---

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: September 30, 2010

[    ] 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: 333-139660

CHINA TMK BATTERY SYSTEMS INC.(Exact Name of Registrant as Specified in Its Charter)

|Nevada                          | 98-0506246                          
|------------------------------- | ------------------------------------
|(State or other jurisdiction of | (I.R.S. Employer Identification No.)
|incorporation or organization)  |                                     

Sanjun Industrial Park 
No. 2 Huawang Rd., Dalang Street 
Bao'an District, Shenzhen 518109 
People’s Republic of China (Address of principal executive offices, Zip Code)

(86) 755 28109908(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 [   ]        
|------------------------------------------------------------------------ | -------------------------------
|                                                                         |                                
|Non-accelerated filer [   ](Do not check if a smaller reporting company) | Smaller reporting company [ X ]

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 November [*], 2010 is as follows:

|Class of Securities            | Shares Outstanding
|------------------------------ | ------------------
|Common Stock, $0.001 par value | 36,888,000        

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CHINA TMK BATTERY SYSTEMS INC.

Quarterly Report on Form 10-Q 
Three and Nine Months Ended September 30,
2010


TABLE OF CONTENTS

PART I FINANCIAL
INFORMATION

|Item 1. | Financial Statements                                                                        | 2 
|------- | ------------------------------------------------------------------------------------------- | --
|Item 2. | Managements Discussion and Analysis of
      Financial Condition and Results of Operations | 16
|Item 3. | Quantitative and
      Qualitative Disclosures About Market Risk                            | 24
|Item 4. | Controls and Procedures                                                                     | 24

PART II OTHER INFORMATION

|Item 1.  | Legal Proceedings                                                 | 25
|-------- | ----------------------------------------------------------------- | --
|Item 1A. | Risk Factors                                                      | 25
|Item 2.  | Unregistered Sales of
      Equity Securities and Use of Proceeds | 25
|Item 3.  | Defaults Upon Senior Securities                                   | 25
|Item 4.  | (Removed and Reserved)                                            | 25
|Item 5.  | Other Information                                                 | 25
|Item 6.  | Exhibits                                                          | 25

i

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PART I FINANCIAL
INFORMATION

ITEM 1.     FINANCIAL STATEMENTS.

CHINA TMK BATTERY SYSTEMS INC.

CONSOLIDATED FINANCIAL STATEMENTS 
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

INDEX TO FINANCIAL STATEMENTS

|                                                                                          | Page(s)
|----------------------------------------------------------------------------------------- | -------
|Financial Statements                                                                      |        
|Consolidated Balance Sheets                                                               | 2      
|Consolidated Statements of Income                                                         | 3      
|Consolidated Statements of Changes in Stockholders'
      Equity and Comprehensive Income | 4      
|Consolidated Statements of Cash Flows                                                     | 5      
|Notes to Consolidated Financial Statements                                                | 6-[*]  

2

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China TMK Battery Systems Inc. and Subsidiaries 
Consolidated
Balance Sheets

|                                                                     |       | September 30,  |   |   | December 31, |  
|-------------------------------------------------------------------- | ----- | -------------- | - | - | ------------ | -
|                                                                     |       | 2010           |   |   | 2009         |  
|                                                                     |       | (Unaudited)    |   |   |              |  
|                                                                     |       |                |   |   |              |  
|Assets                                                               |       |                |   |   |              |  
|Current Assets                                                       |       |                |   |   |              |  
|Cash
      and cash equivalents                                      | $     | 5,416,248      |   | $ | 185,590      |  
|Trade receivables, net                                               |       | 7,750,879      |   |   | 2,909,234    |  
|VAT
      recoverable                                                |       | 146,625        |   |   | 34,660       |  
|Inventories, net                                                     |       | 4,423,742      |   |   | 3,973,697    |  
|Due
      from related parties                                       |       | -              |   |   | 15,204       |  
|Prepaid expenses and other receivables                               |       | 59,785         |   |   | -            |  
|Advances to suppliers                                                |       | 1,110,087      |   |   | 215,689      |  
|Restricted cash                                                      |       | 895,800        |   |   | 438,780      |  
|Total current assets                                                 |       | 19,803,166     |   |   | 7,772,854    |  
|Property, equipment and construction in progress, net                |       | 16,149,587     |   |   | 11,039,703   |  
|Advances for property and equipment purchase                         |       | 14,932,564     |   |   | 16,930,020   |  
|Restricted cash                                                      |       | 358,320        |   |   | 263,268      |  
|Deposit for business acquisition                                     |       | 3,238,157      |   |   | -            |  
|Other assets                                                         |       | 96,853         |   |   | 50,804       |  
|Total Assets                                                         | **$** | **54,578,647** |   | $ | 36,056,649   |  
|                                                                     |       |                |   |   |              |  
|Liabilities and Shareholders' Equity                                 |       |                |   |   |              |  
|Current
      Liabilities                                            |       |                |   |   |              |  
|Accounts payable                                                     | $     | 2,348,691      |   | $ | 1,832,737    |  
|Accrued liabilities and other payable                                |       | 327,913        |   |   | 519,129      |  
|Customer deposits                                                    |       | 1,480,948      |   |   | 179,272      |  
|Wages payable                                                        |       | 471,330        |   |   | 556,189      |  
|Corporate tax payable                                                |       | -              |   |   | 216,443      |  
|Short-term loan                                                      |       | -              |   |   | 4,722,660    |  
|Current portion of long-term bank loans                              |       | 630,494        |   |   | 2,451,700    |  
|Property purchase payable                                            |       | 492,936        |   |   | -            |  
|Deferred revenue                                                     |       | 9,405          |   |   | 36,854       |  
|Due to related parties                                               |       | 1,447,110      |   |   | 17,691       |  
|Total current liabilities                                            |       | 7,208,827      |   |   | 10,532,675   |  
|Long-term bank loans                                                 |       | 17,640,442     |   |   | 9,236,953    |  
|Deferred tax liabilities                                             |       | 606,323        |   |   | 593,977      |  
|Derivative liability                                                 |       | 1,255,314      |   |   | -            |  
|Total Liabilities                                                    |       | 26,710,906     |   |   | 20,363,605   |  
|                                                                     |       |                |   |   |              |  
|Stockholders' Equity                                                 |       |                |   |   |              |  
|Preferred stock,
      $0.001 par value, 10,000,000 shares           |       |                |   |   |              |  
|authorized, none issued and outstanding at September 30, 2010        |       |                |   |  
|and December 31, 2009                                                |       | -              |   |   | -            |  
|Common stock, $0.001
      par value, 300,000,000 shares authorized, |       |                |   |  
|36,888,000 and 25,250,000 shares issued and outstanding              |       |                |   |   |              |  
|at
      September 30, 2010 and December 31, 2009, respect           |       | 36,888         |   |   | 25,250       |  
|Common stock
      subscribed,                                       |       | -              |   |   | -            |  
|Additional paid-in capital                                           |       | 10,518,662     |   |   | 1,193,591    |  
|Accumulated
      other comprehensive income                         |       | 859,782        |   |   | 365,187      |  
|Distribution to owners                                               |       | (2,986,622     | ) |   | (1,476,622   | )
|Statutory
      reserves                                             |       | 1,038,988      |   |   | 1,038,988    |  
|Retained earnings (unrestricted)                                     |       | 18,400,043     |   |   | 14,546,650   |  
|Total
      stockholders' equity                                     |       | 27,867,741     |   |   | 15,693,044   |  
|Total Liabilities & Stockholders' Equity                             | **$** | **54,578,647** |   | $ | 36,056,649   |  

The accompanying notes are an integral part of these
consolidated financial statements.

3

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China TMK Battery Systems Inc. and Subsidiaries 
Consolidated
Statements of Income(Unaudited) 
(In US Dollars)

|                                                   |   | For the Three Months
      Ended |   |   | For the Nine Months
      Ended |  
|-------------------------------------------------- | - | -------------------------------- | - | - | ------------------------------- | -
|                                                   |   | September 30,                    |   |   | September 30,                   |  
|                                                   |   | 2010                             |   |   | 2009                            |  
|                                                   |   |                                  |   |   |                                 |  
|Revenue                                            | $ | 16,460,230                       |   | $ | 13,008,546                      |  
|Cost of Goods Sold                                 |   | (12,407,686                      | ) |   | (9,872,563                      | )
|Gross Profit                                       |   | 4,052,544                        |   |   | 3,135,983                       |  
|                                                   |   |                                  |   |   |                                 |  
|                                                   |   |                                  |   |   |                                 |  
|Operating Costs and Expenses                       |   |                                  |   |   |                                 |  
|Selling
      expenses                             |   | 435,879                          |   |   | 257,409                         |  
|Depreciation                                       |   | 64,927                           |   |   | 28,601                          |  
|General
      and administrative                   |   | 356,844                          |   |   | 325,739                         |  
|Research and development                           |   | 156,729                          |   |   | 140,110                         |  
|Total
      operating expenses                     |   | 1,014,379                        |   |   | 751,859                         |  
|Income from operations                             |   | 3,038,165                        |   |   | 2,384,124                       |  
|                                                   |   |                                  |   |   |                                 |  
|Other income (expenses):                           |   |                                  |   |   |                                 |  
|Interest
      expense                             |   | (318,540                         | ) |   | (91,983                         | )
|Change in fair value of
      derivative liability |   | 627,803                          |   |   | -                               |  
|Other
      expense, net                           |   | (168                             | ) |   | (58,930                         | )
|Gain on acquisition of
      business              |   | -                                |   |   | 106,350                         |  
|Total
      other income (expenses)                |   | 309,095                          |   |   | (44,563                         | )
|                                                   |   |                                  |   |   |                                 |  
|Income before income taxes                         |   | 3,347,260                        |   |   | 2,339,561                       |  
|Income taxes                                       |   | (296,445                         | ) |   | (338,633                        | )
|Net income                                         | $ | 3,050,815                        |   | $ | 2,000,928                       |  
|                                                   |   |                                  |   |   |                                 |  
|                                                   |   |                                  |   |   |                                 |  
|Earnings per share - basic                         | $ | 0.08                             |   | $ | 0.08                            |  
|                                                   |   |                                  |   |   |                                 |  
|Weighted-average shares outstanding, basic         |   | 36,888,000                       |   |   | 25,250,000                      |  
|                                                   |   |                                  |   |   |                                 |  
|Earnings per share - diluted                       | $ | 0.08                             |   | $ | 0.08                            |  
|                                                   |   |                                  |   |   |                                 |  
|Weighted-average shares outstanding, diluted       | $ | 36,913,320                       |   |   | 25,250,000                      |  

The accompanying notes are an integral part of these
consolidated financial statements.

4

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China TMKBatterySystemsInc. andSubsidiaries

ConsolidatedStatementofChangesinStockholders'EquityFor the Nine Months Ended September 30, 2010 
(Unaudited) 
(In US
Dollars)

|                                                                                                  |  |              |  |   |         |  |   |               |   |   | Accumulated |  |   |           |  |   |                |   |   |            |  
|------------------------------------------------------------------------------------------------- |  | ------------ |  | - | ------- |  | - | ------------- | - | - | ----------- |  | - | --------- |  | - | -------------- | - | - | ---------- | -
|                                                                                                  |  |              |  |   |         |  |   | Additional    |   |   | Other       |  |   |           |  |   | Retained       |   |   | Total      |  
|                                                                                                  |  | Common Stock |  |   | Paid-in |  |   | Comprehensive |   |   | Statutory   |  |   | Earnings  |  |   | Stockholders'  |  
|                                                                                                  |  | Share        |  |   | Amount  |  |   | Capital       |   |   | Income      |  |   | Reserves  |  |   | (Unrestricted) |   |   | Equity     |  
|Balance at December 31, 2009                                                                      |  | 25,250,000   |  | $ | 25,250  |  | $ | 1,193,591     |   | $ | 365,187     |  | $ | 1,038,988 |  | $ | 13,070,028     |   | $ | 15,693,044 |  
|                                                                                                  |  |              |  |   |         |  |   |               |   |   |             |  |   |           |  |   |                |   |   |            |  
|Retained of 2,750,000 shres by
      original Deerfield shareholders                              |  | 2,750,000    |  | $ | 2,750   |  | $ | (2,750        | ) | $ | -           |  | $ | -         |  | $ | -              |   | $ | -          |  
|Issuance of 560,000 shares to investment bank                                                     |  | 560,000      |  |   | 560     |  |   | 699,440       |   |   | -           |  |   | -         |  |   | -              |   |   | 700,000    |  
|Issuance of 125,000 shares to Hayden
      Communications International, Inc (IR)                 |  | 125,000      |  |   | 125     |  |   | 156,125       |   |   | -           |  |   | -         |  |   | -              |   |   | 156,250    |  
|Issuance of 5,486,000 shares at 1.25 per share in
      private placement, net of offering costs  |  | 5,486,000    |  |   | 5,486   |  |   | 6,297,467     |   |   | -           |  |   | -         |  |   | -              |   |   | 6,302,953  |  
|Issuance of 2,717,000 shares at 1.25
      per share in a private placement for Chinese investors |  | 2,717,000    |  |   | 2,717   |  |   | 3,393,533     |   |   | -           |  |   | -         |  |   | -              |   |   | 3,396,250  |  
|Distribution to owners - share purchase from former
      owners                                  |  | -            |  |   | -       |  |   | -             |   |   | -           |  |   | -         |  |   | (1,510,000     | ) |   | (1,510,000 | )
|Reclassification of equity-linked
      financial instruments to derivative liability             |  | -            |  |   | -       |  |   | (1,218,744    | ) |   |             |  |   |           |  |   |                |   |   | (1,218,744 | )
|Foreign currency translation adjustment                                                           |  | -            |  |   | -       |  |   | -             |   |   | 494,595     |  |   | -         |  |   | -              |   |   | 494,595    |  
|Net income for the nine months ended
      September 30, 2010                                     |  | -            |  |   | -       |  |   | -             |   |   | -           |  |   | -         |  |   | 3,853,393      |   |   | 3,853,393  |  
|Balance at September 30, 2010                                                                     |  | 36,888,000   |  | $ | 36,888  |  | $ | 10,518,662    |   | $ | 859,782     |  | $ | 1,038,988 |  | $ | 15,413,421     |   | $ | 27,867,741 |  

The accompanying notes are an integral part of these
consolidated financial statements.

5

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China TMK Battery Systems Inc. and Subsidiaries 
Consolidated
Statements of Comprehensive Income(Unaudited) 
(In US Dollars)

|                                                |   | For the Nine Months Ended
      September 30, | 
|----------------------------------------------- | - | --------------------------------------------- | 
|                                                |   | 2010                                          | 
|Net income                                      | $ | 3,853,393                                     | 
|Other comprehensive income, net of tax:         |   |                                               | 
|Unrealized gain on foreign currency translation |   | 494,595                                       | 
|Comprehensive income                            | $ | 4,347,988                                     | 

The accompanying notes are an integral part of these
consolidated financial statements.

6

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China TMK Battery Systems Inc. and Subsidiaries 
Consolidated
Statements of Cash Flows(Unaudited) 
(In US Dollars)

|                                                                                        |   | For the Nine Months
      Ended |  
|--------------------------------------------------------------------------------------- | - | ------------------------------- | -
|                                                                                        |   | September 30,                   |  
|                                                                                        |   | 2010                            |  
|                                                                                        |   |                                 |  
|Cash Flows From Operating Activities                                                    |   |                                 |  
|                                                                                        |   |                                 |  
|Net income                                                                              | $ | 3,853,393                       |  
|Adjustments to reconcile net income to
      net cash provided by operating activities: |   |                                 |  
|Depreciation expense                                                                    |   | 530,056                         |  
|Gain on business
      acquisition                                                      |   | -                               |  
|Gain on
      assets impairment adjustment                                              |   | -                               |  
|Deferred tax benefit                                                                    |   | -                               |  
|Change in
      fair value of derivative liability                                      |   | 36,570                          |  
|Common stocks for service
      provided                                                |   | 856,250                         |  
|Deferred
      income                                                                   |   | (27,799                         | )
|Changes in operating assets and
      liabilities:                                      |   |                                 |  
|Account receivable-trade                                                                |   | (4,710,724                      | )
|Advance to
      suppliers for purchases                                                |   | (876,802                        | )
|Inventories, net                                                                        |   | (362,038                        | )
|Account
      payable - trade                                                           |   | 470,819                         |  
|Accrued liabilities and other payables                                                  |   | (199,029                        | )
|Customer
      deposits                                                                 |   | 1,278,824                       |  
|Prepaid expense and other receivables                                                   |   | (58,904                         | )
|Other
      Payable                                                                     |   | -                               |  
|Wages payable                                                                           |   | (94,999                         | )
|Various
      taxes payable                                                             |   | (327,291                        | )
|Other
      Assets                                                                      |   | (44,330                         | )
|Net cash used in operating activities                                                   |   | 323,996                         |  
|                                                                                        |   |                                 |  
|Cash Flows From Investing Activities                                                    |   |                                 |  
|Change in restricted
      cash                                                         |   | (529,560                        | )
|Purchases and advance for property and
      equipment                                  |   | (2,538,393                      | )
|Purchase of Borou, net
      of cash acquired                                           |   | -                               |  
|Deposit for Hualian acquisition                                                         |   | (3,190,441                      | )
|Collection of
      advances/loans - related parties                                    |   | 15,204                          |  
|Advances/loans - related parties                                                        |   | -                               |  
|Collection of
      short-term loan receivable                                          |   | -                               |  
|Net cash used in investing activities                                                   |   | (6,243,190                      | )
|                                                                                        |   |                                 |  
|Cash Flows From Financing Activities                                                    |   |                                 |  
|Borrowing from bank
      notes                                                         |   | -                               |  
|Repayment of bank notes                                                                 |   | -                               |  
|Borrowing from bank
      loans                                                         |   | 10,786,027                      |  
|Repayments of bank loans                                                                |   | (9,289,887                      | )
|Net proceeds from share
      issuance                                                  |   | 9,699,203                       |  
|Distribution to former owners                                                           |   | (1,481,557                      | )
|Proceeds from related
      parties                                                     |   | 1,446,725                       |  
|Repayment to related parties                                                            |   | (17,691                         | )
|Net cash provided by financing
      activities                                         |   | 11,142,820                      |  
|                                                                                        |   |                                 |  
|Effect of exchange rate changes on cash                                                 |   | 7,032                           |  
|Net increase (decrease) in cash and cash
      equivalents                              |   | 5,230,658                       |  
|Cash and cash equivalents,
      beginning of period                                    |   | 185,590                         |  
|Cash and cash equivalents, end of period                                                | $ | 5,416,248                       |  
|                                                                                        |   |                                 |  
|                                                                                        |   |                                 |  
|Supplemental disclosure
      information:                                              |   |                                 |  
|Income taxes paid                                                                       | $ | 1,109,446                       |  
|Interest paid                                                                           | $ | 805,504                         |  

The accompanying notes are an integral part of these
consolidated financial statements.

7

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China TMK Battery Systems Inc. and Subsidiaries 
Notes to Consolidated
Financial Statements

NOTE 1: DESCRIPTION OF BUSINESS AND ORGANIZATION

China TMK Battery System Inc. (“TMK US”, or “the Company”) (formerly Deerfield Resource, Ltd.) was incorporated under the laws of the State of Nevada on June 21, 2006. On February 10, 2010, we entered into and closed the
Share Exchange Agreement with Leading Asia, a BVI company, and its sole stockholder, Unitech, a BVI company, pursuant to which we acquired 100% of the issued and outstanding capital stock of Leading Asia in exchange for 25,250,000 shares of our
common stock, par value $0.001, which constituted 90.18% of our issued and outstanding capital stock on a fully-diluted basis as of and immediately after the consummation of the transactions contemplated by the Share Exchange Agreement.

In connection with the reverse acquisition of Leading Asia, Deerfield also entered into the Cancellation Agreement with United Fertilisers, its controlling stockholder, whereby United Fertilisers agreed to the cancellation of 272,250,000 shares of
China TMK's common stock owned by it. As a condition precedent to the consummation of the Share Exchange Agreement, on February 10, 2010, China TMK also entered into a termination and release agreement with ASK Prospecting & Guiding Inc.,
pursuant to which Deerfield terminated that certain Mineral Claim Purchase Agreement, dated as of October 10, 2006. On February 10, 2010, Deerfield Resources, Ltd. changed its name to "China TMK Battery Systems Inc." to more accurately reflect its
new business operations.

The transaction has been treated as a recapitalization of Leading Asia and its subsidiaries, with China TMK Battery Systems Inc. (the legal acquirer of Leading Asia and its subsidiaries, including the consolidation of the TMK Power Industries Ltd.)
considered the accounting acquiree, and Leading Asia whose management took control of China TMK Battery Systems Inc. (the legal acquiree of Leading Asia) considered the accounting acquirer. The Company did not recognize goodwill or any intangible
assets in connection with the transaction. All costs related to the transaction are being charged to operations as incurred. The 25,250,000 shares of common stock issued to the shareholders and designees of China TMK BVI in conjunction with the
Share Exchange have been presented as outstanding for all periods. The historical consolidated financial statements include the operations of the accounting acquirer for all periods presented.

TMK US, through its wholly-owned subsidiary in the People’s Republic of China (“PRC”), is engaged in the research, development, production, marketing and sales of environment-friendly batteries including nickel metal hydride
batteries.

TMK US and its subsidiaries - Leading Asia Pacific Investment Limited, Good Wealth Capital Investment Limited, TMK Power Industries (SZ) Co., Ltd., and Borou Industrial Co., Ltd – are collectively referred to as the “Company.”

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a. Basis of preparation

The consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation SX. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete financial statements. These consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company for the year ended
December 31, 2009 and notes thereto contained in our Registration Statement on Form S-1 filed with the United States Securities and Exchange Commission (the “SEC”) on May 24, 2010. Interim results are not necessarily indicative of the
results for the full year.

8

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China TMK Battery Systems Inc. and Subsidiaries 
Notes to Consolidated
Financial Statements

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

b. Foreign currency translation

The functional currency of the Company is Renminbi (“RMB”). The Company maintains its financial statements using the functional currency. Monetary assets and liabilities denominated in currencies other than the functional currency are
translated into the functional currency at rates of exchange prevailing at the balance sheet dates. Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates
prevailing at the dates of the transaction. Exchange gains or losses
arising from foreign currency transactions are included in the determination of
net income (loss) for the respective periods.

For financial reporting purposes, the financial statements of
TMK Shenzhen and Borou, which are prepared in RMB, are translated into the
Companys reporting currency, United States Dollars (USD). Balance sheet
accounts are translated using the closing exchange rate in effect at the balance
sheet date and income and expense accounts are translated using the average
exchange rate prevailing during the reporting period. Adjustments resulting from
the translation, if any, are included in accumulated other comprehensive income
(loss) in stockholders equity.

The exchange rates used for foreign currency translation were
as follows (USD$1 = RMB):

|Period
      Covered                       |  | Balance Sheet Date Rates |  |  | Average Rates | 
|------------------------------------------ |  | ------------------------ |  |  | ------------- | 
|                                           |  |                          |  |  |               | 
|Year ended December 31, 2009               |  | 6.83720                  |  |  | 6.82082       | 
|Nine Months
      Ended September 30, 2009 |  | 6.83761                  |  |  | 6.82175       | 
|Nine Months Ended September 30, 2010       |  | 6.69792                  |  |  | 6.79810       | 

c. Reclassifications

Certain amounts in the consolidated financial statements for
the prior year have been reclassified to conform to the presentation of the
current year for the comparative purposes.

d. Recently issued accounting pronouncements

In January 2010, the FASB issued ASU No. 2010-6, Improving
Disclosures About Fair Value Measurements, that amends existing disclosure
requirements under ASC 820 by adding required disclosures about items
transferring into and out of levels 1 and 2 in the fair value hierarchy; adding
separate disclosures about purchase, sales, issuances, and settlements relative
to level 3 measurements; and clarifying, among other things, the existing fair
value disclosures about the level of disaggregation. This ASU is effective for
the first quarter of 2010, except for the requirement to provide level 3
activities of purchases, sales, issuances, and settlements on a gross basis,
which is effective beginning the first quarter of 2011. Since this standard
impacts disclosure requirements only, its adoption will not have a material
impact on the Companys consolidated results of operations or financial
condition.

NOTE 3: ACQUISITION

In January 4, 2010, the Company entered into a Memorandum of
Understanding (MOU) with Shenzhen DongFang Hualian Technology Ltd. (Hualian).
The Company paid overall $3.2 million as deposit during January through
September 2010, which shall be withdrawn based upon the MOU if Hualian fails the
legal and financial due diligence which are currently in the process and are
expected to be completed by the end of the fourth quarter of 2010. In addition,
the Company can withdraw the $3.2 million deposit if the 2009 net profit of
Hualian is less than $4,105,080 (RMB 28 million).

9

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China TMK Battery Systems Inc. and Subsidiaries 
Notes to Consolidated
Financial Statements

NOTE 4: ADVANCES FOR PROPERTY AND EQUIPMENT PURCHASE

Advances for property and equipment purchase consist of the
following:

|                                                                                                                                                     |   | September  |  |   | December 31, | 
|---------------------------------------------------------------------------------------------------------------------------------------------------- | - | ---------- |  | - | ------------ | 
|                                                                                                                                                     |   | 30, 2010   |  |   | 2009         | 
|Advances for Property Purchase (1
      unit located in Shihao Mansion)                                                                              | $ | 3,086,966  |  | $ | 3,024,108    | 
|Advances for Equipment Purchase (4 vendors as of 9/30/2010
      and 2 vendors as of 12/31/2009)                                                     |   | 2,904,783  |  |   | 2,989,816    | 
|Advances for Property Purchase (5th and 6th floor as of
      9/30/2010 and 3rd, 5th and 6th floor as of 12/31/2009 located in Jinli
      Building) |   | 8,940,815  |  |   | 10,916,096   | 
|Total Advances for Property Purchase                                                                                                                 | $ | 14,932,564 |  | $ | 16,930,020   | 

The Company entered into two agreements to purchase equipment
from two vendors in 2009 and three agreements to purchase equipment from four
vendors during nine months ended September 30, 2010. Based on the agreements,
the Company is required to pay certain deposits prior to equipment delivery
date. The remaining price is to be paid after trial-run of the equipment within
certain acceptance period. The ownership of equipment will be transferred to the
Company upon the receipt of full purchase price.

The Company is in the process of acquiring several properties
and has entered into various property purchase agreements starting year 2009.
These agreements generally require the Company to make installment payments and
the title and possession transfer to the Company upon the final payment. For the
properties listed in the table above, the final payment had not been made by
September 30, 2010 and December 31, 2009 and as a result, the payments made
through those respective dates were not recorded as properties. No depreciation
was recorded related to these advances.

NOTE 5: SHORT-TERM BANK LOANS

Short term bank loans consist of the following:

|                                          |   | September 30, |  |   | December 31, | 
|----------------------------------------- | - | ------------- |  | - | ------------ | 
|                                          |   | 2010          |  |   | 2009         | 
|Bank
      Loans borrowed by TMK Shenzhen |   |               |  |   |              | 
|Bank of China Shenzhen Branch             | $ | -             |  | $ | 2,382,500    | 
|Bank of
      Ningbo Shenzhen Branch      |   | -             |  |   | 1,170,080    | 
|                                          |   |               |  |   |              | 
|Bank
      Loans borrowed by Borou        |   |               |  |   |              | 
|Bank of Ningbo Shenzhen Branch            |   | -             |  |   | 1,170,080    | 
|Short-term loans                          | $ | -             |  | $ | 4,722,660    | 

On September 2, 2009, Borou obtained a one-year term loan in
the amount of $1,170,080 (RMB 8,000,000) from Bank of Ningbo Shenzhen Branch
("BN") bearing interest at approximately 6.37% with maturity date on August 23,
2010. The loan is personally guaranteed by Mr. Wu, Henian and Mr. Tu Jun and
secured by Mr. Zhuang, Zehao's personal property. The loan was fully repaid on
August 19, 2010.

On September 2, 2009, TMK Shenzhen obtained a one-year term
loan in the amount of $1,170,080 (RMB 8,000,000) from Bank of Ningbo Shenzhen
Branch ("BON") bearing interest at approximately 6.37% with maturity date on
August 20, 2010. The loan is personally guaranteed by Mr. Wu, Henian and secured
by Mr. Zhuang, Zehao's personal property. The Company remained compliant with
the terms of the loan agreement and on August 19, 2010 the Company repaid the
loan in full.

On June 18, 2008, TMK Shenzhen entered into a credit agreement
with Bank of China Shenzhen Branch (BOC) to obtain a line of credit in the
amount of $2,787,109 (RMB 19,000,000). The loan bears interest at approximately
5.346% per annum and matured on June 18, 2010. The loan is personally guaranteed
by Mr. Wu, Henian.

The unused line of credit amounted to $0 and $403,957 at
September 30, 2010 and December 31, 2009, respectively.

10

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China TMK Battery Systems Inc. and Subsidiaries 
Notes to Consolidated
Financial Statements

NOTE 6: LONG-TERM BANK LOANS

Long term bank loans consist of the following:

|                                        |   | September 30, 2010 |   |   | December 31, 2009 |  
|--------------------------------------- | - | ------------------ | - | - | ----------------- | -
|DBS Bank                                | $ | 1,698,636          |   | $ | 2,181,753         |  
|China Construction Bank Shenzhen Branch |   | 3,135,300          |   |   | 4,387,800         |  
|Bank of China Shenzhen Branch           |   | 5,972,000          |   |   | 5,119,100         |  
|Bank of Shanghai Shenzhen Branch        |   | 7,465,000          |   |   | -                 |  
|Less current portion                    |   | (630,494           | ) |   | (2,451,700        | )
|Long -term portion                      | $ | 17,640,442         |   | $ | 9,236,953         |  

On June 22, 2010, TMK Shenzhen entered into a three-year term
loan agreement with Shanghai Bank Shenzhen Branch (SB) in the amount of
$7,343,500 (RMB 50,000,000) bearing interest at approximately 5.508% paid
monthly. Pursuant to the loan agreement, the Company is required to make
principal payment at a fixed amount of $293,380 (RMB 2,000,000) starting from
the 13th month (after the receipt of first loan proceeds) until maturity date on
June 28, 2013. In addition, the Company is required to pay $14,669 (RMB 100,000)
per annum as service consulting charge. The loan is personally guaranteed by Mr.
Wu, Henian and secured by property owned by Dongguan Yikang Metal Material Ltd.
According to the loan agreement, SB has right to request TMK Shenzhen to repay
the outstanding debt in full immediately if the Company does not meet any of the
following: (a) the purpose of loan is to purchase raw materials, banks written
consent is needed
for any change of purpose; (b) TMK Shenzhen needs to pay off all the required interests, service charges and principle repayments on time; (c) the Company should provide annual audited financial to SB prior to April 30; (d) The Borrower shall obtain
written approval before providing a guarantee or pledge its primary assets for any third party; (e) the Company should notify the Bank of any significant corporate changes in writing 30 days in advance; (f) the Company should notify the Bank of any
related parties transactions with amount exceeding 10% of its net assets. The Company did not violate any of the above covenants as of September 30, 2010.

On November 13, 2009, TMK Shenzhen obtained a 3-year term loan from DBS Bank (China) Limited Shenzhen Branch (“DBS”) in the amount of $2,237,778 (RMB 15,300,000) bearing interest at approximately 130% of the prevailing prime rate at
the time of the loan (approximately 7.02% per annum) paid monthly. The loan can only be used for equipment purchase (RMB 11,318,500) and working capital purpose (RMB 3,981,500). Based on agreement, DBS has right to request the Company to repay the
outstanding balance immediately if the Company does not meet any of the following: (a) the Company should provide audited financial within six months of year-end; (b) the Company cannot pledge its account receivables to any other third parties
without DBS permission; (c) the Company's account receivable settlements (cash collections) should be maintained at $5,850,400 (RMB 40,000,000) annually and $1,462,600 (RMB 10,000,000) quarterly. The Company did not violate any of the above
covenants as of September 30, 2010.

On August 05, 2009, Borou obtained a 3-year term loan from Bank of China Shenzhen Branch (“BOC”) in the amount of $5,850.400 (RMB 40,000,000) bearing interest at approximately 110% of the prevailing prime rate at the time of the loan
(approximately 5.94% per annum) paid monthly. As of December 31, 2009, $5,119,100 (RMB 35,000,000) was received in August 2009 and the remaining $731,100 (RMB 5,000,000) was received in January 2010. Pursuant to the loan agreement, the loan
can only be used for working capital purpose (RMB 20,000,000) and fixed asset purchase purpose (RMB 20,000,000). If violated, a penalty will be charged at 100% of interest rate on the violated amount. The loan is guaranteed by TMK Shenzhen and
secured by Mr. Wu Henian, Mr. Huang Junbiao, and Mr. Wang Zongfu's ownerships in TMK Shenzhen. In addition, the loan is secured by property owned by Deli Investment Limited Co. with fair value of $2,925,200 (RMB 20,000,000) and one of
Borou’s properties with fair value of $2,925,200 (RMB 20,000,000). Based on loan agreement, BOC also has right to request the Company to repay the outstanding balance immediately if Borou does not meet any of the following: (a) Borou
cannot distribute any bonus or dividend if it incurs an after-tax loss, or its pretax net income is not significant enough to pay for its prior year' loss. Any pretax net income should be used to pay off principal and interests; (b) Borou should pay
off the Bank before it pays off borrowing from its shareholders and other debt; (c) Fixed assets purchase loan can only be used for equipment purchase. The proceeds will be sent to equipment vendor directly. Any new equipment purchased under the
loan should be added to bank collateral 30 days after payment is made; (d) Prior to loan payoff date, Borou should maintain monthly purchase settlements of not less than $1,170,080 (RMB 8,000,000) with the bank (note purchase settlements are
accounted for as the total of each cash-in and cash-out transaction amounts). Borou did not violate any of the above covenants at September 30, 2010. In accordance with the loan agreement, Borou also agreed to pay $175,512 (RMB 1,200,000) of
bank charge in 3 years with annual bank charge of $58,504 (RMB 400,000) made prior to August 30 each year.

On December 30, 2008, TMK Shenzhen obtained a three-year term loan from China Construction Bank Shenzhen Branch (“CCB”) in the amount of $4,400,698 (RMB 30,000,000) bearing interest at approximately 105% of the prevailing prime rate
at the time of the loan (approximately 5.67% per annum and subject to adjustment every 12 months) paid monthly. Pursuant to the loan agreement, the principal needs to be made at a fixed amount of $146,260 (RMB 1,000,000) starting from the
13th month until maturity date. In the event the Company defaulted on the loan, the interest rate will be increased to 150% of prime rate. In addition, the loan should be used for working capital purpose only. If violated, the interest
rate will be increased to 200% of prime rate and the penalty will be computed at 11.34% of violated amount. The terms of the loan also called for a deposit of $263,268 (RMB 1,800,000) to Shenzhen General Chamber of Commerce to secure the loan
until the term loan repaid in full. The loan with CCB is personally guaranteed by Mr. Wang, Zongfu and Mr. Huang, Junbiao and secured by Ms. Tu, Lanzhen (CEO’s Wife)'s personal property with fair value of $440,070 (RMB 3,000,000) and the
Company's equipment with fair value of $2,938,302 (RMB 20,030,700). The Company did not violate any of the above covenants as of September 30, 2010.

11

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China TMK Battery Systems Inc. and Subsidiaries 
Notes to Consolidated
Financial Statements

NOTE 7: RELATED PARTY TRANSACTIONS

Due from related parties

Due from related party consists of the following:

|              |   | September 30, |  |   | December 31, | 
|------------- | - | ------------- |  | - | ------------ | 
|              |   | 2010          |  |   | 2009         | 
|Liu, Xiangjun | $ | -             |  | $ | 15,204       | 

The above amount due from Liu, Xiangjun represents advance for
regular business expense to be paid by her on behalf of the Company. The amount
is non-secured, non-interest bearing, and is considered to be short-term. As of
the date of this filing, in anticipation of being a U.S. public company, the due
from balance has been repaid and no loans to Liu, Xiangjun are outstanding.

Due to related party

Due to related party consists of the following:

|                           |   | September 30, |  |   | December 31, | 
|-------------------------- | - | ------------- |  | - | ------------ | 
|                           |   | 2010          |  |   | 2009         | 
|Wu, Henian                 | $ | 890,760       |  | $ | -            | 
|Wang,
      Zongfu         |   | 371,185       |  |   | -            | 
|Huang, Junbiao             |   | 184,298       |  |   | -            | 
|Li, Guifang                |   | 385           |  |   | -            | 
|Q-Lite Industrial Co., Ltd |   | 206           |  |   | 17,691       | 
|Tu, Jun                    |   | 276           |  |   | -            | 
|Total                      | $ | 1,447,110     |  | $ | 17,691       | 

Ms. Yu, Zhengfei, Mr. Wang, Zongfus wife, holds 25% ownership
of Q-Lite Industrial Co., Ltd. (Q-Lite). During the nine months ended
September 30, 2010 and for the year ended December 31, 2009, the Company sold
products to Q-Lite in the amounts of $205,202 and $346,047 respectively.

NOTE 8: INCOME TAX

Leading Asia is registered in BVI and under the current laws of
the BVI, is not subject to income taxes.

Good Wealth is a holding company registered in Hong Kong and
has no operating profit for tax liabilities.

TMK Shenzhen is registered in PRC and has tax advantages
granted by local government for corporate income taxes and sales taxes
commencing 2005.

Borou is registered in PBC and is subject to regular corporate
income tax rate. The assessment of its tax liabilities is combined with that of
TMK Shenzhen.

A reconciliation between the income tax computed at the U.S.
statutory rate and the Company's provision for income tax is as follows:

|                                                       |  | Three Months Ended |  |  | NineMonths Ended | 
|------------------------------------------------------ |  | ------------------ |  |  | ---------------- | 
|                                                       |  | September 30,      |  |  | September 30,    | 
|                                                       |  | 2010               |  |  | 2009             | 
|                                                       |  |                    |  |  |                  | 
|U.S. statutory rate                                    |  | 34.0%              |  |  | 34.0%            | 
|Foreign income not recognized in the
      U.S.        |  | -34.0%             |  |  | -34.0%           | 
|PRC preferential
      enterprise income tax rate      |  | 25.0%              |  |  | 25.0%            | 
|Tax holiday and relief granted to the
      Subsidiary |  | -10.0%             |  |  | -10.0%           | 
|Change in valuation
      allowance                    |  | -6.1%              |  |  | -0.5%            | 
|Provision for income tax                               |  | 8.9%               |  |  | 14.5%            | 

Various Taxes

The Company is subject to pay various taxes such as Value Added
Tax (VAT), City Development Tax, and Education tax to the local government tax
authorities. The VAT collected on sales is netted against the taxes paid for
purchases of cost of goods sold to determine the amounts payable and refundable.
The City Development Tax and Education Tax are expensed as general and
administrative expense.

12

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China TMK Battery Systems Inc. and Subsidiaries 
Notes to Consolidated
Financial Statements

NOTE 9 - PRIVATE PLACEMENT

On February 10, 2010, concurrently with the close of the Share
Exchange, the Company conducted a private placement transaction (the Private
Placement) pursuant to which the Company sold an aggregate of 5,486,000 shares
of common stock at $1.25 per share (the shares were sold in 54.86 units, each of
which included 100,000 shares of common stock and 50,000 detachable common stock
warrants with a five year maturity). As a result, the Company received gross
proceeds in the amount of approximately $6.9 million. Warrants are five year
term from date of issuance and permit a cashless exercise, callable if the
common stock closing bid price is at least $3.00 and the average trading volume
at least 100,000 shares for 15 consecutive trading days and an effective registration is in
place. At the closing of the private placement, the Company paid a cash fee of
$445,738, or 6.5% of the gross proceeds received from the sale of the securities
as placement agent commission, of which $351,488 was paid to Hudson Securities,
Inc (Hudson), and $87,750 and $6,500 was paid to SHP Securities, LLC (SHP)
and Williams Financial Group, respectively, at the direction of Hudson. The
Company incurred $108,810 in other fees and costs. As partial consideration for
placement agent service provided, the Company also issued warrants for the
purchase of an aggregate of 658,320 shares of its common stock, exercisable for
a period of five years at an exercise price of $1.25 per share of which 553,020
warrants were issued to Hudson and its designees and 105,300 warrants were
issued to SHP Securities LLC, at the direction of Hudson. These warrants also
contain a reset provision, see Note 11 for further discussion.

In connection with the private placement, the Company also
issued to Hayden Communications International, Inc. (Hayden), an investor
relations consulting firm, 125,000 shares of Common Stock as partial
consideration for the consulting services provided by Hayden.

In addition, the Company evaluated the warrants under ASC 815
to determine whether the warrants are indexed to the company's own stock, see Note 11 for
further discussion.

On March 27, 2010, the Company entered into common share
subscription agreements with multiple employees to raise around $3.4 million
capital in exchange for 2.7 million shares of common stock (at par value $0.001)
.. By September 30, 2010, all shares subscribed have been paid and these shares
are registered on April 27, 2010.

NOTE 10- COMMON STOCK WARRANTS

In connection with the private placement, the Company had
2,743,000 shares of common stock issuable upon the exercise of five-year
warrants issued to the investors in the private placement with exercise price of
$1.60 per share. In addition, the Company granted Hudson and SHP a five-year
warrant for the purchase of an amount of shares equal to 8% of the number of
securities issued in the private placement. The warrants have an exercise price
of $1.25 per share, are currently exercisable and expire on February 9, 2015.
The Company agreed to register the 3,401,320 shares of common stock underlying
the warrants in a Registration Statement. The Registration Statement was filed
on May 24, 2010.

A summary of the Companys warrant activities for the six
months ended September 30, 2010 is as follows:

|                                  |  |           |  |   | Weighted       | 
|--------------------------------- |  | --------- |  | - | -------------- | 
|                                  |  | Number of |  |   | average        | 
|                                  |  | Warrants  |  |   | Exercise Price | 
|December 31, 2009                 |  | -         |  | $ | N/A            | 
|Private
      placement investors |  | 2,743,000 |  | $ | 1.60           | 
|Hudson Securities, Inc.           |  | 553,020   |  | $ | 1.25           | 
|SHP
      Securities LLC          |  | 105,300   |  | $ | 1.25           | 
|September 30, 2010                |  | 3,401,320 |  | $ | 1.53           | 

13

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China TMK Battery Systems Inc. and Subsidiaries 
Notes to Consolidated
Financial Statements

NOTE 11 - DERIVATIVE LIABILITIES

In June 2008, the FASB finalized ASC 815-15, "Determining
Whether an Instrument (or Embedded Feature) is indexed to an Entity's Own
Stock". The EITF lays out a procedure to determine if an equity-linked financial
instrument (or embedded feature) is indexed to its own common stock. The EITF is
effective for fiscal years beginning after December 15, 2008. Pursuant to the
Subsequent Equity Sales section under warrant agreement the Company granted, if
and whenever on or after the date of inception and through the earlier to occur
of (i) eighteen months from the date hereof and (ii) date that there is an
effective registration statement on file with the Securities and Exchange
Commission covering the resale of all of the Warrant Stock and all of the shares
of common stock issued in the offering, the Company issues or sells any shares
of common stock or securities convertible into common stock for a consideration
per share of common stock less than the then current Exercise Price, then, the
Exercise Price shall be multiplied by a fraction. Because of the reset
provision, the warrant agreement is considered not indexed to the Companys
stock and therefore the 3,401,320 warrants were determined to be derivative
liability under ASC 815-15 and ASC 815-20. The fair value of these warrants at
the inception of the private placement was $1,218,744.

At September 30, 2010, the derivative liability was valued at
$1,255,314 using the Multinomial Lattice models. The $36,570 change in fair
value is reported in the Companys consolidated statement of operations as a
loss on derivatives. The warrants were valued with the following assumptions: at
February 10, 2010 - annual volatility of 73%, term of 5 years, risk free rate of
2.39%, target exercise price of $2.50 for the $1.25 warrants and $3.00 for the
$1.60 warrants; at September 30, 2010 - annual volatility of 50%, term of 4.37
years, risk free rate of 1.27%, target exercise price of $2.50 for the $1.25
warrants and $3.00 for the $1.60 warrants. The projected volatility is based on
historical volatilities of 15 comparable companies for the valuation periods as
the Company does not have sufficient trading history.

The fair value hierarchy for the Companys derivative liability
accounted for at fair value was:

|                     |   | September 30, 2010 |  |  | December 31, 2009 | 
|-------------------- | - | ------------------ |  |  | ----------------- | 
|                     |   | Level 1            |  |  | Level 2           | 
|Liabilities          |   |                    |  |  |                   | 
|Derivative liability | $ | -                  |  |  | -                 | 
|                     |   |                    |  |  |                   | 
|Total liabilities    | $ | -                  |  |  | -                 | 

NOTE 12: REVENUE INFORMATION AND GEOGRAPHIC INFORMATION

The Company believes that it operates in one business segment
(research, development, production, marketing and sales of electronic products)
and in one geographical segment (China), as all of the Companys current
operations are carried out in China.

The geographic information for revenue is as follows:

|              |   | Nine Months Ended September
      30, | 
|------------- | - | ------------------------------------- | 
|              |   | 2010                                  | 
|United States | $ | 374,484                               | 
|Ukraine       |   | 167,494                               | 
|Sweden        |   | -                                     | 
|Korea         |   | 194,611                               | 
|Japan         |   | 22,282                                | 
|Germany       |   | 117,041                               | 
|Australia     |   | 10,900                                | 
|UK            |   | -                                     | 
|South Africa  |   | 4,829                                 | 
|Taiwan        |   | 110,312                               | 
|Hong Kong     |   | 1,808,612                             | 
|China         |   | 43,668,855                            | 
|Peru          |   | -                                     | 
|Viet Nam      |   | -                                     | 
|Total         | $ | 46,479,420                            | 

14

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China TMK Battery Systems Inc. and Subsidiaries 
Notes to Consolidated
Financial Statements

NOTE 13 - RECONCILIATION OF EARNINGS PER SHARE

|                                                                          |   | Nine Months Ended |  |   | Three Months Ended | 
|------------------------------------------------------------------------- | - | ----------------- |  | - | ------------------ | 
|                                                                          |   | September 30,     |  |   | September 30,      | 
|                                                                          |   | 2010              |  |   | 2009               | 
|Numerator                                                                 |   |                   |  |   |                    | 
|Net income available to common
      stockholders                         | $ | 3,853,393         |  | $ | 5,093,083          | 
|Denominator:                                                              |   |                   |  |   |                    | 
|Weighted-average shares outstanding for
      earnings per share, basic   |   | 34,426,418        |  |   | 25,250,000         | 
|Effect of dilutive securities:                                            |   |                   |  |   |                    | 
|Common stock warrants                                                     |   | 242,714           |  |   | -                  | 
|Weighted-average shares outstanding for earnings per share,
      diluted |   | 34,669,132        |  |   | 25,250,000         | 
|Net income per share:                                                     |   |                   |  |   |                    | 
|Basic                                                                     | $ | 0.11              |  | $ | 0.20               | 
|Diluted                                                                   | $ | 0.11              |  | $ | 0.20               | 

NOTE 14: LEASE COMMITMENT

The Company planned to expand production capacity and signed an
agreement with Shenzhen Xutang Economics and Business Ltd. (Xutang) at the end
of March, 2010 to lease the A3 plant building (a four-storey building), A5 plant
building (a four-storey building), C1 dorm (a six-storey building), and office
building (a three-storey) located in Zhongcheng Industry Park, Shenzhen. The
lease term is for five years from April 1, 2010 to March 31, 2015 with monthly
lease payments for around $24,000. The remodeling was completed in the third
quarter of 2010.

NOTE 15: SUBSEQUENT EVENT

Effective October 1, 2010, Borou has been approved as a general
VAT taxpayer by Shenzhen National Tax Bureau and will be subject to 17% VAT
rate.

15

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ITEM 2.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

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” of our Annual Report filed on Form 10-K for the fiscal year ended December 31, 2009, 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 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:

- “we,” “us,” “our,” or “the Company” are to combined business of China TMK Battery Systems Inc., a Nevada corporation, and its consolidated subsidiaries, Leading Asia, Good Wealth, TMK and Borou;
- “Leading Asia” are to Leading Asia Pacific Investment Limited, a BVI company;
- “Good Wealth” are to Good Wealth Capital Investment Limited, a Hong Kong company;
- “TMK” are to Shenzhen TMK Power Industries Ltd., a PRC limited company;
- “Borou” are to Shenzhen Borou Industrial Co., Ltd., a PRC limited company;
- “BVI” are to the British Virgin Islands;
- “Hong Kong” are to the Hong Kong Special Administrative Region of the People’s Republic of China;
- “PRC,” “China,” and “Chinese,” are to the People’s Republic of China;
- “SEC” are to the Securities and Exchange Commission;
- “Securities Act” are to the Securities Act of 1933, as amended;
- “Exchange Act” are to the Securities Exchange Act of 1934, as amended;
- “Renminbi” and “RMB” are to the legal currency of China; and
- “U.S. dollars,” “dollars” and “$” are to the legal currency of the United States.

Overview of our Business

Through our indirect Chinese subsidiary, TMK, we design, develop, manufacture and sell environmentally-friendly nickel-metal hydride cell, or Ni-MH, rechargeable batteries, which are commonly used to power applications such as, vacuum cleaners and
other household electrical appliances; cordless power tools; medical devices; light electric vehicles, such as bicycles, electric vehicles and hybrid electric vehicles; light fittings, battery-operated toys, telecommunications, traffic control, and
traffic lighting applications; and personal portable electronic devices, such as digital cameras, portable media players, portable gaming devices and PDAs.

Historically, we have focused on the development of high-rate Ni-MH rechargeable batteries of types SC, C, D, and F and have been engaged in the large-scale production of these products for over eight years. The target customers of these products
are mainly factories that produce power tools, vacuum cleaners and other household electrical appliances, electric bicycles, battery-operated toys and medical devices and whose requirements for battery performance are higher-rate than
those of the ordinary type AA and AAA batteries used for domestic purposes. Some of our customers include Siemens, LG, Electrolux, Bosch, Venom, and Changhong.

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More recently, we have developed a working prototype of a hybrid electric vehicle battery pack and are producing sample cells for testing an electric vehicle battery pack. To expand our business into the hybrid electric vehicle and electric vehicle
markets, we plan to establish an advanced power battery research and development center, set up a battery-production base for small scale testing, production and establishing a cooperation application demonstration point with 1-3 vehicle producers
to lay a solid foundation for the approval of the project and for the support of the government. To date, we have entered into letters of intent with two automobile companies in China for the sale of our hybrid electric vehicle battery packs.

We are also actively seeking opportunities to expand into the Lithium-Ion battery space through leveraging our lithium battery patent and those of our customers who purchase both nickel-metal hydride and Lithium-Ion batteries, and opportunities to
design and distribute batteries for use in telecommunications, traffic control, and traffic lighting applications. We have developed and sent working prototypes of both nickel-metal hydride battery and Lithium-Ion battery to some of our customers
for testing and expect to roll out new products before the end of 2010.

We conduct all of our operations in Shenzhen City, China, in close proximity to China’s electronics manufacturing base and its rapidly growing market. Our access to China’s supply of low-cost skilled labor, raw materials, machinery and
facilities enables us to price our products competitively in an increasingly price-sensitive market. In addition, we have automated key stages of our manufacturing process to be able to produce high-quality battery cells that consistently meet the
stringent requirements of our customers.

Third Quarter Financial Performance Highlights

The following are some financial highlights for the third quarter:

- Revenue: Revenue increased $3.5 million, or 26.5%, to $16.5 million for the three months ended September 30, 2010, from $13.0 million for the same period in 2009.
- Income from operations: Income from operations increased $0.6 million, or 27.4%, to $3.0 million for the three months ended September 30, 2010, from $2.4 million for the same period in 2009.
- Net income: Net income increased $1.1 million, or 52.5%, to $3.1 million for the three months ended September 30, 2010, from $2.0 million for the same period in 2009.
- Fully diluted net income per share: Fully diluted net income per share was $0.08 for the three months ended September 30, 2010, as compared to $0.08 for the same period in 2009.

Results of Operations

The following table sets forth key components of our results of operations for the periods indicated, both in dollars and as a percentage of revenue.

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Comparison of Three Months Ended September 30, 2010 and September 30, 2009 (Unaudited)

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

|                                              |   | For the Three Months
      Ended |  
|--------------------------------------------- | - | -------------------------------- | -
|                                              |   | September 30,                    |  
|                                              |   |                                  |  
|                                              |   | **2010**                         |  
|                                              |   |                                  |  
|Revenue                                       | $ | 16,460,230                       |  
|Cost of Goods Sold                            |   | (12,407,686                      | )
|Gross Profit                                  |   | 4,052,544                        |  
|                                              |   |                                  |  
|Operating Costs and Expenses                  |   |                                  |  
|Selling expenses                              |   | 435,879                          |  
|Depreciation                                  |   | 64,927                           |  
|General and
      administrative              |   | 356,844                          |  
|Research and development                      |   | 156,729                          |  
|Total operating
      expenses                |   | 1,014,379                        |  
|Income from operations                        |   | 3,038,165                        |  
|                                              |   |                                  |  
|Other income (expenses):                      |   |                                  |  
|Interest expense                              |   | (318,540                         | )
|Change in fair value of  derivative liability |   | 627,803                          |  
|Other expense
      (income), net             |   | (168                             | )
|Gain no acquisition of business               |   | -                                |  
|Total other
      expenses                    |   | 309,095                          |  
|                                              |   |                                  |  
|Income before income taxes                    |   | 3,347,260                        |  
|Income taxes                                  |   | (296,445                         | )
|Deferred tax benefit                          |   | -                                |  
|Net income                                    | $ | 3,050,815                        |  

Revenue. Our revenue increased to $16.5 million
in the three months ended September 30, 2010 from $13.0 million in the same
period in 2009, representing a $3.5 million or 26.5% increase
period-over-period. The increase in revenue is due to the increase in customer
demand.

Cost of goods sold. Our cost of goods sold
increased $2.5 million, or 25.7%, to $12.4 million in the three months ended
September 30, 2010 from $9.9 million for the same period in 2009. The increase
of cost of sales is mainly due to growth of sales revenue.

Gross profit and gross margin. Our gross profit
increased $0.9 million, or 29.2%, to $4.1 million in the three months ended
September 30, 2010 from $3.1 million in the same period in 2009. The increase in
our gross profit is primarily due to the increase in sales and is relatively
consistent with the increase in our net revenue. Our gross margin is 24.6% in
third quarter of 2010 compared to 24.1% in the same period last year.

Selling expenses. Our selling expenses were $0.44
million for the three months ended September 30, 2010, an increase of $0.18
million, or 69.3%, compared to $0.26 million for the same period in 2009. The
increase is primarily due to increase of sales force.

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General and administrative expenses. Our general and administrative expenses increased $0.03 million, or 9.5%, to $0.36 million in the three months ended September 30, 2010 from $0.33 million in the same period in 2009. The
administration expense is consistent with costs incurred in the same period of prior year.

Research and development expenses. Our research and development expenses consist of the costs associated with research and development personnel and expense in research and development projects. Our research and development expenses
increased $0.02 million, or 11.9%, to $0.16million in the three months ended September 30, 2010 from $0.14 million in the same period in 2009. The R&D cost is consistent with costs incurred in the same period of prior year.

Interest expense. Interest expense increased $0.2 million, or 246.3%, to $0.3 million in the three months ended September 30, 2010 from $0.1 million in the same period in 2009. The increase in interest expense is due
to the fact the Company borrowed more bank loans in 3 months ended 9/30/2010 compared to 9/30/2009. This is consistent with increase in our bank loan outstanding balance at 9/30/2010 vs. 9/30/2009.

Change in fair value of  derivative liability. We granted a total of 3,401,320 warrants in connection with our private placement in February 2010. Due to the reset provision included in our warrant agreements,  warrants
are classified as derivative liability. The gain of 0.6 million from change in fair value of derivative liability represents the difference of fair value between June 30, 2010 and September 30, 2010.

Income before income taxes. Our income before income taxes increased by $1.0 million, or 43.1%, to $3.3 million in the three months ended September 30, 2010 from $2.3 million in the same period in 2009. The increase of
income before income taxes is due to an increase of sales revenue as well as gain in fair value of derivative liability partial offset by increase in expenses.

Net income. Net income was $3.1 million for the three months ended September 30, 2010, an increase of $1.1 million, or 52.5%, compared to $2.0 million for the same period in 2009.

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Comparison of Nine Months Ended September 30, 2010 and
September 30, 2009 (Unaudited)

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

|                                                    |   | For the Nine Months
      Ended |  
|--------------------------------------------------- | - | ------------------------------- | -
|                                                    |   | September 30,                   |  
|                                                    |   |                                 |  
|                                                    |   | **2010**                        |  
|                                                    |   |                                 |  
|Revenue                                             | $ | 46,479,420                      |  
|Cost of Goods Sold                                  |   | (35,888,821                     | )
|Gross Profit                                        |   | 10,590,599                      |  
|                                                    |   |                                 |  
|Operating Costs and Expenses                        |   |                                 |  
|Selling expenses                                    |   | 1,168,685                       |  
|Depreciation                                        |   | 131,506                         |  
|General and administrative                          |   | 2,991,466                       |  
|Research and
      development                      |   | 650,123                         |  
|Total operating expenses                            |   | 4,941,780                       |  
|Income from operations                              |   | 5,648,819                       |  
|                                                    |   |                                 |  
|Other income (expenses):                            |   |                                 |  
|Interest expense                                    |   | (805,330                        | )
|Change in fair
      value of  derivative liability |   | (36,570                         | )
|Other expense (income), net                         |   | (60,523                         | )
|Gain no acquisition
      of business               |   | -                               |  
|Total other expenses                                |   | (902,423                        | )
|                                                    |   |                                 |  
|Income before income taxes                          |   | 4,746,396                       |  
|Income taxes                                        |   | (893,003                        | )
|Net income                                          | $ | 3,853,393                       |  

Revenue. Our revenue increased to $46.5 million
in the nine months ended September 30, 2010 from $34.3 million in the same
period in 2009, representing a 12.2 million or 35.6% increase period-over-period. The increase
in revenue is due to the increase in customer demand, which we believe is a
result of our market expansion efforts.

Cost of goods sold. Our cost of goods sold
increased $9.9 million, or 38.3%, to $35.9 million in the nine months ended
September 30, 2010 from $26.0 million in the same period in 2009. The increase
of cost of goods sold is consistent with growth rate of our sales revenue. In
addition, the Company made one-time bonus payments in the amount of$0.7
million to its employees in second quarter of 2010 as a consideration of their
contributions to the Companys growth in the past few years. The Company does
not expect same type of payments in next two years.

Gross profit and gross margin. Our gross profit
increased $2.3 million, or 27.0%, to $10.6 million in the nine months ended
September 30, 2010 from $8.3 million in the same period in 2009. The increase in
our gross profit is primarily due to the increase in sales revenue. Our gross
margin was 22.8% for the nine months ended September 30, 2010, compared to 24.3%
in the same period last year.

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Selling expenses. Our selling expenses were $1.2
million for the nine months ended September 30, 2010, an increase of $0.5
million, or 78.8%, compared to $0.7 million for the same period in 2009. The
increase is primarily due to an increase in sales compensation, including sales
commission, as a percentage of sales revenue and marketing activities.

General and administrative expenses. Our general
and administrative expenses increased $2.1 million, or 235.8%, to $3.0 million
in the nine months ended September 30, 2010 from $0.9 million in the same period
in 2009. The increase was primarily due to $1.77 million in one-time merger
costs incurred in the first quarter of 2010 in connection with our reverse
acquisition. The one-time merger cost included approximately $0.9 million in
consulting, legal, audit and transaction fees in connection with the reverse
merger, and approximately $0.86 million in financial advisory consultation and
service fees paid to our financial advisor in connection with the reverse merger
and concurrent financing. In addition, we paid $0.5 million one-time bonus
payments to employees (excluding management level employees) as a consideration
of their contributions to our going public activity.

Research and development expenses. Our research
and development expenses consist of the costs associated with research and
development personnel and expense in research and development projects. Our
research and development expenses increased $0.3, or 72.0%, to $0.7 million in
the nine months ended September 30, 2010 from $0.4 million in the same period in
2009 due to an increase in research and development personnel in connection with
our commitment to increase our investment in research and development to fuel
future growth.

Interest expense. Interest expense
increased $0.4 million, or 99.3%, to $0.8 million in the nine months ended
September 30, 2010 from $0.4 million in the same period in 2009. The increase in
interest expense is due to the fact the Company borrowed more bank loans in 9
months ended 9/30/2010 compared to 9/30/2009. This is consistent with our
increase in bank loan outstanding balance at 9/30/2010 compared 9/30/2009.

Change in fair value of  derivative liability. We
granted a total of 3,401,320 warrants in connection with our private placement
in February 2010. Due to the reset provision included in our warrant agreements,

warrants are classified as derivative liability. The loss
from change in fair value of derivative liability represents the difference of
fair value between February 10, 2010 (inception date) and September 30,
2010.

Income before income taxes. Our income before
income taxes decreased by $1.2 million, or 20.5 %, to $4.8 million in the nine
months ended September 30, 2010 from $6.0 million in the same period in 2009.
The decrease is primarily due to onetime merger cost of $1.77 million as well as
additional bonus payments of $1.5 million.

Income taxes. We incurred $0.9 million income tax
expenses in the nine months ended September 30, 2010, as compared to $0.9
million in the same period in 2009. The income taxes expense is consistent with
same period in 2009 since merger cost of $1.77 million was incurred on US shell
company level which was not subject to any income taxes.

Net income. Net income was $3.9 million for the
nine months ended September 30, 2010, a decrease of $1.2 million, or 24.3%,
compared to $5.1 million for the same period in 2009.

Liquidity and Capital Resources

As of September 30, 2010, we had cash and cash equivalents of
$5.4 million, primarily consisting of cash on hand and demand deposits. The
following table provides detailed information about our net cash flow for all
financial statement periods presented in this report. To date, we have financed
our operations primarily through cash flows from operations, augmented by
short-term bank borrowings and equity contributions by our stockholders.

Cash Flow(all amounts in U.S. dollars)

|                                                |   | Nine Months Ended September 30, |  
|----------------------------------------------- | - | ------------------------------- | -
|                                                |   | 2010                            |  
|Net cash provided by operating
      activities | $ | 323,996                         |  
|Net cash used in investing activities           |   | (6,243,190                      | )
|Net cash provided by financing
      activities |   | 11,142,820                      |  
|Effects of
      exchange rate change in cash   |   | 7,032                           |  
|Net increase in cash and cash
      equivalents |   | 5,230,658                       |  

|Cash and cash equivalents at beginning of the period |   | 185,590   |  |   | 186,463 | 
|---------------------------------------------------- | - | --------- |  | - | ------- | 
|Cash and cash equivalent at end of the period        | $ | 5,416,248 |  | $ | 320,843 | 

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Operating Activities

Net cash used in operating activities was $0.3 million for the
nine months ended September 30, 2010, as compared to $6.0 million net cash
provided by operating activities for the same period in 2009. The decrease in
net cash provided in operating activities is primarily due to decrease in net
income and increase in accounts receivable and advance to suppliers. The
decrease is partially offset by the increase in customer deposit.

Investing Activities

Net cash used in investing activities for the nine months ended
September 30, 2010 was $6.2 million, as compared to $15.2 million net cash used
in investing activities for the same period of 2009. The decrease of net cash
used in investing activities is due to decrease in cash spent in purchase and
advance for property and equipment. In addition, the Company completed the
acquisition of Shenzhen Borou Industrial Co., Ltd with cash consideration mainly
paid out in the third quarterly of 2009.

Financing Activities

Net cash provided by financing activities for the nine months
ended September 30, 2010 was $11.1 million, as compared to $9.2 million net cash
provided by financing activities for the same period of 2009. The increase of
net cash provided by financing activities is mainly attributable to net proceeds
of $9.7 million received from two private placements in the first and second
quarters of 2010. The increase is partially offset by the repayment of bank
loans in the nine months ended September 30, 2010.

We believe that our cash on hand and cash flow from operations
will meet part of our present cash needs and we will require additional cash
resources, including loans, to meet our expected capital expenditure and working
capital for the next 12 months. We may, however, in the future, require
additional cash resources due to changed business conditions, implementation of
our strategy to ramp up our marketing efforts and increase brand awareness, or
acquisitions we may decide to pursue. If our own financial resources are
insufficient to satisfy our capital requirements, we may seek to sell additional
equity or debt securities or obtain additional credit facilities. The sale of
additional equity securities could result in dilution to our stockholders. The
incurrence of indebtedness would result in increased debt service obligations
and could require us to agree to operating and financial covenants that would
restrict our operations. Financing may not be available in amounts or on terms
acceptable to us, if at all. Any failure by us to raise additional funds on
terms favorable to us, or at all, could limit our ability to expand our business
operations and could harm our overall business prospects.

Obligations Under Material Contracts

Except with respect to the loan obligations disclosed above, we
have no obligations to pay cash or deliver cash to any other party.

Inflation

Inflation and changing prices have not had a material effect on
our business and we do not expect that inflation or changing prices will
materially affect our business in the foreseeable future. However, our
management will closely monitor price changes in our industry and continually
maintain effective cost controls in operations.

Off Balance Sheet Arrangements

We do not have any off balance sheet arrangements that have or
are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity or capital expenditures or capital resources that is
material to an investor in our securities.

Seasonality

Our operating results and operating cash flows historically
have not been subject to seasonal variations. This pattern may change, however,
as a result of new market opportunities or new product introduction.

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Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires our management to make assumptions, estimates and judgments that affect the amounts reported, including the notes
thereto, and related disclosures of commitments and contingencies, if any. We have identified certain accounting policies that are significant to the preparation of our financial statements. These accounting policies are important for an
understanding of our financial condition and results of operation. Critical accounting policies are those that are most important to the portrayal of our financial conditions and results of operations and require management’s difficult,
subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates are particularly sensitive because of their
significance to financial statements and because of the possibility that future events affecting the estimate may differ significantly from management’s current judgments. We believe the following critical accounting policies involve the most
significant estimates and judgments used in the preparation of our financial statements:

Revenue recognition

The Company generates revenues from the sales of environment-friendly batteries including nickel metal hydride batteries. Sales are recognized when the following four revenue criteria are met: persuasive evidence of an arrangement exists, delivery
has occurred, the selling price is fixed or determinable, and collectability is reasonably assured. Sales are presented net of VAT. No return allowance is made as products returns are insignificant based on historical experience. The Company does
not provide different policies in term warranties, credits, discounts, rebates, price protection, or similar privileges among customers. Orders are placed by both the distributors and original equipment manufacturers and the products are delivered
to the customers within 30-45 days of order, the Company does not provide price protection or right of return to the customers. The price of the products are predetermined and fixed based on contractual agreements, therefore the customers would be
responsible for any loss if the customers are faced with sales price reductions and rapid technology obsolescence in the industry. The Company does not allow any discounts, product warrants, credits, rebates or similar privileges.

Accounts receivable

Accounts receivables are recognized and carried at original invoiced amount less an allowance for uncollectible accounts, as needed. The Company uses the aging method to estimate the valuation allowance for anticipated uncollectible receivable
balances. Under the aging method, bad debts percentages determined by management based on historical experience as well as current economic climate are applied to customers' balances categorized by the number of months the underlying invoices have
remained outstanding. The valuation allowance balance is adjusted to the amount computed as a result of the aging method. When facts subsequently become available to indicate that the amount provided as the allowance was incorrect, an adjustment
which classified as a change in estimate is made.

Inventories

Inventories consist of raw materials, production cost, semi-assembled goods and finished goods. Inventories are stated at the lower of cost or market value. Costs are calculated on the weighted average basis and are comprised of direct materials,
direct labor and manufacturing overhead. Slow-moving inventories are periodically reviewed for impairment

Impairment of long-lived assets

The Company accounts for impairment of plant and equipment and amortizable intangible assets in accordance with ASC 360, “Accounting for Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of”, which requires the Company
to evaluate a long-lived asset for recoverability when there is event or circumstance that indicate the carrying value of the asset may not be recoverable. An impairment loss is recognized when the carrying amount of a long-lived asset or asset
group is not recoverable (when carrying amount exceeds the gross, undiscounted cash flows from use and disposition) and is measured as the excess of the carrying amount over the asset's (or asset group's) fair value.

Foreign currency

The functional currency of the Company is RMB. The Company maintains its financial statements using the functional currency. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the
functional currency at rates of exchange prevailing at the balance sheet dates. Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of
the transaction. Exchange gains or losses arising from foreign currency transactions are included in the determination of net income (loss) for the respective periods.

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For financial reporting purposes, the financial statements of the Company, which are prepared in RMB, are translated into the Company's reporting currency, USD. Balance sheet accounts are translated using the closing exchange rate in effect at the
balance sheet date and income and expense accounts are translated using the average exchange rate prevailing during the reporting period. Adjustments resulting from the translation, if any, are included in accumulated other comprehensive income
(loss) in stockholder's equity.

ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable.

ITEM 4.     CONTROLS AND PROCEDURES.

Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the
reports we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

As required by Rule 13a-15(e), our management has carried out an evaluation, with the participation and under the supervision of our Chief Executive Officer, Ms. Xiangjun Liu and our Chief Financial Officer, Mr. Jin Hu, of the effectiveness of the
design and operation of our disclosure controls and procedures, as of September 30, 2010. Based upon this evaluation, Ms. Liu and Mr. Hu, determined that, as of September 30, 2010, and as of the date that the evaluation of the effectiveness of our
disclosure controls and procedures was completed, our disclosure controls and procedures are not effective due to the deficiencies described below.

These deficiencies consisted of inadequate staffing and supervision that could lead to the untimely identification and resolution of accounting and disclosure matters and failure to perform timely and effective reviews. In addition, there are
deficiencies in the recording and classification of accounting transactions and a lack of personnel with expertise in US generally accepted accounting principles and SEC rules and regulations.

Deficiencies in our controls and procedures have led to restatements of our financial statements. In August 2010, we discovered that our financial statements for the three months ended March 31, 2010 should not be relied upon due to an error in
accounting for warrants issued by the Company in connection with our private placement. On February 10, 2010, the Company issued warrants to both investors and private placement agent. The Warrants terms included rights to purchase shares of stock
at various exercise prices per share and subject to adjustment for share issuances (dilutive reset). The Warrants contain reset features (subject to adjustment for dilutive share issuances) and based on the guidance of ASC 815-15 and ASC 815-20, the
warrants should be valued as a derivative liability. The Company failed to record Derivative Liability and related Additional Paid-in Capital at inception date. In addition, the Company failed to record the change in fair value of derivative
liability between inception date and March 31, 2010. As a result, the Company restated its financial statements for the quarter ended March 31, 2010 on October 20, 2010.

We are seeking to improve our controls and procedures in an effort to remediate these deficiencies through improving supervision, education, and training of our accounting staff. We will also seek third-party financial consultant to review and
analyze our financial statements and assist us in improving our reporting of financial information. Management plans to enlist additional qualified in-house accounting personnel and third-party accounting personnel to ensure that management will
have adequate resources in order to attain complete reporting of financial information disclosures in a timely matter.

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Changes in Internal Controls over Financial
Reporting

We regularly review our system of internal control over
financial reporting and make changes to our processes and systems to improve
controls and increase efficiency, while ensuring that we maintain an effective
internal control environment. Changes may include such activities as
implementing new, more efficient systems, consolidating activities, and
migrating processes.

Due to the implementation of the remedial measures described
above, there were changes in our internal controls over financial reporting
during the third quarter of 2010 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.

From time to time, we may become involved in various lawsuits
and legal proceedings, which arise, in the ordinary course of business. However,
litigation is subject to inherent uncertainties, and an adverse result in these,
or other matters, may arise from time to time that may harm our business. We are
currently not aware of any such legal proceedings or claims that we believe will
have a material adverse affect on our business, financial condition or operating
results.

ITEM 1A.  RISK FACTORS.

Not applicable.

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:

|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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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: November 15, 2010 | CHINA TMK BATTERY SYSTEMS INC.
|----------------------- | ------------------------------
|                        |                               
|                        | By:                           
|                        |                               
|                        |                               
|                        |                               
|                        | By:                           
|                        |                               
|                        |                               
|                        |                               

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