**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 June 30,
                2008**





** ̈**
            **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 of America**


(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.)**





**21-Jia
      Bei Si Dong Road, Tie Xi Qu**


**Shenyang,
      P. R. China 110021**


**(Address
      of Principal Executive Offices)**





**(8624)
      2560-9750**


**(Registrant’s
      Telephone Number, including area code)**










Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.


Yes**x**
            
            
            No** ̈**





Indicate
      by check mark whether the registrant 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)


Yes** ̈**
            
            
            No**x**





As
      of
      August 12, 2008, the registrant had 39,872,704 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.








**TABLE
      OF CONTENTS**




**PART
                I – FINANCIAL
                INFORMATION**Item
                1. Financial Statements
            
            3Item
                2. Management’s Discussion and Analysis of Financial
                Condition and Results of Operations
            
            23Item
                3. Quantitative and Qualitative Disclosures About
                Market Risk
            
            34Item
                4T. Controls and Procedures
            
            34**PART
                II – OTHER INFOMRATION**Item
                1. Legal Proceedings
            
            34Item
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds
            
            34Item
                3. Defaults Upon Senior Securities
            
            34Item
                4. Submission of Matters to a Vote of Security
                Holders
            
            34Item
                5. Other Information
            
            34Item
                6. Exhibits
            
            34Signatures
            
            35


2


**PART
      I – FINANCIAL INFORMATION**





**Item
      1.****Financial
      Statements**





**NF
      ENERGY SAVING CORPORATION OF AMERICA**





**INDEX
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(UNAUDITED)**


**Page**Condensed
                  Consolidated BalanceSheets asof
                  June 30, 2008 and December 31,
                  2007
              
              
              4Condensed
                  ConsolidatedStatements
                  of Operations And Comprehensive Incomefor
                  the three and six months ended June 30, 2008 and 2007
              
              
              5Condensed
                  Consolidated Statements
                  of Cash Flowsfor
                  the six months ended June 30, 2008 and 2007
              
              
              6Condensed
                  Consolidated Statementof
                  Stockholders’ Equityfor
                  the six months ended June 30, 2008
              
              
              7Notes
                    to Condensed Consolidated Financial
                    Statements
              
              
              8 to
                  22


3


**NF
      ENERGY SAVING CORPORATION OF AMERICA**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**


**AS
      OF JUNE 30, 2008 AND DECEMBER 31, 2007**


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


**(Unaudited)**





June 30, 2008
            
            December 31, 2007(Unaudited)
            
            (Audited)**ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            4,761,252
            
            $
            2,240,901Accounts
                receivable, trade
            
            
            5,325,700
            
            
            4,061,352Inventories
            
            
            1,437,880
            
            
            1,448,386Prepayments
                and other receivables
            
            
            972,812
            
            
            605,989Total
                current assets
            
            
            12,497,644
            
            
            8,356,628Plant
                and equipment, net
            
            
            2,592,141
            
            
            2,514,795**TOTAL
                ASSETS**
            
            $
            15,089,785
            
            $
            10,871,423**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**Current
                liabilities:Accounts
                payable, trade
            
            $
            1,229,217
            
            $
            1,259,081Customer
                deposits
            
            
            135,542
            
            
            22,719Value
                added tax payable
            
            
            66,071
            
            
            70,604Other
                payables and accrued liabilities
            
            
            165,410
            
            
            355,390Total
                current liabilities
            
            
            1,596,240
            
            
            1,707,794Commitments
                and contingencies
            
            
            268,825
            
            
            -Stockholders’
                equity:Common
                stock, $0.001 par value; 50,000,000 shares authorized; 39,872,704
                and
                33,227,328 shares issued and outstanding as of June 30, 2008 and
                December
                31, 2007
            
            
            39,872
            
            
            33,227Additional
                paid-in capital
            
            
            7,706,587
            
            
            5,713,232Statutory
                reserve
            
            
            517,774
            
            
            517,774Accumulated
                other comprehensive income
            
            
            1,245,949
            
            
            557,503Retained
                earnings
            
            
            3,983,363
            
            
            2,341,893Total
                stockholders’ equity
            
            
            13,493,545
            
            
            9,163,629**TOTAL
                LIABILITIES AND STOCKHOLDERS’ EQUITY**
            
            $
            15,089,785
            
            $
            10,871,423





See
      accompanying notes to condensed consolidated financial
      statements.


4


**NF
      ENERGY SAVING CORPORATION OF
      AMERICA**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


**AND
      COMPREHENSIVE INCOME**


**FOR
      THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007**


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


**(Unaudited)**





Three months ended June 30,
            
            Six months ended June 30,2008
            
            2007
            
            2008
            
            2007**REVENUE,
                NET**Product
            
            $
            3,036,313
            
            $
            3,013,085
            
            $
            5,279,366
            
            $
            3,945,336Services
            
            
            837,555
            
            
            1,015,812
            
            
            1,168,936
            
            
            1,086,047Projects
            
            
            422,659
            
            
            -
            
            
            713,182
            
            
            -Total
                operation revenues
            
            
            4,296,527
            
            
            4,028,897
            
            
            7,161,484
            
            
            5,031,383**COST
                OF REVENUES:**Cost
                of products
            
            
            2,092,071
            
            
            2,266,486
            
            
            3,752,218
            
            
            3,007,717Cost
                of services
            
            
            582,581
            
            
            258,510
            
            
            792,101
            
            
            294,734Cost
                of projects
            
            
            370,866
            
            
            -
            
            
            610,636
            
            
            -Total
                cost of revenues
            
            
            3,045,518
            
            
            2,524,996
            
            
            5,154,955
            
            
            3,302,451**GROSS
                PROFIT**
            
            
            1,251,009
            
            
            1,503,901
            
            
            2,006,529
            
            
            1,728,932**OPERATING
                EXPENSES:**Sales
                and marketing
            
            
            48,921
            
            
            14,709
            
            
            62,280
            
            
            14,709Research
                and development
            
            
            47,254
            
            
            329,906
            
            
            85,586
            
            
            329,906Stock-based
                compensation
            
            
            -
            
            
            255,000
            
            
            -
            
            
            510,000General
                and administrative
            
            
            113,401
            
            
            71,759
            
            
            241,824
            
            
            129,229Total
                operating expenses
            
            
            209,576
            
            
            671,374
            
            
            389,690
            
            
            983,844**INCOME
                FROM OPERATIONS**
            
            
            1,041,433
            
            
            832,527
            
            
            1,616,839
            
            
            745,088Other
                income:Interest
                income
            
            
            8,813
            
            
            342
            
            
            8,813
            
            
            342Other
                income
            
            
            12,141
            
            
            4,867
            
            
            16,123
            
            
            11,519Total
                other income
            
            
            20,954
            
            
            5,209
            
            
            24,936
            
            
            11,861**INCOME
                BEFORE INCOME TAXES**
            
            
            1,062,387
            
            
            837,736
            
            
            1,641,775
            
            
            756,949Income
                tax expense
            
            
            (4
            )
            
            -
            
            
            (305
            )
            
            -**NET
                INCOME**
            
            $
            1,062,383
            
            $
            837,736
            
            $
            1,641,470
            
            $
            756,949Other
                comprehensive income:-
                Foreign currency translation gain
            
            
            275,802
            
            
            35,254
            
            
            688,446
            
            
            71,852**COMPREHENSIVE
                INCOME**
            
            $
            1,338,185
            
            $
            872,990
            
            $
            2,329,916
            
            $
            828,801Net
                income per share **–** basic and diluted
            
            $
            0.03
            
            $
            0.03
            
            $
            0.05
            
            $
            0.02Weighted
                average shares outstanding **–** basic and
                diluted
            
            
            36,033,153
            
            
            31,527,328
            
            
            34,630,241
            
            
            31,388,439





See
      accompanying notes to condensed consolidated financial
      statements.


5


**NF
      ENERGY SAVING CORPORATION OF AMERICA**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**FOR
      THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007**


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


**(Unaudited)**





Six months ended June 30,2008
            
            2007**Cash
                flows from operating activities:**Net
                income
            
            $
            1,641,470
            
            $
            756,949Adjustments
                to reconcile net income to net cash provided by operating
                activitiesDepreciation
            
            
            170,415
            
            
            113,254Gain
                on disposal of plant and equipment
            
            
            -
            
            
            (10,533
            )Stock-based
                compensation
            
            
            -
            
            
            510,000Change
                in operating assets and liabilities:Accounts
                receivable
            
            
            (974,464
            )
            
            (288,838
            )Inventories
            
            
            100,786
            
            
            192,661Prepayments
                and other receivables
            
            
            (330,241
            )
            
            (1,142,062
            )Accounts
                payable
            
            
            (107,754
            )
            
            50,319Customer
                deposits
            
            
            108,199
            
            
            63,720Income
                tax payable
            
            
            -
            
            
            (378,069
            )Value
                added tax payables
            
            
            2,324
            
            
            139,235Other
                payables and accrued liabilities
            
            
            (132,019
            )
            
            215,173Net
                cash provided by operating activities
            
            
            478,716
            
            
            221,809**Cash
                flows from investing activities:**Purchase
                of plant and equipment
            
            
            (160,722
            )
            
            (74,170
            )Proceeds
                from disposal of plant and equipment
            
            
            -
            
            
            53,823Net
                cash used in investing activities
            
            
            (160,722
            )
            
            (20,347
            )**Cash
                flows from financing activities:**Proceeds
                from private sale of common stock
            
            
            2,000,000
            
            
            870,000Net
                cash provided by financing activities
            
            
            2,000,000
            
            
            870,000Effect
                on exchange rate change on cash and cash equivalents
            
            
            202,357
            
            
            71,852**NET
                CHANGE IN CASH AND CASH EQUIVALENTS**
            
            
            2,520,351
            
            
            1,143,314**CASH
                AND CASH EQUIVALENTS, BEGINNING OF PERIOD**
            
            
            2,240,901
            
            
            796,944**CASH
                AND CASH EQUIVALENTS, END OF PERIOD**
            
            $
            4,761,252
            
            $
            1,940,258**SUPPLEMENTAL
                DISCLOSURE OF CASH FLOW INFORMATION:**Cash
                paid for income taxes
            
            $
            305
            
            $
            378,069Cash
                paid for interest expenses
            
            $
            -
            
            $
            -





See
      accompanying notes to condensed consolidated financial
      statements.


6





**NF
      ENERGY SAVING CORPORATION OF
      AMERICA**


**CONDENSED
      CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY**


**FOR
      THE SIX MONTHS ENDED JUNE 30, 2008**


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


**(** **Unaudited)**





Common stock
            
            
            
            Accumulated
              other
            
            
            
            
            
            TotalNo. of
              shares
            
            Amount
            
            Additional
              paid-in capital
            
            comprehensive
              income
            
            Statutory
              reserve
            
            Retained
              earnings
            
            stockholders’
              equityBalance as of January 1, 2008
            
            
            33,227,328
            
            $
            33,227
            
            $
            5,713,232
            
            $
            557,503
            
            $
            517,774
            
            $
            2,341,893
            
            $
            9,163,629Private
                sale of common stock
            
            
            6,645,376
            
            
            6,645
            
            
            1,993,355
            
            
            -
            
            
            -
            
            
            -
            
            
            2,000,000Foreign
                currency translation adjustment
            
            
            -
            
            
            -
            
            
            -
            
            
            688,446
            
            
            -
            
            
            -
            
            
            688,446Net
                income for the period
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,641,470
            
            
            1,641,470Balance
                as of June 30, 2008
            
            
            39,872,704
            
            $
            39,872
            
            $
            7,706,587
            
            $
            1,245,949
            
            $
            517,774
            
            $
            3,983,363
            
            $
            13,493,545





See
      accompanying notes to condensed consolidated financial
      statements.


7




**NF
      ENERGY SAVING CORPORATION OF AMERICA**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE THREE MONTHS ENDED JUNE 30, 2008**


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


**(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,
        2007
        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 June 30, 2008 are not necessarily
        indicative of the results to be expected for the entire fiscal year ending
        December 31, 2008 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-KSB for the year ended December 31, 2007.





**NOTE
      -** **2**  **ORGANIZATION
      AND BUSINESS BACKGROUND**





NF
      Energy
      Saving Corporation of America (the “Company” or “NFES”) 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 further changed to its existing
      name.





The
      Company, through its subsidiaries, mainly engages in the production of
      industrial valve components and products in The People’s Republic of China (the
“PRC”). During 2007, the Company commenced a new business segment in the
      provision of technical service and re-engineering projects in the energy saving
      related industry in the PRC.





Liaoning
      Nengfa Weiye Energy Technology Co. Ltd. (“Nengfa Energy”) (formerly Neng Fa
      Weiye Pipe Network Construction and Operation Co., Ltd.) is a wholly-owned
      subsidiary of the Company. Nengfa Energy is a valves manufacturer and involves
      in the 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. All the customers are located
      in
      the PRC.





Liaoning
      Nengfa Weiye Tie Fa Sales Co., Ltd. (“Sales Company”) is a wholly-owned
      subsidiary of Nengfa Energy in the PRC. Sales Company was incorporated as a
      limited liability company under the laws of the PRC with a registered capital
      of
      $683,620 (equivalent to RMB 5,000,000) on September 5, 2007. It is mainly
      engaged in the sales and marketing of valves components and products in the
      PRC.





NFES,
      Nengfa Energy and Sales Company are hereinafter referred to as (the
“Company”).




8


**NF
      ENERGY SAVING CORPORATION OF AMERICA**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE THREE MONTHS ENDED JUNE 30, 2008**


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


**(Unaudited)**





**NOTE
      -** **3**  **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES**





·  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 period
      reported. Actual results may differ from these estimates.





·  Basis
      of
      consolidation





The
      condensed consolidated financial statements include the financial statements
      of
      NFES and its subsidiaries, Nengfa Energy and Sales Company.





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. The
      Company extends unsecured credit to its customers in the ordinary course of
      business but mitigates the associated risks by performing credit checks and
      actively pursuing past due accounts. An allowance for doubtful accounts is
      established and determined based on managements’ assessment of known
      requirements, aging of receivables, payment history, the customer’s current
      credit worthiness and the economic environment. As of June 30, 2008, the Company
      has determined that no allowance for doubtful accounts is
      necessary.





·  Inventories





Inventories
      are stated at the lower of cost or market (net realizable value), cost being
      determined on a weighted average method. Costs include material, labor and
      manufacturing overhead costs. The Company quarterly 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. As of June 30, 2008, the Company
      did
      not record an allowance for obsolete inventories, nor have there been any
      write-offs.





·  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:





Depreciable life
            
            Residual valuePlant
                and machinery
            
            
            3 –
                20 years
            
            
            5
            %Furniture,
                fixture and equipment
            
            
            5 –
                8 years
            
            
            5
            %




9


**NF
      ENERGY SAVING CORPORATION OF AMERICA**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE THREE MONTHS ENDED JUNE 30, 2008**


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


**(Unaudited)**





Expenditure
      for repairs and maintenance is expensed as incurred. When assets are 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.





·  Impairment
      of long-lived assets





In
      accordance with the Statement of Financial Accounting Standard (SFAS) No. 144, *“Accounting
      for the Impairment or Disposal of Long-Lived Assets”* ,
      all
      long-lived assets such as plant and equipment held and used by the Company
      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 June
      30,
      2008.





·  Revenue
      recognition





In
      accordance with the SEC’s Staff Accounting Bulletin No. 104, *“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 revenues from the sale of self-manufactured products and
      provision of engineering services. The Company recognizes its revenues net
      of
      related business taxes and 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. Output VAT is borne by customers in addition to the
      invoiced value of sales and input VAT is borne by the Company in addition to
      the
      invoiced value of purchases to the extent not refunded for export sales.





The
      Company recognizes revenue from the sale of products upon delivery to the
      customers and the transfer of title and risk of loss. The Company experienced
      no
      product returns and has recorded no reserve for sales returns for the six months
      ended June 30, 2008.





(b)  Service
      revenue





Service
      revenue is primarily derived from energy-saving technical 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. Revenue is recognized when service
      is rendered and accepted by the customers.





(c)   Project
      revenue





The
      Company applies the percentage-of-completion method under SOP 81-1 “ *Accounting
      for Performance of Construction-Type and Production-Type
      Contracts* ”,
      to
      recognize revenues for energy-saving re-engineering projects that require
      significant modification or customization or installation subject to the
      customers. The Company records a provision in those instances in which the
      Company believes a contract will probably generate a net loss and the Company
      can reasonably estimate this loss. If the Company cannot reasonably estimate
      the
      loss, the Company limits the amount of revenue that the Company recognizes
      to
      the costs the Company has incurred, until the Company can estimate the total
      loss. Advance payments from customers and amounts billed to clients in excess
      of
      revenue recognized are recorded as receipt in advance.




10




**NF
      ENERGY SAVING CORPORATION OF AMERICA**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE THREE MONTHS ENDED JUNE 30, 2008**


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


**(Unaudited)**





(d)  Interest
      income





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





·  Cost
      of
      revenues





Cost
      of
      revenues consists primarily of material costs, direct labor, depreciation and
      manufacturing overheads, which are directly attributable to the manufacture
      of
      products and the rendering of services.





·  Stock-based
      compensation





The
      Company adopts SFAS No. 123 (revised 2004), " *Share-Based
      Payment* "
      ("SFAS
      No. 123R") using the fair value method. Under SFAS No. 123(R), the stock-based
      compensation is measured using the Black-Scholes Option-Pricing model on the
      date of grant. The fair value of stock-based compensation that are expected
      to
      vest are recognized using the straight-line method over the requisite service
      period.





·  Income
      taxes





The
      Company accounts for income tax using SFAS No. 109 *“Accounting
      for Income Taxes”* ,
      which
      requires the asset and liability approach for financial accounting and reporting
      for income taxes. Under this approach, deferred income taxes are provided for
      the estimated future tax effects attributable to temporary differences between
      financial statement carrying amounts of assets and liabilities and their
      respective tax bases, and for the expected future tax benefits from loss
      carry-forwards and provisions, if any. Deferred tax assets and liabilities
      are
      measured using the enacted tax rates expected in the years of recovery or
      reversal and the effect from a change in tax rates is recognized in the
      statements of operations and comprehensive income in the period of enactment.
      A
      valuation allowance is provided to reduce the amount of deferred tax assets
      if
      it is considered more likely than not that some portion of, or all of the
      deferred tax assets will not be realized.





Effective
      January 1, 2007, the Company also adopts the provisions of the Financial
      Accounting Standards Interpretation No. 48, *“Accounting
      for Uncertainty in Income Taxes” (“* FIN
      48 *”)* .
      FIN 48
      prescribes a recognition threshold and measurement process for recording in
      the
      financial statements uncertain tax positions taken or expected to be taken
      in a
      tax return. FIN No. 48 also provides guidance on de-recognition, classification,
      interest and penalties, accounting in interim periods, disclosures and
      transitions. In connection with the adoption of FIN No. 48, the Company has
      analyzed the filing positions in all of the jurisdictions where the Company
      is
      required to file income tax returns, as well as all open tax years in these
      jurisdictions. The Company also follows the policy of recognizing interest
      and
      penalties, if any, related to unrecognized tax positions as income tax expense.
      The Company did not have any unrecognized tax position and there was no effect
      on the financial condition or results of operations for the period ended June
      30, 2008.




11




**NF
      ENERGY SAVING CORPORATION OF AMERICA**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE THREE MONTHS ENDED JUNE 30, 2008**


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


**(Unaudited)**





The
      Company conducts its major 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 the local and foreign tax
      authority.





·  Net
      income per share





The
      Company calculates net income per share in accordance with SFAS No.
      128, *“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.





·  Comprehensive
      income





SFAS
      No.
      130, *“Reporting
      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
      comprehensive income 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.





·  Product
      warranty





Under
      the
      terms of the contracts, the Company will provide a product warranty to its
      customers for a period of twelve months, free of charge and then at the
      discretion of the customers, enter into maintenance contracts. The Company
      has
      not experienced any material returns 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 six months ended June 30, 2008.





·  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 its local currency, the Renminbi Yuan ("RMB"), which
      is 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 SFAS No. 52, “ *Foreign
      Currency Translation”* ,
      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.




12




**NF
      ENERGY SAVING CORPORATION OF AMERICA**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE THREE MONTHS ENDED JUNE 30, 2008**


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


**(Unaudited)**





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





2008
            
            2007Months
                end RMB:US$ exchange rate
            
            
            7.0726
            
            
            7.3141Average
                monthly RMB:US$ exchange rate
            
            
            6.8718
            
            
            7.5633





·  Segment
      reporting





SFAS
      No.
      131 *“Disclosures
      about Segments of an Enterprise and Related Information”* 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
      the financial statements. The Company currently operates in two reportable
      business segments in Tieling City, Liaoning Province, the PRC: Valves
      manufacturing business and Energy-saving related business.





·  Fair
      value of financial instruments





The
      Company values its financial instruments as required by SFAS No. 107, *“Disclosures
      about Fair Value of Financial Instruments”* .
      The
      estimated fair value amounts have been determined by the Company, using
      available market information and appropriate valuation methodologies. The
      estimates presented herein are not necessarily indicative of amounts that the
      Company could realize in a current market exchange.





The
      Company’s financial instruments primarily include cash and cash equivalents,
      trade accounts receivable, prepayments and other receivables, accounts payable,
      customer deposits, value added tax payable and other payables and accrued
      liabilities.





As
      of the
      balance sheet date, the estimated fair values of financial instruments were
      not
      materially different from their carrying values as presented due to short
      maturities of these instruments.





·  Recent
      accounting pronouncements





The
      Company has reviewed all recently issued, but not yet effective, accounting
      pronouncements and do 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.





In
      February 2007, the FASB issued SFAS No. 159, *"The
      Fair Value Option for Financial Assets and Financial Liabilities"* ("SFAS
      No. 159"). SFAS No. 159 permits entities to choose to measure, on an
      item-by-item basis, specified financial instruments and certain other items
      at
      fair value. Unrealized gains and losses on items for which the fair value option
      has been elected are required to be reported in earnings at each reporting
      date.
      SFAS No. 159 is effective for fiscal years beginning after November 15, 2007,
      the provisions of which are required to be applied prospectively. The Company
      believes that SFAS 159 should not have a material impact on the consolidated
      financial position or results of operations.




13




**NF
      ENERGY SAVING CORPORATION OF AMERICA**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE THREE MONTHS ENDED JUNE 30, 2008**


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


**(Unaudited)**





In
      December 2007, the FASB issued SFAS No. 141 (Revised 2007), *"Business
      Combinations" (* "SFAS
      No.
      141R"). SFAS No. 141R will change the accounting for business combinations.
      Under SFAS No. 141R, an acquiring entity will be required to recognize all
      the
      assets acquired and liabilities assumed in a transaction at the acquisition-date
      fair value with limited exceptions. SFAS No. 141R will change the accounting
      treatment and disclosure for certain specific items in a business combination.
      SFAS No. 141R applies prospectively to business combinations for which the
      acquisition date is on or after the beginning of the first annual reporting
      period beginning on or after December 15, 2008. Accordingly, any business
      combinations the Company engages in will be recorded and disclosed following
      existing GAAP until January 1, 2009. The Company expects SFAS No. 141R will
      have
      an impact on accounting for business combinations once adopted but the effect
      is
      dependent upon acquisitions at that time. The Company is still assessing the
      impact of this pronouncement.





In
      December 2007, the FASB issued SFAS No. 160, *"Noncontrolling
      Interests in Consolidated Financial Statements--An Amendment of ARB No. 51,
      or
      SFAS No. 160"* ("SFAS
      No. 160"). SFAS No. 160 establishes new accounting and reporting standards
      for
      the noncontrolling interest in a subsidiary and for the deconsolidation of
      a
      subsidiary. SFAS No. 160 is effective for fiscal years beginning on or after
      December 15, 2008. The Company believes that SFAS 160 should not have a material
      impact on the consolidated financial position or results of
      operations.





In
      March
      2008, the FASB issued SFAS No. 161, *"Disclosures
      about Derivative Instruments and Hedging Activities"* ("SFAS
      No. 161"). SFAS No. 161 requires companies with derivative instruments to
      disclose information that should enable financial-statement users to understand
      how and why a company uses derivative instruments, how derivative instruments
      and related hedged items are accounted for under FASB Statement No. 133 *"Accounting
      for Derivative Instruments and Hedging Activities"* and how
      derivative instruments and related hedged items affect a company's financial
      position, financial performance and cash flows. SFAS No. 161 is effective for
      financial statements issued for fiscal years and interim periods beginning
      after
      November 15, 2008. The adoption of this statement is not expected to have a
      material effect on the Company's future financial position or results of
      operations.





In
      May
      2008, the FASB issued SFAS No. 162, *“The
      Hierarchy of Generally Accepted Accounting Principles”* ("SFAS
      No. 162"). This statement identifies the sources of accounting principles and
      the framework for selecting the principles to be used in the preparation of
      financial statements in conformity with generally accepted accounting principles
      (GAAP) in the United States. This statement is effective 60 days following
      the
      SEC’s approval of the Public Company Accounting Oversight Board amendments to AU
      Section 411, *“The
      Meaning of Present Fairly in Conformity With Generally Accepted Accounting
      Principles”* .
      The
      Company does not expect the adoption of SFAS No. 162 to have a material effect
      on the financial condition or results of operations of the Company.





**NOTE
      -** **4** **ACCOUNTS
      RECEIVABLE, TRADE**





The
      majority of the Company’s sales are on open credit terms and in accordance with
      terms specified in the contracts governing the relevant transactions. The
      Company evaluates the need of an allowance for doubtful accounts based on
      specifically identified amounts that management believes to be uncollectible.
      If
      actual collections experience changes, revisions to the allowance may be
      required. Based upon the aforementioned criteria, management has determined
      that
      no allowance for doubtful accounts is required for the period ended June 30,
      2008.


14


**NF
      ENERGY SAVING CORPORATION OF AMERICA**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE THREE MONTHS ENDED JUNE 30, 2008**


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


**(Unaudited)**





**NOTE
      -** **5**  **INVENTORIES**





Inventories
      consisted of the following:





June 30, 2008
            
            December 31, 2007(Unaudited)
            
            (Audited)Raw
                materials
            
            $
            381,273
            
            $
            310,040Work-in-process
            
            
            1,043,474
            
            
            734,711Finished
                goods
            
            
            13,133
            
            
            403,635$
            1,437,880
            
            $
            1,448,386





For
      the
      three and six months ended June 30, 2008 and 2007, no allowance for obsolete
      inventories was recorded by the Company.





**NOTE
      -** **6**  **PREPAYMENTS
      AND OTHER RECEIVABLES**





Prepayments
      and other receivables consisted of the following:





June 30, 2008
            
            December 31, 2007(Unaudited)
            
            (Audited)Prepayment
                to vendors for raw materials
            
            $
            878,616
            
            $
            558,047Advance
                to employees
            
            
            59,410
            
            
            -Deposits
            
            
            23,284
            
            
            -Prepaid
                expenses
            
            
            9,336
            
            
            25,874Value
                added tax receivable
            
            
            1,875
            
            
            12,537Other
                receivables
            
            
            291
            
            
            9,531$
            972,812
            
            $
            605,989





**NOTE
      -** **7**  **PLANT
      AND EQUIPMENT, NET**





Plant
      and
      equipment, net, consisted of the following:





June 30, 2008
            
            December 31, 2007(Unaudited)
            
            (Audited)Plant
                and machinery
            
            $
            2,798,838
            
            $
            2,566,042Furniture,
                fixture and equipment
            
            
            40,142
            
            
            33,968Construction
                in progress
            
            
            234,729
            
            
            223,029Foreign
                translation difference
            
            
            194,828
            
            
            162,4603,268,537
            
            
            2,985,499Less:
                accumulated depreciation
            
            
            (641,119
            )
            
            (448,981
            )Less:
                foreign translation difference
            
            
            (35,277
            )
            
            (21,723
            )$
            2,592,141
            
            $
            2,514,795




15


**NF
      ENERGY SAVING CORPORATION OF AMERICA**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE THREE MONTHS ENDED JUNE 30, 2008**


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


**(Unaudited)**





Depreciation
      expenses for the three months ended June 30, 2008 and 2007 were $83,262 and
      $56,709 respectively.





Depreciation
      expenses for the six months ended June 30, 2008 and 2007 were $170,415 and
      $113,254, respectively.





**NOTE
      -** **8**  **OTHER
      PAYABLES AND ACCRUED LIABILITIES**





Other
      payables and accrued liabilities consisted of the following:





June 30, 2008
            
            December 31, 2007(Unaudited)
            
            (Audited)Rent
                payable
            
            $
            18,190
            
            $
            37,599Welfare
                payable
            
            
            87,203
            
            
            108,125Accrued
                expenses
            
            
            36,005
            
            
            74,576Advance
                to staff
            
            
            4,279
            
            
            -Payable
                to equipment vendors
            
            
            19,733
            
            
            135,090$
            165,410
            
            $
            355,390





**NOTE
      -** **9**  **COMMON
      STOCK SUBSCRIPTIONS**





In
      January 2008, the Company entered a loan agreement to borrow an aggregate of
      $2,000,000 from two independent investors namely, South World Ltd. and Oriental
      United Resources Ltd. (the “Investors”), which are established under the laws of
      the British Virgin Islands. The loans were unsecured, non-interest bearing
      and
      convertible into common stock in a term of 3 months from the drawdown date.
      The
      Company also had an option to repay the balance with interest charge at a rate
      of 36% per annum. The Company received the aggregate amount of $2,000,000 in
      January and March 2008, respectively.





On
      April
      28, 2008, the Company entered into a Securities Purchase Agreement with two
      independent investors (“the Investors”) to consummate a private placement of
      6,645,376 shares of restricted common stock for an aggregate purchase price
      of
      $2,000,000 at a 50-trading days weighted average market quoted price of $0.30
      per share. The Investors are South World Ltd. and Oriental United Resources
      Ltd., which are established under the laws of the British Virgin Islands, each
      of the Investors acquired one half of these common stock, or 3,322,688 shares.
      As a result of this transaction, each of the investors owns 8.33% of the issued
      and outstanding common stock of the Company. The proceeds were used to fund
      the
      working capital. The Company also entered into various covenants with the
      Investors, including its (i) obtaining a listing on a United States stock
      exchange not later than December 31, 2009, (ii) developing a step by step energy
      saving and emission reduction business plan as a products and service provider
      in consultation with the Investors, (iii) limiting business arrangements with
      affiliates, and (iv) establishing good corporate governance and seeking good
      financial development.




16


**NF
      ENERGY SAVING CORPORATION OF AMERICA**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE THREE MONTHS ENDED JUNE 30, 2008**


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


**(Unaudited)**





As
      of
      June 30, 2008, the number of issued and outstanding shares of the Company’s
      common stock was 39,872,704.





**NOTE
      -** **10**  **INCOME
      TAXES**





NFES
      is
      registered in the State of Delaware and is subject to United States of America
      tax law.





As
      of
      June 30, 2008, the operation in the United States of America has incurred
      $642,414 of cumulative net operating losses which can be carried forward to
      offset future taxable income. The net operating loss carryforwards begin to
      expire in 2029, if unutilized. The Company has provided for a full valuation
      allowance against the deferred tax assets of $224,845 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, Nengfa Energy and Sales Company
      are
      subject to the Corporate Income Tax governed by the Income Tax Law of the
      People’s Republic of China.





Effective
      from January 1, 2008, the Corporate Income Tax Law of the People’s Republic of
      China (the “New CIT Law”) is followed. Under the New CIT Law, Nengfa Energy, as
      a foreign investment enterprise continues to enjoy the unexpired tax holidays
      for a full exemption of income tax for the first two profit making years with
      a
      15% exemption of income tax for the next three years. Sales Company is a
      domestic company which is entitled to the tax rate reduction from 33% to 25%.





The
      Company’s effective income tax rates for the six months ended June 30, 2008 and
      2007 were 0%, and 0%.





The
      Company adopted the provisions of FIN 48 on January 1, 2007. This interpretation
      prescribes a recognition threshold and measurement attribute for the tax
      positions taken, or expected to be taken, on a tax return. The Company files
      tax
      returns in the various tax jurisdictions in which its subsidiaries operate
      in
      the PRC. The United States tax returns of its tax years 2002 to 2007 remain
      open
      to examination by IRS. The PRC 2007 tax return has been filed and
      cleared.





**NOTE
      -** **11**  **SEGMENT
      INFORMATION**





The
      Company’s business units have been aggregated into two reportable segments:
      Valves manufacturing business and Energy-saving related business. Valves
      manufacturing business included the production of valves components and
      provision of valve improvement and engineering services. Energy-saving related
      business included the provision of energy-saving related re-engineering and
      technical services and long-term construction project. The Company operates
      these 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 periods ended June 30, 2008 and 2007. 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.




17




**NF
      ENERGY SAVING CORPORATION OF AMERICA**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE THREE MONTHS ENDED JUNE 30, 2008**


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


**(Unaudited)**


Summarized
        financial information concerning the Company’s reportable segments is shown in
        the following table for the three and six months ended June 30, 2008:
 
 Three
                  months ended June 30, 2008:
              
              Valves
                manufacturing
                business
              
              Energy-saving
                related business
              
              TotalOperating
                  revenues-
                  Products
              
              $
              3,036,313
              
              $
              -
              
              $
              3,036,313-
                  Services
              
              
              -
              
              
              837,555
              
              
              837,555-
                  Projects
              
              
              -
              
              
              422,659
              
              
              422,659Total
                  operating revenues
              
              
              3,036,313
              
              
              1,260,214
              
              
              4,296,527Cost
                  of revenues
              
              
              2,092,071
              
              
              953,447
              
              
              3,045,518Gross
                  profit
              
              
              944,242
              
              
              306,767
              
              
              1,251,009Depreciation
              
              
              58,840
              
              
              24,422
              
              
              83,262Net
                  income
              
              
              750,774
              
              
              311,609
              
              
              1,062,383Expenditure
                  for long-lived assets
              
              $
              32,171
              
              $
              13,353
              
              $
              45,524
 
 Six
                  months ended June 30, 2008:
              
              Valves
                manufacturing
                business
              
              Energy-saving
                related business
              
              TotalOperating
                  revenues-
                  Products
              
              $
              5,279,366
              
              $
              -
              
              $
              5,279,366-
                  Services
              
              
              -
              
              
              1,168,936
              
              
              1,168,936-
                  Projects
              
              
              -
              
              
              713,182
              
              
              713,182Total
                  operating revenues
              
              
              5,279,366
              
              
              1,882,118
              
              
              7,161,484Cost
                  of revenues
              
              
              3,752,218
              
              
              1,402,737
              
              
              5,154,955Gross
                  profit
              
              
              1,527,148
              
              
              479,381
              
              
              2,006,529Depreciation
              
              
              125,616
              
              
              44,799
              
              
              170,415Net
                  income
              
              
              1,226,306
              
              
              415,164
              
              
              1,641,470Expenditure
                  for long-lived assets
              
              $
              118,482
              
              
              42,240
              
              
              160,722
 
 Summarized
        financial information concerning the Company’s reportable segments is shown in
        the following table for the three and six months ended June 30, 2007:
 
 Three
                  months ended June 30, 2007:
              
              Valves
                manufacturing
                business
              
              Energy-saving
                related business
              
              TotalOperating
                  revenues-
                  Products
              
              $
              3,013,085
              
              
              -
              
              
              3,013,085-
                  Services
              
              
              -
              
              
              1,015,812
              
              
              1,015,812Total
                  operating revenues
              
              
              3,013,085
              
              
              1,015,812
              
              
              4,028,897Cost
                  of revenues
              
              
              2,266,486
              
              
              258,510
              
              
              2,524,996Gross
                  profit
              
              
              746,599
              
              
              757,302
              
              
              1,503,901Depreciation
              
              
              44,415
              
              
              12,294
              
              
              56,709Net
                  income
              
              
              351,261
              
              
              486,475
              
              
              837,736Expenditure
                  for long-lived assets
              
              $
              61,294
              
              $
              12,876
              
              $
              74,170
  18


**NF
      ENERGY SAVING CORPORATION OF AMERICA**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE THREE MONTHS ENDED JUNE 30, 2008**


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


**(** **Unaudited)**





Six months ended June 30, 2007:
            
            Valves
              manufacturing
              business
            
            Energy-saving
              related business
            
            TotalOperating
                revenues-
                Products
            
            $
            3,945,336
            
            $
            -
            
            $
            3,945,336-
                Services
            
            
            -
            
            
            1,086,047
            
            
            1,086,047Total
                operating revenues
            
            
            3,945,336
            
            
            1,086,047
            
            
            5,031,383Cost
                of revenues
            
            
            3,007,717
            
            
            294,734
            
            
            3,302,451Gross
                profit
            
            
            937,619
            
            
            791,313
            
            
            1,728,932Depreciation
            
            
            100,995
            
            
            12,259
            
            
            113,254Net
                income
            
            
            270,474
            
            
            486,475
            
            
            756,949Expenditure
                for long-lived assets
            
            $
            61,294
            
            $
            12,876
            
            $
            74,170





**NOTE
      -** **12**  **CONCENTRATION
      AND RISK**





For
      the
      six months ended June 30, 2008, 100% of the Company’s assets were located in the
      PRC and 100% of the Company’s revenues and purchases were derived from customers
      and vendors located in the PRC.




(a)  Major
      customers





For
      the
      three and six months ended June 30, 2008, customers who account for 10% or
      more
      of revenues are presented as follows:





Three months ended June 30, 2008
            
            
            
            June 30, 2008Customers
            
            
            Revenues
            
            Percentage
              of revenues
            
            
            
            Accounts
              receivable, tradeCustomer
                A
            
            
            $
            426,724
            
            
            10
            %
            
            
            
            $
            837,481Customer
                B
            
            
            
            648,623
            
            
            15
            %
            
            
            
            
            592,747Customer
                C
            
            
            
            2,455,184
            
            
            56
            %
            
            
            
            
            2,720,899Total:
            
            $
            3,530,531
            
            
            81
            %
            
            Total:
            
            $
            4,151,127




19




**NF
        ENERGY SAVING CORPORATION OF AMERICA**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
        THE THREE MONTHS ENDED JUNE 30, 2008**
 **(Currency
        expressed in United States Dollars (“US$”))**
 **(** **Unaudited)**


Six months ended June 30, 2008
              
              
              
              June 30, 2008Customers
              
              
              Revenues
              
              Percentage
                of revenues
              
              
              
              Accounts
                receivable, tradeCustomer
                  A
              
              
              $
              713,899
              
              
              10
              %
              
              
              
              $
              837,481Customer
                  B
              
              
              
              874,927
              
              
              12
              %
              
              
              
              
              592,747Customer
                  C
              
              
              
              4,620,642
              
              
              65
              %
              
              
              
              
              2,720,899Total:
              
              $
              6,209,468
              
              
              87
              %
              
              Total:
              
              $
              4,151,127




For
      the
      three and six months ended June 30, 2007, customers who account for 10% or
      more
      of revenues are presented as follows:





Three months ended June 30, 2007
            
            
            
            June 30, 2007Customers
            
            
            Revenues
            
            Percentage
              of revenues
            
            
            
            Accounts
              receivable, tradeCustomer
                C
            
            
            $
            939,455
            
            
            23
            %
            
            
            
            $
            189,908Customer
                D
            
            
            
            559,953
            
            
            14
            %
            
            
            
            
            -Customer
                E
            
            
            
            479,174
            
            
            12
            %
            
            
            
            
            231,081Customer
                F
            
            
            
            392,490
            
            
            10
            %
            
            
            
            
            -Total:
            
            $
            2,371,072
            
            
            59
            %
            
            Total:
            
            $
            420,989





Six months ended June 30, 2007
            
            
            
            June 30, 2007Customers
            
            
            Revenues
            
            Percentage
              of revenues
            
            
            
            Accounts
              receivable, tradeCustomer
                C
            
            
            $
            1,696,433
            
            
            34
            %
            
            
            
            $
            189,908Customer
                D
            
            
            
            1,187,225
            
            
            24
            %
            
            
            
            
            -Total:
            
            $
            2,883,658
            
            
            58
            %
            
            Total:
            
            $
            189,908





(b)  Major
      vendors





For
      the
      three and six months ended June 30, 2008, vendors who account for 10% or more
      of
      purchases are presented as follows:





Three months ended June 30, 2008
            
            
            
            June 30, 2008Vendors
            
            
            Purchases
            
            Percentage
              of purchases
            
            
            
            Accounts
              payableVendor
                B
            
            
            $
            240,117
            
            
            11
            %
            
            
            
            $
            245,498Vendor
                C
            
            
            
            250,443
            
            
            11
            %
            
            
            
            
            -Total:
            
            $
            490,560
            
            
            22
            %
            
            Total:
            
            $
            245,498




20




**NF
        ENERGY SAVING CORPORATION OF AMERICA**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
        THE THREE MONTHS ENDED JUNE 30, 2008**
 **(Currency
        expressed in United States Dollars (“US$”))**
 **(** **Unaudited)**




Six months ended June 30, 2008
            
            
            
            June 30, 2008Vendors
            
            
            Purchases
            
            Percentage
              of purchases
            
            
            
            Accounts
              payableVendor
                A
            
            
            $
            730,197
            
            
            17
            %
            
            
            
            $
            -Vendor
                B
            
            
            
            1,402,461
            
            
            32
            %
            
            
            
            
            245,498Total:
            
            $
            2,132,658
            
            
            49
            %
            
            Total:
            
            $
            245,498





For
      the
      three and six months ended June 30, 2007, vendors who account for 10% or more
      of
      purchases are presented as follows:





For
      the
      three and six months ended June 30, 2007, one vendor represented more than
      10%
      of the Company’s purchases and accounts payable, respectively. This vendor
      accounts for 52% of purchases amounting to $1,321,818 and 48% of purchases
      amounting to $1,587,815 for the three and six months ended respectively, with
      $78,755 of accounts payable as of June 30, 2007.





(c)  Credit
      risk





Financial
      instruments that potentially subject the Company to significant concentrations
      of credit risk consist principally of trade accounts receivable. The Company
      performs ongoing credit evaluations of its customers' financial condition,
      but
      does not require collateral to support such receivables.





(d)  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.





**NOTE -** **13**  **COMMITMENT
      AND CONTINGENCIES**





(a) Operating
          lease commitment


The
      Company leased an office premise under a non-cancelable operating lease
      agreement for a renewal period of one year, due February 9, 2009. The annual
      lease payment is $39,665 (RMB300,000).




(b) Capital
          commitment


As
      of
      June 30, 2008, the Company has contracted for purchase of equipment amounting
      to
      $268,825 (RMB 1,848,000), of which $65,427 (RMB 449,600) was paid to
      suppliers.





(c) Litigation


On
      May
      21, 2007, a civil complaint *Robert
      Dawley vs NF Energy Saving Corp. of America, etal.* was
      filed in the United States District Court, Middle District of Florida, Orlando,
      Civil No. 6:07-cv-872-Orl-18DAB. The complaint faults the defendants in breach
      of contract, which was signed by Sam Winer, former Chief Executive Officer,
      before the commencement of reverse merger with the current subsidiary. The
      case
      was dismissed on August 13, 2007 without justice. On October 5, 2007 the
      plaintiff filed amended complaint Case No. 6:07-cv-872-Orl-19DAB and the case
      was authorized by court on November 16, 2007. The plaintiff charged the Company
      with breach of contract since March 8, 2006 and sought a relief of 11,900,000
      shares of common stock plus $60,000-$120,000 annual “consultant
      income”.




21




**NF
        ENERGY SAVING CORPORATION OF AMERICA**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
        THE THREE MONTHS ENDED JUNE 30, 2008**
 **(Currency
        expressed in United States Dollars (“US$”))**
 **(** **Unaudited)**




On
      March
      5, 2008 the Company has filed a counterclaim against Dawley and Winer for
      $2,000,000. It included charges of security fraud and breach of warranty by
      Winer. The counter claim against Winer has been referred to arbitration and
      the
      Company is seeking a stay of proceedings until the completion of the
      Arbitration. The trial was scheduled for October, 2008. Counsel advised that
      the
      October 2008 trial would probably be postponed because of the new issues raised
      in the counterclaim.





The
      Company plans to fight against the lawsuit aggressively. At this point, the
      Company does not believe that the lawsuit would have a material impact on the
      Company.


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,” “NFES” and the "Company"
      means, NF Energy Saving Corporation of America, a Delaware corporation, formerly
      known as Diagnostic Corporation of America, Global Broadcast Group, Inc., Galli
      Process, Inc. These terms also refer to our subsidiary corporation, Liaoning
      Nengfa Weiye Energy Technology Co., 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 (“Neng Fa”) acquired in November 2006.





NF
      Energy
      Saving Corporation of America 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
      January 31, 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 3, 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 to more accurately
      reflect our business after a stock exchange transaction with Neng Fa. Our
      principal place of business is 21-Jia Bei Si Dong Road, Tie Xi Qu, Shenyang,
      P.
      R. China 110021. Our telephone number is (8624)
      2560-9750.




On
      November 15, 2006, we executed a Plan of Exchange ("Plan of Exchange"), between
      and among us, Neng Fa, the shareholders of Neng Fa (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 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 Neng Fa owned by the Neng Fa shareholders. Immediately
      upon
      the closing, Neng Fa became our 100% owned subsidiary, and we ceased all of
      our
      current remaining operations and adopted and implemented the business plan
      of
      Neng Fa.





On
      September 5, 2007, we established a new sales company “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. The sales company
      is a subsidiary 99% owned by Neng Fa. The sales company will market and sell
      the
      Company’s valve products in China.





On
      January 31, 2008 to better reflect our energy technology business we changed
      the
      name of our 100% own subsidiary “Liaoning Nengfa Weiye Pipe Network Construction
      and Operation Co. Ltd” to “Liaoning Nengfa Weiye Energy Technology Company Ltd.”
(“Nengfa Energy”). Nengfa Energy’s area of business include research and
      development,  processing , manufacturing,  and marketing and
      distribution of valves, actuating device and pipe fittings; manufacturing,
      marketing and distribution of energy equipment, wind power equipment and
      fittings; energy saving technical reconstruction; and energy saving technology
      consulting services.





Nengfa
      Energy specializes in energy technology business. We provide energy saving
      technology consulting, optimization design services, energy saving
      reconstruction of pipeline networks and contractual energy management services
      for China’s utility, metallurgy, petrochemical, coal, construction, and
      municipal infrastructure development industries. We are also engaged in the
      manufacturing and sales of large-diameter low pressure valves. At present,
      our
      valve business holds a leading position in China. Our Company has the Det Norske
      Veritas Management System Certificate that certifies our products conform to
      the
      Management System Standard ISO9001:2000. We have been a member of 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”.




23




Our
      main
      development directions in the future include the expansion of our capabilities
      for technology consulting and production of equipment and pipe network for
      building energy efficient infrastructures for municipalities, providing
      comprehensive technology solutions for regional energy conservation and emission
      reduction, and conducting research and development and the manufacturing of
      equipment and accessories for wind power plants.




**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" 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, our dependence on network
      infrastructure, capacity, telecommunications carriers and other suppliers,
      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 the prescribed condition; 2) our ability to compete
      effectively with other companies in the same industry; 3) our ability to raise
      sufficient capital in order to effectuate our business plan; and 4) our ability
      to retain our key executives.





**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 SEC’s Staff Accounting Bulletin No. 104, *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.




24




(a)
      Sale
      of products





The
      Company derives revenues from the sale of self-manufactured products and
      provision of engineering services. The Company recognizes its revenues net
      of
      related business taxes and 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. Output VAT is borne by customers in addition to the
      invoiced value of sales and input VAT is borne by the Company in addition to
      the
      invoiced value of purchases to the extent not refunded for export sales.





The
      Company recognizes revenue from the sale of products upon delivery to the
      customers and the transfer of title and risk of loss. The Company experienced
      no
      product returns and has recorded no reserve for sales returns for the six months
      ended June 30, 2008.





(b)
      Service revenue





Service
      revenue is primarily derived from energy-saving technical 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. Revenue is recognized when service
      is rendered and accepted by the customers.





(c)
      Project revenue





The
      Company applies the percentage-of-completion method under SOP 81-1 “ *Accounting
      for Performance of Construction-Type and Production-Type
      Contracts* ”,
      to
      recognize revenues for energy-saving re-engineering projects that require
      significant modification or customization or installation subject to the
      customers. The Company records a provision in those instances in which the
      Company believes a contract will probably generate a net loss and the Company
      can reasonably estimate this loss. If the Company cannot reasonably estimate
      the
      loss, the Company limits the amount of revenue that the Company recognizes
      to
      the costs the Company has incurred, until the Company can estimate the total
      loss. Advance payments from customers and amounts billed to clients in excess
      of
      revenue recognized are recorded as receipt in advance.





(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 and do not bear interest. The
      Company extends unsecured credit to its customers in the ordinary course of
      business but mitigates the associated risks by performing credit checks and
      actively pursuing past due accounts. An allowance for doubtful accounts is
      established and determined based on managements’ assessment of known
      requirements, aging of receivables, payment history, the customer’s current
      credit worthiness and the economic environment. As of June 30, 2008, the Company
      has determined that no allowance for doubtful accounts is
      necessary.





**Inventories**





Inventories
      are stated at the lower of cost or market (net realizable value), cost being
      determined on a weighted average method. Costs include material, labor and
      manufacturing overhead costs. The Company quarterly 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. As of June 30, 2008, the Company
      did
      not record an allowance for obsolete inventories, nor have there been any
      write-offs.




25




**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:





Depreciable life
            
            Residual valuePlant and machinery
            
            
            3
                – 20 years
            
            
            5
            %Furniture,
                fixture and equipment
            
            
            5
                – 8 years
            
            
            5
            %





Expenditure
      for repairs and maintenance is expensed as incurred. When assets are 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.





**Income
      Taxes**





The
      Company accounts for income tax using SFAS No. 109 *“Accounting
      for Income Taxes”* ,
      which
      requires the asset and liability approach for financial accounting and reporting
      for income taxes. Under this approach, deferred income taxes are provided for
      the estimated future tax effects attributable to temporary differences between
      financial statement carrying amounts of assets and liabilities and their
      respective tax bases, and for the expected future tax benefits from loss
      carry-forwards and provisions, if any. Deferred tax assets and liabilities
      are
      measured using the enacted tax rates expected in the years of recovery or
      reversal and the effect from a change in tax rates is recognized in the
      statements of operations and comprehensive income in the period of enactment.
      A
      valuation allowance is provided to reduce the amount of deferred tax assets
      if
      it is considered more likely than not that some portion of, or all of the
      deferred tax assets will not be realized.





Effective
      January 1, 2007, the Company also adopts the provisions of the Financial
      Accounting Standards Interpretation No. 48, *“Accounting
      for Uncertainty in Income Taxes” (“* FIN
      48 *”)* .
      FIN 48
      prescribes a recognition threshold and measurement process for recording in
      the
      financial statements uncertain tax positions taken or expected to be taken
      in a
      tax return. FIN No. 48 also provides guidance on de-recognition, classification,
      interest and penalties, accounting in interim periods, disclosures and
      transitions. In connection with the adoption of FIN No. 48, the Company has
      analyzed the filing positions in all of the jurisdictions where the Company
      is
      required to file income tax returns, as well as all open tax years in these
      jurisdictions. The Company also follows the policy of recognizing interest
      and
      penalties, if any, related to unrecognized tax positions as income tax expense.
      The Company did not have any unrecognized tax position and there was no effect
      on the financial condition or results of operations for the period ended June
      30, 2008.





The
      Company conducts its major 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 the local and foreign tax
      authority.





**RESULTS
      OF OPERATIONS**


**FOR
      THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007**




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 $4,296,527 and $7,161,484 for the three and six months ended
      June 30, 2008, respectively, as compared to $4,028,897 and $5,031,383 for
      the corresponding periods in 2007.




26




Total
      revenues increased by $267,630 and $2,130,101, a 7% and 42% increase, for the
      three and six months ended June 30, 2008, as compared to total revenues for
      the
      three and six months ended June 30, 2007.




Three Months Ended
            
            Three Months EndedJune 30 2008
            
            June 30 2007
            
            ChangeAmount
            
            % of
              Total
              Revenues
            
            Amount
            
            % of Total
              Revenues
            
            Amount
            
            % changeREVENUE, NETProducts
            
            $
            3,036,313
            
            
            70.67
            %
            $
            3,013,085
            
            
            74.79
            %
            $
            23,228
            
            
            1
            %Service
            
            
            837,555
            
            
            19.49
            %
            
            1,015,812
            
            
            25.21
            %
            
            -178,257
            
            
            -18
            %Projects
            
            
            422,659
            
            
            9.84
            %
            
            -
            
            
            -
            
            
            422,659
            
            
            -Total
                Operating Revenues
            
            $
            4,296,527
            
            
            100
            %
            $
            4,028,897
            
            
            100
            %
            $
            267,630
            
            
            7
            %





Six Months Ended
            
            Six Months EndedJune 30 2008
            
            June 30 2007
            
            ChangeAmount
            
            % of
              Total
              Revenues
            
            Amount
            
            % of Total
              Revenues
            
            Amount
            
            % changeREVENUE,
                NETProducts
            
            $
            5,279,366
            
            
            73.72
            %
            $
            3,945,336
            
            
            78.41
            %
            $
            1,334,030
            
            
            34
            %Service
            
            
            1,168,936
            
            
            16.32
            %
            
            1,086,047
            
            
            21.59
            %
            
            82,889
            
            
            8
            %Projects
            
            
            713,182
            
            
            9.96
            %
            
            -
            
            
            -
            
            
            713,182
            
            
            -Total
                Operating Revenues
            
            $
            7,161,484
            
            
            100
            %
            $
            5,031,383
            
            
            100
            %
            $
            2,130,101
            
            
            42
            %





***Product
      Revenues***




Product
      revenues are derived principally from the sale of self-manufactured products
      and
      provision of engineering services. Product revenues were $3,036,313 and
      $5,279,366, or 70.67% and 73.72% of total revenues for the three and six months
      ended June 30, 2008, as compared to $3,013,085 and $3,945,336, or 74.79%
      and 78.41% of total revenues for both the corresponding periods in 2007. Product
      revenues increased by $23,228, a 1% increase, to $3,036,313 for the three months
      ended June 30, 2008 and increased by $1,334,030, a 34% increase, to
      $5,279,366 for the six months ended June 30, 2008 as compared to the
      corresponding three and six month periods in 2007.




***Service
      Revenues***




Service
      revenues are derived principally from energy-saving technical 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. Service revenues were $837,555
      and
      $1,168,936, or 19.49% and 16.32% of total revenues for the three and six months
      ended June 30, 2008, as compared to $1,015,812 and $1,086,047, or 25.21%
      and 21.59% of total revenues for both the corresponding periods in 2007. Service
      revenues decreased by $178,257, a 18% decrease, to $837,555 for the three months
      ended June 30, 2008 and increased by $82,889, an 8% increase, to $1,168,936
      for the six months ended June 30, 2008 as compared to the corresponding
      three and six month periods in 2007.




27




***Project
      Revenues***




Project
      revenues are derived principally from for energy-saving re-engineering projects
      that require significant modification or customization or installation subject
      to the customers. The  Company
      applies the percentage-of-completion method to recognize project revenues.
      This
      is a newly created business line in 2007. Project revenues were $422,659 and
      $713,182, or 9.84% and 9.96% of total revenues for the three and six months
      ended June 30, 2008. With the Company’s new emphasis on managing
      comprehensive energy saving and emission reduction projects for municipalities
      and large industrial enterprises, we expect the project revenues will continue
      to increase in 2008.




**COSTS
      AND EXPENSES**





***Cost
      of Revenues***




Cost
      of
      product revenues consists primarily of material costs, direct labor,
      depreciation and manufacturing overheads, which are directly attributable to
      the
      manufacture of products and the rendering of services. Total cost of revenues
      was $3,045,518 and $5,154,955 for the three and six months ended June 30,
      2008, respectively, as compared to $2,524,996 and $3,302,451 for the
      corresponding three and six month periods in 2007. The total cost of revenues
      increased by $520,522 (21%) and $1,852,504 (56%) for the three and six months
      ended June 30, 2008, as compared to total cost of revenues for the corresponding
      three and six months periods in 2007. The increase in total cost of revenues
      was
      due partly to increased supporting costs for increasing sales and partly induced
      by the inflation in PRC.


Three Months Ended
              
              Three Months EndedJune 30 2008
              
              June 30 2007
              
              ChangeAmount
              
              % of
                Total
                Cost of
                Revenues
              
              Amount
              
              % of Total
                Cost of
                Revenues
              
              Amount
              
              % changeCOST
                  OF REVENUESCost
                  of Products
              
              $
              2,092,071
              
              
              68.69
              %
              $
              2,266,486
              
              
              89.76
              %
              
              -$174,415
              
              
              -8
              %Cost
                  of Service
              
              
              582,581
              
              
              19.13
              %
              
              258,510
              
              
              10.24
              %
              
              324,071
              
              
              125
              %Cost
                  of Projects
              
              
              370,866
              
              
              12.18
              %
              
              -
              
              
              -
              
              
              370,866
              
              
              -Total
                  Cost of Revenues
              
              $
              3,045,518
              
              
              100.00
              %
              $
              2,524,996
              
              
              100.00
              %
              $
              520,522
              
              
              21
              %







Six Months Ended
            
            Six Months EndedJune 30 2008
            
            June 30 2007
            
            ChangeAmount
            
            % of
              Total
              Cost of
              Revenues
            
            Amount
            
            % of Total
              Cost of
              Revenues
            
            Amount
            
            % changeCOST
                OF REVENUESCost
                of Products
            
            $
            3,752,218
            
            
            72.79
            %
            $
            3,007,717
            
            
            91.08
            %
            $
            744,501
            
            
            25
            %Cost
                of Service
            
            
            792,101
            
            
            15.37
            %
            
            294,734
            
            
            8.92
            %
            
            497,367
            
            
            169
            %Cost
                of Projects
            
            
            610,636
            
            
            11.85
            %
            
            -
            
            
            -
            
            
            610,636
            
            
            -Total
                Cost of Revenues
            
            $
            5,154,955
            
            
            100.00
            %
            $
            3,302,451
            
            
            100.00
            %
            $
            1,852,504
            
            
            56
            %





The
      overall gross profit for the Company was $1,251,009 and $2,006,529, or 29.12%
      and 28.02% for the three and six months ended June 30, 2008 respectively. Profit
      margin decreased by $252,892, an 8.21% decrease, to $1,251,009, for the three
      months ended June 30, 2008 and increased by $277,597, a 6.34 % decrease, to
      $2,006,529 for the six months ended June 30, 2008 as compared to the
      corresponding three and six month periods in 2007.




28





Three
                Months EndedJune
                30, 2008Products
            
            %
            
            Service
            
            %
            
            Projects
            
            %
            
            Total
            
            %Revenues
            
            $
            3,036,313
            
            
            100.00
            %
            $
            837,555
            
            
            100.00
            %
            $
            422,659
            
            
            100.00
            %
            $
            4,296,527
            
            
            100.00
            %Cost
                of Revenues
            
            
            2,092,071
            
            
            68.90
            %
            
            582,581
            
            
            69.56
            %
            
            370,866
            
            
            87.75
            %
            $
            3,045,518
            
            
            70.88
            %Gross
                Margin
            
            $
            944,242
            
            
            31.10
            %
            $
            254,974
            
            
            30.44
            %
            $
            51,793
            
            
            12.25
            %
            $
            1,251,009
            
            
            29.12
            %





Three
                Months EndedJune
                30 2007Products
            
            %
            
            Service
            
            %
            
            Projects
            
            %
            
            Total
            
            %Revenues
            
            $
            3,013,085
            
            
            100.00
            %
            $
            1,015,812
            
            
            100.00
            %
            
            -
            
            
            -
            
            $
            4,028,897
            
            
            100.00
            %Cost
                of Revenues
            
            
            2,266,486
            
            
            75.22
            %
            
            258,510
            
            
            25.45
            %
            
            -
            
            
            -
            
            
            2,524,996
            
            
            62.67
            %Gross
                Margin
            
            $
            746,599
            
            
            24.78
            %
            $
            757,302
            
            
            74.55
            %
            
            -
            
            
            -
            
            $
            1,503,901
            
            
            37.33
            %





Six
                Months EndedJune
                30, 2008Products
            
            %
            
            Service
            
            %
            
            Projects
            
            %
            
            Total
            
            %Revenues
            
            $
            5,279,366
            
            
            100.00
            %
            $
            1,168,936
            
            
            100.00
            %
            $
            713,182
            
            
            100.00
            %
            $
            7,161,484
            
            
            100.00
            %Cost
                of Revenues
            
            
            3,752,218
            
            
            71.07
            %
            
            792,101
            
            
            67.76
            %
            
            610,636
            
            
            85.62
            %
            $
            5,154,955
            
            
            71.98
            %Gross
                Margin
            
            $
            1,527,148
            
            
            28.93
            %
            $
            376,835
            
            
            32.24
            %
            $
            102,546
            
            
            14.38
            %
            $
            2,006,529
            
            
            28.02
            %





Six
                Months EndedJune
                30 2007Products
            
            %
            
            Service
            
            %
            
            Projects
            
            %
            
            Total
            
            %Revenues
            
            $
            3,945,336
            
            
            100.00
            %
            $
            1,086,047
            
            
            100.00
            %
            
            -
            
            
            -
            
            $
            5,031,383
            
            
            100.00
            %Cost
                of Revenues
            
            
            3,007,717
            
            
            76.23
            %
            
            294,734
            
            
            27.14
            %
            
            -
            
            
            -
            
            
            3,302,451
            
            
            65.64
            %Gross
                Margin
            
            $
            937,619
            
            
            23.77
            %
            $
            791,313
            
            
            72.86
            %
            
            -
            
            
            -
            
            $
            1,728,932
            
            
            34.36
            %





***Cost
      of Products***




Cost
      of
      product revenues was $2,092,071 and $3,752,218, or 68.90% and 71.07% of total
      products revenues, for the three and six months ended June 30, 2008 respectively
      as compared to $2,266,486 and $3,007,717, or 75.22% and 76.23% of total product
      revenues, for the corresponding three and six month periods in 2007. The cost
      of
      product revenues decreased by $174,415 to $2,092,071, a decrease of 6.32% of
      total revenues, for the three months ended June 30, 2008, as compared to
      the corresponding period in 2007. Cost of product revenues increased by $744,501
      to $3,752,218, an increase of 5.16% of total revenues, for the six months ended
      June 30, 2008, as compared to the corresponding period in 2007.




29


The
      gross
      profit for products was $944,242 and $1,527,148, or 31.1% and 28.93% for the
      three and six months ended June 30, 2008 respectively as compared to $746,599
      and $937,619, or 24.78% and 23.77% for the corresponding three and six month
      periods in 2007. Gross profit increased by $197,643 to $944,242, an increase
      of
      6.32%, for the three months ended June 30, 2008, as compared to the
      corresponding period in 2007. Gross profit increased by $589,529 to $1,527,148,
      an increase of 5.16%, for the six months ended June 30, 2008, as compared
      to the corresponding period in 2007. The increase in gross profit for products
      is due to increase in sales and better control of costs of products
      revenues.




***Cost
      of Service***




Cost
      of
      service revenues was $582,581 and $792,101, or 69.56% and 67.76% of total
      service revenues, for the three and six months ended June 30, 2008 respectively
      as compared to $258,510 and $294,734, or 25.45% and 27.14% of total service
      revenues, for the corresponding three and six month periods in 2007. Cost of
      service revenues increased by $324,071 to $582,581, an increase of 44.11% of
      total service revenues, for the three months ended June 30, 2008, as
      compared to the corresponding period in 2007. Cost of service revenues increased
      by $497,367 to $792,101, an increase of 40.62% of total service revenues, for
      the six months ended June 30, 2008, as compared to the corresponding period
      in 2007.





The
      gross
      profit for service was $254,974 and $376,835, or 30.44% and 32.24% for the
      three
      and six months ended June 30, 2008 respectively as compared to $757,302 and
      $791,313, or 74.55% and 72.86% for the corresponding three and six month periods
      in 2007. Gross profit decreased by $502,328 to $254,974, a decrease of 44.11%,
      for the three months ended June 30, 2008, as compared to the corresponding
      period in 2007. Gross profit decreased by $414,478 to $376,835, a decrease
      of
      40.62%, for the six months ended June 30, 2008, as compared to the
      corresponding period in 2007. The decrease in gross profit for service is due
      to
      that the company just started providing energy-saving technical services in
      2007
      and lower cost of service revenues were reported in 2007.





***Cost
      of Projects***





In
      2007
      the Company began contracting energy-saving re-engineering projects that require
      significant modification or customization or installation subject to the
      customers. Cost of projects revenues was $370,866 and $610,636, or 87.75% and
      85.62% of project revenues, for the three and six months ended June 30, 2008
      respectively. The gross profit for projects was $51,793 and $102,546, or 12.25%
      and 14.38% for the three and six months ended June 30, 2008 respectively.





***Operating
      Expenses***




Total
      operating expenses was $209,576 and $389,690, or 4.88% and 5.44% of total
      revenues, for the three and six months ended June 30, 2008 respectively as
      compared to $671,374 and $983,844, or 15.63% and 19.55% of total revenues,
      for
      the corresponding three and six month periods in 2007. Total
      operating expenses decreased by $461,798 to $209,576 for the three months ended
      June 30, 2008, and decreased by $594,154 to $389,690 for the six months
      ended June 30, 2008, as compared to the corresponding three and six month
      periods in 2007. The decrease for the three months ended June 30, 2008 from
      the corresponding period in 2007 primarily consists of a $255,000 decrease
      in
      stock based compensation expense incurred in 2007. The decrease for the six
      months ended June 30, 2008 from the corresponding period in 2007 primarily
      consists of a $510,000 decrease in stock compensation expense that was incurred
      in 2007 for issuing 1,000,000 shares of restricted common stock for business
      advisory services to Greentree Financial Group, Inc..





***Sales
      and marketing expenses***




On
      September 5, 2007 the Company established a new subsidiary, Liaoning Nengfa
      Weiye Tie Fa Sales Co., Ltd. to engage in the sales and marketing of valves
      products in the PRC. Sales and marketing expenses was $48,921 and $62,280,
      or
      1.14% and 0.87% of total revenues, for the three and six months ended June
      30,
      2008 respectively as compared to $14,709 and $14,709, or 0.37% and 0.29% of
      total revenues, for the corresponding three and six month periods in
      2007.




30




Sales
      and
      marketing expenses increased by $34,212 to $48,921 for the three months ended
      June 30, 2008, and increased by $47,571 to $62,280 for the six months ended
      June 30, 2008, as compared to the corresponding three and six month periods
      in 2007. The increase for the three months ended June 30, 2008 from the
      corresponding period in 2007 and the increase for the six months ended
      June 30, 2008 from the corresponding period in 2007 are both due to
      increased sales and marketing activities during these periods. Another reason
      for the increase in sales and marketing expenses was that in 2007 the sales
      and
      marketing expenses were included in general and administrative expenses.





***Research
      and development expenses***





The
      Company incurred research and development expenses to study the possibility
      of
      using the Company’s existing manufacturing facilities and valve production
      expertise to produce equipment and accessories for wind power plants. The
      R&D effort enabled the Company to create a new line of business to tap into
      a large demand for the equipment needed for new wind power plants that have
      been
      planned in PRC.




Research
      and development expenses was $47,254 and $85,586, or 1.10% and 1.20% of total
      revenues, for the three and six months ended June 30, 2008 respectively as
      compared to $329,906 and $329,906, or 8.19% and 6.56% of total revenues, for
      the
      corresponding three and six month periods in 2007. Research and development
      expenses decreased by $282,652 to $47,254 for the three months ended
      June 30, 2008, and decreased by $244,320 to $85,586 for the six months
      ended June 30, 2008, as compared to the corresponding three and six month
      periods in 2007. The decrease for the three months ended June 30, 2008 from
      the corresponding period in 2007 and the decrease for the six months ended
      June 30, 2008 from the corresponding period in 2007 are primarily due to
      intensive research and development activities during 2007 to study the
      possibility of using the company’s existing manufacturing facilities and valve
      production expertise to produce equipment for wind power plants.





***General
      and administrative expenses***




General
      and administrative expenses was $113,401 and $241,824, or 2.64% and 3.38% of
      total revenues, for the three and six months ended June 30, 2008 respectively
      as
      compared to $71,759 and $129,229, or 1.78% and 2.57% of total revenues, for
      the
      corresponding three and six month periods in 2007. General and administrative
      expenses increased by $41,642 to $113,401 for the three months ended
      June 30, 2008, and increased by $112,595 to $241,824 for the six months
      ended June 30, 2008, as compared to the corresponding three and six month
      periods in 2007.  The
      increase for the three months ended June 30, 2008 from the corresponding
      period in 2007 and the increase for the six months ended June 30, 2008 from
      the corresponding period in 2007 were both due to an increase in personnel
      expenses.




**Income
      from Operations**




As
      a
      result of the foregoing, for the three and six months ended June 30, 2008,
      income from operations was $1,041,433 and $1,616,839, 24.24% and 22.58% of
      total
      revenues, as compared to $832,527 and $745,088, 20.66% and 14.81% of total
      revenues, for the three and six months ended June 30, 2007. Our income from
      operations increased by $208,906 to $1,041,433, for the three months ended
      June 30, 2008, and increased by $871,751 to $1,616,839, for the six months
      ended June 30, 2008, as compared to the corresponding three and six month
      periods in 2007.





**Income
      Tax Expenses**





For
      the
      three and six months ended June 30, 2008, income tax expense was $4 and $305,
      as
      compared to $0 and $0 for the three and six months ended June 30, 2007. The
      Company is enjoying the tax holiday in PRC due to NFES'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 15% for the
      following three years.




31


As
      of
      June 30, 2008, the operation in the United States of America has incurred
      $642,414 of cumulative net operating losses which can be carried forward to
      offset future taxable income. The net operating loss carryforwards begin to
      expire in 2029, if unutilized. The Company has provided for a full valuation
      allowance against the deferred tax assets of $224,845 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.




**Net
      Income**




As
      a
      result of the foregoing, we had net income of $1,062,383 and $1,641,470, 24.73%
      and 22.92% of total revenues, for the three and six months ended June 30,
      2008, as compared to net income of $837,736 and $756,949 for the three and
      six
      months ended June 30, 2007. Our net income increased by $224,647 (3.93%) to
      $1,062,383 for the three months ended June 30, 2008, and increased by
      $884,521 (7.88%) to $1,641,470 for the six months ended June 30, 2008, as
      compared to the corresponding three and six month periods in 2007.





**LIQUIDITY
      AND CAPITAL RESOURCES**





**Operating
      activities**





For
      the
      six months ended June 30, 2008, net cash provided by operating activities was
      $478,716. This was primarily attributable to our net income of $1,641,470,
      adjusted by non-cash items of depreciation $170,415, and a $1,333,169 decrease
      in working capital. The decrease in working capital in the first six months
      of
      2008 were due primarily to the increase in accounts receivable by $974,464,
      prepayments, and other receivables by $330,241, and the decrease in accounts
      payable by $107,754, and other payables and accrued liabilities by $132,019,
      partially offset by the decrease in inventories by $100,786, increase in
      customer deposits by $108,199 and value added tax payable by $2,324 in this
      period.


The
        large
        increase in accounts receivable of $974,464, an increase of 24.0% over the
        accounts receivables balances at December 31, 2007, is mainly due to the
        sales
        growth during the period. The decrease in inventories of $100,786 reflects
        a
        lower inventory level the company maintains for the current sales level.
        The
        reason for the large increase in the prepayments and other receivables of
        $330,241, a 54.5% increase over the prepayments and other receivables balance
        of
        $605,989 at December 31, 2007 is that the Company expects the cost of the
        raw-material will increase in the coming year. In order to hedge the increase
        in
        raw material costs, the company has signed more purchase contracts in advance
        with the suppliers and hence increasing the prepayments. The decrease in
        accounts payable of $107,754 corresponds to more efficient payment of the
        accounts payable during the period. The increase in customer deposits of
        $108,199 is due to the increase in sales. The decrease of $132,019 in other
        payables and accrued liabilities are due to the decrease in welfare payable,
        payables to equipment vendors and other accrued expenses. A decrease of $2,324
        in value added tax payable is due to reduced value added tax payable this
        period.





For
      the
      six months ended June 30, 2007, net cash provided by operating activities was
      $221,809. This was primarily attributable to a net income of $756,949, adjusted
      by non-cash items of depreciation $113,254, gain on disposal of plant and
      equipment of $10,533, a non-cash expense for shares issued for service rendered
      $510,000, and a $1,147,861 decrease in working capital. The decrease in working
      capital in the first six months of 2007 were due primarily to the increase
      in
      accounts receivable by $288,838, prepayments and other receivables by 1,142,062
      and a decrease in income tax payable by $378,069, partially offset by the
      decrease in inventories by $192,661, an increase in accounts payable by $50,319,
      customer deposits by $63,720, value added tax payable by $139,235 and other
      payables and accrued liabilities by $215,173 in this period.




32


**Investing
      activities**




For
      the
      six months ended June 30, 2008, net cash used in investing activities was
      $160,722, and was primarily attributable to the purchase of plant and equipment.
      For the six months ended June 30, 2007, net cash used in investing activities
      was $20,347 attributable to the purchase of plant and equipment of $74,170,
      partially offset by the proceeds from disposal of plant and equipment $53,823.





**Financing
      activities**




For
      the
      six months ended June 30, 2008, net cash provided by financing activities was
      $2,000,000 attributable to the issuance of common stock to two investors from
      a
      convertible note. For the six months ended June 30, 2007, net cash provided
      by
      financing activities was $870,000 attributable to the issuance of common stock.





During
      January 2008, the company borrowed an aggregate of $2,000,000 from two
      independent investors. The loans were made on a demand, interest free basis,
      on
      the condition that the principal would be converted into common equity. The
      parties have completed negotiations of a Securities Purchase Agreement, dated
      April 28, 2008, for the issuance of an aggregate of 6,645,376 shares of common
      stock, at an equivalent per share price of $0.30, of “restricted stock”, without
      registration rights, on conversion of the loans. The investors are South World
      Ltd. and Oriental United Resources Ltd., each a company established under the
      laws of the British Virgin Islands (together the “Investors”), each of which
      Investor acquired one half of the above securities, or 3,322,688 shares. As
      a
      result of the issuance of the shares, each of the investors owns 8.33% of the
      issued and outstanding common stock of the Company. The proceeds of the loans
      have been used and will continue to be used for working capital.





We
      anticipate we will need additional working capital in 2008 and in the future
      to
      fund our company’s new business plans and to help establish our company to be a
      leader in equipment manufacturing for wind power plants and in comprehensive
      energy saving infrastructure projects for municipalities while keeping our
      current leading position in valve production. We may decide to pursue additional
      investments or debt financing to obtain additional cash resources to fund our
      company’s new business and other future developments.





**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.





**EFFECTS
      OF INFLATION**





We
      believe that the rate of inflation over the past few years has not had a
      significant impact on our results of operations . At
      present we are able to increase our prices due to the rising prices of raw
      materials .





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.


33


**Item
      3. Quantitative and Qualitative Disclosures About Market
      Risk**





Not
      Applicable.





**Item
      4T. Controls and Procedures.**




The
      Company maintains disclosure controls and procedures designed to ensure that
      information required to be disclosed in reports filed under the Securities
      Exchange Act of 1934 (“Exchange Act”) is recorded, processed, summarized and
      reported within the specified time periods. The Company’s Chief Executive
      Officer and its Chief Financial Officer (collectively, the “Certifying
      Officers”) are responsible for maintaining disclosure controls and procedures
      for the Company. The controls and procedures established by the Company are
      designed to provide reasonable assurance that information required to be
      disclosed by the issuer in the reports that it files or submits under the
      Exchange Act are recorded, processed, summarized and reported within the time
      periods specified in the Commission’s rules and forms.




As
      of the
      end of the period covered by this report, the Certifying Officers evaluated
      the
      effectiveness of the Company’s disclosure controls and procedures. Based on the
      evaluation, the Certifying Officers concluded that the Company’s disclosure
      controls and procedures were effective to provide reasonable assurance that
      information required to be disclosed by us in the reports that we file or submit
      under the Exchange Act is recorded, processed, summarized and reported, within
      the time periods specified in the applicable rules and forms, and that it is
      accumulated and communicated to our management, including the Certifying
      Officers, as appropriate to allow timely decisions regarding required
      disclosure.





**PART
      II. OTHER INFORMATION**





**Item
      1.      Legal
      Proceedings.**





There
      have been no material developments in a civil complaint *Robert
      Dawley vs NF Energy Saving Corp. of America, etal.* which
      was filed in the United States District Court, Middle District of Florida,
      Orlando, Civil No. 6:07-cv-872-Orl-19DAB.





**Item
      2.      Unregistered Sales of Equity
      Securities and Use of Proceeds.**





On
      April
      30, 2008, the Company filed an 8-K report under Item 1.01 Entry into a
      Material Definitive Agreement and Item 3.02, Unregistered Sales of Equity
      Securities reporting that On April 28, 2008, the Company entered into a
      Securities Purchase Agreement with two independent investors to consummate
      a
      private placement of 6,645,376 shares of restricted common stock for an
      aggregate purchase price of $2,000,000 at an equivalent price of $0.30 per
      share.





**Item
      3.      Defaults Upon Senior
      Securities.**


None.





**Item
      4.      Submission of Matters to a
      Vote of Security Holders.**


None.





**Item
      5.      Other
      Information.**


None.





**Item
      6.     
Exhibits.**





Exhibits
      required by Item 601 of Regulation S-K are listed in the Index to Exhibits
      Beginning on page 36 of this Form 10-Q, which is incorporated herein by
      reference.




34


**SIG****NATURES**





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 of America**(Registrant)Date:
                  August 11, 2008
              By:
              /s/
                  Gang LiGang
                  LiChairman,
                  Chief Executive Officer and
                  President




35


**INDEX
      TO E** **XHIBITS**


**Exhibit No.**
              
              **Description**31.1
              
              Certification
                  of Chief Executive Officer31.2
              
              Certification
                  of Chief Financial Officer32.1
              
              Certification
                  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section
                  906 of
                  the Sarbanes-Oxley Act of 200232.2
              
              Certification
                  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section
                  906 of
                  the Sarbanes-Oxley Act of
                  2002




36