The following management's discussion and analysis should be read in conjunction with our financial statements and the notes thereto and the other financial information appearing elsewhere in this report. Our financial statements are prepared in U.S. dollars and in accordance with U.S. GAAP.

Special Note Regarding Forward Looking Statements

In addition to historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We use words such as "believe," "expect," "anticipate," "project," "target," "plan," "optimistic," "intend," "aim," "will" or similar expressions which are intended to identify forward-looking statements. Such statements include, among others, those concerning market and industry segment growth and demand and acceptance of new and existing products; any projections of sales, earnings, revenue, margins or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements regarding future economic conditions or performance; as well as all assumptions, expectations, predictions, intentions or beliefs about future events. You are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, including those identified in Item 1A, "Risk Factors" described in our Annual Report on Form 10-K for the fiscal year ended September 30, 2011, as well as assumptions, which, if they were to ever materialize or prove incorrect, could cause the results of the Company to differ materially from those expressed or implied by such forward-looking statements.

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, except as required by law, to provide updates, revisions or amendments to any forward-looking statements to reflect changes in our expectations or future events

Use of Terms

Except as otherwise indicated by the context and for the purposes of this report only, references in this report to:

º "Company," "we," "us" and "our" are to the combined business of China BAK Battery, Inc., a Nevada corporation, and its consolidated subsidiaries;
º "BAK International" are to our Hong Kong subsidiary, BAK International Limited;
º "BAK Europe" are to our German subsidiary, BAK Europe GmbH;
º "BAK Canada" are to our Canadian subsidiary, BAK Battery Canada Ltd.;
º "BAK India" are to our Indian subsidiary, BAK Telecom India Private Limited;
º "Shenzhen BAK" are to our PRC subsidiary, Shenzhen BAK Battery Co., Ltd.;
º "BAK Tianjin" are to our PRC subsidiary, BAK International (Tianjin) Ltd.;
º "BAK Electronics" are to our PRC subsidiary, BAK Electronics (Shenzhen) Co., Ltd.;
º "Tianjin Meicai" are to our PRC subsidiary, Tianjin Meicai New Material Technology Co., Ltd.;
º "China" and "PRC" are to People's Republic of China;
º "RMB" are to Renminbi, the legal currency of China;
º "U.S. dollar," "$" and "US$" are to the legal currency of the United States;
º "SEC" are to the United States Securities and Exchange Commission;
º "Securities Act" are to the Securities Act of 1933, as amended; and
º "Exchange Act" are to the Securities Exchange Act of 1934, as amended.

We are a leading global manufacturer of lithium-based battery cells. We produce battery cells for original equipment manufacturer, or OEM, customers and replacement battery manufacturers that are the principal component of rechargeable batteries commonly used to power the following applications:

º cellular phones and smartphones;

º notebook computers, tablet computers and e-book readers;

º 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

º electric bicycles and other light electric vehicles, hybrid electric vehicles, and other 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 assemble our prismatic cells into battery packs at our Shenzhen facility or engage battery pack manufacturers to assemble our cells into batteries for a fee, and then sell battery packs to these customers both for the replacement and OEM markets.

During the fiscal quarter ended March 31, 2012, we encountered reduced demand for prismatic cells and cylindrical cells. The second fiscal quarter is also a traditionally slow quarter due in part to Chinese New Year, which significantly reduced overall sales volume. In addition, continued weakness in the global economy also negatively impacted our business by forcing us to lower selling prices. In response, the Company expects to continue to increase sales volume in the tier 1 OEM market and to take cost-cutting actions to improve gross margin.

On October 24, 2011, NASDAQ Staff notified the Company that its common stock was not in compliance with one of the standards for continued listing on the NASDAQ Global Market because the closing bid price of its common stock had fallen below $1.00 for 30 consecutive business days. The Staff also notified the Company that it had been granted a grace period of 180 calendar days, or until April 23, 2012, in which to regain compliance. In a letter dated April 10, 2012, the Staff informed the Company that it had determined that the closing bid price of China BAK's common stock had been at $1.00 per share or greater for ten consecutive business days from March 26, 2012 to April 9, 2012. Accordingly, the Company regained compliance with NASDAQ Listing Rule 5450(a)(1) and this matter was closed.

To help us finance and expand our operations, we had access to $224.8 million in short-term credit facilities and $23.8 million in long-term credit facilities as of March 31, 2012. As of March 31, 2012, the principal outstanding amounts included short-term bank loans of $140.9 million under credit facilities and long-term bank loans of $23.6 million maturing in over one year, and bills payable of $62.7 million under credit facilities, leaving $47.4 million of short-term funds available under our credit facilities for additional cash needs.

We had a working capital deficiency, accumulated deficit from recurring net losses incurred for the current and prior periods as at March 31, 2012 and significant short-term debt obligations maturing in less than one year. These factors raise substantial doubts about our ability to continue as a going concern. Accordingly, we have continued to develop a strategic plan to continue to generate a positive cash flow from operating activities for the fiscal years ending September 30, 2012 and 2013. Under this plan, we will continue to increase our presence in the OEM market both domestically and internationally with more aggressive marketing strategies to expand and secure our market base. We will also continue to implement reductions of both manufacturing costs and operating expenses to improve profit margins as well as reduce receivable turnover days through stronger credit controls.

Second Quarter Financial Performance Highlights

The following are some financial highlights for the second quarter of our fiscal year ended September 30, 2012:

º Net revenues: Net revenues decreased by $14.0 million, or 29.8%, to $32.8 million for the three months ended March 31, 2012, from $46.7 million for the same period in 2011.

º Operating loss: Operating loss was $14.6 million for the three months ended March 31, 2012, an increase of $12.8 million from operating loss of $1.8 million for the same period in 2011.

º Net loss: Net loss was $15.6 million for the three months ended March 31, 2012, an increase of $11.5 million, or 282.8%, from $4.1 million for the same period in 2011.

º Fully diluted net loss per share: Fully diluted net loss per share was $0.25 for the three months ended March 31, 2012, as compared to $0.06 for the same period in 2011.

Financial Statement Presentation

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

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

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

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

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

Property, plant and equipment 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.

Government grant income. Government grant income for the three and six months ended March 31, 2012 mainly consisted of receipt of grants to fund certain lithium battery research projects and to subsidize the payment for land use rights of BAK Industrial Park. No present or future obligation arises from the receipt of such amount.

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

Income taxes. On March 16, 2007, the National People's Congress of China passed a new enterprise income tax law, or the EIT Law, and on November 28, 2007, the State Council of China passed its implementing rules, both of which took effect on January 1, 2008. The EIT Law unifies the application scope, tax rate, tax deduction and preferential policy for both domestic enterprises and foreign invested enterprises, or FIEs. The EIT Law gives existing FIEs a five-year grandfather period during which they can continue to enjoy their existing preferential tax treatments.

Shenzhen BAK and BAK Electronics are each recognized as a "Manufacturing Enterprise Located in Special Economic Zone." As a result, they have been entitled to certain preferential tax rates. Shenzhen BAK's income tax rate after consideration of its tax concessions was 15% for both calendar years 2010 and 2011 and starting in calendar year 2012, it is expected to be subject to an income tax rate of 25%. BAK Electronics' income tax rates were 11% and 24% for calendar years 2010 and 2011, respectively, and starting in calendar year 2012, it is expected to be subject to an income tax rate of 25%. BAK Electronics did not incur any enterprise income tax for the calendar year 2011 due to the current tax losses carried forward from calendar year 2009 and 2010. BAK Tianjin is currently paying no enterprise income tax due to cumulative tax losses.

Our effective tax expense rate was 13.8% for the six months ended March 31, 2012, and our effective tax benefit rate was 3.9% for the six months ended March 31, 2011.

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, 2012 and March 31, 2011

The following tables set forth key components of our results of operations for
the periods indicated, both in dollars and as a percentage of net revenues.

      (All amounts, other than percentages, in thousands of U.S. dollars)

                                            Three Months Ended
                                                March 31,
                                            2012          2011     $  Change      % Change
Net revenues                            $    32,781   $   46,711   $  (13,930 )      (29.8 )
Cost of revenues                             36,651       42,262       (5,611 )      (13.3 )
Gross (loss) / profit                        (3,870 )      4,449       (8,319 )     (187.0 )
Operating expenses:
         Research and development             1,848        1,933          (85 )       (4.4 )
expenses
         Sales and marketing expenses         1,753        2,199         (446 )      (20.3 )
         General and administrative           7,112        2,150        4,962        230.8
expenses
Total operating expenses                     10,713        6,282        4,431         70.5
Operating loss                              (14,583 )     (1,833 )    (12,750 )      695.6
Finance costs, net                           (2,634 )     (2,512 )       (122 )        4.9
Government grant income                       1,185           31        1,154       3722.6
Other income                                    412           49          363        740.8
Income tax (expenses) / benefits                 (8 )        182         (190 )     (104.4 )
Net loss                                $   (15,628 ) $   (4,083 ) $  (11,545 )      282.8

Net revenues. Net revenues were $32.8 million for the three months ended March 31, 2012, as compared to $46.7 million for the same period in 2011, a decrease of $13.9 million, or 29.8% .

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

                                     Three Months Ended March 31,
                                       2012                2011
Prismatic cells                  $                  $
         Aluminum-case cells              11,690              16,251
         Battery packs                     8,787              12,799
Cylindrical cells                          7,621              15,198
Lithium polymer cells                      2,342               1,676
High-power lithium battery cells           2,341                 787
Total                            $        32,781    $         46,711

Net revenues from sales of aluminum-case cells decreased to $11.7 million in the three months ended March 31, 2012, from $16.3 million in the same period in 2011, a decrease of $4.6 million, or 28.1%, resulting from sales volume decrease of 31.2% driven by a decrease in sales to the domestic (PRC) market and a decrease of 5.3% in our average selling price.

Net revenues from sales of battery packs decreased to $8.8 million in the three months ended March 31, 2012, from $12.8 million in the same period in 2011, an increase of $4.0 million, or 31.3% . This resulted from a decrease in sales volume of 14.2% driven by a decrease in sales to the domestic (PRC) market and a 28.7% decrease in average selling price.

Net revenues from sales of cylindrical cells decreased to $7.6 million in the three months ended March 31, 2012, from $15.2 million in the same period in 2011, a decrease of $7.6 million, or 49.8% . This resulted from a decrease in sales volume of 44.1% driven by a decrease in sales to the domestic (PRC) market and a 15.3% decrease in average selling price.

We sold $2.3 million in lithium polymer cells for the three months ended March 31, 2012, compared to $1.7 million in lithium polymer cells in the same period in 2011, an increase of $666,000, or 39.7%, resulting from an increase of 72.4% in sales volume, offset by a decrease of 21.2% in our average selling price.

We also sold approximately $2.3 million in high-power lithium battery cells for the three months ended March 31, 2012, as compared to $787,000 in high-power lithium battery cells in the same period in 2011, due to our increased sales of products used in electric bicycles, power tools and other applications from our Tianjin facility over the three months ended March 31, 2012.

Cost of revenues. Cost of revenues decreased to $36.7 million for the three months ended March 31, 2012, as compared to $42.3 million for the same period in 2011, a decrease of $5.6 million, or 13.3% . The decrease in cost of revenues was due to a decrease in prismatic and cylindrical cells sales volume over the three months ended March 31, 2012.

Gross (loss) / profit. Gross loss for the three months ended March 31, 2012 was $3.9 million, or (11.9%) of net revenues, as compared to gross profit of $4.4 million, or 9.5% of net revenues, for the same period in 2011. Our significant change from gross profit to gross loss was largely due to a decrease in prismatic and cylindrical sales volume during the three months ended March 31, 2012, and a significant write down of obsolete inventory over the three months ended March 31, 2012.

Research and development expenses. Research and development expenses decreased to $1.8 million for the three months ended March 31, 2012, as compared to $1.9 million for the same period in 2011, a decrease of $85,000, or 4.4% . This decrease was mainly due to a decrease in research funds by approximately $87,000 as a result of a decrease in R&D projects.

Sales and marketing expenses. Sales and marketing expenses decreased to $1.8 million for the three months ended March 31, 2012, as compared to $2.2 million for the same period in 2011, a decrease of $446,000, or 20.3%, primarily due to decreased packing and transportation expenses of $139,000, depreciation of $75,000 and repair and maintenance expenses of $45,000, resulting from improved cost control under our strategic plan. As a percentage of revenues, sales and marketing expenses have increased to 5.3% for the three months ended March 31, 2012, from 4.7% for the same period in 2011, primarily due to the decrease in revenues from sales over the three months ended March 31, 2012.

General and administrative expenses. General and administrative expenses increased to $7.1 million, or 21.7% of revenues, for the three months ended March 31, 2012, as compared to $2.2 million, or 4.6% of revenues, for the same period in 2011, an increase of $5.0 million, or 230.8% . The primary reason for the increase was that provision for bad debt expenses increased by $3.2 million over the three months ended March 31, 2012 due to the provision charged following an assessment of account collectability in the second quarter of 2012, compared to the three months ended March 31, 2011, and increased by $1.7 million of exchange gain.

Finance costs, net. Finance costs, net, increased to $2.6 million for the three months ended March 31, 2012, as compared to $2.5 million for the same period in 2011, an increase of $122,000, or 4.9% . The slight 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 over the three months ended March 31, 2012.

Government grant income / Other Income. Government grant income was $1.2 million and other income was $412,000 for the three months ended March 31, 2012, as compared to government grant income of $31,000 and other income of $49,000 for the same period in 2011. Government grant income for the three months ended March 31, 2012 mainly consisted of government grant funds as follows: $1.1 million to fund certain lithium battery research projects and $63,000 representing amortization of government subsidies received in relation to the additional cost of the land use rights of BAK Industrial Park. No present or future obligation arose from the receipt of such government subsidies.

Income tax (expense) / benefit. Income tax expense was $8,000 for the three months ended March 31, 2012, as compared to income tax benefit of $182,000 for the same period in 2011.

Net loss. As a cumulative result of the foregoing, we had a net loss of $15.6 million for the three months ended March 31, 2012, compared to $4.1 million for the three months ended March 31, 2011.

Comparison of Six Months Ended March 31, 2012 and March 31, 2011

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,
                                             2012         2011     $  Change      % Change
Net revenues                             $  104,536   $  110,241   $   (5,705 )       (5.2 )
Cost of revenues                             94,375       95,795       (1,420 )       (1.5 )
Gross profit                                 10,161       14,446       (4,285 )      (29.7 )
Operating expenses:
         Research and development             3,092        3,577         (485 )      (13.6 )
expenses
         Sales and marketing expenses         3,711        4,472         (761 )      (17.0 )
         General and administrative          12,901       10,029        2,872         28.6
expenses
         Property, plant and equipment        2,708            -        2,708        100.0
impairment charge
Total operating expenses                     22,412       18,078        4,334         24.0
Operating loss                              (12,251 )     (3,632 )     (8,619 )      237.3
Finance costs, net                           (5,517 )     (5,352 )       (165 )        3.1
Government grant income                       2,010          638        1,372        215.0
Other income / (expenses)                       432          290          142         49.0
Income tax (expenses) / benefit              (2,122 )        316       (2,438 )     (771.5 )
Net loss                                 $  (17,448 ) $   (7,741 ) $   (9,707 )      125.4

Net Revenues. Net revenues decreased to $104.5 million for the six months ended March 31, 2012, as compared to $110.2 million for the same period of the prior year, a decrease of $5.7 million or 5.2% . The following sets forth the breakdown of our net revenues by battery cell type for the periods indicated.

                                      Six Months Ended
                                         March 31,
                                     2012          2011
                                       (in thousands)
Prismatic cells
   Aluminum-case cells           $   45,941   $    46,849
   Battery packs                     29,626        29,697
Cylindrical cells                    20,594        25,669
Lithium polymer cells                 4,977         5,140
High-power lithium battery cells      3,398         2,886
Total                            $  104,536   $   110,241

º Net revenues from sales of battery packs slightly decreased to $29.6 million in the six months ended March 31, 2012, from $29.7 million in the same period in fiscal year 2011, a decrease of $71,000 or 0.2%. This resulted from a decrease in sales volume of 5.9% due to decreased sales in the PRC, offset by a 4.3% increase in average selling price.

º Net revenues from sales of cylindrical cells decreased to $20.6 million in the six months ended March 31, 2012, from $25.7 million in the same period in fiscal year 2011, a decrease of $5.1 million or 19.9%. This resulted from a decrease in sales volume of 18.4% due to a decrease in export sales and a 1.9% decrease in average selling price.

. . .