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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)

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

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.

Large accelerated filer [  ]	Accelerated filer                   [X]
Non-accelerated filer   [  ]	Smaller reporting company [   ]
(Do not check if a smaller reporting company)

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:

Class of Securities	Shares Outstanding
Common Stock, $0.001 par value	63,616,276

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CHINA BAK BATTERY, INC.

TABLE OF CONTENTS

	PART I FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS	F-1
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.	1
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.	18
ITEM 4.	CONTROLS AND PROCEDURES.	18
	PART II OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS.	19
ITEM 1A.	RISK FACTORS.	19
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.	19
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES.	19
ITEM 4.	(REMOVED AND RESERVED).	19
ITEM 5.	OTHER INFORMATION.	19
ITEM 6.	EXHIBITS.	19

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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

Contents	Page
Condensed Interim Consolidated Balance Sheets as of September 30, 2010 and March 31, 2011 (unaudited)	F-2 - F-3
Condensed Interim Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2010 and 2011 (unaudited)	F-4
Condensed Interim Consolidated Statements of Operations and Comprehensive Loss for the six months ended March 31, 2010 and 2011 (unaudited)	F-5
Condensed Interim Consolidated Statements of Shareholders’ Equity for the six months ended March 31, 2010 and 2011 (unaudited)	F-6
Condensed Interim Consolidated Statements of Cash Flows for the three months ended March 31, 2010 and 2011 (unaudited)	F7 - F-8
Condensed Interim Consolidated Statements of Cash Flows for the six months ended March 31, 2010 and 2011 (unaudited)	F-9 - F-10
Notes to the Condensed Consolidated Financial Statements (unaudited)	F-11- F-39

F-1

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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$)

					September 30,			March 31,
		Note			2010			2011
								(Unaudited)
Assets
Current assets
Cash and cash equivalents				$	22,588,635		$	25,557,962
Pledged deposits		2			9,425,838			5,882,359
Trade accounts receivable, net		3			86,198,239			91,586,477
Inventories		4			64,048,366			66,797,093
Prepayments and other receivables		5			5,513,221			3,807,485
Deferred tax assets					6,887,723			7,451,629
Total current assets					194,662,022			201,083,005
Property, plant and equipment, net		6			228,884,576			232,296,998
Lease prepayments, net					31,924,396			32,332,093
Intangible assets, net					184,367			166,746
Deferred tax assets					1,680,348			1,719,874
Total assets				$	457,335,709		$	467,598,716

See accompanying notes to the condensed interim consolidated financial statements.

F-2

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

					September 30,			March 31,
		Note			2010			2011
								(Unaudited)
Liabilities
Current liabilities
Short-term bank loans		7		$	137,418,187		$	142,447,010
Current maturities of long-term bank loans		8			11,956,002			15,270,440
Accounts and bills payable					93,724,448			109,598,805
Accrued expenses and other payables					22,411,066			19,094,969
Total current liabilities					265,509,703			286,411,224
Long-term bank loans, less current maturities		8			29,890,004			15,270,440
Deferred revenue					7,352,941			7,390,893
Other long-term payables		9			3,431,373			10,892,883
Deferred tax liabilities					718,912			728,907
Total liabilities					306,902,933			320,694,347
Commitments and contingencies		13
Shareholders’ equity
Common stock US$ 0.001 par value;
100,000,000 authorized; 63,612,526 and 63,616,276 issued           and outstanding as of September 30, 2010 and March 31, 2011 respectively					63,613			63,617
Donated shares					14,101,689			14,101,689
Additional paid-in capital					124,551,522			125,485,853
Statutory reserves					7,314,565			7,645,303
Accumulated deficit					(19,542,138	)		(27,614,228	)
Accumulated other comprehensive income					28,010,135			31,288,745
					154,499,386			150,970,979
Less: Treasury shares					(4,066,610	)		(4,066,610	)
Total shareholders’ equity					150,432,776			146,904,369
Total liabilities and shareholders’ equity				$	457,335,709		$	467,598,716

See accompanying notes to the condensed interim consolidated financial statements.

F-3

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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$)

		Three months ended March 31,
		2010			2011
Net revenues	$	50,423,715		$	46,710,589
Cost of revenues		(41,420,960	)		(42,261,582	)
Gross profit		9,002,755			4,449,007
Operating expenses:
Research and development expenses		(1,625,378	)		(1,932,735	)
Sales and marketing expenses		(1,705,649	)		(2,198,785	)
General and administrative expenses		(4,818,460	)		(2,149,986	)
Total operating expenses		(8,149,487	)		(6,281,506	)
Operating income / (loss)		853,268			(1,832,499	)
Finance costs, net		(2,190,607	)		(2,512,322	)
Government grant income		78,970			30,769
Other (expense) / income		(145,024	)		48,732
Loss before income taxes		(1,403,393	)		(4,265,320	)
Income tax (expense) / benefits		(1,146,418	)		181,760
Net loss	$	(2,549,811	)	$	(4,083,560	)
Other comprehensive (loss) / income
- Foreign currency translation adjustment		(164,260	)		1,228,458
Comprehensive loss	$	(2,714,071	)	$	(2,855,102	)
Net loss per share:
- Basic	$	(0.04	)	$	(0.06	)
- Diluted	$	(0.04	)	$	(0.06	)
Weighted average number of shares of common stock:
- Basic		62,881,663			62,895,246
- Diluted		62,881,663			62,895,246

See accompanying notes to the condensed interim consolidated financial statements.

F-4

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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$)

		Six months ended March 31,
		2010			2011
Net revenues	$	100,651,267		$	110,240,808
Cost of revenues		(82,088,632	)		(95,795,437	)
Gross profit		18,562,635			14,445,371
Operating expenses:
Research and development expenses		(3,393,485	)		(3,577,479	)
Sales and marketing expenses		(3,733,619	)		(4,472,148	)
General and administrative expenses		(13,455,800	)		(10,028,657	)
Total operating expenses		(20,582,904	)		(18,078,284	)
Operating loss		(2,020,269	)		(3,632,913	)
Finance costs, net		(4,343,733	)		(5,351,962	)
Government grant income		434,274			637,740
Other (expense) / income		(138,308	)		290,225
Loss before income taxes		(6,068,036	)		(8,056,910	)
Income tax benefits		125,898			315,558
Net loss	$	(5,942,138	)	$	(7,741,352	)
Other comprehensive (loss) / income
- Foreign currency translation adjustment		(271,606	)		3,278,610
Comprehensive loss	$	(6,213,744	)	$	(4,462,742	)
Net loss per share:
- Basic	$	(0.10	)	$	(0.12	)
- Diluted	$	(0.10	)	$	(0.12	)
Weighted average number of shares of common stock:
- Basic		61,984,941			62,895,122
- Diluted		61,984,941			62,895,122

See accompanying notes to the condensed interim consolidated financial statements.

F-5

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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

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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$)

		Three months ended March 31,
		2010			2011
Cash flow from operating activities
Net loss	$	(2,549,811	)	$	(4,083,560	)
Adjustments to reconcile net loss to net cash (used in ) / provided by operating activities:
Depreciation and amortization		4,600,067			4,655,882
Provision for / (recovery of) doubtful debts		921,213			(613,782	)
Provision for / (recovery of) obsolete inventories		142,130			(737,407	)
Share-based compensation		799,675			409,316
Deferred income taxes		200,170			(182,041	)
Deferred revenue		(58,587	)		(60,795	)
Exchange loss / (gain)		416,069			(135,060	)
Changes in operating assets and liabilities:
Trade accounts receivable		(10,399,402	)		1,996,606
Inventories		3,475,403			1,656,539
Prepayments and other receivables		4,754,453			1,284,517
Accounts and bills payable		(7,593,860	)		(1,272,685	)
Accrued expenses and other payables		3,774,284			(292,823	)
Net cash (used in) / provided by operating activities		(1,518,196	)		2,624,707
Cash flow from investing activities
Purchases of property, plant and equipment		(3,803,885	)		(6,349,350	)
Purchases of intangible assets		(135	)		-
Net cash used in investing activities	$	(3,804,020	)	$	(6,349,350	)

See accompanying notes to the condensed interim consolidated financial statements.

F-7

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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$)

		Three months ended March 31,
		2010			2011
Cash flow from financing activities
Proceeds from borrowings	$	100,894,215		$	66,874,383
Repayment of borrowings		(74,554,760	)		(72,954,215	)
Decrease in pledged deposits		1,017,887			10,567,373
Net cash provided by financing activities		27,357,342			4,487,541
Effect of exchange rate changes on cash and cash equivalents		(693,641	)		268,172
Net increase in cash and cash equivalents		21,341,485			1,031,070
Cash and cash equivalents at the beginning of period		18,302,923			24,526,892
Cash and cash equivalents at the end of period	$	39,644,408		$	25,557,962
Supplemental disclosure of cash flow information:
Cash received during the period for:
Bills receivable discounted to banks	$	-		$	5,184,165
Cash paid during the period for:
Income taxes	$	-		$	42,097
Interest, net of amounts capitalized	$	1,819,958		$	2,348,209

See accompanying notes to the condensed interim consolidated financial statements.

F-8

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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$)

		Six months ended March 31,
		2010			2011
Cash flow from operating activities
Net loss	$	(5,942,138	)	$	(7,741,352	)
Adjustments to reconcile net loss to net cash (used in ) / provided by operating activities:
Depreciation and amortization		8,792,802			8,975,240
Provision for doubtful debts		5,657,549			2,447,086
Recovery of obsolete inventories		(138,125	)		(737,407	)
Share-based compensation		1,944,885			934,335
Deferred income taxes		(1,294,485	)		(417,791	)
Deferred revenue		(117,174	)		(120,891	)
Exchange loss/(gain)		153,511			(200,587	)
Changes in operating assets and liabilities:
Trade accounts receivable		(5,924,142	)		(5,875,117	)
Inventories		(10,097,219	)		(571,497	)
Prepayments and other receivables		(3,442,801	)		1,805,828
Accounts and bills payable		(12,388,975	)		14,689,029
Accrued expenses and other payables		3,905,219			7,823,961
Net cash (used in) / provided by operating activities		(18,891,093	)		21,010,837
Cash flow from investing activities
Purchases of property, plant and equipment		(7,708,534	)		(12,317,071	)
Purchases of intangible assets		(1,638	)		-
Net cash used in investing activities	$	(7,710,172	)	$	(12,317,071	)

See accompanying notes to the condensed interim consolidated financial statements.

F-9

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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$)

		Six months ended March 31,
		2010			2011
Cash flow from financing activities
Proceeds from borrowings	$	141,832,103		$	94,628,666
Repayment of borrowings		(138,268,619	)		(104,714,179	)
Decrease in pledged deposits		13,088,683			3,809,754
Proceeds from issuance of capital stock, net		19,616,080			-
Net cash provided by / (used in) financing activities		36,268,247			(6,275,759	)
Effect of exchange rate changes on cash and cash equivalents		(700,926	)		551,320
Net increase in cash and cash equivalents		8,966,056			2,969,327
Cash and cash equivalents at the beginning of period		30,678,352			22,588,635
Cash and cash equivalents at the end of period	$	39,644,408		$	25,557,962
Supplemental disclosure of cash flow information:
Cash received during the period for:
Bills receivable discounted to banks	$	585,969		$	14,279,747
Cash paid during the period for:
Income taxes	$	222,339		$	42,097
Interest, net of amounts capitalized	$	3,642,153		$	4,750,809

See accompanying notes to the condensed interim consolidated financial statements.

F-10

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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

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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

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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

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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

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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

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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:

			September 30,			March 31,
			2010			2011
	Pledged deposits with banks for:
	Construction payable	$	463,410		$	4,211,961
	Short-term bank loans (Note 7)		658,508			-
	Bills payable		8,303,920			1,670,398
		$	9,425,838		$	5,882,359

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:

			September 30,			March 31,
			2010			2011
	Trade accounts receivable	$	98,625,901		$	104,563,112
	Less: Allowance for doubtful accounts		(23,354,925	)		(26,349,819	)
			75,270,976			78,213,293
	Bills receivable		10,927,263			13,373,184
		$	86,198,239		$	91,586,477

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

			Six months ended March 31,
			2010			2011
	Balance at beginning of period	$	13,081,331		$	23,354,925
	Addition of bad debt expense, net		5,648,694			2,447,086
	Foreign exchange adjustment		2,092			547,808
	Balance at end of period	$	18,732,117		$	26,349,819

F-16

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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:

			September 30,			March 31,
			2010			2011
	Raw materials	$	18,357,473		$	21,629,811
	Work-in-progress		6,771,843			11,103,896
	Finished goods		47,458,604			42,048,007
			72,587,920			74,781,714
	Less: Provision for obsolete inventories		(8,539,554	)		(7,984,621	)
		$	64,048,366		$	66,797,093

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:

			September 30,			March 31,
			2010			2011
	Prepayments for raw materials and others	$	2,198,770		$	1,589,888
	Other receivables		3,952,530			2,878,214
	Less: Allowance for doubtful accounts		(638,079	)		(660,617	)
		$	5,513,221		$	3,807,485

F-17

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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:

			September 30,			March 31,
			2010			2011
	Buildings	$	121,050,663		$	124,663,241
	Machinery and equipment		135,127,265			140,475,044
	Office equipment		2,207,168			2,354,595
	Motor vehicles		1,416,369			1,447,891
			259,801,465			268,940,771
	Accumulated depreciation		(61,340,759	)		(71,350,162	)
	Construction in progress		33,791,211			39,364,632
	Prepayment for acquisition of property, plant and equipment		2,550,733			1,391,940
	Assets held for abandonment		1,043,835			1,063,327
	Net book value		235,846,485			239,410,508
	Impairment charge		(6,961,909	)		(7,113,510	)
	Carried amount	$	228,884,576		$	232,296,998

F-18

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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)

(i)	Depreciation expense for the six months ended March 31, 2010 and 2011 is included in the condensed interim consolidated statements of operations and comprehensive loss as follows:

			Six months ended March 31,
			2010			2011
	Cost of revenues	$	6,499,739		$	6,743,209
	Research and development expenses		282,843			208,154
	Sales and marketing expenses		195,494			243,916
	General and administrative expenses		1,019,415			1,292,048
		$	7,997,491		$	8,487,327

(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:

			September 30,			March 31,
			2010			2011
	Net book value	$	1,043,835			1,063,327
	Less: impairment charge		(819,874	)		(846,487	)
	Carried amount	$	223,961			216,840

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

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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:

			September 30,			March 31,
			2010			2010
	Pledged deposits (Note 2)	$	658,508		$	-
	Inventories (Note 4)		22,417,504			22,905,659
	Machinery and equipment, net (Note 6)		31,788,414			26,409,205
		$	54,864,426		$	49,314,864

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

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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

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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:

		Percentage of		Initial
Number of Shares		Options Issued		Vesting Date
800,000		40%		July 1, 2007
600,000		30%		January 1, 2008
600,000		30%		July 1, 2008
2,000,000		100%

F-22

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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:

								Weighted
					Weighted			average
					average			remaining			Aggregate
		Number of			exercise price			contractual			intrinsic
		shares			per share			term			value (1)
Outstanding as of October 1, 2010		200,000		$	6.25
Exercised		-			-
Forfeited		-			-
Cancelled		-			-
Outstanding as of March 31, 2011		200,000		$	6.25			0.1 years		$	-
Exercisable as of March 31, 2011		200,000		$	6.25			0.1 years		$	-

(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

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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:

		Number of Shares			Weighted average exercise price per share			Weighted average remaining contractua l term			Aggregate intrinsic value (1)
Outstanding as of October 1, 2010		923,500		$	3.29
Exercised		-			-
Forfeited		-			-
Cancelled		-			-
Outstanding as of March 31, 2011		923,500		$	3.29			2.4 years		$	-
Exercisable as of March 31, 2011		665,500		$	3.18			1.9 years		$	-

(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

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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:

		Number of Shares			Weighted average exercise price per share			Weighted average remaining contractual term			Aggregate intrinsic value (1)
Outstanding as of October 1, 2010		360,000		$	4.30
Exercised		-			-
Forfeited		-			-
Cancelled		-			-
Outstanding as of March 31, 2011		360,000		$	4.30			1.8 years		$	-
Exercisable as of March 31, 2011		360,000		$	4.30			1.8 years		$	-

(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

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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:

								Weighted
					Weighted			average
					average			remaining			Aggregate
		Number of			exercise price			contractual			intrinsic
		shares			per share			term			value (1)
Outstanding as of October 1, 2010		1,250,000		$	4.18
Exercised		-			-
Forfeited		-			-
Cancelled		-			-
Outstanding as of March 31, 2011		1,250,000		$	4.18			2.1 years		$	-
Exercisable as of March 31, 2011		695,837		$	4.18			1.0 years		$	-

(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

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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:

		Number of shares			Weighted average exercise price per share			Weighted average remaining contractual term			Aggregate intrinsic value (1)
Outstanding as of October 1, 2010		1,694,355		$	2.81
Exercised		-			-
Forfeited		51,000			2.81
Cancelled		-			-
Outstanding as of March 31, 2011		1,643,355		$	2.81			5.2 years		$	-
Exercisable as of March 31, 2011		420,800		$	2.81			5.2 years		$	-

(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:

		Number of shares			Weighted average exercise price per share			Weighted average remaining contractual term			Aggregate intrinsic value (1)
Outstanding as of October 1, 2010		75,000		$	3.24
Exercised		-			-
Forfeited		-			-
Cancelled		-			-
Outstanding as of March 31, 2011		75,000		$	3.24			5.2 years		$	-
Exercisable as of March 31, 2011		18,750		$	3.24			5.2 years		$	-

(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:

		Number of shares			Weighted average exercise price per share			Weighted average remaining contractual term			Aggregate intrinsic value (1)
Outstanding as of October 1, 2010		50,000		$	2.58
Exercised		-			-
Forfeited		50,000			2.58
Cancelled		-			-
Outstanding as of March 31, 2011		-		$	-			-		$	-
Exercisable as of March 31, 2011		-		$	-			-		$	-

(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

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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:

		Number of shares			Weighted average exercise price per share			Weighted average remaining contractual term			Aggregate intrinsic value (1)
Outstanding as of October 1, 2010		100,000		$	2.43
Exercised		-			-
Forfeited		-			-
Cancelled		-			-
Outstanding as of March 31, 2011		100,000		$	2.43			6.4 years		$	-
Exercisable as of March 31, 2011		25,000		$	2.43			6.4 years		$	-

(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

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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:

		Number of shares			Weighted average exercise price per share			Weighted average remaining contractual term			Aggregate intrinsic value (1)
Outstanding as of October 1, 2010		80,000		$	1.58
Exercised		-			-
Forfeited		80,000			1.58
Cancelled		-			-
Outstanding as of March 31, 2011		-		$	-			-		$	-
Exercisable as of March 31, 2011		-		$	-			-		$	-

(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:

(i)	25% of the restricted shares granted will immediately vest on the grant date; and
(ii)	The remaining 75% of the restricted shares will vest in three equal quarterly installments on the last day of each subsequent quarter or in three equal quarterly installments on the last day of each calendar quarter beginning on the last day of the first full calendar quarter after the grant date.

The Company recorded non-cash share-based compensation expense of US$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

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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

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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

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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:

		September 30,			March 31,
		2010			2011
Guaranteed for Shenzhen Tongli Hi-tech Co. Ltd. - a non-related party	$	2,241,750		$	2,290,566
Guaranteed for Hunan Reshine New Material Ltd. - a non-related party		5,978,001			6,108,176
Guaranteed for Nanjing Special Metal Equipment Co. Ltd. - a non-related party		14,197,752			11,452,830
Guaranteed for Siping Juyuan Hanyang Plate Heat Exchanger Co. Ltd. - a non-related party		2,989,000			3,054,088
Guaranteed for Shanghai Global Children Products Co. Ltd.– a non-related party		747,250			763,522
Guaranteed for Beijing Triolion Technology Co. Ltd. – a non-related party		597,800			-
Guaranteed for Tianjin Bike New Energy Research Institute - a non-related party		-			7,635,220
Guaranteed for Shenzhen Yasu Technology Co. Ltd. - a non-related party		4,483,501			4,581,132
Guaranteed for Shenzhen B&G Technology Development Co. Ltd. - a non-related party		8,967,001			9,162,264
	$	40,202,055		$	45,047,798

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

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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

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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:

		Six months ended March 31,
		2010						2011
					%						%
Aluminum-case cell	$	52,443,541			52.10		$	46,848,778			42.50
Battery pack		21,305,633			21.17			29,697,236			26.94
Cylindrical cells		21,499,654			21.36			25,668,780			23.28
Lithium polymer cells		4,886,728			4.86			5,140,245			4.66
High-power lithium battery cells		515,711			0.51			2,885,769			2.62
	$	100,651,267			100.00		$	110,240,808			100.00

Net revenues by geographic area:

		Six months ended March 31,
		2010						2011
					%						%
PRC Mainland	$	69,032,783			68.59		$	77,589,671			70.38
PRC Taiwan		15,045,833			14.95			19,893,333			18.05
India		2,524,113			2.51			5,635,636			5.11
Europe		287,610			0.28			610,231			0.55
Hong Kong, China		12,548,381			12.46			4,219,393			3.83
Others		1,212,547			1.21			2,292,544			2.08
	$	100,651,267			100.00		$	110,240,808			100.00

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

F-38

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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

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

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

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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.

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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.

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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.

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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.

		Three Months Ended
		March 31,
		2011			2010			$Change			% Change
Net revenues	$	46,711		$	50,423		$	(3,712	)		(7.4	)
Cost of revenues		42,262			41,421			841			2.0
Gross profit		4,449			9,002			(4,553	)		(50.6	)
Operating expenses:
Research and development expenses		1,933			1,625			308			19.0
Sales and marketing expenses		2,199			1,705			494			29.0
General and administrative expenses		2,150			4,819			(2,669	)		(55.4	)
Total operating expenses		6,282			8,149			(1,867	)		(22.9	)
Operating (loss) / income		(1,833	)		853			(2,686	)		(314.9	)
Finance costs, net		(2,512	)		(2,190	)		322			14.7
Government grant income		31			79			(48	)		(60.8	)
Other income / (expenses)		49			(145	)		194			133.8
Income tax benefits / (expenses)		182			(1,146	)		1,328			115.9
Net loss	$	(4,083	)	$	(2,549	)	$	1,534			60.2

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.

		Three Months Ended
		March 31,
		2011			2010
		(in thousands)
Prismatic cells
Aluminum-case cells	$	16,251		$	24,581
Battery packs		12,799			10,386
Cylindrical cells		15,198			13,386
Lithium polymer cells		1,676			1,718
High-power lithium battery cells		787			352
Total	$	46,711		$	50,423

• 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.
  

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• 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%.

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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.

		Six Months Ended
		March 31,
		2011			2010			$Change			% Change
Net revenues	$	110,241		$	100,651		$	9,590			9.5
Cost of revenues		95,795			82,089			13,706			16.7
Gross profit		14,446			18,562			(4,117	)		(22.2	)
Operating expenses:
Research and development expenses		3,577			3,393			184			5.4
Sales and marketing expenses		4,472			3,734			738			19.8
General and administrative expenses		10,029			13,456			(3,427	)		(25.5	)
Total operating expenses		18,078			20,583			(2,505	)		(12.2	)
Operating loss		(3,632	)		(2,021	)		1,611			79.9
Finance costs, net		(5,352	)		(4,344	)		1,008			23.2
Government grant income		638			434			204			47.0
Other income / (expenses)		290			(138	)		428			(310.1	)
Income tax benefit		316			126			190			150.8
Net loss	$	(7,741	)	$	(5,943	)	$	1,798			30.2

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.

		Six Months Ended
		March 31,
		2011			2010
		(in thousands)
Prismatic cells
Aluminum-case cells	$	46,849		$	52,444
Battery packs		29,697			21,306
Cylindrical cells		25,669			21,500
Lithium polymer cells		5,140			4,886
High-power lithium battery cells		2,886			515
Total	$	110,241		$	100,651

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• 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%.

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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)

		Six Months Ended
		March 31
		2011			2010
Net cash provided by / (used in) operating activities	$	21,011		$	(18,891	)
Net cash used in investing activities		(12,317	)		(7,710	)
Net cash (used in) / provided by financing activities		(6,276	)		36,268
Effect of exchange rate on cash and cash equivalents		551			(701	)
Net increase in cash and cash equivalents		2,969			8,966
Cash and cash equivalents at beginning of the period		22,589			30,678
Cash and cash equivalents at end of period		25,558			39,644

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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:

					Amount
					Borrowed
					(includes
		Maximum			bank loans
		Amount			and bills
		Available			payable)
		(in thousands)
Short-term credit facilities:
Agricultural Bank of China	$	61,082		$	61,082
Shenzhen Development Bank		30,541			22,906
China CITIC Bank		12,216			12,216
Bank of China		68,717			53,888
China Everbright Bank		18,325			13,988
Bank of Communications		7,635			-
Industrial Bank		9,544			7,635
Guangdong Development Bank		15,270			-
Tianjin Branch, Bank of Dalian		12,216			6,418
Subtotal—Short-term credit facilities	$	235,546		$	178,133
Long-term credit facilities:
Agricultural Bank of China		7,635			7,635
China Development Bank		22,905			7,635
Agricultural Bank of China, Tianjin Jinxin Branch		15,271			15,271
Subtotal—Long-term credit facilities	$	45,811		$	30,541
Lines of Credit:
Shenzhen Branch, Bank of China					8,150
Tianjin Branch, Bank of China					134
Tianjin Branch, Bank of Dalian					1,959
Shanghai Pudong Development Bank					185
Subtotal—Lines of credit				$	10,428
Total Principal Outstanding	$	281,357		$	219,102

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The above principal outstanding amounts under credit facilities and lines of credit included short-term bank loans of $142.4 million, long-term bank loans of $15.3 million maturing within one year and long-term bank loans of $15.3 million maturing in over one year, and bills payable of $46.1 million.

For the purpose of presentation, the effect of increases in bills payable balances is included in operating activities in the statements of cash flows.

During the three months ended March 31, 2011, we repaid 25 loans totaling approximately $73.0 million, renewed three comprehensive credit facility agreements with a maximum loan amount of approximately $47.7 million, and six short-term bank loan agreements became effective totaling approximately $42.8 million. The material financing terms of these loans are described below.

On January 20, 2011, we renewed our comprehensive credit facility agreement with Shenzhen Development Bank, Longgang Branch, or Shenzhen Development Bank, to provide a maximum loan amount of RMB 200 million (approximately $30.5 million). Loans may be drawn at any time from January 26, 2011 to January 18, 2012 and will be due based on each loan agreement. This credit facility agreement was guaranteed by BAK International, BAK Tianjin and Mr. Xiangqian Li, and also was secured by $22.9 million of inventory. As of March 31, 2011, we had three outstanding short-term loans under the comprehensive credit facility with Shenzhen Development Bank totaling approximately $22.9 million. The first loan, dated January 25, 2011, was approximately $10.7 million, carried a floating interest rate equal to the benchmark rate of the PBOC on the date of the loan agreement and adjusted quarterly, and is repayable on January 24, 2012. The second loan, dated January 30, 2011, was approximately $9.2 million, carried a floating interest rate equal to the benchmark rate of the PBOC on the date of the loan agreement and adjusted quarterly, and is repayable on January 29, 2012. The third loan, dated August 4, 2010, was approximately $3.0 million, carried a floating interest rate at 95% of the benchmark rate of the PBOC on the date of the loan agreement and adjusted quarterly, and is repayable on June 14, 2011. The third loan was borrowed after a predecessor loan was repaid on August 2, 2010, not December 31, 2010 as had been reported in our Form 10-Q for the fiscal quarter ended December 31, 2010.

On December 26, 2010, we renewed our comprehensive credit facility agreement with Industrial Bank, Shenzhen Hi-tech District Branch, or Shenzhen Industrial Bank, to provide a maximum loan amount of RMB 62.5 million (approximately $9.5 million). Loans may be drawn at any time over the one-year period beginning December 26, 2010 and will be due based on each loan agreement. This credit facility agreement was guaranteed by BAK International, BAK Tianjin and Mr. Xiangqian Li. As of March 31, 2011, we had borrowed approximately $7.6 million under the loan agreement, carrying annual interest rate at 6.391% and the due date is December 10, 2011.

On October 27, 2010, we renewed our comprehensive credit facility agreement with Tianjin Branch, Bank of Dalian, or Bank of Dalian, to provide a maximum loan amount of RMB 80 million (approximately $12.3 million), effective January 2011. Loans may be drawn at any time over the period from October 27, 2010 to January 26, 2012 and will be due based on each loan agreement. This credit facility agreement was guaranteed up to RMB 50 million by Shenzhen BAK Battery Co., Ltd. and Mr. Xiangqian Li. As of March 31, 2011, we had borrowed approximately $6.1 million under a loan agreement dated October 27, 2010, bearing annual interest of 6.116%, adjusted monthly, repayable on October 26, 2011, and $0.3 million notes payable under this credit facility agreement. In addition, we had also borrowed $1.9 million of short term loans separate from the credit facility.

During the first quarter of our fiscal year ended September 30, 2011, we renewed our guaranty contract with Shanghai Pudong Development Bank to provide guaranty for the loans drawn from November 30, 2010 to October 25, 2011. The maximum guaranty amount for all loans will be RMB 30 million (approximately $4.6 million). As of March 31, 2011, we had borrowed approximately $0.2 million of notes payable outside any credit facility.

As of March 31, 2011, we had a comprehensive credit facility agreement with Agricultural Bank of China, Shenzhen Eastern Branch, or Agricultural Bank – Shenzhen Branch, to provide a maximum loan amount of RMB 500 million (approximately $75.7 million), including RMB 400 million (approximately $60.6 million) of one-year term credit facilities and RMB 100 million (approximately $15.1 million) of five-year term credit facilities. This comprehensive credit facility agreement renewed a predecessor credit facility agreement between Shenzhen BAK and Agricultural Bank – Shenzhen Branch dated November 26, 2009 and governs all loans that were subject to the predecessor agreement at the time of the renewal. New loans may be drawn under this credit facility from November 15, 2010 through November 10, 2011, with the term of the loan established at the time each new loan is drawn, except as to funds borrowed under a loan agreement between Shenzhen BAK and Agricultural Bank – Shenzhen Branch dated November 23, 2006 and effective December 18, 2006, or the 2006 Loan Agreement, which may be drawn at any time within five years of December 18, 2006, and which will mature five years after such funds are drawn. Pursuant to the comprehensive credit facility, Shenzhen BAK must obtain prior approval from Agricultural Bank – Shenzhen Branch to renew long-term loans that are subject to this credit facility. In addition, Shenzhen BAK undertook to ensure that the percentage of certain business conducted with Agricultural Bank – Shenzhen Branch relative to such business it conducts with all financial institutions combined be at least equal to the percentage of its indebtedness to Agricultural Bank – Shenzhen Branch relative to its indebtedness to all financial institutions combined (referred to as the “Percentages Undertaking”). The “business” referred to in the preceding sentence refers to the volume of transactional payments that are drawn from Shenzhen BAK’s accounts with Agricultural Bank –Shenzhen Branch or applicable financial institutions and the amount of foreign currencies deposited with Agricultural Bank – Shenzhen Branch or applicable financial institutions. Shenzhen BAK also undertook not to issue any dividends without the written consent of Agricultural Bank – Shenzhen Branch prior to the expiration of all loans under this credit facility (this undertaking and the Percentages Undertaking are collectively referred to as the “Undertakings”). The obligations of Shenzhen BAK under this comprehensive credit facility are guaranteed by Mr. Xiangqian Li, BAK Tianjin, and BAK International. Shenzhen BAK’s obligations under this credit facility agreement are also guaranteed by Shenzhen BAK’s pledge of the property ownership and land use rights certificates relating to its manufacturing and other facilities in Shenzhen, PRC, known as BAK Industrial Park. In the event that Shenzhen BAK breaches any of the Undertakings or any guaranteed party breaches any of its guaranty obligations, Agricultural Bank – Shenzhen Branch may, in addition to exercising any other applicable remedies under the applicable agreements, accelerate repayment of all loan amounts governed by this credit facility.

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As of March 31, 2011, we had six outstanding short-term loans under the comprehensive credit facility with Agricultural Bank – Shenzhen Branch, totaling approximately $61.1 million, carrying annual interest at 5.31% and 5.0445%, adjusted quarterly. The first loan, of approximately $9.2 million, carried annual interest at 5.0445% and was due on April 20, 2011. We repaid this loan on April 12, 2011. The second loan, of approximately $11.5 million, carried annual interest at 5.0445% and was due on April 22, 2011. We repaid this loan on April 14, 2011. The third loan, of approximately $13.7 million, carried annual interest at 5.0445% and was due on April 19, 2011. We repaid this loan on April 15, 2011. The fourth loan, of approximately $11.5 million, currently carries annual interest at 95% of the benchmark rate of the People’s Bank of China, or PBOC and is due on December 21, 2011. The fifth loan, of approximately $7.6 million, currently carries annual interest at the benchmark rate of the PBOC and is due on January 11, 2012. The sixth loan, of approximately $7.6 million, currently carries annual interest at the benchmark rate of the PBOC and is due on January 18, 2012. Each of the loan agreements specifically provides for acceleration of repayment of the loan under certain conditions, as well as other penalties and remedies.

As of March 31, 2011, we also had two five-year term loans totaling approximately $7.6 million under the Agricultural Bank – Shenzhen Branch comprehensive credit facility carrying interest at 90% of the benchmark rate of the PBOC for three-year to five-year long-term loans. The first loan, of approximately $6.1 million, currently carries annual interest of 5.184% and is due on January 25, 2012. The second loan, of approximately $9.1 million, currently carries annual interest of 5.184% and is due in two installments of approximately $7.6 million on January 25, 2011, which we repaid on January 25, 2011, and approximately $1.5 million on January 25, 2012, respectively. These five-year term loans are specifically: (i) guaranteed by Mr. Xiangqian Li; (ii) secured by Shenzhen BAK’s machinery and equipment with carrying values of approximately $26.4 million as of March 31, 2011; and (iii) secured by the property ownership and land use rights certificates with an aggregate net book value of $114.1 million as of March 31, 2011 in relation to the land on which Shenzhen BAK’s corporate campus had been constructed and any machinery and equipment purchased and used at the campus subsequent to such construction.

As of March 31, 2011, we had a comprehensive credit facility agreement with China Everbright Bank to provide a maximum amount of RMB 120 million (approximately $18.3 million) including RMB 40 million to support bank acceptance bills (instruments commonly used in China that are similar to letters of credit) and RMB 80 million to cover discounts on our notes receivable due to their assignment to certain banks, suppliers, vendors, and other creditors from November 8, 2010 to November 8, 2011. This credit facility agreement is guaranteed by BAK International and Mr. Xiangqian Li. As of March 31, 2011, we had borrowed $14.0 million of notes payable under this credit facility.

As of March 31, 2011, we had a credit facility with Shenzhen Branch, China CITIC Bank to provide a maximum loan amount of RMB 80 million (approximately $12.2 million). This credit facility was guaranteed by BAK International and Mr. Xiangqian Li. As of March 31, 2011, we had borrowed $12.2 million under two loans at floating interest rate of 5.0445%, with a rate in line with the benchmark interest rate adjustment of the PBOC under this credit facility. The first loan, of approximately $6.0 million, carried floating interest of 5.0445% and is repayable on June 11, 2011. The second loan, of approximately $6.1 million, also carried floating interest of 5.0445% and is also repayable on June 11, 2011.

As of March 31, 2011, we had also borrowed $0.1 million of notes payable outside any credit facility from Bank of China, Tianjin Branch, Tianjin Branch, or Bank of China.

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As of March 31, 2011, we had a credit facility agreement with Bank of China to provide a maximum loan amount of RMB 450 million (approximately $68.7 million). This credit facility was guaranteed by BAK International and Mr. Xiangqian Li, and also is secured by machinery and equipment with carrying values of approximately $30.4 million as of March 31, 2011. As of March 31, 2011, we had two outstanding short-term loans under the comprehensive credit facility. The first loan, of approximately $22.8 million, currently carries annual interest of 5.31% and is due on March 11, 2011. The second loan, of approximately $7.7 million, currently carries annual interest at 95% of the benchmark rate of the PBOC and is due on November 9, 2011, and $23.3 million of notes payable under this credit facility agreement. We had also borrowed $8.1 million of notes payable separate from the credit facility.

As of March 31, 2011, we had a six-year long-term loan agreement expiring on December 30, 2015 of RMB 150 million (approximately $22.9 million) with Shenzhen Branch, China Development Bank, or China Development Bank. The long-term loan is secured by Shenzhen BAK’s pledge of its land use rights certificates, property ownership and equipment built-up by use of this long-term loan pursuant to the loan agreement. According to the property ownership and land use rights certificate that we obtained in relation to this facility, the certificate may not be pledged without the approval of the relevant government office. On April 7, 2010, the pledge of the land use rights certificate to China Development Bank was approved by the relevant government bureau. For further discussion regarding the status of property ownership rights relating to this facility, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Capital Expenditures.” The obligations of Shenzhen BAK under this loan agreement are guaranteed by Mr. Xiangqian Li. We had borrowed approximately $7.6 million under a loan agreement dated March 1, 2010, bearing annual interest of 5.90%, adjusted monthly, and repayable within 72 months.

As of March 31, 2011, we had a four-year, long-term loan agreement expiring May 26, 2012 of RMB 100 million (approximately $15.3 million) with Agricultural Bank of China, Tianjin Branch, or Agricultural Bank – Tianjin Branch. This loan agreement is secured by the machinery and equipment purchased for the automated high-power lithium battery cells production line at our Tianjin facility with carrying values of approximately $1.9 million as of March 31, 2011. As of March 31, 2011, we had borrowed $15.3 million under this loan agreement, payable in two installments: (i) RMB 50 million (approximately $7.6 million) on December 26, 2011; and (ii) RMB 50 million (approximately $7.7 million) on May 26, 2012.

We had negative working capital of $85.3 million as of March 31, 2011, as compared to negative working capital of $70.8 million as of September 30, 2010. Current assets as of March 31, 2011 were $201.1 million compared with $194.6 million as of September 30, 2010, an increase of $6.5 million. Current liabilities as of March 31, 2011 were $286.4 million compared with $265.5 million as of September 30, 2010, an increase of $20.9 million. We had short-term bank loans maturing in less than one year of $142.4 million and long-term bank loans maturing within one year of $15.3 million as of March 31, 2011, or a total of $157.7 million of loans maturing within one year, as compared to a total of $149.4 million of such loans as of September 30, 2010, an increase of $8.3 million. We had long-term bank loans maturing in over one year of $15.3 million as of March 31, 2011, as compared to $29.9 million of such loans as of September 30, 2010, a decrease of $14.6 million.

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

Capital Expenditures

We made capital expenditures of $12.3 and $7.7 million in the six months ended March 31, 2011 and 2010, respectively. Our capital expenditures were used primarily to purchase plant and equipment to expand our production capacity.

The following table sets forth the breakdown of our capital expenditures by use for the periods indicated.

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		Six Months Ended
		March 31,
		2011			2010
		(in thousands)
Construction costs	$	2,055		$	884
Purchase of equipment		10,262			6,824
Total capital expenditures	$	12,317		$	7,708

We estimate that our total capital expenditures in fiscal year 2011 will reach approximately $35.0 million, to purchase manufacturing equipment for our production lines and for the construction of our new Research and Development Test Centre at our Shenzhen facility.

We have completed the construction and put into use facilities measuring 218,178 square meters comprised of manufacturing facilities, warehousing and packaging facilities, dormitory space, dining halls and administrative offices at the BAK Industrial Park in Shenzhen. Of that space, approximately 81,411 square meters are manufacturing facilities. We have also completed the construction and put into use facilities measuring 65,907 square meters comprised of manufacturing facilities, dormitory space, dining halls and other facilities in Tianjin. Of that space, approximately 44,129 square meters are manufacturing facilities. The primary reasons for our continuing investments in the facilities in Tianjin are to realize the benefits of our prior investment in these facilities, to position the Company to capitalize on our knowledge of and experience with established markets for lithium-phosphate technology, such as electric bicycles, cordless power tools, and to penetrate emerging consuming markets for this technology, such as electric cars, electric buses, light electric vehicles, and hybrid electric vehicles. We have received several contracts to supply high-power lithium cells for use in electric cars, electric bicycles, UPS, and other applications.

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

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

As of September 30, 2007, we had fully paid the lease prepayment amount of $14.1 million for the acquisition of land use rights regarding our Tianjin facility. As of September 30, 2008, we had obtained the relevant land use rights certificate to this facility. As of March 31, 2011, we were in the process of obtaining the relevant property ownership rights certificate to this facility.

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Pursuant to our land use rights certificate relating to our Tianjin facility, the Tianjin government had originally requested that we complete construction of the Tianjin facility before September 30, 2008. As of September 30, 2008, we had not done so. Notwithstanding this requirement, we have obtained an extension from the Business Administration Bureau of Beichen District, Tianjin, to make the remaining contribution of the registered capital by December 11, 2009, which we interpreted as an extension of the completion date of construction to this date. 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 complete this contribution no later than December 2012. As of March 31, 2011, we were in the process of negotiating with the relevant government bureau for the extension of the completion date of the construction of the Tianjin facility.

As of September 30, 2007, we had paid the lease prepayment amount of $717,000 for the acquisition of land use rights for a new Research and Development Test Centre to be constructed in Shenzhen, China. As of September 30, 2008, we had obtained the relevant property ownership and land use rights certificate. Pursuant to the property ownership and land use rights certificate, we are required to complete at least 25% of the construction of the new Research and Development Test Centre facility by September 30, 2008. As of September 30, 2008, we had not done so. Notwithstanding this requirement, the Shenzhen government has agreed to increase the dimensions of the Research and Development Test Centre and signed two supplemental agreements with us. According to the supplemental agreements, we are required to complete the construction by May 6, 2011. As of March 31, 2011, we are in the process of applying for an extension from the Shenzhen government. In addition, according to the property ownership and land use rights certificate, such land may not be pledged without the approval of the relevant government office. We are required to pledge our property ownership and land use rights certificate in relation to the new Research and Development Test Centre to China Development Bank pursuant to the loan agreement entered into with it. 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. In addition, the so-named “property ownership and land use rights certificate” relating to this facility that we were issued lacks certain terms relating to property ownership rights, which appears to indicate that the granting government has so far only granted us the relevant land use rights. As a result, this certificate may not be adequate evidence of our property ownership rights to this property. We anticipate that the government will re-grant this certificate with adequate property ownership indicia after we have satisfied the above construction requirement and followed certain procedures.

Contractual Obligations and Commercial Commitments

Please refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations –Contractual Obligations and Commercial Commitments” in the 2010 Form 10-K for a discussion of our contractual obligations and commercial commitments as of September 30, 2010. There were no material changes outside the ordinary course of our business in our contractual obligations and commercial commitments for the quarter ended March 31, 2011.

Off-Balance Sheet Transactions

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

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

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

Transactions described above require accounting treatment under ASC Topic 460 “Guarantees”. Under that standard, we would be required to recognize the fair value of guarantees issued or modified after December 31, 2002, for non-contingent guarantee obligations, and also a liability for contingent guarantee obligations based on the probability that the guaranteed party will not perform under the contractual terms of the guaranty agreement.

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We have assessed the contingent liabilities arising from the above-described guarantees and have considered them immaterial to the consolidated financial statements. Therefore, no liabilities in respect of the guarantees were recognized as of March 31, 2011. As of March 31, 2011, we provided the guarantees for the following non-related parties: Nanjing Special Metal Equipment Co., Ltd., Hunan Reshine New Material Ltd, Shenzhen Tongli Hi-tech Co. Ltd., Shenzhen B&G Technology Development Co. Ltd., Shanghai Global Children Products Co. Ltd., Shenzhen Yasu Technology Co. Ltd., Beijing Triolion Technology Co. Ltd., Siping Juyuan Hanyang Plate Heat Exchanger Co. Ltd and Tianjin Bike New Energy Research Institute. The maximum amount of our exposure for these guarantees was $45.0 million and $40.2 million at March 31, 2011 and September 30, 2010, respectively.

Critical Accounting Policies

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

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

Recoverability of Long-Lived Assets

Our business is capital intensive and has required, and will continue to require, significant investments in property, plant and equipment. As of March 31, 2011 and September 30, 2010, the carrying amount of property, plant and equipment, net was $232.3 million and $228.9 million, respectively. We assess the recoverability of property, plant and equipment to be held and used by a comparison of the carrying amount of an asset or group of assets to the future net undiscounted cash flows expected to be generated by the asset or group of assets. If such assets are considered impaired, the impairment recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets.

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

We have not recognized any additional impairment charges for the long-lived assets for the six months ended March 31, 2011.

Inventory Obsolescence

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

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Allowance for Doubtful Accounts

The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our accounts receivable. We determine the allowance based on historical write-off experience, customer specific facts and economic conditions. Bad debt expense is included in the general and administrative expenses. We review outstanding account balances individually for collectability. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. As of March 31, 2011 and September 30, 2010, we had not charged off any balances as we had yet to exhaust all means of collection.

Equity-Based Compensation

We adopted the provisions of ASC Topic 718 “Compensation – Stock Compensation,” which requires the use of the fair value method of accounting for share-based compensation. Under the fair value based method, compensation cost related to employee stock options or similar equity instruments is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. ASC Topic 718 also requires measurement of cost of a liability-classified award based on its current fair value. The fair value of the liability-classified award will be subsequently re-measured at each reporting date through the settlement date. Change in fair value during the requisite service period will be recognized as compensation cost over that period.

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

Pursuant to ASC Topic 718, we have recognized compensation costs of $934,000 in relation to stock-based awards to our employees and non-employee directors for the six months ended March 31, 2011, as an increase in both the operating costs and shareholder’s equity.

Recently Issued Accounting Pronouncements

Please refer to note 1 to our condensed interim consolidated financial statements, “Principal Activities, Basis of Presentation and Organization – Recently Issued Accounting Standards,” for a discussion of relevant pronouncements.

Exchange Rates

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

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

		RMB per U.S. Dollar
		2011			2010
Balance sheet items as of March 31		6.5486			6.8259
Amounts included in the statement of operations and comprehensive income, statement of changes in stockholders’ equity and statement of cash flows for the six months ended March 31		6.6178			6.8275
Balance sheet items as of September 30		-			6.6912

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ITEM 3.           QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Interest Rate Risk

We are exposed to interest rate risk primarily with respect to our short-term bank loans and long-term bank loans. Although the interest rates, which are based on the banks’ prime rates with respect to our short-term loans are fixed for the terms of the loans, the terms are typically three to twelve months for short-term bank loans and interest rates are subject to change upon renewal. There were no material changes in interest rates for short-term bank loans renewed during the three months ended March 31, 2011.

Please refer to Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations —Liquidity and Capital Resources — Financing Activities” for a discussion of our credit facilities and loan agreements.

A hypothetical 1.0% increase in the annual interest rates for all of our credit facilities under which we had outstanding borrowings at March 31, 2011, would increase net loss before provision for income taxes by approximately $1.7 million, or 40.5%, for the three months ended March 31, 2011. Management monitors the banks’ prime rates in conjunction with our cash requirements to determine the appropriate level of debt balances relative to other sources of funds. We have not entered into any hedging transactions in an effort to reduce our exposure to interest rate risk.

Foreign Exchange Risk

Although our reporting currency is the U.S. dollar, the financial records of our operating subsidiaries are maintained in their local currency, the RMB, which is our functional currency. Approximately 97.4% of our revenues and 98.8% of our costs and expenses for the three months ended March 31, 2011 are denominated in RMB, with the balance denominated in U.S. dollars. Approximately 99.6% of our assets except for cash were denominated in RMB as of March 31, 2011. As a result, we are exposed to foreign exchange risk as our revenues and results of operations may be affected by fluctuations in the exchange rate between U.S. dollars and RMB. If the RMB depreciates against the U.S. dollar, the value of our RMB revenues, earnings and assets as expressed in our U.S. dollar financial statements will decline. Assets and liabilities of our operating subsidiaries are translated into U.S. dollars at the exchange rate at the balance sheet date, their equity accounts are translated at historical exchange rates, and their income and expenses items are translated using the average rate for the period. Any resulting exchange differences are recorded in accumulated other comprehensive income or loss. An average appreciation (depreciation) of the RMB against the U.S. dollar of 5% would increase (decrease) our comprehensive income by $9.1 million based on our outstanding revenues, costs and expenses, assets, and liabilities denominated in RMB as of March 31, 2011. As of March 31, 2011, our accumulated other comprehensive income was $31.3 million. We have not entered into any hedging transactions in an effort to reduce our exposure to foreign exchange risk.

Inflation Risk

Inflationary factors such as increases in the cost of our products and overhead costs may adversely affect our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and selling and general and administrative expenses as a percentage of net revenues if the selling prices of our products do not increase with these increased costs.

ITEM 4.           CONTROLS AND PROCEDURES.

Disclosure Controls and Procedures

As required by Rule 13a-15 under the Exchange Act, our management has carried out an evaluation, with the participation and under the supervision of our chief executive officer and interim chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2011. Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our chief executive officer and interim chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired

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control objectives, and management is required to apply its judgment in evaluating and implementing possible controls and procedures.

Management conducted its evaluation of disclosure controls and procedures under the supervision of our chief executive officer and our interim chief financial officer. Based upon, and as of the date of this evaluation, our chief executive officer and interim chief financial officer concluded that our disclosure controls and procedures were effective as of March 31, 2011.

Changes in Internal Control over Financial Reporting

There were no changes in our internal controls over financial reporting during our fiscal quarter ended March 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II
OTHER INFORMATION

ITEM 1.           LEGAL PROCEEDINGS.

None.

ITEM 1A.        RISK FACTORS.

There have been no material changes to the risk factors disclosed in our 2010 Form 10-K. Investors are directed to Item 1, “Risk Factors” of the 2010 Form 10-K.

ITEM 2.           UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None.

ITEM 3.           DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4.           (REMOVED AND RESERVED).

ITEM 5.           OTHER INFORMATION.

We have no information to disclose that was required to be in a report on Form 8-K during the period covered by this Report, but was not reported. There have been no material changes to the procedures by which security holders may recommend nominees to our board of directors.

ITEM 6.           EXHIBITS.

The following exhibits are filed as part of this report or incorporated by reference: [To be updated with loan agreements, material agreements, etc.]

Exhibit No.		Description
31.1		Certifications of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certifications of Principal Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certifications of Principal Executive Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certifications of Principal Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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Exhibit No.		Description
99.1		Comprehensive Credit Facility Agreement of Maximum Amount (English summary), dated December 26, 2010, between Shenzhen BAK Battery Co., Ltd. and Shenzhen Hi-Tech District Branch, Industrial Bank Co. Ltd.
99.2		Loan Agreement (English summary), dated December 26, 2010, between Shenzhen BAK Battery Co., Ltd. and Shenzhen Hi-Tech District Branch, Industrial Bank Co. Ltd.
99.3		Guaranty Contract of Maximum Amount (English summary), dated December 26, 2010, between BAK International Limited and Shenzhen Hi-Tech District Branch, Industrial Bank Co. Ltd.
99.4		Guaranty Contract of Maximum Amount (English summary), dated December 26, 2010, between BAK International (Tianjin) Ltd. and Shenzhen Hi-Tech District Branch, Industrial Bank Co. Ltd.
99.5		Guaranty Contract of Maximum Amount (English summary), dated December 26, 2010, between Xiangqian Li and Shenzhen Hi-Tech District Branch, Industrial Bank Co. Ltd.
99.6		Comprehensive Credit Facility Agreement of Maximum Amount (English summary), dated October 27, 2010, between BAK International (Tianjin) Ltd. and Tianjin Branch, Bank of Dalian.
99.7		Guaranty Contract of Maximum Amount (English summary), dated October 27, 2010, between Shenzhen BAK Battery Co., Ltd, Xiangqian Li , and Tianjin Branch, Bank of Dalian.
99.8		Comprehensive Credit Facility Agreement of Maximum Amount (English summary), dated January 20, 2011, between Shenzhen BAK Battery Co., Ltd and Shenzhen Longgang Branch, Shenzhen Development Bank.
99.9		Loan Agreement (English summary), dated August 4, 2010, between Shenzhen BAK Battery Co., Ltd. and Longgang Branch, Shenzhen Development Bank Co., Ltd.
99.10		Loan Agreement (English summary), dated January 25, 2011, between Shenzhen BAK Battery Co., Ltd. and Longgang Branch, Shenzhen Development Bank Co., Ltd.
99.11		Loan Agreement (English summary), dated January 30, 2011, between Shenzhen BAK Battery Co., Ltd. and Longgang Branch, Shenzhen Development Bank Co., Ltd.
99.12		Mortgage Contract of Maximum Amount (English summary), dated January 20, 2011, between Shenzhen BAK Battery Co., Ltd. and Longgang Branch, Shenzhen Development Bank Co., Ltd.
99.13		Guaranty Contract of Maximum Amount (English summary), dated January 21, 2011, between BAK International Limited and Longgang Branch, Shenzhen Development Bank.
99.14		Guaranty Contract of Maximum Amount (English summary), dated January 21, 2011, between BAK International (Tianjin) Ltd. and Longgang Branch, Shenzhen Development Bank.
99.15		Guaranty Contract of Maximum Amount (English summary), dated January 21, 2011, between Xiangqian Li and Longgang Branch, Shenzhen Development Bank.
99.16		Guaranty Contract of Maximum Amount (English summary), dated November 30, 2010, between Shenzhen BAK Battery Co., Ltd. and Tianjin Branch, Shanghai Pudong Development Bank.
99.17		Loan Agreement (English summary), dated January 11, 2011, between Shenzhen BAK Battery Co., Ltd. and Shenzhen Eastern Branch, Agricultural Bank of China.
99.18		Loan Agreement (English summary), dated January 18, 2011, between Shenzhen BAK Battery Co., Ltd. and Shenzhen Eastern Branch, Agricultural Bank of China.

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SIGNATURES

          In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: May 10, 2011	CHINA BAK BATTERY, INC.
	By:	/s/ Xiangqian Li
		Xiangqian Li, Chief Executive Officer
		(Principal Executive Officer)
	By:	/s/ Ke Marcus Cui
		Ke Marcus Cui, Interim Chief Financial Officer
		(Principal Financial Officer and Principal
		Accounting Officer)

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