---

UNITED STATES SECURITIES 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,
2010

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

For the transition period from
____________ to _____________

Commission File 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 13, 2010 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                                                                        |   
|-------- | -------------------------------------------------------------------------------------------- | --
|         |                                                                                              |   
|ITEM 1.  | FINANCIAL STATEMENTS.                                                                        | 1 
|ITEM 2.  | MANAGEMENTS DISCUSSION AND ANALYSIS OF
      FINANCIAL CONDITION AND RESULTS OF OPERATIONS. | 18
|ITEM 3.  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
      MARKET RISK.                            | 26
|ITEM 4.  | CONTROLS AND PROCEDURES.                                                                     | 26
|         |                                                                                              |   
|PART II  | OTHER INFORMATION                                                                            |   
|         |                                                                                              |   
|ITEM 1.  | LEGAL PROCEEDINGS.                                                                           | 27
|ITEM 1A. | RISK FACTORS.                                                                                | 27
|ITEM 2.  | UNREGISTERED SALES OF EQUITY
      SECURITIES AND USE OF PROCEEDS.                           | 27
|ITEM 3.  | DEFAULTS UPON SENIOR SECURITIES.                                                             | 27
|ITEM 4.  | (REMOVED AND RESERVED).                                                                      | 27
|ITEM 5.  | OTHER INFORMATION.                                                                           | 27
|ITEM 6.  | EXHIBITS.                                                                                    | 28

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PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

CHINA TMK BATTERY SYSTEMS INC.INDEX TO
CONSOLIDATED FINANCIAL STATEMENTSFOR THE THREE AND SIX MONTHS ENDED
JUNE 30, 2010 AND 2009

|Contents                                                                                                                                           | Page(s)
|-------------------------------------------------------------------------------------------------------------------------------------------------- | -------
|Consolidated Balance Sheets as of June 30,
      2010 (unaudited) and December 31, 2009                                                            | 2      
|Consolidated Statements of Income and Other Comprehensive
      Income for the three and six months ended June 30, 2010 and 2009
      (unaudited) | 3      
|Consolidated Statements of Changes in
      Equity for six months ended June 30, 2010 (unaudited)                                                  | 4      
|Consolidated Statements of Cash Flows for the six months
      ended June 30, 2010 and 2009 (unaudited)                                            | 6      
|Notes to the Consolidated Financial
      Statements (unaudited)                                                                                   | 7      

1

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China TMK Battery Systems Inc. and Subsidiaries
Consolidated Balance Sheets

|                                                                                                                                                                                                                               |   | June 30,    |  |   | December 31, | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | - | ----------- |  | - | ------------ | 
|                                                                                                                                                                                                                               |   | 2010        |  |   | 2009         | 
|                                                                                                                                                                                                                               |   | (Unaudited) |  |   |              | 
|                                                                                                                                                                                                                               |   |             |  |   |              | 
|Assets                                                                                                                                                                                                                         |   |             |  |   |              | 
|Current Assets                                                                                                                                                                                                                 |   |             |  |   |              | 
|Cash and cash equivalents                                                                                                                                                                                                      | $ | 926,786     |  | $ | 185,590      | 
|Trade
      receivables, net                                                                                                                                                                                                   |   | 7,028,619   |  |   | 2,909,234    | 
|Advances to suppliers                                                                                                                                                                                                          |   | 248,931     |  |   | 215,689      | 
|VAT
      recoverable                                                                                                                                                                                                          |   | 505,770     |  |   | 34,660       | 
|Inventories, net                                                                                                                                                                                                               |   | 5,663,856   |  |   | 3,973,697    | 
|Due from
      related parties                                                                                                                                                                                                 |   |             |  |   | 15,204       | 
|Prepaid expenses and other receivables                                                                                                                                                                                         |   | 99,137      |  |   | -            | 
|Restricted
      cash                                                                                                                                                                                                          |   |             |  |   | 438,780      | 
|Total current
      assets                                                                                                                                                                                                     |   | 14,473,099  |  |   | 7,772,854    | 
|Property,
      equipment and construction in progress, net                                                                                                                                                                    |   | 12,690,024  |  |   | 11,039,703   | 
|Advances for property and equipment purchase                                                                                                                                                                                   |   | 17,590,198  |  |   | 16,930,020   | 
|Restricted
      cash                                                                                                                                                                                                          |   | 352,488     |  |   | 263,268      | 
|Deposit for business acquisition                                                                                                                                                                                               |   | 3,185,452   |  |   | -            | 
|Other
      assets                                                                                                                                                                                                             |   | 98,699      |  |   | 50,804       | 
|Total Assets                                                                                                                                                                                                                   | $ | 48,389,960  |  | $ | 36,056,649   | 
|                                                                                                                                                                                                                               |   |             |  |   |              | 
|Liabilities and Shareholders' Equity                                                                                                                                                                                           |   |             |  |   |              | 
|Current Liabilities                                                                                                                                                                                                            |   |             |  |   |              | 
|Accounts payable                                                                                                                                                                                                               | $ | 3,962,136   |  | $ | 1,832,737    | 
|Accrued
      liabilities and other payable                                                                                                                                                                                    |   | 323,955     |  |   | 519,129      | 
|Customer deposits                                                                                                                                                                                                              |   | 266,847     |  |   | 179,272      | 
|Wages
      payable                                                                                                                                                                                                            |   | 481,522     |  |   | 556,189      | 
|Corporate taxpayable                                                                                                                                                                                                           |   | 28,704      |  |   | 216,443      | 
|Short-term
      bank loan                                                                                                                                                                                                     |   | 3,763,789   |  |   | 4,722,660    | 
|Current portion of long-term bank loans                                                                                                                                                                                        |   | 1,236,981   |  |   | 2,451,700    | 
|Deferred
      revenue                                                                                                                                                                                                         |   | 18,504      |  |   | 36,854       | 
|Due to related parties                                                                                                                                                                                                         |   | 1,423,363   |  |   | 17,691       | 
|Total current liabilities                                                                                                                                                                                                      |   | 11,505,801  |  |   | 10,532,675   | 
|Long-term bank loans                                                                                                                                                                                                           |   | 10,009,827  |  |   | 9,236,953    | 
|Deferred
      tax liabilities                                                                                                                                                                                                 |   | 596,454     |  |   | 593,977      | 
|Derivative liability                                                                                                                                                                                                           |   | 1,883,117   |  |   | -            | 
|Total Liabilities                                                                                                                                                                                                              |   | 23,995,199  |  |   | 20,363,605   | 
|                                                                                                                                                                                                                               |   |             |  |   |              | 
|Stockholders' Equity                                                                                                                                                                                                           |   |             |  |   |              | 
|Preferred
      stock, $0.001 par value, 10,000,000
      shares           authorized,
      none issued and outstanding at March 31,
      2010           and
      December 31, 2009                                         |   | -           |  |   | -            | 
|Common stock, $0.001 par
      value, 300,000,000 shares
      authorized,           34,171,000
      and 25,250,000 shares issued and
      outstanding           at
      March 31, 2010 and December 31, 2009, respectively |   | 36,888      |  |   | 25,250       | 
|Common stock
      subscribed, 2,717,250 shares at March 31, 2010                                                                                                                                                              |   |             |  |   | -            | 
|Additional paid-in capital                                                                                                                                                                                                     |   | 10,518,662  |  |   | 1,193,591    | 
|Accumulated other
      comprehensive income                                                                                                                                                                                   |   | 437,617     |  |   | 365,187      | 
|Subscription receivables                                                                                                                                                                                                       |   |             |  |   | -            | 
|Statutory reserves                                                                                                                                                                                                             |   | 1,038,988   |  |   | 1,038,988    | 
|Retained earnings (unrestricted)                                                                                                                                                                                               |   | 12,362,606  |  |   | 13,070,028   | 
|Total stockholders'
      equity                                                                                                                                                                                               |   | 24,394,761  |  |   | 15,693,044   | 
|Total Liabilities & Stockholders' Equity                                                                                                                                                                                       | $ | 48,389,960  |  | $ | 36,056,649   | 

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

2

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China TMKBatterySystemsInc.
andSubsidiaries ConsolidatedStatementsofIncome(Unaudited)

|                                                  |   | For the Six Months Ended |   |   | For the Three Months Ended |  
|------------------------------------------------- | - | ------------------------ | - | - | -------------------------- | -
|                                                  |   | June 30,                 |   |   | June 30,                   |  
|                                                  |   | 2010                     |   |   | 2009                       |  
|                                                  |   |                          |   |   |                            |  
|                                                  |   |                          |   |   |                            |  
|                                                  |   |                          |   |   |                            |  
|Revenue                                           | $ | 30,019,190               |   | $ | 21,278,432                 |  
|Cost of Goods Sold                                |   | (23,481,135              | ) |   | (16,078,400                | )
|Gross Profit                                      |   | 6,538,055                |   |   | 5,200,032                  |  
|                                                  |   |                          |   |   |                            |  
|Operating Costs and Expenses                      |   |                          |   |   |                            |  
|Selling expenses                                  |   | 732,806                  |   |   | 396,304                    |  
|Depreciation                                      |   | 66,579                   |   |   | 58,398                     |  
|General and administrative                        |   | 2,634,622                |   |   | 565,182                    |  
|Research and
      development                    |   | 493,394                  |   |   | 237,760                    |  
|Total operating expenses                          |   | 3,927,401                |   |   | 1,257,644                  |  
|Income from operations                            |   | 2,610,654                |   |   | 3,942,388                  |  
|                                                  |   |                          |   |   |                            |  
|Other income (expenses):                          |   |                          |   |   |                            |  
|Interest expense, net                             |   | (486,790                 | ) |   | (312,165                   | )
|Other expense, net                                |   | (60,355                  | ) |   | (678                       | )
|Change in fair value of embedded
      derivative |   | (664,373                 | ) |   | -                          |  
|Total other income
      (expenses)               |   | (1,211,518               | ) |   | (312,843                   | )
|                                                  |   |                          |   |   |                            |  
|Income before income taxes                        |   | 1,399,136                |   |   | 3,629,545                  |  
|Income taxes                                      |   | (596,558                 | ) |   | (537,390                   | )
|Net income                                        | $ | 802,578                  |   | $ | 3,092,155                  |  
|                                                  |   |                          |   |   |                            |  
|                                                  |   |                          |   |   |                            |  
|Earnings per share - basic                        | $ | 0.02                     |   | $ | 0.12                       |  
|                                                  |   |                          |   |   |                            |  
|Weighed-average shares outstanding, basic         |   | 33,175,227               |   |   | 25,250,000                 |  
|                                                  |   |                          |   |   |                            |  
|Earnings per share - diluted                      | $ | 0.02                     |   | $ | 0.12                       |  
|                                                  |   |                          |   |   |                            |  
|Weighed-average shares outstanding, diluted       | $ | 33,833,547               |   |   | 25,250,000                 |  

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

3

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China TMKBatterySystemsInc.
andSubsidiaries ConsolidatedStatementsofChangesinStockholders'EquityFor the Six
Months Ended June 30, 2010 (Unaudited)

AccumulatedAdditional
    
    
    Other
    
    
    
    
    
    Retained
    
    
    TotalCommon Stock
    
    
    Paid-in
    
    
    Comprehensive
    
    
    Statutory
    
    
    Earnings
    
    
    Stockholders'Share
    
    
    Amount
    
    
    Capital
    
    
    Income
    
    
    Reserves
    
    
    (Unrestricted)
    
    
    EquityBalance at December 31, 2009
    
    25,250,000
    
    $
    25,250
    
    $
    1,193,591
    
    $
    365,187
    
    $
    1,038,988
    
    $
    13,070,028
    
    $
    15,693,044Retained of 2,750,000 shares by original
      shell shareholders
    
    2,750,000
    
    $
    2,750
    
    $
    (2,750
    )
    $
    -
    
    $
    -
    
    $
    -
    
    
    -Issuance of 560,000 shares for acquisition fee
    
    560,000
    
    
    560
    
    
    699,440
    
    
    -
    
    
    -
    
    
    -
    
    
    700,000Issuance of 125,000 shares for consulting
      services
    
    125,000
    
    
    125
    
    
    156,125
    
    
    -
    
    
    -
    
    
    -
    
    
    156,250Issuance of 5,486,000 shares at 1.25 per share in private
      placement, net of offering costs
    
    5,486,000
    
    
    5,486
    
    
    6,297,467
    
    
    -
    
    
    -
    
    
    -
    
    
    6,302,953Issuance of 2,717,000 shares at 1.25 per
      share in a private placement for Chinese investors
    
    2,717,250
    
    
    2,717
    
    
    3,393,533
    
    
    
    
    
    
    
    
    
    
    
    3,396,250Distribution to owners - share purchase from former owners
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (1,510,000
    )
    
    (1,510,000
    )Embedded feature of equity
    
    
    
    
    
    
    
    (1,218,744
    )
    
    
    
    
    
    
    
    
    
    
    (1,218,744
    )Foreign currency translation adjustment
    
    -
    
    
    -
    
    
    -
    
    
    72,430
    
    
    -
    
    
    -
    
    
    72,430Net income for the six months ended June
      30, 2010
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    802,578
    
    
    802,578Balance at June 30, 2010
    
    36,888,250
    
    $
    36,888
    
    $
    10,518,662
    
    $
    437,617
    
    $
    1,038,988
    
    $
    12,362,606
    
    $
    24,394,761


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

4

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

|                                                |   | For the Six Months Ended
      June 30, | 
|----------------------------------------------- | - | --------------------------------------- | 
|                                                |   | 2010                                    | 
|Net income                                      | $ | 802,578                                 | 
|Other comprehensive income, net of tax:         |   |                                         | 
|Unrealized gain on foreign currency translation |   | 72,430                                  | 
|Comprehensive income                            | $ | 875,008                                 | 

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

5

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

|                                                                                                    |   | For the Six Months Ended |  
|--------------------------------------------------------------------------------------------------- | - | ------------------------ | -
|                                                                                                    |   | June 30,                 |  
|                                                                                                    |   | 2010                     |  
|                                                                                                    |   |                          |  
|Cash Flows From Operating Activities                                                                |   |                          |  
|                                                                                                    |   |                          |  
|Net income                                                                                          | $ | 802,578                  |  
|Adjustments to reconcile net income to
      net cash       provided by
      operating activities: |   |                          |  
|Depreciation
      expense                                                                          |   | 405,482                  |  
|Common stocks for services
      provided                                                           |   | 856,250                  |  
|Deferred income                                                                                     |   | (18,350                  | )
|Change in fair value of embedded
      derivative                                                   |   | 664,373                  |  
|Changes in operating assets
      and liabilities:                                                  |   |                          |  
|Trade receivables                                                                                   |   | (4,119,385               | )
|Advance to suppliers                                                                                |   | (33,242                  | )
|Inventories, net                                                                                    |   | (1,690,159               | )
|Account payable - trade                                                                             |   | 2,129,399                |  
|Accrued
      liabilities and other payables                                                        |   | (195,174                 | )
|Customer deposits                                                                                   |   | 87,575                   |  
|Other assets                                                                                        |   | (47,895                  | )
|Prepaid expenses and other receivables                                                              |   | (99,137                  | )
|Wages payable                                                                                       |   | (74,667                  | )
|Various taxes payable                                                                               |   | (658,849                 | )
|                                                                                                    |   |                          |  
|Net cash used in (provided by) operating
      activities                                           |   | (1,991,201               | )
|                                                                                                    |   |                          |  
|Cash Flows From Investing Activities                                                                |   |                          |  
|Change in restricted cash                                                                           |   | 349,560                  |  
|Purchases and advances for
      property and equipment purchase                                    |   | (2,626,277               | )
|Deposit for Hualian acquisition                                                                     |   | (3,185,452               | )
|Collection of advances/loans -
      related parties                                                |   | 15,204                   |  
|Advances/loans - related parties                                                                    |   | -                        |  
|Collection of short-term loan
      receivable                                                      |   | -                        |  
|Net cash used in investing activities                                                               |   | (5,446,965               | )
|                                                                                                    |   |                          |  
|Cash Flows From Financing Activities                                                                |   |                          |  
|Borrowing from bank notes                                                                           |   |                          |  
|Repayment of bank notes                                                                             |   |                          |  
|Borrowing from bank loans                                                                           |   | 3,157,422                |  
|Repayment of bank loans                                                                             |   | (4,624,782               | )
|Net proceeds from share
      issuance                                                              |   | 9,699,203                |  
|Distribution to owners                                                                              |   | -                        |  
|Distribution to former owners                                                                       |   | (1,504,180               | )
|Proceeds from related parties                                                                       |   | 1,421,235                |  
|Repayment to related parties                                                                        |   | (17,691                  | )
|Net cash provided by financing activities                                                           |   | 8,131,207                |  
|                                                                                                    |   |                          |  
|Effect of exchange
      rate changes on cash                                                       |   | 48,155                   |  
|Net increase (decrease) in cash and cash
      equivalents                                          |   | 741,196                  |  
|Cash and cash equivalents, beginning of period                                                      |   | 185,590                  |  
|Cash and cash equivalents, end of
      period                                                      | $ | 926,786                  |  
|                                                                                                    |   | -                        |  
|                                                                                                    |   |                          |  
|Supplemental disclosure information:                                                                |   |                          |  
|Income taxes paid                                                                                   | $ | 784,297                  |  
|Interest paid                                                                                       | $ | 486,920                  |  

The accompanying notes are an integral part of these
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, we entered into and closed the
Share Exchange Agreement with Leading Asia, a BVI company, and its sole
stockholder, Unitech, a BVI company, pursuant to which we acquired 100% of the
issued and outstanding capital stock of Leading Asia in exchange for 25,250,000
shares of our common stock, par value $0.001, which constituted 90.18% of our
issued and outstanding capital stock on a fully-diluted basis as of and
immediately after the consummation of the transactions contemplated by the Share
Exchange Agreement.

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

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

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

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

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a. Basis of preparation

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

7

---

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

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)

b. Foreign currency translation

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

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

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

Period Covered
    Balance Sheet Date Rates
    Average RatesYear ended December 31, 2009
    6.83720
    6.82082Six Months Ended June 30, 2009
    6.82454
    6.82268Six Months Ended June 30,
      2010
    6.80874
    6.81710


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

Period Covered
    Balance Sheet Date Rates
    Average RatesYear ended December 31, 2009
    7.80000
    7.80000Six Months Ended June 30, 2009
    7.80000
    7.80000Six Months Ended June 30,
      2010
    7.80000
    7.80000


c. Reclassifications

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

d. Recently issued accounting pronouncements

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

8

---

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

NOTE 3: ACQUISITION

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

NOTE 4: ADVANCES FOR PROPERTY AND EQUIPMENT PURCHASE

Advances for property and equipment purchase consist of the
following:

|                                                                                                 |   | June 30, 2010 |  |   | December 31, | 
|------------------------------------------------------------------------------------------------ | - | ------------- |  | - | ------------ | 
|                                                                                                 |   |               |  |   | 2009         | 
|Advances for Property Purchase (1 unit
      located in Shihao Mansion)                          | $ | 3,036,721     |  | $ | 3,024,108    | 
|Advances for Equipment Purchase (4 vendors as of 6/30/2010
      and 2 vendors as of 12/31/2009) |   | 2,857,504     |  |   | 2,989,816    | 
|Advances for Property Purchase (3rd, 5th
      and 6th floor located in Jinli Building)          |   | 11,695,973    |  |   | 10,916,096   | 
|Total Advances for Property Purchase                                                             | $ | 17,590,198    |  | $ | 16,930,020   | 

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

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

NOTE 5: SHORT-TERM BANK LOANS

Short term bank loans consist of the following:

|                                    |   | June 30, 2010 |  |   | December 31, 2009 | 
|----------------------------------- | - | ------------- |  | - | ----------------- | 
|Bank Loans borrowed by TMK Shenzhen |   |               |  |   |                   | 
|Bank of China Shenzhen Branch       | $ | 1,766,357     |  | $ | 2,382,500         | 
|Bank of Ningbo Shenzhen Branch      |   | 1,174,960     |  |   | 1,170,080         | 
|                                    |   |               |  |   |                   | 
|Bank Loans borrowed by Borou        |   |               |  |   |                   | 
|Bank of Ningbo Shenzhen Branch      |   | 822,472       |  |   | 1,170,080         | 
|Short-term loans                    | $ | 3,763,789     |  | $ | 4,722,660         | 

On August 24, 2009, Borou obtained a one-year term loan in the
amount of $1,170,080 (RMB 8,000,000) from Bank of Ningbo Shenzhen Branch ("BN")
bearing interest at approximately 6.37% with maturity date on August 23, 2010.
The loan is personally guaranteed by Mr. Wu, Henian and Mr. Tu Jun
and secured by Mr. Zhuang, Zehao's personal property. According to the loan
agreement, BN has right to request Borou to repay the outstanding debt in full
immediately if the Company does not meet any of the following: (a) Borou should
repay 30% of principal within 6 months of receipt of the first borrowing; (b)
Within term of loan, Borou should maintain certain amounts of cash deposits and
cash withdrawals with the bank on monthly basis of not less than 30% of its
revenue; (c) The Company as a whole (Borou and TMK Shenzhen)s total loans
should not exceed $19,013,800 (RMB 130,000,000); (d) The Company as a whole
(Borou and TMK Shenzhen)'s total revenue including VAT tax should not be less
than $51,191,000 (RMB 350,000,000); (e) Borou cannot distribute any dividend or
pledge using its assets, cannot add any additional borrowing within loan period;
(f) Borou's total revenue including VAT tax should be maintained at not less
than $51,191,000 (RMB 350,000,000). Borou has met all of the above requirements
and has repaid principal and interests due through March 2010, except item (f)
BN has not requested Borou to pay off this loan, however, Borou was not able to
obtain a waive letter from BN.

9

---

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

NOTE 5: SHORT-TERM BANK LOANS (CONTINUED)

On August 21, 2009, TMK Shenzhen obtained a one-year term loan
in the amount of $1,170,080 (RMB 8,000,000) from Bank of Ningbo Shenzhen Branch
("BON") bearing interest at approximately 6.37% with maturity date on August 20,
2010. The loan is personally guaranteed by Mr. Wu, Henian and secured by Mr.
Zhuang, Zehao's personal property. According to the loan agreement, BN has right
to request TMK Shenzhen to repay the outstanding debt in full immediately if the
Company does not meet any of the following: (a) the Company cannot distribute
any bonus or dividend; (b) The total financing amount cannot exceed $19,013,800
(RMB 130,000,000) and the total revenue should not be less than $51,191,000 (RMB
350,000,000), the revenue defined here includes VAT tax). As of the filing date,
the Company is not in violation of any requirements stated above.

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

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

NOTE 6: LONG-TERM BANK LOANS

Long term bank loans consist of the following:

|                                        |   | June
      30, 2010 |   |   | December 31, 2009 |  
|--------------------------------------- | - | ------------------- | - | - | ----------------- | -
|DBS Bank                                | $ | 1,847,128           |   | $ | 2,181,753         |  
|China Construction Bank Shenzhen Branch |   | 3,524,880           |   |   | 4,387,800         |  
|Bank of China Shenzhen Branch           |   | 5,874,800           |   |   | 5,119,100         |  
|Less current portion                    |   | (1,236,981          | ) |   | (2,451,700        | )
|Long -term portion                      | $ | 10,009,827          |   | $ | 9,236,953         |  

On November 13, 2009, TMK Shenzhen obtained a 3-year term loan
from DBS Bank (China) Limited Shenzhen Branch (DBS) in the amount of
$2,237,778 (RMB 15,300,000) bearing interest at approximately 130% of the
prevailing prime rate at the time of the loan (approximately 7.02% per annum)
paid monthly. The loan can only be used for equipment purchase (RMB 11,318,500)
and working capital purpose (RMB 3,981,500). DBS requires the Company to deposit
$438,780 (RMB 3,000,000) as security (refunded to the Company in 6 months as the
company made payments on timely basis). Based on agreement, DBS has right to
request the Company to repay the outstanding balance immediately if the Company
does not meet any of the following: (a) the Company should provide audited
financial within six months of year-end; (b) the Company cannot pledge its
account receivables to any other third parties without DBS permission; (c) the
Company's account receivable settlements (cash collections) should be maintained
at $5,850,400 (RMB 40,000,000) annually and $1,462,600 (RMB 10,000,000) quarterly. The Company
did not violate any of the above covenants at June 30, 2010.

10

---

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

NOTE 6: LONG-TERM BANK LOANS (CONTINUED)

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

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

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

11

---

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

NOTE 6: LONG-TERM BANK LOANS (CONTINUED)

As of the filling date, the Company has received full amount of
7,343,500from SB with the first loan proceeds received on July 2, 2010.

The terms of the long-term bank loans require the Company to
maintain a deposit at the bank to secure the loans as follows:

|                          |   | June
      30, 2010 |  |   | December 31, 2009 | 
|------------------------- | - | ------------------- |  | - | ----------------- | 
|                          |   |                     |  |   |                   | 
|DBS Bank                  | $ | -                   |  | $ | 438,780           | 
|Total Current Portion     | $ | -                   |  | $ | 438,780           | 
|                          |   |                     |  |   |                   | 
|China Construction Bank   | $ | 352,488             |  | $ | 263,268           | 
|Total Non-current Portion | $ | 352,488             |  | $ | 263,268           | 

NOTE 7: RELATED PARTY TRANSACTIONS

Due from related parties

Due from related party consists of the following:

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

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

Due to related party

Due to related party consists of the following:

|                           |   | June 30, 2010 |  |   | December 31, 2009 | 
|-------------------------- | - | ------------- |  | - | ----------------- | 
|                           |   |               |  |   |                   | 
|Wu, Henian                 | $ | 876,262       |  | $ | -                 | 
|Wang, Zongfu               |   | 365,143       |  |   | -                 | 
|Huang, Junbiao             |   | 181,298       |  |   | -                 | 
|Li, Guifang                |   | 385           |  |   | -                 | 
|Q-Lite Industrial Co., Ltd |   | -             |  |   | 17,691            | 
|Tu, Jun                    |   | 275           |  |   | -                 | 
|Total                      | $ | 1,423,363     |  | $ | 17,691            | 

Ms. Yu, Zhengfei, Mr. Wang, Zongfus wife, holds 25% ownership
of Q-Lite Industrial Co., Ltd. (Q-Lite). During the six months ended June 30,
2010 and for the year ended December 31, 2009, the Company sold products to
Q-Lite in the amounts of $166,924 and $346,047 respectively.

12

---

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

NOTE 8: INCOME TAX

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

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

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

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

The effective tax rate for the Company for the six months ended
June 30, 2010 and 2009 was 42.6% and 14.8%, respectively. The effective tax rate
for the Company for the three months ended June 30, 2010 and 2009 was 9.5% and
14.7%, respectively. The difference between the effective tax rate and the tax
rate prevalent in the United States is due to the fact that 100% of our
operations are located and taxed in PRC.

Various Taxes

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

NOTE 9 - PRIVATE PLACEMENT

On February 10, 2010, concurrently with the close of the Share
Exchange, the Company conducted a private placement transaction (the Private
Placement) pursuant to which the Company sold an aggregate of 5,486,000 shares
of common stock at $1.25 per share (the shares were sold in 54.86 units, each of
which included 100,000 shares of common stock and 50,000 detachable common stock
warrants with a five year maturity). As a result, the Company received gross
proceeds in the amount of approximately $6.9 million. Warrants are five year
term from date of issuance, exercisable on a cash payable basis, callable if
the common stock closing bid price is at least $3.00 and the average trading
volume at least 100,000 shares for 15 consecutive trading days and an effective
registration is in place. At the closing of the private placement, the Company
paid a cash fee of $445,738, or 6.5% of the gross proceeds received from the
sale of the securities as placement agent commission, of which $351,488 was paid
to Hudson Securities, Inc (Hudson), and $87,750 and $6,500 was paid to SHP
Securities, LLC (SHP) and Williams Financial Group, respectively, at the
direction of Hudson. The Company incurred $108,810 in other fees and costs. As
partial consideration for placement agent service provided, the Company also
issued warrants for the purchase of an aggregate of 658,320 shares of its common
stock, exercisable for a period of five years at an exercise price of $1.25 per
share of which 553,020 warrants were issued to Hudson and its designees and
105,300 warrants were issued to SHP Securities LLC, at the direction of Hudson.
The fair value of the warrants issued to Hudson and SHP Securities is calculated
based upon the Black Scholes model and historical stock price/volatility of
stocks prices of comparable trading companies. In connection with the private
placement, the Company also issued to Hayden Communications International, Inc.
(Hayden), an investor relations consulting firm, 125,000 shares of Common
Stock as partial consideration for the consulting services provided by Hayden.

The Company issued warrants for the purchase of an aggregate of
658,320 shares of its common stock, exercisable for a period of five years at an
exercise price of $1.25 per share, of which 553,020 warrants were issued to
Hudson and its designees and 105,300 warrants were issued to SHP Securities
LLC, at the direction of Hudson. In connection with the private placement, the
Company also issued to Hayden Communications International, Inc. (Hayden), an
investor relations consulting firm, 125,000 shares of Common Stock as partial
consideration for the consulting services provided by Hayden.

13

---

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

NOTE 9 - PRIVATE PLACEMENT (CONTINUED)

In addition, the Company evaluated the warrants under ASC 815
to determine whether there is embedded feature included in the warrant
agreements that should be recorded as derivative liability, see Note 11 for
further discussion.

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

NOTE 10- COMMON STOCK WARRANTS

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

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

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

NOTE 11 - DERIVATIVE LIABILITIES

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

14

---

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

NOTE 11 - DERIVATIVE LIABILITIES (CONTINUED)

At June 30, 2010, the derivative liability was valued at
$1,883,117 using the Multinomial Lattice models. The $664,373 change in fair
value is reported in the Companys consolidated statement of operations as a
loss on derivatives.

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

June 30, 2010
    
    
    December 31, 2009Level
      1
    
    
    Level
      2
    
    
    Level
      3
    
    
    Total
    
    
    Level
      1
    
    
    Level
      2
    
    
    Level
      3
    
    
    TotalLiabilitiesDerivative liability - embedded feature of equity
    $
    -
    
    
    1,883,117
    
    
    -
    
    
    1,883,117
    
    $
    -
    
    
    -
    
    
    -
    
    
    -Total liabilities
    $
    -
    
    
    1,883,117
    
    
    -
    
    
    1,883,117
    
    $
    -
    
    
    -
    
    
    -
    
    
    -


NOTE 12: REVENUE INFORMATION AND GEOGRAPHIC INFORMATION

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

The geographic information for revenue is as follows:

|              |   | Six Months Ended June 30, | 
|------------- | - | ------------------------- | 
|              |   | 2010                      | 
|United States | $ | 84,535                    | 
|Ukraine       |   | 81,726                    | 
|Sweden        |   | 261,810                   | 
|Korea         |   | 22,184                    | 
|Japan         |   | 21,087                    | 
|Germany       |   | 114,483                   | 
|Australia     |   | 7,491                     | 
|UK            |   | -                         | 
|Taiwan        |   | 72,932                    | 
|Hong Kong     |   | 687,045                   | 
|China         |   | 28,665,897                | 
|Peru          |   | -                         | 
|Total         | $ | 30,019,190                | 

15

---

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

NOTE 13 - RECONCILIATION OF EARNINGS PER SHARE

|                                                                          | Six Months Ended June 30, |            |  | Three Months Ended June 30, |           
|------------------------------------------------------------------------- | ------------------------- | ---------- |  | --------------------------- | ----------
|                                                                          |                           | 2010       |  |                             | 2009      
|Numerator                                                                 |                           |            |  |                             |           
|Net income available to common stockholders                               | $                         | 802,578    |  | $                           | 3,092,155 
|Denominator:                                                              |                           |            |  |                             |           
|Weighted-average shares outstanding for earnings per share,
      basic   |                           | 33,175,227 |  |                             | 25,250,000
|Effect of dilutive securities:                                            |                           |            |  |                             |           
|Common stock warrants                                                     |                           | 658,320    |  |                             | -         
|Weighted-average shares outstanding for
      earnings per share, diluted |                           | 33,833,547 |  |                             | 25,250,000
|Net income per share:                                                     |                           |            |  |                             |           
|Basic                                                                     | $                         | 0.02       |  | $                           | 0.12      
|Diluted                                                                   | $                         | 0.02       |  | $                           | 0.12      

NOTE 14: LEASE COMMITMENT

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

NOTE 15: RESTATEMENT

On August 16, 2010, the Company discovered the following errors
in the Form 10-Q it filed on May 24, 2010:

| | A. | The Company issued 3,401,320 warrants in connection with
      its private placement on February 10, 2010. The warrants contain reset
      features that should be valued as a derivative liability in accordance
      with ASC 815. The Company
      failed to record Derivative Liability and related Additional Paid-in
      Capital at inception date. In addition, the Company failed to record the
      change in fair value of derivative liability between inception date and
      March 31, 2010.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | B. | The weighted average number of common shares outstanding
      is being restated to correct a clerical error.                                                                                                                                                                                                                                                                                                                                                                                                   

The following is a summary of items affected by the
corrections described above:

16

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

NOTE 15: RESTATEMENT (CONTINUED)

|                                         |   | Originally |  |  |            |   |   |            |      
|---------------------------------------- | - | ---------- |  |  | ---------- | - | - | ---------- | -----
|                                         |   | Filed      |  |  | Adjustment |   |   | Restated   |      
|March 31, 2010                           |   |            |  |  |            |   |   |            |      
|                                         |   |            |  |  |            |   |   |            |      
|Derivative liability                     | $ | -          |  |  | 2,943,977  |   | $ | 2,943,977  | A    
|Total Liabilities                        |   | 21,906,078 |  |  | 2,943,977  |   |   | 24,850,055 |      
|                                         |   |            |  |  |            |   |   |            |      
|Stockholders' Equity                     |   |            |  |  |            |   |   |            |      
|Additional paid-in capital               |   | 11,737,406 |  |  | (1,218,744 | ) |   | 10,518,662 | **A**
|Retained earnings (unrestricted)         |   | 11,817,894 |  |  | (1,725,233 | ) |   | 10,092,661 | **A**
|Total stockholders' equity               |   | 23,622,079 |  |  | (2,943,977 | ) |   | 20,678,102 |      
|Total Liabilities & Stockholders' Equity | $ | 45,528,157 |  |  |            |   | $ | 45,528,157 |      

|                                            |   | Originally |   |  |            |   |   |            |      
|------------------------------------------- | - | ---------- | - |  | ---------- | - | - | ---------- | -----
|                                            |   | Filed      |   |  | Adjustment |   |   | Restated   |      
|Three Months Ended March 31, 2010           |   |            |   |  |            |   |   |            |      
|Other income (expenses):                    |   |            |   |  |            |   |   |            |      
|Change in fair value of embedded derivative |   | -          |   |  | (1,725,233 | ) |   | (1,725,233 | )A   
|Total other expenses                        |   | (302,288   | ) |  | (1,725,233 | ) |   | (2,027,521 | )    
|Income before income taxes                  |   | 616,041    |   |  | (1,725,233 | ) |   | (1,109,192 | )    
|Net income                                  | $ | 257,866    |   |  | (1,725,233 | ) | $ | (1,467,367 | )    
|Comprehensive income                        | $ | 290,084    |   |  | (1,725,233 | ) | $ | (1,435,149 | )    
|Weighted average shares outstanding         |   |            |   |  |            |   |   |            |      
|Basic                                       |   | 26,472,055 |   |  | 3,734,056  |   |   | 30,206,111 | **B**
|Diluted                                     |   | 26,849,979 |   |  | 4,460,335  |   |   | 31,310,314 | **B**
|Earnings per share - Basic                  | $ | 0.01       |   |  | (0.06      | ) | $ | (0.05      | )A, B
|Earnings per share - Diluted                | $ | 0.01       |   |  | (0.06      | ) | $ | (0.05      | )A, B

|                                                                                                                 |   | Originally |   |  |            |   |   |            |      
|---------------------------------------------------------------------------------------------------------------- | - | ---------- | - |  | ---------- | - | - | ---------- | -----
|                                                                                                                 |   | Filed      |   |  | Adjustment |   |   | Restated   |      
|Three Months Ended March 31, 2010                                                                                |   |            |   |  |            |   |   |            |      
|                                                                                                                 |   |            |   |  |            |   |   |            |      
|Cash Flows From Operating Activities                                                                             |   |            |   |  |            |   |   |            |      
|                                                                                                                 |   |            |   |  |            |   |   |            |      
|Net
      income                                                                                                 | $ | 257,866    |   |  | (1,725,233 | ) | $ | (1,467,367 | )A   
|Adjustments
      to reconcile net income to net
      cash              provided
      by operating activities: |   |            |   |  |            |   |   |            |      
|Change in fair value of embedded derivative                                                                      |   | -          |   |  | 1,725,233  |   |   | 1,725,233  | **A**
|Net cash used in (provided by) operating activities                                                              |   | (1,147,250 | ) |  |            |   |   | (1,147,250 | )    
|                                                                                                                 |   |            |   |  |            |   |   |            |      
|Net cash used in investing activities                                                                            |   | (5,874,237 | ) |  |            |   |   | (5,874,237 | )    

|Net cash provided by financing
      activities      |   | 6,970,904 |  |  |  |  |   | 6,970,904 | 
|---------------------------------------------------- | - | --------- |  |  |  |  | - | --------- | 
|                                                     |   |           |  |  |  |  |   |           | 
|Effect of exchange rate changes on cash              |   | 154,354   |  |  |  |  |   | 154,354   | 
|Net increase (decrease) in cash and cash equivalents |   | 103,771   |  |  |  |  |   | 103,771   | 
|Cash and cash equivalents, beginning of
      period |   | 185,590   |  |  |  |  |   | 185,590   | 
|Cash and cash equivalents, end of period             | $ | 289,361   |  |  |  |  | $ | 289,361   | 

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

This report contains forward-looking statements. The
forward-looking statements are contained principally in the sections entitled
Description of Business, Risk Factors, and Management's Discussion and
Analysis of Financial Condition and Results of Operations. These statements
involve known and unknown risks, uncertainties and other factors which may cause
our actual results, performance or achievements to be materially different from
any future results, performances or achievements expressed or implied by the
forward-looking statements. These risks and uncertainties include, but are not
limited to, the factors described in the section captioned Risk Factors of our
Current Report on Form 8-K filed on February 12, 2010. In some cases, you can
identify forward-looking statements by terms such as anticipates, believes,
could, estimates, expects, intends, may, plans, potential,
predicts, projects, should, would and similar expressions intended to
identify forward-looking statements. Forward-looking statements reflect our
current views with respect to future events and are based on assumptions and
subject to risks and uncertainties. Given these uncertainties, you should not
place undue reliance on these forward-looking statements.

Also, forward-looking statements represent our estimates and
assumptions only as of the date of this report. You should read this report and
the documents that we reference and filed as exhibits to this report completely
and with the understanding that our actual future results may be materially
different from what we expect. Except as required by law, we assume no
obligation to update any forward-looking statements publicly, or to update the
reasons actual results could differ materially from those anticipated in any
forward-looking statements, even if new information becomes available in the
future.

Use of Terms

Except where the context otherwise requires and for the
purposes of this report only:

- the Company, we, us, and our refer to the combined business of
  China TMK Battery Systems Inc., a Nevada corporation (formerly, Deerfield
  Resources, Ltd.), and its wholly owned subsidiaries, Leading Asia Pacific
  Investment Limited, or Leading Asia, a BVI company, Good Wealth Capital
  Investment Limited, or Good Wealth, a Hong Kong company, and Shenzhen TMK
  Power Industries Ltd., or TMK, a PRC limited company, as the case may be;
- BVI refers to the British Virgin Islands;
- Exchange Act refers the Securities Exchange Act of 1934, as amended;
- Hong Kong refers to the Hong Kong Special Administrative Region of the
  People's Republic of China;
- PRC, China, and Chinese, refer to the People's Republic of China;
- Renminbi and RMB refer to the legal currency of China;
- SEC refers to the Securities and Exchange Commission;
- Securities Act refers to the Securities Act of 1933, as amended; and
- U.S. dollars, dollars and $ refer to the legal currency of the
  United States. Throughout this report, we have converted RMB to USD as
  follows:

|June 30, 2010                                |                             
|-------------------------------------------- | ----------------------------
|Balance sheet                                | RMB 6.80874 to
      US$1.00
|Statement of income and comprehensive income | RMB 6.81710 to US$1.00      
|                                             |                             
|June 30, 2009                                |                             
|Balance sheet                                | RMB 6.82454 to
      US$1.00
|Statement of income and comprehensive income | RMB 6.82268 to US$1.00      

Overview

We were incorporated under the laws of the State of Nevada on
June 21, 2006. We were originally formed as an exploration stage company to
engage in the search for mineral deposits or reserves. From inception through
September 2007, we conducted preliminary exploration activities on certain properties in White Bay,
Newfoundland, Canada, on which we held six gold mining claims, pursuant to the
Claim Purchase Agreement. Our activities included the conduct of preliminary
geological mapping and trenching on the properties, which determined that there
were no economic quantities of minerals or reserves whatsoever on any of the
properties. From September 2008 through to the date of our reverse acquisition,
discussed below, we were a shell company with no operations and our sole purpose
was to locate and consummate a merger or acquisition with a private entity. As a
result of the reverse acquisition transaction, discussed below, we terminated
the Claim Purchase Agreement and are now engaged in the design, development,
manufacture and sale of environmentally-friendly nickel-metal hydride cell, or
Ni-MH, rechargeable batteries in China, through our wholly owned PRC subsidiary,
TMK.

18

---

We produce and sell high-rate SC, C, D, and F Ni-MH batteries
primarily to manufacturers that produce mechanical devices to clients worldwide.
Our products are commonly used to power 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. We
are actively seeking opportunities to expand into the Lithium-Ion battery space
through leveraging our lithium battery patent and those of our customers who
purchase both nickel-metal hydride and Lithium-Ion batteries, and opportunities
to design and distribute batteries for use in telecommunications, traffic
control, and traffic lighting applications. We have developed and sent working
prototypes of both nickel-metal hydride battery and Lithium-Ion battery to some
of our customers for testing and expect to roll out new products before the end
of 2010. More recently, we have developed a working prototype of a hybrid
electric vehicle battery pack and are producing sample cells for testing an
electric vehicle battery pack. To expand our business into the hybrid electric
vehicle and electric vehicle markets, we plan to establish an advanced power
battery research and development center, set up a battery-production base for
small scale testing, production and establishing a cooperation application
demonstration point with 1-3 vehicle producers to lay a solid foundation for the
approval of the project and for the support of the government. To date, we have
entered into letters of intent with two automobile companies in China for the
sale of our hybrid electric vehicle battery packs.

We 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.

Second Quarter of 2010 Financial Performance Highlights

The following are some financial highlights for the three
months ended June 30, 2010:

- Revenue: Revenue increased $5.4 million, or 47.3%, to $16.8 million
  for the three months ended June 30, 2010, from $11.4mil for the same period in
  2009.
- Income from operations: Income from operations decreased $0.5
  million, or 21.5%, to $1.7 million for the three months ended June 30, 2010,
  from $2.2 million for the same period in 2009.
- Net income: Net income increased $0.5 million, or 28.9%, to $2.3
  million for the three months ended June 30, 2010, from $1.8 million for the
  same period in 2009.
- Fully diluted net income per share: Fully diluted net income per
  share was $0.06 for the three months ended June 30, 2010, as compared to $0.07
  for the same period in 2009.

Results of Operations

The following table sets forth key components of our results of
operations during the three month periods ended June 30, 2010 and 2009,
respectively, both in dollars and as a percentage of our net sales. As the
acquisition of Leading Asia, Good Wealth and TMK was entered into on February
10, 2010 and acquisition of Borou on July 14, 2009 and during the periods
indicated such entities were the only entities in our combined business that had
operations, the results of operations below refer only to that of Leading Asia,
Good Wealth, Borou and TMK.

19

---

For the Three-Month Periods Ended June 30, 2010 and 2009
(Unaudited)

|                                                  |  | For the Three Months Ended |  
|------------------------------------------------- |  | -------------------------- | -
|                                                  |  | June 30,                   |  
|                                                  |  | 2010                       |  
|                                                  |  |                            |  
|                                                  |  |                            |  
|                                                  |  |                            |  
|                                                  |  |                            |  
|Revenue                                           |  | 16,754,718                 |  
|Cost of Goods Sold                                |  | (13,375,438                | )
|                                                  |  |                            |  
|Gross Profit                                      |  | 4,108,537                  |  
|                                                  |  |                            |  
|                                                  |  |                            |  
|Operating Costs and Expenses                      |  |                            |  
|Selling expenses                                  |  | 498,088                    |  
|                                                  |  |                            |  
|Depreciation                                      |  | 49,074                     |  
|                                                  |  |                            |  
|General and
      administrative                  |  | 811,643                    |  
|                                                  |  |                            |  
|Research and development                          |  | 328,150                    |  
|                                                  |  |                            |  
|Total operating expenses                          |  | 1,686,955                  |  
|Income from operations                            |  | 1,692,325                  |  
|Other income (expenses):                          |  |                            |  
|                                                  |  |                            |  
|Interest expense                                  |  | (244,883                   | )
|Change
      in fair value of Embedded derivative |  | 1,060,860                  |  
|                                                  |  |                            |  
|Other
      income, net                           |  | 26                         |  
|Total other income
      (expenses)               |  | 816,003                    |  
|                                                  |  |                            |  
|Income before income taxes                        |  | 2,508,328                  |  
|Income taxes                                      |  | (238,383                   | )
|Net income                                        |  | 2,269,945                  |  

Sales Revenue. Our sales revenue increased to
$16.8 million in the three months ended June 30, 2010 from $11.4 million in the
same period in 2009, representing a 47.3% increase period-over-period. The
increase in revenue is due to the increase in customer demand.

Cost of Sales. Our cost of sales increased $4.8
million, or 55.7%, to $13.4 million in the three months ended June 30, 2010 from
$8.6 million in the same period in 2009. The increase of cost of sales is mainly
due to growth of sales revenue. In addition, the Company made additional bonus payments to its employees as a
consideration of their contributions to the Companys growth in the past few
years. The Company does not expect same type of payments in next two years.

20

---

Gross Profit and Gross Margin. Our gross profit
increased $0.6 million, or 21.2%, to $3.4 million in the three months ended June
30, 2010 from $2.8 million in the same period in 2009. The increase of gross
profit is primarily due to growth of sales revenue. Our gross margin is 20.2% in
second quarter of 2010 compared to 24.5% in the same period last year.

Selling expenses, Our selling expenses, were $0.5
million for the three months ended June 30, 2010, an increase of $0.3 million,
or 143.1%, compared to $0.2 million for the same period in 2009. The increase
was primarily due to an increase in sales compensation including sales
commission as a percentage of sales revenue and marketing activities.

Administrative Expenses. Our administration
expense was $0.3 million in the three months ended June 30, 2010 and 0.8 million
in the same period in 2009. The increase is related 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. The Company does not
expect any welfare payments in next two years. Excluding this factor, the
administration expense is consistent with costs incurred in the same period of
prior year.

Research and Development Expenses. Our research
and development expenses consist of the costs associated with research and
development personnel and expense in research and development projects. Our
research and development expenses increased 161.0%, to $0.3 million in the three
months ended June 30, 2010 from $0.1 million in the same period in 2009 due to
the increase of R&D personnel. The company deemed that future growth would
depend on increased investment in R&D.

Operating ExpenseOperating expense was 1.7
million in the three months ended June 30, 2010 compare to $0.6 million in the
same period last year. It is due to increase in selling expense and R&D
investment as a result of revenue growth as well as welfare payments made in
second quarter.

Change in Fair Value of Embedded Derivative 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,
embedded feature of warrants is classified as derivative liability. The gain
from change in fair value of derivative liability represents the difference of
fair value between March 31, 2010 and June 30, 2010.

Income Before Income Taxes. Our income before
income taxes increased by $0.4 million, or 21.6%, to $2.5 million in the three
months ended June 30, 2010 from $2.1 million in the same period in 2009. The
increase of income before income taxes is due to increase of sales revenue as
well as gain in fair value of derivative liability offset by increase in
administration expense, selling expense and R&D investment.

Income Taxes. We incurred $0.2 million income tax
expenses in the three months ended June 30, 2010, as compared to $0.3 million in
the same period in 2009. The income tax expense decreased compared to the same
period in 2009 due to the fact that the gain of $1.0 million from change in fair
value of derivative liability was incurred on US shell company level therefore
was not subject to any income taxes.

Net Income. Net income was $2.3 million for the
three months ended June 30, 2010, an increase of $0.5 million, or 28.9%,
compared to $1.8 million for the same period in 2009.

21

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For the Six-Month Periods Ended June 30, 2010 and 2009
(Unaudited)

|                                                    | For the Six
      Months Ended |            
|--------------------------------------------------- | ------------------------------ | -----------
|                                                    | June 30,                       |            
|                                                    |                                | 2010       
|                                                    |                                |            
|                                                    |                                |            
|Revenue                                             |                                | 30,019,190 
|Cost of Goods Sold                                  |                                | (23,481,135
|Gross Profit                                        |                                | 7,267,312  
|                                                    |                                |            
|                                                    |                                |            
|Operating Costs and Expenses                        |                                |            
|Selling
      expenses                              |                                | 732,806    
|Depreciation                                        |                                | 66,579     
|General
      and administrative                    |                                | 2,634,622  
|Research and development                            |                                | 493,394    
|Total
      operating expenses                      |                                | 3,927,401  
|Income from operations                              |                                | 2,610,654  
|                                                    |                                |            
|Other income (expenses):                            |                                |            
|Interest
      expense                              |                                | (486,790   
|Change in
      market value of Embedded derivative |                                | (664,373   
|Other
      income, net                             |                                | (60,355    
|Total other expenses                                |                                | (1,211,518 
|                                                    |                                |            
|Income before income taxes                          |                                | 1,399,136  
|Income taxes                                        |                                | (596,558   
|Net income                                          |                                | 802,578    

Sales Revenue. Our sales revenue increased to
$30.0 million in the six months ended June 30, 2010 from $21.3 million in the
same period in 2009, representing a 41.1% increase period-over-period. The
increase in revenue is due to the increase in customer demand.

Cost of Sales. Our cost of sales increased $7.4
million, or 46.0%, to $23.5 million in the six months ended June 30, 2010 from
$16.1 million in the same period in 2009. The increase of cost of sales is
consistent with growth rate of sales revenue. In addition, the Company made
additional bonus payments to its employees as a consideration of their
contributions to the Companys growth in the past few years in second quarter..
The Company does not expect same type of payments in next two years.

Gross Profit and Gross Margin. Our gross profit
increased $1.3 million, or 25.7%, to $6.5 million in the six months ended June
30, 2010 from $5.2 million in the same period in 2009. The increase of gross
profit is primarily due to growth of our sales revenue. Our gross margin is
21.8% in second quarter of 2010 compared to 24.4% in the same period last
year.

Selling expenses, Our selling expenses, were $0.7
million for the six months ended June 30, 2010, an increase of $0.3 million, or
84.9%, compared to $0.4 million for the same period in 2009. The increase was
primarily due to an increase in sales compensation including sales commission as
a percentage of sales revenue and marketing activities.

Administrative Expenses. Our administration
expenses increased $2.1 million, or 366.2%, to $2.6 million in the six months
ended June 30, 2010 from $0.6 million in the same period in 2009. The increase
is primarily due to $1.77 million of merger cost incurred in the first quarter
of 2010 in connection with TMK's reverse acquisition. In addition, the Company
paid $0.5 million one-time welfare to employees (excluding management level) as
a consideration of their efforts to the Companys going public activity. The
Company does not expect any welfare payments in next two years. Excluding these
two factors, our administration expenses would show a decrease trend.

22

---

Research and Development Expenses. Our research
and development expenses consist of the costs associated with research and
development personnel and expense in research and development projects. Our
research and development expenses increased 107.5%, to $0.5 million in the six
months ended June 30, 2010 from $0.2 million in the same period in 2009 due to
the increase in R&D personnel. The company is committed to increase R&D
investment to fuel future growth.

Operating ExpenseOperating expense was $3.9
million in the six months ended June 30, 2010 compare to $1.3 million in the
same period last year. The increase is primarily due to $1.77 million of merger
cost incurred in second quarter in 2010 in connection with TMK's reverse
acquisition as well as welfare payments made in second quarter. Excluding these
factors, the increase rate of operation expense is lower than the growth rate of
revenue.

Change in Fair Value of Embedded Derivative 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,
embedded feature of warrants is classified as derivative liability. The loss
from change in fair value of derivative liability is the difference of fair
value between February 10, 2010 (inception) and June 30, 2010.

Income Before Income Taxes. Our income before
income taxes decreased by 33.8%, to $2.6 million in the six months ended June
30, 2010 from $3.9 million in the same period in 2009. Revenue increase 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 $0.6 million income tax
expenses in the six months ended June 30, 2010, as compared to $0.5 million in
the same period in 2009. The income taxes increased in the six months ended June
30, 2010 vs. same period in 2009 even though income before income taxes
decreased in the six months ended June 30, 2010 vs. same period in 2009. The
reason was that merger cost of $1.77 million and loss of $0.7 million from
change in fair value of derivative liability were incurred on US shell company
level which was not subject to any income taxes.

Net Income. Net income was $0.8 million for the
six months ended June 30, 2010, a decrease of $2.3 million, or 74%, compared to
$3.1 million for the same period in 2009.

Liquidity and Capital Resources

As of June 30, 2010, we had cash and cash equivalents of $0.93
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:

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

|                                                          |  | For the Six Months Ended |  
|--------------------------------------------------------- |  | ------------------------ | -
|                                                          |  | June 30,                 |  
|                                                          |  | 2010                     |  
|                                                          |  |                          |  
|Net cash used in (provided by) operating
      activities |  | (1,991,201               | )
|Net cash used in investing activities                     |  | (5,446,965               | )
|Net cash provided by financing
      activities           |  | 8,131,207                |  
|Effect of exchange rate changes on cash                   |  | 48,155                   |  
|Net increase in cash and cash
      equivalents           |  | 741,196                  |  

|Cash and cash equivalents, beginning of period |   | 185,590 |  |   | 186,463 | 
|---------------------------------------------- | - | ------- |  | - | ------- | 
|Cash and cash equivalents, end of period       | $ | 926,786 |  | $ | 442,827 | 

23

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Operating activities

Net cash used in operating activities was $2.0 million for the
six months ended June 30, 2010, as compared to $0.2 million net cash provided by
operating activities for the same period in 2009. The decrease in net cash
provided in operating activities was primarily due to decrease in net income and
increase in inventories and AR. The decrease is partially offset by the increase
in accounts payable.

Investing activities

Net cash used in investing activities for the six months ended
June 30, 2010 was $5.4 million, as compared to $5.2 million net cash used in
investing activities for the same period of 2009. The increase of net cash used
in investing activities was mainly attributable to the deposit for Hualian
acquisition offset by the decrease of purchase and advance for property and
equipment purchase.

Financing activities

Net cash provided by financing activities for the six months
ended June 30, 2010 was $8.1 million, as compared to $5.2 million net cash
provided by financing activities for the same period of 2009. The increase of
net cash provided by financing activities was mainly attributable to completion
of two private placements in the first and second quarter of 2010. The increase
is partially offset by the decrease in bank loans and payment to former owners
in six months ended June 30, 2010.

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

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 the price change in travel industry and
continually maintain effective cost control in operations.

Off Balance Sheet Arrangements

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

Seasonality

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

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Significant Accounting Policies

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

Revenue recognition

The Company generates revenues from the sales of
environment-friendly batteries including nickel metal hydride batteries. Sales
are recognized when the following four revenue criteria are met: persuasive
evidence of an arrangement exists, delivery has occurred, the selling price is
fixed or determinable, and collectability is reasonably assured. Sales are
presented net of VAT. No return allowance is made as products returns are
insignificant based on historical experience.

Use of estimates

The preparation of financial statements in conformity with
generally accepted accounting principles, or GAAP, in the United States of
American. GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, disclosure of contingent assets
and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting year. Because of the use
of estimates inherent in the financial reporting process, actual results could
differ from those estimates.

Accounts receivable

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

Impairment of long-lived assets

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

Comprehensive income

The Company reports comprehensive income, its components, and
accumulated balances in its financial statements. Accumulated other
comprehensive income represents the accumulated balance of foreign currency
translation adjustments. No other items of comprehensive income are present.

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Foreign currency

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

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK.

Not Applicable.

ITEMS 4 AND 4A(T). CONTROLS AND PROCEDURES.

Evaluation of disclosure controls and procedures

Disclosure controls and procedures are controls and other
procedures that are designed to ensure that information required to be disclosed
by us in the reports that we file or submit under the Securities Exchange Act of
1934, as amended (the Exchange Act) is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by the Company in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the SECs rules and forms and that information
required to be disclosed by us in the reports that we file or submit under the
Exchange Act is accumulated and communicated to our management, including our
principal executive and financial officers, as appropriate to allow timely
decisions regarding required disclosure.

As of the end of the period covered by this Quarterly Report,
we conducted an evaluation, under the supervision and with the participation of
our Chief Executive Officer and Chief Financial Officer, of our disclosure
controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the
Exchange Act). Based upon this evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that the Companys disclosure controls and
procedures are not effective as of June 30, 2010 due to the deficiencies
described below.

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

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

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

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Changes in Internal Control over Financial Reporting

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

ITEM 1A. RISK FACTORS.

Not applicable.

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

We have not sold any equity securities during the quarter ended
June 30, 2010 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 May 1, 2010, the Board of Directors appointed Mr. Jin Hu to
serve as our Chief Financial Officer. Mr. Hu is a CPA certified in Virginia with
a diverse background in corporate finance, accounting and investment with
leading companies in a variety of industries. Prior to joining us, Mr. Hu acted
as financial controller with Johnson & Johnson in Beijing from June 2009 to
April 2010, where he worked closely with senior management to drive the Multiple
Specialty pharmaceutical business unit with 60% sales growth rate and over 100%
net profit growth rate in 2009. Prior to that, he served, from August 2008 to
January 2009, as an internal consultant with Citigroup in New York to conduct
research on industry trends and to evaluate new services to company clients, and
from May 2006 to May 2008, worked at Ernst & Young in Washington D.C to
perform both financial and IT auditing for clients including Capital One,
NASDAQ, Marriott, and United States Department of Health and Human Services. Mr.
Hu also served, from November 2003 to May 2006, as a member of the corporate
finance team at McKesson Corporation, and worked, from September 2000 to
November 2003, as a senior analyst at Stock-Trak Inc. in Atlanta. Mr. Hu earned
his Masters Degree in Business Administration from Cornell University, and a
dual Masters Degree in Computer Information Systems and Accounting from Georgia
State University. He studied in a university in China for three years and then transferred to
Louisiana Tech University where he received his Bachelors Degree in accounting.

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Other than the item reported above, we have no information to
include that was required to be but was not disclosed in a report on Form 8-K
during the period covered by this Form 10-Q. There have been no material changes
to the procedures by which security holders may recommend nominees to our Board
of Directors.

ITEM 6. EXHIBITS.

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

|Exhibit |                                                                                                                
|------- | ---------------------------------------------------------------------------------------------------------------
|Number  | Description                                                                                                    
|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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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 16, 2010 | /s/ Henian
      Wu                                                 
|                       | Henian Wu                                                           
|                       | Chairman                                                            
|                       | (Principal Executive Officer)                                       
|                       |                                                                     
|                       |                                                                     
|                       |                                                                     
|Dated: August 16, 2010 | /s/ Jin
      Hu                                                    
|                       | Jin Hu                                                              
|                       | Chief Financial Officer                                             
|                       | (Principal Financial Officer and Principal
      Accounting Officer)

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EXHIBIT INDEX

|Exhibit |                                                                                                                
|------- | ---------------------------------------------------------------------------------------------------------------
|Number  | Description                                                                                                    
|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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