Summary of PUDA COAL, INC.

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

Forward-Looking Statements

The following discussion may contain certain forward-looking statements that involve substantial risks and uncertainties. These statements include the plans and objectives of management for the future growth of Puda Coal, Inc., formerly Purezza Group, Inc. ("Puda Coal" or the "Company") and its subsidiaries, including plans and objectives related to the consummation of acquisitions and future private and public issuances of Puda Coal's equity and debt securities and expectation of management of strong continued economic growth in China and strong demand for steel and high grade metallurgical coking coal. The forward-looking statements included herein are based on current expectations that involve numerous risks and uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of Puda Coal. Although Puda Coal believes that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could be inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this Form 10-Q will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by Puda Coal or any other person that the objectives and plans of Puda Coal will be achieved.

The words "we," "us" and "our" refer to Puda Coal and its subsidiaries. The words or phrases "would be," "will allow," "intends to," "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project," or similar expressions are intended to identify "forward-looking statements." Actual results could differ materially from those projected in the forward looking statements as a result of a number of risks and uncertainties, including but not limited to: (a) limited amount of resources devoted to expanding our business plan; (b) our failure to implement our business plan within the time period we originally planned to accomplish; (c) our ability to remediate or otherwise mitigate any material weaknesses in internal control over financial reporting or significant deficiencies that have been and may be further identified; and (d) other risks that are discussed in our Form 10-K filed on April 10, 2008, as updated by subsequent Forms 10-Q, and incorporated herein by reference or included in our previous filings with the Securities and Exchange Commission.

Results of Operations

Three Months Ended June 30, 2008 Compared to Three Months Ended June 30, 2007

Net Revenue. Net revenue was $53,188,000 for the three months ended June 30, 2008, compared to $38,097,000 for the three months ended June 30, 2007, an increase of $15,091,000, or 40%. The tonnage sales of cleaned coal increased approximately 123,000 MT, or 26%, from approximately 469,000 MT for the three months ended June 30, 2007 to approximately 592,000 MT for the three months ended June 30, 2008. The increase in the tonnage sales of cleaned coal was the primary reason for the increase in our net revenue. Increase in tonnage sales accounted for approximately 26% of the total 40% increase in net revenue and the remaining 14% was attributable to exchange rate differences and the slight increase in selling price. Increase in tonnage sales was primarily due to increased orders of cleaned coal from existing and new customers for the three months ended June 30, 2008 as a result of the increase in the general demand for high-grade coking coal in China, which was largely driven by the economic growth that China continued to experience for the three months ended June 30, 2008. Steel is a key component of rail systems, bridges, ports, airports, construction projects and car production spearheading China's economic growth and the increased demand for steel directly causes the increased demand for the cleaned high-grade metallurgical coking coal, which we sell. The average selling price was approximately $90 and $89 (after adjusting for RMB appreciation against USD over this period) per ton for the three months ended June 30, 2008 and 2007, respectively.

In response to this increase in general demand, we have significantly expanded our capacity to 3.5 million MT per year through the purchase of three new coal washing facilities in November 2005 and June 2007. The Liulin County plant (annual clean coal washing capacity of 1.1 million MT) became operational in December 2005, the Zhongyang County plant (annual clean coal washing capacity of 1.2 million MT) became operational by the end of March 2006 and the Lingshi County Chongjie plant (annual clean coal washing capacity of 1.2 million MT) became operational in August 2007. In June 2007, the Company exchanged all assets of its 400,000 MT Liulin Dongqiang coal washing plant for all assets of the Lingshi County Chongjie plant. Management anticipates that China's strong economic growth will continue in 2008 and believes that this will drive the demand for steel and high-grade metallurgical coking coal. However, in response to this strong demand in the market, it is expected that there will be more supply in the market from competitors and due to increased supply, and notwithstanding the expected strong demand, our average selling price per ton is not expected to increase significantly.

Cost of Revenue. Cost of revenue was $46,491,000 for the three months ended June 30, 2008, compared to $31,469,000 for the three months ended June 30, 2007, an increase of $15,022,000, or 48%. This was primarily due to an increase in the average purchase price of raw coal from approximately $55 (after adjusting for RMB appreciation against USD over this period) per ton for the three months ended June 30, 2007 to approximately $57 per ton for the three months ended June 30, 2008.

Gross Profit. Gross profit was $6,697,000 for the three months ended June 30, 2008, compared to $6,628,000 for the three months ended June 30, 2007, an increase of $69,000, or 1%. Gross profit margins for the three months ended June 30, 2008 and 2007 were 13% and 17%, respectively. Such decrease in gross profit margins was primarily due to an increase in average purchase price of raw coal across the three months ended June 30, 2008.

Selling Expenses. Selling expenses were $858,000 for the three months ended June 30, 2008, compared to $704,000 for the three months ended June 30, 2007. This represents an increase of $154,000, or 22%, primarily due to the increase in net revenue in the three months ended June 30, 2008

General and Administrative Expenses. General and administrative expenses were $626,000 for the three months ended June 30, 2008, compared to $640,000 for the three months ended June 30, 2007. This represents a decrease of $14,000, or 2%, primarily due to a decrease in legal and professional fees and investor relation expenses, which was offset by an increase in insurance expenses.

Income from Operations. Income from operations was $5,213,000 for the three months ended June 30, 2008, compared to $5,284,000 for the three months ended June 30, 2007. The decrease of $71,000, or 1%, was primarily the result of an increase in operating expenses of $140,000, which was offset by an increase in gross profit of $69,000.

Interest Expense. Interest expense was $196,000 for the three months ended June 30, 2008, compared to $512,000 for the three months ended June 30, 2007. This represents a decrease of $316,000, or 62%, and such decrease was primarily due to a decrease of $276,000 for the expensed portion of the discount on the conversion feature and warrants related to converted notes and exercised warrants, a decrease in interest payments of $20,000 for the 8% convertible notes, and a decrease in interest payments of $20,000 for the 6% loan from Resources Group for the purchase of the Liulin and Zhongyang facilities.

Debt Financing Costs. Debt financing costs were $109,000 for the three months ended June 30, 2008, compared to $639,000 for the three months ended June 30, 2007. This represents a decrease of $530,000, or 83%, primarily due to a decrease in penalty payment of $379,000 for not having the registration statement effective by March 17, 2006, and a decrease in amortization of discount on convertible notes and warrants of $151,000.

Derivative Unrealized Fair Value Loss. Derivative unrealized fair value loss of $144,000 and $2,716,000 for the three months ended June 30, 2008 and 2007, respectively represented a change in fair value of the warrants issued to the placement agent.

Other Expense. Other expense of $719,000 in the three months ended June 30, 2008 represented the donation for earthquake rescue efforts in Sichuan Province, PRC.

Income Before Income Taxes. Income before income taxes was $4,071,000 for the three months ended June 30, 2008, compared to $1,432,000 for the three months ended June 30, 2007. The increase of $2,639,000, or 184%, was primarily the result of a decrease in derivative unrealized fair value loss of $2,572,000, a decrease in debt financing costs of $530,000, and a decrease in interest expenses of $316,000, which was offset by an increase in other expense of $719,000, and a decrease in operating profit of $71,000 in the three months ended June 30, 2008.

Income Taxes. Income taxes were $1,208,000 for the three months ended June 30, 2008, compared to $2,102,000 for the three months ended June 30, 2007, a decrease of $894,000, or 43%. Income tax was imposed by the China Tax Bureau on income of Shanxi Coal, as calculated under Chinese GAAP and tax rules. The decrease was primarily the result of the reduction in the income tax rate from 33% to 25%, effective since January 1, 2008.

Net Income. Net income was $2,863,000 for the three months ended June 30, 2008, compared to net loss of $670,000 for the three months ended June 30, 2007, an increase of $3,533,000, or 527%, mainly due to a decrease in derivative unrealized fair value loss of $2,572,000, a decrease in income taxes of $894,000, a decrease in debt financing costs of $530,000, and a decrease in interest expenses of $316,000, which was offset by an increase in other expense of $719,000, and a decrease in income from operations of $71,000 in the three months ended June 30, 2008.

Inflation had no significant impact on the Company's results of operations for the three months ended June 30, 2008 and 2007.

Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007

Net Revenue. Net revenue was $103,786,000 for the six months ended June 30, 2008, compared to $75,512,000 for the six months ended June 30, 2007, an increase of $28,274,000, or 37%. The tonnage sales of cleaned coal increased approximately 232,000 MT, or 25%, from approximately 936,000 MT for the six months ended June 30, 2007 to approximately 1,168,000 MT for the six months ended June 30, 2008. The increase in the tonnage sales of cleaned coal was the primary reason for the increase in our net revenue. The increase in tonnage sales accounted for approximately 25% of the total 37% increase in net revenue and the remaining 12% was attributable to exchange rate differences and the slight increase in selling price. The increase in tonnage sales was primarily due to increased orders of cleaned coal from existing and new customers for the six months ended June 30, 2008 as a result of the increase in the general demand for high-grade coking coal in China, which was largely driven by the economic growth that China continued to experience for the six months ended June 30, 2008. Steel is a key component of rail systems, bridges, ports, airports, construction projects and car production spearheading China's economic growth and the increased demand for steel directly causes the increased demand for the cleaned high-grade metallurgical coking coal, which we sell. The average selling price was approximately $89 and $88 (after adjusting for RMB appreciation against USD over this period) per ton for the six months ended June 30, 2008 and 2007, respectively.

Cost of Revenue. Cost of revenue was $89,636,000 for the six months ended June 30, 2008, compared to $61,379,000 for the six months ended June 30, 2007, an increase of $28,257,000, or 46%. This was primarily due to an increase in the average purchase price of raw coal from approximately $53 (after adjusting for RMB appreciation against USD over this period) per ton for the six months ended June 30, 2007 to approximately $57 per ton for the six months ended June 30, 2008.

Gross Profit. Gross profit was $14,150,000 for the six months ended June 30, 2008, compared to $14,133,000 for the six months ended June 30, 2007, an increase of $17,000. Gross profit margins for the six months ended June 30, 2008 and 2007 were 14% and 19%, respectively. Such decrease in gross profit margins was primarily due to an increase in average purchase price of raw coal across the six months ended June 30, 2008.

Selling Expenses. Selling expenses were $1,612,000 for the six months ended June 30, 2008, compared to $1,546,000 for the six months ended June 30, 2007. This represents an increase of $66,000, or 4%, primarily due to the increase in net revenue, which was offset by a decrease in shipping charges because of decreased tonnage sales to customers outside Shanxi Province in the six months ended June 30, 2008.

General and Administrative Expenses. General and administrative expenses were $1,103,000 for the six months ended June 30, 2008, compared to $992,000 for the six months ended June 30, 2007. This represents a decrease of $111,000, or 11%, primarily due to an increase in insurance expenses.

Income from Operations. Income from operations was $11,435,000 for the six months ended June 30, 2008, compared to $11,595,000 for the six months ended June 30, 2007. The decrease of $160,000, or 1%, was primarily the result of an increase in operating expenses of $177,000, which was offset by an increase in gross profit of $17,000.

Interest Expense. Interest expense was $397,000 for the six months ended June 30, 2008, compared to $1,001,000 for the six months ended June 30, 2007. This represents a decrease of $604,000, or 60%, and such decrease was primarily due to a decrease of $508,000 for the expensed portion of the discount on the conversion feature and warrants related to converted notes and exercised warrants, a decrease in interest payments of $56,000 for the 8% convertible notes, and a decrease in interest payments of $40,000 for the 6% loan from Resources Group for the purchase of the Liulin and Zhongyang facilities.

Debt Financing Costs. Debt financing costs were $622,000 for the six months ended June 30, 2008, compared to $1,406,000 for the six months ended June 30, 2007. This represents a decrease of $784,000, or 56%, primarily due to a decrease in amortization of discount on convertible notes and warrants of $403,000, a decrease in penalty payment of $375,000 for not having the registration statement effective by March 17, 2006, and a decrease in amortization of debt issue costs of $6,000 in the six months ended June 30, 2008.

Derivative Unrealized Fair Value Gain. Derivative unrealized fair value gain of $220,000 and derivative unrealized fair value loss of $1,848,000 for the six months ended June 30, 2008 and 2007, respectively represented a change in fair value of the warrants issued to the placement agent.

Other Expense. Other expense of $719,000 in the six months ended June 30, 2008 represented the donation for earthquake rescue efforts in Sichuan Province, PRC.

Income Before Income Taxes. Income before income taxes was $9,970,000 for the six months ended June 30, 2008, compared to $7,380,000 for the six months ended June 30, 2007. The increase of $2,590,000, or 35%, was primarily the result of an increase in derivative unrealized fair value gain of $2,068,000, a decrease in debt financing costs of $784,000, and a decrease in interest expenses of $604,000, which was offset by an increase in other expense of $719,000, and a decrease in operating profit of $160,000 in the six months ended June 30, 2008.

Income Taxes. Income taxes were $2,812,000 for the six months ended June 30, 2008, compared to $4,203,000 for the six months ended June 30, 2007, a decrease of $1,391,000, or 33%. Income tax was imposed by the China Tax Bureau on income of Shanxi Coal, as calculated under Chinese GAAP and tax rules. The decrease was primarily the result of the reduction in the income tax rate from 33% to 25%, effective since January 1, 2008.

Net Income. Net income was $7,158,000 for the six months ended June 30, 2008, compared to $3,177,000 for the six months ended June 30, 2007, an increase of $3,981,000, or 125%, mainly due to an increase in derivative unrealized fair value gain of $2,068,000, a decrease in income taxes of $1,391,000, a decrease in debt financing costs of $784,000, and a decrease in interest expenses of $604,000, which was offset by an increase in other expense of $719,000, and a decrease in income from operations of $160,000 in the six months ended June 30, 2008.

Inflation had significant impact on the Company's results of operations for the six months ended June 30, 2008 and 2007.

Liquidity and Capital Resources

Net cash provided by operating activities was $10,202,000 for the six months ended June 30, 2008, compared to net cash used in operating activities of $11,070,000 for the six months ended March 31, 2007, an increase of $21,272,000. This was primarily due to a decrease in working capital needs resulting from decreased inventory.

Net cash used in investing activities of $5,977,000 for the six months ended June 30, 2007 was to acquire a new coal washing facility in June 2007. There were no investing activities for the six months ended June 30, 2008.

Net cash used in financing activities of $650,000 for the six months ended June 30, 2008 was for the repayment of long-term debt. Net cash used in financing activities of $20,000 for the six months ended June 30, 2007 was for the repayment of long-term debt of $650,000, which was offset by cash received from the exercise of warrants of $630,000.

On November 17, 2005, Shanxi Coal entered into two conveyance agreements with Resources Group, pursuant to which Shanxi Coal acquired two new coal washing facilities, related land-use rights and coal washing equipment in Liulin County and Zhongyang County, Shanxi Province. The Liulin County plant with an annual clean coal washing capacity of 1.1 million MT started full production in December 2005. The Liulin County plant, land-use rights and related equipment were purchased for a cost of $5,800,000. The Zhongyang County plant with an annual clean coal washing capacity of 1.2 million MT started full production at the end of March 2006. The Zhongyang County plant, land-use rights and related equipment were purchased from a related person for a cost of $7,200,000. Each conveyance agreement provides that the purchase price paid by Shanxi Coal to Resources Group ($13,000,000), which is controlled by our controlling shareholders, will be amortized over 10 years from December 31, 2005 and bears interest at a rate of 6% per annum payable quarterly. On June 6, 2007, Shanxi Coal entered into an Asset Exchange Agreement with Lingshi Jinliao Coal & Chemical Co. Ltd. Pursuant to the Asset Exchange Agreement, Shanxi Coal agreed to exchange all assets of its 400,000 MT Liulin Dongqiang coal washing plant, with a book value of RMB11.5 million ($1,511,000), plus RMB45.5 million ($5,977,000) in cash, for all assets of Lingshi County Chongjie coal washing plant, with a book value of RMB57 million ($7,488,000). The Lingshi County Chongjie plant with an annual clean coal washing capacity of 1.2 million MT started formal production in August 2007.

On September 6, 2007, Shanxi Coal entered into an agreement with Xin Kai Yuan Hotel and Restaurant Co. Limited, pursuant to which, Shanxi Coal agreed to purchase the coal mining right with respect to a coal mine located in Duanjia Village, Jingle County, Shanxi Province of China. As consideration, Shanxi Coal agreed to pay an aggregate purchase price of RMB460 million (approximately $60.7 million) in cash. Under the agreement, Shanxi Coal agreed to pay a first installment in the amount of RMB200 million ($26.5 million) within 10 business days after the receipt of the mining permit by the seller and a second installment in the amount of RMB150 million ($19.9 million) within ten business days after the receipt of the mining commencement report by the seller. Shanxi Coal agreed to pay the remaining purchase price, RMB110 million ($14.6 million) within three months after the receipt of the mining commencement permit. Shanxi Coal plans to finance the purchase through a debt facility which it is currently negotiating. If the seller does not obtain the mining permit for the benefit of Shanxi Coal within two months of the agreement date, Shanxi Coal may terminate the agreement. As of the date of purchase, the coal mine was not operating and Shanxi Coal would have to construct the coal mine after the commencement permit has been obtained. Shanxi Coal has to get external financing to facilitate the acquisition and construction.

As of August 7, 2008, Xin Kai Yuan Hotel and Restaurant Co. Ltd., has not obtained the mining permit for the benefit of us. According to the agreement, we have the right to unilaterally terminate the agreement, and our management has not decided whether to terminate the agreement. If our management decides not to terminate the agreement but to proceed with the acquisition once the mining permit is obtained by the seller, the large cash payment for the coal mine will have a material impact on the liquidity. If we do not obtain sufficient external financing, our cash at hand and internally generated cash will not be sufficient to fund the acquisition. If we are not able to timely obtain external financing on acceptable terms, we may decide not to proceed with the acquisition. If we obtain the outside financing, the funds generated from the Company's operations may not be sufficient to pay for the interest and principal on the financing.

Our principal on-going capital requirements are to finance our coal washing operations and to fund the payment of the loans to an entity controlled by our controlling shareholders, with the outstanding balance of $9,750,000 as of June 30, 2008, for the acquisition of the new Liulin County plant and the new Zhongyang County plant. We must also pay interest on the notes issued in our November 18, 2005 private placement which have an aggregate principal amount of $2,240,000, an interest rate of 8% per annum and a maturity date of October 31, 2008. Interest is payable quarterly and the principal amount is payable at the maturity date. These notes may be converted into our common stock at the conversion price of $.50 per share. The price of our stock is likely to impact our liquidity needs for payment of these notes on both a long-term and short-term basis. We believe that if our stock becomes sufficiently valuable, the note holders will be more likely to convert their notes into common stock, and we would not be required to pay the interest any longer or the principal at all, decreasing our need for cash. We believe our internally generated cash should be sufficient to pay off the outstanding principal balance at the maturity date.

Conversely, if our stock price decreases, note holders are less likely to convert and our need for cash to pay interest and principal on the notes will increase. Warrants were also issued in that private placement to acquire up to 15,900,000 shares of our common stock which are exercisable at price of $.60 per share, or an aggregate of $9,540,000 if all warrants are exercised by the payment of cash. We believe that the likelihood that these warrants being exercised increases as our stock price increases and decreases as our stock price decreases, with a corresponding effect on the likelihood of our realizing proceeds from their exercise.

Our business is heavily dependent on our coal inventory. Because of certain coal mining accidents, the Chinese government has been closing mines throughout China. In addition, in Shanxi Province, the authorities are not approving new mines that produce less than 300,000 MT output per year, are closing mines that produce less than 90,000 MT per year and are consolidating existing mines into larger mines with outputs between 300,000 MT and 900,000 MT. These activities may lead to increased competition for coal and result in higher prices for the raw coal we purchase, increasing our need for capital resources and reducing our gross profit margins if we are not able to increase the selling price of our products sufficiently to offset our increased costs.

In addition, while the Chinese steel industry has been expanding, over-supply could have the effect of depressing steel prices, reducing our net revenueand making the collection of our accounts receivable more difficult.

Our cash balance was $27,198,000 as of June 30, 2008. We believe that our cash will be adequate to satisfy our anticipated cash requirements for fiscal 2008, including requirements to maintain current operations, complete projects already underway and achieve stated objectives or plans, commitment for capital or other expenditure and other reasonably likely future needs. Cash requirements for our long-term business needs, including the funding of capital expenditure and debt service for outstanding financings, are expected to be financed by a combination of internally generated funds, the proceeds from the sale of our securities, borrowings and other external financing sources, etc., although adequate financing may not be available to us on acceptable terms when we need it. Our biggest capital project on hand is the purchase of the coal mining right of $60.7 million (as mentioned in previous paragraphs). If we decide not to terminate the contract, we must obtain large external financing which will have a negative impact on our liquidity. Our opinion concerning our liquidity is based on current information. If the current information proves to be inaccurate, or if circumstances change, we may not be able to meet our cash needs.

Putai, a wholly-owned indirect subsidiary of Puda, had an Option to purchase Shanxi Coal under an Exclusive Option Agreement dated June 24, 2005 among Putai, Shanxi Coal, and the two shareholders of Shanxi Coal, Zhao Ming and Zhao Yao, . . .