursuant to
November 2007 Registration Rights Agreement. During the fiscal quarter
ended December 31, 2008, we were initially liable for liquidated damages to a
shareholder whose shares were required to be included in a resale registration
statement on Form S-3 that we filed pursuant to a registration rights agreement
that we entered into with this shareholder and certain other investors in
November 2007. Under the registration rights agreement, among other things, if a
registration statement filed pursuant thereto has not been declared effective by
the SEC by the 100th calendar day after the closing of our private placement on
November 9, 2007, or the “Effectiveness Deadline”, then we would be liable to
pay partial liquidated damages to each investor of (a) 1.5% of the aggregate
purchase price paid by such investor for the shares it purchased in our November
2007 private placement on the one-month anniversary of the Effectiveness
Deadline; (b) an additional 1.5% of the aggregate purchase price paid by such
investor every thirtieth day thereafter (prorated for periods totaling less than
thirty days) until the earliest of the effectiveness of the registration
statement, the ten-month anniversary of the Effectiveness Deadline, and the time
that we are no longer required to keep such resale registration statement
effective because either the investors have sold all of their shares or the
investors may sell their shares pursuant to Rule 144 without volume limitations;
and (c) 0.5% of the aggregate purchase price paid by each investor for the
shares it purchased in our November 2007 private placement on the ten-month
anniversary of the Effectiveness Deadline and every thirtieth day thereafter
(pro-rated for periods totaling less than thirty days), until the earlier of the
effectiveness of the registration statement and the time that we are no longer
required to keep such resale registration statement effective because either the
investors have sold all of their shares or the investors may sell their shares
pursuant to Rule 144 without volume limitations. Such liquidated damages would
bear interest at the rate of 1% per month (prorated for partial months) until
paid in full.





On
December 21, 2007, pursuant to the registration rights agreement, we filed a
registration statement on Form S-3, which was declared effective by the SEC on
May 7, 2008.  The lateness of this filing triggered liquidated damages
consistent with the formula described above.  On August 26, 2008, we
conducted a registered direct offering of 4,102,564 shares of common stock, at
an offering price of $3.90 per share, in which the investors also received
warrants to purchase up to 4,102,564 shares of common stock at an exercise price
of $3.90 per share.  With one exception, all of the investors that
participated in our November 2007 private placement, or persons controlling
them, participated in our August 2008 registered direct offering.  We
reduced each of these investors’ (or each such investor’s participating
affiliate’s) purchase price by an amount that was at least equal to the amount
that we determined that we were liable for as liquidated damages to such
investor (or its participating affiliate).  As of December 31, 2008,
the remaining investor had waived any and all rights relating to liquidated
damages pursuant to the November 2007 registration rights
agreement.





Make-Good Settlements.
Beginning on March 13, 2008, we have entered into settlement agreements with
certain investors in the January 20, 2005, private placement completed by the
Company. Pursuant to the settlement agreements, we and such investors have
agreed, without any admission of liability, to a settlement and mutual releases
from all claims relating to the January 20, 2005 private placement, including
all claims relating to 1,089,775 “make good shares” of our common stock that had
been placed into escrow by Xiangqian Li, our chairman and chief executive
officer, in connection with the January 20, 2005, private placement, as well as
all claims, including claims for liquidated damages, relating to registration
rights granted in connection with the January 20, 2005, private placement.
Pursuant to the settlement agreements, we have made settlement payments to each
of the settling investors of a number of shares of common stock equal to 50% of
the number of “make good shares” such investor had claimed. Aggregate settlement
payments amounted to 368,745 shares as of September 30, 2008, all of which were
issued in the fiscal year ended September 30, 2008. Share payments to date have
been made in reliance upon the exemptions from registration provided by Section
4(2) and/or other applicable provisions of the Securities Act of 1933, as
amended. In accordance with the settlement agreements, we filed a registration
statement covering the resale of such shares, which was declared effective by
the SEC on June 26, 2008.





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





Item
      1A.
            Risk
      Factors.





We face risks related to general
domestic and global economic conditions and to the current credit
crisis.





We currently generate sufficient
operating cash flows, which combined with access to the credit markets, provides
us with significant discretionary funding capacity. However, the current
uncertainty arising out of domestic and global economic conditions, including
the recent disruption in credit markets, poses a risk to the economies in which
we operate that has impacted demand for our products and services, and may
impact our ability to manage normal relationships with our customers, suppliers
and creditors. If the current situation deteriorates significantly, our business
could be materially negatively impacted, including such areas as reduced demand
for our products and services from a slow-down in the general economy, or
supplier or customer disruptions resulting from tighter credit
markets.





See Item
1A. “Risk Factors” included in our 2008 Form 10-K.




21





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





None.





Item
      3.
            Defaults
      Upon Senior Securities.





None.





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





None.





Item
      5.
            Other
      Information.





On
December 8, 2008, we renewed our comprehensive credit facility agreement with
Shenzhen Development Bank to provide a maximum loan amount of RMB 150 million
(approximately $22.0 million).  Loans may be drawn at any time over
the one-year period beginning December 8, 2008 and will be due after a period
ranging from 2 months to 1 year from the date each is borrowed.  This
credit facility agreement is guaranteed by BAK International, BAK Tianjin and
Mr. Xiangqian Li, and is also secured by Shenzhen BAK’s mortgage of $34.8
million of inventory and $20.2 million of machinery and equipment.  As
of December 31, 2008, we had borrowed approximately $22.0 million under a loan
agreement dated December 16, 2008 under this credit facility agreement, bearing
interest of 105% of the PBOC’s benchmark rate on the date of the loan agreement
and adjusted quarterly, and which is repayable on December 16, 2009. Under the
loan agreement, Shenzhen Development Bank may, in addition to exercising any
other applicable remedies under the applicable agreements, accelerate repayment
of the loan amount if we terminate or otherwise cease operations; provide
documents containing untrue statements or omitting material financial
information regarding our operations; intentionally evade bank debts by way of
related-party transactions or any other means; use loan proceeds other than as
agreed without consent; or if any other event occurs that creates a material
risk of non-repayment of the loan.  Copies of summaries of the
comprehensive credit facility agreement, loan agreement, mortgage contracts, and
guaranties are included as Exhibits 10.1 through 10.7 to this Report and are
hereby incorporated by reference herein.





On
November 27, 2008, we renewed our comprehensive credit facility agreement with
Agricultural Bank – Shenzhen Branch to provide a maximum loan amount of RMB 580
million (approximately $85.0 million), including RMB 400 million (approximately
$58.6 million) one-year term credit facilities and RMB 180 million
(approximately $26.4 million) five-year term credit facilities.  This
credit facility agreement renewed a predecessor credit facility agreement
between Shenzhen BAK and Agricultural Bank – Shenzhen Branch dated June 8, 2007
and governs all loans that were subject to the predecessor agreement at the time
of the renewal. New loans may be drawn under this credit facility from November
27, 2008 through November 27, 2009, with the term of the loan established at the
time each new loan is drawn, except as to funds borrowed under the 2006 Loan
Agreement, which may be drawn at any time within five years of December 18,
2006, and which will mature five years after such funds are
drawn.  Pursuant to this credit facility, Shenzhen BAK must obtain
prior approval from Agricultural Bank – Shenzhen Branch to renew long-term loans
subject to this credit facility. In addition, Shenzhen BAK made the
Undertakings.  The obligations of Shenzhen BAK under this credit
facility are guaranteed by Mr. Xiangqian Li, BAK Tianjin, and BAK International.
Shenzhen BAK’s obligations under this credit facility agreement are also
guaranteed by Shenzhen BAK’s pledge of the property ownership and land use
rights certificates relating to its manufacturing and other facilities in
Shenzhen, PRC, known as BAK Industrial Park. In the event that Shenzhen
BAK breaches any of the Undertakings or any guarantying party breaches any of
its guaranty obligations, Agricultural Bank – Shenzhen Branch may, in addition
to exercising any other applicable remedies under the applicable agreements,
accelerate repayment of all loan amounts governed by this credit
facility.




22





During
the fiscal quarter ended December 31, 2008, we entered into three short-term
loan agreements with Agricultural Bank – Shenzhen Branch under this credit
facility agreement totaling approximately $47.7 million, carrying annual
interest of 5.04% to 5.58%, adjusted quarterly.  The first loan, of
approximately $22.0 million, currently carries annual interest of 5.58% and is
repayable on December 1, 2009. The second loan, of approximately $11.0 million,
currently carries annual interest at 5.58% and is repayable on December 15,
2009. The third loan, of approximately $14.7 million, currently carries annual
interest at 5.04% and is repayable on June 15, 2009.  Each of the loan
agreements specifically provides for acceleration of repayment of the loan, as
well as other penalties and remedies, for breach of contract.  Copies
of summaries of these loan agreements are included as Exhibits 10.8 through
10.11 to this Report and are hereby incorporated by reference
herein.





During
the fiscal quarter ended December 31, 2008, we entered into three short-term
loan agreements with China CITIC Bank under our credit facility agreement with
this bank totaling approximately $14.7 million at certain fixed interest rates.
The first loan, of approximately $5.9 million, carried annual interest of 6.12%,
and was repayable on January 15, 2009.  The second loan, of
approximately $5.7 million, carried annual interest of 6.12%, and was repayable
on January 17, 2009.  The third loan, of approximately $3.1 million,
carried annual interest of 6.03%, and was repayable on February 1,
2009.  Each loan was repaid on its respective maturity
date.  Under the loan agreements, China CITIC Bank, in addition to
exercising any other applicable remedies under the applicable agreements, may
have accelerated repayment of each loan amount if we had: failed to make timely
repayment of the loan interest; suffered major operational losses; became
involved in, or were threatened to become involved in, litigation or other legal
proceedings; provided untrue financial statements or information; used loan
proceeds other than as agreed to; refused oversight by China CITIC Bank or
refused to provide relevant financial statements or information; experienced
substantial changes in management; or if any other event had occurred that would
have created a material risk of non-repayment of the loan.  Copies of
summaries of these loan agreements are included as Exhibits 10.16 through 10.18
to this Report and are hereby incorporated by reference herein.





Item
      6.
            Exhibits.





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





Exhibit
      No.
            
            Description3.1
            
            Articles
      of Incorporation of the Registrant (incorporated by reference to Exhibit
      3.1 to the Registrant’s Annual Report on Form 10-K for the fiscal year
      ended September 30, 2006).3.2
            
            Bylaws
      of the Registrant (incorporated by reference to Exhibit 3.2 to the
      Registrant’s Annual Report on Form 10-K for the fiscal year ended
      September 30, 2007).10.1
            
            Summary
      of Comprehensive Credit Facility Agreement of Maximum Amount by and
      between Shenzhen BAK Battery Co., Ltd. and Shenzhen Longgang Branch,
      Shenzhen Development Bank Co., Ltd., dated December 8,
    2008.10.2
            
            Summary
      of Loan Agreement by and between Shenzhen BAK Battery Co., Ltd. and
      Shenzhen Longgang Branch, Shenzhen Development Bank Co., Ltd., dated
      December 16, 2008.10.3
            
            Summary
      of Mortgage Contract of Maximum Amount by and between Shenzhen BAK Battery
      Co., Ltd. and Shenzhen Longgang Branch, Shenzhen Development Bank Co.,
      Ltd., dated December 3, 2008.10.4
            
            Summary
      of Mortgage Contract of Maximum Amount by and between Shenzhen BAK Battery
      Co., Ltd. and Shenzhen Longgang Branch, Shenzhen Development Bank Co.,
      Ltd., dated December 3, 2008.10.5
            
            Summary
      of Guaranty Contract of Maximum Amount Pledge by and between BAK
      International Limited and Longgang Branch, Shenzhen Development Bank Co.,
      Ltd., dated December 3, 2008.10.6
            
            Summary
      of Guaranty Contract of Maximum Amount by and between Xiangqian Li and
      Longgang Branch, Shenzhen Development Bank Co., Ltd., dated December 3,
      2008.10.7
            
            Summary
      of Guaranty Contract of Maximum Amount by and between BAK International
      (Tianjin) Ltd. and Longgang Branch, Shenzhen Development Bank Co., Ltd.,
      dated December 3, 2008.10.8
            
            Summary
      of Loan Agreement by and between Shenzhen BAK Battery Co., Ltd. and
      Shenzhen Eastern Branch, Agricultural Bank of China, dated December 2,
      2008.10.9
            
            Summary
      of Loan Agreement by and between Shenzhen BAK Battery Co., Ltd. and
      Shenzhen Eastern Branch, Agricultural Bank of China, dated December 15,
      2008.




23




Exhibit
      No.
            
            Description10.10
            
            Summary
      of Loan Agreement by and between Shenzhen BAK Battery Co., Ltd. and
      Shenzhen Eastern Branch, Agricultural Bank of China, dated December 18,
      2008.10.11
            
            Summary
      of Comprehensive Credit Facility Agreement of Maximum Amount by and
      between Shenzhen BAK Battery Co., Ltd. and Shenzhen Eastern Branch,
      Agricultural Bank of China, dated November 27, 2008 (incorporated by
      reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K
      filed December 12, 2008).10.12
            
            Summary
      of Guaranty Contract of Maximum Amount by and among Xiangqian Li, BAK
      International (Tianjin) Limited, BAK International Limited, and Shenzhen
      Eastern Branch, Agricultural Bank of China, dated November 27, 2008
      (incorporated by reference to Exhibit 10.2 to the Registrant’s Current
      Report on Form 8-K filed December 12, 2008).10.13
            
            Summary
      of Mortgage Contract of Maximum Amount by and between Shenzhen BAK Battery
      Co., Ltd. and Shenzhen Eastern Branch, Agricultural Bank of China, dated
      November 27, 2008 (incorporated by reference to Exhibit 10.3 to the
      Registrant’s Current Report on Form 8-K filed December 12,
      2008).10.14
            
            Summary
      of Comprehensive Credit Facility Agreement of Maximum Amount by and
      between Shenzhen BAK Battery Co., Ltd. and Shenzhen Eastern Branch,
      Agricultural Bank of China, dated June 8, 2007 (incorporated by reference
      to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed
      with the SEC on August 7, 2007).10.15
            
            Summary
      of Loan Agreement between Shenzhen BAK Battery Co., Ltd. and Shenzhen
      Eastern Branch, Agricultural Bank of China, effective December 18, 2006
      (incorporated by reference to Exhibit 10.1 to the Registrant’s Current
      Report on Form 8-K, filed with the SEC on December 22,
    2006).10.16
            
            Summary
      of Loan Agreement by and between Shenzhen BAK Battery Co., Ltd. and
      Shenzhen Branch, China CITIC Bank Co., Ltd., dated October 15,
      2008.10.17
            
            Summary
      of Loan Agreement by and between Shenzhen BAK Battery Co., Ltd. and
      Shenzhen Branch, China CITIC Bank Co., Ltd., dated October 17,
      2008.10.18
            
            Summary
      of Loan Agreement by and between Shenzhen BAK Battery Co., Ltd. and
      Shenzhen Branch, China CITIC Bank Co., Ltd., dated October 31,
      2008.10.19
            
            Summary
      of Comprehensive Credit Facility Agreement of Maximum Amount between
      Shenzhen BAK Battery Co., Ltd. and Shenzhen Branch, China CITIC Bank Co.,
      Ltd., dated May 9, 2008 (incorporated by reference to Exhibit 10.5 to the
      Registrant’s Quarterly Report on Form 10-Q, filed with the SEC on August
      8, 2008).10.20
            
            Summary
      of Guaranty Contract of Maximum Amount between BAK International Limited
      and Shenzhen Branch, China CITIC Bank Co., Ltd., dated May 9, 2008
      (incorporated by reference to Exhibit 10.6 to the Registrant’s Quarterly
      Report on Form 10-Q, filed with the SEC on August 8,
  2008).10.21
            
            Summary
      of Guaranty Contract of Maximum Amount between Xiangqian Li and Shenzhen
      Branch, China CITIC Bank Co., Ltd., dated May 9, 2008 (incorporated by
      reference to Exhibit 10.7 to the Registrant’s Quarterly Report on Form
      10-Q, filed with the SEC on August 8, 2008).31.1
            
            Certifications
      of Principal Executive Officer filed pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
            
            Certifications
      of Principal Financial Officer filed pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1
            
            Chief
      Executive Officer and Chief Financial Officer Certifications furnished
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.




24




SIGNATURES





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








Date:
      February 9, 2009
            CHINA
      BAK BATTERY, INC.By:
            /s/
      Xiangqian LiXiangqian
      Li, Chief Executive Officer(Principal
      Executive Officer)




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