CBAK Energy Technology, Inc. - Quarter Report: 2011 March (Form 10-Q)

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

FORM 10−Q

(Mark One)

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

For the quarterly period ended: March 31, 2011

[   ] 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)

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

(86-755) 8977-0093
(Registrant’s telephone number, including area code)

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

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

Yes [X]             No [   ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [   ]             No [   ]

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

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

Yes [   ]             No [X]

The number of shares outstanding of each of the issuer’s classes of common stock, as of May 9, 2011 is as follows:

CHINA BAK BATTERY, INC.

TABLE OF CONTENTS

PART I
FINANCIAL INFORMATION

ITEM 1.           FINANCIAL STATEMENTS.

CHINA BAK BATTERY, INC. AND SUBSIDIARIES
CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2011

F-1

PART I
FINANCIAL INFORMATION

Item 1.           Financial Statements.

China BAK Battery, Inc. and subsidiaries
Condensed interim consolidated balance sheets
As of September 30, 2010 and March 31, 2011
(In US$)

See accompanying notes to the condensed interim consolidated financial statements.

F-2

China BAK Battery, Inc. and subsidiaries
Condensed interim consolidated balance sheets
As of September 30, 2010 and March 31, 2011 (continued)
(In US$)

See accompanying notes to the condensed interim consolidated financial statements.

F-3

China BAK Battery, Inc. and subsidiaries
Condensed interim consolidated statements of operations and comprehensive loss
For the three months ended March 31, 2010 and 2011
(Unaudited)
(In US$)

See accompanying notes to the condensed interim consolidated financial statements.

F-4

China BAK Battery, Inc. and subsidiaries
Condensed interim consolidated statements of operations and comprehensive loss
For the six months ended March 31, 2010 and 2011
(Unaudited)
(In US$)

See accompanying notes to the condensed interim consolidated financial statements.

F-5

China BAK Battery, Inc. and subsidiaries
Condensed interim consolidated statements of shareholders’ equity
For the six months ended March 31, 2010 and 2011
(Unaudited)

See accompanying notes to the condensed interim consolidated financial statements.

F-6

China BAK Battery, Inc. and subsidiaries
Condensed interim consolidated statements of cash flows
For the three months ended March 31, 2010 and 2011
(Unaudited)
(In US$)

See accompanying notes to the condensed interim consolidated financial statements.

F-7

China BAK Battery, Inc. and subsidiaries
Condensed interim consolidated statements of cash flows
For the three months ended March 31, 2010 and 2011(continued)
(Unaudited)
(In US$)

See accompanying notes to the condensed interim consolidated financial statements.

F-8

China BAK Battery, Inc. and subsidiaries
Condensed interim consolidated statements of cash flows
For the six months ended March 31, 2010 and 2011
(Unaudited)
(In US$)

See accompanying notes to the condensed interim consolidated financial statements.

F-9

China BAK Battery, Inc. and subsidiaries
Condensed interim consolidated statements of cash flows
For the six months ended March 31, 2010 and 2011(continued)
(Unaudited)
(In US$)

See accompanying notes to the condensed interim consolidated financial statements.

F-10

China BAK Battery, Inc. and subsidiaries
Notes to the condensed interim consolidated financial statements
For the six months ended March 31, 2010 and 2011
(Unaudited)

1.        Principal Activities, Basis of Presentation and Organization

Principal Activities

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

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

Basis of Presentation and Organization

As of March 31, 2011, the Company’s subsidiaries consisted of: i) BAK International Limited (“BAK International”), a wholly owned limited liability company incorporated in Hong Kong on December 29, 2003 as BATCO International Limited, which changed its name to BAK International Limited on November 3, 2004; ii) Shenzhen BAK Battery Co., Ltd. (“Shenzhen BAK”), a wholly owned limited liability company established on August 3, 2001 in the People’s Republic of China (“PRC”); iii) BAK Electronics (Shenzhen) Co., Ltd. (“BAK Electronics”), a wholly owned limited liability company established on August 15, 2005 in the PRC; iv) BAK International (Tianjin) Ltd. (“BAK Tianjin”), a wholly owned limited liability company established on December 12, 2006 in the PRC; v) BAK Battery Canada Ltd. (“BAK Canada”), a wholly owned limited liability company established on December 20, 2006 in Canada as BAK Canada Battery Ltd., which changed its name to BAK Battery Canada Ltd. on December 22, 2006; vi) BAK Europe GmbH (“BAK Europe”), a wholly owned limited liability company established in Germany on November 28, 2007; vii) BAK Telecom India Private Limited (“BAK India”), a wholly owned limited liability company established in India on August 14, 2008; and viii) Tianjin Meicai New Materials Technology Co., Ltd. (“Tianjin Meicai”), a wholly owned limited liability company established on February 22, 2011 in the PRC. BAK International beneficially owns 100% of BAK India partly through a nominee agreement with one of its employees.

BAK Tianjin was established in Tianjin Technology Industrial District on December 12, 2006 as a wholly owned subsidiary of BAK International with registered capital of US$99,990,000. Pursuant to BAK Tianjin’s articles of association and relevant PRC regulations, BAK International was required to contribute US$20,000,000 to BAK Tianjin as capital (representing 20% of BAK Tianjin’s registered capital) before March 11, 2007. An extension from the Business Administration Bureau of Beichen District, Tianjin, was obtained to make this contribution no later than December 11, 2007. On November 16, 2007, BAK International contributed approximately US$20,000,000 capital to BAK Tianjin. The remaining US$79,990,000 was originally required to be fully contributed no later than December 11, 2008 and an extension from the Business Administration Bureau of Beichen District, Tianjin, was obtained to make this contribution no later than December 11, 2009. On November 16, 2009, BAK International contributed approximately US$9,000,000 capital to BAK Tianjin and as of November 16, 2009, the total contribution from BAK International was US$29,000,000. The remaining US$70,990,000 was originally required to be fully contributed no later than December 11, 2009 and an extension from the Business Administration Bureau of Beichen District, Tianjin, was obtained to make this contribution no later than December 2012. BAK Tianjin is principally engaged in the manufacture of larger lithium ion batteries for use in cordless power tools and various types of vehicles.

F-11

China BAK Battery, Inc. and subsidiaries
Notes to the condensed interim consolidated financial statements
For the six months ended March 31, 2010 and 2011
(Unaudited)

1.         Principal Activities, Basis of Presentation and Organization (continued)

Basis of Presentation and Organization (continued)

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

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

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

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

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

F-12

China BAK Battery, Inc. and subsidiaries
Notes to the condensed interim consolidated financial statements
For the six months ended March 31, 2010 and 2011
(Unaudited)

1.         Principal Activities, Basis of Presentation and Organization (continued)

Basis of Presentation and Organization (continued)

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

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

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

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

Pursuant to the 2008 Settlement Agreements, the Company and the settling investors have agreed, without any admission of liability, to a settlement and mutual release from all claims relating to the January 2005 private placement, including all claims relating to the escrow shares related to the 2005 performance threshold that had been placed into escrow by Mr. Xiangqian Li, as well as all claims, including claims for liquidated damages relating to registration rights granted in connection with the January 2005 private placement. Under the 2008 Settlement Agreement, the Company has made settlement payments to each of the settling investors of the number of shares of the Company’s common stock equivalent to 50% of the number of the escrow shares related to the 2005 performance threshold these investors had claimed; aggregate settlement payments as of March 31, 2011 amounted to 368,745 shares. Share payments to date have been made in reliance upon the exemptions from registration provided by Section 4(2) and/or other applicable provisions of the Securities Act of 1933, as amended. In accordance with the 2008 Settlement Agreements, the Company filed a registration statement covering the resale of such shares which was declared effective by the SEC on June 26, 2008.

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

F-13

China BAK Battery, Inc. and subsidiaries
Notes to the condensed interim consolidated financial statements
For the six months ended March 31, 2010 and 2011
(Unaudited)

1.         Principal Activities, Basis of Presentation and Organization (continued)

Basis of Presentation and Organization (continued)

The interim results of operations are not necessarily indicative of the results to be expected for the fiscal year ending September 30, 2011. The Company’s consolidated balance sheet as of September 30, 2010 has been taken from the Company’s audited consolidated balance sheet as of that date. All other financial statements contained herein are unaudited and, in the opinion of management, contain all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of financial position, results of operations and cash flows for the periods presented. The Company’s accounting policies and certain other disclosure are set forth in the notes to the consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended September 30, 2010. These financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto.

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

The Company has a working capital deficiency and accumulated deficit from net losses incurred for each of the three years in the fiscal year ended September 30, 2010 and for the six months ended March 31, 2011. These factors may raise doubts about the Company’s ability to continue as a going concern. The interim consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. The Company accordingly has developed a strategic plan to generate a positive cash flow from operating activities for the fiscal year ending September 30, 2011 (the “FY2011 Turnaround Plan”). Under the FY2011 Turnaround Plan, the Company will implement cost reductions on both manufacturing costs and operating expenses to improve profit margins as well as reduce receivable turnover days through stronger credit controls.

F-14

China BAK Battery, Inc. and subsidiaries
Notes to the condensed interim consolidated financial statements
For the six months ended March 31, 2010 and 2011
(Unaudited)

1.         Principal Activities, Basis of Presentation and Organization (continued)

Recently Issued Accounting Standards

In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements, or ASU 2010-06 that expands the required disclosures about fair value measurements. This guidance provides for new disclosures requiring the Company to (i) disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers and (ii) present separately information about purchases, sales, issuances and settlements in the reconciliation of Level 3 fair value measurements. This guidance also provides clarification of existing disclosures requiring the Company to (i) determine each class of assets and liabilities based on the nature and risks of the investments rather than by major security type and (ii) for each class of assets and liabilities, disclose the valuation techniques and inputs used to measure fair value for both Level 2 and Level 3 fair value measurements. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Early application is permitted. The adoption of ASU 2010-06 has no material impact on the Company’s financial statements.

In April 2010, the FASB issued ASU 2010-13, Compensation-Stock Compensation (Topic 718) - Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades - a consensus of the FASB Emerging Issues Task Force, or ASU 2010-13. ASU 2010-13 provides amendments to Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The amendments in this update do not expand the recurring disclosures required by Topic 718. Disclosures currently required under Topic 718 are applicable to a share-based payment award, including the nature and the term of share-based payment arrangements. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The adoption of ASU 2010-13 has no material impact on the Company’s financial statements.

In April 2010, the FASB issued ASU 2010-17, Revenue Recognition—Milestone Method (Topic 605)—Revenue Recognition, or ASU 2010-17. ASU 2010-17 provides guidance on defining the milestone and determining when the use of the milestone method of revenue recognition for research or development transactions is appropriate. It provides criteria for evaluating if the milestone is substantive and clarifies that a vendor can recognize consideration that is contingent upon achievement of a milestone as revenue in the period in which the milestone is achieved, if the milestone meets all the criteria to be considered substantive. ASU 2010-17 is effective for us in our first quarter of fiscal 2012 and should be applied prospectively. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of ASU 2010-17 on its financial statements.

In July 2010, the FASB issued ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses (Topic 310)—Receivables, or ASU 2010- 20. ASU 2010-20 enhances the disclosure requirements about the credit quality and related allowance for credit losses of financing receivables. ASU 2010-20 is effective for interim and annual reporting periods on or after December 15, 2010. The adoption of ASU 2010-20 has no material impact on the Company’s financial statements.

F-15

China BAK Battery, Inc. and subsidiaries
Notes to the condensed interim consolidated financial statements
For the six months ended March 31, 2010 and 2011
(Unaudited)

2         Pledged Deposits

Pledged deposits as of September 30, 2010 and March 31, 2011 consisted of the following:

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

3         Trade Accounts Receivable, net

Trade accounts receivable as of September 30, 2010 and March 31, 2011 consisted of the following:

An analysis of the allowance for doubtful accounts for the six months ended March 31, 2010 and 2011 is as follows:

F-16

China BAK Battery, Inc. and subsidiaries
Notes to the condensed interim consolidated financial statements
For the six months ended March 31, 2010 and 2011
(Unaudited)

4         Inventories

Inventories as of September 30, 2010 and March 31, 2011 consisted of the following:

Part of the Company’s inventories with carrying value of US$22,417,504 and US$22,905,659 as of September 30, 2010 and March 31, 2011, respectively, was pledged as collateral under certain loan agreements (see Note 7).

5         Prepayments and Other Receivables

Prepayments and other receivables as of September 30, 2010 and March 31, 2011 consisted of the following:

F-17

China BAK Battery, Inc. and subsidiaries
Notes to the condensed interim consolidated financial statements
For the six months ended March 31, 2010 and 2011
(Unaudited)

6         Property, Plant and Equipment, net

Property, plant and equipment as of September 30, 2010 and March 31, 2011 consisted of the following:

F-18

China BAK Battery, Inc. and subsidiaries
Notes to the condensed interim consolidated financial statements
For the six months ended March 31, 2010 and 2011
(Unaudited)

6         Property, Plant and Equipment, net (continued)

(ii) Construction in Progress

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

For the six months ended March 31, 2010 and 2011, the Company capitalized interest of US$548,798 and US$240,449 respectively to the cost of construction in progress.

(iii) Pledged Property, Plant and Equipment

As of September 30, 2010 and March 31, 2011, machinery and equipment with net book value of US$59,735,854 and US$58,763,355 of the Company were pledged as collateral under certain loan arrangements (see Notes 7 and 8).

(iv) Assets held for abandonment

Assets held for abandonment as of September 30, 2010 and March 31, 2011 consisted of the following:

The carried amount as of March 31, 2011 composed of the machinery and equipment relating to steel-case cell production line and certain used assets which have been written down to their salvage value of $216,840.

F-19

China BAK Battery, Inc. and subsidiaries
Notes to the condensed interim consolidated financial statements
For the six months ended March 31, 2010 and 2011
(Unaudited)

7         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:

As of September 30, 2010 and March 31, 2011, the Company had several short-term bank loans with aggregate outstanding balances of US$137,418,187 and US$142,447,010, respectively. The loans were primarily obtained for general working capital, carried interest rates ranging from 4.56% to 6.39% per annum, and had maturity dates ranging from 3 to 12 months. Each loan is guaranteed by Mr. Xiangqian Li, who did not receive any compensation for acting as guarantor.

As of March 31, 2011, the Company had pledged the land use rights certificate in relation to the land on which Shenzhen BAK’s corporate campus had been constructed for short-term bank loans amounting to US$61,081,758 borrowed from Shenzhen Eastern Branch, Agricultural Bank of China. As of March 31, 2011, the aggregate net book value of the buildings and land use rights in relation to the land use rights certificate was US$115,951,734.

8         Long-term Bank Loans

As of September 30, 2010 and March 31, 2011, the Company had long-term bank loans of US$41,846,006 and US$30,540,880, respectively. As of March 31, 2011, US$7,635,220 was borrowed under a four-year long-term loan credit facility from China Development Bank, bearing interest at the benchmark rate of the People’s Bank of China (“PBOC”) for three-year to five-year long-term loans, which is currently 5.94% per annum. This long-term bank loan is repayable on February 28, 2016.

Two other long-term loans totaled an aggregate borrowed amount of US$7,635,220 as of March 31, 2011. These loans were borrowed under a five-year long-term loan credit facility from Shenzhen Eastern Branch, Agricultural Bank of China, and carry interest at 90% of the benchmark rate of the PBOC for three-year to five-year long-term loans. The first loan of US$6,108,176 currently carries interest at 5.184% per annum and is repayable on January 25, 2012. The second loan of US$1,527,044 currently carries annual interest of 5.184% and is repayable on January 25, 2012. Another loan of US$15,270,440 as of March 31, 2011 was borrowed under a four-year long-term loan credit facility from Tianjin Branch, Agricultural Bank of China and carries interest at the benchmark rate of the PBOC for three-year to five-year long-term loans, which is currently 5.76% per annum. This loan is repayable in two installments of US$7,635,220 on December 26, 2011 and US$7,635,220 on May 26, 2012.

F-20

China BAK Battery, Inc. and subsidiaries
Notes to the condensed interim consolidated financial statements
For the six months ended March 31, 2010 and 2011
(Unaudited)

8         Long-term Bank Loans (continued)

The long-term bank loan with China Development Bank is: (i) guaranteed by Mr. Xiangqian Li; (ii) secured by certain shares of the Company owned by Mr. Xiangqian Li; and (iii) to be secured by the property ownership and land use rights certificate relating to the land on which the Company’s Research and Development Test Centre is to be constructed and the facilities to be constructed thereon. On April 7, 2010, the pledge of the land use rights certificate to China Development Bank was approved by the relevant government bureau. On April 20, 2010, the relevant land use rights certificate was pledged to China Development Bank.

The long-term bank loan with Shenzhen Eastern Branch, Agricultural Bank of China is: (i) guaranteed by Mr. Xiangqian Li; (ii) secured by the Company’s machinery and equipment with carrying values of US$30,408,945 as of March 31, 2011 (see Note 6); and (iii) secured by the property ownership certificate and land use rights certificate in relation to the land on which Shenzhen BAK’s corporate campus had been constructed and any machinery and equipment purchased and used in the campus subsequent to such construction.

The long-term bank loan with Tianjin Branch, Agricultural Bank of China is secured by the machinery and equipment purchased for the automated high-power lithium battery cells production line in Tianjin with carrying values of US$1,945,205 as of March 31, 2011.

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

The aggregate maturities of long-term bank loans as of March 31, 2011 are as follows:

9         Other Long-term payables

Other long-term payables as of March 31, 2011 include a government subsidy of approximately US$7,500,000 received for the company’s automated high-power lithium battery project from the National Development and Reform Commission and the Ministry of Industry and Information Technology.

F-21

China BAK Battery, Inc. and subsidiaries
Notes to the condensed interim consolidated financial statements
For the six months ended March 31, 2010 and 2011
(Unaudited)

10     Share-based Compensation

(i) Options

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

Stock Option Plan

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

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

F-22

China BAK Battery, Inc. and subsidiaries
Notes to the condensed interim consolidated financial statements
For the six months ended March 31, 2010 and 2011
(Unaudited)

10     Share-based Compensation (continued)

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.

A summary of share option plan activity for these options during the six months ended March 31, 2011 is presented below:

(1) Aggregate intrinsic value represents the value of the Company’s closing stock price on March 31, 2011 (US$1.81) in excess of the exercise price multiplied by the number of options outstanding or exercisable.

The weighted-average grant-date fair value of options granted during 2005 was US$3.67 per share. No non-cash share-based compensation expense was recognized in respect of these share options for the six months ended March 31, 2010 and 2011.

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

As of March 31, 2011, there were no unrecognized compensation costs related to non-vested share options.

Pursuant to the Plan, the Company also granted options to purchase 1,501,500 shares of the Company’s common stock with a weighted-average exercise price of US$3.28 per share on June 25, 2007. In accordance with the vesting provisions of the grants, the options will become vested and exercisable during the period from December 31, 2007 to February 9, 2012 according to each employee’s respective agreement.

F-23

China BAK Battery, Inc. and subsidiaries
Notes to the condensed interim consolidated financial statements
For the six months ended March 31, 2010 and 2011
(Unaudited)

10     Share-based Compensation (continued)

A summary of share option plan activity for these options during the six months ended March 31, 2011 is presented below:

(1) Aggregate intrinsic value represents the value of the Company’s closing stock price on March 31, 2011 (US$1.81) in excess of the exercise price multiplied by the number of options outstanding or exercisable.

The weighted-average grant-date fair value of options granted during 2007 was US$2.15 per share. The Company recorded non-cash share-based compensation expense of US$114,742 and US$49,224 For the six months ended March 31, 2010 and 2011 respectively, in respect of share options granted on June 25, 2007, which was allocated to cost of revenues, sales and marketing expenses, general and administrative expenses and research and development expenses respectively.

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

As of March 31, 2011, there were unrecognized compensation costs of US$24,604 related to the above non-vested share options. These costs are expected to be recognized over a weighted average period of 0.1 year.

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

F-24

China BAK Battery, Inc. and subsidiaries
Notes to the condensed interim consolidated financial statements
For the six months ended March 31, 2010 and 2011
(Unaudited)

10     Share-based Compensation (continued)

A summary of share option plan activity for these options during the six months ended March 31, 2011 is presented below:

(1) Aggregate intrinsic value represents the value of the Company’s closing stock price on March 31, 2011 (US$1.81) in excess of the exercise price multiplied by the number of options outstanding or exercisable.

The weighted average grant-date fair value of options granted on January 28, 2008 was US$3.59 per share. The Company recorded non-cash share-based compensation expense of US$105,291 and US$14,812 for the six months ended March 31, 2010 and 2011, respectively, in respect of share options granted on January 28, 2008, which was allocated to general and administrative expenses and research and development expenses respectively.

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

As of March 31, 2011, there were no unrecognized compensation costs related to non-vested share options.

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

F-25

China BAK Battery, Inc. and subsidiaries
Notes to the condensed interim consolidated financial statements
For the six months ended March 31, 2010 and 2011
(Unaudited)

10     Share-based Compensation (continued)

A summary of share option plan activity for these options during the six months ended March 31, 2011 is presented below:

(1) Aggregate intrinsic value represents the value of the Company’s closing stock price on March 31, 2011 (US$1.81) in excess of the exercise price multiplied by the number of options outstanding or exercisable.

The weighted average grant-date fair value of options granted on May 29, 2008 was US$2.36 per share. The Company recorded non-cash share-based compensation expense of US$353,080 and US$121,198 for the six months ended March 31, 2010 and 2011 respectively, in respect of share options granted on May 29, 2008, which was allocated to general and administrative expenses and research and development expenses respectively.

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

As of March 31, 2011, there were unrecognized compensation costs of US$51,492 related to the above non-vested share options. These costs are expected to be recognized over a weighted average period of 0.3 years.

On June 22, 2009, the Compensation Committee of the Company’s Board of Directors recommended and approved the grant of options to purchase 1,928,200 shares of the Company’s common stock to certain key employees, officers and consultants with an exercise price of US$2.81 per share. In accordance with the vesting provisions of the grants, the options will become vested and exercisable over five years in twenty equal quarterly installments on the first day of each fiscal quarter beginning on October 1, 2009.

F-26

China BAK Battery, Inc. and subsidiaries
Notes to the condensed interim consolidated financial statements
For the six months ended March 31, 2010 and 2011
(Unaudited)

10     Share-based Compensation (continued)

A summary of share option plan activity for these options during the six months ended March 31, 2011 is presented below:

(1) Aggregate intrinsic value represents the value of the Company’s closing stock price on March 31, 2011 (US$1.81) in excess of the exercise price multiplied by the number of options outstanding or exercisable.

The weighted average grant-date fair value of options granted on June 22, 2009 was US$2.46 per share. The Company recorded non-cash share-based compensation expense of US$983,568 and of US$519,752 for the six months ended March 31, 2010 and 2011, respectively, in respect of share options granted on June 22, 2009, which was allocated to general and administrative expenses and research and development expenses respectively.

The fair value of the above option awards granted on June 22, 2009 was estimated on the date of grant using the Black-Scholes Option Valuation Model that uses the following assumptions.

As of March 31, 2011, there were unrecognized compensation costs of US$1,228,678 related to the above non-vested share options. These costs are expected to be recognized over a weighted average period of 1.9 years.

On June 26, 2009, the Compensation Committee of the Company’s Board of Directors recommended and approved the grant of options to purchase 75,000 shares of the Company’s common stock to certain key management with an exercise price of US$3.24 per share. In accordance with the vesting provisions of the grants, the options will become vested and exercisable over five years in twenty equal quarterly installments on the first day of each fiscal quarter beginning on October 1, 2009.

F-27

China BAK Battery, Inc. and subsidiaries
Notes to the condensed interim consolidated financial statements
For the six months ended March 31, 2010 and 2011
(Unaudited)

10     Share-based Compensation (continued)

A summary of share option plan activity for these options during the six months ended March 31, 2011 is presented below:

(1) Aggregate intrinsic value represents the value of the Company’s closing stock price on March 31, 2011 (US$1.81) in excess of the exercise price multiplied by the number of options outstanding or exercisable.

The weighted average grant-date fair value of options granted on June 26, 2009 was US$2.86 per share. The Company recorded non-cash share-based compensation expense of US$48,884 and US$25,716 for the six months ended March 31, 2010 and 2011, respectively, in respect of share options granted on June 26, 2009, which was allocated to research and development expenses.

The fair value of the above option awards granted on June 26, 2009 was estimated on the date of grant using the Black-Scholes Option Valuation Model that uses the following assumptions.

As of March 31, 2011, there were unrecognized compensation costs of US$66,332 related to the above non-vested share options. These costs are expected to be recognized over a weighted average period of 1.7 years.

On March 11, 2010, the Compensation Committee of the Company’s Board of Directors recommended and approved the grant of options to purchase 50,000 shares of the Company’s common stock to certain key management with an exercise price of US$2.58 per share. In accordance with the vesting provisions of the grants, the options will become vested and exercisable over two years in two equal installments beginning on each anniversary of the grant day on March 11, 2010.

F-28

China BAK Battery, Inc. and subsidiaries
Notes to the condensed interim consolidated financial statements
For the six months ended March 31, 2010 and 2011
(Unaudited)

10     Share-based Compensation (continued)

A summary of share option plan activity for these options during the six months ended March 31, 2011 is presented below:

(1) Aggregate intrinsic value represents the value of the Company’s closing stock price on March 31, 2011 (US$1.81) in excess of the exercise price multiplied by the number of options outstanding or exercisable.

The weighted average grant-date fair value of options granted on March 11, 2010 was US$1.51 per share. The Company recorded non-cash share-based compensation expense of US$3,100 for the six months ended March 31, 2010 in respect of share options granted on March 11, 2010 and no non-cash share-based compensation expense was recognized in respect of these share options for the six months ended March 31, 2011.

The fair value of the above option awards granted on March 11, 2010 was estimated on the date of grant using the Black-Scholes Option Valuation Model that uses the following assumptions.

As of March 31, 2011, there were no unrecognized compensation costs related to non-vested share options.

On April 8, 2010, the Compensation Committee of the Company’s Board of Directors recommended and approved the grant of options to purchase 100,000 shares of the Company’s common stock to certain key management with an exercise price of US$2.43 per share. In accordance with the vesting provisions of the grants, the options will become vested and exercisable in eight equal installments beginning on each quarter after September 30, 2010.

F-29

China BAK Battery, Inc. and subsidiaries
Notes to the condensed interim consolidated financial statements
For the six months ended March 31, 2010 and 2011
(Unaudited)

10     Share-based Compensation (continued)

A summary of share option plan activity for these options during the six months ended March 31, 2011 is presented below:

(1) Aggregate intrinsic value represents the value of the Company’s closing stock price on March 31, 2011 (US$1.81) in excess of the exercise price multiplied by the number of options outstanding or exercisable.

The weighted average grant-date fair value of options granted on April 8, 2010 was US$1.41 per share. The Company recorded non-cash share-based compensation expense of US$26,926 for the six months ended March 31, 2011 in respect of share options granted on April 8, 2010 which was allocated to research and development expense.

The fair value of the above option awards granted on April 8, 2010 was estimated on the date of grant using the Black-Scholes Option Valuation Model that uses the following assumptions.

As of March 31, 2011, there were unrecognized compensation costs of US$65,064 related to the above non-vested share options. These costs are expected to be recognized over a weighted average period of 2.2 years.

On July 23, 2010, the Compensation Committee of the Company’s Board of Directors recommended and approved the grant of options to purchase 80,000 shares of the Company’s common stock to certain key management with an exercise price of US$1.58 per share. In accordance with the vesting provisions of the grants, the options will become vested and exercisable in eight equal installments beginning on each quarter after September 30, 2010.

F-30

China BAK Battery, Inc. and subsidiaries
Notes to the condensed interim consolidated financial statements
For the six months ended March 31, 2010 and 2011
(Unaudited)

10     Share-based Compensation (continued)

A summary of share option plan activity for these options during the six months ended March 31, 2011 is presented below:

(1) Aggregate intrinsic value represents the value of the Company’s closing stock price on March 31, 2011 (US$1.81) in excess of the exercise price multiplied by the number of options outstanding or exercisable.

The weighted average grant-date fair value of options granted on July 23, 2010 was US$1.58 per share. No non-cash share-based compensation expense was recognized in respect of these share options for the six months ended March 31, 2011, in respect of share options granted on July 23, 2010.

The fair value of the above option awards granted on July 23, 2010 was estimated on the date of grant using the Black-Scholes Option Valuation Model that uses the following assumptions.

As of March 31, 2011, there were no unrecognized compensation costs related to non-vested share options.

(ii) Restricted Shares

Pursuant to the Plan and in accordance with the China BAK Battery, Inc. Compensation Plan for Non-Employee Directors, the Company granted 5,000 restricted shares to each of the existing elected independent directors with a fair value of US$1.68 per share on July 1, 2010. The eligible directors shall vest in their rights under the restricted shares according to the following schedule:

The Company recorded non-cash share-based compensation expense of US$6,854 for the six months ended March 31, 2011, in respect of the restricted shares granted in July 1, 2010, which was allocated to general and administrative expenses.

The first and second 25% of the restricted shares were already issued as fully paid shares of common stock to the Company’s three independent directors on August 4, 2010 and October 6, 2010. According to the resolution of Compensation Committee on December 28, 2010, the third and forth 25% of the restricted shares were cancelled. As of March 31, 2011, there were no unrecognized compensation costs associated with these restricted shares granted to non-employee directors.

F-31

China BAK Battery, Inc. and subsidiaries
Notes to the condensed interim consolidated financial statements
For the six months ended March 31, 2010 and 2011
(Unaudited)

10     Share-based Compensation (continued)

Pursuant to the Plan, the Compensation Committee of the Company’s Board of Directors recommended and approved the grant of 500,000 restricted shares to Chief Executive Officer, Mr. Xiangqian Li with a fair value of US$2.81 per share on June 22, 2009. In accordance with the vesting schedule of the grant, the restricted shares will vest in twenty equal quarterly installments on the first day of each fiscal quarter beginning on October 1, 2009.

The Company recorded non-cash share-based compensation expense of US$322,424 and of US$169,853 for the six months ended March 31, 2010 and 2011 respectively in respect of the restricted shares granted on June 22, 2009, which was allocated to general and administrative expenses.

As of March 31, 2011, there were unrecognized stock-based compensation costs of US$421,257 associated with these restricted shares granted to Mr. Xiangqian Li. These costs are expected to be recognized over a weighted-average period of 2.9 years.

As the Company itself is an investment holding company which is not expected to generate operating profits to realize the tax benefits arising from its net operating loss carried forward, no income tax benefits were recognized for such stock-based compensation cost under the Stock Option Plan for the six months ended March 31, 2010 and 2011.

F-32

China BAK Battery, Inc. and subsidiaries
Notes to the condensed interim consolidated financial statements
For the six months ended March 31, 2010 and 2011
(Unaudited)

11     Net Loss per Share

The calculation of basic net loss per share is based on the net loss for the six months ended March 31, 2011 attributable to equity shareholders of $7,741,352 (six months ended March 31, 2010: $5,942,138) and the weighted average number of shares of common stock of 62,895,122 issued and outstanding during the six months ended March 31, 2011 (six months ended March 31, 2010: 61,984,941).

The effects of 4,488,655 shares of stock options, 503,750 shares of restricted stock and 1,447,500 warrants outstanding during the six months ended or as of March 31, 2010 were all anti-dilutive and the effects of 4,551,855 shares of stock options, 500,000 shares of restricted stock and 1,447,500 warrants outstanding during the six months ended or as of March 31, 2011 were all anti-dilutive. As such, basic and diluted net loss per share for the six months ended March 31, 2010 and 2011 are the same.

12     Fair Value of Financial Instruments

The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties. The carrying amounts of financial assets and liabilities, such as cash and cash equivalents, pledged deposits, trade accounts receivable, other receivables, short-term bank loans, long-term bank loans, accounts and bills payable and other payables, approximate their fair values because of the short maturity of these instruments and market rates of interest.

F-33

China BAK Battery, Inc. and subsidiaries
Notes to the condensed interim consolidated financial statements
For the six months ended March 31, 2010 and 2011
(Unaudited)

13     Commitments and Contingencies

(i) Capital Commitments

As of September 30, 2010 and March 31, 2011, the Company had the following contracted capital commitments:

(ii) Land Use Rights and Property Ownership Certificate

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

The Company did not obtain the land use right certificate and approvals for project-planning and construction relating to the premises occupied by the Company, BAK Industrial Park, before construction of the buildings was commenced. On July 3, 2009, the Company had obtained the approval for project-planning and construction from the local government of Shenzhen. As of March 31, 2011, the Company has obtained the aforementioned land use rights certificate and government approvals and was in the process of negotiating with the relevant government for the application and acquisition of the appropriate property ownership certificate.

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

F-34

China BAK Battery, Inc. and subsidiaries
Notes to the condensed interim consolidated financial statements
For the six months ended March 31, 2010 and 2011
(Unaudited)

13     Commitments and Contingencies (continued)

(ii) Land Use Rights and Property Ownership Certificate (continued)

Pursuant to the land use rights certificate relating to the Company’s Tianjin facility, the Tianjin government had requested that the Company complete the construction of the Tianjin facility before September 30, 2008. As of March 31, 2011, the Company was in the process of negotiating with the relevant government bureau for the extension of the completion date. If the Company fails to obtain the approval for the extension of the completion date from the relevant government bureau, there is a risk that the land use rights certificate relating to the Company’s Tianjin facility will become invalid. However, management believes that this possibility, while present, is remote.

Pursuant to the land use rights certificate that the Company obtained relating to the Research and Development Test Centre to be constructed in Shenzhen, the Company must complete at least 25% of the construction of the Research and Development Test Centre by September 30, 2008. On November 11, 2008 and May 27, 2009, the Company has signed two supplement agreements with Shenzhen government to increase the dimensions of the Research and Development Test Centre. According to the supplement agreements, the Company is required to complete the construction by May 6, 2011. According to the property ownership and land use rights certificate, such rights may not be pledged without the approval of the relevant government office. The Company is required to pledge its property ownership and land use rights certificate in relation to the Research and Development Test Centre to China Development Bank according to the loan agreement entered into with it. On April 7, 2010, the pledge of the land use rights certificate to China Development Bank was approved by the relevant government bureau. On April 20, 2010, the relevant land use rights certificate was pledged to China Development Bank.

On December 15, 2008, the Company purchased insurance for its manufacturing facilities at BAK Industrial Park in Shenzhen, China. Under the insurance policy entered into with Ping An Property & Casualty Insurance Company of China, Ltd, the insured amount for our manufacturing facilities at BAK Industrial Park is RMB585,373,070 (approximately $85.8 million) for the period from November 26, 2008 to August 25, 2010. On August 20, 2010, the Company purchased the new insurance for its manufacturing facilities at BAK Industrial Park in Shenzhen, China. Under the new insurance policy entered into with Ping An Property & Casualty Insurance Company of China, Ltd, the insured amount for our manufacturing facilities at BAK Industrial Park is RMB550,000,000 (approximately $82.2 million) for the period from August 26, 2010 to March 26, 2012.

On July 2, 2010, the Company purchased insurance for its manufacturing facilities in Tianjin, China. Under the insurance policy entered into with Ping An Property & Casualty Insurance Company of China, Ltd, the insured amount for our manufacturing facilities in Tianjin is RMB220,991,420 (approximately $33.0 million) for the period from July 2, 2010 to July 2, 2011.

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

F-35

China BAK Battery, Inc. and subsidiaries
Notes to the condensed interim consolidated financial statements
For the six months ended March 31, 2010 and 2011
(Unaudited)

13     Commitments and Contingencies (continued)

(iii) Guarantees

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

Management has assessed the fair value of the obligation arising from the above financial guarantees and considered it immaterial to the condensed interim consolidated financial statements. Therefore, no obligations in respect of the above guarantees were recognized as of March 31, 2011.

(iv) Outstanding Discounted Bills and Transferred Bills

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

The Company’s outstanding discounted and transferred bills as of September 30, 2010 and March 31, 2011 are summarized as follows:

F-36

China BAK Battery, Inc. and subsidiaries
Notes to the condensed interim consolidated financial statements
For the six months ended March 31, 2010 and 2011
(Unaudited)

14     Significant Concentrations

(a) Customers and Credit Concentrations

No customer individually comprised 10% or more of net revenue for the six months ended March 31, 2010 and 2011.

(b) Credit Risk

Financial instruments that potentially subject the Company to a significant concentration of credit risk consist primarily of cash and cash equivalents and pledged deposits. As of September 30, 2010 and March 31, 2011, substantially all of the Company’s cash and cash equivalents and pledged deposits were held by major financial institutions located in the PRC, which management believes are of high credit quality.

F-37

China BAK Battery, Inc. and subsidiaries
Notes to the condensed interim consolidated financial statements
For the six months ended March 31, 2010 and 2011
(Unaudited)

15     Segment Information

The Company currently engages in the manufacture, commercialization and distribution of a wide variety of standard and customized lithium ion rechargeable batteries for use in a wide array of applications. During the six months ended March 31, 2011, the Company manufactured five types of Li-ion rechargeable batteries: aluminum-case cell, battery pack, cylindrical cell, lithium polymer cell and high-power lithium battery 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 six months ended March 31, 2010 and 2011 were as follows:

Net revenues by product:

Net revenues by geographic area:

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

F-38

China BAK Battery, Inc. and subsidiaries
Notes to the condensed interim consolidated financial statements
For the six months ended March 31, 2010 and 2011
(Unaudited)

16     Subsequent Events

The Company evaluated all events or transactions that occurred after March 31, 2011 through the date these financial statements were issued and has determined that there is no material recognizable nor subsequent events or transactions which would require recognition or disclosure in the financial statements.

F-39

Special Note Regarding Forward Looking Statements

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

• our ability to continue as a going concern;

• our anticipated growth strategies and our ability to manage the expansion of our business operations effectively;

• our future business development, results of operations and financial condition;

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

• our ability to maintain or increase our market share in the competitive markets in which we do business;

• our ability to keep up with rapidly changing technologies and evolving industry standards, including our ability to achieve technological advances;

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

• our ability to diversify our product offerings and capture new market opportunities;

• our ability to obtain original equipment manufacturer, or OEM, qualifications from brand names;

• our ability to source our needs for skilled labor, machinery and raw materials economically;

• our ability to secure raw materials in the future and to manage the costs of raw materials or to secure alternative or substitute raw materials;

• our ability to maintain low costs without damaging our competitive position;

• uncertainties with respect to the PRC legal and regulatory environment;

• our ability to remediate any material weaknesses in our internal control over financial reporting;

• our ability to obtain property ownership rights to our facilities; and

• other risks identified in this Report and in our other reports filed with the U.S. Securities and Exchange Commission, or SEC.

Additional disclosures regarding factors that could cause our results and performance to differ from results or performance anticipated by this Report are discussed in other reports that we file with the SEC, including without limitation our Annual Report on Form 10-K for the fiscal year ended September 30, 2010, or the 2010 Form 10-K. Readers are urged to carefully review and consider the various disclosures made by us in this Report and our other filings with the SEC. These reports attempt to advise interested parties of the risks and factors that may affect our business, financial condition and results of operations and prospects. The forward-looking statements made in this Report speak only as of the date hereof and we disclaim any obligation to provide updates, revisions or amendments to any forward-looking statements to reflect changes in our expectations or future events.

1

Use of Terms

Except as otherwise indicated by the context, all references in this Report to: “we,” “us,” “our” and the “Company” are to the combined business of China BAK Battery, Inc. and its consolidated subsidiaries. Unless the context requires otherwise, all references to:

• “BAK Canada” are to our Canadian subsidiary, BAK Battery Canada Ltd.;

• “BAK Electronics” are to our PRC subsidiary, BAK Electronics (Shenzhen) Co., Ltd.;

• “BAK Europe” are to our German subsidiary, BAK Europe GmbH;

• “BAK India” are to our Indian subsidiary, BAK Telecom India Private Limited;

• “BAK International” are to our Hong Kong subsidiary, BAK International Limited;

• “BAK Tianjin” are to our PRC subsidiary, BAK International (Tianjin) Ltd.;

• “China,” “Chinese” and “PRC” are to the People’s Republic of China, excluding for the purposes of this Report only, Taiwan, Hong Kong and Macau;

• “Exchange Act” are to the Securities Exchange Act of 1934, as amended;

• “RMB” are to Renminbi, the legal currency of China; and

• “Securities Act” are to the Securities Act of 1933, as amended;

• “Shenzhen BAK” refers to our PRC subsidiary, Shenzhen BAK Battery Co., Ltd.;

• “Tianjin Meicai” refers to our PRC subsidiary, Tianjin Meicai New Materials Technology Co., Ltd.;

• “U.S. dollar,” “$” and “US$” are to the legal currency of the United States of America.

Overview

We are a leading global manufacturer of lithium based battery cells. We produce battery cells that are the principal component of rechargeable batteries commonly used to power the following applications:

• cellular phones and smart phones—customer categories include OEM customers and replacement battery manufacturers;

• notebook computers;

• portable consumer electronics, such as digital cameras, portable media players, portable gaming devices, personal digital assistants, or PDAs, camcorders, digital cameras, and Bluetooth headsets; and

• light electric vehicles, hybrid electric vehicles, electric vehicles, cordless power tools, and uninterruptible power supplies, or UPS.

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 the OEM market. Our products are packed into batteries by third-party battery pack manufacturers in accordance with the specifications of manufacturers of portable electronic applications. At the request of our customers that order prismatic battery packs, we also engage battery pack manufacturers to assemble our prismatic cells into batteries for a fee and then sell battery packs to these customers both for the replacement and OEM markets.

2

As we expand our production capacity and add other lithium-ion battery cell product lines in response to evolving market demands, we have derived and will continue to derive an increasing portion of our revenues from our other product lines.

Second Fiscal Quarter Financial Performance Highlights

During the second quarter of fiscal year 2011, we generated $46.7 million in net revenues, down 26.5% from $63.5 million last quarter and down 7.9% from $50.4 million for the same quarter in fiscal year 2010.

Gross profit for the second quarter of fiscal year 2011 was $4.4 million, down 55.5% from $10.0 million last quarter and down 50.6% from $9.0 million in the same quarter of last year. Gross margin was 9.5%, compared with 15.7% last quarter and 17.9% in the year ago period. The decline in gross profit was mainly attributable to a decline in sales volume and the selling price of prismatic cells as a result of traditional seasonality and intense market price competition. In addition, the decline in selling price of cylindrical cells also caused the decline in gross profit.

We had access to $235.5 million in short-term credit facilities and $45.8 million in long-term credit facilities as of March 31, 2011. As of March 31, 2011, the principal outstanding amounts included short-term bank loans of $142.4 million, long-term bank loans of $15.3 million maturing within one year, long-term bank loans of $15.3 million maturing in over one year, and bills payable of $46.1 million, leaving $72.7 million of short-term funds available for additional cash needs. In addition, on July 10, 2008, our $60.0 million shelf registration statement was declared effective by the SEC, pursuant to which we have raised $36.6 million in gross revenue from common stock purchases and issued common stock warrants exercisable for up to $21.6 million in additional gross proceeds. As $16.0 million of these warrants were not exercised before their expiration, we may raise up to an additional $17.8 million in gross proceeds from future equity financings under this shelf registration statement.

Financial Statement Presentation

Net revenues. Our net revenues represent the invoice 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 invoice value of our products. Provision for sales returns are recorded as a reduction of revenue in the same period that revenue is recognized. The provision for sales returns represents our best estimate of the amount of goods that will be returned from our customers based on historical sales returns data.

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

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

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

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

Fixed Assets Impairment Charges. Impairment charges consist primarily of impairment losses for long-lived assets. These losses reflect the amounts by which the carrying values of these assets exceed their estimated fair value as determined by their estimated future discounted cash flows.

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

3

Government Grant Income / Other Income and Expenses. Income from government grants consist primarily of grant funds awarded to Shenzhen BAK as consideration for its contributions to the Shenzhen area’s economy and as subsidies for land-use rights at BAK Industrial Park. Our Tianjin subsidiary also received a government grant for its R&D and production work on electric vehicles. No present or future obligations arise from the receipt of these funds. No present or future obligations arise from the receipt of these funds.

Income Taxes. Under PRC income tax laws and regulations, before January 1, 2008, a foreign-invested enterprise, or FIE, was generally subject to an enterprise income tax rate of 33.0%, which included a 30.0% state income tax and a 3.0% local income tax. However, from at least calendar year 2002 through calendar year 2007, an enterprise recognized as a “Manufacturing Enterprise Located in Special Economic Zone” under PRC tax laws was entitled to a preferential income tax rate of 15%. Moreover, a foreign-invested manufacturing enterprise, starting from its first profitable calendar year after offset of accumulated tax losses, was entitled to a two-year exemption from enterprise income tax followed by a three-year 50% reduction in its enterprise income tax rate, also referred to herein as the “tax holiday.” An enterprise qualified for such treatment may receive a further tax rate reduction related to the size of qualified capital contributions received. In addition, from at least calendar year 2002 through calendar year 2007, an enterprise qualified as an “advanced technology enterprise” under PRC tax law was also entitled to a 50% reduction of income taxes.

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

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

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

For BAK Electronics, established in August 2005, the same tax holiday was in effect for calendar years 2006 and 2007, making BAK Electronics fully exempt from any enterprise income tax. Following the tax holiday, a three-year 50% reduction in BAK Electronics’ enterprise income tax rate commenced. Pursuant to the transition period of the New CIT Law, BAK Electronics’ income tax rates for calendar years 2010 and 2011 were expected to be 22% and 24%, respectively, and starting in calendar year 2012 it was expected to be subject to an income tax rate of 25%. Taking the 50% reduction into account, BAK Electronics’ income tax rates are now expected to be 11% and 24% for calendar years 2010 and 2011, respectively, with no change in its expected 2012 tax rate of 25%. BAK Electronics did not incur any enterprise income tax for calendar year 2010 due to the current tax losses.

Shenzhen BAK and BAK Electronics received in aggregate a tax benefit of $233,000 pursuant to their transitional tax rate for the six months ended March 31, 2011, or $0.004 per basic share.

Tianjin Meicai is currently paying no enterprise income tax due to current tax losses.

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

Our Canadian, German, Indian, and Hong Kong subsidiaries—BAK Canada, BAK Europe, BAK India, and BAK International—are subject to profits taxes in their respective countries at rates of 38%, 25%, 30%, and 16.5% respectively.

4

However, because they do not have any assessable income derived from or arising in those countries, they have not paid any such tax.

Our effective tax benefit rate was 3.9% for the six months ended March 31, 2011 and our effective tax expense rate was 2.1% for the six months ended March 31, 2010.

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

Results of Operations

Comparison of Three Months Ended March 31, 2011 and March 31, 2010

The following table sets forth key components of our results of operations for the periods indicated. All amounts, other than percentages, are in thousands of U.S. dollars.

Net Revenues. Net revenues decreased to $46.7 million for the three months ended March 31, 2011 as compared to $50.4 million for the same period of the prior year, a decrease of $3.7 million or 7.4%. The following sets forth the breakdown of our net revenues by battery cell type for the periods indicated.

• Net revenues from sales of aluminum-case cells decreased to $16.3 million in the three months ended March 31, 2011, from $24.6 million in the same period in fiscal year 2010, a decrease of $8.3 million or 33.9%, resulting from a decrease in our average selling price of 8.2% and a decrease in our sales volume of 19.8% driven by decreased sales in the PRC.
  

5

• Net revenues from sales of battery packs increased to $12.8 million in the three months ended March 31, 2011, from $10.4 million in the same period in fiscal year 2010, an increase of $2.4 million or 23.2%. This resulted from an increase in sales volume of 26.4% due to increased export sales, offset by a 15.7% decrease in average selling price.
  

• Net revenues from sales of cylindrical cells increased to $15.2 million in the three months ended March 31, 2011, from $13.4 million in the same period in fiscal year 2010, an increase of $1.8 million or 13.5%, due to an increase in sales volume of 36.8% driven by increased sales to laptop manufacturers and offset by a decrease in our average selling prices of 16.8% which was driven by strong market competition on price.
  

• We sold $1.7 million in lithium polymer cells in the three months ended March 31, 2011, compared to $1.7 million in lithium polymer cells in the same period in fiscal year 2010, a decrease of $42,000 or 2.4%, resulting from a decrease of 25.8% in sales volume and offset by an increase of 20.0% in our average selling price. The decrease in sales volume was primary due to a slowdown in orders from new customers and some current clients postponed launching new products.
  

• We also sold approximately $787,000 in high-power lithium battery cells in the three months ended March 31, 2011, as compared to $352,000 in high-power lithium battery cells in the same period of fiscal year 2010, due to our increased sales of products used in electric bicycles, power tools, uninterruptible power supplies, and other applications from our Tianjin facility.

Cost of Revenues. Cost of revenues increased to $42.3 million for the three months ended March 31, 2011, as compared to $41.4 million for the same period in fiscal year 2010, an increase of $841,000 or 2.0%. The increase in cost of revenues correlates to an increase of unit cylindrical costs over the three months ended March 31, 2011.

As a result, gross profit for the three months ended March 31, 2011 was $4.4 million, or 9.5% of net revenues, as compared to gross profit of $9.0 million, or 17.9% of net revenues, for the same period in fiscal year 2010. The decrease in our gross profit as a percentage of net revenues was primarily due to a significant decrease in sales volume for prismatic cells and a decrease in the average selling price for prismatic and cylindrical cells during the three months ended March 31, 2011 as compared to the same period of 2010.

Research and Development Costs. Research and development costs increased to $1.9 million for the three months ended March 31, 2011, as compared to $1.6 million for the same period in fiscal year 2010, an increase of $308,000 or 19.0%. Salaries and cost of benefits of R&D staff increased $373,000 primarily in response to guidance issued to Shenzhen-based companies by relevant local government authorities during the three months ended June 30, 2010 and effective July 1, 2010.

Sales and Marketing Expenses. Sales and marketing expenses increased to $2.2 million for the three months ended March 31, 2011, as compared to $1.7 million for the same period in fiscal year 2010, an increase of $494,000, or 29.0%. Salaries and benefits of sales and marketing staff increased $372,000 primarily in response to guidance issued to Shenzhen-based companies by relevant local government authorities during the three months ended June 30, 2010 and effective July 1, 2010. As a percentage of revenues, sales and marketing expenses have increased to 4.7% for the three months ended March 31, 2011 from 3.3% for the same period in 2010, due to the decrease in revenues from sales during the three months ended March 31, 2011.

General and Administrative Expenses. General and administrative expenses decreased to $2.2 million, or 4.6% of revenues, for the three months ended March 31, 2011, as compared to $4.8 million, or 9.6% of revenues, for the same period in fiscal year 2010, a decrease of $2.7 million, or 55.4%. Bad debt expenses decreased by $1.7 million during the three months ended March 31, 2011. We also recognized exchange gain of $1.3 million for the three months ended March 31, 2011, compared with exchange loss of $416,000 for the three months ended March 31, 2010.

Operating Loss. As a result of the above, operating loss totaled $1.8 million for the three months ended March 31, 2011, as compared to an operating income of $853,000 for the same period of the prior year, a decrease of $2.7 million, or 314.8%.

6

Finance Costs, Net. Finance costs, net, increased to $2.5 million for the three months ended March 31, 2011, as compared to $2.2 million for the same period of the prior fiscal year, an increase of $321,000 or 14.7%. The increase in net finance costs is mainly attributable to an increase in the average bank loan interest rates on both our short-term and long-term bank loans during the three months ended March 31, 2011.

Government Grant Income / Other Income and Expenses. We had deferred revenue from government grant income of $31,000 and other income of $49,000 for the three-month period ended March 31, 2011, as compared to government grant income of $79,000 and other expense of $145,000 for the same period of the prior fiscal year. The government grant income for the three months ended March 31, 2011 and March 31, 2010 mainly consisted of subsidies to pay for the land use rights to our corporate campus at BAK Industrial Park and government grant funds to subsidize certain lithium battery projects. No present or future obligation will arise from the receipt of such income.

Income Tax Benefits (Expense). Income tax benefits were $182,000 for the three months ended March 31, 2011, as compared to income tax expenses of $1.1 million for the same period of 2010. The change was the result of a deferred tax provision during the three months ended March 31, 2011.

Net Loss. As a result of the foregoing, we had a net loss of $4.1 million for the three months ended March 31, 2011 compared to $2.5 million for the same period of 2010.

Comparison of Six Months Ended March 31, 2011 and March 31, 2010

The following table sets forth key components of our results of operations for the periods indicated. All amounts, other than percentages, are in thousands of U.S. dollars.

Net Revenues. Net revenues increased to $110.2 million for the six months ended March 31, 2011 as compared to $100.6 million for the same period of the prior year, an increase of $9.6 million or 9.5%. The following sets forth the breakdown of our net revenues by battery cell type for the periods indicated.

7

• Net revenues from sales of aluminum-case cells decreased to $46.8 million in the six months ended March 31, 2011, from $52.4 million in the same period in fiscal year 2010, a decrease of $5.6 million or 10.7%, resulting from a decrease in our average selling price of 8.6% and sales volume of 11.2% driven by decreased sales in the PRC.

• Net revenues from sales of battery packs increased to $29.7 million in the six months ended March 31, 2011, from $21.3 million in the same period in fiscal year 2010, an increase of $8.4 million or 39.4%. This resulted from an increase in sales volume of 6.7% due to increased export sales, offset by a 2.5% decrease in average selling price.

• Net revenues from sales of cylindrical cells increased to $25.7 million in the six months ended March 31, 2011, from $21.5 million in the same period in fiscal year 2010, an increase of $4.2 million or 19.4%. This resulted from an increase in sales volume of 43.7% due to increased export sales, offset by a 8.6% decrease in average selling price driven by fierce market price competition.

• We sold $5.1 million in lithium polymer cells in the six months ended March 31, 2011, compared to $4.9 million in lithium polymer cells in the same period in fiscal year 2010, an increase of $254,000 or 5.2%, resulting from an increase of 34.0% in our average selling price, offset by a decrease of 19.8% in sales volume.

• We also sold approximately $2.9 million in high-power lithium battery cells in the six months ended March 31, 2011, as compared to $515,000 in high-power lithium battery cells in the same period of fiscal year 2010, due to our increased sales of products used in electric bicycles, power tools, uninterruptible power supplies, and other applications from our Tianjin facility.

Cost of Revenues. Cost of revenues increased to $95.8 million for the six months ended March 31, 2011, as compared to $82.1 million for the same period in fiscal year 2010, an increase of $13.7 million or 16.7%. The increase in cost of revenues correlates to an increase of cylindrical battery cell unit costs over the six months ended March 31, 2011.

As a result, gross profit for the six months ended March 31, 2011 was $14.4 million, or 13.1% of net revenues, as compared to gross profit of $18.6 million, or 18.4% of net revenues, for the same period in fiscal year 2010. Our decrease in gross profit as a percentage of net revenues was primarily due to a decrease in prismatic sales volume and a decrease in the average selling price in both prismatic and cylindrical cells during the six months ended March 31, 2011, as compared to the same period of 2010.

Research and Development Costs. Research and development costs increased to $3.5 million for the six months ended March 31, 2011, as compared to $3.4 million for the same period in fiscal year 2010, an increase of $184,000 or 5.4%. Salaries and costs of benefits of R&D staff increased $324,000 primarily as a response to guidance issued to Shenzhen-based companies by relevant local government authorities during the three months ended June 30, 2010 and effective July 1, 2010. Equity-based compensation included in R&D costs during the six months ended March 31, 2011 decreased by $167,000 compared to the six months ended March 31, 2010 as charges relating to outstanding stock options to R&D staff had already been reflected in large part in the same periods in the fiscal year 2010.

Sales and Marketing Expenses. Sales and marketing expenses increased to $4.5 million for the six months ended March 31, 2011, as compared to $3.7 million for the same period in fiscal year 2010, an increase of $738,000, or 19.8%. Salaries and welfare increased $443,000 primarily due to increased basic salaries and benefits in response to guidance issued to Shenzhen-based companies by relevant local government authorities during the three months ended June 30, 2010 and effective July 1, 2010. As a percentage of revenues, sales and marketing expenses have increased to 4.1% for the six months ended March 31, 2011 from 3.7% for the same period in 2010, due to the significant decrease in revenues from sales.

General and Administrative Expenses. General and administrative expenses decreased to $10.0 million, or 9.1% of revenues, for the six months ended March 31, 2011, as compared to $13.5 million, or 13.4% of revenues, for the same period in fiscal year 2010, a decrease of $3.4 million, or 25.5%. Bad debt expenses decreased by $3.2 million during the six months ended March 31, 2011.

Operating Loss. As a result of the above, operating loss totaled $3.6 million for the six months ended March 31, 2011, as compared to $2.0 million for the same period of the prior year, an increase of $1.6 million, or 79.9%.

8

Finance Costs, Net. Finance costs, net, increased to $5.4 million for the six months ended March 31, 2011, as compared to $4.3 million for the same period of the prior fiscal year, an increase of $1.0 million or 23.2%. The increase in net finance costs is mainly attributable to an increase in the average bank loan interest rates on both our short-term and long-term bank loans and in discounts charged for bills receivable recognized during the six months ended March 31, 2011.

Government Grant Income / Other Income and Expenses. We had deferred revenue from government grant income of $638,000 and other income of $290,000 for the six months ended March 31, 2011, as compared to government grant income of $434,000 and other expenses of $138,000 for the same period of the prior fiscal year. The government grant income for the six month months ended March 31, 2011 and 2010 mainly consisted of subsidies to pay for the land use rights to our corporate campus at BAK Industrial Park and government grant funds to subsidize certain lithium battery projects. No present or future obligation will arise from the receipt of such income.

Income Tax Benefits (Expense). Income tax benefits were $316,000 for the six months ended March 31, 2011, as compared to income tax benefits of $126,000 for the same period of 2010. The change was the result of a deferred tax provision during the six months ended March 31, 2011.

Net Loss. As a result of the foregoing, we had a net loss of $7.7 million for the six months ended March 31, 2011 compared to $5.9 million for the same period of 2010.

Liquidity and Capital Resources

We have historically financed our liquidity requirements from a variety of sources, including short-term bank loans, long-term bank loans and bills payable under bank credit agreements, sale of bills receivable and issuance of capital stock. As of March 31, 2011, we had cash and cash equivalents of $25.6 million, as compared to $22.6 million as of September 30, 2010. In addition, we had pledged deposits amounting to $5.9 million and $9.4 million as of March 31, 2011 and September 30, 2010, respectively. Typically, our banks require their borrowers to maintain deposits of approximately 10% to 100% of the outstanding loan balances and bills payable. The individual bank loans have maturities ranging from three to twelve months which coincides with the periods the cash remains pledged to the banks.

We had access to $235.5 million in short-term credit facilities and $45.8 million in long-term credit facilities as of March 31, 2011. As of March 31, 2011, the principal outstanding amounts included short-term bank loans of $142.4 million, long-term bank loans of $15.3 million maturing within one year, long-term bank loans of $15.3 million maturing in over one year, and bills payable of $46.1 million, leaving $72.7 million of short-term funds available for additional cash needs. In addition, on July 10, 2008, our $60.0 million shelf registration statement was declared effective by the SEC, pursuant to which we have raised $36.6 million in cash from common stock purchases and issued common stock warrants exercisable for up to $21.6 million in additional gross proceeds. As $16.0 million of these warrants were not exercised before their expiration, we may raise up to an additional $17.8 million in gross proceeds from future equity financings under this shelf registration statement.

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

Cash Flow
(All amounts in thousands of U.S. dollars)

9

Operating Activities

Net cash provided by operating activities was $21.0 million in the six months ended March 31, 2011, compared to $18.9 million of net cash used in operating activities in the same period in fiscal year 2010. The increase of $39.9 million in operating activities was mainly attributable to longer credit terms we obtained from our suppliers.

Investing Activities

Net cash used in investing activities was $12.3 million in the six months ended March 31, 2011, compared to $7.7 million of net cash used in investing activities in the same period in fiscal year 2010. The net cash used in investing activities during the period ended March 31, 2011 was mainly used for procurement of machinery and equipment for our cylindrical cell line and prismatic cell production line and construction of our Research and Development Test Centre in Shenzhen.

Financing Activities

Net cash used in financing activities was $6.3 million in the six months ended March 31, 2011, compared to $36.3 million net cash provided by financing activities in the same period in 2010. This was mainly attributable to (i) net proceeds of $19.6 million from a private placement of our common stock completed in October 2009, (ii) a $9.3 million decrease in cash deposits at banks as collateral in the six months ended March 31, 2011, and (iii) decreased borrowings, net of repayments, of $13.5 million in the six months ended March 31, 2011.

As of March 31, 2011, the principal amounts outstanding under our credit facilities and lines of credit were as follows: