UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q

                   QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                 For the quarterly period ended August 31, 2010

                         Commission file number 0-21210

                          JACOBS FINANCIAL GROUP, INC.
         ---------------------------------------------------------------
             (Exact name of registrant as specified in its charter)


   ===================================== ==================================
                 DELAWARE                           84-0922335
   ------------------------------------- ----------------------------------
     (State or other jurisdiction of     (IRS Employer Identification No.)
              incorporation)
   ===================================== ==================================



               300 SUMMERS STREET, SUITE 970, CHARLESTON, WV 25301
         ---------------------------------------------------------------
               (Address of principal executive offices) (Zip Code)

       Registrant's telephone number, including area code: (304) 343-8171
                                                           --------------


Indicated  by a 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  proceeding  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 ]
                                                                     ---

<PAGE>


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

               Yes[   ]                             No[ X ]
                                                       ---

Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest  practicable date:  225,379,679  shares of common
stock as of October 15, 2010.


                         PART I -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
----------------------------

The following financial statements are included herein in response to Item 1:


<TABLE>
<CAPTION>


Financial Statements (Unaudited)                                                              Page
                                                                                       --------------------

<S>                                                                                    <C>
Consolidated Condensed Balance Sheets                                                          F-1
Consolidated Condensed Statements of Operations                                                F-2
Consolidated Condensed Statements of Comprehensive Income (Loss)                               F-3
Consolidated Condensed Statements of Cash Flows                                                F-4
Consolidated Condensed Statement of Mandatorily Redeemable Preferred Stock and               F-5 and
Stockholders Equity (Deficit)                                                                  F-6
Notes to Consolidated Condensed Financial Statements                                           F-7
</TABLE>



























                                      -2-

<PAGE>
JACOBS FINANCIAL GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
                                                                                           AUGUST 31, 2010    MAY 31, 2010
                                                                                          ----------------- ----------------
<S>                                                                                       <C>               <C>
ASSETS

INVESTMENTS AND CASH:

 Bonds and mortgaged-back securities available for sale, at market value                  $    6,945,239    $    6,618,472
  (amortized cost - 8/31/10 $6,746,736; 05/31/10 $6,413,857)
 Short-term investments, at cost (approximates market value)                                     172,638           264,079
 Cash                                                                                            125,423            74,571
                                                                                          ----------------- ----------------
                                            TOTAL INVESTMENTS AND CASH                         7,243,300         6,957,122

 Investment income due and accrued                                                                31,227            31,833
 Premiums and other accounts receivable                                                          186,876           147,466
 Prepaid reinsurance premium                                                                     263,723           214,385
 Funds deposited with Reinsurers                                                                       -           122,568
 Deferred policy acquisition costs                                                               175,268           128,453
 Furniture, Automobile, and equipment, net of accumulated depreciation
  of $146,320 and $144,102, respectively                                                          37,820            18,380
 Other assets                                                                                     22,291            27,832
 Intangible assets                                                                               150,000           150,000
                                                                                          ----------------- ----------------
                                                          TOTAL ASSETS                    $    8,110,505    $    7,798,039
                                                                                          ================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

 Reserve for losses and loss expenses                                                     $      653,516    $      611,190
 Reserve for unearned premiums                                                                   780,313           618,095
 Accrued expenses and professional fees payable                                                  598,246           613,301
 Accounts payable                                                                                165,176           150,673
 Ceded reinsurance payable                                                                        29,721                 -
 Related party payable                                                                            96,185            96,160
 Term note payable to related party                                                              360,000           360,000
 Demand notes payable to related party                                                            96,666            82,104
 Notes payable                                                                                 4,266,907         4,159,119
 Accrued interest payable                                                                        749,887           651,983
 Accrued interest payable to related party                                                       107,289            71,481
 Other liabilities                                                                               232,217           212,995

 Mandatorily redeemable Series B Preferred Stock, $.0001 Par
 value per share; 3,136.405 Shares authorized; 2,817.004 Shares
 issued and outstanding at August 31, 2010 and May 31,
 2010; stated liquidation value of $1,000 per share                                            3,950,011         3,826,882
                                                                                          ----------------- ----------------
                        TOTAL LIABILITIES                                                     12,086,134        11,453,983

 Series A Preferred Stock, $.0001 par value per share; 1 million shares
 authorized; 2,675 shares issued and outstanding at August 31, 2010
 and May 31, 2010, respectively; stated liquidation value of $1,000 per share                  3,039,971         3,005,266
                                                                                          ----------------- ----------------
                        TOTAL MANDATORILY REDEEMABLE PREFERRED STOCK                           3,039,971         3,005,266

COMMITMENTS AND CONTINGENCIES (SEE NOTES)

STOCKHOLDERS' EQUITY (DEFICIT)

 Series C Preferred Stock,  $.0001 par value per share; 10,000 shares
 authorized; 6,804.936  shares  issued and outstanding at August 31, 2010
 and May 31,  2010, respectively;  includes  $2,859,271 and  $2,670,286
 accrued Series C dividends, respectively                                                      8,890,202         8,701,217

 Common  stock,  $.0001 par value per  share;  490  million  shares
 authorized;  215,859,012 and 214,464,012 shares issued and outstanding
 at August 31, 2010 and May 31, 2010,  respectively                                               21,586            21,446
 Additional  paid in capital                                                                   3,440,332         3,404,431
 Accumulated   deficit                                                                       (19,566,223)      (18,992,919)
 Accumulated  other comprehensive income (loss)                                                  198,503           204,615
                                                                                          ----------------- ----------------
                                   TOTAL STOCKHOLDERS' EQUITY (DEFICIT)                       (7,015,600)       (6,661,210)
                                                                                          ----------------- ----------------

                             TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)         $    8,110,505    $    7,798,039
                                                                                          ================= =================
</TABLE>
                            See accompanying notes.

                                      F-1
<PAGE>
JACOBS FINANCIAL GROUP, INC,
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
                                                                                         THREE MONTHS ENDED AUGUST 31,
                                                                                        -----------------------------
                                                                                              2010            2009
                                                                                        -------------  --------------
<S>                                                                                     <C>            <C>

REVENUES:

 Investment advisory services                                                           $    54,170    $     64,326
 Insurance premiums and commissions                                                         198,990         214,332
 Net investment income                                                                       33,251          72,244
 Net realized investment gains (losses)                                                      51,019               -
 Other income                                                                                 1,633           4,822
                                                                                        -------------  --------------
                                      TOTAL REVENUES                                        339,063         355,724


OPERATING EXPENSES:

 Incurred policy losses                                                                      42,327          48,185
 Insurance policy acquisition costs                                                          59,981          62,602
 General and administrative                                                                 255,398         400,614
 Mutual fund costs                                                                                -          38,326
 Depreciation                                                                                 3,392           2,795
                                                                                        -------------  --------------
                                      TOTAL OPERATING EXPENSES                              361,098         552,522
                                                                                        -------------  --------------

                                      NET INCOME (LOSS) FROM OPERATIONS                     (22,035)       (196,798)

 Accrued dividends and accretion of Series B Mandatorily
  Redeemable Preferred Stock                                                               (123,129)              -
 Interest expense                                                                          (204,368)       (327,284)
                                                                                        -------------  --------------

                                      NET INCOME (LOSS)                                    (349,532)       (524,082)

 Accrued dividends on Series C Preferred Stock equity                                      (188,985)              -
 Accretion of Mandatorily Redeemable Convertible
  Preferred Stock, including accrued dividends                                              (34,705)       (418,860)
                                                                                        -------------  --------------

        NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS                           $  (573,222)   $   (942,942)
                                                                                        =============  ==============


BASIC AND DILUTIVE NET INCOME (LOSS) PER SHARE:

        NET INCOME (LOSS) PER SHARE                                                     $         -    $      (0.01)
                                                                                        =============  ==============


        WEIGHTED-AVERAGE SHARES OUTSTANDING                                             214,963,577     185,278,229
                                                                                        =============  ==============
</TABLE>






                            See accompanying notes.

                                      F-2
<PAGE>

JACOBS FINANCIAL GROUP, INC,
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

<TABLE>
<CAPTION>




                                                                                            THREE MONTHS ENDED
                                                                                                AUGUST 31
                                                                                        ------------------------------

                                                                                              2010            2009
                                                                                        --------------   -------------
<S>                                                                                     <C>              <C>

COMPREHENSIVE INCOME (LOSS):

Net income (loss) attributable to common stockholders                                   $   (573,222)    $  (942,942)


OTHER COMPREHENSIVE INCOME (LOSS):


 Net unrealized gain (loss) of available-for-sale investments
 arising during period                                                                        30,732           5,421

 Reclassification adjustment for realized (gain) loss included
 in net income                                                                               (36,844)              -
                                                                                        --------------   -------------

 Net unrealized gain (loss) attributable to available-for-sale
 investments recognized in other comprehensive income                                         (6,112)          5,421
                                                                                        --------------   -------------

  COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS                       $    (579,334)   $   (937,521)
                                                                                        ==============   =============
</TABLE>
















                            See accompanying notes.

                                      F-3
<PAGE>
JACOBS FINANCIAL GROUP, INC,
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
                                                                                         THREE MONTHS ENDED AUGUST 31
                                                                                         ----------------------------
                                                                                              2010           2009
                                                                                         -------------   ------------
<S>                                                                                       <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES

 Net Income (Loss)                                                                        $ (349,532)    $ (524,082)

 Adjustments  to reconcile  net income  (loss) to net cash  provided by (used in)
 operating activities:

        Unearned premium                                                                     112,880            953
        Stock option expense                                                                  13,452        138,890
        Stock issued (or to be issued) in connection with financing arrangements              22,507        223,886
        Accrual of Series B preferred stock dividends and accretion                          123,129              -
        Provision for loss reserves                                                           42,326         48,185
        Amortization of premium                                                               57,458         14,873
        Depreciation                                                                           3,392          2,795
        Accretion of discount                                                                   (166)        (4,579)
        Realized (gain) loss on sale of securities                                           (51,018)             -
        Loss on disposal of equipment                                                            336              -
        Change in operating assets and liabilities:
           Other assets                                                                        5,541          7,199
           Premium and other receivables                                                     (39,410)        (4,559)
           Investment income due and accrued                                                   1,260           (817)
           Deferred policy acquisition costs                                                 (46,815)       (15,561)
           Related party accounts payable                                                         25         15,525
           Accounts payable and cash overdraft                                                14,503         57,917
           Accrued expenses and other liabilities                                            290,168       (106,098)
                                                                                         -------------   ------------
        NET CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES                                   200,036       (145,473)

CASH FLOWS FROM INVESTING ACTIVITIES

 (Increase) decrease in short-term investments                                                91,441         75,508
 Costs of bonds acquired                                                                  (1,292,185)             -
 Costs of mortgaged-backed securities acquired                                              (643,019)      (396,343)
 Sale of securities available for sale                                                       840,684              -
 Repayment of mortgage-backed securities                                                     754,713        324,321
 Purchase of furniture and equipment                                                         (23,168)             -
                                                                                         -------------   ------------
        NET CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES                                  (271,534)         3,486

CASH FLOWS FROM FINANCING ACTIVITIES

 Proceeds from related party debt                                                            334,870        106,597
 Repayment of related party debt                                                            (320,308)      (102,515)
 Proceeds from borrowings                                                                    304,500        317,500
 Repayment of borrowings                                                                    (196,712)       (86,396)
 Proceeds from issuance of Series A preferred stock                                                -         10,000
 Proceeds from exercise of common stock warrants                                                   -          1,795
                                                                                         -------------   ------------
        NET CASH FLOWS FROM FINANCING ACTIVITIES                                             122,350        246,981

NET INCREASE (DECREASE) IN CASH                                                               50,852        104,994

CASH AT BEGINNING OF PERIOD                                                                   74,571         80,038
                                                                                         -------------   ------------

CASH AT END OF PERIOD                                                                    $   125,423     $  185,032
                                                                                         =============   ============
SUPPLEMENTAL DISCLOSURES
 Interest paid                                                                           $    46,298     $  257,471
 Income taxes paid                                                                                 -              -

 Non-cash investing and financing transaction:
  Additional consideration paid for issuance of debt                                          22,507        223,886
</TABLE>
                            See accompanying notes.

                                      F-4
<PAGE>
<TABLE>
<CAPTION>
JACOBS FINANCIAL GROUP, INC.
CONSOLIDATED CONDENSED STATEMENT OF MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) (UNAUDITED)
FOR THE THREE MONTH PERIOD ENDED AUGUST 31, 2009
                                                                 -------------------------------------------------------------------
                                                                                   STOCKHOLDERS' EQUITY (DEFICIT)
                                                                 -------------------------------------------------------------------
                                                                                                                ACCUM.
                                            SERIES B                                                            OTHER
                      SERIES A        MANDATORILY REDEEMABLE                                                    COMPRE-
              MANDATORILY REDEEMABLE      CONVERTIBLE                                  ADDITIONAL               HENSIVE
                  PREFERRED STOCK         PREFERRED STOCK                               PAID-IN   ACCUMULATED   INCOME
                 SHARES     AMOUNT       SHARES     AMOUNT          SHARES    AMOUNT    CAPITAL    DEFICIT      (LOSS)     TOTAL
                 ------   -----------   ---------  ----------    ----------- -------  ----------  ------------  ------  ------------
<S>              <C>      <C>          <C>        <C>            <C>         <C>      <C>         <C>           <C>     <C>
BALANCE,
MAY 31, 2009      2,665   $ 2,860,670   9,621.940 $11,429,440   $179,682,912 $17,968 $2,626,236 $(16,279,725) $39,493  $(13,596,028)

Issuance of
Series A
and B Preferred
Stock and common
stock                10        10,000           -           -              -       -          -            -        -             -

Issuance of
common stock as
additional
consideration for
financing arrange-
ments                 -             -           -           -        500,000      50     19,025            -        -        19,075

Exercise
of warrants           -             -           -           -      1,795,273     180      1,616            -        -         1,796

Accretion of
mandatorily
redeemable
convertible
preferred stock       -         4,380           -     143,920              -       -          -     (148,300)       -      (148,300)

Accrued dividends
of mandatorily
redeemable
convertible
preferred stock       -        27,020           -     243,539              -       -          -     (270,559)       -      (270,559)

Expense of
common shares
to be issued
in connection
with financing
arrangements          -             -           -           -      5,171,993     517    204,294            -        -       204,811

Common stock
option expense        -             -           -           -              -       -    138,890            -        -       138,890

Unrealized net
gain on available
for sale
securities            -             -           -           -              -       -          -            -    5,421         5,421

Net income (loss),
three month
period ended
August 31, 2009       -             -           -           -              -       -          -     (524,083)       -      (524,083)
                 ------   -----------   ---------  ----------    ----------- -------  ---------- ------------- ------  -------------
BALANCE,
AUGUST 31, 2009   2,675   $ 2,902,070   9,621.940 $11,816,899    187,150,178 $18,715  $2,990,061 $(17,222,667)$44,914  $(14,168,977)
                 ------   -----------   ---------  ----------    ----------- -------  ---------- ------------- ------  -------------
                  -------------------------------------------    -------------------------------------------------------------------
</TABLE>
                             See accompanying notes.

                                       F-5
<PAGE>
JACOBS FINANCIAL GROUP, INC.
CONSOLIDATED CONDENSED STATEMENT OF MANDATORILY REDEEMABLE PREFERRED STOCK AND
 STOCKHOLDERS' EQUITY (DEFICIT) (UNAUDITED)
FOR THE THREE MONTH PERIOD ENDED AUGUST 31, 2010

<TABLE>
<CAPTION>

                       -----------------    ----------------------------------------------------------------------------------------

                                                                       STOCKHOLDERS' EQUITY (DEFICIT)

                                            ----------------------------------------------------------------------------------------
                          SERIES A                                           SERIES C PREFERRED               ACCUMULATED
                     MANDATORILY REDEEMABLE                                 --------------------                 OTHER
                                                                ADDITIONAL                                    COMPREHENSIVE
                       PREFERRED STOCK                           PAID-IN                AMOUNT     ACCUMULATED   INCOME
                       SHARES   AMOUNT       SHARES     AMOUNT   CAPITAL     SHARES    AND APIC      DEFICIT     (LOSS)     TOTAL
                       ------ ----------   ----------- -------  ---------- --------- ----------- ------------- -------- ------------
<S>                    <C>    <C>          <C>         <C>      <C>        <C>       <C>         <C>           <C>      <C>
BALANCE, MAY 31, 2010   2,675 $3,005,266   214,464,012 $21,446  $3,404,431 6,804.936 $ 8,701,217 $(18,992,919) $204,615 $(6,661,210)

Issuance of common
 stock as compensa-
 tion for services          -          -       500,000      50       1,998         -           -           -          -       2,048

Issuance of common
 stock as additional
 consideration for
 financing arrangements     -          -       895,000      90       3,769         -           -           -          -       3,859

Accretion of Series A
 mandatorily redeemable
 convertible preferred
 stock                      -      4,626             -       -           -         -           -      (4,626)         -      (4,626)

Accrued dividends of
 Series A mandatorily
 redeemable convertible
 preferred stock            -     30,079             -       -           -         -           -     (30,161)         -     (30,161)

Accrued dividends of
 Series C equity
 preferred stock            -          -             -       -           -         -     188,985    (188,985)                     -

Increase (Decrease) in
 accural of common
 shares to be issued
 in connection with
 financing arrangements     -          -             -       -      16,682         -           -           -          -      16,682

Common stock option
 expense                    -          -             -       -      13,452         -           -           -          -      13,452

Unrealized net gain
 on available for sale
 securities                 -          -             -       -           -         -           -           -     (6,112)     (6,112)

Net income (loss),
 three month period
 ended August 31, 2010      -          -             -       -           -         -           -     (349,532)        -    (349,532)
                       ------ ----------   ----------- -------  ---------- --------- ----------- ------------- -------- ------------

BALANCE,
 AUGUST 31, 2010        2,675 $3,039,971   215,859,012 $21,586  $3,440,332 6,804.936 $ 8,890,202 $(19,566,223) $198,503 $(7,015,600)
                       ====== ==========   =========== =======  ========== ========= =========== ============= ======== ============

                       -----------------    ----------------------------------------------------------------------------------------
</TABLE>




                            See accompanying notes.

                                      F-6

<PAGE>

JACOBS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

NOTE A - BASIS OF PRESENTATION
------------------------------

The accompanying  unaudited financial  statements are of Jacobs Financial Group,
Inc.  (the  "Company" or "JFG").  These  financial  statements  were prepared in
accordance with generally accepted  accounting  principles for interim financial
information and Article 8-03 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally  accepted  accounting
principles for complete financial statements. In the opinion of management,  all
adjustments  considered  necessary  for a fair  presentation  of the  results of
operations and financial condition for the periods presented have been included.
Such adjustments are of a normal recurring nature. The results of operations for
the three month period ended August 31, 2010, are not necessarily  indicative of
the results of  operations  that can be expected  for the fiscal year ending May
31, 2011.  For further  information,  refer to the Company's  audited  financial
statements  and  footnotes  thereto  included  in Item 8. of Form 10-K  filed on
September 14, 2010.

RECLASSIFICATIONS

Certain amounts have been  reclassified in the  presentation of the Consolidated
Financial   Statements  as  of  August  31,  2009  to  be  consistent  with  the
presentation  in the  Consolidated  Financial  Statements as of August 31, 2010.
This reclassification had no impact on previously reported net income, cash flow
from operations or changes in shareholder equity.

LIQUIDITY AND GOING CONCERN

These  financial  statements  are  presented  on the basis that the Company is a
going  concern.  Going concern  contemplates  the  realization of assets and the
satisfaction  of  liabilities in the normal course of business over a reasonable
length of time.  The Company  incurred  operating  losses  (after  accretion  of
mandatorily redeemable convertible preferred stock, including accrued dividends)
of approximately  $2,713,000 and $3,058,000 for the years ended May 31, 2010 and
2009 and has  incurred  losses of  approximately  $573,000  for the three  month
period  ended  August  31,  2010.  Losses are  expected  to  continue  until the
Company's  insurance  company  subsidiary,   First  Surety  Corporation  ("FSC")
develops a more substantial book of business.  While  improvement is anticipated
as the business  plan is  implemented,  restrictions  on the use of FSC's assets
(See Management's Discussion and Analysis), the Company's significant deficiency
in working capital and  stockholders'  equity raise  substantial doubt about the
Company's ability to continue as a going concern.

Expansion  of  FSC's  business  to  other  states  is a key  component  of fully
implementing the Company's business plan.  Regulatory  approval and licensing is
required for each state in which FSC seeks to conduct business.  In fiscal 2009,
the  Company  was able to  increase  the  capital  of FSC and  reactivate  FSC's
insurance  license in Ohio and obtain  authority  to issue  surety bonds in that
state. However,  management has found that entry into other states (as a surety)
has been difficult without the benefit of more substantial capital and reserves,
due to FSC's  status as a new entry into this  market,  and based  upon  current
financial condition of the parent company.  This is the case notwithstanding the
reinsurance agreement entered into by FSC with Lloyd's of London, in April 2009,
and the  resulting  increase in bonding  capacity.  Management  believes that if
FSC's capital and surplus reserves were  significantly  more substantial and the
financial condition of the Company was stabilized, entry into other states would
be less challenging.  Accordingly,  management  continues to pursue avenues that
can  provide  additional  capital to  increase  the  capacity  of its  insurance
subsidiary  and to fund  continuing  operations  as the  business is being fully

                                      F-7
<PAGE>
JACOBS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

developed. In addition, as an alternative means of addressing access to markets,
management  is  seeking  to  establish  a  relationship  with any one of several
possible sureties that are licensed in those states in addition to West Virginia
and Ohio that comprise  significant  markets for the bonding programs of FSC and
could issue surety bonds that are  underwritten and reinsured by FSC. Under such
a "fronting" arrangement, the need for additional capital at the level of FSC to
facilitate  entry to other  state  markets  would  become  secondary,  since the
payment of a fronting fee to the insurance  company with active  licenses  would
provide access to the state market without formal entry.

Beginning in fiscal 2008 and completed  during the first quarter of fiscal 2009,
the Company  obtained  two rounds of bridge  financing  totaling an aggregate of
$3,500,000.  The purpose of the financing was to pay expenses of operations  and
to pay fees and expenses  incurred or expected to be incurred in connection with
a larger permanent  financing and, in addition,  to increase the capital surplus
of FSC to make possible the reactivation of FSC's surety license in the state of
Ohio. The terms of the bridge-financing  arrangement provide for payment in full
upon  consummation by the Company of a qualified  equity offering  providing net
proceeds of at least $15 million on or before  September  10, 2013;  and because
such a qualified  equity  offering was not  consummated  by September  10, 2008,
accrued  interest-to-date was payable,  and quarterly  installments of principal
and interest  became  payable over five years  commencing in December  2008. The
interest  rates on such notes were fixed at 10.00%.  Payments due December  2008
and March 2009 were not made by the  Company  as  scheduled,  but a  forbearance
agreement was subsequently entered into with the bridge lenders on June 5, 2009,
modifying payment terms to cure the default  (including  increasing the interest
rate on the loans to 17%),  issuing additional common stock to the loan holders,
and  pledging  the stock of the  Company's  subsidiary,  CMW,  as  security  for
repayment of the loans. The modification required the Company to pay interest of
$224,515 on June 10, 2009 and increase the  quarterly  payments by $67,185 (to a
total of $291,700) for eight consecutive  quarters beginning  September 10, 2009
to satisfy the  arrearage.  Although  the Company has failed to make the payment
that was due  September  10, 2009 and the payments  that were due in the ensuing
quarters,  management  has remained in close  contact  with the bridge  lenders,
providing  reports  regarding  its efforts to refinance  or otherwise  repay the
bridge loans.  To date,  none of the bridge  lenders has elected to pursue legal
remedies.

Certain  equity  inducements  in the form of common  stock of the  Company  were
provided  under the terms of the bridge  loan  documents.  Upon  issuance of the
bridge notes, an aggregate of 7% of the outstanding  common stock of the Company
was issued to the bridge lenders. Upon retirement of the notes upon consummation
of a qualified equity  offering,  the Company will issue to the bridge lenders a
percentage of the outstanding  common stock of the Company which,  when added to
the stock initially issued,  may equal as much as 28% of the common stock of the
Company that would  otherwise have been retained by the holders of the Company's
common shares immediately prior to the financing.  Finally,  because a qualified
financing was not  completed by September 10, 2008,  the Company was required to
issue to the bridge  lenders  under the terms of the loan  documents  a total of
2.8% of the Company's outstanding common shares at such date. An additional 2.8%
of the Company's  outstanding  common shares are required to be issued upon each
six-month anniversary date thereof until retirement of the notes. (See Note D).

Given current  financial  market  conditions  and the  uncertainties  as to when
stability will return to the financial markets, until permanent financing can be
secured, management will strive to reduce and then eliminate operating losses by
implementing  further measures to control and reduce costs while maintaining and
growing the Company's  current revenue base.  Unless permanent  financing can be

                                      F-8
<PAGE>
JACOBS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

secured,  future  revenue growth can be expected to be achieved at a slower pace
than has been  projected  by the  Company.  Until  such time that the  Company's
operating costs can be serviced by the Company's revenue stream, management will
continue  to seek to raise  additional  funds  for  operations  through  private
placements  of stock,  other  long-term or permanent  financing,  or  short-term
borrowings.  However,  the  Company  cannot be  certain  that it will be able to
continue to obtain  adequate  funding in order to reasonably  predict whether it
will  be  able  to  continue  as a going  concern.  The  accompanying  financial
statements do not include any adjustments  that might result from the outcome of
this uncertainty.

NOTE B - RECENT ACCOUNTING PRONOUNCEMENTS
-----------------------------------------

In July 2010, the FASB issued Accounting Standards Update 2010-20,  "Disclosures
about the Credit Quality of Financing  Receivables  and the Allowance for Credit
Losses."  This FASB is  intended  to provide  additional  information  to assist
financial  statement  users in  assessing an entity's  credit risk  exposure and
evaluating the adequacy of its allowance for credit losses.  This update affects
all entities with financing  receivables,  excluding  short-term  trade accounts
receivable or receivables measured at fair value or lower of cost or fair value.
This update is effective for interim and annual  reporting  periods ending on or
after  December  15,  2010.  Management  does not expect  this  update to have a
material effect on the Company's financial statements.

In August 2010, the FASB issued Accounting Standards Update 2010-21, "Accounting
for Technical  Amendments to Various SEC Rules and  Schedules".  This Accounting
Standards  Update  amends  various SEC  paragraphs  pursuant to the  issuance of
Release  No.  33-9026;  Technical  Amendments  to Rules,  Forms,  Schedules  and
Codifications of Financial Reporting  Policies.  Management does not expect this
update to have a material effect on the Company's financial statements.

In  February  2010,  the  FASB  issued  Accounting   Standards  Update  2010-09,
"Subsequent   Events:   Amendments  to  Certain   Recognition   and   Disclosure
Requirements."  This FASB retracts the  requirement to disclose the date through
which  subsequent  events have been  evaluated and whether that date is the date
the financial statements were issued or were available to be issued. ASU 2010-09
is effective for interim and annual financial  periods ending after February 24,
2010,  and has been applied with no material  impact on the Company's  financial
statements.

In  February  2010,  the  FASB  issued  Accounting   Standards  Update  2010-08,
"Technical Corrections to Various Topics." This FASB eliminates  inconsistencies
and outdated provisions in GAAP and provides needed clarification on others. ASU
2010-08 is  effective  for interim and annual  financial  periods  ending  after
February  2010,  and has been applied with no material  impact on the  Company's
financial statements.

In January 2010, the FASB issued  Accounting  Standards  Update  2010-06,  "Fair
Value  Measurements  and  Disclosures:  Improving  Disclosures  About Fair Value
Measurements."  This FASB requires  additional  disclosures about the fair value
measurements including transfers in and out of Levels 1 and 2 and a higher level
of  disaggregation  for the different  types of financial  instruments.  For the
reconciliation of Level 3 fair value measurements,  information about purchases,
sales, issuances and settlements should be presented separately.  ASU 2010-06 is
effective for interim and annual  financial  periods  beginning  after  December
2009, and is not expected to have a material  impact on the Company's  financial
statements.

                                      F-9
<PAGE>
JACOBS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

In August  2009,  the  Financial  Accounting  Standards  Board  ("FASB")  issued
Accounting   Standards  Update  2009-04,   "Accounting  for  Redeemable   Equity
Instruments - Amendment to Section 480-10-S99". This updates Section 480-10-S99,
"Distinguishing  Liabilities  from  Equity",  to reflect the SEC  staff's  views
regarding the application of Accounting Series Release No. 268, "Presentation in
Financial Statements of "Redeemable Preferred Stocks." The exchange for Series B
Preferred shares into Series C shares as elected by those shareholders  utilizes
the view of the SEC in  classifying  the  Series C  Preferred  shares as equity.
There is no stated maturity on the Series C Preferred  shares and at the time of
redemption  the Company  will  accrete  changes in the  redemption  value at the
appropriate  time.  These amounts will be adjusted at the end of each  reporting
period as applicable.

In August 2009, the FASB issued Accounting Standards Update 2009-05, "Fair Value
Measurements and Disclosures (Topic 820) - Measuring Liabilities at Fair Value".
This update includes  amendments to Subtopic 820-10 "Fair Value Measurements and
Disclosures  -  Overall"  for the fair value  measurements  of  liabilities  and
provides  clarification that in circumstances in which quoted price in an active
market for the  identical  liability  is not  available,  a reporting  entity is
required to measure fair value using one or more of the techniques  provided for
in this  update.  This  Statement  is effective  for fiscal  years,  and interim
periods  within those fiscal years,  beginning on or after August 26, 2009.  The
application  of this  update  did not have a  material  impact on the  Company's
results of operations or financial position.

In  September  2009,  the  FASB  issued  Accounting  Standards  Update  2009-08,
"Earnings Per  Share-Amendments  to Section  260-10-S99".  This update  includes
technical  corrections to Topic 260-10-S99,  "Earnings Per Share", based on EITF
Topic  D-53,  "Computation  of Earnings  Per Share for a Period that  Includes a
Redemption or an Induced  Conversion of a Portion of a Class of Preferred Stock"
and EITF Topic D-42,  "The Effect of the  Calculation  of Earnings Per Share for
the Redemption or Induced  Conversion of Preferred  Stock".  The  application of
this  update  did not have an impact on the  Company's  results  of  operations,
therefore not requiring additional earnings per share computation.

NOTE C - INVESTMENTS AND FAIR VALUE DISCLOSURES
-----------------------------------------------

The Company classifies its investments as available-for-sale,  and as such, they
are carried at fair value.  The amortized  cost of  investments  is adjusted for
amortization  of premiums and  accretion of discounts  which are included in net
investment  income.  Changes in fair value are  reported as a component of other
comprehensive income,  exclusive of  other-than-temporary  impairment losses, if
any.  For the three  month  period  ended  August 31,  2010,  there have been no
other-than-temporary  impairments.  The Company  intends and believes it has the
ability  to hold all  investments  in an  unrealized  loss  position  until  the
expected recovery in value, which may be at maturity.

The following table sets forth the amortized cost and estimated  market value of
bonds and equity  securities  available-for-sale  and carried at market value on
August 31, 2010.

                                      F-10
<PAGE>

JACOBS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

<TABLE>
<CAPTION>
                                                        Gross Unrealized     Gross Unrealized
                                     Amortized Cost           Gains               Losses         Fair Market Value
                                   ------------------- -------------------- ------------------- --------------------
<S>                                <C>                 <C>                  <C>                 <C>
U.S. government agency
mortgage-backed securities         $        5,454,442  $           201,402  $           11,700  $         5,644,144
State and municipal securities                970,715                4,231                 623              974,323
Foreign obligations                           321,579                5,193                   -              326,772
                                   ------------------- -------------------- ------------------- --------------------
                                   $        6,746,736  $           210,826  $           12,323  $         6,945,239
                                   =================== ==================== =================== ====================
</TABLE>

The following table sets forth the amortized cost and estimated  market value of
bonds and equity  securities  available-for-sale  and carried at market value on
May 31, 2010.
<TABLE>
<CAPTION>
                                                         Gross Unrealized     Gross Unrealized
                                     Amortized Cost            Gains               Losses         Fair Market Value
                                   ------------------- -------------------- ------------------- --------------------
<S>                                <C>                 <C>                  <C>                 <C>
U.S. government agency
mortgage-backed securities         $        6,413,856  $           208,315  $            3,700  $         6,618,472
                                   ------------------- -------------------- ------------------- --------------------
                                   $        6,413,856  $           208,315  $            3,700  $         6,618,472
                                   =================== ==================== =================== ====================
</TABLE>

The Company's short-term investments of $172,638 and $264,079 at August 31, 2010
and May 31, 2010 consisted of money-market investment funds.

Management  believes  the  Company  has the  ability  to hold all  fixed  income
securities to maturity. However, during fiscal year 2010, the Company determined
it may dispose of securities prior to their scheduled maturity due to changes in
interest  rates,  prepayments,  tax  and  credit  considerations,  liquidity  or
regulatory  capital  requirements,  or other similar factors.  As a result,  the
Company  reclassified  all of its fixed  income  securities  (bonds)  and equity
securities as  available-for-sale.  These securities are reported at fair value,
with  unrealized  gains and losses,  net of deferred  income taxes,  reported in
stockholders'  equity as a separate component of accumulated other comprehensive
income.  Cost of  these  investments  totaled  $5,647,133  and  market  value at
transfer was $5,822,613 for an unrealized gain of $175,480.

There are no securities classified as held to maturity at May 31, 2010 or August
31, 2010.

Invested assets are exposed to various risks,  such as interest rate, market and
credit risks. Due to the level of risk associated with certain of these invested
assets  and the level of  uncertainty  related  to changes in the value of these
assets,  it is possible that changes in risks in the near term may significantly
affect the amounts  reported in the  Consolidated  Condensed  Balance Sheets and
Statements of Income.

Fair  value is the  price  that  would be  received  to sell an asset or paid to
transfer a liability in an orderly  transaction  between market  participants at
the  measurement  date. The Company uses the following  fair value  hierarchy in
selecting  inputs,  with the highest priority given to Level 1, as these are the
most transparent or reliable:

                                      F-11
<PAGE>
JACOBS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)


     O    Level 1 - Quoted prices for identical instruments in active markets.

     O    Level 2 - Quoted  prices for similar  instruments  in active  markets;
          quoted prices for identical or similar instruments in markets that are
          not active;  and  model-derived  valuations  in which all  significant
          inputs are observable in active markets.

     O    Level 3 - Valuations derived from valuation techniques in which one or
          more significant inputs are unobservable.

Fair  market  values  are  provided  by  the  Company's  independent  investment
custodians that utilize third-party  quotation services for the valuation of the
fixed-income  investment  securities and money-market  funds held. The Company's
investment custodians are large money-center banks.

The following  section  describes the  valuation  methodologies  used to measure
different  financial  instruments at fair value,  including an indication of the
level  in the  fair  value  hierarchy  in  which  the  instrument  is  generally
classified.

FIXED INCOME SECURITIES

Securities  valued using Level 1 inputs include highly liquid  government  bonds
for which quoted market prices are  available.  Securities  using Level 2 inputs
are valued using pricing for similar securities, recently executed transactions,
cash flow models with yield curves and other pricing models utilizing observable
inputs.  Most fixed income  securities are valued using Level 2 inputs.  Level 2
includes corporate bonds, municipal bonds,  asset-backed securities and mortgage
pass-through securities.

EQUITY SECURITIES

Level 1 includes publicly traded securities valued using quoted market prices.

SHORT-TERM INVESTMENTS

The valuation of securities  that are actively  traded or have quoted prices are
classified  as Level 1. These  securities  include  money  market funds and U.S.
Treasury bills.  Level 2 includes  commercial  paper,  for which all significant
inputs are observable.

Assets measured at fair value on a recurring basis are summarized below:
<TABLE>
<CAPTION>

                                                                   August 31, 2010
                                         ---------------------------------------------------------------------
                                                      Fair Value Measurements Using
                                          --------------- ----------------- ---------------- -----------------
                                             Level 1          Level 2           Level 3         Assets At
                                                                                                Fair Value
                                         ---------------- ----------------- ---------------- -----------------
<S>                                      <C>              <C>               <C>              <C>
Assets:
Fixed income securities at fair value    $             -  $      6,945,239  $             -  $      6,945,239
Short-term investments at fair value             172,638                 -                -           172,638
                                         ---------------- ----------------- ---------------- -----------------
Total Assets                             $       172,638  $      6,945,239  $             -  $      7,117,877

</TABLE>


                                      F-12
<PAGE>

JACOBS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

<TABLE>
<CAPTION>
                                                                     May 31, 2010
                                         --------------------------------------------------- -----------------
                                                   Fair Value Measurements Using
                                         ---------------- ----------------- ---------------- -----------------
                                             Level 1          Level 2           Level 3         Assets At
                                                                                                Fair Value
                                         ---------------- ----------------- ---------------- -----------------
<S>                                      <C>              <C>               <C>              <C>
Assets:
Fixed income securities at fair value    $             -  $      6,618,472  $             -  $      6,618,472
Short-term investments at fair value             264,079                 -                -           264,079
                                         ---------------- ----------------- ---------------- -----------------
Total Assets                             $       264,079  $      6,618,472  $             -  $      6,882,551
</TABLE>

The Company had no assets or  liabilities  measured at fair value on a recurring
basis using significant  unobservable inputs (Level 3) at either May 31, 2010 or
at August 31, 20010.

During the three  months ended August 31,  2010,  the company  recognized  gross
realized gains on the sale of securities classified as  available-for-sale.  The
sales consisted of U.S.  Government  agency  mortgage backed  securities with an
amortized cost basis of $789,666, which were sold for a gain of $51,019.

NOTE D - NOTES PAYABLE AND ADVANCES FROM RELATED PARTY
------------------------------------------------------

The Company had the  following  unsecured  notes  payable to  individuals  and a
commercial bank as of August 31, 2010 and May 31, 2010 respectively:
<TABLE>
<CAPTION>

                                                             August 31,           May 31,
                                                                2010               2010
                                                        ------------------ ------------------
<S>                                                     <C>                <C>
Unsecured demand notes payable to individuals
and others; interest rate fixed @ 10.00%
($75,000 to related party)                              $       1,182,000  $       1,057,000

Unsecured note(s) payable to individual(s) under
a bridge-financing arrangement described below
($360,000 to related party)                                     3,500,000          3,500,000

Unsecured short-term advances from principal
shareholder and chief executive officer;
interest rate fixed @ 12.00                                        21,666              7,104

Unsecured  term  note  payable  to  commercial  bank
in the  original  amount of $250,000 and payable in
equal monthly payments of $5,738;  interest rate fixed
@ 13.25% maturing January 31, 2012                                 19,907             37,119
                                                        ------------------ ------------------
                                    Notes payable       $       4,723,573  $       4,601,223
                                                        ================== ==================
</TABLE>



                                      F-13
<PAGE>

JACOBS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)


In accordance with the terms of the first round bridge-financing of $2.5 million
on March 10, 2008, the holders of such notes were paid accrued  interest-to date
and issued 5.00% of the Company's common shares.  Holders of the second round of
bridge-financing  notes of $1.0 million  received 2.00% of the Company's  common
shares.  Upon retirement of the notes  subsequent to consummation of a qualified
equity offering,  the Company shall issue to the holders of the bridge financing
notes  additional  Company common stock that,  when added to the stock initially
issued to the holders of the notes,  will equal the  noteholder's pro rata share
of the applicable  percentage of the outstanding  common stock of the Company as
follows: If the qualified financing consists of $50 million or more, the holders
of such notes will  receive 28% of the common  stock of the  Company  that would
otherwise be retained by the holders of the Company's common shares  immediately
prior to the  financing;  if the qualified  financing is for an amount less than
$50 million,  the percentage will be reduced on a sliding scale to a fraction of
28% of the amount retained by the holders of the Company's  common shares (where
the numerator is the amount of financing and the denominator is $50 million).

Beginning  September  10,  2008,  because  a  qualified  financing  had not been
completed,  the Company became required under the terms of the bridge  financing
to issue 2.80% of the Company's  outstanding common shares and shall issue 2.80%
of the Company's  outstanding common shares upon each six-month anniversary date
thereof until  retirement of the notes.  On September 10, 2008,  March 10, 2009,
September 10, 2009, and March 10, 2010,  4,870,449,  5,010,640,  5,354,642,  and
6,005,925 common shares, respectively, were issued to those noteholders.

Pursuant  to the  terms  of the  Promissory  Notes,  the  first  two of 20 equal
quarterly installments of principal and interest payable thereunder were to have
been paid on December  10, 2008 and March 10,  2009 (the  "INITIAL  AMORTIZATION
PAYMENTS").  As the result of upheavals and dislocations in the capital markets,
the Company was unable to either  refinance  the  indebtedness  evidenced by the
Promissory Notes or make the Initial  Amortization  Payments to the Holders when
due; and an Event of Default (as defined in the Promissory Notes) occurred under
the  Promissory  Notes as a result of the  Company's  failure to pay the Initial
Amortization Payments within 14 days after same became due and payable.

On June 5, 2009 the Company entered into an agreement with the bridge lenders to
forbear from exercising  their rights and remedies arising from the Acknowledged
Events of Default.  As  consideration  for the  forbearance,  the Company issued
5,171,993  shares of  Common  stock,  and  pledged  the  stock of the  Company's
subsidiary,  Crystal  Mountain  Water (CMW),  as security  for  repayment of the
loans.  The  original  repayment  schedule  called  for  quarterly  payments  of
$224,515. The Holders agreed that under the forebearance the Company may satisfy
its obligation by increasing the quarterly  payments by $67,185,  (to a total of
$291,700) for eight consecutive quarters beginning September 10, 2009 to satisfy
the arrearage.  In addition, the interest rate was increased to 17.00%. Although
the Company has failed to make the payment that was due  September  10, 2009 and
the payments that were due in the ensuing  quarters,  management has remained in
close contact with the bridge lenders,  providing  reports regarding its efforts
to refinance or otherwise  repay the bridge loans.  To date,  none of the bridge
lenders has elected to pursue legal remedies.

During the three months ended August 31, 2010 and the year ended May 31, 2010, a
company  owned by a board  member  provided  consulting  services.  This company
provided services totaling $15,525 in the three months ended August 31, 2010 and
$15,525 in the three months ended August 31, 2009.  Amounts owed to this company
are treated as related  party  payables  in the  amounts  $96,185 and $96,160 at
August 31, 2010 and May 31, 2010.

                                      F-14
<PAGE>
JACOBS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)


Advances  have been made to the Company by its principal  shareholder  and chief
executive  officer to fund ongoing  operations  under a  pre-approved  unsecured
financing  arrangement bearing interest at the rate of 12.00%.  During the three
months ended August 31, 2010, the principal shareholder  personally assumed debt
that was payable by the Company in the amount of $169,180,  of which $19,180 was
interest and $150,000 was principal. The following table summarizes the activity
under such arrangement for the three month period ended August 31, 2010.

                                              Three month
                                             period ended
                                               August 31,
                                                 2010
                                           ------------------
Balance owed, beginning of period          $           7,104
Proceeds from borrowings                             122,375
Assumption of company debt                           169,180
Accrued payroll offsetting repayments                 43,315
Repayments                                          (320,308)
                                           ------------------
Balance owed, end of period                $          21,666
                                           ==================


Scheduled  maturities  and  principal  payments  for each of the next five years
ending August 31 are as follows:

2011 (including demand notes)          $      4,723,573
2012 - 2015                                           -
                                       -----------------
                                       $      4,723,573
                                       =================

NOTE E-STOCKHOLDERS EQUITY
--------------------------

In the three month period ending  August 31, 2010,  the Company  issued  895,000
shares  of the  Company's  common  stock in  connection  with new and  continued
borrowings totaling $895,000.  The shares were valued at approximately  $.004312
per share based on the average quoted  closing price of the Company's  stock for
the 20-day period proceeding the date of the transaction and totaled $3,859.

In the three month period ending August 31, 2010,  the Company  awarded  500,000
shares to an individual as compensation  for services  instrumental to advancing
the Company's  business plan,  including  introductions  and  negotiations  with
reinsurers,  investors  and  insurers  with the  potential  to  provide  license
authority in additional states. The shares were valued at approximately $.004095
per share based on the average quoted  closing price of the Company's  stock for
the 20-day period proceeding the date of the transaction and totaled $2,048.

As a means of alleviating  obligations  associated  with the Company's  Series B
Preferred  Stock,  which by its  terms  matures  at the end of 2010,  management
proposed a  recapitalization  to assist in stabilizing the financial position of
the Company. The Company's Certificate of Incorporation provides for two classes
of  capital  stock,  known as common  stock,  $0.0001  par value per share  (the

                                      F-15
<PAGE>
JACOBS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)


"COMMON  STOCK"),  and  preferred  stock,  $0.0001  par  value  per  share  (the
"PREFERRED  STOCK").  The Company's  Board is authorized by the  Certificate  of
Incorporation  to provide for the issuance of the shares of  Preferred  Stock in
series, and by filing a certificate  pursuant to the applicable law of the State
of Delaware,  to establish from time to time the number of shares to be included
in such series and to fix the designations, preferences and rights of the shares
of  each  such  series  and the  qualifications,  limitations  and  restrictions
thereof.  Board deemed it advisable to designate a Series C Preferred  Stock and
fixed and determined the preferences,  rights,  qualifications,  limitations and
restrictions relating to the Series C Preferred Stock as follows:

     1.   Designation.  The  shares  of  such  series  of  Preferred  Stock  are
          designated  "Series  C  Preferred  Stock"  (referred  to herein as the
          "SERIES C STOCK"). The date on which the first share of Series C Stock
          is issued  shall  hereinafter  be referred to as the  "ORIGINAL  ISSUE
          DATE".

     2.   Authorized  Number.  The  number of shares  constituting  the Series C
          Stock are 10,000.

     3.   Ranking.  The  Series  C Stock  ranks,  (a) as to  dividends  and upon
          Liquidation  senior and prior to the Common Stock and all other equity
          securities  to  which  the  Series  C ranks  prior,  with  respect  to
          dividends and upon Liquidation  (collectively,  "JUNIOR  SECURITIES"),
          (b) pari passu with the  Corporation's  Series A Preferred  Stock, par
          value  $0.0001  per share (the  "SERIES A STOCK"),  the  Corporation's
          Series B Stock,  and any other series of Preferred Stock  subsequently
          established  by the Board with equal ranking (any such other series of
          Preferred Stock,  together with the Series C Stock, the Series B Stock
          and Series A Stock are collectively  referred to as the "EQUAL RANKING
          PREFERRED")  and (c)  junior to any other  series of  Preferred  Stock
          subsequently established by the Board with senior ranking.

     4.   Dividends.

          (a)  DIVIDEND  ACCRUAL AND PAYMENT.  The holders of the Series C Stock
               shall be  entitled to receive,  in  preference  to the holders of
               Junior  Securities,  dividends  ("DIVIDENDS") on each outstanding
               share of Series C Stock at the rate of 8% per annum of the sum of
               (i) the  Series C Face  Amount  plus (ii) an amount  equal to any
               accrued, but unpaid,  dividends on such Series C Stock, including
               for this purpose the exchanged  Series B Amount  outstanding with
               respect to such Series C Stock. For purposes hereof,  the "SERIES
               B AMOUNT"  means an amount equal to the dividend  that would have
               accrued on such Series C Stock held by such holder from and after
               the Series B  Original  Issue  Date  applicable  to such share of
               Series C Stock, through the Original Issue Date as if such Series
               C Stock had been  issued on such  Series B Original  Issue  Date,
               less all amounts  thereof  distributed  by the  Corporation  with
               respect  to such  Series C  Stock.  Dividends  shall  be  payable
               quarterly  in  arrears  on each  January  1,  April 1, July 1 and
               October 1 following the Original Issue Date, or, if any such date
               is a  Saturday,  Sunday  or legal  holiday,  then on the next day
               which  is  not a  Saturday,  Sunday  or  legal  holiday  (each  a
               "DIVIDEND  PAYMENT  DATE"),  as declared by the Board and, if not
               paid  on  the  Dividend  Payment  Date,  shall  accrue.   Amounts
               available  for payment of Dividends  (including  for this purpose
               the Series B Amount)  shall be allocated and paid with respect to
               the  shares of Series C  Preferred  and any other  Equal  Ranking
               Preferred, FIRST, among the shares of Equal Ranking Preferred pro
               rata in  accordance  with the amounts of dividends  accruing with
               respect to such shares at the current Dividend Payment Date, and,
               THEN,  any  additional  amounts  available  for  distribution  in
               accordance  with the  accrued,  but  unpaid,  dividends  (and the
               Series B Amount then  outstanding) at each prior Dividend Payment
               Date, in reverse  chronological order, with respect to all shares
               of the Equal Ranking  Preferred  then  outstanding  in accordance
               with amounts accrued,  but unpaid.  For purposes hereof, the term

                                      F-16
<PAGE>

JACOBS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

               "SERIES B ORIGINAL  ISSUE DATE" shall mean,  with  respect to any
               share of Series C Stock issued by the Corporation in exchange for
               a share  of  Series B Stock,  the date on which  the  Corporation
               originally issued such share of Series B Stock.

The  Recapitalization  consisted  of the  exchange  of  Series  B  Shares  for a
combination  of Series C Shares and Common Stock.  For each Series B Share,  the
participating  holder  received  (i) one Series C Share and (ii) 2,000 shares of
JFG Common Stock (for no additional consideration).

The Series B Shares have an 8.0% per annum compounding dividend preference,  are
convertible  into  Common  Shares  of JFG  at the  option  of the  holders  at a
conversion  price of $1.00 per Share (as  adjusted  for  dilution)  and,  to the
extent not  converted,  must be  redeemed by the  Corporation  at any time after
December 31, 2010 at the option of the holder. Any such redemption is subject to
legal  constraints,  such as the availability of capital or surplus out of which
to pay the redemption, and to a determination by our Board of Directors that the
redemption will not impair the operations of First Surety.

The Series C Shares issued in the Recapitalization  have the same 8.0% per annum
compounding dividend preference and carry over from the Series B Shares the same
accrued but unpaid  dividends.  While  dividends  had never been declared on the
Series B shares,  they had been accrued,  increasing the dividend preference and
the redemption price and liquidity  preference of such shares and increasing the
liability  represented  thereby  based upon the Series B Shares  fixed  maturity
date.  The  accrued  (but  undeclared)  dividends  associated  with the Series C
exchange  amounted to $2,295,624 and are included in the total amount  exchanged
for Series C Shares.  Unlike the Series B Shares with their fixed maturity date,
the  Series  C  Shares  are  permanent  equity,  with  accruing  dividends  only
increasing the preference amount that must be satisfied before junior securities
may participate in dividends or on liquidation.  Accordingly,  the effect of the
accrual  of  dividends  with  respect  to the  Series C Shares on the  Company's
balance sheet is to increase the  aggregate  claim of the Series C Shares on the
equity of the  corporation  and to increase the deficit in common equity,  while
having  no  effect  on  the  net  equity  of the  corporation  as a  whole.  The
entitlement  of the  Series  C  Shares  to a  priority  in  relation  to  junior
securities  with  respect to  dividends  and on  liquidation  does not create an
obligation  to the Company and  therefore  no  liability  is recorded  until the
dividends are declared by the Board of the Company. The Series C Shares are pari
passu with the  Corporation's  Series A Preferred  Stock and Series B Shares (to
the  extent  any  remain  outstanding  following  the  Recapitalization)  and no
dividends or other  distributions  will be paid upon Common  Shares or any other
class of Shares  that is junior in  priority  to the  Series C  Preferred  while
dividends are in arrears. In addition,  the Series C Shares are convertible into
Common Shares of JFG at the option of the holders at a conversion price of $0.10
per Share.  The  Series C Shares  may be  redeemed  by the  Corporation,  at its
option, when it is in a financial position to do so.

For the year  ending  May 31,  2010,  6,804.936  shares of  Series B Stock  were
surrendered and exchanged for 6,804.936 shares of Series C Stock.  This exchange
amounted to $6,269,051 of carrying  value of Series B stock being  exchanged for
Series C and Common Stock.  13,609,872 shares of Common Stock were issued to the
Series C Stock  holders at the rate of 2,000  Common  shares for each  exchanged
Series B Stock,  with the  related  cost  associated  with the  Common  issuance
offsetting  the Series C carrying  value by $265,120.  The shares were valued at
approximately $.01948 per share based on the average quoted closing price of the
Company's  stock for the 20-day period  proceeding the date of the  transaction.
Series C stock may be redeemed by the Company but does not have a fixed maturity
date and,  thus, is classified as permanent  equity.  Holders of over 70% of the
outstanding   Series  B  Preferred   Shares   elected  to   participate  in  the
recapitalization.  Those  Series B  Preferred  Shareholders  that  chose  not to

                                      F-17
<PAGE>

JACOBS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

convert at this time are listed in the Liabilities section of the Balance Sheet,
and therefore the  accretion  and dividends  associated  with the Series B stock
after November 30, 2009 are deductions  from net income.  As the redemption date
on the Series B shares got closer,  it became apparent that it was unlikely that
the shares would be converted  to common at $1.00,  and thus the  classification
was  changed.  Accretion  and  dividends  on  Series  B  mandatorily  redeemable
preferred stock deducted from net income amounted to $44,624 and $78,505 for the
three-month  period  ended August 31, 2010.  The  remaining  Series B shares are
continuing to be accreted from carrying  value to the face amount for the 5 year
period from the date of issuance. Series C stock has no accretion. There were no
shares of Series B Stock  surrendered  or exchanged in the 3 month period ending
August 31, 2010.


NOTE F - COMMITMENTS, CONTINGENCIES, AND MATERIAL AGREEMENTS
------------------------------------------------------------

As of August 31,  2010,  the  Company had  accrued  and  withheld  approximately
$167,000 in Federal  payroll  taxes and  approximately  $31,000 in West Virginia
payroll withholdings. These amounts have not been remitted and are still payable
at October 20, 2010, as well as penalties and interest of approximately $31,000.
These amounts are reflected in the accompanying  financial statements as accrued
expenses, and management intends to pay this obligation as soon as possible.


NOTE G - SEGMENT REPORTING
--------------------------
The Company has two reportable segments, investment advisory services and surety
insurance products and services.  The following table presents revenue and other
financial information by industry segment.

                                                   THREE MONTH PERIOD ENDED
                        INDUSTRY SEGMENT        AUGUST 31,         AUGUST 31,
                                                   2010               2009
                        ----------------     ---------------     --------------
REVENUES:
 Investment advisory                         $        55,804     $       69,148
 Surety insurance                                    283,259            286,575
 Corporate                                                 -                  -
                                             ---------------     --------------
 Total revenues                              $       339,063     $      355,723
                                             ===============     ==============

NET INCOME (LOSS):
 Investment advisory                                 $11,897     $      (11,042)
 Surety insurance                                    120,321            129,930
 Corporate                                          (481,750)          (642,970)
                                             ---------------     --------------
 Total net income (loss)                     $      (349,532)    $     (524,082)
                                             ===============     ==============




                                      F-18
<PAGE>
JACOBS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)


NOTE H - REINSURANCE
--------------------

The  Company  limits the  maximum  net loss that can arise  from large  risks by
reinsuring  (ceding)  certain  levels  of  such  risk  with  reinsurers.   Ceded
reinsurance is treated as the risk and liability of the assuming companies.  The
Company cedes  insurance to other companies and these  reinsurance  contracts do
not relieve the Company from its obligations to policyholders.

Effective  April 1, 2009, FSC entered into a reinsurance  agreement with various
syndicates  at Lloyd's of London and one Bermuda based  reinsurer  ("Reinsurer")
for its coal reclamation surety bonding programs.  The reinsurance  agreement is
an excess of loss  contract  which  protects  the Company  against  losses up to
certain limits over stipulated amounts, has an initial term of 39 months and can
be terminated by either party by written notice of at least 90 days prior to any
July 1. The contract called for the first year of the agreement to consist of 15
months with premium due within 30 days of the end of the first  Agreement  Year,
June 1, 2010,  at a rate of 35% of gross written  premium,  subject to a minimum
premium $490,000.  Year 2 of the contract is 12 months in duration, with premium
due within 30 days of the end of the second  Agreement  Year, June 1, 2011, at a
rate of 35% of gross written premium,  subject to a minimum premium $490,000. At
August 31, 2010 and May 31, 2010, the Company had prepaid  reinsurance  premiums
of $263,723 and $214,385 and ceded  reinsurance  payable/(deposited)  of $29,721
and ($122,568).  At May 31, 2010, the amounts  deposited with the Reinsurer were
greater than the ceded premium written,  resulting in a net deposit instead of a
payable.

There were no ceded  losses and lae  expenses  for the three months ended August
31, 2010 or 2009

The  effects of  reinsurance  on premium  written and earned for fiscal 2010 and
2009 are as follows;
<TABLE>
<CAPTION>
                             THREE MONTH         THREE MONTH         THREE MONTH     THREE MONTH PERIOD
                            PERIOD ENDING       PERIOD ENDING       PERIOD ENDING     ENDING AUGUST 31,
                          AUGUST 31, 2010 -    AUGUST 31, 2010    AUGUST 31, 2009 -        2009 -
                               WRITTEN             - EARNED            WRITTEN             EARNED
                          ------------------- ------------------- ------------------ --------------------
<S>                       <C>                 <C>                 <C>                <C>
             DIRECT       $          448,924  $          286,706  $         313,598  $           250,033
             CEDED        $          152,287  $          102,950  $         105,752  $            43,141
                          ------------------- ------------------- ------------------ --------------------
             NET          $          296,637  $          183,756  $         207,846   $          206,892
                          =================== =================== ================== =====================
</TABLE>


NOTE I-STOCK-BASED COMPENSATION
-------------------------------

On June 30, 2009 the  compensation  committee of the board of directors  awarded
10,000,000 incentive stock options to acquire common shares at an exercise price
of four cents ($.04) per share, of which 4,700,000 shares vested immediately and
the remaining 5,300,000 options vesting over the next three years ending in June
2011. The term of the options is five years and expires in June 2014.


                                      F-19

<PAGE>
JACOBS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)



NOTE J - SUBSEQUENT EVENTS
--------------------------

Subsequent to August 31, 2010, the Company obtained  borrowings of $255,000 from
individuals  and  business' to fund ongoing  operations  and made  repayments of
$100,000. Such borrowings were obtained under demand or short term notes bearing
interest at the rate of 10.00%.  These  borrowings,  and the renewal of previous
borrowings,  included  the  issuance  of 680,000  shares of its common  stock as
additional  consideration.  Additionally,  the Company  obtained  borrowings  of
$151,517 from its principal  shareholder and chief  executive  officer under its
pre-approved  financing  arrangement  bearing interest at the rate of 12.00% and
made repayments totaling $153,400.

In October 2010,  warrants were exercised for a total of 2,627,381 shares of the
Company's common stock.

On September  10, 2010,  the Company  issued  6,213,285  shares of the Company's
common stock in  connection  with the  semi-annual  issuance of shares under the
bridge-financing arrangements (see Note D).

On  September  30,  2010,  the Company  elected to continue to defer  payment of
dividends on its Series A Preferred Stock,  Series B Preferred Stock, and Series
C Preferred Stock, with such accrued and unpaid quarterly dividends amounting to
$30,713,  $80,951 and  $194,873,  respectively.  As of September  30, 2010,  the
accumulated  accrued and unpaid dividend amounted to $401,945,  $1,278,476,  and
$3,054,144, respectively.















                                      F-20
<PAGE>

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

During fiscal 2010 and the three-month period ended August 31, 2010, the Company
has focused its primary  efforts on the  development and marketing of its surety
business  in  West  Virginia  and  Ohio,   arranging  for  potential   strategic
relationships  that will  accelerate the  progression of the Company's  business
plan,  and  raising  additional  capital to  increase  the  capital  base of its
insurance subsidiary, First Surety Corporation ("FSC"), to facilitate entry into
other state markets.

RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIOD ENDED AUGUST 31, 2010

The  Company  experienced  a loss (after  accretion  of  mandatorily  redeemable
convertible  preferred  stock, and accrued  dividends on mandatorily  redeemable
preferred stock and equity  preferred  stock) for the  three-month  period ended
August  31,  2010  of  $573,222  as  compared  with a loss of  $942,942  for the
corresponding period ended August 31, 2009.

REVENUES

Revenues from operations for the  three-month  period ended August 31, 2010 were
$339,063 as compared with $355,724 for the corresponding period ended August 31,
2009. The overall  decrease in revenues is  attributable to the timing of earned
premium by FSC,  the  removal of mutual  fund fees upon the  liquidation  of the
Jacobs & Company  Mutual Fund,  and the receipt of large  principal  payments on
mortgage  backed  securities,  which resulted in large  amortization of premiums
recognized in the quarter.

INVESTMENT ADVISORY REVENUES

Quarterly  revenues from the Company's  investment  management segment (Jacobs &
Company or J&C), net of advisory referral fees, were $54,170 for the three-month
period  ended  August 31, 2010 as compared  with  $64,326 for the  corresponding
period ended  August 31,  2009.  As  investment  advisory  fees are based on the
market  value of assets under  management,  some  fluctuation  will occur due to
overall market conditions. For the most part, however, such revenues will remain
relatively  constant from quarter to quarter with any large  fluctuations  being
attributable to the growth or decline of assets under  management.  The decrease
in revenues is  attributable  to the  liquidation of the Jacobs & Company Mutual
Fund in November 2009, as summarized below. (See "Expenses, Mutual Fund Costs,")

                                                   Three-month Period Ended
                                                          August 31,
                                                          ----------
                                                    2010              2009
                                              ----------------- ----------------

Individually managed accounts                 $         54,170  $         58,419
Mutual fund                                                  -             5,907
                                              ----------------- ----------------
                                       Total  $         54,170  $         64,326
                                              ================= ================


                                      -3-
<PAGE>

INSURANCE AND INVESTMENT REVENUES

Quarterly  revenues from the Company's surety insurance  segment,  consisting of
FSC and Triangle Surety Agency,  Inc ("TSA"),  were $283,260 for the three-month
period ended  August 31, 2010 as compared  with  $286,575 for the  corresponding
period ended August 31,  2009.  Revenues  attributable  to premium  earned,  net
investment income and commissions earned are as follows:

                                                   Three-month Period Ended
                                                          August 31,
                                                          ----------
                                                    2010              2009
                                              ----------------- ----------------

Premium earned                                $        183,756  $        206,892
Net investment income                                   84,270            72,243
Commissions earned                                      15,234             7,440
                                              ----------------- ----------------
                                       Total  $        283,260  $        286,575
                                              ================= ================

Premium  revenue is  recognized  ratably over the term of the policy  period and
thus is relatively stable from period to period with fluctuations for comparable
periods  generally  reflecting the overall growth or loss of business.  Whereas,
commission  revenue,  which is dependent on the timing of issuance or renewal of
bonds, is expected to be somewhat more "seasonable" from quarter-to-quarter with
fluctuations  for comparable  periods  largely  reflecting the overall growth or
loss of business.  The  decrease in premium  earned for the  three-month  period
ended August 31, 2010 in comparison to the  corresponding  period from the prior
year is a result of having 12 months covered by reinsurance, and thus reduced by
12 months of ceded  premiums,  versus only 5 months of  reinsurance in the prior
year. Investment income should remain relatively  consistent,  but can fluctuate
based on interest rates and market conditions as well as the average assets held
for investment. The increase in corresponding periods reflects growth in average
assets held for  investment in FSC's  investment  portfolio  from  approximately
$6.452 million for the three-month period ended August 31, 2009 to approximately
$6.974  million for the  three-month  period  ended  August 31, 2010 offset by a
decrease in investment yield from approximately 4.31% for the three-month period
ended August 31, 2009 to  approximately  3.72% for the three-month  period ended
August 31, 2010.  In addition,  the sale of  investments  resulted in a realized
gain,  which was offset by the  amortization  of premium  for larger  than usual
principal payments on mortgage backed securities.

EXPENSES

INCURRED POLICY LOSSES

The Company has experienced no claims for losses as of August 31, 2010. However,
"incurred but not reported"  (IBNR)  policy  losses for the  three-month  period
ended  August 31, 2010 and 2009  amounted  to $42,327 and $48,185  respectively.
Such  amounts  represent  the  provision  for loss and loss  adjustment  expense
attributable to surety bonds issued by FSC. Such estimates are based on industry
averages adjusted for factors that are unique to FSC's underwriting approach and
are  constantly  reviewed for adequacy  based on current  market  conditions and
other factors unique to FSC's business.  For each of these periods,  IBNR policy
losses were approximately 23% of earned premium.

                                      -4-
<PAGE>

POLICY ACQUISITION COSTS

Insurance  policy  acquisition  costs of $59,981 and $62,602 for the three-month
periods  ended August 31,  20010 and 2009,  respectively,  represent  charges to
operations for policy acquisition expense and premium tax attributable to surety
polices  issued  by FSC and are  recognized  ratably  over the  period  in which
premiums  are  earned.   Such  cost  as  a  percentage  of  earned  premium  was
approximately  33% and 30% for the  periods  ended  August  31,  2010  and  2009
respectively.

GENERAL AND ADMINISTRATIVE

General and administrative expenses for the three-month periods ended August 31,
2010 and 2009 were $255,398 and $400,614  respectively,  representing a decrease
of $145,216, and were comprised of the following:

<TABLE>
<CAPTION>
                                                                 Three-month Period Ended
                                                                        August 31,
                                                           ------------------ ------------------
                                                                   2010               2009           Difference
                                                           ------------------ ------------------ -------------------
<S>                                                        <C>                 <C>               <C>
Salaries and related costs                                 $         112,548   $        233,504  $        (120,956)
General office expense                                                28,377             27,841                536
Legal and other professional fees and costs                           25,326             67,076            (41,750)
Audit, accounting and related services                                25,543             24,018              1,525
Travel, meals and entertainment                                        9,660             15,332             (5,672)
Other general and administrative                                      53,944             32,843             21,101
                                                           ------------------ ------------------ -------------------
                         Total general and administrative  $         255,398  $         400,614  $        (145,216)
                                                           ================== ================== ===================
</TABLE>


Salaries and related costs, net of deferred internal policy  acquisition  costs,
decreased approximately $121,000 and are comprised of the following:
<TABLE>
<CAPTION>
                                                                Three-month Period Ended
                                                                       August 31,
                                                          --------------------------------------
                                                                   2010               2009           Difference
                                                          ------------------- ------------------ -------------------
<S>                                                       <C>                 <C>                <C>
Salaries and taxes                                        $          128,546  $         126,761  $           1,785
Commissions                                                            7,631             11,332             (3,701)
Stock option expense                                                  13,452            138,890           (125,438)
Fringe benefits                                                       14,262             12,561              1,701
Key-man insurance                                                     10,988             11,219               (231)
Deferred payroll costs                                               (62,331)           (67,259)             4,928
                                                          ------------------- ------------------ -------------------
                         Total salaries and related costs $          112,548  $         233,504  $        (120,956)
                                                          =================== ================== ===================
</TABLE>


The  decrease  in stock  option  expense is  attributable  to the award of stock
options on June 30, 2009.


                                      -5-
<PAGE>

Legal and other professional fees and costs were comprised of the following:
<TABLE>
<CAPTION>
                                                                Three-month Period Ended
                                                                       August 31,
                                                          --------------------------------------
                                                                   2010               2009           Difference
                                                          -------------------- ------------------ ------------------

<S>                                                       <C>                  <C>                <C>
General corporate services                                $            8,589   $         38,218   $        (30,098)
Coal reclamation consulting                                            6,420                  -              6,420
Acquisition and financing related costs                               10,317             28,858            (18,541)
                                                          -------------------- ------------------ ------------------
                  Total legal and other professional fees $           25,326   $         67,076   $        (41,750)
                                                          ==================== ================== ==================
</TABLE>

The decrease in general  corporate  services  results  primarily from legal fees
incurred in the  recapitalization  and exchange of Series B Preferred shares for
Series C Preferred shares, as well as timing  differences  related to review and
assistance provided in connection with the filing of the Company's annual report
with the Securities and Exchange  Commission.  In the  three-month  period ended
August 31,  2010,  the  Company  incurred  expense  of $6,420  related to a coal
reclamation   consulting   services  agreement  between  FSC  and  an  unrelated
individual.  Legal and other  professional  services  and costs  related  to the
Company's  pending   acquisitions  and  on-going  efforts  to  obtain  financing
necessary to expand the Company's business and penetrate new markets amounted to
$10,317 and $28,858 for the three-month  periods ended August 31, 2010 and 2009,
respectively.

The  decrease in travel,  meals and  entertainment  expense for the  three-month
period  ended  August 31,  2010 as  compared  to the  corresponding  2009 period
related primarily to additional efforts made by management to reduce expense.

Other general and administrative expense increased approximately $21,000 for the
three-month  period ended August 31, 2010 as compared to the corresponding  2009
period. This increase in general and administrative expense is due to additional
training and  conferences  for staff,  timing of FSC board  meetings,  increased
licenses and fees for FSC related to obtaining a U.S.  Treasury  Listing and the
purchase of network and computer equipment.

MUTUAL FUND COSTS

J&C was the investment  advisor to the Jacobs & Company Mutual Fund (the "Fund")
until its liquidation and  distribution to its shareholders on December 1, 2009.
While the Fund was  responsible  for its own  operating  expenses,  J&C,  as the
investment  advisor,  had agreed to limit the Fund's  aggregate annual operating
expenses to 2% of the average net assets.  The cumulative  reimbursement due the
Fund by J&C as of August 31, 2010 was $54,866.

J&C had no revenue or expenses  attributable  to the Fund for the period  ending
August 31, 2010; it had absorbed $38,326 of the Fund's operating expenses during
the corresponding period from the previous year.

                                      -6-
<PAGE>

INTEREST EXPENSE

Interest  expense for the three-month  period ended August 31, 2010 was $204,368
as compared  with $327,284 for the  corresponding  period ended August 31, 2009.
Components of interest expense are comprised of the following:
<TABLE>
<CAPTION>
                                                                    Three-month Period Ended
                                                                           August 31,
                                                               -----------------------------------
                                                                      2010             2009            Difference
                                                               ----------------- ----------------- -----------------
<S>                                                            <C>                <C>              <C>
Interest expense on bridge-financing                           $        149,973   $        83,911  $        66,062
Expense of common shares issued or to be issued in
 connection with bridge financing and other arrangements                 24,358           225,970         (201,612)
Interest expense on demand and term notes                                28,448            17,047           11,401
Other finance charges                                                     1,589               356            1,233
                                                               ----------------- ----------------- -----------------
                                       Total interest expense  $        204,368  $        327,284  $      (122,916)
                                                               ================= ================= =================
</TABLE>

The  decrease in the expense of common  shares  issued (or to be issued) for the
three-month period ended August 31, 2010 as compared to the corresponding period
of the previous year was largely attributable to the issuance of common stock on
June 5, 2009 in relation to the agreement with the bridge loan holders. Interest
expense on  bridge-financing  increased due to the increase in the interest rate
to 17% as part of the forebearance  agreement terms.  Interest expense on demand
and term notes increased due to increased borrowings.


ACCRETION AND DIVIDENDS

Accretion of  mandatorily  redeemable  convertible  preferred  stock issued at a
discount and accrued dividends for three-month periods ended August 31, 2010 and
2009 are as follows:
<TABLE>
<CAPTION>

                                                                  Three-month Period Ended
                                                                         August 31,
                                                            --------------------------------------
                                                                    2010                2009            Difference
                                                            --------------------- ------------------ -----------------
<S>                                                         <C>                   <C>                <C>
Accretion of discount                                       $            4,626    $       148,300    $      (143,674)
Accrued dividends - mandatorily redeemable preferred stock              30,079            270,559           (240,480)
Accrued dividends - equity preferred stock                             188,985                  -            188,985
                                                            --------------------- ------------------ -----------------
                            Total accretion and dividends   $          223,690    $       418,859    $      (195,169)
                                                            ===================== ================== =================
</TABLE>


The Series B class of stock is treated as a liability  as of  November  30, 2009
after the majority was exchanged for Series C equity stock. Therefore, accretion
of $44,624 and dividends of $78,505 associated with the Series B remaining after
that date are  deductions  from net income and not  included in the table above.
The  decrease  in the  accretion  of  discount  and  the  accrued  dividends  on
mandatorily  redeemable  preferred stock results from this exclusion of Series B
subsequent  to November 30, 2009 as well as the  application  of the interest or
constant  yield  method to the initial  discount  recorded  with  respect to the

                                      -7-
<PAGE>

mandatorily redeemable preferred stock over a period of five years from the date
of issuance of the stock.  Series C equity stock  accrues  dividends at the same
rate as the Series B it was exchanged for,  however it is separated in the table
above  due to  Series  C not  being  mandatorily  redeemable.  Series C does not
accrete.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

INTANGIBLE ASSETS

In exchange for the purchase  price of $2.9 million for the 2005  acquisition of
FSC,  the Company  received  cash and  investments  held by FSC  totaling  $2.75
million,  with the difference  being  attributed to the multi-line  property and
casualty licenses of FSC in the states of West Virginia,  Ohio and Indiana. Such
licenses have indefinite lives and are evaluated annually for recoverability and
impairment loss.  Impairment loss, if any, is measured by estimating future cash
flows  attributable  to such  assets  based on  forecasts  and  projections  and
comparing such  discounted cash flow amounts to the carrying value of the asset.
Should actual results differ from such  forecasts and  projections,  such assets
may be subject to future impairment charges.

RESERVE FOR LOSSES AND LOSS EXPENSES

Reserves  for  unpaid  losses  and loss  adjustment  expenses  of the  insurance
subsidiary are estimated using individual  case-basis  valuations in conjunction
with estimates derived from industry and company experience. FSC has experienced
no claims for losses as of August 31, 2010.

FSC is licensed to write  surety in West  Virginia  and Ohio and has focused its
efforts  primarily  on coal  permit  bonds.  Reclamation  of land  that has been
disturbed  by  mining  operations  is  highly  regulated  by  federal  and state
jurisdictions,  and the  surety  bonds  posted to  assure  that  reclamation  is
accomplished  are  generally  long-term in nature,  with mining  operations  and
reclamation  work being  conducted  in unison as the  property  is being  mined.
Additionally,  no two  principals or properties  are alike due to varied company
structures and unique geography and geology of each site.

In underwriting coal reclamation bonds, management obtains estimates of costs to
reclaim the relevant  properties in accordance  with the  specifications  of the
mining permit prepared by independent outside professionals  experienced in this
field of work.  Such estimates are then  periodically  updated and compared with
marketable securities pledged and held in an account in which FSC has a security
interest as  collateral  for the surety  bond to  significantly  mitigate  FSC's
exposure to loss.  Should the principal default in its obligation to reclaim the
property as specified in the mining permit,  FSC would then use the funds in the
collateral  account to reclaim the  property or as an offset in  forfeiting  the
face  amount of the surety  bond.  Losses can occur if the costs of  reclamation
exceed the  estimates  obtained  at the time the bond was  underwritten  or upon
subsequent  re-evaluations  if  sufficient  collateral is not obtained or if the
collateral has  experienced  significant  deterioration  in value and FSC is not
otherwise able to recover under its contractual rights to indemnification.


                                      -8-
<PAGE>

Miscellaneous fixed-liability surety bonds are generally fully collateralized by
the principal's cash investment into a collateral  investment account managed by
the Company's investment advisory subsidiary (Jacobs & Co.) that mitigates FSC's
exposure  to  loss.  Losses  can  occur  should  the  principal  default  on the
performance  required  by the bond  and the  collateral  held in the  investment
account experiences deterioration in value.

In establishing its reserves for losses and loss adjustment expense,  management
continually  reviews  its  exposure  to loss  based on  reports  provided  after
periodic monitoring and inspections, along with industry averages and historical
experience.  Management has estimated such losses based on industry  experience,
adjusted  for  factors  that  are  unique  to  the  Company's  approach,  and in
consultation with actuaries experienced in the surety field.

ANALYSIS OF LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL POSITION AND
RECENT DEVELOPMENTS AND FUTURE DIRECTION OF COMPANY

The Company has experienced  significant  losses (after accretion of mandatorily
redeemable  convertible  preferred  stock and accrued  dividends on  mandatorily
redeemable   preferred  stock  and  equity  preferred  stock)  of  approximately
$2,713,000  and  $3,058,000  for the fiscal  years  ended May 31, 2010 and 2009,
respectively,  and a loss of approximately  $573,000 for the three-month  period
ended  August 31,  2010.  The Company had  positive  cash flow of  approximately
$200,000 from operating  activities for the three-month  period ended August 31,
2010.  A  substantial  portion of the  Company's  cash flow is  generated by its
insurance subsidiary and is subject to certain withdrawal restrictions.  Despite
the continued reduction of operating expenses,  the Company has not been able to
pay certain amounts due to professionals  and others,  continues to be unable to
pay  its  preferred  stock  dividend  obligation,   certain  payroll  taxes  and
withholdings from 2009 or to cure its default in certain quarterly  payments due
its bridge-financing  lenders.  While management expects revenue growth and cash
flow to increase significantly as its business plan is fully implemented,  it is
anticipated  that losses will continue and the Company will be cash  constrained
until FSC is able to develop a substantial book of business.

The Company is restricted in its ability to withdraw monies from FSC without the
prior approval of the Insurance  Commissioner.  Of the Company's investments and
cash of  $7,243,300  as of August 31, 2010,  $7,234,122  is  restricted  to FSC.
Furthermore,  capital raised pursuant to the sale of Series A preferred stock of
the Company in connection with the issuance of  partially-collateralized  surety
bonds must be contributed by the Company into the surplus accounts of FSC.

Effective  April 1, 2009, FSC entered into a reinsurance  agreement with Lloyd's
of London for its coal reclamation  surety bonding programs.  This agreement has
provided  additional  bonding  capacity to FSC and has enabled FSC to write more
bonds and of greater size for its coal reclamation  bonding clients.  Management
expects this reinsurance arrangement to allow FSC to expand its market share and
to  result  in  increased  cash  flow  for  each  of  the  Company's   operating
subsidiaries.

Expansion  of  FSC's  business  to  other  states  is a key  component  to fully
implementing  the Company's  business plan. In fiscal 2009, the Company was able
to increase the capital of FSC,  reactivate FSC's insurance  license in Ohio and

                                      -9-
<PAGE>

obtain  authority to issue surety bonds in that state.  However,  management has
found that entry into other states (as a surety) has been difficult  without the
benefit of more substantial capital and reserves due to FSC's status as a recent
entry into this market and the financial  condition of the Company.  This is the
case notwithstanding the reinsurance  agreement entered into by FSC with Lloyd's
of London and the resulting  increase in bonding capacity.  Management  believes
that if FSC's capital and surplus reserves were  significantly  more substantial
and the financial  condition of the Company became stabilized,  entry into other
states would be less challenging.  Accordingly,  management  continues to pursue
avenues that can provide additional  capital to its insurance  subsidiary and to
fund  continuing  operations  as the  business  is  being  fully  developed.  In
addition, as an alternative means of addressing access to markets, management is
seeking to establish a relationship  with any one of several  possible  sureties
that are  licensed in states  other than West  Virginia  and Ohio that  comprise
significant markets for the bonding programs of FSC and could issue surety bonds
that are underwritten and reinsured by FSC. Under such a "fronting" arrangement,
the need for additional capital at the level of FSC to facilitate entry to other
state markets would become secondary, since the payment of a fronting fee to the
insurance  company with active licenses would provide access to the state market
without formal entry.

As a means of alleviating  obligations  associated  with the Company's  Series B
Preferred  Stock,  which by its  terms  matures  at the end of 2010,  management
proposed a  recapitalization  to assist in stabilizing the financial position of
the  Company.  Holders  of  the  Series  B  Preferred  Stock  were  offered  the
opportunity to exchange their Series B Shares for an equal number of shares of a
new series of JFG preferred  stock  designated as Series C Preferred  Stock plus
2,000 shares of JFG Common Stock.  Series C Preferred Stock is equal in priority
to the Series B Preferred  Stock,  is entitled to  dividends at the same rate as
Series B Preferred  Stock, is entitled to convert to common stock of the Company
at a  conversion  rate of $.10 per common  share (in contrast to $1.00 per share
for Series B  Preferred)  and may be redeemed by the Company but does not have a
fixed  maturity date and,  thus, is classified as permanent  equity.  Holders of
over 70% of the outstanding  Series B Preferred Shares elected to participate in
the recapitalization.  Management believes the recapitalization will improve the
Company's  prospects for engaging in a larger  financing,  will assist FSC as it
applies to enter  other state  markets,  and will be an impetus to the growth of
the Company's business.

Through the sharing of resources  (primarily  personnel)  to minimize  operating
costs, the Company and its subsidiaries  attempt to minimize  operating expenses
and  preserve  resources.  Although  FSC is cash flow  positive,  the use of its
assets and profits are  restricted  to its  stand-alone  operation by regulatory
authority until its capital and surplus reserves reach more substantial  levels.
While growth of the FSC business  continues to provide  additional  cash flow to
the Company's other subsidiaries,  Jacobs and Triangle Surety, it is anticipated
that working capital  deficiencies  will continue and will need to be met either
through the raising of additional capital or borrowings.  However,  there can be
no assurance that additional  capital (or debt financing) will be available when
and to the extent required or, if available, on terms acceptable to the Company.
Accordingly, concerns as to the Company's ability to continue as a going concern
are  substantial.  The  consolidated  financial  statements  do not  include any
adjustments that might result from the outcome of this uncertainty.

                                      -10-
<PAGE>

The  Company's  exposure  to the  subprime  mortgage  risk is minimal due to its
investment  in  mortgage-backed  securities  having  been  limited to only those
securities  backed by the United States  government  (i.e.  Government  National
Mortgage  Association  or GNMA  securities).  The Company  also holds  municipal
obligations  that have been fully  defeased  through the purchase of  Resolution
Funding  Corporation  ("REFCORP")  strips that were placed in escrow and provide
the  means  for  the  bond  repayment.  REFCORP  was  created  by the  Financial
Institutions Reform,  Recovery and Enforcement Act of 1989 ("FIRREA") to provide
funds to the Resolution Trust  Corporation  ("RTC") in order to help resolve the
Savings and Loan failures.  REFCORP  operates as a United States Treasury agency
under the direction of the RTC Oversight Board,  whose chair is the secretary of
the United States  Treasury,  and its obligations  are ultimately  backed by the
United States government.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
------------------------------------------------------------------

As  the  Registrant  qualifies  as a  small  reporting  company  as  defined  by
ss.229.10(f)(1) of Regulation S-K, the Registrant is not required to provide the
information required by this item.


ITEM 4T. CONTROLS AND PROCEDURES
--------------------------------

We  maintain   disclosure  controls  and  procedures  designed  to  ensure  that
information  required to be disclosed  in the reports that the Company  files or
submits  under  the  Securities   and  Exchange  Act  is  recorded,   processed,
summarized,  and reported  within the time periods  specified in the SEC's rules
and forms,  and that such  information is accumulated  and  communicated  to the
Company's management,  including its Chief Executive Officer and Chief Financial
Officer,   as  appropriate,   to  allow  timely  decisions   regarding  required
disclosures.

Our management,  with the participation of its Chief Executive Officer and Chief
Financial  Officer,  has evaluated the effectiveness of our disclosure  controls
and procedures as defined in Rules 13a-15(e)  under the Securities  Exchange Act
of 1934, as of August 31, 2010.  As previously  reported in our Annual Report on
Form 10-K for the year ended May 31, 2010, control  deficiencies were identified
that  constitute  a  material   weakness  in  internal  control  over  financial
reporting.  Such control  deficiencies relate to the use of internally developed
non-integrated   accounting   systems,   lack  of  internal  review  of  account
reconciliations,  and  lack of  internal  review  of  general  journal  entries,
elimination entries and the financial  statement  consolidation  process.  Based
upon their  evaluation,  the Chief Executive Officer and Chief Financial Officer
concluded that the Company's  disclosure  controls and procedures,  as of August
31, 2010, were ineffective.  Changes will be considered as additional  financial
resources and accounting staff become available.

Notwithstanding  the  above,  management  believes  the  unaudited  consolidated
condensed  financial  statements  in this  Quarterly  Report on Form 10-Q fairly
present,  in all material  respects,  the  Company's  financial  condition as of
August 31,  2010 and May 31,  2010 and the  results of its  operations  and cash
flows for the three month period  ended  August 31, 2010 and 2009 in  conformity
with U.S. generally accepted accounting principals (GAAP).

                                      -11-

<PAGE>
                           PART II - OTHER INFORMATION


ITEM 1. LEGAL PROCEEDINGS
-------------------------

None.


ITEM 1A.   RISK FACTORS
-----------------------

As  the  Registrant  qualifies  as a  small  reporting  company  as  defined  by
ss.229.10(f)(1) of Regulation S-K, the Registrant is not required to provide the
information required by this item.


ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES
-----------------------------------------------

Certificates  of  Designations,  Powers,  Preferences  and  Rights  of  Series A
Preferred Stock adopted by the Board of Directors of the Company on December 22,
2005 is set forth as Exhibit 4.1

In the three months ended August 31, 2010,  1,395,000  common shares were issued
as additional consideration to various lenders in private placements pursuant to
short-term borrowings. Subsequent to August 31, 2010, 680,000 common shares were
issued in private  placements  to  various  individuals  pursuant  to short term
borrowings,  2,627,381  common  shares  were  issued to holders  exercising  the
company's  warrants,  and  6,213,285  common  shares  were  issued to the Bridge
lenders.

The  issuance  of the  aforementioned  securities  is exempt  from  registration
provisions of the Securities Act of 1933, as amended (the "Securities  Act"), by
reason of the provision of Section 4(2) of the Securities  Act, as  transactions
not involving any public  offering,  in reliance upon,  among other things,  the
representations made by the investors, including representations regarding their
status  as  accredited  investors  (as  such  term is  defined  under  Rule  501
promulgated  under the Securities Act), and their  acquisition of the securities
for  investment  and not  with a  current  view  to  distribution  thereof.  The
securities  contain  a  legend  to the  effect  that  such  securities  are  not
registered  under  the  Securities  Act  pursuant  to  an  exemption  from  such
registration. The issuance of the securities was not underwritten.


ITEM 3. DEFAULTS UPON SENIOR SECURITIES
---------------------------------------

The Company has incurred an event of default with respect to quarterly  interest
and principal payments under its bridge-financing arrangement. As of the date of
filing this report, the amount required to cure the default is $1,458,510.


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-----------------------------------------------------------

None.


ITEM 5. OTHER INFORMATION
-------------------------

None.


                                      -12-
<PAGE>
<TABLE>
<CAPTION>

ITEM 6. EXHIBITS
----------------
<S>   <C>
3.1   Company's Articles of Incorporation (1)
3.2   Company's By-laws (1)
3.3   Certificate of the Designations, Powers, Preferences and Rights of Series A Preferred Stock of Jacobs Financial Group (1)
3.4   Certificate of the Designations, Powers, Preferences and Rights of Series B Preferred Stock of Jacobs Financial Group (1)
4.1   Certificate of the Designations, Powers, Preferences and Rights of Series A Preferred Stock of Jacobs Financial Group (1)
4.2   Certificate of the Designations, Powers, Preferences and Rights of Series B Preferred Stock of Jacobs Financial Group (1)
10.1  Agreement to acquire by merger Reclamation Surety Holding Company, Inc. (2) (4)
10.2  Stock Purchase Agreement with National Indemnity Company to purchase Unione Italiana Insurance Company of America dated
      August 20, 2008 (5) (6)
31.1  Certification  of Chief  Executive  Officer  and Chief  Financial  Officer pursuant to Rule 13a-146.1  promulgated under the
      Securities Exchange Act of 1934
32.1  Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
      to Section 906 of the Sarbanes-Oxley Act of 2002
99.1  Form of Subscription Agreement and Promissory Note  (Bridge-financing) (3)
------------------------------------------------------------------------------------------------------------------------------------
      (1)   Incorporated by reference to the Company's Current Report on form 8-K dated December 29, 2005.
      (2)   Incorporated by reference to the Company's Current Report on form 8-K dated February 8, 2008.
      (3)   Incorporated by reference to the Company's Current Report on form 8-K dated June 6, 2008
      (4)   Incorporated by reference to the Company's Current Report on form 8-K dated June 24, 2008
      (5)   Incorporated by reference to the Company's Current Report on form 8-K dated August 20, 2008
      (6)   Incorporated by reference to the Company's Current Report on form 8-K dated November 13, 2008
</TABLE>


















                                      -13-
<PAGE>



SIGNATURES


Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.


Date: October 20, 2010                    JACOBS FINANCIAL GROUP, INC.
                              --------------------------------------------------
                                                 (Registrant)
                           By:
                              /s/John M. Jacobs
                              --------------------------------------------------
                              John M. Jacobs, President




























                                      -14-