**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**







**FORM
      10-Q**







**(Mark
                One)**x
            **Quarterly
                Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
                of 1934****For
                the quarterly period ended March 31, 2007****o**
            **Transition
                Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
                of 1934****For
                the transition period from _________ to
                _________**




**Commission
      File Number: 001-32898**







**China
                BAK Battery, Inc.***(Exact
                name of registrant as specified in its
                charter)*







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





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




**(86
      755) 897-70093**


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







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




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




Large
      Accelerated Filer  o Accelerated
      Filer  x Non-Accelerated
      Filer  o




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




Indicate
      the number of shares outstanding of each of the issuer’s classes of common
      stock, as of the latest practicable date:  48,893,396 shares of common
      stock, par value $0.001 per share, outstanding on May 7, 2007.







**TABLE
        OF CONTENTS**


Introductory
                CommentsPART
                  I —
              
              FINANCIAL
                  INFORMATIONItem 1.
                  Financial Statements
              3Item 2. 
                  Management’s Discussion and Analysis of Financial Condition and Results of
                  Operations
              25Item 3. 
                  Quantitative and Qualitative Disclosures About Market Risk
              39Item 4.
                  Controls and Procedures
              40PART
                  II —
              
              OTHER
                  INFORMATIONItem 1. 
                  Legal Proceedings
              42Item 1A. 
                  Risk Factors
              43Item 2. 
                  Unregistered Sales of Equity Securities and Use of
                  Proceeds
              44Item 3. 
                  Defaults Upon Senior Securities
              44Item 4. 
                  Submission of Matters to a Vote of Security Holders
              44Item 5. 
                  Other Information
              44Item 6. 
                  Exhibits
              44




i


**INTRODUCTORY
        COMMENTS**
  **Terminology**
  Throughout
        this Report, the terms “we,” “us” and “our” refer to China BAK Battery, Inc. and
        its subsidiaries on a consolidated basis; “BAK International” refers to our Hong
        Kong subsidiary, BAK International, Ltd.; “BAK Tianjin” refers to our PRC
        subsidiary, BAK International (Tianjin) Limited; “Shenzhen BAK” refers to our
        PRC subsidiary, Shenzhen BAK Battery Co., Ltd.; “BAK Electronics” refers to our
        PRC subsidiary, BAK Electronics (Shenzhen) Co., Ltd.; “BAK Canada” refers to our
        Canadian subsidiary, BAK Battery Canada Ltd.; “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.
  **Forward-Looking
        Statements**
  Statements
        contained in this Report include “forward-looking statements” within the meaning
        of such term in Section 27A of the Securities Act of 1933 and Section 21E
        of the
        Securities Exchange Act of 1934. Forward-looking statements involve known
        and
        unknown risks, uncertainties and other factors which could cause actual
        financial or operating results, performances or achievements expressed or
        implied by such forward-looking statements not to occur or be realized.
        Forward-looking statements made in this Report generally are based on our
        best
        estimates of future results, performances or achievements, predicated upon
        current conditions and the most recent results of the companies involved
        and
        their respective industries. Forward-looking statements may be identified
        by the
        use of forward-looking terminology such as “may,” “will,” “could,” “should,”
“project,” “expect,” “believe,” “estimate,” “anticipate,” “intend,” “continue,”
“potential,” “opportunity” or similar terms, variations of those terms or the
        negative of those terms or other variations of those terms or comparable
        words
        or expressions. Potential risks and uncertainties include, among other things,
        such factors as:
  —
              our
                  limited operating history in developing, manufacturing and selling
                  of
                  lithium-based rechargeable battery cells;—
              our
                  ability to keep up with rapidly changing technologies and evolving
                  industry standards;—
              our
                  dependence on the growth in demand for the portable electronic
                  devices
                  that are powered by our products;—
              our
                  ability to diversify our product offering and capture new market
                  opportunities;—
              our
                  ability to manage the expansion of our business operations
                  effectively;—
              our
                  ability to fund our operations and manage our substantial short-term
                  indebtedness;—
              uncertainties
                  with respect to the PRC legal and regulatory
                  environment;—
              our
                  ability to maintain cost leadership;—
              our
                  ability to acquire land use rights to our facilities;
                  and—
              other
                  risks identified in this Report.
  Additional
        disclosures regarding factors that could cause our results and performance
        to
        differ from results or performance anticipated by this Report are discussed
        in
        other reports that we filed with the SEC, including without limitation our
        Annual Report on Form 10-K for the fiscal year ended September 30, 2006.
        Readers
        are urged to carefully review and consider the various disclosures made by
        us in
        this Report and our other filings with the SEC. These reports attempt to
        advise
        interested parties of the risks and factors that may affect our business,
        financial condition and results of operations and prospects. The forward-looking
        statements made in this Report speak only as of the date hereof and we disclaim
        any obligation to provide updates, revisions or amendments to any
        forward-looking statements to reflect changes in our expectations or future
        events.
  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.
  2




**PART
        I — FINANCIAL INFORMATION**
  **Item 1. 
        Financial Statements**
  **China
        BAK Battery****,
        Inc. and subsidiaries**
 **Condensed
        interim consolidated balance sheets**
 **As
        of September 30, 2006 and March 31, 2007**
 (In
        U.S.
        dollars)
  **
              *September
                  30,*
              **
              *March
                  31,*
              ****
              *Note*
              **
              *2006*
              **
              *2007*(Unaudited)**Assets**Current
                  assetsCash
                  and cash equivalents
              
              
              
              
              $
              21,099,555
              
              $
              14,839,584Pledged
                  deposits
              
              
              2
              
              
              12,971,989
              
              
              9,100,630Trade
                  accounts receivable, net
              
              
              3
              
              
              64,332,171
              
              
              56,515,407Inventories
              
              
              4
              
              
              47,388,936
              
              
              54,469,305Prepayments
                  and other receivables
              
              
              
              
              
              1,134,770
              
              
              1,152,453Total
                  current assets
              
              
              
              
              
              146,927,421
              
              
              136,077,379Property,
                  plant and equipment, net
              
              
              5
              
              
              109,406,116
              
              
              123,825,432Lease
                  prepayments, net
              
              
              
              
              
              3,161,477
              
              
              16,842,317Intangible
                  assets, net
              
              
              
              
              
              74,682
              
              
              72,176Deferred
                  tax assets
              
              
              
              
              
              85,598
              
              
              105,176Total
                  assets
              
              
              
              
              $
              259,655,294
              
              $
              276,922,480
  *See
        accompanying notes to the condensed interim consolidated financial
        statements.*
  3
  **China
        BAK Battery** **,
        Inc. and subsidiaries**
 **Condensed
        interim consolidated balance sheets**
 **As
        of September 30, 2006 and March 31, 2007 (continued)**
 (In
        U.S.
        dollars)







**


*September
                30,*
            
            *March
                31,**Note*
            
            *2006*
            
            *2007*(Unaudited)**Liabilities**Current
                liabilitiesShort-term
                bank loans
            
            
            6
            
            $
            67,899,908
            
            $
            71,759,199Accounts
                and bills payable
            
            
            
            
            
            48,316,250
            
            
            43,019,656Accrued
                expenses and other payables
            
            
            
            
            
            25,880,985
            
            
            18,884,868Share-based
                payment liabilities
            
            
            
            
            
            3,625,165
            
            
            —Total
                current liabilities
            
            
            
            
            
            145,722,308
            
            
            133,663,723Long-term
                bank loans
            
            
            7
            
            
            —
            
            
            18,101,420Deferred
                tax liabilities
            
            
            
            
            
            304,957
            
            
            318,909Total
                liabilities
            
            
            
            
            
            146,027,265
            
            
            152,084,052Commitments
                and contingencies
            
            
            10**Shareholders’
                equity**Ordinary
                shares US$ 0.001 par value; 100,000,000 authorized; 48,885,896 and
                48,893,396 issued and outstanding as of September 30, 2006 and March
                31,
                2007 respectively
            
            
            
            
            
            48,886
            
            
            48,893Additional
                paid-in-capital
            
            
            
            
            
            68,126,689
            
            
            72,620,130Statutory
                reserves
            
            
            
            
            
            5,791,718
            
            
            6,473,622Retained
                earnings
            
            
            
            
            
            36,212,357
            
            
            39,552,932Accumulated
                other comprehensive income
            
            
            
            
            
            3,448,379
            
            
            6,142,851Total
                shareholders’ equity
            
            
            
            
            
            113,628,029
            
            
            124,838,428Total
                liabilities and shareholders’ equity
            
            
            
            
            $
            259,655,294
            
            $
            276,922,480




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




4




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


**Condensed
      interim consolidated statements of income**


**and
      comprehensive income**


**For
      the three months ended March 31, 2006 and 2007**


(Unaudited)


(In
      U.S.
      dollars)





*Three
                  months ended March 31,**2006*
              
              *2007*Net
                  revenues
              
              $
              38,219,728
              
              $
              29,528,846Cost
                  of revenues
              
              
              (25,977,085
              )
              
              (23,382,523
              )Gross
                  profit
              
              
              12,242,643
              
              
              6,146,323Operating
                  expenses:Research
                  and development costs
              
              
              (463,680
              )
              
              (928,443
              )Sales
                  and marketing expenses
              
              
              (1,296,594
              )
              
              (1,064,497
              )General
                  and administrative expenses
              
              
              (2,026,240
              )
              
              (2,151,675
              )Total
                  operating expenses
              
              
              (3,786,514
              )
              
              (4,144,615
              )Operating
                  income
              
              
              8,456,129
              
              
              2,001,708Finance
                  costs, net
              
              
              (515,175
              )
              
              (1,163,828
              )Other
                  expenses
              
              
              (33,700
              )
              
              (240,135
              )Income
                  before income taxes
              
              
              7,907,254
              
              
              597,745Income
                  taxes
              
              
              (353,098
              )
              
              (158,018
              )Net
                  income
              
              $
              7,554,156
              
              $
              439,727Other
                  comprehensive income-
                  Foreign currency translation adjustment
              
              
              665,400
              
              
              1,149,688Comprehensive
                  income
              
              $
              8,219,556
              
              $
              1,589,415Net
                  income per share:-Basic
              
              $
              0.15
              
              $
              0.01-Diluted
              
              $
              0.15
              
              $
              0.01Weighted
                  average number ofordinary
                  shares:-Basic
              
              
              48,878,396
              
              
              48,889,438-Diluted
              
              
              49,287,977
              
              
              49,419,102




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




5




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


**Condensed
      interim consolidated statements of income**


**and
      comprehensive income**


**For
      the six months ended March 31, 2006 and 2007**


(Unaudited)


(In
      U.S.
      dollars)





*Six
                months ended March 31,**Note*
            
            *2006*
            
            *2007*Net
                revenues
            
            
            12
            
            $
            64,323,478
            
            $
            72,610,999Cost
                of revenues
            
            
            
            
            
            (45,005,275
            )
            
            (58,268,122
            )Gross
                profit
            
            
            
            
            
            19,318,203
            
            
            14,342,877Operating
                expenses:Research
                and development costs
            
            
            
            
            
            (958,885
            )
            
            (1,565,357
            )Sales
                and marketing expenses
            
            
            
            
            
            (2,501,151
            )
            
            (2,106,913
            )General
                and administrative expenses
            
            
            
            
            
            (4,189,009
            )
            
            (5,112,649
            )Total
                operating expenses
            
            
            
            
            
            (7,649,045
            )
            
            (8,784,919
            )Operating
                income
            
            
            
            
            
            11,669,158
            
            
            5,557,958Finance
                costs, net
            
            
            
            
            
            (695,811
            )
            
            (2,064,660
            )Gain
                on trading securities
            
            
            
            
            
            279,260
            
            
            —Other
                (expenses) / income
            
            
            
            
            
            (37,899
            )
            
            691,939Income
                before income taxes
            
            
            
            
            
            11,214,708
            
            
            4,185,237Income
                taxes
            
            
            
            
            
            (468,674
            )
            
            (162,758
            )Net
                income
            
            
            
            
            $
            10,746,034
            
            $
            4,022,479Other
                comprehensive income-
                Foreign currency translation adjustment
            
            
            
            
            
            887,130
            
            
            2,694,472Comprehensive
                income
            
            
            
            
            $
            11,633,164
            
            $
            6,716,951Net
                income per share:-Basic
            
            
            9
            
            $
            0.22
            
            $
            0.08-Diluted
            
            
            9
            
            $
            0.22
            
            $
            0.08Weighted
                average number of ordinary shares:-Basic
            
            
            9
            
            
            48,878,396
            
            
            48,887,647-Diluted
            
            
            9
            
            
            48,977,921
            
            
            49,074,049




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




6




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


**Condensed
      interim consolidated statements of shareholders’ equity**


**For
      the six months ended March 31, 2006 and 2007**


(Unaudited)


(In
      U.S.
      dollars)





AccumulatedOrdinary
                shares
            
            Additional
            
            
            
            
            
            other
            
            TotalNumber
                of
            
            
            
            paid
            
            Statutory
            
            Retained
            
            comprehensive
            
            share-holders’shares
            
            amount
            
            -in-capital
            
            reserves
            
            earnings
            
            income
            
            equityBalance
                as of October 1, 2005
            
            
            48,878,396
            
            
            48,878
            
            
            67,415,501
            
            
            3,034,141
            
            
            18,805,368
            
            
            1,005,255
            
            
            90,309,143Net
                income
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            10,746,034
            
            
            —
            
            
            10,746,034Share-based
                compensation for employee stock awards
            
            
            —
            
            
            —
            
            
            1,416,261
            
            
            —
            
            
            —
            
            
            —
            
            
            1,416,261Appropriation
                to statutory reserves
            
            
            —
            
            
            —
            
            
            —
            
            
            1,256,398
            
            
            (1,256,398
            )
            
            —
            
            
            —Foreign
                currency translation adjustment
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            887,130
            
            
            887,130Balance
                as of March 31, 2006
            
            
            48,878,396
            
            $
            48,878
            
            $
            68,831,762
            
            $
            4,290,539
            
            $
            28,295,004
            
            $
            1,892,385
            
            $
            103,358,568Balance
                as of October 1, 2006
            
            
            48,885,896
            
            $
            48,886
            
            $
            68,126,689
            
            $
            5,791,718
            
            $
            36,212,357
            
            $
            3,448,379
            
            $
            113,628,029Net
                income
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            4,022,479
            
            
            —
            
            
            4,022,479Issuance
                of 914,994 shares of restricted stock and reclassification of
                liability-classified awards
            
            
            —
            
            
            —
            
            
            3,679,934
            
            
            —
            
            
            —
            
            
            —
            
            
            3,679,934Share-based
                compensation for employee stock options awards
            
            
            —
            
            
            —
            
            
            291,398
            
            
            —
            
            
            —
            
            
            —
            
            
            291,398Share-based
                compensation for common stock granted to employees and non-employee
                directors
            
            
            —
            
            
            —
            
            
            522,116
            
            
            —
            
            
            —
            
            
            —
            
            
            522,116Issuance
                of common stock to non- employee directors
            
            
            7,500
            
            
            7
            
            
            (7
            )
            
            —
            
            
            —
            
            
            —
            
            
            —Appropriation
                to statutory reserves
            
            
            —
            
            
            —
            
            
            —
            
            
            681,904
            
            
            (681,904
            )
            
            —
            
            
            —Foreign
                currency translation adjustment
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            2,694,472
            
            
            2,694,472Balance
                as of March 31, 2007
            
            
            48,893,396
            
            $
            48,893
            
            $
            72,620,130
            
            $
            6,473,622
            
            $
            39,552,932
            
            $
            6,142,851
            
            $
            124,838,428




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




7




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


**Condensed
      interim consolidated statements of cash flows**


**For
      the three months ended March 31, 2006 and 2007**


(Unaudited)


(In
      U.S.
      dollars)


**
              *Three
                  months ended March 31,**2006*
              
              *2007*
              ****
              **
              **
              **
              **
              ****Cash
                  flow from operating activities**
              **
              **
              **
              **
              **Net
                  income
              
              $
              7,554,156
              
              $
              439,727Adjustments
                  to reconcile net income to net cash (used in) / provided by operating
                  activities:Depreciation
                  and amortization
              
              
              1,428,652
              
              
              2,211,399Bad
                  debt expense
              
              
              422,163
              
              
              (850,888
              )Share-based
                  compensation
              
              
              704,748
              
              
              605,828Deferred
                  income taxes
              
              
              3,286
              
              
              59,864Changes
                  in operating assets and liabilities:Trade
                  accounts receivable
              
              
              (8,011,225
              )
              
              12,805,112Inventories
              
              
              (9,030,479
              )
              
              (9,744,361
              )Prepayments
                  and other receivables
              **
              **
              *(500,998*
              )
              **
              *(107,265*
              )Accounts
                  and bills payable
              
              
              2,554,531
              
              
              4,960,036Accrued
                  expenses and other payables
              
              
              626,169
              
              
              (2,874,543
              )Net
                  cash (used in) / provided by operating activities
              
              
              (4,248,997
              )
              
              7,504,909**Cash
                  flow from investing activities**Purchases
                  of property, plant and equipment
              
              
              (2,795,910
              )
              
              (10,333,935
              )Payment
                  of lease prepayment
              
              
              —
              
              
              (13,024,026
              )Purchases
                  of intangible assets
              
              
              (2,321
              )
              
              —Net
                  cash used in investing activities
              
              $
              (2,798,231
              )
              $
              (23,357,961
              )




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




8




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


**Condensed
      interim consolidated statements of cash flows**


**For
      the three months ended March 31, 2006 and 2007 (continued)**


(Unaudited)


(In
      U.S.
      dollars)


*Three
                  months ended March 31,**2006*
              
              *2007***Cash
                  flow from financing activities**Proceeds
                  from borrowings
              
              $
              22,625,537
              
              $
              37,347,228Repayment
                  of borrowings
              
              
              (18,747,603
              )
              
              (32,970,443
              )(Increase)
                  / decrease in pledged deposits
              
              
              (353,595
              )
              
              570,892Amounts
                  received from related parties
              
              
              21,588
              
              
              —Net
                  cash provided by financing activities
              
              
              3,545,927
              
              
              4,947,677**Effect
                  of exchange rate changes on cash and cash
                  equivalents**
              
              
              **55,117**
              
              
              **381,379****Net
                  decrease in cash and cash equivalents**
              
              
              **(3,446,184**
              **)**
              
              **(10,523,996**
              **)****Cash
                  and cash equivalents at the beginning of period**
              
              
              **11,368,998**
              
              
              **25,363,580****Cash
                  and cash equivalents at the end of period**
              
              **$**
              **7,922,814**
              
              **$**
              **14,839,584****Supplemental
                  disclosure of cash flow information:**Cash
                  received during the period for:Bills
                  receivable discounted to bank
              
              $
              11,984,834
              
              $
              2,566,265Cash
                  paid during the period for:Income
                  taxes
              
              $
              49,907
              
              $
              27,832Interest,
                  net of amounts capitalized
              
              $
              464,132
              
              $
              1,320,032





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




9




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


**Condensed
      interim consolidated statements of cash flows**


**For
      the six months ended March 31, 2006 and 2007**


(Unaudited)


(In
      U.S.
      dollars)





*Six
                months ended March 31,*
            ****
            *2006*
            **
            *2007***Cash
                flow from operating activities**Net
                income
            
            $
            10,746,034
            
            $
            4,022,479Adjustments
                to reconcile net income to netcash
                (used in) / provided by operating activities:Depreciation
                and amortization
            
            
            2,675,159
            
            
            4,257,216Bad
                debt expense
            
            
            677,651
            
            
            (365,481
            )Share-based
                compensation
            
            
            1,416,261
            
            
            868,283Deferred
                income taxes
            
            
            9,361
            
            
            (10,539
            )Changes
                in operating assets and liabilities:Trade
                accounts receivable
            
            
            (14,419,154
            )
            
            9,607,403Inventories
            
            
            (24,220,121
            )
            
            (5,990,262
            )Prepayments
                and other receivables
            
            
            (745,150
            )
            
            145,507Accounts
                and bills payable
            
            
            14,218,862
            
            
            (6,802,159
            )Accrued
                expenses and other payables
            
            
            1,650,056
            
            
            (382,939
            )Net
                cash (used in) / provided byoperating
                activities
            
            
            (7,991,041
            )
            
            5,349,508**Cash
                flow from investing activities******Purchases
                of property, plant and equipment
            
            
            (14,962,270
            )
            
            (22,886,409
            )Payment
                of lease prepayment
            
            
            —
            
            
            (13,664,337
            )Purchases
                of intangible assets
            
            
            (2,321
            )
            
            (4,759
            )Net
                cash used in investing activities
            
            $
            (14,964,591
            )
            $
            (36,555,505
            )




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




10




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


**Condensed
      interim consolidated statements of cash flows**


**For
      the six months ended March 31, 2006 and 2007 (continued)**


(Unaudited)


(In
      U.S.
      dollars)


*Six
                  months ended March 31,**2006*
              
              *2007***Cash
                  flow from financing activities**Proceeds
                  from borrowings
              
              $
              30,184,209
              
              $
              65,750,162Repayment
                  of borrowings
              
              
              (26,819,015
              )
              
              (45,392,485
              )(Increase)
                  / decrease in pledged deposits
              
              
              (5,852,709
              )
              
              4,149,549Amounts
                  received from related parties
              
              
              271,873
              
              
              —Net
                  cash (used in) / provided by financing activities
              
              
              (2,215,642
              )
              
              24,507,226******Effect
                  of exchange rate changes on cash and cash
                  equivalents**
              
              
              **38,304**
              
              
              **438,800****Net
                  decrease in cash and cash equivalents**
              
              
              **(25,132,970**
              **)**
              
              **(6,259,971**
              **)********Cash
                  and cash equivalents at the beginning of period**
              
              
              **33,055,784**
              
              
              **21,099,555****Cash
                  and cash equivalents at the end of period**
              
              **$**
              **7,922,814**
              
              **$**
              **14,839,584********Supplemental
                  disclosure of cash flow information:**Cash
                  received during the period for:Bills
                  receivable discounted to bank
              
              $
              13,364,732
              
              $
              2,566,265Proceeds
                  from disposal of trading securities
              
              $
              3,981,274
              
              $
              —Cash
                  paid during the period for:Income
                  taxes
              
              $
              196,487
              
              $
              27,832Interest,
                  net of amounts capitalized
              
              $
              692,192
              
              $
              2,199,950Purchases
                  of trading securities
              
              $
              3,702,014
              
              $
              —





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




11


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


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


**For
      the six months ended March 31, 2006 and 2007**




(Unaudited)




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




*Principal
      Activities*





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





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





*Basis
      of Presentation and Organization*





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





BAK
      Tianjin was established in Tianjin Technology Industrial District on December
      12, 2006 as a wholly owned subsidiary of BAK International with registered
      capital of $99,990,000. Pursuant to BAK Tianjin’s articles of association and
      relevant PRC regulations, BAK International is required to contribute
      $20,000,000 to BAK Tianjin as capital (representing 20% of BAK Tianjin’s
      registered capital) before March 11, 2007. The remaining $79,990,000 shall
      be
      fully contributed no later than December 11, 2008. BAK Tianjin will be
      principally engaged in the manufacture of advanced lithium ion batteries for
      use
      in light electric vehicles and uninterruptible power supply. As of March 31,
      2007, BAK International had not contributed the $20,000,000 capital to BAK
      Tianjin; BAK International is in the course of negotiating with the relevant
      government bureau for an extension of the applicable contribution
      period.





BAK
      International, a non-operating holding company that had substantially the same
      shareholders as Shenzhen BAK, entered into a share swap transaction with
      Shenzhen BAK on November 6, 2004 for the purpose of the subsequent reverse
      acquisition of the interest of China BAK as described below. Pursuant to the
      terms of the transaction, the parties exchanged all outstanding shares of their
      capital stock for US$11.5 million in cash, and as a result, BAK International
      became the parent company of Shenzhen BAK. Certain shareholders of Shenzhen
      BAK,
      representing ownership interests of approximately 1.85%, elected not to acquire
      shares in BAK International. The non-participating shareholders of Shenzhen
      BAK
      sold their right to acquire their proportional ownership interests in BAK
      International for cash, and the proportionate interests in BAK International
      to
      which the non-participating shareholders were entitled were acquired by the
      transferees. After the share swap transaction between BAK International and
      the
      shareholders of Shenzhen BAK was complete, there were 31,225,642 shares of
      BAK
      International stock outstanding, exactly the same as the number of shares of
      capital stock of Shenzhen BAK outstanding immediately prior to the share swap,
      and the shareholders of BAK International were substantially the same as the
      shareholders of Shenzhen BAK prior to the share purchases. Consequently, the
      share purchases between BAK International and the shareholders of Shenzhen
      BAK
      have been accounted for as a reverse acquisition of Shenzhen BAK with no
      adjustment to the historical basis of the assets and liabilities of Shenzhen
      BAK, and the operations were consolidated as though the transactions occurred
      as
      of the beginning of the first accounting period presented in the accompanying
      consolidated financial statements.




12


**China
        BAK Battery, Inc. and subsidiaries**
 **Notes
        to the condensed interim consolidated financial statements**
 **For
        the six months ended March 31, 2006 and 2007**
  (Unaudited)


On
      January 20, 2005, BAK International executed a private placement of its common
      stock with unrelated investors whereby it issued an aggregate of 8,600,433
      shares of common stock for gross proceeds of US$17,000,000. In conjunction
      with
      this financing, Mr Li Xiangqian, the Chairman and Chief Executive Officer of
      the
      Company, agreed to place 2,179,550 shares of the Company's common stock owned
      by
      him into an escrow account, of which 50% are to be released to the investors
      in
      the private placement if audited net income of the Group for the fiscal year
      ended September 30, 2005 is not at least US$12,000,000, and the remaining 50%
      are to be released to investors in the private placement if audited net income
      of the Group for the fiscal year ended September 30, 2006 is not at least
      US$27,000,000. If the audited net income of the Group 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 Li Xiangqian (the “Escrow
      Arrangement”).





The
      Escrow Arrangement regarding the shares placed by Mr Li Xiangqian in an escrow
      account and the subsequent potential release of those shares based on the
      fulfillment of certain performance thresholds constitutes a compensatory plan
      to
      Mr Li Xiangqian. A compensation charge should be recorded in the financial
      statements of the Company should these performance thresholds be achieved and
      shares released to Mr Li Xiangqian. However, as the Company did not meet the
      performance threshold for the years ended September 30, 2005 and 2006 after
      consideration of the related compensation charge, the Company has determined
      that the threshold has not been achieved and no compensation charge was recorded
      by the Company for the years ended September 30, 2005 and 2006.





While
      the
      1,089,775 escrow shares relating to the 2005 performance threshold were
      previously released to Mr. Li Xiangqian, Mr. Li Xiangqian had undertaken on
      August 21, 2006, to return those shares to the escrow agent for the distribution
      to the relevant investors. The remaining 1,089,775 shares of Mr. Li Xiangqian
      relating to the 2006 performance threshold had been transferred to the relevant
      investors as of December 31, 2006.





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





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





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





The
        interim results of operations are not necessarily indicative of the results
        to
        be expected for the fiscal year ending September 30, 2007. The Company’s
        consolidated balance sheet as of September 30, 2006 has been taken from the
        Company’s audited balance sheet as of that date. All other financial statements
        contained herein are unaudited and, in the opinion of management, contain
        all
        adjustments (consisting only of normal recurring accruals) necessary for
        a fair
        presentation of financial position, results of operations and cash flows
        for the
        period presented. The Company’s accounting policies and certain other
        disclosures are set forth in the notes to the condensed interim consolidated
        financial statements contained in the Company’s Annual Report on Form 10-K for
        the year ended September 30, 2006. These financial statements should be read
        in
        conjunction with the Company’s audited consolidated financial statements and
        notes thereto. The preparation of financial statements in conformity with
        US
        GAAP requires management to make estimates and assumptions that affect the
        reported amounts of assets and liabilities and disclosures of contingent
        assets
        and liabilities at the date of the financial statements and the reported
        amounts
        of revenues and expenses during the reporting period. Actual results could
        differ from those estimates.




13


**China
        BAK Battery, Inc. and subsidiaries**
 **Notes
        to the condensed interim consolidated financial statements**
 **For
        the six months ended March 31, 2006 and 2007**
  (Unaudited)


This
      basis of accounting differs in certain material respects from that used for
      the
      preparation of the books of account of the Company’s principal subsidiaries,
      which are prepared in accordance with the accounting principles and the relevant
      financial regulations applicable to enterprises with limited liabilities
      established in the PRC (“PRC GAAP”), in Hong Kong or in Canada, the accounting
      standards used in the places of their domicile. The accompanying condensed
      interim consolidated financial statements reflect necessary adjustments not
      recorded in the books of account of the Company's subsidiaries to present them
      in conformity with US GAAP.





**Recently
      Issued Accounting Standards**





*FASB
      Interpretation No. (“FIN”) 48, Accounting for Uncertainty in Income Taxes—an
      Interpretation of FASB Statement No. 109*





In
        July
        2006, the Financial
        Accounting Standards Board ("FASB") issued FIN 48, “ Accounting
        for Uncertainty in Income Taxes—an Interpretation of FASB Statement No.
        109”, which
        clarifies the accounting for uncertainty in tax positions. This Interpretation
        requires that the Company recognize in its consolidated financial statements
        the
        impact of a tax position if that position is more likely than not of being
        sustained on audit, based on the technical merits of the position. The
        provisions of FIN 48 become effective for the Company on October 1, 2007,
        with
        the cumulative effect of the change in accounting principle, if any, recorded
        as
        an adjustment to opening retained earnings. The
        Company is currently evaluating the impact of adoption of FIN 48 on its
        consolidated financial statements.




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





In
        February 2007, FASB issued Statement of Financial Accounting Standards
        No. (“SFAS”) 159, “The Fair Value Option for Financial Assets and Financial
        Liabilities - Including an Amendment of FASB Statement No. 115” (“SFAS 159”).
        SFAS 159 permits entities to choose to measure many financial instruments
        and
        certain other items at fair value. Entities that elect the fair value option
        will report unrealized gains and losses in earnings at each subsequent reporting
        date. The fair value option may be elected on an instrument-by-instrument
        basis,
        with a few exceptions. SFAS 159 also establishes presentation and disclosure
        requirements to facilitate comparisons between entities that choose different
        measurement attributes for similar assets and liabilities. The requirements
        of
        SFAS 159 are effective for our fiscal year beginning on October 1, 2008.
        Our
        management is in the process of evaluating this guidance and therefore has
        not
        yet determined the impact that SFAS 159 will have on the Company’s financial
        statements upon adoption.




14


**China
        BAK Battery, Inc. and subsidiaries**
 **Notes
        to the condensed interim consolidated financial statements**
 **For
        the six months ended March 31, 2006 and 2007**
  (Unaudited)


**2**  **Pledged
      Deposits**


Pledged
        deposits as of September 30, 2006 and March 31, 2007 consist of the
        following:
 
 *September
                    30,*
                
                *March
                    31,**2006*
                
                *2007*Pledged
                    deposits with banks forbills
                    payable
                
                $
                12,971,989
                
                
                9,100,630
  **3**  **Trade
        Accounts Receivable, net**
  Trade
        accounts receivable as of September 30, 2006 and March 31, 2007 consist of
        the
        following:
 
 *September
                  30,*
              
              *March
                  31,**2006*
              
              *2007*Trade
                  accounts receivable
              
              $
              56,197,229
              
              $
              49,410,886Less:
                  Allowance for doubtful accounts
              
              
              (1,063,285
              )
              
              (751,496
              )55,133,944
              
              
              48,659,390Bills
                  receivable
              
              
              9,198,227
              
              
              7,856,017$
              64,332,171
              
              $
              56,515,407
  An
        analysis of the allowance for doubtful accounts for the six months ended
        March
        31, 2006 and 2007 is as follows:
 
 *Six
                  months ended March 31,*
              ****
              *2006*
              **
              *2007*Balance
                  at beginning of period
              
              $
              1,593,538
              
              $
              1,063,285Addition
                  / (recovery) ofbad
                  debt expense, net
              
              
              640,738
              
              
              (334,611
              )Foreign
                  exchange adjustment
              
              
              18,925
              
              
              22,822Balance
                  at end of period
              
              $
              2,253,201
              
              $
              751,496
  **4**  **Inventories**
 
 Inventories
        as of September 30, 2006 and March 31, 2007 consist of the
        following:
 
 *September
                  30,*
              
              *March
                  31,**2006*
              
              *2007*Raw
                  materials
              
              $
              20,693,915
              
              $
              18,910,602Work-in-progress
              
              
              5,686,328
              
              
              6,674,890Finished
                  goods
              
              
              21,008,693
              
              
              28,883,813$
              47,388,936
              
              $
              54,469,305
  15
 **China
          BAK Battery, Inc. and subsidiaries**
 **Notes
          to the condensed interim consolidated financial statements**
 **For
          the six months ended March 31, 2006 and 2007**
  (Unaudited)
  A
            part of
            the Company’s inventories with carrying values of US$10,115,442 and
            US$10,343,668 as of September 30, 2006 and March 31, 2007, respectively,
            was pledged as collateral under certain loan agreements (see Note
            6).
 
 **5**  **Property,
        Plant and Equipment, net**
 
 Property,
        plant and equipment as of September 30, 2006 and March 31, 2007 consist of
        the
        following:
  *September
                  30,*
              
              *March
                  31,**2006*
              
              *2007*Buildings
              
              $
              63,508,910
              
              $
              68,288,757Machinery
                  and equipment
              
              
              30,658,968
              
              
              47,503,883Office
                  equipment
              
              
              750,115
              
              
              905,719Motor
                  vehicles
              
              
              1,018,042
              
              
              1,041,01295,936,035
              
              
              117,739,371Accumulated
                  depreciation and amortization
              
              
              (9,925,557
              )
              
              (14,308,120
              )Construction
                  in progress
              
              
              23,395,638
              
              
              15,188,860Prepayment
                  for acquisition of property, plantand
                  equipment
              
              
              —
              
              
              5,205,321$
              109,406,116
              
              $
              123,825,432
  *(i)*  Depreciation
        and amortization expense for the six months ended March 31, 2006 and 2007
        is
        included in the consolidated statements of income and comprehensive income
        as
        follows:
  *Six
                  months ended March 31,**2006*
              
              *2007*Cost
                  of revenues
              
              $
              1,949,238
              
              $
              3,008,251Research
                  and development costs
              
              
              124,567
              
              
              140,815Sales
                  and marketing expenses
              
              
              237,774
              
              
              294,470General
                  and administrative expenses
              
              
              209,452
              
              
              812,060$
              2,521,031
              
              $
              4,255,596
  *(ii)*  *Construction
        in Progress*
 
 Construction
        in progress mainly comprises capital expenditures for construction of the
        Company’s new corporate campus, including offices, factories and staff
        dormitories.
 
 For
        the
        six months ended March 31, 2006 and 2007, the Company capitalized interest
        of
        approximately $390,642 and $113,884, respectively, to the cost of construction
        in progress.
  *(iii)*  *Pledged
        Property, Plant and Equipment*
 
 As
        of
        September 30, 2006 and March 31, 2007, machinery and equipment with net book
        value of $6,253,302 and $18,872,622 of the Company were pledged as collateral
        under certain loan arrangements (see Notes 6 and 7).
  16
 **China
          BAK Battery, Inc. and subsidiaries**
 **Notes
          to the condensed interim consolidated financial statements**
 **For
          the six months ended March 31, 2006 and 2007**
  (Unaudited)
 **6**  **Short-term
        Bank Loans**
 
 The
        Company obtained several short-term loan facilities from financial institutions
        in the PRC. These facilities were secured by the Company’s assets with the
        following carrying values:
 
 *September
                  30,*
              
              *March
                  31,**2006*
              
              *2007*Inventories
                  (Note 4)
              
              $
              10,115,442
              
              $
              10,343,668Machinery
                  and equipment, net (Note 5)
              
              
              6,253,302
              
              
              5,461,839$
              16,368,744
              
              $
              15,805,507
  As
        of
        September 30, 2006 and March 31, 2007, the Company had several short-term
        bank
        loans with aggregate outstanding balances of $67,899,908 and $71,759,199
        respectively. The loans were primarily obtained for general working capital,
        carried interest rates ranging from 4.725% to 5.85% per annum, and had maturity
        dates ranging from 6 to 12 months. Each loan is guaranteed by Mr. Li Xiangqian,
        Chairman of the Company, who did not receive any compensation for acting
        as
        guarantor.
 
 The
        Company is subject to certain covenants, which require the Company to comply
        with certain financial ratios for its loan facilities, which are tested on
        a
        monthly basis. If the Company fails to meet the requirements, the outstanding
        bank loans, including interest and penalties due thereunder, will accelerate
        and
        become immediately due and payable. As of March 31, 2007, the Company is
        in
        compliance with all of these requirements.
 
 **7**  **Long-term
        Bank Loans**
 
 As
        of
        March 31, 2007, the Company had long-term bank loans of $18,101,420. The
        amount
        $12,929,585 was borrowed under a four-year long-term loan credit facility
        from
        China Development Bank, bearing interest at the benchmark rate of the People’s
        Bank of China for three- to five-year long-term loans, which is currently
        at
        6.48% per annum. The long-term bank loan is repayable in three instalments
        of
        $3,878,876 on November 20, 2008, $3,878,876 on November 20, 2009 and $5,171,833
        on December 26, 2010. An additional $5,171,835 was borrowed under a five-year
        long-term loan credit facility from Shenzhen Eastern Branch, Agricultural
        Bank
        of China, which bears interest at 90% of the benchmark rate of the People’s Bank
        of China for three- to five-year long-term loans (currently 5.832% per annum);
        this loan is repayable in full on January 25, 2012.
 
 The
        long-term bank loan with China Development Bank is guaranteed by Mr. Li
        Xiangqian, Chairman of the Company, and is secured by the fixed assets and
        land
        use rights of the Company’s Research and Development Test Center which will be
        constructed in Shenzhen, PRC after obtaining the required land use rights
        for
        the location of the facility.
 
 The
        long-term bank loan with Agricultural Bank of China is guaranteed by Mr.
        Li
        Xiangqian, Chairman of the Company, and is secured by pledged machinery and
        equipment valued at $13,410,783 as of March 31, 2007 (see Note 5).
 
 Certain
        shares of the Company owned by Mr. Li Xiangqian were pledged to secure the
        long-term bank loans as of March 31, 2007. Mr. Li Xiangqian did not receive
        any
        compensation for acting as guarantor for the above long-term bank
        loans.
 
 **8**  **Share-based
        Compensation**
 
 The
        Company grants share options to officers and employees to reward for services
        and restricted ordinary shares to its non-employee directors.
  17
 **China
          BAK Battery, Inc. and subsidiaries**
 **Notes
          to the condensed interim consolidated financial statements**
 **For
          the six months ended March 31, 2006 and 2007**
  (Unaudited)
 **Employee
        Stock Option Plan**
  In
        May
        2005, the Board of Directors adopted the China BAK Battery, Inc. 2005 Stock
        Option Plan (the “Plan”). The Plan authorizes the issuance of up to 4,000,000
        shares of the Company’s common stock. The exercise price of the options granted,
        pursuant to the Plan, must be at least equal to the fair market value of
        the
        Company’s common stock at the date of the grant. The Plan will terminate on May
        16, 2055.
 
 Pursuant
        to the Plan, the Company issued 2,000,000 options with an exercise price
        of
        US$6.25 per share on May 16, 2005. In accordance with the vesting provisions
        of
        the grants, the options will become vested and exercisable under the following
        schedule:
 
 *Number
                    of shares*
                **
                *Percentage
                    of*
                  *options
                    issued*
                
                *Initial
                    vesting date*800,000
                
                
                40
                %
                
                July
                    1, 2007600,000
                
                
                30
                %
                
                January
                    1, 2008600,000
                
                
                30
                %
                
                July
                    1, 20082,000,000
                
                
                100
                %
  Subsequent
        to the grant date, options to purchase 200,000 shares of common stock were
        forfeited because the optionees terminated their employment with the Company.
        In
        addition, on September 28, 2006, options to purchase a total of 1,400,000
        shares
        of common stock were cancelled pursuant to the Termination and Release
        Agreements signed on that day. Details of the cancellation of stock options
        and
        the relevant replacement awards are set out below under “Employee Restricted
        Stock Awards.”
 
 A
        summary
        of share option plan activity for the six months ended March 31, 2007 is
        presented below:
 *Weighted
                    average*
                
                *Weighted
                    average**Number
                    of*
                
                *exercise
                    price*
                
                *remaining**shares*
                
                *per
                    share*
                
                *contractual
                    term*Outstanding
                    as of October 1, 2006
                
                
                400,000
                
                $
                6.25Granted
                
                
                -
                
                
                -Exercised
                
                
                -
                
                
                -Forfeited
                
                
                -
                
                
                -Cancelled
                
                
                -
                
                
                -Outstanding
                    as of March 31, 2007
                
                
                400,000
                
                $
                6.25
                
                
                5
                    yearsExercisable
                    as of March 31, 2007
                
                
                -
                
                
                -
                
                
                -
 The
        weighted-average grant-date fair value of options granted during 2005 was
        $3.67
        per share. The Company recorded non-cash share-based compensation expense
        of
        $291,398 for the six months ended March 31, 2007, in respect of share options
        granted in 2005, which was allocated to general and administrative expenses
        and
        research and development costs, respectively.
  The
        fair
        value of the above option awards was estimated on the date of grant using
        a
        Black-Scholes Option Valuation Model that uses the assumptions noted in the
        following table. The expected volatility was based on the historical
        volatilities of the Company’s listed common stock in the United States. The
        Company uses historical data to estimate employee termination within the
        valuation model. The expected life of options granted is the period between
        the
        option grant date and the expected exercise date which is the mid-point of
        the
        exercisable date and the expiry date, which represents the period of time
        that
        options granted are expected to be outstanding. Since the share options once
        exercised will primarily trade in the U.S. capital market, the risk-free
        rate
        for periods within the contractual term of the share option is based on the
        U.S.
        Treasury yield curve in effect at the time of grant.
  18
 **China
          BAK Battery, Inc. and subsidiaries**
 **Notes
          to the condensed interim consolidated financial statements**
 **For
          the six months ended March 31, 2006 and 2007**
  (Unaudited)
 Expected
                  volatility
              
              
              59.85
              %Expected
                  dividends
              
              
              NilExpected
                  life
              
              
              6
                  yearsRisk-free
                  interest rate
              
              
              4.13
              %
 
 As
        of
        March 31, 2007, there were unrecognized compensation costs of approximately
        $371,000 related to non-vested share options. These costs are expected to
        be
        recognized over the remaining vesting period.
 
 **Employee
        Restricted Stock Award**
 
 On
        September 22, 2006, the Compensation Committee approved the form of Termination
        and Release Agreement covering the cancellation of 1,400,000 shares of stock
        options granted to the optionees who are residents of the PRC. The Compensation
        Committee also consented to adopt the terms and provisions for Restricted
        Stock
        Grant Agreement covering the issuance of restricted shares, and committed
        to
        determine an appropriate number of shares of restricted stock that would
        be
        granted to these optionees under the Plan (the “Replacement Awards”) during the
        first quarter of fiscal year 2007. In addition, the Compensation Committee
        also
        approved the officer of the Company to authorize delivery of the restricted
        shares to the employees. On September 28, 2006, options to purchase a total
        of
        1,400,000 shares of common stock were cancelled pursuant to the Termination
        and
        Release Agreements signed on that day. The Replacement Awards were classified
        as
        liability-classified awards as of September 30, 2006.
 
 Subsequent
        to September 28, 2006, certain employees who were entitled to the Replacement
        Awards terminated their employment with the Company. The related potential
        restricted stock grant of these employees were forfeited with the previously
        recognized compensation cost of $181,290 credited to sales and marketing
        expenses and general and administrative expenses.
 
 The
        Company has estimated the fair value of the Replacement Awards to be $4.27
        per
        share as of December 26, 2006, based on the estimated fair value of the
        cancelled options using the Black-Scholes Option Valuation Model together
        with
        the following assumptions.
 
 Expected
                  volatility
              
              
              89.51
              %Expected
                  dividends
              
              
              NilExpected
                  life
              
              
              4.4
                  yearsRisk-free
                  interest rate
              
              
              4.61
              %
 
 On
        December 26, 2006, pursuant to the restricted stock grant agreements signed
        between the Company’s officers and the relevant optionees and based on the
        closing market price of the Company’s listed common stock on that date, i.e.
        $6.25 per share, a total of 914,994 shares of restricted stock were granted
        as
        Replacement Awards to the employees who gave up their stock options and
        continued to be employed by the Company on that date. Fair value of the
        Replacement Awards granted to each optionee approximated that of the employee’s
        terminated stock options. The Compensation Committee ratified the grants
        on
        January 15, 2007.
  19
 **China
          BAK Battery, Inc. and subsidiaries**
 **Notes
          to the condensed interim consolidated financial statements**
 **For
          the six months ended March 31, 2006 and 2007**
  (Unaudited)
 Prior
        to
        vesting, the shares of restricted stock granted to each employee pursuant
        to the
        Replacement Awards are subject to restrictions on transferability and will
        be
        forfeited if the grantee’s employment with the Company is terminated. In
        accordance with the vesting provisions of the grants, the shares of restricted
        stock will become vested and shall no longer be subject to forfeiture under
        the
        following schedule:
  *Number
                    of shares*
                **
                **
                *Percentage
                    of*
                  *options
                    issued*
                **
                **
                *Initial
                    vesting date*365,998
                
                
                40
                %
                
                July
                    1, 2007274,498
                
                
                30
                %
                
                January
                    1, 2008274,498
                
                
                30
                %
                
                July
                    1, 2008914,994
                
                
                100
                %
 
 Upon
        the
        grant of restricted stock, the Company has reclassified share-based payment
        liabilities of $3,679,934 to shareholders’ equity. The restricted stock grant is
        treated as equity-classified awards and the unrecognized compensation costs
        will
        be recognized over the vesting period. The Company recognized share-based
        compensation expense of $236,059 for the period from October 1, 2006 to December
        26, 2006 in respect of the liability-classified award, and $31,186 for the
        period from December 26, 2006 to December 31, 2006 in respect of the
        equity-classified award.
 
 The
          Company recognized shared-based compensation expense of $643,616 for the
          period
          from January 1, 2007 to March 31, 2007 in respect of the equity-classified
          award, which was allocated to cost of revenues, selling expenses, general
          and
          administrative expenses and research and development costs, respectively.
          The
          restricted stock grant of certain employees who resigned during the period
          from
          January 1, 2007 to March 31, 2007, were forfeited with the previously recognized
          compensation cost of $96,392 credited to cost of revenues.
 
 A
        summary
        of the restricted stock grant activity for the six months ended March 31,
        2007
        is presented below:
  *Weighted
                  average**Number
                  of*
              
              *exercise
                  price**shares*
              
              *per
                  share*Non-vested
                  as of October 1, 2006
              
              
              —
              
              $
              —Granted
                  on December 26, 2006
              
              
              914,994
              
              
              6.25Vested
              
              
              —
              
              
              —Forfeited
              
              
              (23,899
              )
              
              6.25Non-vested
                  as of March 31, 2007
              
              
              891,095
              
              $
              6.25
  As
        such
        stock-based compensation is not deductible for income tax purpose in the
        PRC, no
        income tax benefits were recognized in this respect for the six months ended
        March 31, 2007.
 
 As
        of
        March 31, 2007, there were unrecognized compensation costs of approximately
        $1,408,000 related to the restricted stock granted. These costs are expected
        to
        be recognized over the vesting period.
 
 **Compensation
        Plan for Non-employee Directors**
  On
        May
        12, 2006, the Board of Directors adopted the China BAK Battery, Inc.
        Compensation Plan for Non-employee Directors (the “Plan 2006”). The Plan 2006
        authorizes the issuance of 5,000 restricted shares of the Company’s common stock
        to each of the three eligible directors in addition to their annual retainer
        fee. Such restricted shares entitle the relevant non-employee directors to
        all
        rights of ordinary share ownership except that the shares may not be sold,
        transferred, pledged, exchanged or otherwise disposed of during the vesting
        period.
 
 On
        May
        12, 2006, the Company granted 5,000 restricted shares to each of the three
        newly
        elected independent directors with a fair value of $11.5 per share pursuant
        to
        the Plan 2006. The eligible directors shall vest in their rights under the
        restricted shares according to the following schedule:
  (i)  25%
        of
        the restricted shares granted will immediately vest on the grant date;
        and
  20
 **China
          BAK Battery, Inc. and subsidiaries**
 **Notes
          to the condensed interim consolidated financial statements**
 **For
          the six months ended March 31, 2006 and 2007**
  (Unaudited)
 (ii)  The
        remaining 75% of the restricted shares will vest in three equal quarterly
        instalments on the last day of each subsequent quarter or in three equal
        quarterly instalments on the last day of each calendar quarter beginning
        on the
        last day of the first full calendar quarter after the grant date.
 
 As
        of
        March 31, 2007, there was not any unrecognized stock-based compensation
        associated with these restricted shares granted to non-employee directors.
        The
        every 25% of the restricted shares were issued as fully paid ordinary shares
        to
        the three independent directors on July 19, 2006, August 16, 2006, January
        8,
        2007 and March 29, 2007, respectively.
 
 As
        the
        Company itself is an investment holding company which is not expected to
        generate operating profits to realize the tax benefits arising from its net
        operating loss carried forward, no income tax benefits were recognized for
        such
        stock-based compensation cost for non-employee directors for the six months
        ended March 31, 2007.
 
 **9**  **Net
        Income per Share**
 
 The
        calculation of basic net income per share is based on the net income for
        the six
        months ended March 31, 2007 attributable to equity shareholders of $4,022,479
        (six months ended March 31, 2006: $10,746,034) and the weighted average number
        of ordinary shares of 48,887,647 in issue during the six months ended March
        31,
        2007 (six months ended March 31, 2006: 48,878,396).
 
 The
        calculation of diluted net income per share is based on the net income for
        the
        six months ended March 31, 2007 attributable to equity shareholders of
        $4,022,479 (six months ended March 31, 2006: $10,746,034) and the weighted
        average number of ordinary shares of 49,074,049 in issue during the six months
        ended March 31, 2007 (six months ended March 31, 2006: 48,977,921) after
        adjusting for the number of 186,402 dilutive potential ordinary shares.
        Restricted stock granted to employees and to non-employee directors are included
        in the computation of diluted net income per share for the six months ended
        March 31, 2007. Share warrants granted to external financial advisors, stock
        options granted to employees are excluded from the computation of diluted
        net
        income per share as the warrant and stock options were both
        anti-dilutive.
 
 **10**  **Commitments
        and Contingencies**
 
 *(i)*  *Capital
        Commitments*
 
 As
        of
        September 30, 2006 and March 31, 2007, the Company had the following capital
        commitments:
 
 *September
                  30,*
              
              *March
                  31,**2006*
              
              *2007*For
                  construction of buildings
              
              $
              557,883
              
              $
              —For
                  purchases of equipment
              
              
              12,184,346
              
              
              18,819,787$
              12,742,229
              
              $
              18,819,787
  (a)  A
        new
        subsidiary, BAK Tianjin, was incorporated in Tianjin city, the PRC on December
        12, 2006. BAK Tianjin plans to develop a production plant. As of March 31,
        2007,
        the Company is in the process of evaluating the development plan and the
        budgeted development costs have yet to be determined.
 
 (b)  The
        Company plans to construct a new Research and Development Test Center in
        Shenzhen. As of March 31, 2007, the Company is in the process of evaluating
        the
        development plan and the budgeted development costs have yet to be
        determined.
  21
 **China
          BAK Battery, Inc. and subsidiaries**
 **Notes
          to the condensed interim consolidated financial statements**
 **For
          the six months ended March 31, 2006 and 2007**
  (Unaudited)
 *(ii)*  *Land
        Use Rights and Property Ownership Certificate*
 
 According
        to the relevant PRC laws and regulations, a land use right certificate, along
        with government approvals for land planning, project planning and construction,
        needs to be obtained before construction of a building is commenced. A property
        ownership certificate shall be granted by the government upon application
        under
        the condition that the aforementioned certificate and government approvals
        are
        obtained.
 
 The
        Company has not yet obtained the land use right certificate relating to the
        premises occupied by the Company, BAK Industrial Park. However, the Company
        is
        in the process of applying to obtain the land use right certificate. The
        local
        government of Kuichong Township of Longgang District of Shenzhen has, however,
        granted permission for Shenzhen BAK to commence the construction of the new
        production plant.
 
 Management
        believes that the Company will ultimately be granted a land use right
        certificate, and that there should be no legal barriers for the Company to
        obtain a property ownership certificate for the premises presently occupied
        by
        the Company in BAK Industrial Park. However, in the event that the Company
        fails
        to obtain the land use right certificate relating to BAK Industrial Park,
        there
        is a risk that the buildings constructed will need to be vacated as illegitimate
        constructions and the Company might be subject to penalties and fines. However,
        management believes that this possibility, while present, is
        remote.
 
 The
        Company is not able to insure its manufacturing facilities since it has not
        yet
        received its land use right certificate. The Company intends to procure such
        insurance once it has received the certificate.
 
 *(iii)*  *Guarantees*
 
 In
        order
        to secure the supplies of certain raw materials and upon the request of
        suppliers, the Company has given guarantee to certain suppliers which are
        summarized as follows:
 
 *September
                  30,*
              
              *March
                  31,**2006*
              
              *2007*Guaranteed
                  for Shenzhen Tongli Hi-tech Co. Ltd. -a
                  non-related party
              
              $
              2,528,861
              
              $
              2,585,917Guaranteed
                  for Shenzhen Kuichong ZhendaIndustrial
                  Co. Ltd. - a non-related party
              
              
              1,264,430
              
              
              1,292,958$
              3,793,291
              
              $
              3,878,875
  Management
        has assessed the fair value of the obligation arising from the above financial
        guarantees and considered it is immaterial to the consolidated financial
        statements. Therefore, no obligations in respect of the above guarantees
        were
        recognized as of March 31, 2007.
 
 *(iv)*  *Outstanding
        Discounted Bills*
 
 From
        time
        to time, the Company factors bills receivable to banks. At the time of the
        factoring, all rights and privileges of holding the receivables are transferred
        to the banks. The Company removes the asset from its books and records a
        corresponding expense for the amount of the discount. The Company remains
        contingently liable on the amount outstanding in the event the bill issuer
        defaults.
  22
 **China
          BAK Battery, Inc. and subsidiaries**
 **Notes
          to the condensed interim consolidated financial statements**
 **For
          the six months ended March 31, 2006 and 2007**
  (Unaudited)
 The
        Company's outstanding discounted bills as of September 30, 2006 and March
        31,
        2007 are summarized as follows:
 
 *September
                  30,*
              
              *March
                  31,**2006*
              
              *2007*Bank
                  acceptance bills
              
              $
              1,972,303
              
              $
              2,585,917Commercial
                  acceptance bills
              
              
              5,013,466
              
              
              —$
              6,985,769
              
              $
              2,585,917
  *(v)*  *Litigation
        and claims*
 
 On
        September 12, 2006, Hydro-Quebec, a Canadian company, and the Board of Regents
        of the University of Texas System brought a federal patent infringement suit
        in
        the United States District Court for the Northern District of Texas against
        the
        Company. The Company has an agreement with A123Systems, Inc., under which
        the
        Company agrees to manufacture products for A123Systems, Inc. according to
        the
        specifications furnished by, and using the finished electrodes and other
        materials consigned by, A123Systems, Inc. to the Company. The plaintiffs
        alleged
        that by manufacturing rechargeable lithium cells for one of the Company’s
        customers, A123Systems, Inc., for use in DeWalt 36-volt cordless power tools
        manufactured by Black & Decker Corporation, the Company has infringed two
        U.S. patents owned by and exclusively licensed to the plaintiffs. The plaintiffs
        seek injunctive relief and damages in an unspecified amount. If the court
        issues
        an adverse decision, the Company may be required to pay the plaintiffs
        substantial monetary damages, terminate the Company’s existing production of
        rechargeable lithium cells manufactured for A123Systems, Inc., or pay royalties
        to continue such production. The court has not yet issued a decision on this
        matter and the Company is unable to quantify the extent of any possible award
        of
        damages that might become payable by the Company.
 
 Furthermore,
        if A123Systems, Inc. is found liable for the infringement, it may not be
        able to
        continue its cooperation with the Company at all or on terms and conditions
        acceptable to the Company, which in turn would adversely affect the Company’s
        ability to execute its strategy to expand its production of cells for power
        tools and capture high-margin businesses. Accordingly, the Company’s revenues
        and business prospects would be materially adversely affected.
 
 **11**  **Significant
        Concentrations**
 
 **(a)**  **Customers
        and Credit Concentrations**
 
 The
        Company had one customer that individually comprised 10% or more of net revenue
        for the six months ended March 31, 2006 and 2007, as follows:
  *Six
                    months ended March 31,***
                *2006*
                **
                *2007*A123Systems,
                    Inc.
                
                
                $2,677,892
                4%
                
                
                $14,284,447
                20%
 
 Approximately
        1% of gross trade accounts receivable was due from A123Systems, Inc. at both
        September 30, 2006
        and March 31, 2007. A termination in relationship in or a reduction in orders
        from this customer could have a material impact on the Company’s results of
        operations and financial condition.
 
 **(b)** **Credit
        Risk**
 
 Financial
        instruments that potentially subject the Company to significant concentration
        of
        credit risk consist primarily of cash and cash equivalents and pledged deposits.
        As of September 30, 2006 and March 31, 2007, substantially all of the Company’s
        cash and cash equivalents and pledged deposits were held by major financial
        institutions located in the PRC, which management believes are of high credit
        quality.
  23
 **China
          BAK Battery, Inc. and subsidiaries**
 **Notes
          to the condensed interim consolidated financial statements**
 **For
          the six months ended March 31, 2006 and 2007**
  (Unaudited)
 **12**  **Segment
        Information**
 
 The
        Company currently engages in the manufacture, commercialization and distribution
        of a wide variety of standard and customized lithium ion rechargeable batteries
        for use in a wide array of applications. The Company manufactures six types
        of
        Li-ion rechargeable batteries: steel-case cell, aluminum-case cell, battery
        pack, cylindrical cell, polymer cell and industrial battery. The Company's
        products are sold to packing plants operated by third parties primarily for
        use
        in mobile phones and other electronic devices. Net revenues for the six months
        ended March 31, 2006 and 2007 were as follows:
 
 *Net
        revenues by product:*
 
 *Six
                    months ended March 31,**2006*
                
                *2007*%
                
                %Steel-case
                    Cell
                
                $
                33,251,247
                
                
                51.69
                
                $
                22,621,050
                
                
                31.15Aluminium-case
                    cell
                
                
                23,048,171
                
                
                35.83
                
                
                29,064,760
                
                
                40.03High-power
                    lithium-phosphate
                    cell
                
                
                2,529,019
                
                
                3.93
                
                
                14,274,214
                
                
                19.66Battery
                    pack
                
                
                5,273,039
                
                
                8.20
                
                
                3,714,597
                
                
                5.12Cylindrical
                    cell
                
                
                34,000
                
                
                0.05
                
                
                1,282,896
                
                
                1.76Polymer
                    cell
                
                
                188,002
                
                
                0.30
                
                
                1,653,482
                
                
                2.28$
                64,323,478
                
                
                100.00
                
                $
                72,610,999
                
                
                100.00
  *Net
        revenues by geographic area:*
  *Six
                    months ended March 31,**2006*
                
                *2007*%
                
                %PRC
                    Mainland
                
                $
                48,776,298
                
                
                75.83
                
                $
                48,466,021
                
                
                66.74United
                    States of America
                
                
                2,636,588
                
                
                4.10
                
                
                14,343,586
                
                
                19.75Hong
                    Kong, China
                
                
                5,460,648
                
                
                8.49
                
                
                3,536,344
                
                
                4.87The
                    Republic of Turkey
                
                
                4,734,920
                
                
                7.36
                
                
                748,789
                
                
                1.03Others
                
                
                2,715,024
                
                
                4.22
                
                
                5,516,259
                
                
                7.61$
                64,323,478
                
                
                100.00
                
                $
                72,610,999
                
                
                100.00
  24
  **Item 2. 
        Management’s Discussion and Analysis of Financial Condition and Results of
        Operations**
  The
        following discussion should be read in conjunction with the condensed interim
        consolidated financial statements and notes included in Item 1 of Part I of
        this Report. Except for the historical information contained herein, this
        Report
        contains forward-looking statements that involve risks and uncertainties.
        Our
        actual results may differ materially from those indicated by such
        forward-looking statements.
  **Overview**
  Overall,
        during the first half of fiscal 2007, we have continued to see consistent sales
        performance of our polymer cells, as well as development of our laptop
        cylindrical business. We have also made progress in expanding our manufacturing
        capability into first tier OEM capabilities, and in working through the
        qualification processes of targeted first tier OEMs. However, we continue
        to
        face pressure due to increased costs of raw materials, particularly lithium
        cobalt dioxide, and higher overhead related to expanding our manufacturing
        capabilities. This has resulted in lower profit margins for the three and
        six
        months ended March 31, 2007, as compared to the same periods in fiscal
        2006.
  In
        the
        near-term, we anticipate that we will continue to experience pressure due
        to
        pricing pressure and overhead costs, including the costs of raw materials
        as
        well as the costs of our anticipated capital improvements as we transition
        from
        predominantly replacement market to global first tier OEM capabilities. In
        response to this challenge, while we believe that we remain among the low
        cost
        manufacturers in the industry, we are seeking to reduce the purchase costs
        of
        raw materials and other unit costs of production while pursuing opportunities
        to
        raise selling prices where it would benefit our financial results. In addition,
        we are seeking to identify alternative raw material suppliers to the extent
        there are viable alternatives and to expand our use of alternative raw
        materials. We have also restructured our operations in an effort to streamline
        corporate recourses and improve internal efficiency, with a particular focus
        on
        manufacturing and sales.
  From
        a
        long-term perspective, we believe that our investment in building out 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 once we have completed the qualification processes
        of applicable first tier OEM companies and have completed the investment
        in
        applicable equipment and infrastructure.
  **Our
        Business**
  We
        are
        one of the largest manufacturers of lithium-ion battery cells in China and
        the
        world, as measured by production output. Our battery cells are the principal
        component of rechargeable lithium-based batteries used to power the following
        applications:
  —
              cellular
                  phones — customer segments include OEM and replacement battery
                  manufacturers;—
              notebook
                  computers;—
              cordless
                  power tools; and—
              portable
                  consumer electronics, such as digital media devices, portable media
                  players, and personal digital assistants, or
                  PDAs.
  We
        conduct all of our operations in China, in close proximity to China’s
        electronics manufacturing base and its rapidly growing market.
  Historically,
        we have primarily manufactured prismatic lithium-ion cells for the cellular
        phone replacement battery market and original equipment manufacturer, or
        OEM,
        market. Our products are packed into batteries by third-party battery pack
        manufacturers in accordance with the specifications of manufacturers of portable
        electronic applications.
  At
        the
        request of our customers that order prismatic battery packs, we also engage
        pack
        battery manufacturers to assemble our prismatic cells into batteries for
        a fee
        and then sell battery packs to these customers both for the cellular phone
        battery replacement market and OEM markets.
  25
  Since
        2005, we have expanded our product offerings by adding three product lines,
        which have become our new resources for future growth:
  —
              High-power,
                  lithium-phosphate cells for use in cordless power tools. We began
                  commercial production of lithium-phosphate cells in October 2005
                  for use
                  in cordless power tools of Black & Decker, a leading power tools
                  manufacturer.—
              Lithium
                  polymer cells for use in ultra-portable electronic devices, such
                  as
                  high-end cellular phones, Bluetooth headsets, digital medial players
                  and
                  digital audio players. We began commercial production of lithium
                  polymer
                  cells in September 2005.—
              Cylindrical
                  lithium-ion cells for use in notebook computers. We began trial
                  production
                  of cylindrical cells in April 2006 and began commercial production
                  in June
                  2006. Prior to this, we had been producing a limited number of
                  cylindrical
                  cells using primarily a manual manufacturing process. These cylindrical
                  cells were primarily sold for use on portable DVD players. In March
                  2007,
                  our cylindrical lithium-ion cells met the safety standards for
                  use in
                  mining lamps set by the Quality Supervision and Testing Center
                  of the
                  Chemical and Physical Power Sources of the Ministry of Information
                  Industry.
  **Pricing
        Pressure**
  Portable
        electronic devices such as cellular phones and notebook computers are subject
        to
        declines in average selling prices from time to time due to evolving
        technologies, industry standards and consumer preferences. As a result,
        manufacturers of these electronic devices expect us, as a supplier, to cut
        our
        costs and lower the price of our products, particularly when they place
        substantial orders with us. Our ability to maintain our cost-effectiveness
        will
        be critical to our future success in an increasingly price-sensitive market.
        We
        seek to achieve this by ramping up our production capacity to give us greater
        economies of scale through a higher bargaining power to secure a supply of
        materials and equipment at a lower cost, and a larger base for spreading
        out our
        fixed cost allocation. We believe this will provide incremental long-term
        growth
        opportunities, but in the short-term, will also require us to incur substantial
        capital expenditures.
  **Seasonality
        of Operating Results**
  Our
        revenues are now affected by seasonal variations in customer demand. We expect
        to experience seasonal lows in the demand for our products during the months
        of
        April to July, reflecting our customers’ decreased purchases. On the other hand,
        we will generally experience seasonal peaks during the months of September
        to
        March, primarily as a result of increased purchases from our customers during
        the holiday season, except that the months of October and February tend to
        be
        seasonally low sales months due to plant closures for the Chinese New Year
        and
        national holidays in the PRC.
  **Financial
        Statement Presentation**
  *Net
        revenues* .
         Our net revenues represent the invoiced value of our products sold, net of
        value added taxes, or VAT, sales returns, trade discounts and allowances.
        We are
        subject to VAT, which is levied on most of our products at the rate of 17%
        on
        the invoiced value of our products. Provision for sales returns are recorded
        as
        a reduction of revenue in the same period that revenue is recognized. The
        provision for sales returns represents our best estimate of the amount of
        goods
        that will be returned from our customers based on historical sales return
        data.
  The
        following table sets forth the breakdown of our net revenues by battery cell
        type for the periods indicated:
  **Three
                  Months Ended**
                **March 31,**
              
              **Six
                  Months Ended**
                **March 31,****2007**
              
              **2006**
              
              **2007**
              
              **2006****(in
                  thousands)**Prismatic
                  cellsSteel-case
                  cells
              
              $
              7,590
              
              $
              19,030
              
              $
              22,621
              
              $
              33,251Aluminum-case
                  cells
              
              
              11,862
              
              
              14,193
              
              
              29,065
              
              
              23,048Battery
                  packs
              
              
              1,301
              
              
              2,319
              
              
              3,715
              
              
              5,273Cylindrical
                  cells(1)
              
              
              428
              
              
              21
              
              
              1,283
              
              
              34High-power
                  lithium-phosphate cells
              
              
              7,875
              
              
              2,529
              
              
              14,274
              
              
              2,529Lithium
                  polymer cells
              
              
              473
              
              
              128
              
              
              1,653
              
              
              188Total
              
              $
              29,529
              
              $
              38,220
              
              $
              72,611
              
              $
              64,323
  26
  Our
        net
        revenues have increased during the six months ended March 31, 2007, because
        of
        increased shipments as we ramped up our production capacity to meet customer
        demands for our products.
  *Cost
        of Revenues* . 
        Cost of revenues consists primarily of material costs, employee remuneration
        for
        staff engaged in production activity, share-based compensation, depreciation
        and
        related expenses that are directly attributable to the production of products.
        Cost of revenues also includes write-downs of inventory to lower of cost
        or
        market.
  The
        cost
        of raw materials for aluminum-case cells is generally higher than that of
        steel-case cells. Cost of revenues from the sales of battery packs also includes
        the fees we pay to pack manufacturers for assembling our prismatic cells
        into
        battery packs.
  Because
        the average unit costs of the products increased significantly during the
        six
        months ended March 31, 2007, as the purchase cost of lithium cobalt dioxide
        increased, our gross profit, as a percentage of net revenues, decreased from
        30.0% for the six months ended March 31, 2006, to 19.8% for the same period
        of
        fiscal 2007.
  *Research
        and Development Costs* . 
        Research and development costs 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* . 
        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* . 
        General and administrative expenses consist primarily of employee remuneration,
        share-based compensation, professional fees, insurance, benefits, general
        office
        expenses, depreciation, liquidated damage charge and bad debt
        expenses.
  *Gain
        on Trading Securities* . 
        Gain on trading securities represents realized gain from purchases and sales
        of
        certain listed shares in open market of Hong Kong Stock Exchange. These
        transactions were concluded by BAK International Limited, our Hong Kong
        subsidiary.  As of March 31, 2007, we and our subsidiary do not hold any
        equity or debt securities on hand for trading purpose.  We do not
        anticipate investment in trading securities to form an ongoing part of our
        treasury function.
  *Other
        Income / (Expense).* Other income for the six months ended March 31, 2007 mainly consists of
        government subsidy given as recognition of our contribution to the economic
        development of the area.  No present or future obligation will arise from
        the receipt of such amount.
  *Finance
        Costs, Net* . 
        Finance costs consist primarily of interest income, interest on bank loans,
        net
        of capitalized interest, and bank charges.
  *Income
        Taxes* . 
        Under applicable income tax laws and regulations, an enterprise located in
        Shenzhen, including the district where our operations are located, is subject
        to
        a 15% enterprise income tax. Further, according to PRC laws and regulations,
        foreign invested manufacturing enterprises are entitled to, starting from
        their
        first profitable year, a two-year exemption from enterprise income tax followed
        by a three-year 50% reduction in its enterprise income tax rate. Our PRC
        subsidiaries, Shenzhen BAK and BAK Electronics, are each entitled to a two-year
        exemption from enterprise income tax and a reduced enterprise income tax
        rate of
        7.5% for the following three years from its first profitable year. As such,
        for
        the first two calendar years ended December 31, 2003, Shenzhen BAK was exempted
        from any enterprise income tax. Between January 1, 2004 and December 31,
        2006,
        Shenzhen BAK is subject to the enterprise income tax rate of 7.5%. BAK
        Electronics, established in August 2005, is eligible for the same preferential
        tax treatment applicable to Shenzhen BAK and currently is in the tax holiday
        and
        fully exempt from any enterprise income tax.
  27
  In
        addition, due to the additional capital invested in Shenzhen BAK in both
        2005
        and 2006, Shenzhen BAK was granted a lower income tax rate of 3.309% and
        1.7% in
        calendar year 2005 and 2006 respectively.
  Furthermore,
        to encourage foreign investors to introduce advanced technologies to China,
        the
        PRC government has offered additional tax incentives to enterprises that
        are
        classified as a foreign invested enterprise with advanced technologies.
        According to an official notice issued by the Shenzhen Municipal Trade and
        Industry Bureau, Shenzhen BAK received such designation in August 2005. As
        a
        result, as long as Shenzhen BAK maintains this designation, it may apply
        to the
        tax authority to extend its current reduced tax rate of 7.5% for another
        three
        years, until December 31, 2009.
  The
        PRC
        legislature is planning to reform PRC income tax laws in fiscal year 2007
        or
        2008, in which case the applicable tax rates might be subject to change such
        reform might also impact the preferential policies, from which our subsidiaries
        in the PRC currently benefit. As the details of such reform have not yet
        been
        finalized, management is not in a position to estimate whether there would
        be
        any potential financial statement impact on us.
  Our
        company is subject to U.S. tax at the statutory rate of 35%. We have not
        made
        provisions for any U.S. tax because we have determined that we have no U.S.
        taxable income.
  Our
        Hong
        Kong subsidiary, BAK International, is subject to Hong Kong profits tax at
        the
        rate of 17.5%. However, because it does not have any assessable income derived
        from or arising in Hong Kong, it has not paid any Hong Kong profits
        tax.
  Our
        effective tax rates were 4.2% and 3.9% for the six months ended March 31,
        2006
        and 2007, respectively.
  **Results
        of Operations**
  ***Results
        of operations for the three months ended March 31, 2007 as compared to the
        three
        months ended March 31, 2006.***
  **Three****Months****Ended**
                **March
                  31,****2007**
              
              **2006**
              
              **$
                  Change**
              
              **%
                  Change****(In
                  thousands, except percentages)**Statement
                  of Operations dataRevenues
              
              $
              29,529
              
              $
              38,220
              
              $
              (8,691
              )
              
              (22.7
              )%Cost
                  of revenues
              
              
              23,383
              
              
              25,977
              
              
              (2,594
              )
              
              (10.0
              )Gross
                  profit
              
              
              6,146
              
              
              12,243
              
              
              (6,097
              )
              
              (49.8
              )Operation
                  expenses:Research
                  and development costs
              
              
              928
              
              
              464
              
              
              464
              
              
              100.0Sales
                  and marketing expenses
              
              
              1,064
              
              
              1,297
              
              
              (233
              )
              
              (17.9
              )General
                  and administrative expenses
              
              
              2,152
              
              
              2,026
              
              
              126
              
              
              6.2Total
                  operating expenses
              
              
              4,144
              
              
              3,787
              
              
              357
              
              
              9.5Operating
                  income
              
              
              2,002
              
              
              8,456
              
              
              (6,454
              )
              
              (76.3
              )Finance
                  costs, net
              
              
              1,164
              
              
              515
              
              
              649
              
              
              125.9Other
                  expenses
              
              
              240
              
              
              34
              
              
              206
              
              
              605.9Income
                  taxes
              
              
              158
              
              
              353
              
              
              (195
              )
              
              (55.2
              )Net
                  income
              
              $
              440
              
              $
              7,554
              
              $
              (7,114
              )
              
              (94.2
              )%
  *Net
        Revenues* . 
        Net revenues decreased to $29.5 million for the three months ended March
        31,
        2007 as compared to $38.2 million for same period of the prior year, a decrease
        of $8.7 million or 22.7%.
  —
              Net
                  revenues from the sales of steel-case cells decreased to $7.6 million
                  in
                  the three months ended March 31, 2007, from $19.0 million in the
                  same
                  period in fiscal 2006, a decrease of $11.4 million or 60.1%, due
                  to a
                  decrease in sales volume by 56.7%, as it took time for the market
                  to
                  accept the rise in sale prices caused by a significant increase
                  in the
                  purchase costs of raw materials, especially lithium cobalt dioxide,
                  which
                  increased approximately 30% to 40% in the quarter ended March 31,
                  2007.
  28
  —
              Net
                  revenues from the sales of aluminum-case cells decreased to $11.9
                  million
                  in the three months ended March 31, 2007, from $14.2 million in
                  the same
                  period in fiscal 2006, a decrease of $2.3 million or 16.4%, due
                  to a
                  decrease in sales volume by 23.6% driven by an increase in the
                  average
                  selling price by 9.4% as the result of the increased purchase cost
                  of
                  lithium cobalt dioxide.—
              Net
                  revenues from sales of battery packs decreased to $1.3 million
                  in the
                  three months ended March 31, 2007, from $2.3 million in the same
                  period in
                  fiscal 2006, a decrease of $1.0 million or 43.9%, due to a significant
                  decrease of 45.2% in average selling price. The decrease in average
                  selling price is primarily attributable to the change of type of
                  the
                  battery packs.—
              We
                  also sold $7.9 million of high-power lithium-ion cells, $473,000
                  of
                  lithium polymer cells and $428,000 million of cylindrical cells
                  in the
                  three months ended March 31, 2007, compared to $2.5 million of
                  high-power
                  lithium-ion cells, $128,000 of lithium polymer cells and $21,000
                  of
                  cylindrical cells in the same period of
                  2006.
  *Cost
        of Revenues* . 
        Cost of revenues decreased to $23.4 million for the three months ended March
        31,
        2007, as compared to $26.0 million for the same period in fiscal 2006, a
        decrease of $2.6 million or 10.0%. The decrease in cost of revenues was
        attributable to a decrease in units of products sold by 40.1%, offset by
        a
        significant increase in the purchase cost of lithium cobalt
        dioxide.
  As
        a
        result, gross profit for the three months ended March 31, 2007 was $6.1 million
        or 20.8% of net revenues as compared to gross profit of $12.2 million or
        32.0%
        of net revenues for the same period in fiscal 2006. The decrease in gross
        profit
        as a percentage of net revenues was primarily due to the decrease in units
        of
        products sold by 40.1% as a result of increase of selling price and increasingly
        competitive market pressure, offset by a significant increase in the purchase
        cost of lithium cobalt dioxide.
  *Research
        and Development Costs* . 
        Research and development costs increased to $928,000 for the three months
        ended
        March 31, 2007, as compared to $464,000 for the same period in fiscal 2006.
        Salaries related to research increased to $299,000 from $86,000 for the same
        period of the prior year, an increase of $213,000, primarily due to increased
        average employee salaries and hiring more experienced professionals. Research
        and development material costs increased to $250,000 from $79,000 for the
        same
        period of the prior year, an increase of $171,000, primarily as result of
        more
        and more research projects were in process.
  *Sales
        and Marketing Expenses* . 
        Sales and marketing expenses decreased to $1.1 million for the three months
        ended March 31, 2007, as compared to $1.3 million for the same period in
        fiscal
        2006, a decrease of $232,000 or 17.9%. Share-based compensation included
        in
        sales and marketing expenses decreased by $108,000. On December 26, 2006,
        we
        made grants of a total of 914,994 shares of restricted stock to the employees
        whose options had been terminated and who continued to be employed by us
        on
        December 26, 2006, in order to replace the cancellation on September 22,
        2006,
        of options to purchase 1,400,000 shares of stock that had been granted to
        those
        employees in May 2005. See Note 8 of the Notes to condensed interim consolidated
        financial statements for further information. As a percentage of net revenues,
        sales and marketing expenses have increased to 3.6% for the three months
        ended
        March 31, 2007, from 3.4% for the same period in fiscal 2006, primarily
        attributable to an decrease in net revenue.
  *General
        and Administrative Expenses* . 
        General and administrative expenses increased to $2.2 million, or 7.3% of
        revenues, for the three months ended March 31, 2007, as compared to $2.0
        million, or 5.3% of revenues, for the same period in fiscal 2006, an increase
        of
        $125,000 or 6.2%. Salaries increased by $202,000 as a result of increased
        headcount of administrative staff due to the restructuring of certain
        departments and increased average employee’s salary. Depreciation charges also
        increased by $239,000 due to increased fixed assets. Bad debt expenses decreased
        by $1.6 million due to the better control in collection of accounts receivables.
  We
        are
        liable for liquidated damages to certain shareholders whose shares were included
        in a resale registration statement on Form SB-2 that we filed pursuant to
        a
        registration rights agreement that we entered into with such shareholders
        in
        September 2005. On August 15, 2006, the SEC declared effective a post-effective
        amendment that we had filed on August 4, 2006, terminating the effectiveness
        of
        a resale registration statement on Form SB-2 that had been filed pursuant
        to a
        registration rights agreement with certain shareholders to register the resale
        of shares held by those shareholders. In addition, on December 8, 2006, we
        filed
        our 2006 Form 10-K. After the filing of the 2006 Form 10-K, our previously
        filed
        registration statement on Form S-1 was no longer available for resales by
        the
        selling shareholders whose shares were included in such Form S-1. Under the
        registration rights agreement, those selling shareholders became eligible
        for
        liquidated damages relating to above two events totaling approximately $1
        million from us. We therefore recognized in general and administrative expenses
        an amount of $563,000 for the liquidated damage for the three months ended
        March
        31, 2007. There was no comparable expense in same period of fiscal
        2006.
  29
  *Operating
        Income* . 
        As a result of the above, operating income totaled $2.0 million for the three
        months ended March 31, 2007, as compared to operating income of $8.5 million
        for
        the same period of the prior year, a decrease of $6.5 million or 76.3%. As
        a
        percentage of net revenues, operating income was 6.8% for the three months
        ended
        March 31, 2007, as compared to 22.1% for the same period of the prior fiscal
        year.
  *Finance
        Costs, Net* . 
        Finance costs, net, increased to $1.2 million for the three months ended
        March
        31, 2007, as compared to $515,000 for the same period of the prior fiscal
        year,
        an increase of $649,000 or 125.9%. We had $71.8 million in short term loans
        and
        $18.1 million in long term loans outstanding as of March 31, 2007, as compared
        to $42.9 million in short term loans outstanding as of March 31, 2006. The
        increase in net finance costs is also attributable to the increase in the
        borrowing of short term loans and long term loans.
  *Other
        Expenses* . 
        Other expenses were $240,000 for the three month period ended March 31, 2007,
        as
        compared to $34,000 of other expenses for the same period of fiscal 2006,
        an
        increase of $206,000 or 605.9%. The difference represents the value of certain
        scrap materials that have been discarded.
  *Income
        tax expenses* . 
        Income tax expenses decreased to $158,000 for the three months ended March
        31,
        2007, as compared to $353,000 for the same period of 2006. The decrease was
        the
        result of a decrease in net income.
  *Net
        Income* . 
        As a result of the foregoing, we decreased our net income to $440,000 for
        the
        three months ended March 31, 2007 from $7.6 million for the same period of
        the
        prior year.
  ***Results
        of operations for the six months ended March 31, 2007 as compared to the
        six
        months ended March*** **** ***31,
        2006.***
  **Six****Months****Ended**
                **March
                  31,****2007**
              
              **2006**
              
              **$
                  Change**
              
              **%
                  Change****(In
                  thousands, except percentages)**Statement
                  of Operations dataRevenues
              
              $
              72,611
              
              $
              64,323
              
              $
              8,288
              
              
              12.9
              %Cost
                  of revenues
              
              
              58,268
              
              
              45,005
              
              
              13,263
              
              
              29.5Gross
                  profit
              
              
              14,343
              
              
              19,318
              
              
              (4,975
              )
              
              (25.8
              )Operation
                  expenses:Research
                  and development costs
              
              
              1,565
              
              
              959
              
              
              606
              
              
              63.2Sales
                  and marketing expenses
              
              
              2,107
              
              
              2,501
              
              
              (394
              )
              
              (15.8
              )General
                  and administrative expenses
              
              
              5,113
              
              
              4,188
              
              
              925
              
              
              22.0Total
                  operating expenses
              
              
              8,785
              
              
              7,648
              
              
              1,137
              
              
              14.9Operating
                  income
              
              
              5,558
              
              
              11,670
              
              
              (6,112
              )
              
              (52.4
              )Finance
                  costs, net
              
              
              2,065
              
              
              696
              
              
              1,369
              
              
              196.7Other
                  expenses / (income)
              
              
              (692
              )
              
              38
              
              
              (730
              )
              
              (1,921.0
              )Gain
                  on trading securities
              
              
              
              
              
              (279
              )
              
              279
              
              
              100.0Income
                  taxes
              
              
              163
              
              
              469
              
              
              (306
              )
              
              (65.2
              )Net
                  income
              
              $
              4,022
              
              $
              10,746
              
              $
              (6,724
              )
              
              (62.6
              )%
  *Net
        Revenues* . 
        Net revenues increased to $72.6 million for the six months ended March 31,
        2007,
        as compared to $64.3 million for same period of the prior fiscal year, an
        increase of $8.3 million or 12.9%.
  —
              Net
                  revenues from the sales of steel-case cells decreased to $22.6
                  million in
                  the six months ended March 31, 2007, from $33.3 million in the
                  same period
                  in fiscal 2006, a decrease of $10.7 million or 32.0%, due to a
                  decrease in
                  sales volume by 25.8% and a decrease in average selling price by
                  8.3%
                  primarily attributable to the pricing pressure in an increasingly
                  competitive market.
  30
  —
              Net
                  revenues from the sales of aluminum-case cells increased to $29.1
                  million
                  in the six months ended March 31, 2007, from $23.0 million in the
                  same
                  period in fiscal 2006, an increase of $6.1 million or 26.1%, due
                  to an
                  increase in sales volume by 25.8% driven by increased sales in
                  the OEM
                  market in the PRC and a slight increase in the average selling
                  price by
                  0.2%.—
              Net
                  revenues from sales of battery packs decreased to $3.7 million
                  in the six
                  months ended March 31, 2007, from $5.3 million in the same period
                  in
                  fiscal 2006, a decrease of $1.6 million or 29.6%, due to a significant
                  decrease in average selling price by 51.2%. The decrease in average
                  selling price is primarily attributable to the change of type of
                  the
                  battery packs.—
              We
                  also sold $14.3 million of high-power lithium-ion cells, $1.7 million
                  of
                  lithium polymer cells and $1.3 million of cylindrical cells in
                  the six
                  months ended March 31, 2007, compared to $2.5 million of high-power
                  lithium-ion cells, $188,000 of lithium polymer cells and $34,000
                  of
                  cylindrical cells in the same period of
                  2006.
  *Cost
        of Revenues* . 
        Cost of revenues increased to $58.3 million for the six months ended March
        31,
        2007, as compared to $45.0 million for the same period in fiscal 2006, an
        increase of $13.3 million or 29.5%. The increase in cost of revenues was
        mainly
        attributable to a significant increase in the purchase cost of lithium cobalt
        dioxide and an increase in the units of products sold.
  As
        a
        result, gross profit for the six months ended March 31, 2007, was $14.3 million
        or 19.8% of net revenues as compared to gross profit of $19.3 million or
        30.0%
        of net revenues for the same period in fiscal 2006. The decrease in gross
        profit
        as a percentage of net revenues was primarily due to a significant increase
        in
        the purchase cost of lithium cobalt dioxide.
  *Research
        and Development Costs* . 
        Research and development costs increased to $1.6 million for the six months
        ended March 31, 2007, as compared to $959,000 for the same period in fiscal
        2006. Salaries related to research increased to $526,000 from $173,000 for
        the
        same period of the prior fiscal year, an increase of $353,000, primarily
        due to
        increased average employee salaries and hiring more experienced professionals.
        Research and development material costs increased to $367,000 from $157,000
        for
        the same period of the prior fiscal year, an increase of $210,000, primarily
        as
        a result of more research projects in process during the current period.
  *Sales
        and Marketing Expenses* . 
        Sales and marketing expenses decreased to $2.1 million for the six months
        ended
        March 31, 2007, as compared to $2.5 million for the same period in fiscal
        2006,
        a decrease of $394,000 or 15.8%. Share-based compensation included in sales
        and
        marketing expenses decreased by $161,000. On December 26, 2006, we made grants
        of a total of 914,994 shares of restricted stock to the employees whose options
        had been terminated and who continued to be employed by us on December 26,
        2006,
        in order to replace the cancellation on September 22, 2006, of options to
        purchase 1,400,000 shares of stock that had been granted to those employees
        in
        May 2005. See Note 8 of the Notes to condensed interim consolidated financial
        statements for further information. Salaries decreased by $125,000 as the
        result
        of decreased headcount of sales and marketing department staffs due to the
        restructuring of certain departments. As a percentage of net revenues, sales
        and
        marketing expenses have decreased to 2.9% for the six months ended March
        31,
        2007, from 3.9% for the same period in fiscal 2006, primarily attributable
        to an
        increase in net revenue.
  *General
        and Administrative Expenses* . 
        General and administrative expenses increased to $5.1 million, or 7.0% of
        revenues, for the six months ended March 31, 2007, as compared to $4.2 million,
        or 6.6% of revenues, for the same period in fiscal 2006, an increase of $925,000
        or 22.0%. Salaries increased by $523,000 as a result of increased headcount
        of
        administrative staff due to the restructuring of certain departments.
        Depreciation charges also increased by $492,000 due to increased fixed assets.
        Bad debt expenses decreased by $1.0 million due to the better control in
        collection of accounts receivables.
  We
        are
        liable for liquidated damages to certain shareholders whose shares were included
        in a resale registration statement on Form SB-2 that we filed pursuant to
        a
        registration rights agreement that we entered into with such shareholders
        in
        September 2005. On August 15, 2006, the SEC declared effective a post-effective
        amendment that we had filed on August 4, 2006, terminating the effectiveness
        of
        a resale registration statement on Form SB-2 that had been filed pursuant
        to a
        registration rights agreement with certain shareholders to register the resale
        of shares held by those shareholders. In addition, on December 8, 2006, we
        filed
        our 2006 Form 10-K. After the filing of the 2006 Form 10-K, our previously
        filed
        registration statement on Form S-1 was no longer available for resales by
        the
        selling shareholders whose shares were included in such Form S-1. Under the
        registration rights agreement, those selling shareholders became eligible
        for
        liquidated damages relating to above two events totaling approximately $1
        million from us. We therefore recognized in general and administrative expenses
        an amount of $760,000 for the liquidated damage for the six months ended
        March
        31, 2007. There was no comparable expense in same period of fiscal
        2006.
  31
  *Operating
        Income* . 
        As a result of the above, operating income totaled $5.6 million for the six
        months ended March 31, 2007, as compared to operating income of $11.7 million
        for the same period of the prior fiscal year, a decrease of $6.1 million
        or
        52.4%. As a percentage of net revenues, operating income was 7.7% for the
        six
        months ended March 31, 2007, as compared to 18.1% for the same period of
        the
        prior fiscal year.
  *Finance
        Costs, Net* . 
        Finance costs, net, increased to $2.1 million for the six months ended March
        31,
        2007, as compared to $696,000 for the same period of the prior fiscal year,
        an
        increase of $1.4 million or 196.7%. We had $71.8 million in short term loans
        and
        $18.1 million in long term loans outstanding as of March 31, 2007, as compared
        to $42.9 million in short term loans outstanding as of March 31, 2006. The
        increase in net finance costs is also attributable to the increase in the
        borrowing of short term loans and long term loans.
  *Other
        Expenses/(Income)* . 
        Other income was $692,000 for the six months ended March 31, 2007, as compared
        to other expenses of $38,000 for the same period of fiscal 2006. Other income
        for the six months ended March 31, 2007, mainly consists of a government
        subsidy
        given as recognition of our contribution to the economic development of the
        area, partially offset by other expenses, including the value of certain
        scrap
        materials that have been discarded. No present or future obligation will
        arise
        from the receipt of such government subsidy. There was no comparable income
        in
        the same period of the prior year.
  *Gain
        on Trading Securities* . 
        We recognized income of $279,000 from BAK International’s short-term investment
        in trading securities during the six months ended March 31, 2006.  There
        was no such trading gain during the six months ended March 31,
        2007.
  *Income
        tax expenses* . 
        Income tax expenses decreased to $163,000 for the six months ended March
        31,
        2007, as compared to $469,000 for the same period of fiscal 2006. The decrease
        was the result of a decrease in net income.
  *Net
        Income* . 
        As a result of the foregoing, we decreased our net income to $4.0 million
        for
        the six months ended March 31, 2007, from $10.7 million for the same period
        of
        the prior fiscal year.
  **Liquidity
        and Capital Resources**
  We
        have
        historically financed our liquidity requirements from a variety of sources,
        including short-term bank loans and bills payable under bank credit agreements,
        long term bank loans, sale of bills receivable and issuance of capital stock.
        As
        of March 31, 2007, we had cash and cash equivalents of $14.8 million, as
        compared to $21.1 million as of September 30, 2006. In addition, we had pledged
        deposits amounting to $9.1 million and $13.0 million at March 31, 2007 and
        September 30, 2006, respectively. Typically, banks will require borrowers
        to
        maintain deposits of approximately 20% to 100% of the outstanding loan balances
        and bills payable. The individual short term bank loans have maturities ranging
        from six to twelve months which coincides with the periods the cash remains
        pledged to the banks.
  The
        following table sets forth a summary of our cash flows for the periods
        indicated:
  **Six
                  Months Ended March 31,****2007**
              
              
              **2006****(in
                  thousands)**Net
                  cash (used in) / provided by operating activities
              
              
              5,350
              
              
              (7,991
              )Net
                  cash used in investing activities
              
              
              (36,556
              )
              
              (14,965
              )Net
                  cash (used in) / provided by financing activities
              
              
              24,507
              
              
              (2,215
              )Effect
                  of exchange rate changes on cash and cash equivalents
              
              
              439
              
              
              38Net
                  decrease in cash and cash equivalent
              
              
              (6,260
              )
              
              (25,133
              )Cash
                  and cash equivalents at the beginning of period
              
              
              21,100
              
              
              33,056Cash
                  and cash equivalents at the end of period
              
              
              14,840
              
              
              7,923
  32
  **Operating
        Activities**
  Net
        cash
        provided by operating activities was $5.4 million in the six months ended
        March
        31, 2007, compared to net cash used in operating activities of $8.0 million
        in
        the same period in fiscal 2006. The improvement by $13.3 million in operating
        activities was mainly attributable to the better control in collection of
        trade
        accounts receivable and inventory management.
  **Investing
        Activities**
  Net
        cash
        used in investing activities increased from $15.0 million in the six months
        ended March 31, 2006, to $36.6 million in the same period in fiscal 2007. 
The net cash used in investing activities during the period ended March 31,
        2007, was mainly used for purchase of equipments for a new automated cylindrical
        cell production line and a new automated prismatic cell production line and
        a
        lease prepayment in Tianjin.
  **Financing
        Activities**
  Net
        cash
        provided by financing activities was $24.5 million in the six months ended
        March
        31, 2007, compared to net cash used in finance activities of $2.2 million
        in the
        same period in fiscal 2006. This was mainly attributable to (i) a $17.0 million
        increase in net proceeds from borrowing due to more loans being secured for
        working capital and construction of new production line in the six months
        ended
        March 31, 2007, and (ii) $10.0 million decrease in cash deposited to bank
        as
        collateral in the six months ended March 31, 2007.
  As
        of
        March 31, 2007, the principal outstanding under our credit facilities and
        lines
        of credit were as follows:
  **Maximum**
                **Amount**
                **Available**
              
              
              **Amount**
                **Borrowed****(in
                  thousands)****Short-term
                  credit facilities:**Agricultural
                  Bank of China
              
              $
              30,838
              
              $
              30,838Shenzhen
                  Development Bank
              
              
              19,394
              
              
              12,930Shenzhnen
                  Commercial Bank
              
              
              12,930
              
              
              6,465China
                  CITIC Bank
              
              
              25,859
              
              
              -China
                  Construction Bank
              
              
              19,394
              
              
              -Bank
                  of China
              
              
              64,648
              
              
              39,051CITIC
                  Ka Wah Bank Limited
              
              
              6,000
              
              
              —Subtotal—short-term
                  credit facilities
              
              $
              179,063
              
              $
              89,284**Long-term
                  credit facilities:**Agricultural
                  Bank of China
              
              
              25,859
              
              
              5,172China
                  Development Bank
              
              
              12,930
              
              
              12,930Subtotal—long-term
                  credit facilities
              
              
              38,789
              
              
              18,102**Lines
                  of Credit:**Agricultural
                  Bank of China
              
              
              
              
              
              1,808Subtotal—lines
                  of credit
              
              
              
              
              
              1,808Total
                  Principal Outstanding
              
              
              
              
              $
              109,194
  33
  There
        are
        no restrictions for our above unused credit facilities.
  The
        above
        principal outstanding amounts under credit facilities included short-term
        bank
        loans of $71.8 million, bills payable of $19.3 million and long-term bank
        loans
        of $18.1 million.
  For
        the
        purpose of presentation, the movement in bills payable balances is included
        in
        operating activities and in investing activities in the statements of cash
        flows
        due to their nature.
  We
        refinanced our short-term bank loans during the three months ended March
        31,
        2007 at annual interest rates of 4.725% to 5.85%, payable monthly, and for
        terms
        of six to twelve months. These debt arrangements are generally guaranteed
        by Mr.
        Li Xiangqian, our chairman, president, and chief executive officer.
  Pursuant
        to the refinancing, we pledged $10.3 million of inventory and $18.9 million
        of
        equipment and machinery as security for our comprehensive credit facility
        with
        Agricultural Bank of China and Shenzhen Development Bank as of March 31,
        2007.
  During
          the three months ended March 31, 2007, we repaid thirteen short-term bank
          loans
          totaling $33.0 million, and entered into three new short-term bank loan
          agreements totaling $33.0 million. The three new short-term bank loan agreements
          provide for monthly interest payments at annual interest rates from 5.022%
          to
          5.85%, with principal repayments at maturities during the second half of
          2007
          and the first calendar quarter of 2008.
  During
        the three months ended March 31, 2007, we renewed two of our short-term credit
        facilities. On February 14, 2007, Shenzhen BAK renewed the Comprehensive
        Credit
        Facility Agreement of Maximum Amount with Dapeng Branch, China Construction
        Bank. We may borrow up to RMB 150 million ($19.4 million) under this
        Comprehensive Credit Facility Agreement, which will expire on February 14,
        2008.
        As of March 31, 2007, we had no borrowings under this Comprehensive Credit
        Facility Agreement. On March 14, 2007, Shenzhen BAK renewed the Comprehensive
        Credit Facility Agreement of Maximum Amount with Shenzhen Branch, China CITIC
        Bank. We may borrow up to RMB 200 million ($25.9 million) under this
        Comprehensive Credit Facility Agreement, which will expire on March 14, 2008.
        As
        of March 31, 2007, we had no borrowings under this Comprehensive Credit Facility
        Agreement.
  On
        November 23, 2006, Shenzhen BAK entered into a $26 million long-term loan
        agreement with Shenzhen Eastern Branch, Agricultural Bank of China, which
        became
        effective on December 18, 2006. The long-term loan may be drawn at any time
        within five years of the effective date of the loan agreement, and will mature
        in five years after it is drawn. The long-term loan when drawn will carry
        a
        floating interest rate of 90% of the People’s Bank of China benchmark rate. The
        long-term loan is secured by pledged machinery and equipment valued at $13.4
        million as of March 31, 2007. Shenzhen BAK’s obligations under the loan
        agreement are guaranteed by BAK International and by Mr. Li Xiangqian. As
        of
        March 31, 2007, we had borrowed $5.2 million under this loan
        agreement.
  On
        December 26, 2006, Shenzhen BAK entered into a four-year long-term loan
        agreement of $12.8 million with Shenzhen Branch, China Development Bank.
        The
        long-term loan is payable in three installments as follows:
  RMB
        30
        million on November 20, 2008;
  RMB
        30
        million on November 20, 2009; and
  RMB
        40
        million on December 26, 2010.
  The
        long-term loan carries an annual interest rate equal to the benchmark rate
        of
        the People’s Bank of China for three- to five-year long-term loans, which is
        currently 6.48% per annum. The long-term loan is secured by Shenzhen BAK’s
        pledge of its new Research and Development Test Center, which is to be
        constructed in Shenzhen, China, after Shenzhen BAK obtains the required land
        use
        rights for the location of the facility; such land use rights will also be
        pledged as security. The obligations of Shenzhen BAK under the loan agreement
        are guaranteed by Mr. Li. We borrowed the full $12.9 million under this loan
        agreement on December 27, 2006.
  34
  We
        had a
        working capital (refer to current assets less current liabilities excluding
        share-based payment liabilities) surplus of $2.4 million as of March 31,
        2007,
        as compared to $4.8 million as of September 30, 2006, a decrease of $2.4
        million. This decrease was primarily attributable to the $4.5 million increase
        in accounts payable to purchase more raw materials. We had short-term bank
        loans
        maturing in less than one year of $71.8 million as of March 31, 2007, as
        compared to $67.9 million as of September 30, 2006, an increase of $3.9
        million.
  We
        believe that our current cash and cash equivalents and anticipated cash flow
        from operations will be sufficient to meet our anticipated cash needs, including
        our cash needs for working capital and capital expenditures for at least
        the
        next 12 months. We may, however, require additional cash due to changing
        business conditions or other future developments, including any investments
        or
        acquisitions we may decide to pursue. If our existing cash and amount available
        under existing credit facilities is insufficient to meet our requirements,
        we
        may seek to sell debt securities or borrow from lending institutions. We
        can
        make no assurances that financing will be available in the amounts we need
        or on
        terms acceptable to us, if at all. The sale of additional equity securities,
        including convertible debt securities, would dilute our shareholders. The
        incurrence of debt would divert cash for working capital and capital
        expenditures to service debt obligations and could result in operating and
        financial covenants that restrict our operations and our ability to pay
        dividends to our shareholders. If we are unable to obtain additional equity
        or
        debt financing as required, our business operations and prospects may
        suffer.
  **Capital
        Expenditures**
  We
        made
        capital expenditures of $36.6 million and $15.0 million in the six months
        ended
        March 31, 2007 and 2006, respectively. Our capital expenditures were used
        primarily to purchase plant and equipment to expand our production capacity
        and
        to make a lease prepayment. The table below sets forth the breakdown of our
        capital expenditures by use for the periods indicated.
  **Six
                    Months Ended March 31,****2007**
                
                
                **2006****(in
                    thousands)**Construction
                    costs
                
                $
                10,144
                
                $
                3,603Lease
                    prepayment
                
                $
                13,664
                
                $
                —Purchase
                    of equipment
                
                $
                12,748
                
                $
                11,360Total
                    capital expenditures
                
                $
                36,556
                
                $
                14,963
  We
        estimate that our total capital expenditures in fiscal 2007 will reach
        approximately $55.0 million, primarily to purchase manufacturing equipment
        for
        the expansion of our production lines.
  We
        have
        completed the construction of 185,993 square meters of new facilities comprised
        of manufacturing facilities, warehousing and packaging facilities, dormitory
        space and administrative offices at the BAK Industrial Park. Of that space,
        approximately 111,000 square meters are new manufacturing facilities. We
        have
        completed construction and put into use an additional administrative area,
        production facility, four manufacturing facilities, a warehouse and packaging
        facility, three dormitories and two dining halls. At present, we have no
        significant payment obligations related to these facilities.
  We
        do not
        hold the land use right to the tract of property on which we have constructed
        our manufacturing facilities and other related facilities. According to the
        relevant PRC laws and regulations, a land use right certificate, along with
        government approvals for land planning, project planning, and construction
        must
        be obtained before the construction of any building is commenced. An ownership
        certificate will be granted by the government upon application under the
        condition that the aforementioned certificate and government approvals are
        obtained.
  We
        are
        constructing and have completed part of the construction of our facilities
        with
        the approval of the local government of Kuichong Township of Longgang District
        of Shenzhen, which we understand does not have the authority to grant us
        the
        land use rights certificate. Under our agreement with the Kuichong Township
        government, we have to pay for a 50-year land use rights certificate at an
        agreed unit price, which in the aggregate amounted to $4.0 million as of
        September 30, 2004 and $3.3 million as of September 30, 2006, following an
        adjustment of the site area after a land survey. Out of the $3.3 million,
        $0.3
        million has been paid to the Kuichong Township government. The Shenzhen
        municipal government has approved the grant of a land use rights certificate,
        which we are currently in the process of obtaining. In the meantime, we have
        recognized a net payable purchase price of $3.0 million for the land use
        rights
        on the assumption that it will be on the same terms as those agreed with
        the
        Kuichong Township government.
  35
  As
        of
        March 31, 2007, we had fully paid the lease prepayment of amount $13.7 million
        for acquisition of land use rights in Tianjin and the application of land
        use
        rights certificate was in process.
  The
        following table sets forth our contractual obligations and commercial
        commitments as of March 31, 2007:
  **Payment
                  Due by Period****Total**
              
              
              **Less than
                  1 Year**
              
              
              **1-3
                  Years**
              
              
              **3-5
                  Years**
              
              
              **More than
                  5 Years****(in
                  thousands)**Short-term
                  bank loans
              
              
              71,759
              
              
              71,759
              
              
              -
              
              
              -
              
              
              -Bills
                  payable
              
              
              19,333
              
              
              19,333
              
              
              -
              
              
              -
              
              
              -Long-term
                  bank loans
              
              
              18,101
              
              
              -
              
              
              7,758
              
              
              10,343
              
              
              -Land
                  use rights payable
              
              
              3,100
              
              
              3,100Capital
                  commitments
              
              
              18,820
              
              
              18,820
              
              
              -
              
              
              -
              
              
              -Future
                  interest payment on short-term bank loans
              
              
              1,187
              
              
              1,187
              
              
              -
              
              
              -
              
              
              -Future
                  interest payment on long-term bank loans
              
              
              4,046
              
              
              1,227
              
              
              1,814
              
              
              1,005
              
              
              -Total
              
              
              136,346
              
              
              115,426
              
              
              9,572
              
              
              11,348
              
              
              -
  Other
        than the contractual obligations and commercial commitments set forth above,
        we
        did not have any other long-term debt obligations, operating lease obligations,
        capital commitments, purchase obligations or other long-term liabilities
        as of
        March 31, 2007.
  **Off-Balance
        Sheet Transactions**
  In
        the
        ordinary course of business practices in China, we enter into transactions
        with
        banks or other lenders where we guarantee the debt of other parties. These
        parties may be related to or unrelated to us. Conversely, our debt with lenders
        may also be guaranteed by other parties which may be related or unrelated
        to
        us.
  Under
        U.S. GAAP, these transactions may not be recorded on our balance sheet or
        may be
        recorded in amounts different than the full contract or notional amount of
        the
        transaction. Our primary off balance sheet arrangements would result from
        our
        loan guaranties in which Shenzhen BAK would provide contractual assurance
        of the
        debt, or guarantee the timely re-payment of principal and interest of the
        guaranteed party.
  Typically,
        no fees are received for this service. Thus in those transactions, Shenzhen
        BAK
        would have a contingent obligation related to the guarantee of payment in
        the
        event the underlying loan is in default.
  Transactions
        described above require accounting treatment under FASB Interpretation 45,
        Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including
        Indirect Guarantees of Indebtedness of Others, or FIN 45. Under that standard,
        we would be required to recognize the fair value of guarantees issued or
        modified after December 31, 2002 for non-contingent guarantee obligations,
        and
        also a liability for contingent guarantee obligations based on the probability
        that the guaranteed party will not perform under the contractual terms of
        the
        guaranty agreement.
  We
        have
        assessed the liabilities arising from these guarantees and considered they
        are
        immaterial to the consolidated financial statements. Therefore, no liabilities
        in respect of the guarantees were recognized as of March 31, 2007. We had
        guaranteed the timely re-payment of principal and interest of two parties
        to a
        bank. The maximum amount of our exposure for those guarantees was $3.9 million
        at both March 31, 2007 and September 30, 2006.
  36
  **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 September
        30,
        2006 and March 31, 2007, the carrying amount of property, plant and equipment,
        net was $109.4 million and $123.8 million, respectively. We assess the
        recoverability of property, plant and equipment to be held and used by a
        comparison of the carrying amount of an asset or group of assets to the future
        net undiscounted cash flows expected to be generated by the asset or group
        of
        assets. If such assets are considered impaired, the impairment recognized
        is
        measured as the amount by which the carrying amount of the assets exceeds
        the
        fair value of the assets.
  A
        prolonged general economic downturn and, specifically, a continued downturn
        in
        the battery cell industry as well as other market factors could intensify
        competitive pricing pressure, create an imbalance of industry supply and
        demand,
        or otherwise diminish volumes or profits. Such events, combined with changes
        in
        interest rates, could adversely affect our estimates of future net cash flows
        to
        be generated by our long-lived assets. Consequently, it is possible that
        our
        future operating results could be materially and adversely affected by
        additional impairment charges related to the recoverability of our long-lived
        assets.
  ***Inventory
        Obsolescence***
  We
        review
        our inventory for potential impairment on a quarterly or more frequent basis
        as
        deemed necessary. Such review includes, but is not limited to, reviewing
        the
        levels of inventory versus customer requirements and obsolescence. The review
        and evaluation also considers the potential sale of impaired inventory at
        lower
        than market prices. At each balance sheet date, we identify inventories that
        are
        worth less than cost and write them down to their net realizable value and
        the
        difference is charged to our cost of revenues of that period. Though management
        considers such write-down of inventories adequate and proper, changes in
        sales
        volumes due to unexpected economic or competitive conditions are among the
        factors that could materially affect the adequacy of such write
        down.
  ***Allowance
        for Doubtful Accounts***
  The
        allowance for doubtful accounts is our best estimate of the amount of probable
        credit losses in our accounts receivable. We determine the allowance based
        on
        historical write-off experience, customer specific facts and economic
        conditions. Bad debt expense is included in the general and administrative
        expenses. We review outstanding account balances individually for
        collectibility. Account balances are charged off against the allowance after
        all
        means of collection have been exhausted and the potential for recovery is
        considered remote. As of September 30, 2006 and March 31, 2007, we had not
        charged off any balances as we had yet to exhaust all means of
        collection.
  ***Stock-Based
        Compensation***
  We
        have
        adopted the alternate intrinsic value method recognition provision of SFAS
        123.
        Pursuant to the requirements of SFAS 123, we have disclosed in our annual
        financial statements for the year ended September 30, 2005 the pro forma
        effect
        of application of the preferred fair value method recognition provision.
        Further, effective October 1, 2005, we adopted the provisions of SFAS 123R,
        which requires the use of the fair value method of accounting for share-based
        compensation. Under the fair value based method, compensation cost related
        to
        employee stock options or similar equity instruments is measured at the grant
        date based on the value of the award and is recognized over the service period,
        which is usually the vesting period. SFAS 123R also requires measurement
        of cost
        of a liability- classified award based on its current fair value. The fair
        value
        of the liability-classified award will be subsequently remeasured at each
        reporting date through the settlement date. Change in fair value during the
        requisite service period will be recognized as compensation cost over that
        period.
  37
  We
        determine fair value using the Black-Scholes model. Under this model, certain
        assumptions, including the risk-free interest rate, the expected life of
        the
        options and the estimated fair value of our ordinary shares and the expected
        volatility, are required to determine the fair value of the options. If
        different assumptions had been used, the fair value of the options would
        have
        been different from the amount we computed and recorded, which would have
        resulted in either an increase or decrease in the compensation
        expense.
  Pursuant
        to SFAS 123R, we have recognized compensation costs of $868,000 in relation
        to
        stock-based award to our employees and non-employee directors in the six
        months
        ended March 31, 2007 as an increase in the operating costs.
  **Changes
        in Accounting Standards**
  In
          July
          2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes an
          Interpretation of FASB Statement No. 109,” or FIN 48, which clarifies the
          accounting for uncertainty in tax positions. This Interpretation requires
          that
          we recognize in our consolidated financial statements the impact of a tax
          position if that position is more likely than not of being sustained on
          audit,
          based on the technical merits of the position. The provisions of FIN
          48 become effective for us on October
          1, 2007, with the cumulative effect of the change in accounting principle,
          if
          any, recorded as an adjustment to opening retained earnings. We
          are
          currently evaluating the impact of adoption of FIN 48 on our consolidated
          financial statements.
  In
        September 2006, the FASB issued SFAS 157, “Fair Value Measurements,” or SFAS
        157, which defines fair value, establishes a framework for measuring fair
        value
        in U.S. GAAP, and expands disclosures about fair value measurements. SFAS
        157
        applies under other accounting pronouncements that require or permit fair
        value
        measurements, where fair value is the relevant measurement attribute. The
        standard does not require any new fair value measurements. SFAS 157 is effective
        for financial statements issued for fiscal years beginning after November
        15,
        2007, and interim periods within those fiscal years. We are currently evaluating
        the impact of adopting SFAS 157 on its consolidated financial
        statements.
  In
          February 2007, FASB issued SFAS 159, “The Fair Value Option for Financial Assets
          and Financial Liabilities - Including an Amendment of FASB Statement No.
          115.”
SFAS 159 permits entities to choose to measure many financial instruments
          and
          certain other items at fair value. Entities that elect the fair value option
          will report unrealized gains and losses in earnings at each subsequent
          reporting
          date. The fair value option may be elected on an instrument-by-instrument
          basis,
          with a few exceptions. SFAS 159 also establishes presentation and disclosure
          requirements to facilitate comparisons between entities that choose different
          measurement attributes for similar assets and liabilities. The requirements
          of
          SFAS 159 are effective for our fiscal year beginning on October 1, 2008.
          Our
          management is in the process of evaluating this guidance and therefore
          has not
          yet determined the impact that SFAS 159 will have on the Company’s financial
          statements upon adoption.
  In
        September 2006, the SEC issued SAB No. 108, which provides guidance on the
        process of quantifying financial statement misstatements. In SAB No. 108,
        the
        SEC staff establishes an approach that requires quantification of financial
        statement errors, under both the iron-curtain and the roll-over methods,
        based
        on the effects of the error on each of our financial statements and the related
        financial statement disclosures. SAB No. 108 is generally effective for annual
        financial statements in the first fiscal year ending after November 15, 2006.
        The transition provisions of SAB No. 108 permits existing public companies
        to
        record the cumulative effect in the first year ending after November 15,
        2006 by
        recording correcting adjustments to the carrying values of assets and
        liabilities as of the beginning of that year with the offsetting adjustment
        recorded to the opening balance of retained earnings. We do not expect that
        the
        adoption of SAB No. 108 would have a material effect on our consolidated
        financial statements.
  **Exchange
        Rates**
  The
        financial records of Shenzhen BAK and BAK Electronics are maintained in
        Renminbi. In order to prepare our financial statements, we have translated
        amounts in Renminbi into amounts in U.S. dollars. The amounts of our assets
        and
        liabilities on our balance sheets are translated using the closing exchange
        rate
        as of the date of the balance sheet. Revenues, expenses, gains and losses
        are
        translated using the average exchange rate prevailing during the period covered
        by such financial statements. Adjustments resulting from the translation,
        if
        any, are included in our cumulative other comprehensive income (loss) in
        our
        stockholders’ equity section of our balance sheet. All other amounts that were
        originally booked in Renminbi and translated into U.S. dollars, were translated
        using the closing exchange rate on the date of recognition. Consequently,
        the
        exchange rates at which the amounts in those comparisons were computed varied
        from year to year.
  38
  The
        exchange rates used to translate amounts in Renminbi into U.S. dollars in
        connection with the preparation of our financial statements were as
        follows:
  **RMB
                  per U.S. Dollar****2007**
              
              
              **2006**Balance
                  sheet items as of March 31
              
              
              7.7342
              
              
              7.8087Amounts
                  included in the statement of income and comprehensive income, statement
                  of
                  changes in stockholders’ equity and statement of cash flows for the years
                  ended September 30
              
              
              7.7612
              
              
              7.8647Balance
                  sheet items as of September 30
              
              
              N/A
              
              
              7.9087
  Renminbi
        is not readily convertible into U.S. dollars in the foreign exchange markets.
        The foreign exchange rate between the RMB and the U.S. dollar had been stable
        at
        approximately RMB 8.28 to $1.00 for the last few years. On July 21, 2005,
        the
        Central Bank of China announced that it would allow the RMB to move to a
        flexible exchange rate with a maximum daily variance against the U.S. dollar
        of
        0.3%. No provision has been made in the accompanying financial statements
        for
        the change in currency policy, nor has any determination been made, as to
        the
        potential impact, this may have on our future operations. As a result, the
        stated exchange rates may not accurately reflect the amount in U.S. dollars
        into
        which RMB could be actually converted at the date or during the periods
        reflected in the foregoing table.
  **Item
        3.  Quantitative and Qualitative Disclosures About Market
        Risk**
  **Interest
        Rate Risk**
  We
        are
        exposed to interest rate risk primarily with respect to our short-term bank
        loans and long-term bank loans. Although the interest rates, which are based
        on
        the banks’ prime rates with respect to our short-term loans are fixed for the
        terms of the loans, the terms are typically six to twelve months for short-term
        bank loans and interest rates are subject to change upon renewal. There were
        no
        material changes in interest rates for short-term bank loans renewed during
        the
        three and six months ended March 31, 2007.
  We
        have a
        long term bank loan of $12.9 million maturing on December 26, 2010 with three
        installments payable under which we have outstanding borrowings; the interest
        rate we pay on this long term loan is benchmark rate of the People’s Bank of
        China for three- to five- year long-term loans. In addition, we have a RMB
        200
        million (approximately $26 million) long-term loan agreement with Shenzhen
        Eastern Branch, Agricultural Bank of China, which became effective on December
        18, 2006. The long-term loan may be drawn at any time within five years from
        the
        effective date of the agreement and will mature five years after it is drawn.
        The term loan, when drawn, will carry a floating interest rate of 90% of
        The
        People’s Bank of China benchmark rate. As of March 31, 2007, we had borrowed of
        $5.2 million under this loan agreement, which is payable on January 25,
        2012.
  A
        hypothetical 1.0% increase in the annual interest rates for all of our credit
        facilities under which we had outstanding borrowings at March 31, 2007, would
        decrease net income before provision for income taxes by $449,303 or 10.7%
        for
        the six months ended March 31, 2007. Management monitors the banks’ prime rates
        in conjunction with our cash requirements to determine the appropriate level
        of
        debt balances relative to other sources of funds. We have not entered into
        any
        hedging transactions in an effort to reduce our exposure to interest rate
        risk.
  39
  **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 66.7% of our revenues and 94.0% of
        our
        costs and expenses for the six months ended March 31, 2007 are denominated
        in
        RMB, with the balance denominated in U.S. dollars. Approximately 98.0% of
        our
        assets except for cash were denominated in RMB as of March 31, 2007. As a
        result, we are exposed to foreign exchange risk as our revenues and results
        of
        operations may be affected by fluctuations in the exchange rate between U.S.
        dollars and RMB. If the RMB depreciates against the U.S. dollar, the value
        of
        our RMB revenues, earnings and assets as expressed in our U.S. dollar financial
        statements will decline. Assets and liabilities of our operating subsidiaries
        are translated into U.S. dollars at the exchange rate at the balance sheet
        date,
        their equity accounts are translated at historical exchange rate and their
        income and expenses items are translated using the average rate for the period.
        Any resulting exchange differences are recorded in accumulated other
        comprehensive income or loss. An average appreciation (depreciation) of the
        RMB
        against the U.S. dollar of 5% would increase (decrease) our comprehensive
        income
        by $5.9 million based on our outstanding revenues, costs and expenses, assets
        and liabilities denominated in RMB as of March 31, 2007. As of March 31,
        2007,
        our accumulated other comprehensive income was $6.1 million. We have not
        entered
        into any hedging transactions in an effort to reduce our exposure to foreign
        exchange risk.
  **Item 4. 
        Controls and Procedures.**
  ***Disclosure
        Controls and Procedures***
  As
        required by Rule 13a-15 under the Securities Exchange Act, our management
        has
        carried out an evaluation, with the participation and under the supervision
        of
        our chief executive officer and chief financial officer, of the effectiveness
        of
        the design and operation of our disclosure controls and procedures as of
        March
        31, 2007. Disclosure controls and procedures refer to controls and other
        procedures designed to ensure that information required to be disclosed in
        the
        reports we file or submit under the Securities Exchange Act is recorded,
        processed, summarized and reported within the time periods specified in the
        rules and forms of the SEC and that such information is accumulated and
        communicated to our management, including our chief executive officer and
        chief
        financial officer, as appropriate, to allow timely decisions regarding required
        disclosure. In designing and evaluating our disclosure controls and procedures,
        management recognizes that any controls and procedures, no matter how well
        designed and operated, can provide only reasonable assurance of achieving
        the
        desired control objectives, and management is required to apply its judgment
        in
        evaluating and implementing possible controls and procedures.
  Management
        conducted its evaluation of disclosure controls and procedures under the
        supervision of our chief executive officer and our chief financial officer.
        Based upon, and as of the date of this evaluation, our chief executive officer
        and chief financial officer, concluded that our disclosure controls and
        procedures were not effective, because of the material weaknesses described
        in
        Item 9A. “Controls and Procedures” of the Company’s Annual Report on Form 10-K
        for the fiscal year ended September 30, 2006 (the “2006 Form 10-K”). Management
        believes that appropriate measures have been implemented to remediate these
        weaknesses, although some measures have not yet been in place long enough
        to be
        adequately tested. Investors are directed to Item 9A of the 2006 Form 10-K
        for
        the description of these weaknesses.
  **Remediation
        Measures of Material Weaknesses**
  To
        remediate the first five material weaknesses reported in Item 9A. “Controls and
        Procedures — Management’s Report on Internal Control over Financial Reporting”
in our 2006 Form 10-K, we have implemented the measures described below.
        We will
        continue to evaluate the effectiveness of such measures, and may in the future
        implement additional measures, as necessary, to remediate such
        weaknesses.
  1.  We
        hired and trained personnel to ensure that we will have sufficient personnel
        with knowledge, experience and training in the application of U.S. GAAP
        commensurate with our financial reporting requirements. These measures include
        the following:
  —
              We
                  hired a U.S. accountant in May 2006 with relevant accounting experience,
                  skills and knowledge in the preparation of financial statements
                  under the
                  requirements of U.S. GAAP and financial reporting disclosure under
                  the
                  requirement of SEC rules;
  —
              We
                  trained our accounting personnel in the application of U.S. GAAP
                  commensurate with our financial reporting requirements, which include:
                  (a)
                  basic accounting personnel participated in training programs concerning
                  general accounting policies and principles provided by the governmental
                  agencies and professional accounting firms; (b) key accounting
                  personnel,
                  including the U.S. accountant, finance manager, finance controller
                  and
                  chief financial officer, participated in special training programs
                  (in
                  addition to the training of general accounting policies and principles
                  described in item i) above) provided by professional accounting
                  firms
                  retained by us concerning the difference between U.S. GAAP and
                  the
                  accounting principles generally accepted in the People’s Republic of
                  China, SEC rules, recent developments in accounting policies, with
                  particular attention to the areas where errors in the preparation
                  and
                  disclosure of our financial statements were previously
                  identified.
  40
  2.  We
        engaged outside consultants, with relevant accounting experience, skills
        and
        knowledge, working under the supervision and direction of our management,
        to
        supplement our existing accounting personnel on U.S. GAAP; and
  3.  We
        retained and intend to continue to retain the services of outside U.S.
        counselors to advise us on the SEC disclosure requirements.
  During
        fiscal 2006 and the first half of fiscal 2007, management implemented the
        above
        measures, which were designed to remediate the first five material weaknesses
        described in Item 9A. “Controls and Procedures — Management’s Report on Internal
        Control over Financial Reporting” in our 2006 Form 10-K. However, such measures
        have not yet been in place long enough to be adequately tested. Following
        the
        completion of testing, management will evaluate whether the material weaknesses
        have been successfully remediated.
  To
        remediate the last two material weaknesses described in Item 9A. “Controls and
        Procedures — Management’s Report on Internal Control over Financial Reporting”
in our 2006 Form 10-K, we have implemented the measures described below.
        We will
        continue to evaluate the effectiveness of such measures, and may in the future
        implement additional measures, as necessary, to remediate such
        weaknesses.
  4.  We
        implemented procedures to ensure construction in progress projects are recorded
        based on the expenditures actually incurred on a quarterly basis and are
        reviewed accordingly, including:
  —
              Engaging
                  an independent construction surveyor company to supervise the progress
                  of
                  the construction projects and report the expenditures actually
                  incurred in
                  the form of project progress reports to us on a quarterly
                  basis;
  —
              Requiring
                  our construction manager of the Company to review and approve the
                  project
                  progress reports and the finance department records construction
                  in
                  progress based on the approved project progress reports on a quarterly
                  basis; and
  —
              Requiring
                  the finance manager to review the accounting entry as well as the
                  approved
                  project progress reports.
  5.  We
        implemented procedures to ensure construction in progress is transferred
        to
        property, plant, and equipment in order to commence depreciation of the asset
        when it is ready for intended use and is reviewed accordingly,
        including:
  —
              Finance
                  department transfers construction in progress to cost of property,
                  plant
                  and equipment when it is ready for its intended use, at which time
                  depreciation charges commence thereon; the criteria used to determine
                  when
                  an asset is ready for intended use are based on policies that are
                  consistent with U.S. GAAP;
  —
              Independent
                  construction surveyors are retained to assist management in the
                  determination of readiness for construction projects that meet
                  certain
                  minimum criteria;
  —
              Finance
                  manager reviews the accounting entry and time of transfer;
                  and
  41
  —
              Estimated
                  unbilled costs and costs to complete assets that have been determined
                  to
                  be ready for their intended use are based on relevant historical
                  cost and
                  budget information by authorized personnel within the finance
                  department.
  Management
        successfully completed implementation of these measures during fiscal year
        2006
        and the first quarter of fiscal year 2007 and believes that the implementation
        of such measures, which were designed to remediate those two material weakness,
        will provide sufficient basis to conclude as to the absence of these material
        weaknesses at such time that formal testing as completed. As such testing
        of the
        operation of the implemented measures has been completed as of March 31,
        2007, we had sufficient evidence to conclude that the material weaknesses
        had
        been successfully remediated.
  We
        believe that we are taking the steps necessary for remediation of the remaining
        material weaknesses identified above, and we will continue to monitor the
        effectiveness of these steps and to make any changes that our management
        deems
        appropriate.
  ***Changes
        in Internal Controls over Financial Reporting***
  Other
        than the remediation measures described above, there were no changes in our
        internal controls over financial reporting after March 31, 2007 that have
        materially affected, or are reasonably likely to materially affect our internal
        control over financial reporting.
  **PART
        II — OTHER INFORMATION**
  **Item 1. 
        Legal Proceedings.**
  Except
        as
        described below, we are not a party to any legal proceedings, nor are we
        aware
        of any threatened or contemplated proceedings which are expected to result
        in a
        material adverse effect on our business financial position, or result of
        operation.
  *Patent
        Litigation* .
        On
        September 12, 2006, Hydro-Quebec, a Canadian company, and the Board of Regents
        of the University of Texas System brought a federal patent infringement suit
        in
        the United States District Court for the Northern District of Texas against
        us.
        We have an agreement with A123Systems, Inc., under which we agree to manufacture
        products for A123Systems, Inc. according to the specifications furnished
        by, and
        using the finished electrodes and other materials consigned by, A123Systems,
        Inc. to us. The plaintiffs alleged that by manufacturing rechargeable lithium
        cells for one of our customers, A123Systems, Inc., for use in DeWalt 36-volt
        cordless power tools manufactured by Black & Decker Corporation, we had
        infringed two U.S. patents owned by and exclusively licensed to the plaintiffs.
        The plaintiffs seek injunctive relief and damages in an unspecified amount.
        If
        the court issues an adverse decision, we may be required to pay the plaintiffs
        substantial monetary damages, terminate our existing production of rechargeable
        lithium cells manufactured for A123Systems, Inc., or pay royalties to continue
        such production. The court has not yet issued a decision on this matter and
        we
        are unable to quantify the extent of any possible award of damages that might
        become payable by us.
  Furthermore,
        if A123 Systems, Inc. is found liable for the infringement, it may not be
        able
        to continue its cooperation with us at all or on terms and conditions acceptable
        to us, which in turn would adversely affect our ability to execute our strategy
        to expand our production of cells for power tools and capture high-margin
        businesses. Accordingly, our revenues and business prospects would be materially
        adversely affected.
  *Liquidated
        Damages.* We are
        liable for liquidated damages to certain shareholders whose shares were included
        in a resale registration statement on Form SB-2 that we filed pursuant to
        a
        registration rights agreement that we entered into with such shareholders
        in
        September 2005. Under the registration rights agreement, among other things,
        (a)
        if a registration statement filed pursuant thereto ceases to be effective
        after
        its effective date to cover the resale of the shares for more than 30 trading
        days or (b) if for any reason we are required to file an additional registration
        statement covering such shares, and we do not file such additional registration
        statement within 45 days after the time we first know, or reasonably should
        have
        known, that such registration statement would be required to be filed, then,
        while the relevant shares could not be put back to us, we would be liable
        to pay
        partial liquidated damages to those selling shareholders equal to 1.0% of
        the
        aggregate investment amount paid by those selling shareholders for the shares,
        and on each monthly anniversary thereafter, unless the event is cured by
        such
        date, an additional 1.5% on (except with respect to the first such event)
        a
        daily pro-rata basis.
  42
  On
        August
        15, 2006, the SEC declared effective a post-effective amendment we filed
        on
        August 4, 2006 to terminate the effectiveness of the resale registration
        statement on Form SB-2 that included the resale of the shares held by those
        selling shareholders. Accordingly, as we were no longer eligible to file
        on Form
        SB-2, we were required to file an additional registration statement within
        45
        days after the termination of the effectiveness of the Form SB-2. On October
        11,
        2006, we filed a registration statement on Form S-1 that covers resale of
        the
        shares held by those shareholders, which was declared to be effective on
        October
        19, 2006. Following the termination of the Form SB-2, our failure to file
        an
        additional registration statement within the period provided under the
        registration rights agreement triggered, for the first time, an obligation
        to
        pay liquidated damages to the selling shareholders of 1% of the aggregate
        investment amount paid by them for the shares, or $241,232, based on the
        formula
        specified in the registration rights agreement. Because the Form S-1 was
        filed
        by the one-month anniversary of the applicable filing date, the event was
        cured
        and no additional liquidated damages were incurred. We previously reported
        in
        our Annual Report on Form 10-K for the fiscal year ended September 30, 2006,
        and
        in our Quarterly Report on Form 10-Q for the quarter ended December 31, 2006,
        that liquidated damages totaling $487,946 were due from us in respect of
        such
        event based on an incorrect interpretation of the liquidated damages due
        under
        the registration rights agreement. Among other things, the amount was calculated
        on a pro rata daily basis although the event, the first under the registration
        rights agreement, was cured by its one-month anniversary date.
  In
        addition, on December 8, 2006, we filed our 2006 Form 10-K. After the filing
        of
        the 2006 Form 10-K, our previously filed registration statement on Form S-1
        was
        no longer available for resales by the selling shareholders whose shares
        were
        included in such Form S-1. A post-effective amendment to the Form S-1 covering
        resales by the selling shareholders was declared effective by the SEC on
        March
        23, 2007. Our failure to have the post effective amendment declared effective
        within the 30-trading-day time period provided under the registration rights
        agreement (i.e., by January 25, 2007), triggered, for the second time, an
        obligation to pay liquidated damages to the selling shareholders. We estimate
        that we are liable to those selling shareholders for liquidated damages related
        to this second event in the amount of approximately $810,000, such that the
        total current estimated liquidated damages relating to both events amounts
        to
        approximately $1 million.
  As
        reported in our 2006 Form 10-K and our Form 10-Q for the quarter ended December
        31, 2006, we previously recorded charges in our statement of income and
        comprehensive income of $290,575 for the year ended September 30, 2006, and
        $197,371 for the quarter ended December 31, 2006, based on the original
        incorrect interpretation of the calculation of liquidated damages. Accordingly,
        the amounts recorded in excess of $241,232 (i.e., $246,714) have been applied
        to
        offset the charge related to the liquidated damages incurred related to the
        second event in the second fiscal quarter of 2007, and we have recorded an
        additional charge in the second fiscal quarter of 2007 relating to the
        additional liquidated damages incurred of $563,000. We have assessed the
        impact
        of the foregoing on the financial statements included in our 2006 Form 10-K
        and
        our Form 10-Q for the quarter ended December 31, 2006, and have determined
        that
        the impact is not material. Accordingly, we do not intend to restate the
        financial information included in the 2006 Form 10-K or the Form 10-Q for
        the
        quarter ended December 31, 2006; however, future filings will reflect the
        foregoing information. No liquidated damages have been paid as of the filing
        date of this Report.
  **Item 1A. 
        Risk Factors.**
  See
        Item
        1A. “Risk Factors” included in our 2006 Form 10-K.
  *Implementation
        of the PRC’s new corporate income tax law may adversely affect us.* On
        March
        16, 2007, the National People’s Congress of the PRC determined to adopt a new
        corporate income tax law in its fifth plenary session. The new corporate
        income
        tax law unifies the application scope, tax rate, tax deduction and preferential
        policy for both domestic and foreign-invested enterprises. The new corporate
        income tax law will be effective on January 1, 2008. According to the new
        corporate income tax law, the applicable income tax rate for our operating
        subsidiaries is subject to change. As the implementation detail has not yet
        been
        announced, we cannot be sure of the potential impact of such new corporate
        income tax law on our financial position and operating results.
  *Changes
        in PRC property rights law may affect our interests in our properties.* The
        new
        PRC Law on Property Rights was approved by the Fifth Session of the Tenth
        National People's Congress on 16 March 2007, and will come into effect on
        1
        October 2007.  The Property Rights Law is the first piece of Mainland PRC
        legislation that comprehensively regulates the different types of rights
        which
        can be created or acquired over tangible property. We are currently evaluating
        the impact under the Property Rights Law.
  43
  **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.**
  During
        the three months ended March 31, 2007, we extended certain of our short-term
        credit facilities and guaranties thereof for an additional year. Summaries
        of
        the terms of such agreements are included as Exhibits 10.5 through 10.7 to
        this
        Report and are hereby incorporated by reference herein.
  We
        also
        renewed two of our short-term credit facilities. On February 14, 2007, Shenzhen
        BAK renewed the Comprehensive Credit Facility Agreement of Maximum Amount
        with
        Dapeng Branch, China Construction Bank. We may borrow up to RMB 150 million
        ($19.4 million) under this Comprehensive Credit Facility Agreement, which
        will
        expire on February 14, 2008. As of March 31, 2007, we had no borrowings under
        this Comprehensive Credit Facility Agreement. A summary of the terms of such
        Credit Facility is included as Exhibit 10.4 to this Report and is hereby
        incorporated by reference herein. In addition, on March 14, 2007, Shenzhen
        BAK
        renewed the Comprehensive Credit Facility Agreement of Maximum Amount with
        Shenzhen Branch, China CITIC Bank. We may borrow up to RMB 200 million ($25.9
        million) under this Comprehensive Credit Facility Agreement, which will expire
        on March 14, 2008. As of March 31, 2007, we had no borrowings under this
        Comprehensive Credit Facility Agreement. A summary of the terms of such Credit
        Facility and related guaranties are included as Exhibits 10.1 through 10.3
        to
        this Report and are hereby incorporated by reference herein.
  **Item 6. 
        Exhibits.**
  **Number**
              
              **Description**3.1
              
              Articles
                  of Incorporation of the Registrant (incorporated by reference to
                  Exhibit
                  3.1 to China BAK Battery, Inc.’s Annual Report on Form 10-K for the fiscal
                  year ended September 30, 2006).3.2
              
              Bylaws
                  of the Registrant (incorporated by reference to Exhibit 3.2 to
                  the
                  Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30,
                  2006).10.1
              
              Summary
                  of Comprehensive Credit Facility Agreement of Maximum Amount
                  (Comprehensive Agreement) entered into between Shenzhen BAK Battery
                  Co.,
                  Ltd. and Shenzhen Branch, China CITIC Bank on March 14,
                  2007.10.2
              
              Summary
                  of Guaranty Contract of Maximum Amount entered into between BAK
                  International Limited and China CITIC Bank on March 14,
                  2007.10.3
              
              Summary
                  of Guaranty Contract of Maximum Amount entered into between Xiangqian
                  Li
                  and Shenzhen Branch, China CITIC Bank on March 14, 2007.10.4
              
              Summary
                  of Comprehensive Credit Facility Agreement entered into between
                  Shenzhen
                  BAK Battery Co., Ltd and Shenzhen Branch, China Construction Bank
                  on
                  February 14, 2007.10.5
              
              Summary
                  of Guaranty Agreement of Maximum Amount entered into between BAK
                  International Limited and Shenzhen Branch, China Construction Bank
                  on
                  February 14, 2007.10.6
              
              Summary
                  of Loan Agreement by and between Shenzhen BAK Battery Co., Ltd.
                  and
                  Eastern Branch, Agricultural Bank of China dated March 5,
                  2007.
  44
  10.7
              
              Summary
                  of Loan Agreement by and between Shenzhen BAK Battery Co., Ltd.
                  and
                  Eastern Branch, Agricultural Bank of China dated January 9,
                  2007.31.1
              
              Chief
                  Executive Officer Certification furnished pursuant to Section 302
                  of the
                  Sarbanes-Oxley Act of 2002.31.2
              
              Chief
                  Financial Officer Certification furnished pursuant to Section 302
                  of the
                  Sarbanes-Oxley Act of 2002.32.1
              
              Chief
                  Executive Officer and Chief Financial Officer Certifications furnished
                  pursuant to Section 906 of the Sarbanes-Oxley Act of
                  2002.
  45
  **SIGNATURES**
  Pursuant
        to the requirements of the Securities Exchange Act of 1934, the registrant
        has
        duly caused this report to be signed on its behalf by the undersigned thereunto
        duly authorized.
 Date:
                  May 8, 2007
              CHINA
                  BAK BATTERY, INC.By:
              /s/
                  Xiangqian LiXiangqian
                  Li, Chief Executive Officer(Principal
                  Executive Officer)
 By:
              /s/
                  Yongbin HanYongbin
                  Han, Chief Financial Officer(Principal
                  Financial Officer and Principal Accounting
                  Officer)
  46
  **EXHIBITS**
  **Number**
              
              **Description**3.1
              
              Articles
                  of Incorporation of the Registrant (incorporated by reference to
                  Exhibit
                  3.1 to China BAK Battery, Inc.’s Annual Report on Form 10-K for the fiscal
                  year ended September 30, 2006).3.2
              
              Bylaws
                  of the Registrant (incorporated by reference to Exhibit 3.2 to
                  the
                  Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30,
                  2006).10.1
              
              Summary
                  of Comprehensive Credit Facility Agreement of Maximum Amount
                  (Comprehensive Agreement) entered into between Shenzhen BAK Battery
                  Co.,
                  Ltd. and Shenzhen Branch, China CITIC Bank on March 14,
                  2007.10.2
              
              Summary
                  of Guaranty Contract of Maximum Amount entered into between BAK
                  International Limited and China CITIC Bank on March 14,
                  2007.10.3
              
              Summary
                  of Guaranty Contract of Maximum Amount entered into between Xiangqian
                  Li
                  and Shenzhen Branch, China CITIC Bank on March 14, 2007.10.4
              
              Summary
                  of Comprehensive Credit Facility Agreement entered into between
                  Shenzhen
                  BAK Battery Co., Ltd and Shenzhen Branch, China Construction Bank
                  on
                  February 14, 2007.10.5
              
              Summary
                  of Guaranty Agreement of Maximum Amount entered into between BAK
                  International Limited and Shenzhen Branch, China Construction Bank
                  on
                  February 14, 2007.10.6
              
              Summary
                  of Loan Agreement by and between Shenzhen BAK Battery Co., Ltd.
                  and
                  Eastern Branch, Agricultural Bank of China dated March 5,
                  2007.10.7
              
              Summary
                  of Loan Agreement by and between Shenzhen BAK Battery Co., Ltd.
                  and
                  Eastern Branch, Agricultural Bank of China dated January 9,
                  2007.31.1
              
              Chief
                  Executive Officer Certification furnished pursuant to Section 302
                  of the
                  Sarbanes-Oxley Act of 2002.31.2
              
              Chief
                  Financial Officer Certification furnished pursuant to Section 302
                  of the
                  Sarbanes-Oxley Act of 2002.32.1
              
              Chief
                  Executive Officer and Chief Financial Officer Certifications furnished
                  pursuant to Section 906 of the Sarbanes-Oxley Act of
                  2002.