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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C.
20549

FORM 10Q

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

For the quarterly period ended: June 30, 2011

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

For the transition period from _____________to _____________

Commission File No. 333-139660

CHINA TMK BATTERY SYSTEMS
INC.(Name of Small Business Issuer in Its Charter)

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

Sanjun Industrial ParkNo. 2 Huawang Rd., Dalang
StreetBao'an District, Shenzhen 518109People's Republic
of China(Address of principal executive offices)

(86) 755 28109908(Registrants telephone
number, including area code)

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   [   ]                 | Smaller reporting company [X]                        
|(Do not check if a smaller reporting company) |                                                      

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

Yes [ 
 ]                No [X]

The number of shares outstanding of each of the issuers classes
of common equity, as of August 12, 2011 is as follows:

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

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TABLE OF CONTENTS

|PART
      I   | FINANCIAL
      INFORMATION                                                                  | 1 
|-------------- | -------------------------------------------------------------------------------------------- | --
|               |                                                                                              |   
|ITEM
      1.  | FINANCIAL
      STATEMENTS.                                                                  | 2 
|ITEM
      2.  | MANAGEMENTS
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. | 18
|ITEM
      3.  | QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.                            | 25
|ITEM
      4.  | CONTROLS
      AND PROCEDURES                                                                | 25
|               |                                                                                              |   
|PART
      II  | OTHER
      INFORMATION                                                                      | 25
|               |                                                                                              |   
|ITEM
      1.  | LEGAL
      PROCEEDINGS.                                                                     | 25
|ITEM
      1A. | RISK
      FACTORS.                                                                          | 26
|ITEM
      2.  | UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.                           | 26
|ITEM
      3.  | DEFAULTS
      UPON SENIOR SECURITIES.                                                       | 26
|ITEM
      4.  | (REMOVED
      AND RESERVED).                                                                | 26
|ITEM
      5.  | OTHER
      INFORMATION.                                                                     | 26
|ITEM
      6.  | EXHIBITS.                                                                                    | 26

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PART IFINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

CHINA TMK BATTERY SYSTEMS INC.INDEX TO
CONSOLIDATED FINANCIAL STATEMENTSFOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010

|Contents                                                                                                                             | Page(s)
|------------------------------------------------------------------------------------------------------------------------------------ | -------
|Consolidated Balance Sheets as of June 30,
      2011 (unaudited) and December 31, 2010                                              | 2      
|Consolidated Statements of Income for the three and six
    months ended June 30, 2011 and 2010 (unaudited)                          | 3      
|Consolidated Statements of  Other
    Comprehensive Income for the three and six months ended June 30, 2011 and
    2010 (unaudited) | 4      
|Consolidated Statements of Changes in
      Equity for six months ended June 30, 2011 (unaudited)                                    | 5      
|Consolidated
      Statements of Cash Flows for the six months ended June 30, 2011 and 2010
      (unaudited)                        | 6      
|Notes
      to the Consolidated Financial Statements (unaudited)                                                                     | 7      

1

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|China TMK Battery System Inc.
|-----------------------------
|Consolidated Balance Sheets  
|(Stated in US dollars)       

|                                                                                                                                                                                   |   | June 30, 2011 |  |   | December 31, 2010 | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ------------- |  | - | ----------------- | 
|                                                                                                                                                                                   |   | (Unaudited)   |  |   |                   | 
|                                                                                                                                                                                   |   |               |  |   |                   | 
|ASSETS                                                                                                                                                                             |   |               |  |   |                   | 
|Current assets                                                                                                                                                                     |   |               |  |   |                   | 
|Cash and cash
      equivalents                                                                                                                                                    | $ | 8,900,046     |  | $ | 356,871           | 
|Short-term investment                                                                                                                                                              |   | 9,043,761     |  |   | 1,512,400         | 
|Trade receivables, net                                                                                                                                                             |   | 14,955,130    |  |   | 12,351,588        | 
|VAT recoverable                                                                                                                                                                    |   | 380,754       |  |   | 276,768           | 
|Inventories, net                                                                                                                                                                   |   | 13,321,602    |  |   | 4,973,989         | 
|Due from related parties                                                                                                                                                           |   | 65,139        |  |   | 2,269             | 
|Prepaid expenses and
      other receivables                                                                                                                                       |   | 5,640,983     |  |   | 45,372            | 
|Advances to suppliers                                                                                                                                                              |   | 1,112,149     |  |   | 528,509           | 
|Restricted cash                                                                                                                                                                    |   | 1,546,500     |  |   | 1,270,416         | 
|Deposit for business acquisition                                                                                                                                                   |   | 10,491,290    |  |   | 9,397,891         | 
|Total Current Assets                                                                                                                                                               |   | 65,457,354    |  |   | 30,716,073        | 
|                                                                                                                                                                                   |   |               |  |   |                   | 
|Property, equipment and
      construction in progress, net                                                                                                                        |   | 18,569,887    |  |   | 17,239,438        | 
|Advance for property and equipment
      purchase                                                                                                                                  |   | 14,912,883    |  |   | 13,849,212        | 
|Restricted cash                                                                                                                                                                    |   | 742,320       |  |   | -                 | 
|Other assets                                                                                                                                                                       |   | 47,434        |  |   | 46,516            | 
|                                                                                                                                                                                   |   |               |  |   |                   | 
|TOTAL ASSETS                                                                                                                                                                       | $ | 99,729,878    |  | $ | 61,851,239        | 
|LIABILITIES & SHAREHOLDERS
      EQUITY                                                                                                                                           |   |               |  |   |                   | 
|Current Liabilities                                                                                                                                                                |   |               |  |   |                   | 
|Accounts payable                                                                                                                                                                   | $ | 7,198,882     |  | $ | 4,437,186         | 
|Accrued liabilities and other payable                                                                                                                                              |   | 2,596,300     |  |   | 576,164           | 
|Customer deposits                                                                                                                                                                  |   | 2,121,052     |  |   | 493,256           | 
|Wages payable                                                                                                                                                                      |   | 253,879       |  |   | 398,699           | 
|Corporate tax payable                                                                                                                                                              |   | 761,097       |  |   | 210,717           | 
|Short-term loan                                                                                                                                                                    |   | 1,268,130     |  |   | 2,571,080         | 
|Current portion of
      long-term bank loans                                                                                                                                      |   | 6,742,153     |  |   | 5,159,422         | 
|Property purchase payable                                                                                                                                                          |   | 510,600       |  |   | 499,342           | 
|Derivative liability                                                                                                                                                               |   | 563,117       |  |   | 1,141,118         | 
|Due to related parties                                                                                                                                                             |   | 15,606        |  |   | 19,695            | 
|Reigstration rights
      liability                                                                                                                                                |   | 411,450       |  |   | 411,450           | 
|Total Current Liabilities                                                                                                                                                          |   | 22,442,266    |  |   | 15,918,129        | 
|                                                                                                                                                                                   |   |               |  |   |                   | 
|Long-term bank loans                                                                                                                                                               |   | 20,733,490    |  |   | 12,710,430        | 
|Deferred tax liability                                                                                                                                                             |   | 603,997       |  |   | 598,520           | 
|Due to related parties                                                                                                                                                             |   | 1,498,069     |  |   | 1,465,420         | 
|TOTAL LIABILITIES                                                                                                                                                                  | $ | 45,277,822    |  | $ | 30,692,499        | 
|                                                                                                                                                                                   |   |               |  |   |                   | 
|SHAREHOLDERS EQUITY                                                                                                                                                               |   |               |  |   |                   | 
|Preferred stock, $0.001 par
      value, 10,000,000 shares authorized, 5,000,000 shares and none issued and
      outstanding at June 30, 2011 and December 31, 2010, respectively | $ | 5,000         |  | $ | -                 | 
|Preferred stock
      subscribed                                                                                                                                                   |   | 3,000         |  |   | -                 | 
|Common stock, $0.001 par
      value, 300,000,000 shares authorized, 36,888,000 shares issued and
      outstanding at June 30, 2011 and December 31, 2010, respectively           |   | 36,888        |  |   | 36,888            | 
|Common stock subscribed                                                                                                                                                            |   | -             |  |   | 253               | 
|Additional paid-in capital                                                                                                                                                         |   | 26,510,662    |  |   | 11,024,449        | 
|Accumulated other
      comprehensive income                                                                                                                                       |   | 1,954,389     |  |   | 1,207,195         | 
|Statutory reserves                                                                                                                                                                 |   | 1,038,988     |  |   | 1,038,988         | 
|Retained earnings
      (unrestricted)                                                                                                                                             |   | 24,903,129    |  |   | 17,850,967        | 
|TOTAL SHAREHOLDERS EQUITY                                                                                                                                                         |   | 54,452,056    |  |   | 31,158,740        | 
|                                                                                                                                                                                   |   |               |  |   |                   | 
|EQUITY                                                                                                                                                                             | $ | 99,729,878    |  | $ | 61,851,239        | 

The accompanying notes are an integrated part of these unaudited
consolidated financial statements

2

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|China TMK Battery System Inc.    
|---------------------------------
|Consolidated Statements of Income
|(Unaudited)                      
|(Stated in US dollars)           

|                                                   |   | For the Six Months Ended June 30, |   |   | For the Three Months Ended June 30, |  
|-------------------------------------------------- | - | --------------------------------- | - | - | ----------------------------------- | -
|                                                   |   | 2011                              |   |   | 2010                                |  
|                                                   |   |                                   |   |   |                                     |  
|Sales revenue                                      | $ | 45,364,436                        |   | $ | 30,019,190                          |  
|Cost of goods sold                                 |   | (34,714,962                       | ) |   | (23,481,135                         | )
|Gross profit                                       |   | 10,649,474                        |   |   | 6,538,055                           |  
|                                                   |   |                                   |   |   |                                     |  
|Operating costs and expenses                       |   |                                   |   |   |                                     |  
|Selling expenses                                   |   | 828,261                           |   |   | 732,806                             |  
|Depreciation                                       |   | 122,297                           |   |   | 66,579                              |  
|Other general and administrative
      expenses    |   | 933,830                           |   |   | 2,634,622                           |  
|Research and
      development                     |   | 384,097                           |   |   | 493,394                             |  
|Total operating costs and
      expenses           |   | 2,268,485                         |   |   | 3,927,401                           |  
|                                                   |   |                                   |   |   |                                     |  
|Income from operations                             |   | 8,380,989                         |   |   | 2,610,654                           |  
|                                                   |   |                                   |   |   |                                     |  
|Interest expense, net                              |   | (679,865                          | ) |   | (486,790                            | )
|Change in fair
      value of derivative liability |   | 578,001                           |   |   | (664,373                            | )
|Other income (expense), net                        |   | (6,472                            | ) |   | (60,355                             | )
|Total other
      income (expenses)                |   | (108,336                          | ) |   | (1,211,518                          | )
|                                                   |   |                                   |   |   |                                     |  
|Income before income tax                           |   | 8,272,653                         |   |   | 1,399,136                           |  
|                                                   |   |                                   |   |   |                                     |  
|Income Tax Expense                                 |   | (1,220,491                        | ) |   | (596,558                            | )
|                                                   |   |                                   |   |   |                                     |  
|Net Income                                         | $ | 7,052,162                         |   | $ | 802,578                             |  
|                                                   |   |                                   |   |   |                                     |  
|Earnings per share - basic                         |   | 0.19                              |   |   | 0.02                                |  
|                                                   |   |                                   |   |   |                                     |  
|Weighted-average shares outstanding,
      basic   |   | 36,888,000.00                     |   |   | 33,175,227                          |  
|                                                   |   |                                   |   |   |                                     |  
|Earnings per share - diluted                       |   | 0.19                              |   |   | 0.02                                |  
|                                                   |   |                                   |   |   |                                     |  
|Weighted-average shares outstanding,
      diluted |   | 36,888,000.00                     |   |   | 33,833,547                          |  

The accompanying notes are an integrated part of these unaudited
consolidated financial statements

3

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|China TMK Battery System Inc.                  
|-----------------------------------------------
|Consolidated Statements of Comprehensive Income
|(Unaudited)                                    
|(Stated in US dollars)                         

|                                                |   | For the Six Months Ended June 30, | 
|----------------------------------------------- | - | --------------------------------- | 
|                                                |   | 2011                              | 
|                                                |   |                                   | 
|                                                |   |                                   | 
|Net Income                                      | $ | 7,052,162                         | 
|                                                |   |                                   | 
|Other comprehensive income                      |   |                                   | 
|Unrealized gain on foreign currency translation |   | 747,194                           | 
|Total Comprehensive Income                      | $ | 7,799,356                         | 

The accompanying notes are an integrated part of these unaudited
consolidated financial statements

4

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|China TMK Battery System Inc.                                  
|---------------------------------------------------------------
|Consolidated Statement of Changes in Shareholders
      Equity
|For the Six Months Ended June 30, 2011                         
|(Unaudited)                                                    
|(Stated in US dollars)                                         

|                                                         |  | Preferred Stock |  |       | Preferred Stock Subscribed |  |  | Common Stock |  |       | Common Stock Subscribed |  |  |            |  |   |        |  |       |             |   |  |        |   |  |                            |  
|-------------------------------------------------------- |  | --------------- |  | ----- | -------------------------- |  |  | ------------ |  | ----- | ----------------------- |  |  | ---------- |  | - | ------ |  | ----- | ----------- | - |  | ------ | - |  | -------------------------- | -
|                                                         |  | Shares          |  |       | Amount                     |  |  | Shares       |  |       | Amount                  |  |  | Shares     |  |   | Amount |  |       | Shares      |   |  | Amount |   |  | Additional Paid-in Capital |  
|                                                         |  |                 |  |       |                            |  |  |              |  |       |                         |  |  |            |  |   |        |  |       |             |   |  |        |   |  |                            |  
|Balance as of December 31, 2010                          |  | -               |  | **$** | **-**                      |  |  | -            |  | **$** | **-**                   |  |  | 36,888,000 |  | $ | 36,888 |  | **$** | **253,020** |   |  | 253    |   |  | 11,024,449                 |  
|Issuance of 5,000,000 shares of preferred stock          |  | 5,000,000       |  |       | 5,000                      |  |  |              |  |       |                         |  |  | -          |  |   | -      |  |       |             |   |  |        |   |  | 9,995,000                  |  
|Preferred stock subscribed                               |  |                 |  |       |                            |  |  | 3,000,000    |  |       | 3,000                   |  |  |            |  |   |        |  |       |             |   |  |        |   |  | 5,997,000                  |  
|Cancellation of the common stock subscription agreements |  |                 |  |       |                            |  |  |              |  |       |                         |  |  |            |  |   |        |  |       | (253,020    | ) |  | (253   | ) |  | (505,787                   | )
|Foreign currency translation adjustment                  |  |                 |  |       |                            |  |  |              |  |       |                         |  |  |            |  |   |        |  |       |             |   |  |        |   |  |                            |  
|Net income for the period                                |  |                 |  |       |                            |  |  |              |  |       |                         |  |  |            |  |   |        |  |       |             |   |  |        |   |  |                            |  
|Balance as of June 30, 2011                              |  | 5,000,000       |  |       | 5,000                      |  |  | 3,000,000    |  |       | 3,000                   |  |  | 36,888,000 |  |   | 36,888 |  |       | -           |   |  | -      |   |  | 26,510,662                 |  

The accompanying notes are an integrated part of these unaudited
consolidated financial statements

5

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|China TMK Battery System Inc.        
|-------------------------------------
|Consolidated Statements of Cash Flows
|(Unaudited)                          
|(Stated in US dollars)               

|                                                                                        |   | For the Six Months Ended June 30, |  
|--------------------------------------------------------------------------------------- | - | --------------------------------- | -
|                                                                                        |   | 2011                              |  
|                                                                                        |   |                                   |  
|CASH FLOWS FROM OPERATING ACTIVITIES                                                    |   |                                   |  
|Net income                                                                              | $ | 7,052,162                         |  
|Adjustments to reconcile net income
      to net cash provided by operating activities: |   |                                   |  
|Depreciation expense                                                                    |   | 522,979                           |  
|Deferred tax benefit                                                                    |   | (7,917                            | )
|Change in fair value of
      derivative liability                                      |   | (578,001                          | )
|Common stocks for service provided                                                      |   | -                                 |  
|Deferred income                                                                         |   | -                                 |  
|Changes in operating assets and liabilities:                                            |   |                                   |  
|Trade receivable-trade                                                                  |   | (2,295,735                        | )
|Advance to suppliers                                                                    |   | (564,515                          | )
|Inventories, net                                                                        |   | (8,131,623                        | )
|Accounts payable - trade                                                                |   | 2,614,869                         |  
|Accrued liabilities and
      other payable                                             |   | 1,966,567                         |  
|Customer deposit                                                                        |   | 1,596,290                         |  
|Prepaid expenses and
      other receivable                                             |   | (5,534,003                        | )
|Wage payable                                                                            |   | (151,870                          | )
|Various taxes payable                                                                   |   | 442,236                           |  
|Other assets                                                                            |   | 129                               |  
|Due from/to Related
      Parties                                                       |   | (68,835                           | )
|CASH USED IN OPERATING ACTIVITIES                                                       |   | (3,137,267                        | )
|                                                                                        |   |                                   |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                                    |   |                                   |  
|Change in restricted
      cash                                                         |   | (977,280                          | )
|Purchase and advances for of
      property, plant, and equipment                       |   | (2,171,616                        | )
|Deposit for Hualian acquisition                                                         |   | (870,390                          | )
|Collection of
      advance/loans - related parties                                     |   | 2,291                             |  
|Proceeds from maturity of certificate
      of deposit                                  |   | 1,512,832                         |  
|Short-term investments                                                                  |   | (9,070,507                        | )
|CASH USED IN INVESTING ACTIVITIES                                                       |   | (11,574,670                       | )
|                                                                                        |   |                                   |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                                    |   |                                   |  
|Borrowing from bank
      loans                                                         |   | 14,964,600                        |  
|Repayment of bank loans                                                                 |   | (7,221,520                        | )
|Net proceeds from
      issuance of common stock                                        |   | -                                 |  
|Net proceeds from issuance of preferred
      stock                                     |   | 10,000,000                        |  
|Net proceeds from
      subscription of preferred stock                                 |   | 6,000,000                         |  
|Distribution to owners                                                                  |   | -                                 |  
|Proceeds from related
      parties                                                     |   | -                                 |  
|Repayment to related parties                                                            |   | -                                 |  
|Refund related to
      cancellation of subscription agreement                          |   | (506,040                          | )
|CASH PROVIDED BY FINANCING ACTIVITIES                                                   |   | 23,237,040                        |  
|                                                                                        |   |                                   |  
|Effect of exchange rate changes on cash and cash
      equivalents                      |   | 18,072                            |  
|                                                                                        |   |                                   |  
|NET INCREASE IN CASH                                                                    |   | 8,543,175                         |  
|CASH AND CASH EQUIVALENTS AT BEGINNING
      OF                                         | $ | 356,871                           |  
|CASH AND CASH EQUIVALENTS AT END OF YEAR                                                | $ | 8,900,046                         |  
|                                                                                        |   |                                   |  
|Supplementary Disclosures for Cash Flow Information                                     |   |                                   |  
|Interest expense paid                                                                   | $ | 668,751                           |  
|Income taxes paid                                                                       | $ | 680,022                           |  

The accompanying notes are an integrated part of these unaudited
consolidated financial statements

6

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China TMK Battery System, Inc. and SubsidiariesNotes to Consolidated Financial Statements(Unaudited)

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, the Company entered into and
closed the Share Exchange Agreement with Leading Asia Pacific Investment Limited
(Leading Asia), a BVI company, and its sole stockholder, Unitech, a BVI
company, pursuant to which the Company 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.

Leading Asia Pacific Investment Limited (Leading Asia) was
incorporated in British Virgin Islands on July 08, 2008. Leading Asia had 50,000
capital shares authorized with $1.00 par value and 50,000 shares issued and
outstanding.

Good Wealth Capital Investment Limited (Good Wealth) was
incorporated in Hong Kong on May 16, 2008. The Company had 10,000 capital shares
authorized with 1.00 HK dollar par value and 10,000 shares issued and
outstanding. On August 12, 2008, Leading Asia acquired Good Wealth and became
the sole shareholder.

In September 2008, Good Wealth entered into an ownership
transfer agreement with TMK Power Industries (SZ) Co., Ltd. and its
shareholders. Pursuant to the agreement, TMK's shareholders agreed to transfer
their 100% ownership interest to Good Wealth at a price of $1,510,000. The
ownership transfer was approved and completed by the appropriate China
government department in February 2010. TMK Power Industries (SZ) Co., Ltd.
(TMK Shenzhen) was incorporated in Shenzhen, People's Republic of China
(PRC) on September 3, 2001. The Company had an authorized and invested capital
of $362,911 (or RMB 3 million). On August 1, 2005, the Company increased its
authorized and invested capital from $362,911 (or RMB 3 million) to $1,218,451
(or RMB 10 million). The Company's primary business activities involve research,
development, production, marketing and sales of environment-friendly batteries
including lithium batteries and nickel metal hydride batteries.

For accounting purposes, the reorganization above has been
accounted for as a combination between entities under common control as the
companies were controlled by the same persons before and after the
reorganization. The Company accounted for them at historical cost similar to a
pooling of interest transaction. The financial statements presented in this 10K
have been prepared as if the existing corporate structure had been in existence
throughout all periods and the reorganization had occurred as of the beginning
of the earliest period presented in the accompanying financial statements.

On July 14, 2009, TMK Shenzhen acquired 100% of the ownership
of Shenzhen Borou Industrial Co., Ltd. ("Borou"), a PRC based company
specializing in domestic and international trade business. Pursuant to the
ownership transfer agreement, TMK Shenzhen became the parent and sole owner of
Borou.

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

All of our business operations are conducted through our
Chinese subsidiaries.

7

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NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a. Basis of preparation

The unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("US GAAP") for interim financial information and the
instructions to Form 10-Q and Article 10-01 of Regulation S-X of the Securities
and Exchange Commission (SEC). Accordingly, they do not include all of the
information and footnotes required by U.S. GAAP for annual financial statements.
These consolidated financial statements should be read in conjunction with the
consolidated financial statements of the Company and notes thereto contained in
our Annual Report on Form 10-K filed on March 31, 2011.

In the opinion of management, the interim financial statements
reflect all normal adjustments that are necessary to provide a fair presentation
of the financial results for the interim periods presented. Operating results
for interim periods are not necessarily indicative of results that may be
expected for an entire fiscal year. All significant inter-company balances and
transactions have been eliminated in consolidation.

b. Foreign currency translation

The functional currency of Good Wealth is Hong Kong Dollar
(HKD). 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.

The functional currency of TMK Shenzhen and Borou is the
Renminbi (RMB), the PRCs currency. These two companies maintain their
financial statements using their own 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
Good Wealth, which are prepared in HKD, are translated into the Companys
reporting currency, United States Dollars (USD); the financial statements of
TMK Shenzhen and Borou, 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.

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

|Period Covered                 |  | Balance Sheet Date RatesAverage Rates | 
|------------------------------ |  | ------------------------------------- | 
|                               |  |                                       | 
|Year ended December 31, 2010   |  | 6.61201                               | 
|Six months ended June 30, 2010 |  | 6.80874                               | 
|Six months ended June 30, 2011 |  | 6.46621                               | 

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

|Period Covered                 |  | Balance Sheet Date RatesAverage Rates | 
|------------------------------ |  | ------------------------------------- | 
|                               |  |                                       | 
|Year ended December 31, 2010   |  | 7.80000                               | 
|Six months ended June 30, 2010 |  | 7.80000                               | 
|Six months ended June 30, 2011 |  | 7.80000                               | 

8

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c. Fair values of financial instruments

US GAAP requires certain disclosures about fair value of
financial instruments. The Company defines fair value, using the required
three-level valuation hierarchy for disclosures of fair value measurement, the
enhanced disclosures requirements for fair value measures. Current assets and
current liabilities qualified as financial instruments and management believes
their carrying amounts are a reasonable estimate of fair value because of the
short period of time between the origination of such instruments and their
expected realization and if applicable, their current interest rate is
equivalent to interest rates currently available. The three levels are defined
as follows:

Level 1  inputs to the valuation methodology are quoted prices
(unadjusted) for identical assets or liabilities in active markets.

Level 2  inputs to the valuation methodology include quoted
prices for similar assets and liabilities in active markets, and inputs that are
observable for the assets or liability, either directly or indirectly, for
substantially the full term of the financial instruments.

Level 3  inputs to the valuation methodology are unobservable
and significant to the fair value.

Assets and liabilities measured at fair value on a recurring
basis as of June 30, 2011 and December 31, 2010 are as follows:

|                                   |   | Fair
      Value Measurements at Reporting Date Using | 
|---------------------------------- | - | ----------------------------------------------------- | 
|                                   |   | Quoted Prices                                         | 
|                                   |   | in Active                                             | 
|                                   |   | Markets for                                           | 
|                                   |   | Identical Assets                                      | 
|                                   |   | (Level 1)                                             | 
|At June 30, 2011                   |   |                                                       | 
|Assets - Short Term Investment     | $ | -                                                     | 
|Liabilities - Derivative liability | $ | -                                                     | 
|                                   |   |                                                       | 
|At December 31, 2010               |   |                                                       | 
|Assets - Short Term Investment     |   | -                                                     | 
|Liabilities - Derivative liability | $ | -                                                     | 

The fair value of derivative classified as Level 3 in the fair
value hierarchy changed as follows during this quarter:

|                                                                              |   | Six
      Months Ended June 30, |  
|----------------------------------------------------------------------------- | - | ------------------------------- | -
|                                                                              |   | 2011                            |  
|Fair Value Measurements Using Significant
      Unobservable Inputs (Level 3) |   |                                 |  
|Beginning balance                                                             | $ | (1,141,118                      | )
|Total gain (loss) included in
      earnings                                  |   | 578,001                         |  
|Included in other comprehensive income                                        |   | -                               |  
|Ending balance                                                                | $ | (563,117                        | )

9

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d. Derivative liability

The Company granted a total of 3,401,320 warrants in connection
with their private placement in February 2010. 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 were valued
using the Multinomial Lattice models at each reporting periods, gain or loss
from change in fair value of derivative liability are recorded in other income
(expense).

e. Short-term investment

The short-term investments include time deposit of $9,043,761
with various financial institutions for a term of 120 days with 6.8% -7.8% fixed
annual interest rate.

NOTE 3: ADVANCE FOR BUSINESS ACQUISITION

On January 4, 2010, the Company entered into a Memorandum of
Understanding (MOU) with Shenzhen DongFang Hualian Technology Ltd. (Hualian).
The Company paid $9,397,891 as acquisition deposit during 2010 and $870,390
during the six months ended June 30, 2011. The Company completed the due
diligence efforts in March 2011 and are currently negotiating with Hualians
management on the acquisition price/structure. The Company expected to finalize
the acquisition by the end of September 2011.

NOTE 4: SHORT-TERM BANK LOANS

Short term bank loans consist of the following:

|                                    |   | June
      30, 2011 |  |   | December 31, 2010 | 
|----------------------------------- | - | ------------------- |  | - | ----------------- | 
|Bank Loans borrowed by TMK Shenzhen |   |                     |  |   |                   | 
|Shenzhen Development Bank           | $ | -                   |  | $ | 1,209,920         | 
|DBS Bank                            |   | 1,268,130           |  |   |                   | 
|Bank Loans borrowed by
      Borou  |   |                     |  |   |                   | 
|Industrial Bank Co. Ltd.            |   | -                   |  |   | 1,361,160         | 
|                                    |   |                     |  |   |                   | 
|Short-term loans                    | $ | 1,268,130           |  | $ | 2,571,080         | 

On October 20, 2010, TMK Shenzhen obtained a three-month loan
in the amount of RMB 8,000,000 (or approximately $1,209,920) from Shenzhen
Development Bank bearing interest at approximately 4.86% with maturity date on
January 19, 2011. The loan was fully repaid in January 2011.

On November 22, 2010, Borou obtained a six-month term loan in
the amount of RMB 9,000,000 (or approximately $1,361,160) from Industrial Bank
Co., Ltd. bearing interest at 6.116% with maturity date on May 22, 2011, which
had been fully paid off by the Company prior to June 30, 2011. This loan is
borrowed under a line of credit in the amount of RMB 10,000,000 (approximately
$1,512,400) that is available from November 19, 2010 to November 19, 2011. The
unused line of credit amounted to $1,546,500 and $151,240 at June 30, 2011 and
December 31, 2010, respectively.

On March 23, 2011, TMK Shenzhen entered into a credit agreement
from DBS Bank (China) Limited Shenzhen Branch (DBS) to obtain a line of credit
in the amount of RMB 10,000,000 (approximately $1,522,000) in the form of AR
factoring. The loan bears interest at approximately 130% of the prevailing PRC
prime rate (prime rate) at the time of the loan. Based on the loan agreement,
each borrowing should be repaid within 165 days of invoice date. The agreement
has not specified an expiration date. The loan proceeds of RMB 10,000,000
(approximately $1,522,000) were received in April, 2011, of which RMB 1,800,000
(or approximately $278,370) principle payment was made by the Company prior to
June 30, 2011.

NOTE 5: LONG-TERM BANK LOANS

Long term bank loans consist of the following:

10

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|                                        |   | June
      30, 2011 |   |   | December 31, 2010 |  
|--------------------------------------- | - | ------------------- | - | - | ----------------- | -
|DBS Bank                                | $ | 1,185,143           |   | $ | 1,535,932         |  
|China Construction Bank Shenzhen Branch |   | 12,372,000          |   |   | 2,722,320         |  
|Bank of Shanghai Shenzhen
      Branch  |   | 7,732,500           |   |   | 7,562,000         |  
|Bank of China Shenzhen Branch           |   | 6,186,000           |   |   | 6,049,600         |  
|                                        |   |                     |   |   |                   |  
|Less current portion                    |   | (6,742,153          | ) |   | (5,159,422        | )
|Long-term portion                       | $ | 20,733,490          |   | $ | 12,710,430        |  

On November 16, 2009, TMK Shenzhen obtained a three-year term
loan from DBS Bank (China) Limited Shenzhen Branch (DBS) in the amount of RMB
15,300,000 (approximately $2,237,778) bearing interest at approximately 130% of
the prevailing PRC prime rate (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 the 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 RMB 40,000,000
(approximately $5,850,400) annually and RMB 10,000,000 (approximately
$1,462,600) quarterly. The Company did not violate any of the above covenants as
of and for the six months ended June 30, 2011.

On December 30, 2008, TMK Shenzhen obtained a three-year term
loan from China Construction Bank Shenzhen Branch (CCB) in the amount of RMB
30,000,000 (approximately $4,400,698) 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 RMB 1,000,000
(approximately $146,260) starting from the 13th month until maturity
date. In the event the Company defaults on the loan, the interest rate will be
increased to 150% of the 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 the 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 RMB 1,800,000 to
Shenzhen General Chamber of Commerce (SGCC) to secure the loan until the term
loan is repaid in full (see Note 6). During 2010, the Company made additional
deposit of RMB 600,000 to SGCC as requested by CCB. The loan with CCB is
personally guaranteed by Mr. Wang, Zongfu and Mr. Huang, Junbiao and secured by
the Companys property with fair value of RMB 3,000,000 (approximately $440,070)
and the Company's equipment with fair value of RMB 20,030,700 (approximately
$2,938,302). The loan was paid in full by the Company at June 30, 2011 and the
deposit was refunded.

On June 22, 2010, TMK Shenzhen obtained a three-year term loan
from Shanghai Bank Shenzhen Branch (SHB) in the amount of RMB 50,000,000
(approximately $7,562,000) bearing interest at 5.508% annually with maturity
date on June 28, 2013. Pursuant to the loan agreement, the principal needs to be
paid at a fixed amount of RMB 2,000,000 (approximately $320,480) starting from
the 13th month until maturity date. In the event the Company defaults
on the loan, the interest rate will be increased to 150% of the prime rate. In
addition, the loan should be used for the purchase of production materials only.
If violated, the interest rate will be increased to 200% of the prime rate. The
agreement also requires that during the 12-month period after signing of the
loan agreement, the Company needs to generate international sales of no less
than RMB 50 million (approximately $7,562,000) and domestic sales of no less
than RMB 100 million (approximately $15,124,000). The loan is guaranteed by
Dongguan Yikang Metal Material Companys properties and Mr. Wu, Henians
personal property. The Company did not violate any of the above covenants as of
and for the six months ended June 30, 2011.

On August 05, 2009, Borou obtained a three-year term loan from
Bank of China Shenzhen Branch (BOC) in the amount of RMB 40,000,000
(approximately $5,850,400) bearing interest at approximately 110% of the
prevailing prime rate at the time of the loan (approximately 5.94% per annum)
paid monthly. Pursuant to the loan agreement, the loan can only be used for
working capital purposes (RMB 20,000,000) and fixed asset purchases (RMB
20,000,000). If violated, a penalty will be charged 100% 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 RMB 20,000,000 (approximately $2,925,200) and one of Borou's
properties with fair value of RMB 20,000,000 (approximately $2,925,200). Based
on the loan agreement, BOC also has the 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 asset
purchase loans can only be used for equipment purchases. The proceeds will be
sent to the equipment vendor directly. Any new equipment purchased under the
loan should be added to bank collateral 30 days after a payment is made; (d)
Prior to loan payoff date, Borou should maintain monthly purchase settlements of
not less than RMB 8,000,000 (approximately $1,170,080) 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 as of and
for the six months ended June 30, 2011. In accordance with the loan agreement,
Borou also agreed to pay RMB 1,200,000 of bank charge in three years with annual
bank charge of RMB 400,000 made prior to August 30 each year.

11

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On May 16, 2011, TMK Shenzhen obtained a three-year term loan
from China Construction Bank Shenzhen Branch (CCB) in the amount of RMB
80,000,000 (approximately $12,372,000) bearing interest at approximately 110% of
the prevailing prime rate at the time of the loan. Pursuant to the loan
agreement, the principal needs to be made as installment starting from the
13th month until maturity date. In the event the Company defaults on
the loan, the interest rate will be increased to 150% of the 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 the prime rate and the penalty
will be computed at 14.08% of violated amount. Pursuant to the loan agreement,
TMK Shenzhen is required to maintain its debt ratio to be less than 70%. The
terms of the loan also called for a deposit of RMB 2,400,000 (approximately
$371,160) to Shenzhen General Chamber of Commerce (SGCC) to secure the loan
until the term loan is repaid in full (see Note 6). The loan with CCB is
personally guaranteed by Mr. Wang, Zongfu, Mr. Huang, Junbiao, Mr. Wu, Zongfu
and secured by the Companys equipment with cost of RMB 45,035,320
(approximately $6,964,700) and the Companys property with fair value of RMB
10,380,000 (approximately $1,605,300). The loan is also co-guaranteed by
Shenzhen DongFang Hualian Technology Ltd. (Hualian) and Shenzhen Junyuda
Investment Ltd. (Junyuda) and secured by Junyudas property with fair value of
RMB 44,170,000 (approximately $6,830,900). The Company did not violate any of
the above covenants as of and for the six months ended June 30, 2011.

NOTE 6: RESTRICTED CASH

|                                            |   | June
      30, 2011 |  |   | December 31, 2010 | 
|------------------------------------------- | - | ------------------- |  | - | ----------------- | 
|Deposit of TMK Hubei Invested
      Capital | $ | 1,546,500           |  | $ | -                 | 
|China Construction Bank                     |   | 742,320             |  |   | 362,976           | 
|Jiangsu Bank                                |   | -                   |  |   | 907,440           | 
|Restricted Cash                             | $ | 2,288,820           |  | $ | 1,270,416         | 

In July 2011, TMK Shenzhen set up a wholly owned subsidiary in
Hubei province, PRC (TMK Hubei). At June 30, 2011, a deposit of RMB 10,000,000
(approximately $1,546,500) was made as the invested capital for TMK Hubei in
order to satisfy local governments requirements for setting up the subsidiary.
The fund was recorded as restricted cash at June 30, 2011 and was later
transferred to invested capital account of TMK Hubei when the registration of
the subsidiary was approved by the local government in July 2011.

The terms of the long-term loan with China Construction Bank
Shenzhen Branch entered in December 2008 and May 16, 2011 require the Company to
make a deposit of $742,320 and $362,976 at June 30, 2011 and December 31, 2010,
respectively, to Shenzhen General Chamber of Commerce (SGCC) to secure the loan
until the term loan is fully repaid (see Note 5).

The Company was in the process of negotiating a new loan with
Jiangsu Bank and agreed to make a deposit of RMB 6,000,000 (approximately
$907,440) with Jiangsu Bank Shenzhen Branch at December 31, 2010. The Company
did not reach to an agreement with Jiangsu Bank and the deposit was refunded to
the Company in March 2011.

NOTE 7: RELATED PARTY TRANSACTIONS

The related parties consist of the following:

|Wu, Henian   | CEO, Chairman
      & Shareholder                            
|------------ | -------------------------------------------------------------
|Wang, Zongfu | Director (since
      inception of the Company) & Shareholder
|Yu, Zhengfei | Wang, Zongfus wife                                          

|Liu, Xiangjun               | General Manager                                              
|--------------------------- | -------------------------------------------------------------
|Huang, Junbiao              | Director (since inception of the
      Company) & Shareholder
|Q-Lite Industrial Co., Ltd. | Yu, Zhengfei
      holds 25% of ownership                    
|Liu, Jun                    | Sales Manager                                                

12

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Due from related parties consists of the following:

|                           |   | June
      30, 2011 |  |   | December 31, 2010 | 
|-------------------------- | - | ------------------- |  | - | ----------------- | 
|Q-Lite Industrial Co., Ltd | $ | 65,139              |  | $ | -                 | 
|Liu, Xiangjun              |   | -                   |  |   | 2,269             | 
|Total                      | $ | 65,139              |  | $ | 2,269             | 

The receivable from Q-Lite industrial Co., Ltd. represents a
trade receivable of products sold to Q-Lite industrial Co., Ltd. during the
quarter ended June 30, 2011.

The receivable from Mr. Liu, Xiangjun represents advance to her
for regular business expense paid by her on behalf of the Company. The amount is
non-secured, non-interest bearing, and is considered to be short-term. The due
from balance was repaid during the first quarter of 2011 and no loans to Liu,
Xiangjun are outstanding at June 30, 2011.

Due to related parties

Due to related party consists of the following:

|                           |   | June
      30, 2011 |  |   | December 31, 2010 | 
|-------------------------- | - | ------------------- |  | - | ----------------- | 
|Q-Lite Industrial Co., Ltd | $ | -                   |  | $ | 4,474             | 
|Wu, Henian                 |   | 922,680             |  |   | 902,335           | 
|Wang, Zongfu               |   | 384,486             |  |   | 376,008           | 
|Huang, Junbiao             |   | 190,903             |  |   | 186,692           | 
|Liu, Jun                   |   | 15,606              |  |   | 15,606            | 
|                           |   |                     |  |   |                   | 
|Total                      | $ | 1,513,675           |  |   | 1,485,115         | 

During 2010, the Company borrowed $1,465,035 from Mr. Wu,
Henian, Mr. Wang, Zongfu and Mr. Huang, Junbiao to support its operational
funding needs. There was no formal agreement between the Company and those
parties, the borrowing bears no interests and will be due on demand agreed by
the related parties.

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 the PRC and has tax advantages
granted by the local government for corporate income taxes and sales taxes
commencing 2005. The Company was entitled to have a full tax exemption for the
first two profitable years, followed by a 50% reduction on normal tax rate of 24% for the following three
consecutive years. The Company was approved by local government as a high-tech
company and granted tax benefits for corporate income taxes and sales taxes
commencing 2007.

13

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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.

Beginning January 1, 2008, the new Enterprise Income Tax
(EIT) law has replaced the old laws for Domestic Enterprises (DES) and
Foreign Invested Enterprises (FIEs). The new standard EIT rate of 25% replaces
the 33% rate applicable to both DES and FIEs, except for High Tech companies
that pay a reduced rate of 15%, subject to government verification for Hi-Tech
company status in every three years. Companies established before March 16, 2007
continue to benefit from tax holiday treatment approved by the local government
for a grace period of either the next 5 years or until the tax holiday term is
completed, whichever is sooner.

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

|                                                 |  | For Three Months Ended June |  |  | For Six Months Ended June | 
|------------------------------------------------ |  | --------------------------- |  |  | ------------------------- | 
|                                                 |  | 30,                         |  |  | 30,                       | 
|                                                 |  | 2011                        |  |  | 2010                      | 
|                                                 |  |                             |  |  |                           | 
|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%                    | 
|Other                                            |  | 0.0%                        |  |  | -5.5%                     | 
|Provision for income tax                         |  | 15.0%                       |  |  | 9.5%                      | 

The tax authority of the PRC Government conducts periodic and
ad hoc tax filing reviews on business enterprises operating in the PRC after
those enterprises have completed their relevant tax filings, hence the Company's
tax filings may not be finalized. It is therefore uncertain as to whether the
PRC tax authority may take different views about the Company's tax filings which
may lead to additional tax liabilities.

Accounting for Uncertainty in Income Taxes

Based on the Companys evaluation, the Company has concluded
that there are no significant uncertain tax positions requiring recognition in
its financial statements.

NOTE 9: EQUITY

Common Stock Subscription

In December, 2010, the Company entered into common share
subscription agreements with seven employees to raise $506,040 capital in
exchange for 253,020 shares of common stock (at par value $0.001) . The Company
received full payments by December 31, 2010. In January 2011, the Company and
those employees entered into an agreement to cancel the subscription agreements
entered in December 2010. The Company refunded subscription payment in full in
January 2011.

Preferred Stock

On May 28, 2011, the Company entered into a Share Purchase
Agreement with China Development Industrial bank (CDIB) to issue 5,000,000
shares of its preferred stock at $2.00 per share for a total cash consideration
of $10,000,000.

14

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On June 20, 2011, the Company entered into a Share Purchase
Agreement with ZTE Energy (Cayman) Co. Limited (ZTE) to issue  3,000,000 shares of its preferred stock at
$2.00 per share for a total cash consideration of  $6,000,000.

As of June 30, 2011, total proceeds of $16,000,000 had been
collected; the Company issued 5,000,000 shares of preferred stock to CDIB and is
in the process of issuing preferred shares to ZTE as of the filing date.

NOTE 10: COMMON STOCK WARRANTS

As of June 30, 2011 and December 31, 2010, there were 2,743,000
warrants with an exercise price of $1.60 per share outstanding and 658,320
warrants with an exercise price of $1.25 per share outstanding. No warrants were
issued or cancelled during the six months ended June 30, 2011.

NOTE 11: DERIVATIVE LIABILITIES

The Company granted a total of 3,401,320 warrants in connection
with their private placement in February 2010. 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 a 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 June 30, 2011 and December 31, 2010, the derivative
liability was valued at $563,117 and $1,141,118, respectively using the
Multinomial Lattice models. The $578,001 change in fair value is reported in the
Companys consolidated statement of operations as a gain 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 December 31, 2010 - annual volatility of 50%, term of 4.11 years, risk free
rate of 2.01%, target exercise price of $2.50 for the $1.25 warrants and $3.00
for the $1.60 warrants; at June 30, 2011- annual volatility of 50%, term of 3.62
years, risk free rate of 1.76%, 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
average volatility of 15 comparable companies over the previous years as the
Company does not have sufficient trading history. The attributes of the
comparable companies used in volatility analysis included 1) SIC 3600
(Electrical Equipment) and 3670 (Electronics), 2) Battery and power related
products and services, 3) Market cap $38 million to $3.9 billion, 4) Global
sales and operations, and 5) Annual revenues $73 million to 1.8 billion.

15

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NOTE 12: REVENUE INFORMATION AND GEOGRAPHIC
INFORMATION

|              |   | For
      Six Months Ended June 30, | 
|------------- | - | ----------------------------------- | 
|              |   | 2011                                | 
|United States | $ | 382,424                             | 
|Germany       |   | 80,763                              | 
|Ukraine       |   | 37,422                              | 
|Sweden        |   | -                                   | 
|North Korea   |   | 159,050                             | 
|Japan         |   | -                                   | 
|Australia     |   | 15,159                              | 
|Taiwan        |   | 25,833                              | 
|Hong Kong     |   | 505,666                             | 
|Malaysia      |   | 9,873                               | 
|Romania       |   | 7,286                               | 
|South Korea   |   | 3,502                               | 
|China         |   | 44,137,458                          | 
|              |   |                                     | 
|Total         | $ | 45,364,436                          | 

16

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NOTE 13: RECONCILIATION OF EARNINGS PER SHARE

|                                                                          |   | Six Months Ended |  |   | Three Months Ended | 
|------------------------------------------------------------------------- | - | ---------------- |  | - | ------------------ | 
|                                                                          |   | June 30,         |  |   | June 30,           | 
|                                                                          |   | 2011             |  |   | 2010               | 
|Numerator:                                                                |   |                  |  |   |                    | 
|Net income available to common stockholders                               | $ | 7,052,162        |  | $ | 802,578            | 
|Denominator:                                                              |   |                  |  |   |                    | 
|Weighted-average shares outstanding for earnings
      per share, basic   |   | 36,888,000       |  |   | 33,175,227         | 
|Effect of dilutive securities:                                            |   |                  |  |   |                    | 
|Common stock warrants                                                     |   | -                |  |   | 658,320            | 
|Weighted-average shares outstanding for earnings per share,
      diluted |   | 36,888,000       |  |   | 33,833,547         | 
|Net income per share:                                                     |   |                  |  |   |                    | 
|Basic                                                                     | $ | 0.19             |  | $ | 0.02               | 
|Diluted                                                                   | $ | 0.19             |  | $ | 0.02               | 

NOTE 14: SUBSEQUENT EVENT

On July 14, 2011, TMK Shenzhen set up its wholly owned
subsidiary, Hubei TMK Battery Co., Ltd., in Hubei province, PRC. The subsidiary
is expected to become a manufacturing center for the Company. At June 30, 2011,
a deposit of RMB 10,000,000 (approximately $1,546,500) was made as the invested
capital for TMK Hubei. The fund was recorded as restricted cash at June 30, 2011
and was later transferred to invested capital account of TMK Hubei when the
registration of the subsidiary was approved by the local government in July
2011.

The Company also made a payment of RMB 10,996,000
(approximately $1,700,531) to a contractor for the construction of the
manufacturing site of TMK Hubei) in July 2011.

On August 13, 2011, the Company entered into a Share Purchase
Agreement (the Purchase Agreement), dated August 13, 2011, among the Company,
its wholly-owned subsidiary, Leading Asia, and the shareholders of Loyal Top
Capital Investment Limited (Loyal Top), for the purchase of Loyal Top and its
wholly-owned Chinese subsidiary, Shenzhen Dongfang Hualian Technology Co., Ltd
(Hualian), for an aggregate purchase price of RMB 72 million (approximately
$11 million) in cash and 8,108,000 shares of the Companys common stock at $2
per share to be issued within 90 days of the closing of the Purchase Agreement.
The closing of the transaction is expected to occur on or before September 15,
2011 following the registration of Loyal Tops ownership of Hualian with the
Shenzhen Administration for Industry and Commerce. As of June 30, 2011, the
Company had made an advance payment of RMB 67,838,925 (approximately $10.5
million) towards the purchase price on behalf of Leading Asia. The Purchase
Agreement also contains a make good provision, pursuant to which, the Company is
obligated to issue and deliver shares of the Companys common stock to the
Seller if Hualian achieves a net profit of RMB 60 million
(approximately $ 9.3 million) for the fiscal year ended December 31, 2011.

17

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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 in our annual report on Form 10-K for
the fiscal year ended December 31, 2010, as well as assumptions, which, if they
were to ever materialize or prove incorrect, could cause the results of the
Company to differ materially from those expressed or implied by such
forward-looking statements.

Readers are urged to carefully review and consider the various
disclosures made by us in this report and our other filings with the SEC. These
reports attempt to advise interested parties of the risks and factors that may
affect our business, financial condition and results of operations and
prospects. The forward-looking statements made in this report speak only as of
the date hereof and we disclaim any obligation, except as required by law, to
provide updates, revisions or amendments to any forward-looking statements to
reflect changes in our expectations or future events.

Use of Terms

Except as otherwise indicated by the context, 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 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.

18

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Historically, we have focused on the development of high-rate
types SC, C, D, and F Ni-MH rechargeable batteries 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.

More recently, we have developed a working prototype of a
hybrid electric vehicle battery pack and are producing sample cells for testing
for 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 and production and establish 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. We are also
actively seeking opportunities to expand into the Lithium-Ion battery space. We
have a lithium battery patent and some customers who are the purchasers of both
nickel-metal hydride battery and Lithium-Ion battery. Therefore, we are
searching for the potential acquiree to develop our production capacity to meet
the demand of our customers and to grow our business, and have signed the
purchase agreement with Dongfang HuaLian, a lithium ion battery manufacturer,
discussed under Item 5 Other Information In addition, we have been actively
seeking opportunities to design and distribute batteries for use in
telecommunications, traffic control, and traffic lighting applications. We have
developed working prototypes of both nickel-metal hydride battery and
Lithium-Ion battery and sent to our customers for testing .

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.

First Quarter Financial Performance Highlights

The following are some financial highlights for the second
quarter:

- Revenue: Revenue increased $8.3 million, or 49.4%, to $25.1
  million for the three months ended June 30, 2011, from $16.8 million for the
  same period in 2010.
- Gross Profit: Gross profit increased $2.4 million, or 70.6%,
  to $5.8 million for the three months ended June 30, 2011, from $3.4 million
  for the same period in 2010.
- Income from operations: Income from operations increased $2.9
  million, or 170.6%, to $4.5 million for the three months ended June 30, 2011,
  from $1.7 million for the same period last year.
- Fully diluted net income per share: Fully diluted net income
  per share was $0.10 for the three months ended June 30, 2011, as compared to
  fully diluted net income per share of $0.06 for the same period last year.

Recent Development

On July 14, 2011, TMK Shenzhen set up its wholly owned
subsidiary, Hubei TMK Battery Co., Ltd., in Hubei province, PRC. The subsidiary
is expected to become a manufacturing center for the Company.

Results of Operations

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

19

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|                       |   | Three Months Ended |  
|---------------------- | - | ------------------ | -
|                       |   | June 30,           |  
|                       |   | **2011**           |  
|                       |   |                    |  
|                       |   |                    |  
|                       |   | **In Dollars**     |  
|Revenues               | $ | 25,071,628         |  
|Cost of Goods Sold     |   | (19,288,162        | )
|Gross Profit           |   | 5,783,466          |  
|Operating Expenses     |   | (1,237,378         | )
|Operating Income       |   | 4,546,088          |  
|Other Income (Expense) |   | (231,969           | )
|Income Taxes           |   | (647,929           | )
|Net Income             | $ | 3,666,190          |  

Revenues.We derive revenues from the sale of
environmentally-friendly Ni-MH rechargeable batteries. We had revenues of $25.1
million for the three months ended June 30, 2011, an increase of $8.3 million,
or 49.4%, compared to $16.8 million for the three months ended June 30, 2010.
The increase was due to an increase of new customers, increased demand from
existing customers, and increased production.

Cost of Goods Sold.Our cost of goods sold includes the
direct costs of our raw materials as well as the cost of labor and overhead. In
the three months ended June 30, 2011, our cost of goods sold increased by 44.0%,
from $13.4 million to $19.3 million, compared to the 2010 period. The increase
of cost of sales in the 2011 period is attributable to the increase of product
sales.

Gross Profit and Gross Margin. Our gross profit is equal
  to the difference between our revenues and our cost of goods sold. During the
  three months ended June 30, 2011, the gross margin increased 3% to 23%, compared
  to 20% for the same period of 2010.

Selling Expenses. Our selling expenses consist primarily
of compensation and benefits to our sales and marketing staff, sales commission,
cost of advertising, promotion, business travel, after-sale support,
transportation costs and other sales related costs. Our selling expenses
decreased $41,815, or 8.4%, to $456,273 in the three months ended June 30, 2011,
from $498,088 in the same period in 2010. The decrease was primarily due to
sales and marketing department reorganization.

General and Administrative Expenses. Our general and
administrative expenses consist primarily of compensation and benefits to our
general management, finance and administrative staff, professional advisor fees
and other expenses incurred in connection with general operations. General and
administrative expenses decreased $283,023, or 33%, to $577,694 in the three
months ended June 30, 2011, from $860,717 in the same period of 2010. The
decrease was primarily due to $0.5 million one-time welfare paid to employees
(excluding management level) as a consideration of their efforts to the
Companys going public activity in second quarter of 2010.

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 decreased $124,739, or 38%, to $203,411 in the
three months ended June 30, 2011, from $328,150 in the 2010 period, due to
one-time welfare paid to employees (excluding management level) as a
consideration of their efforts to the Companys going public activity in second
quarter of 2010.

Interest Expense. Interest expense increased $140,061,
or 57.2%, to $384,944 in the three months ended June 30, 2011, from $244,883 in
the 2010 period. The increase in interest expense is due to the fact we borrowed
more bank loans in the three months ended June 30, 2011, compared to the same
period in 2010. This is consistent with the increase in the balance of our bank
loans outstanding at June 30, 2011, compared to June 30, 2010.

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 from change in fair
value of derivative liability for the three months ended June 30, 2011
represents the difference of fair value between March 31, 2011 and June 30,
2011. The gain from change in fair value of derivative liability for the three
months ended June 30, 2010 represents the difference of fair value between March
31, 2010 and June 30, 2010.

Income Before Income Taxes. Our income before income
taxes increased $1.8 million or 72%, to $4.3 million in the three months ended
June 30, 2011, from $2.5 million for the 2010 period. The increase is primarily
due to the increased gross margin, decreased operating expenses and offset by
decreased gain from change in fair value of derivative liability.

20

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Net Income.As a result of the foregoing factors,our net income was $3.7 million for the three months ended June 30, 2011, as
compared to $2.3 million for the three months ended June 30, 2010.

For the Six-Month Periods Ended June 30, 2011 and 2010
(Unaudited)

|                       |   | Six Months Ended |  
|---------------------- | - | ---------------- | -
|                       |   | June 30,         |  
|                       |   | 2011             |  
|                       |   |                  |  
|                       |   |                  |  
|                       |   | **In Dollars**   |  
|Revenues               | $ | 45,364,436       |  
|Cost of Goods Sold     |   | (34,714,962      | )
|Gross Profit           |   | 10,649,474       |  
|Operating Expenses     |   | (2,268,485       | )
|Operating Income       |   | 8,380,989        |  
|Other Income (Expense) |   | (108,336         | )
|Income Taxes           |   | (1,220,491       | )
|Net Income             | $ | 7,052,162        |  

Revenue. Our sales revenue increased to $45.4
million in the six months ended June 30, 2011 from $30 million in the same
period in 2010, representing a 51.3% increase period-over-period. The increase
in revenue is due to the increase in customer demand.

Cost of Goods Sold. Our cost of sales increased
  $11.2 million, or 47.7%, to $34.7 million in the six months ended June 30, 2011
  from $23.5 million in the same period in 2010. The increase of cost of sales
  is consistent with growth rate of sales revenue.

Gross Profit. Our gross profit increased $4.1
million, or 63.1%, to $10.6 million in the six months ended June 30, 2011 from
$6.5 million in the same period in 2010. The increase of gross profit is
primarily due to growth of our sales revenue. Our gross margin is 23.5% in
second quarter of 2011 compared to 21.8% in the same period last year.

Operating Expense.Operating expense was $2.3
million in the six months ended June 30, 2011 compare to $3.9 million in the
same period last year. The decrease is primarily due to $1.77 million of merger
cost incurred in second quarter in 2010 in connection with TMK's reverse
acquisition. Excluding this factor, the operation expense remains consistent
period over period.

Income Before Income Taxes. Our income before
income taxes increased by 492.9%, to $8.3 million in the six months ended June
30, 2011 from $1.4 million in the same period in 2010. The increase is primarily
due to the increased gross margin, decreased operating expenses and increased
gain from change in fair value of derivative liability. Revenue for the first
six months ended in 2010 was mainly offset by one- time $1.77 million merger
cost and loss of $0.7 million from change in fair value of derivative liability
as well as additional welfare and bonus payments made in second quarter.

Income Taxes. We incurred $1.2 million income tax
expenses in the six months ended June 30, 2011, as compared to $0.6 million in
the same period in 2010. The increase in income taxes is primarily due to
increased income before income tax.

Net Income. Net income was $7.1 million for the
six months ended June 30, 2011, an increase of $6.3 million, or 787.5%, compared
to $0.8 million for the same period in 2010.

Liquidity and Capital Resources

As of June 30, 2011, we had cash and cash equivalents of $8.9
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.

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

21

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

|                                                     |   | For the Six Months Ended |  
|---------------------------------------------------- | - | ------------------------ | -
|                                                     |   | June
      30,           |  
|                                                     |   | **2011**                 |  
|                                                     |   |                          |  
|Net cash used in operating activities                |   | (3,137,267               | )
|Net cash used in investing activities                |   | (11,574,670              | )
|Net cash provided by financing activities            |   | 23,237,040               |  
|Effect of exchange rate changes on cash              |   | 18,072                   |  
|Net increase in cash and cash equivalents            |   | 8,543,175                |  
|                                                     |   |                          |  
|Cash and cash equivalents, beginning of
      period |   | 356,871                  |  
|Cash and cash equivalents, end of period             | $ | 8,900,046                |  

Operating activities

Net cash used in operating activities was $3.1 million for the
  six months ended June 30, 2011, as compared to $2.0 million net cash used in
  operating activities for the same period in 2010. The increase in net cash used
  in operating activities was primarily due to increase in prepaid expenses and
  inventory, partially offset by the increase in net income.

Investing activities

Net cash used in investing activities for the six months ended
  June 30, 2011 was $11.6 million, as compared to $5.4 million net cash used in
  investing activities for the same period of 2010. The increase of net cash used
  in investing activities was mainly attributable to $9.1 million short term investment
  in time deposit with various financial institutions, partially offset by the
  decrease in the deposit for Hualian acquisition.

Financing activities

Net cash provided by financing activities for the six months
ended June 30, 2011 was $23.2 million, as compared to $8.1 million net cash
provided by financing activities for the same period of 2010. The increase of
net cash provided by financing activities was mainly attributable to $16 million
cash received in connection with the subscription and issuance of 8,000,000 shares of
preferred stock to certain accredited investors during the second quarter of
2011 and an increase in bank loans.

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.

22

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Loan Commitments

As of June 30, 2011, the amount, maturity date and term of each
of our bank loans were as follows:

|                                        |   |             |  |  | **Interest** |  |  |                         |  |  |          | 
|--------------------------------------- | - | ----------- |  |  | ------------ |  |  | ----------------------- |  |  | -------- | 
|Bank                                    |   | **Amount*** |  |  | **Rate**     |  |  | **Maturity
      Date** |  |  | Duration | 
|China Construction Bank Shenzhen Branch | $ | 12,372,000  |  |  | 7.04%        |  |  | May 15, 2014            |  |  | 3 Years  | 
|Bank of China Shenzhen Branch           |   | 6,186,000   |  |  | 5.95%        |  |  | August 13, 2012         |  |  | 3 Years  | 
|DBS Bank                                |   | 1,268,130   |  |  | 7.6%         |  |  | Various                 |  |  | 165 Days | 
|DBS Bank                                |   | 1,185,143   |  |  | 7.02%        |  |  | November 15, 2012       |  |  | 3 Years  | 
|Bank of Shanghai Shenzhen Branch        |   | 7,732,500   |  |  | 5.508%       |  |  | June 28, 2013           |  |  | 3 Years  | 
|Total                                   | $ | 28,743,773  |  |  |              |  |  |                         |  |  |          | 

_____________ * Calculated based on the exchange rate of $1
= RMB 6.4662

On October 20, 2010, TMK Shenzhen obtained a three-month loan
in the amount of RMB 8,000,000 (or approximately $1,209,920) from Shenzhen
Development Bank bearing interest at approximately 4.86% with maturity date on
January 19, 2011. The loan was fully repaid in January 2011.

On November 22, 2010, Borou obtained a six-month term loan in
the amount of RMB 9,000,000 (or approximately $1,361,160) from Industrial Bank
Co., Ltd. bearing interest at 6.116% with maturity date on May 22, 2011, which
had been fully paid off by the Company prior to June 30, 2011. This loan is
borrowed under a line of credit in the amount of RMB 10,000,000 (approximately
$1,512,400) that is available from November 19, 2010 to November 19, 2011. The
unused line of credit amounted to $1,546,500 and $151,240 at June 30, 2011 and
December 31, 2010, respectively.

On March 23, 2011, TMK Shenzhen entered into a credit agreement
from DBS Bank (China) Limited Shenzhen Branch (DBS) to obtain a line of credit
in the amount of RMB 10,000,000 (approximately $1,522,000) in the form of AR
factoring. The loan bears interest at approximately 130% of the prevailing PRC
prime rate (prime rate) at the time of the loan. Based on the loan agreement,
each borrowing should be repaid within 165 days of invoice date. The agreement
has not specified an expiration date. The loan proceeds of RMB 10,000,000
(approximately $1,522,000) were received in April, 2011, of which RMB 1,800,000
(or approximately $278,370) principal payment was made by the Company prior to
June 30, 2011.

On November 16, 2009, TMK Shenzhen obtained a three-year term
loan from DBS Bank (China) Limited Shenzhen Branch (DBS) in the amount of RMB
15,300,000 (approximately $2,237,778) bearing interest at approximately 130% of
the prevailing PRC prime rate (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 the 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 RMB 40,000,000
(approximately $5,850,400) annually and RMB 10,000,000 (approximately
$1,462,600) quarterly. The Company did not violate any of the above covenants as
of and for the six months ended June 30, 2011.

On December 30, 2008, TMK Shenzhen obtained a three-year term
loan from China Construction Bank Shenzhen Branch (CCB) in the amount of RMB
30,000,000 (approximately $4,400,698) 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 RMB 1,000,000
(approximately $146,260) starting from the 13th month until maturity
date. In the event the Company defaults on the loan, the interest rate will be
increased to 150% of the 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 the 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 RMB 1,800,000 to
Shenzhen General Chamber of Commerce (SGCC) to secure the loan until the term
loan is repaid in full (see Note 6). During 2010, the Company made additional
deposit of RMB 600,000 to SGCC as requested by CCB. The loan with CCB is
personally guaranteed by Mr. Wang, Zongfu and Mr. Huang, Junbiao and secured by
the Companys property with fair value of RMB 3,000,000 (approximately $440,070)
and the Company's equipment with fair value of RMB 20,030,700 (approximately
$2,938,302). The loan was paid in full by the Company at June 30, 2011 and the
deposit was refunded.

On June 22, 2010, TMK Shenzhen obtained a three-year term loan
from Shanghai Bank Shenzhen Branch (SHB) in the amount of RMB 50,000,000
(approximately $7,562,000) bearing interest at 5.508% annually with maturity
date on June 28, 2013. Pursuant to the loan agreement, the principal needs to be
paid at a fixed amount of RMB 2,000,000 (approximately $320,480) starting from
the 13th month until maturity date. In the event the Company defaults
on the loan, the interest rate will be increased to 150% of the prime rate. In
addition, the loan should be used for the purchase of production materials only.
If violated, the interest rate will be increased to 200% of the prime rate. The
agreement also requires that during the 12-month period after signing of the
loan agreement, the
Company needs to generate international sales of no less than RMB 50 million (approximately $7,562,000) and domestic sales of no less than RMB 100 million (approximately $15,124,000). The loan is guaranteed by Dongguan Yikang Metal Material
Company's properties and Mr. Wu, Henian's personal property. The Company did not violate any of the above covenants as of and for the six months ended June 30, 2011.

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On August 5, 2009, Borou obtained a three-year term loan from Bank of China Shenzhen Branch ("BOC") in the amount of RMB 40,000,000 (approximately $5,850,400) bearing interest at approximately 110% of the prevailing prime rate at the
time of the loan (approximately 5.94% per annum) paid monthly. Pursuant to the loan agreement, the loan can only be used for working capital purposes (RMB 20,000,000) and fixed asset purchases (RMB 20,000,000). If violated, a penalty will be charged
100% 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 RMB 20,000,000 (approximately $2,925,200) and one of Borou's properties with fair value of RMB 20,000,000 (approximately $2,925,200). Based on the loan agreement, BOC also has the 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 asset purchase loans can only be used for
equipment purchases. The proceeds will be sent to the equipment vendor directly. Any new equipment purchased under the loan should be added to bank collateral 30 days after a payment is made; (d) Prior to loan payoff date, Borou should maintain
monthly purchase settlements of not less than RMB 8,000,000 (approximately $1,170,080) 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 as of and for the six months ended June 30, 2011. In accordance with the loan agreement, Borou also agreed to pay RMB 1,200,000 of bank charge in three years with annual bank charge of RMB 400,000 made prior to August 30 each year.

On May 16, 2011, TMK Shenzhen obtained a three-year term loan from China Construction Bank Shenzhen Branch ("CCB") in the amount of RMB 80,000,000 (approximately $12,372,000) bearing interest at approximately 110% of the prevailing
prime rate at the time of the loan. Pursuant to the loan agreement, the principal needs to be made as installment starting from the 13th month until maturity date. In the event the Company defaults on the loan, the interest rate will be
increased to 150% of the 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 the prime rate and the penalty will be computed at 14.08% of violated amount.
Pursuant to the loan agreement, TMK Shenzhen is required to maintain its debt ratio to be less than 70%. The terms of the loan also called for a deposit of RMB 2,400,000 (approximately $371,160) to Shenzhen General Chamber of Commerce (SGCC) to
secure the loan until the term loan is repaid in full (see Note 6). The loan with CCB is personally guaranteed by Mr. Wang, Zongfu, Mr. Huang, Junbiao, Mr. Wu, Zongfu and secured by the Company's equipment with cost of RMB 45,035,320
(approximately $6,964,700) and the Company's property with fair value of RMB 10,380,000 (approximately $1,605,300). The loan is also co-guaranteed by Shenzhen DongFang Hualian Technology Ltd. ("Hualian") and Shenzhen
Junyuda Investment Ltd. ("Junyuda") and secured by Junyuda's property with fair value of RMB 44,170,000 (approximately $6,830,900). The Company did not violate any of the above covenants as of and for the six months ended June
30, 2011.

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.

Critical Accounting Policies

There have been no changes in our critical accounting policies from those under Item 7. "Management's Discussion and Analysis of Results of Operations and Financial Condition" in our annual report on Form 10-K for the fiscal year ended
December 31, 2010.

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.

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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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK.

Not Applicable.

ITEMS 4 AND 4A(T). 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, Mr. 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 June 30, 2011. Based upon, and as of the date of this
evaluation, Mr. Liu and Mr. Chang, determined that, as of June 30, 2011, because
of the material weaknesses described in Item 9A Controls and Procedures on our
Annual Report on Form 10-K for the fiscal year ended December 31, 2010, which we
are still in the process of remediating as of June 30, 2011, our disclosure
controls and procedures were not effective. Investors are directed to Item 9A of
our Annual Report on Form 10-K for the fiscal year ended December 31, 2010 for a
description of these weaknesses.

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.

During its evaluation of the effectiveness of internal control
over financial reporting as of June 30, 2011, the management concluded that: (1)
we lacked an audit committee within our board to oversee the financial reporting
pursuant to U.S. GAAP and the SECs rules and regulations; and (2) our
accounting staff lacked sufficient accounting skills and experience necessary to
fulfill our public reporting obligations according to U.S. GAAP and the SECs
rules and regulations.

As of June 30, 2011, our management is still in the process of
implementing remediation procedures to improve internal controls over financial
reporting. We have already taken measures to remediate these material weaknesses
by seeking additional financial reporting and accounting staff members with
relevant accounting experience, skills and knowledge in the preparation of
financial statements in accordance with of U.S. GAAP and financial reporting
disclosure requirements under SEC rules. We are also in the process of
implementing a rigorous process for collecting and reviewing information
required for the preparation of the financial statements to meet our public
accounting obligations according to U.S. GAAP and the SECs rules and
regulations with the support from the board and additional personnel experienced
in U.S. GAAP and the SECs rules to be hired. Management remains committed to
improving its internal control over financial reporting and will continue to
work to put effective controls in place.

Other than the foregoing changes, there were no changes in our
internal controls over financial reporting during period covered by this report
that have materially affected, or are reasonably likely to materially affect our
internal control over financial reporting.

PART IIOTHER 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. Other
than the legal proceedings set forth below, 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.

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ITEM 1A. RISK FACTORS.

Not applicable.

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

On May 28, 2011 and on June 20, 2011, the Company entered into
a securities purchase agreement with each of China Development Industrial Bank
and ZTE Energy (Cayman) Co. Limited (together the Investors), pursuant to which
the Investors purchased an aggregate of 8,000,000 shares of the Companys
preferred stock, par value, $2 per share, for an aggregate purchase price of $16
million. 5,000,000 shares were issued and sold to China Development Industrial
Bank and 3,000,000 shares were authorized and under the process of issuance to
ZTE Energy (Cayman) Co. Limited in reliance on the exemption provided by Section
4(2) of the Securities Act for the offer and sale of securities not involving a
public offering. Other than as set forth above, we have not sold any equity
securities during the quarter ended June 30, 2011 which sale was not previously
disclosed in a current report on Form 8-K filed during that period.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. (REMOVED AND RESERVED).

ITEM 5. OTHER INFORMATION.

On August 13, 2011, we entered into a Share Purchase Agreement
(the "Purchase Agreement"), dated August 13, 2011, among the Company, its
wholly-owned subsidiary, Leading Asia, and the shareholders of Loyal Top Capital
Investment Limited (Loyal Top), for the purchase of Loyal Top and its
wholly-owned Chinese subsidiary, Shenzhen Dongfang Hualian Technology Co., Ltd
("Dongfang Hualian"), for an aggregate purchase price of RMB72 million
(approximately $11 million) in cash and 8,108,000 shares of the Companys common
stock at $2 per share to be issued within 90 days of the closing of the Purchase
Agreement. The closing of the transaction is expected to occur on or before
September 15, 2011 following the registration of Loyal Tops ownership of
Dongfang Hualian with the Shenzhen Administration for Industry and Commerce. As
of June 30, 2011, the Company had made an advance payment of RMB 67,838,925
(approximately $10.5 million) towards the purchase price on behalf of Leading
Asia. The Company is obligated to issue and deliver 5,000,000 shares of the
Companys common stock to the Seller within 90 days of the closing of the
Purchase Agreement and deliver the rest 3,108,000 shares of the Companys common
stock to the Seller if Dongfang Hualian achieves a net profit of RMB 60 million
(approximately $ 9.3 million) for the fiscal year ended December 31, 2011.

Loyal Top was established in 2011 in Hong Kong with 10,000 HK
dollar of registered capital for the purpose of being a holding company for
Dongfang Hualian.. Dongfang Hualian was established on September 29, 2005 in
Shenzhen with a registered capital of 10 million RMB for the purpose of engaging
in the design, manufacture, and marketing of lithium-ion (PLI) batteries. On
April 11, 2011, Loyal Top acquired Dongfang Hualian from Shenzhen Guangyixin
Dianchi Co., Feng Liang and Jiaxiao Zhang for an aggregate purchase price of 11
million RMB. In May, 2011 Loyal Top received MOFCOM approval for its acquisition
of Dongfang Hualian, but it is still awaiting registration of Loyal Tops
ownership of Dongfang Hualian with the Shenzhen Administration for Industry and
Commerce.

ITEM 6. EXHIBITS.

The following exhibits are filed as part of this report or
incorporated by reference:

|Exhibit |                                                                                                                                                                   
|------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number  | Description                                                                                                                                                       
|10.1    | Share
    Purchase Agreement, dated May 28, 2011, between the Company and China
    Development Industrial Bank                                                   
|10.2    | Share Purchase
    Agreement, dated June 20, 2011, between the Company and ZTE Energy (Cayman)
    Co. Limited                                                    
|10.3    | Share
    Purchase Agreementn dated August 13, 2011, among the Company, Leading Asia,
    and the shareholders of Loyal Top Capital Investment Limited            
|10.4    | Equity Transfer
    Agreement, dated April 11, 2011, among Loyal Top Capital Investment Limited,
    Shenzhen Guangyixin Dianchi Co., Feng Liang and Jiaxiao Zhang
|31.1    | Certifications
      of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002                                                   
|31.2    | Certifications of Chief
      Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                         
|32.1    | Certifications
      of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002                                                   
|32.2    | Certifications of Chief
      Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                         

26

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SIGNATURES

Pursuant to the requirements of
the Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.

|                       | CHINA TMK BATTERY SYSTEMS INC.                                      
|---------------------- | --------------------------------------------------------------------
|                       |                                                                     
|                       |                                                                     
|Dated: August 15, 2011 | /s/ Xiangjun Liu                                                    
|                       | Xiangjun Liu                                                        
|                       | Chief Executive Officer                                             
|                       | (Principal Executive Officer)                                       
|                       |                                                                     
|                       |                                                                     
|                       |                                                                     
|Dated: August 15, 2011 | /s/ Jin Hu                                                          
|                       | Jin Hu                                                              
|                       | Chief Financial Officer                                             
|                       | (Principal Financial Officer and Principal
      Accounting Officer)

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EXHIBIT INDEX

|Exhibit |                                                                                                                                                                   
|------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number  | Description                                                                                                                                                       
|10.1    | Share
    Purchase Agreement, dated May 28, 2011, between the Company and China
    Development Industrial Bank                                                   
|10.2    | Share Purchase
    Agreement, dated June 20, 2011, between the Company and ZTE Energy (Cayman)
    Co. Limited                                                    
|10.3    | Share
    Purchase Agreementn dated August 13, 2011, among the Company, Leading Asia,
    and the shareholders of Loyal Top Capital Investment Limited            
|10.4    | Equity Transfer
    Agreement, dated April 11, 2011, among Loyal Top Capital Investment Limited,
    Shenzhen Guangyixin Dianchi Co., Feng Liang and Jiaxiao Zhang
|31.1    | Certifications
      of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002                                                   
|31.2    | Certifications of Chief
      Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                         
|32.1    | Certifications
      of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley
      Act of 2002                                                   
|32.2    | Certifications of Chief
      Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                         



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