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.

Since the beginning of fiscal year 2012, our growth strategy has included two objectives: to enhance our product portfolio by producing high-capacity battery cells that meet market demand in both prismatic and cylindrical spaces, and to improve our customer base by aggressively seeking more tier 1 OEM market share from both existing markets and emerging markets. During the fiscal quarter ended June 30, 2012, we continued to be in transition towards achieving these objectives. Our management expects that the Company may experience challenges in financing new projects and collecting old receivables while migrating from the replacement market to OEM markets. During the quarter, we incurred a significant gross loss in cylindrical and polymer battery cell sales at the same time as the continuing decrease in gross profit of prismatic battery cells. However, we also report the following accomplishments:

º a significant increase in sale volumes of polymer cells during this quarter;

º progress in improving our customer base, as the number of the leading 15 cell phone OEMs purchasing our products grew to 13 during the quarter; and

º the shipment of battery packs (rather than cells) grew for prismatic products. As of June 30, 2012 battery shipments accounted for 37% of total shipments, representing a 7% increase in comparison with the third quarter of our fiscal year ended September 30, 2011.

During the fiscal quarter ended June 30, 2012, we encountered increased costs for prismatic cells and reduced demand for cylindrical cells. Although the continued weakness in the global economy continued to negatively impact our business by reducing the sales volume of our products, quarterly revenues from sales of lithium polymer cells and high-power lithium battery cells were the highest in our company's history as a result of our efforts to increase our share in the smartphone, electric bicycle and electric vehicle markets. In response to the globally weak market, 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 requirements 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.

On May 25, 2012, the Company received a new notice from the NASDAQ staff indicating that, for the last 30 consecutive business days, the bid price for the Company's common stock had closed below the minimum $1.00 per share required for continued inclusion on The NASDAQ Global Market under NASDAQ Listing Rule 5450(a)(1). The notification letter stated that the Company will be afforded 180 calendar days, or until November 21, 2012, to regain compliance with the minimum bid price requirement. In order to regain compliance, shares of the Company's common stock must maintain a minimum closing bid price of at least $1.00 per share for a minimum of ten consecutive business days.

To help us finance and expand our operations, we had access to $219.6 million in short-term credit facilities and $23.6 million in long-term credit facilities as of June 30, 2012. As of June 30, 2012, the principal outstanding amounts included short-term bank loans of $146.3 million under credit facilities and long-term bank loans of $23.4 million maturing in over one year, and bills payable of $66.2 million under credit facilities, leaving $40.5 million of short-term funds available under our credit facilities for additional cash needs. As of June 30, 2012, our cash position had weakened due to the repayment of some of our short-term loans. Our management expects that government monetary policy may continue to be tight in the short-term future, which may reduce our liquidity. We expect to respond to this challenge in at least two ways: first, we will continue to reinforce our efforts to improve the collection of receivables; and second, we will continue to consider strategic asset dispositions.

We had a working capital deficiency, accumulated deficit from recurring net losses incurred for the current and prior periods as at June 30, 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.

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

º Net revenues: Net revenues decreased by $286,000, or 0.6%, to $46.8 million for the three months ended June 30, 2012, from $47.1 million for the same period in 2011.

º Gross loss: Gross loss was $5.1 million for the three months ended June 30, 2012, a change of $8.6 million from gross profit of $3.6 million for the same period in 2011.

º Operating loss: Operating loss was $24.5 million for the three months ended June 30, 2012, an increase of $19.1 million from operating loss of $5.3 million for the same period in 2011.

º Net loss: Net loss was $27.6 million for the three months ended June 30, 2012, an increase of $20.4 million, or 280.9%, from $7.2 million for the same period in 2011.

º Fully diluted net loss per share: Fully diluted net loss per share was $0.44 for the three months ended June 30, 2012, as compared to $0.12 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 nine months ended June 30, 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.

Our Canadian, German, Indian, and Hong Kong subsidiaries-BAK Canada, BAK Europe, BAK India, and BAK International-are subject to profits taxed in their respective countries at rates of 38%, 25%, 30%, and 16.5%, respectively. 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 expense rate was 5.6% for the nine months ended June 30, 2012, and our effective tax benefit rate was 2.1% for the nine months ended June 30, 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 June 30, 2012 and June 30, 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
                                              June 30,
                                         2012          2011        $ Change      % Change
Net revenues                         $    46,844   $    47,130   $      (286 )        (0.6 )
Cost of revenues                          51,907        43,537         8,370          19.2
Gross (loss) / profit                     (5,063 )       3,593        (8,656 )      (240.9 )
Operating expenses:
         Research and development          1,612         1,839          (227 )       (12.3 )
expenses
         Sales and marketing               2,257         2,042           215          10.5
expenses
         General and administrative       11,925         5,042        6, 883         136.5
expenses
         Impairment charge                 3,617             -         3,617         100.0
Total operating expenses                  19,411         8,923        10,488         117.5
Operating loss                           (24,474 )      (5,330 )     (19,144 )       359.2
Finance costs, net                        (2,799 )      (2,711 )         (88 )         3.2
Government grant income                       20           405          (385 )       (95.1 )
Other (expenses) / income                    (68 )         391          (459 )      (117.4 )
Income tax expenses                         (275 )           -           275         100.0
Net loss                             $   (27,596 ) $    (7,245 ) $   (20,351 )       280.9

Net revenues. Net revenues were $46.8 million for the three months ended June 30, 2012, as compared to $47.1 million for the same period in 2011, a decrease of $286,000, or 0.6% .

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

                                     Three Months Ended June 30,
                                       2012               2011
Prismatic cells                  $                 $
         Aluminum-case cells             14,032             13,865
         Battery packs                   11,762             11,911
Cylindrical cells                        11,099             17,291
Lithium polymer cells                     6,338              2,009
High-power lithium battery cells          3,613              2,054
Total                            $       46,844    $        47,130

Net revenues from sales of aluminum-case cells slightly increased to $14.0 million in the three months ended June 30, 2012, from $13.9 million in the same period in 2011, an increase of $167,000, or 1.2%, resulting from an increase of 15.4% in our average selling price and offset by a decrease of 11.6% of sales volume driven by a decrease in sales to the domestic (PRC) market.

Net revenues from sales of battery packs decreased to $11.8 million in the three months ended June 30, 2012, from $11.9 million in the same period in 2011, a decrease of $149,000, or 1.3% . This resulted from a 16.5% decrease in average selling price, offset by an increase in sales volume of 16.5% driven by an increase in sales to the domestic (PRC) market.

Net revenues from sales of cylindrical cells decreased to $11.1 million in the three months ended June 30, 2012, from $17.3 million in the same period in 2011, a decrease of $6.2 million, or 35.8% . This resulted from a decrease in sales volume of 35.0% driven by a decrease in sales to the domestic (PRC) market and a 10.6% decrease in average selling price.

We sold $6.3 million in lithium polymer cells for the three months ended June 30, 2012, compared to $2.0 million in lithium polymer cells in the same period in 2011, an increase of $4.3 million, or 215.5%, resulting from an increase of 179.4% in sales volume, offset by a decrease of 21.2% in our average selling price.

We also sold approximately $3.6 million in high-power lithium battery cells for the three months ended June 30, 2012, as compared to $2.1 million 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 increased to $51.9 million for the three months ended June 30, 2012, as compared to $43.5 million for the same period in 2011, an increase of $8.4 million, or 19.2% . The increase in cost of revenues was due to an increase in sales volume in new lithium polymer cell products over the three months ended June 30, 2012 and a significant write-down of obsolete inventory over the three months ended June 30, 2012.

Gross (loss) / profit. Gross loss for the three months ended June 30, 2012 was $5.1 million, or 10.8% of net revenues, as compared to gross profit of $3.6 million, or 7.6% of net revenues, for the same period in 2011. Our significant change from gross profit to gross loss was mainly due to:

a) decrease in gross profit from prismatic products, primarily battery packs, compared with the same period of 2011, primarily due to the continued increase in cost of goods sold as result of increase in raw materials costs and salaries;

b) a decrease in cylindrical cell products sales volume during the three months ended June 30, 2012 compared to the three months ended June 30, 2011 and a significant increase in sales with negative gross profit compared with positive gross profit from cylindrical cell products during the same period of 2011 due to a significant increase in sales over the three months ended June 30, 2011 as the result of a sharp increase in market demand relating to an earthquake and tsunami that disrupted operations in Japan in March 2011;

c) gross loss from polymer products was mainly due to increased sales volume with negative gross profit compared with the same period of 2011as a result of the continuing lower yield rate of production; and

d) a significant write-down of obsolete inventory over the three months ended June 30, 2012.

Research and development expenses. Research and development expenses decreased to $1.6 million for the three months ended June 30, 2012, as compared to $1.8 million for the same period in 2011, a decrease of $227,000, or 12.3% . This decrease was mainly due to a decrease in research funds of approximately $35,000 and salaries of $191,000 as a result of a decrease in R&D projects.

Sales and marketing expenses. Sales and marketing expenses increased to $2.2 million for the three months ended June 30, 2012, as compared to $2.0 million for the same period in 2011, an increase of $215,000, or 10.5%, primarily due to increased salaries and social insurance benefits of $232,000. As a percentage of revenues, sales and marketing expenses have increased to 4.8% for the three months ended June 30, 2012, from 4.3% for the same period in 2011, primarily due to the decrease in revenues from sales over the three months ended June 30, 2012.

General and administrative expenses. General and administrative expenses increased to $11.9 million, or 25.5% of revenues, for the three months ended June 30, 2012, as compared to $5.0 million, or 10.7% of revenues, for the same period in 2011, an increase of $6.9 million, or 136.5% . The primary reason for the increase was that provision for bad debt expenses increased by $7.1 million over the three months ended June 30, 2012.

Operating loss. As a result of the above, operating loss totaled $24.5 million for the three months ended June 30, 2012, as compared to an operating loss of $5.3 million for the same period in 2011. As a percentage of net revenues, operating loss was 52.2% for the three months ended June 30, 2012, as compared to the loss of 11.3% for the same period in 2011.

Finance costs, net. Finance costs, net, increased to $2.8 million for the three months ended June 30, 2012, as compared to $2.7 million for the same period in 2011, an increase of $88,000, or 3.2% . 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 June 30, 2012.

Government grant income / Other Income. Government grant income was $20,000 and other income was $68,000 for the three months ended June 30, 2012, as compared to government grant income of $405,000 and other income of $391,000 for the same period in 2011.

Income tax (expense) / benefit. Income tax expense was $275,000 for the three months ended June 30, 2012, as compared to no income tax benefits or expenses for the same period in 2011.

Net loss. As a cumulative result of the foregoing, we had a net loss of $27.6 million for the three months ended June 30, 2012, compared to $7.2 million for the three months ended June 30, 2011.

Comparison of Nine Months Ended June 30, 2012 and June 30, 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.

. . .