**SETTLEMENT
      AGREEMENT**




**THIS
      SETTLEMENT AGREEMENT** (the
      “ Settlement
      Agreement ”)
      is
      entered into by and between The Pinnacle Fund, L.P. (“ Pinnacle ”)
      and
      China BAK Battery, Inc. (the “ Company ”)
      and
      its subsidiary BAK International, Ltd. (“ BAK
      International ”
and,
      together with the Company, “ CBAK ”).
      Pinnacle and CBAK are also each referred to separately as a “ Party ”
and
      together as the “ Parties .”
The
      Parties, in order to resolve disputed and contested issues and to limit the
      hazards, uncertainties and inconvenience of potential litigation, enter into
      this Settlement Agreement.




1.  **Escrow
      Agreement** **.** On
      January 20, 2005, BAK International consummated 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 (the
“ Private
      Placement ”).
      Immediately thereafter, the shares of BAK International were exchanged for
      shares of the Company. Pinnacle was an investor in the Private Placement and
      entered into a subscription agreement (the “ Subscription
      Agreement ”)
      in
      connection therewith. In conjunction with the Private Placement, pursuant to
      an
      Escrow Agreement dated January 20, 2005, Mr. Li Xiangqian, the Chairman and
      Chief Executive Officer of the Company, placed 2,179,550 shares of the Company’s
      common stock owned by him (the “ Make
      Good Shares ”)
      into
      an escrow account. The terms and conditions regarding release of the Make Good
      Shares from escrow was set forth in the Escrow Agreement. A dispute has arisen
      between Pinnacle and CBAK regarding 1,089,775 Make Good Shares (herein referred
      to as the “ Released
      Shares ”)
      released from the escrow account to Mr. Li and subsequently delivered by Mr.
      Li
      to BAK International, which then delivered the shares to the Company.





The
      Parties have agreed, without any admission of liability, that it is in the
      interests of all of the Parties to resolve the issues relating to the Released
      Shares amicably.





2.  **Definitions** **.** Capitalized terms not otherwise defined herein shall have the following
      meanings:




**a.**
            **Affiliates**means all persons and entities controlling, controlled by or under
                common
                control with a Party. Investors in Pinnacle shall not be deemed Affiliates
                of Pinnacle for purposes of this Settlement Agreement, except to
                the
                extent of any rights that they may derive as an investor in
                Pinnacle.




**b.**
            **Claims******means
                any and all claims, demands, causes of actions, or liabilities, of
                any and
                every character, kind and nature whatsoever, in law or in equity,
                whether
                known or unknown, foreseen or unforeseen, past, present, or future,
                accrued or unaccrued, contingent or fixed, arising out of or related
                to
                any or all of the Subscription Agreement, the Escrow Agreement, the
                Make
                Good Shares (including the Released Shares), and the Private Placement,
                including any registration rights (other than the registration rights
                granted pursuant to Section 3.b. of this Settlement Agreement) related
                thereto; provided, that "Claims" does not include any claims, demands,
                causes of actions, or liabilities arising as a result of any breach
                of
                this Settlement Agreement.


**SETTLEMENT
        AGREEMENT**


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**c.**
            **Release
                Date**means the earliest of (x) such time as all of the Pinnacle Shares
                have
                been sold by Pinnacle; (y)such
                time as all of the Pinnacle Shares may be sold by Pinnacle without
                volume
                limitations pursuant to Rule 144 under the Securities Act, as determined
                by the counsel to the Company pursuant to a written opinion letter
                to such
                effect, addressed and acceptable to the Company’s transfer
                agent;
                and (z) the date a Registration Statement on Form S-3 (or other
                appropriate form) covering the resale by Pinnacle of the Pinnacle
                Shares
                is declared effective by the SEC as set forth in Section
                3.b.




**d.**
            **SEC**means the U.S. Securities and Exchange
                Commission.




**e.**
            **Securities
                Act**means the U.S. Securities Act of 1933, as
                amended.




3.  **Settlement
      Terms** .




**a.**
            **Delivery
                of Shares**.
                Upon execution of this Settlement Agreement by the Company and Pinnacle,
                the Company shall promptly, and no later than three days after the
                date
                this Settlement Agreement is executed by the Parties, deliver to
                Pinnacle
                at the address set out below a certificate or certificates registered
                in
                the name of The Pinnacle Fund, L.P. for 133,657 of the Released Shares
                (the “Pinnacle
                Shares”).
                On the date this Settlement Agreement is executed by the Parties,
                the
                Company shall furnish Pinnacle with a copy of its irrevocable instruction
                to its transfer agent irrevocably directing the delivery of the Pinnacle
                Shares to Pinnacle. The Company agrees that, upon execution of this
                Settlement Agreement, Pinnacle is irrevocably entitled to receive
                the
                Pinnacle Shares and that the consideration for the Pinnacle Shares
                has
                been fully paid or given to the Company; accordingly, the Company
                understands and agrees that the holding period under Rule 144 under
                the
                Securities Act, as in effect on the date hereof, shall commence on
                the
                date this Settlement Agreement is executed by the Parties, whether
                or not
                the Pinnacle Shares are timely delivered to or received by Pinnacle
                in
                accordance with this Section 3.a.




**b.**
            **Registration**.
                On or prior to the date (the “Filing
                Date”)
                that is one month after the date that the Company’s Registration Statement
                on Form S-3 (Registration No. 333-148253) is declared effective by
                the SEC
                (or, if the Filing Date is not a business day, the first business
                day
                after the Filing Date), and provided that Pinnacle has provided the
                Company with a completed questionnaire in the form attached asExhibit
                Ahereto, the Company shall prepare and file with the SEC a Registration
                Statement on Form S-3 (or such other appropriate form for such purpose)
                covering the resale by Pinnacle of the Pinnacle Shares in an offering
                to
                be made on a continuous basis pursuant to Rule 415 under the Securities
                Act. Such Registration Statement may also include such other selling
                holders as the Company shall deem appropriate (provided that the
                aggregate
                number of shares listed for resale on such Registration Statement
                shall
                not exceed the number that is 33.3% of the Company’s outstanding common
                equity held by non-Affiliates of the Company on the date the Registration
                Statement is filed with the SEC). The Company shall cause such
                Registration Statement to be declared effective under the Securities
                Act
                as soon as possible, and shall use its reasonable best efforts to
                keep
                such Registration Statement continuously effective under the Securities
                Act until the date which is the earliest of (i) two years after its
                effective date; (ii) such time as all of the Pinnacle Shares covered
                by
                such Registration Statement have been sold by Pinnacle; and (iii)
                such
                time as all of the Pinnacle Shares covered by such Registration Statement
                may be sold by Pinnacle without volume limitations pursuant to Rule
                144,
                as determined by counsel to the Company pursuant to a written opinion
                letter to such effect, addressed and acceptable to the Company’s transfer
                agent. No later than 5:00 p.m. Eastern time on the day following
                the date
                the Registration Statement is declared effective, the Company shall
                file
                with the SEC in accordance with Rule 424 under the Securities Act
                the
                final prospectus to be used in connection with sales pursuant to
                such
                Registration Statement (whether or not such filing is technically
                required
                under such Rule).


**SETTLEMENT
        AGREEMENT**




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**c.**
            **Ability
                to Disclose Information**.
                The Company agrees that Pinnacle may inform other investors in the
                Private
                Placement of the terms of this Settlement Agreement. The Company
                agrees
                that it will promptly furnish or file a report on Form 8-K regarding
                this
                Settlement Agreement, or otherwise make information regarding this
                Settlement Agreement available in accordance with Regulation FD.




**d.**
            **Relief**.
                The Company acknowledges that in the event it fails to deliver a
                certificate or certificates representing the Pinnacle Shares as provided
                in Section 3.a, any remedy at law may prove to be inadequate relief
                to
                Pinnacle. The Company agrees that Pinnacle may require specific
                performance of this Settlement Agreement by insisting upon delivery
                of the
                Pinnacle Shares in addition to or in combination with any other remedy
                available to it under the law or equity (including terminating this
                Settlement Agreement), and that Pinnacle is entitled to seek temporary
                and
                permanent injunctive relief without the necessity of proving actual
                damages and without posting a bond or other security.




4  **Interpretation** **.** The
      Parties have participated jointly in the negotiation and drafting of this
      Settlement Agreement. If an ambiguity or question of intent or interpretation
      arises, this Settlement Agreement will be construed as if drafted jointly by
      the
      Parties, and no presumption or burden of proof will arise favoring or
      disfavoring any Party because of the authorship of any provision of this
      Settlement Agreement.


**SETTLEMENT
        AGREEMENT**




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5.  **No
      Admission** **.** By
      entering into this Settlement Agreement, no Party is in any way admitting any
      liability to any other Party on account of any matter covered by this Settlement
      Agreement. Rather, this Settlement Agreement is entered into solely for the
      purpose of compromise and settlement of doubtful and contested claims and
      issues, to buy peace, and to avoid the hazards, delays, and uncertainties of
      litigation.




6.  **Mutual
      Releases** **.** Effective on the Release Date, Pinnacle releases,
      acquits, and forever discharges CBAK, its predecessors and successors in
      interest, its parent and subsidiary organizations, and its Affiliates, all
      of
      their respective officers, directors, employees, managers, shareholders,
      partners, attorneys, accountants, advisors, representatives, agents, insurers,
      heirs, executors and assigns (collectively, the “ CBAK
      Releasees ”)
      of and
      from any and all Claims; and Pinnacle covenants never to sue any of the CBAK
      Releasees, directly or indirectly through others, upon any of the Claims hereby
      released. Effective on the Release Date, CBAK, on behalf of itself and its Affiliates,
      releases, acquits, and forever discharges Pinnacle, and all of its officers,
      directors, employees, managers, shareholders, partners, attorneys, accountants,
      advisors, representatives, agents, insurers, heirs, executors, and assigns
      (collectively, the “ Pinnacle
      Releasees ”)
      of and
      from any and all Claims; and CBAK covenants never to sue any of the Pinnacle
      Releasees, directly or indirectly through others, upon any of the Claims hereby
      released.




7.  **Choice
      of Law** **.** This
      Settlement Agreement shall be interpreted and construed according to the
      internal laws of the State of New York (without giving effect to any choice
      of
      law or conflict of law provisions of any jurisdiction), and applicable laws
      of
      the United States of America. Each Party agrees that all proceedings concerning
      the interpretation, enforcement and defense of the transactions contemplated
      by
      this Settlement Agreement shall be commenced exclusively in the state and
      federal courts of the State of New York (the “ New
      York Courts ”).
      Each
      Party hereto hereby irrevocably submits to the exclusive jurisdiction of the
      New
      York Courts for the adjudication of any dispute hereunder or in connection
      herewith, and hereby irrevocably waives, and agrees not to assert in any such
      proceeding, any claim that it is not personally subject to the jurisdiction
      of
      any such New York Court, or that such proceeding has been commenced in an
      improper or inconvenient forum. Each Party hereto hereby irrevocably waives
      personal service of process and consents to process being served in any such
      proceeding by mailing a copy thereof via registered or certified mail or
      overnight delivery (with evidence of delivery) to such party at the address
      in
      effect for notices to it under this Settlement Agreement and agrees that such
      service shall constitute good and sufficient service of process and notice
      thereof.




8.  **Entire
      Agreement** **.** This
      Settlement Agreement supersedes all other prior oral or written agreements
      between the Parties with respect to the matters set forth herein and contains
      the entire agreement of the Parties with respect to the matters set forth
      herein. If
      any
      provision of this Agreement shall be held invalid or unenforceable in any
      jurisdiction, such invalidity or unenforceability shall not affect the validity
      or enforceability of the remainder of this Settlement Agreement in that
      jurisdiction or the validity or enforceability of that or any other provision
      of
      this Settlement Agreement in any other jurisdiction.




9.  **Amendments** **.** This
      Settlement Agreement may be modified or amended only in writing, signed by
      each
      of the Parties to this Settlement Agreement prior to the effective date of
      any
      such modification or amendment. Any waiver must be in writing and signed by
      each
      Party whose interests are adversely affected by such waiver. No waiver granted
      in any one instance shall be construed as a continuing waiver or as a waiver
      applicable to any other provision. No
      exercise or failure to exercise any right shall preclude any other or further
      exercise of that right or any other right.


**SETTLEMENT
        AGREEMENT**




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10.  **Representations** **.** The
      Parties acknowledge that this Settlement Agreement is executed after
      substantial, long-term negotiations between and among representatives of the
      Parties. Each Party represents that: (a) such Party and its attorneys have
      conducted their own investigation concerning the facts surrounding the matters
      covered by this Settlement Agreement and in voluntarily choosing to execute
      this
      Settlement Agreement, have relied upon their own analysis of such facts and
      not
      on any information furnished by any other Party or its representatives;
      (b) there are no oral or other written agreements concerning the subject
      matter of this Settlement Agreement; (c) the right to rely on any oral or
      written statement of any Party or any failure of any Party to state any fact
      is
      expressly waived and released; (d) it owns and has the right to release any
      Claims released herein; (e) such Party has the requisite corporate power and
      authority to enter into and to perform this Settlement Agreement; and (f) the
      person signing the Settlement Agreement on behalf of such Party has been
      authorized to execute and deliver this Settlement Agreement on behalf of such
      Party. In addition, Pinnacle represents  that
      it
      (i) is acquiring the Pinnacle Shares in the ordinary course of business for
      its
      own account and not with a view towards, or for resale in connection with,
      the
      sale or distribution thereof, except pursuant to sales registered or exempted
      under the Securities Act, (ii) does not have a present arrangement to effect
      any
      distribution of the Pinnacle Shares to or through any person or entity, (iii)
      does not presently have any agreement or understanding, directly or indirectly,
      with any person to distribute any of the Pinnacle Shares, (iv) is an “accredited
      investor” as that term is defined in Rule 501(a) of Regulation D under the
      Securities Act and (v) is not a registered broker-dealer under Section 15 of
      the
      Securities Exchange Act of 1934, as amended. When executed by all Parties and
      delivered by each Party to the other Parties, this Settlement Agreement will
      constitute the legal, valid and binding obligation of each Party. This
      Settlement Agreement shall be binding upon the assignees and successors of
      the
      Parties. This Settlement Agreement is personal to the Parties and is not
      intended to create any right in any third person who is not a Party or is not
      identified as a CBAK Releasee or a Pinnacle Releasee in Section 6 of this
      Settlement Agreement.




11.  **Notice** **.** All
      notices, demands, waivers or other communications required or permitted under
      this Settlement Agreement must be in writing and will be deemed to have been
      delivered: (i) upon receipt, when delivered personally; (ii) upon receipt,
      when
      sent by facsimile evidenced by confirmation of transmission (provided a copy
      of
      such facsimile is also sent by one of the methods provided in (i), (iii) or
      (iv)
      of this Section 11 within 24 hours of transmission); (iii) two calendar days
      after deposit with a courier service that regularly conducts deliveries in
      the
      recipient’s jurisdiction; or (iv) if the recipient is located in the United
      States, five calendar days after deposit in the United States mail, postage
      prepaid, return receipt requested, in each case addressed to the addressees
      shown below:


**SETTLEMENT
        AGREEMENT**




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**If
                to Pinnacle****:**
            
            **If
                to CBAK****:**Eric
                L. Cohen
              Winston
                & Strawn LLP
              200
                Park Avenue
              New
                York, New York 10166-4193
              Tel:
                (212) 294-3540
              Fax:
                (212) 294-4700
              Email:
                elcohen@winston.com
            
            Louis
                Bevilacqua
              Thelen
                Reid Brown Raysman &
              Steiner
                LLP
              701
                Eighth Street, NW
              Washington,
                DC 20001-3721
              Tel:
                (202) 508-4281
              Fax:
                (202) 654-1804
              E-mail:
                lbevilacqua@thelen.com





Any
      Party
      may change such Party’s address for the purpose of notices, demands and requests
      required or permitted under this Settlement Agreement by providing written
      notice of such change of address to the other Party, which change of address
      shall only be effective when notice of the change is actually received by the
      Party who thereafter sends any notice, demand, or request.




12.  **Counterparts** **.** This
      Settlement Agreement may be executed in multiple counterparts, each of which
      shall be deemed an original and all of which shall constitute one and the same
      instrument. A facsimile or electronically reproduced signature shall constitute
      due execution, shall be admissible as evidence of execution, and shall be
      binding upon the signatory with the same force and effect as if the signature
      were an original.




**[Signature
      Page Follows]**


**SETTLEMENT
      AGREEMENT**


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**IN
      WITNESS WHEREOF,** the
      Parties have executed and delivered this Settlement Agreement.




**THE
                PINNACLE FUND, LP**By:
                Pinnacle Advisers, L.P., its general partnerBy:
                Pinnacle Fund Management, LLC,
              its general partnerBy:Barry
                M. Kitt, its sole member**CHINA
                BAK BATTERY, INC.**By:Name:
            Tony
                ShenTitle:
            Chief
                Financial OfficerBAK
                International, Inc.By:Name:Title:


**SETTLEMENT
        AGREEMENT**




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Exhibit
      A




**CHINA
      BAK BATTERY, INC.**





**SELLING
      STOCKHOLDER QUESTIONNAIRE**