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 February 28, 2011

                         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:  241,369,804  shares of common
stock as of April 19, 2011.


                         PART I -- FINANCIAL INFORMATION

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

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




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

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     F-5 and
 Stock and Stockholders Equity (Deficit)                                 F-6
Notes to Consolidated Condensed Financial Statements                     F-7





















                                      -2-
<PAGE>
JACOBS FINANCIAL GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
                                                                                                 FEBRUARY 28, 2011     MAY 31, 2010
                                                                                                -------------------  ---------------
<S>                                                                                             <C>                  <C>
ASSETS

INVESTMENTS AND CASH:
 Bonds and mortgaged-back securities available for sale, at market value                        $     6,232,810      $  6,618,472
  (amortized cost - 02/28/11 $6,107,349; 05/31/10 $6,413,857)
 Short-term investments, at cost (approximates market value)                                          1,149,231           264,079
 Cash                                                                                                    99,295            74,571
                                                                                                -------------------  ---------------
                                                  TOTAL INVESTMENTS AND CASH                          7,481,336         6,957,122

 Investment income due and accrued                                                                       24,558            31,833
 Premiums and other accounts receivable                                                                 115,272           147,466
 Prepaid reinsurance premium                                                                            247,041           214,385
 Funds deposited with Reinsurers                                                                              -           122,568
 Deferred policy acquisition costs                                                                      168,299           128,453
 Furniture, Automobile, and equipment, net of accumulated depreciation
  of $154,483 and $144,102, respectively                                                                 35,685            18,380
 Other assets                                                                                            26,932            27,832
 Intangible assets                                                                                      150,000           150,000
                                                                                                -------------------  ---------------
                                                                TOTAL ASSETS                    $     8,249,123      $  7,798,039
                                                                                                ===================  ===============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
 Reserve for losses and loss expenses                                                           $       759,191      $    611,190
 Reserve for unearned premiums                                                                          715,447           618,095
 Accrued expenses and professional fees payable                                                         631,970           613,301
 Accounts payable                                                                                       258,820           150,673
 Ceded reinsurance payable                                                                               51,962                 -
 Related party payable                                                                                   99,234            96,160
 Term note payable to related party                                                                     360,000           360,000
 Demand notes payable to related party                                                                   82,430            82,104
 Notes payable                                                                                        4,545,000         4,159,119
 Accrued interest payable                                                                             1,024,735           651,983
 Accrued interest payable to related party                                                              122,865            71,481
 Other liabilities                                                                                      121,254           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
 FEBRUARY 28, 2011 AND MAY 31, 2010; STATED LIQUIDATION VALUE OF $1,000 PER SHARE                     4,174,987         3,826,882
                                                                                                -------------------  ---------------
                                                           TOTAL LIABILITIES                         12,947,895        11,453,983

 SERIES A PREFERRED STOCK, $.0001 PAR VALUE PER SHARE; 1 MILLION SHARES AUTHORIZED;
 2,675 SHARES ISSUED AND OUTSTANDING AT FEBRUARY 28, 2011 AND MAY 31, 2010,
 RESPECTIVELY; STATED LIQUIDATION VALUE OF $1,000 PER SHARE                                           3,107,969         3,005,266
                                                                                                -------------------  ---------------
                                TOTAL MANDATORILY REDEEMABLE PREFERRED STOCK                          3,107,969         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 February 28, 2011 and May 31, 2010,
 respectively; includes $3,252,946 and $2,670,286 accrued
 Series C dividends, respectively                                                                     9,283,877         8,701,217

 Common  stock,  $.0001  par value per  share;  490  million  shares  authorized;
 234,077,622 and 214,464,012 shares issued and outstanding at February 28, 2011 and
 May 31, 2010, respectively                                                                              23,408            21,446
 Additional paid in capital                                                                           3,512,144         3,404,431
 Accumulated deficit                                                                                (20,751,631)      (18,992,919)
 Accumulated other comprehensive income (loss)                                                          125,461           204,615
                                                                                                -------------------  ---------------
                                         TOTAL STOCKHOLDERS' EQUITY (DEFICIT)                        (7,806,741)       (6,661,210)
                                                                                                -------------------  ---------------
                         TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)                   $     8,249,123      $  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                NINE MONTHS ENDED
                                                                                FEBRUARY 28,                     FEBRUARY 28,
                                                                       -----------------------------   -----------------------------
                                                                           2011             2010             2011            2010
                                                                       ------------     ------------   --------------   ------------
<S>                                                                    <C>              <C>            <C>              <C>
REVENUES:

 Investment advisory services                                          $    69,670      $    62,596    $     188,268    $    193,885
 Insurance premiums and commissions                                        242,377          175,032          681,160         597,881
 Net investment income                                                      69,012           58,435          169,446         201,938
 Net realized investment gains (losses)                                     26,994           42,926           90,701          40,828
 Other income                                                                6,208            6,649           14,029          12,416
                                                                       ------------     ------------   --------------   ------------
                                                      TOTAL REVENUES       414,261          345,638        1,143,604      1,046,948


OPERATING EXPENSES:

 Incurred policy losses                                                     55,290           41,382          148,002        139,068
 Insurance policy acquisition costs                                         87,135           60,721          224,468        185,640
 General and administrative                                                253,797          289,068          823,400      1,022,642
 Mutual fund costs                                                               -              125                -         75,038
 Depreciation                                                                4,048            2,501           11,555          7,946
                                                                       ------------     ------------   --------------   ------------
                                            TOTAL OPERATING EXPENSES       400,270          393,797        1,207,425      1,430,334
                                                                       ------------     ------------   --------------   ------------

                                   NET INCOME (LOSS) FROM OPERATIONS        13,991          (48,159)         (63,821)      (383,386)

 Gain on debt extinguishment                                                     -          200,239                -        200,239
 Accrued dividends and accretion of Series B Mandatorily
 Redeemable Preferred Stock                                                (98,610)        (115,950)        (348,104)      (115,950)
 Interest expense                                                         (260,082)        (181,995)        (661,341)      (691,093)
                                                                       ------------     ------------   --------------   ------------

                                                   NET INCOME (LOSS)      (344,701)        (145,865)      (1,073,266)      (990,190)

Accrued dividends on Series C Preferred Stock equity                      (198,802)        (175,720)        (582,660)      (175,720)
Accretion of Mandatorily Redeemable Convertible
Preferred Stock, including accrued dividends                               (32,599)         (34,028)        (102,703)      (846,580)
                                                                       ------------     ------------   --------------   ------------

              NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS    $  (576,102)     $  (355,613)   $  (1,758,629)   $(2,012,490)
                                                                       ============     ============   ==============   ============


BASIC AND DILUTIVE NET INCOME (LOSS) PER SHARE:

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


WEIGHTED-AVERAGE SHARES OUTSTANDING                                    231,494,905      207,452,531      223,423,461    195,657,796
                                                                       ============     ============   ==============   ============
</TABLE>







                            See accompanying notes.
                                      F-2

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


<TABLE>
<CAPTION>



                                                                     THREE MONTHS ENDED                NINE MONTHS ENDED
                                                                         FEBRUARY 28,                     FEBRUARY 28,
                                                                -----------------------------    ------------------------------
                                                                     2011            2010             2011            2010
                                                                -------------    ------------    --------------   -------------
<S>                                                             <C>              <C>             <C>              <C>
COMPREHENSIVE INCOME (LOSS):

Net income (loss) attributable to common stockholders           $  (576,102)     $ (355,613)     $ (1,758,629)    $(2,012,490)


OTHER COMPREHENSIVE INCOME (LOSS):

 Net unrealized gain (loss) of available-for-sale
 investments arising during period                                  (76,047)        (11,585)          (18,204)         16,836

 Reclassification adjustment for realized (gain)
 loss included in net income                                        (19,555)        (42,926)          (60,950)        (40,828)
                                                                -------------    ------------    --------------   -------------

 Net unrealized gain (loss) attributable to available-for-sale
 investments recognized in other comprehensive income               (95,602)        (54,511)          (79,154)        (23,992)
                                                                -------------    ------------    --------------   -------------


COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO COMMON
                                    STOCKHOLDERS                $  (671,704)     $ (410,124)     $ (1,837,783)    $(2,036,482)
                                                                =============    ============    ==============   =============
</TABLE>
















                            See accompanying notes.
                                      F-3

<PAGE>
JACOBS FINANCIAL GROUP, INC,
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
                                                                           THREE MONTHS ENDED                NINE MONTHS ENDED
                                                                               FEBRUARY 28,                     FEBRUARY 28,
                                                                         --------------------------       -------------------------
                                                                            2011           2010              2011           2010
                                                                         -----------    -----------       -----------   -----------
<S>                                                                      <C>            <C>               <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES

 Net Income (Loss)                                                       $ (344,699)    $ (145,865)       $(1,073,262)  $ (990,190)

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

        Unearned premium                                                    114,314         21,988             64,696     (138,044)
        Stock option expense                                                  1,110         39,907             15,672      212,902
        Stock issued (or to be issued) in connection with
         financing arrangements                                              29,009         23,416             89,062      257,510
        Accrual of Series B preferred stock dividends and accretion          98,610        115,950            348,105      115,950
        Provision for loss reserves                                          55,290         41,382            148,001      139,068
        Amortization of premium                                              19,730         22,631            101,464       54,236
        Depreciation                                                          4,048          2,501             11,555        7,945
        Accretion of discount                                                (7,810)             -             (8,554)      (9,217)
        Realized (gain) loss on sale of securities                          (26,994)       (42,926)           (90,701)     (42,926)
        Gain on extinguishment of debt                                            -       (200,239)                 -     (200,239)
        Loss on disposal of equipment                                             -              -                336            -
        Change in operating assets and liabilities:
         Other assets                                                        (5,853)        (3,984)               900       12,663
           Premium and other receivables                                      2,280         (8,825)            32,194      (41,502)
           Investment income due and accrued                                 18,321            284              6,849          281
           Deferred policy acquisition costs                                (46,857)          (290)           (39,846)      38,004
        Related party accounts payable                                        1,025         10,525              3,075       36,575
        Accounts payable and cash overdraft                                  85,695          4,479            108,147      119,492
        Accrued expenses and other liabilities                              199,162        197,776            525,594      186,062
                                                                         -----------    -----------       -----------   -----------
             NET CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES             196,381         78,710            243,287     (241,430)

CASH FLOWS FROM INVESTING ACTIVITIES

 (Increase) decrease in short-term investments                             (890,569)      (187,105)          (885,152)    (164,422)
 Costs of bonds acquired                                                   (826,741)             -         (2,623,919)           -
 Costs of mortgaged-backed securities acquired                                2,761       (958,003)          (737,569)  (1,578,090)
 Sale of securities available for sale                                    1,236,761        404,958          2,280,517      404,958
 Repayment of mortgage-backed securities                                    264,243        482,471          1,385,695    1,163,998
 Purchase of furniture and equipment                                         (3,667)        (4,400)           (29,196)      (4,400)
                                                                         -----------    -----------       -----------   -----------
             NET CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES            (217,212)      (262,079)          (609,624)    (177,956)

CASH FLOWS FROM FINANCING ACTIVITIES

 Proceeds from related party debt                                            74,033        268,773            914,552      525,305
 Repayment of related party debt                                           (208,762)      (153,854)          (914,227)    (410,338)
 Proceeds from borrowings                                                   470,000        135,000          1,357,500      767,500
 Repayment of borrowings                                                   (262,694)      (167,213)          (971,619)    (410,059)
 Proceeds from issuance of Series A preferred stock                               -              -                  -       10,000
 Proceeds from exercise of common stock warrants                              1,991              -              4,855        2,963
                                                                         -----------    -----------       -----------   -----------
                      NET CASH FLOWS FROM FINANCING ACTIVITIES               74,568         82,706            391,061      485,371

NET INCREASE (DECREASE) IN CASH                                              53,737       (100,663)            24,724       65,985

CASH AT BEGINNING OF PERIOD                                                  45,558        246,686             74,571       80,038
                                                                         -----------    -----------       -----------   -----------
CASH AT END OF PERIOD                                                    $   99,295     $  146,023        $    99,295   $  146,023
                                                                         ===========    ===========       ===========   ===========
SUPPLEMENTAL DISCLOSURES

 Interest paid                                                           $   51,046     $   11,302        $   143,030   $  278,380
 Income taxes paid                                                                -              -                  -            -

 Non-cash investing and financing transaction:
        Additional consideration paid for issuance of debt                   29,009         23,415             89,066      257,510
</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 FEBRUARY 28, 2011

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

                                                                      STOCKHOLDERS' EQUITY (DEFICIT)

                       ------------------  -----------------------------------------------------------------------------------------
                          SERIES A                 COMMON STOCK              SERIES C PREFERRED               ACCUMULATED
                         MANDATORILY       ------------------------------  ---------------------                OTHER
                         REDEEMABLE                           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,
 NOVEMBER 30, 2010      2,675 $ 3,075,370 226,747,282  $22,675 $3,480,767  6,804.936  $9,085,075 $(20,175,529) $221,063 $(7,365,949)

Issuance of common
 stock as compensation
 for services               -           -           -        -          -                                   -         -           -

Issuance of common
 stock as additional
 consideration for
 financing arrangements     -           -   1,835,000      183     11,055                                   -         -      11,238

Exercise of warrants                        5,495,340      550      1,441                                                     1,991

Accretion of Series A
 mandatorily redeemable
 convertible preferred
 stock                      -       1,577           -        -          -                              (1,577)        -      (1,577)

Accrued dividends of
 Series A mandatorily
 redeemable convertible
 preferred stock            -      31,022           -        -          -                             (31,022)        -     (31,022)

Accrued dividends of
 Series C equity
 preferred stock                                                                         198,802     (198,802)                    -

Increase (Decrease) in
 accural of common
 shares to be issued in
 connection with financing
 arrangements               -           -           -        -     17,771                                   -         -      17,771

Common stock option
 expense                    -           -           -        -      1,110                                   -         -       1,110

Unrealized net gain
(loss) on available for
 sale securities            -           -           -        -          -                                   -   (95,602)    (95,602)

Net income (loss), three
 month period ended
 February 28, 2011          -           -           -        -          -          -           -     (344,701)        -    (344,701)
                       ------ ----------- -----------  ------- ----------  --------- ----------- ------------- -------- ------------

BALANCE,
 FEBRUARY 28, 2011      2,675 $ 3,107,969 234,077,622  $23,408 $3,512,144  6,804.936  $9,283,877 $(20,751,631) $125,461 $(7,806,741)
                       ====== =========== ===========  ======= ==========  ========= =========== ============= ======== ============
                       ------------------ ------------------------------------------------------------------------------------------
</TABLE>




                            See accompanying notes.

                                      F-5
<PAGE>
<TABLE>
<CAPTION>
JACOBS FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENT OF MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE NINE MONTH PERIOD ENDED FEBRUARY 28, 2011

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

                                                                    STOCKHOLDERS' EQUITY (DEFICIT)

                       -----------------  ------------------------------------------------------------------------------------------
                           SERIES A                 COMMON STOCK             SERIES C PREFERRED              ACCUMULATED
                         MANDATORILY      -------------------------------- --------------------                 OTHER
                          REEDEMABLE                            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     -          -   10,754,284     1,076     26,114         -          -             -         -      27,190

Exercise of warrants        -          -    8,359,326       836      4,019         -          -             -         -       4,855

Accretion of Series A
 mandatorily redeemable
 convertible preferred
 stock                      -     10,889            -         -          -         -          -       (10,889)        -     (10,889)

Accrued dividends of
 Series A mandatorily
 redeemable convertible
 preferred stock            -     91,814            -         -          -         -          -       (91,897)        -    ( 91,897)

Accrued dividends of
 Series C equity
 preferred stock            -          -            -         -          -         -    582,660      (582,660)        -           -

Increase (Decrease)
 in accrual of common
 shares to be issued
 in connection with         -          -            -         -     59,910         -          -             -         -      59,910
 financing arrangements

Common stock option
 expense                    -          -            -         -     15,672         -          -             -         -      15,672

Unrealized net gain
 (loss) on available
 for sale securities        -          -            -         -          -         -          -             -   (79,154)    (79,154)

Net income (loss),
 nine months ended
 February 28, 2011          -          -            -         -          -         -          -    (1,073,266)        -  (1,073,266)
                       ------ ----------  -----------  -------- ---------- --------- ----------  ------------- -------- ------------
BALANCE,
 FEBRUARY 28, 2011      2,675 $3,107,969  234,077,622  $ 23,408 $3,512,144 6,804.936 $9,283,877  $(20,751,631) $125,461 $(7,806,741)
                       ====== ==========  ===========  ======== ========== ========= ==========  ============= ======== ============
                       -----------------  ------------------------------------------------------------------------------------------
</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 and nine month periods ended  February 28, 2011,  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  February  28,  2010  to  be  consistent  with  the
presentation in the Consolidated  Financial  Statements as of February 28, 2011.
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  $576,000 and $1,759,000 for the
three and nine month  periods  ended  February 28, 2011.  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,  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 the  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 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  financing  paid  expenses  of  operations,  fees and  expenses
incurred in connection  with a larger  permanent  financing which was ultimately
cancelled  and, in  addition,  to increase  the capital  surplus of FSC,  making
possible  the  reactivation  of FSC's surety  license in the state of Ohio.  The
terms of the  bridge-financing  arrangement  provided  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 have been
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.  Additionally,  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 with an
additional  2.8% of the  Company's  outstanding  common  shares 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  measures to control and reduce costs while maintaining and growing
the Company's current revenue base.  Unless permanent  financing can be 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

                                      F-8
<PAGE>
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)


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 this uncertainty.

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

In October 2010, the FASB issued Accounting Standards Update 2010-26, "Financial
Services - Insurance: Accounting for Costs Associated with Acquiring or Renewing
Insurance  Contracts."  This FASB is intended to specify  costs  incurred in the
acquisition of new and renewal  contracts that should be capitalized as deferred
acquisition costs and amortized over time using  amortization  methods dependent
upon the nature of the underlying  insurance contract.  This update is effective
for annual reporting periods beginning on or after December 15, 2011 and interim
periods within that fiscal year.  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.  This  update has no material
effect on the Company's financial statements.

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.
The effective date of this update is deferred by  ASU-2011-01,  "Deferral of the
Effective Date of  Disclosures  about  Troubled Debt  Restructuring".  It is now
effective for interim and annual  reporting  periods  beginning on or after June
15, 2011.  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.

                                      F-9
<PAGE>
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)


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.

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 and nine month  periods ended  February 28, 2011,  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
February 28, 2011.

                                      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             $        3,799,189  $           181,238  $            4,923  $         3,975,504
mortgage-backed securities
State and municipal securities              1,980,683                3,864              53,850            1,930,697
Foreign obligations                           327,477                    -                 868              326,609
                                   ------------------- -------------------- ------------------- --------------------
                                   $        6,107,349           $  185,102      $       59,641       $    6,232,810
                                   =================== ==================== =================== ====================
</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    Fair Market Value
                                     Amortized Cost           Gains               Losses         Fair Market Value
                                   ------------------- -------------------- ------------------- --------------------
<S>                                <C>                 <C>                  <C>                 <C>
U.S. government agency             $        6,413,856  $           208,315  $            3,700  $         6,618,472
mortgage-backed securities
                                   ------------------- -------------------- ------------------- --------------------
                                   $        6,413,856  $           208,315  $            3,700  $         6,618,472
                                   =================== ==================== =================== ====================
</TABLE>

The Company's short-term  investments of $1,149,231 and $264,079 at February 28,
2011 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
February 28, 2011.

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.

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

                                                                  February 28, 2011
                                         ---------------------------------------------------------------------
                                                   Fair Value Measurements Using
                                                                                                Assets At
                                             Level 1          Level 2           Level 3         Fair Value
                                         ---------------- ----------------- ---------------- -----------------
<S>                                      <C>              <C>               <C>              <C>
Assets:
Fixed income securities at fair value    $             -  $      6,232,810  $             -  $      6,232,810
Short-term investments at fair value           1,149,231                 -                -         1,149,231
                                         ---------------- ----------------- ---------------- -----------------
Total Assets                             $     1,149,231  $      6,232,810  $             -  $      7,382,041

</TABLE>


                                      F-12
<PAGE>
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

<TABLE>
<CAPTION>
                                                                     May 31, 2010
                                         ---------------------------------------------------------------------
                                                   Fair Value Measurements Using
                                                                                                Assets At
                                             Level 1          Level 2           Level 3         Fair Value
                                         ---------------- ----------------- ---------------- -----------------
Assets:
<S>                                      <C>              <C>               <C>              <C>
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 November 28, 2011.

During the three and nine months ended February 28, 2011, the company recognized
gross realized gains on the sale of securities classified as available-for-sale.
For the three month period ending February 28, 2011, the sales consisted of U.S.
Government  agency  mortgage  backed  securities with an amortized cost basis of
$888,066,  which were sold for a gain of $20,310,  and a foreign obligation with
accreted cost basis of $321,702,  sold for a gain of $6,684. For the nine months
period ending February 28, 2011, the sales consisted of U.S.  Government  agency
mortgage  backed  securities  with an amortized cost basis of $1,868,116,  which
were sold for a gain of $84,017,  and a foreign  obligation  with  accreted cost
basis of $321,702, sold for a gain of $6,684.


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 February 28, 2011 and May 31, 2010 respectively:

                                                      February 28,     May 31,
                                                          2011          2010
                                                      ------------- ------------
Unsecured demand notes payable to individuals
and others; interest rate fixed @ 10.00%
($75,000 to related party)                            $  1,332,000  $  1,057,000

Unsecured demand notes payable to individuals
and others                                                 103,000             -

Secured demand note payable to individuals;
interest rate fixed @ 14%;  secured
by accounts receivable for investment advisory fees
for the quarter ending June 30, 2011                        45,000             -

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%                                 7,430         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; maturing
January 31, 2011                                                 -        37,119
                                                      ------------- ------------
                                    Notes payable     $  4,987,430  $  4,601,223
                                                      ============= ============

                                      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  noteholders' 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 has issued 2.80%
of the Company's  outstanding common shares upon each six-month anniversary date
thereof until retirement of the notes. The following table summarizes the common
shares issued to those note holders.

                        Date of Issuance             Shares Issued
                        -------------------------- ----------------
                        September 10, 2008               4,870,449
                        March 10, 2009                   5,010,640
                        September 10, 2009               5,354,642
                        March 10, 2010                   6,005,925
                        September 10, 2010               6,213,285
                                                   ----------------
                                                        27,454,941
                                                   ================

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 forbearance 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.

                                      F-14
<PAGE>
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

During the three and nine months ended  February 28, 2011 and the year ended May
31, 2010, a company owned by a board member provided consulting  services.  This
company  provided  services  totaling  $15,525 and $46,575 in the three and nine
months  ended  February  28,  2011 and $15,525 and $46,575 in the three and nine
months  ended  February  28,  2010.  Amounts owed to this company are treated as
related party  payables in the amounts  $99,234 and $96,160 at February 28, 2011
and May 31, 2010.

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 nine
months ended February 28, 2011,  the principal  shareholder  personally  assumed
debt that was payable by the Company in the amount of $514,131, of which $39,131
was interest and $475,000 was  principal.  The following  table  summarizes  the
activity  under  such  arrangement  for the three and nine month  periods  ended
February 28, 2011.

                                              Three month         Nine month
                                             period ended        period ended
                                           February 28, 2011   February 28, 2011
                                           ------------------ ------------------

Balance owed, beginning of period          $         142,159  $           7,104
Proceeds from borrowings                              46,739            301,921
Assumption of company debt                                 -            514,131
Accrued payroll offsetting repayments                 27,293             98,501
Repayments                                          (208,761)          (914,227)
                                           ------------------ ------------------
Balance owed, end of period                $           7,430  $           7,430
                                           ================== ==================


Scheduled  maturities  and  principal  payments  for each of the next five years
ending February 28 are as follows:

2011 (including demand notes)          $      4,987,430
2012 - 2015                                           -
                                       -----------------
                                       $      4,987,430
                                       =================

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

In the three month period ending February 28, 2011, the Company issued 1,835,000
shares  of the  Company's  common  stock in  connection  with new and  continued
borrowings totaling $1,875,000. The shares were valued at approximately $.006125
per share based on the average quoted  closing price of the Company's  stock for
the 20-day period preceding the date of the transactions and totaled $11,239.

In the three month period ending February 28, 2011,  warrants totaling 1,990,578
were  exercised for cash and 1,990,578  common shares of the Company were issued
at a price of $.001 per share. In addition,  warrants totaling 4,266,666 (gross)
were exercised under the cashless exercise option, resulting in 761,904 warrants
surrendered at the market price of $.0056 to effect those  holders'  purchase of
3,504,762 net common shares. The remaining 986,667 warrants expired  unexercised
on the fifth  anniversary  of their  issuance  and the company no longer has any
warrants outstanding.

In the three month period ending November 30, 2010, the Company issued 1,810,999
shares  of the  Company's  common  stock in  connection  with new and  continued
borrowings totaling $1,208,000. The shares were valued at approximately $.007539
per share based on the average quoted  closing price of the Company's  stock for
the 20-day period preceding the date of the transactions and totaled $13,653.

In the three month period ending November 30, 2010,  warrants totaling 2,863,986
were  exercised for cash and 2,863,986  common shares of the Company were issued
at a price of $.001 per share.

                                      F-15
<PAGE>
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

In the three month period ending November 30, 2010, the Company issued 6,213,285
shares of the Company's common stock in connection with the semi-annual issuance
of shares  under  terms of the  bridge-financing  arrangement.  The shares  were
valued at  approximately  $.00607 per share based on the average  quoted closing
price of the  Company's  stock for the 20-day  period  preceding the date of the
transaction and totaled $37,715.

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  matured  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
"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.  The 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 Company's  Series A Preferred Stock, par value
          $0.0001  per share (the  "SERIES A  STOCK"),  the  Company'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

                                      F-16
<PAGE>
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

               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 Company 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 "SERIES B ORIGINAL  ISSUE DATE" shall
               mean,  with  respect to any share of Series C Stock issued by the
               Company in  exchange  for a share of Series B Stock,  the date on
               which the Company 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 Company 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 (see Note J).

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  by the Company and  therefore  no  liability  is recorded  until the

                                      F-17
<PAGE>
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)


dividends are declared by the Board of the Company. The Series C Shares are pari
passu with the  Company'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 Company, 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
convert at that 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 (See Note J), 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 $16,027 and
$82,583 for the  three-month  period  ended  February  28, 2011 and $106,066 and
$242,038 for the nine month period  ending  February  28,  2011.  The  remaining
Series B shares not converted  were  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 or nine month periods ending February 28, 2011.

The Company's outstanding Series B Preferred stock matured on December 30, 2010,
meaning that the holders of the Series B Stock  became  entitled to request that
the Company  redeem  their Series B Shares.  As of this report,  the Company has
received requests for redemption of 2,141.341 shares of Series B Preferred.  The
aggregate  amount to which the holders are entitled as of March 31,  2011,  upon
redemption is $3,246,081.

Under the terms of the Series B Preferred Stock, upon receipt of such a request,
the Company's  Board was required to make a good faith  determination  regarding
(A) whether the funds of the Company legally  available for redemption of shares
of Series B Stock are  sufficient to redeem the total number of shares of Series
B Stock to be  redeemed  on such  date and (B)  whether  the  amounts  otherwise
legally  available for redemption  would, if used to effect the redemption,  not
result in an impairment of the  operations of the Insurance  Subsidiary.  If the
Board  determines  that there is a  sufficiency  of legally  available  funds to
accomplish  the  redemption  and  that  the  use of such  funds  to  effect  the
redemption  will not result in an impairment of the  operations of the Insurance
Subsidiary, then the redemption shall occur on the Redemption Date. If, however,

                                      F-18
<PAGE>
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)


the  Board  determines  either  that  there  are not  sufficient  funds  legally
available to accomplish  the  redemption or that the use of such funds to effect
the  redemption  will result in an impairment of the operations of the Insurance
Subsidiary,  then (X) the Company  shall notify the holders of shares that would
otherwise  have been redeemed of such fact and the  consequences  as provided in
this paragraph, (Y) the Company will use those funds which are legally available
therefor and which would not result in an  impairment  of the  operations of the
Insurance Subsidiary to redeem the maximum possible number of shares of Series B
Stock for which Redemption  Notices have been received ratably among the holders
of such shares to be redeemed based upon their holdings of such shares,  and (Z)
thereafter,  until such shares are redeemed in full, the dividends  accruing and
payable on such shares of Series B Stock to be redeemed shall be increased by 2%
of the Series B Face Amount,  with the amount of such increase  (I.E., 2% of the
Series B Face Amount) to be satisfied by  distributions on each Dividend Payment
Date of shares of Common  Stock having a value  (determined  by reference to the
average  closing  price of such Common Stock over the preceding 20 trading days)
equal to the amount of such increase.  The shares of Series B Stock not redeemed
shall remain outstanding and entitled to all the rights and preferences provided
herein.  At any time thereafter when additional funds of the Company are legally
available  for the  redemption  of shares of Series B Stock and such  redemption
will not result in an impairment of operations of the Insurance Subsidiary, such
funds will  immediately  be used to redeem the balance of the shares of Series B
Stock to be redeemed.  No dividends or other  distributions shall be declared or
paid on, nor shall the  Company  redeem,  purchase or acquire any shares of, the
Common Stock or any other class or series of Junior  Securities or Equal Ranking
Preferred of the Company unless the Redemption Price per share of all shares for
which Redemption Notices have been given shall have been paid in full,  provided
that the redemption price of any Equal Ranking  Preferred  subject of redemption
shall be paid on a pari passu  basis with the  Redemption  Price of the Series B
Stock subject of redemption in accordance  herewith.  Until the Redemption Price
for each share of Series B Stock elected to be redeemed  shall have been paid in
full, such share of Series B Stock shall remain outstanding for all purposes and
entitle the holder thereof to all the rights and privileges provided herein, and
Dividends  shall continue to accrue and, if unpaid prior to the date such shares
are redeemed, shall be included as part of the Redemption Price.

On March 8, 2011,  The  Company's  Board of  Directors  determined  based on the
criteria  established under the terms of the Series B Preferred Stock that there
were insufficient funds available for the redemption of Series B Stock.


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

As of February  28,  2011,  the Company had accrued and  withheld  approximately
$64,000 in Federal  payroll  taxes and  approximately  $24,000 in West  Virginia
payroll  withholdings,  as well  as  penalties  and  interest  of  approximately
$34,000. These amounts are reflected in the accompanying financial statements as
accrued  expenses.  In December 2010, the Company  entered into a repayment plan
with the West Virginia State Tax  Department.  Monthly  installment  payments of
$2,874,  including interest and penalties,  are to be made through November 2011
to satisfy the payroll tax withholding obligation.


                                      F-19
<PAGE>
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)


NOTE G - SEGMENT REPORTING
--------------------------
<TABLE>
<CAPTION>
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                                     FEBRUARY 28,              FEBRUARY 28,
                        ----------------                                         2011                      2010
                                                                          -----------------          ----------------
<S>                                                                       <C>                        <C>
REVENUES:
 Investment advisory                                                      $          75,878          $       69,245
 Surety insurance                                                                   338,383                 276,393
 Corporate                                                                                -                       -
                                                                          -----------------          ----------------
 Total revenues                                                           $         414,261          $      345,638
                                                                          =================          ================

NET INCOME (LOSS):
 Investment advisory                                                      $          30,713          $      115,007
 Surety insurance                                                                   125,210                 224,616
 Corporate                                                                         (500,624)               (485,488)
                                                                          -----------------          ----------------
 Total net income (loss)                                                  $        (344,701)         $     (145,865)
                                                                          =================          ================
</TABLE>
<TABLE>
<CAPTION>


                                                                                   NINE MONTH PERIOD ENDED
                        INDUSTRY SEGMENT                                     FEBRUARY 28,              FEBRUARY 28,
                        ----------------                                   ----------------          ----------------
                                                                                 2011                      2010
                                                                           ----------------          ----------------
<S>                                                                        <C>                        <C>
REVENUES:
 Investment advisory                                                       $       202,297            $       204,203
 Surety insurance                                                                  941,307                    842,745
 Corporate                                                                               -                          -
                                                                           -----------------          ----------------
Total revenues                                                             $     1,143,604            $     1,046,948
                                                                           ================           ================

NET INCOME (LOSS):
 Investment advisory                                                              $ 28,259            $        81,586
 Surety insurance                                                                  352,597                    428,390
 Corporate                                                                      (1,454,122)                (1,500,166)
                                                                           -----------------          ----------------
 Total net income (loss)                                                   $    (1,073,266)           $      (990,190)
                                                                           ================           ================
</TABLE>



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.

                                      F-20
<PAGE>
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

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
February 28, 2011 and May 31, 2010, the Company had prepaid reinsurance premiums
of $247,041 and  $214,385.  At February 28, 2011,  the Company had ceded premium
written in excess of ceded premium deposited with the Reinsurer,  resulting in a
net  payable of $51,962.  At May 31,  2010,  the  Company had ceded  reinsurance
deposited with the Reinsurer in excess of ceded premium written resulting in net
deposits of $122,568.

There were no ceded  losses or loss  adjustment  expenses for the three and nine
months ended February 28, 2011 or 2010.

The effects of reinsurance on premium  written and earned for the three and nine
month periods ending February 28, 2011 and 2010 are as follows;
<TABLE>
<CAPTION>

                             THREE MONTH         THREE MONTH         THREE MONTH         THREE MONTH
                            PERIOD ENDING       PERIOD ENDING       PERIOD ENDING       PERIOD ENDING
                          FEBRUARY 28, 2011   FEBRUARY 28, 2011   FEBRUARY 28, 2010    FEBRUARY 28, 2010
                                  -                   -                   -                    -
                               WRITTEN              EARNED             WRITTEN               EARNED
                         ------------------   -----------------   -----------------   -------------------
<S>                      <C>                  <C>                 <C>                 <C>
             DIRECT      $      549,309       $     373,119       $     311,773       $        253,700
             CEDED       $      193,198       $     131,322       $     108,752       $         72,667
                         ------------------   -----------------   -----------------   -------------------
             NET         $      356,111       $     241,797       $     203,021       $        181,033
                         ==================   =================   =================   ===================

</TABLE>
<TABLE>
<CAPTION>

                             NINE  MONTH         NINE  MONTH         NINE  MONTH         NINE  MONTH
                            PERIOD ENDING       PERIOD ENDING       PERIOD ENDING       PERIOD ENDING
                          FEBRUARY 28, 2011   FEBRUARY 28, 2011   FEBRUARY 28, 2010    FEBRUARY 28, 2010
                                  -                   -                   -                    -
                               WRITTEN              EARNED             WRITTEN               EARNED
                         ------------------   -----------------   -----------------   -------------------
<S>                      <C>                  <C>                 <C>                 <C>
             DIRECT      $    1,097,599       $   1,000,246       $     691,676       $        759,127
             CEDED       $      371,491       $     338,835       $     237,538       $        166,946
                         ------------------   -----------------   -----------------   -------------------
             NET         $      726,108       $     661,411       $     454,138       $        592,181
                         ==================   =================   =================   ===================

</TABLE>

                                      F-21
<PAGE>
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)


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.

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

Subsequent  to February 28, 2011,  the Company  obtained  borrowings of $194,000
from individuals to fund ongoing operations and made repayments of $75,000. 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  269,000  shares of its common  stock as  additional
consideration. Additionally, the Company obtained borrowings of $34,750 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 $74,450.

On March 10, 2011, the Company issued  6,738,900  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 March 31, 2011, 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
$30,654,  $82,417  and  $198,402,  respectively.  As  of  March  31,  2011,  the
accumulated  accrued and unpaid dividend amounted to $463,621,  $1,443,475,  and
$3,451,348, respectively.

On March 31, 2011 the Company  issued  309,281  shares of the  Company's  common
stock in connection with the additional 2% stock dividend associated with Series
B Preferred  shares that were  requested to be redeemed  upon maturity (see Note
E).

Subsequent to February 28, 2011, the Company has remitted  approximately $69,000
in  Federal  payroll  taxes  and  interest  and has  satisfied  the  outstanding
obligation with the Internal Revenue Service.















                                      F-22
<PAGE>

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

During  fiscal 2010 and the  nine-month  period ended  February  28,  2011,  the
Company  focused its primary  efforts on the  development  and  marketing of its
surety  business in West Virginia and Ohio,  arranging  for potential  strategic
relationships  to 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 FEBRUARY 28, 2011

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
February  28,  2011 of $576,102  as  compared  with a loss of  $355,613  for the
corresponding period ended February 28, 2010.

REVENUES

Revenues from operations for the three-month period ended February 28, 2011 were
$414,261 as compared with $345,638 for the  corresponding  period ended February
28, 2010.  The overall  increase in revenues is  attributable  to an increase in
written premium by FSC.

INVESTMENT ADVISORY REVENUES

Quarterly  revenues from the Company's  investment  management segment (Jacobs &
Company or J&C), net of advisory referral fees, were $69,670 for the three-month
period ended  February 28, 2011 as compared  with $62,596 for the  corresponding
period ended February 28, 2010. Investment advisory fees are based on the market
value of assets under  management  therefore 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.

  INSURANCE AND INVESTMENT REVENUES

Quarterly  revenues from the Company's surety insurance  segment,  consisting of
FSC and Triangle Surety Agency,  Inc ("TSA"),  were $338,383 for the three-month
period ended  February 28, 2011 as compared with $276,393 for the  corresponding
period ended February 28, 2010.  Revenues  attributable to premium  earned,  net
investment income and commissions earned are as follows:

                                      -3-
<PAGE>

                                                 Three-month Period Ended
                                                       February 28,
                                            -----------------------------------
                                                  2011              2010
                                            ----------------- -----------------

Premium earned                              $        241,797  $        181,034
Net investment income                                 69,012            58,435
Net realized investment gains                         26,994            42,926
                                            ----------------- -----------------

Commissions earned                                       580           (6,002)
                                            ----------------- -----------------
                                     Total  $        338,383  $        276,393
                                            ================= =================

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.  Commission
revenue  is  dependent  on the  timing of  issuance  or  renewal of bonds and is
somewhat  more  seasonable  from   quarter-to-quarter   with   fluctuations  for
comparable  periods  largely  reflecting the overall growth or loss of business.
The increase in premiums  earned for the  three-month  period ended February 28,
2011 in comparison to the  corresponding  period from the prior year is a result
of growth in bonds issued for new and existing clients. Investment income should
be 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 $6.61 million for the three-month  period ended
February 28, 2010 to $7.29 million for the three-month period ended February 28,
2011, as well as an increase in investment  yield from  approximately  3.95% for
the three-month  period ended February 28, 2010 to  approximately  4.22% for the
three-month  period ended February 28, 2011. Due to releases on coal reclamation
bonds  written and timing  difference  in the  recording of those  transactions,
commissions  earned resulted in a negative $6,002 for the quarter ended February
28, 2010.

During the three month period ending February 28, 2011, the Company sold certain
US Government  agency  mortgage  backed  securities and foreign  obligations for
$1,236,762,  resulting in realized gains of $26,994.  In the three-month  period
ending  February  28,  2010,  the  Company  sold  certain   available  for  sale
zero-coupon bond municipal securities for $404,958, resulting in a realized gain
of $42,926.

GAIN FROM EXTINGUISHMENT OF DEBT

In the three-month period ending February 28, 2010, the Company,  upon advice of
legal counsel,  removed certain dormant accounts payable in the aggregate amount
of $200,239,  based upon the  conclusion  that none of accounts  represented  an
obligation  that is legally  enforceable  against the Company.  Such removal was
recorded as a gain on debt extinguishment.

EXPENSES

INCURRED POLICY LOSSES

The  Company  has  experienced  no claims for losses as of  February  28,  2011.
However,  "incurred but not reported"  (IBNR) policy losses for the  three-month
period  ended  February  28,  2011 and 2010  amounted  to  $55,290  and  $41,382
respectively.  Such amounts represent the provision for loss and loss adjustment
expense  attributable  to surety bonds issued by FSC.  Such  estimates  based on
industry averages are adjusted for factors that are unique to FSC's underwriting

                                      -4-
<PAGE>

approach  and are  routinely  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% and 23% of earned premium,
respectively.

POLICY ACQUISITION COSTS

Insurance  policy  acquisition  costs of $87,135 and $60,721 for the three-month
periods ended  February 28, 2011 and 2010,  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  36% and 34% for the  periods  ended  February  28,  2011 and 2010
respectively.

GENERAL AND ADMINISTRATIVE

General and administrative  expenses for the three-month  periods ended February
28,  2011 and 2010 were  $253,797  and  $289,068  respectively,  representing  a
decrease of $35,271, and were comprised of the following:
<TABLE>
<CAPTION>

                                                                 Three-month Period Ended
                                                                       February 28,
                                                           -------------------------------------
                                                                  2011               2010             Difference
                                                           ------------------ ------------------ -------------------
<S>                                                        <C>                <C>                <C>
Salaries and related costs                                 $         110,602  $         155,015  $         (44,413)
General office expense                                                28,399             28,823               (424)
Legal and other professional fees and costs                           32,978             34,334             (1,356)
Audit, accounting and related services                                10,024             33,237            (23,213)
Travel, meals and entertainment                                       23,956              8,331              15,625
Other general and administrative                                      47,838             29,328              18,510
                                                           ------------------ ------------------ -------------------
                         Total general and administrative  $         253,797  $         289,068  $         (35,271)
                                                           ================== ================== ===================
</TABLE>


Salaries and related costs, net of deferred internal policy  acquisition  costs,
decreased approximately $44,000 and are comprised of the following:
<TABLE>
<CAPTION>

                                                                Three-month Period Ended
                                                                      February 28,
                                                           -------------------------------------
                                                                  2011               2010            Difference
                                                           ------------------ ------------------ -------------------
<S>                                                        <C>                <C>                <C>
Salaries and taxes                                         $         147,280  $         128,021  $          19,259
Commissions                                                           41,741             16,995             24,746
Stock option expense                                                   1,110             39,906            (38,796)
Fringe benefits                                                       18,655             12,379              6,276
Key-man insurance                                                     12,656             12,587                 69
Deferred payroll costs                                              (110,840)           (54,873)           (55,967)
                                                           ------------------ ------------------ -------------------
                         Total salaries and related costs  $         110,602  $         155,015  $         (44,413)
                                                           ================== ================== ===================
</TABLE>

                                      -5-
<PAGE>

The increase in salaries and taxes is  attributable  to year end bonuses paid to
certain employees in December 2010 which were not paid in the previous year. The
increase in commissions is attributable to the FSC's  commission  structure that
pays a larger  commission  percentage on the origination of a policy but reduced
for  subsequent  policy  renewals.  The  decrease  in stock  option  expense  is
attributable to the award of stock options on June 30, 2009.

Legal and other professional fees and costs were comprised of the following:
<TABLE>
<CAPTION>

                                                                Three-month Period Ended
                                                                      February 28,
                                                           -------------------------------------
                                                                  2011               2010            Difference
                                                           ------------------ ------------------ -------------------
<S>                                                        <C>                <C>                <C>
General corporate services                                 $             655  $          17,999  $          (17,344)
Statutory examination                                                 13,148                  -              13,148
Coal reclamation consulting                                            6,057              4,500               1,557
Acquisition and financing related costs                               13,118             11,835               1,283
                                                           ------------------ ------------------ -------------------
                  Total legal and other professional fees  $          32,978  $          34,334  $           (1,356)
                                                           ================== ================== ===================
</TABLE>


In the three month period ending  February 28, 2011, the Company  incurred costs
in response to a statutory examination of its insurance subsidiary,  required by
the West  Virginia  Insurance  Commission.  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.  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
$13,1181 and $11,835 for the  three-month  periods  ended  February 28, 2011 and
2010, respectively.

The  increase in travel,  meals and  entertainment  expense for the  three-month
period  ended  February  28, 2011 as compared to the  corresponding  2010 period
related  primarily to additional  efforts made by management to pursue financing
and strategic partnerships.

Other general and administrative expense increased approximately $18,500 for the
three-month period ended February 28, 2011 as compared to the corresponding 2010
period, due mainly to the expiration of a finder's fee in February 2010.

INTEREST EXPENSE

Interest expense for the three-month period ended February 28, 2011 was $260,082
as compared with $181,995 for the corresponding  period ended February 28, 2010.
Components of interest expense are comprised of the following:


                                      -6-
<PAGE>
<TABLE>
<CAPTION>

                                                                    Three-month Period Ended
                                                                          February 28,
                                                               -----------------------------------
                                                                      2011              2010          Difference
                                                               ----------------- ----------------- -----------------
<S>                                                            <C>               <C>               <C>
Interest expense on bridge-financing                           $        146,712  $        129,452  $         17,260
Expense of common shares issued or to be issued in
connection with bridge financing and other arrangements                  30,589            25,354             5,235
Interest expense on demand and term notes                                64,734            25,833            38,901
Other finance charges                                                    18,047             1,356            16,691
                                                               ----------------- ----------------- -----------------
                                       Total interest expense  $        260,082  $        181,995  $         78,087
                                                               ================= ================= =================
</TABLE>


The  increase in the expense of common  shares  issued (or to be issued) for the
three-month  period  ended  February  28, 2011 as compared to the  corresponding
period of the previous  year was  attributable  to the  increase in  borrowings.
Interest  expense on bridge  financing  increased due to increasing the interest
rate to 17% as part of the  forbearance  agreement  terms.  Interest  expense on
demand and term notes increased due to increased borrowings and an adjustment of
accrued  interest on a line of credit.  Other finance  charges  increased due to
incentive fees paid to a note holder to obtain borrowings.


ACCRETION AND DIVIDENDS

Accretion of  mandatorily  redeemable  convertible  preferred  stock issued at a
discount and accrued  dividends for three-month  periods ended February 28, 2011
and 2010 are as follows:
<TABLE>
<CAPTION>

                                                                Three-month Period Ended
                                                                      February 28,
                                                          --------------------------------------
                                                                 2011               2010            Difference
                                                          ------------------- ------------------ ----------------
<S>                                                       <C>                 <C>                <C>
Accretion of discount                                     $            1,576  $           4,500  $        (2,924)
Accrued dividends - mandatorily redeemable preferred
stock                                                                 31,022             29,528            1,494
Accrued dividends - equity preferred stock                           198,802            175,720           23,082
                                                          ------------------- ------------------ ----------------
                            Total accretion and dividends $          231,400  $         209,748  $        21,652
                                                          =================== ================== ================
</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 $16,027 and dividends of $82,583 associated with the Series B remaining after
that date are  deductions  from net income and not  included in the table above.
Series C equity  stock  accrues  dividends  at the same rate as the Series B for
which it was exchanged, however it is separated in the table above due to Series
C not being mandatorily  redeemable.  Series C does not accrete. The decrease in
the  accretion  of  discount  in the table  above  relates  to the final  months
accretion  of the  discount on Series A  Preferred  stock  being  recognized  in
December 2010.


                                      -7-
<PAGE>

RESULTS OF OPERATIONS FOR THE NINE-MONTH PERIOD ENDED FEBRUARY 28, 2011

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  nine-month  period ended
February 28, 2011 of $1,758,629  as compared  with a loss of $2,012,490  for the
corresponding period ended February 28, 2010.

REVENUES

Revenues from operations for the nine-month  period ended February 28, 2011 were
$1,143,604  as compared  with  $1,046,948  for the  corresponding  period  ended
February 28, 2010.  Overall revenue increased due to the continued growth of the
surety  business of FSC and the  recognition of gains on the sale of investments
held by the company.  However,  investment  advisory services and net investment
income  decreased due to 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 nine-month period.

INVESTMENT ADVISORY REVENUES

Quarterly  revenues from the Company's  investment  management segment (Jacobs &
Company or J&C), net of advisory referral fees, were $188,268 for the nine-month
period ended  February 28, 2011 as compared with $193,885 for the  corresponding
period ended February 28, 2010.  Because  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  consistent from quarter to quarter with any large fluctuations being
attributable to the growth or loss 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,")

                                                Nine-month Period Ended
                                                      February 28,
                                           -----------------------------------
                                                 2011              2010
                                           ----------------- -----------------

Individually managed accounts              $        188,268  $        182,100
Mutual fund                                               -            11,785
                                           ----------------- -----------------
                                    Total  $        188,268  $        193,885
                                           ================= =================


INSURANCE AND INVESTMENT REVENUES

Quarterly  revenues from the Company's surety insurance  segment,  consisting of
FSC and Triangle  Surety Agency,  Inc ("TSA"),  were $941,307 for the nine-month
period ended  February 28, 2011 as compared with $842,745 for the  corresponding
period ended February 28, 2010.  Revenues  attributable to premium  earned,  net
investment income and commissions earned are as follows:

                                                   Nine-month Period Ended
                                                         February 28,
                                              ----------------------------------
                                                    2011              2010
                                              ----------------- ----------------
Premium earned                                $        661,411  $        592,181
Net investment income                                  169,446           201,938
Net realized investment gain                            90,701            42,926
Commissions earned                                      19,749             5,700
                                              ----------------- ----------------
                                       Total  $        941,307  $        842,745
                                              ================= ================


                                      -8-
<PAGE>

Revenues  for this  segment of the  business  are  expected to be somewhat  more
seasonable  from  quarter-to-quarter  as commission  revenue is dependent on the
timing of issuance or renewal of bonds  placed by the Company,  whereas  premium
revenue is  recognized  ratably  over the term of the policy  period and thus is
more  stable  from  period  to  period.  Fluctuations  in  premium  revenue  for
comparable  periods largely reflect the overall growth or loss of business.  The
increase in premium earned for the nine-month  period ended February 28, 2011 in
comparison  to the  corresponding  period  from the  prior  year is a result  of
increased bonding written for new and existing clients. Investment income should
remain  relatively  consistent,  but can fluctuate  based on interest  rates and
market  conditions.  The decrease in corresponding  periods is attributable to a
decrease in investment yield from approximately  4.48% for the nine-month period
ended February 28, 2010 to approximately  3.74% for the nine-month  period ended
February  28,  2011,  although  average  assets  held  for  investment  in FSC's
investment  portfolio grew from  approximately  $6.50 million for the nine-month
period  ended  February  28,  2010  to  approximately  $ 7.11  million  for  the
nine-month  period ended  February 28, 2011. In addition,  the  amortization  of
premium for larger than usual principal  payments on mortgage backed  securities
in the six months  ended  February  28, 2011  resulted in  decreased  investment
income.

EXPENSES

INCURRED POLICY LOSSES

The  Company  has  experienced  no claims for losses as of  February  28,  2011.
However,  "incurred  but not reported"  (IBNR) policy losses for the  nine-month
period  ended  February  28, 2011 and 2010  amounted to  $148,002  and  $139,068
respectively.  Such amounts represent the provision for loss and loss adjustment
expense attributable to surety bonds issued by FSC. These estimates are based on
industry averages adjusted for factors that are unique to the FSC's underwriting
approach  and are  routinely  reviewed  for  adequacy  based on  current  market
conditions and other factors unique to FSC's  business.  IBNR policy losses were
approximately  22% and 23% of earned premium for the  nine-month  periods ending
February 28, 2011 and 2010, respectively.

POLICY ACQUISITION COSTS

Insurance policy  acquisition  costs of $224,468 and $185,640 for the nine-month
periods ended  February 28, 2011 and 2010,  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 33.94% and 31.35% for the periods ended February 28, 2011 and 2010
respectively.

GENERAL AND ADMINISTRATIVE

General and  administrative  expenses for the nine-month  periods ended February
28, 2011 and 2010 were  $823,400 and  $1,022,642  respectively,  representing  a
decrease of $199,242, and were comprised of the following:

                                      -9-
<PAGE>
<TABLE>
<CAPTION>

                                                                 Nine-month Period Ended
                                                                       February 28,
                                                           -------------------------------------
                                                                   2011                2010          Difference
                                                           ------------------ ------------------ -------------------
<S>                                                        <C>                <C>                <C>
Salaries and related costs                                 $         376,241  $         572,888  $       (196,647)
General office expense                                                89,181             86,230             2,951
Legal and other professional fees and costs                          101,339            137,445           (36,106)
Audit, accounting and related services                                67,380             81,763           (14,383)
Travel, meals and entertainment                                       49,999             36,539            13,460
Other general and administrative                                     139,260            107,777            31,483
                                                           ------------------ ------------------ -------------------
                         Total general and administrative  $         823,400  $       1,022,642  $       (199,242)
                                                           ================== ================== ===================
</TABLE>

Salaries and related costs, net of deferred internal policy  acquisition  costs,
decreased approximately $197,000 and are comprised of the following:
<TABLE>
<CAPTION>

                                                                 Nine-month Period Ended
                                                                      February 28,
                                                           -------------------------------------
                                                                  2011               2010            Difference
                                                           ------------------ ------------------ -------------------
<S>                                                        <C>                <C>                <C>
Salaries and taxes                                         $      405,512     $      380,158     $        25,354
Commissions                                                        77,085             32,264              44,821
Stock option expense                                               15,672            212,901            (197,229)
Fringe benefits                                                    43,476             39,765               3,711
Key-man life insurance                                             51,456             42,844               8,612
Deferred policy acquisition costs                                (216,960)          (135,044)            (81,916)
                                                           ------------------ ------------------ -------------------
                         Total salaries and related costs  $      376,241     $      572,888     $      (196,647)
                                                           ================== ================== ===================
</TABLE>


The increase in salaries and taxes is  attributable  to year end bonuses paid to
certain employees in December 2010 which were not paid in the previous year. The
increase in commissions is attributable to FSC's commission  structure that pays
a larger  commission  percentage on the  origination of a policy but reduced for
subsequent policy renewals. The decrease in stock option expense is attributable
to the award of stock options on June 30, 2009.


                                      -10-
<PAGE>
<TABLE>
<CAPTION>
Legal and other professional fees and costs were comprised of the following:

                                                                   Nine-month Period Ended
                                                                         February 28,
                                                               -----------------------------------
                                                                     2011               2010           Difference
                                                               ----------------- ----------------- -----------------
<S>                                                            <C>               <C>               <C>
General corporate services                                     $      10,163     $       55,164    $     (45,001)
Statutory examination                                                 13,148                  -           13,148
SEC related costs                                                     29,594                  -           29,594
Coal reclamation consulting                                           17,940             10,094            7,846
Acquisition and financing related costs                               30,494             72,187          (41,693)
                                                               ----------------- ----------------- -----------------
                  Total legal and other professional fees      $     101,339     $      137,445    $     (36,106)
                                                               ================= ================= =================
</TABLE>


In the nine month period ending February 28, 2011, the Company incurred costs in
response to a triennial SEC examination of its investment  advisor subsidiary as
well  as  costs  in  response  to  a  statutory  examination  of  its  insurance
subsidiary,  required by the West Virginia Insurance Commission. 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 nine month periods ending  February
28, 2011 and 2010, the Company  incurred  expense of $17,940 and $10,094 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
$30,494 and $72,187 for the nine-month periods ended February 28, 2011 and 2010,
respectively.

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 February 28, 2011 was $54,866.

J&C had no  revenue  or  expenses  attributable  to the Fund for the nine  month
period ending February 28, 2011; it had absorbed $75,038 of the Fund's operating
expenses during the corresponding period from the previous year.

INTEREST EXPENSE

Interest expense for the nine-month  period ended February 28, 2011 was $661,341
as compared with $691,093 for the corresponding  period ended February 28, 2010.
Components of interest expense are comprised of the following:


                                      -11-
<PAGE>
<TABLE>
<CAPTION>
                                                                    Nine-month Period Ended
                                                                          February 28,
                                                               -----------------------------------
                                                                     2011              2010           Difference
                                                               ----------------- ----------------- -----------------
<S>                                                            <C>               <C>               <C>
Interest expense on bridge financing                           $       445,029   $        355,663  $         89,367
Expense of common shares issued or to be issued in
connection with bridge financing and other arrangements                 94,175            263,546          (169,371)
Interest expense on demand and term notes                               97,929             66,891            31,038
Other finance charges                                                   24,208              4,994            19,214
                                                               ----------------- ----------------- -----------------
                                       Total interest expense  $       661,341   $        691,093  $        (29,752)
                                                               ================= ================= =================
</TABLE>

The increase in interest  expense on bridge  financing is due to increasing  the
interest rate on the bridge loans from 10% to 17% as of September 10, 2009.  The
decrease  in the  expense of common  shares  issued  (or to be  issued)  for the
nine-month  period  ended  February  28, 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 demand and term notes increased due to increased  borrowings
and other finance charges  increased due to incentive fees paid to a note holder
to obtain borrowings.

ACCRETION AND DIVIDENDS

Accretion of  mandatorily  redeemable  convertible  preferred  stock issued at a
discount and accrued  dividends for  nine-month  periods ended February 28, 2010
and 2010 are as follows:
<TABLE>
<CAPTION>

                                                                 Nine-month Period Ended
                                                                      February 28,
                                                          ----------------------------------------
                                                                  2011                 2010            Difference
                                                          --------------------- ------------------ -----------------
<S>                                                       <C>                   <C>                <C>
Accretion of discount                                     $           10,888    $       268,808    $      (257,920)
Accrued dividends - mandatorily redeemable preferred
stock                                                                 91,815            577,772           (485,957)
Accrued dividends - equity preferred stock                           582,660            175,720            406,940
                                                          --------------------- ------------------ -----------------
                            Total accretion and dividends $          685,363    $     1,022,300    $      (336,937)
                                                          ===================== ================== =================
</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 $106,066 and dividends of $242,038 associated with the remaining Series B are
deductions from net income and not included in the table above. The decreases in
accretion of discount and accrued dividends on mandatorily  redeemable preferred
stock result from this  exclusion  of Series B subsequent  to November 30, 2009,
the application of the interest or constant yield method to the initial discount
recorded  over a period of five years from the date of issuance of the stock and
the  final  month's  accretion  of the  discount  on  Series A  Preferred  stock
recognized in December 2010. Series C equity stock accrues dividends at the same
rate as the Series B for which it was exchanged; however, it is separated in the
table above due to Series C not being mandatorily redeemable.  Series C does not
accrete.

                                      -12-
<PAGE>

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 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 February 28, 2011.

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.   The  surety  bonds  posted  to  assure  that   reclamation   is
accomplished  are  generally  long-term in nature,  with mining  operations  and
reclamation work conducted in unison as the property is 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 periodically updated and compared to the value
of marketable  securities pledged by the principal to FSC as collateral security
for the surety bond to mitigate  exposure to loss.  Should the principal default
in its obligation to reclaim the property as specified in the mining permit, FSC
would 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  unless sufficient collateral is
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.  FSC's  exposure  to loss is limited to the face  amount of its
bond.

Miscellaneous fixed-liability surety bonds generally are fully collateralized by
the  principal's  cash  investment  into a  collateral  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.

                                      -13-
<PAGE>

To establish  its reserves for losses and loss  adjustment  expense,  management
routinely  reviews its exposure to loss based on reports provided after periodic
monitoring  and  inspections,   along  with  industry  averages  and  historical
experience.  Management  estimates  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  $1,759,000 for the nine-month period
ended  February 28, 2011.  The Company had positive  cash flow of  approximately
$243,000 from operating  activities for the nine-month period ended February 28,
2011.  A  substantial  portion of the  Company's  cash flow is  generated by its
insurance  subsidiary  which 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 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  $7,481,336  as of February 28, 2011,  $7,480,311  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 and has enabled FSC to write more bonds and
of  greater  size for its coal  reclamation  bonding  clients.  The  reinsurance
arrangement  has allowed FSC to expand its market share and to improve cash flow
for each of the Company's operating subsidiaries.  The reinsurance agreement was
renewed effective July 1, 2010 for an additional one year period.

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
obtain  authority to issue surety bonds in that state.  However,  management has
found that entry into other  states has been  difficult  without  the benefit of
more  substantial  capital and reserves  due to FSC's status as a  comparatively
recent  entry  into this  market and the  financial  condition  of the  Company,
notwithstanding  the  reinsurance  agreement  with  Lloyd's  of  London  and the
resulting  increase  in  bonding  capacity.  Management  believes  that if FSC's
capital and surplus reserves were 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 fully develops. As an alternative means of addressing
access to markets,  management is seeking to establish a  relationship  with any
one of several 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.

                                      -14-
<PAGE>

As a means of alleviating  obligations  associated  with the Company's  Series B
Preferred  Stock,  which by its  terms  matured  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  levels that are more
substantial.  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 this uncertainty.

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.

                                      -15-
<PAGE>

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 February 28, 2011. 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 February
28, 2011, 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
February  28, 2011 and May 31, 2010 and the results of its  operations  and cash
flows for the three and six month  periods  ended  February 28, 2011 and 2010 in
conformity with U.S. generally accepted accounting principals (GAAP).














                                      -16-
<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 nine months ended February 28, 2011,  5,040,999 common shares were issued
as additional consideration to various lenders in private placements pursuant to
short-term borrowings, 8,332,326 common shares were issued to holders exercising
the company's  warrants,  and 6,213,285  common shares were issued to the Bridge
lenders.  Subsequent to February 28, 2011,  244,000 common shares were issued in
private  placements to various  individuals  pursuant to short term  borrowings,
309,282  common  shares  were  issued as stock  dividends  to Series B Preferred
shareholders, and 6,738,900 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 $2,041,914.

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

None.

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

None.

                                      -17-
<PAGE>

ITEM 6. EXHIBITS
----------------

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.












                                      -18-
<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: April 19, 2011                     JACOBS FINANCIAL GROUP, INC.
                              --------------------------------------------------
                                               (Registrant)
                           By:
                              /s/John M. Jacobs
                              --------------------------------------------------
                              John M. Jacobs, President


































                                      -19-