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. 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 September 30, 2008 Compared to Three Months Ended September 30, 2007

Net Revenue. Net revenue was $74,051,000 for the three months ended September 30, 2008, compared to $40,536,000 for the three months ended September 30, 2007, an increase of $33,515,000, or 83%. The tonnage sales of cleaned coal increased approximately 111,000 MT, or 23%, from approximately 492,000 MT for the three months ended September 30, 2007 to approximately 603,000 MT for the three months ended September 30, 2008. The selling price of cleaned coal increased approximately $32 or 35%, from approximately $91 (after adjusting for RMB appreciation against USD over this period) per ton for the three months ended September 30, 2007 to approximately $123 per ton for the three months ended September 30, 2008. The increase in the tonnage sales and selling price of cleaned coal were the primary reasons for the increase in our net revenue. The increase in tonnage sales was primarily due to increased orders of cleaned coal from existing and new customers for the three months ended September 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 demand of steel production, which 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. There was a significant surge in the price of raw coal and cleaned coal in the third quarter of 2008 due to increase in demand.

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 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.

Cost of Revenue. Cost of revenue was $63,861,000 for the three months ended September 30, 2008, compared to $33,881,000 for the three months ended September 30, 2007, an increase of $29,980,000, or 88%. This was primarily due to an increase in the tonnage sales of cleaned coal. The average purchase price of raw coal increased $34 or 61%, from approximately $56 (after adjusting for RMB appreciation against USD over this period) per ton for the three months ended September 30, 2007 to approximately $90 per ton for the three months ended September 30, 2008.

Gross Profit. Gross profit was $10,190,000 for the three months ended September 30, 2008, compared to $6,655,000 for the three months ended September 30, 2007, an increase of $3,535,000, or 53%. Gross profit margins for the three months ended September 30, 2008 and 2007 were 14% and 16%, 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 September 30, 2008, which was not entirely offset by the increase in cleaned coal price during this period.

Selling Expenses. Selling expenses were $783,000 for the three months ended September 30, 2008, compared to $694,000 for the three months ended September 30, 2007. This represents an increase of $89,000, or 13%, primarily due to the increase in sales volume in the three months ended September 30, 2008.

General and Administrative Expenses. General and administrative expenses were $422,000 for the three months ended September 30, 2008, compared to $452,000 for the three months ended September 30, 2007. This represents a decrease of $30,000, or 7%, primarily due to a reversal of overaccrued estimated administrative expenses from a previous period.

Income from Operations. Income from operations was $8,985,000 for the three months ended September 30, 2008, compared to $5,509,000 for the three months ended September 30, 2007. The increase of $3,476,000, or 63%, was primarily the result of an increase in gross profit of $3,535,000, which was offset by an increase in operating expenses of $59,000.

Interest Expense. Interest expense was $191,000 for the three months ended September 30, 2008, compared to $345,000 for the three months ended September 30, 2007. This represents a decrease of $154,000, or 45%, and such decrease was primarily due to a decrease of $130,000 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 6% loan from Resources Group for the purchase of the Liulin and Zhongyang plants, and a decrease in interest payments of $4,000 for the 8% convertible notes.

Debt Financing Costs. Debt financing costs were $118,000 for the three months ended September 30, 2008, compared to $515,000 for the three months ended September 30, 2007. This represents a decrease of $397,000, or 77%, primarily due to a decrease in penalty payment of $383,000 for not having the registration statement effective by March 17, 2006, and a decrease in amortization of discount on convertible notes and warrants of $14,000.

Derivative Unrealized Fair Value Gain. Derivative unrealized fair value gain of $121,000 and $588,000 for the three months ended September 30, 2008 and 2007, respectively represented a change in fair value of the warrants issued to the placement agent.

Income Before Income Taxes. Income before income taxes was $8,828,000 for the three months ended September 30, 2008, compared to $5,255,000 for the three months ended September 30, 2007. The increase of $3,573,000, or 68%, was primarily the result of an increase in operating profit of $3,476,000, a decrease in debt financing costs of $397,000, and a decrease in interest expense of $154,000, which was offset by a decrease in derivative unrealized fair value gain of $467,000 in the three months ended September 30, 2008.

Income Taxes. Income taxes were $2,289,000 for the three months ended September 30, 2008, compared to $1,890,000 for the three months ended September 30, 2007, an increase of $399,000, or 21%. Income tax was imposed by the China Tax Bureau on income of Shanxi Coal, as calculated under Chinese GAAP and tax rules. The increase was the result of the increase in operating profit of Shanxi Coal from $5,537,000 in the three months ended September 30, 2007 to $9,189,000 in the three months ended September 30, 2008, which was partially offset by the reduction in the income tax rate from 33% to 25%, effective since January 1, 2008.

Net Income. Net income was $6,539,000 for the three months ended September 30, 2008, compared to $3,365,000 for the three months ended September 30, 2007, an increase of $3,174,000, or 94%, mainly due to an increase in operating profit of $3,476,000, a decrease in debt financing costs of $397,000, and a decrease in interest expense of $154,000, which was offset by a decrease in derivative unrealized fair value gain of $467,000, an increase in income taxes of $399,000 in the three months ended September 30, 2008.

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

Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007

Net Revenue. Net revenue was $177,837,000 for the nine months ended September 30, 2008, compared to $116,048,000 for the nine months ended September 30, 2007, an increase of $61,789,000, or 53%. The tonnage sales of cleaned coal increased approximately 343,000 MT, or 24%, from approximately 1,428,000 MT for the nine months ended September 30, 2007 to approximately 1,771,000 MT for the nine months ended September 30, 2008. The selling price of cleaned coal increased approximately $11 or 12%, from approximately $90 (after adjusting for RMB appreciation against USD over this period) per ton for the nine months ended September 30, 2007 to approximately $101 per ton for the nine months ended September 30, 2008. The increase in the tonnage sales and selling price of cleaned coal were the primary reason for the increase in our net revenue. The increase in tonnage sales was primarily due to increased orders of cleaned coal from existing and new customers for the nine months ended September 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 nine months ended September 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. There was a significant surge in the price of raw coal and cleaned coal in the third quarter of 2008 due to increase in demand.

Cost of Revenue. Cost of revenue was $153,497,000 for the nine months ended September 30, 2008, compared to $95,260,000 for the nine months ended September 30, 2007, an increase of $58,237,000, or 61%. This was primarily due to an increase in the tonnage sales of cleaned coal. The average purchase price of raw coal increased $13 or 24%, from approximately $55 (after adjusting for RMB appreciation against USD over this period) per ton for the nine months ended September 30, 2007 to approximately $68 per ton for the nine months ended September 30, 2008.

Gross Profit. Gross profit was $24,340,000 for the nine months ended September 30, 2008, compared to $20,788,000 for the nine months ended September 30, 2007, an increase of $3,552,000, or 17%. Gross profit margins for the nine months ended September 30, 2008 and 2007 were 14% and 18%, 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 September 30, 2008, which was not entirely offset by the increase in cleaned coal price during this period.

Selling Expenses. Selling expenses were $2,395,000 for the nine months ended September 30, 2008, compared to $2,240,000 for the nine months ended September 30, 2007. This represents an increase of $155,000, or 7%, primarily due to the increase in sales volume in the nine months ended September 30, 2008.

General and Administrative Expenses. General and administrative expenses were $1,525,000 for the nine months ended September 30, 2008, compared to $1,444,000 for the nine months ended September 30, 2007. This represents a decrease of $81,000, or 6%, primarily due to an increase in insurance expenses.

Income from Operations. Income from operations was $20,420,000 for the nine months ended September 30, 2008, compared to $17,104,000 for the nine months ended September 30, 2007. The increase of $3,316,000, or 19%, was primarily the result of an increase in gross profit of $3,552,000, which was offset by an increase in operating expenses of $236,000.

Interest Expense. Interest expense was $588,000 for the nine months ended September 30, 2008, compared to $1,346,000 for the nine months ended September 30, 2007. This represents a decrease of $758,000, or 56%, and such decrease was primarily due to a decrease of $638,000 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 $60,000 for the 6% loan from Resources Group for the purchase of the Liulin and Zhongyang plants, and a decrease in interest payments of $60,000 for the 8% convertible notes.

Debt Financing Costs. Debt financing costs were $740,000 for the nine months ended September 30, 2008, compared to $1,921,000 for the nine months ended September 30, 2007. This represents a decrease of $1,181,000, or 61%, primarily due to a decrease in penalty payment of $758,000 for not having the registration statement effective by March 17, 2006, and a decrease in amortization of discount on convertible notes and warrants of $417,000, and a decrease in amortization of debt issue costs of $6,000.

Derivative Unrealized Fair Value Gain. Derivative unrealized fair value gain of $341,000 and derivative unrealized fair value loss of $1,260,000 for the nine months ended September 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 nine months ended September 30, 2008 represented the donation for earthquake rescue efforts in Sichuan Province, PRC.

Income Before Income Taxes. Income before income taxes was $18,798,000 for the nine months ended September 30, 2008, compared to $12,635,000 for the nine months ended September 30, 2007. The increase of $6,163,000, or 49%, was primarily the result of an increase in operating profit of $3,316,000, an increase in derivative unrealized fair value gain of $1,601,000, a decrease in debt financing costs of $1,181,000, and a decrease in interest expense of $758,000, which was partially offset by an increase in other expense of $719,000 in the nine months ended September 30, 2008.

Income Taxes. Income taxes were $5,101,000 for the nine months ended September 30, 2008, compared to $6,093,000 for the nine months ended September 30, 2007, a decrease of $992,000, or 16%. 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, which was offset by an increase in operating profit of Shanxi Coal from $17,303,000 in the nine months ended September 30, 2007 to $20,086,000 in the nine months ended September 30, 2008.

Net Income. Net income was $13,697,000 for the nine months ended September 30, 2008, compared to $6,542,000 for the nine months ended September 30, 2007, an increase of $7,155,000, or 109%, mainly due to an increase in operating profit of $3,316,000, an increase in derivative unrealized fair value gain of $1,601,000, a decrease in debt financing costs of $1,181,000, a decrease in income taxes of $992,000, and a decrease in interest expense of $758,000, which was offset by an increase in other expense of $719,000 in the nine months ended September 30, 2008.

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

Business Outlook

Due to high prices for raw materials used in steel making and other economic factors, China's steel industry is currently experiencing slower production, which the Company believes will have a slight impact on our tonnage sales in the next two quarters or during a longer period of time.

In the longer term, the Company believes the outlook for its coal washing operations remains attractive, as the Company has maintained a stable increased customer base and supply channels, and the demand for high-grade coking coal will continue to increase due to the development programs of China's western regions, which is expected to drive demand for steel in the longer term, and the ongoing need for steel in China's long-term economic development will continue to drive the demand for steel. This provides significant opportunities for suppliers of cleaned coking coal like Puda Coal.

It should be noted that, however, the financial markets are currently experiencing unprecedented volatility, stress, illiquidity and disruption around the world. Many of our customers and suppliers may encounter much uncertainty and risks due to the weakening business environment and credit availability. As a result, these customers and suppliers may be unable to satisfy their contract obligations, may delay payment, or may not repay our credit advance to them, which could negatively affect our business and financial performance. See discussions under "Item 1A Risk Factors" of this report.

The Company is currently operating at approximately 69% utilization and has the capacity to meet the increases in future demand. In addition, the Company intends to execute its strategy of entering the coal mining business to increase profitability. However, if the Company is unable to obtain or manage new coal mines successfully, it will not be able to grow its business in the way that it currently expects. Also, in order to pursue such acquisition opportunities, the Company may need significant additional financing, which may not be available to it on favorable terms, if at all. The availability of such financing is further limited by the recent tightening of the global credit markets and the lack of investors confidence in the equity markets. See discussions under "Item 1A. Risk Factors" of this report.

Liquidity and Capital Resources

Net cash provided by operating activities was $22,559,000 for the nine months ended September 30, 2008, compared to net cash used in operating activities of $17,420,000 for the nine months ended September 30, 2007, an increase of $39,979,000. This was primarily due to a decrease in working capital needs resulting from decreased inventory.

Net cash used in investing activities was $2,000 for the nine months ended September 30, 2008, compared to $5,977,000 for the nine months ended September 30, 2007 which was related to the cash paid to acquire a new coal washing facility in June 2007.

Net cash used in financing activities of $975,000 for the nine months ended September 30, 2008 was for the repayment of long-term debt. Net cash provided by financing activities of $135,000 for the nine months ended September 30, 2007 was cash received from the exercise of warrants of $1,110,000, which was offset by the repayment of long-term debt of $975,000.

On November 17, 2005, Shanxi Coal entered into two conveyance agreements with Resources Group (a related person controlled by our controlling shareholders), pursuant to which Shanxi Coal acquired two coal washing plants, 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 for a cost of $7,200,000. Each conveyance agreement provides that the purchase price paid by Shanxi Coal to Resources Group, which totals $13,000,000, is 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. If the seller does not obtain the mining permit for the benefit of Shanxi Coal within two months of the agreement date, Shanxi Coal has the right to unilaterally terminate the agreement. As the seller fails to obtain the mining permit, our management has decided to terminate the agreement and is now in the process of terminating the agreement with the seller.

Our principal on-going capital requirements are to finance our coal washing operations and to fund the payment of the loans to Resources Group, with the outstanding balance of $9,425,000 as of September 30, 2008, for the acquisition of the new Liulin County plant and the new Zhongyang County plant. On October 31, 2008, the convertible notes with an aggregate principal amount of $2,240,000 and interest rate of 8% per annum, which were issued during our 2005 private placement, matured. The Company plans to pay off the outstanding principal from its cash on hand and internally generated cash upon the surrender of the notes by the note holders as well as the interest.

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. 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 cash balance was $39,429,000 as of September 30, 2008. We believe that our cash will be adequate to satisfy our anticipated cash requirements for fiscal 2008, including payment of the principal and interest on the notes, 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 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, who are also the two principal shareholders of Puda. On September 13, 2007, Putai exercised the Option to acquire 90% of the total registered capital of Shanxi Coal at an acquisition price of RMB20,250,000 (approximately $2,692,000), pursuant to the Exclusive Option Agreement. Upon the Option exercise, Putai entered into a Share Transfer Agreement with the owners of Shanxi Coal, Zhao Ming and Zhao Yao, respectively. Pursuant to the Share Transfer Agreements, Putai agrees to acquire 72% of the total registered capital of Shanxi Coal from Zhao Ming at a purchase price of RMB16,200,000 (approximately $2,154,000) and 18% of the total registered capital of Shanxi Coal from Zhao Yao at a purchase price of RMB4,050,000 (approximately $538,000). As of September 30, 2008, the acquisition price of $2,692,000 to Zhao Ming and Zhao Yao were fully paid. The closing of the acquisition occurred on November 8, 2007, the date a Chinese government approval with respect to the acquisition was received. After the . . .