UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
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 September 30,
2010





 ̈
            Transition Report Pursuant to
      Section 13 or 15(d) of The Securities Exchange Act of 1934 for the
      Transition Period from _______ to
_______





Commission
File Number: 000-50155







NF
Energy Saving Corporation


(Exact
name of registrant as specified in its charter)








Delaware
              02-0563302(State
      or Other Jurisdiction of
                incorporation
      or organization)
              (I.R.S.
      Employer
                Identification
      No.)





Room
3105, Block C, 390 Qingnian Avenue, HePing District


Shenyang, P. R. China
110003


(Address
of Principal Executive Offices)





(8624)
8563-1159


(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.    xYes ̈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.




Large
      accelerated filer  ̈
                Accelerated
      filer  ̈Non-accelerated
      filer    ̈
                Smaller
      reporting company x




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





As of October 31, 2010, the registrant had 5,326,485
shares of common stock, $0.001 par value, issued and
outstanding.








CAUTIONARY
STATEMENT REGARDING FORWARD LOOKING INFORMATION




The
discussion contained in this 10-Q under the Securities Exchange Act of 1934, as
amended, contains forward-looking statements that involve risks and
uncertainties. The issuer's actual results could differ significantly from those
discussed herein. These include statements about our expectations, beliefs,
intentions or strategies for the future, which we indicate by words or phrases
such as "anticipate," "expect," "intend," "plan," "will," "we believe," "the
Company believes," "management believes" and similar language, including those
set forth in the discussions under "Notes to Financial Statements" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations " as well as those discussed elsewhere in this Form 10-Q. We base our
forward-looking statements on information currently available to us, and we
assume no obligation to update them. Statements contained in this Form 10-Q that
are not historical facts are forward-looking statements that are subject to the
"safe harbor" created by the Private Securities Litigation Reform Act of
1995.


- 1
-




TABLE
OF CONTENTS





PART
I – FINANCIAL INFORMATION





Item
      1. Financial Statements
                  
                  F-1Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations
                  
                  3Item
      3. Quantitative and Qualitative Disclosures About Market
    Risk
                  
                  15Item
      4T. Controls and Procedures
                  
                  15PART
      II – OTHER INFOMRATIONItem
      1. Legal Proceedings
                  
                  15Item
      1A. Risk Factors
                  
                  16Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
                  
                  16Item
      3. Defaults Upon Senior Securities
                  
                  16Item
      4. [Reserved]
                  
                  16Item
      5. Other Information
                  
                  16Item
      6. Exhibits
                  
                  16Signatures
                  
                  17


- 2
-


PART
I – FINANCIAL INFORMATION





NF
ENERGY SAVING CORPORATION





INDEX
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





(UNAUDITED)





PageCondensed
      Consolidated Sheets as of September 30, 2010 and December 31,
      2009
                
                F-2Condensed
      Consolidated s of Operations And Comprehensive Income for the Three and
      Nine Months ended September 30, 2010 and 2009
                
                F-3Condensed
      Consolidated for the Nine Months ended September 30, 2010 and
      2009
                
                F-4Condensed
      Consolidated of Stockholders’ Equity for the Nine Months ended September
      30, 2010
                
                F-5Notes
      to Condensed Consolidated Financial Statements
                
                F-6
      to F-22


F-1


NF
ENERGY SAVING CORPORATION


CONDENSED
CONSOLIDATED BALANCE SHEETS


AS
OF SEPTEMBER 30, 2010 AND DECEMBER 31, 2009


(Currency
expressed in United States Dollars (“US$”), except for number of
shares)





September 30, 2010
                                
                                
                                December 31, 2009(Unaudited)
                                
                                
                                (Audited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                                
                                $
                                491,844
                                
                                
                                $
                                227,329Accounts
      receivable, trade
                                
                                
                                11,237,197
                                
                                
                                
                                12,510,875Retention
      receivable, current
                                
                                
                                649,542
                                
                                
                                
                                874,759Inventories
                                
                                
                                1,583,246
                                
                                
                                
                                638,775Deferred
      tax assets
                                
                                
                                1,437
                                
                                
                                
                                1,408Prepayments
      and other receivables
                                
                                
                                1,564,466
                                
                                
                                
                                603,456Total
      current assets
                                
                                
                                15,527,732
                                
                                
                                
                                14,856,602Retention
      receivable, non-current
                                
                                
                                418,468
                                
                                
                                
                                -Plant
      and equipment, net
                                
                                
                                2,028,114
                                
                                
                                
                                2,169,740Construction
      in progress
                                
                                
                                12,808,645
                                
                                
                                
                                9,045,332TOTAL
      ASSETS
                                
                                $
                                30,782,959
                                
                                
                                $
                                26,071,674LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable, trade
                                
                                $
                                2,734,320
                                
                                
                                $
                                2,055,839Customer
      deposits
                                
                                
                                53,667
                                
                                
                                
                                152,850Income
      tax payable
                                
                                
                                315,247
                                
                                
                                
                                201,480Convertible
      promissory notes, net
                                
                                
                                486,843
                                
                                
                                
                                -Current
      portion of obligation under finance lease
                                
                                
                                572,400
                                
                                
                                
                                437,917Amount
      due to a related party
                                
                                
                                188,500
                                
                                
                                
                                -Other
      payables and accrued liabilities
                                
                                
                                619,443
                                
                                
                                
                                1,928,494Total
      current liabilities
                                
                                
                                4,970,420
                                
                                
                                
                                4,776,580Long-term
      liabilities:Obligation
      under finance lease
                                
                                
                                108,809
                                
                                
                                
                                675,809TOTAL
      LIABILITIES
                                
                                
                                5,079,229
                                
                                
                                
                                5,452,389Commitments
      and contingenciesStockholders’
      equity:Common
      stock, $0.001 par value; 50,000,000 shares authorized; 5,326,485 and
      5,326,485 shares issued and outstanding, respectively
                                
                                
                                5,326
                                
                                
                                
                                5,326Additional
      paid-in capital
                                
                                
                                8,728,906
                                
                                
                                
                                7,977,221Statutory
      reserve
                                
                                
                                1,449,345
                                
                                
                                
                                1,449,345Accumulated
      other comprehensive income
                                
                                
                                1,873,878
                                
                                
                                
                                1,348,382Retained
      earnings
                                
                                
                                13,646,275
                                
                                
                                
                                9,839,011Total
      stockholders’ equity
                                
                                
                                25,703,730
                                
                                
                                
                                20,619,285TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
                                
                                $
                                30,782,959
                                
                                
                                $
                                26,071,674





See
accompanying notes to condensed consolidated financial
statements.


F-2


NF
ENERGY SAVING CORPORATION


CONDENSED
CONSOLIDATED STATEMENTS OF


OPERATIONS
AND COMPREHENSIVE INCOME


FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009


(Currency
expressed in United States Dollars (“US$”), except for number of
shares)


(Unaudited)





Three months ended September 30,
                                            
                                            
                                            Nine months ended September 30,2010
                                            
                                            
                                            2009
                                            
                                            
                                            2010
                                            
                                            
                                            2009REVENUES,
      NETProducts
                                            
                                            $
                                            3,680,336
                                            
                                            
                                            $
                                            6,697,102
                                            
                                            
                                            $
                                            9,845,180
                                            
                                            
                                            $
                                            13,426,663Services
                                            
                                            
                                            3,987,846
                                            
                                            
                                            
                                            869,319
                                            
                                            
                                            
                                            7,506,297
                                            
                                            
                                            
                                            1,778,294Project
                                            
                                            
                                            377,176
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            752,333
                                            
                                            
                                            
                                            -Total
      revenues, net
                                            
                                            
                                            8,045,358
                                            
                                            
                                            
                                            7,566,421
                                            
                                            
                                            
                                            18,103,810
                                            
                                            
                                            
                                            15,204,957COST
      OF REVENUES:Cost
      of products
                                            
                                            
                                            2,569,018
                                            
                                            
                                            
                                            4,200,439
                                            
                                            
                                            
                                            6,833,561
                                            
                                            
                                            
                                            9,016,453Cost
      of services
                                            
                                            
                                            2,318,911
                                            
                                            
                                            
                                            647,932
                                            
                                            
                                            
                                            5,103,747
                                            
                                            
                                            
                                            1,266,213Cost
      of project
                                            
                                            
                                            308,028
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            614,406
                                            
                                            
                                            
                                            -Total
      cost of revenues
                                            
                                            
                                            5,195,957
                                            
                                            
                                            
                                            4,848,371
                                            
                                            
                                            
                                            12,551,714
                                            
                                            
                                            
                                            10,282,666GROSS
      PROFIT
                                            
                                            
                                            2,849,401
                                            
                                            
                                            
                                            2,718,050
                                            
                                            
                                            
                                            5,552,096
                                            
                                            
                                            
                                            4,922,291OPERATING
      EXPENSES:Sales
      and marketing
                                            
                                            
                                            25,786
                                            
                                            
                                            
                                            32,040
                                            
                                            
                                            
                                            58,438
                                            
                                            
                                            
                                            106,493General
      and administrative
                                            
                                            
                                            290,972
                                            
                                            
                                            
                                            193,955
                                            
                                            
                                            
                                            644,482
                                            
                                            
                                            
                                            533,201Stock
      based compensation
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            349,000Total
      operating expenses
                                            
                                            
                                            316,758
                                            
                                            
                                            
                                            225,995
                                            
                                            
                                            
                                            702,920
                                            
                                            
                                            
                                            988,694INCOME
      FROM OPERATIONS
                                            
                                            
                                            2,532,643
                                            
                                            
                                            
                                            2,492,055
                                            
                                            
                                            
                                            4,849,176
                                            
                                            
                                            
                                            3,933,597Other
      (expense) income:Interest
      income
                                            
                                            
                                            193
                                            
                                            
                                            
                                            1,493
                                            
                                            
                                            
                                            787
                                            
                                            
                                            
                                            10,498Other
      income
                                            
                                            
                                            -
                                            
                                            
                                            
                                            4
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            10,165Subsidy
      income
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            33,613Interest
      expense
                                            
                                            
                                            (152,369
                                            )
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (387,149
                                            )
                                            
                                            
                                            -Total
      other (expense) income
                                            
                                            
                                            (152,176
                                            )
                                            
                                            
                                            1,497
                                            
                                            
                                            
                                            (386,362
                                            )
                                            
                                            
                                            54,276INCOME
      BEFORE INCOME TAXES
                                            
                                            
                                            2,380,467
                                            
                                            
                                            
                                            2,493,552
                                            
                                            
                                            
                                            4,462,814
                                            
                                            
                                            
                                            3,987,873Income
      tax expense
                                            
                                            
                                            (310,705
                                            )
                                            
                                            
                                            (317,084
                                            )
                                            
                                            
                                            (655,550
                                            )
                                            
                                            
                                            (560,544
                                            )NET
      INCOME
                                            
                                            $
                                            2,069,762
                                            
                                            
                                            $
                                            2,176,468
                                            
                                            
                                            $
                                            3,807,264
                                            
                                            
                                            $
                                            3,427,329Other
      comprehensive income:–
      Foreign currency translation gain
                                            
                                            
                                            429,251
                                            
                                            
                                            
                                            26,493
                                            
                                            
                                            
                                            525,496
                                            
                                            
                                            
                                            66,822COMPREHENSIVE
      INCOME
                                            
                                            $
                                            2,499,013
                                            
                                            
                                            $
                                            2,202,961
                                            
                                            
                                            $
                                            4,332,760
                                            
                                            
                                            $
                                            3,494,151Net
      income per share:–
      Basic
                                            
                                            $
                                            0.39
                                            
                                            
                                            $
                                            0.41
                                            
                                            
                                            $
                                            0.71
                                            
                                            
                                            $
                                            0.64–
      Diluted
                                            
                                            $
                                            0.38
                                            
                                            
                                            $
                                            0.40
                                            
                                            
                                            $
                                            0.70
                                            
                                            
                                            $
                                            0.64Weighted
      average common stock outstanding:–
      Basic
                                            
                                            
                                            5,326,485
                                            
                                            
                                            
                                            5,316,555
                                            
                                            
                                            
                                            5,326,485
                                            
                                            
                                            
                                            5,316,555–
      Diluted
                                            
                                            
                                            5,413,819
                                            
                                            
                                            
                                            5,496,555
                                            
                                            
                                            
                                            5,401,019
                                            
                                            
                                            
                                            5,389,128





See
accompanying notes to condensed consolidated financial
statements.


F-3


NF
ENERGY SAVING CORPORATION


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009


(Currency
expressed in United States Dollars (“US$”))


(Unaudited)





Nine months ended September 30,2010
                                                
                                                
                                                2009Cash
      flows from operating activities:Net
      income
                                                
                                                $
                                                3,807,264
                                                
                                                
                                                $
                                                3,427,329Adjustments
      to reconcile net income to net cash provided by operating
      activitiesDepreciation
                                                
                                                
                                                218,760
                                                
                                                
                                                
                                                233,085Stock
      based compensation
                                                
                                                
                                                -
                                                
                                                
                                                
                                                349,000(Gain)
      loss on disposal of plant and equipment
                                                
                                                
                                                (223
                                                )
                                                
                                                
                                                4,844Warrant
      expenses, non-cash
                                                
                                                
                                                278,528
                                                
                                                
                                                
                                                -Change
      in operating assets and liabilities:Accounts
      receivable, trade
                                                
                                                
                                                1,506,879
                                                
                                                
                                                
                                                (3,713,394
                                                )Retention
      receivable
                                                
                                                
                                                (172,046
                                                )
                                                
                                                
                                                (435,252
                                                )Inventories
                                                
                                                
                                                (915,044
                                                )
                                                
                                                
                                                712,676Prepayments
      and other receivables
                                                
                                                
                                                (870,742
                                                )
                                                
                                                
                                                (165,247
                                                )Accounts
      payable, trade
                                                
                                                
                                                624,753
                                                
                                                
                                                
                                                1,651,801Customer
      deposits
                                                
                                                
                                                (100,580
                                                )
                                                
                                                
                                                (5,286
                                                )Income
      tax payable
                                                
                                                
                                                107,681
                                                
                                                
                                                
                                                317,003Other
      payables and accrued liabilities
                                                
                                                
                                                (1,323,997
                                                )
                                                
                                                
                                                370,515Net
      cash provided by operating activities
                                                
                                                
                                                3,161,233
                                                
                                                
                                                
                                                2,747,074Cash
      flows from investing activities:Purchase
      of plant and equipment
                                                
                                                
                                                (36,345
                                                )
                                                
                                                
                                                (179,089
                                                )Payments
      to construction in progress
                                                
                                                
                                                (3,513,416
                                                )
                                                
                                                
                                                (3,317,133
                                                )Proceeds
      from disposal of plant and equipment
                                                
                                                
                                                1,254
                                                
                                                
                                                
                                                7,869Net
      cash used in investing activities
                                                
                                                
                                                (3,548,507
                                                )
                                                
                                                
                                                (3,488,353
                                                )Cash
      flows from financing activities:Advance
      from a director
                                                
                                                
                                                188,500
                                                
                                                
                                                
                                                -Payments
      on finance lease
                                                
                                                
                                                (447,738
                                                )
                                                
                                                
                                                (1,075,731
                                                )Proceeds
      from private placement
                                                
                                                
                                                900,000
                                                
                                                
                                                
                                                -Net
      cash provided by (used in) financing activities
                                                
                                                
                                                640,762
                                                
                                                
                                                
                                                (1,075,731
                                                )Effect
      on exchange rate change on cash and cash equivalents
                                                
                                                
                                                11,027
                                                
                                                
                                                
                                                30,008NET
      CHANGE IN CASH AND CASH EQUIVALENTS
                                                
                                                
                                                264,515
                                                
                                                
                                                
                                                (1,787,002
                                                )BEGINNING
      OF PERIOD
                                                
                                                
                                                227,329
                                                
                                                
                                                
                                                2,252,771END
      OF PERIOD
                                                
                                                $
                                                491,844
                                                
                                                
                                                $
                                                465,769SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Cash
      paid for income taxes
                                                
                                                $
                                                547,869
                                                
                                                
                                                $
                                                243,100Cash
      paid for interest
                                                
                                                $
                                                55,661
                                                
                                                
                                                $
                                                -SUPPLEMENTAL
      DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:Settlement
      of note payable to offset with accounts receivable
                                                
                                                $
                                                528,138
                                                
                                                
                                                $
                                                -Equipment
      purchased under finance leases
                                                
                                                $
                                                -
                                                
                                                
                                                $
                                                2,331,019





See
accompanying notes to condensed consolidated financial
statements.


F-4


NF
ENERGY SAVING CORPORATION


CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2010


(Currency
expressed in United States Dollars (“US$”), except for number of
shares)


(Unaudited)




Common
      stock
                            
                            
                            Additional
                            
                            
                            Statutory
                            
                            
                            Accumulated
                              other
                              comprehensive
                            
                            
                            Retained
                            
                            
                            Total
                              stockholders’No.
      of shares
                            
                            
                            Amount
                            
                            
                            paid-in
      capital
                            
                            
                            reserve
                            
                            
                            income
                            
                            
                            earnings
                            
                            
                            equityBalance
      as of January 1, 2010, as restated
                            
                            
                            5,326,485
                            
                            
                            $
                            5,326
                            
                            
                            $
                            7,977,221
                            
                            
                            $
                            1,449,345
                            
                            
                            $
                            1,348,382
                            
                            
                            $
                            9,839,011
                            
                            
                            $
                            20,619,285Beneficial
      conversion feature and warrants granted in connection with convertible
      promissory notes
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            751,685
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            751,685Foreign
      currency translation adjustment
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            525,496
                            
                            
                            
                            -
                            
                            
                            
                            525,496Net
      income for the period
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            3,807,264
                            
                            
                            
                            3,807,264Balance
      as of September 30, 2010
                            
                            
                            5,326,485
                            
                            
                            $
                            5,326
                            
                            
                            $
                            8,728,906
                            
                            
                            $
                            1,449,345
                            
                            
                            $
                            1,873,878
                            
                            
                            $
                            13,646,275
                            
                            
                            $
                            25,703,730


See
accompanying notes to condensed consolidated financial
statements.


F-5


NF
ENERGY SAVING CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2010


(Currency
expressed in United States Dollars (“US$”), except for number of
shares)


(Unaudited)





NOTE-1
              BASIS
      OF PRESENTATION





The
accompanying unaudited condensed consolidated financial statements have been
prepared by management in accordance with both accounting principles generally
accepted in the United States (“GAAP”), and the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Certain information and note disclosures normally
included in audited financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to those
rules and regulations, although the Company believes that the disclosures made
are adequate to make the information not misleading.





In the
opinion of management, the consolidated balance sheet as of December 31, 2009,
which has been derived from audited financial statements, and these unaudited
condensed consolidated financial statements reflect all normal and recurring
adjustments considered necessary to state fairly the results for the periods
presented. The results for the period ended September 30, 2010 are not
necessarily indicative of the results to be expected for the entire fiscal year
ending December 31, 2010 or for any future period.





These
unaudited condensed consolidated financial statements and notes thereto should
be read in conjunction with the Management’s Discussion and the audited
financial statements and notes thereto included in the Annual Report on Form
10-K for the year ended December 31, 2009.





NOTE-2
              ORGANIZATION
      AND BUSINESS BACKGROUND





NF Energy
Saving Corporation (the “Company” or “NFEC”) was incorporated in the State of
Delaware in the name of Galli Process, Inc. on October 31, 2000. On February 7,
2002, the Company changed its name to “Global Broadcast Group, Inc.” On November
12, 2004, the Company changed its name to “Diagnostic Corporation of America.”
On March 15, 2007, the Company changed its name to “NF Energy Saving
Corporation of America.” On August 24, 2009, the Company further changed its
current name to “NF Energy Saving Corporation.”





The
Company, through its subsidiaries, mainly operates in the energy technology
business in the People’s Republic of China (the “PRC”). The Company specializes
in the provision of energy saving technology consulting, optimization design
services, energy saving reconstruction of pipeline networks and contractual
energy management services to China’s electric power, petrochemical, coal,
metallurgy, construction, and municipal infrastructure development industries.
The Company also engages in the manufacturing and sales of the energy-saving
flow control equipment. All of its customers are located in PRC.





On
September 16, 2010, the Company effected a 1 for 2.5 reverse stock split of
its common stock. As a result of the reverse stock split, the number of issued
and outstanding shares of the Company's common stock was decreased from
13,315,486 pre-split shares to 5,326,485 post-split shares.





Description of
subsidiaries





Name
              
              Place of incorporation
                and kind of
                legal entity
              
              Principal activities
                and place of operation
              
              Particulars of
                issued/
                registered share
                capital
              
              Effective
                interest
                heldLiaoning
      Nengfa Weiye Energy Technology Co. Ltd (“Nengfa Energy”)
              
              The
      PRC, a limited liability company
              
              Production
      of a variety of industrial valve components which are widely used in
      water supply and sewage system, coal and gas fields, power generation
      stations, petroleum and chemical industries in the PRC
              
              US$3,580,880
              
              100%Liaoning
      Nengfa Weiye Tei Fa Sales Co., Ltd. (“Sales Company”)
              
              The
      PRC, a limited liability company
              
              Sales
      and marketing of valves components and products in the PRC
              
              RMB5,000,000
              
              100%


F-6


NF
ENERGY SAVING CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2010


(Currency
expressed in United States Dollars (“US$”), except for number of
shares)


(Unaudited)





NFEC and
its subsidiaries are hereinafter referred to as (the “Company”).





NOTE-3
              SUMMARY
      OF SIGNIFICANT ACCOUNTING
POLICIES





The
accompanying condensed consolidated financial statements reflect the application
of certain significant accounting policies as described in this note and
elsewhere in the accompanying condensed consolidated financial statements and
notes.





·
            Use
      of estimates





In
preparing these condensed consolidated financial statements, management makes
estimates and assumptions that affect the reported amounts of assets and
liabilities in the balance sheet and revenues and expenses during the periods
reported. Actual results may differ from these estimates.





·
            Basis
      of consolidation





The
condensed consolidated financial statements include the financial statements of
NFEC and its subsidiaries. All significant inter-company balances and
transactions within the Company have been eliminated upon
consolidation.





·
            Cash
      and cash equivalents





Cash and
cash equivalents are carried at cost and represent cash on hand, demand deposits
placed with banks or other financial institutions and all highly liquid
investments with an original maturity of three months or less as of the
purchase date of such investments.





·
            Accounts
      receivable





Accounts
receivable are recorded at the invoiced amount and do not bear interest, which
are due within contractual payment terms, generally 30 to 90 days from shipment.
Credit is extended based on evaluation of a customer's financial condition, the
customer credit-worthiness and their payment history. Accounts receivable
outstanding longer than the contractual payment terms are considered past due.
Past due balances over 90 days and over a specified amount are reviewed
individually for collectibility. At the end of each period, the Company
specifically evaluates individual customer’s financial condition, credit
history, and the current economic conditions to monitor the progress of the
collection of accounts receivables. The Company will consider the allowance
for doubtful accounts for any estimated losses resulting from the inability of
its customers to make required payments. For the receivables that are past due
or not being paid according to payment terms, the appropriate actions are taken
to exhaust all means of collection, including seeking legal resolution in a
court of law. Account balances are charged off against the allowance after all
means of collection have been exhausted and the potential for recovery is
considered remote. The Company does not have any off-balance sheet credit
exposure related to its customers.





·
            Retention
      receivable


F-7


NF
ENERGY SAVING CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2010


(Currency
expressed in United States Dollars (“US$”), except for number of
shares)


(Unaudited)





Retention
receivable is the amount withheld by a customer based upon 5-10% of the contract
value, until a product warranty is expired.





·
            Inventories





Inventories
are stated at the lower of cost or market value (net realizable value), cost
being determined on a weighted average method. Costs include material, labor and
manufacturing overhead costs. The Company reviews historical sales activity
quarterly to determine excess, slow moving items and potentially obsolete items
and also evaluates the impact of any anticipated changes in future demand. The
Company provides inventory allowances based on excess and obsolete inventories
determined principally by customer demand. As of September 30, 2010, the Company
did not record an allowance for obsolete inventories, nor have there been any
write-offs.





·
            Plant
      and equipment





Plant and
equipment are stated at cost less accumulated depreciation and accumulated
impairment losses, if any. Depreciation is calculated on the straight-line basis
over the following expected useful lives from the date on which they become
fully operational and after taking into account their estimated residual
values:





Depreciable
      life
              
              Residual
      valuePlant
      and machinery
              
              1 –
      20 years
              
              5%Furniture,
      fixture and equipment
              
              5 –
      8 years
              
              5%





Expenditures
for repairs and maintenance are expensed as incurred. When assets have been
retired or sold, the cost and related accumulated depreciation are removed from
the accounts and any resulting gain or loss is recognized in the results of
operations.





Depreciation
expense for the three months ended September 30, 2010 and 2009 were $73,365 and
$84,122, respectively.





Depreciation
expense for the nine months ended September 30, 2010 and 2009 were $218,760 and
$233,085, respectively.





·
            Construction
      in progress





Construction
in progress is stated at cost, which includes acquisition of land use rights,
cost of construction, purchases of plant and equipment and other direct costs
attributable to the construction of a new manufacturing facility in Yinzhou
District Industrial Park, Tieling City, Liaoning Province, the PRC. Total
estimated construction cost of this new manufacturing facility is approximately
$16 million (including land use rights of approximately $3 million). The
construction project is expected to be fully completed by the end of 2010.
Construction in progress is not depreciated until such time as the assets are
completed and put into operational use. No capitalized interest is incurred
during the period of construction





·
            Finance
      leases





Leases
that transfer substantially all the rewards and risks of ownership to the
lessee, other than legal title, are accounted for as finance leases.
Substantially all of the risks or benefits of ownership are deemed to have been
transferred if any one of the four criteria is met: (i) transfer of ownership to
the lessee at the end of the lease term, (ii) a lease containing a
bargain purchase option, (iii) a lease term exceeding 75% of the
estimated economic life of the leased asset, (iv) the present value of the
minimum lease payments exceeding 90% of the fair value. At the inception of a
finance lease, the Company as the lessee records an asset and an obligation at
an amount equal to the present value of the minimum lease payments. The leased
asset is amortized over the shorter of the lease term or its estimated useful
life if title does not transfer to the Company, while the leased asset is
depreciated in accordance with the Company’s normal depreciation policy if the
title is to eventually transfer to the Company. The periodic rent payments made
during the lease term are allocated between a reduction in the obligation and
interest element using the effective interest method in accordance with the
provisions of Accounting Standards Codification ("ASC") Topic 835-30, “Imputation of
Interest”.


F-8


NF
ENERGY SAVING CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2010


(Currency
expressed in United States Dollars (“US$”), except for number of
shares)


(Unaudited)





·
            Impairment
      of long-lived assets





In
accordance with the provisions of ASC Topic 360-10-5, “Impairment or Disposal of Long-Lived
Assets”, all long-lived assets such as plant and equipment held and used
by the Company and construction in progress are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is
evaluated by a comparison of the carrying amount of assets to estimated
discounted net cash flows expected to be generated by the assets. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amounts of the assets exceed the fair value of
the assets. There has been no impairment as of September 30, 2010.





·
            Revenue
      recognition





The
Company offers the following products and service to its customers:




(a)
              Energy
      saving flow control equipment;
 (b)
              Energy
      project management and sub-contracting service;
  and
 (c)
              Energy-saving
      construction projects


In
accordance with the ASC Topic 605, “Revenue Recognition”, the
Company recognizes revenue when persuasive evidence of an arrangement exists,
transfer of title has occurred or services have been rendered, the selling price
is fixed or determinable and collectibility is reasonably assured.





(a)
            Sale
      of products





The
Company derives a majority of its revenues from the sale of energy saving flow
control equipment. Generally, these products are manufactured and configured to
customer requirements. The Company typically produces and builds the energy
saving flow control equipment for customers in a period from 1 to 6 months. When
the Company completes the production in accordance with the customer’s
specification, the customer is required to inspect the finished products for
quality and product conditions, to its full satisfaction, at the Company’s
plant. Once the product is accepted by the customer, the Company usually makes
delivery to the customer within a month.





The
Company recognizes revenue from the sale of such finished products upon delivery
to the customer, whereas the title and risk of loss are fully transferred to the
customers. The Company records its revenues, net of value added taxes (“VAT”).
The Company is subject to VAT which is levied on the majority of the products at
the rate of 17% on the invoiced value of sales. The Company experienced no
product returns and recorded no reserve for sales returns for the nine months
ended September 30, 2010 and 2009.





(b)
            Service
      revenue





Service
revenue is primarily derived from energy-saving technical services or project
management or sub-contracting services that are not an element of an arrangement
for the sale of products. These services are generally billed on a time-cost
plus basis, for a period of time from 2 to 3 months. Revenue is recognized, net
of business taxes, when the service is rendered and accepted by the
customer.


F-9


NF
ENERGY SAVING CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2010


(Currency
expressed in United States Dollars (“US$”), except for number of
shares)


(Unaudited)





(c)
            Project
      revenue





In
February 2010, NFEC, through its subsidiary Nengfa Energy, entered into a
cooperative arrangement with a biomass energy technology company in the PRC
(“Fuxin”) for the development of energy-related systems and facilities and the
provision of an economic energy saving solution to the farmers in Laoning
Province, the PRC, for a term of 1 year. Under this project arrangement, Nengfa
Energy agreed to design, build and provide the energy-related equipment and
components, as well as provide training to Fuxin to operate these energy-related
facilities. Fuxin agreed to operate the administration of this arrangement and
provide on-site training to the farmers to operate these facilities. In
consideration for this cooperative arrangement, both parties agreed to equally
share in the sales of energy-related systems during the term of the project, in
accordance with the agreed energy-saving milestone requirement. At the end of
the project term, Nengfa agreed to transfer its ownership and proprietary rights
to the energy-related system and facility to Fuxin.





Under
this cooperative arrangement, Nengfa Energy is entitled to total project income
of approximately $750,314 from the joint energy-saving project with total
project cost of approximately $618,000 over the term of the project. For the
nine months ended September 30, 2010, Nengfa Energy recognized project revenue
of $752,333 in the statement of operations under the installment
method.





(d)
            Interest
      income





Interest
income is recognized on a time apportionment basis, taking into account the
principal amounts outstanding and the interest rates applicable.





·
            Comprehensive
      income





ASC Topic
220,“Comprehensive
Income”, establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income as defined
includes all changes in equity during a period from non-owner sources.
Accumulated other comprehensive income, as presented in the accompanying
condensed consolidated statement of stockholders’ equity, consists of changes in
unrealized gains and losses on foreign currency translation. This comprehensive
income is not included in the computation of income tax expense or
benefit.





·
            Income
      taxes





Income
taxes are determined in accordance with the provisions of ASC Topic 740, “Income Taxes” (“ASC 740”).
Under this method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax basis. Deferred tax assets and liabilities are measured using
enacted income tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. Any
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment
date.





ASC 740
prescribes a comprehensive model for how companies should recognize, measure,
present, and disclose in their financial statements uncertain tax positions
taken or expected to be taken on a tax return. Under ASC 740, tax positions must
initially be recognized in the financial statements when it is more likely than
not the position will be sustained upon examination by the tax authorities. Such
tax positions must initially and subsequently be measured as the largest amount
of tax benefit that has a greater than 50% likelihood of being realized upon
ultimate settlement with the tax authority assuming full knowledge of the
position and relevant facts.





For the
nine months ended September 30, 2010 and 2009, the Company did not have any
interest and penalties associated with tax positions. As of September 30, 2010,
the Company did not have any significant unrecognized uncertain tax
positions.





The
Company conducts the majority of its businesses in the PRC and is subject to tax
in this jurisdiction. As a result of its business activities, the Company files
tax returns that are subject to examination by a foreign tax authority. For the
nine months ended September 30, 2010, the Company filed and cleared a 2009 PRC
tax return with its tax authority.





·
            Product
      warranty


F-10


NF
ENERGY SAVING CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2010


(Currency
expressed in United States Dollars (“US$”), except for number of
shares)


(Unaudited)





Under the
terms of the contracts, the Company offers its customers with a free product
warranty on a case-by-case basis, depending upon the type of customers, nature
and size of the infrastructure projects. Under such arrangements, a portion of
the project contract balance (usually 5-10% of contract value) is withheld by a
customer from 12 to 24 months, until the product warranty has expired. The
Company has not experienced any material returns or claims where it was under
obligation to honor this standard warranty provision. As such, no reserve for
product warranty has been provided in the result of operations for the nine
months ended September 30, 2010.





·
            Stock
      based compensation





The
Company adopts ASC Topic 718, "Stock Compensation", ("ASC 718") using the fair
value method. Under ASC 718, stock-based compensation is measured using the
Black-Scholes Option-Pricing model on the date of grant.





For
non-employee stock based compensation, the Company adopts ASC Topic
505-50, “Equity-Based Payments to
Non-Employees”, stock based compensation related to non-employees is
accounted for based on the fair value of the related stock or options or the
fair value of the services on the grant date, whichever is more readily
determinable in accordance with ASC 718.





·
            Net
      income per share





The
Company calculates net income per share in accordance with ASC Topic 260,“Earnings per Share.” Basic
income per share is computed by dividing the net income by the weighted-average
number of common shares outstanding during the period. Diluted income per share
is computed similar to basic income per share except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if the potential common stock equivalents had been issued and if the
additional common shares were dilutive.





·
            Foreign
      currencies translation





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. Monetary assets and liabilities denominated in currencies other
than the functional currency are translated into the functional currency using
the applicable exchange rates at the balance sheet dates. The resulting exchange
differences are recorded in the statement of operations.





The
reporting currency of the Company is the United States Dollar ("US$"). The
Company's subsidiaries in the PRC maintain their books and records in
their local currency, the Renminbi Yuan ("RMB"), which is the functional
currency as being the primary currency of the economic environment in which
these entities operate.





In
general, for consolidation purposes, assets and liabilities of its subsidiaries
whose functional currency is not the US$ are translated into US$, in accordance
with ASC Topic 830-30, “Translation of Financial
Statement”,using the exchange rate on
the balance sheet date. Revenues and expenses are translated at average rates
prevailing during the period. The gains and losses resulting from translation of
financial statements of foreign subsidiaries are recorded as a separate
component of accumulated other comprehensive income within the statement of
stockholders’ equity.





Translation
of amounts from RMB into US$1 has been made at the following exchange rates for
the respective period:





September 30, 2010
                
                
                September 30, 2009Period-end
      RMB:US$1 exchange rate
                
                
                6.6981
                
                
                
                6.8376Period
      average RMB:US$1 exchange rate
                
                
                6.8164
                
                
                
                6.8425


F-11




NF
ENERGY SAVING CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2010


(Currency
expressed in United States Dollars (“US$”), except for number of
shares)


(Unaudited)





·
            Related
      parties





Parties,
which can be a corporation or individual, are considered to be related if the
Company has the ability, directly or indirectly, to control the other party or
exercise significant influence over the other party in making financial and
operational decisions. Companies are also considered to be related if they are
subject to common control or common significant influence.





·
            Segment
      reporting





ASC Topic
280, “Segment
Reporting” establishes standards for reporting information about
operating segments on a basis consistent with the Company’s internal
organization structure as well as information about geographical areas, business
segments and major customers in financial statements. The Company operates in
two reportable operating segments in the PRC.





·
            Fair
      value measurement





ASC Topic
820, “Fair Value Measurements
and Disclosures” ("ASC 820"), establishes a new framework for measuring
fair value and expands related disclosures. Broadly, ASC 820 framework requires
fair value to be determined based on the exchange price that would be received
for an asset or paid to transfer a liability (an exit price) in the principal or
most advantageous market for the asset or liability in an orderly transaction
between market participants. ASC 820 establishes a three-level valuation
hierarchy based upon observable and non-observable inputs. These tiers
include: Level 1, defined as observable inputs such as quoted prices in active
markets; Level 2, defined as inputs other than quoted prices in active markets
that are either directly or indirectly observable; and Level 3, defined as
unobservable inputs in which little or no market data exists, therefore
requiring an entity to develop its own assumptions.





For
financial assets and liabilities, fair value is the price the Company would
receive to sell an asset or pay to transfer a liability in an orderly
transaction with a market participant at the measurement date. In the absence of
active markets for the identical assets or liabilities, such measurements
involve developing assumptions based on market observable data and, in the
absence of such data, internal information that is consistent with what market
participants would use in a hypothetical transaction that occurs at the
measurement date.





·
              Financial
      instruments





Cash and
cash equivalents, accounts and retention receivable, prepayments and other
receivable, accounts payable, customer deposits, income tax payable, other
payable and accrued liabilities are carried at cost which approximates fair
value. The estimated fair value of the Company’s convertible promissory
note and its obligations under a finance lease was approximately $1.2
million as of September 30, 2010, based on current market prices or interest
rates. Any changes in fair value of assets or liabilities carried at fair value
are recognized in other comprehensive income for each period.





·
              Recent
      accounting pronouncements





The Company has reviewed all recently issued, but not yet
effective, accounting pronouncements and does not believe the future adoption of
any such pronouncements may be expected to cause a material impact on its
financial condition or the results of its operations, as
follows:





In September 2009, the Financial Accounting
Standard Board (“FASB”) issued certain amendments as codified in ASC Topic
605-25, “Revenue Recognition;
Multiple-Element Arrangements.”  These amendments provide
clarification on whether multiple deliverables exist, how the arrangement should
be separated, and the consideration allocated. An entity is required to allocate
revenue in an arrangement using estimated selling prices of deliverables in the
absence of vendor-specific objective evidence or third-party evidence of selling
price. These amendments also eliminate the use of the residual method and
require an entity to allocate revenue using the relative selling price method.
The amendments significantly expand the disclosure requirements for
multiple-deliverable revenue arrangements. These provisions are to be applied on
a prospective basis for revenue arrangements entered into or materially modified
in fiscal years beginning on or after June 15, 2010, with earlier application
permitted. The Company will adopt the provisions of these amendments in its
fiscal year 2011 and is currently evaluating the impact of these amendments to
its consolidated financial statements.


F-12




NF
ENERGY SAVING CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2010


(Currency
expressed in United States Dollars (“US$”), except for number of
shares)


(Unaudited)





In April
2010, the FASB issued ASU 2010-13, “Compensation – Stock Compensation (Topic 718):
Effect of Denominating the Exercise Price of a Share-Based Payment Award in the
Currency of the Market in Which the Underlying Equity Security Trade “.
ASU 2010-13 provides guidance on the classification of a share-based payment
award as either equity or a liability. A share-based payment that contains a
condition that is not a market, performance, or service condition is required to
be classified as a liability. ASU 2010-13 is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2010 and is not expected to have a significant impact on the Company’s financial
statements.





In July
2010, the FASB issued an accounting standards update to require further
disaggregated disclosures that improve financial statement users’ understanding
of (1) the nature of an entity’s credit risk associated with its financing
receivables and (2) the entity’s assessment of that risk in estimating its
allowance for credit losses as well as changes in the allowance and the reasons
for those changes. This update will be effective for the Company in the second
quarter of fiscal 2011, except for the disclosures relating to activity that
occurred during a reporting period which is effective for the Company
in the third quarter of fiscal 2011. Since this update addresses only
disclosures related to credit quality of financing receivables and the allowance
for credit losses, it is not expected that the adoption of this update will have
a material impact on the Company’s financial
position, results of operations or cash flows.





NOTE-4
              INVENTORIES





Inventories
consisted of the following:





September 30, 2010
                
                
                December 31, 2009(Unaudited)
                
                
                (Audited)Raw
      materials
                
                $
                1,201,115
                
                
                $
                512,903Work-in-process
                
                
                223,838
                
                
                
                122,123Finished
      goods
                
                
                158,293
                
                
                
                3,749$
                1,583,246
                
                
                $
                638,775





For the
three and nine months ended September 30, 2010 and 2009, no allowance for
obsolete inventories was recorded by the Company.





NOTE-5
              PREPAYMENTS
      AND OTHER RECEIVABLES





Prepayments
and other receivables consisted of the following:





September 30, 2010
                
                
                December 31, 2009(Unaudited)
                
                
                (Audited)Prepayment
      to vendors for raw materials
                
                $
                1,490,361
                
                
                $
                545,102Prepayment
      to equipment vendors
                
                
                -
                
                
                
                7,115Prepaid
      operating expenses
                
                
                50,165
                
                
                
                34,801Other
      receivables
                
                
                23,940
                
                
                
                16,438$
                1,564,466
                
                
                $
                603,456


F-13




NF
ENERGY SAVING CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2010


(Currency
expressed in United States Dollars (“US$”), except for number of
shares)


(Unaudited)





The
Company generally makes prepayments to vendors for raw materials in the normal
course of business. Prepayments to vendors are recorded when payment is made by
the Company and relieved against inventory when goods are received, which
include provisions that set the purchase price and delivery date of raw
materials.





NOTE-6
              NOTE
      PAYABLE





On June
20, 2010, the Company issued an unsecured note payable (the “Note”) of $528,743
(equivalent to RMB3,600,000) from Liaoning Dongda Nengfa Weiye Energy Saving
Technology Engineering Design & Research Institute (the “Note Holder”), the
proceeds of which were used for capital expenditure purposes. The Note had a
maturity date of June 19, 2011 and carried interest at 5.31% per annum payable
at maturity. On August 31, 2010, the Company reached an agreement with the Note
Holder and Fuxin to settle the Note in full by offsetting the principal and
interest due under the Note by assigning its account receivable due from Fuxin
to the Note Holder.





NOTE-7
              AMOUNT
      DUE TO A RELATED PARTY





As of
September 30, 2010, the balance of $188,500 represented temporary advances made
by the Company’s major stockholder, Pelaris International Ltd, which is
controlled by Ms. Li Hua Wang (the Company’s CFO) and Mr. Li Gang (the Company’s
CEO), and both directors of the Company, which was unsecured, interest-free with
no fixed repayment term. Imputed interest on this amount is considered
insignificant.





NOTE-8
              OTHER
      PAYABLES AND ACCRUED
LIABILITIES





Other
payables and accrued liabilities consisted of the following:





September 30, 2010
                
                
                December 31, 2009(Unaudited)
                
                
                (Audited)Rent
      payable
                
                $
                29,859
                
                
                $
                40,221Payable
      to the PRC government for land use rights
                
                
                -
                
                
                
                1,018,682Value
      added tax payable
                
                
                233,649
                
                
                
                263,834Provision
      for contingent liability
                
                
                200,000
                
                
                
                200,000Accrued
      operating expenses
                
                
                155,834
                
                
                
                372,324Other
      payable
                
                
                101
                
                
                
                33,433$
                619,443
                
                
                $
                1,928,494





NOTE-9
              PROMISSORY
      NOTES PAYABLE





On
February 24, 2010 and March 4, 2010, the Company sold, through a private
placement to two accredited investors, convertible promissory notes (the
“Notes”) in the aggregate principal amount of $960,000 and warrants (the
"Warrants") to purchase 64,000 shares (post reverse split) of its common stock,
par value $0.001 per share


F-14




NF
ENERGY SAVING CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2010


(Currency
expressed in United States Dollars (“US$”), except for number of
shares)


(Unaudited)





The Notes
while outstanding had an effective interest at the rate of 6% per annum, and
absent an “event of default,” are payable in shares of the Company’s Common
Stock. Provided there is no “event of default,” the Notes convert upon the
earlier to occur of (i) the commencement of trading of the Company’s Common
Stock on a major US stock exchange, or (ii) one year after issuance. Upon
conversion, the holders of the Notes shall receive such number of shares of
Common Stock equal to the quotient obtained by dividing (a) the then-outstanding
principal amount and accrued but unpaid interest on the Notes by (b) the
then-current conversion price, which currently is $7.50 per share (post 2.5-to-1
reverse stock split). The conversion price is subject to adjustment for stock
dividends, splits, combinations and similar events. The Notes while outstanding
are secured by a security interest in and lien upon all of the Company’s
assets.





The
Warrants, which are currently exercisable for shares of Common Stock at an
exercise price of $10 per share (post 2.5-to-1 reverse stock split), were not
exercisable until three months after issuance and will terminate five years
thereafter. The exercise price is subject to adjustment for stock dividends,
splits, combinations and similar events. The warrants also contain an exercise
price ratchet adjustment in the event the Company issues warrants having an
exercise price at less than the exercise price then in effect for the Warrants.
The Company has agreed to provide the investors with “piggy-back” registration
rights with respect to the shares of Common Stock issuable upon conversion of
the Notes and exercise of the Warrants.





The
Company engaged an independent valuer to perform the valuation of the Notes and
the Company determined that for the Notes to be recorded in accordance with ASC
Topic 470-20, “Debt with
conversion and other options”, the warrants and related convertible notes
should be accounted for as two separate instruments (equity and debt
instruments). The accounting for these instruments reflects the notion that the
consideration received upon issuance must be allocated between equity and debt
components. Proceeds from the sale of a debt instrument with stock purchase
warrants are allocated to the two elements, based on the relative fair values of
the debt instrument without the warrants and of the warrants themselves at time
of issuance. The portion of the proceeds allocated to the warrants is accounted
for as paid-in capital. The remainder of the proceeds is allocated to the debt
instrument portion of the transaction as debt discount.





September 30, 2010Notional
      amount of the convertible promissory notes payable, net of
      expenses
                  
                  
                  960,000Less
      : warrant portion
                  
                  
                  (285,342
                  )Less:
      debt discount, unamortized
                  
                  
                  (187,815
                  )Convertible
      promissory notes, net
                  
                  $
                  486,843





The Notes
are discounted for the fair value of warrants on the grant date using
Black-Scholes Option Pricing Model under ASC Topic 718, with the following
assumptions. The discount is being amortized over the life of the Notes using
the effective interest method. For the nine months ended September 30, 2010, the
Company recognized $278,528 as amortization of debt discount and recorded as
interest (warrant) expense in the statement of operations.





Expected
      life (in years)
                  
                  
                  5Volatility
                  
                  
                  63.38%-65.46
                  %Risk
      free interest rate
                  
                  
                  0.32
                  %Dividend
      yield
                  
                  
                  0
                  %Weighted
      average fair value
                  
                  
                  4.4
      – 4.73





NOTE-10
              OBLIGATION
      UNDER FINANCE LEASE





The
Company purchased certain equipment under finance lease agreements with an
effective interest rate of 8.6% per annum, due through May 25, 2012, with
principal and interest payable monthly.


F-15




NF
ENERGY SAVING CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2010


(Currency
expressed in United States Dollars (“US$”), except for number of
shares)


(Unaudited)





The
obligation under the finance lease is as follows:





September 30, 2010Finance
      lease
                
                $
                681,209Less:
      current portion
                
                
                (572,400
                )Non-current
      portion
                
                $
                108,809





The
maturities of the finance lease obligation for the next two years are as
follows:





Years
      ending September 30:2011
                  
                  $
                  619,9042012
                  
                  
                  115,150Total
      finance leases obligation
                  
                  
                  735,054Less:
      interest
                  
                  
                  (53,845
                  )Present
      value of minimum obligation
                  
                  $
                  681,209





The
obligations under these finance leases were guaranteed by the Company’s
executive officers and directors, Mr. Gang Li and Ms. Li Hua Wang. Certain plant
and machinery amounting to $2,107,453 held under these finance leases are
capitalized as construction in progress.





NOTE-11
              INCOME
      TAXES





NFEC is
registered in the State of Delaware and is subject to the tax laws of United
States of America.





As of
September 30, 2010, the operations in the United States of America incurred
$2,185,063 of cumulative net operating losses which can be carried forward to
offset future taxable income. The net operating loss carryforwards begin to
expire in 2030, if unutilized. The Company has provided for a full valuation
allowance against the deferred tax assets of $742,921 on the expected future tax
benefits from the net operating loss carryforwards as the management believes it
is more likely than not that these assets will not be realized in the
future.





The
Company’s subsidiaries operating in the PRC are subject to the Corporate Income
Tax Law of the People’s Republic of China at a unified income tax rate of 25%.
Nengfa Energy is considered a foreign investment enterprise and entitled to
enjoy the unexpired tax holiday of 50%-reduction on the unified income tax
through 2011 under a transitional policy. Sales Company is a domestic company
with a unified income tax rate of 25%.





The
reconciliation of income tax rate to the effective income tax rate for the nine
months ended September 30, 2010 and 2009 is as follows:





Nine months ended September 30,2010
                
                
                2009Income
      before income taxes from PRC operation
                
                $
                5,043,945
                
                
                $
                4,475,335Statutory
      income tax rate
                
                
                25
                %
                
                
                25
                %Income
      tax expense at statutory rate
                
                
                1,260,986
                
                
                
                1,118,834Tax
      effect of non-deductible item
                
                
                9,697
                
                
                
                -Tax
      effect from tax holiday
                
                
                (615,133
                )
                
                
                (558,290
                )Income
      tax expense
                
                $
                655,550
                
                
                $
                560,544




F-16




NF
ENERGY SAVING CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2010


(Currency
expressed in United States Dollars (“US$”), except for number of
shares)


(Unaudited)





The 2009
tax return was filed and finalized by the PRC tax authority with an additional
tax payment of $39,145 in May 2010.





NOTE-12
              WARRANTS





As of
September 30, 2010, the Company has 23,334 shares (post reverse split) issuable
under outstanding warrants at the weighted average exercise price of $4.5. There
was no exercises, grants or forfeituresduring the period ended
September 30, 2010. The Company adopted ASC 718 using the Black-Scholes Option
Pricing Model to measure the fair value of warrants on the grant date, with the
following assumptions:





Expected
      life (in years)
                  
                  
                  5Volatility
                  
                  
                  340.61%-
      456.53
                  %Risk
      free interest rate
                  
                  
                  2.28%
      - 2.89
                  %Dividend
      yield
                  
                  
                  0
                  %





NOTE-13
              SEGMENT
      INFORMATION





The
Company’s business units have been aggregated into two reportable segments, as
defined by ASC Topic 280:





·
            Heavy
      manufacturing business – production of valves components and the provision
      of valve improvement and engineering services;
  and





·
            Energy-saving
      related business – production of wind-energy equipment, provision of
      energy-saving related re-engineering and technical services and long-term
      construction projects.





The
Company operates these business segments in the PRC and all of the identifiable
assets of the Company are located in the PRC during the periods
presented.





The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies (see Note 3). The Company had no
inter-segment sales for the three and nine months ended September 30, 2010 and
2009. The Company’s reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different technology and marketing strategies. Summarized
financial information concerning the Company’s reportable segments is shown in
the following table for the three and nine months ended September 30, 2010 and
2009:





Three months ended September 30, 2010Heavy
                  manufacturing
                  business
                
                
                Energy-saving
                  related business
                
                
                TotalOperating
      revenues, net:-
      Products
                
                $
                3,548,050
                
                
                $
                132,286
                
                
                $
                3,680,336-
      Services
                
                
                2,714,008
                
                
                
                1,273,838
                
                
                
                3,987,846-
      Project
                
                
                -
                
                
                
                377,176
                
                
                
                377,176Total
      operating revenues
                
                
                6,262,058
                
                
                
                1,783,300
                
                
                
                8,045,358Cost
      of revenues
                
                
                (4,663,983
                )
                
                
                (531,974
                )
                
                
                (5,195,957
                )Gross
      profit
                
                
                1,598,075
                
                
                
                1,251,326
                
                
                
                2,849,401Depreciation
                
                
                51,919
                
                
                
                21,446
                
                
                
                73,365Total
      assets
                
                
                26,510,793
                
                
                
                4,272,166
                
                
                
                30,782,959Expenditure
      for long-lived assets
                
                $
                773,200
                
                
                $
                -
                
                
                $
                773,200




F-17




NF
ENERGY SAVING CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2010


(Currency
expressed in United States Dollars (“US$”), except for number of
shares)


(Unaudited)





Nine months ended September 30, 2010Heavy
                  manufacturing
                  business
                
                
                Energy-saving
                  related business
                
                
                TotalOperating
      revenues, net:-
      Products
                
                $
                9,473,141
                
                
                $
                372,039
                
                
                $
                9,845,180-
      Services
                
                
                6,232,459
                
                
                
                1,273,838
                
                
                
                7,506,297-
      Project
                
                
                -
                
                
                
                752,333
                
                
                
                752,333Total
      operating revenues
                
                
                15,705,600
                
                
                
                2,398,210
                
                
                
                18,103,810Cost
      of revenues
                
                
                (11,482,360
                )
                
                
                (1,069,354
                )
                
                
                (12,551,714
                )Gross
      profit
                
                
                4,223,240
                
                
                
                1,328,856
                
                
                
                5,552,096Depreciation
                
                
                187,720
                
                
                
                31,040
                
                
                
                218,760Total
      assets
                
                
                26,510,793
                
                
                
                4,272,166
                
                
                
                30,782,959Expenditure
      for long-lived assets
                
                $
                3,549,761
                
                
                $
                -
                
                
                $
                3,549,761





Three months ended September 30, 2009Heavy
                  manufacturing
                  business
                
                
                Energy-saving
                  related business
                
                
                TotalOperating
      revenues, net:-
      Products
                
                $
                6,646,008
                
                
                $
                51,094
                
                
                $
                6,697,102-
      Services
                
                
                869,319
                
                
                
                -
                
                
                
                869,319Total
      operating revenues
                
                
                7,515,327
                
                
                
                51,094
                
                
                
                7,566,421Cost
      of revenues
                
                
                (4,810,164
                )
                
                
                (38,207
                )
                
                
                (4,848,371
                )Gross
      profit
                
                
                2,705,163
                
                
                $
                12,887
                
                
                $
                2,718,050Depreciation
                
                
                82,363
                
                
                
                1,759
                
                
                
                84,122Total
      assets
                
                
                25,070,532
                
                
                
                253,415
                
                
                
                25,323,947Expenditure
      for long-lived assets
                
                $
                721,376
                
                
                $
                -
                
                
                $
                721,376





Nine months ended September 30, 2009Heavy
                  manufacturing
                  business
                
                
                Energy-saving
                  related business
                
                
                TotalOperating
      revenues, net:-
      Products
                
                $
                13,271,984
                
                
                $
                154,679
                
                
                $
                13,426,663-
      Services
                
                
                1,778,294
                
                
                
                -
                
                
                
                1,778,294Total
      operating revenues
                
                
                15,050,278
                
                
                
                154,679
                
                
                
                15,204,957Cost
      of revenues
                
                
                (10,165,687
                )
                
                
                (116,979
                )
                
                
                (10,282,666
                )Gross
      profit
                
                
                4,884,591
                
                
                
                37,700
                
                
                
                4,922,291Depreciation
                
                
                230,722
                
                
                
                2,363
                
                
                
                233,085Total
      assets
                
                
                25,070,532
                
                
                
                253,415
                
                
                
                25,323,947Expenditure
      for long-lived assets
                
                $
                3,496,222
                
                
                $
                -
                
                
                $
                3,496,222




F-18




NF
ENERGY SAVING CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2010


(Currency
expressed in United States Dollars (“US$”), except for number of
shares)


(Unaudited)





NOTE-14
              CONCENTRATIONS
      OF RISK





The
Company is exposed to the following concentrations of risk:





(a)
            Major
      customers





For the
three and nine months ended September 30, 2010 and 2009, the customers who
accounted for 10% or more of the Company’s revenues and their respective
outstanding accounts receivable balances as at period-end dates, are presented
as follows:





ThreemonthsendedSeptember 30,2010
                                
                                
                                
                                September 30, 2010Customer
                                
                                Revenues
                                
                                
                                Percentage
                                  of revenues
                                
                                
                                
                                Accounts and
                                  retention
                                  ReceivableCustomer
      A
                                
                                $
                                3,398,919
                                
                                
                                
                                42
                                %
                                
                                
                                $
                                6,764,156Customer
      D
                                
                                
                                2,315,407
                                
                                
                                
                                29
                                %
                                
                                
                                
                                206,924Total:
                                
                                $
                                5,714,326
                                
                                
                                
                                71
                                %
                                Total:
                                
                                $
                                6,971,080





NinemonthsendedSeptember 30,2010
                              
                              
                              
                              September 30, 2010Customer
                              
                              Revenues
                              
                              
                              Percentage
                                of revenues
                              
                              
                              
                              Accounts and
                                retention
                                ReceivableCustomer
      A
                              
                              $
                              4,998,363
                              
                              
                              
                              28
                              %
                              
                              
                              $
                              6,764,156Customer
      D
                              
                              
                              4,768,353
                              
                              
                              
                              26
                              %
                              
                              
                              
                              206,924Total:
                              
                              $
                              9,766,716
                              
                              
                              
                              54
                              %
                              Total:
                              
                              $
                              6,971,080





ThreemonthsendedSeptember 30,2009
                              
                              
                              
                              September 30, 2009Customer
                              
                              Revenues
                              
                              
                              Percentage
                                of revenues
                              
                              
                              
                              Accounts
                                ReceivableCustomer
      A
                              
                              $
                              3,714,179
                              
                              
                              
                              49
                              %
                              
                              
                              $
                              7,414,700Customer
      B
                              
                              
                              775,643
                              
                              
                              
                              10
                              %
                              
                              
                              
                              778,084Customer
      C
                              
                              
                              968,056
                              
                              
                              
                              13
                              %
                              
                              
                              
                              1,173,611Total:
                              
                              $
                              5,457,878
                              
                              
                              
                              72
                              %
                              Total:
                              
                              $
                              9,366,395





For the
nine months ended September 30, 2009, only one customer represented more than
10% of the Company’s revenues. This customer accounted for 58% of revenues
amounting to $8,873,432, with $7,414,700 of accounts receivable.





(b)
              Major
      vendors





For the
three and nine months ended September 30, 2010 and 2009, the vendors who
accounted for 10% or more of the Company’s purchases and their respective
outstanding accounts payable balances as at period-end dates, are presented as
follows:


F-19




NF
ENERGY SAVING CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2010


(Currency
expressed in United States Dollars (“US$”), except for number of
shares)


(Unaudited)





ThreemonthsendedSeptember 30,2010
                                
                                
                                
                                September 30, 2010Vendor
                                
                                Purchases
                                
                                
                                Percentage
                                  of purchases
                                
                                
                                
                                Accounts
                                  PayableVendors
      A
                                
                                $
                                2,359,690
                                
                                
                                
                                56
                                %
                                
                                
                                $
                                339,478Vendors
      B
                                
                                
                                722,240
                                
                                
                                
                                17
                                %
                                
                                
                                
                                16,423Total:
                                
                                $
                                3,081,930
                                
                                
                                
                                73
                                %
                                Total:
                                
                                $
                                355,901





For the
nine months ended September 30, 2010, one vendor represented more than 10% of
the Company’s purchases. This vendor accounts for 50% of the Company’s purchases
amounting to $6,377,046, with $339,478 of accounts payable.





For the
three months ended September 30, 2009, one vendor represented more than 10% of
the Company’s purchases. This vendor accounts for 27% of the Company’s purchases
amounting to $1,611,878, with $254,944 of accounts payable.





For the
nine months ended September 30, 2009, one vendor represented more than 10% of
the Company’s purchases. This vendor accounts for 25% of the Company’s purchases
amounting to $2,579,891, with $254,944 of accounts payable.





(c)
            Credit
      risk





Financial
instruments that are potentially subject to credit risk consist principally of
trade receivables. The Company believes the concentration of credit risk in its
trade receivables is substantially mitigated by its ongoing credit evaluation
process and relatively short collection terms. The Company does not generally
require collateral from customers. The Company evaluates the need for an
allowance for doubtful accounts based upon factors surrounding the credit risk
of specific customers, historical trends and other information.





(d)
              Interest
      rate risk





As the
Company has no significant interest-bearing assets, the Company’s income and
operating cash flows are substantially independent of changes in market interest
rates.





The
Company’s interest-rate risk arises from borrowings under promissory notes and
finance leases. The Company manages interest rate risk by varying the issuance
and maturity dates variable rate debt, limiting the amount of variable rate
debt, and continually monitoring the effects of market changes in interest
rates. As of September 30, 2010, borrowings under promissory notes and finance
leases were at fixed rates.





(e)
            Exchange
      rate risk





The
reporting currency of the Company is US$, to date the majority of the revenues
and costs are denominated in RMB and a significant portion of the assets and
liabilities are denominated in RMB. As a result, the Company is exposed to
foreign exchange risk as its revenues and results of operations may be affected
by fluctuations in the exchange rate between US$ and RMB. If RMB depreciates
against US$, the value of RMB revenues and assets as expressed in US$ financial
statements will decline. The Company does not hold any derivative or other
financial instruments that expose to substantial market risk.





(f)
            Economic
      and political risks





The
Company's operations are conducted in the PRC. Accordingly, the Company's
business, financial condition and results of operations may be influenced by the
political, economic and legal environment in the PRC, and by the general state
of the PRC economy.


F-20




NF
ENERGY SAVING CORPORATION


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2010


(Currency
expressed in United States Dollars (“US$”), except for number of
shares)


(Unaudited)





The
Company's operations in the PRC are subject to special considerations and
significant risks not typically associated with companies in North America and
Western Europe. These include risks associated with, among others, the
political, economic and legal environment and foreign currency exchange. The
Company's results may be adversely affected by changes in the political and
social conditions in the PRC, and by changes in governmental policies with
respect to laws and regulations, anti-inflationary measures, currency
conversion, remittances abroad, and rates and methods of taxation.




NOTE-15
              COMMITMENTS
      AND CONTINGENCIES





(a)
            Operating
      lease commitments





The
Company is committed under a non-cancelable operating lease with fixed monthly
rentals, due through February 9, 2011. Costs incurred under the operating lease,
which are considered to equivalent to the market rate, are recorded as rental
expense and totaled approximately $34,842 and $36,536 for the nine months ended
September 30, 2010 and 2009, respectively.





As of
September 30, 2010, the future minimum rental payments due under this
non-cancelable operating lease in the next twelve months is
$15,241.





(b)
            Capital
      commitments





As of
September 30, 2010, the Company is committed to the future contingent payments
of approximately $1.09 million on the purchase of new plant and equipment and
third party contractors relating to its construction project in the next twelve
months.





(c)
            Unused
      credit facility





The
Company obtained a credit facility with the available outstanding balance of
$5.88 million (equivalent to RMB40 million), with a term of 2 years, and expires
on June 28, 2012. Advances under this credit facility are unsecured and bear
interest at a rate of 1.3 times the Bank of China Benchmark Lending Rate,
payable monthly. There were no borrowings under the revolving lines of credit as
of September 30, 2010.





(d)
            Litigation





On May
21, 2007, a civil complaint Robert Dawley vs NF Energy Saving Corp., et al. was
filed in the United States District Court, Middle District of Florida, Orlando,
Civil No. 6:07-cv-872-Orl-18DAB. The complaint accuses the defendants of
breaching a contract for payment of money that was signed by Sam Winer, former
Chief Executive Officer, before the commencement of the Company’s reverse merger
with the current subsidiary. After being initially dismissed by the Court, the
action was authorized to proceed on November 16, 2007. The trial was held in the
United States District Court, Middle District of Florida, Orlando on October 16,
2008. The District Court issued a Judgment on December 11, 2008 awarding the
plaintiff the sum of $400,000 against the company, plus prejudgment interest in
the amount of $132,822, with continuing interest of $132 per day on the $400,000
obligation until it is paid. The Court further adjudged that the plaintiff shall
surrender his stock upon payment of the $400,000. In the event the plaintiff
fails to surrender his stock after payment, the Company may cancel the stock.
Any payments or collection under the Judgment shall be credited first to
interest.





On
January 6, 2009, the Company filed a notice of appeal 09-10140-B in the United
States of Court of Appeals for the 11th Circuit from the District Court’s
judgment. The Company has engaged an attorney to prosecute its appeal of the
above judgment. The Company has also accrued $200,000 for this contingent
liability to the statement of operation in fiscal year 2008. The parties have
completed briefing the appeal and are waiting for the court’s decision on the
appeal. In addition, the Company’s directors, Mr. Gang Li and Ms. Li Hua Wang
have personally agreed to guarantee and bear all contingent liabilities and
costs to be incurred from this litigation claim.




F-21


NF
ENERGY SAVING CORPORATION
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2010
 (Currency
expressed in United States Dollars (“US$”), except for number of
shares)
 (Unaudited)
 
 On April
1, 2010, the Eleventh Circuit issued a unanimous opinion reversing the District
Court’s Judgment on the grounds that Dawley was not entitled to the relief that
he sought and that the law did not support the District Court’s Judgment against
NF Energy. The Eleventh Circuit, to the contrary, entered Judgment in NF
Energy’s favor. NF Energy has filed a Bill of Costs seeking an award of its
costs on appeal, which total less than $1,000, from Dawley.
 
 The
original action by Robert Dawley against NF Energy Saving Corp of American and
Gang Li was terminated by the entry of Judgment against Mr. Dawley by the United
States Court of Appeal for the Eleventh Circuit on April 1, 2010. Subsequently,
the United States District Court for the Middle District of Florida, acting upon
instructions from the Court of Appeal, entered a Bill of Costs against Robert
Dawley on June 24, 2010, totaling $2,088.
 
 Mr.
Dawley has orally advised the Company that he has filed a Petition for Writ of
Certiorari of the Eleventh Circuit’s Opinion and Judgment with the Supreme Court
of the United States. However, to date, the Company has received no indication
that the Supreme Court has accepted any filings by Mr. Dawley or has scheduled
any response to his Petition. The Company therefore has not taken any action
with respect to any such Petition.
 
 On or
about July 1, 2010, Mr. Dawley apparently commenced a second action before the
United States District Court for the Middle District of Florida, entitled Robert
Dawley v. NF Energy Corp. of America, et al. In addition to the Company, Mr.
Dawley has named as defendants Mr. Gang Li and this counsel. Mr. Dawley asserts,
among other things, that defendants committed fraud with respect to the same
agreements as were the subject of the prior action. He also complains that he is
entitled to have a restrictive legend removed from certain stock certificates
that the predecessor company had issued to him in exchange for an additional
capital contribution.
 
 The
Company believes that the second action by Mr. Dawley has no merit, is barred by
the judgment entered by the Court of Appeals in the prior action and, in any
event, fails to state fraud claims with the specificity required by law. Mr.
Dawley has refused to withdraw the complaint, and the Company has filed motions
with the Court asking it to strike the complaint and issue monetary sanctions
against Mr. Dawley equivalent to the amount of the Company’s attorneys’ fees and
costs incurred as a result of the second action. The motions currently are
pending before the Court.
 
 Though
the Company believes that its contemplated motion has merit, the Company cannot
predict with certainty that the Court will agree. Accordingly, the Company does
not express any opinion as to the likelihood of its motion’s success. In the
event that the Court does deny the motion, it is the Company’s intent to
continue its efforts to prevail against Mr. Dawley on behalf of all the named
defendants to the second action.
  F-22
  Item 2. Management’s Discussion and Analysis
of Financial Condition and Results of Operations.
 
 GENERAL
DESCRIPTION OF BUSINESS
 
 As used
herein the terms "we", "us", "our," the “Registrant,” “NFEC” and the "Company"
means, NF Energy Saving Corporation, a Delaware corporation, formerly known as
NF Energy Saving Corporation of America, Diagnostic Corporation of America,
Global Broadcast Group, Inc., and Galli Process, Inc. These terms also refer to
our subsidiary corporations, Liaoning Nengfa Weiye Energy Technology Corporation
Ltd. (“Nengfa Energy”), formerly known as Liaoning Nengfa Weiye Pipe Network
Construction and Operation Co. Ltd., a corporation organized and existing under
the laws of the Peoples’ Republic of China, which was acquired in November 2006,
and Liaoning Nengfa Weiye Tie Fa Sales Co., Ltd. (“Sales Company”), a limited
liability corporation organized and existing under the laws of the Peoples’
Republic of China, which was established in September 2007.
 
 NF Energy
Saving Corporation was incorporated under the laws of the State of Delaware in
the name of Galli Process, Inc. on October 31, 2000 for the purpose of
seeking and consummating a merger or acquisition with a business entity
organized as a private corporation, partnership, or sole proprietorship. On
December 31, 2001, Galli Process, Inc. became a majority owned subsidiary
of City View TV, Inc., a Florida corporation (“City View”). On February 7, 2002,
Galli Process, Inc. changed its name to Global Broadcast Group, Inc. On
March 1, 2002, City View merged into Global Broadcast Group, Inc., which
was the surviving entity. On November 12, 2004, the Company changed its
name to Diagnostic Corporation of America. On March 15, 2007, we changed our
name to NF Energy Saving Corporation of America, and on August 24, 2009, the
Company further changed its name to NF Energy Saving Corporation, in both
instances to more accurately reflect our business after a stock exchange
transaction with Nengfa Energy. Our principal place of business is Room 3105, Block C, 390 Qingnian Avenue, Heping
District ,
Shenyang, P. R. China 110003. Our telephone number is (8624)
8563-1159.
 
 On
November 15, 2006, we executed a Plan of Exchange ("Plan of Exchange"), among
the Company, Nengfa Energy, the shareholders of Nengfa Energy (the "Neng Fa
Shareholders") and Gang Li, our Chairman and Chief Executive Officer ("Mr.
Li").
 
 Pursuant
to and at the closing of the Plan of Exchange, which occurred on November 30,
2006, we issued to the Neng Fa Shareholders 12,000,000 shares of our common
stock, or 89.4% of our then outstanding common stock, in exchange for all of the
shares of capital stock of Nengfa Energy owned by the Neng Fa Shareholders.
Immediately upon the closing, Nengfa Energy became our 100% owned subsidiary,
and the Company ceased all of its other operations and adopted and implemented
the business plan of Nengfa Energy.
 
 Nengfa
Energy’s area of business includes research and development, processing,
manufacturing, marketing and distribution of energy saving flow control
equipment; manufacturing, marketing and distribution of energy equipment,
wind power equipment and fittings; energy saving technical reconstruction;
and energy saving technology consulting services, providing comprehensive
solutions for energy-saving emission reduction. The Sales Company, which is a
subsidiary of Nenfa Energy, is 99% owned by Nengfa Energy. The Sales Company
engages in the sales and marketing of flow control equipment and products in the
PRC.
 
 On August
26, 2009, the Company announced 3 to 1 reverse stock split. The total number of
outstanding common shares changed from 39,872,704 pre-split to 13,291,387
post-split.
 
 On
September 16, 2010, the Company announced 2.5 to 1 reverse stock split. The
total number of outstanding common shares changed from 13,291, 387 to
5,326,485.
 
 On
October 4, 2010, the Company’s stock began trading at Nasdaq Global
Market.
 
 NFEC
specializes in the energy technology business in the PRC. We provide energy
saving technology consulting, optimization design services, energy saving
reconstruction of pipeline networks and contractual energy management services
for China’s electric power, petrochemical, coal, metallurgy, construction,
municipal infrastructure development industries, and customized comprehensive
solutions for energy-saving emission reduction. We also are engaged in the
manufacturing and sales of the energy-saving flow control equipment. According
to an analysis of ESCO Committee of China Energy Conservation Association,
currently, our flow control equipment business holds a leading position in
China. The Company has the Det Norske Veritas Management System Certificate
which certifies that our products conform to the Management System Standard
ISO9001:2000. We have been a member of the Chicago Climate Exchange since 2006.
In 2007, Nengfa Energy received contracts for three sections of the prominent
project “Redirect the water from the Rivers in the South to the North Middle
Section Jingshi Section Water Supply Engineering Project”. This project was
completed and passed inspection in 2008. In 2008, the Company also received flow
control equipment contracts from seven cities in Liaoning Province for their
large water supply system. In 2009, the Company has received several flow
control equipment supply contracts, such as Xijiang diversion project of
Guandong Province, and Phase 1 of Guangdong Yuedian Huilai Power Plant. In 2010,
the Company has commenced a new Biomass energy promotion project with Fuxin
Inner Mongolia Autonomy Country.
  - 3
-
  Our
principal future development focus is to complete the construction of our new
energy manufacturing facility which will enhance the Company’s productivity and
expand its manufacturing capacity. We expect the new facility will be completed
by the end of 2010. In conjunction with the planned facility expansion, we
plan on developing technology to optimize the business revenue structure of the
Company, and to promote energy-saving technologies efficiency as part of our
sales efforts. We are aiming to become a main supplier of new energy equipment,
energy-saving equipment and flow control devices; become a major operator of
energy-saving technological transformation projects and comprehensive management
of energy-saving emission reduction projects; and become the general contractor
of energy-saving technological transformation projects.
 
 FORWARD
LOOKING STATEMENTS
 
 Certain
statements in this report, including statements of our expectations, intentions,
plans and beliefs, including those contained in or implied by "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Notes to Consolidated Financial Statements, are "forward-looking
statements", within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), that are subject to certain events, risks
and uncertainties that may be outside our control. The words “believe”,
“expect”, “anticipate”, “optimistic”, “intend”, “will”, and similar expressions
identify forward-looking statements. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date on
which they are made. We undertake no obligation to update or revise any
forward-looking statements. These forward-looking statements include statements
of management's plans and objectives for our future operations and statements of
future economic performance, information regarding our expansion and possible
results from expansion, our expected growth, our capital budget and future
capital requirements, the availability of funds and our ability to meet future
capital needs, the realization of our deferred tax assets, and the assumptions
described in this report underlying such forward-looking statements. Actual
results and developments could differ materially from those expressed in or
implied by such statements due to a number of factors, including, without
limitation, those described in the context of such forward-looking statements,
our expansion and acquisition strategy, our ability to achieve operating
efficiencies, , industry pricing and technology trends, evolving industry
standards, domestic and international regulatory matters, general economic and
business conditions, the strength and financial resources of our competitors,
our ability to find and retain skilled personnel, the political and economic
climate in which we conduct operations and the risk factors described from time
to time in our other documents and reports filed with the Securities and
Exchange Commission (the "Commission"). Additional factors that could cause
actual results to differ materially from the forward-looking statements include,
but are not limited to: 1) our ability to successfully develop, manufacture and
deliver our products on a timely basis and in compliance with our contract
terms; 2) our ability to compete effectively with other companies in our
industry segments; 3) our ability to raise capital or generate sufficient
working capital in order to effectuate our business plan; 4) our ability to
retain our key executives; and 5) our ability to win and perform significant
construction and infrastructure projects.
 
 CRITICAL
ACCOUNTING POLICIES
 
 An
appreciation of our critical accounting policies is necessary to understand our
financial results. These policies may require management to make difficult and
subjective judgments regarding uncertainties, and as a result, such estimates
may significantly impact our financial results. The precision of these estimates
and the likelihood of future changes depend on a number of underlying variables
and a range of possible outcomes. We applied our critical accounting policies
and estimation methods consistently in all periods presented.
 
 Revenue
recognition
 
 In
accordance with the ASC Topic 605, “Revenue Recognition”, the Company recognizes
revenue when persuasive evidence of an arrangement exists, transfer of title has
occurred or services have been rendered, the selling price is fixed or
determinable and collectability is reasonably assured.
  - 4
-
  The
Company’s revenue is principally derived from three primary sources: Sales of
energy saving flow control equipment, provision of energy project management and
sub-contracting services, and provision of energy-saving reconstruction
projects.
 
 (a) Sale
of products
 
 The
Company derives a majority of its revenues from the sale of energy saving flow
control equipment. Generally, the energy saving flow control equipment is
manufactured and configured to customer requirements. The Company typically
produces the energy saving flow control equipment for customers during a period
from one to six months. When the Company completes production in accordance with
the customer’s specification, the customer is required to inspect the finished
products at the Company’s plant to approve quality and conformity and final
acceptance. Once the product is accepted by the customer, the Company undertakes
delivery to the customer, usually within a month.
 
 The
Company recognizes revenue from the sale of such finished products upon delivery
to the customers, when the title and risk of loss are fully transferred to the
customers. The Company records its revenues, net of value added taxes (“VAT”).
The Company is subject to VAT which is levied on the majority of the products it
sells at the rate of 17% on the invoiced value. The Company experienced no
product returns and has recorded no reserve for returns for the three and nine
months ended September 30, 2010 and 2009.
 
 (b)
Service revenue
 
 Service
revenue is derived from energy-saving technical services, project management or
sub-contracting services that are not an element of the arrangement for the sale
of products. These services are generally billed on a time-cost plus basis, for
the period of service provided, which is generally from two to three
months.
 
 Revenue
is recognized, net of business taxes, when the service is rendered and accepted
by the customer.
 
 (c)
Project revenue
 
 In
February 2010, NFEC, through its subsidiary Nengfa Energy, entered into a
cooperative arrangement with a biomass energy technology company in the PRC
(“Fuxin”) for the development of energy-related systems and facilities and the
provision of an economic energy saving solution to the farmers in Laoning
Province, the PRC, for a term of 1 year. Under this project arrangement, Nengfa
Energy agreed to design, build and provide the energy-related equipments and
components, as well as provide training to Fuxin to operate these energy-related
facilities. Fuxin agreed to operate the administration of this arrangement and
provide on-site training to the farmers to operate these facilities. In
consideration for this cooperative arrangement, both parties agreed to equally
share in the sales of energy-related systems during the term of the project, in
accordance with the agreed energy-saving milestone requirement. At the end of
the project term, Nengfa Energy agreed to transfer its ownership and proprietary
right of the energy-related system and facility to Fuxin.
 
 (d)
Interest income
 
 Interest
income is recognized on a time apportionment basis, taking into account the
principal amounts outstanding and the interest rates applicable.
 
 Accounts
receivable
 
 Accounts
receivable are recorded at the invoiced amount, do not bear interest and are due
within the contractual payment terms, generally 30 to 90 days from shipment.
Credit is extended based on evaluation of a customer's financial condition, the
customer’s credit-worthiness and their payment history. Accounts receivable
outstanding longer than the contractual payment terms are considered past due.
Past due balances over 90 days and over a specified amount are reviewed
individually for collectability. At the end of each period, the Company
specifically evaluates each individual customer’s financial condition, credit
history, and the current economic conditions to monitor the progress of the
collection of accounts receivable. The Company will consider an allowance for
doubtful accounts for any estimated losses resulting from the inability of its
customers to make required payments. For the receivables that are past due or
not being paid according to payment terms, the appropriate actions are taken to
exhaust all means of collection, including seeking legal resolution in a court
of law.
  - 5
-
  The
payment terms for our accounts receivable from each source of revenue is set
forth below:
 
 Revenue items
                            
                            General payment terms:1.
                            
                            Sales
      of products
                            
                            (a)
                            
                            10%
      of the contract value will be paid by the customer upon signing the
      contract.(b)
                            
                            50%
      of the contract value will be paid by the customer after the physical
      inspection (with a credit term from 30 to 90 days).(c)
                            
                            30
      to 35% of the contract value will be paid upon the delivery to the
      customer (with a credit term from 30 to 90 days).(d)
                            
                            5
      to 10% of the contract value will be paid within 12 to 24 months (from the
      delivery date) as warranty retention for the product.2.
                            
                            Services
                            
                            (a)
                            
                            10
      to 15 % of the contract value will be paid by the customer upon signing
      the contract.(b)
                            
                            The
      remaining contract value will be paid by the customer upon the completion
      of the service (with a credit term from 30 to 90 days).3.
                            
                            Projects
                            
                            Payments
      based on the achievement of certain milestones to be made over the term of
      the
project.
 
 In
general, accounts receivable with aging within 90 days, between 91 and 180 days,
and between 181 and 360 days represent approximately 30-40%, 50-60%, and 5%-15%,
respectively, of the total accounts receivable. The Company is highly aware the
risk of default, and as a result, we actively monitor accounts receivable with
aging above 1 year and accounting for at least 1% of the total accounts
receivable.
 
 For most
of our contracts, our customers are generally large or stated-owned construction
contractors or developers mainly engaged in government-sponsored infrastructure
projects such as large hydraulic/aqua-engineering projects, power plants and
urban sewage network projects in the PRC. Usually, these infrastructure projects
are undertaken in a number of phrases over a certain period of time. Our flow
control equipment components are generally considered as major or significant
components in the development phase of these infrastructure projects. In our
industry practice, we are paid by these construction contractors and/or
developers when they have been paid by the local government or state-owned
enterprises after the full inspection of each milestone during the construction
phrase. Given that the construction of these infrastructure projects are very
large in size and complex and require a high quality level in completion, the
inspection process may take a considerable amount of time. Therefore, we may not
collect the accounts receivable on a timely manner or only after a period longer
than our agreed payment terms.
 
 We have a
high level of assurance on the recoverability of these accounts receivable,
based on our ongoing assessment of the customer’s credit-worthiness and their
payment history. These customers are usually large state-owned corporations with
good credit ratings. At the end of each period, we specifically evaluate the
structure and collectability of accounts receivable and for receivables that are
past due or not being paid according to the payment terms, we take appropriate
action to exhaust all means of collection, including seeking legal resolution in
a court of law. For customers with a large accounts receivable balance, we may
take other steps, such as limiting sales and changing payment terms and
requesting forms of security. We will consider an adjustment to the allowance
for doubtful accounts for any estimated losses resulting from the inability of
our customers to make required payments.
 
 Account
balances are charged off against the allowance for doubtful accounts after all
means of collection have been exhausted and the potential for recovery is
considered remote. The Company does not have any off-balance sheet credit
exposure related to its customers.
 
 Product
warranty
 
 Under the
terms of the contracts, the Company offers its customers with a free product
warranty on a case-by-case basis, depending upon the type of customers, nature
and size of the infrastructure projects. Under such arrangements, a portion of
the project contract balance (usually 5-10% of contract value) is withheld by a
customer from 12 to 24 months, until the product warranty has expired. The
Company did not experience any material returns or claims where it was
obligated to honor this standard warranty provision.
  - 6
-
  Inventories
 
 Inventories
are stated at the lower of cost or market (net realizable value), with the cost
being determined on a weighted average method. Costs include material, labor and
manufacturing overhead costs. Quarterly, the Company reviews historical sales
activity to determine excess, slow moving items and potentially obsolete items
and also evaluates the impact of any anticipated changes in future demand. The
Company provides inventory allowances based on excess and obsolete inventories
determined principally by customer demand.
 
 Plant and
equipment, net
 
 Plant and
equipment are stated at cost less accumulated depreciation and accumulated
impairment losses, if any. Depreciation is calculated on the straight-line basis
over the following expected useful lives from the date on which they become
fully operational and after taking into account their estimated residual
values:
 
 Depreciablelife
                    
                    ResidualvaluePlant
      and machinery
                    
                    1 –
      20 years
                    
                    
                    5
                    %Furniture,
      fixture and equipment
                    
                    5 –
      8 years
                    
                    
                    5
                    %
 
 Expenditure
for repairs and maintenance is expensed as incurred. When assets have been
retired or sold, the cost and related accumulated depreciation are removed from
the accounts and any resulting gain or loss is recognized in the results of
operations.
 
 Finance
leases
 
 Leases
that transfer substantially all the rewards and risks of ownership to the
lessee, other than legal title, are accounted for as finance leases.
Substantially all of the risks or benefits of ownership are deemed to have been
transferred if any one of the four criteria is met: (i) transfer of ownership to
the lessee at the end of the lease term, (ii) the lease containing a bargain
purchase option, (iii) the lease term exceeding 75% of the estimated economic
life of the leased asset, and (iv) the present value of the minimum lease
payments exceeding 90% of the fair value. At the inception of a finance lease,
the Company as the lessee records an asset and an obligation at an amount equal
to the present value of the minimum lease payments. The leased asset is
amortized over the shorter of the lease term or its estimated useful life if
title does not transfer to the Company, while the leased asset is depreciated in
accordance with the Company’s normal depreciation policy if the title is to
eventually transfer to the Company. The periodic lease payments made during the
lease term are allocated between a reduction in the obligation and interest
element using the effective interest method in accordance with the provisions of
Accounting Standards Codification ("ASC") Subtopic 835-30, “Imputation of
Interest”.
 
 Stock-based
compensation
 
 The
Company adopts ASC Topic 718, "Stock Compensation",("ASC
718") using the fair value method. Under ASC Topic 718, the stock-based
compensation is measured using the Black-Scholes Option-Pricing model on the
date of grant.
 
 For
non-employee stock-based compensation, the Company adopts ASC Subtopic 505-50,
“Equity-Based Payments to Non-Employees.” Stock-based compensation related to
non-employees is accounted for based on the fair value of the related stock or
options or the fair value of the services on the grant date, whichever is more
readily determinable in accordance with ASC 718.
 
 In
accordance with ASC Topic 470-20 “Debt with conversion and other
options”, the warrants and related convertible notes should be accounted
for as two separate instruments (equity and debt instruments). The accounting
for these instruments reflects the notion that the consideration received upon
issuance must be allocated between equity and debt components. Proceeds from the
sale of a debt instrument with stock purchase warrants are allocated to the two
elements, based on the relative fair values of the debt instruments without the
warrants themselves at time of issuance. The portion of the proceeds allocated
to the warrants is accounted for as paid-in capital. The remainder of the
proceeds is allocated to the debt instruments portion of the transaction This
usually results in a discount, which is to be amortized over the period of debt
using the interest method.
  - 7
-
  Income
Taxes
 
 The
Company adopts ASC Topic 740, “Income Taxes” regarding
accounting for uncertainty in income taxes which prescribes the recognition
threshold and measurement attributes for financial statement recognition and
measurement of tax positions taken or expected to be taken on a tax return. In
addition, the guidance requires the determination of whether the benefits of tax
positions will be more likely than not sustained upon an audit based upon the
technical merits of the tax position. For tax positions that are determined to
be more likely sustainable than not upon audit, the Company recognizes the
largest amount of benefit that is greater than 50% likely of being realized upon
ultimate settlement in the financial statements. For tax positions that are not
determined to be more likely sustainable than not upon audit, the Company does
not recognize any portion of the benefit in the financial statements. The
guidance provides for de-recognition, classification, penalties and interest,
accounting in interim periods and disclosure.
 
 Foreign currencies
translation
 
 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. Monetary assets and liabilities denominated in currencies other
than the functional currency are translated into the functional currency using
the applicable exchange rates at the balance sheet dates. The resulting exchange
differences are recorded in the condensed consolidated statement of
operations.
 
 The
reporting currency of the Company is the United States dollar ("US$"). The
Company's subsidiaries in the PRC, Nengfa Energy and Sales Company maintain
their books and records in the local currency of the PRC, Renminbi ("RMB"),
which is the primary currency of the economic environment in which these
entities operate.
 
 In
general, for consolidation purposes, assets and liabilities of its subsidiaries
whose functional currency is not the US$ are translated into US$, in accordance
with ASC Topic 830-30, “Translationof Financial Statement”, using the exchange rate on
the balance sheet date. Revenues and expenses are translated at average rates
prevailing during the period. The gains and losses resulting from translation of
financial statements of foreign subsidiaries are recorded as a separate
component of accumulated other comprehensive income within the statement of
stockholders’ equity.
 
 Translation
of amounts from RMB into US$1 has been made at the following exchange rates for
the respective period:
 
 September 30, 2010
                  
                  
                  September 30, 2009Period-end
      RMB:US$1 exchange rate
                  
                  
                  6.6981
                  
                  
                  
                  6.8376Average
      monthly RMB:US$1 exchange rate
                  
                  
                  6.8164
                  
                  
                  
                  6.8425
 
 RESULTS
OF OPERATIONS
 FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
 
 The
following discussion should be read in conjunction with the financial statements
included in this report and is qualified in its entirety by the
foregoing.
 
 REVENUES
 
 Total
revenues were $8,045,358 and $18,103,810 for the three months and nine months
ended September 30, 2010, respectively, as compared to $7,566,421 and
$15,204,957 for the corresponding period in 2009. Total revenues increased by
$478,937 and $2,898,853, a 6.3% and 19.1% increase, for the three and nine
months ended September 30, 2010, respectively, as compared to total revenues for
the corresponding period in 2009. The increase was due to a significant increase
in service revenue.
 
 2010 is
the last year of the "Eleventh Five-Year" emission reduction targets. It is also
the first year for China to put forward its 40-45% emission reduction target,
which is a point of emphasis for the Chinese government.  Mr. Zhang
Shaochun, the Vice Minister of Finance for the central government, has stated
that the special funding for the energy-saving emission reduction industry will
be up to 500 billion RMB, 70% more than the prior year. The government intends
to promote large-scaled energy-saving and efficiency products and will support
key energy-saving emission reduction projects.
  - 8
-
  In a 2010
government report from the office of the Chinese Premier, Wen Jiabao, it was
stated that: "We shall put greater efforts on development of low-carbon
technologies, promotion of efficient energy-saving technologies, and actively
develop new energy and renewable energy...."  The report further stated
that the country "...should attempt to engage in construction characterized by
industrial carbon emissions system and consumption patterns.” This indicates
that in 2010 and thereafter low carbon initiatives "...will become a new impetus
and engine for economic development, and it will become a new weathervane for
construction of leading industrial systems and consumption
patterns.”
 
 The
Ministry of Finance is increasing investment in the development of a low-carbon
economy. The government see promotion of energy-efficiency resulting in economic
benefits and promoting growth in higher value technologies and industries.
Therefore the expectation is that government support for energy saving projects
will be widespread and touch on many aspects of the economy, including geo-water
sources, energy management contracts, efficient motors and other energy-saving
elements in the industry. This will promote the development of energy
efficiency, industrial energy efficiency and energy-efficient power transmission
and distribution.
 
 On April
6, 2010, the State Council of China approved the “Opinion on Accelerating the
Implementation of Energy Management Contract to Promote the Development of
Energy Service Industry,” (“the Opinion”)  which was proposed by the
National Development and Reform Commission, the Ministry of Finance, People’s
Bank of China and the State Taxation Administration. A series of new tax
benefits will stimulate China’s domestic energy conservation projects and
services development. NF Energy will further develop its energy conservation
projects by using “Energy Management Contract” (“EMC”) and “Energy Performance
Certificate” models.
 
 On June
3, 2010, the Ministry of Finance of the Peoples’ Republic of China and the
National Development and Reform Commission jointly released a notice policy
“Interim measurements to manage financial incentive funding on Energy Management
Contract”. The policy states that the Ministry of Finance will reward the energy
conservation companies who process industrial energy conservation projects by
using the EMC model and sharing the energy efficiency benefit, with an annual
energy saved between 500 tons of standard coal and 1,000 tons of standard coal.
The reward standard is 240 RMB per ton of standard coal saved. The policies
should stimulate the willingness of industrial companies to undertake energy
conservation projects, and should greatly benefit Nengfa Energy’s energy saving
business which fits within the government stimulus policies for building energy
saving infrastructure projects for municipalities and industrial companies. We
expect significant growth in all our lines of business in 2010.
 
 The
Company plans to restructure its business mix during 2010. The Company expects
increasing revenue from higher margin energy conservation projects and services
as this segment grows to 30% of total revenues by 2010 from 15% of revenues in
2009, while having steady revenue growth from the sale of our products. Due to
market demand, we expect to increase delivery of our flow control equipment in
fourth quarter of 2010, the increase of project revenue has shown that the
restructuring of its business mix is proceeding as planned.
 
 Product
Revenues
 
 Product
revenues are derived principally from the sale of self-manufactured products
relating to energy-saving flow control equipment and new energy related
equipment. Product revenues were $3,680,336 and $9,845,180, or 45.7% and 54.4%
of total revenues, for the three and nine months ended September 30, 2010,
respectively, as compared to $6,697,102 and $13,426,663, or 88.5% and 88.3% of
total revenues, for the corresponding three and nine month periods in 2009,
respectively. Product revenues decreased by $3,016,766 and $3,581,483, a 45% and
26.7% decrease, over the corresponding three and nine month periods in 2009,
respectively. This decrease is primarily due to the Company moving part
of  its manufacturing equipment from its current manufacturing
facility to the new facility as planned. During the moving process, in order to
limit negative effects on its manufacturing capability, the Company
sub-contracted some components of its flow control equipment to third parties,
and then assembled the whole system by itself. This manufacture process took
longer for the sub-contractors to complete their orders, and resulted in a delay
of some of our products’ delivery. The outlook of the Company’s annual
revenue follows an upward trend.
  - 9
-
  Service
Revenues
 
 Service
revenues are derived principally from energy-saving technical services and
product collaboration processing services. The energy-saving technical services
include providing energy saving auditing, conservation plan, and/or related
service reports. These services are generally billed on a time-cost plus basis.
Revenue is recognized, net of business taxes, when service is rendered and
accepted by the customers. Service revenues were $3,987,846 and $7,506,297, or
49.6% and 41.5%, of total revenues, for the three and nine months ended
September 30, 2010, respectively, as compared to $869,319 and $1,778,294, or
11.5% and 11.7% of total revenues, for the corresponding three and nine month
periods in 2009, respectively,. Service revenues increased by $3,118,527 and
$5,728,003, a 358.7% and 322.1% increase, over the corresponding three and nine
month periods in 2009, respectively,. This increase is primarily due to the
increase in service contracts. In particular, the Company signed out-sourcing
service contracts for making steel structured welding mechanical parts in the
amount of RMB 32.5million (approximately $4,8 million). These contracts are part
of the Shenyang underground construction project. In addition, the Company
completed energy-saving retrofitting and technical services for two
energy-saving projects. In one project, the Company provided retrofitting
services to an Indonesia Sugar Refinery on its dehydration and drying process.
During this period, we recognized RMB 1million (approximately $149,000) as
service revenue for this project. In the other project, the Company provided
energy retrofitting technical services for a Shenyang hospital, and recognized
RMB 8 million (approximately $1.2 million) as service revenue for such
project.
 
 Project
Revenues
 
 Project
revenues are derived principally from energy-saving, re-engineering projects
that require significant modification, customization and installation. Project
revenues were $377,176 and $752,333, or 4.7% and 4.2% of the total revenues, for
the three and nine months ended September 30, 2010, respectively, For the same
period ended in 2009, there was no project revenue. The Company has been
continuously trying to develop energy-saving projects; actively developing
energy conservation and energy saving projects and restructuring the Company’s
business mix. In February 2010, NFEC, through its subsidiary Nengfa Energy,
entered into a cooperative arrangement with a Fuxin Biological Energy
Development Company (“Fuxin”) for the development to energy-related systems and
facilities and the provision of an economic energy saving solutions to the
farmers in LaoNing Province, the PRC for a term of 1 year.
 
 For the
nine months ended September 30, 2010, Nengfa Energy recognized $752,333 as
project revenue from this cooperative arrangement in the statement of operation
under the installment method.
 
 COSTS
AND EXPENSES
 
 Cost
of Revenues
 
 Cost of
revenues consists primarily of material costs, direct labor, depreciation and
manufacturing overhead, which are directly attributable to the manufacture of
products and the rendering of services. Total cost of revenues was $5,195,957
and $12,551,714 for the three and nine months ended September 30, 2010,
respectively, as compared to $4,848,371 and $10,282,666 for the corresponding
three and nine month periods in 2009, an increase of $347,586 and $2,269,048, or
approximately 7.2% and 22.1%, respectively. This increase was primarily due to
the increase services provided and projects commenced during this
period.
 
 The
overall gross profit for the Company was $2,849,401 (35.4% margin) and
$5,552,096 (30.7% margin) for the three and nine months ended September 30,
2010, respectively, as compared to $2,718,050 (35.9% margin) and $4,922,291
(32.4% margin) for the corresponding three and nine month periods in 2009, a
increase of $131,351 and $629,805, respectively. There is no significant change
for the overall gross margin of the Company in this period. Due to the revenue
structure of the Company being changed, each gross margin of the revenue
segments were changed accordingly.
 
 Cost
of Products
 
 Total
cost of products was $2,569,018 and $6,833,561 for the three and nine months
ended September 30, 2010, respectively, as compared to $4,200,439 and $9,016,453
for the corresponding three and nine month periods in 2009, a decrease of
$1,631,421 and $2,183,892, or approximately 38.8% and 24.2%, respectively. This
decrease is primarily due to the Company moving part of its manufacturing
equipment from its current manufacturing current facility to the new facility,
which delayed the delivery of some of its products.
  - 10
-
  The gross
profit for products was $1,111,318 (30.2% margin and 39.0% of total gross
profit) and $3,011,619 (30.6% margin and 54.2% of total gross profit ) for the
three and nine months ended September 30, 2010, respectively, as compared to,
$2,496,663 (37.3% margin and 91.9% of total gross profit) and $4,410,210 (32.8%
margin and 89.6% of total gross profit) for the corresponding three and nine
month periods in 2009, a decrease of $1,385,345 and $1,398,591, or approximately
55.5% and 31.7%, respectively. This decrease is primarily due to the Company
moving part of its manufacturing equipment from its current manufacturing
facility to the new one, which caused a delay in the delivery of some of its
products.
 
 Cost
of Services
 
 The cost
of services was $2,318,911 and $5,103,747 for the three and nine months ended
September 30, 2010, respectively, as compared to $647,932 and $1,266,213 for the
corresponding three and nine month periods in 2009, an increase of $1,670,979
and $3,837,534, or approximately 257.9% and 303.1%, respectively,. This increase
is primarily due to the increase of out-sourcing service
contracts..
 
 The gross
profit for services was $1,668,935 (41.9% margin and 58.6% of the total gross
profit) and $2,402,550 (32% margin and 43.3% of the total gross profit) for the
three and nine months ended September 30, 2010, respectively, as compared to
$221,387 (25.5% margin and 8.1% of total gross profit) and $512,081 (28.8%
margin and 10.4% of total gross profit) for the corresponding three and nine
month periods in 2009, an increase of $1,447,548 and $1,890,469, or
approximately 653.9% and 369.2%, respectively. This increase is primarily due to
increase of service contracts in this period.
 
 Cost
of Projects
 
 In 2007,
the Company began contracting for energy-saving re-engineering projects that
require significant modification, customization and/or complex installation. The
cost of projects was $308,028 and $614,406 for the three and nine months ended
September 30, 2010, respectively. There was no project implemented in the same
period accordingly in 2009. Therefore the cost was zero.
 
 The gross
profit for projects was $69,148 (18.3% margin and 2.4% of total gross margin)
and $137,927 (18.3% margin and 2.5% of total gross margin) for the three and
nine months ended September 30, 2010, respectively. This increase is primarily
due to an increase in project revenue. The Company continuously develops other
energy-saving projects, to ensure a steady growth in project
revenue.
 
 Operating
Expenses
 
 Total
operating expenses were $316,758 and $702,920 for the three and nine months
ended September 30, 2010, respectively, as compared to $225,995 and $988,694 for
the corresponding three month and nine month periods in 2009, an increase of
$90,763 and a decrease of $285,774, or approximately an increase of 40.2% and
decrease of 28.9%, respectively. The increase for the three month period is
primarily due to the increased general and administration fees such as legal
fees and listing fees to Nasdaq. The decrease for nine months period is
primarily due to there being no stock based compensation incurred during this
period, and relatively lower sales and marketing expenses.
 
 Selling
and Marketing Expenses
 
 Sales and
marketing expenses were $25,786 and $58,438 for the three and nine month ended
September 30, 2010, respectively, as compared to $32,040 and $106,493 for the
corresponding three and nine month periods in 2009, a decrease of $6,254 and
$48,055, or approximately 19.5% and 45.1%, respectively. This decrease is
primarily due to the revenue structure of the Company being changed and
management’s implementation of improved the cost control measures.
 
 General
and Administrative Expenses
 
 General
and administrative expenses were $290,972 and $644,482 for the three and nine
months ended September 30, 2010, respectively, as compared to $193,955 and
$533,201 for the corresponding three and nine month periods in 2009, an increase
of $97,017 and $111,281, or approximately 50.0% and 20.9%, respectively. The
reason of this increase was mainly due to the Nasdaq listing fees amounting to
$95,000 and other legal fees.
  - 11
-
  INCOME
FROM OPERATIONS
 
 Income
from operations was $2,532,643 and $4,849,176, for the three and nine months
ended September 30, 2010, respectively, as compared to $2,492,055 and
$3,933,597 for the corresponding three and nine month periods in 2009, an
increase of $40,588 and $915,579, respectively.
 
 Other
(expense) Income
 
 Other
expense for the three and nine months ended September 30, 2010 was $152,176 and
$386,362, respectively , as compared to other income of $1,497 and $54,276 for
the corresponding three and nine month periods in 2009, an absolute difference
of $153,673 and $440,638, respectively. This difference is primarily due to an
accumulated $278,528 in discount of convertible notes and $34,402 in interest
expense, resulting from the issuance of $960,000 convertible promissory notes
during the first quarter of 2010, as well as $55,661 in interest expense,
resulting from a financial lease for two machines used in the production of our
products.
 
 Income
Tax Expense
 
 For the
three and nine months ended September 30, 2010, income tax expense was $310,705
and $655,550, respectively, as compare to $317,084 and $560,544 for the
corresponding three and nine month periods in 2009, or a decrease of 2% and
increase of 17%, respectively. By the end of September 2010, the increase of 17%
for the nine month period is due to the increase of the Company’s revenue. The
Company continues to enjoy the tax holiday in the PRC due to Nengfa Energy's
foreign company status. During 2007, the Tieling City local government tax
bureau in the PRC approved Nengfa Energy as a foreign investment enterprise.
Hence, retroactively effective from January 1, 2007, Nengfa Energy is entitled
to a two-year exemption from corporate income tax and a reduced corporate income
tax rate of 12.5% for the following three years. The Sales Company is a domestic
company, which is subject to the unified statutory income tax rate of
25%.
 
 As of
September 30, 2010, the operations in the United States of America have resulted
in $2,185,063 of cumulative net operating losses, which can be carried forward
to offset future taxable income. The net operating loss carry forward will begin
to expire in 2030, if not utilized. The Company has provided for a valuation
allowance against the deferred tax assets of $742,921 on the expected future tax
benefits from the net operating loss carry forward as management believes it is
more likely than not that these assets will not be realized in the
future.
 
 The
Company’s effective income tax rate for the three months and nine months ended
September 30, 2010 was 13.1% and 14.7%, respectively.
 
 NET
INCOME
 
 Net
income for the three and nine months ended September 30, 2010 was $2,069,762 and
$3,807,264, approximately 25.7% and 21.0% of the total revenue, respectively, as
compared to $2,176,468 and $3,472,329, approximately 28.8% and 22.5% of the
total revenue, respectively, , a decrease of $106,706, or approximately 4.9%.
from the corresponding three month period in 2009, and an increase of $334,935,
or approximately 9.6%, from the corresponding nine month period in 2009. The
change in Net Income is primarily due to the increase in revenue and a change of
the Company’s revenue structure.
 
 LIQUIDITY
AND CAPITAL RESOURCES
 
 Operating
activities
 
 For the
nine months ended September 30, 2010, net cash provided by operating activities
was $3,161,233. This was attributable primarily to net income of 3,807,264,
adjusted by non-cash items of depreciation of $218,760, non-cash warrant expense
of $278,528 and a $477,290 increase in working capital. The increase in cash
flow from operating activities in nine months of 2010 was due primarily to the
decrease in accounts receivable by $1,506,879, a increase in accounts payable by
$624,753, a increase in income tax payable by $107,681, which was offset by an
increase in retention receivables by $172,046, and an increase in inventories by
$915,044, the increase in prepayment and other receivables by $870,742, the
decrease in customer deposits by $100,580, and a decrease in other payables and
accrued liabilities by $1,323,997 in this period.
  - 12
-
  At
September 30, 2010, accounts receivable was $11,237,197, which had decreased by
$1,273,678, from $12,510,875 at the beginning of 2010. By the December 31, 2009,
the outstanding accounts receivable was due to a number of large State owned
projects which experienced delayed installation of the systems in which our
products are used and therefore the whole system’s operating tests were not
completed, and as a result, the payment for the products which we provided to
these projects was also delayed. According to our contract, we recognize revenue
once a customer has inspected and has accepted the products and we have
delivered the products to the customer. One of our customers is one of the
contractors to the large state owned infrastructure projects, and our products
are a small part of these projects’ installation. The Company’s receipt of
payment schedule was impacted, not due to the Company’s products, but due to the
customer of the Company meeting its project installation schedule and completion
of the whole system operating test. Although the delayed payment represents a
customer breach of contract, we are willing to work with the contractor to
resolve this issue. Although accounts receivable has decreased by September 30,
2010, with an expected increase in the Company’s revenue for the year, accounts
receivable may increase according to the contracts’ terms.
 
 At
September 30, 2010, the Company had accounts receivable of $11,237,197, 70% and
30% of the accounts receivable are product revenue accounts receivable and
service revenue account receivable, respectively. The accounts receivable with
aging within 90 days, between 91 and 180 days, and between 181 and 365 days, and
above 365 days are $6,781,048, $2,549,102, $1,598,613 and $320,183,
respectively, representing 60.3%, 22.7%, 14.2% and 2.8% of the total account
receivables, respectively, as of September 30, 2010. The Company restricted the
accounts receivable with aging above 1 year within 1% of the total account
receivables. The Company does not have any off-balance-sheet credit exposure
related to its customers. The detailed account receivable aging, starting from
the invoice date, at September 30, 2010 is as follows:
 
 Revenue
                      Sources:
                    
                    Account
                      Receivables
                    
                    
                    Aging of 1-90
                      days
                    
                    
                    Aging of
                      91-180 days
                    
                    
                    Aging of
                      181-365 days
                    
                    
                    Above 365
                      daysProducts
                    
                    
                    7,867,034
                    
                    
                    
                    3,805,352
                    
                    
                    
                    2,199,601
                    
                    
                    
                    1,581,617
                    
                    
                    
                    257,329Services
                    
                    
                    3,317,739
                    
                    
                    
                    2,975,696
                    
                    
                    
                    349,501
                    
                    
                    
                    -
                    
                    
                    
                    15,676Total
                    
                    
                    11,248,946
                    
                    
                    
                    6,781,048
                    
                    
                    
                    2,549,102
                    
                    
                    
                    1,598,613
                    
                    
                    
                    320,183
 
 Most of
our customers make payments in accordance with the agreed payment terms in a
timely manner. In rare cases, we may offer extended payment terms to certain
customers for equipment sales. These customers are usually large state-owned
corporations with good credit ratings. At the end of each period, we evaluate
the structure and collectability of accounts receivable and for those
receivables that are past due or not being paid according to the payment terms,
we take appropriate actions to exhaust all means of collection, including
seeking legal resolution in a court of law, for our collection
efforts.
 
 We offer
our customers a free product warranty on a case-by-case basis, depending upon
the type of customer, nature and size of the infrastructure projects. Under such
arrangements, a portion of the project contract balance (usually 5-10% of
contract value) is withheld by a customer for 12 to 24 months, until the product
warranty has expired. On September 30 2010, the retention receivables were
$649,542.
 
 The
increase in inventories to $1,583,246 reflects a reasonable inventory level
which corresponds to purchase some key raw materials, in order to fulfill large
order manufacturing requirement in fourth quarter. The reason for the large
increase in the prepayments and other receivables to $1,564,466, as compared to
year end December 31, 2009, is due to increases in prepayments to vendors for
raw materials, as the current price of raw materials are uncertain and in order
to lock in the current price, we prepay the vendor. To increase operating cash
flow, the Company obtain a delay of the payment terms from the construction
suppliers to its new manufacturing facility. Therefore at September 30, 2010,
accounts payable was $2,734,320.  During this period, a decrease in
other payables and accrued receivables was due to the Company paying $1,018,682
to the PRC government for land use rights, and a decrease in accrued operating
expense of $216,490.
 
 Investing
activities
 
 In 2008,
the Company was approved by the local government to construct a new
manufacturing facility for energy-saving products and equipment in Yingzhou
District Industrial Park, Tieling City, Liaoning Province, in the PRC. Total
estimated construction cost of the new manufacturing facility is approximately
$16 million (including land use rights for approximately $3 million). The
construction project is expected to be fully completed by the end of 2010. Upon
completion, the estimated manufacturing capacity of the new facility will be
more than 3 times the capacity at the Company’s current manufacturing
facility.
  - 13
-
  For the
nine months ended September 30, 2010, net cash used in investing activities was
$3,548,507, and was primarily attributable to the purchase of plant and
equipment of $36,345 and payments for construction in progress of $3,513,416.
There were also proceeds of $1,254 from the disposal of equipment.
 
 As of
September 30, 2010, the Company has incurred and capitalized $12,808,645 as
construction in progress.
 
 The new
facility and the installation of new and higher quality machines should enhance
the Company’s equipment manufacturing capacity and improve the productivity and
precision level of its products. Furthermore, the Company will have the ability
to expand the sale of its flow control equipment products into other
markets.
 
 Financing
activities
 
 For the
three months ended September 30, 2010, net cash provided by financing activities
was $640,762, of which $447,738 was attributable to the payments on a finance
lease and $900,000 was generated by a private placement financing of convertible
promissory notes. As of September 30, 2010, the Company also received $188,500
in temporary advances made by the Company’s major stockholder, Pelaris
International Ltd, which is controlled by Ms. Li Hua Wang (the Company’s CFO)
and Mr. Li Gang (the Company’s CEO), and both directors of the Company, which is
unsecured, interest-free with no fixed repayment term. Imputed interest on this
amount is considered insignificant.
 
 During
the first quarter of 2010, the Company sold, through a private placement to two
accredited investors, convertible promissory notes in the aggregate principal
amount of $960,000 and warrants to purchase 64,000 shares of its common stock.
The Notes while outstanding had an effective interest at the rate of 6% per
annum, and absent an “event of default,” are payable in shares of the Company’s
common stock. Provided there is no “event of default,” the Notes convert upon
the earlier to occur of (i) the commencement of trading of the Company’s common
stock on a major US stock exchange, or (ii) one year after issuance. Upon
conversion, the holders of the Notes shall receive such number of shares of
common stock equal to the quotient obtained by dividing (a) the then-outstanding
principal amount and accrued but unpaid interest on the Notes by (b) the
then-current conversion price, which currently is $7.50 per share (post 2.5-to-1
reverse stock split). The conversion price is subject to adjustment for stock
dividends, splits, combinations and similar events. The warrants, which are
exercisable for shares of common stock at a current exercise price of $10.00 per
share (post 2.5-to-1 reverse stock split), were not exercisable until three
months after issuance and will terminate five years thereafter. The exercise
price is subject to adjustment for stock dividends, splits, combinations and
similar events. The warrants also contain an exercise price ratchet adjustment
in the event the Company issues warrants having an exercise price at less than
the exercise price then in effect for the Warrants The Company has agreed to
provide the investors with “piggy-back” registration rights with respect to the
shares of common stock issuable upon exercise of the warrants.
 
 As the
Company adopts ASC Topic 470-20 “ Debt with conversion and other
options”, the convertible notes are recorded in accordance with this
topic. Although this accounting treatment has affected our balance sheet and
income statement by increasing the stock based compensation and non-cash
interest expense, it will not affect our cash flow.
 
 On July
27, 2010, the Company signed a two year unsecured credit facility with a
domestic bank to borrow up to RMB 40 million (approximately $5.88 million based
upon current exchange rates).Under the agreement, we will be able to draw up to
a maximum of RMB 40 million ($5.88 million) over a 24 month period ending June
28, 2012. Outstanding balances under the facility will accrue interest at a rate
of 1.3 times the Bank of China benchmark lending rate.  Any amounts of
principal repaid may be redrawn during the 24 month period. Drawings under the
facility will be used to complete the Company’s new manufacturing plant and for
general corporate purposes. The Company has not yet drawn down on this
facility.
 
 We
anticipate we will need additional working capital in 2010 and beyond to fund
the Company’s new business plans to establish a manufacturing base for new
energy equipment and to develop comprehensive energy saving infrastructure
projects for municipalities and energy conservation projects that include blast
furnace power generation, low concentration coal bed methane power generation
and bio-mass gas generation. Furthermore, we may consider expanding the
Company’s business lines. In order to maintain our lead position in
energy-efficient flow control equipment manufacturing,we anticipate a continued and steady growth
of the manufacture and sale of our flow control equipment. We may decide to
pursue additional investments through the sale of equity or equity linked
securities or debt financing to obtain the additional cash resources to fund our
business and other future projects; however, there can be no assurance that we
will be able to obtain additional funds on terms acceptable to the Company or at
all. If we cannot obtain debt or equity financing to fund our working capital
needs, our business development plan may be delayed and we may not be able to
achieve the estimated revenue growth from service and projects or we may not be
able to achieve our total revenues projections for this year.
  - 14
-
  Inflation
 
 We
believe that the relatively moderate rate of inflation over the past few years
has not had a significant impact on our results of operations.
 
 OFF-BALANCE
SHEET ARRANGEMENTS
 
 We do not
have any material off-balance sheet arrangements.
 
 IMPACT
OF RECENTLY ISSUED NEW ACCOUNTING STANDARDS
 
 We do not
expect adoption of recently issued accounting pronouncements to have a
significant impact on our results of operations, financial position or cash
flow.
 
 Item
3. Quantitative and Qualitative Disclosures About Market Risk
 
 Not
Applicable.
 
 Item
4T. Controls and Procedures.
 
 Evaluation
of Disclosure Controls and Procedures
 
 Our chief
executive officer and chief financial officer evaluated the effectiveness of our
disclosure controls and procedures as of September 30, 2010. The term
“disclosure controls and procedures,” as defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means
controls and other procedures of a company that are designed to ensure that
information required to be disclosed by a company in the reports that it files
or submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SEC’s rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by a
company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the company’s management, including its
principal executive and principal financial officers, as appropriate to allow
timely decisions regarding required disclosure. Based on the evaluation of our
disclosure controls and procedures as of September 30, 2010, our chief executive
officer and chief financial officer concluded that, as of such date, our
disclosure controls and procedures were effective.
 
 Changes in
Internal Controls
 
 No change
in our internal control over financial reporting occurred during the fiscal
quarter covered by this report that has materially affected, or is reasonably
likely to affect, our internal control over financial reporting.
 
 PART
II. OTHER INFORMATION
 
 Item 1.
              Legal
      Proceedings.
 
 On May
21, 2007, a civil complaint Robert Dawley v. NF Energy Saving Corp. of America,
et al. was filed in the United States District Court, Middle District of
Florida, Orlando, Civil No. 6:07-cv-872-Orl-18DAB. The complaint accused the
defendant of breaching a contract for payment of money that was signed by Sam
Winer, former Chief Executive Officer of the Company, before the commencement of
the Company’s reverse merger. After being initially dismissed by the court, the
action was authorized to proceed on November 16, 2007. A trial was held in the
United States District Court, Middle District of Florida, Orlando on October 16,
2008. The District Court issued a judgment on December 11, 2008, awarding the
plaintiff the sum of $400,000 against the Company, plus prejudgment interest in
the amount of $132,821.92, with continuing interest of $131.51 per day on the
$400,000 obligation until it is paid. The Court further adjudged that the
plaintiff shall surrender certain shares of common stock he holds in the Company
upon payment of the $400,000. In the event the plaintiff fails to surrender the
specified shares of stock after payment, the Company may cancel the stock. Any
payments or collection under the judgment shall be credited first to
interest.
  - 15
-
  On
January 6, 2009, the Company filed a notice of appeal 09-10140-B in the United
States Court of Appeals for the 11th Circuit from the District Court’s judgment.
The Company has also accrued $200,000 for this contingent liability to the
statement of operation in 2008. In addition, two of the Company’s executive
officers and directors, Mr. Gang Li and Ms. Li Hua Wang have personally agreed
to guarantee and bear all contingent liabilities and costs to be incurred from
this litigation claim.
 
 On April
1, 2010, the Eleventh Circuit issued a unanimous opinion reversing the District
Court’s Judgment on the grounds that Dawley was not entitled to the relief that
he sought and that the law did not support the District Court’s Judgment against
NF Energy. The Eleventh Circuit, to the contrary entered Judgment in NF Energy’s
favor. Subsequently, the United States District Court for the Middle District of
Florida, acting upon instructions from the Court of Appeal, entered a Bill of
Costs against Robert Dawley on June 24, 2010, totaling $2,088.
 
 Mr.
Dawley has orally advised the Company that he has filed a Petition for Writ of
Certiorari of the Eleventh Circuit’s Opinion and Judgment with the Supreme Court
of the United States.  However, to date, the Company has received no
indication that the Supreme Court has accepted any filings by Mr. Dawley or has
scheduled any response to his Petition.  The Company therefore has not
taken any action with respect to any such Petition.
 
 On or
about July 1, 2010, Mr. Dawley apparently commenced a second action before the
United States District Court for the Middle District of Florida, entitled Robert
Dawley v. NF Energy Corp. of America, et al.  In addition to the Company,
Mr. Dawley has named as defendants Mr. Gang Li and the Company’s litigation
counsel.  Mr. Dawley asserts, among other things, that the defendants
committed fraud with respect to the same agreements as were the subject of the
prior action.  He also complains that he is entitled to have a restrictive
legend removed from certain stock certificates that the predecessor company had
issued to him in exchange for an additional capital contribution.  Though
he has served copies of the Complaint, he has yet to serve a Summons requiring
the defendants to respond to the Complaint.
 
 The
Company believes that the second action by Mr. Dawley has no merit, is barred by
the judgment entered by the Court of Appeals in the prior action and, in any
event, fails to state fraud claims with the specificity required by law. 
Mr. Dawley has refused to withdraw the complaint, and so it is the Company’s
intention to ask the Court to strike the complaint and issue monetary sanctions
against Mr. Dawley equivalent to the amount of the Company’s attorneys’ fees and
costs incurred as a result of the second action. The motions currently are
pending before the Court.
 
 Though
the Company believes that its contemplated motion has merit, the Company cannot
predict with certainty that the Court will agree.  Accordingly, the Company
does not express any opinion as to the likelihood of its motion’s success. 
In the event that the Court does deny the motion, it is the Company’s intent to
continue its efforts to prevail against Mr. Dawley on behalf of all the named
defendants to the second action.
 Item
      1A.
                Risk
      Factors.
 
 Not
Applicable.
 Item
      2.
              Unregistered
      Sales of Equity Securities and Use of
Proceeds.
 
 Not
Applicable.
 
 Item
      3.
              Defaults
      Upon Senior Securities.
 
 None.
 
 Item
      4.
              [Reserved]
 
 Item
      5.
              Other
      Information.
 
 None.
 
 Item
      6.
              Exhibits.
 
 The list
of Exhibits , required by Item 601 of Regulation S-K to be filed as a part of
this Form 10-Q are set forth on the Exhibit Index immediately
preceding such Exhibits and is incorporated herein by this
reference.
  - 16
-
  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, there
unto duly authorized.
  NF
      Energy Saving Corporation(Registrant)Date:
      November 12, 2010
                By:
                /s/ Gang LiGang
      LiChairman,
      Chief Executive Officer and
                  President
 
 Date:
      November 12, 2010
                By:
                /s/ Li Hua WangLi
      Hua WangChief
      Financial Officer
                  (Principal
      Financial and Accounting
Officer)
  - 17
-
  INDEX
TO EXHIBITS
 
 Exhibit No.
                
                Description3.1
                
                Certificate
      of Amendment to Certificate of Incorporation (incorporated by reference to
      the Company’s Current Report on Form 8-K filed with the SEC on September
      16, 201010.1*
                
                Preferred
      Provider and Services Agreement between LiaoNing Nengfa Weiye Energy
      Technology Co. LTD. and Nengfa Weiye Tieling Valve Joint-Sock Co.
      Ltd.31.1*
                
                Certification
      of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14
      of the Securities Exchange Act of 1934, as adopted pursuant to
      Section 302 of the Sarbanes-Oxley Act of 200231.2*
                
                Certification
      of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14
      of the Securities Exchange Act of 1934, as adopted pursuant to
      Section 302 of the Sarbanes-Oxley Act of 200232.1*
                
                Certification
      of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to section 906 of the Sarbanes-Oxley Act of
      200232.2*
                
                Certification
      of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to section 906 of the Sarbanes-Oxley Act of
      2002*
                
                Filed
      herewith
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