CBAK Energy Technology, Inc. - Quarter Report: 2007 June (Form 10-Q)

Unassociated Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

	For the quarterly period ended June 30, 2007
	OR
o	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

	For the transition period from _________ to _________

Commission File Number: 001-32898

China BAK Battery, Inc.

(Exact name of registrant as specified in its charter)

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

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

(86 755) 897-70093

(Registrant’s telephone number, including area code)

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

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 49,247,103 shares of common stock, par value $0.001 per share, outstanding on August 2, 2007.

TABLE OF CONTENTS

Introductory Comments

PART I —	FINANCIAL INFORMATION

	Item 1. Financial Statements	4

	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	29

	Item 3. Quantitative and Qualitative Disclosures About Market Risk	45

	Item 4. Controls and Procedures	46

PART II —	OTHER INFORMATION

	Item 1. Legal Proceedings	48

	Item 1A. Risk Factors	49

	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	50

	Item 3. Defaults Upon Senior Securities	50

	Item 4. Submission of Matters to a Vote of Security Holders	50

	Item 5. Other Information	50

	Item 6. Exhibits	51

Introductory Comment — Terminology

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

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

—

our limited operating history in developing, manufacturing and selling of lithium-based rechargeable battery cells;

—

our ability to keep up with rapidly changing technologies and evolving industry standards;

—

our dependence on the growth in demand for the portable electronic devices that are powered by our products;

—

our ability to diversify our product offering and capture new market opportunities;

—

our ability to manage the expansion of our business operations effectively;

—

our ability to fund our operations and manage our substantial short-term indebtedness;

—

uncertainties with respect to the PRC legal and regulatory environment;

—

our ability to maintain cost leadership;

—

our ability to acquire land use rights to our facilities; and

—

other risks identified in this Report.

Additional disclosures regarding factors that could cause our results and performance to differ from results or performance anticipated by this Report are discussed in other reports that we filed with the SEC, including without limitation our Annual Report on Form 10-K for the fiscal year ended September 30, 2006. Readers are urged to carefully review and consider the various disclosures made by us in this Report and our other filings with the SEC. These reports attempt to advise interested parties of the risks and factors that may affect our business, financial condition and results of operations and prospects. The forward-looking statements made in this Report speak only as of the date hereof and we disclaim any obligation to provide updates, revisions or amendments to any forward-looking statements to reflect changes in our expectations or future events.

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

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

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

China BAK Battery, Inc. and subsidiaries

Condensed interim consolidated balance sheets

As of September 30, 2006 and June 30, 2007

(In U.S. dollars)

	Note		September 30, 2006		June 30, 2007
					(Unaudited)
Assets
Current assets
Cash and cash equivalents			$	21,099,555	$	8,944,922
Pledged deposits		2		12,971,989		3,528,577
Trade accounts receivable, net		3		64,332,171		52,367,191
Inventories		4		47,388,936		62,491,161
Prepayments and other receivables				1,134,770		1,843,760
Total current assets				146,927,421		129,175,611

Property, plant and equipment, net		5		109,406,116		138,264,887
Lease prepayments, net				3,161,477		17,725,435
Intangible assets, net				74,682		94,723
Deferred tax assets				85,598		78,310
Total assets			$	259,655,294	$	285,338,966

See accompanying notes to the condensed interim consolidated financial statements.

China BAK Battery, Inc. and subsidiaries

Condensed interim consolidated balance sheets

As of September 30, 2006 and June 30, 2007 (continued)

(In U.S. dollars)

			September 30,		June 30,
	Note		2006		2007
					(Unaudited)
Liabilities
Current liabilities
Short-term bank loans		6	$	67,899,908	$	67,625,238
Accounts and bills payable				48,316,250		48,517,020
Accrued expenses and other payables				25,880,985		17,766,876
Share-based payment liabilities				3,625,165		-
Total current liabilities				145,722,308		133,909,134

Long-term bank loans		7		—		26,262,228
Deferred tax liabilities				304,957		320,848
Total liabilities				146,027,265		160,492,210
Commitments and contingencies		10

Shareholders’ equity
Ordinary shares US$ 0.001 par value; 100,000,000 authorized; 48,885,896 and 48,893,396 issued and outstanding as of September 30, 2006 and June 30, 2007 respectively				48,886		48,893
Additional paid-in-capital				68,126,689		73,376,215
Statutory reserves				5,791,718		6,394,058
Retained earnings				36,212,357		36,942,773
Accumulated other comprehensive income				3,448,379		8,084,817
Total shareholders’ equity				113,628,029		124,846,756
Total liabilities and shareholders’ equity			$	259,655,294	$	285,338,966

See accompanying notes to the condensed interim consolidated financial statements.

China BAK Battery, Inc. and subsidiaries

Condensed interim consolidated statements of income

and comprehensive income

For the three months ended June 30, 2006 and 2007

(Unaudited)

(In U.S. dollars)

	Three months ended June 30,
	2006			2007
Net revenues	$	33,397,236		$	29,477,296
Cost of revenues		(24,898,674	)		(24,414,599	)
Gross profit		8,498,562			5,062,697
Operating expenses:
Research and development costs		(477,429	)		(1,118,458	)
Sales and marketing expenses		(1,040,694	)		(1,164,936	)
General and administrative expenses		(1,962,106	)		(4,188,751	)
Total operating expenses		(3,480,229	)		(6,472,145	)
Operating income / (loss)		5,018,333			(1,409,448	)
Finance costs, net		(297,226	)		(1,069,902	)
Other expenses		(966	)		(90,479	)
Income / (loss) before income taxes		4,720,141			(2,569,829	)
Income taxes		(42,938	)		(119,894	)
Net income / (loss)	$	4,677,203		$	(2,689,723	)
Other comprehensive income
- Foreign currency translation adjustment		363,270			1,941,966
Comprehensive income / (loss)	$	5,040,473		$	(747,757	)
Net income / (loss) per share:
-Basic	$	0.10		$	(0.05	)
-Diluted	$	0.09		$	(0.05	)
Weighted average number of ordinary shares:
-Basic		48,878,396			48,893,396
-Diluted		49,275,493			48,893,396

See accompanying notes to the condensed interim consolidated financial statements.

China BAK Battery, Inc. and subsidiaries

Condensed interim consolidated statements of income

and comprehensive income

For the nine months ended June 30, 2006 and 2007

(Unaudited)

(In U.S. dollars)

			Nine months ended June 30,
	Note		2006			2007
Net revenues		12	$	97,720,714		$	102,088,295
Cost of revenues				(69,903,949	)		(82,682,721	)
Gross profit				27,816,765			19,405,574
Operating expenses:
Research and development costs				(1,436,314	)		(2,683,815	)
Sales and marketing expenses				(3,541,845	)		(3,271,849	)
General and administrative expenses				(6,151,115	)		(9,301,400	)
Total operating expenses				(11,129,274	)		(15,257,064	)
Operating income				16,687,491			4,148,510
Finance costs, net				(993,037	)		(3,134,562	)
Gain on trading securities				279,260			-
Other (expenses) / income				(38,865	)		601,460
Income before income taxes				15,934,849			1,615,408
Income taxes				(511,612	)		(282,652	)
Net income			$	15,423,237		$	1,332,756
Other comprehensive income
- Foreign currency translation adjustment				1,250,400			4,636,438
Comprehensive income			$	16,673,637		$	5,969,194
Net income per share:
-Basic		9	$	0.32		$	0.03
-Diluted		9	$	0.31		$	0.03
Weighted average number of ordinary shares:
-Basic		9		48,878,396			48,889,564
-Diluted		9		49,167,445			49,282,763

See accompanying notes to the condensed interim consolidated financial statements.

China BAK Battery, Inc. and subsidiaries

Condensed interim consolidated statements of shareholders’ equity

For the nine months ended June 30, 2006 and 2007

(Unaudited)

(In U.S. dollars)

													Accumulated		Total
	Ordinary shares				Additional								other		share-
	Number of				paid			Statutory		Retained			comprehensive		holders’
	shares		amount		-in-capital			reserves		earnings			income		equity
Balance as of October 1, 2005		48,878,396		48,878		67,415,501			3,034,141		18,805,368			1,005,255		90,309,143
Net income		—		—		—			—		15,423,237			—		15,423,237
Share-based compensation for employee stock awards		—		—		2,012,245			—		—			—		2,012,245
Appropriation to statutory reserves		—		—		—			1,791,435		(1,791,435	)		—		—
Foreign currency translation adjustment		—		—		—			—		—			1,250,400		1,250,400
Balance as of June 30, 2006		48,878,396	$	48,878	$	69,427,746		$	4,825,576	$	32,437,170		$	2,255,655	$	108,995,025
Balance as of October 1, 2006		48,885,896	$	48,886	$	68,126,689		$	5,791,718	$	36,212,357		$	3,448,379	$	113,628,029
Net income		—		—		—			—		1,332,756			—		1,332,756
Issuance of 914,994 shares of restricted stock and reclassification of liability-classified awards		—		—		3,679,934			—		—			—		3,679,934
Share-based compensation for employee stock options awards		—		—		485,553			—		—			—		485,553
Share-based compensation for common stock granted to employees and non-employee directors		—		—		1,084,046			—		—			—		1,084,046
Issuance of common stock to non-employee directors		7,500		7		(7	)		—		—			—		—
Appropriation to statutory reserves		—		—		—			602,340		(602,340	)		—		—
Foreign currency translation adjustment		—		—		—			—		—			4,636,438		4,636,438
Balance as of June 30, 2007		48,893,396	$	48,893	$	73,376,215		$	6,394,058	$	36,942,773		$	8,084,817	$	124,846,756

See accompanying notes to the condensed interim consolidated financial statements.

China BAK Battery, Inc. and subsidiaries

Condensed interim consolidated statements of cash flows

For the three months ended June 30, 2006 and 2007

(Unaudited)

(In U.S. dollars)

	Three months ended June 30,
	2006			2007
Cash flow from operating activities
Net income / (loss)	$	4,677,203		$	(2,689,723	)
Adjustments to reconcile net income/ (loss) to net cash (used in) / provided by operating activities:
Depreciation and amortization		1,621,328			2,336,980
Bad debt expense		53,796			1,731,276
Share-based compensation		595,984			756,085
Deferred income taxes		(15,976	)		24,981
Changes in operating assets and liabilities:
Trade accounts receivable		643,443			3,287,479
Inventories		(6,693,208	)		(7,024,960	)
Prepayments and other receivables		1,228,460			(338,478	)
Accounts and bills payable		(2,047,753	)		4,728,869
Accrued expenses and other payables		(424,437	)		(491,754	)
Net cash (used in) / provided by operating activities		(361,160	)		2,320,754
Cash flow from investing activities

Purchases of property, plant and equipment		(17,702,246	)		(15,714,291	)
Payment of lease prepayment		—			(707,482	)
Purchases of intangible assets		(18,343	)		(29,026	)
Net cash used in investing activities	$	(17,720,589	)	$	(16,450,799	)

See accompanying notes to the condensed interim consolidated financial statements.

China BAK Battery, Inc. and subsidiaries

Condensed interim consolidated statements of cash flows

For the three months ended June, 2006 and 2007 (continued)

(Unaudited)

(In U.S. dollars)

	Three months ended June 30,
	2006			2007
Cash flow from financing activities

Proceeds from borrowings	$	30,194,912		$	36,210,422
Repayment of borrowings		(20,515,234	)		(33,656,822	)
Decrease in pledged deposits		6,288,046			5,596,713
Net cash provided by financing activities		15,967,724			8,150,313
Effect of exchange rate changes on cash and cash equivalents		523,367			85,070
Net decrease in cash and cash equivalents		(1,590,658	)		(5,894,662	)
Cash and cash equivalents at the beginning of period		7,922,814			14,839,584
Cash and cash equivalents at the end of period	$	6,332,156		$	8,944,922
Supplemental disclosure of cash flow information:
Cash received during the period for:
Bills receivable discounted to bank	$	607,608		$	3,416,680
Cash paid during the period for:
Income taxes	$	476,831		$	290,102
Interest, net of amounts capitalized	$	641,831		$	936,599

See accompanying notes to the condensed interim consolidated financial statements.

China BAK Battery, Inc. and subsidiaries

Condensed interim consolidated statements of cash flows

For the nine months ended June 30, 2006 and 2007

(Unaudited)

(In U.S. dollars)

	Nine months ended June 30,
	2006			2007
Cash flow from operating activities
Net income	$	15,423,237		$	1,332,756
Adjustments to reconcile net income to net cash (used in) / provided by operating activities:
Depreciation and amortization		4,296,487			6,594,196
Bad debt expense		731,447			1,365,795
Share-based compensation		2,012,245			1,624,368
Deferred income taxes		(6,615	)		14,442

Changes in operating assets and liabilities:
Trade accounts receivable		(13,775,711	)		12,894,883
Inventories		(30,913,329	)		(13,015,222	)
Prepayments and other receivables		483,310			(192,971	)
Accounts and bills payable		12,171,109			(2,073,291	)
Accrued expenses and other payables		1,225,619			(874,693	)
Net cash (used in) / provided by operating activities		(8,352,201	)		7,670,262

Cash flow from investing activities

Purchases of property, plant and equipment		(32,664,516	)		(38,600,700	)
Payment of lease prepayment		—			(14,371,819	)
Purchases of intangible assets		(20,664	)		(33,785	)
Net cash used in investing activities	$	(32,685,180	)	$	(53,006,304	)

See accompanying notes to the condensed interim consolidated financial statements.

China BAK Battery, Inc. and subsidiaries

Condensed interim consolidated statements of cash flows

For the nine months ended June 30, 2006 and 2007 (continued)

(Unaudited)

(In U.S. dollars)

	Nine months ended June 30,
	2006			2007
Cash flow from financing activities

Proceeds from borrowings	$	60,379,121		$	101,960,584
Repayment of borrowings		(47,334,249	)		(79,049,307	)
Decrease in pledged deposits		435,337			9,746,262
Amounts received from related parties		271,873			—
Net cash provided by financing activities		13,752,082			32,657,539
Effect of exchange rate changes on cash and cash equivalents		561,671			523,870
Net decrease in cash and cash equivalents		(26,723,628	)		(12,154,633	)
Cash and cash equivalents at the beginning of period		33,055,784			21,099,555
Cash and cash equivalents at the end of period	$	6,332,156		$	8,944,922
Supplemental disclosure of cash flow information:

Cash received during the period for:
Bills receivable discounted to bank	$	13,972,340		$	5,982,945
Proceeds from disposal of trading securities	$	3,981,274		$	—
Cash paid during the period for:
Income taxes	$	196,487		$	290,102
Interest, net of amounts capitalized	$	1,333,725		$	3,136,549
Purchases of trading securities	$	3,702,014		$	—

See accompanying notes to the condensed interim consolidated financial statements.

China BAK Battery, Inc. and subsidiaries

Notes to the condensed interim consolidated financial statements

For the nine months ended June 30, 2006 and 2007

(Unaudited)

1. Principal Activities, Basis of Presentation and Organization

Principal Activities

China BAK Battery, Inc. (“China BAK”) was incorporated in the State of Nevada on October 4, 1999 as a limited liability company, as Medina Copy, Inc. The Company changed its name to Medina Coffee, Inc. (“Medina Coffee”) on October 6, 1999 and subsequently changed its name to China BAK Battery, Inc. on February 14, 2005. The Company and its subsidiaries (hereinafter, collectively referred to as the “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 have been traded in the over-the-counter market through the Over-the-Counter Electronic Bulletin Board since 2005. On May 31, 2006, the Company obtained approval to list its common stock on the National Association of Securities Dealers Automated Quotations stock market, and trading commenced that same date under the symbol "CBAK".

Basis of Presentation and Organization

As of June 30, 2007, the Company’s subsidiaries consist of: i) BAK International Limited (“BAK International”), a wholly owned limited liability company incorporated in Hong Kong on December 29, 2003 as BATCO International Limited, which changed its name to BAK International Limited on November 3, 2004; ii) Shenzhen BAK Battery Co., Ltd. (“Shenzhen BAK”), a wholly owned limited liability company established on August 3, 2001 in the People’s Republic of China (“PRC”); iii) BAK Electronics (Shenzhen) Co., Ltd. (“BAK Electronics”), a wholly owned limited liability company established on August 15, 2005 in the PRC; iv) BAK International (Tianjin) Ltd. (“BAK Tianjin”), a wholly owned limited liability company established on December 12, 2006 in the PRC; and v) BAK Battery Canada Ltd. (“BAK Canada”), a wholly owned limited liability company established on December 20, 2006 in Canada as BAK Canada Battery Ltd., which changed its name to BAK Battery Canada Ltd. on December 22, 2006, which is principally engaged in research and development.

BAK Tianjin was established in Tianjin Technology Industrial District on December 12, 2006 as a wholly owned subsidiary of BAK International with registered capital of $99,990,000. Pursuant to BAK Tianjin’s articles of association and relevant PRC regulations, BAK International is required to contribute $20,000,000 to BAK Tianjin as capital (representing 20% of BAK Tianjin’s registered capital) before March 11, 2007. The remaining $79,990,000 shall be fully contributed no later than December 11, 2008. BAK Tianjin will be principally engaged in the manufacture of advanced lithium ion batteries for use in light electric vehicles and uninterruptible power supply. As of June 30, 2007, BAK International had not contributed the $20,000,000 capital to BAK Tianjin yet and is in the course of negotiating with the relevant government bureau for an extension of the applicable contribution period.

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

China BAK Battery, Inc. and subsidiaries

Notes to the condensed interim consolidated financial statements

For the nine months ended June 30, 2006 and 2007

(Unaudited)

On January 20, 2005, BAK International executed a private placement of its common stock with unrelated investors whereby it issued an aggregate of 8,600,433 shares of common stock for gross proceeds of US$17,000,000. In conjunction with this financing, Mr. 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, of which 50% are 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 is not at least US$12,000,000, and the remaining 50% are to be released to investors in the private placement if audited net income of the Company for the fiscal year ended September 30, 2006 is 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 (the “Escrow Arrangement”).

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

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

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

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

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

China BAK Battery, Inc. and subsidiaries

Notes to the condensed interim consolidated financial statements

For the nine months ended June 30, 2006 and 2007

(Unaudited)

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

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

Recently Issued Accounting Standards

FIN 48, Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement No. 109

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

SFAS 157, Fair Value Measurements

In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements,” or SFAS 157, which defines fair value, establishes a framework for measuring fair value in U.S. GAAP, and expands disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements, where fair value is the relevant measurement attribute. The standard does not require any new fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently evaluating the impact of adopting SFAS 157 on its consolidated financial statements.

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

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

China BAK Battery, Inc. and subsidiaries

Notes to the condensed interim consolidated financial statements

For the nine months ended June 30, 2006 and 2007

(Unaudited)

SAB 108

In September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) No. 108, or SAB 108, which provides guidance on the process of quantifying financial statement misstatements. In SAB 108, the SEC staff establishes an approach that requires quantification of financial statement errors, under both the iron-curtain and the roll-over methods, based on the effects of the error on each of our financial statements and the related financial statement disclosures. SAB 108 is generally effective for annual financial statements in the first fiscal year ending after November 15, 2006. The transition provisions of SAB 108 permits existing public companies to record the cumulative effect in the first year ending after November 15, 2006 by recording correcting adjustments to the carrying values of assets and liabilities as of the beginning of that year with the offsetting adjustment recorded to the opening balance of retained earnings. We do not expect that the adoption of SAB 108 would have a material effect on our consolidated financial statements.

2 Pledged Deposits

Pledged deposits as of September 30, 2006 and June 30, 2007 consist of the following:

		September 30, 2006			June 30, 2007
Pledged deposits with banks for bills payable		$	12,971,989		$	3,528,577

3 Trade Accounts Receivable, net

Trade accounts receivable as of September 30, 2006 and June 30, 2007 consist of the following:

	September 30, 2006			June 30, 2007
Trade accounts receivable	$	56,197,229		$	49,363,710
Less: Allowance for doubtful accounts		(1,063,285	)		(2,527,369	)
		55,133,944			46,836,341
Bills receivable		9,198,227			5,530,850
	$	64,332,171		$	52,367,191

China BAK Battery, Inc. and subsidiaries

Notes to the condensed interim consolidated financial statements

For the nine months ended June 30, 2006 and 2007

(Unaudited)

An analysis of the allowance for doubtful accounts for the nine months ended June 30, 2006 and 2007 is as follows:

	Nine months ended June 30,
	2006		2007
Balance at beginning of period	$	1,593,538	$	1,063,285
Addition of bad debt expense, net		640,738		1,395,011
Foreign exchange adjustment		18,925		69,073
Balance at end of period	$	2,253,201	$	2,527,369

4 Inventories

Inventories as of September 30, 2006 and June 30, 2007 consist of the following:

	September 30, 2006		June 30, 2007
Raw materials	$	20,693,915	$	16,080,253
Work-in-progress		5,686,328		8,816,764
Finished goods		21,008,693		37,594,144
	$	47,388,936	$	62,491,161

Part of the Company’s inventories with carrying value of US$10,115,442 and US$19,696,671 as of September 30, 2006 and June 30, 2007, respectively, was pledged as collateral under certain loan agreements (see Note 6).

5 Property, Plant and Equipment, net

Property, plant and equipment as of September 30, 2006 and June 30, 2007 consist of the following:

	September 30, 2006			June 30, 2007
Buildings	$	63,508,910		$	69,399,581
Machinery and equipment		30,658,968			48,996,268
Office equipment		750,115			974,480
Motor vehicles		1,018,042			1,120,003
		95,936,035			120,490,332
Accumulated depreciation and amortization		(9,925,557	)		(16,829,862	)
Construction in progress		23,395,638			17,686,433
Prepayment for acquisition of property, plant and equipment		—			17,917,984
	$	109,406,116		$	138,942,369

China BAK Battery, Inc. and subsidiaries

Notes to the condensed interim consolidated financial statements

For the nine months ended June 30, 2006 and 2007

(Unaudited)

(i) Depreciation and amortization expense for the nine months ended June 30, 2006 and 2007 is included in the consolidated statements of income and comprehensive income as follows:

	*Nine months ended June 30,*
	2006		2007
Cost of revenues	$	3,162,862	$	4,660,914
Research and development costs		189,101		214,808
Sales and marketing expenses		379,691		442,281
General and administrative expenses		330,619		1,075,218
	$	4,062,273	$	6,393,221

(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 nine months ended June 30, 2006 and 2007, the Company capitalized interest of approximately $390,642 and $242,396, respectively, to the cost of construction in progress.

(iii) Pledged Property, Plant and Equipment

As of September 30, 2006 and June 30, 2007, machinery and equipment with net book value of $6,253,302 and $23,441,159 of the Company were pledged as collateral under certain loan arrangements (see Notes 6 and 7).

6 Short-term Bank Loans

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

	September 30, 2006		June 30, 2007
Inventories (Note 4)	$	10,115,442	$	19,696,671
Machinery and equipment, net (Note 5)		6,253,302		10,156,311
	$	16,368,744	$	29,852,982

As of September 30, 2006 and June 30, 2007, the Company had several short-term bank loans with aggregate outstanding balances of $67,899,908 and $67,625,238 respectively. The loans were primarily obtained for general working capital, carried interest rates ranging from 5.022% to 6.57% per annum, and had maturity dates ranging from 6 to 12 months. Each loan is guaranteed by Mr. Xiangqian Li, Chairman of the Company, who did not receive any compensation for acting as guarantor.

China BAK Battery, Inc. and subsidiaries

Notes to the condensed interim consolidated financial statements

For the nine months ended June 30, 2006 and 2007

(Unaudited)

The Company is subject to certain covenants, which require the Company to comply with certain financial ratios for its loan facilities, which are tested on a monthly basis. If the Company fails to meet the requirements, the outstanding bank loans, including interest and penalties due thereunder, will accelerate and become immediately due and payable. As of June 30, 2007, the Company is in compliance with all of these requirements.

7 Long-term Bank Loans

As of June 30, 2007, the Company had long-term bank loans of $26,262,228. The amount of $13,131,114 was borrowed under a four-year long-term loan credit facility from China Development Bank, bearing interest at the benchmark rate of the People’s Bank of China for three- to five-year long-term loans which is currently 6.48% per annum. The long-term bank loan is repayable in three instalments of $3,939,334 on November 20, 2008, $3,939,334 on November 20, 2009 and $5,252,446 on December 26, 2010. Another $13,131,114 was borrowed under a five-year long-term loan credit facility from Shenzhen Eastern Branch, Agricultural Bank of China, bearing interest at 90% of the benchmark rate of the People’s Bank of China for three- to five-year long-term loans, including a borrowed amount of $5,242,446 with a current interest rate of 5.832% and repayable on January 25, 2012 and another borrowed amount of $7,878,668 with a current interest rate of 6.237%, payable in three instalments of $6,565,557 on January 25, 2011, $5,252,446 on January 25, 2012 and $1,313,111 on February 27, 2012, respectively.

The long-term bank loan with China Development Bank is guaranteed by Mr. Xiangqian Li, Chairman of the Company, and is secured by the buildings and land use rights of the Company’s Research and Development Test Center which will be constructed in Shenzhen, PRC after obtaining the required land use rights for the location of the facility, and certain shares of the Company owned by Mr. Xiangqian Li.

The long-term bank loan with Agricultural Bank of China is guaranteed by Mr. Xiangqian Li, Chairman of the Company, and is secured by pledged machinery and equipment valued at $13,284,848 as of June 30, 2007 (see note 5).

Mr. Xiangqian Li did not receive any compensation for acting as guarantor for the above long-term bank loans.

8 Share-based Compensation

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

Employee Stock Option Plan

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

China BAK Battery, Inc. and subsidiaries

Notes to the condensed interim consolidated financial statements

For the nine months ended June 30, 2006 and 2007

(Unaudited)

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

Numbers of Share	Percentage of Options Issued	Initial 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.”

A summary of share option plan activity for the nine months ended June 30, 2007 is presented below:

	Number of shares		Weighted average exercise price per shares		Weighted average remaining contractual term
Outstanding as of October 1, 2006		400,000	$	6.25
Granted		—		—
Exercised		—		—
Forfeited		—		—
Cancelled		—		—
Outstanding as of June 30, 2007		400,000	$	6.25		4 years
Exercisable as of June 30, 2007		—		—		—

The weighted-average grant-date fair value of options granted during 2005 was $3.67 per share. The Company recorded non-cash share-based compensation expense of $437,098 for the nine months ended June 30, 2007 in respect of share options granted in 2005, which was allocated to general and administrative expenses and research and development costs, respectively.

The fair value of the above option awards was estimated on the date of grant using a Black-Scholes Option Valuation Model that uses the assumptions noted in the following table. The expected volatility was based on the historical volatilities of the Company’s listed common stock in the United States. The Company uses historical data to estimate employee termination within the valuation model. The expected life of options granted is the period between the option grant date and the expected exercise date which is the mid-point of the exercisable date and the expiry date, which represents the period of time that options granted are expected to be outstanding. Since the share options once exercised will primarily trade in the U.S. capital market, the risk-free rate for periods within the contractual term of the share option is based on the U.S. Treasury yield curve in effect at the time of grant.

China BAK Battery, Inc. and subsidiaries

Notes to the condensed interim consolidated financial statements

For the nine months ended June 30, 2006 and 2007

(Unaudited)


Expected volatility	59.85	%
Expected dividends	Nil
Expected life	6 years
Risk-free interest rate	4.13	%

As of June 30, 2007, there were unrecognized compensation costs of approximately $225,000 related to non-vested share options. These costs are expected to be recognized over the remaining vesting period.

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 the each employee’s agreement respectively.

A summary of share option plan activity for the nine months ended June 30, 2007 is presented below:

	Number of shares		Weighted average exercise price per share		Weighted average remaining contractual term
Outstanding as of October 1, 2006		—	$	—
Granted on June 25, 2007		1,501,000		3.28
Exercised		—		—
Forfeited		—		—
Cancelled		—		—
Outstanding as of June 30, 2007		1,501,000	$	3.28		5 years
Exercisable as of June 30, 2007		10,000	$	3.35		3 years

The weighted-average grant-date fair value of options granted during 2007 was $2.15 per share. The Company recorded non-cash share-based compensation expense of $48,455 for the nine months ended June 30, 2007 in respect of share options granted in 2007, which was allocated to cost of revenues, sales and marketing expenses, general and administrative expenses and research and development costs, respectively.

The fair value of the above option awards granted on June 25, 2007 was estimated on the date of grant using a Black-Scholes Option Valuation Model that uses the assumptions noted in the following table. The expected volatility was based on the historical volatilities of the Company’s listed common stock in the United States. The Company uses historical data to estimate employee termination within the valuation model. The expected life of options granted is the period between the option grant date and the expected exercise date which is the mid-point of the exercisable date and the expiry date, which represents the period of time that options granted are expected to be outstanding. Since the share options once exercised will primarily trade in the U.S. capital market, the risk-free rate for periods within the contractual term of the share option is based on the U.S. Treasury yield curve in effect at the time of grant.

China BAK Battery, Inc. and subsidiaries

Notes to the condensed interim consolidated financial statements

For the nine months ended June 30, 2006 and 2007

(Unaudited)


Expected volatility	69.44	%
Expected dividends	Nil
Expected life	4 - 10 years
Risk-free interest rate	5.09	%

As of June 30, 2007, there were unrecognized compensation costs of approximately $3,176,000 related to above non-vested share options. These costs are expected to be recognized over the remaining vesting period.

Employee Restricted Stock Award

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

Subsequent to September 28, 2006, certain employees who were entitled to the Replacement Awards terminated their employment with the Company. The related potential restricted stock grants of these employees were forfeited with the previously recognized compensation cost of $181,290 credited to sales and marketing expenses and general and administrative expenses.

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


Expected volatility	89.51	%
Expected dividends	Nil
Expected life	4.4 years
Risk-free interest rate	4.61	%

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

China BAK Battery, Inc. and subsidiaries

Notes to the condensed interim consolidated financial statements

For the nine months ended June 30, 2006 and 2007

(Unaudited)

Prior to vesting, the shares of restricted stock granted to each employee pursuant to the Replacement Awards are subject to restrictions on transferability and will be forfeited if the grantee’s employment with the Company is terminated. In accordance with the vesting provisions of the grants, the shares of restricted stock will become vested and shall no longer be subject to forfeiture under the following schedule:

Number of Shares	Percentage of Options Issued	Initial Vesting Date
365,998	40%	July 1, 2007
274,498	30%	January 1, 2008
274,498	30%	July 1, 2008
914,994	100%

Upon the grant of restricted stock, the Company has reclassified share-based payment liabilities of $3,679,934 to shareholders’ equity. The restricted stock grant is treated as equity-classified awards and the unrecognized compensation costs will be recognized over the vesting period. The Company recognized share-based compensation expense of $236,059 for the period from October 1, 2006 to December 26, 2006 in respect of the liability-classified award, and $31,186 for the period from December 26, 2006 to December 31, 2006 in respect of the equity-classified award.

The Company recognized shared-based compensation expense of $1,196,374 for the period from January 1, 2007 to June 30, 2007 in respect of the equity-classified award, which was allocated to cost of revenues, sales and marketing expenses, general and administrative expenses and research and development costs, respectively. The restricted stock grant of certain employees who resigned during the period from January 1, 2007 to June 30, 2007 were forfeited with the previously recognized compensation cost of $96,392 credited to cost of revenues.

A summary of the restricted stock grant activity for the nine months ended June 30, 2007 is presented below:

	Number of shares		Weighted average exercise price per share
Non-vested as of October 1, 2006		—	$	—
Granted on December 26, 2006		914,994		6.25
Vested		—		—
Forfeited		23,899		6.25
Non-vested as of June 30, 2007		891,095	$	6.25

As such stock-based compensation is not deductible for income tax purpose in the PRC, no income tax benefits were recognized in this respect for the nine months ended June 30, 2007.

As of June 30, 2007, there were unrecognized compensation costs of approximately $856,000 related to the restricted stock granted. These costs are expected to be recognized over the vesting period.

Compensation Plan for Non-employee Directors

On May 12, 2006, the Board of Directors adopted the China BAK Battery, Inc. Compensation Plan for Non-employee Directors (the “Plan 2006”). The Plan 2006 authorizes the issuance of 5,000 restricted shares of the Company’s common stock to each of the three eligible directors in addition to their annual retainer fee. Such restricted shares entitle the relevant non-employee directors to all rights of ordinary share ownership except that the shares may not be sold, transferred, pledged, exchanged or otherwise disposed of during the vesting period.

China BAK Battery, Inc. and subsidiaries

Notes to the condensed interim consolidated financial statements

For the nine months ended June 30, 2006 and 2007

(Unaudited)

On May 12, 2006, the Company granted 5,000 restricted shares to each of the three newly elected independent directors with a fair value of $11.5 per share pursuant to the Plan 2006. The eligible directors shall vest in their rights under the restricted shares according to the following schedule:

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

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

As of June 30, 2007, there was not any unrecognized stock-based compensation associated with these restricted shares granted to non-employee directors. Each 25% of the restricted shares were issued as fully paid ordinary shares to the three independent directors on July 19, 2006, August 16, 2006, January 8, 2007 and March 28, 2007, respectively.

On June 25, 2007, the Plan 2006 also authorized the issuance of 5,000 restricted shares of the Company’s common stock to each of the two new eligible directors in addition to their annual retainer fee. Such restricted shares entitle the relevant non-employee directors to all rights of ordinary share ownership except that the shares may not be sold, transferred, pledged, exchanged or otherwise disposed of during the vesting period.

On June 25, 2007, the Company granted 5,000 restricted shares to each of the two newly elected independent directors with a fair value of $3.35 per share pursuant to the Plan 2006. The eligible directors shall vest in their rights under the restricted shares according to the following schedule:

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

As of June 30, 2007, the Company had unrecognized stock-based compensation of approximately $24,328 associated with these restricted shares granted to non-employee directors. As of June 30, 2007, the first 25% of the restricted shares had not yet been issued to the two independent directors.

As the Company itself is an investment holding company which is not expected to generate operating profits to realize the tax benefits arising from its net operating loss carried forward, no income tax benefits were recognized for such stock-based compensation cost for non-employee directors for the nine months ended June 30, 2007.

9 Net Income per Share

The calculation of basic net income per share is based on the net income for the nine months ended June 30, 2007 attributable to equity shareholders of $1,332,756 (nine months ended June 30, 2006: $15,423,237) and the weighted average number of ordinary shares of 48,889,564 in issue during the nine months ended June 30, 2007 (nine months ended June 30, 2006: 48,878,396).

China BAK Battery, Inc. and subsidiaries

Notes to the condensed interim consolidated financial statements

For the nine months ended June 30, 2006 and 2007

(Unaudited)

The calculation of diluted net income per share is based on the net income for the nine months ended June 30, 2007 attributable to equity shareholders of $1,332,756 (nine months ended June 30, 2006: $15,423,237) and the weighted average number of ordinary shares of 49,282,763 in issue during the nine months ended June 30, 2007 (nine months ended June 30, 2006: 49,167,445) after adjusting for the number of 393,199 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 nine months ended June 30, 2007. Share warrants granted to external financial advisors and stock options granted to employees are excluded from the computation of diluted net income per share as the warrant and stock options were both anti-dilutive.

10 Commitments and Contingencies

(i) Capital Commitments

As of September 30, 2006 and June 30, 2007, the Company had the following capital commitments:

	September 30, 2006		June 30, 2007
For construction of buildings	$	557,883	$	—
For purchases of equipment		12,184,346		6,497,804
	$	12,742,229	$	6,497,804

(a) A new subsidiary, BAK Tianjin, was incorporated in Tianjin city, the PRC on December 12, 2006. BAK Tianjin plans to develop a production plant. As of June 30, 2007, the Company is in the process of evaluating the development plan and the budgeted development costs have yet to be determined.

(b) The Company plans to construct a new Research and Development Test Center in Shenzhen. As of June 30, 2007, the Company is in the process of evaluating the development plan and the budgeted development costs have yet to be determined.

(ii) Land Use Rights and Property Ownership Certificate

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

The Company has not yet obtained the land use right certificate relating to the premises occupied by the Company, BAK Industrial Park. However, the Company obtained approvals for project-planning and construction from the government of Shenzhen on June 20, 2007 and is in the process of applying to obtain the land use right certificate.

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

China BAK Battery, Inc. and subsidiaries

Notes to the condensed interim consolidated financial statements

For the nine months ended June 30, 2006 and 2007

(Unaudited)

The Company is not able to insure its manufacturing facilities since it has not yet received its land use right certificate. The Company intends to procure such insurance once it has received the certificate.

(iii)Guarantees

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

	September 30, 2006		June 30, 2007
Guaranteed for Shenzhen Tongli Hi-tech Co. Ltd. - a non-related party	$	2,528,861	$	1,969,667
Guaranteed for Shenzhen Kuichong Zhenda Industrial Co. Ltd. - a non-related party		1,264,430		-
	$	3,793,291	$	1,969,667

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 June 30, 2007.

(iv) Outstanding Discounted Bills

From time to time, the Company factors bills receivable to banks. At the time of the factoring, all rights and privileges of holding the receivables are transferred to the banks. The Company removes the asset from its books and records a corresponding expense for the amount of the discount. The Company remains contingently liable on the amount outstanding in the event the bill issuer defaults.

The Company's outstanding discounted bills as of September 30, 2006 and June 30, 2007 are summarized as follows:

	September 30, 2006		June 30, 2007
Bank acceptance bills	$	1,972,303	$	2,922,219
Commercial acceptance bills		5,013,466		—
	$	6,985,769	$	2,922,219

China BAK Battery, Inc. and subsidiaries

Notes to the condensed interim consolidated financial statements

For the nine months ended June 30, 2006 and 2007

(Unaudited)

(v) Litigation and claims

On September 12, 2006, Hydro-Quebec, a Canadian company, and the Board of Regents of the University of Texas System brought a federal patent infringement suit in the United States District Court for the Northern District of Texas against the Company. The Company has an agreement with A123Systems, Inc., under which the Company agrees to manufacture products for A123Systems, Inc. according to the specifications furnished by, and using the finished electrodes and other materials consigned by, A123Systems, Inc. to the Company. The plaintiffs alleged that by manufacturing rechargeable lithium cells for one of the Company’s customers, A123Systems, Inc., for use in DeWalt 36-volt cordless power tools manufactured by Black & Decker Corporation, the Company has infringed two U.S. patents owned by and exclusively licensed to the plaintiffs. The plaintiffs seek injunctive relief and damages in an unspecified amount. If the court issues an adverse decision, the Company may be required to pay the plaintiffs substantial monetary damages, terminate the Company’s existing production of rechargeable lithium cells manufactured for A123Systems, Inc., or pay royalties to continue such production. The court has not yet issued a decision on this matter and the Company is unable to quantify the extent of any possible award of damages that might become payable by the Company.

Furthermore, if A123Systems, Inc. is found liable for the infringement, it may not be able to continue its cooperation with the Company at all or on terms and conditions acceptable to the Company, which in turn would adversely affect the Company’s ability to execute its strategy to expand its production of cells for power tools and capture high-margin businesses. Accordingly, the Company’s revenues and business prospects would be materially adversely affected.

11 Significant Concentrations

(a) Customers and Credit Concentrations

The Company had one customer that individually comprised 10% or more of net revenue for the nine months ended June 30, 2006 and 2007, as follows:

	Nine months ended June 30,
	2006			2007
			%			%
A123Systems, Inc.	$	2,731,272	3	$	17,427,337	18

Approximately 1% and 2.1% of gross trade accounts receivable was due from A123Systems, Inc. at September 30, 2006 and June 30, 2007, respectively. A termination in relationship with or a reduction in orders from this customer could have a material impact on the Company’s results of operations and financial condition.

(b) Credit Risk

Financial instruments that potentially subject the Company to significant concentration of credit risk consist primarily of cash and cash equivalents and pledged deposits. As of September 30, 2006 and June 30, 2007, substantially all of the Company’s cash and cash equivalents and pledged deposits were held by major financial institutions located in the PRC, which management believes are of high credit quality.

China BAK Battery, Inc. and subsidiaries

Notes to the condensed interim consolidated financial statements

For the nine months ended June 30, 2006 and 2007

(Unaudited)

12 Segment Information

The Company currently engages in the manufacture, commercialization and distribution of a wide variety of standard and customized lithium ion rechargeable batteries for use in a wide array of applications. The Company manufactures six types of Li-ion rechargeable batteries: steel-case cell, aluminum-case cell, battery pack, cylindrical cell, polymer cell and 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 nine months ended June 30, 2006 and 2007 were as follows:

Net revenues by product:

	Nine months ended June 30,
	2006				2007
			%				%
Steel-case Cell	$	45,522,441		46.58	$	27,882,363		27.31
Aluminium-case cell		33,514,728		34.30		43,786,621		42.89
High-power lithium-phosphate cell		9,955,746		10.20		17,411,172		17.06
Battery pack		8,244,078		8.42		8,201,389		8.03
Cylindrical cell		96,943		0.10		2,257,865		2.21
Polymer cell		386,778		0.40		2,548,885		2.50
	$	97,720,714		100.00	$	102,088,295		100.00

Net revenues by geographic area:

	Nine months ended June 30,
	2006				2007
			%				%
PRC Mainland	$	69,279,802		70.90	$	71,246,211		69.79
United States of America		9,938,022		10.17		17,760,368		17.40
Hong Kong, China		9,250,688		9.47		4,516,920		4.42
The Republic of Turkey		5,089,720		5.21		4,333,223		4.24
Others		4,162,482		4.25		4,231,573		4.15
	$	97,720,714		100.00	$	102,088,295		100.00

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

The following discussion should be read in conjunction with the condensed interim consolidated financial statements and notes included in Item 1 of Part I of this Report. Except for the historical information contained herein, this Report contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those indicated by such forward-looking statements.

Overview

Overall, during the first three quarters of fiscal 2007, we have continued to see consistent sales performance of our polymer cells, as well as development of our laptop cylindrical business. We have also made progress in expanding our manufacturing capability into first tier OEM capabilities, and in working through the qualification processes of targeted first tier OEMs. However, we continue to face pressure due to increased costs of raw materials, particularly lithium cobalt dioxide, and higher overhead related to expanding our manufacturing capabilities. This has resulted in lower profit margins for the three and nine months ended June 30, 2007, as compared to the same periods in fiscal 2006.

In the near-term, we anticipate that we will continue to experience pressure due to pricing pressure and overhead costs, including the costs of raw materials as well as the costs of our anticipated capital improvements as we transition from predominantly a replacement market to global first tier OEM capabilities. In response to this challenge, while we believe that we remain among the low cost manufacturers in the industry, we are seeking to reduce the purchase costs of raw materials and other unit costs of production while pursuing opportunities to raise selling prices where it would benefit our financial results. In addition, we are seeking to identify alternative raw material suppliers to the extent there are viable alternatives and to expand our use of alternative raw materials. We have also restructured our operations in an effort to streamline corporate recourses and improve internal efficiency, with a particular focus on manufacturing and sales.

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

Our Business

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

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

	—	notebook computers;

	—	cordless power tools; and

	—	portable consumer electronics, such as digital media devices, portable media players, and personal digital assistants, or PDAs.

We conduct all of our operations in China, in close proximity to China’s electronics manufacturing base and its rapidly growing market.

Historically, we have primarily manufactured prismatic lithium-ion cells for the cellular phone replacement battery market and original equipment manufacturer, or OEM, market. Our products are packed into batteries by third-party battery pack manufacturers in accordance with the specifications of manufacturers of portable electronic applications.

At the request of our customers that order prismatic battery packs, we also engage pack battery manufacturers to assemble our prismatic cells into batteries for a fee and then sell battery packs to these customers both for the cellular phone battery replacement market and OEM markets.

Since 2005, we have expanded our product offerings by adding three product lines, which have become our new resources for future growth:

	—	High-power, lithium-phosphate cells for use in cordless power tools. We began commercial production of lithium-phosphate cells in October 2005 for use in cordless power tools of Black & Decker, a leading power tools manufacturer.

	—	Lithium polymer cells for use in ultra-portable electronic devices, such as high-end cellular phones, Bluetooth headsets, digital media players and digital audio players. We began commercial production of lithium polymer cells in September 2005.

	—	Cylindrical lithium-ion cells for use in notebook computers. We began trial production of cylindrical cells in April 2006 and began commercial production in June 2006. Prior to this, we had been producing a limited number of cylindrical cells using primarily a manual manufacturing process. These cylindrical cells were primarily sold for use on portable DVD players. In March 2007, our cylindrical lithium-ion cells met the safety standards for use in mining lamps set by the Quality Supervision and Testing Center of the Chemical and Physical Power Sources of the Ministry of Information Industry.

Pricing Pressure

Portable electronic devices such as cellular phones and notebook computers are subject to declines in average selling prices from time to time due to evolving technologies, industry standards and consumer preferences. As a result, manufacturers of these electronic devices expect us, as a supplier, to cut our costs and lower the price of our products, particularly when they place substantial orders with us. Our ability to maintain our cost-effectiveness will be critical to our future success in an increasingly price-sensitive market. We seek to achieve this by ramping up our production capacity to give us greater economies of scale through a higher bargaining power to secure a supply of materials and equipment at a lower cost, and a larger base for spreading out our fixed cost allocation. We believe this will provide incremental long-term growth opportunities, but in the short-term, will also require us to incur substantial capital expenditures.

Seasonality of Operating Results

Our revenues are now affected by seasonal variations in customer demand. We expect to experience seasonal lows in the demand for our products during the months of April to July, reflecting our customers’ decreased purchases. On the other hand, we will generally experience seasonal peaks during the months of September to March, primarily as a result of increased purchases from our customers during the holiday season, except that the months of February and October tend to be seasonally low sales months due to plant closures for the Chinese New Year and national holidays in the PRC.

Financial Statement Presentation

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

	Three Months Ended June 30,				Nine Months Ended June 30,
	2007		2006		2007		2006
	(in thousands)
Prismatic cells
Steel-case cells	$	5,261	$	12,271	$	27,882	$	45,522
Aluminum-case cells		14,721		10,467		43,786		33,515
Battery packs		4,488		2,951		8,203		8,244
Cylindrical cells		975		62		2,258		97
High-power lithium-phosphate cells		3,137		7,447		17,411		9,956
Lithium polymer cells		895		199		2,548		387

Total	$	29,477	$	33,397	$	102,088	$	97,721

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

Our net revenues have increased during the nine months ended June 30, 2007, because of increased shipments as we ramped up our production capacity to meet customer demands for our products.

Cost of Revenues. Cost of revenues consists primarily of material costs, employee remuneration for staff engaged in production activity, share-based compensation, depreciation and related expenses that are directly attributable to the production of products. Cost of revenues also includes write-downs of inventory to lower of cost or market.

The cost of raw materials for aluminum-case cells is generally higher than that of steel-case cells. Cost of revenues from the sales of battery packs also includes the fees we pay to pack manufacturers for assembling our prismatic cells into battery packs.

Because the average unit costs of the products increased significantly during the nine months ended June 30, 2007, as the purchase cost of lithium cobalt dioxide increased, our gross profit, as a percentage of net revenues, decreased from 28.5% for the nine months ended June 30, 2006, to 19.0% for the same period of fiscal 2007.

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

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

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

Gain on Trading Securities. Gain on trading securities represents realized gain from open market purchases and sales of certain shares listed on the Hong Kong Stock Exchange. These transactions were concluded by BAK International Limited, our Hong Kong subsidiary. As of June 30, 2007, we do not hold any equity or debt securities on hand for trading purposes. We do not anticipate investment in trading securities to form an ongoing part of our treasury function.

Other Income / (Expenses). Other income for the nine months ended June 30, 2007 mainly consists of government subsidy given as recognition of our contribution to the economic development of the area. No present or future obligation will arise from the receipt of such amount.

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

Income Taxes. Under applicable income tax laws and regulations, an enterprise located in Shenzhen, including the district where our operations are located, is subject to a 15% enterprise income tax. Further, according to PRC laws and regulations, foreign invested manufacturing enterprises are entitled to, starting from their first profitable year, a two-year exemption from enterprise income tax followed by a three-year 50% reduction in its enterprise income tax rate. Our PRC subsidiaries, Shenzhen BAK and BAK Electronics, are each entitled to a two-year exemption from enterprise income tax and a reduced enterprise income tax rate of 7.5% for the following three years from its first profitable year. As such, for the first two calendar years ended December 31, 2003, Shenzhen BAK was exempted from any enterprise income tax. Between January 1, 2004 and December 31, 2006, Shenzhen BAK is subject to the enterprise income tax rate of 7.5%. BAK Electronics, established in August 2005, is eligible for the same preferential tax treatment applicable to Shenzhen BAK and currently is in the tax holiday and fully exempt from any enterprise income tax.

In addition, due to the additional capital invested in Shenzhen BAK in both 2005 and 2006, Shenzhen BAK was granted a lower income tax rate of 3.309% and 3.82% in calendar year 2005 and 2006 respectively.

Furthermore, to encourage foreign investors to introduce advanced technologies to China, the PRC government has offered additional tax incentives to enterprises that are classified as a foreign invested enterprise with advanced technologies. According to an official notice issued by the Shenzhen Municipal Trade and Industry Bureau, Shenzhen BAK received such designation in August 2005. As a result, as long as Shenzhen BAK maintains this designation, it may apply to the tax authority to extend the reduction in its enterprise income tax rate for another three years, until December 31, 2009.

On March 16, 2007, the National People’s Congress of the PRC determined to adopt a new corporate income tax law in its fifth plenary session. The new corporate income tax law unifies the application scope, tax rate, tax deduction and preferential policy for both domestic and foreign-invested enterprises. The new corporate income tax law will be effective on January 1, 2008. According to the new corporate income tax law, the applicable income tax rate for our operating subsidiaries is subject to change. As the implementation detail has not yet been announced, we cannot be sure of the potential impact of such new corporate income tax law on our financial position and operating results.

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

Our Canada subsidiary, BAK Canada, is subject to Canada estimated profits tax at the rate of 22%. However, because it does not have any assessable income derived from or arising in Canada, it has not paid any Canada estimated profits tax.

Our Hong Kong subsidiary, BAK International, is subject to Hong Kong profits tax at the rate of 17.5%. However, because it does not have any assessable income derived from or arising in Hong Kong, it has not paid any Hong Kong profits tax.

Our effective tax rates were 3.2% and 17.5% for the nine months ended June 30, 2006 and 2007, respectively.

Results of Operations

For the three months ended June 30, 2007 as compared to the three months ended June 30, 2006.

	Three Months Ended June 30,
	2007			2006		$ Change			% Change
	(In thousands, except percentages)
Statement of Operations data
Revenues	$	29,477		$	33,397	$	(3,920	)		(11.7	)%
Cost of revenues		24,415			24,899		(484	)		(1.9	)

Gross profit		5,062			8,498		(3,436	)		(40.4	)
Operation expenses:
Research and development costs		1,118			477		641			134.4
Sales and marketing expenses		1,165			1,041		124			11.9
General and administrative expenses		4,189			1,962		2,227			113.5

Total operating expenses		6,472			3,480		2,992			86.0

Operating income / (loss)		(1,410	)		5,018		(6,428	)		(128.1	)
Finance costs, net		1,070			297		773			260.3
Other expenses		90			1		89			8900
Income taxes		120			43		77			179.1

Net income / (loss)	$	(2,690	)	$	4,677	$	(7,367	)		(157.5	)%

Revenues. Revenues decreased to $29.5 million for the three months ended June 30, 2007 as compared to $33.4 million for same period of the prior year, a decrease of $3.9 million or 11.7%.

•

Revenues from the sales of steel-case cells decreased to $5.3 million in the three months ended June 30, 2007 from $12.3 million in the same period in 2006, a decrease of $7.0 million or 57.1%, due to a decrease in sales volume by 46.7% primarily attributable to an increasingly competitive market.

•

Revenues from the sales of aluminum-case cells increased to $14.7 million in the three months ended June 30, 2007 from $10.5 million in the same period in 2006, an increase of $4.3 million or 40.7%, due to an increase in sales volume by 25.4% driven by increased sales to OEM market in the PRC and an increase in average selling price by 12.2% as the result of the change of type of the aluminum-case cells.

•

Revenues from sales of battery packs increased to $4.5 million in the three months ended June 30, 2007 from $3.0 million in the same period in 2006, an increase of $1.5 million or 52.0%, due to an increase in sales volume of 58.6% driven by increased sales to the OEM market in the PRC and offset by a decrease in average selling price by 4.1%.

•

Revenues from the sales of high-power lithium-ion cells decreased to $3.1 million in the three months ended June 30, 2007 from $7.4 million in the same period in 2006, a decrease of $4.3 million or 57.9%, due to a decrease in sales volume by 36.6% driven by decreased export sales.

•

We also sold $895,000 of lithium polymer cells and $975,000 of cylindrical cells in the three months ended June 30, 2007, compared to $199,000 of lithium polymer cells and $62,000 of cylindrical cells in the same period in 2006, due to the new capacity and increased demand.

Cost of Revenues. Cost of revenues decreased to $24.4 million for the three months ended June 30, 2007 as compared to $24.9 million for the same period in 2006, a decrease of $484,000 or 1.9%, due primarily to the decrease in sales volume offset by increased purchase cost of lithium cobalt dioxide and increased depreciation charges with the completion of two new production lines.

As a result of the decrease in our revenues, which was disproportionate to the decrease in our cost of revenues, gross profit for the three months ended June 30, 2007 was $5.1 million or 17.2% of revenues as compared to gross profit of $8.5 million or 25.4% of revenues for the same period in 2006.

Research and Development Costs. Research and development costs increased to $1.1 million for the three months ended June 30, 2007 as compared to $477,000 for the same period in 2006, an increase of $641,000 or 134.4%. Share-based compensation included in research and development costs was $290,000 for the three months ended June 30, 2007, an increase of $159,000 compared with the same period in 2006. On September 28, 2006, options to purchase a total of 1,400,000 shares of common stock were cancelled and on December 26, 2006, a total of 914,994 shares of restricted stock were granted as replacement awards. Pursuant to SFAS 123R, we also measured the employee share-based compensation of the replacement awards at grant-date fair value on December 26, 2006 and recognized the value over the remaining vesting period. Research and development material expenses increased by $248,000 in connection with research projects in progress in BAK Canada during the three months ended June 30, 2007 while no such expenses were incurred in the same period in 2006. Salaries related to research increased to $389,000 from $273,000 for the same period of the prior year, an increase of $116,000, primarily because additional research professionals have been hired.

Sales and Marketing Expenses. Sales and marketing expenses increased to $1.2 million for the three-month period ended June 30, 2007 as compared to $1.0 million for the same period in 2006, an increase of $124,000 or 11.9%. As a percentage of revenues, sales and marketing expenses increased to 4.0% for the three months ended June 30, 2007, from 3.1% for the same period in 2006. Packing expenses increased by $168,000 as the result of increased cost of packing materials.

General and Administrative Expenses. General and administrative expenses increased to $4.2 million, or 14.2% of revenues, for the three months ended June 30, 2007 as compared to $2.0 million, or 5.9% of revenues, for the same period in 2006, an increase of $2.2 million or 113.5%. Salaries increased by $330,000 as a result of an increase in average salaries and of the number of employees as part of our expansion. Depreciation charged also increased by $253,000 due to the completion of additional facilities in our industrial park. Bad debt expenses increased by $1,677,000 primarily due to a provision charged against a customer after we had assessed the collection of accounts receivables from this customer during the third quarter of 2007.

Operating Income (Loss). As a result of the above, operating loss totaled $1.4 million for the three months ended June 30, 2007 as compared to operating income of $5.0 million for the same period of the prior year, a decrease of $6.4 million or 128.1%. As a percentage of revenues, operating loss was 4.8% for the three months ended June 30, 2006 as compared to an operating income of 15.0% for the same period of the prior year.

Finance Costs, Net. Finance costs, net increased to $1.1 million for the three-month period ended June 30, 2007 as compared to $297,000 for the same period of the prior year, an increase of $773,000 or 260.3%. We had $67.6 million in short-term bank loans and $26.2 million in long-term bank loans as of June 30, 2007 as compared to $53.2 million outstanding as of June 30, 2006.

Other Expenses. Other expenses were $90,000 for the three months ended June 30, 2007, as compared to $1,000 for the same period in 2006.

Net Income / (loss). As a result of the foregoing, we had a net loss of $2.7 million for the three months ended June 30, 2007 as compared to a net income of $4.7 million for the same period in 2006.

For the nine months ended June 30, 2007 as compared to the nine months ended June 30, 2006.

	Nine months Ended June 30,
	2007			2006			$ Change			% Change
	(In thousands, except percentages)

Statement of Operations data
Revenues	$	102,088		$	97,721		$	4,367			4.5	%
Cost of revenues		82,682			69,904			12,778			18.3

Gross profit		19,406			27,817			(8,411	)		(30.2	)
Operation expenses:
Research and development costs		2,684			1,436			1,248			86.9
Sales and marketing expenses		3,272			3,542			(270	)		(7.6	)
General and administrative expenses		9,301			6,152			3,149			51.2

Total operating expenses		15,257			11,130			4,127			37.1

Operating income		4,149			16,687			(12,538	)		(75.1	)
Finance costs, net		3,134			993			2,141			215.6
Other (income) / expenses		(601	)		39			(640	)		(1641.0	)
Gain on trading securities		—			(280	)		280			100
Income taxes		283			512			(229	)		(44.7	)

Net income	$	1,333		$	15,423		$	(14,090	)		(91.4	)%

Comparison of the nine months ended June 30, 2007 as compared to the nine months ended June 30, 2006.

Revenues. Revenues increased to $ 102.1 million for the nine months ended June 30, 2007 as compared to $97.7 million for same period of the prior year, an increase of $4.4 million or 4.5%.

•

Revenues from the sales of steel-case cells decreased to $27.9 million in the nine months ended June 30, 2007 from $45.5 million in the same period in 2006, a decrease of $17.6 million or 38.8%, due to a decrease in sales volume by 31.6% primarily attributable to an increasingly competitive market.

•

Revenues from the sales of aluminum-case cells increased to $43.8 million in the nine months ended June 30, 2007 from $33.5 million in the same period in 2006, an increase of $10.3 million or 30.6%, due to an increase in sales volume by 25.7% driven by increased sales to the OEM market in the PRC and an increase in average selling price by 4% as the result of the change of type of the aluminum-case cells.

•

Revenues from sales of battery packs were $8.20 million in the nine months ended June 30, 2007, the same as in the same period in 2006.

•

Revenues from the sales of high-power lithium-ion cells increased to $17.4 million in the nine months ended June 30, 2007 from $10.0 million in the same period in 2006, an increase of $7.4 million or 74.5%, due to an increase in sales volume of 100.9% driven by decreased export sales.

•

We also sold $2.5 million of lithium polymer cells and $2.3 million of cylindrical cells in the nine months ended June 30, 2007, compared to $387,000 of lithium polymer cells and $96,000 of cylindrical cells due to our new production line.

Cost of Revenues. Cost of revenues increased to $82.7 million for the nine months ended June 30, 2007, as compared to $69.9 million for the same period in 2006, an increase of $12.8 million or 18.3%. The increase in cost of revenues was mainly attributable to a significant increase in the purchase cost of lithium cobalt dioxide and significantly increased depreciation charges with the completion of two new production lines.

As a result, gross profit for the nine months ended June 30, 2007 was $19.4 million or 19.0% of revenues as compared to gross profit of $27.8 million or 28.5% of revenues for the same period in 2006.

Research and Development Costs. Research and development costs increased to $2.7 million for the nine months ended June 30, 2007 as compared to $1.4 million for the same period in 2006. Share-based compensation included in research and development expenses was $720,000 for the nine months ended June 30, 2007, an increase of $101,000 compared with the same period in 2006. On September 28, 2006, options to purchase a total of 1,400,000 shares of common stock were cancelled and on December 26, 2006, a total of 914,994 shares of restricted stock were granted as replacement awards. Pursuant to SFAS 123R, we also measured the employee share-based compensation at grant-date fair value as of December 26, 2006 and recognized over the remained vesting period. Research and development material expenses increased by $458,000 due to certain new research projects of BAK Canada. Salaries related to research increased to $914,000 from $445,000 for the same period of the prior year, an increase of $469,000, primarily due to our hiring of additional research professionals.

Sales and Marketing Expenses. Sales and marketing expenses decreased to $3.3 million for the nine-month period ended June 30, 2007 as compared to $3.5 million for the same period in 2006, a decrease of $270,000 or 7.6%. As a percentage of revenues, sales and marketing expenses have decreased slightly to 3.2% for the nine months ended June 30, 2007, from 3.6% for the same period in 2006. Share-based compensation was $161,000 for the nine months ended June 30, 2007, a decrease of $119,000, due to the above-mentioned measurement of the fair value of the restricted stock replacement awards at their grant-date of December 26, 2006. Salaries decreased by $165,000 as the result of decreased headcount in our packing departments.

General and Administrative Expenses. General and administrative expenses increased to $9.3 million, or 9.1% of revenues, for the nine months ended June 30, 2007 as compared to $6.2 million, or 6.3% of revenues, for the same period in 2006, an increase of $3.1 million or 51.2%. Salaries increased by $854,000 as a result of an increase of average salaries and an increased headcount. Depreciation charges increased by $745,000 due to the completion of additional facilities in our industrial park. Bad debt expenses increased by $634,000 primarily due to a provision charged for one customer after we had assessed the collection of accounts receivables from this customer during the third quarter of 2007.

We are liable for liquidated damages to certain shareholders whose shares were included in a resale registration statement on Form SB-2 that we filed pursuant to a registration rights agreement that we entered into with such shareholders in September 2005. On August 15, 2006, the SEC declared effective a post-effective amendment that we had filed on August 4, 2006, terminating the effectiveness of a resale registration statement on Form SB-2 that had been filed pursuant to a registration rights agreement with certain shareholders to register the resale of shares held by those shareholders. We subsequently filed Form S-1 for these shareholders. On December 8, 2006, we filed our 2006 Form 10-K. After the filing of the 2006 Form 10-K, our previously filed registration statement on Form S-1 was no longer available for resales by the selling shareholders whose shares were included in such Form S-1. Under the registration rights agreement, those selling shareholders became eligible for liquidated damages relating to 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 nine months ended June 30, 2007. There was no comparable expense in the same period of 2006.

Operating Income. As a result of the above, operating income totaled $4.1 million for the nine months ended June 30, 2007 as compared to operating income of $16.7 million for the same period of the prior year, a decrease of $12.5 million or 75.1%. As a percentage of revenues, operating income was 4.1% for the nine months ended June 30, 2007 as compared to 17.1% for the same period of the prior year.

Finance Costs, Net. Finance costs, net, increased to $3.1 million for the nine-month period ended June 30, 2007 as compared to $993,000 for the same period of the prior year, an increase of $2.1 million or 215.6%. We had $67.6 million in short term loans and $26.3 million in long term loans as of June 30, 2007 as compared to $53.2 million outstanding as of June 30, 2006.

Other (Income) / Expenses. Other income was $601,000 for the nine-month period ended June 30, 2007, as compared to other expenses of $39,000 for the same period of 2006. Other income for the nine months ended June 30, 2007 mainly consists of a government subsidy given as recognition of our contribution to the economic development of the area, partially offset by certain expenses, which include the value of certain scrap materials that have been discarded. No present or future obligation will arise from the receipt of such government subsidy. There was no comparable income in the same period of the prior year

Gain on Trading Securities. We recognized income of $280,000 from BAK International’s short-term investment in trading securities during the nine months ended June 30, 2006. There was no such trading gain during the nine months ended June 30, 2007.

Net Income. As a result of the foregoing, we decreased our net income to $1.3 million for the nine months ended June 30, 2007 from $15.4 million for the same period of the prior year.

Liquidity and Capital Resources

We have historically financed our liquidity requirements from a variety of sources, including short-term bank loans and bills payable under bank credit agreements, long term bank loans, sale of bills receivable and issuance of capital stock. As of June 30, 2007, we had cash and cash equivalents of $8.9 million, as compared to $21.1 million as of September 30, 2006. In addition, we had pledged deposits amounting to $3.5 and $13.0 million at June 30, 2007 and September 30, 2006, respectively. Typically, banks will require borrowers to maintain deposits of approximately 20% to 100% of the outstanding bills payable.

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

	Nine months Ended June 30,
	2007			2006
	(in thousands)
Net cash provided by / (used in) operating activities		7,670			(8,352	)
Net cash used in investing activities		(53,006	)		(32,685	)
Net cash provided by financing activities		32,657			13,752
Effect of exchange rate changes on cash and cash equivalents		524			561
Net decrease in cash and cash equivalent		(12,155	)		(26,724	)
Cash and cash equivalents at the beginning of period		21,100			33,056
Cash and cash equivalents at the end of period		8,945			6,332

Operating Activities

Net cash provided by operating activities was $7.7 million in the nine months ended June 30, 2007 compared with net cash used in operating activities of $8.4 million in the same period in 2006. The improvement of $16.0 million in operating activities was mainly attributable to better control of trade accounts receivable.

Investing Activities

Net cash used in investing activities increased from $32.7 million in the nine months ended June 30, 2006 to $53.0 million in the same period in 2007. The net cash used in investing activities during the period ended June 30, 2007 was mainly used for purchases of equipment for a new automated cylindrical cell production line, a new automated prismatic cell production line and a lease payment in Tianjin.

Financing Activities

Net cash provided by financing activities was $13.8 million in the nine months ended June 30, 2006 compared to $32.7 million in the same period in 2007. This was mainly attributable to (i) a $9.9 million increase in net proceeds from borrowings due to more loans being secured for working capital and construction of new production lines in the nine months ended June 30, 2007, and (ii) a $9.3 million decrease in cash deposits at banks as collateral in the nine months ended June 30, 2007.

As of June 30, 2007, the principal amounts outstanding under our credit facilities and lines of credit were as follows:

	Maximum Amount Available		Amount Borrowed
	(in thousands)
Short—term credit facilities:
Agricultural Bank of China	$	78,787	$	26,147
Shenzhen Development Bank		19,697		—
Shenzhen Commercial Bank		26,262		6,566
China CITIC Bank		26,262		15,895
China Construction Bank		19,697		—
Bank of China		65,655		45,177
CITIC Ka Wah Bank Limited		6,000		—

Subtotal—short—term credit facilities	$	242,360	$	93,785

Long—term credit facilities:
Agricultural Bank of China		26,262		13,131
China Development Bank		13,131		13,131

Subtotal—long—term credit facilities		39,393		26,262

Lines of Credit:
Agricultural Bank of China				112
Bank of China				483
Shenzhen Merchant Bank				1,146

Subtotal—lines of credit				1,741

Total Principal Outstanding			$	121,788

There are no restrictions for our above unused credit facilities.

The above principal outstanding amounts under credit facilities and lines of credit included short-term bank loans of $67.6 million, bills payable of $27.9 million and long-term bank loans of $26.3 million.

For the purpose of presentation, the movement in bills payable balances is included in operating activities and in investing activities in the statements of cash flows according to their nature.

During the three months ended June 30, 2007, we repaid three short-term bank loans totaling $33.6 million, and entered into three new short-term bank loan agreements totaling $27.6 million. The three new short-term bank loan agreements provide for monthly interest payments at annual interest rates from 5.751% to 6.57%, with principal repayments at maturities during the second calendar quarter of 2008. These debt arrangements are generally guaranteed by Mr. Xiangqian Li, our chairman, president, and chief executive officer. The three repaid loan agreements were with Shenzhen Development Bank, Shenzhen Commercial Bank, and Agricultural Bank, and the three new short-term bank loan agreements are with Shenzhen Eastern Branch, Agricultural Bank of China, China CITIC Bank, and Shenzhen Commercial Bank

On June 20, 2007, we renewed our comprehensive credit facility agreement with Shenzhen Longgang Branch, Shenzhen Development Bank to provide a maximum loan amount of RMB 150 million (approximately $19.7 million). The loan may be drawn at any time over the one-year period beginning June 20, 2007. This credit facility agreement is guaranteed by BAK International and Mr. Xiangqian Li, and is also secured by $19.7 million of inventory and $10.2 million of machinery and equipment. As of June 30, 2007, we had no borrowings under this credit facility agreement.

On June 8, 2007, we renewed our comprehensive credit facility agreement with Shenzhen Eastern Branch, Agricultural Bank of China to provide a maximum loan amount of RMB 800 million (approximately $105.1 million), including RMB 600 million (approximately $78.8 million) one-year term credit facilities and RMB 200 million (approximately $26.3 million) five-year term credit facilities. Loans may be drawn under this renewed credit facility agreement beginning June 8, 2007 through May 23, 2008, with the term of the loan established at the time such loan is drawn, except as to funds borrowed under the loan agreement dated November 23, 2006, which may be drawn at any time within five years of the effective date of the loan agreement, and which will mature in five years after such funds are drawn. The credit facility agreement is guaranteed by BAK International and Mr. Xiangqian Li. As of June 30, 2007, we had outstanding under this credit facility agreement a $24.3 million one-year term loan due in the third calendar quarter of 2007 and the second calendar quarter of 2008, bearing interest at 5.022% and 6.57% per annum, and $1.8 million bills payable. As of June 30, 2007, we also had a $13.1 million five-year term loan under this facility, which included a borrowed amount of $5,242,446 with a current interest rate of 5.832% and repayable on January 25, 2012 and another borrowed amount of $7,878,668 with a current interest rate of 6.237%, payable in three instalments of $6,565,557 on January 25, 2011, $5,252,446 on January 25, 2012 and $1,313,111 on February 27, 2012, respectively. The $13.1 million five-year term loan carries a floating interest rate of 90% of the People’s Bank of China benchmark rate, and is secured by pledged machinery and equipment valued at $13.4 million as of June 30, 2007.

On May 15, 2007, we renewed our comprehensive credit facility agreement with Shenzhen Shuibei Branch, Shenzhen Commercial Bank to provide a maximum loan amount of RMB 200 million (approximately $26.2 million), an increase of 100 million (approximately $13.1 million) as compared to the original credit facility agreement. The loan may be drawn at any time over the one-year period beginning May 15, 2007. As of June 30, 2007, we had borrowed $6.6 million under this credit facility agreement. This credit facility agreement is guaranteed by BAK International and Mr. Xiangqian Li.

On February 14, 2007, Shenzhen BAK renewed the Comprehensive Credit Facility Agreement of Maximum Amount with Dapeng Branch, China Construction Bank. We may borrow up to RMB 150 million ($19.7 million) under this Comprehensive Credit Facility Agreement, which will expire on February 14, 2008. As of June 30, 2007, we had no borrowings under this Comprehensive Credit Facility Agreement. On March 14, 2007, Shenzhen BAK renewed the Comprehensive Credit Facility Agreement of Maximum Amount with Shenzhen Branch, China CITIC Bank. We may borrow up to RMB 200 million ($26.3 million) under this Comprehensive Credit Facility Agreement, which will expire on March 14, 2008. As of June 30, 2007, we had borrowed $13.1 million loan and $2.8 million bills payable under this Comprehensive Credit Facility Agreement.

On December 26, 2006, Shenzhen BAK entered into a four-year long-term loan agreement of $13.1 million with Shenzhen Branch, China Development Bank. The long-term loan is payable in three installments as follows:

RMB 30 million on November 20, 2008;

RMB 30 million on November 20, 2009; and

RMB 40 million on December 26, 2010.

The long-term loan carries an annual interest rate equal to the benchmark rate of the People’s Bank of China for three- to five-year long-term loans, which is currently 6.48% per annum. The long-term loan is secured by Shenzhen BAK’s pledge of its new Research and Development Test Center, which is to be constructed in Shenzhen, China, after Shenzhen BAK obtains the required land use rights for the location of the facility; such land use rights will also be pledged as security. The obligations of Shenzhen BAK under the loan agreement are guaranteed by Mr. Xiangqian Li. We borrowed the full $13.1 million under this loan agreement on December 27, 2006.

We had a negative working capital (current assets less current liabilities excluding share-based payment liabilities) of $4.7 million as of June 30, 2007, as compared to working capital of $4.8 million as of September 30, 2006, a decrease of $9.5 million. This decrease was primarily attributable to a lease prepayment of $13.7 million for acquisition of land use rights in Tianjin. We had short-term bank loans maturing in less than one year of $67.6 million as of June 30, 2007, as compared to $67.9 million as of September 30, 2006, a decrease of $0.3 million.

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

Capital Expenditures

We made capital expenditures of $53.0 and $32.7 million in the nine months ended June 30, 2007 and 2006, respectively. Our capital expenditures were used primarily to purchase plant and equipment to expand our production capacity and to make a lease prepayment. The table below sets forth the breakdown of our capital expenditures by use for the periods indicated.

	Nine months Ended June 30,
	2007		2006
	(in thousands)
Construction costs	$	13,944,720	$	10,678,643
Lease prepayment	$	14,371,819	$	—
Purchase of equipment	$	24,689,765	$	22,006,537

Total capital expenditures	$	53,006,304	$	32,685,180

We estimate that our total capital expenditures in fiscal 2007 will reach approximately $60.0 million, primarily to purchase manufacturing equipment for the expansion of our production lines.

We have completed the construction of 185,993 square meters of new facilities comprised of manufacturing facilities, warehousing and packaging facilities, dormitory space and administrative offices at the BAK Industrial Park. Of that space, approximately 111,000 square meters are new manufacturing facilities. We have completed construction and put into use an additional administrative area, production facility, four manufacturing facilities, a warehouse and packaging facility, three dormitories and two dining halls. At present, we have no significant payment obligations related to these facilities.

We do not hold the land use right to the tract of property on which we have constructed our manufacturing facilities and other related facilities. According to the relevant PRC laws and regulations, a land use right certificate, along with government approvals for land planning, project planning, and construction must be obtained before the construction of any building is commenced. An ownership certificate will be granted by the government upon application under the condition that the aforementioned certificate and government approvals are obtained. On June 20, 2007, we obtained the approvals for project planning and construction of the government of Shenzhen.

We are constructing and have completed part of the construction of our facilities with the approval of the local government of Kuichong Township of Longgang District of Shenzhen, which we understand does not have the authority to grant us the land use rights certificate. Under our agreement with the Kuichong Township government, we have to pay for a 50-year land use rights certificate at an agreed unit price, which in the aggregate amounted to $4.0 million as of September 30, 2004 and $3.3 million as of September 30, 2006, following an adjustment of the site area after a land survey. Out of the $3.3 million, $0.3 million has been paid to the Kuichong Township government. The Shenzhen municipal government has approved the grant of a land use rights certificate, which we are currently in the process of obtaining. In the meantime, we have recognized a net payable purchase price of $3.0 million for the land use rights on the assumption that it will be on the same terms as those agreed with the Kuichong Township government.

As of June 30, 2007, we had paid the lease prepayment amount of $707,000 million for acquisition of land use rights in Shenzhen for a new Research and Development Test Centre and the application for the land use rights certificate was in process.

As of June 30, 2007, we had fully paid the lease prepayment amount of $13.7 million for acquisition of land use rights in Tianjin and the application for the land use rights certificate was in process.

The following table sets forth our contractual obligations and commercial commitments as of June 30, 2007:

	Payment Due by Period
	Total		Less than 1 Year		1-3 Years		3-5 Years		More than 5 Years
	(in thousands)
Short-term bank loans		67,625		67,625		—		—		—
Bills payable		27,900		27,900		—		—		—
Long-term bank loans		26,262		—		7,879		18,383		—
Land use rights payable		3,148		3,148
Capital commitments		6,498		6,498		—		—		—
Future interest payment on short-term bank loans		1,862		1,862		—		—		—
Future interest payment on long-term bank loans		7,359		3,567		2,759		1,033		—

Total		140,654		110,600		10,638		19,416		—

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 June 30, 2007.

Off-Balance Sheet Transactions

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

Under U.S. GAAP, these transactions may not be recorded on our balance sheet or may be recorded in amounts different than the full contract or notional amount of the transaction. Our primary off balance sheet arrangements would result from our loan guaranties in which Shenzhen BAK would provide contractual assurance of the debt, or guarantee the timely re-payment of principal and interest of the guaranteed party.

Typically, no fees are received for this service. Thus in those transactions, Shenzhen BAK would have a contingent obligation related to the guarantee of payment in the event the underlying loan is in default.

Transactions described above require accounting treatment under FASB Interpretation 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” or FIN 45. Under that standard, we would be required to recognize the fair value of guarantees issued or modified after December 31, 2002 for non-contingent guarantee obligations, and also a liability for contingent guarantee obligations based on the probability that the guaranteed party will not perform under the contractual terms of the guaranty agreement.

We have assessed the liabilities arising from these guarantees and considered they are immaterial to the consolidated financial statements. Therefore, no liabilities in respect of the guarantees were recognized as of June 30, 2007. On June 30, 2007, we provided a guarantee for a non-related party – Shenzhen Tongli Hi-tech Co. Ltd. of one-year outstanding discounted bills with the Shenzhen Longgang Branch, Shenzhen Development Bank with a maturity of September 27, 2009. The maximum amount of our exposure for this and previous guarantees was $2.0 million and $3.8 million at June 30, 2007 and September 30, 2006, respectively.

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

Recoverability of Long-Lived Assets

Our business is capital intensive and has required, and will continue to require, significant investments in property, plant and equipment. As of September 30, 2006 and June 30, 2007, the carrying amount of property, plant and equipment, net was $109.4 million and $138.3 million, respectively. We assess the recoverability of property, plant and equipment to be held and used by a comparison of the carrying amount of an asset or group of assets to the future net undiscounted cash flows expected to be generated by the asset or group of assets. If such assets are considered impaired, the impairment recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets.

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

Inventory Obsolescence

We review our inventory for potential impairment on a quarterly or more frequent basis as deemed necessary. Such review includes, but is not limited to, reviewing the levels of inventory versus customer requirements and obsolescence. The review and evaluation also considers the potential sale of impaired inventory at lower than market prices. At each balance sheet date, we identify inventories that are worth less than cost and write them down to their net realizable value and the difference is charged to our cost of revenues of that period. Though management considers such write-down of inventories adequate and proper, changes in sales volumes due to unexpected economic or competitive conditions are among the factors that could materially affect the adequacy of such write down.

Allowance for Doubtful Accounts

The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our accounts receivable. We determine the allowance based on historical write-off experience, customer specific facts and economic conditions. Bad debt expense is included in the general and administrative expenses. We review outstanding account balances individually for collectibility. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. As of September 30, 2006 and June 30, 2007, we had not charged off any balances as we had yet to exhaust all means of collection.

Stock-Based Compensation

We have adopted the alternate intrinsic value method recognition provision of SFAS 123. Pursuant to the requirements of SFAS 123, we have disclosed in our annual financial statements for the year ended September 30, 2005 the pro forma effect of application of the preferred fair value method recognition provision. Further, effective October 1, 2005, we adopted the provisions of SFAS 123R, which requires the use of the fair value method of accounting for share-based compensation. Under the fair value based method, compensation cost related to employee stock options or similar equity instruments is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. SFAS 123R also requires measurement of cost of a liability- classified award based on its current fair value. The fair value of the liability-classified award will be subsequently remeasured at each reporting date through the settlement date. Change in fair value during the requisite service period will be recognized as compensation cost over that period.

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

Pursuant to SFAS 123R, we have recognized compensation costs of $1,567,000 in relation to stock-based award to our employees and non-employee directors in the nine months ended June 30, 2007 as an increase in operating costs.

Changes in Accounting Standards

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

In September 2006, the FASB issued SFAS 157, “Fair Value Measurements,” or SFAS 157, which defines fair value, establishes a framework for measuring fair value in U.S. GAAP, and expands disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements, where fair value is the relevant measurement attribute. The standard does not require any new fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We are currently evaluating the impact of adopting SFAS 157 on our consolidated financial statements.

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

In September 2006, the SEC issued SAB 108, which provides guidance on the process of quantifying financial statement misstatements. In SAB 108, the SEC staff establishes an approach that requires quantification of financial statement errors, under both the iron-curtain and the roll-over methods, based on the effects of the error on each of our financial statements and the related financial statement disclosures. SAB 108 is generally effective for annual financial statements in the first fiscal year ending after November 15, 2006. The transition provisions of SAB 108 permits existing public companies to record the cumulative effect in the first year ending after November 15, 2006 by recording correcting adjustments to the carrying values of assets and liabilities as of the beginning of that year with the offsetting adjustment recorded to the opening balance of retained earnings. We do not expect that the adoption of SAB 108 would have a material effect on our consolidated financial statements.

Exchange Rates

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

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

	RMB per U.S. Dollar
	2007		2006

Balance sheet items as of June 30		7.6155		7.9956
Amounts included in the statement of income and comprehensive income, statement of changes in stockholders’ equity and statement of cash flows for nine months ended June 30		7.76910		8.04914
Balance sheet items as of September 30		N/A		7.9087

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

We are exposed to interest rate risk primarily with respect to our short-term bank loans and long-term bank loans. Although the interest rates, which are based on the banks’ prime rates with respect to our short-term loans are fixed for the terms of the loans, the terms are typically six to twelve months for short-term bank loans and interest rates are subject to change upon renewal. There were no material changes in interest rates for short-term bank loans renewed during the three and nine months ended June 30, 2007.

We have a long term bank loan of $13.1 million maturing on December 26, 2010 with three installments payable under which we have outstanding borrowings; the interest rate we pay on this long term loan is benchmark rate of the People’s Bank of China for three- to five- year long-term loans. In addition, we have a RMB 200 million (approximately $26 million) long-term loan agreement with Shenzhen Eastern Branch, Agricultural Bank of China, which became effective on December 18, 2006. The long-term loan may be drawn at any time within five years from the effective date of the agreement and will mature five years after it is drawn. The term loan, when drawn, will carry a floating interest rate of 90% of The People’s Bank of China benchmark rate. As of June 30, 2007, we had borrowed $13.1 million under this loan agreement. This loan comprises $5,242,446 borrowed in the first calendar quarter of 2007 bearing interest at 5.832% per annum and repayable on January 25, 2012, and $7,878,668 borrowed in the second calendar quarter of 2007 bearing interest at 6.237% per annum and repayable in three installments of $6,565,557 on January 25, 2011, $5,252,446 on January 25, 2012, and $1,313,111 on February 27, 2012, respectively.

A hypothetical 1.0% increase in the annual interest rates for all of our credit facilities under which we had outstanding borrowings at June 30, 2007, would decrease net income before provision for income taxes by $704,000 or 43.6% for the nine months ended June 30, 2007. Management monitors the banks’ prime rates in conjunction with our cash requirements to determine the appropriate level of debt balances relative to other sources of funds. We have not entered into any hedging transactions in an effort to reduce our exposure to interest rate risk.

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 69.7% of our revenues and 94.5% of our costs and expenses for the nine months ended June 30, 2007 are denominated in RMB, with the balance denominated in U.S. dollars. Approximately 98.8% of our assets except for cash were denominated in RMB as of June 30, 2007. As a result, we are exposed to foreign exchange risk as our revenues and results of operations may be affected by fluctuations in the exchange rate between U.S. dollars and RMB. If the RMB depreciates against the U.S. dollar, the value of our RMB revenues, earnings and assets as expressed in our U.S. dollar financial statements will decline. Assets and liabilities of our operating subsidiaries are translated into U.S. dollars at the exchange rate at the balance sheet date, their equity accounts are translated at historical exchange rate and their income and expenses items are translated using the average rate for the period. Any resulting exchange differences are recorded in accumulated other comprehensive income or loss. An average appreciation (depreciation) of the RMB against the U.S. dollar of 5% would increase (decrease) our comprehensive income by $6.0 million based on our outstanding revenues, costs and expenses, assets and liabilities denominated in RMB as of June 30, 2007. As of June 30, 2007, our accumulated other comprehensive income was $8.1 million. We have not entered into any hedging transactions in an effort to reduce our exposure to foreign exchange risk.

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

As required by Rule 13a-15 under the Securities Exchange Act, our management has carried out an evaluation, with the participation and under the supervision of our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2007. Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating and implementing possible controls and procedures.

Management conducted its evaluation of disclosure controls and procedures under the supervision of our chief executive officer and our chief financial officer. Based upon, and as of the date of this evaluation, our chief executive officer and chief financial officer, concluded that our disclosure controls and procedures were not effective, because of the material weaknesses described in Item 9A. “Controls and Procedures” of our Annual Report on Form 10-K for the fiscal year ended September 30, 2006 (the “2006 Form 10-K”). Management believes that appropriate measures have been implemented to remediate these weaknesses, although some measures have not yet been in place long enough to be adequately tested. Investors are directed to Item 9A of the 2006 Form 10-K for the description of these weaknesses.

Remediation Measures of Material Weaknesses

To remediate the first five material weaknesses reported in Item 9A. “Controls and Procedures — Management’s Report on Internal Control over Financial Reporting” in our 2006 Form 10-K, we have implemented the measures described below. We will continue to evaluate the effectiveness of such measures, and may in the future implement additional measures, as necessary, to remediate such weaknesses.

1. We hired and trained personnel to ensure that we will have sufficient personnel with knowledge, experience and training in the application of U.S. GAAP commensurate with our financial reporting requirements. These measures include the following:

—

We hired a U.S. accountant in May 2006 with relevant accounting experience, skills and knowledge in the preparation of financial statements under the requirements of U.S. GAAP and financial reporting disclosure under the requirement of SEC rules;

—

We trained our accounting personnel in the application of U.S. GAAP commensurate with our financial reporting requirements, which include: (a) basic accounting personnel participated in training programs concerning general accounting policies and principles provided by the governmental agencies and professional accounting firms; (b) key accounting personnel, including the U.S. accountant, finance manager, finance controller and chief financial officer, participated in special training programs (in addition to the training of general accounting policies and principles described in item (a) above) provided by professional accounting firms retained by us concerning the difference between U.S. GAAP and the accounting principles generally accepted in the People’s Republic of China, SEC rules and recent developments in accounting policies, with particular attention to the areas where errors in the preparation and disclosure of our financial statements were previously identified.

2. We engaged outside consultants, with relevant accounting experience, skills and knowledge, working under the supervision and direction of our management, to supplement our existing accounting personnel on U.S. GAAP; and

3. We retained and intend to continue to retain the services of outside U.S. counselors to advise us on the SEC disclosure requirements.

During fiscal 2006 and the first three quarters of fiscal 2007, management implemented the above measures, which were designed to remediate the first five material weaknesses described in Item 9A. “Controls and Procedures — Management’s Report on Internal Control over Financial Reporting” in our 2006 Form 10-K. However, such measures have not yet been in place long enough to be adequately tested. Following the completion of testing, management will evaluate whether the material weaknesses have been successfully remediated.

To remediate the last two material weaknesses described in Item 9A. “Controls and Procedures — Management’s Report on Internal Control over Financial Reporting” in our 2006 Form 10-K, we have implemented the measures described below. We will continue to evaluate the effectiveness of such measures, and may in the future implement additional measures, as necessary, to remediate such weaknesses.

4. We implemented procedures to ensure construction in progress projects are recorded based on the expenditures actually incurred on a quarterly basis and are reviewed accordingly, including:

—

Engaging an independent construction surveyor company to supervise the progress of the construction projects and report the expenditures actually incurred in the form of project progress reports to us on a quarterly basis;

—

Requiring our construction manager to review and approve the project progress reports and the finance department records regarding construction in progress based on the approved project progress reports on a quarterly basis; and

—

Requiring the finance manager to review the accounting entry as well as the approved project progress reports.

5. We implemented procedures to ensure construction in progress is transferred to property, plant, and equipment in order to commence depreciation of the asset when it is ready for intended use and is reviewed accordingly, including:

—

Finance department transfers construction in progress to cost of property, plant and equipment when it is ready for its intended use, at which time depreciation charges commence thereon; the criteria used to determine when an asset is ready for intended use are based on policies that are consistent with U.S. GAAP;

—

Independent construction surveyors are retained to assist management in the determination of readiness for construction projects that meet certain minimum criteria;

—

Finance manager reviews the accounting entry and time of transfer; and

—

Estimated unbilled costs and costs to complete assets that have been determined to be ready for their intended use are based on relevant historical cost and budget information by authorized personnel within the finance department.

Management successfully completed implementation of these measures during fiscal year 2006 and the first three quarters of fiscal year 2007 and believes that the implementation of such measures, which were designed to remediate those two material weaknesses, will provide sufficient basis to conclude as to the absence of these material weaknesses at such time that formal testing is completed. As such testing of the operation of the implemented measures has been completed as of June 30, 2007, we had sufficient evidence to conclude that the material weaknesses had been successfully remediated.

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

Changes in Internal Controls over Financial Reporting

Other than the remediation measures described above, there were no changes in our internal controls over financial reporting after June 30, 2007 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

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

Patent Litigation. On September 12, 2006, Hydro-Quebec, a Canadian company, and the Board of Regents of the University of Texas System brought a federal patent infringement suit in the United States District Court for the Northern District of Texas against us. We have an agreement with A123Systems, Inc., under which we agree to manufacture products for A123Systems, Inc. according to the specifications furnished by, and using the finished electrodes and other materials consigned by, A123Systems, Inc. to us. The plaintiffs alleged that by manufacturing rechargeable lithium cells for one of our customers, A123Systems, Inc., for use in DeWalt 36-volt cordless power tools manufactured by Black & Decker Corporation, we had infringed two U.S. patents owned by and exclusively licensed to the plaintiffs. The plaintiffs seek injunctive relief and damages in an unspecified amount. If the court issues an adverse decision, we may be required to pay the plaintiffs substantial monetary damages, terminate our existing production of rechargeable lithium cells manufactured for A123Systems, Inc., or pay royalties to continue such production. The court has not yet issued a decision on this matter and we are unable to quantify the extent of any possible award of damages that might become payable by us.

Furthermore, if A123Systems, Inc. is found liable for the infringement, it may not be able to continue its cooperation with us at all or on terms and conditions acceptable to us, which in turn would adversely affect our ability to execute our strategy to expand our production of cells for power tools and capture high-margin businesses. Accordingly, our revenues and business prospects would be materially adversely affected.

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

On August 15, 2006, the SEC declared effective a post-effective amendment we filed on August 4, 2006 to terminate the effectiveness of the resale registration statement on Form SB-2 that included the resale of the shares held by those selling shareholders. Accordingly, as we were no longer eligible to file on Form SB-2, we were required to file an additional registration statement within 45 days after the termination of the effectiveness of the Form SB-2. On October 11, 2006, we filed a registration statement on Form S-1 that covers resale of the shares held by those shareholders, which was declared to be effective on October 19, 2006. Following the termination of the Form SB-2, our failure to file an additional registration statement within the period provided under the registration rights agreement triggered, for the first time, an obligation to pay liquidated damages to the selling shareholders of 1% of the aggregate investment amount paid by them for the shares, or $241,232, based on the formula specified in the registration rights agreement. Because the Form S-1 was filed by the one-month anniversary of the applicable filing date, the event was cured and no additional liquidated damages were incurred. We previously reported in our Annual Report on Form 10-K for the fiscal year ended September 30, 2006, and in our Quarterly Report on Form 10-Q for the quarter ended December 31, 2006, that liquidated damages totaling $487,946 were due from us in respect of such event based on an incorrect interpretation of the liquidated damages due under the registration rights agreement. Among other things, the amount was calculated on a pro rata daily basis although the event, the first under the registration rights agreement, was cured by its one-month anniversary date.

In addition, on December 8, 2006, we filed our 2006 Form 10-K. After the filing of the 2006 Form 10-K, our previously filed registration statement on Form S-1 was no longer available for 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 Form 10-Q for the quarter ended December 31, 2006, we previously recorded charges in our statement of income and comprehensive income of $290,575 for the year ended September 30, 2006, and $197,371 for the quarter ended December 31, 2006, based on the original incorrect interpretation of the calculation of liquidated damages. Accordingly, the amounts recorded in excess of $241,232 (i.e., $246,714) have been applied to offset the charge related to the liquidated damages incurred related to the second event in the second fiscal quarter of 2007, and we have recorded an additional charge in the second fiscal quarter of 2007 relating to the additional liquidated damages incurred of $563,000. We have assessed the impact of the foregoing on the financial statements included in our 2006 Form 10-K and our Form 10-Q for the quarter ended December 31, 2006, and have determined that the impact is not material. Accordingly, we do not intend to restate the financial information included in the 2006 Form 10-K or the Form 10-Q for the quarter ended December 31, 2006; however, future filings will reflect the foregoing information. No liquidated damages have been paid as of the filing date of this Report.

Item 1A. Risk Factors.

See Item 1A. “Risk Factors” included in our 2006 Form 10-K.

Implementation of the PRC’s new corporate income tax law may adversely affect us. On March 16, 2007, the National People’s Congress of the PRC determined to adopt a new corporate income tax law in its fifth plenary session. The new corporate income tax law unifies the application scope, tax rate, tax deduction and preferential policy for both domestic and foreign-invested enterprises. The new corporate income tax law will be effective on January 1, 2008. According to the new corporate income tax law, the applicable income tax rate for our operating subsidiaries is subject to change. As the implementation detail has not yet been announced, we cannot be sure of the potential impact of such new corporate income tax law on our financial position and operating results.

Changes in PRC property rights law may affect our interests in our properties. The new PRC Law on Property Rights was approved by the Fifth Session of the Tenth National People's Congress on 16 March 2007, and will come into effect on 1 October 2007. The Property Rights Law is the first piece of Mainland PRC legislation that comprehensively regulates the different types of rights which can be created or acquired over tangible property. We are currently evaluating the impact of the Property Rights Law.

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

None.

Item 3. Defaults Upon Senior Securities.

None.

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

None.

Item 5. Other Information.

Renewal of Credit Facilities. On May 15, 2007, we renewed our comprehensive credit facility agreement with Shenzhen Shuibei Branch, Shenzhen Commercial Bank to provide a maximum loan amount of RMB 200 million (approximately $26.3 million), an increase of 100 million (approximately $13.1 million) as compared to the original credit facility agreement. The loan may be drawn at any time over the one-year period beginning May 15, 2007. This credit facility agreement is guaranteed by BAK International and Mr. Xiangqian Li, our chairman, president and chief executive officer. A summary of the terms of this credit facility and related guaranties are included as Exhibits 10.8 through 10.10 to this Report and are hereby incorporated by reference herein.

On June 8, 2007, we renewed our comprehensive credit facility agreement with Shenzhen Eastern Branch, Agricultural Bank of China to provide a maximum loan amount of RMB 800 million (approximately $105.1 million) including RMB 600 million (approximately $78.8 million) one-year term credit facilities and RMB 200 million (approximately $26.3 million) five-year term credit facilities. Loans may be drawn under this renewed credit facility agreement beginning June 8, 2007 through May 23, 2008, with the term of the loan established at the time such loan is drawn, except as to funds borrowed under the loan agreement dated November 23, 2006, which may be drawn at any time within five years of the effective date of the loan agreement, and which will mature in five years after such funds are drawn. The credit facility agreement is guaranteed by BAK International and Mr. Xiangqian Li. As of June 30, 2007, we had outstanding under this credit facility agreement a $24.3 million one-year term loan due in the third calendar quarter of 2007 and the second calendar quarter of 2008, bearing interest at 5.022% and 6.57% per annum, and $1.8 million bills payable, and a $13.1 million five-year term loan due in the first calendar quarter of 2011 and 2012. The $13.1 million five-year term loan carries a floating interest rate of 90% of the People’s Bank of China benchmark rate, and is secured by pledged machinery and equipment valued at $13.4 million as of June 30, 2007. A summary of the terms of this credit facility and the related guaranty are included as Exhibits 10.1 and 10.2 to this Report and are hereby incorporated by reference herein.

On June 20, 2007, we renewed our comprehensive credit facility agreement with Shenzhen Longgang Branch, Shenzhen Development Bank to provide a maximum loan amount of RMB 150 million (approximately $19.7 million). The loan may be drawn at any time over the one-year period beginning June 20, 2007. This credit facility agreement is guaranteed by BAK International and Mr. Xiangqian Li, and is also secured by $19.7 million of inventory and $10.2 million of machinery and equipment. Summaries of the terms of this credit facility and related guaranties are included as Exhibits 10.4 through 10.7 to this Report and are hereby incorporated by reference herein.

We intend to use the loans drawn under these comprehensive credit facilities for the purchase of machinery and equipment and for further business development activities.

In addition, during the three months ended June 30, 2007, we repaid three short-term bank loans totaling $33.6 million, and entered into three new short-term bank loan agreements totaling $27.6 million. The new short-term bank loan agreements provide for monthly interest payments at annual interest rates from 5.751% to 6.57%, with principal repayments at maturities during the second calendar quarter of 2008. These debt arrangements are generally guaranteed by Mr. Xiangqian Li. The new agreements are with Eastern Branch, Agricultural Bank of China, China CITIC Bank, and Shenzhen Commercial Bank. A summary of the loan agreement with Eastern Branch, Agricultural Bank of China is included as Exhibit 10.3. The loan certificates under which the other two new loan agreements were made are included as Exhibits 10.11, 10.12, and 10.13 to this Report and are hereby incorporated by reference herein.

Item 6. Exhibits.

Number		Description
3.1		Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to China BAK Battery, Inc.’s Annual Report on Form 10-K for the fiscal year ended September 30, 2006).
3.2		Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006).
10.1		Summary of Comprehensive Credit Facility Agreement of Maximum Amount entered into between Shenzhen BAK Battery Co., Ltd. and Shenzhen Eastern Branch, Agricultural Bank of China on June 8, 2007.
10.2		Guaranty Contract of Maximum Amount entered into among BAK International Limited, Li Xiangqian, and Shenzhen Eastern Branch, Agricultural Bank of China on June 8, 2007.
10.3		Summary of Loan Agreement entered into by and between Shenzhen BAK Battery Co., Ltd. and Eastern Branch, Agricultural Bank of China on June 22, 2007.
10.4		Summary of Comprehensive Credit Facility Agreement entered into between Shenzhen BAK Battery Co., Ltd. and Longgang Branch, Shenzhen Development Bank, dated June 20, 2007.
10.5		Guaranty Contract of Maximum Amount Pledge entered into between Li Xiangqian and Longgang Branch, Shenzhen Development Bank on June 20, 2007.
10.6		Guaranty Contract of Maximum Amount entered into between BAK International Limited and Longgang Branch, Shenzhen Development Bank on June 21, 2007.
10.7		Guaranty Contract of Maximum Amount entered into between Li Xiangqian and Longgang Branch, Shenzhen Development Bank on June 20, 2007.
10.8		Summary of Comprehensive Credit Facility Agreement entered into between Shenzhen BAK Battery Co., Ltd. and Shuibei Branch, Shenzhen Commercial Bank on May 15, 2007.
10.9		Individual Guaranty Contract of Maximum Amount entered into between Li Xiangqian and Shuibei Division, Shenzhen Commercial Bank on May 15, 2007.
10.10		Guaranty Contract of Maximum Amount entered into between BAK International Limited and Shuibei Division, Shenzhen Commercial Bank on May 15, 2007.
10.11		Loan Certificate between Shenzhen BAK Battery Co., Ltd and China CITIC Bank on April 16, 2007.
10.12		Loan Certificate between Shenzhen BAK Battery Co., Ltd and China CITIC Bank on April 18, 2007.
10.13		Loan Certificate between Shenzhen BAK Battery Co., Ltd and Shenzhen Commercial Bank on June 20, 2007.
31.1		Chief Executive Officer Certification furnished pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Chief Financial Officer Certification furnished pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Chief Executive Officer and Chief Financial Officer Certifications furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: August 7, 2007	CHINA BAK BATTERY, INC.

	By:	/s/ Xiangqian Li
		Xiangqian Li, Chief Executive Officer
		(Principal Executive Officer)

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