UNITED STATES 
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

x Annual Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended: September 30, 2009

 ̈ Transition Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ____________ to _____________

Commission File No. 001-32898

China BAK Battery, Inc.
(Name of registrant as specified in its charter)

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

BAK Industrial Park 
No. 1 BAK Street 
Kuichong Town, Longgang District 
Shenzhen 518119 
Peoples Republic of China 
(86-755) 8977-0093
(Address, including zip code, and telephone number, including area code, of registrants principal executive offices)

Securities registered pursuant to Section 12(b) of the Exchange Act:

|Title of each class                      | Name of each exchange on which registered         
|---------------------------------------- | --------------------------------------------------
|Common stock, par value $0.001 per share | The NASDAQ Stock Market LLC
(NASDAQ Global Market)

Securities registered pursuant to Section 12(g) of the Exchange Act: None

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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes  ̈                 No
           x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes  ̈                 No
x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x                 No
 ̈

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

Yes  ̈                 No
            ̈

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 
 ̈

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

|Large Accelerated Filer |  ̈                                             | Accelerated Filer         | x
|----------------------- | --------------------------------------------- | ------------------------- | -
|Non-Accelerated Filer   | (Do not check if a smaller reporting company) | Smaller reporting company |  ̈

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act).

Yes  ̈                 No
           x

The aggregate market value of the 57,683,981 shares of voting and non-voting common equity stock held by non-affiliates of the registrant was $65.57million as of March 31, 2009, the last business day of the registrants most
recently completed second fiscal quarter, based on the last sale price of the registrants common stock on such date of $1.71 per share, as reported
on The NASDAQ Global Market..

There were a total of 63,601,276 shares of the registrants common stock outstanding as of December
11, 2009.

Documents Incorporated by Reference:

Portions of the registrants Proxy Statement for its Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission within 120 days after the close of the registrants fiscal year are incorporated by reference into
Part III of this Annual Report on Form 10-K.

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TABLE OF CONTENTS

|PART I   |                                                                                                                     | 2 
|-------- | ------------------------------------------------------------------------------------------------------------------- | --
|         |                                                                                                                     |   
|ITEM 1.  | BUSINESS.                                                                                                           | 2 
|ITEM 1A. | RISK FACTORS.                                                                                                       | 24
|ITEM 1B. | UNRESOLVED STAFF COMMENTS.                                                                                          | 47
|ITEM 2.  | PROPERTIES                                                                                                          | 47
|ITEM 3.  | LEGAL PROCEEDINGS                                                                                                   | 49
|ITEM 4.  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY
      HOLDERS.                                                          | 51
|         |                                                                                                                     |   
|PART II  |                                                                                                                     | 51
|         |                                                                                                                     |   
|ITEM 5.  | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED
      STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. | 51
|ITEM 6.  | SELECTED FINANCIAL DATA                                                                                             | 52
|ITEM 7.  | MANAGEMENTS DISCUSSION AND ANALYSIS OF
      FINANCIAL CONDITION AND RESULTS OF OPERATIONS                         | 55
|ITEM 7A. | QUANTITATIVE AND QUALITATIVE
      DISCLOSURES ABOUT MARKET RISK.                                                   | 83
|ITEM 8.  | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.                                                                        | 83
|ITEM 9.  | CHANGES IN AND DISAGREEMENTS
      WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                          | 84
|ITEM 9A. | CONTROLS AND PROCEDURES                                                                                             | 84
|ITEM 9B. | OTHER INFORMATION.                                                                                                  | 88
|         |                                                                                                                     |   
|PART III |                                                                                                                     | 89
|         |                                                                                                                     |   
|ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS
      AND CORPORATE GOVERNANCE                                                        | 89
|ITEM 11. | EXECUTIVE COMPENSATION                                                                                              | 89
|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN
      BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS                | 89
|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,
      AND DIRECTOR INDEPENDENCE.                                    | 89
|ITEM 14. | PRINCIPAL ACCOUNTING FEES AND
      SERVICES                                                                        | 89
|         |                                                                                                                     |   
|PART IV  |                                                                                                                     | 89
|         |                                                                                                                     |   
|ITEM 15. | EXHIBITS, FINANCIAL STATEMENT
      SCHEDULES.                                                                      | 89

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Introductory CommentTerminology

Throughout this Annual Report on Form 10-K, or this Report, the terms we, us, our, China BAK, and the Company refer to China BAK Battery, Inc. and its subsidiaries on a consolidated basis;
BAK International refers to our Hong Kong subsidiary, BAK International Limited; BAK Tianjin refers to our PRC subsidiary, BAK International (Tianjin) Ltd.; Shenzhen BAK refers to our PRC subsidiary, Shenzhen BAK
Battery Co., Ltd.; BAK Electronics refers to our PRC subsidiary, BAK Electronics (Shenzhen) Co., Ltd.; BAK Canada refers to our Canadian subsidiary, BAK Battery Canada Ltd.; BAK Europe refers to our German
subsidiary, BAK Europe GmbH; BAK India refers to our Indian subsidiary, BAK Telecom India Private Limited; China or PRC refers to the Peoples Republic of China, excluding for the purposes of this Report
only, Taiwan, Hong Kong and Macau; RMB or Renminbi refers to the legal currency of China; and $ or U.S. dollars refers to the legal currency of the United States of America.

Introductory CommentForward-Looking Statements

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

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

F-1

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- uncertainties with respect to the PRC legal and regulatory environment;
- our ability to remediate any material weaknesses in our internal control over financial reporting;
- our ability to maintain cost leadership;
- our ability to obtain property ownership rights to our facilities;
- other risks identified in this Report and in our other reports filed with the U.S. Securities and Exchange Commission (the SEC).

Additional disclosures regarding factors that could cause our results and performance to differ from results or performance anticipated by this Report are discussed in Item 1A. Risk Factors. 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.

PART I

ITEM 1.         BUSINESS.

Overview

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

- cellular phonescustomer segments include OEM customers and replacement battery manufacturers;
- notebook computers;
- portable consumer electronics, such as digital cameras, portable media players, portable gaming devices and personal digital assistants, or PDAs; and
- other applications, such as cordless power tools, mining lamps, light electric vehicles, and hybrid electric vehicles.

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Our products are packed into batteries by third-party battery pack manufacturers in accordance with the specifications of manufacturers of portable electronic applications. We believe that our proprietary technologies allow us to offer battery cells
that are flexibly configured, lightweight, powerful and safe. We conduct all of our operations in China, in close proximity to Chinas electronics manufacturing base and its rapidly growing market. Our access to Chinas supply of low-cost
skilled labor, raw materials, machinery and facilities enables us to price our products competitively in an increasingly price-sensitive market. In addition, we have automated key stages of our manufacturing process to be able to produce
high-quality battery cells that consistently meet the stringent requirements of our customers.

Historically, we have primarily manufactured prismatic
lithium-ion cells for the cellular phone replacement battery market and OEM
market. Our prismatic cells are targeted at the PRC replacement market, where
cellular phone batteries produced by independent battery manufacturers are
purchased for use in second-hand cellular phones or as back-up batteries. We
also operate in the cellular phone battery OEM market, where we sell battery
cells for incorporation into branded batteries that are included in new cellular
phones or are sold as replacement batteries. We have successfully established
ourselves as a major competitor in the PRC domestic OEM market and leading brand
names such as Lenovo, ZTE, Gionee, Wingtech, Foxconn, Konka and Haier have
designated us as an approved cell provider to approved battery pack
manufacturers for their branded batteries. We intend to leverage the strong
technological capabilities we have developed over the years to continue our
growth and expand our reach to the global cellular phone OEM market, and have
been actively pursuing OEM qualifications from international brand names, such
as Nokia,

At the request of customers that order prismatic battery
packs, we also engage battery pack manufacturers to assemble our prismatic cells
into batteries for a fee and then sell battery packs to these customers for the
replacement and OEM markets. OEMs also purchase our battery cells from battery
pack manufacturers. We expect that sales of prismatic battery packs in such a
manner will represent a decreasing percentage of our revenues going forward.

To meet the growing demand for our products and to capture new opportunities, we offer the following three product lines:

- Cylindrical lithium-ion cellsfor use in notebook computers. We began commercial production of cylindrical cells for notebook computers in June 2006 using our new automated production line. We increased our manufacturing capacity in line with
advancements in our manufacturing technology and increases in customer demand. Leading brand names such as ASUS and Hasee Computer Co., Ltd., or Hasee, have designated us as an approved cell provider for their branded batteries. As of September 30,
2009, a first-tier international OEM notebook computer manufacturer determined that our cylindrical lithium-ion cells met their stringent performance and reliability requirements, and accepted us into its approved vendor list. During the third
quarter of fiscal year 2009, we initiated shipments of cylindrical cells to this OEM notebook manufacturer. Such shipments, while initially small, are expected to promote our penetration into the Notebook OEM market when North America begins its
economic recovery. We have also been actively pursuing other tier-one OEM qualifications from international brand names, such as Dell and Lenovo.
- High-power lithium-phosphate cellsfor use in cordless power tools, uninterruptible power supplies, mining lamps, electric bicycles, light electric vehicles, hybrid electric vehicles, and other applications. We began commercial production of
lithium-phosphate cells at our Shenzhen facility for use in cordless power tools in October 2005, and for mining lamps in March 2007, at which point our lithium-phosphate cells passed certain related governmental safety tests. In December 2006, a
new subsidiary, BAK Tianjin, was incorporated to focus on the R&D, manufacturing and distribution of lithium-phosphate cells. We have since shifted all lithium-phosphate cells manufacturing machinery, equipment and personnel from our Shenzhen
facility to our Tianjin facility. In October 2008, our Tianjin facility completed construction of its first lithium-phosphate cells production line, and initiated trial production of lithium-phosphate cells. Our Tianjin facility is now capable of
producing lithium-phosphate high-power cells for electric bicycles, uninterruptible power supplies, and other applications in addition to those mentioned above. This facility has received positive market feedback to samples of its lithium-phosphate
high-power cells. Moreover, this facilitys Electric Vehicles Lithium-phosphate Power Battery Industrialization Project was accepted into the PRCs National High Technology Research and Development Program, or National
863 Program, by the PRCs Ministry of Science and Technology. In that connection, we sent battery cell samples made at our Tianjin facility for light electric vehicles to customers and to manufacturing partners in the National 863 program. We received positive market
  feedback to these samples. We believe that we will generate additional revenue
  and increase market share as we gradually increase our high-power cells
  production as the demand for these cells has been increasing.

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- Lithium polymer cells, historically for use in ultra-portable
  electronic devices, such as high-end cellular phones, PDAs, Bluetooth
  headsets, digital media players, and digital audio players. We began
  commercial production of lithium polymer cells in September 2005. We have
  recently expanded the applications of our lithium polymer cells to notebook
  computers. During fiscal year 2009, we received orders from notebook computer
  battery OEM manufacturer STL Technology Co., Ltd. We believe that we will
  generate additional revenue and increase market share as the demand for these
  cells has been increasing.

Our operations have grown since our inception in August 2001.
We generated revenues of $145.9 million, $245.3 million, and $211.1 million in
the years ended September 30, 2007, 2008 and 2009, respectively, and net income
of $483,000 and net loss of $7.9 million and $14.0 million during the same
periods, respectively.

Our Industry

The lithium-ion battery was first introduced by Sony
Corporation in 1992 and has since become the battery of choice for a wide range
of portable consumer electronic applications because of its high energy density,
high voltage, compact size, light weight and excellent energy retention
characteristics. The advantages of the lithium-based battery over the
traditional nickel cadmium and nickel metal hydride batteries have resulted in a
significant increase of its share in the global rechargeable battery market.
Demand for lithium-based batteries grows in tandem with consumer electronics
products powered by lithium-based batteries, such as cellular phones, notebook
computers and other portable electronic devices. In addition, as a result of
technological advancements in recent years, the lithium-based battery is being
used in increasingly more powerful and diverse applications. Lithium-based
batteries are now being used in emerging industrial applications such as
cordless power tools, mining lamps, hybrid electric vehicles, and light electric
vehicles. The lithium-based battery market is dominated by manufacturers located
in Japan, South Korea and China. Chinas battery industry continues to grow and
capture market share in the global battery manufacturing industry as both
domestic and international battery manufacturers increase their manufacturing
presence in the PRC. China has a number of key advantages in battery
manufacturing that are expected to continue to drive this growth, including low
costs, proximity to the consumer electronics supply chain, proximity to
end-users and a developing R&D infrastructure. Chinese manufacturers are
becoming increasingly competitive as they have significantly benefited and will
continue to benefit from these advantages.

Rechargeable BatteriesIntroduction

A battery is a portable electrochemical system that releases
stored electrical energy. The battery industry has experienced significant
growth in recent years as a result of increased global demand for portable
electronic applications. The higher power requirements and small size of these
devices have also driven steady progress in battery technology.

The battery industry can be broadly divided into
non-rechargeable (or primary) and rechargeable (or secondary) segments.
Rechargeable batteries have increased their share of the overall battery market
as they have become more cost and time efficient for use over sustained periods.
They also help address environmental concerns over disposal of non-rechargeable
batteries.

The four mainstream chemistries currently used in rechargeable
batteries for portable electronics are nickel cadmium, nickel metal hydride,
lithium-ion, and lithium polymer. The characteristics of each of these battery
types are as follows:

|                        |  | Nickel  |  |  | Nickel Metal |  |  |             |  |  | Lithium | 
|----------------------- |  | ------- |  |  | ------------ |  |  | ----------- |  |  | ------- | 
|                        |  | Cadmium |  |  | Hydride      |  |  | Lithium-Ion |  |  | Polymer | 
|Commercial introduction |  | 1899    |  |  | 1990         |  |  | 1992        |  |  | 1999    | 
|Energy Density          |  | Low     |  |  | Medium       |  |  | High        |  |  | High    | 
|Max Voltage Per Cell    |  | 1.2     |  |  | 1.2          |  |  | 3.6         |  |  | 3.6     | 

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|Memory Effect          | Yes         | Minimal     | No              | No            
|---------------------- | ----------- | ----------- | --------------- | --------------
|Environmental Impact   | High        | Low         | Low             | Low           
|Core Application Usage | Toys        | Hybrid      | Cellular phones | Small scale   
|                       | Lights      | vehicles    | Portable        | portable      
|                       | Power tools | Power tools | consumer        | electronics(2)
|                       | Cordless    |             | electronics(1)  | Headsets      
|                       | phones      |             | Notebook        |               
|                       |             |             | Computers       |               
|                       |             |             | Power tools     |               
|                       |             |             | Mining lamps    |               
|                       |             |             | Electric        |               
|                       |             |             | bicycles        |               
|                       |             |             | Light electric  |               
|                       |             |             | vehicles        |               
|                       |             |             | Uninterruptible |               
|                       |             |             | power supplies  |               

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(1) Portable consumer electronics include portable media
players and portable gaming devices. 
(2) Small-scale portable consumer
electronics include portable audio players and PDAs.

Lithium-Based Rechargeable Batteries

Lithium in its metal form has long been known to be a highly
attractive battery material due to its light weight and high electromagnetic
potential. However, as a result of chemical instability, lithium metal batteries
have not been commercially developed. Instead, various lithium-based compounds
have been introduced. As portable electronic devices integrate enhanced
multi-media features while remaining compact and light-weight, they require
improved battery performance at reduced size and weight. Rechargeable
lithium-based battery cells, compared to rechargeable battery cells based on
nickel cadmium or nickel metal hydride chemistries, have a higher energy
density, meaning a greater energy capacity relative to a given battery cells
weight and size. Furthermore, lithium-based battery cells are able to generate
approximately three times the voltage of nickel-based cells, thereby reducing
the number of cells needed in a battery pack, leading to a reduction in the
weight and size of the pack. These characteristics will enable a portable
electronic device to integrate more features and operate for a longer time while
remaining slim and light, increasing its portability. Lithium-based battery
cells also have other favorable characteristics such as no memory effect and a
slow loss of charge when not in use. Key sub-categories of lithium-based
batteries include:

- Lithium-ion. Although slightly lower in energy density than lithium metal,
  lithium-ion is safe and maintains many of the attractive chemical
  characteristics of lithium. The lithium-ion battery was first developed by
  Sony Corporation in 1992. Our latest development efforts have been to look at
  new lithium compounds. Lithium phosphate is a promising example which has
  recently been put into commercial usage within the cordless power tool market.
  A lithium-ion battery cell consists of a lithium cobalt positive electrode, a
  graphite negative electrode, an electrolyte, lithium salt and separators. Both
  electrodes have a layered structure. When charging, lithium-ions come out from
  the positive electrode and move to the negative electrode through electrolytes
  deposited between the layers of the graphite negative electrode. When
  discharging, the reaction process is reversed.
- Lithium Polymer. First introduced in 1999, lithium polymer has similar
  performance to lithium-ion but uses a polymer gel as the electrolyte. This
  enables a more flexible and smaller form factor, although at higher unit cost.
  Lithium polymer battery cells share many characteristics of lithium-ion
  battery cells and provide similar performance. Since lithium polymer cells can
  be made in a thin and pouch-like case, thereby eliminating the need for a
  metal container, they offer further reduction in weight and size, as well as,
  more importantly, flexibility for design and physical configuration. These
  distinct characteristics have made lithium polymer cells suitable for
  ultra-thin portable electronic devices, such as high-end cellular phones,
  Bluetooth headsets and PDAs.

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Due to their high energy density and capacity, high voltage, compact size, light weight, lack of memory effect and excellent energy retention characteristics, use of lithium-based batteries has risen significantly in portable electronic products. As
the cost/power ratio of lithium-based batteries continues to improve, it is expected that its usage will also extend into other applications.

Key Rechargeable Battery Applications

End-product applications which are driving the demand for rechargeable lithium-based batteries include cellular phones, notebook computers, portable consumer electronics, cordless power tools, mining lamps, uninterruptible power supplies, and
electric bicycles. We also expect interest in light electric vehicles and hybrid electric vehicles to increase demand for rechargeable lithium-based batteries substantially.

Cellular phones

Cellular phone battery cells currently use a mixture of nickel metal hydride, lithium-ion and lithium polymer. The trend in newer models is towards lithium-based batteries as they allow for a smaller and more flexible form and longer battery
life.

Demand for batteries for cellular phones is driven by two factors. The first is the sales of new cellular phones. An OEM of cellular phones includes a battery with a new cellular phone. There is also a replacement market for cellular phone
batteries. Demand in the replacement market is in turn driven by a number of factors. Often a consumer will purchase a second battery to carry as a spare. In addition, lithium-ion batteries have a finite life, so over time consumers will need to
purchase a battery to replace the failed battery in their phone. As the number of active cellular phone subscribers increases, the number of replacement batteries sold increases. A market characteristic unique to the Chinese cellular phone market is
that cell phones are often sold and resold during their useful life. Over time these cell phones require a replacement battery. Our customers for cellular phone battery cells fall into two segments:

- OEM: The OEMs manufacture mobile phone handsets. They purchase batteries to support their production of new cellular phones. They also purchase batteries to serve the replacement market which they sell under their own brand name. OEMs do not
purchase these battery cells directly from us; they purchase them from battery pack manufacturers that have packaged them according to the OEMs specifications.
- Independent Battery Manufacturers: These third-party manufacturers compete against the OEMs for a share of the replacement market. They typically sell their products under their own brand name or a private label.

Notebook computers

Notebook computer sales are forecast to grow further in coming years due to increasingly mobile workforces and the improved power and functionality of notebook computers. Due to their substantial power requirements and larger size relative to other
portable electronic devices, notebook computers have in the past typically utilized nickel metal hydride batteries. However, over the last ten years, lithium-based batteries have almost completely replaced nickel metal hydride batteries due to the
increasing power of lithium-based batteries and demand for smaller lighter notebook computers. We believe that we are the largest notebook computer battery cell manufacturer in China and that there currently are no other significant Chinese
manufacturers in the notebook computer battery market.

Power tools

Power tools such as drills, saws and grinders are used for both commercial and personal use. Due to high power requirements, many power tools have historically used small combustion engines, used heavier nickel metal hydride batteries or relied on
external power sources. Manufacturers of power tools, such as Milwaukee, Black & Decker, Bosch, Metabo and Rigid have begun to use lithium-ion technology. The DeWalt division of Black & Decker began marketing a power tool product line that
uses nano lithium-phosphate technology in its batteries. This technology has increased the power of these batteries to 36 volts. The market for portable high-powered power tools is rapidly
growing and has prompted many users, both commercial and personal, to replace or upgrade their current power tools.

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Portable consumer electronics

This category includes digital audio players (such as MP3/MP4 players), digital still cameras, digital video cameras, portable DVD players, PDAs, BlackBerry devices, portable gaming systems and Bluetooth devices. There is a rapid trend to use
lithium-based batteries in portable consumer electronics (both rechargeable and non-rechargeable) due to a desire for smaller, longer-lasting devices.

Light electric vehicles and hybrid electric vehicles

Due to such recent trends as renewed concerns relating to the availability and price of oil, increased legal fuel-efficiency requirements and incentives, and heightened interest in environmentally-friendly or green technologies, light
electric vehicles and hybrid electric vehicles are likely to continue to attract substantial interest from vehicle manufacturers and consumers. Light electric vehicles include bicycles, scooters, and motorcycles, with rechargeable electric
motors. Due to their relatively small size and light design, approximately 24-150 lithium-phosphate cells can be used to power light electric vehicles. Hybrid electric vehicles include automobiles, trucks, buses, and other vehicles that combine a
conventional propulsion system with a rechargeable energy storage system to achieve better fuel economy than conventional vehicles. As these vehicles tend to be large and heavy, their rechargeable energy storage system generally consists of a large
quantity of rechargeable lithium-phosphate cells.

Uninterruptible power supplies

An uninterruptible power supply (UPS), provides emergency power from a separate source when utility power is not available. The most common type of battery used in uninterruptible power supplies is Sealed Lead-Acid, however, due to the lithium
batterys relatively small size, light design and environmentally-friendly features, the demand for lithium batteries in this industry is increasing.

Battery Manufacturing in China

Chinas battery industry has historically focused on lower-end batteries, with Japan and Korea providing the technical innovation and producing higher-end and rechargeable batteries. However, we believe that as the Chinese government continues
to support battery makers in terms of financial backing and research, Chinas R&D and manufacturing capabilities will become more developed.

Chinas market share of the full breadth of battery production is expected to increase. China has a number of benefits in battery manufacturing which are expected to drive this growth:

- Low costs. Relative to Japan and Korea, China has a significantly lower cost of labor as well as easy access to bulk raw materials and land
- Proximity to electronics supply chain. Electronics manufacturing in general continues to shift to China, giving China-based manufacturers a further cost and cycle time advantage
- Proximity to end-markets. Chinas domestic market for portable applications such as cellular phones and portable audio-visual equipment continues to grow rapidly. Proximity to end-market further consolidates the cost and cycle time advantages
for China manufacturers.
- Developing R&D infrastructure. China has focused in recent years on building its research, development and engineering skill base in all aspects of higher-end manufacturing, including batteries. For example, lithium-ion and lithium polymer
batteries are both part of Chinas tenth five-year development plan which allocates state resources to provide financial assistance to companies engaged in the business of developing and manufacturing batteries, to fund the research and
development of new battery material and to assist patent applications and the protection of intellectual property.

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Our Competitive Strengths

We believe that the following competitive strengths enable us to compete effectively in, and to capitalize on the growth of, the global lithium-ion battery market:

Strong focus on lithium-based batteries and core competency in lithium-ion battery technology

Since our inception in August 2001, we have focused on the research, development and manufacture of lithium-based battery cells. Through this experience, we have been exposed to a rapidly growing market and have developed a core competency in
lithium-ion battery technology that we believe enables us to enhance our product quality, reduce cost and keep up with evolving industry standards. Our cells are used in branded cellular phone batteries of companies such as Lenovo, ZTE, Gionee and
Haier,a testament to our competency in core technologies. Although our production to date has been largely for cellular phone prismatic batteries, we have also been able to develop other lithium-based battery cells, such as lithium-ion
cylindrical cells, lithium-phosphate cells and lithium polymer cells, to capture new market opportunities, such as those for notebook computers and cordless power tools. As of September 30, 2009, we had 344 patents registered in the PRC relating to
battery cell materials, design and manufacturing process, and also had 573 pending patent applications filed in the PRC and 109 in other countries.

Strong R&D capabilities

We place a strong emphasis on R&D, particularly on technological innovation and the development of new battery cell materials and products. We have established a dedicated R&D center with what we believe to be the most advanced equipment in
China. Our R&D team consists of 200researchers and scientists, led by Dr. Huanyu Mao, our chief technology officer, who has pioneered, and is a veteran of, the lithium-ion industry since its commercialization in 1992. Dr. Mao was the
inventor under seven U.S. patents related to lithium-ion technology. In December 2006, we also established a wholly-owned subsidiary, BAK Canada, to focus on the research and development of lithium-ion batteries, which comprises a group of experts
led by Mr. Kenneth G. Broom, our chief operating officer, who brings 25 years li-ion battery industry working experience.

Economies of scale

We are one of the largest manufacturers of lithium-ion battery cells in the world, as measured by production output. As of September 30, 2009 our production capacity reached approximately 30 million units of battery cells per month. We believe our
economies of scale have made us a preferred customer for our suppliers, enabling us to compete effectively in an increasingly price-sensitive market through (i) a higher bargaining power to secure a supply of materials and equipment at a lower cost,
and (ii) a larger base for spreading out our fixed-costs.

China-based, low-cost manufacturing model

We conduct all of our manufacturing activities in Shenzhen, China. Our access to Chinas abundant supply of skilled and low-cost labor, as well as our ability to source raw materials, equipment, land and manufacturing facilities locally and
economically, has considerably lowered our operating cost and expenses as a percentage of revenues. Because our products are not subject to any customs duty as compared to those imported from our Japanese and Korean competitors, we believe we enjoy
a cost advantage in the domestic market for customers in Chinas electronics manufacturing base.

Optimal use of automation in production process

We selectively use automation in our manufacturing process to ensure high uniformity and precision in our products while maintaining our cost-competitive advantage. As a fully automated production line is very expensive, we tailor our semi-automated
solution based on stages of the manufacturing process and product attributes. We use automated machinery in key stages of the manufacturing process while using manual labor for other stages to take advantage of the availability of low-cost, skilled
labor in China. We believe this considerably reduces our capital expenditure requirements. For example, we use automated machinery in manufacturing our cylindrical battery cells because
cylindrical battery cells designed for use in notebook computers require higher uniformity and precision that only can be achieved by use of automation.

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Experienced management team with proven technology and operational record

We have an experienced management team. Mr. Xiangqian Li, our president and chief executive officer and the chairman of our board of directors, has extensive experience in the battery industry. Mr. Li has been instrumental in helping us achieve our
current market position. Kenneth G. Broom, our Chief Operating Officer has more than 20 years of management, engineering and sales experience in the Li-ion battery industry. Tony Shen, our Chief Financial Officer, Secretary and Treasurer, has
extensive experience in financial management. Dr. Huanyu Mao, our chief technology officer, is a pioneer in lithium-ion battery technology since the introduction of lithium-ion batteries in 1992 and was the inventor under seven U.S. patents related
to lithium-ion technology. He has led our in-house R&D team in making significant progress in technology innovations and improvements, product development, and optimizing the use of battery cell materials.

Our Strategy

We believe we are well positioned to take advantage of the opportunities presented by growing market demand for rechargeable lithium-based batteries. Our goal is to build on our existing strengths to become a global leader in the development and
manufacturing of lithium-based battery cells for leading end-application manufacturers. We intend to achieve this objective by pursuing the following strategies:

Enhance leading-edge technology through continual innovation

We intend to continue committing substantial resources to R&D in order to improve our technologies, develop new products and optimize the use of new battery cell materials. In particular, our R&D efforts will focus on the following:

- developing more advanced technologies to increase our productivity and efficiency in the manufacturing process and reduce the per unit cost of production;
- developing and commercializing cost-effective and easily available substitute materials for existing raw materials that are more expensive and in unstable supply;
- enhancing our product quality, reliability and features to satisfy stringent OEM requirements of leading end-application manufacturers and to keep abreast of rapidly changing industry standards and evolving market trends; and
- co-operating closely with our partners to improve our technologies and develop new application markets.

Continue our cost leadership through yield improvements and refining our manufacturing process

We believe that cost-effectiveness will be critical to our future success in an increasingly price-sensitive market. We intend to achieve greater economies of scale by expanding our production capacity. We will also focus on enhancing our yields by
reducing our defect ratio through continual worker training and strict raw material quality control, and refining our semi-automated manufacturing process. We intend to increase our productivity and efficiency in the manufacturing process and reduce
the per unit cost of production through the use of advanced technologies. We also will focus on continuing our development and commercialization of batteries that utilize cost-effective and easily available substitute materials for expensive raw
materials.

Expand our customer base and develop new application markets

We intend to penetrate into new application markets, as well as capture a greater market share in our existing markets.

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- OEM cellular phones. We are already the market leader in Chinas cellular phone replacement battery market. We have also successfully penetrated into the domestic cellular phone OEM market by becoming a designated battery cell supplier for
battery pack suppliers of leading local cellular phone brand owners, such as Lenovo, Gionee, ZTE, Wingtech, Foxconn, Konka and Haier. We have been implementing a strategic transition from the replacement market to the OEM market. We are currently
actively pursuing OEM qualifications from international brand owners such as Nokia, Sony Ericsson, LG and Samsung.
- Notebook computers. In April 2006, we began trial production of cylindrical battery cells used in notebook computers for a few battery pack manufacturers and began commercial production of cylindrical cells in June 2006. Leading brand names such as
ASUS and Hasee have designated us as an approved cell provider to approved battery pack manufacturers for their branded batteries. As of September 30, 2009, a first-tier international OEM notebook computer manufacturer determined that our
cylindrical lithium-ion cells met their stringent performance and reliability requirements, and accepted us into its approved vendor list. During the third quarter of fiscal year 2009, we initiated shipments of cylindrical cells to this OEM notebook
manufacturer. Such shipments, while initially small, are expected to promote our penetration into the Notebook OEM market when North America begins its economic recovery. We have also been actively pursuing other tier-one OEM qualifications from
international brand names, such as Dell and Lenovo.
- Cordless power tools, mining lamps, uninterruptible power supplies, light electric vehicles, hybrid electric vehicles, and other lithium-phosphate cell applications. We began commercial production of lithium- phosphate cells at our Shenzhen facility
for use in cordless power tools in October 2005, and for mining lamps in March 2007, at which point our lithium-phosphate cells passed certain related safety tests set by the Quality Supervision and Testing Center of Chemical and Physical Power
Sources of the PRCs Ministry of Information Industry. In December 2006, a new subsidiary, BAK Tianjin, was incorporated to focus on the R&D, manufacturing and distribution of lithium-phosphate cells. We have since shifted all lithium-
phosphate cells manufacturing machinery, equipment and personnel from our Shenzhen facility to our Tianjin facility. In October 2008, our Tianjin facility completed construction of its first lithium-phosphate cells production line, and initiated
trial production of lithium-phosphate cells. Our Tianjin facility is now capable of producing lithium-phosphate high-power cells for electric bicycles, uninterruptible power supplies, and other applications in addition to those mentioned above. This
facility has received positive market feedback to samples of its lithium-phosphate high-power cells. Moreover, this facilitys Electric Vehicles Lithium-phosphate Power Battery Industrialization Project was accepted into the
PRCs National High Technology Research and Development Program, or National 863 Program, by the PRCs Ministry of Science and Technology. In that connection, we sent battery cell samples made at our Tianjin facility for light
electric vehicles to customers and to manufacturing partners in the National 863 program. We received positive market feedback to these samples. We believe that we will generate additional revenue and increase market share as we gradually increase
our high-power cells production as the demand for these cells has been increasing.
- Ultra-portable electronic devices. In September 2005, we began commercial production of lithium polymer cells for use in ultra-portable electronic devices, such as high-end cellular phones, Bluetooth headsets, digital media players and digital audio
players. During the past fiscal year, we expanded the applications of our lithium polymer cells to notebook computers. During fiscal year 2009, we received orders from notebook computer battery OEM manufacturer STL Technology Co., Ltd. We believe
that we will generate additional revenue and increase market share as the demand for these cells has been increasing.

Increase manufacturing capacity by leveraging our existing infrastructure, access to low-cost local resources and proximity to the electronics supply chain and electronics manufacturing base

We intend to capitalize on robust growing demand for lithium-based batteries by leveraging our access to low-cost local resources and our proximity to the electronics supply chain and manufacturing base to further expand our manufacturing capacity.
As of September 30, 2009, we had completed approximately 146,372 square meters of manufacturing facilities. To meet strong market demand as well as to capture new application markets, we plan to significantly increase our daily production output of
cylindrical cells for notebook computers, high-power lithium-phosphate cells for cordless power tools, mining lamps, uninterruptible power supplies, light electric vehicles, hybrid electric vehicles, and other lithium-phosphate cell applications, and lithium polymer cells for high-end electronic devices such
as ultra-thin and light cellular phones, notebook computers and Bluetooth headsets. We also intend to increase our production output of aluminum-case cells for the cellular phone battery OEM market.

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Our Corporate Structure and Information

We were incorporated in Nevada on October 4, 1999. On January 20, 2005, we completed a share exchange with the stockholders of BAK International, a Hong Kong company, pursuant to which we acquired 100% of BAK International and in exchange, issued
our common stock to these stockholders representing 97.2% of our then post-issuance share capital. BAK International was a holding company that owned a 100% PRC operating subsidiary, Shenzhen BAK. On February 14, 2005, we merged with our
wholly-owned subsidiary, China BAK Battery, Inc. We are the surviving entity of this merger. On that date we also changed our name from Medina Coffee, Inc. to our current name, China BAK Battery, Inc. We accounted for this
share exchange as a reverse acquisition and succeeded to and are considered to be a continuation of Shenzhen BAKs operations and financial statements. We conduct our current business through the following three wholly-owned operating
subsidiaries in China that we own through BAK International:

- Shenzhen BAK, located in Shenzhen, China, incorporated in August 2001, which focuses on the development and manufacture of prismatic cells and cylindrical cells;
- BAK Electronics located in Shenzhen, China, incorporated in August 2005, which focuses on the development and manufacture of lithium polymer cells; and
- BAK Tianjin, located in Tianjin, China, incorporated in December 2006, which focuses on the development and manufacture of lithium-phosphate cells.

In addition, BAK Canada, a wholly-owned subsidiary of BAK International, was incorporated in Canada in December 2006 to advance our R&D of lithium-ion batteries. In November 2007, BAK Europe, a wholly-owned subsidiary of Shenzhen BAK, was
established in Germany, which focuses on the sales and after-sales services of lithium-ion battery cells. In August 2008, BAK India, a wholly-owned subsidiary of BAK International, was incorporated in India to advance the sales and after-sales
services of lithium-ion battery cells. BAK International beneficially owns 100% of BAK India partly through a nominee agreement with one of its employees.

Our principal executive offices are located at BAK Industrial Park, No. 1 BAK Street, Kuichong Town, Longgang District, Shenzhen, 518119, Peoples Republic of China. Our telephone number there is (86-755) 8977-0093.

All inquiries should be directed to us at the address and telephone number of our principal executive offices set forth above. Our website address is www.bak.com.cn. The information contained on our website does not form part of this Report.

Our Products

We develop and manufacture various types of lithium-based rechargeable battery cells, which are the key component of lithium-based batteries used in a wide range of portable electronic applications. Since lithium-based batteries were first
commercialized in the early 1990s, they have become the battery of choice for portable electronic devices because of their unique and favorable characteristics. The following table provides a summary of our battery cell offerings and their
corresponding end applications:

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|Battery Cell
      Type                       |  | End
      applications*            
|--------------------------------------------- |  | -----------------------------------
|                                              |  |                                    
|Prismatic                                     |  | Cellular phone [1]                 
|(aluminum-case only as of September 30, 2009; |  | Camcorder [2]                      
|steel-case discontinued in January 2009)      |  | MP3/MP4 player [1-2]               
|                                              |  | Digital camera [1]                 
|                                              |  | Digital video camera [2-4]         
|                                              |  | PDA [1-2]                          
|                                              |  | BlackBerry [1]                     
|                                              |  |                                    
|Cylindrical                                   |  | Cylindrical                        
|                                              |  | Notebook computer [6-8]            
|                                              |  | Digital camera [1]                 
|                                              |  | Portable DVD player [4]            
|                                              |  | Camcorder [2]                      
|                                              |  | Portable gaming system [1-6]       
|                                              |  |                                    
|Lithium polymer                               |  | Cellular phone [1]                 
|                                              |  | MP3/MP4 player [1]                 
|                                              |  | Digital camera [2]                 
|                                              |  | Bluetooth headset [1]              
|                                              |  |                                    
|High-power lithium-phosphate                  |  | Cordless power tool [4-8]          
|                                              |  | Mining lamp [6-10]                 
|                                              |  | Light electric vehicle [24-150]    
|                                              |  | Hybrid electric vehicle [500]      
|                                              |  | Uninterruptible power supply [3-34]

* Bracketed numbers denote number of cells per particular
battery.

Historically, we have derived most of our revenues from
prismatic cells. As we expand our production capacity and add new product lines
in response to evolving market demands, we have derived and will continue to
derive an increasing portion of our revenues from our new product lines. The
following table sets forth the breakdown of our net revenues by battery cell
type for the periods indicated.

|                                         |   | Year
      ended September 30,                     | 
|---------------------------------------- | - | -------------------------------------------------- | 
|                                         |   | 2009                                               | 
|                                         |   | (in thousands of U.S. dollars, except percentages) | 
|Prismatic cells                          |   |                                                    | 
|Steel-case cells                         | $ | 4,980                                              | 
|Aluminum-case cells                      | $ | 111,700                                            | 
|Battery packs                            | $ | 24,705                                             | 
|Cylindrical cells                        | $ | 55,349                                             | 
|                                         |   |                                                    | 
|High-power lithium-phosphate
      cells | $ | 179                                                | 
|                                         |   |                                                    | 
|Lithium polymer cells                    | $ | 14,231                                             | 
|Total                                    | $ | 211,144                                            | 

Our lithium-ion battery cells can be classified into two types
based on their structure. Prismatic cells are rectangular in shape and are
commonly used in cellular phones and digital cameras. Cylindrical cells are
tubular in shape and commonly used in notebook computers, portable DVD players,
digital cameras, and camcorders. The following pictures depict our standard
prismatic cells and cylindrical cells.

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|                |                  
|--------------- | -----------------
|                |                  
|Prismatic cells | Cylindrical cells

Prismatic cells contribute to a major portion of our revenue.
We are currently the largest maker of prismatic cells in China, based on
production output. Our prismatic cells are contained in metal casing made of
aluminum . Aluminum-case cells generally are more expensive to manufacture and
therefore have a higher cost than steel-case cells, but they are safer and
lighter than steel-case cells, so they are suited for use in batteries included
in OEM cellular phones. To facilitate our transition from the replacement market
to the OEM market, and to capitalize on the greater demand and benefits of
aluminum-case cells, including higher selling price and gross margin, we have
gradually increased the percentage of aluminum-case cells in the production of
our prismatic cells and have phased out entirely steel-case cell production. At
the request of customers that order prismatic battery packs, we also engage
battery pack manufacturers to assemble our prismatic cells into batteries for a
fee and then sell battery packs to these customers for the replacement market.
OEMs with whom we have no contractual relationship may also purchase our battery
cells from battery pack manufacturers.

Cylindrical Cells

Cylindrical cells are generally used for notebook computers, portable DVD players, digital cameras, and camcorders. We target our cylindrical cells for the notebook computer market. One notebook computer battery typically contains at least a group
of six cylindrical cells working together in a coordinated manner, so the failure of only one cell will affect the performance of the entire battery. Accordingly, cylindrical cells for notebook computers require a higher uniformity than prismatic
cells. We had previously produced a small number of cylindrical cells for batteries of portable DVD players. In 2003, we commenced R&D of cylindrical cells designed for notebook computers and in April 2006, we began trial production of a small
volume of cylindrical cells. We began commercial production of cylindrical cells in June 2006. Leading brand names such as ASUS and Hasee have designated us as an approved cell provider to approved battery pack manufacturers for their branded
batteries. As of September 30, 2009, a first-tier international OEM notebook computer manufacturer determined that our cylindrical lithium-ion cells met their stringent performance and reliability requirements, and accepted us into its approved
vendor list. During the third quarter of fiscal year 2009, we initiated shipments of cylindrical cells to this OEM notebook manufacturer. Such shipments, while initially small, are expected to promote our penetration into the Notebook OEM market
when North America begins its economic recovery. We have also been actively pursuing other tier-one OEM qualifications from international brand names, such as Dell and Lenovo.

High-power Lithium-phosphate Cells

The use of new materials have enabled the configuration of high-power lithium-phosphate cells to contain much higher energy density and higher voltage and have a longer life cycle and shorter charge time than other types of lithium-based batteries.
These special attributes, coupled with intrinsic safety features, are suitable for batteries used for cordless power tools and other high-power applications. In the first quarter of calendar 2006, we made our first shipment of high-power
lithium-phosphate battery cells pursuant to a manufacturing agreement entered into by and between Shenzhen BAK and A123 Systems, Inc., or A123Systems. Following the termination of our agreement with A123Systems on August 30, 2007, we have been
researching and developing power tool batteries. In December 2006, a new subsidiary, BAK Tianjin, was incorporated to focus on the R&D, manufacturing and distribution of high-power lithium-phosphate cells. In October 2008, it completed
construction of its first lithium-phosphate cells
production line, and initiated trial production of lithium-phosphate cells. Our Tianjin facility is now capable of producing lithium-phosphate high-power cells for electric bicycles, uninterruptible power supplies, and other applications in addition
to those mentioned above. This facility has received positive market feedback to samples of its lithium-phosphate high-power cells. Moreover, this facilitys Electric Vehicles Lithium-phosphate Power Battery Industrialization
Project was accepted into the PRCs National High Technology Research and Development Program, or National 863 Program, by the PRCs Ministry of Science and Technology. In that connection, we sent battery cell samples
made at our Tianjin facility for light electric vehicles to customers and to manufacturing partners in the National 863 program. We received positive market feedback to these samples. We believe that we will generate additional revenue and increase
market share as we gradually increase our high-power cells production as the demand for these cells has been increasing.

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Lithium Polymer Cells

In September 2005, we began producing and shipping lithium polymer battery cells. Our lithium polymer cells do not have a hard metal casing but rather a flexible, pouch-like container, thereby enabling flexible designs and customizations. Lithium
polymer cells have expanded our reach to high-end cellular phones, Bluetooth headsets and PDAs such as iPod and BlackBerry devices, and will also allow us to capture the growth opportunities presented by new electronic applications. During the past
fiscal year, we have been actively expanding applications of lithium polymer cells to note book computers battery section. During fiscal year 2009, we received orders from notebook computer battery OEM manufacturer STL Technology Co., Ltd. We
believe that we will generate additional revenue and increase market share as the demand for these cells has been increasing.

Quality Assurance

We enforce strict quality assurance procedures throughout all stages of the manufacturing process. We have four levels of controls to monitor and maintain our product quality: design controls, process controls, material inflow controls and output
controls. Our design controls ensure that there are no defects in the design and structure of the products we decide to produce. Our process controls consist of a 15-point check system from the beginning through the end of our production process.
Our material inflow controls assure that we obtain our raw materials at a consistent level of quality. Our output controls test for capacity, voltage, visual defects and internal resistance. We believe these four levels of controls are essential to
our quality control. We also provide ongoing training to our employees to ensure effective application of our quality assurance procedures.

We monitor quality and reliability in accordance with the requirements of QSR, or Quality System Review, and ISO9001 systems. We have received European Unions CE attestation, UL authentication, and ISO 9001:2000 certification, a quality
management system certification. We have passed stringent quality reviews and thus obtained OEM qualifications from various domestic cellular phone brand names. With our strong technological capabilities and use of automated equipment for core
aspects of the manufacturing process, we believe our product quality, in certain key aspects, meets or even exceeds international industry standards.

Manufacturing

Manufacturing of battery cells is a technologically complicated and capital-intensive process, requiring coordinated use of machinery and raw materials at various stages of manufacturing. The primary raw materials used in production of battery cells
include electrode materials, electrolytes, foils, cases and caps and separators.

The electrodes are manufactured using active materials, conductive agents and binder which are mixed with liquid. These mixtures are then uniformly coated onto the thin metal foil, then after drying, the electrodes are cut down to the designated
sizes.

The positive electrode and negative electrode are then wound together with a separator and inserted into a can, and electrolyte is filled. The sealing completes the battery cell assembly.

The diagrams below illustrate the structure of prismatic cells and cylindrical cells.

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|               |                 
|-------------- | ----------------
|Prismatic Cell | Cylindrical Cell

Prior to shipping battery cells to our customers, the battery cells will undergo an aging process, and thorough inspections to ensure the cells meet high quality control standards.

Since August 2004, we have been implementing the TPM, or Total Productive Maintenance, program, which involves a newly defined concept for maintaining plants and equipment. The goal of the TPM program is to markedly increase production while, at the
same time, increasing employee morale and job satisfaction. Since November 2005, we also began implementing the 5S Philosophy developed in Japan. Based on Japanese words that begin with the letter S, the 5S Philosophy focuses on
effective work place organization and standardized work procedures. 5S is intended to simplify our work environment, reduce waste and non-value activity while improving quality efficiency and safety.

A simplified manufacturing process is illustrated below:



These cells are then integrated into packages which are customized into a wide variety of configurations to interface with different electronic devices.

We have adopted a semi-automated manufacturing process. We use fully automated machinery to process key aspects of the manufacturing process to ensure high uniformity and precision, while leaving the non-key aspects of the manufacturing process to
manual labor. For example, we have an automated production line to manufacture our cylindrical cells used for notebook computer batteries to ensure a high level of uniformity and precision. We intend to further improve our automated production
lines. As we have easy access to an ample supply of low-cost skilled labor, we believe our unique semi-automated manufacturing process will enable us to achieve desired cost-competitiveness by substantially lowering our manufacturing cost without
compromising our product quality and uniformity.

For the last few years, we have been expanding our manufacturing capacity to meet the growing market demand for battery products. As the increasingly intense competition in our industry has driven down the per unit profit margins of our products, we
strive to continue investing heavily in our manufacturing infrastructure to further increase our manufacturing capacity, enabling us to lower the per unit cost of our products, thereby maintaining our expected total level of profitability.

Suppliers

We have built a comprehensive supply chain of materials and equipment. The primary raw materials used in the manufacture of lithium-ion batteries include electrode materials, cases and caps, foils, electrolyte and separator. Cost of these raw
materials is a key factor in pricing our products. We believe that there is an ample supply of most of the raw materials we need in China. 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 resources and improve internal efficiency, with a particular focus on
manufacturing and sales. To ensure the quality of our suppliers, we use only
those suppliers who have demonstrated quality control and reliability.

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We aim to maintain multiple supply sources for each of our key
raw materials to ensure that supply problems with any one supplier will not
materially disrupt our operations. In addition, we strive to develop strategic
relationships with new suppliers to secure a stable supply of materials and
introduce competition in our supply chain, thereby increasing our ability to
negotiate a better pricing and reducing our exposure to possible price
fluctuations.

Our economies of scale enable us to purchase materials in large
volumes, offering us leverage to secure better pricing, and to a lesser degree,
increasing the extent to which our suppliers rely on our purchase orders. We
believe this relationship of mutual reliance will enable us to reduce our
exposure to possible price fluctuations. For example, we have entered into a
volume purchase agreement with some of our major suppliers, such as CITIC Guoan,
from whom we purchase cathode material and lithium cobalt dioxide, one of the
key materials for battery cells.

As of September 30, 2009, our key raw material suppliers were
as follows:

|Materials         |  | Main Suppliers                                                                                                                                                          
|----------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Case and caps     |  | Shenzhen Tongli High-tech Co., Ltd., Shenzhen
      Dongri Technology Industry Co., Ltd.                                                                                
|Cathode materials |  | CITIC Guoan, Hunan Reshine New Material Ltd.,
      Beijing Easpring Material Technology Co. Ltd                                                                        
|Anode materials   |  | Qingdao Dahua, BTR Energy Materials Co., Ltd.,
      Ningbo Shanshan New Material Technology Co., Ltd.                                                                  
|Aluminum foil     |  | Aluminum Corporation of America, Shanghai                                                                                                                               
|Copper foil       |  | Huizhou United Copper Foil                                                                                                                                              
|Electrolyte       |  | Zhangjiagang Guotai-Huarong New Chemical
      Materials Co., Ltd., Tianjin Jinniu Electric Source Material Co., Ltd.,
      Dongwan Shanshan Battery Material Co., Ltd.
|Separator         |  | Systems Corporation                                                                                                                                                     

We source our manufacturing equipment both locally and from
overseas, based on consideration of their cost and function. As of September 30,
2009, we purchased our key equipment from the following suppliers:

|Instruments                     |  | Main Suppliers                                                                                                 
|------------------------------- |  | ---------------------------------------------------------------------------------------------------------------
|Coating machine                 |  | Hirano Tecseed Co., Ltd.                                                                                       
|Mixer                           |  | Systems corporation                                                                                            
|Press machine                   |  | SevenStar Huachuang; Innovative Machine
      Corporation, Xingtai Naknor Electrode Rolling Equipment Co., Ltd.
|Ultrasonic spot welding machine |  | Zhenjiang Tianhua Machinery and Electrical Co.,
      Ltd.                                                     
|Laser seam welder               |  | Wuhan Chutian Laser Group                                                                                      
|Vacuum oven                     |  | Jiangsu Wujiang Jiangling                                                                                      
|Winding machine                 |  | Kaido Manufacturing Co., Ltd., Shenzhen Yinghe
      Technology Co., Ltd                                       
|Slitting machine                |  | Nishimura Mfg. Co., Ltd.                                                                                       
|Electrolyte filling machine     |  | BAK (internally developed) / Canon Machinery
      Corporation, Haibar Systems Ltd.                            
|Aging equipment                 |  | Guangzhou Qingtian Industrial Co., Ltd.,
      Hangzhou Hangke                                                 
|Testing and sorting equipment   |  | Guangzhou Qingtian Industrial Co., Ltd.,
      Hangzhou Hangke                                                 

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Customers

Prismatic Cells. Our customers for prismatic cells used for cellular phones in the OEM market and replacement market are local leading battery pack manufacturers, including:

- SCUD (Fujian) Electronics Co., Ltd.
- Maxx Mobile Communications Ltd..
- Shenzhen Weiliwang Electronics Co., Ltd.
- Shenzhen Hailutong Electronics Co., Ltd.
- Shenzhen Huatiantong Technology Co., Ltd.

We primarily sell our prismatic cells to the OEM market in two ways. On most occasions, we sell our prismatic cells to battery pack manufacturers certified by cellular phone brand owners, which will pack our cells into branded batteries and sell
them to the brand owner. Cellular phone brand owners also may directly place orders with us. In such a case, we engage a pack manufacturer to assemble our prismatic cells into batteries for a fee, and then arrange to deliver the batteries to the OEM
brand owners.

Cylindrical Cells. We are a mass producer of cylindrical cells used for notebook computers. During the past fiscal year, a first-tier OEM notebook computer manufacturer determined that our cylindrical lithium-ion cells met their stringent
performance and reliability requirements, and accepted us into its approved vendor list. During the third quarter of fiscal year 2009, we initiated shipments of cylindrical cells to this OEM notebook manufacturer. Such shipments, while initially
small, are expected to promote our penetration into the Notebook OEM market when North America begins its economic recovery. Leading brand names such as ASUS and Hasee have designated us as an approved cell provider for their branded batteries. We
have also been actively pursuing other tier-one OEM qualifications from international brand names, such as Dell and Lenovo.

High-power Lithium-phosphate. We began commercial production of lithium-phosphate cells in October 2005 for use in cordless power tools. In December 2006, a new subsidiary, BAK Tianjin, was incorporated to focus on the R&D, manufacturing
and distribution of high-power lithium-phosphate cells. In October 2008, construction of its first high-power, lithium-phosphate cells production line was completed and it commenced trial production. Our Tianjin facility is now capable of producing
lithium-phosphate high-power cells for electric bicycles, uninterruptible power supplies, and other applications in addition to those mentioned above. This facility has received positive market feedback to samples of its lithium-phosphate high-power
cells. Moreover, this facilitys Electric Vehicles Lithium-phosphate Power Battery Industrialization Project was accepted into the PRCs National High Technology Research and Development Program, or National 863
Program, by the PRCs Ministry of Science and Technology. In that connection, we sent battery cell samples made at our Tianjin facility for light electric vehicles to customers and to manufacturing partners in the National 863 program. We
received positive market feedback to these samples. We believe that we will generate additional revenue and increase market share as we gradually increase our high-power cells production as the demand for these cells has been increasing.

Lithium Polymer. Orders we received for lithium polymer cells tend to be small in quantity, but vary in specifications based on the attributes of a particular electronic application. We sell our lithium polymer cells to certain pack
manufacturers, which pack our cells and sell the final products. We also have the ability to pack our lithium polymer cells into batteries that carry our own trademark. During the past fiscal year,we expanded the applications of our lithium
polymer cells to notebook computers. During fiscal year 2009, we received orders from notebook computer battery OEM manufacturer STL Technology Co., Ltd. We believe that we will generate additional revenue and increase market share as the demand for
these cells has been increasing.

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We sell our products domestically and internationally. The
following table sets forth certain information relating to our total revenues by
location of our customers for the periods indicated.

|                         |  | Year ended September
      30,                           | 
|------------------------ |  | -------------------------------------------------------- | 
|                         |  | 2009                                                     | 
|                         |  | (in thousands of
      U.S. dollars, except percentages) | 
|                         |  |                                                          | 
|PRC Mainland             |  | 132,710                                                  | 
|PRC Taiwan               |  | 47,664                                                   | 
|India                    |  | 10,526                                                   | 
|United States of America |  | 1,413                                                    | 
|Hong Kong, China         |  | 16,086                                                   | 
|Others*                  |  | 2,745                                                    | 
|Total                    |  | 211,144                                                  | 

______________
(1)     Less than 0.1%. 
*       Includes the Middle East, Italy, Germany, and Turkey.

For our international sales, we sell our products directly to
distributors, as well as pack manufacturers in these countries and territories.
If we receive orders from distributors for batteries rather than cells, we
engage pack manufacturers to assemble our cells into batteries for a fee, and
then arrange to deliver the batteries to fulfill the orders.

A small number of prismatic cell customers have historically
accounted for a substantial portion of our revenue. In the year ended September
30, 2009, our top five and top ten customers in aggregate contributed to
approximately 27.9% and 38.2% of our revenue, respectively. As we expand our
product portfolio and target new market segments, our customer composition as
well as the identity and concentration of our top customers are expected to
change from period to period. Currently, we are actively investigating demand
for, and pursuing opportunities in, other product lines, including mining lamps,
uninterruptible power supplies, hybrid electric vehicles, and light electric
vehicles.

Sales and Marketing

We have built an extensive sales and service network in China,
highlighted by our strong presence in Chinas economically prosperous coastal
regions where we generate a significant portion of our sales. We have
representative offices in Beijing, Shanghai, Fuzhou, and Taiwan, targeting our
key customers. Our marketing department at headquarters is responsible for our
marketing efforts in the PRC, and our sales staff in these representative
offices conducts sales and provides post-sales services to brand owners and pack
manufacturers in each designated area. We offer different price incentives to
encourage large-volume and long-term customers. We have established subsidiaries
in Germany and India, where our sales representatives market and sell our
products and also provide after-sale services. In August 2008, we hired North
America sales representatives based in Austin, Texas and Vancouver, British
Columbia to better serve the North America market by bringing us into closer
communications with our customers and prospects in the United States and Canada.
We aim to add additional representative offices in the Middle East and Korea. As
we expand our business, our sales and marketing staff has increased to more than
one hundred, most of whom are professional salespersons and technicians.

Our sales staff works closely with our customers to understand
their needs and provide feedback to us so that we can better address their needs
and improve the quality and features of our products.

We engage in marketing activities such as attending
industry-specific conferences and exhibitions to promote our products and brand
name. We believe these activities are conducive in promoting our products and
brand name among key industry participants.

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Competition

We face intense competition from battery cell makers in China,
as well as in Korea and Japan for each of our product types. The following table
sets forth our major competitors based on product type:

|Product Type                 |  | Competitors |                                                                                                     
|---------------------------- |  | ----------- | ----------------------------------------------------------------------------------------------------
|Prismatic                    |  | Japan:      | Sanyo Group, Sony Corporation,
      Matsushita Electric Works, Ltd., NEC Corporation, Hitachi, Ltd.
|                             |  | Korea:      | LG Group, Samsung Electronics Co., Ltd ,                                                            
|                             |  | China:      | BYD Company Limited, Tianjin
      Lishen Battery Joint- Stock Co., Ltd.,                           
|Cylindrical                  |  | Japan:      | Sanyo Group, Sony Corporation, Matsushita
      Electric Works                                      
|                             |  | Korea:      | LG Group, Samsung Electronics
      Co., Ltd.                                                       
|High-power lithium-phosphate |  | Japan:      | Sanyo Group, Sony Corporation                                                                       
|                             |  | Canada:     | BYD Company Limited                                                                                 
|                             |  | China       | Sanyo Group, Sony Corporation                                                                       
|Lithium polymer              |  | Japan:      | Amperex Technology Limited                                                                          
|                             |  | China:      | LG Group, Samsung Electronics Co., Ltd ,                                                            

We believe that we are able to leverage our low-cost advantage
to compete favorably with our competitors. Compared to Korean and Japanese cell
makers, we are able to source our needs for skilled labor and raw materials
locally and economically. Our substantially expanded production capacity has
translated into greater purchasing power, thereby helping us negotiate lower
purchase prices for materials. Furthermore, our strong proprietary technologies
and use of a combination of manual labor and automation at the key stages of the
manufacturing process enable us to enhance our production efficiency, resulting
in further reduction in cost, while ensuring high uniformity and high-quality
standards.

Research and Development

We have established an advanced R&D center. To enhance our
product quality, reduce cost, and keep up with technological advances and
evolving market trends, our R&D center focuses on advancement in
technologies relating to new materials and new cells with prospects for use in
new end application markets, such as mining lamps, hybrid electric vehicles,
light electric vehicles, electric bicycles, and uninterruptible power supplies.

Our in-house R&D team consists of 200 researchers and
scientists, led by Dr. Mao, our chief technology officer, who pioneered core
technologies in lithium-ion batteries since their introduction in 1992 and was
the inventor under seven U.S. patents related to lithium-ion technology. In
December 2006, we also established a wholly-owned subsidiary, BAK Canada, to
focus on the research and development of lithium-ion batteries. It comprises a
group of experts led by Mr. Kenneth G. Broom, our Chief Operating Officer, who
brings 25 years li-ion battery industry working experience. Our strong R&D
capabilities have enabled us to obtain various government-sponsored R&D
grants. We have been accredited as a new and high-technology company in
Shenzhen, entitling us to enjoy preferential tax treatment and other government
incentive grants and subsidies. Furthermore, we collaborate with a number of
reputable research institutes and science and technology universities in China,
allowing us to capitalize on their R&D results economically.

In December 2006, a new subsidiary, BAK Tianjin was
incorporated to focus on research and development, manufacturing and
distribution of high-power lithium-phosphate cells. We have since shifted all
lithium-phosphate cells manufacturing machinery, equipment and personnel from
our Shenzhen facility to our Tianjin facility. In October 2008, our Tianjin
facility completed construction of its first lithium-phosphate cells production
line, and initiated trial production of lithium-phosphate cells. Our Tianjin
facility is now capable of producing lithium-phosphate high-power cells for
electric bicycles, uninterruptible power supplies, and other applications in
addition to those mentioned above. This facility has received positive market
feedback to samples of its lithium-phosphate
high-power cells. Moreover, this facilitys Electric Vehicles Lithium-phosphate Power Battery Industrialization Project was accepted into the PRCs National High Technology Research and Development Program, or National
863 Program, by the PRCs Ministry of Science and Technology. In that connection, we sent battery cell samples made at our Tianjin facility for light electric vehicles to customers and to manufacturing partners in the National 863
program. We received positive market feedback to these samples. We believe that we will generate additional revenue and increase market share as we gradually increase our high-power cells production as the demand for these cells has been increasing.

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Employees

We had a total of 8,616, 8,200, and 7,099 employees as of September 30, 2007, September 30, 2008 and September 30, 2009, respectively. We have developed a strong company culture that encourages individual thinking and creativity, continual
self-improvement and strong commitment to provide high-quality products to our customers.

Facilities

See Item 2. Properties.

Intellectual Property

We rely on a combination of patents, trade secrets, and employee non-disclosure and confidentiality agreements to protect our intellectual property rights. As of September 30, 2009, we have registered 32 trademarks in the PRC, including BAK in both
English and in Chinese characters as well as our logo, and have registered 29 trademarks in the United States, European Union, Korea, Russia, Taiwan and Hong Kong. We have registered the following Internet and WAP domain name: www.bak.com.cn. As of
September 30, 2009, we have registered 344 patents in the PRC relating to battery cell materials, design and manufacturing processes, and we had 573 pending patent applications filed in the PRC and 109 in other countries.

We also have unpatented proprietary technologies for our product offerings and key stages of the manufacturing process. Our management and key technical personnel have entered into agreements requiring them to keep confidential all information
relating to our customers, methods, business and trade secrets during their terms of employment with us and thereafter and to assign to us their inventions, technologies and designs they develop during their term of employment with us.

We have institutionalized our efforts to safeguard our intellectual property rights by establishing an internal department that includes professionals such as attorneys, engineers, information managers and archives managers responsible for handling
matters relating to our intellectual property rights. We have published internally a series of rules to protect our intellectual property rights.

Environmental Compliance

As we conduct our manufacturing activities in China, we are subject to the requirements of PRC environmental laws and regulations on air emission, waste water discharge, solid waste and noise. We aim to comply with environmental laws and regulations
and have passed ISO14001 certification for environmental practices. We have built environmental treatment facilities concurrently with construction of our manufacturing facilities, where waste air, waste water and waste solids we generate can be
treated in accordance with the relevant requirements. We also outsource disposal of solid waste we generate to a third party contractor. Certain key materials used in manufacturing, such as cobalt dioxide, electrolyte and separators, have proven
innocuous to workers health and safety as well as the environment. We are not subject to any admonitions, penalties, investigations or inquiries imposed by the environmental regulators, nor are we subject to any claims or legal proceedings to
which we are named as defendant for violation of any environmental law or regulation. We do not have any reasonable basis to believe that there is any threatened claim, action or legal proceedings against us that would have a material adverse effect
on our business, financial condition or results of operations.

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PRC Government Regulations

Environmental Regulations

The major environmental regulations applicable to us include the PRC Environmental Protection Law, the PRC Law on the Prevention and Control of Water Pollution and its Implementation Rules, the PRC Law on the Prevention and Control of Air Pollution
and its Implementation Rules, the PRC Law on the Prevention and Control of Solid Waste Pollution, and the PRC Law on the Prevention and Control of Noise Pollution.

Patent Protection in China

The PRCs intellectual property protection regime is consistent with those of other modern industrialized countries. The PRC has domestic laws for the protection of rights in copyrights, patents, trademarks and trade secrets. The PRC is also a
signatory to most of the worlds major intellectual property conventions, including:

- Convention establishing the World Intellectual Property Organization (WIPO Convention) (June 4, 1980);
- Paris Convention for the Protection of Industrial Property (March 19, 1985);
- Patent Cooperation Treaty (January 1, 1994); and
- The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs) (November 11, 2001).

Patents in the PRC are governed by the China Patent Law and its Implementing Regulations, each of which went into effect in 1985. Amended versions of the China Patent Law and its Implementing Regulations came into effect in 2001 and 2003,
respectively.

The PRC is a signatory to the Paris Convention for the Protection of Industrial Property, in accordance with which any person who has duly filed an application for a patent in one signatory country shall enjoy, for the purposes of filing in the
other countries, a right of priority during the period fixed in the convention (12 months for inventions and utility models, and 6 months for industrial designs).

The Patent Law covers three kinds of patents: patents for inventions, utility models and designs respectively. The Chinese patent system adopts the principle of first to file. This means that, where more than one person files a patent application
for the same invention, a patent can only be granted to the people who first filed the application. Consistent with international practice, the PRC only allows the patenting of inventions or utility models that possess the characteristics of
novelty, inventiveness and practical applicability. For a design to be patentable, it should not be identical with or similar to any design which, before the date of filing, has been publicly disclosed in publications in the country or abroad or has
been publicly used in the country, and should not be in conflict with any prior right of another.

PRC law provides that anyone wishing to exploit the patent of another must conclude a written licensing contract with the patent holder and pay the patent holder a fee. One rather broad exception to this, however, is that, where a party possesses
the means to exploit a patent but cannot obtain a license from the patent holder on reasonable terms and in a reasonable period of time, the PRC State Intellectual Property Office, or SIPO, is authorized to grant a compulsory license. A compulsory
license also can be granted where a national emergency or any extraordinary state of affairs occurs or where the public interest so requires. The patent holder may appeal such decision within three months from receiving notification by filing a suit
in a peoples court. SIPO, however, has not granted any compulsory license up to now.

PRC law defines patent infringement as the exploitation of a patent without the authorization of the patent holder. A patent holder who believes their patent is being infringed may file a civil suit or file a complaint with a PRC local Intellectual
Property Administrative Authority, which may order the infringer to stop the infringing acts. A preliminary injunction may be issued by the Peoples Court upon the patentees or the interested parties request before instituting any
legal proceedings or during the proceedings. Evidence preservation and property preservation
measures also are available both before and during the litigation. Damages in the case of patent infringement are calculated as either the loss suffered by the patent holder arising from the infringement or the benefit gained by the infringer from
the infringement. If it is difficult to ascertain damages in this manner, damages may be reasonably determined in an amount ranging from one to more times of the license fee under a contractual license. The infringing party may also be fined by the
Administration of Patent Management in an amount of up to three times the unlawful income earned by such infringing party. If there is no unlawful income so earned, the infringing party may be fined in an amount of up to RMB50,000, or approximately
$7,323.65 as of September 30, 2009.

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Tax

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

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

The tax holiday of Shenzhen BAK commenced in 2002, the first calendar year in which Shenzhen BAK had assessable profit, and ended on December 31, 2006. In addition, due to additional capital contributed by BAK International to Shenzhen BAK in both
2005 and 2006 and Shenzhen BAKs qualification as an advanced technology enterprise in 2007 and 2008, Shenzhen BAK was granted a preferential income tax rate of 7.5%, 11.8% and 12.6% for calendar years 2007, 2008 and 2009, respectively. In
accordance with the transition period of the new corporate income tax law (the New CIT Law) and before considering the above-mentioned tax concessions, Shenzhen BAKs income tax rate for calendar years  2010 and 2011 are
expected to be  22% and 24%, respectively, and starting in calendar year 2012, it is expected to be subject to an income tax rate of 25%. Therefore, Shenzhen BAKs income tax rates after consideration of its tax concessions are expected to
be  15% for both calendar years 2010 and 2011 and starting in calendar year 2012, it is expected to be subject to an income tax rate of 25%.

BAK Electronics, established in August 2005, has been eligible for the same preferential tax treatment previously applicable to Shenzhen BAK and was in the tax holiday and fully exempt from any enterprise income tax for calendar years 2006 and 2007
followed by a three-year 50% reduction in its enterprise income tax rate. In addition, pursuant to the transition period of the New CIT Law and before considering the above-mentioned 50% reduction, BAK Electronics income tax rates for calendar
years 2009, 2010 and 2011 are expected to be 20%, 22% and 24%, respectively, and starting in calendar year 2012, it is expected to be subject to an income tax rate of 25%. Therefore, BAK Electronics income tax rate after consideration of its
tax holiday are expected to be 10%, 11% and 24% for calendar years 2009, 2010 and 2011, respectively, and starting in calendar year 2012, it is expected to be subject to an income tax rate of 25%. BAK Electronics did not incur any enterprise income
tax for the current year due to the current tax losses carried forward from the calendar year 2008.

Shenzhen BAK and BAK Electronics received in aggregate a tax benefit of $103,000 pursuant to their tax holiday
and preferential tax rate for the fiscal year ended September 30, 2009, or $0.007 per basic share.

BAK Tianjin is currently paying no enterprise income tax due to cumulative tax losses.

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

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

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

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

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

Our effective tax benefit rate was 67.9%, 11.6%, and 8.2% for the fiscal years ended September 30, 2007, 2008 and 2009, respectively.

Pursuant to the Provisional Regulation of China on Value Added Tax and its implementing rules, all entities and individuals that are engaged in the sale of goods, the provision of repairs and replacement services and the importation of goods in
China are generally required to pay VAT at a rate of 17.0% of the gross sales proceeds received, less any deductible VAT already paid or borne by the taxpayer. Further, when exporting goods, the exporter is entitled to some or all of the refund of
VAT that it has already paid or borne. Our imported raw materials that are used for manufacturing export products and are deposited in bonded warehouses are exempt from import VAT.

Foreign Currency Exchange

Under the PRC foreign currency exchange regulations applicable to us, the Renminbi is convertible for current account items, including the distribution of dividends, interest payments, trade and service-related foreign exchange transactions.
Conversion of Renminbi for capital account items, such as direct investment, loan, security investment and repatriation of investment, however, is still subject to the approval of the PRC State Administration of Foreign Exchange, or SAFE. FIEs may
only buy, sell and/or remit foreign currencies at those banks authorized to conduct foreign exchange business after providing valid commercial documents and, in the case of capital account item transactions, obtaining approval from the SAFE. Capital
investments by FIEs outside of China are also subject to limitations, which include approvals by the Ministry of Commerce, the SAFE and the State Reform and Development Commission.

Dividend Distributions

Under applicable PRC regulations, FIEs in China may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, a FIE in China is required to set aside at least
10.0% of its after-tax profit based on PRC accounting standards each year to its general reserves until the accumulative amount of such reserves reach 50.0% of its registered capital. These reserves are not distributable as cash dividends. The board
of directors of a FIE has the discretion to allocate a portion of its after-tax profits to staff welfare and bonus funds, which may not be distributed to equity owners except in the event of liquidation.

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ITEM 1A.     RISK FACTORS.

Risks Related to Our Business

Our limited operating history may not serve as an adequate basis to evaluate our future prospects and results of operations.

We have a limited operating history. We are engaged in the business of developing, manufacturing and sales of lithium-based rechargeable battery cells used for a wide range of portable electronic applications. We were established in Shenzhen, China
in August 2001 and commenced operations in June 2002. Our limited operating history may not provide a meaningful basis for an investor to evaluate our business, financial performance and prospects. We may not be able to:

- maintain our leading position in the cellular phone battery replacement market;
- retain existing customers or acquire new customers;
- diversify our revenue sources by successfully developing and selling our products in the global cellular phone OEM market, notebook computer battery market and other markets;
- keep up with evolving industry standards and market developments;
- respond to competitive market conditions;
- maintain adequate control of our expenses;
- manage our relationships with our suppliers;
- attract, train, retain and motivate qualified personnel; or
- protect our proprietary technologies.

If we are unsuccessful in addressing any of these challenges, our business may be materially and adversely affected.

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

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

We are primarily dependent on sales of lithium-ion battery cells for the cellular phone battery replacement market. A reduction in the volume or average price of lithium-ion battery cells that we sell for this market would cause our overall
revenue to decline.

We have derived a major portion of revenues to date from sales of our lithium-ion battery cells for the cellular phone battery replacement market. While we intend to diversify our revenue sources by expanding to the global cellular phone OEM market,
notebook computers and high-power electrical tool markets, we expect that sales of battery cells used for the cellular phone battery replacement market will continue to comprise a significant portion of our
revenues in the near future. Accordingly, any decrease in the demand for our battery cells in the replacement market resulting from success of competing products, slower than expected growth of sales in the replacement market or other adverse
developments relating to the replacement market may materially and adversely affect our business and cause our overall revenue to decline. In addition, our expansion to the global cellular phone battery OEM market and other markets may not increase
our revenue to a level that would enable us to materially reduce our dependence on sales of battery cells for the cellular phone replacement market.

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Our business depends on the growth in demand for portable electronic devices.

As the market demand for portable electronic devices is directly related to the demand for our products, a fast growing portable electronic device market will be critical to the success of our business. In anticipation of an expected increase in
demand for portable electronic devices such as cellular phones and notebook computers in the next few years, we have expanded our manufacturing capacity. However, the markets we have targeted, including those of the PRC, may not achieve the level of
growth we expect. If this market fails to achieve our expected level of growth, we will have excess production capacity and may not be able to generate enough revenue to maintain our profitability.

Our future success depends on the success of manufacturers of the end applications that use our products.

As we expand to the battery markets for global OEM cellular phones, notebook computers and other portable electronic devices, our future success depends on whether end application manufacturers are willing to use batteries that incorporate our
products. To secure acceptance of our products, we must constantly develop and introduce more reliable and cost-effective battery cells with enhanced functionality to meet evolving industry standards. Our failure to gain acceptance of our products
from these manufacturers could materially and adversely affect our future success.

Even if a manufacturer decides to use batteries that incorporate our products, the manufacturer may not be able to market and sell its products successfully. The manufacturers inability to market and sell its products successfully, whether
from lack of market acceptance or otherwise, could materially and adversely affect our business and prospects because this manufacturer may not order new products from us. If we cannot achieve the expected level of sales, we will not be able to make
sufficient profits to offset the expenditures we have incurred to expand our production capacity, nor will we be able to grow our business. Accordingly, our business, financial condition, results of operations and future success would be materially
and adversely affected.

We experience fluctuations in quarterly and annual operating results.

Our quarterly and annual operating results have fluctuated in the past and likely will fluctuate in the future. The demand for our products is driven largely by demand for the end-product applications that are powered by our products. Accordingly,
the rechargeable battery industry is affected by market conditions that are often outside our control. Our results of operations may fluctuate significantly from period to period due to a number of factors, including seasonal variations in consumer
demand for batteries and their end applications, capacity ramp up by competitors, industry-wide technological changes, the loss of a key customer and the postponement, rescheduling or cancellation of large orders by a key customer. As a result of
these factors and other risks discussed in this section, period-to-period comparisons should not be relied upon to predict our future performance.

Our failure to keep up with rapid technological changes and evolving industry standards may cause our products to become obsolete and less marketable, resulting in loss of market share to our competitors.

The lithium-based battery market is characterized by changing technologies and evolving industry standards, which are difficult to predict. This, coupled with frequent introduction of new products and models, has shortened product life cycles and
may render our products obsolete or unmarketable. Our ability to adapt to evolving industry standards and anticipate future standards will be a significant factor in maintaining and improving our competitive position and our prospects for growth. To
achieve this goal, we have invested and plan to continue investing significant financial resources in our R&D infrastructure. R&D activities, however, are inherently uncertain, and we might encounter practical difficulties in commercializing
our research results. Accordingly, our significant
investment in our R&D infrastructure may not bear fruit. On the other hand, our competitors may improve their technologies or even achieve technological breakthroughs that would render our products obsolete or less marketable. Therefore, our
failure to effectively keep up with rapid technological changes and evolving industry standards by introducing new and enhanced products may cause us to lose our market share and to suffer a decrease in our revenue.

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A change in our product mix may cause our results of operations to differ substantially from the anticipated results in any particular period.

Our overall profitability may not meet expectations if our products, customers or geographic mix are substantially different than anticipated. Our profit margins vary among products, customers and geographic markets. Consequently, if our mix of any
of these is substantially different from what is anticipated in any particular period, our profitability could be lower than anticipated.

Failure to successfully obtain OEM certification from international cellular phone brand owners may materially and adversely affect our future growth.

We intend to leverage our position in the cellular phone battery replacement market and to expand to the global cellular phone OEM market. To achieve this goal, we must first be qualified by international brand owners. We have started the process
with Nokia, Sony Ericsson, LG and Samsung . Since international brand owners have very stringent requirements, the qualification process can be lengthy and costly for new component suppliers such as us. Our failure to obtain qualifications
from international brand owners would have a material adverse effect on our ability to execute our business plan and achieve the level of growth we have planned.

We may not be able to manage our expansion of operations effectively.

We were established in August 2001 and have grown rapidly since. We are in the process of significantly expanding our business in order to meet the increasing demand for our products, as well as capture new market opportunities. As we continue to
grow, we must continue to improve our operational and financial systems, procedures and controls, increase manufacturing capacity and output, and expand, train and manage our growing employee base. In order to fund our on-going operations and our
future growth, we need to have sufficient internal sources of liquidity or access to additional financing from external sources. Furthermore, our management will be required to maintain and strengthen our relationships with our customers, suppliers
and other third parties. As a result, our continued expansion has placed, and will continue to place, significant strains on our management personnel, systems and resources. We also will need to further strengthen our internal control and compliance
functions to ensure that we will be able to comply with our legal and contractual obligations and minimize our operational and compliance risks. Our current and planned operations, personnel, systems, internal procedures and controls may not be
adequate to support our future growth. If we are unable to manage our growth effectively, we may not be able to take advantage of market opportunities, execute our business strategies or respond to competitive pressures.

We may not be able to substantially increase our manufacturing output in order to maintain our cost competitiveness.

We believe that our ability to provide cost-effective products is one of the most significant factors that contributed to our current success and will be essential for our future growth. We believe this is one of our competitive advantages over our
Japanese and Korean competitors. In order to continue doing so, we will need to increase our manufacturing output to a level that will enable us to substantially reduce the cost of our products on a per unit basis through economies of scale.
However, our ability to substantially increase our manufacturing output is subject to significant constraints and uncertainties, including:

- the need to raise significant additional funds to purchase and prepay raw materials or to build additional manufacturing facilities, which we may be unable to obtain on reasonable terms or at all;
- delays and cost overruns as a result of a number of factors, many of which may be beyond our control, such as increases in raw material prices and problems with equipment vendors;

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- delays or denial of required approvals by relevant government authorities;
- diversion of significant management attention and other resources; and
- failure to execute our expansion plan effectively.

If we are unable to increase our manufacturing output because of any of the risks described above, we may be unable to maintain our competitive position or achieve the growth we expect. Moreover, even if we expand our manufacturing output, we may
not be able to generate sufficient customer demand for our products to support our increased production output.

Maintaining our manufacturing operations requires significant capital expenditures, and our inability or failure to maintain our operations would have a material adverse impact on our market share and ability to generate revenue.

We had capital expenditures of approximately $41.5 million and $51.2 million in fiscal years 2009 and 2008, respectively. We may incur significant additional capital expenditures as a result of unanticipated expenses, regulatory changes and
other events that impact our business. If we are unable or fail to adequately maintain our manufacturing capacity or quality control processes, we could lose customers and there could be a material adverse impact on our market share and our ability
to generate revenue.

We have been and most likely will continue to be subject to rapidly declining average selling prices, which may harm our revenue and gross profits.

Portable consumer electronics such as cellular phones and notebook computers are subject to rapid declines in average selling prices due to rapidly evolving technologies, industry standards and consumer preferences. As a result, manufacturers of
these electronic devices expect us as suppliers to cut our costs and lower the price of our products in order to mitigate the negative impact on their own margins. We have reduced the price of our products in the past in order to meet market demand
and expect to continue to face market-driven downward pricing pressures in the future. Our revenue and profitability will suffer if we are unable to offset any declines in our average selling prices by developing new or enhanced products with higher
selling prices or gross profit margins, increasing our sales volumes or reducing our costs on a timely basis.

We did not have effective internal control over financial reporting as of September 30, 2009 due to material weaknesses, which relate primarily to the disclosure and presentation of financial information under generally accepted accounting
principles in the United States, or U.S. GAAP. We have restated our consolidated financial statements three times due to such weaknesses. We can make no assurances that additional material weaknesses will not be identified in the future. Our failure
to implement and maintain effective internal control over financial reporting could result in material misstatements in our financial statements which could require us to restate financial statements, cause investors to lose confidence in our
reported financial information and have a negative effect on our stock price.

In the course of the SEC review of registration statements on Form SB-2 (File Nos. 333-122209 and 333-130247), we restated our consolidated balance sheet as of September 30, 2004, our consolidated statements of income and comprehensive income, our
consolidated statements of cash flows and our consolidated statements of changes in shareholders equity for the fiscal year ended September 30, 2004, and also extended or modified certain notes to these consolidated financial statements. This
restatement arose out of accounting errors relating to (1) misclassification of cash transactions, (2) incorrect charging to our statements of income and comprehensive income for fiscal 2003 and 2004 for the deficit attributable to 1,152,456 shares
outstanding prior to our reverse acquisition on January 20, 2005, and (3) incorrect presentation of depreciation expenses in the statement of income and comprehensive income. The restatement resulted in an increase in net cash from financing
activities, a decrease in the number of shares of common stock outstanding and a corresponding increase in paid-in capital, and a decrease in gross profit for the fiscal year ended September 30, 2004 by $1,635,971, or approximately 11%.

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In the course of the SEC review of the registration statements referred to above, we determined that beginning with fiscal quarter ended December 31, 2005, we would no longer be considered a small business issuer. We restated our
consolidated balance sheet as of December 31, 2005, our consolidated statement of income and comprehensive income and our consolidated statement of cash flows for the three months ended December 31, 2005 to reflect the prospective adoption of
Statement of Financial Accounting Standards, or SFAS, No. 123 (Revised 2004), Share-Based Payment, or SFAS 123(R), as superseded by SFAS No. 168 The FASB Accounting Standards CodificationTM and the Hierarchy of Generally
Accepted Accounting Principles, a replacement of FASB Statement No. 162, or SFAS
No. 168, now included in Accounting Standards Codification (ASC) Topic 718, relating to the accounting for stock-based compensation commencing in the first quarter of our fiscal year ending
September 30, 2006. Pursuant to the restatement, we incurred an incremental share-based compensation expense of $711,512 in the quarter ended December 31, 2005. This restatement resulted in, among other things, a decrease in gross profit and net
income per share for the first quarter of our fiscal year 2006.

As reported in the current report on Form 8-K filed with the SEC on August 4, 2006, we changed our independent registered public accounting firm from Schwartz Levitsky Feldman LLP to KPMG. We engaged KPMG on May 15, 2006 to audit our financial
statements for the fiscal years ended September 30, 2003, 2004 and 2005. During the course of the audit, KPMG notified our accounting staff of misstatements in our previously reported financial statements for the fiscal years ended September 30,
2003, 2004 and 2005 that required correction relating to: (1) the overstatement of interest expense because of an error in the application of accounting principles relating to interest capitalization, and the related understatement of property,
plant and equipment, construction in progress and depreciation expenses; (2) the incorrect charging to shareholders equity for fiscal year 2005 of the provision for staff and workers bonus and welfare fund instead of charging it to the
statements of income and comprehensive income; (3) the overstatement of the provision for contributions to a social insurance plan because of a misinterpretation of the applicable PRC laws; (4) the understatement of our accumulated foreign-currency
translation adjustment for fiscal 2005 included in comprehensive income and overstatement of our additional paid-in capital due to a calculation error during consolidation; (5) other misstatements identified, which were individually not material,
including amounts related to amortization of lease prepayments, prepayments and other receivables, accrued expenses and other payables, cost of revenues, general and administrative expenses, finance costs, other expenses, and certain cash flow
items, and (6) the consequential understatements or overstatements of income tax expenses. The net restatement adjustments resulted in an increase in our net income and earnings per share in the relevant periods. For more detailed descriptions, see
Item 9A. Controls and Procedures of our Annual Report on Form 10-K for the fiscal year ended September 30, 2006 (the 2006 Form 10-K).

Our management concluded that our disclosure controls and procedures were not effective as of September 30, 2006, because of the material weaknesses that had been identified and described in Item 9A. Controls and Procedures of the 2006
Form 10-K. Our management also concluded that our disclosure controls and procedures were not effective as of September 30, 2007, because of the material weaknesses that had been identified and described in Item 9A. Controls and
Procedures of our Annual Report on Form 10-K for the fiscal year ended September 30, 2007 (the 2007 Form 10-K). Management believed that some appropriate measures had been implemented to remediate these weaknesses during the fiscal
year 2007, as described in Item 9A. Controls and Procedures of the 2007 Form 10-K. However, management concluded that our disclosure controls and procedures were still not effective as of September 30, 2008, because of the material
weaknesses that had been identified and described in Item 9A. Controls and Procedures of our Annual Report on Form 10-K for the fiscal year ended September 30, 2008 (the 2008 Form 10-K). Investors are directed to Item 9A of
the 2006 Form 10-K, the 2007 Form 10-K, and the 2008 Form 10-K for the description of the weaknesses identified for the corresponding fiscal year, and to Item 9A of the 2007 Form 10-K and Item 9A of the 2008 Form 10-K for the description of the
measures that had been implemented during the fiscal years ended September 30, 2007 and September 30, 2008, respectively.

As disclosed in our current report on Form 8-K filed with the SEC on April 3, 2007, as amended on April 11, 2007 and April 17, 2007, on March 28, 2007 we dismissed KPMG as our independent registered public accounting firm and appointed PKF as our
independent registered public accounting firm, in each case effective April 1, 2007.

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 September 30, 2009 covered by our Managements Report on Internal Control over Financial Reporting. We have identified the following material weaknesses as of September 30, 2009:

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- The Company did not maintain effective controls over the financial reporting process due to an insufficient complement of personnel with a level of accounting knowledge, experience and training in the application of U.S. generally accepted
accounting principles (U.S. GAAP) commensurate with the Companys financial requirements. Additionally, the Companys senior management lacked an adequate level of accounting knowledge, experience and training in the
application of U.S. GAAP, and did not implement adequate and proper supervisory review to ensure the consolidated financial statements were prepared in conformity with U.S. GAAP and with requirements of the U.S. Securities and Exchange
Commission.
- The Company did not maintain effective controls over the accounting for construction in progress assets and the determination of depreciation expenses when the assets are ready for their intended use. Specifically, the Company did not have effective
controls to track and assess the ready-for-intended-use status of the construction in progress assets to ensure the construction in progress assets being transferred to property, plant and equipment and the related commencement of depreciation
expense was in accordance with U.S. GAAP.

See Item 9A. Controls and Procedures for a more detailed discussion of these material weaknesses.

We can make no assurances that additional material weaknesses in our internal control over financial reporting will not be identified in the future. Any failure to maintain or implement required new or improved controls, or any difficulties we
encounter in their implementation, could result in additional significant deficiencies or material weaknesses, cause us to fail to meet our periodic reporting obligations or result in material misstatements in our financial statements. Any such
failure could adversely affect the results of periodic management evaluations and annual auditor attestation reports regarding the effectiveness of our internal control over financial reporting that are required under Section 404 of the
Sarbanes-Oxley Act of 2002. The existence of a material weakness could result in errors in our financial statements that could result in another restatement of financial statements, cause us to fail to meet our reporting obligations and cause
investors to lose confidence in our reported financial information, leading to a decline in our stock price.

Failure to achieve and maintain effective internal controls could have a material adverse effect on our business, results of operations and the trading price of our common stock.

We are subject to the reporting obligations under the U.S. securities laws. The SEC, under Section 404 of the Sarbanes-Oxley Act of 2002, has adopted rules requiring public companies to include a report of management on such companies internal
control over financial reporting in their annual reports that contain an assessment by management of the effectiveness of their internal control over financial reporting at a reasonable assurance level. In addition, pursuant to Auditing Standard No.
5, our independent registered public accounting firm must attest to and report on the operating effectiveness of the Companys internal controls. These requirements first applied to us in connection with the 2006 Form 10-K. Managements
report on internal control over financial reporting is set out in Item 9A Controls and Procedures. of the 2006 Form 10-K.

Management has determined that, as of the fiscal year ended September 30, 2009, the two material weaknesses as described in Item 9A. Controls and Procedures, resulted from material weaknesses in our internal control over financial
reporting. To remediate these material weaknesses, we have taken and will continue to take a number of remediation measures, as described in Item 9A. Controls and Procedures. However, we can make no assurances that we can fully remediate
all our material weaknesses or address additional material weaknesses or significant deficiencies that may subsequently arise by the year end date of fiscal year 2010, so that our management will be able to conclude that we will have effective
internal control over financial reporting as of September 30, 2010. If we cannot implement the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 in a timely manner or with adequate compliance, our registered independent public accounting
firm may not be able to provide a written attestation as to the effectiveness of our internal controls over financial reporting, in which event, our registered independent public accounting firm may issue a disclaimer of their audit opinion. Our
failure to achieve and maintain effective internal control over financial reporting may result in sanctions or investigations by regulatory authorities, such as the SEC, and loss of investor confidence in the reliability of our financial statements,
which in turn could harm our business and negatively impact the trading price of our common stock. Furthermore, we
anticipate that we will continue to incur considerable costs and use significant management and other resources in an effort to comply with Section 404 and other requirements of the Sarbanes-Oxley Act of 2002.

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We are dependent on a limited number of customers for a significant portion of our revenues and this dependence is likely to continue.

We have been dependent on a limited number of customers for a significant portion of our revenue. Our top five customers accounted for approximately 37.1%, 24.1%, and 27.9% of our revenues in the years ended September 30, 2007, 2008, and 2009,
respectively. Dependence on a few customers could make it difficult to negotiate attractive prices for our products and could expose us to the risk of substantial losses if a single dominant customer stops purchasing our products. We expect that a
limited number of customers will continue to contribute to a significant portion of our sales in the near future. Our ability to maintain close relationships with these top customers is essential to the growth and profitability of our business. If
we fail to sell our products to one or more of these top customers in any particular period, or if a large customer purchases fewer of our products, defers orders or fails to place additional orders with us, or if we fail to develop additional major
customers, our revenue could decline, and our results of operations could be adversely affected. A small number of prismatic cell customers and A123Systems have historically accounted for a substantial portion of our revenues. In the year ended
September 30, 2007, sales to A123Systems accounted for 14% of our revenues. In the same period, our top five customers in aggregate contributed to approximately 37.1% of our revenues. Our agreement with A123Systems, as amended on August 18, 2005,
terminated in accordance with its terms on August 30, 2007. As we expand our product portfolio and target new market segments, our customer composition as well as the identity and concentration of our top customers are expected to change from period
to period. The termination of our agreement with A123Systems did not materially and adversely affect our financial condition and results of operation during the 2008 fiscal year or 2009 fiscal year, and in the future we expect that increases in our
sales of aluminum cases, cylindrical cells and polymer cells will more than offset the loss of revenues from A123Systems. However, if we fail to find alternative sources of demand for our lithium-phosphate cells, our revenue may be substantially
impacted.

We do not have long-term purchase commitments from our customers, which may result in significant uncertainties and volatility with respect to our revenue from period to period.

We do not have long-term purchase commitments from our customers and the term of our sales contracts with our customers is typically one year. Furthermore, these contracts leave certain major terms such as price and quantity of products open to be
determined in each purchase order. These contracts also allow parties to re-adjust the contract price for substantial changes in market conditions. As a result, if our customers hold stronger bargaining power than us or the market conditions are in
their favor, we may not be able to enjoy the price downside protection or upside gain. Furthermore, our customers may decide not to continue placing purchase orders with us in the future at the same level as in prior periods. As a result, our
results of operations may vary from period to period and may fluctuate significantly in the future.

We may not be able to accurately plan our production based on our sales contracts, which may result in excess product inventory or product shortages.

Our sales contracts typically provide for a non-binding, three-month forecast on the quantity of products that our customers may purchase from us. We typically have only a 15-day lead time to manufacture products to meet our
customers requirements once our customers place orders with us. To meet the short delivery deadline, we generally make significant decisions on our production level and timing, procurement, facility requirements, personnel needs and other
resources requirements based on our estimate in light of this forecast, our past dealings with such customers, market conditions and other relevant factors. Our customers final purchase orders may not be consistent with our estimates. If the
final purchase orders substantially differ from our estimates, we may have excess product inventory or product shortages. Excess product inventory could result in unprofitable sales or write-offs as our products are susceptible to obsolescence and
price declines. Producing additional products to make up for any product shortages within a short time frame may be difficult, making us unable to fill out the purchase orders. In either case, our results of operation would fluctuate from period to
period.

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We may face impairment charges if economic environments in which our businesses operate and key economic and business assumptions substantially change.

Assessment of the potential impairment of property, plant and equipment, goodwill and other identifiable intangible assets is an integral part of our normal ongoing review of operations. Testing for potential impairment of long-lived assets is
dependent on numerous assumptions and reflects our best estimates at a particular point in time, which may vary from testing date to testing date. The economic environments in which our businesses operate and key economic and business assumptions
with respect to projected product selling prices and materials costs, market growth and inflation rates, can significantly affect the outcome of impairment tests. Estimates based on these assumptions may differ significantly from actual results.
Changes in factors and assumptions used in assessing potential impairments can have a significant impact on both the existence and magnitude of impairments, as well as the time at which such impairments are recognized. Future changes in the economic
environment and the economic outlook for the assets being evaluated could also result in impairment charges. Any significant asset impairments would adversely impact our financial results.

We depend on third parties to supply key raw materials and components to us. Failure to obtain a sufficient supply of these raw materials and components in a timely fashion and at reasonable costs could significantly delay our production and
shipments, which would cause us to breach our sales contracts with our customers.

We purchase from Chinese domestic suppliers certain key raw materials and components such as electrolytes, electrode materials and import separators, a key component of battery cells from foreign countries. We purchase raw materials and components
on the basis of purchase orders. In the absence of firm and long-term contracts, we may not be able to obtain sufficient supply of these raw materials and components from our existing suppliers or alternates in a timely fashion or at a reasonable
cost. Our failure to secure sufficient supply of key raw materials and components in a timely fashion would result in a significant delay in our production and shipments, which may cause us to breach our sales contracts with our customers.
Furthermore, failure to obtain sufficient supply of these raw materials and components at a reasonable cost could also harm our revenue and gross profit margins.

Fluctuations in prices and availability of raw materials, particularly lithium cobalt dioxide, could increase our costs or cause delays in shipments, which would adversely impact our business and results of operations.

Our operating results could be adversely affected by increases in the cost of raw materials, particularly lithium cobalt dioxide, the primary cost component of our battery products, or other product parts or components. Lithium cobalt dioxide mainly
consists of cobalt. Cobalt market prices averaged $27.20 per pound in fiscal year 2007, $41.60 per pound in fiscal year 2008, and $34.9 per pound in fiscal year 2009. Cobalt traded as high as $58.1 per pound on October 8, 2008. The
increase in cobalts market price has negatively impacted our financial results in recent years. We historically have not been able to fully offset the effects of higher costs of raw materials through price increases to customers or by way of
productivity improvements.

Fuel costs have also increased significantly in recent months. Our results of operations could be adversely affected if we are unable to pass along price increases to address higher fuel costs related to the distribution of products from our
warehouses and distribution centers to our customers.

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A significant increase in the price of one or more raw materials, parts or components or the inability to successfully implement price increases / surcharges to mitigate such cost increases could have a material adverse effect on our results of
operations.

We face intense competition from other battery cell manufacturers, many of which have significantly greater resources.

The market for battery cells used for portable electronic devices such as cellular phones is intensely competitive and is characterized by frequent technological changes and evolving industry standards. We expect competition to become more intense.
Increased competition may result in decline in average selling prices, causing a decrease in gross profit margins. We have faced and will continue to face competition from manufacturers of traditional rechargeable battery cells, such as
nickel-cadmium batteries, from manufacturers of rechargeable battery cells of more recent technologies, such as nickel-metal hydride and liquid electrolyte, other manufacturers of lithium-ion battery cells, as well as from companies engaged in the
development of batteries incorporating new technologies. Other manufacturers of lithium-ion battery cells currently include Sanyo Electric Co., Sony Corporation, Matsushita Electric Industrial Co., Ltd. (Panasonic), GS Group, NEC Corporation,
Hitachi Ltd., LG Chemical Ltd., Samsung Electronics Co., Ltd., BYD Co. Ltd., Tianjin Lishen Battery Joint Stock Co., Ltd., Henan Huanyu Group, Harbin Coslight Technology International Group Co., Ltd., Amperex Technology Limited and E-one Moli Energy
(Canada) Limited.

Many of these existing competitors have greater financial, personnel, technical, manufacturing, marketing, sales and other resources than we do. As a result, these competitors may be in a stronger position to respond quickly to market opportunities,
new or emerging technologies and evolving industry standards. Many of our competitors are developing a variety of battery technologies, such as lithium polymer and fuel cell batteries, which are expected to compete with our existing product line.
Other companies undertaking R&D activities of solid-polymer lithium-ion batteries have developed prototypes and are constructing commercial scale production facilities. It is possible that our competitors will be able to introduce new products
with more desirable features than ours and their new products will gain market acceptance. If our competitors successfully do so, we may not be able to maintain our competitive position and our future success would be materially and adversely
affected.

We depend on third-party battery pack manufacturers to incorporate our products into battery packs to make batteries ready for use in various portable consumer electronics. If these factories fail to properly assemble our products and battery
packs, resulting in defective battery cells, our reputation could be severely damaged and our sales could be materially and adversely affected. Moreover, our battery technology may only be commercially viable as a component of other companies'
products, and these companies may choose not to include our systems in their products.

We manufacture only battery cells, the key component of a battery. Battery cells need to be incorporated into battery packs to constitute batteries ready for use in various portable consumer electronics. Some of our end application customers may ask
us to designate certain third-party battery pack manufacturers to assemble our products into batteries. While assembly is a fairly straightforward process as it does not involve complex technologies, the batteries could malfunction unless assembled
properly. If the battery pack manufacturers with whom we cooperate fail to assemble batteries properly and cause a large number of batteries to be defective due to reasons unrelated to the quality of our products, our reputation could be severely
damaged. In addition, if these battery pack manufacturers are unable to assemble a sufficient number of batteries to meet the requirements of our end application customers and we cannot timely find qualified alternative battery pack manufacturers,
our sales could be materially and adversely affected.

To be commercially viable, our batteries must be integrated in most cases into products manufactured by other companies. These other companies may not be able to manufacture appropriate products or, if they do manufacture such products, may choose
not to use our technology. Any integration, design, manufacturing or marketing problems encountered by companies using our products could adversely affect the market for our products and our financial results. Any perceived problem while conducting
demonstrations of our batteries could hurt our reputation and the reputation of our products, which could impede the development of our business.

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We have demonstrated our battery technology in the past and we plan to conduct additional demonstrations in public and in private in the future. We also expect our customers to conduct field testing and pilot programs to evaluate products which
utilize our technology. Although to date we have not experienced significant problems in demonstration or testing, future demonstrations and testing could encounter problems for a number of reasons, including the failure of our technology, the
failure of the technology of others, the failure to combine these technologies properly and the failure to maintain and service the test systems properly. Many of these potential problems and delays are beyond our control. In addition, field test
programs, by their nature, involve delays and modifications. Any problem or perceived problem with our field tests could hurt our reputation and the reputation of our products, which could impede the development of our business.

Our business depends substantially on the continuing efforts of our senior executives and other key personnel, and our business may be severely disrupted if we lost their services.

Our future success heavily depends on the continued service of our senior executives and other key employees. In particular, we rely on the expertise and experience of our chief executive officer and president, Mr. Xiangqian Li, our chief technical
officer, Dr. Huanyu Mao, our chief financial officer, Mr. Tony Shen, or our chief operating officer, Mr. Kenneth Broom. If one or more of our senior executives are unable or unwilling to continue to work for us in their present positions, we may
have to spend a considerable amount of time and resources searching, recruiting and integrating the replacements into our operations, which would substantially divert managements attention from our business and severely disrupt our business.
This may also adversely affect our ability to execute our business strategy. Moreover, if any of our senior executives joins a competitor or forms a competing company, we may lose customers, suppliers, know-how and key personnel. Each of our
executive officers has entered into an employment agreement with us, which contains non-competition and confidentiality clauses. However, if any dispute arises between our executive officers and the Company, it is hard to predict the extent to which
any of these agreements could be enforced in China, where these executive officers reside (other than Mr. Broom, who resides in Canada), in light of the uncertainties with Chinas legal system.

The success of our business depends on our ability to attract, train and retain highly skilled employees and key personnel.

Because of the highly specialized, technical nature of our business, we must attract, train and retain a sizable workforce comprising highly skilled employees and other key personnel. Since our industry is characterized by high demand and intense
competition for talent, we may have to pay higher salaries and wages and provide greater benefits in order to attract and retain highly skilled employees or other key personnel that we will need to achieve our strategic objectives. As we are still a
relatively young company and our business has grown rapidly, our ability to train and integrate new employees into our operations may not meet the requirements of our growing business. Our failure to attract, train or retain highly skilled employees
and other key personnel in numbers that are sufficient to satisfy our needs would materially and adversely affect our business.

Manufacturing or use of our products may cause accidents, which could result in significant production interruption, delay or claims for substantial damages.

Due to the high energy density inherent in lithium-based batteries, our batteries can pose certain safety risks, including the risk of fire. Although we incorporate safety procedures in the research, development, manufacture and transportation of
batteries that are designed to minimize safety risks, the manufacture or use of our products may still cause accidents. Any accident, whether occurring at the manufacturing facilities or from the use of our products, may result in significant
production interruption, delays or claims for substantial damages caused by personal injuries or property damages.

We extend relatively long payment terms to our customers.

As is customary in the industry in the PRC, we extend relatively long payment terms and provide generous return policies to our customers. As a result of the size of many of our orders, these extended terms may adversely affect our cash flow and our
ability to fund our operations out of our operating cash flow. In addition, although we attempt to establish appropriate reserves for our receivables, those reserves may not prove to be adequate in view of actual
levels of bad debts. The failure of our customers to pay us timely would negatively affect our working capital, which could in turn adversely affect our cash flow.

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Our customers often place large orders for products, requiring fast delivery, which impacts our working capital. If our customers do not incorporate our products into their products and sell them in a timely fashion, for example, due to excess
inventories, sales slowdowns or other issues, they may not pay us in a timely fashion, even on our extended terms. Our customers failure to pay may force us to defer or delay further product orders, which may adversely affect our cash flows,
sales or income in subsequent periods.

We manufacture and market lithium-based battery cells only. If a viable substitute product or chemistry emerges and gains market acceptance, our business, financial condition and results of operations will be materially and adversely
affected.

We manufacture and market lithium-based battery cells only. As we believe that the market for lithium-based batteries has good growth potential, we have focused our R&D activities on exploring new chemistry and formula to enhance our product
quality and features while reducing cost. Some of our competitors are conducting R&D on alternative battery technologies, such as fuel cells. If any viable substitute product emerges and gains market acceptance because it has more enhanced
features, more power, more attractive pricing, or better reliability, the market demand for our products may be reduced, and accordingly our business, financial condition and results of operations would be materially and adversely affected.

We face risks associated with the marketing, distribution and sale of our products internationally, and if we are unable to effectively manage these risks, they could impair our ability to expand our business abroad.

In the years ended September 30, 2008 and 2009, we derived 28.6% and 37.2% respectively of our sales from outside the PRC. The marketing, international distribution and sale of our products expose us to a number of risks, including:

- fluctuations in currency exchange rates;
- difficulty in engaging and retaining distributors that are knowledgeable about, and can function effectively in, overseas markets;
- increased costs associated with maintaining marketing efforts in various countries;
- difficulty and cost relating to compliance with the different commercial and legal requirements of the overseas markets in which we offer our products;
- inability to obtain, maintain or enforce intellectual property rights; and
- trade barriers such as export requirements, tariffs, taxes and other restrictions and expenses, which could increase the prices of our products and make us less competitive in some countries.

We rely on third parties whose operations are outside our control.

We rely on arrangements with third-party shippers and carriers such as independent shipping companies for timely delivery of our products to our customers. As a result, we may be subject to carrier disruptions and increased costs due to factors that
are beyond our control, including labor strikes, inclement weather, natural disasters and rapidly increasing fuel costs. If the services of any of these third parties become unsatisfactory, we may experience delays in meeting our customers
product demands and we may not be able to find a suitable replacement on a timely basis or on commercially reasonable terms. Any failure to deliver products to our customers in a timely and accurate manner may damage our reputation and could cause
us to lose customers.

We also utilize third-party distributors and manufacturer's representatives to sell, install and service certain of our products. While we are selective in whom we choose to represent us, it is difficult for us to ensure that our
distributors and manufacturer's representatives consistently act in accordance with the standards we set for them. To the extent any of our end-customers have negative experiences with any of our distributors or manufacturer's representatives; it
could reflect poorly on us and damage our reputation, thereby negatively impacting our financial results.

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Defects in our products could result in a loss of customers and decrease in revenue, unexpected expenses and a loss of market share.

We have purchased certain product liability insurance from some PRC-based insurance companies to provide against any claims against us based on our product quality. If any of our products is found to have reliability, quality or compatibility
problems, we will be required to accept returns, provide replacements, provide refunds, or pay damages. As our insurance policy imposes a ceiling for maximum coverage and high deductibles, we may not be able to obtain from our insurance policy a
sufficient amount to compensate our customers for damages they suffered attributable to the quality of our products. Moreover, our insurance policy also excludes certain types of claims from its coverage, and if any of our customers claims
against us falls into those exclusions, we would not receive any amount from our insurance policy at all. In either case, we may still be required to incur substantial amounts to indemnify our customers in respect of their product quality claims
against us, which would materially and adversely affect the results of our operations and severely damage our reputation.

We are subject to a patent infringement lawsuit in the United States involving our production of battery cells for A123Systems for use in cordless power tools. If the court holds against us, we may be required to pay monetary damages,
terminate our production of the cells, or pay royalties to continue the production. This would in turn materially adversely affect our ability to execute our growth strategy, revenues and business prospects.

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. The
plaintiffs alleged that by manufacturing rechargeable lithium cells for A123Systems for use in DeWalt 36-volt cordless power tools manufactured by Black & Decker, we have infringed two U.S. patents owned by and exclusively licensed to the
plaintiffs. The plaintiffs seek injunctive relief and damages in an unspecified amount. A123Systems, Black & Decker Corporation and Black & Decker (U.S.) Inc. have also been named as co-defendants in this lawsuit. The court has not ruled on
this lawsuit. We understand that this lawsuit is a countersuit against A123Systems, which filed a claim against Hydro-Quebec in the United States District Court of Massachusetts in April 2006. In that suit, A123Systems sought declaratory relief that
the two said U.S. patents are invalid and that A123Systems is not infringing either of these two patents.

Following the filing of the lawsuit, the United States Patent and Trademark Office reexamined the patents. The patents were re-issued with substantial modification of the patent claims. The plaintiffs have advised that, in their view, the lawsuit
continues to be viable against the defendants, including China BAK. The plaintiffs' position has not been tested. Currently pending is the plaintiffs' motion to amend their complaint to take the USPTO action into account.

If the court were to issue an adverse decision, the Company could face a substantial monetary damages award. While such an adverse decision could also prohibit the Company from future production of rechargeable lithium cells manufactured for
A123Systems or may require the Company to pay royalties to engage in any such production, the Company has no plans to pursue production of batteries for A123. The court has not issued any substantive decisions in the litigation and there has been no
substantive pretrial discovery. As a result, at this time, the Company is unable to express a view on the extent of any possible award of damages that might be rendered in the litigation.

We may be exposed to infringement or misappropriation claims by third parties, which, if determined adversely to us, could cause our loss of significant rights and inability to continue providing our existing product offerings.

Our success also depends largely on our ability to use and develop our technology and know-how without infringing the intellectual property rights of third parties. The validity and scope of claims relating to lithium-ion battery technology patents
involve complex scientific, legal and factual questions and analysis and, therefore, may be highly
expensive and time-consuming. If there is a successful claim of infringement against us, we may be required to pay substantial damages to the party claiming infringement, develop non-infringing technologies or enter into royalty or license
agreements that may not be available at acceptable terms, if at all. Our failure to develop non-infringing technologies or license the proprietary rights on a timely basis would harm our business. Protracted litigation could result in our customers,
or potential customers, deferring or limiting their purchase or use of our products until resolution of such litigation. Parties making the infringement claim may also obtain an injunction that can prevent us from selling our products or using
technology that contains the allegedly infringing contents. Any intellectual property litigation could have a material adverse effect on our business, results of operation and financial condition.

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Other future litigation could impact our financial results and condition.

Our business, results of operations and financial condition could be affected by other significant future litigation or claims adverse to us. Types of potential litigation cases include: product liability, contract, employment-related, labor
relations, personal injury or property damage, intellectual property, stockholder claims and claims arising from any injury or damage to persons, property or the environment from hazardous substances used, generated or disposed of in the conduct of
our business (or that of a predecessor to the extent we are not indemnified for those liabilities).

We may not be able to prevent others from unauthorized use of our intellectual property, or others may challenge our intellectual property rights, which could harm our business and competitive position.

We rely on a combination of patent, trademark and trade secret laws, as well as confidentiality agreements to protect our intellectual property rights. As of September 30, 2009, we owned 344 registered patents in China and had 573 pending patent
applications in China. We had 32 registered trademarks in China and 29 registered trademarks in the United States, European Union, Korea, Russia, Taiwan and Hong Kong that cover various categories of goods and services. We can make no assurances
that all the pending patent applications will result in issue of patents or, if issued, that it will sufficiently protect our intellectual property rights. Nor can we make any assurances that any patent, trademark or other intellectual property
rights that we have obtained may not be challenged by third parties. Implementation of PRC intellectual property-related laws has historically been lax, primarily because of ambiguities in the PRC laws and difficulties in enforcement. Accordingly,
intellectual property rights and confidentiality protections in China may not be as effective as in the United States or other countries. Policing unauthorized use of proprietary technology is difficult and expensive. The steps we have taken may not
be adequate to prevent unauthorized use of our intellectual property rights. Reverse engineering, unauthorized copying or other misappropriation of our proprietary technologies could enable third parties to benefit from our technologies without
paying us any royalties. Though we are not currently involved in any litigation with respect to intellectual property, we may need to enforce our intellectual property rights through litigation.

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We do not hold the property ownership rights for facilities located in the PRC. We may lose some or all of the land use rights that we have obtained. We are currently required to pledge land use rights and property rights that we do not
currently have or do not have the requisite government approval to pledge.

We currently do not hold the property ownership rights to at least one of the tracts of property on which we have constructed our manufacturing facilities and other related facilities in the PRC. Under relevant PRC laws and regulations, because we
previously did not have the land use right for the underlying land, we were not eligible to apply for the required property ownership right certificates and construction or zoning permits for the facilities we later built on the land, including our
manufacturing facilities, and therefore we are not deemed to be the rightful owner for these facilities. While we have purchased the land use rights and construction and zoning permits relating to all of our facilities, we can make no assurances
that we will not be subject to any fine or other penalty for our past non-compliance with these requirements. If we are unsuccessful in acquiring the property ownership rights, we could be forced to halt our production, vacate our current premises,
and lose all of our facilities situated on the land without any compensation, which would adversely and materially affect our business, results of operations and our financial condition.

Pursuant to our land use rights certificate relating to our Tianjin facility, the Tianjin government had requested that we complete construction of the Tianjin facility before September 30, 2008. As of September 30, 2008, we had not done so.
Notwithstanding this requirement, we have obtained an extension from the Business Administration Bureau of Beichen District, Tianjin, to make the remaining contribution of the registered capital by December 11, 2009, which we have interpreted as an
extension of the completion date of construction to this date. If we fail to make the remaining contribution and complete the construction by the extension date or obtain approval for a further extension of the completion date from the relevant
government bureau, there is a risk that the land use rights certificate relating to our Tianjin facility will become invalid. Should this occur, we could be forced to halt our production, vacate our current premises, and lose all of our facilities
situated on the land without any compensation, which would adversely and materially affect our business, results of operations and our financial condition.

Pursuant to the property ownership and land use rights certificate that we obtained relating to the Research and Development Test Centre to be constructed in Shenzhen, we are required to complete at least 25% of the construction of the new Research
and Development Test Centre facility by September 30, 2008. As of September 30, 2008, we had not done so. Notwithstanding this requirement, the Shenzhen government has agreed to increase the dimensions of the Research and Development Test Centre and
signed two supplement agreements with us. According to the supplement agreements, we are required to complete the construction by May 6, 2011. In addition, according to the property ownership and land use rights certificate, such land may not
be pledged without the approval of the relevant government office. We are required to pledge our property ownership and land use rights certificate in relation to the new Research and Development Test Centre to China Development Bank pursuant to the
loan agreement entered into with it. As of September 30, 2009, we were in the process of negotiating with the relevant government bureau for the requisite approval. In addition, the so-named property ownership and land use rights
certificate relating to this facility that we were issued lacks certain terms relating to property ownership rights, which appears to indicate that the granting government has so far only granted us the relevant land use rights. As a result,
this certificate may not be adequate evidence of our property ownership rights to this property. We anticipate that the government will re-grant this certificate with adequate property ownership indicia after we have satisfied the above construction
requirement and followed certain procedures. If we have misinterpreted our agreement with the Shenzhen government or our application for a reissued certificate with property ownership rights proves unsuccessful, we could be forced to halt our
production, vacate our current premises, lose all of our facilities situated on the land without any compensation, and/or be considered in breach of our loan agreement with China Development Bank, any of which would adversely and materially affect
our business, results of operations and our financial condition.

As of September 30, 2009, we have insurance for all of the buildings located at our BAK Industrial Park facility and owned by Shenzhen BAK, which constitute all of our PRC-based facilities in Shenzhen. We also had insurance for our facilities at
Tianjin, PRC. We did not have insurance for our R&D Test Centre to be constructed in Shenzhen.

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Compliance with environmental regulations can be expensive, and our failure to comply with these regulations may result in adverse publicity and a material adverse effect on our business.

As a manufacturer, we are subject to various PRC environmental laws and regulations on air emission, waste water discharge, solid waste and noise. Although we believe that our operations are in substantial compliance with current environmental laws
and regulations, we may not be able to comply with these regulations at all times as the PRC environmental legal regime is evolving and becoming more stringent. Therefore, if the PRC government imposes more stringent regulations in the future, we
will have to incur additional substantial costs and expenses in order to comply with new regulations, which may negatively affect our results of operations. If we fail to comply with any of the present or future environmental regulations in material
aspects, we may suffer from negative publicity and may be required to pay substantial fines, suspend or even cease operations. Failure to comply with PRC environmental laws and regulations may materially and adversely affect our business, financial
condition and results of operations.

To the extent we ship our products outside of the PRC, or to the extent our products are used in products sold outside of the PRC, they may be affected by the following: The transportation of non-rechargeable and rechargeable lithium batteries is
regulated by the International Civil Aviation Organization (ICAO), and corresponding International Air Transport Association (IATA), Pipeline & Hazardous Materials Safety Administration (PHMSA), Dangerous Goods Regulations and the International
Maritime Dangerous Goods Code (IMDG), and in the PRC by General Administration of Civil Aviation of China and Maritime Safety Administration of Peoples Republic of China. These regulations are based on the United Nations (UN) Recommendations
on the Transport of Dangerous Goods Model Regulations and the UN Manual of Tests and Criteria. We currently ship our products pursuant to ICAO, IATA and PHMSA hazardous goods regulations. New regulations that pertain to all lithium battery
manufacturers went into effect in 2003 and 2004, and additional regulations will go into effect on October 1, 2009. The regulations require companies to meet certain testing, packaging, labeling and shipping specifications for safety reasons. We
comply with all current PRC and international regulations for the shipment of our products, and will comply with any new regulations that are imposed. We have established our own testing facilities to ensure that we comply with these regulations. If
we were unable to comply with the new regulations, however, or if regulations are introduced that limit our ability to transport our products to customers in a cost-effective manner, this could have a material adverse effect on our business,
financial condition and results of operations.

We have significant short-term debt obligations, which mature in less than one year. Failure to extend those maturities of, or to refinance, that debt could result in defaults, and in certain instances, foreclosures on our assets. Moreover, we
may be unable to obtain financing to fund ongoing operations and future growth.

At September 30, 2009, we had short-term bank loans of $139.2 million, long-term bank loans of $16.1 million maturing within one year, long-term bank loans of $39.6 million maturing over one year, and bills payable of $53.9 million,
a substantial portion of which is secured by certain of our assets that amounted to $89.9 million. Our inventory, machinery and equipment worth $55.1 million secured the short-term bank loans and long-term bank loans, and our deposits worth
$31.1 million secured certain bills payable, construction payable and short-term bank loans. Failure to obtain extensions of the maturity dates of, or to refinance, these obligations or to obtain additional equity financing to meet these debt
obligations would result in an event of default with respect to such obligations and could result in the foreclosure on the collateral. The sale of such collateral at foreclosure would significantly disrupt our ability to produce products for our
customers in the quantities required by customer orders or deliver products in a timely fashion, which could significantly lower our revenues and profitability. We may be able to refinance or obtain extensions of the maturities of all or some of
such debt only on terms that significantly restrict our ability to operate, including terms that place additional limitations on our ability to incur other indebtedness, to pay dividends, to use our assets as collateral for other financing, to sell
assets or to make acquisitions or enter into other transactions. Such restrictions may adversely affect our ability to finance our future operations or to engage in other business activities. If we finance the repayment of our outstanding
indebtedness by issuing additional equity or convertible debt securities, such issuances could result in substantial dilution to our stockholders.

While we believe that our revenue growth projections and our ongoing cost controls will allow us to generate cash and achieve profitability in the foreseeable future, there is no assurance as to when or if we will be able to achieve our projections.
Our future cash flows from operations, combined with our accessibility to cash and credit, may not be sufficient to allow us to finance ongoing operations or to make required investments for future growth. We may
need to seek additional credit or access capital markets for additional funds. There is no assurance that we would be successful in this regard.

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We have limited insurance coverage against damages or loss we might suffer.

The insurance industry in China is still in an early stage of development and business interruption insurance available in China offers limited coverage compared to that offered in many developed countries. We do not carry business interruption
insurance and therefore any business disruption or natural disaster could result in substantial damages or losses to us. In addition, there are certain types of losses (such as losses from forces of nature) that are generally not insured because
either they are uninsurable or insurance cannot be obtained on commercially reasonable terms. Should an uninsured loss or a loss in excess of insured limits occur, our business could be materially adversely affected. As of September 30, 2009, we
have insurance for all of the buildings located at our BAK Industrial Park facility and owned by Shenzhen BAK, which constitute all of our PRC-based facilities in Shenzhen. We also had insurance for our facilities at Tianjin, PRC. We did not have
insurance for our R&D Test Centre to be constructed in Shenzhen. If we were to suffer any losses or damages to any uninsured facilities, or if our insurance does not cover any losses or damages that occur, our business, financial condition and
results of operations would be materially and adversely affected.

Risks Related to Doing Business in China

Adverse changes in political and economic policies of the PRC government could impede the overall economic growth of China, which could reduce the demand for our products and damage our business.

We conduct substantially all of our operations and generate most of our revenue in China. Accordingly, our business, financial condition, results of operations and prospects are affected significantly by economic, political and legal developments in
China. The PRC economy differs from the economies of most developed countries in many respects, including:

- a higher level of government involvement;
- an early stage of development of the market-oriented sector of the economy;
- a rapid growth rate;
- a higher level of control over foreign exchange; and
- the allocation of resources.

As the PRC economy has been transitioning from a planned economy to a more market-oriented economy, the PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. While these measures may
benefit the overall PRC economy, they may also have a negative effect on us.

Although the PRC government has in recent years implemented measures emphasizing the utilization of market forces for economic reform, the PRC government continues to exercise significant control over economic growth in China through the allocation
of resources, controlling the payment of foreign currency-denominated obligations, setting monetary policy and imposing policies that impact particular industries or companies in different ways.

Any adverse change in economic conditions or government policies in China could have a material adverse effect on the overall economic growth in China, which in turn could lead to a reduction in demand for our products and consequently have a
material adverse effect on our business and prospects.

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Uncertainties with respect to the PRC legal system could limit the legal protections available to you and us.

We conduct substantially all of our business through our operating subsidiaries in China. Our operating subsidiaries are generally subject to laws and regulations applicable to foreign investments in China and, in particular, laws applicable to
FIEs. The PRC legal system is based on written statutes, and prior court decisions may be cited for reference, but have limited precedential value. Since 1979, a series of new PRC laws and regulations have significantly enhanced the protections
afforded to various forms of foreign investments in China. However, since the PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and
rules involve uncertainties for you and us. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.

If we are found to have failed to comply with applicable laws, we may incur additional expenditures or be subject to significant fines and penalties.

Our operations are subject to PRC laws and regulations applicable to us. However, many PRC laws and regulations are uncertain in their scope, and the implementation of such laws and regulations in different localities could have significant
differences. In certain instances, local implementation rules and/or the actual implementation are not necessarily consistent with the regulations at the national level. Although we strive to comply with all the applicable PRC laws and regulations,
we cannot assure you that the relevant PRC government authorities will not later determine that we have not been in compliance with certain laws or regulations.

In addition, our facilities and products are subject to many laws and regulations. Our failure to comply with these and other applicable laws and regulations in China could subject us to administrative penalties and injunctive relief, as well as
civil remedies, including fines, injunctions and recalls of our products. It is possible that changes to such laws or more rigorous enforcement of such laws or with respect to our current or past practices could have a material adverse effect on our
business, operating results and financial condition. Further, additional environmental, health or safety issues relating to matters that are not currently known to management may result in unanticipated liabilities and expenditures.

We currently enjoy a reduced tax rate and other government incentives, and the loss of or reduction in these benefits may materially and adversely affect our business and results of operations.

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

The tax holiday of Shenzhen BAK commenced in 2002, the first calendar year in which Shenzhen BAK had assessable profit, and ended on December 31, 2006. In addition, due to additional capital contributed by BAK International to Shenzhen BAK in both
2005 and 2006 and Shenzhen BAKs qualification as an advanced technology enterprise in 2007 and 2008, Shenzhen BAK was granted a preferential income tax rate of 7.5%, 11.8% and 12.6% for calendar years 2007, 2008 and 2009, respectively. In
accordance with the transition period of the new corporate income tax law (the New CIT Law) and before considering the above-mentioned tax concessions, Shenzhen BAKs income tax rate for calendar years  2010 and 2011 are
expected to be  22% and 24%, respectively, and starting in calendar year 2012, it is expected to be subject to an income tax rate of 25%. Therefore, Shenzhen BAKs income tax rates after consideration of its tax concessions are expected to
be  15% for both calendar years  2010 and 2011, and starting in calendar year 2012, it is expected to be subject to an income tax rate of 25%.

BAK Electronics, established in August 2005, has been eligible for the same preferential tax treatment previously applicable to Shenzhen BAK and was in the tax holiday and fully exempt from any enterprise income tax for calendar years 2006 and 2007
followed by a three-year 50% reduction in its enterprise income tax rate. In addition, pursuant to the transition period of the New CIT Law and before considering the above-mentioned 50% reduction, BAK Electronics income tax rates for calendar
years 2009, 2010 and 2011 are expected to be 20%, 22% and 24%, respectively, and starting in calendar year 2012, it is expected to be subject to an income tax rate of 25%. Therefore,
BAK Electronics income tax rate after consideration of its tax holiday are expected to be 10%, 11% and 24% for calendar years 2009, 2010 and 2011, respectively, and starting in calendar year 2012, it is expected to be subject to an income tax
rate of 25%. BAK Electronics did not incur any enterprise income tax for the current year due to the current tax losses carried forward from the calendar year 2008.

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BAK Tianjin is currently paying no enterprise income tax due to cumulative tax losses.

We rely on dividends and other distributions on equity paid by our subsidiaries for our cash needs.

We are a holding company, and we conduct all of our operations through our three subsidiaries in PRC: Shenzhen BAK, BAK Electronics and BAK Tianjin, each a limited liability company established in China. We rely on dividends and other distributions
on equity paid by our PRC subsidiaries for our cash needs, including the funds necessary to pay dividends and other cash distributions to our stockholders, to service any debt we may incur and to pay our operating expenses. Current regulations in
the PRC permit payment of dividends only out of accumulated profits as determined in accordance with PRC accounting standards and regulations. According to the articles of association of our PRC subsidiaries, each of our PRC subsidiaries is required
to set aside at least 10% of its after-tax profit based on the PRC accounting standards and regulations each year to its enterprise development reserve, until the balance in the reserve reaches 50% of the registered capital of the company. Funds in
the reserve are not distributable to us in forms of cash dividends, loans or advances. In addition, if our PRC subsidiaries incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends
or make other distributions to us, which in turn will adversely affect our available cash. Any limitations on the ability of our PRC subsidiaries to transfer funds to us could materially and adversely limit our ability to grow, make investments or
acquisitions that could be beneficial to our business, pay dividends and otherwise fund and conduct our business.

Restrictions on currency exchange may limit our ability to receive and use our sales revenue effectively.

Most of our sales revenue and expenses are denominated in RMB. Under PRC law, the RMB is currently convertible under the current account, which includes dividends and trade and service-related foreign exchange transactions, but not under
the capital account, which includes foreign direct investment and loans. Currently, our PRC operating subsidiaries may purchase foreign currencies for settlement of current account transactions, including payments of dividends to us,
without the approval of the State Administration of Foreign Exchange, or SAFE, by complying with certain procedural requirements. However, the relevant PRC government authorities may limit or eliminate our ability to purchase foreign currencies in
the future. Since a significant amount of our future revenue will be denominated in RMB, any existing and future restrictions on currency exchange may limit our ability to utilize revenue generated in RMB to fund our business activities outside
China that are denominated in foreign currencies.

Foreign exchange transactions by PRC operating subsidiaries under the capital account continue to be subject to significant foreign exchange controls and require the approval of or need to register with PRC government authorities, including SAFE. In
particular, if our PRC operating subsidiaries borrow foreign currency through loans from us or other foreign lenders, these loans must be registered with SAFE, and if we finance the subsidiaries by means of additional capital contributions, these
capital contributions must be approved by certain government authorities, including the Ministry of Commerce, or MOFCOM, or their respective local counterparts. These limitations could affect their ability to obtain foreign exchange through debt or
equity financing.

Fluctuation in the value of the RMB may result in foreign currency translation losses or in increased costs to us.

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 62.9% of our revenues and 96.9% of our costs and
expenses for the year ended September 30, 2009 are denominated in RMB, with the balance denominated in U.S. dollars. Approximately 99.6% of our assets excluding cash were denominated in RMB as of September 30, 2009. As a result, we are exposed to
foreign exchange risk as our revenues and results of operations may be affected by fluctuations in the exchange rate between U.S. dollars and RMB. If the RMB depreciates against the U.S. dollar, the value of our RMB revenues, earnings and assets as
expressed in our U.S. dollar financial statements will decline. Assets and liabilities of our operating subsidiaries are translated into U.S. dollars at the exchange rate at the balance sheet date, their equity accounts are translated at historical
exchange 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 $8.8 million based on our outstanding revenues, costs and expenses, assets and liabilities denominated in RMB as of September 30, 2009. As of September 30, 2009, our accumulated
other comprehensive income was $24.8 million. We have not entered into any hedging transactions in an effort to reduce our exposure to foreign exchange risk.

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Failure to comply with PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident stockholders to personal liability, limit our ability to acquire PRC companies or to
inject capital into our PRC subsidiaries, limit our PRC subsidiaries ability to distribute profits to us or otherwise materially adversely affect us.

In October 2005, the PRC State Administration of Foreign Exchange, or SAFE, issued the Notice on Relevant Issues in the Foreign Exchange Control over Financing and Return Investment Through Special Purpose Companies by Residents Inside China,
generally referred to as Circular 75, which required PRC residents to register with the competent local SAFE branch before establishing or acquiring control over an offshore special purpose company, or SPV, for the purpose of engaging in an equity
financing outside of China on the strength of domestic PRC assets originally held by those residents. Internal implementing guidelines issued by SAFE, which became public in June 2007 (known as Notice 106), expanded the reach of Circular 75 by (i)
purporting to cover the establishment or acquisition of control by PRC residents of offshore entities which merely acquire control over domestic companies or assets, even in the absence of legal ownership; (ii) adding requirements
relating to the source of the PRC residents funds used to establish or acquire the offshore entity; (iii) covering the use of existing offshore entities for offshore financings; (iv) purporting to cover situations in which an offshore SPV
establishes a new subsidiary in China or acquires an unrelated company or unrelated assets in China; and (v) making the domestic affiliate of the SPV responsible for the accuracy of certain documents which must be filed in connection with any such
registration, notably, the business plan which describes the overseas financing and the use of proceeds. Amendments to registrations made under Circular 75 are required in connection with any increase or decrease of capital, transfer of shares,
mergers and acquisitions, equity investment or creation of any security interest in any assets located in China to guarantee offshore obligations, and Notice 106 makes the offshore SPV jointly responsible for these filings. In the case of an SPV
which was established, and which acquired a related domestic company or assets, before the implementation date of Circular 75, a retroactive SAFE registration was required to have been completed before March 31, 2006; this date was subsequently
extended indefinitely by Notice 106, which also required that the registrant establish that all foreign exchange transactions undertaken by the SPV and its affiliates were in compliance with applicable laws and regulations. Failure to comply with
the requirements of Circular 75, as applied by SAFE in accordance with Notice 106, may result in fines and other penalties under PRC laws for evasion of applicable foreign exchange restrictions. Any such failure could also result in the SPVs
affiliates being impeded or prevented from distributing their profits and the proceeds from any reduction in capital, share transfer or liquidation to the SPV, or from engaging in other transfers of funds into or out of China.

We believe our stockholders who are PRC residents as defined in Circular 75 have registered with the relevant branch of SAFE, as currently required, in connection with their equity interests in us and our acquisitions of equity interests in our PRC
subsidiaries. However, we cannot provide any assurances that their existing registrations have fully complied with, and they have made all necessary amendments to their registration to fully comply with, all applicable registrations or approvals
required by Circular 75. Moreover, because of uncertainty over how Circular 75 will be interpreted and implemented, and how or whether SAFE will apply it to us, we cannot predict how it will affect our business operations or future strategies. For
example, our present and prospective PRC subsidiaries ability to conduct foreign exchange activities, such as the remittance of dividends and foreign currency-denominated borrowings, may be subject to compliance with Circular 75 by our PRC
resident beneficial holders. In addition, such PRC residents may not always be able to complete the necessary registration procedures required by Circular 75. We also have little control over either our present or prospective direct or indirect
stockholders or the outcome of such registration procedures. A failure by our PRC resident beneficial holders or future PRC resident stockholders to comply with Circular 75, if SAFE requires it, could subject these PRC resident beneficial holders to
fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our subsidiaries ability to make distributions or pay dividends or affect our ownership structure, which could adversely affect our business and
prospects.

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The M&A Rule establishes more complex procedures for some acquisitions of Chinese companies by foreign investors, which could make it more difficult for us to pursue growth through acquisitions in China.

On August 8, 2006, six PRC regulatory agencies, including the China Securities Regulatory Commission, promulgated the Provisions Regarding Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (the M&A Rule), which
became effective on September 8, 2006. The M&A Rule establishes additional procedures and requirements that could make some acquisitions of Chinese companies by foreign investors more time-consuming and complex, including requirements in some
instances that the PRC Ministry of Commerce be notified in advance of any change-of-control transaction and in some situations, require approval of the PRC Ministry of Commerce when a foreign investor takes control of a Chinese domestic enterprise.
The regulations prohibit a transaction at an acquisition price obviously lower than the appraised value of the PRC business or assets and in certain transaction structures, require that consideration must be paid within defined periods, generally
not in excess of a year. The regulation also limits our ability to negotiate various terms of the acquisition, including aspects of the initial consideration, contingent consideration, holdback provisions, indemnification provisions and provisions
relating to the assumption and allocation of assets and liabilities. Transaction structures involving trusts, nominees and similar entities are prohibited. Government approvals will have expiration dates by which a transaction must be completed and
reported to the government agencies. In the future, we may grow our business in part by acquiring complementary businesses, although we do not have any plans to do so at this time. The M&A Rule also requires PRC Ministry of Commerce anti-trust
review of any change-of-control transactions involving certain types of foreign acquirers. Complying with the requirements of the M&A Rule to complete such transactions could be time-consuming, and any required approval processes, including
obtaining approval from the PRC Ministry of Commerce, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.

Investors may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions in China based upon U.S. laws, including the federal securities laws or other foreign laws against us or our
management.

All of our current operations are conducted in China. Moreover, most of our current directors and officers are nationals or residents of China. All or a substantial portion of the assets of these persons are located outside the United States and in
the PRC. As a result, it may not be possible to effect service of process within the United States or elsewhere outside China upon these persons. In addition, uncertainty exists as to whether the courts of China would recognize or enforce judgments
of U.S. courts obtained against us or such officers and/or directors predicated upon the civil liability provisions of the securities laws of the United States or any state thereof, or be competent to hear original actions brought in China against
us or such persons predicated upon the securities laws of the United States or any state thereof.

An outbreak of a pandemic avian influenza, Severe Acute Respiratory Syndrome (SARS), swine flu, or other contagious disease may have an adverse effect on the economies of certain Asian countries and may adversely affect our results
of operations.

During the past six years, large parts of Asia experienced unprecedented outbreaks of avian influenza caused by the H5N1 virus which, according to a report of the World Health Organization, or WHO, in 2004, moved the world closer than any time
since 1968 to an influenza pandemic with high morbidity, excess mortality and social and economic disruption. Currently, no fully effective avian flu vaccines have been developed and there is evidence that the H5N1 virus is evolving and an
effective vaccine may not be discovered in time to protect against the potential avian flu pandemic. In the first half of 2003, certain countries in Asia experienced an outbreak of severe acute respiratory syndrome, or SARS, a highly contagious form
of atypical pneumonia, which seriously interrupted the economic activities and the demand for goods plummeted in the affected regions. Additionally, during April and May 2009, there have been outbreaks of highly pathogenic swine flu, caused by the
H1N1A virus, in certain regions of the world, including parts of Asia. An outbreak of avian flu, SARS, swine flu, or other contagious disease or the measures taken by the governments of affected countries against such potential outbreaks, may
seriously interrupt our production operations or those of our suppliers and customers, which may have a material adverse effect on our results of operations. The perception that an outbreak of avian flu, SARS, swine flu, or other contagious disease
may occur again may also have an adverse effect on the economic conditions of countries in Asia.

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Our production facilities are subject to risks of power shortages.

Many cities and provinces in the PRC have suffered serious power shortages since the second quarter of 2004. Many of the regional grids do not have sufficient power generating capacity to fully satisfy the increased demand for electricity driven by
continual economic growth and persistent hot weather. Local governments have recently required local factories to temporarily shut down their operations or reduce their daily operational hours in order to reduce local power consumption levels. To
date, our operations have not been affected by those administrative measures. However, there is a risk that our operations may be affected by those administrative measures in the future, thereby causing material production disruption and delay in
delivery schedule. In such event, our business, results of operation and financial conditions could be materially adversely affected. We do not have any back-up power generation system. Although we have not experienced any power outages in the past,
we may be adversely affected by any power outages in the future.

Under the New Enterprise Income Tax Law, or the New CIT Law, we may be classified as a resident enterprise of China. Such classification will likely result in unfavorable tax consequences to us and our non-PRC stockholders.

China passed the New CIT Law and its implementing rules, both of which became effective on January 1, 2008. Under the New CIT Law, an enterprise established outside of China with de facto management bodies within China is considered a
resident enterprise, meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. The implementing rules of the New CIT Law define de facto management as substantial and overall
management and control over the production and operations, personnel, accounting, and properties of the enterprise. Because the New CIT Law and its implementing rules are new, no official interpretation or application of this new
resident enterprise classification is available. Therefore, it is unclear how tax authorities will determine tax residency based on the facts of each case.

If the PRC tax authorities determine that China BAK Battery, Inc. is a resident enterprise for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First, we may be subject to the enterprise
income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. In our case, this would mean that income such as interest on offering proceeds and non-China source income would be subject to
PRC enterprise income tax at a rate of 25%. Second, although under the New CIT Law and its implementing rules dividends paid to us from our PRC subsidiaries would qualify as tax-exempt income, we cannot guarantee that such dividends will
not be subject to a 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax, have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident
enterprises for PRC enterprise income tax purposes. Finally, it is possible that future guidance issued with respect to the new resident enterprise classification could result in a situation in which a 10% withholding tax is imposed on
dividends we pay to our non-PRC stockholders and with respect to gains derived by our non-PRC stockholders from transferring our shares. We are actively monitoring the possibility of resident enterprise treatment for the 2009 tax year
and are evaluating appropriate organizational changes to avoid this treatment, to the extent possible.

In addition, under the New CIT Law, dividends payable by a FIE to any of its foreign non-resident enterprise investors shall be subject to a 10% withholding tax, unless such foreign non-resident enterprise investors jurisdiction of
incorporation has signed a tax treaty or arrangement for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income with China that provides for a reduced rate of withholding tax on dividends. Since the PRC
and Hong Kong have signed the above-mentioned tax arrangement for the avoidance of double taxation, and Shenzhen BAK, BAK Electronics and BAK Tianjin are wholly owned by BAK International, the dividends payable by each of Shenzhen BAK, BAK
Electronics and BAK Tianjin to its foreign non-resident enterprise investors are expected to be subject to a 5% withholding tax pursuant to the China-Hong Kong double tax arrangement. However, dividends declared and paid from pre-January 1, 2008
distributable profits are grandfathered under the New CIT Law and are not subject to withholding tax.

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The Chinese government exerts substantial influence over the manner in which we must conduct our business activities.

The PRC government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Our ability to operate in China may be harmed by changes in its laws and
regulations, including those relating to taxation, import and export tariffs, environmental regulations, land use and property ownership rights, and other matters. We believe that our operations in China are in material compliance with all
applicable legal and regulatory requirements. However, the central or local governments of the jurisdictions in which we operate may impose new, stricter regulations or interpretations of existing regulations that would require additional
expenditures and efforts on our part to ensure our compliance with such regulations or interpretations.

Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies,
could have a significant effect on economic conditions in China or particular regions thereof, and could require us to divest ourselves of any interest we then hold in Chinese properties or joint ventures.

Future inflation in China may inhibit our ability to conduct business profitably in China.

In recent years, the Chinese economy has experienced periods of rapid expansion and highly fluctuating rates of inflation. During the past ten years, the rate of inflation in China has been as high as 5.9% and as low as -1.4% . These factors have
led to the adoption by the Chinese government, from time to time, of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. High inflation may in the future cause the Chinese government
to impose controls on credit and/or prices, or to take other action, which could inhibit economic activity in China, and thereby harm the market for our products.

Risks Related to Our Common Stock

The market price for our common stock may be volatile.

The market price for our common stock may be highly volatile and could be subject to wide fluctuations in response to a variety of factors, some of which may be beyond our control. Factors affecting the trading price of our common stock include:

- the lack of depth and liquidity of the market for our common stock;
- actual or anticipated fluctuations in our quarterly operating results;
- announcements of new products or services by us or our competitors;
- changes in financial estimates by securities analysts;
- market conditions in our industry;
- changes in operations or market valuations of other companies in our industry;
- our sales of common stock;
- investor perceptions of us and our business;
- changes in the estimates of the future size and growth rate of our markets;
- market conditions in industries of our customers;
- announcements by our competitors of significant acquisitions;
- strategic partnerships, joint ventures or capital commitments;

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- recruitment or departures of key personnel;
- potential litigation;
- any material weaknesses in our internal control over financial reporting; and
- the overall economy, geopolitical events, terrorist activities, or threats of terrorism.

In addition, the stock market in general has experienced significant price and volume fluctuations that have often been unrelated or disproportionate to the performance of listed companies. These broad market and industry factors may seriously harm
the market price of our common stock, regardless of our operating performance. For example, the trading price of our common stock could decline in reaction to events that negatively affect other companies in our industry even if these events do not
directly affect us at all.

In the past, many companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be a target of this type of litigation in the future. Securities litigation against us
could result in substantial costs and divert our managements attention from other business concerns, which could seriously harm our business.

Our directors and executive officers, collectively, own approximately 34.4% of our outstanding common stock and may be able to control our management and affairs.

As of September 30, 2009, Mr. Xiangqian Li, our president and chief executive officer and chairman of our board, and our other executive officers and directors beneficially owned an aggregate of 34.4% of our outstanding common stock. As a result,
our directors and executive officers, acting together, may be able to control our management and affairs, including the election of directors and approval of significant corporate transactions, such as mergers, consolidation, and sale of all or
substantially all of our assets. Consequently, this concentration of ownership may have the effect of delaying or preventing a change of control, including a merger, consolidation or other business combination involving us, even if such a change of
control would benefit our stockholders.

Provisions in our articles of incorporation and bylaws could entrench our board of directors and prevent a change in control.

Our articles of incorporation provide that special meetings of the stockholders can only be called by our president or any other executive officer, or the board of directors, or any member thereof, the record holder or holders of at least 10% of all
shares entitled to vote at the meeting, or the president or secretary at the written request of our stockholders holding not less than 30% of all shares issued, outstanding and entitled to vote. In addition, our bylaws and/or our articles of
incorporation (i) allow vacancies in the board of directors to be filled by a majority of the remaining directors, though less than a quorum, (ii) provide that no contract or transaction between us and one or more of our directors or officers is
void if certain criteria are met, (iii) provide that our bylaws may be amended or appealed at any meeting of the board of directors at which a quorum is present, by the affirmative vote of a majority of the directors present at such meeting, and
(iv) provide that at an annual meeting, our stockholders elect a board of directors and transact such other business as may properly be brought before the meeting; by contrast, at a special meeting, our stockholders may transact only the business
for the purposes specified in the notice of the meeting unless all of our stockholders entitled to vote are present at the special meeting and consent.

In addition, our board of directors may cause us to issue our authorized but unissued shares of common stock in the future without stockholders approval. These additional shares may be utilized for a variety of corporate purposes, including
future public offerings to raise additional capital, corporate acquisitions and employee benefit plans. The existence of authorized but unissued shares of common stock could render more difficult or discourage an attempt to obtain control of a
majority of our common stock by means of a proxy contest, tender offer, merger or otherwise.

Collectively, these provisions may have the effect of entrenching our existing board members, discouraging or preventing a transaction including a change in control transaction where such transaction would be beneficial to our stockholders.

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We are obligated to indemnify our officers and directors
for certain losses they suffer.

To the fullest extent permitted by Chapter 78 of the Nevada
Revised Statues, we may, if and to the extent authorized by our board of
directors, indemnify our officers and any other persons who we have power to
indemnify against liability, reasonable expense or other matter whatsoever. If
we are required to indemnify any persons under this policy, we may have to pay
indemnity in a substantial amount which we may be unable to recover at all.

ITEM 1B.         UNRESOLVED STAFF COMMENTS.

None.

ITEM 2.             PROPERTIES.

We have completed the construction and put into use facilities
measuring 218,178 square meters comprised of manufacturing facilities,
warehousing and packaging facilities, dormitory space, dining halls and
administrative offices at the BAK Industrial Park in Shenzhen. Of that space,
approximately 81,411 square meters are manufacturing facilities. We have
completed the construction and put into use facilities measuring 65,127 square
meters comprised of manufacturing facilities, dormitory space, dining halls and
other facilities in Tianjin. Of that space, approximately 44,129 square meters
are manufacturing facilities. The primary reasons for our continuing investments
in the facilities in Tianjin are to realize the benefits of our prior investment
in these facilities, to position the Company to capitalize on our knowledge of
and experience with established markets for lithium-phosphate technology, such
as electric bicycles, cordless power tools, and mining lamps, and to penetrate
emerging consuming markets for this technology, such as light electric vehicles
and hybrid electric vehicles. The first trial shipment of its lithium-phosphate
cells was used in electric bicycles, cordless power tools, uninterruptible power
supplies and mining lamps. We have received positive market feedback to these
samples. We expect interest in light electric vehicles and hybrid electric
vehicles to increase demand for our rechargeable lithium-based batteries
substantially. We have been engaged in the research and development of
lithium-phosphate cells specifically for use in light electric vehicles and
hybrid electric vehicles. As indicated above, our Tianjin facility is the nexus
for all such research and development.

At present, we have no significant payment obligations related
to these facilities.

We believe that our existing facilities have met our current
business needs and will meet the needs of our expanded operations.

The following table sets forth the breakdown of our facilities
as of September 30, 2009 based on use and product type:

|Shenzhen BAK
      facilities |  | Usage                        |  |  | Area (m2)) | 
|----------------------------- |  | ---------------------------- |  |  | ---------- | 
|Completed facilities          |  | Manufacturing                |  |  |            | 
|                              |  | Prismatic (steel-case)       |  |  | - 0 -      | 
|                              |  | Prismatic (aluminum-case)    |  |  | 45,179     | 
|                              |  | Cylindrical                  |  |  | 22,344     | 
|                              |  | Lithium polymer              |  |  | 13,888     | 
|                              |  | R&D and administrative       |  |  | 39,425     | 
|                              |  | Warehousing                  |  |  | 19,087     | 
|                              |  | Workers dormitory           |  |  | 46,124     | 
|                              |  | Other facilities             |  |  | 32,131     | 
|                              |  | Sub-total                    |  |  | 218,178    | 
|                              |  |                              |  |  |            | 
|BAK Tianjin facilities        |  |                              |  |  |            | 
|Completed facilities          |  | Manufacturing                |  |  |            | 
|                              |  | High-power lithium-phosphate |  |  | 44,129     | 
|                              |  | Workers dormitory           |  |  | 13,481     | 
|                              |  | Dinning hall                 |  |  | 7,407      | 

| |  | Other facilities |  | 110     | 
| |  | ---------------- |  | ------- | 
| |  | Sub- total       |  | 65,127  | 
| |  |                  |  |         | 
| |  | Total            |  | 283,305 | 

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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 recently obtained the land
use right to the tract of property on which we have constructed and on which we
plan further construction of our manufacturing facilities and other related
facilities in Shenzhen. While we have been constructing and have completed a
substantial part of the construction of our facilities with the approval of the
local government of Kuichong Township of Longgang District of Shenzhen, we
understand it did not have the authority to grant us the land use rights
certificate. However, the Company obtained approval for project planning and
construction from the government of Shenzhen on June 20, 2007. Under an
agreement with the government of Shenzhen for the acquisition of the land use
rights to BAK Industrial Park dated June 29, 2007, effective June 2008, the
government agreed to provide us with the land use rights certificate relating to
BAK Industrial Park on the condition that the Company would pay it an additional
$11,819,841. According to a notice received from the government of Shenzhen on
June 6, 2008, the Company obtained government grants of $7,889,991 to subsidize
this additional payment. As of September 30, 2008, the Company had fully paid
the remaining cost of $3,929,850 and had obtained the land use rights
certificate for BAK Industrial Park.

We have insurance for our manufacturing facilities for Shenzhen
BAK Battery Co., Ltd located in BAK Industrial Park and our manufacturing
facilities at our Tianjin facility. However, we are not able to insure our new
Research and Development Test Centre to be constructed in Shenzhen, China, until
we receive the required certificate of property ownership. Upon receipt of the
certificate of property ownership, we intend to procure such insurance. The
applications for the related certificates of property ownership rights are in
process with respect to our facilities at BAK Industrial Park and Tianjin (see
discussion of our Research and Development Test Centre below). As we have been
granted the land use rights certificate to the premises presently occupied by
the Company in BAK Industrial Park, there should be no legal barriers for us to
obtain a property ownership certificate for this property. However, it is
possible that the Shenzhen government may determine that even with our land use
rights certificate, the buildings constructed at BAK Industrial Park were still
constructed without the proper authority and must be vacated as illegitimate
constructions, and we might be subject to penalties and fines. However, we
believe that this possibility, while present, is remote.

As of September 30, 2007, we had fully paid the lease
prepayment amount of $14.1 million for the acquisition of land use rights
regarding our Tianjin facility. As of September 30, 2008, we had obtained the
relevant land use rights certificate to this facility. As of September 30, 2009,
we were in the process of obtaining the relevant property ownership rights
certificate to this facility. Pursuant to our land use rights certificate
relating to our Tianjin facility, the Tianjin government had originally
requested that we complete construction of the Tianjin facility before September
30, 2008. As of September 30, 2008, we had not done so. Notwithstanding this
requirement, we have obtained an extension from the Business Administration
Bureau of Beichen District, Tianjin, to make the remaining contribution of the
registered capital by December 11, 2009, which we have interpreted as an
extension of the completion date of construction to this date.

As of September 30, 2007, we had paid the lease prepayment
amount of $717,000 for the acquisition of land use rights for a new Research and
Development Test Centre to be constructed in Shenzhen, China. As of September
30, 2008, we had obtained the relevant property ownership and land use rights
certificate. Pursuant to the property ownership and land use rights certificate,
we are required to complete at least 25% of the construction of the new Research
and Development Test Centre facility by September 30, 2008. As of September 30,
2008, we had not done so. Notwithstanding this requirement, the Shenzhen
government has agreed to increase the dimensions of the Research and Development
Test Centre and signed two supplemental agreements with us. According to the
supplemental agreements, we are required to complete the construction by May 6,
2011. In addition, according to the property ownership and land use rights
certificate, such land may not be pledged without the approval of the relevant
government office. We are required to pledge our property ownership and land use
rights certificate in
relation to the new Research and Development Test Centre to China Development Bank pursuant to the loan agreement entered into with it. As of September 30, 2009 we were in the process of negotiating with the relevant government bureau for the
requisite approval. In addition, the so-named property ownership and land use rights certificate relating to this facility that we were issued lacks certain terms relating to property ownership rights, which appears to indicate that the
granting government has so far only granted us the relevant land use rights. As a result, this certificate may not be adequate evidence of our property ownership rights to this property. We anticipate that the government will re-grant this
certificate with adequate property ownership indicia after we have satisfied the above construction requirement and followed certain procedures.

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ITEM 3. LEGAL PROCEEDINGS.

Except as described below, we are not a party to any legal proceedings, nor are we aware of any threatened or contemplated proceedings which are expected to result in a material adverse effect on our financial position, or results of operation.

Patent Litigation. On September 12, 2006, Hydro-Quebec, a Canadian company, and the Board of Regents of the University of Texas System brought a federal patent infringement suit in the United States District Court for the Northern District of
Texas against us. We had an agreement with A123Systems, which, as amended on August 18, 2005, terminated in accordance with its terms on August 30, 2007, under which we had agreed to manufacture products for A123Systems according to the
specifications furnished by, and using the finished electrodes and other materials consigned by, A123Systems to us. The plaintiffs alleged that, by manufacturing rechargeable lithium cells for A123Systems for use in DeWalt 36-volt cordless power
tools manufactured by Black & Decker Corporation, we had infringed two U.S. patents owned by and exclusively licensed to the plaintiffs. The plaintiffs seek injunctive relief and damages in an unspecified amount.
A123Systems, Black & Decker Corporation and Black & Decker (U.S.) Inc. have also
been named as co-defendants in this lawsuit. The court has not ruled on this
lawsuit. The Company understands that this lawsuit is a countersuit against
A123Systems, which filed a claim against Hydro-Quebec in the United States
District Court of Massachusetts in April 2006. In that suit, A123Systems sought
declaratory relief that the two said U.S. patents are invalid and that
A123Systems is not infringing either of these two patents.

Following the filing of the lawsuit, the United States Patent and Trademark Office reexamined the patents. The patents were re-issued with substantial modification of the patent claims. The plaintiffs have advised that, in their view, the lawsuit
continues to be viable against the defendants, including China BAK. The plaintiffs' position has not been tested. Currently pending is the plaintiffs' motion to amend their complaint to take the USPTO action into account.

If the court were to issue an adverse decision, the Company could face a substantial monetary damages award. While such an adverse decision could also prohibit the Company from future production of rechargeable lithium cells manufactured for
A123Systems or may require the Company to pay royalties to engage in any such production, the Company has no plans to pursue production of batteries for A123. The court has not issued any substantive decisions in the litigation and there has been no
substantive pretrial discovery. As a result, at this time, the Company is unable to express a view on the extent of any possible award of damages that might be rendered in the litigation.

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

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

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

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

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

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On December 21, 2007, pursuant to the registration rights agreement, we filed a registration statement on Form S-3, which was declared effective by the SEC on May 7, 2008. The lateness of this filing triggered liquidated damages consistent with the
formula described above. On August 26, 2008, we conducted a registered direct offering of 4,102,564 shares of common stock, at an offering price of $3.90 per share, in which the investors also received warrants to purchase up to 4,102,564 shares
of common stock at an exercise price of $3.90 per share. With one exception, all of the investors that participated in our November 2007 private placement, or affiliates of them, participated in our August 2008 registered direct offering. We
reduced each of these investors (or each such investors participating affiliates) purchase price by an amount that was at least equal to the amount that we determined that we were liable for as liquidated damages to such investor
(or its participating affiliate). As of June 30, 2009, the remaining investor had waived any and all rights relating to liquidated damages pursuant to the November 2007 registration rights agreement.As of September 30, 2009, approximately
$159,000 of liquidated damages remained outstanding for accounting purposes. 
Pursuant to the settlements described above, however, we do not believe that we
are actually liable for this amount.

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

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

ITEM 4.         SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.

PART II

ITEM 5.         MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Market Price Information for Our Common Stock

Since May 31, 2006, our common stock has been listed on the Nasdaq Global Market under the symbol CBAK. On
December 11, 2009, the last reported sales price of our common stock on the Nasdaq
Global Market was $2.48 per
share.

The following table sets forth, for the quarters indicated, the range of closing high and low bid prices of our common stock as reported by the Nasdaq Global Market, as adjusted for all previously effected stock splits. These prices do not include
retail markup, markdown or commission and may not represent actual transactions.

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|                                    |   | Common Stock | 
|----------------------------------- | - | ------------ | 
|                                    |   |              | 
|                                    |   | High         | 
|Year Ended
      September 30, 2009 |   |              | 
|First Quarter                       | $ | 3.70         | 
|Second Quarter                      | $ | 1.82         | 
|Third Quarter                       | $ | 3.64         | 
|Fourth Quarter                      | $ | 4.95         | 
|                                    |   |              | 
|Year Ended
      September 30, 2008 |   |              | 
|First Quarter                       | $ | 8.58         | 
|Second Quarter                      | $ | 5.88         | 
|Third Quarter                       | $ | 5.25         | 
|Fourth Quarter                      | $ | 5.10         | 

Holders of Our Common Stock

As of December 11, 2009, there were 63,601,276

Dividend Policy

We have never declared or paid any dividends, nor do we have
any present plan to pay any cash dividends on our ordinary shares in the
foreseeable future. We currently intend to retain most, if not all, of our
available funds and any future earnings to operate and expand our business.

As we are a holding company, we rely on dividends paid to us by
our subsidiaries in the PRC through our Hong Kong subsidiary, BAK International.
In accordance with its articles of association, each of our subsidiaries in the
PRC is required to allocate to its enterprise development reserve at least 10%
of its respective after-tax profits determined in accordance with the PRC
accounting standards and regulations. Each of our subsidiaries in the PRC may
stop allocations to its general reserve if such reserve has reached 50% of its
registered capital. Allocations to the reserve can only be used for making up
losses and other specified purposes and may not be paid to us in forms of loans,
advances, or cash dividends. Dividends paid by our PRC subsidiaries to BAK
International, our Hong Kong subsidiary, will not be subject to Hong Kong
capital gains or other income tax under current Hong Kong laws and regulations
because they will not be deemed to be assessable income derived from or arising
in Hong Kong.

Our board of directors has discretion on whether to pay
dividends unless the distribution would render us unable to repay our debts as
they become due, as provided in Chapter 78.288 of the Nevada Revised Statutes.
Even if our board of directors decides to pay dividends, the form, frequency and
amount will depend upon our future operations and earnings, capital requirements
and surplus, general financial condition, contractual restrictions and other
factors that the board of directors may deem relevant.

Securities Authorized for Issuance Under Equity Compensation
Plans

See Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters  Securities Authorized for
Issuance Under Equity Compensation Plans.

Recent Sales of Unregistered Securities

No securities were sold by the registrant during the fiscal
year ended September 30, 2009 that were not registered under the Securities
Act.

Purchases of Our Equity Securities

No repurchases of our common stock were made during the fourth
quarter of our fiscal year ended September 30, 2009.

52

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ITEM 6.         SELECTED FINANCIAL DATA.

Selected Consolidated Financial Data

The selected consolidated statement of operations and
comprehensive income / (loss) data for the years ended September 30, 2007, 2008
and 2009 and the selected consolidated balance sheet data as of September 30,
2008 and 2009 are derived from our audited consolidated financial statements
included elsewhere in this Report.

The selected consolidated balance sheet data as of September
30, 2005, 2006 and 2007, and the selected consolidated financial data for the
years ended September 30, 2005 and 2006, are derived from our audited
consolidated financial statements not included in this Report.

Through a share exchange on January 20, 2005, we acquired 100%
of BAK International, which owns 100% of Shenzhen BAK. We accounted for this
share exchange as a reverse acquisition and succeeded to and are considered to
be a continuation of Shenzhen BAKs operations for the purpose of our financial
statement presentation.

The following selected consolidated historical financial
information should be read in conjunction with our consolidated financial
statements and related notes and the information contained in Item 7.
Managements Discussion and Analysis of Financial Condition and Results of
Operations.

|                                            |   | As of September 30,                                         |  
|------------------------------------------- | - | ----------------------------------------------------------- | -
|                                            |   | 2009                                                        |  
|                                            |   | (in thousands of
      U.S. dollars, except per share data) |  
|Statement of Operations Data:               |   |                                                             |  
|Net revenues                                | $ | 211,144                                                     |  
|Cost of revenues                            | $ | 184,388                                                     |  
|Gross profit                                | $ | 26,756                                                      |  
|Operating expenses                          | $ | 33,809                                                      |  
|Operating (loss) / income                   | $ | (7,053                                                      | )
|Finance costs, net                          | $ | 9,356                                                       |  
|Gain on trading securities                  | $ | -                                                           |  
|Government grant income                     | $ | 636                                                         |  
|Other (income) / expenses                   | $ | (528                                                        | )
|Income tax (benefit) / expense              | $ | (1,253                                                      | )
|Net (loss) / income                         | $ | (13,992                                                     | )
|Other comprehensive income / (loss)         |   |                                                             |  
|- Foreign currency translation adjustment   | $ | (354                                                        | )
|Comprehensive (loss) / income               | $ | (14,346                                                     | )
|Net (loss) / income per share
      data(2) |   |                                                             |  
|Basic and Diluted                           | $ | (0.25                                                       | )

|Weighted average number of
      shares |  |        |  |  |        |  |  |        |  |  |        |  |  |        | 
|--------------------------------------- |  | ------ |  |  | ------ |  |  | ------ |  |  | ------ |  |  | ------ | 
|Basic                                   |  | 56,964 |  |  | 52,314 |  |  | 48,979 |  |  | 48,880 |  |  | 38,289 | 
|Diluted                                 |  | 56,964 |  |  | 52,314 |  |  | 49,442 |  |  | 48,913 |  |  | 38,409 | 

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(1) Prior to October 1, 2005, we applied the intrinsic-value
method for stock-based award accounting, under which compensation expense is
recorded only if on measurement day, which is generally the date of grant, the
market price exceeded the exercise price. No stock-based compensation costs were
recognized in fiscal year 2005. We adopted SFAS 123(R), now included in ASC
Topic 718,
commencing from October 1, 2005 using the modified prospective approval.
Therefore, share-based compensation costs of $2.6 million, $3.8 million, and
$3.7 million are recognized in fiscal years 2007, 2008, and 2009,
respectively.

(2) Basic net (loss) / income per share is computed by dividing
net (loss) / income by the weighted average number of shares outstanding for the
period. Diluted net income per share reflects the potential dilution that could
occur if currently outstanding securities or other contracts to issue shares
were exercised or converted into shares.

(3) Less than $1,000.

|                                                     |   | As of September 30,            | 
|---------------------------------------------------- | - | ------------------------------ | 
|                                                     |   | 2009                           | 
|                                                     |   | (in thousands of U.S. dollars) | 
|Consolidated Balance Sheet Data:                     |   |                                | 
|Cash and cash equivalents                            | $ | 30,678                         | 
|Pledged deposits                                     | $ | 31,115                         | 
|Trade accounts receivable, net                       | $ | 83,292                         | 
|Inventories                                          | $ | 65,535                         | 
|Property, plant and equipment,
      net             | $ | 219,685                        | 
|Lease prepayments, net                               | $ | 32,166                         | 
|Total assets                                         | $ | 472,084                        | 
|                                                     |   |                                | 
|Total current liabilities                            | $ | 266,270                        | 
|Short-term bank loans                                | $ | 139,159                        | 
|Long term liabilities                                | $ | 49,213                         | 
|Total liabilities                                    | $ | 315,483                        | 
|Total shareholdersequity                            | $ | 156,601                        | 
|                                                     |   |                                | 
|Total liabilities and
    shareholders
      equity | $ | 472,084                        | 

|                                                     |   | As of September 30,                                      |  
|---------------------------------------------------- | - | -------------------------------------------------------- | -
|                                                     |   | 2009                                                     |  
|                                                     |   | (in thousands of
      U.S. dollars, except percentages) |  
|Other Consolidated Financial Data:                   |   |                                                          |  
|Gross margin (1)                                     |   | 12.7%                                                    |  
|Operating (loss) / margin (2)                        |   | (3.3%                                                    | )
|Net (loss) / margin (3)                              |   | (6.6%                                                    | )
|Capital expenditures                                 | $ | 41,507                                                   |  
|Depreciation and amortization                        | $ | 12,832                                                   |  
|Net cash provided by / (used in)operating activities | $ | 38,391                                                   |  
|Net cash used in investing
      activities          | $ | 41,638                                                   |  
|Net cash (used in) / provided byfinancing activities | $ | (1,623                                                   | )

(1) Gross margin represents gross profit divided by revenues.

(2) Operating (loss) / margin represents operating (loss) /
income divided by revenues.

(3) Net (loss) / margin represents net (loss) / income divided by revenues.

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ITEM 7.         MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following managements discussion and analysis should be read in conjunction with our consolidated financial statements and the notes thereto and the other financial information appearing elsewhere in this Report. In addition to
historical information, the following discussion contains certain forward-looking information. See Forward Looking Statements above for certain information concerning those forward looking statements. Our financial statements are
prepared in U.S. dollars and in accordance with U.S. GAAP. See  Exchange Rates below for information concerning the exchange rates at which Renminbi were converted to U.S. dollars at various pertinent dates and for pertinent
periods. References in this Report to a particular fiscal year are to our fiscal year ended on September 30.

Overview

Although the business climate in China is recovering, the global economic environment remains weak. During the fiscal year ended September 30, 2009, we generated $211.1 million in net revenues, which is 13.9% lower than the $245.3 million in
net revenues generated in the fiscal year ended September 30, 2008 and 44.8% higher than our net revenues of $145.9 million in the fiscal year ended September 30, 2007. The substantial year-over-year decrease in net revenues during fiscal year
2009 as compared to the same period of fiscal years 2008 and 2007 was generally due to the global financial crisis and recession, which weakened demand for many of the products that our customers sell.

In fiscal year 2009, we implemented our aggressive cost management program to reduce costs and expenses. We have adjusted our long-term and short-term bank loans structure, and as a result, finance costs decreased to their lowest annual levels since
fiscal year 2007, $9.4million. We also have been focusing on developing new revenue sources in our domestic market and abroad.

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

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

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

Also, our Tianjin facility received positive market feedback to samples of its lithium-phosphate high-power cells, used in electric bicycles, power tools, uninterruptible power supplies, and other applications. We believe that we will generate
additional revenue and increase market share as we gradually increase our high-power cells production. We also sent battery cell samples made at our Tianjin facility for light electric vehicles to customers and to manufacturing partners in
Chinas State High-Tech Development Plan (also known as the National 863 program). We expect that these initiatives will set the stage for our future growth in the new energy industry. We believe that in the future this product will become a
significant additional revenue source as the demand for it has been increasing.

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To help us finance and expand our operations, we have access to $212.4 million in short-term credit facilities and $55.7 million in long-term credit facilities. As of September 30, 2009, the principal outstanding amounts included short-term
bank loans of $131.9 million under credit facilities and $7.3 million separate from our credit facilities, long-term bank loans of $16.1 million maturing within one year and long-term bank loans of $39.6 million maturing in over one
year, and bills payable of $30.9 million under credit facilities and $23.0 million separate from our credit facilities, leaving $49.6 million of short-term funds available under our credit facilities for additional cash needs. In
addition, on July 10, 2008, our $60.0 million shelf registration statement was declared effective by the SEC, pursuant to which we raised $16.0 million in gross revenue from common stock purchases and issued common stock warrants exercisable
for up to $16.0 million in additional gross proceeds. As none of the warrants were exercised before their expiration, as of September 30, 2009 we were in a position to raise up to an additional $44.0 million in gross proceeds from additional
equity financings under this shelf registration statement.

Our Business

We are one of the largest manufacturers of lithium-ion battery cells in the world, as measured by production output. 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;
- portable consumer electronics, such as digital media devices, portable media players, and PDAs; and
- cordless power tools and other products using high-power lithium-phosphate batteries, such as mining lamps, hybrid electric vehicles, and light electric vehicles.

Our products are packed into batteries by third-party battery pack manufacturers in accordance with the specifications of manufacturers of portable electronic end applications. 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 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 customers that order prismatic battery packs, we also engage battery pack manufacturers to assemble our prismatic cells into batteries for a fee and then sell battery packs to these customers for the replacement market and OEM
market. OEMs also purchase our battery cells from battery pack manufacturers. We expect that sales of prismatic battery packs in such a manner will represent a decreasing percentage of our revenues going forward.

To meet the growing demand for our products and to capture new opportunities, we offer the following three product lines:

- Cylindrical lithium-ion cellsfor use in notebook computers. We began commercial production of cylindrical cells for notebook computers in June 2006 using our new automated production line. We increased our manufacturing capacity in line with
advancements in our manufacturing technology and increases in customer demand. We have become a major competitor in the PRC domestic OEM market and leading brand names such as ASUS and Hasee have designated us as an approved cell provider for their
branded batteries. As of September 30, 2009, a first-tier international OEM notebook computer manufacturer determined that our cylindrical lithium-ion cells met their stringent performance and reliability requirements, and accepted us into its
approved vendor list. During the third quarter of fiscal year 2009, we initiated shipments of cylindrical cells to this OEM notebook manufacturer. Such shipments, while initially small, are expected to promote our penetration into the Notebook OEM
market when North America begins its economic recovery. We have also been actively pursuing other tier-one OEM qualifications from international brand names,
  such as Dell and Lenovo.

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- High-power lithium-phosphate cellsfor use in cordless power tools,
  uninterruptible power supplies, mining lamps, electric bicycles, light
  electric vehicles, hybrid electric vehicles, and other applications. We began
  commercial production of lithium-phosphate cells at our Shenzhen facility for
  use in cordless power tools in October 2005, and for mining lamps in March
  2007, at which point our lithium-phosphate cells passed certain related
  governmental safety tests. In December 2006, a new subsidiary, BAK Tianjin,
  was incorporated to focus on the R&D, manufacturing and distribution of
  lithium-phosphate cells. We have since shifted all lithium-phosphate cells
  manufacturing machinery, equipment and personnel from our Shenzhen facility to
  our Tianjin facility. In October 2008, our Tianjin facility completed
  construction of its first lithium-phosphate cells production line, and
  initiated trial production of lithium-phosphate cells. Our Tianjin facility is
  now capable of producing lithium-phosphate high-power cells for electric
  bicycles, uninterruptible power supplies, and other applications in addition
  to those mentioned above. This facility has received positive market feedback
  to samples of its lithium-phosphate high-power cells. Moreover, this
  facilitys Electric Vehicles Lithium-phosphate Power Battery
  Industrialization Project was accepted into the PRCs National High
  Technology Research and Development Program, or National 863 Program, by the
  PRCs Ministry of Science and Technology. In that connection, we sent battery
  cell samples made at our Tianjin facility for light electric vehicles to
  customers and to manufacturing partners in the National 863 program. We
  received positive market feedback to these samples. We believe that we will
  generate additional revenue and increase market share as we gradually increase
  our high-power cells production as the demand for these cells has been
  increasing.
- Lithium polymer cells, historically for use in ultra-portable
  electronic devices, such as high-end cellular phones, PDAs, Bluetooth
  headsets, digital media players, and digital audio players. We began
  commercial production of lithium polymer cells in September 2005. We have
  recently expanded the applications of our lithium polymer cells to notebook
  computers. During fiscal year 2009, we received orders from notebook computer
  battery OEM manufacturer STL Technology Co., Ltd. We believe that we will
  generate additional revenue and increase market share as the demand for these
  cells has been increasing.

Demand for Lithium-Based Batteries

All of our products are lithium-based rechargeable battery
cells. Rechargeable lithium-based battery cells, compared to other types of
rechargeable battery cells based on nickel cadmium or nickel metal hydride
chemistries, have a higher energy density, meaning a greater energy capacity
relative to a given battery cells weight and size. As a result, use of
lithium-based batteries has risen significantly in portable electronic products.
As the cost/power ratio of lithium-based batteries continues to improve, it is
expected that its usage will also extend into other applications. End-product
applications that are driving the demand for rechargeable lithium-based
batteries include cellular phones, notebook computers, cordless power tools and
portable consumer electronics.

Cellular Phones. Demand for batteries for cellular
phones is driven by two factors. The first is the sales of new cellular phones.
An OEM of cellular phones includes a battery with a new cellular phone. There is
also a replacement market for cellular phone batteries. Demand in the
replacement market is in turn driven by a number of factors. Often a consumer
will purchase a second battery to carry as a spare. In addition, lithium-ion
batteries have a finite life, so over time consumers will need to purchase a
battery to replace the failed battery in their phone. As the number of active
cellular phone subscribers increases, the number of replacement batteries sold
increases. A market characteristic unique to the Chinese cellular phone market
is that cell phones are often sold and resold during their useful life. Over
time these cell phones require a replacement battery. Our customers for cellular
phone battery cells fall into two segments:

- OEM. The OEMs manufacture mobile phone handsets. They purchase batteries
  to support their production of new cellular phones. They also purchase
  batteries to serve the replacement market which they sell under their own
  brand name.
- Independent Battery Manufacturers. These third party manufacturers compete
  against the OEM for a share of the replacement market. They typically sell
  their products under their own brand name or a private label.

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Notebook Computers. Sales of notebook computers are
driven by the increasing demand for mobile computing and the improved power and
functionality of notebook computers. Lithium-based batteries have almost
completely replaced nickel metal hydride batteries for notebook computers due to
the increasing power of lithium-based batteries and demand for smaller lighter
notebook computers.

Power Tools and Other Applications for High-Power
Lithium-Phosphate Batteries. Power tools such as drills, saws and grinders
are used for both commercial and personal use. Due to high power requirements,
many power tools have historically used small combustion engines, used heavier
nickel metal hydride batteries or relied on external power sources. However,
since the beginning of 2005, most major tool manufacturers, including Milwaukee,
DeWalt/Black & Decker, Metabo, Ridgid and Bosch, have begun to use
lithium-based battery packs, in particular lithium-phosphate batteries, in their
product lines. These manufacturers have taken advantage of both the increased
power produced by lithium based batteries and the light weight of lithium based
batteries by: (1) introducing more powerful products; (2) extending the life
cycle of current products; or (3) decreasing the size of current products. The
market for portable high-powered power tools and other applications for
high-power lithium-phosphate batteries is rapidly growing and has prompted many
users, both commercial and personal, to replace or upgrade their equipment.

Moreover, due to such recent trends as renewed concerns
relating to the availability and price of oil, increased legal fuel-efficiency
requirements and incentives, and heightened interest in environmentally-friendly
or green technologies, light electric vehicles and hybrid electric vehicles
are likely to continue to attract substantial interest from vehicle
manufacturers and consumers. Light electric vehicles include bicycles, scooters,
and motorcycles, with rechargeable electric motors. Due to their relatively
small size and light design, approximately 24-150 lithium-phosphate cells can be
used to power light electric vehicles. Hybrid electric vehicles include
automobiles, trucks, buses, and other vehicles that combine a conventional
propulsion system with a rechargeable energy storage system to achieve better
fuel economy than conventional vehicles. As these vehicles tend to be large and
heavy, their rechargeable energy storage system generally consists of a large
quantity of rechargeable lithium-phosphate cells.

Portable Consumer Electronics. This category includes
digital audio players (such as MP3 players), digital still cameras, digital
video cameras, portable DVD players, PDAs, BlackBerry devices, portable gaming
systems and Bluetooth devices. There is a rapid trend to use lithium-based
batteries in portable consumer electronics (both rechargeable and
non-rechargeable) due to a desire for smaller, longer lasting devices.

Pressure from Increases in Costs of Raw Materials

In the near-term, we anticipate that we will continue to
experience pressure due to increased costs, including the costs of raw materials
and overhead, as well as the costs of additional anticipated capital
improvements as we transition from primarily the replacement market industry to
global first-tier OEM products. During the first fiscal quarter of fiscal year
2009, the price of lithium cobalt dioxide, the primary cost component of our
battery products, remained at historically high levels. 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. We seek to achieve this by
increasing our production capacity to give us greater economies of scale through
higher bargaining power to secure a supply of materials and equipment at a lower
cost, and a larger base for spreading out our fixed costs. In addition, we are
seeking to identify alternative raw materials suppliers to the extent there are
viable alternatives and to expand our use of alternative raw materials. Among
other things, we have successfully developed the technology to use substitute
materials to reduce the amount of lithium cobalt dioxide used in the manufacture
of lithium-based cells. We have also restructured our operations in an effort to
streamline corporate resources and improve internal efficiency, with a
particular focus on manufacturing and sales.

Seasonality of Operating Results

Historically, our revenues were not materially impacted by
seasonal variations. During the first several years of our operation,
manufacturing capacities fell short of customer demands. As such, seasonality
was minimal. Since we increased our manufacturing capacities, 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. Also, at various times during the year,
our inventories may be increased in anticipation of increased demand for
consumer electronics. The months of October and February tend to be seasonally
low sales months due to plant closures for national holidays and the Chinese New
Year in the PRC.

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Controls and Procedures

First Restatement

In the course of the SEC review of registration statements on
Form SB-2 (File Nos. 333-122209 and 333-130247), we restated on January 30,
2006, pursuant to Amendment No.1 to our annual report on Form 10-KSB for the
fiscal year ended September 30, 2005, our consolidated balance sheet as of
September 30, 2004, our consolidated statements of income and comprehensive
income, our consolidated statements of cash flows and our consolidated
statements of changes in shareholders equity for the fiscal year ended
September 30, 2004, and also extended or modified certain notes to these
consolidated financial statements. This restatement arose out of accounting
errors relating to (1) misclassification of cash transactions, (2) incorrect
charging to our statements of income and comprehensive income for fiscal 2003
and 2004 for the deficit attributable to 1,152,456 shares outstanding prior to
our reverse merger on January 20, 2005, and (3) incorrect presentation of
depreciation expenses in the statement of income and comprehensive income. The
restatement resulted in an increase in net cash from financing activities, a
decrease in the amount of common stock outstanding and a corresponding increase
in paid-in capital, and a decrease in gross profit for the fiscal year ended
September 30, 2004 by $1,635,971, or approximately 11%.

Second Restatement

In the course of the SEC review of the registration statements
referred to above, we determined that beginning with fiscal quarter ended
December 31, 2005, we would no longer be considered a small business issuer.
We restated on March 29, 2006, pursuant to Amendment No.2 to our quarterly
report on Form 10-Q for the quarter ended December 31, 2005, our consolidated
balance sheet as of December 31, 2005, our consolidated statement of income and
comprehensive income and our consolidated statement of cash flows for the three
months ended December 31, 2005 to reflect the prospective adoption of SFAS
123(R), now included in ASC Topic 718, relating to the accounting for
stock-based compensation commencing in the first quarter of our fiscal year
ending September 30, 2006. Pursuant to the restatement, we recognized
incremental share-based compensation expense of $711,512 in the quarter ended
December 31, 2005. This restatement resulted in among other things, a decrease
in gross profit and net income per share for the first quarter of our fiscal
year 2006.

Third Restatement

As reported in the current report on Form 8-K filed with the
SEC on August 4, 2006, we changed our independent registered public accounting
firm from Schwartz Levitsky Feldman LLP to KPMG. We engaged KPMG on May 15, 2006
to audit our previously reported financial statements for the fiscal years ended
September 30, 2003, 2004 and 2005. During the course of the audit, KPMG notified
our accounting staff of misstatements in our previously reported financial
statements for the fiscal years ended September 30, 2003, 2004 and 2005 that
required correction relating to: (1) the overstatement of interest expense
because of an error in the application of accounting principles relating to
interest capitalization, and the related understatement of property, plant and
equipment, construction in progress and depreciation expense; (2) the incorrect
charging to shareholders equity for fiscal year 2005 of the provision for staff
and workers bonus and welfare fund instead of charging it to the statements of
income and comprehensive income; (3) the overstatement of the provision for
contributions to a social insurance plan because of a misinterpretation of the
applicable PRC laws; (4) the understatement of our accumulated foreign-currency
translation adjustment for fiscal 2005 included in comprehensive income and
overstatement of our additional paid-in capital due to a calculation error
during consolidation; (5) other misstatements identified, which were
individually not material, including amounts related to amortization of lease
prepayments, prepayments and other receivables, accrued expenses and other
payables, cost of revenues, general and administrative expenses, finance costs,
other expenses, and certain cash flow items, and (6) the consequential
understatements or overstatements of income tax expenses. The net restatement
adjustments resulting from these accounting misstatements resulted in an
increase in our net income and earnings per share for the fiscal years 2003,
2004 and 2005, respectively.

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Our management concluded that our disclosure controls and
procedures were not effective as of September 30, 2006, because of the material
weaknesses that had been identified and described in Item 9A. Controls and
Procedures of the 2006 Form 10-K. Our management also concluded that our
disclosure controls and procedures were not effective as of September 30, 2007,
because of the material weaknesses that had been identified and described in
Item 9A. Controls and Procedures of the 2007 Form 10-K. Management believed
that some appropriate measures had been implemented to remediate these
weaknesses during the fiscal year 2007, as described in Item 9A. Controls and
Procedures of the 2007 Form 10-K. However, management concluded that our
disclosure controls and procedures were still not effective as of September 30,
2008, because of the material weaknesses that had been identified and described
in Item 9A. Controls and Procedures of the 2008 Form 10-K. Investors are
directed to Item 9A of the 2006 Form 10-K, the 2007 Form 10-K, and the 2008 Form
10-K for the description of the weaknesses identified for the corresponding
fiscal year, and to Item 9A of the 2007 Form 10-K and Item 9A of the 2008 Form
10-K for the description of the measures that had been implemented during the
fiscal years ended September 30, 2007 and September 30, 2008, respectively.

As disclosed in our current report on Form 8-K filed with the
SEC on April 3, 2007, as amended on April 11, 2007 and April 17, 2007, on March
28, 2007 we dismissed KPMG as our independent registered public accounting firm
and appointed PKF as our independent registered public accounting firm, in each
case effective April 1, 2007.

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 September 30, 2009 covered by our
Managements Report on Internal Control over Financial Reporting. We have
identified the following material weaknesses as of September 30, 2009:

- The Company did not maintain effective controls over the financial
  reporting process due to an insufficient complement of personnel with a level
  of accounting knowledge, experience and training in the application of U.S.
  generally accepted accounting principles (U.S. GAAP) commensurate with the
  Companys financial requirements. Additionally, the Companys senior
  management lacked an adequate level of accounting knowledge, experience and
  training in the application of U.S. GAAP, and did not implement adequate and
  proper supervisory review to ensure the consolidated financial statements were
  prepared in conformity with U.S. GAAP and with requirements of the U.S.
  Securities and Exchange Commission.
- The Company did not maintain effective controls over the accounting for
  construction in progress assets and the determination of depreciation expenses
  when the assets are ready for their intended use. Specifically, the Company
  did not have effective controls to track and assess the ready-for-intended-use
  status of the construction in progress assets to ensure the construction in
  progress assets being transferred to property, plant and equipment and the
  related commencement of depreciation expense was in accordance with U.S. GAAP.

See Item 9A. Controls and Procedures for a more detailed
discussion of these material weaknesses.

Financial Statement Presentation

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

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

60

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

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

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

Government Grant Income / Other Expenses / (Other
Income). Government grant income for the year ended September 30, 2009
mainly consisted of receipt of grant funds to reward Shenzhen BAK for its
contributions to the Shenzhen areas economy and to subsidize the payment for
land use rights of BAK Industrial Park. No present or future obligation arises
from the receipt of such amount.

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

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

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

The tax holiday of Shenzhen BAK commenced in 2002, the first
calendar year in which Shenzhen BAK had assessable profit, and ended on December
31, 2006. In addition, due to additional capital contributed by BAK
International to Shenzhen BAK in both 2005 and 2006 and Shenzhen BAKs
qualification as an advanced technology enterprise in 2007 and 2008, Shenzhen
BAK was granted a preferential income tax rate of 7.5%, 11.8% and 12.6% for
calendar years 2007, 2008 and 2009, respectively. In accordance with the
transition period of the new corporate income tax law (the New CIT Law) and
before considering the above-mentioned tax concessions, Shenzhen BAKs income
tax rate for calendar years 2010 and 2011 are expected to be  22% and
24%, respectively, and starting in calendar year 2012, it is expected to be
subject to an income tax rate of 25%. Therefore, Shenzhen BAKs income tax rates after consideration of its tax
concessions are expected to be 15%for both
calendar years  2010 and 2011and starting in calendar year
2012, it is expected to be subject to an income tax rate of 25%.

61

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BAK Electronics, established in August 2005, has been eligible
for the same preferential tax treatment previously applicable to Shenzhen BAK
and was in the tax holiday and fully exempt from any enterprise income tax for
calendar years 2006 and 2007 followed by a three-year 50% reduction in its
enterprise income tax rate. In addition, pursuant to the transition period of
the New CIT Law and before considering the above-mentioned 50% reduction, BAK
Electronics income tax rates for calendar years 2009, 2010 and 2011 are
expected to be 20%, 22% and 24%, respectively, and starting in calendar year
2012, it is expected to be subject to an income tax rate of 25%. Therefore, BAK
Electronics income tax rate after consideration of its tax holiday are expected
to be 10%, 11% and 24% for calendar years 2009, 2010 and 2011, respectively, and
starting in calendar year 2012, it is expected to be subject to an income tax
rate of 25%. BAK Electronics did not incur any enterprise income tax for the current
year due to the current tax losses carried forward from the calendar year
2008.

Shenzhen BAK and BAK Electronics received in aggregate a tax
benefit of $103,000 pursuant to their tax holiday and preferential tax rate for the fiscal year ended
September 30, 2009, or $0.007 per basic share.

BAK Tianjin is currently paying no enterprise income tax due to
cumulative tax losses.

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

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

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

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

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

Our effective tax benefit rate was 67.9%, 11.6%, and 8.2% for
the fiscal years ended September 30, 2007, 2008 and 2009, respectively.

Pursuant to the Provisional Regulation of China on Value Added
Tax and its implementing rules, all entities and individuals that are engaged in
the sale of goods, the provision of repairs and replacement services and the
importation of goods in China are generally required to pay VAT at a rate of
17.0% of the gross sales proceeds received, less any deductible VAT already paid
or borne by the taxpayer. Further, when exporting goods, the exporter is
entitled to some or all of the refund of VAT that it has already paid or borne.
Our imported raw materials that are used for manufacturing export products and
are deposited in bonded warehouses are exempt from import VAT.

Results of Operations

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

62

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Fiscal year ended September 30,2009
    
    
    2008
    
    
    2007As a
    
    
    
    
    
    As aAs a
    
    
    
    
    
    percentage
    
    
    
    
    
    percentageAll
    
    
    percentage of
    
    
    All
    
    
    of net
    
    
    All
    
    
    of netamounts
    
    
    net revenues
    
    
    amounts
    
    
    revenues
    
    
    amounts
    
    
    revenues(in thousands of U.S. dollars,
      except percentages)Statement of
      operations data:Net revenues
    $
    211,144
    
    
    100%
    
    $
    245,348
    
    
    100%
    
    $
    145,861
    
    
    100%Cost of revenues
    $
    184,388
    
    
    87.3%
    
    $
    214,442
    
    
    87.4%
    
    $
    120,255
    
    
    82.4%Gross profit
    $
    26,756
    
    
    12.7%
    
    $
    30,906
    
    
    12.6%
    
    $
    25,606
    
    
    17.6%Operating expenses:Research and development expenses
    $
    5,644
    
    
    2.7%
    
    $
    6,252
    
    
    2.5%
    
    $
    3,957
    
    
    2.7%Sales and marketing expenses
    $
    6,176
    
    
    2.9%
    
    $
    5,803
    
    
    2.4%
    
    $
    4,696
    
    
    3.2%General and administrative expenses
    $
    21,989
    
    
    10.4%
    
    $
    19,347
    
    
    7.9%
    
    $
    12,372
    
    
    8.5%Total operating expenses
    $
    33,809
    
    
    16.0%
    
    $
    31,402
    
    
    12.8%
    
    $
    21,025
    
    
    14.4%Operating (loss) / income
    $
    (7,053
    )
    
    (3.3%
    )
    $
    (496
    )
    
    (0.2%
    )
    $
    4,581
    
    
    3.2%Finance Costs, Net
    $
    9,356
    
    
    4.4%
    
    $
    11,021
    
    
    4.5%
    
    $
    5,225
    
    
    3.6%Other (income) / expenses
    $
    (528
    )
    
    (0.3%
    )
    $
    (757
    )
    
    (0.2%
    )
    $
    103
    
    
    0.1%Government grant income
    $
    636
    
    
    0.3%
    
    $
    1,774
    
    
    0.7%
    
    $
    1,035
    
    
    0.7%Income tax benefit
    $
    (1,253
    )
    
    (0.6%
    )
    $
    (1,045
    )
    
    (0.4%
    )
    $
    (195
    )
    
    (0.1%
    )Net (loss) / income
    $
    (13,992
    )
    
    (6.6%
    )
    $
    (7,941
    )
    
    (3.2%
    )
    $
    483
    
    
    0.3 %


Results of operations for the fiscal year ended September
30, 2009 as compared to the fiscal year ended September 30, 2008.

The following table sets forth the breakdown of our net
revenues by battery cell type for the periods indicated.

|                      |   | Year ended September 30, | 
|--------------------- | - | ------------------------ | 
|                      |   | 2009                     | 
|                      |   | (in thousands of U.S.    | 
|                      |   | dollars)                 | 
|Prismatic cells       |   |                          | 
|Aluminum-case cells   | $ | 111,700                  | 
|Battery
      packs   | $ | 24,705                   | 
|Steel-case cells      | $ | 4,980                    | 
|Cylindrical cells     | $ | 55,349                   | 
|Lithium polymer cells | $ | 14,230                   | 

|High-power lithium-phosphate cells | $ | 180     |  | $ | -       | 
|---------------------------------- | - | ------- |  | - | ------- | 
|                                   |   |         |  |   |         | 
|Total                              | $ | 211,144 |  | $ | 245,348 | 

63

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Net Revenues. Net revenues
were $211.1 million for the fiscal year ended September 30, 2009 as compared to
$245.3 million for the same period of the prior year, a decrease of $34.2
million or 13.9% .

- Net revenues from sales of aluminum-case cells decreased to $111.7 million
  in the year ended September 30, 2009, from $130.1 million in the same period
  in fiscal year 2008, a decrease of $18.4 million or 14.1%, due to a 12.8%
  decrease in sales volume driven by decreased sales to the OEM market in the
  PRC resulting from the global financial crisis and recession, and by a 1.5%
  decrease in the average selling price resulting from a change in the type of
  the aluminum-case cells sold.
- Net revenues from sales of battery packs decreased to $24.7 million in the
  year ended September 30, 2009, from $25.5 million in the same period in fiscal
  year 2008, a decrease of $796,000 or 3.1%, due a decrease in our average
  selling price of 4.2% driven by decreased sales to customers in the OEM market
  in the PRC which have been hurt by the global financial crisis and recession
  and offset by a 5.1% increase in the sales volume due to increased export
  sales.
- Net revenues from the sales of steel-case cells decreased to $5.0 million
  in the year ended September 30, 2009 from $29.3 million in the same period in
  2008, a decrease of $24.3 million or 83.0%. This decrease was due to reduced
  sales volume of 80.7%, which was primarily attributable to our long-term
  strategic reduction, and suspension in January 2009, of steel-case cell
  production which was designed to increase our production capacity of
  aluminum-case cells for sale to the OEM market and to take advantage of the
  greater sales prospects and lower costs of aluminum-case cells. During the
  year ended September 30, 2009, the price and profit margin of steel-case cells
  were lower than those of aluminum-case cells and market demand for
  aluminum-case cells was stronger than for steel-case cells. As a result, we
  suspended our production of steel-case cells in January 2009. We expect that
  our revenue will be positively impacted by this shift.
- Net revenues from sales of cylindrical cells increased to $55.3 million in
  the year ended September 30, 2009, from $42.6 million in the same period in
  fiscal year 2008, an increase of $12.8 million or 30.0%, due to an increase in
  sales volume of 54.2% driven by increased export sales and offset by a
  decrease in our average selling price of 15.7%.
- We sold $14.3 million of lithium polymer cells for the year ended
  September 30, 2009, compared to $17.9 million of lithium polymer cells in the
  same period in 2008, due to a decrease of 25.1% in sales volume offset by an
  increase of 6.3% in our average selling price as a result of a decline in
  market demand relating to the global financial crisis and recession.
- We also sold approximately $180,000 of high-power lithium-phosphate cells
  in the year ended September 30, 2009, as compared to no sales of this battery
  cell type in the same period of fiscal year 2008, due to our sale of samples
  used in electric bicycles, power tools, uninterruptible power supplies, and
  other applications from our Tianjin facility.

Cost of Revenues. Cost of
revenues decreased to $184.4 million for the year ended September 30, 2009, as
compared to $214.4 million for the same period in 2008, a decrease of $30.1
million or 14.0% . The decrease in cost of revenues correlated with a decrease
in sales volume over the year ended September 30, 2009.

As a result, gross profit for the year ended September 30, 2009
was $26.8 million or 12.7% of net revenues as compared to gross profit of $30.9
million or 12.6% of net revenues for the same period in 2008. The slight
increase in gross profit as a percentage of net revenues was mainly due to a
significant increase in the sales of cylindrical cells to customers in the
laptop computer market, and an increase in our average selling price, which
together generated a slightly higher gross margin, during the year ended
September 30, 2009.

64

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Research and Development
Expenses. Research and development expenses decreased to $5.6 million for
the year ended September 30, 2009, as compared to $6.3 million for the same
period in 2008, a decrease of $608,000 or 9.7%, due to a number of decreases in
R&D-related costs over the year ended September 30, 2009. Equity-based
compensation included in R&D costs decreased by $521,000 as charges relating
to outstanding stock options to R&D staff had already been reflected in
large part in fiscal periods prior to fiscal year 2009. Depreciation charges
increased by $11,000 and research materials charges decreased by $357,000,
mainly due to the reduction in work hours during the year ended September 30,
2009. Salaries related to R&D staff increased by $19,000, primarily due to
additional compensation charges from severance packages relating to reduction of
headcount. Research technical support decreased by $338,000 due to the
suspension of a research project during fiscal year 2009.

Sales and Marketing
Expenses. Sales and marketing expenses increased to $6.2 million for the
year ended September 30, 2009 as compared to $5.8 million for the same period in
2009, an increase of $374,000 or 6.4%, primarily due to a $107,000 increase in
packing expenses which increased in line with increased export sales.
Equity-based compensation included in sales and marketing expenses increased by
$75,000 due to compensation charges applied to the grant of stock options to
employees in our sales department on June 22, 2009. As a percentage of revenues,
sales and marketing expenses have increased to 2.9% for the year ended September
30, 2009, from 2.4% for the same period in 2008, due to the decrease in revenues
from sales offset by lower overall sales expenses.

General and Administrative
Expenses. General and administrative expenses increased to $22.0 million, or
10.4% of revenues, for the year ended September 30, 2009 as compared to $19.3
million, or 7.9% of revenues, for the same period in 2008, an increase of $2.6
million or 13.7% . Equity-based compensation included in general and marketing
expenses increased by $225,000 due to compensation charges applied to the grant
of stock options to our administrative staff on June 22, 2009. Bad debt expenses
increased by $5.8 million due to the provision charged after we had assessed the
collection of accounts receivables from customers during the year ended
September 30, 2009. We recognized exchange loss of $49,000 for the year ended
September 30, 2009, compared with $1.3 million for the same period in fiscal
year 2008.

In addition, we are liable for liquidated damages to certain
shareholders whose shares were included in a resale registration statement on
Form S-3 that we filed pursuant to a registration rights agreement that we
entered into with such shareholders in relation to a private placement that we
closed in November 2007. The SEC did not declare this registration statement
effective by a certain date, and under the November 2007 registration rights
agreement, the included selling shareholders became eligible for liquidated
damages of approximately $561,000 as of September 30, 2008. Please see Part I,
Item 3. Legal Proceedings  Liquidated Damages Pursuant to November 2007
Registration Rights Agreement for a further description of these liquidated
damages. We therefore recognized in general and administrative expenses an
amount of approximately $561,000 for the liquidated damages for the fiscal year
ended September 30, 2008.

On August 26, 2008, we conducted a registered direct offering
of 4,102,564 shares of common stock, at an offering price of $3.90 per share, in
which the investors also received warrants to purchase up to 4,102,564 shares of
common stock at an exercise price of $3.90 per share. With one exception, all of
the investors that participated in our November 2007 private placement, or
affiliates of them, participated in our August 2008 registered direct offering.
We reduced each of these investors (or each such investors participating
affiliates) purchase price by an amount that was at least equal to the amount
that we determined that we were liable for as
liquidated damages to such investor (or its participating affiliate). As of June
30, 2009, the remaining investor had waived any and all rights relating to
liquidated damages pursuant to the November 2007 registration rights agreement.As of September 30, 2009,
approximately $159,000 of liquidated damages were recognized as general and
administrative expenses.  Pursuant to the settlements described above, however,
we do not believe that we are actually liable for this amount.

As described under Part I, Item 3. Legal Proceedings  Make
Good Settlements we have entered into settlement agreements pursuant to which
we have issued shares to certain shareholders that purchased shares in a January
20, 2005 private placement transaction in settlement of claims related to the
private placement, including claims for liquidated damages. Pursuant to the
settlement agreements, the claims of each shareholder are released as of the
applicable release date which occurred on June 26, 2008, the date the resale
registration statement we filed relating to resales by the settling shareholders
of the shares issued pursuant to the settlement agreement was declared effective
by the SEC. We expect such settlements may result in gains in one or more future
periods in accordance with their waivers of claims to liquidated damages.

65

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Operating Loss. As a
result of the above, operating loss totaled $7.1 million for the year ended
September 30, 2009, as compared to operating loss of $497,000 for the same
period of the prior fiscal year, an increase of $6.6 million or 1,320%. As a
percentage of net revenues, operating loss was 3.3% for the year ended September
30, 2009, as compared to operating loss of 0.2% for the same period of the prior
fiscal year.

Finance Costs, Net.
Finance costs, net, decreased to $9.4 million for the year ended September 30,
2009 as compared to $11.0 million for the same period of the prior year, a
decrease of $1.7 million or 15.1% . We have $139.2 million in short-term bank
loans maturing in less than one year, $16.1 million in long-term bank loans
maturing within one year, and $39.5 million in other long-term bank loans
maturing in more than one year, outstanding as of September 30, 2009, as
compared to $105.6 million in short-term bank loans maturing in less than one
year, $8.8 million in long-term bank loans maturing in more than one year, and
$55.7 million in other long-term bank loans maturing in more than one year,
outstanding as of September 30, 2008. The decrease in net finance costs is
mainly attributable to a decrease in the average bank loan interest rates on
both our short-term and long-term bank loans during the year ended September 30,
2009, although the outstanding principal amounts of both our short-term and
long-term bank loans increased.

Government Grant Income/Other
Expenses/(Other Income). Government grant income was $636,000 for the year
ended September 30, 2009 as compared to $1.8 million for the same period of
2008. Government grant income for the year ended September 30, 2009 mainly
consisted of government grant funds of $402,000 to reward Shenzhen BAK for its
contributions to the Shenzhen areas economy and the amortization of deferred
revenue of $234,000 in respect of the government subsidies received for the
additional cost of land use rights for BAK Industrial Park. No present or future
obligation arises from the receipt of such government subsidies. Government
grant income was $1.8 million for the year ended September 30, 2008. Government
grant income for the year ended September 30, 2008 mainly consisted of
government grant funds of $1.0 million to subsidize the interest expenses
incurred by the Company in prior years for R&D activities, of $492,000 to
reward Shenzhen BAK for its contributions to the Shenzhen areas economy and
the amortization of deferred revenue in respect of the government subsidies
received for additional costs of land use rights for BAK Industrial Park.

Income Tax Benefit.
Income tax benefit was $1.3 million for the year ended September 30, 2009, as
compared to $1.0 million for the same period of 2008. The change was the result
of a deferred tax provision during the year ended September 30, 2009.

Net Loss.As
a result of the foregoing, we had a net loss of $14.0 million for the year ended
September 30, 2009, compared to $7.9 million for the same period of 2008.

Results of operations for the fiscal year ended September
30, 2008 as compared to the fiscal year ended September 30, 2007.

The following table sets forth the breakdown of our net
revenues by battery cell type for the periods indicated.

|                                   |   | Year ended September 30, | 
|---------------------------------- | - | ------------------------ | 
|                                   |   | 2008                     | 
|                                   |   | (in thousands of U.S.    | 
|                                   |   | dollars)                 | 
|Prismatic cells                    |   |                          | 
|Aluminum-case cells                | $ | 130,110                  | 
|Battery
      packs                | $ | 25,500                   | 
|Steel-case cells                   | $ | 29,300                   | 
|Cylindrical cells                  | $ | 42,567                   | 
|Lithium polymer cells              | $ | 17,871                   | 
|High-power lithium-phosphate cells | $ | -                        | 
|                                   |   |                          | 
|Total                              | $ | 245,348                  | 

66

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Net Revenues. Net revenues
increased to $245.3 million for the fiscal year ended September 30, 2008 as
compared to $145.9 million for the same period of the prior year, an increase of
$99.4 million or 68.2% .

- Net revenues from the sales of steel-case cells decreased to $29.3 million
  in the year ended September 30, 2008 from $34.9 million in the same period in
  2007, a decrease of $5.6 million or 16.0%, due to our strategic reduction of
  steel-case cell production in order to increase our aluminum-case cell
  production capacity, to facilitate our transition from the secondary market to
  the OEM market, and to capitalize on the greater benefits of aluminum-case
  cells. During the year ended September 30, 2008, the price and profit margin
  of steel-case cells were lower than those of aluminum-case cells, and market
  demand for aluminum- case cells was stronger than that for steel-case cells.
  As a result, we expect to continue to increase our production of aluminum-case
  cells and decrease our production of steel-case cells. We expect that this
  shift will positively impact our revenue.
- Net revenues from the sales of aluminum-case cells increased to $130.1
  million in the year ended September 30, 2008 from $69.9 million in the same
  period in 2007, an increase of $60.2 million or 86.1%, due to a 65.5% increase
  in sales volume, driven by increased sales to the OEM market in the PRC, and a
  12.5% increase in our average selling price.
- Net revenues from sales of battery packs increased to $25.5 million in
  year ended September 30, 2008 from $11.8 million in the same period in 2007,
  an increase of $13.7 million or 116.2%, due to a 73.7% increase in sales
  volume and a 24.4% increase in average selling price, driven by increased
  sales to the OEM market in the PRC.
- Net revenues from the sales of cylindrical cells increased to $42.6
  million in the year ended September 30, 2008 from $3.4 million in the same
  period in 2007, an increase of $39.2 million or 1143.9%, due to a 213.1%
  increase in sales volume and a 70.5% increase in average selling price, driven
  by increased exports.
- We also sold $17.9 million of lithium polymer cells for the year ended
  September 30, 2008, compared to $5.3 million of lithium polymer cells in the
  same period in 2007, an increase of $12.6 million or 237.5%, due to our
  ability to meet additional demand by increasing production.
- We had no sales of high-power lithium-ion for the year ended September 30,
  2008, compared to $20.6 million in the same period in 2007, primarily due to
  the termination of our manufacturing agreement with A123Systems in August
  2007.

Cost of Revenues. Cost of
revenues increased to $214.4 million for the year ended September 30, 2008, as
compared to $120.3 million for the same period in 2007, an increase of $94.1
million or 78.3% . The increase in cost of revenues was mainly due to a
significant increase in the cost of lithium cobalt dioxide, the main raw
material in our products.

As a result, gross profit for the year ended September 30, 2008
was $30.9 million or 12.6% of net revenues as compared to gross profit of $25.6
million or 17.6% of net revenues for the same period in 2007. The decrease in
gross profit as a percentage of net revenues was primarily due to the
significant increase in the cost of lithium cobalt dioxide.

The average unit costs of our products was higher in the fiscal
year ended September 30, 2008, as compared to the fiscal years ended September
30, 2007 and 2006, mainly because the purchase cost of lithium cobalt dioxide
increased. Lithium cobalt dioxide is the main material in our products,
rechargeable lithium batteries. In addition, during the fiscal year ended
September 30, 2008, there was a trend of increasing costs relating to overhead,
other raw materials, transportation, labor, and other business costs. As a
result, our gross profit, as a percentage of net revenues, decreased from 27.6%
for the fiscal year ended September 30, 2006 and 17.6% for the fiscal year ended
September 30, 2007 to 12.6% for the fiscal year ended September 30, 2008.
Likewise, net loss for the fiscal year ended September 30, 2008 was $7.9 million
as compared to net income of $483,000 for the fiscal year ended September 30,
2007 and net income of $20.1 million for the fiscal year ended September 30,
2006. We believe that the average price of lithium cobalt dioxide in the fiscal
year ended September 30, 2008, which was approximately 65.2% higher than the average price of lithium cobalt dioxide
during the same period of fiscal year 2007 and 118.7% higher than the average
price of lithium cobalt dioxide during the same period of fiscal year 2006, will
fluctuate and may continue to increase in the short run.To the extent
that we are not able to fully reflect these increased costs in our prices or use
alternative less costly materials, our gross profit, as a percentage of net
revenues, may decrease.

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Research and Development
Expenses. Research and development expenses increased to $6.3 million for
the year ended September 30, 2008, as compared to $4.0 million for the same
period in 2007. Salaries related to R&D staff increased to $2.4 million from
$1.3 million for the same period of the prior year, an increase of $1.1 million,
primarily due to our hiring of additional R&D professionals. Share-based
compensation included in R&D expenses increased by $267,000 due to new stock
options granted to the employees in our R&D department on June 25, 2007,
January 28, 2008 and May 29, 2008. The cost of depreciation, mainly concerning
R&D equipment at BAK Canada and BAK Tianjin, increased by $172,000, and the
cost of research materials increased by $259,000.

Sales and Marketing
Expenses. Sales and marketing expenses increased to $5.8 million for the
year ended September 30, 2008 as compared to $4.7 million for the same period in
2007, an increase of $1.1 million or 23.6%, primarily due to a $380,000 increase
in salaries and a $614,000 increase in packing expenses due to increased sales.
Share-based compensation included in sales and marketing expenses decreased by
$89,000. As a percentage of revenues, sales and marketing expenses have
decreased to 2.4% for the year ended September 30, 2008, from 3.2% for the same
period in 2007.

General and Administrative
Expenses. General and administrative expenses increased to $19.3 million, or
7.9% of revenues, for the year ended September 30, 2008 as compared to $12.4
million, or 8.5% of revenues, for the same period in 2007, an increase of $7.0
million or 56.4% . Share-based compensation included in general and
administrative expenses increased by $899,000 due to new stock options granted
to the employees in our general administration department on June 25, 2007,
January 28, 2008 and May 29, 2008. We also recognized an exchange loss of $1.3
million for the year ended September 30, 2008. Salaries and welfare increased by
$1.3 million in the aggregate due to an increase in average salaries paid. Audit
fees, legal fees and consultant fees also increased by US$442,000 due to two
securities offerings consummated on November 9, 2007 and August 26, 2008,
respectively.

We are liable for liquidated damages to certain shareholders
whose shares were included in a resale registration statement on Form SB-2 that
we filed pursuant to a registration rights agreement that we entered into with
such shareholders in September 2005. On August 15, 2006, the SEC declared
effective a post-effective amendment that we had filed on August 4, 2006,
terminating the effectiveness of a resale registration statement on Form SB-2
that had been filed pursuant to a registration rights agreement with certain
shareholders to register the resale of shares held by those shareholders. In
addition, on December 19, 2006, we filed the 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 the
above two events totaling approximately $1 million from us. We therefore
recognized in general and administrative expenses an amount of $760,000 as
liquidated damages for the year ended September 30, 2007, as compared to the
approximately $561,000 recognized as liquidated damages for the year ended
September 30, 2008 described below. Please see Part I, Item 3. Legal
Proceedings  Liquidated Damages Pursuant to September 2005 Registration Rights
Agreement for a further description of these liquidated damages and related
accounting treatment.

In addition, we were liable for liquidated damages to certain
shareholders whose shares were included in a resale registration statement on
Form S-3 that we filed pursuant to a registration rights agreement that we
entered into with such shareholders in relation to a private placement that we
closed in November 2007. The SEC did not declare this registration statement
effective by a certain date, and under the November 2007 registration rights
agreement, the included selling shareholders became eligible for liquidated
damages of approximately $561,000 as of September 30, 2008. Please see Part I,
Item 3. Legal Proceedings  Liquidated Damages Pursuant to November 2007
Registration Rights Agreement for a further description of these liquidated
damages. We therefore recognized in general and administrative expenses an
amount of approximately $561,000 for the liquidated damages for the fiscal year
ended September 30, 2008, as compared to approximately $760,000 for the same
period in 2007.

As described under Part I, Item 3. Legal Proceedings  Make
Good Settlements we have entered into settlement agreements pursuant to which
we have issued shares to certain shareholders that purchased shares in a January
20, 2005 private placement transaction in settlement of claims
related to the private placement, including claims for liquidated damages.
Pursuant to the settlement agreements, the claims of each shareholder are
released as of the applicable release date which occurred on June 26, 2008,
the date the resale registration statement we filed relating to resales by the
settling shareholders of the shares issued pursuant to the settlement agreement
was declared effective by the SEC. We expect such settlements may result in
gains in one or more future periods in accordance with their waivers of claims
to liquidated damages.

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Operating Income / (Loss).
As a result of the above, operating loss totaled $497,000 for the year ended
September 30, 2008, as compared to operating income of $4.6 million for the same
period of the prior fiscal year, a decrease of $5.1 million or 110.8% . As a
percentage of net revenues, operating loss was 0.2% for the year ended September
30, 2008, as compared to operating income of 3.2% for the same period of the
prior fiscal year.

Finance Costs, Net.
Finance costs, net, increased to $11.0 million for the year ended September 30,
2008 as compared to $5.2 million for the same period of the prior year, an
increase of $5.8 million or 110.9% . We had $105.6 million in short-term bank
loans maturing in less than one year, $8.8 million in long-term bank loans
maturing within one year, and $55.7 million in other long-term bank loans
maturing in more than one year, outstanding as of September 30, 2008, as
compared to $89.9 million in short-term bank loans maturing in less than one
year and $29.3 million in long-term bank loans maturing in more than one year,
outstanding as of September 30, 2007. The increase in net finance costs is also
attributable to the increase in average bank loan interest rates on both our
short-term and long-term bank loans and the increase in outstanding principal
for both our short-term and long-term bank loans.

Government Grant Income/Other
Expenses /(Other Income). Government grant income was $1.7 million for the
year ended September 30, 2008 as compared to $1.0 million for the same period of
2007. Government grant income for the year ended September 30, 2008 mainly
consisted of government grant funds of $1.0 million to subsidize the interest
expenses incurred by the Company in prior years for R&D activities, of
$492,000 to reward Shenzhen BAK for its contributions to the Shenzhen areas
economy and the amortization of deferred revenue in respect of the government
subsidies received for the additional cost of land use rights for BAK Industrial
Park. No present or future obligation arises from the receipt of such government
subsidies. Government grant income was $1.0 million for the year ended September
30, 2007. Government grant income for the year ended September 30, 2007 mainly
consisted of receipt of grant funds of $777,000 to subsidize the interest
expenses incurred by the Company in prior years for research and development
activities and $257,000 represented the refund of a value-added tax paid by
Shenzhen BAK in prior years in light of Shenzhen BAKs qualification as a new
and high technology enterprise.

Income Tax Benefit.
Income tax benefit was $1.0 million for the year ended September 30, 2008, as
compared to $195,000 for the same period of 2007. The increase was attributable
to a deferred tax provision for the year ended September 30, 2008.

Net (Loss) / Income. As a
result of the foregoing, we had a net loss of $7.9 million for the year ended
September 30, 2008, compared to a net income of $483,000 for the same period of
2007.

Liquidity and Capital Resources

We have historically financed our liquidity requirements from a
variety of sources, including short-term bank loans, long-term bank loans and
bills payable under bank credit agreements, sale of bills receivable and
issuance of capital stock. As of September 30, 2009, we had cash and cash
equivalents of $30.7 million, as compared to $35.7 million as of September 30,
2008. In addition, we had pledged deposits amounting to $31.1 million and $4.4
million at September 30, 2009 and September 30, 2008, respectively. Typically,
banks will require borrowers to maintain deposits of approximately 10% to 100%
of the outstanding loan balances and bills payable. The individual bank loans
have maturities ranging from six to twelve months which coincides with the
periods the cash remains pledged to the banks.

We had access to $212.4 million in short-term credit facilities
and $55.7 million in long-term credit facilities. As of September 30, 2009, the
principal outstanding amounts included short-term bank loans of $131.9 million
under credit facilities and $7.3 million separate from our credit facilities,
long-term bank loans of $16.1 million maturing within one year and long-term bank loans of $39.6 million
maturing in over one year, and bills payable of $30.9 million under credit
facilities and $23.0 million separate from our credit facilities, leaving $49.6
million of short-term funds available under our credit facilities for additional
cash needs. In addition, on July 10, 2008, our $60 million shelf registration
statement was declared effective by the SEC, pursuant to which we had issued $16
million in securities as of September 30, 2009, giving us the potential to raise
up to an additional aggregate $44 million in gross proceeds from additional
equity financings.

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

|                                                                   |   | Year ended September 30,             |  
|------------------------------------------------------------------ | - | ------------------------------------ | -
|                                                                   |   | 2009                                 |  
|                                                                   |   | (In thousands of U.S.
      dollars) |  
|Net cash provided by  operating
      activities                   | $ | 38,391                               |  
|Net cash used in investing activities                              | $ | (41,639                              | )
|Net cash (used in) / provided by financing
      activities        | $ | (1,623                               | )
|Effect of exchange rate changes on cash and cash
      equivalents | $ | (158                                 | )
|Net (decrease) / increase in cash and cash
      equivalents       | $ | (5,029                               | )
|Cash and cash equivalents at the beginning of period               | $ | 35,707                               |  
|Cash and cash equivalents at the end of
      period               | $ | 30,678                               |  

Operating Activities

Net cash provided by operating activities was $38.4 million in
the year ended September 30, 2009 compared with net cash provided by operating
activities of $2.7 million in the same period in 2008. The increase of $35.7
million in operating activities was mainly attributable to longer credit terms
we obtained from our suppliers.

Net cash provided by operating activities was $2.7 million in
the year ended September 30, 2008 compared with net cash provided by operating
activities of $3.0 million in the same period in 2007. The decrease of $0.3
million provided by operating activities was mainly attributable to an increase
in prepayments to our lithium cobalt dioxide suppliers. We purchased more
lithium cobalt dioxide, the main raw material in our products, in anticipation
of the higher future cost of lithium cobalt dioxide.

Investing Activities

Net cash used in investing activities decreased from $50.6
million in the year ended September 30, 2008 to $41.6 million in the same period
in 2009. The net cash used in investing activities for the year ended September
30, 2009, was mainly used for procurement of machinery and equipment for two
additional cylindrical cell lines, an additional automated prismatic cell
production line and construction of new factories in Tianjin, China.

Net cash used in investing activities decreased from $65.9
million in the year ended September 30, 2007 to $50.6 million in the same period
in 2008. The net cash used in investing activities for the year ended September
30, 2008, was mainly used for purchasing equipment for a new automated
cylindrical cell production line and a new automated prismatic cell production
line and paying for the land use rights of BAK Industrial Park.

Financing Activities

Net cash used in financing activities was $1.6million
in the year ended September 30, 2009 compared to $67.2 million provided by
financing activities in the same period in 2008. This change was attributable to
(i) net proceeds of $12.8 million from a private placement of our common stock
completed in November 2007 and net proceeds of $15.0 million from a registered
direct offering of our common stock and warrants to purchase our common stock
completed in August 2008, with no equivalent proceeds during fiscal year
2009, (ii) a $27.2 million increase in cash deposits at banks as
collateral in the year ended September 30, 2009, and (iii) decreased borrowings,
net of repayments, of $12.5 million in the year ended September 30, 2009.

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Net cash provided by financing activities was $67.2 million in
the year ended September 30, 2008 compared to $55.2 million in the same period
in 2007. This was mainly attributable to (i) net proceeds of $12.8 million from
a private placement of our common stock completed in November 2007, (ii) net
proceeds of $15.0 million from a registered direct offering of our common stock
and warrants to purchase our common stock completed in August 2008, (iii) a $1.2
million increase in net proceeds from our issuance of capital stock in the
fiscal year ended September 30, 2008, (iv) a $8.2 million decrease in cash
deposits at banks as collateral in the fiscal year ended September 30, 2008, and
(v) decreased borrowings, net of repayments, of $9.1 million.

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

|                                                         |   |                                      |  |   | Amount     | 
|-------------------------------------------------------- | - | ------------------------------------ |  | - | ---------- | 
|                                                         |   |                                      |  |   | Borrowed   | 
|                                                         |   |                                      |  |   | (Include   | 
|                                                         |   | Maximum                              |  |   | bank loans | 
|                                                         |   | Amount                               |  |   | and bills  | 
|                                                         |   | Available                            |  |   | payable)   | 
|                                                         |   | (in thousands of U.S.
      dollars) | 
|Short-term credit facilities:                            |   |                                      |  |   |            | 
|Agricultural Bank of China                               | $ | 58,597                               |  | $ | 58,597     | 
|Shenzhen Development Bank                                |   | 21,974                               |  |   | 21,974     | 
|China Everbright Bank                                    |   | 14,649                               |  |   | 4,351      | 
|China CITIC Bank                                         |   | 21,974                               |  |   | 18,420     | 
|Bank of Communications                                   |   | 29,298                               |  |   | 7,325      | 
|Bank of China                                            |   | 65,922                               |  |   | 52,136     | 
|Subtotalshort-term credit facilities                    | $ | 212,414                              |  | $ | 162,803    | 
|Long-term credit facilities:                             |   |                                      |  |   |            | 
|Agricultural Bank of China                               |   | 21,974                               |  |   | 21,974     | 
|China Development Bank                                   |   | 10,254                               |  |   | 10,254     | 
|Agricultural Bank of China, Tianjin Jinxin Branch        |   | 23,439                               |  |   | 23,439     | 
|Subtotallong-term credit facilities                     | $ | 55,667                               |  | $ | 55,667     | 
|Lines of Credit:                                         |   |                                      |  |   |            | 
|Agricultural Bank of China                               |   |                                      |  |   | 4,096      | 
|Shenzhen Development Bank                                |   |                                      |  |   | 2,402      | 
|Bank of China                                            |   |                                      |  |   | 7,106      | 
|China CITIC Bank                                         |   |                                      |  |   | 1,529      | 
|Ningbo Bank                                              |   |                                      |  |   | 14,612     | 
|Shanghai Pudong Development Bank, Tianjin Pucheng Branch |   |                                      |  |   | 551        | 
|Subtotal-lines of credit                                 |   |                                      |  | $ | 30,296     | 
|Total Principal Outstanding                              | $ | 268,081                              |  | $ | 248,766    | 

The above principal outstanding amounts under credit facilities
and lines of credit included short-term bank loans of $139.2 million, long-term
bank loans of $16.1 million maturing within one year and long-term bank loans of
$39.6 million maturing in over one year, and bills payable of $53.9 million.

For presentation purposes, the effect of the increase in bills
payable balances is included in operating activities in the statements of cash
flows due to their nature.

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During fiscal year 2009, we repaid 24 loans totaling $151.4million, and entered into 23 new bank loan agreements totaling $176.3
million. During the fourth quarter of fiscal 2009, we repaid two short-term bank
loans with Agricultural Bank of China, Shenzhen Eastern Branch (Agricultural
Bank  Shenzhen Branch), totaling $14.6 million, and entered into three
short-term loan agreements totaling $17.9 million. The three new short-term loan
agreements include one loan agreement with Bank of China, Shenzhen Branch (Bank
of China), totaling $3.3 million, and two loan agreements with Agricultural
Bank  Shenzhen Branch, totaling $14.6 million. The material financing terms of
these loans are described below.

During the fourth quarter of fiscal year 2009, we borrowedone short-term loan from Bank of China separate from our credit agreement
with Bank of China totaling $3.3 million, carrying annual interest of 0.74375%
and is due on July 20, 2010.

During the fourth quarter of fiscal year 2009, we also borrowed
two short-term loans from Agricultural Bank  Shenzhen Branch totaling $14.6
million, carrying annual interest at 4.617%, adjusted quarterly. The first loan,
of approximately $7.3 million, currently carries annual interest at 4.617% and
is due on January 21 2010. The second loan, of approximately $7.3 million,
currently carries annual interest at 4.617% and is due on January 22 2010.

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

On January 21, 2009, we entered into a comprehensive credit
facility agreement with Shenzhen Nanshan Branch, China Everbright Bank (China
Everbright Bank) to provide a maximum loan amount of RMB 100 million
(approximately $14.6 million). Loans may be drawn at any time from March 30,
2009 to March 30, 2010. As of September 30, 2009, we had borrowed $4.4 million
of notes payable under this facility.

On December 8, 2008, we renewed our comprehensive credit
facility agreement with Shenzhen Development Bank to provide a maximum loan
amount of RMB 150 million (approximately $22.0 million). Loans may be drawn at
any time over the one-year period beginning December 8, 2008 and will be due
based on each loan agreement. This credit facility agreement is guaranteed by
BAK International, BAK Tianjin and Mr. Xiangqian Li, and is also secured by
$22.0 million of inventory and $5.0 million of machinery and equipment. As of
September 30, 2009, we had borrowed approximately $22.0 million under a loan
agreement dated December 16, 2008 under this credit facility agreement, bearing
a floating interest rate equal to the PBOCs benchmark rate on the date of the
loan agreement and adjusted quarterly, and which is repayable on December 16,
2009. We have since repaid approximately $2.9 million of the principal of this
loan. We borrowed approximately $2.9 million under a second loan agreement
bearing a floating interest rate equal to the PBOCs benchmark rate on March 9,
2009 and adjusted quarterly, and which matures on March 9, 2010.

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

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As of September 30, 2009, we had five outstanding short-term
loans under this credit facility totaling approximately $58.6 million, carrying
annual interest at 4.86%, 5.58% and 5.31%, adjusted quarterly. The first loan,
of approximately $22.0 million, currently carries annual interest of 5.58% and
is due on December 1, 2009. The second loan, of approximately $11.0 million,
currently carries annual interest at 5.58% and is due on December 14, 2009. The
third loan, of approximately $7.3 million, currently carries annual interest at
4.86% and is due on December 14, 2009. The forth loan, of approximately $7.3
million, currently carries annual interest at 4.86% and is due on December 17,
2009. The fifth loan, of approximately $11.0 million, currently carries annual
interest at 5.31% and is due on January 5, 2010. Each of the loan agreements
specifically provide for acceleration of repayment of the loan, as well as other
penalties and remedies. We also had borrowed three short-term loans separate
from our credit agreement totaling $4.0 million, carrying annual interest from
0.29643% to 0.41286% . The first loan, of approximately $0.32 million, carries
annual interest of 0.29643% and is repayable on May 26, 2010. The second loan,
of approximately $0.68 million, carries annual interest of 0.41286% and is
repayable on June 21, 2010. The third loan, of approximately $3.0 million,
carries annual interest of 0.34786% and is repayable on June 25, 2010. As of
September 30, 2009, we also had three five-year term loans totaling
approximately $22.0 million under this credit facility carrying interest at 90%
of the benchmark rate of the PBOC for three-year to five-year long-term loans.
The first loan, of approximately $5.9 million, currently carries annual interest
of 5.184% and is due on January 25, 2012. The second loan, of approximately
$11.7 million, currently carries annual interest of 5.184% and is due in three
installments of approximately $2.9 million on January 25, 2010, approximately
$7.3 million on January 25, 2011, and approximately $1.5 million on January 25,
2012, respectively. The third loan, originally totaling approximately $8.8
million, currently carries annual interest of 5.76% and was structured to be
repaid in two installments. The first installment of approximately $4.4 million
was due on January 25, 2009, and was repaid on January 20, 2009. The second
installment of approximately $4.4 million is due on January 25, 2010. These
five-year term loans are specifically: (i) guaranteed by Mr. Xiangqian Li; (ii)
secured by Shenzhen BAKs machinery and equipment with carrying values of
approximately $34.8 million as of September 30, 2009; and (iii) secured by the
property ownership and land use rights certificates with an aggregate net book
value of $104.5 million as of September 30, 2009 in relation to the land on
which Shenzhen BAKs corporate campus had been constructed and any machinery and
equipment purchased and used at the campus subsequent to such construction.

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

On February 13, 2009, we renewed a credit facility with China
CITIC Bank. This credit facility was guaranteed by BAK International and Mr.
Xiangqian Li. We were permitted to borrow up to RMB 150 million ($22.0 million)
under this credit facility, which matures on February 12, 2010. As of September
30, 2009, we had borrowed $14.6 million under two loans at the fixed annual
interest rate of 5.31% and $3.8 million of notes payable under this credit facility totaling approximately $18.4 million. The first loan,
of approximately $7.3 million is repayable on February 25, 2010. The second
loan, of approximately $7.3 million, carried annual interest of 5.31% prior to
May 21, 2009. As of May 21, 2009, pursuant to a supplement agreement modifying
the interest rate, this loan carries an annual interest rate of 4.779% . It is
repayable on March 6, 2010. We also borrowed $1.5 million of notes payable
separate from the credit facility.

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On March 4, 2009, we renewed our credit facility agreement with
Bank of China to provide a maximum loan amount of RMB 450 million (approximately
$65.9 million). This credit facility was guaranteed by BAK International and Mr.
Xiangqian Li, and is also secured by machinery and equipment with carrying
values of approximately $28.2 million as of September 30, 2009. As of September
30, 2009, we had borrowed $29.3 million under three loans carrying annual
interest at 5.31% and 4.779%, and $22.8 million of notes payable under this
credit facility agreement. The first loan, of approximately $14.6 million,
carries annual interest of 5.31% and is repayable on March 13, 2010. The second
loan, of approximately $7.3 million, carries annual interest of 5.31% and
matures on March 30, 2010. The third loan, of approximately $7.3 million,
carries annual interest of 4.779% and is repayable on June 2, 2010. We had also
borrowed $3.3 million of short-term bank loans and $3.8 million of notes payable
separate from the credit facility.

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

We had negative working capital of $46.3 million as of
September 30, 2009, as compared to working capital of $3.2 million as of
September 30, 2008, an increase in negative working capital of $49.5 million.
This increase was primarily attributable to longer credit terms we obtained from
our suppliers and an increase in short-term bank loans and long-term bank loans
maturing within one year. We had short-term bank loans maturing in less than one
year of $139.2 million and long-term bank loans maturing within one year of
$16.1 million as of September 30, 2009, or a total of $155.3 million of loans
maturing within one year, as compared to a total of $114.4 million of such loans
as of September 30, 2008, an increase of $40.9 million. We had long-term bank
loans maturing in over one year of $39.6 million as of September 30, 2009, as
compared to $55.7 million of such loans as of September 30, 2008, a decrease of
$16.1 million.

We believe that our current cash and cash equivalents and
anticipated cash flow from operations will be sufficient to meet our anticipated
cash needs, including our cash needs for working capital and capital
expenditures for at least the next 12 months. We may, however, require
additional cash due to changing business conditions or other future
developments, including any investments or acquisitions we may decide to pursue.
If our existing cash and amount available under existing credit facilities is
insufficient to meet our requirements, we may seek to sell additional equity
securities, debt securities or borrow from lending institutions. We can make no
assurances that financing will be available in the amounts we need or on terms
acceptable to us, if at all. The sale of additional equity securities, including
convertible debt securities, would dilute the interests of our current
shareholders. The incurrence of debt would divert cash for working capital and
capital expenditures to service debt obligations and could result in operating
and financial covenants that restrict our operations and our ability to pay
dividends to our shareholders. If we are unable to obtain additional equity or
debt financing as required, our business operations and prospects may
suffer.

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Capital Expenditures

We made capital expenditures of $65.8 million, $51.2 million,
and $41.5million in fiscal years 2007, 2008 and 2009, respectively. Our
capital expenditures were used primarily to purchase plant and equipment to
expand our production capacity and construction of new factories in Tianjin,
China. The table below sets forth the breakdown of our capital expenditures by
use for the periods indicated.

|                          | Year ended September 30,             |       
|------------------------- | ------------------------------------ | ------
|                          |                                      | 2009  
|                          | (In thousands of
      U.S. dollars) |       
|Construction costs        | $                                    | 869   
|Lease prepayment          | $                                    | 1,077 
|Purchase of equipment     | $                                    | 39,561
|Total capital expenditure | $                                    | 41,507

We estimate that our total capital expenditures in fiscal year
2010 will reach approximately $40.0 million, to purchase manufacturing equipment
for the expansion of our production lines and for the construction of our new
Research and Development Test Centre at our Shenzhen facility.

We have completed the construction and put into use facilities
measuring 218,178 square meters comprised of manufacturing facilities,
warehousing and packaging facilities, dormitory space, dining halls and
administrative offices at the BAK Industrial Park in Shenzhen. Of that space,
approximately 81,411 square meters are manufacturing facilities. We have also
completed the construction and put into use facilities measuring 65,127 square
meters comprised of manufacturing facilities, dormitory space, dining halls and
other facilities in Tianjin. Of that space, approximately 44,129 square meters
are manufacturing facilities. The primary reasons for our continuing investments
in the facilities in Tianjin are to realize the benefits of our prior investment
in these facilities, to position the Company to capitalize on our knowledge of
and experience with established markets for lithium-phosphate technology, such
as electric bicycles, cordless power tools, and mining lamps, and to penetrate
emerging consuming markets for this technology, such as light electric vehicles
and hybrid electric vehicles. The first trial shipment of its lithium-phosphate
cells was used in electric bicycles, cordless power tools, uninterruptible power
supplies and mining lamps. We have received positive market feedback to these
samples. We expect interest in light electric vehicles and hybrid electric
vehicles to increase demand for our rechargeable lithium-based batteries
substantially. We have been engaged in the research and development of
lithium-phosphate cells specifically for use in light electric vehicles and
hybrid electric vehicles. As indicated above, our Tianjin facility is the nexus
for all such research and development.

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 recently obtained the land
use right to the tract of property on which we have constructed and on which we
plan further construction of our manufacturing facilities and other related
facilities in Shenzhen. While we have been constructing and have completed a
substantial part of the construction of our facilities with the approval of the
local government of Kuichong Township of Longgang District of Shenzhen, we
understand it did not have the authority to grant us the land use rights
certificate. However, the Company obtained approval for project planning and
construction from the government of Shenzhen on June 20, 2007. Under an
agreement with the government of Shenzhen for the acquisition of the land use
rights to BAK Industrial Park dated June 29, 2007, effective June 2008, the
government agreed to provide us with the land use rights certificate relating to
BAK Industrial Park on the condition that the Company would pay it an additional
$11,819,841. According to a notice received from the government of Shenzhen on
June 6, 2008, the Company obtained government grants of $7,889,991 to subsidize
this additional payment. As of September 30, 2008, the Company had fully paid
the remaining cost of $3,929,850 and had obtained the land use rights
certificate for BAK Industrial Park.

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We have insurance for our manufacturing facilities for Shenzhen
BAK Battery Co., Ltd located in BAK Industrial Park and our manufacturing
facilities at our Tianjin facility. However, we are not able to insure our new
Research and Development Test Centre to be constructed in Shenzhen, China, until
we receive the required certificate of property ownership. Upon receipt of the
certificate of property ownership, we intend to procure such insurance. The
applications for the related certificates of property ownership rights are in
process with respect to our facilities at BAK Industrial Park and Tianjin (see
discussion of our Research and Development Test Centre below). As we have been
granted the land use rights certificate to the premises presently occupied by
the Company in BAK Industrial Park, there should be no legal barriers for us to
obtain a property ownership certificate for this property. However, it is
possible that the Shenzhen government may determine that even with our land use
rights certificate, the buildings constructed at BAK Industrial Park were still
constructed without the proper authority and must be vacated as illegitimate
constructions, and we might be subject to penalties and fines. However, we
believe that this possibility, while present, is remote.

As of September 30, 2007, we had fully paid the lease
prepayment amount of $14.1 million for the acquisition of land use rights
regarding our Tianjin facility. As of September 30, 2008, we had obtained the
relevant land use rights certificate to this facility. As of September 30, 2009,
we were in the process of obtaining the relevant property ownership rights
certificate to this facility. Pursuant to our land use rights certificate
relating to our Tianjin facility, the Tianjin government had originally
requested that we complete construction of the Tianjin facility before September
30, 2008. As of September 30, 2008, we had not done so. Notwithstanding this
requirement, we have obtained an extension from the Business Administration
Bureau of Beichen District, Tianjin, to make the remaining contribution of the
registered capital by December 11, 2009, which we have interpreted as an
extension of the completion date of construction to this date.

As of September 30, 2007, we had paid the lease prepayment
amount of $717,000 for the acquisition of land use rights for a new Research and
Development Test Centre to be constructed in Shenzhen, China. As of September
30, 2008, we had obtained the relevant property ownership and land use rights
certificate. Pursuant to the property ownership and land use rights certificate,
we are required to complete at least 25% of the construction of the new Research
and Development Test Centre facility by September 30, 2008. As of September 30,
2008, we had not done so. Notwithstanding this requirement, the Shenzhen
government has agreed to increase the dimensions of the Research and Development
Test Centre and signed two supplemental agreements with us. According to the
supplemental agreements, we are required to complete the construction by May 6,
2011. In addition, according to the property ownership and land use rights
certificate, such land may not be pledged without the approval of the relevant
government office. We are required to pledge our property ownership and land use
rights certificate in relation to the new Research and Development Test Centre
to China Development Bank pursuant to the loan agreement entered into with it.
As of September 30, 2009 we were in the process of negotiating with the relevant
government bureau for the requisite approval. In addition, the so-named
property ownership and land use rights certificate relating to this facility
that we were issued lacks certain terms relating to property ownership rights,
which appears to indicate that the granting government has so far only granted
us the relevant land use rights. As a result, this certificate may not be
adequate evidence of our property ownership rights to this property. We
anticipate that the government will re-grant this certificate with adequate
property ownership indicia after we have satisfied the above construction
requirement and followed certain procedures.

Contractual Obligations and Commercial Commitments

The following table sets forth our contractual obligations and
commercial commitments as of September 30, 2009:

Payment Due by PeriodMoreLess than 1
    
    
    1-3
    
    
    3-5
    
    
    than 5Total
    
    
    year
    
    
    years
    
    
    years
    
    
    years(In thousands of
      U.S. dollars)Short-term bank loans
    $
    139,159
    
    $
    139,159
    
    $
    -
    
    $
    -
    
    $
    -Bills payable
    $
    53,939
    
    $
    53,939
    
    $
    -
    
    $
    -
    
    $
    -Long-term bank loans
    $
    55,667
    
    $
    16,114
    
    $
    39,553
    
    $
    -
    
    $
    -Capital commitments
    $
    9,541
    
    $
    9,541
    
    $
    -
    
    $
    -
    
    $
    -Future interest payment on short-term bank loans
    $
    1,866
    
    $
    1,866
    
    $
    -
    
    $
    -
    
    $
    -Future interest payment on long-term bank loans
    $
    12,213
    
    $
    9,201
    
    $
    3,012
    
    $
    -
    
    $
    -Total
    $
    272,385
    
    $
    229,820
    
    $
    42,565
    
    $
    -
    
    $
    -


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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 September 30, 2009.

Off-Balance Sheet Transactions

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

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

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 No. 45, Guarantors Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others, or FIN
45, now included in ASC Topic 460. Under that standard, we would be required to
recognize the fair value of guarantees issued or modified after December 31,
2002, for non-contingent guarantee obligations, and also a liability for
contingent guarantee obligations based on the probability that the guaranteed
party will not perform under the contractual terms of the guaranty agreement.

We have assessed the contingent liabilities arising from the
above-described guarantees and have considered them immaterial to the
consolidated financial statements. Therefore, no liabilities in respect of the
guarantees were recognized as of September 30, 2009. As of September 30, 2009,
we provided a guarantee for a non-related party, Nanjing Special Metal Equipment
Co., Ltd., of one-year short-term bank loans with Evergrowing Bank with a
maturity of August 6, 2010. We also provided the guarantees for four other
non-related parties, Hunan Reshine New Material Ltd, Shenzhen Tongli Hi-tech Co.
Ltd., Shenzhen B&G Technology Development Co. Ltd., and Siping Juyuan
Hanyang Plate Heat Exchanger Co. Ltd. The maximum amount of our exposure for
these guarantees was $28.6 million and $16.9 million at September 30, 2009 and
September 30, 2008, respectively.

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Interest Rate Risk

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

Please refer to Item 7 Managements Discussion and Analysis of
Financial Condition and Results of Operations  Liquidity and Capital Resources
 Financing Activities for a discussion of our credit facilities and loan
agreements.

A hypothetical 1.0% increase in the annual interest rates for
all of our credit facilities under which we had outstanding borrowings at
September 30, 2009, would decrease net income before provision for income taxes
by approximately $1.9 million or 12.5% for the fiscal year ended September 30,
2009. Management monitors the banks prime rates in conjunction with our cash
requirements to determine the appropriate level of debt balances relative to
other sources of funds. We have not entered into any hedging transactions in an
effort to reduce our exposure to interest rate risk.

Foreign Exchange Risk

Although our reporting currency is the U.S. dollar, the
financial records of our operating subsidiaries are maintained in their local
currency, the RMB, which is our functional currency. Approximately 62.9% of our
revenues and 96.9% of our costs and expenses for the year ended September 30,
2009 are denominated in RMB, with the balance denominated in U.S. dollars.
Approximately 99.6% of our assets excluding cash were denominated in RMB as of
September 30, 2009. As a result, we are exposed to foreign exchange risk as our
revenues and results of operations may be affected by fluctuations in the
exchange rate between U.S. dollars and RMB. If the RMB depreciates against the
U.S. dollar, the value of our RMB revenues, earnings and assets as expressed in
our U.S. dollar financial statements will decline. Assets and liabilities of our
operating subsidiaries are translated into U.S. dollars at the exchange rate at
the balance sheet date, their equity accounts are translated at historical
exchange 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 $8.8 million based on our outstanding
revenues, costs and expenses, assets and liabilities denominated in RMB as of
September 30, 2009. As of September 30, 2009, our accumulated other
comprehensive income was $24.8 million. We have not entered into any hedging
transactions in an effort to reduce our exposure to foreign exchange risk.

Critical Accounting Policies

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

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

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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, 2009 and September 30, 2008, the carrying amount of
property, plant and equipment, net was $219.7million and $195.4 million,
respectively. We assess the recoverability of property, plant and equipment to
be held and used by a comparison of the carrying amount of an asset or group of
assets to the future net undiscounted cash flows expected to be generated by the
asset or group of assets. If such assets are considered impaired, the impairment
recognized is measured as the amount by which the carrying amount of the assets
exceeds the fair value of the assets.

A prolonged general economic downturn and, specifically, a
continued downturn in the battery cell industry as well as other market factors
could intensify competitive pricing pressure, create an imbalance of industry
supply and demand, or otherwise diminish volumes or profits. Such events,
combined with changes in interest rates, could adversely affect our estimates of
future net cash flows to be generated by our long-lived assets. Consequently, it
is possible that our future operating results could be materially and adversely
affected by additional impairment charges related to the recoverability of our
long-lived assets.

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

Stock-Based Compensation

We adopted the provisions of SFAS 123(R), now included in ASC
Topic 718, 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. ASC Topic 718 also requires measurement of cost of a
liability-classified award based on its current fair value. The fair value of
the liability-classified award will be subsequently remeasured at each reporting
date through the settlement date. Change in fair value during the requisite
service period will be recognized as compensation cost over that period.

We determine fair value using the Black-Scholes model. Under
this model, certain assumptions, including the risk-free interest rate, the
expected life of the options and the estimated fair value of our ordinary shares
and the expected volatility, are required to determine the fair value of the
options. If different assumptions had been used, the fair value of the options
would have been different from the amount we computed and recorded, which would
have resulted in either an increase or decrease in the compensation expense.

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Pursuant to ASC Topic 718, we have recognized compensation costs of
$3.7 million in relation to stock-based awards to our employees and non-employee
directors for the fiscal year ended September 30, 2009, as an increase in both
the operating costs and shareholders equity.

Changes in Accounting Standards

In June 2009, the Financial Accounting Standards Board (FASB)
issued SFAS No.168 The FASB Accounting Standards CodificationTM
and the Hierarchy of Generally Accepted Accounting Principles  a replacement of
FASB Statement No. 162. The Accounting Standards Codification combines all
authoritative standards into a comprehensive, topically organized online
database. Following this Statement, which is now included in ASC Topic 105,
Generally Accepted Accounting Principles, the FASB will not issue new
standards in the form of Statements, FASB Staff Positions, or Emerging Issues
Task Force Abstracts. Instead, it will issue Accounting Standards Updates (ASU)
to update the ASC. Since the launch of the ASC on July 1, 2009, only one level
of authoritative U.S. GAAP for non-governmental entities exists, other than
guidance issued by the Securities and Exchange Commission. This Statement became
effective for our annual reporting periods ending after September 15, 2009, but
did not have a material impact on our financial statements.

In September 2006, the FASB issued SFAS No. 157 Fair Value
Measurements, or SFAS No. 157, now included in ASC Topic 820, Fair Value
Measurements and Disclosures, which defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles, and
expands disclosures about fair value measurements. SFAS No. 157 applies under
other accounting pronouncements that require or permit fair value measurements,
where fair value is the relevant measurement attribute. The standard does not
require any new fair value measurements. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. The adoption of SFAS No. 157 has no
material impact on our financial statements.

In February 2007, the FASB issued SFAS No. 159 The Fair Value
Option for Financial Assets and Financial Liabilities - Including an Amendment
of FASB Statement No. 115, or SFAS No. 159, now included in ASC Topic 825,
Financial Instruments. SFAS No. 159 permits entities to choose to measure many
financial instruments and certain other items at fair value. Entities that elect
the fair value option will report unrealized gains and losses in earnings at
each subsequent reporting date. The fair value option may be elected on an
instrument-by-instrument basis, with a few exceptions. SFAS No. 159 also
establishes presentation and disclosure requirements to facilitate comparisons
between entities that choose different measurement attributes for similar assets
and liabilities. The requirements of SFAS No. 159 apply to our financial
statements starting in its fiscal year beginning on October 1, 2008. The
adoption of SFAS No. 159 has no material impact on our financial statements.

In December 2007, the FASB issued SFAS No. 160 Noncontrolling
Interests in Consolidated Financial Statements-an amendment of ARB No. 51, or SFAS No. 160, now included in ASC Topic 810, Consolidation. SFAS No. 160
establishes accounting and reporting standards for the noncontrolling interest
in a subsidiary and for the deconsolidation of a subsidiary. The guidance will
apply to our financial statements starting in its fiscal year beginning on
October 1, 2009. Adoption of SFAS No. 160 is not expected to have a material
impact on our financial statements.

In December 2007, the FASB issued SFAS No. 141 (Revised)
Business Combinations, or SFAS No. 141 (Revised), now included in ASC Topic
805, Business Combinations. SFAS No. 141 (Revised) establishes principles and
requirements for how the acquirer of a business recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
and any noncontrolling interest in the acquiree. The statement also provides
guidance for recognizing and measuring the goodwill acquired in the business
combination and determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination. SFAS No. 141 (Revised) is required to be adopted by us for business
acquisitions for which the acquisition date is on or after October 1, 2009.

In February 2008, the FASB issued FASB Staff Position (FSP)
FAS No. 157-1 Application of FASB Statement No. 157 to FASB Statement No. 13
and Other Accounting Pronouncements That Address Fair Value Measurements for
Purposes of Lease Classification or Measurement under Statement 13, or FSP FAS
No. 157-1, now included in ASC Topic 820, Fair Value Measurements and
Disclosures. FSP FAS No. 157-1 provides a scope exception from Statement of Financial Accounting Standards No. 157, Fair
Value Measurements (SFAS No. 157) for the evaluation criteria on lease
classification and capital lease measurement under SFAS No. 13, Accounting for
Leases and other related accounting pronouncements. We adopted FSP FAS No.
157-1 effective October 1, 2008. Accordingly, the provisions of SFAS No. 157
will not be applied to lease transactions under SFAS No.13 except when applying
SFAS No. 157 to business combinations recorded by us.

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In February 2008, the FASB issued FSP FAS No. 157-2 Effective
Date of FASB Statement No. 157, or FSP FAS No. 157-2, now included in ASC Topic
820, Fair Value Measurements and Disclosures, which delays the effective date
of SFAS No. 157 to fiscal years beginning after November 15, 2008 for certain
nonfinancial assets and nonfinancial liabilities. FSP FAS No. 157-2 will become
effective for us on October 1, 2009. We are in the process of evaluating the
impact of applying FSP FAS No. 157-2 to nonfinancial assets and liabilities
measured on a nonrecurring basis. Examples of items to which the deferral would
apply include, but are not limited to:

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

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

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

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

In March 2008, the FASB issued SFAS No. 161 Disclosures about
Derivative Instruments and Hedging Activities, or SFAS No. 161, now included in
ASC Topic 815, Derivatives and Hedging. SFAS No. 161 is intended to improve
financial reporting about derivative instruments and hedging activities by
requiring enhanced disclosures to enable investors to better understand their
effects on an entitys financial position, financial performance, and cash
flows. It is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with early application
encouraged. Adoption o f SFAS No. 161 is not expected to have a material impact
on our financial statements.

In April 2008, the FASB issued FSP FAS No. 142-3 Determination
of the Useful Life of Intangible Assets, or FSP FAS No. 142-3, now included in
ASC Topic 350, Intangibles-Goodwill and Other. FSP FAS No. 142-3 amends the
factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible asset under
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets (SFAS No. 142). FSP FAS No. 142-3 is intended to improve the
consistency between the useful life of an intangible asset determined under SFAS
No. 142 and the period of expected cash flows used to measure the fair value of
the asset under SFAS No. 141(Revised) and other U.S. GAAP. FSP FAS No. 142-3 is
effective for fiscal years beginning after December 15, 2008 which means that it
will be effective for our fiscal year beginning on October 1, 2009. Early
adoption is prohibited. Adoption of FSP FAS No. 142-3 is not expected to have a
material impact on our financial statements.

In April 2009, the FASB issued FSP FAS No. 107-1 and APB No.
28-1 Interim Disclosures about Fair Value of Financial Instruments, or FSP FAS
No. 107-1 and APB No. 28-1, now included in ASC Topic 825, Financial
Instruments. FSP FAS No. 107-1 and APB No. 28-1 amends SFAS No. 107,
Disclosures about Fair Value of Financial Instruments, to require disclosures
about fair value of financial instruments for interim reporting periods of
publicly traded companies as well as in annual financial statements. In
addition, the FSP amends APB Opinion No. 28, Interim Financial Reporting, to
require those disclosures in summarized financial information at interim
reporting periods. The FSP is effective for interim periods ending after June
15, 2009, with earlier adoption permitted for periods ending after March 15, 2009. The adoption
of FSP FAS No. 107-1 and APB No. 28-1 have no material impact on our financial
statements.

81

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In April 2009, the FASB issued FSP FAS No. 115-2 and FAS No.
124-2 Recognition of Other-Than-Temporary Impairments, or FSP FAS No. 115-2 and
FAS No. 124-2, now included in ASC Topic 820, Fair Value Measurements and
Disclosures. FSP FAS No. 115-2 and FAS No. 124-2 amends the
other-than-temporary impairment guidance in SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities, for debt securities and the
presentation and disclosure requirements of other-than-temporary impairments on
debt and equity securities in the financial statements. FSP FAS No. 115-2 and
FAS No. 124-2 is effective for interim and annual reporting periods ending after
June 15, 2009, with early adoption permitted for periods ending after March 15,
2009. The adoption of FSP FAS No. 115-2 and FAS No. 124-2 have no material
impact on our financial statements.

In April 2009, the FASB issued FSP No. 157-4 Determining
Whether a Market is Not Active and a Transaction Is Not Distressed, or FSP No.
157-4, now included in ASC Topic 815, Derivatives and Hedging. FSP No. 157-4
clarifies when markets are illiquid or that market pricing may not actually
reflect the real value of an asset. If a market is determined to be inactive
and market price is reflective of a distressed price then an alternative method
of pricing can be used, such as a present value technique to estimate fair
value. FSP No. 157-4 identifies factors to be considered when determining
whether or not a market is inactive. FSP No. 157-4 would be effective for
interim and annual periods ending after June 15, 2009, with early adoption
permitted for periods ending after March 15, 2009 and shall be applied
prospectively. The adoption of FSP No. 157-4 has no material impact
on our financial statements.

In April 2009, the FASB issued FSP No. 141R-1 Accounting for
Assets Acquired and Liabilities Assumed in a Business Combination That Arise
from Contingencies, or FSP No. 141R-1, now included in ASC Topic 805, Business
Combinations. FSP No. 141R-1 amends the provisions in SFAS No. 141 (Revised)
for the initial recognition and measurement, subsequent measurement and
accounting, and disclosures for assets and liabilities arising from
contingencies in business combinations. FSP No. 141R-1 eliminates the
distinction between contractual and non-contractual contingencies, including the
initial recognition and measurement criteria in SFAS No. 141 (Revised) and
instead carries forward most of the provisions in SFAS No. 141 for acquired
contingencies. FSP No. 141R-1 is effective for contingent assets and contingent
liabilities acquired in evaluating the impact of SFAS No. 141 (Revised). We are
currently evaluating the impact of the adoption of FSP No. 141R-1 on our
financial statements.

In May 2009, the FASB issued SFAS No. 165 Subsequent Events,
or SFAS No. 165, now included in ASC Topic 855, Subsequent Events, which sets
forth general standards of accounting for and disclosure of events that occur
after the balance sheet date but before financial statements are issued or are
available to be issued. SFAS No.165 is effective after June 15, 2009. The
adoption of SFAS No. 165 has no material effect on our financial statements.

In June 2009, the FASB issued SFAS No. 166 Accounting for
Transfers of Financial Assets  an amendment of FASB Statement No. 140, or SFAS
No. 166, now included in ASC Topic 860, Transfers and Servicing. SFAS No. 166
improves the relevance, representational faithfulness, and comparability of the
information that a reporting entity provides in its financial statements about a
transfer of financial assets; the effects of a transfer on its financial
position, financial performance, and cash flows; and a transferors continuing
involvement, if any, in transferred financial assets. SFAS No. 166 is effective
as of the beginning of each reporting entitys first annual reporting period
that begins after November 15, 2009, for interim periods within that first
annual reporting period and for interim and annual reporting periods thereafter.
We are currently evaluating the impact of the adoption of SFAS No. 166 on our
financial statements.

In June 2009, the FASB issued SFAS No. 167 Amendments to FASB
Interpretation No. 46(R), or SFAS No. 167, now included in ASC Topic 810,
Consolidation, which amends FASB Interpretation No. 46 (revised December 2003)
to address the elimination of the concept of a qualifying special purpose
entity. SFAS No. 167 also replaces the quantitative-based risks and rewards
calculation for determining which enterprise has a controlling financial
interest in a variable interest entity with an approach focused on identifying
which enterprise has the power to direct the activities of a variable interest
entity and the obligation to absorb losses of the entity or the right to receive
benefits from the entity. Additionally, SFAS No. 167 provides more timely and
useful information about an enterprises involvement with a variable interest
entity. SFAS No. 167 shall be effective as of the beginning of each reporting entitys first annual reporting period that begins
after November 15, 2009, for interim periods within that first annual reporting
period, and for interim and annual reporting periods thereafter. Earlier
application is prohibited. We are currently evaluating the impact of the
adoption of SFAS No. 167 on our financial statements.

In August 2009, the FASB issued ASU 2009-05, Fair Value
Measurements and Disclosures (Topic 820)  Measuring Liabilities at Fair Value,
or ASU 2009-05. ASU 2009-05 provides additional guidance for measuring the fair
value of liabilities and clarifies that the quoted price for the identical
liability, when traded as an asset in an active market, is a Level 1
measurement, providing there are no adjustments to the quoted price.
Alternatively, when no quoted price is available, ASU 2009-05 affirms the use of
other valuation techniques outlined in SFAS No. 157. ASU 2009-05 is effective
for the first interim or annual reporting period beginning after its issuance.
Adoption of ASU 2009-05 is not expected to have a material impact on our
financial statements.

In September 2009, the FASB issued ASU 2009-12, Fair Value
Measurements and Disclosures (Topic 820)  Investments in Certain Entities That
Calculate Net Asset Value per Share (or Its Equivalent), or ASU 2009-12. ASU
2009-12 amends SFAS No. 157 to permit a reporting entity to measure the fair
value of certain investments on the basis of the net asset value per share of
the investment (or its equivalent). ASU 2009-12 also requires new disclosures,
by major category of investments, about the attributes includes of investments
within the scope of this amendment to the Codification. ASU 2009-12 is effective
for interim and annual periods ending after December 15, 2009. Early adoption is
permitted. Adoption of ASU 2009-14 is not expected to have a material impact on
our financial statements.

In October 2009, the FASB issued ASU 2009-13, Revenue
Recognition (Topic 605)  Multiple-Deliverable Revenue Arrangements, or ASU
2009-13. AUS 2009-13 requires companies to allocate revenue in multiple-element
arrangements based on an elements estimated selling price if vendor-specific or
other third party evidence of value is not available. AUS 2009-13 is to be
applied on a prospective basis for revenue arrangements entered into or
materially modified in fiscal years beginning on or after June 15, 2010, with
earlier application permitted. We are currently evaluating the impact of the
adoption of ASU 2009-13 on our financial statements.

In October 2009, the FASB issued ASU 2009-14, Software
(Topic 985)  Certain Revenue Arrangements That Include Software Elements, or
ASU 2009-14. ASU 2009-14 changes the accounting model for revenue arrangements
that include both tangible products and software elements. Under ASU 2009-14,
tangible products containing software and non-software components that function
together to deliver the tangible products essential functionality are excluded
from the software revenue guidance in ASC Topic 985-605, Software  Revenue
Recognition. In addition, hardware components of a tangible product containing
software component are always excluded from the software revenue guidance. ASU
2009-14 is effective prospectively for revenue arrangement entered into or
materially modified in fiscal years beginning on or after June 15, 2010. Early
adoption is permitted. Adoption of ASU 2009-14 is not expected to have a
material impact on our financial statements.

82

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Exchange Rates

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

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

|                                                                                                                                                                                                     | RMB per U.S. Dollar |       
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------- | ------
|                                                                                                                                                                                                     |                     | 2009  
|Balance sheet items as of September 30                                                                                                                                                               |                     | 6.8263
|Amounts included in the statement of income and comprehensive
      income / (loss), statement of changes in stockholders equity and
      statement of cash flows for the years ended September 30 |                     | 6.8340

ITEM 7A.         QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.

The information required by this item is discussed in Item 7.
Interest Rate Risk and Foreign Exchange Risk.

ITEM 8.             FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Consolidated Financial Statements

The financial statements required by this item begin on page
F-1 hereof.

Quarterly Financial Results

The following table reflects our unaudited quarterly
consolidated statement of operations data for the quarters presented. We believe
that the historical quarterly information has been prepared substantially on the
same basis as the audited consolidated financial statements, and all necessary
adjustments, consisting only of normal recurring adjustments, have been included
in the amounts below to state fairly the unaudited quarterly results of
operations data.

June
    
    
    Mar
    
    
    
    
    
    
    
    
    June
    
    
    MarSep 30
    
    
    30
    
    
    31
    
    
    Dec 31
    
    
    Sep 30
    
    
    30
    
    
    31
    
    
    Dec 312009
    
    
    2009
    
    
    2009
    
    
    2008
    
    
    2008
    
    
    2008
    
    
    2008
    
    
    2007(in thousands of U.S. dollars,
      except percentage) / UnauditedNet revenues
    $
    57,550
    
    $
    44,689
    
    $
    40,815
    
    $
    68,090
    
    $
    72,739
    
    $
    68,486
    
    $
    51,336
    
    $
    52,787Cost of revenues
    $
    49,457
    
    $
    39,641
    
    $
    37,793
    
    $
    57,497
    
    $
    61,258
    
    $
    60,082
    
    $
    47,421
    
    $
    45,681Gross profit
    $
    8,093
    
    $
    5,048
    
    $
    3,022
    
    $
    10,593
    
    $
    11,481
    
    $
    8,404
    
    $
    3,915
    
    $
    7,106


83

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|                                                                   |   |                                                                     |   |   | June   |   |   | Mar    |   |   |        |   |   |        |   |   | June   |   |   | Mar    |   |   |        |  
|------------------------------------------------------------------ | - | ------------------------------------------------------------------- | - | - | ------ | - | - | ------ | - | - | ------ | - | - | ------ | - | - | ------ | - | - | ------ | - | - | ------ | -
|                                                                   |   | Sep 30                                                              |   |   | 30     |   |   | 31     |   |   | Dec 31 |   |   | Sep 30 |   |   | 30     |   |   | 31     |   |   | Dec 31 |  
|                                                                   |   | 2009                                                                |   |   | 2009   |   |   | 2009   |   |   | 2008   |   |   | 2008   |   |   | 2008   |   |   | 2008   |   |   | 2007   |  
|                                                                   |   | (in thousands of U.S. dollars,
      except percentage) / Unaudited |  
|Gross profit ratio                                                 | $ | 14.1%                                                               |   |   | 11.3%  |   |   | 7.4%   |   |   | 15.6%  |   |   | 15.8%  |   |   | 12.3%  |   |   | 7.6%   |   |   | 13.5%  |  
|Research and development expenses                                  | $ | 1,630                                                               |   | $ | 1,472  |   | $ | 1,125  |   | $ | 1,417  |   | $ | 1,688  |   | $ | 1,855  |   | $ | 1,390  |   | $ | 1,319  |  
|Sales and marketing expenses                                       | $ | 1,841                                                               |   | $ | 1,581  |   | $ | 1,154  |   | $ | 1,600  |   | $ | 1,568  |   | $ | 1,484  |   | $ | 1,403  |   | $ | 1,348  |  
|General and administrative expenses                                | $ | 5,562                                                               |   | $ | 5,551  |   | $ | 4,116  |   | $ | 6,760  |   | $ | 5,186  |   | $ | 5,101  |   | $ | 4,823  |   | $ | 4,238  |  
|Operating (loss) /
    income                                      | $ | (940                                                                | ) | $ | (3,556 | ) | $ | (3,373 | ) | $ | 816    |   | $ | 3,039  |   | $ | (36    | ) | $ | (3,701 | ) | $ | 201    |  
|Finance costs, net                                                 | $ | 2,256                                                               |   | $ | 1,897  |   | $ | 2,364  |   | $ | 2,839  |   | $ | 3,644  |   | $ | 2,736  |   | $ | 2,418  |   | $ | 2,223  |  
|Other (income, including government grant
      income) / expenses | $ | (962                                                                | ) | $ | 131    |   | $ | (226   | ) | $ | (108   | ) | $ | (1,081 | ) | $ | (453   | ) | $ | (55    | ) | $ | (943   | )
|(Loss) / income before income taxes                                | $ | (2,234                                                              | ) | $ | (5,584 | ) | $ | (5,511 | ) | $ | (1,915 | ) | $ | 476    |   | $ | (2,319 | ) | $ | (6,064 | ) | $ | (1,079 | )
|Income tax  (benefit)
    / expense                                | $ | (875                                                                | ) | $ | (413   | ) | $ | 211    |   | $ | (176   | ) | $ | (994   | ) | $ | (31    | ) | $ | 119    |   | $ | (139   | )
|Net (loss) / income                                                | $ | (1,359                                                              | ) | $ | (5,171 | ) | $ | (5,722 | ) | $ | (1,739 | ) | $ | 1,470  |   | $ | (2,288 | ) | $ | (6,183 | ) | $ | (940   | )
|Other comprehensive (loss) / income                                |   |                                                                     |   |   |        |   |   |        |   |   |        |   |   |        |   |   |        |   |   |        |   |   |        |  
|- Foreign currency translation adjustment                          | $ | (113                                                                | ) | $ | (141   | ) | $ | (261   | ) | $ | 160    |   | $ | 1,241  |   | $ | 3,886  |   | $ | 6,364  |   | $ | 3,770  |  
|Comprehensive (loss) / income                                      | $ | (1,472                                                              | ) | $ | (5,312 | ) | $ | (5,983 | ) | $ | (1,579 | ) | $ | 2,711  |   | $ | 1,598  |   | $ | 181    |   | $ | 2,830  |  

ITEM 9.             CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

ITEM 9A.         CONTROLS AND PROCEDURES.

84

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(a) Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that
are designed to ensure that information required to be disclosed in reports that
we file or submit under the Securities Exchange Act of 1934, as amended (the
Exchange Act), is recorded, processed, summarized, and reported during the
year 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. Our
internal control over financial reporting is designed to provide reasonable
assurance to our management and Board of Directors regarding the reliability of
financial reporting and published financial statements.

As of September 30, 2009, our Management, including our chief
executive officer and chief financial officer, evaluated the effectiveness of
our disclosure controls and procedures, in accordance with Rules 13a-15(b) and
15d-15(b) of the Exchange Act. As of the date of this assessment, our management
concluded that through the ongoing remediation efforts from last year, the
Company was able to correct numerous internal controls deficiencies.
However, these remediation efforts, individually and in the aggregate, were
insufficient to fully eliminate those weaknesses that have materially affected,
or were reasonably likely to materially affect, our internal control over
financial reporting in fiscal year 2009.

As a result, our chief executive officer and chief financial
officer concluded that our disclosure controls and procedures were not effective
as of September 30, 2009, at the reasonable assurance level.

(b) Managements Report on Internal Control Over Financial
Reporting

Management is responsible for establishing and maintaining
adequate internal control over financial reporting for the Company. Internal
control over financial reporting refers to the process designed by, or under the
supervision of, our chief executive officer and chief financial officer, and
effected by our Board of Directors, management and other personnel, to provide
reasonable assurance regarding the reliability of our financial reporting and
the preparation of financial statements for external purposes in accordance with
U.S. GAAP, and includes those policies and procedures that:

(1) pertain to the maintenance of records that in reasonable
detail accurately and fairly reflect the transactions and dispositions of our
assets;

(2) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with
U.S. GAAP, and that our receipts and expenditures are being made only in
accordance with the authorization of our management and directors; and

(3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of our assets that
could have a material effect on the financial statements.

Because of inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of our internal control
over financial reporting as of September 30, 2009. In making this assessment,
management used the framework set forth in the report entitled Internal Control
- Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission, or COSO. The COSO framework summarizes each of the
components of a companys internal control system, including (i) the control
environment, (ii) risk assessment, (iii) control activities, (iv) information
and communication, and (v) monitoring.

A material weakness is a control deficiency, or combination of
control deficiencies, that results in more than a remote likelihood that a
material misstatement of the financial statements will not be prevented or
detected. Management identified the following material weaknesses during its
assessment of our internal control over financial reporting as of September 30,
2009:

85

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- The Company did not maintain effective controls over the financial
  reporting process due to an insufficient complement of personnel with a level
  of accounting knowledge, experience and training in the application of U.S.
  GAAP commensurate with the Companys financial requirements. Additionally, the
  Companys senior management lacked an adequate level of accounting knowledge,
  experience and training in the application of U.S. GAAP, and did not implement
  adequate and proper supervisory review to ensure the consolidated financial
  statements were prepared in conformity with U.S. GAAP and with requirements of
  the U.S. Securities and Exchange Commission.
- The Company did not maintain effective controls over the accounting for
  construction in progress assets and the determination of depreciation expenses
  when the assets are ready for their intended use. Specifically, the Company
  did not have effective controls to track and assess the ready-for-intended-use
  status of the construction in progress assets to ensure the construction in
  progress assets being transferred to property, plant and equipment and the
  related commencement of depreciation expense was in accordance with U.S. GAAP.

As a result of the existence of these material weaknesses, our
chief executive officer and chief financial officer have concluded that our
company did not maintain effective control over financial reporting as of
September 30, 2009, based on the criteria in Internal Control - Integrated
Framework.

Our independent registered public accounting firm, PKF Hong
Kong, has
issued an audit report on our internal control over financial reporting. Their
audit report is included herein.

(c) Remediation Measures for Material Weaknesses

To remediate the material weaknesses described above in
Managements Report on Internal Control Over Financial Reporting, we have
begun to take steps to remediate them, and plan to implement the new measures
described below in our ongoing efforts to address the internal control
deficiencies described above.

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

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

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

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

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

| | i) | We will provide additional training to finance managers
      to review any applicable accounting entry and time of
  transfer;
| | -- | -------------------------------------------------------------------------------------------------------------------------------

86

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



|(d) | Changes in Internal Control over Financial
      Reporting
|--- | ----------------------------------------------------------

There have been no changes in our internal control over
financial reporting during the fourth quarter of fiscal year 2009 that have
materially affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of China BAK
Battery, Inc.

We have audited the internal control over financial reporting
of China BAK Battery, Inc. and subsidiaries as of September 30, 2009, based on
criteria established in Internal ControlIntegrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission. The
Companys management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Managements
Report on Internal Control over Financial Reporting. Our responsibility is to
express an opinion on the Companys internal control over financial reporting
based on our audit.

We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in
all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk and performing such other procedures
as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A
company's internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a
material effect on the financial statements.

Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a control deficiency, or combination of
control deficiencies, that results in more than a remote likelihood that a
material misstatement of the annual or interim financial statements will not be
prevented or detected. The following material weaknesses have been identified
and included in the accompanying Managements Report on Internal Control over
Financial Reporting as of September 30, 2009:

- The Company did not maintain effective controls over the financial
  reporting process due to an insufficient complement of personnel with a level
  of accounting knowledge, experience and training in the application of U.S. GAAP commensurate with the Companys
  financial requirements. Additionally, the Companys senior management lacked
  an adequate level of accounting knowledge, experience and training in the
  application of U.S. GAAP, and did not implement adequate and proper
  supervisory review to ensure the consolidated financial statements were
  prepared in conformity with U.S. GAAP and with requirements of U.S. Securities
  and Exchange Commission.
- The Company did not maintain effective controls over the accounting for
  construction in progress assets and the determination of depreciation expenses
  when the assets are ready for their intended use. Specifically, the Company
  did not have effective controls to track and assess the ready-for-intended-use
  status of the construction in progress assets to ensure the construction in
  progress assets being transferred to property, plant and equipment and the
  related commencement of depreciation expense was in accordance with U.S. GAAP.

87

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In our opinion, the Company did not maintain, in all material
respects, effective internal control over financial reporting as of September
30, 2009, based on criteria established in Internal ControlIntegrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.

We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the consolidated
financial statements of the Company. These material weaknesses were considered
in determining the nature, timing, and extent of audit tests applied in our
audit of the Companys consolidated financial statements as of and for the year
ended September 30, 2009, and this report does not affect our report dated
December 14, 2009 on those consolidated financial statements, which expressed an
unqualified opinion on those consolidated financial statements.

/s/ PKFCertified Public Accountants Hong Kong
December 14, 2009

ITEM 9B.         OTHER INFORMATION.

We entered into a standalone loan agreement with Bank of China
on July 17, 2009 to borrow approximately $3.3 million, bearing annual interest
of 0.74375% . It is repayable on July 20, 2010. In the event that we fail to
make timely repayment, we will incur penalty interest at the rate of 2.23% .
Bank of China may also accelerate the repayment of the loan if we fail to make
timely repayment of interest or principal, provide untrue declarations or breach
any promise, or breaks any other agreement with respect to its obligations under
the loan agreement. A copy of the summary of this loan agreement is included as
Exhibit 10.89 to this Report and is hereby incorporated by reference
herein.

We entered into a loan agreement with Agricultural Bank 
Shenzhen Branch on July 22, 2009 to borrow approximately $7.3 million, bearing
annual interest of 4.617%, adjustable quarterly. It is repayable on January 21,
2010. In the event that we fail to make timely repayment, we will incur penalty
interest at the rate of 6.0021% . Bank of China may also accelerate the
repayment of the loan if we breach the loan agreement. A copy of the summary of
this loan agreement is included as Exhibit 10.90 to this Report and is
hereby incorporated by reference herein.

We entered into a loan agreement with Agricultural Bank 
Shenzhen Branch on July 23, 2009 to borrow approximately $7.3 million, bearing
annual interest of 4.617%, adjustable quarterly. It is repayable on January 22,
2010. In the event that we fail to make timely repayment, we will incur penalty
interest at the rate of 6.0021% . Bank of China may also accelerate the
repayment of the loan if we breach the loan agreement. A copy of the summary of
this loan agreement is included as Exhibit 10.91 to this Report and is
hereby incorporated by reference herein.

88

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PART III

ITEM 10.         DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE.

The information required by Item 10 of Part III is included in
our Proxy Statement relating to the 2010 Annual Meeting of Stockholders and is
incorporated herein by reference.

ITEM 11.         EXECUTIVE COMPENSATION.

The information required by Item 11 of Part III is included in
our Proxy Statement relating to the 2010 Annual Meeting of Stockholders and is
incorporated herein by reference.

ITEM 12.         SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The information required by Item 12 of Part III is included in
our Proxy Statement relating to the 2010 Annual Meeting of Stockholders and is
incorporated herein by reference.

ITEM 13.         CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE.

The information required by Item 13 of Part III is included in
our Proxy Statement relating to the 2010 Annual Meeting of Stockholders and is
incorporated herein by reference.

ITEM 14.         PRINCIPAL ACCOUNTING FEES AND SERVICES.

The information required by Item 14 of Part III is included in
our Proxy Statement relating to the 2010 Annual Meeting of Stockholders and is
incorporated herein by reference.

PART IV

ITEM 15.         EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

(a) Financial Statements and Schedules

The financial statements are set forth under Item 8 of this
Annual Report on Form 10-K. Financial statement schedules have been omitted
since they are either not required, not applicable, or the information is
otherwise included.

(b) Exhibit Listing

|Exhibit No. |  | Description                                                                                                                                                                                                            
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1         |  | Articles of Incorporation of the
      Registrant (incorporated by reference to Exhibit 3.1 to the Registrants
      Annual Report on Form 10-K filed with the Commission on December 8, 2006)                        
|3.2         |  | By-laws of the Registrant (incorporated by reference
      to Exhibit 3.2 to the Registrants Annual Report on Form 10-K filed with
      the Commission on December 19, 2007)                                         
|4.1         |  | Form of Registration Rights Agreement,
      dated November 5, 2007 (incorporated by reference to Exhibit 4.1 to the
      Registrants Current Report on Form 8-K filed with the Commission on
      November 6, 2007)
|4.2         |  | China BAK Battery, Inc. Stock Option Plan
      (incorporated by reference to Exhibit 10.1 to the Registrants Quarterly
      Report on Form 10-Q filed with the Commission on August 22, 2006)                       

89

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|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                       
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.3         |  | Amendment No. 1 to the China BAK
      Battery, Inc. Stock Option Plan (incorporated by reference to Exhibit 4.1
      to the Registrants Quarterly Report on Form 10-Q filed with the
      Commission on August 8, 2008)                                                                                                                                       
|4.4         |  | Form of Warrant (incorporated by reference to Exhibit
      4.1 to the Registrants Current Report on Form 8-K filed with the
      Commission on August 26, 2008)                                                                                                                                                                                                
|4.5         |  | Specimen Common Stock Certificate
      representing shares of Common Stock, par value $0.001 per share
      (incorporated by reference to Exhibit 4.1 to the Registrants Registration
      Statement on Form S- 8 filed with the Commission on September 24, 2008)                                                                                            
|10.1        |  | China BAK Battery, Inc. Compensation
      Plan for Non-Employee Directors (incorporated by reference to Exhibit 10.2
      to the Registrants Quarterly Report on Form 10-Q filed with the
      Commission on August 22, 2006)                                                                                                                                 
|10.2        |  | Form of Indemnification Agreement with
      the Registrants directors (incorporated by reference to Exhibit 10.3 to
      the Registrants Quarterly Report on Form 10-Q filed with the Commission
      on August 22, 2006)                                                                                                                                    
|10.3        |  | Employment Agreement between the Registrant and
      Xiangqian Li , dated June 30, 2006 (incorporated by reference to Exhibit
      10.4 to the Registrants Annual Report on Form 10-K filed with the
      Commission on December 19, 2007)                                                                                                                    
|10.4        |  | Employment Agreement between the
      Registrant and Huanyu Mao, dated June 30, 2006 (incorporated by reference
      to Exhibit 10.6 to the Registrants Annual Report on Form 10-K filed with
      the Commission on December 19, 2007)                                                                                                                       
|10.5        |  | Employment Agreement between the Registrant and
      Kenneth G. Broom, dated December 20, 2006 (incorporated by reference to
      Exhibit 10.7 to the Registrants Annual Report on Form 10-K filed with the
      Commission on December 19, 2007)                                                                                                             
|10.6        |  | Employment Agreement between the
      Registrant and Tony Shen, dated May 13, 2007 (incorporated by reference to
      Exhibit 10.8 to the Registrants Annual Report on Form 10-K filed with the
      Commission on December 19, 2007)                                                                                                                         
|10.7        |  | Loan Certificate between Shenzhen BAK Battery Co.,
      Ltd. and Shenzhen Pingshan Branch, Shenzhen Development Bank, dated
      December 14, 2007 (incorporated by reference to Exhibit 10.8 to the
      Registrants Quarterly Report on Form 10-Q filed with the Commission on
      February 6, 2008)                                                      
|10.8        |  | Loan Certificate between Shenzhen BAK
      Battery Co., Ltd. and Shenzhen Pingshan Branch, Shenzhen Development Bank,
      dated December 20, 2007 (incorporated by reference to Exhibit 10.9 to the
      Registrants Quarterly Report on Form 10-Q filed with the Commission on
      February 6, 2008)                                                      
|10.9        |  | Form of Settlement Agreement between the Registrant
      and certain investors (incorporated by reference to Exhibit 10.2 to the
      Companys Current Report on Form 8-K, filed with the Commission on March
      31, 2008)                                                                                                                                  
|10.10       |  | Form of Settlement Agreement between
      the Registrant and Chinamerica Fund, LP, dated March 13, 2008
      (incorporated by reference to Exhibit 10.1 to the Registrants Quarterly
      Report on Form 10-Q filed with the Commission on May 12, 2008)                                                                                                      
|10.11       |  | Form of Settlement Agreement between the
      Registrant and The Pinnacle Fund, L.P., dated March 21, 2008 (incorporated
      by reference to Exhibit 10.2 to the Registrants Quarterly Report on Form
      10- Q filed with the Commission on May 12, 2008)                                                                                                  
|10.12       |  | Summary of Comprehensive Credit
      Facility Agreement, by and between Shenzhen BAK Battery Co., Ltd and
      Shenzhen Hi-tech Industrial Park Branch, Industrial Bank Co., Ltd, dated
      March 25, 2008 (incorporated by reference to Exhibit 10.4 to the
      Registrants Quarterly Report on Form 10-Q filed with the Commission on
      May 12, 2008)
|10.13       |  | Summary of Guaranty Contract of Maximum Amount, by and
      between Mr. Xiangqian Li and Shenzhen Hi-tech Industrial Park Branch,
      Industrial Bank Co., Ltd on March 24, 2008 (incorporated by reference to Exhibit 10.5 to the
      Registrants Quarterly Report on Form 10-Q filed with the Commission on
      May 12, 2008)                           

90

---



|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                     
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.14       |  | Summary of Loan Agreement, by and
      between Shenzhen BAK Battery Co., Ltd. and Shenzhen Hi- tech Industrial
      Park Branch, Industrial Bank Co., Ltd, dated March 25, 2008 (incorporated
      by reference to Exhibit 10.6 to the Registrants Quarterly Report on Form
      10-Q filed with the Commission on May 12, 2008)           
|10.15       |  | Loan certificate with Shenzhen Hi-tech Industrial Park
      Branch, Industrial Bank Co., Ltd, dated March 25, 2008 (incorporated by
      reference to Exhibit 10.7 to the Registrants Quarterly Report on Form
      10-Q filed with the Commission on May 12, 2008)                                                                         
|10.16       |  | Loan certificate with Shenzhen Branch,
      Bank of China, dated March 27, 2008 (incorporated by reference to Exhibit
      10.8 to the Registrants Quarterly Report on Form 10-Q filed with the
      Commission on May 12, 2008)                                                                                                            
|10.17       |  | Summary of Loan Agreement between BAK International
      (Tianjin) Limited and Tianjin Branch, Agricultural Bank of China, dated
      May 26, 2008 (incorporated by reference to Exhibit 10.2 to the
      Registrants Quarterly Report on Form 10-Q filed with the Commission on
      August 8, 2008)                                      
|10.18       |  | Summary of Loan Agreement between
      Shenzhen BAK Battery Co., Ltd. and Shenzhen East Branch, Agricultural Bank
      of China, dated May 20, 2008 (incorporated by reference to Exhibit 10.3 to
      the Registrants Quarterly Report on Form 10-Q filed with the Commission
      on August 8, 2008)                                     
|10.19       |  | Summary of Guaranty Contract of Maximum Amount between
      BAK International (Tianjin) Ltd. and Shenzhen Eastern Branch, Agricultural
      Bank of China, dated May 20, 2008 (incorporated by reference to Exhibit
      10.4 to the Registrants Quarterly Report on Form 10-Q filed with the
      Commission on August 8, 2008)           
|10.20       |  | Summary of Comprehensive Credit
      Facility Agreement of Maximum Amount between Shenzhen BAK Battery Co.,
      Ltd. and Shenzhen Branch, China CITIC Bank Co., Ltd., dated May 9, 2008
      (incorporated by reference to Exhibit 10.5 to the Registrants Quarterly
      Report on Form 10-Q filed with the Commission on August 8, 2008)
|10.21       |  | Summary of Guaranty Contract of Maximum Amount between
      BAK International Limited and Shenzhen Branch, China CITIC Bank Co., Ltd.,
      dated May 9, 2008 (incorporated by reference to Exhibit 10.6 to the
      Registrants Quarterly Report on Form 10-Q filed with the Commission on
      August 8, 2008)                           
|10.22       |  | Summary of Guaranty Contract of
      Maximum Amount between Xiangqian Li and Shenzhen Branch, China CITIC Bank
      Co., Ltd., dated May 9, 2008 (incorporated by reference to Exhibit 10.7 to
      the Registrants Quarterly Report on Form 10-Q filed with the Commission
      on August 8, 2008)                                        
|10.23       |  | Supplemental Agreement between Shenzhen BAK Battery
      Co., Ltd. and Shenzhen Branch, Agricultural Bank of China, dated August 6,
      2008 (incorporated by reference to Exhibit 10.8 to the Registrants
      Quarterly Report on Form 10-Q filed with the Commission on August 8, 2008)                                                 
|10.24       |  | Summary of Loan Agreement by and
      between Shenzhen BAK Battery Co., Ltd. and Shenzhen Eastern Branch,
      Agricultural Bank of China, dated September 17, 2008 (incorporated by
      reference to Exhibit 10.70 to the Registrants Annual Report on Form 10-K
      filed with the Commission on December 12, 2008)                    
|10.25       |  | Summary of Loan Agreement by and between Shenzhen BAK
      Battery Co., Ltd. and Shenzhen Eastern Branch, Agricultural Bank of China,
      dated September 19, 2008 (incorporated by reference to Exhibit 10.71 to
      the Registrants Annual Report on Form 10-K filed with the Commission on
      December 12, 2008)                    
|10.26       |  | Credit Loan Certificate between Bank
      of China and Shenzhen BAK Battery Co., Ltd., dated August 19, 2008
      (incorporated by reference to Exhibit 10.72 to the Registrants Annual
      Report on Form 10- K filed with the Commission on December 12, 2008)                                                                           

91

---



|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                 
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.27       |  | Credit Loan Certificate between Bank
      of China, Shenzhen Branch and Shenzhen BAK Battery Co., Ltd., dated August
      29, 2008 (incorporated by reference to Exhibit 10.73 to the Registrants
      Annual Report on Form 10-K filed with the Commission on December 12, 2008)                                                                                       
|10.28       |  | Guaranty Contract of Maximum Amount among BAK
      International (Tianjin) Limited, BAK International Limited, Xiangqian Li,
      and Shenzhen Eastern Branch, Agricultural Bank of China, dated September
      17, 2008 (incorporated by reference to Exhibit 10.74 to the Registrants
      Annual Report on Form 10-K filed with the Commission on December 12, 2008)
|10.29       |  | Summary of Shenzhen Land Use Right
      Grant Agreement by and between Shenzhen Municipal Bureau of Land Resources
      and Housing Management and Shenzhen BAK Battery Co., Ltd., dated June 29,
      2007 (incorporated by reference to Exhibit 10.75 to the Registrants
      Annual Report on Form 10-K filed with the Commission on December 12, 2008)             
|10.30       |  | Summary of Contract for Assignment of Shenzhen Land
      Use Right by and between Shenzhen Municipal Bureau of Land Resources and
      Housing Management and Shenzhen BAK Battery Co., Ltd., dated June 29, 2007
      (incorporated by reference to Exhibit 10.70 to the Registrants Annual
      Report on Form 10-K filed with the Commission on December 12, 2008)  
|10.31       |  | Form of Securities Purchase Agreement
      (incorporated by reference to Exhibit 10.1 to the Registrants Current
      Report on Form 8-K filed with the Commission on August 26, 2008)                                                                                                                                                                                   
|10.32       |  | Placement Agency Agreement between the Registrant and
      Brean Murray, Carret & Co., LLC, accepted August 22, 2008
      (incorporated by reference to Exhibit 10.2 to the Registrants Current
      Report on Form 8-K filed with the Commission on August 26, 2008)                                                                                                   
|10.33       |  | Amendment to Placement Agency
      Agreement between the Registrant and Brean Murray, Carret & Co., LLC,
      dated August 22, 2008 (incorporated by reference to Exhibit 10.3 to the
      Registrants Current Report on Form 8-K filed with the Commission on
      August 26, 2008)                                                                                   
|10.34       |  | Form of Securities Purchase Agreement, dated November
      5, 2007 (incorporated by reference to Exhibit 10.1 to the Registrants
      Current Report on Form 8-K filed with the Commission on November 6, 2007)                                                                                                                                                          
|10.35       |  | Delivery of Make Good Shares,
      Settlement and Release Agreement, by and among China BAK Battery, Inc.,
      Xiangqian Li, and BAK International, Ltd., dated October 22, 2007
      (incorporated by reference to Exhibit 10.2 to the Registrants Current
      Report on Form 8-K filed with the Commission on November 6, 2007)                                    
|10.36       |  | Escrow Agreement by and among Medina Coffee, Inc.,
      certain investors indicated therein, Xiangqian Li, and Securities Transfer
      Corporation, dated as of January 20, 2005 (incorporated by reference to
      Exhibit 10.2 to the Companys Current Report on Form 8-K filed with the
      Commission on January 21, 2005)                                       
|10.37       |  | Form of Restricted Stock Grant
      Agreement (incorporated by reference to Exhibit 10.1 to the Registrants
      Quarterly Report on Form 10-Q filed with the Commission on February 9,
      2007)                                                                                                                                                                      
|10.38       |  | Comprehensive Credit Facility Agreement of Maximum
      Amount by and between Shenzhen BAK Battery Co., Ltd. and Shenzhen Caitian
      Branch, Bank of Communications, dated April 26, 2009 (incorporated by
      reference to Exhibit 10.1 of the Registrants Quarterly Report on Form
      10-Q filed with the Commission on August 7, 2009)                         
|10.39       |  | Summary of Loan Agreement by and
      between Shenzhen BAK Battery Co., Ltd. and Shenzhen Caitian Branch, Bank
      of Communications, dated June 22, 2009 (incorporated by reference to
      Exhibit 10.2 of the Registrants Quarterly Report on Form 10-Q filed with
      the Commission on August 7, 2009)                                                          
|10.40       |  | Summary of Guaranty Contract of Maximum Amount by and
      between Xiangqian Li and Shenzhen Caitian Branch, Bank of Communications,
      dated April 26, 2009 (incorporated by reference to Exhibit 10.3 of the
      Registrants Quarterly Report on Form 10-Q filed with the Commission on August 7, 2009)                                                            

92

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|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                       
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.41       |  | Summary of Guaranty Contract of
      Maximum Amount by and between BAK International (Tianjin) Limited and
      Shenzhen Caitian Branch, Bank of Communications, dated April 26, 2009
      (incorporated by reference to Exhibit 10.4 of the Registrants Quarterly
      Report on Form 10-Q filed with the Commission on August 7, 2009)                     
|10.42       |  | Summary of Loan Agreement by and between Shenzhen BAK
      Battery Co., Ltd. and Shenzhen Branch, Bank of China, dated June 2, 2009
      (incorporated by reference to Exhibit 10.5 of the Registrants Quarterly
      Report on Form 10-Q filed with the Commission on August 7, 2009)                                                                        
|10.43       |  | Summary of Loan Agreement by and
      between Shenzhen BAK Battery Co., Ltd. and Shenzhen Eastern Branch,
      Agricultural Bank of China, dated May 26, 2009 (incorporated by reference
      to Exhibit 10.6 of the Registrants Quarterly Report on Form 10-Q filed
      with the Commission on August 7, 2009)                                             
|10.44       |  | Summary of Chattel Mortgage Contract by and between
      Shenzhen BAK Battery Co., Ltd. and Shenzhen Eastern Branch, Agricultural
      Bank of China, dated May 26, 2009 (incorporated by reference to Exhibit
      10.7 of the Registrants Quarterly Report on Form 10-Q filed with the
      Commission on August 7, 2009)                                  
|10.45       |  | Summary of Loan Agreement by and
      between Shenzhen BAK Battery Co., Ltd. and Shenzhen Eastern Branch,
      Agricultural Bank of China, dated June 15, 2009 (incorporated by reference
      to Exhibit 10.8 of the Registrants Quarterly Report on Form 10-Q filed
      with the Commission on August 7, 2009)                                            
|10.46       |  | Summary of Loan Agreement by and between Shenzhen BAK
      Battery Co., Ltd. and Shenzhen Eastern Branch, Agricultural Bank of China,
      dated June 18, 2009 (incorporated by reference to Exhibit 10.9 of the
      Registrants Quarterly Report on Form 10-Q filed with the Commission on
      August 7, 2009)                                            
|10.47       |  | Summary of Loan Agreement by and
      between Shenzhen BAK Battery Co., Ltd. and Shenzhen Eastern Branch,
      Agricultural Bank of China, dated June 22, 2009 (incorporated by reference
      to Exhibit 10.10 of the Registrants Quarterly Report on Form 10-Q filed
      with the Commission on August 7, 2009)                                           
|10.48       |  | Summary of Chattel Mortgage Contract Mortgage Contract
      by and between Shenzhen BAK Battery Co., Ltd. and Shenzhen Eastern Branch,
      Agricultural Bank of China, dated June 22, 2009 (incorporated by reference
      to Exhibit 10.11 of the Registrants Quarterly Report on Form 10-Q filed
      with the Commission on August 7, 2009)              
|10.49       |  | Summary of Loan Agreement by and
      between Shenzhen BAK Battery Co., Ltd. and Shenzhen Eastern Branch,
      Agricultural Bank of China, dated June 26, 2009 (incorporated by reference
      to Exhibit 10.12 of the Registrants Quarterly Report on Form 10-Q filed
      with the Commission on August 7, 2009)                                           
|10.50       |  | Summary of Chattel Mortgage Contract by and between
      Shenzhen BAK Battery Co., Ltd. and Shenzhen Eastern Branch, Agricultural
      Bank of China, dated June 26, 2009 (incorporated by reference to Exhibit
      10.13 of the Registrants Quarterly Report on Form 10-Q filed with the
      Commission on August 7, 2009)                                
|10.51       |  | Supplemental Agreement by and between
      Shenzhen BAK Battery Co., Ltd. and Shenzhen Branch, China CITIC Bank Co.
      Ltd., dated May 21, 2009 (incorporated by reference to Exhibit 10.14 of
      the Registrants Quarterly Report on Form 10-Q filed with the Commission
      on August 7, 2009)                                                        
|10.52       |  | Summary of Comprehensive Credit Facility Agreement of
      Maximum Amount by and between Shenzhen BAK Battery Co., Ltd. and Shenzhen
      Eastern Branch, Agricultural Bank of China, dated November 27, 2008
      (incorporated by reference to Exhibit 10.1 to the Companys Current Report
      on Form 8-K filed with the Commission on December 12, 2008)

93

---



|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                  
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.53       |  | Summary of Loan Agreement by and
      between Shenzhen BAK Battery Co., Ltd. and Shenzhen Eastern Branch,
      Agricultural Bank of China, dated January 6, 2009 (incorporated by
      reference to Exhibit 10.2 of the Registrants Quarterly Report on Form
      10-Q filed with the Commission on May 11, 2009)                                                       
|10.54       |  | Summary of Comprehensive Credit Facility Agreement of
      Maximum Amount by and between Shenzhen BAK Battery Co., Ltd. and Shenzhen
      Nanshan Branch, China Everbright Bank, dated January 21, 2009
      (incorporated by reference to Exhibit 10.3 of the Registrants Quarterly
      Report on Form 10-Q filed with the Commission on May 11, 2009)                
|10.55       |  | Summary of Comprehensive Credit
      Facility Agreement of Maximum Amount by and between Shenzhen BAK Battery
      Co., Ltd. and Shenzhen Branch, China CITIC Bank, dated February 13, 2009
      (incorporated by reference to Exhibit 10.4 of the Registrants Quarterly
      Report on Form 10-Q filed with the Commission on May 11, 2009)                            
|10.56       |  | Summary of Loan Agreement by and between Shenzhen BAK
      Battery Co., Ltd. and Shenzhen Branch, China CITIC Bank, dated February
      25, 2009 (incorporated by reference to Exhibit 10.5 of the Registrants
      Quarterly Report on Form 10-Q filed with the Commission on May 11, 2009)                                                                             
|10.57       |  | Summary of Loan Agreement by and
      between Shenzhen BAK Battery Co., Ltd. and Shenzhen Branch, China CITIC
      Bank, dated March 6, 2009 (incorporated by reference to Exhibit 10.6 of
      the Registrants Quarterly Report on Form 10-Q filed with the Commission
      on May 11, 2009)                                                                           
|10.58       |  | Summary of Guaranty Contract of Maximum Amount by and
      between Xiangqian Li and Shenzhen Branch, China CITIC Bank, dated February
      13, 2009 (incorporated by reference to Exhibit 10.7 of the Registrants
      Quarterly Report on Form 10-Q filed with the Commission on May 11, 2009)                                                                          
|10.59       |  | Summary of Guaranty Contract of
      Maximum Amount by and between BAK International Limited and Shenzhen
      Branch, China CITIC Bank, dated February 2009 (incorporated by reference
      to Exhibit 10.8 of the Registrants Quarterly Report on Form 10-Q filed
      with the Commission on May 11, 2009)                                                           
|10.60       |  | Summary of Comprehensive Credit Facility Agreement of
      Maximum Amount by and between Shenzhen BAK Battery Co., Ltd. and Shenzhen
      Branch, Bank of China, dated March 4, 2009 (incorporated by reference to
      Exhibit 10.9 of the Registrants Quarterly Report on Form 10-Q filed with
      the Commission on May 11, 2009)                                   
|10.61       |  | Summary of Loan Certificate between
      Shenzhen BAK Battery Co., Ltd. and Bank of China, Shenzhen Branch, dated
      March 13, 2009 (incorporated by reference to Exhibit 10.10 of the
      Registrants Quarterly Report on Form 10-Q filed with the Commission on
      May 11, 2009)                                                                                 
|10.62       |  | Summary of Loan Certificate between Shenzhen BAK
      Battery Co., Ltd. and Bank of China, Shenzhen Branch, dated March 31, 2009
      (incorporated by reference to Exhibit 10.11 of the Registrants Quarterly
      Report on Form 10-Q filed with the Commission on May 11, 2009)                                                                                       
|10.63       |  | Summary of Guaranty Contract of
      Maximum Amount by and between BAK International Limited and Shenzhen
      Branch, Bank of China, dated March 4, 2009 (incorporated by reference to
      Exhibit 10.12 of the Registrants Quarterly Report on Form 10-Q filed with
      the Commission on May 11, 2009)                                                             
|10.64       |  | Summary of Guaranty Contract of Maximum Amount by and
      between Xiangqian Li and Shenzhen Branch, Bank of China, dated March 4,
      2009 (incorporated by reference to Exhibit 10.13 of the Registrants
      Quarterly Report on Form 10-Q filed with the Commission on May 11, 2009)                                                                                
|10.65       |  | Summary of Mortgage Contract of
      Maximum Amount by and between Shenzhen BAK Battery Co., Ltd. and Shenzhen
      Branch, Bank of China, dated March 4, 2009 (incorporated by reference to
      Exhibit 10.14 of the Registrants Quarterly Report on Form 10-Q filed with
      the Commission on May 11, 2009)                                                        
|10.66       |  | Summary of Comprehensive Credit Facility Agreement of
      Maximum Amount by and between Shenzhen BAK Battery Co., Ltd. and Shenzhen
      Longgang Branch, Shenzhen Development Bank Co., Ltd., dated December 8,
      2008 (incorporated by reference to Exhibit 10.1 to the Companys Quarterly
      Report on Form 10-Q filed with the Commission on February 9, 2009)

94

---



|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                           
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.67       |  | Summary of Loan Agreement by and
      between Shenzhen BAK Battery Co., Ltd. and Longgang Branch, Shenzhen
      Development Bank, dated March 9, 2009 (incorporated by reference to
      Exhibit 10.16 of the Registrants Quarterly Report on Form 10-Q filed with
      the Commission on May 11, 2009)                                                                          
|10.68       |  | Summary of Comprehensive Credit Facility Agreement of
      Maximum Amount by and between Shenzhen BAK Battery Co., Ltd. and Shenzhen
      Longgang Branch, Shenzhen Development Bank Co., Ltd., dated December 8,
      2008 (incorporated by reference to Exhibit 10.1 of the Registrants
      Quarterly Report on Form 10-Q filed with the Commission on February 9,
      2009)
|10.69       |  | Summary of Loan Agreement by and
      between Shenzhen BAK Battery Co., Ltd. and Shenzhen Longgang Branch,
      Shenzhen Development Bank Co., Ltd., dated December 16, 2008 (incorporated
      by reference to Exhibit 10.2 of the Registrants Quarterly Report on Form
      10-Q filed with the Commission on February 9, 2009)                                                
|10.70       |  | Summary of Mortgage Contract of Maximum Amount by and
      between Shenzhen BAK Battery Co., Ltd. and Shenzhen Longgang Branch,
      Shenzhen Development Bank Co., Ltd., dated December 3, 2008 (incorporated
      by reference to Exhibit 10.3 of the Registrants Quarterly Report on Form
      10-Q filed with the Commission on February 9, 2009)                            
|            |  |                                                                                                                                                                                                                                                                                                                                                                                       
|10.71       |  | Summary of Mortgage Contract of Maximum Amount
      by and between Shenzhen BAK Battery Co., Ltd. and Shenzhen Longgang
      Branch, Shenzhen Development Bank Co., Ltd., dated December 3, 2008
      (incorporated by reference to Exhibit 10.4 of the Registrants Quarterly
      Report on Form 10-Q filed with the Commission on February 9, 2009)                            
|10.72       |  | Summary of Guaranty Contract of
      Maximum Amount Pledge by and between BAK International Limited and
      Longgang Branch, Shenzhen Development Bank Co., Ltd., dated December 3,
      2008 (incorporated by reference to Exhibit 10.5 of the Registrants
      Quarterly Report on Form 10-Q filed with the Commission on February 9,
      2009)                             
|10.73       |  | Summary of Guaranty Contract of Maximum Amount by and
      between Xiangqian Li and Longgang Branch, Shenzhen Development Bank Co.,
      Ltd., dated December 3, 2008 (incorporated by reference to Exhibit 10.6 of
      the Registrants Quarterly Report on Form 10-Q filed with the Commission
      on February 9, 2009)                                                       
|10.74       |  | Summary of Guaranty Contract of
      Maximum Amount by and between BAK International (Tianjin) Ltd. and
      Longgang Branch, Shenzhen Development Bank Co., Ltd., dated December 3,
      2008 (incorporated by reference to Exhibit 10.7 of the Registrants
      Quarterly Report on Form 10-Q filed with the Commission on February 9,
      2009)                             
|10.75       |  | Summary of Loan Agreement by and between Shenzhen BAK
      Battery Co., Ltd. and Shenzhen Eastern Branch, Agricultural Bank of China,
      dated December 2, 2008 (incorporated by reference to Exhibit 10.8 of the
      Registrants Quarterly Report on Form 10-Q filed with the Commission on
      February 9, 2009)                                                           
|            |  |                                                                                                                                                                                                                                                                                                                                                                                       
|10.76       |  | Summary of Loan Agreement by and between
      Shenzhen BAK Battery Co., Ltd. and Shenzhen Eastern Branch, Agricultural
      Bank of China, dated December 15, 2008 (incorporated by reference to
      Exhibit 10.9 of the Registrants Quarterly Report on Form 10-Q filed with
      the Commission on February 9, 2009)                                                          
|10.77       |  | Summary of Loan Agreement by and
      between Shenzhen BAK Battery Co., Ltd. and Shenzhen Eastern Branch,
      Agricultural Bank of China, dated December 18, 2008 (incorporated by
      reference to Exhibit 10.10 of the Registrants Quarterly Report on Form
      10-Q filed with the Commission on February 9, 2009)                                                         

95

---



|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                          
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.78       |  | Summary of Comprehensive Credit
      Facility Agreement of Maximum Amount by and between Shenzhen BAK Battery
      Co., Ltd. and Shenzhen Eastern Branch, Agricultural Bank of China, dated
      November 27, 2008 (incorporated by reference to Exhibit 10.1 to the
      Registrants Current Report on Form 8-K filed December 12, 2008)                       
|10.79       |  | Summary of Guaranty Contract of Maximum Amount by and
      among Xiangqian Li, BAK International (Tianjin) Limited, BAK International
      Limited, and Shenzhen Eastern Branch, Agricultural Bank of China, dated
      November 27, 2008 (incorporated by reference to Exhibit 10.2 to the
      Registrants Current Report on Form 8-K filed December 12, 2008)
|10.80       |  | Summary of Mortgage Contract of
      Maximum Amount by and between Shenzhen BAK Battery Co., Ltd. and Shenzhen
      Eastern Branch, Agricultural Bank of China, dated November 27, 2008
      (incorporated by reference to Exhibit 10.3 to the Registrants Current
      Report on Form 8-K filed December 12, 2008)                                             
|10.81       |  | Summary of Comprehensive Credit Facility Agreement of
      Maximum Amount by and between Shenzhen BAK Battery Co., Ltd. and Shenzhen
      Eastern Branch, Agricultural Bank of China, dated June 8, 2007
      (incorporated by reference to Exhibit 10.1 to the Registrants Quarterly
      Report on Form 10-Q filed with the SEC on August 7, 2007)            
|10.82       |  | Summary of Loan Agreement between
      Shenzhen BAK Battery Co., Ltd. and Shenzhen Eastern Branch, Agricultural
      Bank of China, effective December 18, 2006 (incorporated by reference to
      Exhibit 10.1 to the Registrants Current Report on Form 8-K, filed with
      the SEC on December 22, 2006)                                                    
|10.83       |  | Summary of Loan Agreement by and between Shenzhen BAK
      Battery Co., Ltd. and Shenzhen Branch, China CITIC Bank Co., Ltd., dated
      October 15, 2008 (incorporated by reference to Exhibit 10.16 of the
      Registrants Quarterly Report on Form 10-Q filed with the Commission on
      February 9, 2009)                                                 
|10.84       |  | Summary of Loan Agreement by and
      between Shenzhen BAK Battery Co., Ltd. and Shenzhen Branch, China CITIC
      Bank Co., Ltd., dated October 17, 2008 (incorporated by reference to
      Exhibit 10.17 of the Registrants Quarterly Report on Form 10-Q filed with
      the Commission on February 9, 2009)                                                 
|10.85       |  | Summary of Loan Agreement by and between Shenzhen BAK
      Battery Co., Ltd. and Shenzhen Branch, China CITIC Bank Co., Ltd., dated
      October 31, 2008 (incorporated by reference to Exhibit 10.18 of the
      Registrants Quarterly Report on Form 10-Q filed with the Commission on
      February 9, 2009)                                                 
|10.86       |  | Summary of Comprehensive Credit
      Facility Agreement of Maximum Amount between Shenzhen BAK Battery Co.,
      Ltd. and Shenzhen Branch, China CITIC Bank Co., Ltd., dated May 9, 2008
      (incorporated by reference to Exhibit 10.5 to the Registrants Quarterly
      Report on Form 10-Q, filed with the SEC on August 8, 2008)                           
|10.87       |  | Summary of Guaranty Contract of Maximum Amount between
      BAK International Limited and Shenzhen Branch, China CITIC Bank Co., Ltd.,
      dated May 9, 2008 (incorporated by reference to Exhibit 10.6 to the
      Registrants Quarterly Report on Form 10-Q, filed with the SEC on August
      8, 2008)                                                      
|10.88       |  | Summary of Guaranty Contract of
      Maximum Amount between Xiangqian Li and Shenzhen Branch, China CITIC Bank
      Co., Ltd., dated May 9, 2008 (incorporated by reference to Exhibit 10.7 to
      the Registrants Quarterly Report on Form 10-Q, filed with the SEC on
      August 8, 2008)                                                                   
|10.89       |  | Summary of Loan Agreement between Shenzhen BAK Battery Co., Ltd. and Shenzhen
Longgang Branch, Bank of China, dated July 17, 2009                                                                                                                                                                                                                                    
|10.90       |  | Summary of Loan Agreement between
      Shenzhen BAK Battery Co., Ltd. and Shenzhen Eastern Branch, Agricultural
      Bank of China, effective July 22, 2009                                                                                                                                                                                                        

96

---



|Exhibit No. |  | Description                                                                                                                                                                                                       
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.91       |  | Summary of
      Loan Agreement between Shenzhen BAK Battery Co., Ltd. and Shenzhen Eastern
      Branch, Agricultural Bank of China, effective July 23, 2009                                                     
|14.1        |  | Code of Business Conduct and
      Ethics of the Registrant (incorporated by reference to Exhibit 14.1 to the
      Registrants Quarterly Report on Form 10-Q filed with the Commission on
      August 22, 2006)
|21.1        |  | Subsidiaries
      of the Registrant (incorporated by reference to Exhibit 21.1 to the
      Registrants Annual Report on Form 10-K filed with the Commission on
      December 12, 2008)                        
|23.1        |  | Consent of PKF                                                                                                                                                                                                    
|24.1        |  | Power of
      Attorney (included on signature page)                                                                                                                                                              
|31.1        |  | Certifications of Chief
      Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002                                                                                                   
|31.2        |  | Certifications of Chief Financial Officer Pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                         
|32.1        |  | Certifications of Chief
      Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002                                                                                                   
|32.2        |  | Certifications of Chief Financial Officer Pursuant to
      Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                         

97

---

CHINA BAK BATTERY, INC. INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS FOR THE YEARS ENDED SEPTEMBER 30, 2007, 2008 AND 2009

|Contents                                                                                                                                  |  | Page(s)   
|----------------------------------------------------------------------------------------------------------------------------------------- |  | ----------
|Report of Independent Registered Public
      Accounting Firm                                                                             |  | F-1       
|Consolidated Balance Sheets as of September 30, 2008 and
      2009                                                                       |  | F-2 - F-3 
|Consolidated Statements of Operations and
      Comprehensive Income / (Loss) for the years ended September 30, 2007, 2008 and
      2009 |  | F-4       
|Consolidated Statements of Shareholders Equity for the
      years ended September 30, 2007, 2008 and 2009                               |  | F-5       
|Consolidated Statements of Cash Flows for
      the years ended September 30, 2007, 2008 and 2009                                         |  | F-6 - F-7 
|Notes to the Consolidated Financial Statements                                                                                            |  | F-8 - F-46

98

---

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of China BAK
Battery, Inc.:

We have audited the accompanying consolidated balance sheets of
China BAK Battery, Inc. and subsidiaries (the Company) as of September 30,
2009 and 2008, and the related consolidated statements of operations and
comprehensive income / (loss), shareholders equity, and cash flows for each of
the three years in the period ended September 30, 2009. These consolidated
financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial position of the
Company and subsidiaries as of September 30, 2009 and 2008, and the results of
their operations and their cash flows for each of the three years in the period
ended September 30, 2009 in conformity with U.S. generally accepted accounting
principles.

We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the Companys
internal control over financial reporting as of September 30, 2009, based on
criteria established in Internal Control  Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated December 14, 2009 expressed an adverse opinion on the effectiveness
of the Companys internal control over financial reporting.

/s/ PKF Certified Public Accountants Hong Kong
December 14, 2009

F-1

---

China BAK Battery, Inc. and subsidiaries Consolidated
balance sheets As of September 30, 2008 and 2009

(In US$)

|                                   |  | Note  |     |   | 2008        |  |   | 2009        | 
|---------------------------------- |  | ----- | --- | - | ----------- |  | - | ----------- | 
|                                   |  |       |     |   |             |  |   |             | 
|Assets                             |  |       |     |   |             |  |   |             | 
|Current assets                     |  |       |     |   |             |  |   |             | 
|Cash and cash equivalents          |  |       |     | $ | 35,706,834  |  | $ | 30,678,352  | 
|Pledged deposits                   |  | 3     |     |   | 4,449,244   |  |   | 31,115,109  | 
|Trade accounts receivable, net     |  | 4     |     |   | 82,740,288  |  |   | 83,291,698  | 
|Inventories                        |  | 5     |     |   | 67,583,060  |  |   | 65,535,384  | 
|Prepayments and other receivables  |  | 6     |     |   | 4,462,492   |  |   | 4,632,424   | 
|Assets held for sale               |  | 8     |     |   | -           |  |   | 803,648     | 
|Deferred tax assets                |  | 7     | (b) |   | 1,719,662   |  |   | 3,894,703   | 
|Total current assets               |  |       |     |   | 196,661,580 |  |   | 219,951,318 | 
|Property, plant and equipment, net |  | 9, 22 |     |   | 195,435,212 |  |   | 219,684,994 | 
|Lease prepayments, net             |  | 10    |     |   | 31,782,129  |  |   | 32,165,629  | 
|Intangible assets, net             |  | 11    |     |   | 161,418     |  |   | 239,487     | 
|Deferred tax assets                |  | 7     | (b) |   | 6,543       |  |   | 42,911      | 
|Total assets                       |  |       |     | $ | 424,046,882 |  | $ | 472,084,339 | 

See accompanying notes to the consolidated financial
statements.

F-2

---

China BAK Battery, Inc. and subsidiaries Consolidated
balance sheets As of September 30, 2008 and 2009 (continued)

(In US$)

|                                                                                                                                                                                     |  | *Note* |     |   | 2008        |   |   | 2009        |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------ | --- | - | ----------- | - | - | ----------- | -
|                                                                                                                                                                                     |  |        |     |   |             |   |   |             |  
|Liabilities                                                                                                                                                                          |  |        |     |   |             |   |   |             |  
|Current liabilities                                                                                                                                                                  |  |        |     |   |             |   |   |             |  
|Short-term bank loans                                                                                                                                                                |  | 12     |     | $ | 105,598,170 |   | $ | 139,159,380 |  
|Current maturities of long-term bank loans                                                                                                                                           |  | 13     |     |   | 8,799,848   |   |   | 16,114,146  |  
|Accounts and bills payable                                                                                                                                                           |  |        |     |   | 57,486,716  |   |   | 92,571,516  |  
|Accrued expenses and other payables                                                                                                                                                  |  | 14     |     |   | 21,581,182  |   |   | 18,425,271  |  
|Total current
      liabilities                                                                                                                                                      |  |        |     |   | 193,465,916 |   |   | 266,270,313 |  
|Long-term bank loans, less current maturities                                                                                                                                        |  | 13     |     |   | 55,732,366  |   |   | 39,552,906  |  
|Deferred revenue                                                                                                                                                                     |  | 15     |     |   | 7,685,200   |   |   | 7,441,806   |  
|Other long-term payables                                                                                                                                                             |  |        |     |   | -           |   |   | 1,940,217   |  
|Deferred tax liabilities                                                                                                                                                             |  | 7      | (b) |   | 91,400      |   |   | 278,227     |  
|Total liabilities                                                                                                                                                                    |  |        |     |   | 256,974,882 |   |   | 315,483,469 |  
|Commitments and contingencies                                                                                                                                                        |  | 22     |     |   |             |   |   |             |  
|Shareholders equity                                                                                                                                                                 |  |        |     |   |             |   |   |             |  
|Ordinary shares US$ 0.001 par value;
         100,000,000 authorized; 57,676,481 and 57,737,481 issued
      and outstanding    as of September 30, 2008 and 2009
      respectively |  |        |     |   | 57,677      |   |   | 57,738      |  
|Donated shares                                                                                                                                                                       |  |        |     |   | 14,101,689  |   |   | 14,101,689  |  
|Additional paid-in capital                                                                                                                                                           |  |        |     |   | 97,286,286  |   |   | 101,161,455 |  
|Statutory reserves                                                                                                                                                                   |  |        |     |   | 6,917,943   |   |   | 7,227,195   |  
|Retained earnings                                                                                                                                                                    |  |        |     |   | 27,628,860  |   |   | 13,328,115  |  
|Accumulated other comprehensive income                                                                                                                                               |  |        |     |   | 25,146,155  |   |   | 24,791,288  |  
|                                                                                                                                                                                     |  |        |     |   |             |   |   |             |  
|                                                                                                                                                                                     |  |        |     |   | 171,138,610 |   |   | 160,667,480 |  
|Less: Treasury shares                                                                                                                                                                |  |        |     |   | (4,066,610  | ) |   | (4,066,610  | )
|Total shareholders
      equity                                                                                                                                                     |  |        |     |   | 167,072,000 |   |   | 156,600,870 |  
|Total liabilities and shareholders equity                                                                                                                                           |  |        |     | $ | 424,046,882 |   | $ | 472,084,339 |  

See accompanying notes to the consolidated financial
statements.

F-3

---

China BAK Battery, Inc. and subsidiaries Consolidated
statements of operations and comprehensive income / (loss) For the years
ended September 30, 2007, 2008 and 2009

(In US$)

|                                                |  | Note  |     |   | 2007         |   |   | 2008         |   |   | 2009         |  
|----------------------------------------------- |  | ----- | --- | - | ------------ | - | - | ------------ | - | - | ------------ | -
|                                                |  |       |     |   |              |   |   |              |   |   |              |  
|Net revenues                                    |  | 24    |     | $ | 145,860,899  |   | $ | 245,347,569  |   | $ | 211,143,971  |  
|Cost of revenues                                |  | 9,19  |     |   | (120,254,925 | ) |   | (214,441,714 | ) |   | (184,387,559 | )
|                                                |  |       |     |   |              |   |   |              |   |   |              |  
|Gross profit                                    |  |       |     |   | 25,605,974   |   |   | 30,905,855   |   |   | 26,756,412   |  
|Operating expenses:                             |  |       |     |   |              |   |   |              |   |   |              |  
|Research and development
      expenses         |  | 9, 19 |     |   | (3,957,145   | ) |   | (6,252,106   | ) |   | (5,643,369   | )
|Sales and marketing expenses                    |  | 9, 19 |     |   | (4,695,604   | ) |   | (5,802,655   | ) |   | (6,176,294   | )
|General and administrative
      expenses       |  | 9, 19 |     |   | (12,371,873  | ) |   | (19,347,625  | ) |   | (21,989,400  | )
|                                                |  |       |     |   |              |   |   |              |   |   |              |  
|Total operating expenses                        |  |       |     |   | (21,024,622  | ) |   | (31,402,386  | ) |   | (33,809,063  | )
|                                                |  |       |     |   |              |   |   |              |   |   |              |  
|Operating income / (loss)                       |  |       |     |   | 4,581,352    |   |   | (496,531     | ) |   | (7,052,651   | )
|                                                |  |       |     |   |              |   |   |              |   |   |              |  
|Finance costs, net                              |  | 18    |     |   | (5,224,800   | ) |   | (11,020,808  | ) |   | (9,355,983   | )
|Government grant income                         |  |       |     |   | 1,034,685    |   |   | 1,774,375    |   |   | 636,468      |  
|Other (expenses) / income                       |  |       |     |   | (103,430     | ) |   | 757,151      |   |   | 528,091      |  
|                                                |  |       |     |   |              |   |   |              |   |   |              |  
|Income / (loss) before income taxes             |  |       |     |   | 287,807      |   |   | (8,985,813   | ) |   | (15,244,075  | )
|                                                |  |       |     |   |              |   |   |              |   |   |              |  
|Income tax benefit                              |  | 7     | (a) |   | 195,521      |   |   | 1,045,213    |   |   | 1,252,582    |  
|                                                |  |       |     |   |              |   |   |              |   |   |              |  
|Net income / (loss)                             |  |       |     | $ | 483,328      |   | $ | (7,940,600   | ) | $ | (13,991,493  | )
|Other comprehensive income / (loss)             |  |       |     |   |              |   |   |              |   |   |              |  
|- Foreign currency translation
      adjustment |  |       |     |   | 6,436,370    |   |   | 15,261,406   |   |   | (354,867     | )
|                                                |  |       |     |   |              |   |   |              |   |   |              |  
|Comprehensive income / (loss)                   |  |       |     | $ | 6,919,698    |   | $ | 7,320,806    |   | $ | (14,346,360  | )
|Net income / (loss) per share:                  |  |       |     |   |              |   |   |              |   |   |              |  
|- Basic                                         |  | 17    |     | $ | 0.01         |   | $ | (0.15        | ) | $ | (0.25        | )
|- Diluted                                       |  | 17    |     | $ | 0.01         |   | $ | (0.15        | ) | $ | (0.25        | )
|Weighted average number of ordinary shares:     |  |       |     |   |              |   |   |              |   |   |              |  
|- Basic                                         |  | 17    |     |   | 48,979,115   |   |   | 52,313,768   |   |   | 56,964,129   |  
|- Diluted                                       |  | 17    |     |   | 49,442,285   |   |   | 52,313,768   |   |   | 56,964,129   |  

See accompanying notes to the consolidated financial
statements.

F-4

---

China BAK
Battery, Inc. and subsidiaries 
Consolidated statements of shareholders equity 
For the years ended September 30, 2007, 2008 and 2009

(In US$)

|                                                                                                    |                 |           |  |            |  |         |        |                 |   |            |       |          |                 | Accumulated   |        |           |  |        |             | Total    |  
|--------------------------------------------------------------------------------------------------- | --------------- | --------- |  | ---------- |  | ------- | ------ | --------------- | - | ---------- | ----- | -------- | --------------- | ------------- | ------ | --------- |  | ------ | ----------- | -------- | -
|                                                                                                    | Ordinary shares |           |  |            |  |         |        |                 |   |            | other |          | Treasury shares |               | share- |          
|                                                                                                    |                 | Number of |  |            |  | Donated |        | Additional      |   | Statutory  |       | Retained |                 | comprehensive |        | Number of |  |        |             | holders |  
|                                                                                                    | Note            | shares    |  | Amount     |  | shares  |        | paid-in capital |   | reserves   |       | earnings |                 | income        |        | shares    |  | Amount |             | equity   |  
|                                                                                                    |                 |           |  |            |  |         |        |                 |   |            |       |          |                 |               |        |           |  |        |             |          |  
|Balance as of September 30, 2006                                                                    |                 |           |  | 48,885,896 |  | $       | 48,886 |                 | $ |           |       | $        | 68,126,689      |               | $      | 5,791,718 |  | $      | 36,212,357  |          | $
|                                                                                                    |                 |           |  |            |  |         |        |                 |   |            |       |          |                 |               |        |           |  |        |             |          |  
|Net income                                                                                          |                 |           |  |           |  |         |       |                 |   |           |       |          |                |               |        |          |  |        | 483,328     |          |  
|                                                                                                    |                 |           |  |            |  |         |        |                 |   |            |       |          |                 |               |        |           |  |        |             |          |  
|2006 escrow shares donated by Mr. Xiangqian Li and released to investors                            |                 |           |  |           |  |         |       |                 |   | 7,955,358  |       |          | (7,955,358      | )             |        |          |  |        |            |          |  
|                                                                                                    |                 |           |  |            |  |         |        |                 |   |            |       |          |                 |               |        |           |  |        |             |          |  
|Share-based compensation for employee stock option awards                                           |                 | 20        |  |           |  |         |       |                 |   |           |       |          | 1,173,033       |               |        |          |  |        |            |          |  
|                                                                                                    |                 |           |  |            |  |         |        |                 |   |            |       |          |                 |               |        |           |  |        |             |          |  
|Issuance of 914,994 shares of restricted stocks and reclassification of liability-classified awards |                 | 20        |  |           |  |         |       |                 |   |           |       |          | 4,969,974       |               |        |          |  |        |            |          |  
|                                                                                                    |                 |           |  |            |  |         |        |                 |   |            |       |          |                 |               |        |           |  |        |             |          |  
|Share-based compensation for common stock granted to employees and non-employee directors           |                 | 20        |  |           |  |         |       |                 |   |           |       |          | 41,178          |               |        |          |  |        |            |          |  
|                                                                                                    |                 |           |  |            |  |         |        |                 |   |            |       |          |                 |               |        |           |  |        |             |          |  
|Issuance of common stock to employees and non-employee directors                                    |                 | 20        |  | 364,957    |  |         | 365    |                 |   |           |       |          | (365            | )             |        |          |  |        |            |          |  
|                                                                                                    |                 |           |  |            |  |         |        |                 |   |            |       |          |                 |               |        |           |  |        |             |          |  
|Appropriation to statutory reserves                                                                 |                 |           |  |           |  |         |       |                 |   |           |       |          |                |               |        | 635,259   |  |        | (635,259    | )        |  
|                                                                                                    |                 |           |  |            |  |         |        |                 |   |            |       |          |                 |               |        |           |  |        |             |          |  
|Foreign currency translation adjustment                                                             |                 |           |  |           |  |         |       |                 |   |           |       |          |                |               |        |          |  |        |            |          |  
|                                                                                                    |                 |           |  |            |  |         |        |                 |   |            |       |          |                 |               |        |           |  |        |             |          |  
|Balance as of September 30, 2007                                                                    |                 |           |  | 49,250,853 |  | $       | 49,251 |                 | $ | 7,955,358  |       | $        | 66,355,151      |               | $      | 6,426,977 |  | $      | 36,060,426  |          | $
|                                                                                                    |                 |           |  |            |  |         |        |                 |   |            |       |          |                 |               |        |           |  |        |             |          |  
|2005 escrow shares donated by Mr. Xiangqian Li                                                      |                 |           |  |           |  |         |       |                 |   | 6,146,331  |       |          |                |               |        |          |  |        |            |          |  
|                                                                                                    |                 |           |  |            |  |         |        |                 |   |            |       |          |                 |               |        |           |  |        |             |          |  
|2005 escrow shares settlement                                                                       |                 |           |  |           |  |         |       |                 |   |           |       |          | (2,079,721      | )             |        |          |  |        |            |          |  
|                                                                                                    |                 |           |  |            |  |         |        |                 |   |            |       |          |                 |               |        |           |  |        |             |          |  
|Net loss                                                                                            |                 |           |  |           |  |         |       |                 |   |           |       |          |                |               |        |          |  |        | (7,940,600  | )        |  
|                                                                                                    |                 |           |  |            |  |         |        |                 |   |            |       |          |                 |               |        |           |  |        |             |          |  
|Share-based compensation for employee stock option awards and issuance of restricted stock          |                 | 20        |  |           |  |         |       |                 |   |           |       |          | 3,780,074       |               |        |          |  |        |            |          |  
|                                                                                                    |                 |           |  |            |  |         |        |                 |   |            |       |          |                 |               |        |           |  |        |             |          |  
|Exercise of stock options awards                                                                    |                 | 20        |  | 277,500    |  |         | 278    |                 |   |           |       |          | 1,502,980       |               |        |          |  |        |            |          |  
|                                                                                                    |                 |           |  |            |  |         |        |                 |   |            |       |          |                 |               |        |           |  |        |             |          |  
|Issuance of common stock to employees                                                               |                 | 20        |  | 530,560    |  |         | 530    |                 |   |           |       |          | (530            | )             |        |          |  |        |            |          |  
|                                                                                                    |                 |           |  |            |  |         |        |                 |   |            |       |          |                 |               |        |           |  |        |             |          |  
|Issuance of common stock to non-employee directors                                                  |                 | 20        |  | 15,000     |  |         | 15     |                 |   |           |       |          | (15             | )             |        |          |  |        |            |          |  
|                                                                                                    |                 |           |  |            |  |         |        |                 |   |            |       |          |                 |               |        |           |  |        |             |          |  
|Issuance of new common stock                                                                        |                 |           |  | 7,602,568  |  |         | 7,603  |                 |   |           |       |          | 27,728,347      |               |        |          |  |        |            |          |  
|                                                                                                    |                 |           |  |            |  |         |        |                 |   |            |       |          |                 |               |        |           |  |        |             |          |  
|Appropriation to statutory reserves                                                                 |                 |           |  |           |  |         |       |                 |   |           |       |          |                |               |        | 490,966   |  |        | (490,966    | )        |  
|                                                                                                    |                 |           |  |            |  |         |        |                 |   |            |       |          |                 |               |        |           |  |        |             |          |  
|Foreign currency translation adjustment                                                             |                 |           |  |           |  |         |       |                 |   |           |       |          |                |               |        |          |  |        |            |          |  
|                                                                                                    |                 |           |  |            |  |         |        |                 |   |            |       |          |                 |               |        |           |  |        |             |          |  
|Balance as of September 30, 2008                                                                    |                 |           |  | 57,676,481 |  | $       | 57,677 |                 | $ | 14,101,689 |       | $        | 97,286,286      |               | $      | 6,917,943 |  | $      | 27,628,860  |          | $
|                                                                                                    |                 |           |  |            |  |         |        |                 |   |            |       |          |                 |               |        |           |  |        |             |          |  
|Net loss                                                                                            |                 |           |  |           |  |         |       |                 |   |           |       |          |                |               |        |          |  |        | (13,991,493 | )        |  
|                                                                                                    |                 |           |  |            |  |         |        |                 |   |            |       |          |                 |               |        |           |  |        |             |          |  
|Share-based compensation for employee stock option awards                                           |                 | 20        |  |           |  |         |       |                 |   |           |       |          | 3,724,901       |               |        |          |  |        |            |          |  
|                                                                                                    |                 |           |  |            |  |         |        |                 |   |            |       |          |                 |               |        |           |  |        |             |          |  
|Exercise of stock options awards                                                                    |                 | 20        |  | 46,000     |  |         | 46     |                 |   |           |       |          | 150,283         |               |        |          |  |        |            |          |  
|                                                                                                    |                 |           |  |            |  |         |        |                 |   |            |       |          |                 |               |        |           |  |        |             |          |  
|Issuance of common stock to non-employee directors                                                  |                 | 20        |  | 15,000     |  |         | 15     |                 |   |           |       |          | (15             | )             |        |          |  |        |            |          |  
|                                                                                                    |                 |           |  |            |  |         |        |                 |   |            |       |          |                 |               |        |           |  |        |             |          |  
|Appropriation to statutory reserves                                                                 |                 |           |  |           |  |         |       |                 |   |           |       |          |                |               |        | 309,252   |  |        | (309,252    | )        |  
|                                                                                                    |                 |           |  |            |  |         |        |                 |   |            |       |          |                 |               |        |           |  |        |             |          |  
|Foreign currency translation adjustment                                                             |                 |           |  |           |  |         |       |                 |   |           |       |          |                |               |        |          |  |        |            |          |  
|                                                                                                    |                 |           |  |            |  |         |        |                 |   |            |       |          |                 |               |        |           |  |        |             |          |  
|Balance as of September 30, 2009                                                                    |                 |           |  | 57,737,481 |  | $       | 57,738 |                 | $ | 14,101,689 |       | $        | 101,161,455     |               | $      | 7,227,195 |  | $      | 13,328,115  |          | $



See accompanying notes to the consolidated financial
statements.

F-5

---

China BAK Battery, Inc. and subsidiaries Consolidated
statements of cash flows For the years ended September 30, 2007, 2008 and
2009

(In US$)

|                                                                                                 |   | 2007        |   |   | 2008        |   |   | 2009        |  
|------------------------------------------------------------------------------------------------ | - | ----------- | - | - | ----------- | - | - | ----------- | -
|Cash flow from operating activities                                                              |   |             |   |   |             |   |   |             |  
|Net income / (loss)                                                                              | $ | 483,328     |   | $ | (7,940,600  | ) | $ | (13,991,493 | )
|Adjustments to reconcile net income /
      (loss) to net cash provided by operating activities: |   |             |   |   |             |   |   |             |  
|Depreciation and
      amortization                                                              |   | 8,911,704   |   |   | 13,249,392  |   |   | 12,831,899  |  
|Provision
      for doubtful debts                                                               |   | 1,825,149   |   |   | 1,943,006   |   |   | 7,724,963   |  
|Provision for obsolete
      inventories                                                         |   | 1,639,024   |   |   | 609,950     |   |   | 928,915     |  
|Share-based compensation                                                                         |   | 2,559,020   |   |   | 3,780,074   |   |   | 3,724,901   |  
|Loss on disposal of
      property, plant and equipment                                          |   | -           |   |   | 194,572     |   |   | 6,534       |  
|Deferred
      income taxes                                                                      |   | (609,684    | ) |   | (1,152,379  | ) |   | (2,024,214  | )
|Deferred revenue                                                                                 |   | -           |   |   | (281,786    | ) |   | (234,124    | )
|Exchange
      loss / (gain)                                                                     |   | -           |   |   | 1,326,524   |   |   | (48,541     | )
|Changes in operating assets and liabilities:                                                     |   |             |   |   |             |   |   |             |  
|Trade
      accounts receivable                                                                  |   | 2,617,075   |   |   | (14,600,168 | ) |   | (8,375,251  | )
|Inventories                                                                                      |   | (11,306,910 | ) |   | (2,223,341  | ) |   | 1,043,668   |  
|Prepayments and other receivables                                                                |   | (218,914    | ) |   | (2,564,878  | ) |   | 383,283     |  
|Accounts and bills
      payable                                                                 |   | (3,037,756  | ) |   | 6,934,131   |   |   | 36,331,394  |  
|Accrued
      expenses and other payables                                                        |   | 123,504     |   |   | 3,429,849   |   |   | 89,892      |  
|Net cash provided by operating activities                                                        |   | 2,985,540   |   |   | 2,704,346   |   |   | 38,391,826  |  
|Cash flow from investing activities                                                              |   |             |   |   |             |   |   |             |  
|Purchases of property, plant and equipment                                                       |   | (48,792,746 | ) |   | (45,774,710 | ) |   | (40,431,374 | )
|Payment of lease prepayment                                                                      |   | (17,041,954 | ) |   | (5,454,339  | ) |   | (1,077,342  | )
|Proceeds from disposal of property, plant and equipment                                          |   | -           |   |   | 786,401     |   |   | 10,716      |  
|Purchases of intangible assets                                                                   |   | (60,756     | ) |   | (108,501    | ) |   | (140,672    | )
|Net cash used in investing activities                                                            | $ | (65,895,456 | ) | $ | (50,551,149 | ) | $ | (41,638,672 | )

See accompanying notes to the consolidated financial
statements.

F-6

---

China BAK Battery, Inc. and subsidiaries Consolidated
statements of cash flows For the years ended September 30, 2007, 2008
and 2009 (continued)

(In US$)

|                                                                              |   | 2007         |   |   | 2008         |   |   | 2009         |  
|----------------------------------------------------------------------------- | - | ------------ | - | - | ------------ | - | - | ------------ | -
|Cash flow from financing activities                                           |   |              |   |   |              |   |   |              |  
|Proceeds from borrowings                                                      | $ | 157,532,382  |   | $ | 159,913,210  |   | $ | 176,316,019  |  
|Repayment of borrowings                                                       |   | (111,115,433 | ) |   | (122,576,645 | ) |   | (151,448,641 | )
|Decrease / (increase) in pledged deposits                                     |   | 8,827,193    |   |   | 588,058      |   |   | (26,640,989  | )
|Proceeds from issuance of capital stock,
      net                            |   | -            |   |   | 29,239,208   |   |   | 150,329      |  
|                                                                              |   |              |   |   |              |   |   |              |  
|Net cash provided by / (used in) financing activities                         |   | 55,244,142   |   |   | 67,163,831   |   |   | (1,623,282   | )
|                                                                              |   |              |   |   |              |   |   |              |  
|Effect of exchange rate changes on cash
      and cash equivalents            |   | 762,732      |   |   | 2,193,293    |   |   | (158,354     | )
|                                                                              |   |              |   |   |              |   |   |              |  
|Net (decrease) / increase in cash and cash
      equivalents                  |   | (6,903,042   | ) |   | 21,510,321   |   |   | (5,028,482   | )
|Cash and cash equivalents at the
      beginning of year                      |   | 21,099,555   |   |   | 14,196,513   |   |   | 35,706,834   |  
|                                                                              |   |              |   |   |              |   |   |              |  
|Cash and cash equivalents at the end of year                                  | $ | 14,196,513   |   | $ | 35,706,834   |   | $ | 30,678,352   |  
|Supplemental disclosure of cash flow
      information:                       |   |              |   |   |              |   |   |              |  
|Cash received during the year for:                                            |   |              |   |   |              |   |   |              |  
|Bills
      receivable discounted to banks                                    | $ | 7,019,450    |   | $ | 18,000,115   |   | $ | 27,147,571   |  
|Cash paid during the year for:                                                |   |              |   |   |              |   |   |              |  
|Income
      taxes                                                            | $ | 306,992      |   | $ | 141,918      |   | $ | 625,817      |  
|Interest, net of amounts
      capitalized                                    | $ | 5,659,556    |   | $ | 9,615,904    |   | $ | 9,046,153    |  
|Non-cash movements affecting financing
      transactions:                    |   |              |   |   |              |   |   |              |  
|2006 escrow shares
      donated by Mr. Xiangqian Li and release to investors | $ | 7,955,358    |   | $ | -            |   | $ | -            |  
|2005
      escrow shares donated by Mr. Xiangqian Li                          | $ | -            |   | $ | 6,146,331    |   | $ | -            |  
|2005 escrow shares
      settlement                                           | $ | -            |   | $ | 2,079,721    |   | $ | -            |  
|Government grants to subsidize additional cost of land use rights             | $ | -            |   | $ | 7,889,991    |   | $ | -            |  

See accompanying notes to the consolidated financial
statements.

F-7

---

China BAK Battery, Inc. and subsidiaries Notes to the
consolidated financial statements As of September 30, 2007, 2008 and 2009

|1. | Principal Activities, Basis of Presentation and
      Organization                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | Principal Activities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | China BAK Battery, Inc. (China BAK) is a corporation
      formed in the State of Nevada on October 4, 1999 as Medina Copy, Inc. The
      Company changed its name to Medina Coffee, Inc. on October 6, 1999 and
      subsequently changed its name to China BAK Battery, Inc. on February 14,
      2005. China BAK and its subsidiaries (hereinafter, collectively referred
      to as the Company) are principally engaged in the manufacture,
      commercialization and distribution of a wide variety of standard and
      customized lithium ion (known as Li-ion or Li-ion cell) rechargeable
      batteries for use in cellular telephones, as well as various other
      portable electronic applications, including high-power handset telephones,
      laptop computers, power tools, digital cameras, video camcorders, MP3
      players, electric bicycles, hybrid/electric motors, and general industrial
      applications.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | The shares of the Company were traded in the
      over-the-counter market through the Over-the-Counter Bulletin Board from
      2005 until May 31, 2006, when the Company obtained approval to list its
      common stock on The NASDAQ Global Market, and trading commenced that same
      date under the symbol CBAK.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | Basis of Presentation and Organization                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | As of September 30, 2009, the Companys subsidiaries
      consist of: i) BAK International Limited (BAK International), a wholly
      owned limited liability company incorporated in Hong Kong on December 29,
      2003 as BATCO International Limited, which changed its name to BAK
      International Limited on November 3, 2004; ii) Shenzhen BAK Battery Co.,
      Ltd. (Shenzhen BAK), a wholly owned limited liability company
      established on August 3, 2001 in the Peoples Republic of China (PRC);
      iii) BAK Electronics (Shenzhen) Co., Ltd. (BAK Electronics), a wholly
      owned limited liability company established on August 15, 2005 in the PRC;
      iv) BAK International (Tianjin) Ltd. (BAK Tianjin), a wholly owned
      limited liability company established on December 12, 2006 in the PRC; v)
      BAK Battery Canada Ltd. (BAK Canada), a wholly owned limited liability
      company established on December 20, 2006 in Canada as BAK Canada Battery
      Ltd., which changed its name to BAK Battery Canada Ltd. on December 22,
      2006; vi) BAK Europe GmbH (BAK Europe), a wholly owned limited liability
      company established in Germany on November 28, 2007; and vii) BAK Telecom
      India Private Limited (BAK India), a wholly owned limited liability
      company established in India on August 14, 2008. BAK International
      beneficially owns 100% of BAK India partly through a nominee agreement
      with one of its employees.                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | BAK Tianjin was established in Tianjin Technology
      Industrial District on December 12, 2006 as a wholly owned subsidiary of
      BAK International with registered capital of US$99,990,000. Pursuant to
      BAK Tianjins articles of association and relevant PRC regulations, BAK
      International was required to contribute US$20,000,000 to BAK Tianjin as
      capital (representing 20% of BAK Tianjins registered capital) before
      March 11, 2007. An extension from the Business Administration Bureau of
      Beichen District, Tianjin, was obtained to make this contribution no later
      than December 11, 2007. On November 16, 2007, BAK International
      contributed approximately US$20,000,000 capital to BAK Tianjin. The
      remaining US$79,990,000 was originally required to be fully contributed no
      later than December 11, 2008 and an extension from the Business
      Administration Bureau of Beichen District, Tianjin, was obtained to make
      this contribution no later than December 11, 2009. On November 16, 2009,
      BAK International contributed approximately US$9,000,000 capital to BAK
      Tianjin and as of November 16, 2009, the total contribution from BAK
      International was US$29,000,000. We are discussing with the authorities to
      extend this deadline and no action has been taken by the authorities. BAK Tianjin is principally engaged in the
      manufacture of advanced lithium ion batteries for use in cordless power
      tools and other applications.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | Pursuant to Shenzhen BAKs articles of association and
      relevant PRC regulations, BAK International was required to contribute
      about US$5.72 million to Shenzhen BAK as capital (representing 7% of
      Shenzhen BAKs registered capital) no later than October 2008. On May 5,
      2009, an approval from Shenzhen Bureau of Trade and Industry was obtained
      to reduce the required registered capital to US$76,877,480, which had been
      fully paid up, and on June 22, 2009, an updated business license of
      Shenzhen BAK from the Business Administration Bureau of Shenzhen was
      obtained.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

F-8

---

China BAK Battery, Inc. and subsidiaries Notes to the
consolidated financial statements As of September 30, 2007, 2008 and 2009
(continued)

Basis of Presentation and
Organization (continued)

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

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

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

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

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

F-9

---

China BAK Battery, Inc. and subsidiaries Notes to the
consolidated financial statements As of September 30, 2007, 2008 and 2009
(continued)

Basis of Presentation and
Organization (continued)

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

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

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

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

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

The Companys consolidated financial
statements have been prepared in accordance with US GAAP.

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), Hong Kong, Germany, India or Canada, the accounting standards used in
the places of their domicile. The accompanying consolidated financial statements reflect necessary adjustments not recorded in the
books of account of the Company's subsidiaries to present them in conformity
with US GAAP.

F-10

---

China BAK Battery, Inc. and subsidiaries Notes to the
consolidated financial statements As of September 30, 2007, 2008 and 2009
(continued)

|2   | Summary of Significant Accounting Policies and
      Practices                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(a) | Principles of Consolidation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | The consolidated financial statements include the
      financial statements of the Company and its subsidiaries. All significant
      inter-company balances and transactions have been eliminated on
      consolidation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(b) | Cash and Cash Equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | Cash consists of cash on hand and in banks. The Company
      considers all highly liquid debt instruments, with initial terms of less
      than three months to be cash equivalents. As of September 30, 2008 and
      2009, there were no cash equivalents.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(c) | Trade Accounts Receivable                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | Trade accounts receivable are recorded at the invoiced
      amount, net of allowances for doubtful accounts and sales returns. The
      allowance for doubtful accounts is the Companys best estimate of the
      amount of probable credit losses in the Companys existing trade accounts
      receivable. The Company determines 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.                                                                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | Outstanding accounts balances are reviewed individually
      for collectability. Accounts balances are charged off against the
      allowance after all means of collection have been exhausted and the
      potential for recovery is considered remote. To date, the Company has not
      charged off any balances as it has yet to exhaust all means of collection.
      The Company does not have any off-balance-sheet credit exposure to its
      customers, except for outstanding bills receivable discounted with banks
      (see note 22) that are subject to recourse for non-payment.                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(d) | Inventories                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | Inventories are stated at the lower of cost and market.
      The cost of inventories is determined using weighted average cost method,
      and includes expenditure incurred in acquiring the inventories and
      bringing them to their existing location and condition. In case of
      finished goods and work in progress, cost includes an appropriate share of
      production overheads based on normal operating capacity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | The Company regularly reviews the cost of inventories
      against their estimated fair market value and records a lower of cost or
      market write-down for inventories that have cost in excess of estimated
      market value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(e) | Assets held for sale                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    | The Company classifies long-lived assets to be sold as
      held-for-sale in the period in which all of the following criteria are
      met: management having the appropriate authority commits to a plan to sell
      the asset; the asset is available for immediate sale in its present
      condition; an active program to locate a buyer and other actions required
      to sell the asset have been initiated; sale of the asset is probable and
      expected to occur within one year; the asset is being actively marketed
      for sale at a price that is reasonable in relation to its fair value; and
      actions required to complete the plan indicate that it is unlikely
      significant changes to the plan will be made or that the plan will be
      withdrawn. Assets held-for-sale are not depreciated and are measured at
      the lower of carrying amount or fair value less costs to sell.

F-11

---

China BAK Battery, Inc. and subsidiaries Notes to the
consolidated financial statements As of September 30, 2007, 2008 and 2009
(continued)

|(f) | Property, Plant and Equipment                                                                                                                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                       
|    | Property, plant and equipment are stated at cost less
      accumulated depreciation. Depreciation is calculated based on the
      straight- line method (after taking into account their respective
      estimated residual values) over the estimated useful lives of the assets
      as follows:



| | Buildings               | 30-40 years
| | ----------------------- | -----------
| | Machinery and equipment | 5-12 years 
| | Office equipment        | 5 years    
| | Motor vehicles          | 8 years    



|    | The cost and accumulated depreciation of property, plant
      and equipment sold are removed from the consolidated balance sheets and
      resulting gains or losses are recognized in the consolidated statements of
      operations and comprehensive income / (loss). Construction in progress
      mainly represents expenditures in respect of the Companys corporate
      campus, including offices, factories and staff dormitories, under
      construction. All direct costs relating to the acquisition or construction
      of the Companys corporate campus and equipment, including interest
      charges on borrowings, are capitalized as construction in progress. No
      depreciation is provided in respect of construction in progress.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|(g) | Lease Prepayments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | Lease prepayments represent the cost of land use rights
      in the PRC. Land use rights are carried at cost and amortized on a
      straight-line basis over the period of rights of 50 years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|(h) | Foreign Currency Transactions and
      Translation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | The reporting currency of the Company is the United
      States dollar (US dollar). Transactions denominated in currencies other
      than US dollar are translated into US dollar at the average rates for the
      period. Monetary assets and liabilities denominated in currencies other
      than US dollar are translated into US dollar at the rates of exchange
      ruling at the balance sheet date. The resulting exchange differences are
      recorded in the other (expenses) / income in the statement of operations
      and comprehensive income / (loss).                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | The financial records of the Companys operating
      subsidiaries are maintained in their local currency, the Renminbi (RMB),
      which is the functional currency. Assets and liabilities are translated at
      the exchange rates at the balance sheet date, equity accounts are
      translated at historical exchange rates, and income and expenses items are
      translated using the average rate for the period. The translation
      adjustments are recorded in accumulated other comprehensive income under
      shareholders equity.                                                                                                                                                                                                        

F-12

---

China BAK Battery, Inc. and subsidiaries Notes to the
consolidated financial statements As of September 30, 2007, 2008 and 2009
(continued)

(h)

Foreign Currency Transactions and Translation (continued)

RMB is not a fully convertible
currency. All foreign exchange transactions involving RMB must take place either
through the Peoples Bank of China (the PBOC) or other institutions authorized
to buy and sell foreign exchange. The exchange rates adopted for the foreign
exchange transactions are the rates of exchange quoted by the PBOC, which are
determined largely by supply and demand. Translation of amounts from RMB into US
dollar has been made at the following exchange rates for the respective years:

| | September 30, 2009                                              |                      
| | --------------------------------------------------------------- | ---------------------
| | Balance sheet                                                   | RMB 6.8263 to US$1.00
| | Statement of operations and
      comprehensive income / (loss) | RMB 6.8340 to US$1.00
| |                                                                 |                      
| | September 30, 2008                                              |                      
| | Balance sheet                                                   | RMB 6.8183 to US$1.00
| | Statement of operations and
      comprehensive income          | RMB 7.0976 to US$1.00
| |                                                                 |                      
| | September 30, 2007                                              |                      
| | Balance sheet                                                   | RMB 7.5108 to US$1.00
| | Statement of operations and
      comprehensive income          | RMB 7.7127 to US$1.00

(i)

Intangible Assets

Intangible assets are stated in the
balance sheet at cost less accumulated amortization. The costs of the intangible
assets are amortized on a straight-line basis over their estimated useful lives.
The respective amortization periods for the intangible assets are as follows:

| | Trademarks | 10 years   
| | ---------- | -----------
| | Technology | 7 years    
| | Software   | 3 - 5 years

(j)

Impairment of Long-lived Assets

Long-lived assets, which include
property, plant and equipment and intangible assets, are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable.

Recoverability of long-lived assets to
be held and used is measured by a comparison of the carrying amount of an asset
to the estimated undiscounted future cash flows expected to be generated by the
asset. If the carrying amount of an asset exceeds its estimated undiscounted
future cash flows, an impairment charge is recognized by the amount by which the
carrying amount of the asset exceeds the fair value of the asset.

F-13

---

China BAK Battery, Inc. and subsidiaries Notes to the
consolidated financial statements As of September 30, 2007, 2008 and 2009
(continued)

(k)

Revenue Recognition

The Company recognizes revenue on
product sales when products are delivered and the customer takes ownership and
assumes risk of loss, collection of the relevant receivable is probable,
persuasive evidence of an arrangement exists and the sales price is fixed or
determinable.

Net sales of products represent the
invoiced value of goods, net of value added taxes (VAT), sales returns, trade
discounts and allowances. The Company is subject to VAT which is levied on the
majority of the products of Shenzhen BAK, BAK Electronics and BAK Tianjin at the
rate of 17% on the invoiced value of sales. Output VAT is borne by customers in
addition to the invoiced value of sales and input VAT is borne by the Company in
addition to the invoiced value of purchases to the extent not refunded for
export sales. Provision for sales returns are recorded as a reduction of revenue
in the same period that revenue is recognized. The provision for sales returns,
which is based on historical sales returns data, is the Companys best estimate
of the amounts of goods that will be returned from its customers.

(l)

Cost of Revenues

Cost of revenues consists primarily of
material costs, employee compensation, depreciation and related expenses, which
are directly attributable to the production of products. Write-down of inventory
to lower of cost or market is also recorded in cost of revenues.

(m)

Income Taxes

Income taxes are accounted for under
the asset and liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carry-forwards.
Deferred tax assets are reduced by a valuation allowance to the extent
management concludes it is more likely than not that the assets will not be
realized. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in the statement
of operations and comprehensive income / (loss) in the period that includes the
enactment date.

(n)

Research and Development and Advertising Expenses

Research and development and
advertising expenses are expensed as incurred. Research and development expenses
consist primarily of remuneration for research and development staff,
depreciation and maintenance expenses of research and development equipment and
material costs for research and development. Advertising expenses, included in
sales and marketing expenses, amounted to US$138,639, US$22,232 and US$32,205
for the years ended September 30, 2007, 2008 and 2009 respectively.

(o)

Bills Payable

Bills payable represent bills issued by
financial institutions to the Companys vendors. The Companys vendors receive
payments from the financial institutions directly upon maturity of the bills and
the Company is obliged to repay the face value of the bills to the financial
institutions.

F-14

---

China BAK Battery, Inc. and subsidiaries Notes to
the consolidated financial statements As of September 30, 2007, 2008 and
2009 (continued)

(p)

Government Grants

Receipts of government grants to encourage research and
development activities which are non-refundable are credited to deferred income
upon receipt. Government grants are used for purchases of assets, to subsidize
the research and development expenses incurred, for compensation expenses
already incurred or for good performance of the Company.

Grants applicable to land are amortized over the life of the
depreciable facilities constructed on it. For research and development expenses,
the Company matches and offsets the government grants with the expenses of the
research and development activities as specified in the grant approval document
in the corresponding period when such expenses are incurred. For government
grants received as compensation for expenses already incurred are recognized as
income in the period they become recognizable.

Government grants of US$794,635 and US$614,107 were offset
against the finance costs for the years ended September 30, 2008 and 2009,
respectively. No government grants were offset against the finance costs for the
year ended September 30, 2007. Government grants recorded as deferred income
(Note 14(b)) amounted to US$637,989 and US$673,864 as of September 30, 2008 and
2009, respectively.

During the year ended September 30, 2007, the Company recorded
government grant income of US$1,034,685. US$777,289 of the grant was received to
subsidize the interest expenses incurred by the Company in prior years for
research and development activities and US$257,396 represents refund of
value-added tax paid by Shenzhen BAK in prior years since Shenzhen BAK qualifies
as a new and high technology enterprise.

During the year ended September 30, 2008, the Company
recorded government grant income of US$1,774,375. US$1,000,338 of the grant was
received to subsidize the interest expenses incurred by the Company in prior
years for research and development activities, US$492,251 was received to reward
the Companys contributions to the Shenzhen areas economy and US$281,786
represented amortization of government subsidies received in relation to the
additional cost of land use rights of BAK Industrial Park (Note 15).

During the year ended September 30, 2009, the Company
recorded government grant income of US$636,468. US$402,344 of the grant was
received to reward the Companys contributions to the Shenzhen areas economy and US$234,124 represented amortization of government subsidies received in
relation to the additional cost of land use rights of BAK Industrial Park (Note
15).

(q)

Share-based Compensation

In December 2004, the Financial Accounting Standard Board
(FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123
(Revised 2004) Share-Based Payment (SFAS No. 123R), now included in ASC
Topic 718. SFAS No. 123R requires the Company to measure and recognize
compensation expenses for an award of equity instrument based on the grant-date
fair value. The cost is recognized over the vesting period (or the requisite
service period). SFAS No. 123R also requires the Company to measure the cost of
a liability-classified award based on its current fair value. The fair value of
the award will be remeasured subsequently at each reporting date through the
settlement date. Changes in fair value during the requisite service period are
recognized as compensation cost over that period. Further, SFAS No. 123R
requires the Company to estimate forfeitures in calculating the expense related
to stock-based compensation.

The Company adopted SFAS No. 123R commencing from October 1,
2005. The Company has used the modified prospective method for recognizing the
expense over the remaining vesting period for awards that were outstanding but
unvested as of October 1, 2005. Under the modified prospective method, the
Company has not adjusted the financial statements for periods ended on or prior
to September 30, 2005. Under the modified prospective method, the adoption of
SFAS No. 123R applies to new awards and to awards modified, repurchased, or
cancelled after September 30, 2005, as well as to the unvested portion of awards
outstanding as of October 1, 2005.

The fair value of each option award is estimated on the date of grant using the Black-Scholes Option Valuation Model. The expected volatility was based on the historical volatilities of the Companys listed common stock in the United States and
other relevant market information. The Company uses historical data to estimate share option exercises and employee departure behavior used in the valuation model. The expected terms of share options granted is derived from the output of the option
pricing model and represents the period of time that share 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.

F-15

---

China BAK Battery, Inc. and subsidiaries Notes to the
consolidated financial statements As of September 30, 2007, 2008 and 2009
(continued)

(r)

Retirement and Other Postretirement Benefits

Contributions to retirement schemes
(which are defined contribution plans) are charged to cost of revenues, research
and development expenses, sales and marketing expenses and general and
administrative expenses in the statement of operations and comprehensive income
/ (loss) as and when the related employee service is provided.

(s)

Earnings /
(loss) per share

Basic earnings / (loss) per share is computed by
dividing net income / (loss) by the weighted average number of ordinary shares
outstanding during the period. Diluted earnings / (loss) per share is computed by
dividing net income / (loss) by the sum of the weighted average number of
ordinary shares outstanding and dilutive potential ordinary shares during the
period.

(t)

Use of Estimates

The preparation of the consolidated
financial statements in accordance with US GAAP requires management of the
Company to make a number of estimates and assumptions relating to the reported
amount of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the period. Actual results
could differ from those estimates. Significant items subject to such estimates
and assumptions include the recoverability of the carrying amount of long-lived
assets; provisions for inventories; valuation allowances for receivables;
provision for sales returns; valuation of share-based compensation expense; and
fair value assessment of financial guarantees. Actual results could differ from
those estimates.

(u)

Segment Reporting

The Company uses the management
approach in determining reportable operating segments. The management approach
considers the internal organization and reporting used by the Companys chief
operating decision maker for making operating decisions and assessing
performance as the source for determining the Companys reportable segments.
Management, including the chief operating decision maker, reviews operating
results solely by monthly revenue of Li-ion rechargeable batteries (but not by
sub-product type or geographic area) and operating results of the Company and,
as such, the Company has determined that the Company has one operating segment
as defined by SFAS No. 131 Disclosures about Segments of an Enterprise and
Related Information, now included in ASC Topic 280.

(v)

Commitments and Contingencies

Liabilities for loss contingencies
arising from claims, assessments, litigation, fines and penalties and other
sources are recorded when it is probable that a liability has been incurred and
the amount of the assessment can be reasonably estimated.

(w)

Recently Issued Accounting Standards

In June 2009, the Financial Accounting
Standards Board (FASB) issued SFAS No.168 The FASB Accounting Standards
CodificationTM and the Hierarchy of Generally Accepted
Accounting Principles  a replacement of FASB Statement No. 162. The Accounting
Standards Codification (ASC) combines all authoritative standards into a
comprehensive, topically organized online database. Following this Statement,
which is now included in ASC Topic 105, Generally Accepted Accounting
Principles, the FASB will not issue new standards in the form of Statements,
FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, it will
issue Accounting Standards Updates (ASU) to update the ASC. Since the launch
of the ASC on July 1, 2009, only one level of authoritative U.S. GAAP for
non-governmental entities exists, other than guidance issued by the Securities
and Exchange Commission. This Statement became effective for the Companys
annual reporting periods ending after September 15, 2009, but did not have a
material impact on the Companys financial statements.

F-16

---

China BAK Battery, Inc. and subsidiaries Notes to the
consolidated financial statements As of September 30, 2007, 2008 and 2009
(continued)

(w)

Recently Issued Accounting Standards
(continued)

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

In February 2007, the FASB issued SFAS
No. 159 The Fair Value Option for Financial Assets and Financial Liabilities -
Including an Amendment of FASB Statement No. 115, or SFAS No. 159, now included
in ASC Topic 825, Financial Instruments. SFAS No. 159 permits entities to
choose to measure many financial instruments and certain other items at fair
value. Entities that elect the fair value option will report unrealized gains
and losses in earnings at each subsequent reporting date. The fair value option
may be elected on an instrument-by-instrument basis, with a few exceptions. SFAS
No. 159 also establishes presentation and disclosure requirements to facilitate
comparisons between entities that choose different measurement attributes for
similar assets and liabilities. The requirements of SFAS No. 159 apply to the
Companys financial statements starting in its fiscal year beginning on October
1, 2008. The adoption of SFAS No. 159 has no material impact on the Companys
financial statements.

In December 2007, the FASB issued SFAS
No. 160 Noncontrolling Interests in Consolidated Financial Statements-an
amendment of ARB No. 51, or SFAS No. 160, now included in ASC Topic 810,
Consolidation. SFAS No. 160 establishes accounting and reporting standards for
the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. The guidance will apply to the Companys financial statements
starting in its fiscal year beginning on October 1, 2009. Adoption of SFAS No.
160 is not expected to have a material impact on the Companys financial
statements.

In December 2007, the FASB issued SFAS
No. 141 (Revised) Business Combinations, or SFAS No. 141 (Revised), now
included in ASC Topic 805, Business Combinations, SFAS No. 141 (Revised)
establishes principles and requirements for how the acquirer of a business
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree. The statement also provides guidance for recognizing and measuring the
goodwill acquired in the business combination and determines what information to
disclose to enable users of the financial statements to evaluate the nature and
financial effects of the business combination. SFAS No. 141 (Revised) is
required to be adopted by the Company for business acquisitions for which the
acquisition date is on or after October 1, 2009.

In February 2008, the FASB issued FASB
Staff Position (FSP) FAS No. 157-1 Application of FASB Statement No. 157 to
FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair
Value Measurements for Purposes of Lease Classification or Measurement under
Statement 13, or FSP FAS No. 157-1, now included in ASC Topic 820, Fair Value
Measurements and Disclosures. FSP FAS No. 157-1 provides a scope exception from
Statement of Financial Accounting Standards No. 157, Fair Value Measurements
(SFAS No. 157) for the evaluation criteria on lease classification and capital
lease measurement under SFAS No. 13, Accounting for Leases and other related
accounting pronouncements. The Company adopted FSP FAS No. 157-1 effective
October 1, 2008. Accordingly, the provisions of SFAS No. 157 will not be applied
to lease transactions under SFAS No.13 except when applying SFAS No. 157 to
business combinations recorded by the Company.

F-17

---

China BAK Battery, Inc. and subsidiaries Notes to the
consolidated financial statements As of September 30, 2007, 2008 and 2009
(continued)

(w)

Recently Issued Accounting Standards
(continued)

In February 2008, the FASB issued FSP
FAS No. 157-2 Effective Date of FASB Statement No. 157, or FSP FAS No. 157-2,
now included in ASC Topic 820, Fair Value Measurements and Disclosures, which
delays the effective date of SFAS

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

- nonfinancial assets and nonfinancial liabilities that are measured at fair
  value in a business combination or other new basis event, except those that
  are remeasured at fair value in subsequent periods;
- reporting units measured at fair value in the first step of a goodwill
  impairment test as described in SFAS No. 142, Goodwill and Other Intangible
  Assets (SFAS No.142), and nonfinancial assets and nonfinancial liabilities
  measured at fair value in the SFAS No. 142 goodwill impairment test, if
  applicable; and
- nonfinancial liabilities for exit or disposal activities initially
  measured at fair value under SFAS No. 146, Accounting for Costs Associated
  with Exit or Disposal Activities (SFAS No. 146).

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

In March 2008, the FASB issued SFAS No.
161 Disclosures about Derivative Instruments and Hedging Activities, or SFAS
No. 161, now included in ASC Topic 815, Derivatives and Hedging. SFAS No. 161
is intended to improve financial reporting about derivative instruments and
hedging activities by requiring enhanced disclosures to enable investors to
better understand their effects on an entitys financial position, financial
performance, and cash flows. It is effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008, with early
application encouraged. Adoption of SFAS No. 161 is not expected to have a
material impact on the Companys financial statements.

In April 2008, the FASB issued FSP FAS
No. 142-3 Determination of the Useful Life of Intangible Assets, or FSP FAS
No. 142-3, now included in ASC Topic 350, Intangibles-Goodwill and Other. FSP
FAS No. 142-3 amends the factors that should be considered in developing renewal
or extension assumptions used to determine the useful life of a recognized
intangible asset under Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets (SFAS No. 142). FSP FAS No. 142-3 is
intended to improve the consistency between the useful life of an intangible
asset determined under SFAS No. 142 and the period of expected cash flows used
to measure the fair value of the asset under SFAS No. 141(Revised) and other
U.S. GAAP. FSP FAS No. 142-3 is effective for fiscal years beginning after
December 15, 2008 which means that it will be effective for the Companys fiscal
year beginning on October 1, 2009. Early adoption is prohibited. Adoption of FSP
FAS No. 142-3 is not expected to have a material impact on the Companys
financial statements.

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

F-18

---

China BAK Battery, Inc. and subsidiaries Notes to the
consolidated financial statements As of September 30, 2007, 2008 and 2009
(continued)

(w)

Recently Issued Accounting Standards
(continued)

In April 2009, the FASB issued FSP FAS
No. 115-2 and FAS No. 124-2 Recognition of Other-Than-Temporary Impairments, or FSP FAS No. 115-2 and FAS No. 124-2, now included in ASC Topic 820, Fair Value
Measurements and Disclosures. FSP FAS No. 115-2 and FAS No. 124-2 amends the
other-than-temporary impairment guidance in SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities, for debt securities and the
presentation and disclosure requirements of other-than-temporary impairments on
debt and equity securities in the financial statements. FSP FAS No. 115-2 and
FAS No. 124-2 is effective for interim and annual reporting periods ending after
June 15, 2009, with early adoption permitted for periods ending after March 15,
2009. The adoption of FSP FAS No. 115-2 and FAS No. 124-2 has no material impact
on the Companys financial statements.

In April 2009, the FASB issued FSP No.
157-4 Determining Whether a Market is Not Active and a Transaction Is Not
Distressed, or FSP No. 157-4, now included in ASC Topic 815, Derivatives and
Hedging. FSP No. 157-4 clarifies when markets are illiquid or that market
pricing may not actually reflect the real value of an asset. If a market is
determined to be inactive and market price is reflective of a distressed price
then an alternative method of pricing can be used, such as a present value
technique to estimate fair value. FSP No. 157-4 identifies factors to be
considered when determining whether or not a market is inactive. FSP No. 157-4
would be effective for interim and annual periods ending after June 15, 2009,
with early adoption permitted for periods ending after March 15, 2009 and shall
be applied prospectively. The adoption of FSP No. 157-4 has no material impact
on the Companys financial statements.

In April 2009, the FASB issued FSP No.
141R-1 Accounting for Assets Acquired and Liabilities Assumed in a Business
Combination That Arise from Contingencies, or FSP No. 141R-1, now included in
ASC Topic 805, Business Combinations. FSP No. 141R-1 amends the provisions in
SFAS No. 141 (Revised) for the initial recognition and measurement, subsequent
measurement and accounting, and disclosures for assets and liabilities arising
from contingencies in business combinations. FSP No. 141R-1 eliminates the
distinction between contractual and non-contractual contingencies, including the
initial recognition and measurement criteria in SFAS No. 141 (Revised) and
instead carries forward most of the provisions in SFAS No. 141 for acquired
contingencies. FSP No. 141R-1 is effective for contingent assets and contingent
liabilities acquired in evaluating the impact of SFAS No. 141 (Revised). The
Company is currently evaluating the impact of the adoption of FSP No. 141R-1 on
its financial statements.

In May 2009, the FASB issued SFAS No.
165 Subsequent Events, or SFAS No. 165, now included in ASC Topic 855,
Subsequent Events, which sets forth general standards of accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. SFAS No.165 is
effective after June 15, 2009. The adoption of SFAS No. 165 has no material
effect on the Companys financial statements.

In June 2009, the FASB issued SFAS No.
166 Accounting for Transfers of Financial Assets  an amendment of FASB
Statement No. 140, or SFAS No. 166, now included in ASC Topic 860, Transfers
and Servicing. SFAS No. 166 improves the relevance, representational
faithfulness, and comparability of the information that a reporting entity
provides in its financial statements about a transfer of financial assets; the
effects of a transfer on its financial position, financial performance, and cash
flows; and a transferors continuing involvement, if any, in transferred
financial assets. SFAS No. 166 is effective as of the beginning of each
reporting entitys first annual reporting period that begins after November 15,
2009, for interim periods within that first annual reporting period and for
interim and annual reporting periods thereafter. The Company is currently
evaluating the impact of the adoption of SFAS No. 166 on its financial
statements.

F-19

---

China BAK Battery, Inc. and subsidiaries Notes to the
consolidated financial statements As of September 30, 2007, 2008 and 2009
(continued)

(w)

Recently Issued Accounting Standards
(continued)

In June 2009, the FASB issued SFAS No.
167 Amendments to FASB Interpretation No. 46(R), or SFAS No. 167, now included
in ASC Topic 810, Consolidation, which amends FASB Interpretation No. 46
(revised December 2003) to address the elimination of the concept of a
qualifying special purpose entity. SFAS No. 167 also replaces the
quantitative-based risks and rewards calculation for determining which
enterprise has a controlling financial interest in a variable interest entity
with an approach focused on identifying which enterprise has the power to direct
the activities of a variable interest entity and the obligation to absorb losses
of the entity or the right to receive benefits from the entity. Additionally,
SFAS No. 167 provides more timely and useful information about an enterprises
involvement with a variable interest entity. SFAS No. 167 shall be effective as
of the beginning of each reporting entitys first annual reporting period that
begins after November 15, 2009, for interim periods within that first annual
reporting period, and for interim and annual reporting periods thereafter.
Earlier application is prohibited. The Company is currently evaluating the
impact of the adoption of SFAS No. 167 on its financial statements.

In August 2009, the FASB issued ASU
2009-05, Fair Value Measurements and Disclosures (Topic 820)  Measuring
Liabilities at Fair Value, or ASU 2009-05. ASU 2009-05 provides additional
guidance for measuring the fair value of liabilities and clarifies that the
quoted price for the identical liability, when traded as an asset in an active
market, is a Level 1 measurement, providing there are no adjustments to the
quoted price. Alternatively, when no quoted price is available, ASU 2009-05
affirms the use of other valuation techniques outlined in SFAS No. 157. ASU
2009-05 is effective for the first interim or annual reporting period beginning
after its issuance. Adoption of ASU 2009-05 is not expected to have a material
impact on the Companys financial statements.

In September 2009, the FASB issued
ASU 2009-12, Fair Value Measurements and Disclosures (Topic 820)  Investments
in Certain Entities That Calculate Net Asset Value per Share (or Its
Equivalent), or ASU 2009-12. ASU 2009-12 amends SFAS No. 157 to permit a
reporting entity to measure the fair value of certain investments on the basis
of the net asset value per share of the investment (or its equivalent). ASU
2009-12 also requires new disclosures, by major category of investments, about
the attributes includes of investments within the scope of this amendment to the
Codification. ASU 2009-12 is effective for interim and annual periods ending
after December 15, 2009. Early adoption is permitted. Adoption of ASU 2009-14 is
not expected to have a material impact on the Companys financial statements.

In October 2009, the FASB issued ASU
2009-13, Revenue Recognition (Topic 605)  Multiple-Deliverable Revenue
Arrangements, or ASU 2009-13. AUS 2009-13 requires companies to allocate
revenue in multiple-element arrangements based on an elements estimated selling
price if vendor-specific or other third party evidence of value is not
available. AUS 2009-13 is to be applied on a prospective basis for revenue
arrangements entered into or materially modified in fiscal years beginning on or
after June 15, 2010, with earlier application permitted. The Company is
currently evaluating the impact of the adoption of ASU 2009-13 on its financial
statements.

In October 2009, the FASB issued ASU
2009-14, Software (Topic 985)  Certain Revenue Arrangements That Include
Software Elements, or ASU 2009-14. ASU 2009-14 changes the accounting model for
revenue arrangements that include both tangible products and software elements.
Under ASU 2009-14, tangible products containing software and non-software
components that function together to deliver the tangible products essential
functionality are excluded from the software revenue guidance in ASC Topic 985-605,
Software  Revenue Recognition. In addition, hardware components of a tangible
product containing software component are always excluded from the software
revenue guidance. ASU 2009-14 is effective prospectively for revenue arrangement
entered into or materially modified in fiscal years beginning on or after June
15, 2010. Early adoption is permitted. Adoption of ASU 2009-14 is not expected
to have a material impact on the Companys financial statements.

3

Pledged Deposits

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

| |                                  |   | 2008      |  |   | 2009       | 
| | -------------------------------- | - | --------- |  | - | ---------- | 
| |                                  |   |           |  |   |            | 
| | Pledged deposits with banks for: |   |           |  |   |            | 
| | Construction payable             | $ | 931,317   |  | $ | 893,603    | 
| | Short-term bank loans            |   | -         |  |   | 7,137,307  | 
| | Bills payable                    |   | 3,517,927 |  |   | 23,084,199 | 
| |                                  |   |           |  |   |            | 
| |                                  | $ | 4,449,244 |  | $ | 31,115,109 | 

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

4

Trade Accounts Receivable, net

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

| |                                       |   | 2008       |   |   | 2009        |  
| | ------------------------------------- | - | ---------- | - | - | ----------- | -
| | Trade accounts receivable             | $ | 87,974,185 |   | $ | 84,133,865  |  
| | Less: Allowance for doubtful accounts |   | (5,351,244 | ) |   | (13,081,331 | )
| |                                       |   |            |   |   |             |  
| |                                       |   | 82,622,941 |   |   | 71,052,534  |  
| | Bills receivable                      |   | 117,347    |   |   | 12,239,164  |  
| |                                       |   |            |   |   |             |  
| |                                       | $ | 82,740,288 |   | $ | 83,291,698  |  

An analysis of the allowance for
doubtful accounts for the years ended September 30, 2007, 2008 and 2009 is as
follows:

| |                                   |   | 2007      |  |   | 2008      |  |   | 2009       | 
| | --------------------------------- | - | --------- |  | - | --------- |  | - | ---------- | 
| |                                   |   |           |  |   |           |  |   |            | 
| | Balance at beginning of year      | $ | 1,063,285 |  | $ | 3,021,617 |  | $ | 5,351,244  | 
| | Addition of bad debt expense, net |   | 1,852,213 |  |   | 1,943,139 |  |   | 7,727,643  | 
| | Foreign exchange adjustment       |   | 106,119   |  |   | 386,488   |  |   | 2,444      | 
| |                                   |   |           |  |   |           |  |   |            | 
| | Balance at end of year            | $ | 3,021,617 |  | $ | 5,351,244 |  | $ | 13,081,331 | 

F-20

---

China BAK Battery, Inc. and subsidiaries Notes to the
consolidated financial statements As of September 30, 2007, 2008 and 2009
(continued)

5

Inventories

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

| |                                          |   | 2008       |   |   | 2009       |  
| | ---------------------------------------- | - | ---------- | - | - | ---------- | -
| |                                          |   |            |   |   |            |  
| | Raw materials                            | $ | 16,671,505 |   | $ | 18,476,929 |  
| | Work-in-progress                         |   | 12,993,897 |   |   | 10,488,114 |  
| | Finished goods                           |   | 40,638,380 |   |   | 40,217,837 |  
| |                                          |   |            |   |   |            |  
| |                                          |   | 70,303,782 |   |   | 69,182,880 |  
| | Provision for obsolete
      inventories |   | (2,720,722 | ) |   | (3,647,496 | )
| |                                          |   |            |   |   |            |  
| |                                          | $ | 67,583,060 |   | $ | 65,535,384 |  

Part of the Companys inventories with
carrying value of US$21,999,619 and US$21,973,836 as of September 30, 2008 and
2009, respectively, was pledged as collateral under certain loan agreements (see
Note 12).

6

Prepayments and Other Receivables

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

| |                                                |   | 2008      |   |   | 2009      |  
| | ---------------------------------------------- | - | --------- | - | - | --------- | -
| |                                                |   |           |   |   |           |  
| | Prepayments for raw materials and
      others | $ | 866,561   |   | $ | 1,437,115 |  
| | Other receivables                              |   | 3,605,465 |   |   | 3,202,149 |  
| | Less: Allowance for doubtful
      accounts    |   | (9,534    | ) |   | (6,840    | )
| |                                                |   |           |   |   |           |  
| |                                                | $ | 4,462,492 |   | $ | 4,632,424 |  

7

Income Taxes

United States Tax

China BAK is subject to United States
of America tax law. No provision for income taxes in the United States or
elsewhere has been made as China BAK had no taxable income for the years ended
September 30, 2007, 2008 and 2009. The statutory tax rate for each of the years
ended December 31, 2007, 2008 and 2009 is 35%.

Canada States Tax

BAK Canada is subject to Canada tax
law. No provision for income taxes in Canada has been made as BAK Canada had no
taxable income for the years ended September 30, 2007, 2008 and 2009. The
statutory tax rate for the years ended September 30, 2007, 2008 and 2009 is 38%.

German States Tax

BAK Europe is subject to Germany tax
law. No provision for income taxes in German has been made as BAK Europe had no
taxable income for the years ended September 30, 2008 and 2009. The statutory
tax rate for the years ended December 31, 2008 and 2009 is 25%.

India Tax

BAK India is subject to India tax law. No provision for income
taxes in India has been made as BAK India had no taxable income for the years
ended September 30, 2008 and 2009. The statutory tax rate for the years ended
September 30, 2008 and 2009 is 30%.

F-21

---

China BAK Battery, Inc. and subsidiaries Notes to the
consolidated financial statements As of September 30, 2007, 2008 and 2009
(continued)

7

Income Taxes (continued)

Hong Kong Tax

BAK International is subject to Hong
Kong profits tax rate of 16.5% . Management of BAK International has determined
that all income and expenses are offshore and not subject to Hong Kong profits
tax. As a result, BAK International did not incur any Hong Kong profits tax
during the years presented.

PRC Tax

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

The tax holiday of Shenzhen BAK
commenced in 2002, the first calendar year in which Shenzhen BAK had assessable
profit, and ended on December 31, 2006. In addition, due to additional capital
contributed by BAK International to Shenzhen BAK in both 2005 and 2006 and
Shenzhen BAKs qualification as an advanced technology enterprise in 2007 and
2008, Shenzhen BAK was granted a preferential income tax rate of 7.5%, 11.8% and
12.6% for calendar years 2007, 2008 and 2009, respectively. In accordance with
the transition period of the new corporate income tax law (the New CIT Law)
and before considering the above-mentioned tax concessions, Shenzhen BAKs
income tax rate for calendar years  2010 and 2011 are expected to be
22% and 24%, respectively, and starting in calendar year 2012, it is expected to
be subject to an income tax rate of 25%. Therefore, Shenzhen BAKs income tax
rates after consideration of its tax concessions are expected to be  15% for
both calendar years 2010 and 2011and starting in calendar year 2012, it is expected to be subject
to an income tax rate of 25%.

BAK Electronics, established in August
2005, has been eligible for the same preferential tax treatment previously
applicable to Shenzhen BAK and was in the tax holiday and fully exempt from any
enterprise income tax for calendar years 2006 and 2007 followed by a three-year
50% reduction in its enterprise income tax rate. In addition, pursuant to the
transition period of the New CIT Law and before considering the above-mentioned
50% reduction, BAK Electronics income tax rates for calendar years 2009, 2010
and 2011 are expected to be 20%, 22% and 24%, respectively, and starting in
calendar year 2012, it is expected to be subject to an income tax rate of 25%.
Therefore, BAK Electronics income tax rate after consideration of its tax
holiday are expected to be 10%, 11% and 24% for calendar years 2009,  2010 and
2011, respectively, and starting in calendar year 2012, it is expected to be
subject to an income tax rate of 25%. BAK Electronics did not incur any
enterprise income tax for the current year due to the current tax losses carried
forward from the calendar year 2008.

BAK Tianjin is currently paying no
enterprise income tax due to cumulative tax losses.

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

(a) Income taxes in the
consolidated statements of operations and comprehensive income / (loss)

Income taxes consist of:

| |             |   | 2007    |  |   | 2008    |  |   | 2009    | 
| | ----------- | - | ------- |  | - | ------- |  | - | ------- | 
| | Current tax | $ | 414,163 |  | $ | 107,166 |  | $ | 771,632 | 

| | Deferred tax       |   | (609,684 | ) |   | (1,152,379 | ) |   | (2,024,214 | )
| | ------------------ | - | -------- | - | - | ---------- | - | - | ---------- | -
| |                    |   |          |   |   |            |   |   |            |  
| | Income tax benefit | $ | (195,521 | ) | $ | (1,045,213 | ) | $ | (1,252,582 | )

Substantially all of the Companys
income / (loss) before income taxes and related tax benefit are from PRC
sources. Actual income tax benefit reported in the consolidated statements of
operations and comprehensive income / (loss) differ from the amounts computed by
applying the US statutory income tax rate of 35% to income / (loss) before
income taxes for the three years ended September 30, 2007, 2008 and 2009 for the
following reasons:

F-22

---

China BAK Battery, Inc. and subsidiaries Notes to the
consolidated financial statements As of September 30, 2007, 2008 and 2009
(continued)

7

Income Taxes (continued)

| |                                                                         |   | 2007     |   |   | 2008       |   |   | 2009        |  
| | ----------------------------------------------------------------------- | - | -------- | - | - | ---------- | - | - | ----------- | -
| |                                                                         |   |          |   |   |            |   |   |             |  
| | Income / (loss) before income taxes                                     | $ | 287,807  |   | $ | (8,985,813 | ) | $ | (15,244,075 | )
| |                                                                         |   |          |   |   |            |   |   |             |  
| | Computed expected income tax
      expense at 35%                     |   | 100,732  |   |   | (3,145,034 | ) |   | (5,335,426  | )
| | Change in the balance of the valuation allowance for
      deferred tax |   | 691,540  |   |   | 464,569    |   |   | 802,066     |  
| | Deferred tax due to the enacted tax
      rate change                   |   | -        |   |   | (697,928   | ) |   | -           |  
| | Loss of tax credit due to change of tax law                             |   | -        |   |   | 224,804    |   |   | -           |  
| | Foreign tax rate differential                                           |   | (730,303 | ) |   | (204,968   | ) |   | (147,896    | )
| | Non-taxable income                                                      |   | (624,936 | ) |   | (800,440   | ) |   | (1,070,181  | )
| | Non-deductible expenses                                                 |   |          |   |   |            |   |   |             |  
| | - Share-based compensation                                              |   | 867,746  |   |   | 1,323,026  |   |   | 1,303,715   |  
| | - Other non-deductible
      expenses                                   |   | 361,189  |   |   | 1,984,161  |   |   | 3,053,752   |  
| | Under-provision in previous year                                        |   | -        |   |   | -          |   |   | 244,417     |  
| | Preferential tax rate and tax holiday                                   |   | (861,489 | ) |   | (193,403   | ) |   | (103,029    | )
| |                                                                         |   |          |   |   |            |   |   |             |  
| | Actual income tax benefit                                               | $ | (195,521 | ) | $ | (1,045,213 | ) | $ | (1,252,582  | )

Shenzhen BAK and BAK Electronics
received in aggregate tax benefit of US$861,489, US$193,403 and US$103,029, or
US$0.02, US$0.04 and US$0.007 per basic share pursuant to their tax holiday and
preferential tax rate for the three years ended
September 30, 2007, 2008 and 2009 respectively.

The significant components of deferred
income tax benefits for the three years ended September 30, 2007, 2008 and 2009
are as follows:

| |                                             |   | 2007       |   |   | 2008       |   |   | 2009       |  
| | ------------------------------------------- | - | ---------- | - | - | ---------- | - | - | ---------- | -
| | Deferred tax income                         | $ | (1,299,227 | ) | $ | (1,616,948 | ) | $ | (2,826,280 | )
| | Valuation allowance for deferred tax assets |   | 689,543    |   |   | 464,569    |   |   | 802,066    |  
| |                                             |   |            |   |   |            |   |   |            |  
| |                                             | $ | (609,684   | ) | $ | (1,152,379 | ) | $ | (2,024,214 | )

F-23

---

China BAK Battery, Inc. and subsidiaries Notes to the
consolidated financial statements As of September 30, 2007, 2008 and 2009
(continued)

7

Income Taxes (continued)

(b) Deferred taxation

The tax effects of temporary
differences that give rise to significant portions of the deferred tax assets
and liabilities as of September 30, 2008 and 2009 are presented below:

| |                                            |   | 2008      |   |   | 2009       |  
| | ------------------------------------------ | - | --------- | - | - | ---------- | -
| | Deferred tax assets                        |   |           |   |   |            |  
| |                                            |   |           |   |   |            |  
| | Short-term                                 |   |           |   |   |            |  
| | Trade accounts
      receivable            | $ | 973,311   |   | $ | 2,862,981  |  
| | Inventories                                |   | 461,097   |   |   | 627,422    |  
| | Accrued expenses
      and other payables  |   | 285,254   |   |   | 404,300    |  
| |                                            |   |           |   |   |            |  
| | Short-term deferred tax assets             |   | 1,719,662 |   |   | 3,894,703  |  
| |                                            |   |           |   |   |            |  
| | Long-term                                  |   |           |   |   |            |  
| | Property, plant and equipment              |   | 6,543     |   |   | 42,911     |  
| | Net operating loss
      carried forward   |   | 581,525   |   |   | 1,383,591  |  
| | Valuation allowance                        |   | (581,525  | ) |   | (1,383,591 | )
| |                                            |   |           |   |   |            |  
| | Long-term deferred tax
      assets        |   | 6,543     |   |   | 42,911     |  
| |                                            |   |           |   |   |            |  
| | Total net deferred tax assets              | $ | 1,726,205 |   | $ | 3,937,614  |  
| |                                            |   |           |   |   |            |  
| | Deferred tax assets /
      (liabilities): |   |           |   |   |            |  
| |                                            |   |           |   |   |            |  
| | Long-term                                  |   |           |   |   |            |  
| | Intangible assets                          | $ | 294,680   |   | $ | 147,686    |  
| | Property, plant and equipment              |   | (386,080  | ) |   | (425,913   | )
| |                                            |   |           |   |   |            |  
| | Long-term deferred
      tax liabilities   | $ | (91,400   | ) | $ | (278,227   | )
| |                                            |   |           |   |   |            |  
| | Net deferred tax assets                    | $ | 1,634,805 |   | $ | 3,659,387  |  

In assessing the realizability of
deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary differences
become deductible or are utilized. Management considers the scheduled reversal
of deferred tax liabilities, projected future taxable income and tax planning
strategies in making this assessment. Based upon an assessment of the level of
historical taxable income and projections for future taxable income over the
periods in which the deferred tax assets are tested whether they are deductible
or can be utilized, management believes that the deferred tax assets as of
September 30, 2008 and 2009 are more likely than not to be realized, except for
the deferred tax assets relating to the net operating loss carried forward
incurred by the Company and its subsidiaries.

In order to fully realize the deferred
tax asset of US$35,803 arising from the net operating loss carried forward of

US$102,293 incurred by the Company itself, the Company will need
to generate sufficient future taxable income to cover the above net operating
loss carried forward before its expiration in fiscal year 2026 through 2027. As
the Company is a non-operating holding company and currently does
not expect those unremitted earnings of its foreign subsidiaries to reverse and
become taxable to the Company, it is more likely than not that the Company will
not realize the benefits of its net operating loss carried forward. Therefore,
full valuation allowance of US$35,803 was provided for the deferred tax assets
in this respect.

F-24

---

China BAK Battery, Inc. and subsidiaries Notes to the
consolidated financial statements As of September 30, 2007, 2008 and 2009
(continued)

7

Income Taxes (continued)

(b) Deferred taxation (continued)

In order to fully realize the deferred
tax asset of US$172,307 arising from the net operating loss carried forward of

US$1,723,072 incurred by BAK Electronics, BAK Electronics will
need to generate sufficient future taxable income to cover the above net
operating loss carried forward before its expiration in fiscal year 2013 through
2014.

In order to fully realize the deferred
tax asset of US$1,175,481 arising from the net operating loss carried forward of

US$4,701,925 incurred by BAK Tianjin, BAK Tianjin will need to
generate sufficient future taxable income to cover the above net operating loss
carried forward before its expiration in fiscal year 2012 through 2014.

The amount of the deferred tax assets
considered realizable, however, could be reduced in the near term if future
taxable income decreases.

The Company has not recognized a
deferred tax liability for the undistributed earnings of its foreign
subsidiaries of  US$59,897,132 and US$37,567,665 as of September
30, 2008 and 2009 because the Company currently does not expect those unremitted
earnings to reverse and become taxable to the Company in the foreseeable future.
A deferred tax liability will be recognized when the Company no longer plans to
permanently reinvest undistributed earnings. Calculation of related unrecognized
deferred tax liability is not practicable.

8

Assets Held for Sale

In fiscal year 2009, the Company
decided to dispose of its machinery and equipment relating to steel-case cell
production line. The Company expects that the final sale and disposal of the assets
will be completed in the fiscal year 2010. In connection with the disposal,
the Company determined that the carrying value of the assets that are held for
sale is separately presented in the consolidated balance sheets in the caption
Assets held for sale, and these assets are no longer depreciated.

9

Property, Plant and Equipment, net

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

| |                                                                   |   | 2008        |   |   | 2009        |  
| | ----------------------------------------------------------------- | - | ----------- | - | - | ----------- | -
| | Buildings                                                         | $ | 94,062,610  |   | $ | 100,280,425 |  
| | Machinery and equipment                                           |   | 89,999,435  |   |   | 123,796,485 |  
| | Office equipment                                                  |   | 1,590,015   |   |   | 1,802,825   |  
| | Motor vehicles                                                    |   | 1,083,278   |   |   | 1,168,575   |  
| |                                                                   |   |             |   |   |             |  
| |                                                                   |   | 186,735,338 |   |   | 227,048,310 |  
| | Accumulated depreciation                                          |   | (33,033,996 | ) |   | (42,709,026 | )
| | Construction in progress                                          |   | 36,116,818  |   |   | 27,959,855  |  
| | Prepayment for acquisition of property, plant and
      equipment |   | 5,617,052   |   |   | 7,385,855   |  
| |                                                                   |   |             |   |   |             |  
| |                                                                   | $ | 195,435,212 |   | $ | 219,684,994 |  

(i) Depreciation expense is included in the consolidated
statements of operations and comprehensive income / (loss) as follows:

| |                                     |   | 2007      |  |   | 2008       |  |   | 2009       | 
| | ----------------------------------- | - | --------- |  | - | ---------- |  | - | ---------- | 
| | Cost of revenues                    | $ | 6,274,424 |  | $ | 9,757,827  |  | $ | 9,291,825  | 
| | Research and development expenses   |   | 296,199   |  |   | 468,556    |  |   | 479,980    | 
| | Sales and marketing expenses        |   | 591,583   |  |   | 636,301    |  |   | 444,060    | 
| | General and administrative expenses |   | 1,455,911 |  |   | 1,652,456  |  |   | 1,896,383  | 
| |                                     |   |           |  |   |            |  |   |            | 
| |                                     | $ | 8,618,117 |  | $ | 12,515,140 |  | $ | 12,112,248 | 

Property, plant and equipment with net book value of US$575,240
was sold in the current year for US$568,706, of which US$557,990 was included in
prepayments and other receivables in the consolidated balance sheets.

F-25

---

China BAK Battery, Inc. and subsidiaries Notes to the
consolidated financial statements As of September 30, 2007, 2008 and 2009
(continued)

9

Property, Plant and Equipment, net (continued)

(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 years ended September 30, 2007,
2008 and 2009, the Company capitalized interest of  US$451,226,
US$300,805 and US$723,527, respectively, to the cost of construction in
progress.

(iii) Pledged Property, Plant and Equipment

As of September 30, 2008 and 2009,
machinery and equipment with net book value of US$42,582,851 and US$67,873,955
of the Company were pledged as collateral under certain loan arrangements (see
Notes 12 and 13).

10

Lease Prepayments, net

Lease prepayments as of September 30,
2008 and 2009 consisted of the following:

| |                          |   | 2008       |   |   | 2009       |  
| | ------------------------ | - | ---------- | - | - | ---------- | -
| | Lease  prepayments       | $ | 33,009,123 |   | $ | 34,048,996 |  
| | Accumulated amortization |   | (1,226,994 | ) |   | (1,883,367 | )
| |                          |   |            |   |   |            |  
| |                          | $ | 31,782,129 |   | $ | 32,165,629 |  

During the year ended September 30,
2007, the Company fully paid the lease prepayment of US$717,344 in relation to
the right to use the land in Shenzhen relating to its new Research and
Development Test Centre. The Company obtained the related property ownership and
land use rights certificate during the fiscal year ended September 30, 2008. The
Company also fully paid the lease prepayment of US$14,119,888 for the right to
use the land relating to its Tianjin facility. As of September 30, 2008, the
Company had obtained related land use rights certificate of the land relating to
the Tianjin facility, but the Tianjin government had requested that the Company
complete the construction of the facility on the land before September 30, 2008,
which the Company had not done. As of September 30, 2009, the Company was in the
course of negotiating with the relevant government bureau for an extension of
the completion date.

The lease prepayment with a cost of
US$3,498,035 represents the right to use the land on which the Companys
corporate campus had been constructed and is owned by the PRC government.
According to the agreement with the local government of Kuichong Township of
Longgang District of Shenzhen, the Company is obligated to pay approximately
US$13.60 per square meter to the local government to obtain the right to use the
land for a period of 50 years. According to a preliminary measurement conducted
in 2004, total consideration payable by the Company in respect of the land use
rights amounted to US$4,029,038, which was reduced to US$3,246,791 in accordance
with the results of the final measurement by the local government in 2005. The
balance of US$528,976 was still outstanding as of September 30, 2007. The local
government granted permission to the Company to commence the construction of a
new production plant. On June 20, 2007, the Company obtained the approvals for
project planning and construction from the government of Shenzhen. Under the
agreement with the local government of Shenzhen for the acquisition of land use
rights for BAK Industrial Park entered into on June 29, 2007, the Company was
required to pay an additional US$11,819,841 to acquire the land for BAK
Industrial Park. Additionally, according to a notice received from the local
government of Shenzhen on June 6, 2008, the Company obtained government grants
totaling US$7,889,991 to subsidize such additional cost of the land use rights.
As of September 30, 2008, the Company had fully paid the remaining cost of
US$3,929,850 and had obtained the land use rights certificate. On July 3, 2009,
the Company had obtained the approval for project-planning and construction from
the local government of Shenzhen. As of September 30, 2009, the application for
the related property ownership certificate was in process.

Amortization expenses for the above lease prepayments were approximately US$274,000, US$702,000 and US$657,000 for the years ended September 30, 2007, 2008 and 2009 respectively. Estimated amortization expense for the next five years is
approximately US$682,000 each year, respectively.

The Company has committed to pledge its property ownership and land use rights certificate relating to the Companys Research and Development Test Centre (Note 13) to China Development Bank. As of September 30, 2009, the Company was in the
process of negotiating with the relevant government for the requisite approval. The aggregate net book value of the related land use rights as of September 30, 2008 and 2009 were US$769,261 and US$1,232,651.

F-26

---

China BAK Battery, Inc. and subsidiaries Notes to the
consolidated financial statements As of September 30, 2007, 2008 and 2009
(continued)

11

Intangible Assets, net

Intangible assets as of September 30,
2008 and 2009 consist of the following:

| |                                                    |   | 2008    |   |   | 2009     |  
| | -------------------------------------------------- | - | ------- | - | - | -------- | -
| | Trademarks, computer software and
      technology | $ | 244,314 |   | $ | 385,593  |  
| | Less: Accumulated amortization                     |   | (82,896 | ) |   | (146,106 | )
| |                                                    |   |         |   |   |          |  
| |                                                    | $ | 161,418 |   | $ | 239,487  |  

Intangible assets represent the
trademarks, computer software and technology used for battery production and
research.

Amortization expenses for these
intangible assets were approximately US$19,000, US$33,000 and US$63,000 for the
years ended September 30, 2007, 2008 and 2009 respectively. Estimated
amortization expense for the next five years is approximately US$70,000 each
year.

12

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:

| |                                             |   | 2008       |  |   | 2009       | 
| | ------------------------------------------- | - | ---------- |  | - | ---------- | 
| | Pledged  deposits (Note 3)                  | $ | -          |  | $ | 7,137,307  | 
| | Inventories (Note 5)                        |   | 21,999,619 |  |   | 21,973,836 | 
| | Machinery and equipment, net (Note
      9) |   | 14,058,213 |  |   | 33,174,263 | 
| |                                             |   |            |  |   |            | 
| |                                             | $ | 36,057,832 |  | $ | 62,285,406 | 

As of September 30, 2008 and 2009, the
Company had several short-term bank loans with aggregate outstanding balances of
US$105,598,170 and US$139,159,380, respectively. The loans were primarily
obtained for general working capital, carried interest rates ranging from 0.30%
to 5.58% per annum, and had maturity dates ranging from 6 to 12 months. Each
loan is guaranteed by Mr. Xiangqian Li, who did not receive any compensation for
acting as guarantor.

As of September 30, 2009, the Company
had pledged the land use rights certificate in relation to the land on which
Shenzhen BAKs corporate campus had been constructed for short-term bank loans
amounting to US$58,596,897 borrowed from Shenzhen Eastern Branch, Agricultural
Bank of China. As of September 30, 2009, the aggregate net book value of the
buildings and land use rights in relation to the land use rights certificate was
US$104,461,858.

13

Long-term Bank Loans

As of September 30, 2008 and 2009, the
Company had long-term bank loans of US$64,532,214 and US$55,667,052
respectively. As of September 30, 2009, US$10,254,457 was borrowed under a
four-year long-term loan credit facility from China Development Bank, bearing
interest at the benchmark rate of the Peoples Bank of China (PBOC) for
three-year to five-year long-term loans, which is currently 5.76% per annum.
This long-term bank loan is repayable in two installments of US$4,394,767 on
November 20, 2009 and US$5,859,690 on December 26, 2010.

Three other long-term loans totaled an
aggregate borrowed amount of US$21,973,835 as of September 30, 2009. These loans
were borrowed under a five-year long-term loan credit facility from Shenzhen
Eastern Branch, Agricultural Bank of China, and carry interest at 90% of the
benchmark rate of the PBOC for three-year to five-year long-term loans. The
first loan of US$5,859,689 currently carries interest at 5.184% per annum and is
repayable on January 25, 2012. The second loan of US$11,719,379 currently
carries annual interest of 5.184% and is repayable in three installments of
US$2,929,845 on January 25, 2010, US$7,324,612 on January 25, 2011 and
US$1,464,922 on January 25, 2012, respectively. The third loan of US$4,394,767
currently carries annual interest of 5.76% and is repayable on January 25, 2010.

Another loan of US$23,438,760 as of September 30, 2009 was borrowed under a four-year long-term loan credit facility from Tianjin Branch, Agricultural Bank of China and carries interest at the benchmark rate of the PBOC for three-year to
five-year long-term loans, which is currently 5.76% per annum. This loan is repayable in four installments of US$4,394,767 on December 26, 2009, US$4,394,767 on December 26, 2010, US$7,324,613 on December 26, 2011, and US$7,324,613
on May 26, 2012.

F-27

---

China BAK Battery, Inc. and subsidiaries Notes to the
consolidated financial statements As of September 30, 2007, 2008 and 2009
(continued)

13

Long-term Bank Loans (continued)

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

The long-term bank loan with Shenzhen
Branch, Agricultural Bank of China is: (i) guaranteed by Mr. Xiangqian Li; (ii)
secured by the Companys machinery and equipment with carrying values of
US$28,524,638 and US$34,699,692 as of September 30, 2008 and 2009 (see Note 9);
and (iii) secured by the property ownership certificate and land use rights
certificate in relation to the land on which Shenzhen BAKs corporate campus had
been constructed and any machinery and equipment purchased and used in the
campus subsequent to such construction.

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

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

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

| | Fiscal years ending on September 30, |   |            | 
| | ------------------------------------ | - | ---------- | 
| | 2010                                 | $ | 16,114,146 | 
| | 2011                                 |   | 17,579,070 | 
| | 2012                                 |   | 21,973,836 | 
| |                                      |   |            | 
| |                                      | $ | 55,667,052 | 

14

Accrued Expenses and Other Payables

Accrued expenses and other payables as
of September 30, 2008 and 2009 consist of the following:

| |                                                 |   | 2008       |  |   | 2009       | 
| | ----------------------------------------------- | - | ---------- |  | - | ---------- | 
| | Construction costs payable                      | $ | 1,995,060  |  | $ | 3,068,008  | 
| | Equipment purchases payable                     |   | 9,310,546  |  |   | 6,938,873  | 
| | Customer deposits (Note 14(a))                  |   | 1,916,412  |  |   | 2,343,334  | 
| | Other payables and accruals (Note 14(b))        |   | 7,859,769  |  |   | 5,576,246  | 
| | Staff and workers welfare and bonus
      fund |   | 499,395    |  |   | 498,810    | 
| |                                                 |   |            |  |   |            | 
| |                                                 | $ | 21,581,182 |  | $ | 18,425,271 | 



| | (a) | Customer deposits were received from customers in
      connection with orders of products to be delivered in future periods.                                                             
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                           
| | (b) | Other payables and accruals included deferred income from
      receipts of government grants amounting to US$637,989 and US$673,864 as of
      September 30, 2008 and 2009 respectively.
| |     |                                                                                                                                                                                           
| |     | Other payables and accruals as of September 30, 2008 and
      2009 also included payable for liquidated damage of US$1,210,213 and
      US$1,208,795 respectively (Note 16).            

15

Deferred
Revenue

Deferred revenue represents a government grant of subsidy for additional cost of land use rights relating to BAK Industrial Park, which is amortized on a straight-line basis over the estimated useful lives of the depreciable facilities constructed
thereon of 35 years.

F-28

---

China BAK Battery, Inc. and subsidiaries Notes to the
consolidated financial statements As of September 30, 2007, 2008 and 2009
(continued)

16

Shareholders Equity

On September 16, 2005, the Company sold
7,899,863 shares of its common stock to new investors for US$43,449,247. The
Company granted certain registration rights to such purchasers, including a
covenant to file with the Securities and Exchange Commission a registration
statement covering their shares. Pursuant to the terms of 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 the
Company is required to file an additional registration statement covering such
shares, and it does not file such additional registration statement within 45
days after the time it first knew, 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 the Company, it 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. The Company also issued warrants to purchase 631,989 shares of
its common stock at an exercise price of US$7.92 per share, being 110% of the
share price as of the grant date, exercisable for three years after the date of
issuance, as a fee to its financial advisors and other external parties in
connection with this transaction. The grant date fair value of the warrants
amounted to US$1,630,532 and has been recorded within additional paid-in-capital
as a cost of the offering, and therefore, the issuance of the share warrants
does not have any impact on the net income.

On August 15, 2006, the SEC declared
effective a post-effective amendment that the Company 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. The Company subsequently filed Form S-1 for these shareholders. On
December 8, 2006, the Company filed its Annual Report on Form 10-K for the year
ended September 30, 2006 (the 2006 Form 10-K). After the filing of the 2006
Form 10-K, the Companys previously filed registration statement on Form S-1 was
no longer available for resales by the selling shareholders whose shares were
included in such Form S-1. Under the registration rights agreement, those
selling shareholders became eligible for liquidated damages relating to the
above two events totaling approximately US$1,051,000 from the Company. The
Company therefore recognized in general and administrative expenses an amount of
approximately US$760,000 as liquidated damages for the year ended September 30,
2007. As of September 30, 2009, no liquidated damages relating to both events
have been paid.

On November 9, 2007, the Company
completed a private placement for the gross proceeds to the Company of
US$13,650,000 by selling 3,500,000 shares of common stock at the price of $3.90
per share. Roth Capital Partners, LLC acted as the Company's exclusive financial
advisor and placement agent in connection with the private placement and
received a cash fee of US$819,000. The Company may have become liable for
liquidated damages to certain shareholders whose shares were included in a
resale registration statement on Form S-3 that the Company filed pursuant to a
registration rights agreement that the Company entered into with such
shareholders in November 2007. Under the registration rights agreement, among
other things, if a registration statement filed pursuant thereto was not
declared effective by the SEC by the 100th calendar day after the closing of the
Companys private placement on November 9, 2007, or the Effectiveness
Deadline, then the Company would be liable to pay partial liquidated damages to
each such investor of (a) 1.5% of the aggregate purchase price paid by such
investor for the shares it purchased on the one month anniversary of the
Effectiveness Deadline; (b) an additional 1.5% of the aggregate purchase price
paid by such investor every thirtieth day thereafter (pro rated for periods
totaling less than thirty days) until the earliest of the effectiveness of the
registration statement, the ten-month anniversary of the Effectiveness Deadline
and the time that the Company are no longer required to keep such resale
registration statement effective because either such shareholders have sold all
of their shares or such shareholders may sell their shares pursuant to Rule 144
without volume limitations; and (c) 0.5% of the aggregate purchase price paid by
such investor for the shares it purchased in our November 2007 private placement
on each of the following dates: the ten-month anniversary of the Effectiveness
Deadline and every thirtieth day thereafter (pro rated for periods totaling less
than thirty days), until the earlier of the effectiveness of the registration
statement and the time that the Company no longer is required to keep such
resale registration statement effective because either such shareholders have
sold all of their shares or such shareholders may sell their shares pursuant to
Rule 144 without volume limitations. Such liquidated damages would bear interest
at the rate of 1% per month (prorated for partial months) until paid in full.

On
December 21, 2007, pursuant to the registration rights agreement, the Company
filed a registration statement on Form S-3, which was declared effective by the
SEC on May 7, 2008. As a result, the Company estimated liquidated damages
amounting to US$561,174 for the November 2007 registration rights agreement. As
of September 30, 2009, the Company had settled the liquidated damages with all
the investors and the remaining provision of approximately $159,000 was included
in other payables and accruals (note 14(b)).

F-29

---

China BAK Battery, Inc. and subsidiaries Notes to the
consolidated financial statements As of September 30, 2007, 2008 and 2009
(continued)

16

Shareholders Equity (continued)

On August 26, 2008, the Company
completed a registered direct offering in the amount of 4,102,564 units at a
price of $3.90 for gross proceeds to the Company of $16,000,000. Each unit is
comprised of one common share and one share purchase warrant of the Company.
Each warrant entitles the holder to purchase an additional common share of the
Company for a period of 60 days beginning on the date of the initial issuance of
warrants on August 26, 2008 at an exercise price of $3.90 per share. Brean
Murray, Carret & Co., LLC, acted as the Company's exclusive investment
banker and agent in connection with the registered direct offering and received
a cash fee of US$800,000, representing 5% of the gross proceeds received from
the sale of the Shares and warrants. Pursuant to an amendment to the placement
agency agreement, the Company also agreed to pay Brean Murray, Carret & Co.,
LLC an aggregate commission equal to 5% of the gross exercise price of received
from investors for the exercise of the warrants in the offering. The placement
agent had no obligation to buy any of the shares from the Company. As of
September 30, 2009, 4,102,564 shares had been issued and no warrants had been
exercised.

17

Net Income / (Loss) per Share

The calculation of basic net loss per
share is based on the net loss for the year ended September 30, 2009
attributable to equity shareholders of US$13,991,493 (Net income for the year
ended September 30, 2007: US$483,328 and net loss for the year ended September
30, 2008: US$7,940,600) and the weighted average number of ordinary shares of
56,964,129 outstanding during the year ended September 30, 2009 (2007:
48,979,115 shares and 2008: 52,313,768 shares).

The effects of 3,110,000 shares of
stock options and 11,250 shares of restricted stock outstanding during the year
ended or as of September 30, 2008 were all anti-dilutive and the effects of
4,883,700 shares of stock options, 511,250 shares of restricted stock and
4,102,564 warrants outstanding during the year ended or as of September 30, 2009
were all anti-dilutive. As such, basic and diluted net loss per share for the
years ended September 30, 2008 and 2009 are the same.

The calculation of diluted net income
per share for the year ended September 30, 2007 is based on the net income
attributable to equity shareholders of US$483,328 and the weighted average
number of ordinary shares of 49,442,285 in issue during the year 2007 after
adjusting for the number of 463,170 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 year ended September
30, 2007. The number of 631,989 share warrants granted to external financial
advisors and 1,818,500 stock options granted to employees are excluded from the
computation of diluted net income per share as the warrants and stock options
were both anti-dilutive.

18

Finance Costs, net

Details of finance costs are summarized
as follows:

| |                              |   | 2007      |   |   | 2008       |   |   | 2009      |  
| | ---------------------------- | - | --------- | - | - | ---------- | - | - | --------- | -
| | Total interest cost incurred | $ | 5,404,305 |   | $ | 10,007,094 |   | $ | 9,769,680 |  
| | Less: Interest capitalized   |   | (451,226  | ) |   | (300,805   | ) |   | (723,527  | )
| | Interest income              |   | (283,264  | ) |   | (87,949    | ) |   | (300,895  | )
| | Bank charges                 |   | 186,715   |   |   | 779,054    |   |   | 441,603   |  
| | Exchange loss                |   | 368,270   |   |   | 623,414    |   |   | 169,122   |  
| |                              |   |           |   |   |            |   |   |           |  
| |                              | $ | 5,224,800 |   | $ | 11,020,808 |   | $ | 9,355,983 |  

F-30

---

China BAK Battery, Inc. and subsidiaries Notes to the
consolidated financial statements As of September 30, 2007, 2008 and 2009
(continued)

19

Pension and Other Postretirement Benefits

Pursuant to the relevant PRC
regulations, the Company is required to make contributions at a rate of 8% to
11% of employees salaries and wages to a defined contribution retirement scheme
organized by a state-sponsored social insurance plan in respect of the
retirement benefits for the Companys employees in the PRC. The total amount of
contributions charged to expense in the accompanying consolidated statements of
operations and comprehensive income / (loss) are presented as follows:

| |                                     |   | 2007    |  |   | 2008      |  |   | 2009      | 
| | ----------------------------------- | - | ------- |  | - | --------- |  | - | --------- | 
| | Cost of revenues                    | $ | 279,191 |  | $ | 717,353   |  | $ | 608,260   | 
| | Research and development expenses   |   | 57,575  |  |   | 85,227    |  |   | 135,443   | 
| | Sales and marketing expenses        |   | 142,739 |  |   | 86,551    |  |   | 91,284    | 
| | General and administrative expenses |   | 160,627 |  |   | 200,315   |  |   | 316,311   | 
| |                                     |   |         |  |   |           |  |   |           | 
| |                                     | $ | 640,132 |  | $ | 1,089,446 |  | $ | 1,151,298 | 

The Company has no other obligation to
make payments in respect of retirement benefits of the employees. The
state-sponsored retirement plan is responsible for the entire pension
obligations payable to all employees.

20

Share-based Compensation

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

Stock Option Plan

In May 2005, the Board of Directors
adopted the China BAK Battery, Inc. 2005 Stock Option Plan (the Plan). The
Plan 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 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. On July 28, 2008, the
Companys stockholders approved certain amendments to the Plan, including
increasing the total number of shares available for issuance under the Plan to
8,000,000.

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
became vested and exercisable under the following schedule:

| |                  |  | Percentage of  |  | Initial        
| | ---------------- |  | -------------- |  | ---------------
| | Numbers of Share |  | Options Issued |  | Vesting Date   
| | 800,000          |  | 40%            |  | July 1, 2007   
| | 600,000          |  | 30%            |  | January 1, 2008
| | 600,000          |  | 30%            |  | July 1, 2008   
| | 2,000,000        |  | 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.

F-31

---

China BAK Battery, Inc. and subsidiaries Notes to the
consolidated financial statements As of September 30, 2007, 2008 and 2009
(continued)

20

Share-based Compensation (continued)

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

| |                                         |  |           |  |   |                |  |  | Weighted    |  |   |           |  
| | --------------------------------------- |  | --------- |  | - | -------------- |  |  | ----------- |  | - | --------- | -
| |                                         |  |           |  |   | Weighted       |  |  | average     |  |   |           |  
| |                                         |  |           |  |   | average        |  |  | remaining   |  |   | Aggregate |  
| |                                         |  | Number of |  |   | exercise price |  |  | contractual |  |   | intrinsic |  
| |                                         |  | shares    |  |   | per share      |  |  | term        |  |   | value (1  | )
| | Outstanding as of
      October 1, 2008 |  | 200,000   |  | $ | 6.25           |  |  |             |  |   |           |  
| | Exercised                               |  | -         |  |   | -              |  |  |             |  |   |           |  
| | Forfeited                               |  | -         |  |   | -              |  |  |             |  |   |           |  
| | Cancelled                               |  | -         |  |   | -              |  |  |             |  |   |           |  
| |                                         |  |           |  |   |                |  |  |             |  |   |           |  
| | Outstanding as of September 30, 2009    |  | 200,000   |  | $ | 6.25           |  |  | 1.6 years   |  | $ | -         |  
| |                                         |  |           |  |   |                |  |  |             |  |   |           |  
| | Exercisable as of September 30, 2009    |  | 200,000   |  | $ | 6.25           |  |  | 1.6 years   |  | $ | -         |  



| | (1) | Aggregate intrinsic value represents the value of the Companys
      closing stock price on September 30, 2009 (US$4.95) in excess of the
      exercise price multiplied by the number of options outstanding or
      exercisable.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The weighted-average grant-date fair
value of options granted during 2005 was US$3.67 per share. The Company recorded
non-cash share-based compensation expense of US$588,716 and US$73,935 for the
years ended September 30, 2007 and 2008 in respect of these share options
granted in 2005. The expense of 2007 was allocated to general and administrative
expenses and research and development expenses respectively and that of 2008 was
allocated to research and development expenses. No
non-cash share-based compensation expense was recognized in respect of these
share options for the year ended September 30, 2009.

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

| | Expected volatility     |  | 59.85%  | 
| | ----------------------- |  | ------- | 
| | Expected dividends      |  | Nil     | 
| | Expected life           |  | 6 years | 
| | Risk-free interest rate |  | 4.13%   | 
| |                         |  |         | 

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

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

F-32

---

China BAK Battery, Inc. and subsidiaries Notes to the
consolidated financial statements As of September 30, 2007, 2008 and 2009
(continued)

20

Share-based Compensation (continued)

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

| |                                         |  |           |  |   | Weighted         |  |  | Weighted average |  |   |                     |  
| | --------------------------------------- |  | --------- |  | - | ---------------- |  |  | ---------------- |  | - | ------------------- | -
| |                                         |  | Number of |  |   | average exercise |  |  | remaining        |  |   | Aggregate intrinsic |  
| |                                         |  | shares    |  |   | price per share  |  |  | contractual term |  |   | value (1            | )
| |                                         |  |           |  |   |                  |  |  |                  |  |   |                     |  
| | Outstanding as of
      October 1, 2008 |  | 1,300,000 |  | $ | 3.29             |  |  |                  |  |   |                     |  
| | Exercised                               |  | 46,000    |  |   | 3.27             |  |  |                  |  |   |                     |  
| | Forfeited                               |  | 183,500   |  |   | 3.27             |  |  |                  |  |   |                     |  
| | Cancelled                               |  | -         |  |   | -                |  |  |                  |  |   |                     |  
| |                                         |  |           |  |   |                  |  |  |                  |  |   |                     |  
| | Outstanding as of September 30, 2009    |  | 1,070,500 |  | $ | 3.29             |  |  | 3.7 years        |  | $ | 1,777,030           |  
| |                                         |  |           |  |   |                  |  |  |                  |  |   |                     |  
| | Exercisable as of September 30, 2009    |  | 730,500   |  | $ | 3.29             |  |  | 3.2 years        |  | $ | 1,212,630           |  



| | (1) | Aggregate intrinsic value represents the value of the Companys
      closing stock price on September 30, 2009 (US$4.95) in excess of the
      exercise price multiplied by the number of options outstanding or
      exercisable.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The weighted average grant-date fair
value of options granted during 2007 was US$2.15 per share. The Company recorded
non-cash share-based compensation expense of US$545,749, US$1,580,205 and
US$660,821 for the years ended September 30, 2007, 2008 and 2009 in respect of
share options granted in June 2007, which was allocated to cost of revenues,
sales and marketing expenses, general and administrative expenses and research
and development expenses respectively.

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

| | Expected volatility     |  | 69.44%       | 
| | ----------------------- |  | ------------ | 
| | Expected dividends      |  | Nil          | 
| | Expected life           |  | 4 - 10 years | 
| | Risk-free interest rate |  | 5.09%        | 

As of September 30, 2009, there were
unrecognized compensation costs of US$270,823 related to the above non-vested
share options. These costs are expected to be recognized over a weighted average
period of 1.4 year.

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

F-33

---

China BAK Battery, Inc. and subsidiaries Notes to the
consolidated financial statements As of September 30, 2007, 2008 and 2009
(continued)

20

Share-based Compensation (continued)

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

| |                                         |  |           |  |   |                |  |  | Weighted    |  |   |           |  
| | --------------------------------------- |  | --------- |  | - | -------------- |  |  | ----------- |  | - | --------- | -
| |                                         |  |           |  |   | Weighted       |  |  | average     |  |   |           |  
| |                                         |  |           |  |   | average        |  |  | remaining   |  |   | Aggregate |  
| |                                         |  | Number of |  |   | exercise price |  |  | contractual |  |   | intrinsic |  
| |                                         |  | shares    |  |   | per share      |  |  | term        |  |   | value (1  | )
| | Outstanding as of
      October 1, 2008 |  | 360,000   |  | $ | 4.30           |  |  |             |  |   |           |  
| | Exercised                               |  | -         |  |   | -              |  |  |             |  |   |           |  
| | Forfeited                               |  | -         |  |   | -              |  |  |             |  |   |           |  
| | Cancelled                               |  | -         |  |   | -              |  |  |             |  |   |           |  
| |                                         |  |           |  |   |                |  |  |             |  |   |           |  
| | Outstanding as of September 30, 2009    |  | 360,000   |  | $ | 4.30           |  |  | 3.3 years   |  | $ | 234,000   |  
| |                                         |  |           |  |   |                |  |  |             |  |   |           |  
| | Exercisable as of September 30, 2009    |  | 180,000   |  | $ | 4.30           |  |  | 3.3 years   |  | $ | 117,000   |  

(1) Aggregate intrinsic value
represents the value of the Companys closing stock price on September 30, 2009
(US$4.95) in excess of the exercise price multiplied by the number of options
outstanding or exercisable.

The weighted average grant-date fair
value of options granted on January 28, 2008 was US$3.59 per share. The Company
recorded non-cash share-based compensation expense of US$681,363 and US$436,965
for the years ended September 30, 2008 and 2009 respectively in respect of share
options granted on January 28, 2008, which was allocated to general and
administrative expenses and research and development expenses respectively.

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

| | Expected volatility     |  | 120.23% | 
| | ----------------------- |  | ------- | 
| | Expected dividends      |  | Nil     | 
| | Expected life           |  | 5 years | 
| | Risk-free interest rate |  | 3.59%   | 

As of September 30, 2009, there were
unrecognized compensation costs of US$175,504 related to the above non-vested
share options. These costs are expected to be recognized over a weighted average
period of 0.6 year.

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

F-34

---

China BAK Battery, Inc. and subsidiaries Notes to the
consolidated financial statements As of September 30, 2007, 2008 and 2009
(continued)

20

Share-based
Compensation (continued)

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

| |                                         |  |           |  |   |                |  |  | Weighted    |  |   |           |  
| | --------------------------------------- |  | --------- |  | - | -------------- |  |  | ----------- |  | - | --------- | -
| |                                         |  |           |  |   | Weighted       |  |  | average     |  |   |           |  
| |                                         |  |           |  |   | average        |  |  | remaining   |  |   | Aggregate |  
| |                                         |  | Number of |  |   | exercise price |  |  | contractual |  |   | intrinsic |  
| |                                         |  | shares    |  |   | per share      |  |  | term        |  |   | value (1  | )
| | Outstanding as of
      October 1, 2008 |  | 1,250,000 |  | $ | 4.18           |  |  |             |  |   |           |  
| | Exercised                               |  | -         |  |   | -              |  |  |             |  |   |           |  
| | Forfeited                               |  | -         |  |   | -              |  |  |             |  |   |           |  
| | Cancelled                               |  | -         |  |   | -              |  |  |             |  |   |           |  
| |                                         |  |           |  |   |                |  |  |             |  |   |           |  
| | Outstanding as of September 30, 2009    |  | 1,250,000 |  | $ | 4.18           |  |  | 3.6 years   |  | $ | 962,500   |  
| |                                         |  |           |  |   |                |  |  |             |  |   |           |  
| | Exercisable as of September 30, 2009    |  | 492,500   |  | $ | 4.18           |  |  | 3.6 years   |  | $ | 379,225   |  

(1) Aggregate intrinsic value
represents the value of the Companys closing stock price on September 30, 2009
(US$4.95) in excess of the exercise price multiplied by the number of options
outstanding or exercisable.

The weighted average grant-date fair
value of options granted on May 29, 2008 was US$2.36 per share. The Company
recorded non-cash share-based compensation expense of US$840,789 and
US$1,358,988 for the years ended September 30, 2008 and 2009 respectively in
respect of share options granted on May 29, 2008, which was allocated to general
and administrative expenses and research and development expenses respectively.

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

| | Expected volatility     |  | 59.48%  | 
| | ----------------------- |  | ------- | 
| | Expected dividends      |  | Nil     | 
| | Expected life           |  | 5 years | 
| | Risk-free interest rate |  | 4.01%   | 

As of September 30, 2009, there were
unrecognized compensation costs of US$746,571 related to the above non-vested
share options. These costs are expected to be recognized over a weighted average
period of 1.3 year.

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

F-35

---

China BAK Battery, Inc. and subsidiaries Notes to the
consolidated financial statements As of September 30, 2007, 2008 and 2009
(continued)

20

Share-based
Compensation (continued)

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

| |                                            |  |           |  |   |                |  |  | Weighted    |  |   |           |  
| | ------------------------------------------ |  | --------- |  | - | -------------- |  |  | ----------- |  | - | --------- | -
| |                                            |  |           |  |   | Weighted       |  |  | average     |  |   |           |  
| |                                            |  |           |  |   | average        |  |  | remaining   |  |   | Aggregate |  
| |                                            |  | Number of |  |   | exercise price |  |  | contractual |  |   | intrinsic |  
| |                                            |  | shares    |  |   | per share      |  |  | term        |  |   | value (1  | )
| | Outstanding as of
      October 1, 2008    |  | -         |  | $ | -              |  |  |             |  |   |           |  
| | Granted on June 22, 2009                   |  | 1,928,200 |  |   | 2.81           |  |  |             |  |   |           |  
| | Exercised                                  |  | -         |  |   | -              |  |  |             |  |   |           |  
| | Forfeited                                  |  | -         |  |   | -              |  |  |             |  |   |           |  
| | Cancelled                                  |  | -         |  |   | -              |  |  |             |  |   |           |  
| |                                            |  |           |  |   |                |  |  |             |  |   |           |  
| | Outstanding as of
      September 30, 2009 |  | 1,928,200 |  | $ | 2.81           |  |  | 6.7 years   |  | $ | 4,126,348 |  
| |                                            |  |           |  |   |                |  |  |             |  |   |           |  
| | Exercisable as of
      September 30, 2009 |  | -         |  | $ | -              |  |  | -           |  | $ | -         |  

(1) Aggregate intrinsic value
represents the value of the Companys closing stock price on September 30, 2009
(US$4.95) in excess of the exercise price multiplied by the number of options
outstanding or exercisable.

The weighted average grant-date fair
value of options granted on June 22, 2009 was US$2.46 per share. The Company
recorded non-cash share-based compensation expense of US$892,295 for the year
ended September 30, 2009 in respect of share options granted on June 22, 2009,
which was allocated to cost of revenues, sales and marketing expenses, general
and administrative expenses and research and development expenses respectively.

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

| | Expected volatility     |  | 111.03% | 
| | ----------------------- |  | ------- | 
| | Expected dividends      |  | Nil     | 
| | Expected life           |  | 7 years | 
| | Risk-free interest rate |  | 3.69%   | 

As of September 30, 2009, there were
unrecognized compensation costs of US$3,843,730 related to the above non-vested
share options. These costs are expected to be recognized over a weighted average
period of 2.7 years.

On June 26, 2009, the Compensation
Committee of the Companys Board of Directors recommended and approved the grant
of options to purchase 75,000 shares of the Companys common stock to certain
key management with an exercise price of US$3.24 per share. In accordance with
the vesting provisions of the grants, the options will become vested and
exercisable over five years in twenty equal quarterly installments on the first
day of each fiscal quarter beginning on October 1, 2009.

F-36

---

China BAK Battery, Inc. and subsidiaries Notes to the
consolidated financial statements As of September 30, 2007, 2008 and 2009
(continued)

20

Share-based
Compensation (continued)

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

| |                                            |  |           |  |   |                |  |  | Weighted    |  |   |           |  
| | ------------------------------------------ |  | --------- |  | - | -------------- |  |  | ----------- |  | - | --------- | -
| |                                            |  |           |  |   | Weighted       |  |  | average     |  |   |           |  
| |                                            |  |           |  |   | average        |  |  | remaining   |  |   | Aggregate |  
| |                                            |  | Number of |  |   | exercise price |  |  | contractual |  |   | intrinsic |  
| |                                            |  | shares    |  |   | per share      |  |  | term        |  |   | value (1  | )
| | Outstanding as of
      October 1, 2008    |  | -         |  | $ | -              |  |  |             |  |   |           |  
| | Granted on June 26, 2009                   |  | 75,000    |  |   | 3.24           |  |  |             |  |   |           |  
| | Exercised                                  |  | -         |  |   | -              |  |  |             |  |   |           |  
| | Forfeited                                  |  | -         |  |   | -              |  |  |             |  |   |           |  
| | Cancelled                                  |  | -         |  |   | -              |  |  |             |  |   |           |  
| |                                            |  |           |  |   |                |  |  |             |  |   |           |  
| | Outstanding as of
      September 30, 2009 |  | 75,000    |  | $ | 3.24           |  |  | 6.7 years   |  | $ | 128,250   |  
| |                                            |  |           |  |   |                |  |  |             |  |   |           |  
| | Exercisable as of
      September 30, 2009 |  | -         |  | $ | -              |  |  | -           |  | $ | -         |  

(1) Aggregate intrinsic value
represents the value of the Companys closing stock price on September 30, 2009
(US$4.95) in excess of the exercise price multiplied by the number of options
outstanding or exercisable.

The weighted average grant-date fair
value of options granted on June 26, 2009 was US$2.86 per share. The Company
recorded non-cash share-based compensation expense of US$38,976 for the year
ended September 30, 2009 in respect of share options granted on June 26, 2009,
which was allocated to research and development expenses.

The fair value of the above option
awards granted on June 26, 2009 was estimated on the date of grant using the
Black-Scholes Option Valuation Model that uses the following assumptions.

| | Expected volatility     |  | 113.58% | 
| | ----------------------- |  | ------- | 
| | Expected dividends      |  | Nil     | 
| | Expected life           |  | 7 years | 
| | Risk-free interest rate |  | 3.51%   | 

As of September 30, 2009, there were
unrecognized compensation costs of US$175,200 related to the above non-vested
share options. These costs are expected to be recognized over a weighted average
period of 2.7 years.

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

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

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

The Company recorded non-cash
share-based compensation expense of US$30,504 and US$37,896 for the years ended
September 30, 2008 and 2009, in respect of the restricted shares granted in
August 2008, which was allocated to general and administrative expenses.

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

F-37

---

China BAK Battery, Inc. and subsidiaries Notes to the
consolidated financial statements As of September 30, 2007, 2008 and 2009
(continued)

20

Share-based
Compensation (continued)

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

The Company recorded non-cash
share-based compensation expense of US$264,200 for the year ended September 30,
2009, in respect of the restricted shares granted in June 22, 2009, which was
allocated to general and administrative expenses.

As of September 30, 2009, there were
unrecognized stock-based compensation costs of US$1,140,800 associated with
these restricted shares granted to Mr. Xiangqian Li. These costs are expected to
be recognized over a weighted-average period of 2.7 years.

Pursuant to the Plan, and in accordance
with the China BAK Battery, Inc. Compensation Plan for Non-Employee Directors,
the Company also granted 5,000 restricted shares to each of the existing elected
independent directors with a fair value of US$3.24 per share on June 26, 2009.
The eligible directors shall vest in their rights under the restricted shares
according to the following schedule:

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

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

The Company recorded non-cash
share-based compensation expense of US$34,760 for the year ended September 30,
2009, in respect of the restricted shares granted in June 2009, which was
allocated to general and administrative expenses.

As of September 30, 2009, there were
unrecognized stock-based compensation costs of US$13,840 for the year ended
September 30, 2009 associated with these restricted shares granted to
non-employee directors. The first 25% of the restricted shares were already
issued as fully paid shares of common stock to the Companys three independent
directors on July 24, 2009.

As the Company itself is an investment
holding company which is not expected to generate operating profits to realize
the tax benefits arising from its net operating loss carried forward, no income
tax benefits were recognized for such stock-based compensation cost under stock
option plan for the years ended September 30, 2008 and 2009.

Employee Restricted Stock Award

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

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

| | Expected volatility     |  | 89.51%    | 
| | ----------------------- |  | --------- | 
| | Expected dividends      |  | Nil       | 
| | Expected life           |  | 4.4 years | 
| | Risk-free interest rate |  | 4.61%     | 

F-38

---

China BAK Battery, Inc. and subsidiaries Notes to the
consolidated financial statements As of September 30, 2007, 2008 and 2009
(continued)

20

Share-based
Compensation (continued)

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

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

| | Number of
      Shares | Percentage of Options Issued | Initial Vesting Date
| | ---------------------- | ---------------------------- | --------------------
| |                        |                              |                     
| | 365,998                | 40%                          | July 1, 2007        
| | 274,498                | 30%                          | January 1, 2008     
| | 274,498                | 30%                          | July 1, 2008        
| |                        |                              |                     
| | 914,994                | 100%                         |                     

Upon the grant of restricted stock, the
Company reclassified share-based payment liabilities of US$3,679,934 to
shareholders equity. The restricted stock grant is treated as equity-classified
awards and the unrecognized compensation costs were recognized over the vesting
period. The Company recognized share-based compensation expense of US$556,696
for the year ended September 30, 2008 in respect of the equity-classified award.
These share-based compensation costs were allocated to cost of revenues, sales
and marketing expenses, general and administrative expenses and research and
development expenses respectively. All shares of restricted stock granted as of
September 30, 2009 vested before September 30, 2008 and no non-cash share-based
compensation expense was recognized for the year ended September 30, 2009.

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

21

Fair Value of
Financial Instruments

The fair value of a financial
instrument is the amount at which the instrument could be exchanged in a current
transaction between willing parties. The carrying amounts of financial assets
and liabilities, such as cash and cash equivalents, pledged deposits, trade
accounts receivable, other receivables, property, plant and equipment held for
sale, short-term bank loans, long-term bank loans, accounts and bills payable
and other payables, approximate their fair values because of the short maturity
of these instruments and market rates of interest.

22

Commitments and
Contingencies

(i) Capital Commitments

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

| |                               |   | 2008       |  |   | 2009      | 
| | ----------------------------- | - | ---------- |  | - | --------- | 
| |                               |   |            |  |   |           | 
| | For construction of buildings | $ | 5,957,292  |  | $ | 5,950,310 | 
| | For purchases of equipment    |   | 4,313,237  |  |   | 3,590,812 | 
| |                               |   |            |  |   |           | 
| |                               | $ | 10,270,529 |  | $ | 9,541,122 | 

F-39

---

China BAK Battery, Inc. and subsidiaries Notes to the
consolidated financial statements As of September 30, 2007, 2008 and 2009
(continued)

22

Commitments and
Contingencies (continued)

(ii) Land Use Rights and Property Ownership Certificate

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

The Company did not obtain the land use
right certificate and approvals for project-planning and construction relating
to the premises occupied by the Company, BAK Industrial Park, before
construction of the buildings was commenced. On July 3, 2009, the Company had
obtained the approval for project-planning and construction from the local
government of Shenzhen. As of September 30, 2009, the Company has obtained the
aforementioned land use rights certificate and government approvals and was in
the process of negotiating with the relevant government for the application and
acquisition of the appropriate property ownership certificate.

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

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

Pursuant to the property ownership and
land use rights certificate that the Company obtained relating to the Research
and Development Test Centre to be constructed in Shenzhen, the Company must
complete at least 25% of the construction of the new Research and Development
Test Centre by September 30, 2008. On November 11, 2008 and May 27, 2009, the
Company has signed two supplement agreements with Shenzhen government to
increase the dimensions of the Research and Development Test Centre. According
to the supplement agreements, the Company is required to complete the
construction by May 6, 2011. According to the property ownership and land use
rights certificate, such rights may not be pledged without the approval of the
relevant government office. The Company is required to pledge its property
ownership and land use rights certificate in relation to the new Research and
Development Test Centre to China Development Bank according to the loan
agreement entered into with it. As of September 30, 2009, the Company was in the
process of negotiating with the relevant government for the requisite approval.

The Company is not able to insure its
manufacturing facilities since it has not yet received its property ownership
certificates for these facilities. The Company intends to procure such insurance
once it has received the certificates.

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

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

F-40

---

China BAK Battery, Inc. and subsidiaries Notes to the
consolidated financial statements As of September 30, 2007, 2008 and 2009
(continued)

22

Commitments and
Contingencies (continued)

(iii) Guarantees

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

| |                                                                                                |   | 2008       |  |   | 2009       | 
| | ---------------------------------------------------------------------------------------------- | - | ---------- |  | - | ---------- | 
| |                                                                                                |   |            |  |   |            | 
| | Guaranteed for Shenzhen Tongli Hi-tech Co.
      Ltd. - a non-related party                    | $ | 2,933,282  |  | $ | 2,197,384  | 
| | Guaranteed for Hunan Reshine New Material Ltd. - a
      non-related party                     |   | 5,866,565  |  |   | 5,859,690  | 
| | Guaranteed for Nanjing Special Metal
      Equipment Co. Ltd. - a non-related party            |   | 1,466,641  |  |   | 7,324,612  | 
| | Guaranteed for Siping Juyuan Hanyang Plate Heat Exchanger
      Co. Ltd. - a non-related party |   | 2,933,282  |  |   | 4,394,767  | 
| | Guaranteed for Shenzhen B&G Technology
      Development Co. Ltd. - a non-related party        |   | 3,666,603  |  |   | 8,789,535  | 
| |                                                                                                |   |            |  |   |            | 
| |                                                                                                | $ | 16,866,373 |  | $ | 28,565,988 | 

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 September
30, 2009.

(iv) Outstanding Discounted Bills
and Transferred Bills

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

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

| |                       |   | 2008       |  |   | 2009       | 
| | --------------------- | - | ---------- |  | - | ---------- | 
| |                       |   |            |  |   |            | 
| | Commercial bills      | $ | -          |  | $ | 439,477    | 
| | Bank acceptance bills |   | 34,721,831 |  |   | 13,469,235 | 
| |                       |   |            |  |   |            | 
| |                       | $ | 34,721,831 |  | $ | 13,908,712 | 

F-41

---

China BAK Battery, Inc. and subsidiaries Notes to the
consolidated financial statements As of September 30, 2007, 2008 and 2009
(continued)

22

Commitments and
Contingencies (continued)

(v) Litigation and claims

On September 12, 2006, Hydro-Quebec, a
Canadian company, and the Board of Regents of the University of Texas System
brought a federal patent infringement suit in the United States District Court
for the Northern District of Texas against the Company. The plaintiffs alleged
that by manufacturing rechargeable lithium cells for A123Systems for use in
DeWalt 36-volt cordless power tools manufactured by Black & Decker, 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. A123Systems, Black & Decker Corporation and Black & Decker
(U.S.) Inc. have also been named as co-defendants in this lawsuit. The court has
not ruled on this lawsuit. The Company understands that this lawsuit is a
countersuit against A123Systems, which filed a claim against Hydro-Quebec in the
United States District Court of Massachusetts in April 2006. In that suit,
A123Systems sought declaratory relief that the two said U.S. patents are invalid
and that A123Systems is not infringing either of these two patents.

Following the filing of the lawsuit,
the United States Patent and Trademark Office reexamined the patents. The
patents were re-issued with substantial modification of the patent claims. The
plaintiffs have advised that, in their view, the lawsuit continues to be viable
against the defendants, including China BAK. The plaintiffs' position has not
been tested. Currently pending is the plaintiffs motion to amend their
complaint to take the USPTO action into account.

If the court were to issue an adverse
decision, the Company could face a substantial monetary damages award. While
such an adverse decision could also prohibit the Company from future production
of rechargeable lithium cells manufactured for A123Systems or may require the
Company to pay royalties to engage in any such production, the Company has no
plans to pursue production of batteries for A123. The court has not issued any
substantive decisions in the litigation and there has been no substantive
pretrial discovery. As a result, at this time, the Company is unable to express
a view on the extent of any possible award of damages that might be rendered in
the litigation.

23

Significant
Concentrations

(a) Customers and Credit
Concentrations

The Company had only one customer that
individually comprised 10% or more of net revenue for the year ended September
30, 2007, as follows:

| |                  |   | 2007       |  |  |    |  |   | 2008 |  |  |   |  |   | 2009 |  |  |   | 
| | ---------------- | - | ---------- |  |  | -- |  | - | ---- |  |  | - |  | - | ---- |  |  | - | 
| |                  |   |            |  |  | %  |  |   |      |  |  | % |  |   |      |  |  | % | 
| |                  |   |            |  |  |    |  |   |      |  |  |   |  |   |      |  |  |   | 
| | A123System, Inc. | $ | 20,586,775 |  |  | 14 |  | $ | -    |  |  | - |  | $ | -    |  |  | - | 

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

As of September 30, 2007, approximately
3% of gross trade accounts receivable was due from A123Systems Inc.. On August
30, 2007, the Companys agreement with this customer terminated in accordance
with its terms. The Company did not have a balance of gross trade accounts
receivables due from this customer as of September 30, 2008 and 2009.

(b) Credit Risk

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

F-42

---

China BAK Battery, Inc. and subsidiaries Notes to the
consolidated financial statements As of September 30, 2007, 2008 and 2009
(continued)

24

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.During the fiscal
year ended September 30, 2009, the Company manufactured six types of Li-ion
rechargeable batteries: steel-case cell, aluminum-case cell, battery pack,
cylindrical cell, polymer cell and high-power lithium-phosphate cell.The Company's products are
sold to packing plants operated by third parties primarily for use in mobile
phones and other electronic devices. Net revenues for the years ended September
30, 2007, 2008 and 2009 were as follows:

Net revenues by product:

| |                                    |   | 2007        |  |  |        |  |   | 2008        |  |  |        |  |   | 2009        |  |  |        | 
| | ---------------------------------- | - | ----------- |  |  | ------ |  | - | ----------- |  |  | ------ |  | - | ----------- |  |  | ------ | 
| |                                    |   |             |  |  | %      |  |   |             |  |  | %      |  |   |             |  |  | %      | 
| |                                    |   |             |  |  |        |  |   |             |  |  |        |  |   |             |  |  |        | 
| | Steel-case cell                    | $ | 34,868,786  |  |  | 23.91  |  | $ | 29,299,493  |  |  | 11.94  |  | $ | 4,979,548   |  |  | 2.36   | 
| | Aluminum-case cell                 |   | 69,916,244  |  |  | 47.93  |  |   | 130,109,946 |  |  | 53.03  |  |   | 111,700,018 |  |  | 52.90  | 
| | High-power lithium- phosphate cell |   | 20,561,865  |  |  | 14.10  |  |   | -           |  |  | -      |  |   | 179,389     |  |  | 0.09   | 
| | Battery pack                       |   | 11,797,560  |  |  | 8.09   |  |   | 25,500,658  |  |  | 10.40  |  |   | 24,705,154  |  |  | 11.70  | 
| | Cylindrical cell                   |   | 3,421,901   |  |  | 2.34   |  |   | 42,566,664  |  |  | 17.35  |  |   | 55,348,867  |  |  | 26.21  | 
| | Polymer cell                       |   | 5,294,543   |  |  | 3.63   |  |   | 17,870,808  |  |  | 7.28   |  |   | 14,230,995  |  |  | 6.74   | 
| |                                    |   |             |  |  |        |  |   |             |  |  |        |  |   |             |  |  |        | 
| |                                    | $ | 145,860,899 |  |  | 100.00 |  | $ | 245,347,569 |  |  | 100.00 |  | $ | 211,143,971 |  |  | 100.00 | 

The manufacturing of
steel-case cells was discontinued in January 2009.

Net revenues by geographic area:

| |                          |   | 2007        |  |  |        |  |   | 2008        |  |  |        |  |   | 2009        |  |  |        | 
| | ------------------------ | - | ----------- |  |  | ------ |  | - | ----------- |  |  | ------ |  | - | ----------- |  |  | ------ | 
| |                          |   |             |  |  | %      |  |   |             |  |  | %      |  |   |             |  |  | %      | 
| |                          |   |             |  |  |        |  |   |             |  |  |        |  |   |             |  |  |        | 
| | PRC Mainland             | $ | 105,567,176 |  |  | 72.38  |  | $ | 175,302,425 |  |  | 71.45  |  | $ | 132,709,688 |  |  | 62.85  | 
| | PRC Taiwan               |   | 7,025,209   |  |  | 4.82   |  |   | 41,904,752  |  |  | 17.08  |  |   | 47,663,572  |  |  | 22.57  | 
| | India                    |   | 4,299,314   |  |  | 2.95   |  |   | 5,660,586   |  |  | 2.31   |  |   | 10,525,872  |  |  | 4.99   | 
| | United States of America |   | 20,740,356  |  |  | 14.22  |  |   | 75,030      |  |  | 0.03   |  |   | 1,412,803   |  |  | 0.67   | 
| | Hong Kong, China         |   | 6,417,931   |  |  | 4.40   |  |   | 19,955,673  |  |  | 8.13   |  |   | 16,086,222  |  |  | 7.62   | 
| | Others                   |   | 1,810,913   |  |  | 1.23   |  |   | 2,449,103   |  |  | 1.00   |  |   | 2,745,814   |  |  | 1.30   | 
| |                          |   |             |  |  |        |  |   |             |  |  |        |  |   |             |  |  |        | 
| |                          | $ | 145,860,899 |  |  | 100.00 |  | $ | 245,347,569 |  |  | 100.00 |  | $ | 211,143,971 |  |  | 100.00 | 

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

F-43

---

China BAK Battery, Inc. and subsidiaries Notes to the
consolidated financial statements As of September 30, 2007, 2008 and 2009
(continued)

25

China BAK Battery, Inc. (Parent Company)

Under PRC regulations, Shenzhen BAK,
BAK Electronics and BAK Tianjin may pay dividends only out of their accumulated
profits, if any, determined in accordance with PRC GAAP. In addition, Shenzhen
BAK, BAK Electronics and BAK Tianjin are required to set aside at least 10% of
their after-tax net profits each year, if any, to fund the statutory general
reserve until the balance of the reserves reaches 50% of their registered
capital. The statutory general reserves are not distributable in the form of
cash dividends to the Company and can be used to make up cumulative prior year
losses, if any, and may be converted into share capital by the issue of new
shares to shareholders in proportion to their existing shareholdings, or by
increasing the par value of the shares currently held by them, provided that the
reserve balance after such issue is not less than 25% of the registered capital.
As of September 30, 2009, additional transfers of US$82,207,805 were required
before the statutory general reserve reached 50% of the registered capital of
Shenzhen BAK, BAK Electronics and BAK Tianjin. As of September 30, 2009,
US$7,227,195 has been appropriated from retained earnings and set aside for
statutory general reserves by Shenzhen BAK and BAK Electronics. BAK Tianjin did
not have after-tax net profits since its incorporation and therefore no
appropriation was made to fund its statutory general reserve as of September 30,
2009.

As of September 30, 2009, the amount of
restricted net assets of Shenzhen BAK, BAK Electronics and BAK Tianjin, which
may not be transferred to the Company in the forms of loans, advances or cash
dividends by the subsidiaries without the consent of a third party, was
approximately 5% of the Companys consolidated net assets as discussed above. In
addition, the current foreign exchange control policies applicable in the PRC
also restrict the transfer of assets on dividends outside the PRC.

The following presents unconsolidated
financial information of the parent company only:

Condensed Balance Sheets as of
September 30, 2008 and 2009

| |                                                  |   | 2008        |  |   | 2009        | 
| | ------------------------------------------------ | - | ----------- |  | - | ----------- | 
| | Cash and cash equivalents                        | $ | 34          |  | $ | 34          | 
| | Other receivables                                |   | 86,709      |  |   | 114,034     | 
| | Investments in subsidiaries                      |   | 173,854,017 |  |   | 164,326,246 | 
| |                                                  |   |             |  |   |             | 
| | Total assets                                     | $ | 173,940,760 |  | $ | 164,440,314 | 
| |                                                  |   |             |  |   |             | 
| | Other current liabilities                        | $ | 6,868,760   |  | $ | 7,839,444   | 
| |                                                  |   |             |  |   |             | 
| | Total liabilities                                | $ | 6,868,760   |  | $ | 7,839,444   | 
| |                                                  |   |             |  |   |             | 
| | Total shareholders equity                       | $ | 167,072,000 |  | $ | 156,600,870 | 
| |                                                  |   |             |  |   |             | 
| | Total
      liabilities and shareholders equity | $ | 173,940,760 |  | $ | 164,440,314 | 

F-44

---

China BAK Battery, Inc. and subsidiaries Notes to the
consolidated financial statements As of September 30, 2007, 2008 and 2009
(continued)

25

China BAK Battery, Inc. (Parent Company) (continued)

Condensed Statements of Operations
for the years ended September 30, 2007, 2008 and 2009

| |                                     |   | 2007       |   |   | 2008       |   |   | 2009        |  
| | ----------------------------------- | - | ---------- | - | - | ---------- | - | - | ----------- | -
| | General and administrative expenses | $ | (1,970,123 | ) | $ | (2,664,359 | ) | $ | (1,043,339  | )
| | Investment income / (loss)          |   | 2,453,451  |   |   | (5,276,241 | ) |   | (12,948,154 | )
| |                                     |   |            |   |   |            |   |   |             |  
| | Income / (loss) before income taxes |   | 483,328    |   |   | (7,940,600 | ) |   | (13,991,493 | )
| | Income taxes                        |   | -          |   |   | -          |   |   | -           |  
| |                                     |   |            |   |   |            |   |   |             |  
| | Net income / (loss)                 | $ | 483,328    |   | $ | (7,940,600 | ) | $ | (13,991,493 | )

Condensed Statements of Cash Flows
for the years ended September 30, 2007, 2008 and 2009

| |                                                                                             |   | 2007       |   |   | 2008        |   |   | 2009        |  
| | ------------------------------------------------------------------------------------------- | - | ---------- | - | - | ----------- | - | - | ----------- | -
| | Cash flow from operating
      activities                                                   |   |            |   |   |             |   |   |             |  
| |                                                                                             |   |            |   |   |             |   |   |             |  
| | Net income / (loss)                                                                         | $ | 483,328    |   | $ | (7,940,600  | ) | $ | (13,991,493 | )
| | Adjustment to reconcile net income / (loss) to net cash
      used in operating activities: |   |            |   |   |             |   |   |             |  
| | Share-based compensation                                                                    |   | 79,747     |   |   | 47,086      |   |   | 72,656      |  
| | Investment
      (income) / loss                                                            |   | (2,453,451 | ) |   | 5,276,241   |   |   | 12,948,154  |  
| | Changes in operating assets and
      liabilities:                                          |   |            |   |   |             |   |   |             |  
| | Other receivables                                                                           |   | -          |   |   | (86,709     | ) |   | (27,325     | )
| | Other liabilities                                                                           |   | 1,889,601  |   |   | 1,991,572   |   |   | 970,682     |  
| |                                                                                             |   |            |   |   |             |   |   |             |  
| | Net cash used in operating
      activities                                                 |   | (775       | ) |   | (712,410    | ) |   | (27,326     | )
| |                                                                                             |   |            |   |   |             |   |   |             |  
| | Cash flow from investing
      activities                                                   |   |            |   |   |             |   |   |             |  
| | Advances to subsidiaries                                                                    |   | -          |   |   | (28,545,878 | ) |   | (123,003    | )
| |                                                                                             |   |            |   |   |             |   |   |             |  
| | Net cash used in investing activities                                                       |   | -          |   |   | (28,545,878 | ) |   | (123,003    | )
| |                                                                                             |   |            |   |   |             |   |   |             |  
| | Cash flow from financing activities                                                         |   |            |   |   |             |   |   |             |  
| | Proceeds from issuance of capital
      stock, net                                          |   | -          |   |   | 29,239,208  |   |   | 150,329     |  
| |                                                                                             |   |            |   |   |             |   |   |             |  
| | Net cash provided by financing
      activities                                             |   | -          |   |   | 29,239,208  |   |   | 150,329     |  
| |                                                                                             |   |            |   |   |             |   |   |             |  
| | Net decrease in cash and cash
      equivalents                                             |   | (775       | ) |   | (19,080     | ) |   | -           |  
| |                                                                                             |   |            |   |   |             |   |   |             |  
| | Cash and cash equivalents at the
      beginning of year                                    |   | 19,889     |   |   | 19,114      |   |   | 34          |  
| |                                                                                             |   |            |   |   |             |   |   |             |  
| | Cash and cash equivalents at the
      end of year                                          | $ | 19,114     |   | $ | 34          |   | $ | 34          |  

The details of the Companys investment
in subsidiaries and the net proceeds from issuance of its capital stock are
fully described in the consolidated statements of shareholders equity, Note 1
and Note 16 to the consolidated financial statements.

F-45

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China BAK Battery, Inc. and subsidiaries Notes to the
consolidated financial statements As of September 30, 2007, 2008 and 2009
(continued)

26

Subsequent
Events



On October 28, 2009, the Company
completed a registered direct offering of 5,790,000 units, each unit consisting
of a share of common stock and a warrant to purchase 0.25 of a share of common
stock. The price of the securities sold was $3.55 per unit, for an aggregate
purchase price of US$20,554,500. Pursuant to subscription agreements between the
Company and the investors in this offering, the warrants may be exercised to
purchase an aggregate of 1,447,500 shares of the Company's common stock at an
exercise price of $3.90 per share. The warrants are exercisable for 24 months
beginning on the date of the initial issuance of the warrants. Cowen and
Company, LLC, a subsidiary of Cowen Group, Inc., acted as the Company's
exclusive investment agent in connection with the registered direct offering and
received a cash fee of US$1,027,725, representing 5% of the gross proceeds
received from the sale of the Shares and warrants. Pursuant to an amendment to
the placement agency agreement, the Company also agreed to pay Cowen and
Company, LLC, an aggregate commission equal to 5% of the gross exercise price of
received from investors for the exercise of the warrants in the offering. The
placement agent had no obligation to buy any of the shares from the Company. As
of October 28, 2009, 5,790,000 shares had been issued and no warrants had been
exercised.

On November 16, 2009, BAK International
contributed approximately US$9,000,000 capital to BAK Tianjin and the Capital
Injection Verification Report of BAK Tianjin has been obtained.

Apart from the aforementioned, the
Company has evaluated all other subsequent events through December 14, 2009, the
date these consolidated financial statements were issued, and determined that
there were no other subsequent events or transactions that require recognition
or disclosures in the financial statements.

F-46

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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, in
Shenzhen, Peoples Republic of China, on December 14, 2009.

| | CHINA BAK BATTERY, INC.              
| | -------------------------------------
| |                                      
| | By: /s/
      Xiangqian Li           
| | Xiangqian Li                         
| | Director, Chairman of the Board,     
| | President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities indicated on December 14, 2009.

Each person whose signature appears below hereby authorizes
Xiangqian Li and Tony Shen, or any of them, as attorneys-in-fact to sign on his
or her behalf, individually, and in each capacity stated below, and to file all
amendments and/or supplements to this Annual Report on Form 10-K.

|Signature                  |  | Title                                                                       
|-------------------------- |  | ----------------------------------------------------------------------------
|                           |  |                                                                             
|/s/ Xiangqian Li           |  |                                                                             
|Name: Xiangqian Li         |  | Director, Chairman of the Board,
      President and Chief Executive Officer
|                           |  | (Principal Executive
      Officer)                                         
|                           |  |                                                                             
|/s/ Tony Shen              |  |                                                                             
|Name: Tony Shen            |  | Chief Financial Officer, Secretary and
      Treasurer (Principal Financial 
|                           |  | Officer and Principal Accounting
      Officer)                             
|                           |  |                                                                             
|/s/ Huanyu Mao             |  |                                                                             
|Name: Huanyu Mao           |  | Director, Chief Technical Officer                                           
|                           |  |                                                                             
|/s/ Charlene Spoede Budd   |  |                                                                             
|Name: Charlene Spoede Budd |  | Director                                                                    
|                           |  |                                                                             
|/s/ Chunzhi Zhang          |  |                                                                             
|Name: Chunzhi Zhang        |  | Director                                                                    
|                           |  |                                                                             
|/s/ Richard B. Goodner     |  |                                                                             
|Name: Richard B. Goodner   |  | Director                                                                    



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