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

                                    FORM 10-Q

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

                 For the quarterly period ended August 31, 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:  251,822,963  shares of common
stock as of October 20, 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 Stock and Stockholders Equity (Deficit)                  F-5 and F-6
Notes to Consolidated Condensed Financial Statements                   F-7



                                      -2-
<PAGE>
<TABLE>
<CAPTION>
Jacobs Financial Group, Inc.
Consolidated Condensed Balance Sheets (Unaudited)
                                                                                            August 31, 2011           May 31, 2011
                                                                                           ------------------      -----------------
<S>                                                                                        <C>                     <C>
ASSETS

Investments and Cash:
Bonds and mortgaged-back securities available for sale, at market value                    $   6,637,754           $    6,038,718
(amortized cost - 08/31/11 $6,380,170; 05/31/11 $5,858,595)
Equity investments available for sale, at market value, net                                      451,303                  453,456
(amortized cost - 08/31/11 $510,419; 05/31/11 $450,908)
Short-term investments, at cost (approximates market value)                                      695,262                1,007,617
Cash                                                                                             265,567                  290,569
                                                                                           ------------------      -----------------
                                             Total Investments and Cash                        8,049,886                7,790,360

Investment income due and accrued                                                                 30,300                   38,736
Premiums and other accounts receivable                                                           187,222                  171,702
Prepaid reinsurance premium                                                                      251,599                  264,763
Deferred policy acquisition costs                                                                191,642                  190,711
Furniture, automobile, and equipment, net of accumulated depreciation of
 $94,574 and $158,267, respectively                                                               30,447                   33,140
Other assets                                                                                      15,146                   21,986
Intangible assets                                                                                150,000                  150,000
                                                                                           ------------------      -----------------

                                                           TOTAL ASSETS                    $   8,906,242           $    8,661,398
                                                                                           ==================      =================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Reserve for losses and loss expenses                                                       $     875,924           $      815,512
Reserve for unearned premiums                                                                    813,593                  851,783
Advanced premium                                                                                   1,477                   20,195
Accrued expenses and professional fees payable                                                   570,051                  573,568
Accounts payable                                                                                 275,531                  144,997
Ceded reinsurance payable                                                                         57,240                   77,635
Related party payable                                                                            103,734                   99,209
Term and demand notes payable to related party                                                   287,301                  405,035
Notes payable                                                                                  4,926,500                4,874,500
Accrued interest payable                                                                       1,284,089                1,148,730
Accrued interest payable to related party                                                        157,497                  140,181
Other liabilities                                                                                127,506                   89,257

Mandatorily  redeemable  Series B Preferred  Stock,  $.0001 par value per share;
3,136.405 shares authorized;  2,817.004 shares issued and outstanding at August
31, 2011 and May 31, 2011; stated liquidation value of $1,000 per share                        4,342,804                4,257,703
                                                                                           ------------------      -----------------
                                                      Total Liabilities                       13,823,247               13,498,305

Series A  Preferred  Stock,  $.0001  par  value  per  share;  1  million  shares
authorized;  2,675 shares issued and  outstanding at August 31, 2011 and May 31,
2011, respectively; stated liquidation value of $1,000 per share                               3,169,923                3,138,623
                                                                                           ------------------      -----------------
                           Total Mandatorily Redeemable Preferred Stock                        3,169,923                3,138,623

Commitments and Contingencies (See Notes)

Stockholders' Equity (Deficit)

Series C  Preferred  Stock,  $.0001  par value per  share;  10,000  shares
authorized; 6,804.936 shares issued and outstanding at August 31, 2011 and
May 31, 2011, respectively; includes $3,655,912 and $3,451,348 accrued
Series C dividends, respectively                                                               9,686,843                9,482,279
Common stock, $.0001 par value per share; 490 million shares authorized;
244,709,253 and 242,304,304 shares issued and outstanding at August 31, 2011
and May 31, 2011, respectively                                                                    24,471                   24,230
Additional paid in capital                                                                     3,580,519                3,549,443
Accumulated deficit                                                                          (21,577,230)             (21,214,153)
Accumulated other comprehensive income (loss)                                                    198,469                  182,671
                                                                                           ------------------      -----------------
                                    Total Stockholders' Equity (Deficit)                      (8,086,928)              (7,975,530)
                                                                                           ------------------      -----------------
                             TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)          $   8,906,242           $    8,661,398
                                                                                           ==================      =================
</TABLE>
                            See accompanying notes.

                                      F-1
<PAGE>
<TABLE>
<CAPTION>
Jacobs Financial Group, Inc,
Consolidated Condensed Statements of Operations (Unaudited)






                                                                                                    Three Months Ended August 31,
                                                                                                        2011              2010
                                                                                                  ----------------   ---------------
<S>                                                                                               <C>                <C>

Revenues:

 Investment advisory services                                                                     $        74,970    $     54,170
 Insurance premiums and commissions                                                                       499,039         198,990
 Net investment income                                                                                     70,017          33,251
 Net realized investment gains (losses)                                                                    12,093          51,019
 Other income                                                                                                 645           1,633
                                                                                                  ----------------   ---------------
                                                            Total Revenues                                656,764         339,063


Operating Expenses:

 Incurred policy losses                                                                                    60,413          42,327
 Insurance policy acquisition costs                                                                        84,919          59,981
 General and administrative                                                                               321,105         255,398
 Depreciation                                                                                               2,693           3,392
                                                                                                  ----------------   ---------------
                                                  Total Operating Expenses                                469,130         361,098
                                                                                                  ----------------   ---------------

                                                              Income (Loss) from Operations               187,634         (22,035)

 Accrued dividends and accretion of Series B Mandatorily
  Redeemable Preferred Stock                                                                              (85,102)       (123,129)
 Interest expense                                                                                        (229,573)       (204,368)
                                                                                                  ----------------   ---------------

                                                          Net Income (Loss)                              (127,041)       (349,532)

 Accretion of Mandatorily Redeemable Convertible
  Preferred Stock, including accrued dividends                                                            (31,300)        (34,705)
 Accrued dividends on Series C Preferred Stock equity                                                    (204,564)       (188,985)
                                                                                                  ----------------   ---------------

                                  Net Income (Loss) Attributable to Common Stockholders           $      (362,905)   $   (573,222)
                                                                                                  ================   ===============


Basic and Dilutive Net Income (Loss) Per Share:

Net Income (Loss) Per Share                                                                       $             -    $          -
                                                                                                  ================   ===============


Weighted-Average Shares Outstanding                                                                   243,496,194     214,963,577
                                                                                                  ================   ===============
</TABLE>

                            See accompanying notes.

                                      F-2

<PAGE>
<TABLE>
<CAPTION>
Jacobs Financial Group, Inc,
Consolidated Condensed Statements of Comprehensive Income (Loss) (Unaudited)





                                                                                                Three Months Ended
                                                                                                     August 31

                                                                                           2011                          2010
                                                                                    ------------------           -------------------
<S>                                                                                 <C>                          <C>

Comprehensive income (loss):

Net income (loss) attributable to common stockholders                               $   (362,905)                $      (573,222)


Other comprehensive income (loss):

Net unrealized gain (loss) of available-for-sale investments arising during period        22,540                          30,732

Reclassification adjustment for realized (gain) loss included in net income               (6,742)                        (36,844)
                                                                                    ------------------           -------------------

Net unrealized gain (loss) attributable to available-for-sale investments
 recognized in other comprehensive income                                                 15,798                          (6,112)
                                                                                    ------------------           -------------------


              Comprehensive income (loss) attributable to common stockholders       $   (347,107)                $      (579,334)
                                                                                    ==================           ===================
</TABLE>






















                            See accompanying notes.

                                      F-3
<PAGE>
<TABLE>
<CAPTION>
Jacobs Financial Group, Inc,
Consolidated Condensed Statement of Cash Flows (Unaudited)
                                                                                               Three Months Ended August 31
                                                                                                     2011            2010
                                                                                               ---------------  --------------
<S>                                                                                            <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES

Net Income (Loss)                                                                              $    (127,041)   $ (349,532)

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

Unearned premium                                                                                     (43,744)      112,880
Stock option expense                                                                                     370        13,452
Stock issued (or to be issued) in connection with financing arrangements                              20,215        22,507
Stock issued (or to be issued) in connection with dividend arrangements                               10,560             -
Accrual of Series B preferred stock dividends and accretion                                           85,101       123,129
Provision for loss reserves                                                                           60,412        42,326
Amortization of premium                                                                               17,207        57,458
Depreciation                                                                                           2,693         3,392
Accretion of discount                                                                                      -          (166)
Realized (gain) loss on sale of securities                                                           (12,093)      (51,018)
Loss on disposal of equipment                                                                              -           336
Change in operating assets and liabilities:
Other assets                                                                                           6,840         5,541
Premium and other receivables                                                                        (15,520)      (39,410)
Investment income due and accrued                                                                      8,381         1,260
Deferred policy acquisition costs                                                                       (931)      (46,815)
Related party accounts payable                                                                         4,525            25
Accounts payable and cash overdraft                                                                  130,534        14,503
Accrued expenses and other liabilities                                                               167,012       290,168
                                                                                               ---------------  --------------
                                      Net cash flows from (used in) operating activities             314,521       200,036

CASH FLOWS FROM INVESTING ACTIVITIES

(Increase) decrease in short-term investments                                                        312,355        91,441
Costs of bonds acquired                                                                             (434,412)   (1,292,185)
Costs of mortgaged-backed securities acquired                                                       (345,298)     (643,019)
Purchase of equity securities                                                                       (133,964)            -
Sale of securities available for sale                                                                113,939       840,684
Repayment of mortgage-backed securities                                                              213,591       754,713
Purchase of furniture and equipment                                                                        -       (23,168)
                                                                                               ---------------  --------------
                                      Net cash flows from (used in) investing activities            (273,789)     (271,534)

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from related party debt                                                                     120,252       334,870
Repayment of related party debt                                                                     (237,986)     (320,308)
Proceeds from borrowings                                                                             258,000       304,500
Repayment of borrowings                                                                             (206,000)     (196,712)
Proceeds from issuance of Series A preferred stock                                                         -             -
Proceeds from exercise of common stock warrants                                                            -             -
                                                                                               ---------------  --------------
                                      Net cash flows from (used in) financing activities             (65,734)      122,350

NET INCREASE (DECREASE) IN CASH                                                                      (25,002)       50,852

CASH AT BEGINNING OF PERIOD                                                                          290,569        74,571
                                                                                               ---------------  --------------
CASH AT END OF PERIOD                                                                          $     265,567    $  125,423
                                                                                               ===============  ==============
SUPPLEMENTAL DISCLOSURES

Interest paid                                                                                  $      44,590    $   46,298
Income taxes paid                                                                                          -             -

Non-cash investing and financing transaction:
Additional consideration paid for issuance of debt                                                    20,215        22,507

</TABLE>
                            See accompanying notes.

                                      F-4
<PAGE>
<TABLE>
<CAPTION>
JACOBS FINANCIAL GROUP, INC.
CONSOLIDATED CONDENSED STATEMENT OF MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) (UNAUDITED)
FOR THE THREE MONTH PERIOD ENDED AUGUST 31, 2010


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

                                                                       STOCKHOLDERS' EQUITY (DEFICIT)

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

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

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

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

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

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

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

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

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

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

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

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




                            See accompanying notes.

                                      F-5
<PAGE>
<TABLE>
<CAPTION>
JACOBS FINANCIAL GROUP, INC.
CONSOLIDATED CONDENSED STATEMENT OF MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) (UNAUDITED)
FOR THE THREE MONTH PERIOD ENDED AUGUST 31, 2011


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

                                                                       STOCKHOLDERS' EQUITY (DEFICIT)

                                            ----------------------------------------------------------------------------------------
                          SERIES A                                           SERIES C PREFERRED               ACCUMULATED
                     MANDATORILY REDEEMABLE                                 --------------------                 OTHER
                                                                ADDITIONAL                                    COMPREHENSIVE
                       PREFERRED STOCK                           PAID-IN                AMOUNT     ACCUMULATED   INCOME
                       SHARES   AMOUNT       SHARES     AMOUNT   CAPITAL     SHARES    AND APIC      DEFICIT     (LOSS)     TOTAL
                       ------ ----------   ----------- -------  ---------- --------- ----------- ------------- -------- ------------
<S>                    <C>    <C>          <C>         <C>      <C>        <C>       <C>         <C>           <C>      <C>
BALANCE, MAY 31, 2011   2,675 $3,138,623   242,304,304 $24,230  $3,549,443 6,804.936 $ 9,482,279 $(21,214,153) $182,671 $(7,975,530)

Issuance of common
 stock as additional
 consideration for
 financing arrangements     -          -     2,404,949     241      17,112         -           -           -          -      17,353

Accrued dividends of
 Series A mandatorily
 redeemable convertible
 preferred stock            -     31,300             -       -           -         -           -     (31,300)         -     (31,300)

Accrued dividends of
 Series C equity
 preferred stock            -          -             -       -           -         -     204,564    (204,736)                  (172)

Increase (Decrease) in
 accural of common
 shares to be issued
 in connection with
 financing arrangements     -          -             -       -      13,594         -           -           -          -      13,594

Common stock option
 expense                    -          -             -       -         370         -           -           -          -         370

Unrealized net gain
 on available for sale
 securities                 -          -             -       -           -         -           -           -     15,798      15,798

Net income (loss),
 three month period
 ended August 31, 2011      -          -             -       -           -         -           -     (127,041)        -    (127,041)
                       ------ ----------   ----------- -------  ---------- --------- ----------- ------------- -------- ------------

BALANCE,
 AUGUST 31, 2011        2,675 $3,169,923   244,709,253 $24,471  $3,580,519 6,804.936 $ 9,686,843 $(21,577,230) $198,469 $(8,086,928)
                       ====== ==========   =========== =======  ========== ========= =========== ============= ======== ============

                       -----------------    ----------------------------------------------------------------------------------------
</TABLE>
                            See accompanying notes.

                                      F-6

<PAGE>

JACOBS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

NOTE A - BASIS OF PRESENTATION
------------------------------
The accompanying  unaudited financial  statements are of Jacobs Financial Group,
Inc.  (the  "Company" or "JFG").  These  financial  statements  were prepared in
accordance with generally accepted  accounting  principles for interim financial
information and Article 8-03 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally  accepted  accounting
principles for complete financial statements. In the opinion of management,  all
adjustments  considered  necessary  for a fair  presentation  of the  results of
operations and financial condition for the periods presented have been included.
Such adjustments are of a normal recurring nature. The results of operations for
the three month period ended August 31, 2011, are not necessarily  indicative of
the results of  operations  that can be expected  for the fiscal year ending May
31, 2012.  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 13, 2011.

RECLASSIFICATIONS

Certain amounts have been  reclassified in the  presentation of the Consolidated
Financial Statements for the three-months ended August 31, 2010 to be consistent
with  the  presentation  in  the  Consolidated   Financial  Statements  for  the
three-months  ended  August 31,  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 of approximately  $22,000
and $458,000  for the years ended May 31, 2011 and 2010.  The  Company's  losses
increase when accretion of mandatorily  redeemable  convertible  preferred stock
and accrued dividends on mandatorily  redeemable  preferred stock are taken into
account to  approximately  $1,440,000 and $2,339,000 for the years ended May 31,
2011 and 2010.

For the three month period  ended  August 31, 2011,  the Company had income from
operations of approximately  $188,000, or a loss of approximately $158,000 after
accretion of  mandatorily  redeemable  convertible  preferred  stock and accrued
dividends on  mandatorily  redeemable  preferred  stock are taken into account .
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.

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

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

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

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 by each state in which FSC seeks to conduct  business.  In fiscal 2009,
the  Company  was able to  increase  the  capital  of FSC and  reactivate  FSC's
insurance  license in Ohio and obtain  authority  to issue  surety bonds in that
state. However,  management has found that entry into other states (as a surety)
has been difficult without the benefit of more substantial  capital and reserves
due to FSC's status as a new entry into this market and based upon the financial
condition  of the parent  company,  notwithstanding  the  reinsurance  agreement
entered into by FSC with Lloyd's of London and the resulting increase in bonding
capacity.  Management  believes that if FSC's capital and surplus  reserves were
significantly  more  substantial and the financial  condition of the Company 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 developed.  As an alternative means of
generating premium revenue in additional state markets, management is seeking to
establish a  relationship  with sureties  licensed in other states that comprise
significant  markets for the bonding  programs of FSC therefore  permitting  the
issuance of surety bonds that are  underwritten and reinsured by FSC. Under such
a "fronting" arrangement, the need for additional capital at the level of FSC to
facilitate  entry to other  state  markets  would  become  secondary,  since the
payment of a fronting fee to the insurance  company with active  licenses  would
provide access to the state market without formal entry.

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

Certain  equity  inducements  in the form of common  stock of the  Company  were
provided  under the terms of the bridge  loan  documents.  Upon  issuance of the
bridge notes, an aggregate of 7% of the outstanding  common stock of the Company
was issued to the bridge lenders. Upon retirement of the notes upon consummation
of a qualified equity  offering,  the Company will issue to the bridge lenders a
percentage of the outstanding  common stock of the Company which,  when added to
the stock initially issued,  may equal as much as 28% of the common stock of the
Company that would  otherwise have been retained by the holders of the Company's

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

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

common shares immediately prior to the financing.  Finally,  because a qualified
financing was not  completed by September 10, 2008,  the Company was required to
issue to the bridge  lenders  under the terms of the loan  documents  a total of
2.8% of the Company's outstanding common shares at such date. An additional 2.8%
of the Company's  outstanding  common shares are required to be issued upon each
six-month anniversary date thereof until retirement of the notes. (See Note D).

Given current  financial  market  conditions  and the  uncertainties  as to when
stability will return to the financial markets, until permanent financing can be
secured, management will strive to reduce and then eliminate operating losses by
implementing  further measures to control and reduce costs while maintaining and
growing the Company's  current revenue base.  Unless permanent  financing can be
secured,  future  revenue growth can be expected to be achieved at a slower pace
than has been  projected  by the  Company.  Until  such time that the  Company's
operating costs can be serviced by the Company's revenue stream, management will
continue  to seek to raise  additional  funds  for  operations  through  private
placements  of stock,  other  long-term or permanent  financing,  or  short-term
borrowings.  However,  the  Company  cannot be  certain  that it will be able to
continue to obtain  adequate  funding in order to reasonably  predict whether it
will  be  able  to  continue  as a going  concern.  The  accompanying  financial
statements do not include any adjustments  that might result from the outcome of
this uncertainty.

NOTE B - RECENT ACCOUNTING PRONOUNCEMENTS
-----------------------------------------
In  June  2011,   the  FASB  issued   Accounting   Standards   Update   2011-05,
"Comprehensive  Income:  Presentation of Comprehensive  Income".  This object of
this Update is to improve the  comparability,  consistency,  and transparency of
financial  reporting and to increase the  prominence of items  reported in other
comprehensive  income.  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 May 2011, the FASB issued  Accounting  Standards Update  2011-04,"Fair  Value
Measurement:  Amendments to Achieve Common Fair Value Measurement and Disclosure
Requirements in U.S. GAAP and AFRSs". The amendments in this Update will improve
the  comparability  of  fair  value  measurements  presented  and  disclosed  in
financial  statements  prepared  in  accordance  with  U.S.  generally  accepted
accounting  principles and International  Financial  Reporting  Standards.  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 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

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

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

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.

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 does 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

                                      F-10
<PAGE>
JACOBS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

required to measure fair value using one or more of the techniques  provided for
in this  update.  This  Statement  is effective  for fiscal  years,  and interim
periods  within those fiscal years,  beginning on or after August 26, 2009.  The
application  of this  update  did not have a  material  impact on the  Company's
results of operations or financial position.

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

NOTE C - INVESTMENTS AND FAIR VALUE DISCLOSURES
-----------------------------------------------
The Company classifies its investments as available-for-sale,  and as such, they
are carried at fair value.  The amortized  cost of  investments  is adjusted for
amortization  of premiums and  accretion of discounts  which are included in net
investment  income.  Changes in fair value are  reported as a component of other
comprehensive income,  exclusive of  other-than-temporary  impairment losses, if
any.  For the three  month  period  ended  August 31,  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  Company  uses  derivatives  in the form of  covered  call  options  sold to
generate  additional income and provide limited downside protection in the event
of a market  correction.  These  transactions  expose the  Company to  potential
market risk for which the Company  receives a premium up front.  The market risk
relates to the  requirement to deliver the underlying  security to the purchaser
of the call within a definite  time at an agreed  price  regardless  of the then
current  price of the  security.  As a result the Company takes the risk that it
may be required to sell the security at the strike price, which could be a price
less than the then market price.  Should the security  decline in price over the
holding  period of the call  option,  the Company  realizes  the option  premium
received as income and the Company  lessens or mitigates  this risk which may be
eliminated  by a  closing  transaction  for the  covered  call  and  sale of the
underlying security.

The  Company  invests  in large  capitalized  US  securities  traded on major US
exchanges and writes  standardized  covered  calls only against these  positions
(covered calls), which are openly traded on major US exchanges.  The use of such
underlying  securities  and  standardized  calls  lessens the credit risk to the
furthest  extent  possible.  The  Company  is not  exposed to  significant  cash
requirements  through  the use of  covered  calls  in that it sells a call for a
premium and may use these proceeds to enter a closing  transaction  for the call
at a later date.


                                      F-11
<PAGE>

JACOBS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

<TABLE>
<CAPTION>
The following table sets forth the amortized cost and estimated  market value of
bonds and equity  securities  available-for-sale  and carried at market value on
August 31, 2011.

                                                        Gross Unrealized     Gross Unrealized
                                     Amortized Cost           Gains               Losses         Fair Market Value
                                   ------------------- -------------------- ------------------- --------------------
<S>                                <C>                 <C>                  <C>                 <C>
State and municipal securities     $        1,297,391  $            10,770  $            3,934  $         1,304,227

Equity securities                             510,419                    -              59,116              451,303
Foreign obligations                           208,627                    -                 334              208,293
U.S. government agency
mortgage-backed securities                  4,874,152              251,114                  32            5,125,234
                                   ------------------- -------------------- ------------------- --------------------
                                   $        6,890,589  $           261,884  $           63,416  $         7,089,057
                                   =================== ==================== =================== ====================
</TABLE>
<TABLE>
<CAPTION>
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, 2011.

                                     Amortized Cost     Gross Unrealized     Gross Unrealized    Fair Market Value
                                                              Gains               Losses
                                   ------------------- -------------------- ------------------- --------------------
<S>                                <C>                 <C>                  <C>                 <C>
State and municipal securities     $        1,073,724  $                 -  $           26,955  $         1,046,769

Equity securities                             461,524               11,685               7,002              466,207
Derivatives                                   (10,616)              (3,010)               (875)             (12,751)
U.S. government agency
mortgage-backed securities         $        4,784,871  $           208,356  $            1,278  $         4,991,949
                                   ------------------- -------------------- ------------------- --------------------

                                   $        6,309,503  $           217,031  $           34,360  $         6,492,174
                                   =================== ==================== =================== ====================
</TABLE>

The Company's  short-term  investments  of $695,262 and $1,007,617 at August 31,
2011 and May 31, 2011 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.

There are no securities classified as held to maturity at May 31, 2011 or August
31, 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.


                                      F-12
<PAGE>

JACOBS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

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:

     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.


                                      F-13
<PAGE>

JACOBS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

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

                                                                   August 31, 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   $               -  $    6,637,754  $              -  $      6,637,754
Equity securities at fair value                   451,303               -                 -           451,303
(includes derivatives)
Short-term investments at fair value              695,262               -                 -           695,262
                                        ------------------ --------------- ----------------- -----------------
Total Assets                            $       1,146,565  $    6,637,754  $              -  $      7,784,319
                                        ================== =============== ================= =================
</TABLE>
<TABLE>
<CAPTION>
                                                                    May 31, 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   $               -  $    6,038,718  $              -  $      6,038,718
Equity securities at fair value                   453,456               -                 -           453,456
(includes derivatives)
Short-term investments at fair value            1,007,617               -                 -         1,007,617
                                        ------------------ --------------- ----------------- -----------------
Total Assets                            $       1,461,073  $    6,038,718  $              -  $      7,499,791
                                        ================== =============== ================= =================
</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, 2011 or
at August 31, 2011.

<TABLE>
<CAPTION>
During the three  months ended August 31,  2011,  the company  recognized  gross
realized  gains on the sale of securities  classified as  available-for-sale  as
follows:


                                                                        Gross              Gross
                                                    Gross             Realized           Realized
                                                   Proceeds             Gains             Losses
                                              ------------------- ------------------ ------------------
<S>                                           <C>                 <C>                <C>
Mortgage-backed securities                    $          27,393   $          1,479   $              -
Equity securities                                        77,451              2,168                  -
Equity securities (derivatives)                          16,064              8,467                (21)
                                              ------------------- ------------------ ------------------
Total                                         $         120,908   $         12,114   $            (21)
                                              =================== ================== ==================
</TABLE>


                                      F-14

<PAGE>
JACOBS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)



NOTE D - NOTES PAYABLE AND ADVANCES FROM RELATED PARTY
------------------------------------------------------
<TABLE>
<CAPTION>
The  Company  had the  following  unsecured  notes  payable to  individuals  and
businesses as of August 31, 2011 and May 31, 2011 respectively:

                                                           August 31,           May 31,
                                                              2011               2011
                                                        ------------------ ------------------
<S>                                                     <C>                <C>
Unsecured demand notes payable to individuals
and others; interest rate fixed @ 10.00%
($75,000 to related party)                              $       1,559,500  $       1,492,500

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

Secured demand note payable to individuals;
interest rate fixed @ 10%;  secured
by accounts receivable for investment advisory
fees for the quarter ending September 30, 2011                     50,000                  -

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

Secured demand note payable to individuals;
interest rate fixed @ 12%; secured by accounts
receivable for investment advisory fees                            20,000             40,000

Secured demand note payable to individuals;
interest rate fixed @ 12%;  secured
by accounts receivable for investment advisory
fees for the quarters ending September 30 and
December 2011                                                     129,000            129,000

Unsecured short-term advances from principal
shareholder and chief executive officer;
interest rate fixed @ 12%                                        (147,699)           (29,965)

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
                                                        ------------------ ------------------
                                    Notes payable       $       5,213,801  $       5,279,535
                                                        ================== ==================
</TABLE>


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


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

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)


equity offering,  the Company shall issue to the holders of the bridge financing
notes  additional  Company common stock that,  when added to the stock initially
issued to the holders of the notes,  will equal the  noteholder's pro rata share
of the applicable  percentage of the outstanding  common stock of the Company as
follows: If the qualified financing consists of $50 million or more, the holders
of such notes will  receive 28% of the common  stock of the  Company  that would
otherwise be retained by the holders of the Company's common shares  immediately
prior to the  financing;  if the qualified  financing is for an amount less than
$50 million,  the percentage will be reduced on a sliding scale to a fraction of
28% of the amount retained by the holders of the Company's  common shares (where
the numerator is the amount of financing and the denominator is $50 million).

Beginning  September  10,  2008,  because  a  qualified  financing  had not been
completed,  the Company became required under the terms of the bridge  financing
to issue 2.80% of the Company's  outstanding common shares and shall issue 2.80%
of the Company's  outstanding common shares upon each six-month anniversary date
thereof until retirement of the notes. 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
March 10, 2011                   6,738,900
                           ----------------
                                34,193,841
                           ================

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-16
<PAGE>

JACOBS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)


During the three months ended August 31, 2011 and the year ended May 31, 2011, a
company  owned by a board  member  provided  consulting  services.  This company
provided services totaling $15,525 in the three months ended August 31, 2011 and
$15,525 in the three months ended August 31, 2010.  Amounts owed to this company
are treated as related  party  payables in the amounts  $103,209  and $99,209 at
August 31, 2011 and May 31, 2011.

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%.  The  following
table  summarizes the activity under such arrangement for the three month period
ended August 31, 2011.

                                              Three month
                                              period ended
                                               August 31,
                                                  2011
                                           --------------------

Balance owed, beginning of period          $           (29,965)
Proceeds from borrowings                                70,560
Accrued payroll offsetting repayments
                                                        49,692
Repayments                                            (237,986)
                                           --------------------
Balance owed, end of period                $          (147,699)
                                           ====================


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

2013 (including demand notes)          $      5,213,801
2014 - 2016                                           -
                                       -----------------
                                       $      5,213,801
                                       =================

NOTE E-STOCKHOLDERS EQUITY
--------------------------
In the three month period ending August 31, 2011, the Company  issued  1,032,000
shares  of the  Company's  common  stock in  connection  with new and  continued
borrowings totaling $732,000.  The shares were valued at approximately  $.006581
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 $6,792.

On July 1, 2011 the Company  issued  1,372,949  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.  The shares
were valued at  approximately  $.007691  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 $10,560.



                                      F-17
<PAGE>

JACOBS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)



NOTE F-PREFERRED STOCK
----------------------
REDEEMABLE PREFERRED STOCK

On December 30, 2005, through a private placement, the Company issued 350 shares
of 4% Non-Voting Series A Preferred Stock (Series A Preferred Stock), along with
1,050,000   warrants  for  common   shares  of  Company   stock  as   additional
consideration,  for a cash  investment in the amount of $350,000,  in connection
with the Company's  acquisition of FSC.  Holders of Series A Preferred Stock are
entitled to  participate in FSC's  partially  collateralized  bonding  programs,
subject to continuing  satisfaction  of  underwriting  criteria,  based upon the
bonding capacity of FSC attributable to capital reserves of FSC established with
the   subscription   proceeds  (i.e.,   bonding  capacity  equal  to  ten  times
subscription  proceeds)  and for so long as the  subscriber  holds the  Series A
shares.  Holders of the Series A Preferred  Stock are entitled to receive,  when
and  as  declared  by the  board  of  directors,  cumulative  preferential  cash
dividends at a rate of four  percent of the $1,000  liquidation  preference  per
annum  (equivalent  to a fixed  annual  rate of $40 per  share).  The  Series  A
Preferred  Stock ranks senior to the Company's  common stock and pari passu with
the Company's  Series B Preferred  and Series C Preferred  Stock with respect to
dividend  rights and rights upon  liquidation,  dissolution or winding up of the
Company.  The holder may  redeem  the Series A  Preferred  Stock on or after the
seventh  anniversary  of the  Issue  Date,  if the  holder  provides  a  written
statement to the Company that it will no longer  require  surety bonds issued by
the Company's  insurance  subsidiary  (FSC) under its  partially  collateralized
bonding programs and, if no such surety bonds are then outstanding, the Company,
at the option of the  holder,  will  redeem  all or any  portion of the Series A
Preferred  Stock of such  holder  at a price  per  share  equal to the  Series A
Preferred  Stock Issue Price plus all accrued and unpaid  dividends with respect
to the shares of the Series A Preferred Stock of such holder to be redeemed. The
conditional  redemption  shall  not be  available  to any  holder  of  Series  A
Preferred  Stock  for  so  long  as  surety  bonds  of the  Company's  insurance
subsidiary issued on a partially collateralized basis remain outstanding for the
benefit of such  holder,  and upon  redemption,  such holder  shall no longer be
eligible to participate in the partially  collateralized bonding programs of the
insurance subsidiary.  The Company is authorized to issue up to 1,000,000 shares
of the Series A  Preferred  Stock.  As of May 31,  2011,  the Company has issued
2,675 shares of Series A Preferred Stock in exchange for cash investments in the
amount of  $2,675,000.  No shares were issued in the three month  period  ending
August 31, 2011.

On December  30, 2005,  through a private  placement,  the Company  issued 3,980
shares of 8% Non-Voting Series B Convertible Preferred Stock (Series B Preferred
Stock),  along with  19,900,000  warrants for common  shares of Company stock as
additional consideration, for a cash investment in the amount of $2,985,000; and
issued  4,890.599  shares of Series B  Preferred  Stock,  along with  24,452,996
warrants for common shares of Company stock as additional  consideration,  for a
conversion of $3,667,949 of indebtedness of the Company,  in connection with the
Company's  acquisition  of FSC.  Holders  of the  Series B  Preferred  Stock are
entitled to receive, when and as declared by the board of directors,  cumulative
preferential cash dividends at a rate of eight percent of the $1,000 liquidation
preference per annum  (equivalent to a fixed annual rate of $80 per share).  The
Series B Preferred  Stock ranks  senior to the  Company's  common stock and pari
passu with the Company's  Series A Preferred  and Series C Preferred  Stock with
respect to dividend rights and rights upon  liquidation,  dissolution or winding
up of the Company.  Each share of the Series B Preferred Stock is convertible at
the option of the holder,  at any time after the original issue date, into 1,000
fully  paid  and  non-assessable  shares  of the  Company's  common  stock  at a
conversion  price of $1.00 per common share. The Company may redeem the Series B
Preferred  Stock at any time after the first  anniversary  of the Original Issue
Date at a price per share equal to the Series B Preferred Stock Face Amount plus
all  accrued  and unpaid  dividends  with  respect to the shares of the Series B

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

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

Preferred  Stock of such holder to be redeemed.  To the extent that the Series B
Preferred Stock has not been redeemed by the Company,  the holder may redeem the
Series B Preferred Stock on or after the fifth anniversary of the Original Issue
Date at a price per share equal to the Series B Preferred Stock Face Amount plus
all  accrued  and unpaid  dividends  with  respect to the shares of the Series B
Preferred  Stock of such holder to be  redeemed.  The Company is  authorized  to
issue up to 10,000 shares of the Series B Preferred  Stock.  The Company has not
issued any  additional  shares of Series B  Preferred  Stock  during this fiscal
year.

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  requesting  redemption are entitled as of
September 30, 2011, is $3,377,585.

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  affect  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,
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

                                      F-19
<PAGE>
JACOBS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

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.

For the three months ended August 31, 2011, the Company experienced a loss after
accretion of mandatorily  redeemable  convertible  preferred  stock, and accrued
dividends on mandatorily redeemable preferred stock of $158,341 as compared with
a loss after accretion of mandatorily  redeemable  convertible  preferred stock,
and accrued dividends on mandatorily  redeemable preferred stock of $384,237 for
the three months ended August 31, 2010.

EQUITY PREFERRED STOCK

As a means of alleviating  obligations  associated  with the Company's  Series B
Preferred  Stock,  which by its  terms  matures  at the end of 2010,  management
proposed a  recapitalization  to assist in stabilizing the financial position of
the Company. The Company's Certificate of Incorporation provides for two classes
of  capital  stock,  known as common  stock,  $0.0001  par value per share  (the
"COMMON  STOCK"),  and  preferred  stock,  $0.0001  par  value  per  share  (the
"PREFERRED  STOCK").  The Company's  Board is authorized by the  Certificate  of
Incorporation  to provide for the issuance of the shares of  Preferred  Stock in
series, and by filing a certificate  pursuant to the applicable law of the State
of Delaware,  to establish from time to time the number of shares to be included
in such series and to fix the designations, preferences and rights of the shares
of  each  such  series  and the  qualifications,  limitations  and  restrictions
thereof.  Board deemed it advisable to designate a Series C Preferred  Stock and
fixed and determined the preferences,  rights,  qualifications,  limitations and
restrictions relating to the Series C Preferred Stock as follows:

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

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

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


                                      F-20
<PAGE>
JACOBS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)



     4.   Dividends.

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

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

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.

The accrual of dividends on the equity  preferred  stock resulted in a charge to
common stockholders' equity and a credit to the equity of equity preferred stock
of $204,564 for the three month period  ending August 31, 2011, as compared with
a charge to common  stockholders'  equity of $188,985 for the three month period
ending August 31, 2010.

                                      F-21
<PAGE>
JACOBS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)


DIVIDEND PREFERENCE AND ACCRETION

The Series A Shares are entitled to receive cumulative  dividends at the rate of
4.00% per annum.

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

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

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 this time are listed in the  Liabilities  section of the
Balance  Sheet,  and therefore the accretion and dividends  associated  with the
Series B stock after  November 30, 2009 are deductions  from net income.  As the
redemption  date on the Series B shares got closer,  it became  apparent that it
was unlikely that the shares would be converted to common at $1.00, and thus the
classification  was changed.  Accretion  and  dividends on Series B  mandatorily
redeemable preferred stock deducted from net income amounted to $125 and $84,977
for the three-month  period ended August 31, 2011. The remaining Series B shares
are  continuing to be accreted from carrying  value to the face amount for the 5
year period from the date of issuance.  Series C stock has no  accretion.  There
were no shares of Series B Stock  surrendered or exchanged in the 3 month period
ending August 31, 2011.

As of August 31, 2011 the Company has chosen to defer  payment of  dividends  on
the Series A Preferred Stock with such accrued and unpaid dividends amounting to
$494,921 through August 31, 2011.

                                      F-22
<PAGE>

JACOBS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)


As of August 31, 2011 the Company has chosen to defer  payment of  dividends  on
the Series B and Series C Preferred Stock with such accrued and unpaid dividends
amounting to $1,528,451 and $3,655,912 through August 31, 2011.

NOTE G - COMMITMENTS, CONTINGENCIES, AND MATERIAL AGREEMENTS
------------------------------------------------------------
As of August 31,  2011,  the  Company had  accrued  and  withheld  approximately
$82,000 in noncurrent Federal payroll taxes which are reflected in the financial
statements as other  liabilities.  Management intends to satisfy this obligation
as soon as possible.

As of August 31,  2011,  the  Company had  accrued  and  withheld  approximately
$14,000 in West Virginia payroll  withholdings,  of which $3,500 was non-current
and is being  remitted as part of a monthly  payment  plan  negotiated  with the
State of West Virginia.  This 12 month plan runs through  November 2011 and will
result in the full  payment  of all non  current  withholding  taxes,  including
interest  and  penalties  of  approximately  $5,000  which are  reflected in the
accompanying financial statements as accrued expenses.

NOTE H - 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                               AUGUST 31, 2011          AUGUST 31, 2010
                        ----------------                          -------------------------- -----------------------
<S>                                                               <C>                        <C>
REVENUES:
 Investment advisory                                              $                  75,616  $               55,804
 Surety insurance                                                                   581,148                 283,259
 Corporate                                                                                -                       -
                                                                  -------------------------- -----------------------
 Total revenues                                                   $                 656,764  $              339,063
                                                                  ========================== =======================

NET INCOME (LOSS):
 Investment advisory                                              $                  24,913  $               11,897
 Surety insurance                                                                   328,766                 120,321
 Corporate                                                                         (480,720)               (481,750)
                                                                  -------------------------- -----------------------
 Total net income (loss)                                          $                (127,041) $            (349,532)
                                                                  ========================== =======================
</TABLE>



                                      F-23
<PAGE>
JACOBS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)



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

Effective  April 1, 2009, FSC entered into a reinsurance  agreement with various
syndicates  at Lloyd's of London and one Bermuda based  reinsurer  ("Reinsurer")
for its coal reclamation surety bonding programs.  The reinsurance  agreement is
an excess of loss  contract  which  protects  the Company  against  losses up to
certain limits over stipulated amounts, has an initial term of 39 months and can
be terminated by either party by written notice of at least 90 days prior to any
July 1. The contract called for the first year of the agreement to consist of 15
months with premium due within 30 days of the end of the first  Agreement  Year,
June 1, 2010,  at a rate of 35% of gross written  premium,  subject to a minimum
premium $490,000. For the second agreement year, which covered the twelve months
beginning  July 1, 2010,  the  premium  rate  remained  the same at 35% with the
premium due within 30 days of the close of the second agreement year, subject to
a minimum premium of $490,000.  For the third year agreement year,  which covers
the twelve months  beginning  July 1, 2011, the premium rate remains the same at
35% with the  premium  due  within 30 days of the close of the  agreement  year,
subject to a minimum  premium of $490,000.  Deposits are made to the  reinsurers
quarterly in arrears in equal  amounts of  $140,000.  At August 31, 2011 and May
31, 2011, the Company had prepaid reinsurance  premiums of $251,599 and $264,763
and ceded reinsurance payable of $57,240 and $77,635.

There were no ceded  losses and LAE  expenses  for the three months ended August
31, 2011 or 2010.

<TABLE>
<CAPTION>
The effects of reinsurance on premium written and earned for fiscal 2011 and 2010 are as follows;

                              THREE MONTH         THREE MONTH         THREE MONTH        THREE MONTH
                             PERIOD ENDING       PERIOD ENDING       PERIOD ENDING      PERIOD ENDING
                            AUGUST 31, 2011      AUGUST 31, 2011    AUGUST 31, 2010    AUGUST 31, 2011
                               - WRITTEN           - EARNED            - WRITTEN          - EARNED
                          ------------------- ------------------- ------------------ --------------------
<S>                       <C>                 <C>                 <C>                <C>
            DIRECT        $          369,070  $          407,259  $         448,924  $           286,706
            CEDED         $          126,551  $          139,715  $         152,287  $           102,950
                          ------------------- ------------------- ------------------ --------------------
             NET          $          242,519  $          267,544  $         296,637  $           183,756
                          =================== =================== ================== ====================
</TABLE>


Under the terms of its  reinsurance  treaty,  the  Company is  entitled  to a No
Claims  Bonus  from the  reinsurers  for each  claim year in which no claims are
received.  The  bonus  is 20% of the  annual  reinsurance  premium  and is to be
recorded  upon the  completion  of each  contract  year.  On August 31, 2011 the
Company  recorded  receipt of  $213,281  from its  reinsurers  representing  the
cumulative  No Claims  Bonus under the terms of its  reinsurance  treaty for the
claim years ending June 30, 2010 and June 30,  2011.  The No Claims Bonus is not
included in the analysis of written and earned premium above.


                                      F-24
<PAGE>

JACOBS FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)


NOTE J-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 vested over the next three years ending in June
2011. The term of the options is five years and expires in June 2014.


NOTE K - SUBSEQUENT EVENTS
--------------------------
Subsequent to August 31, 2011,  the Company  obtained new  borrowings of $35,000
from a business to fund  ongoing  operation  and made  repayments  of $70,000 on
existing debt. Such borrowings were obtained under demand notes bearing interest
at the rate of 10%. These  borrowings  included the issuance of 70,000 shares of
its common stock as additional  consideration.  The Company also obtained  short
term  borrowing of $29,000 from a business to fund ongoing  operations  and made
repayments of $29,000 as well as $2,000 in interest.  Additionally,  the Company
obtained  borrowings  of $297,315  ($181,733  of which was Company  debt assumed
personally by owner) 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 $140,513,  to bring the balance owed to the
principal shareholder to $9,104 at the date of this filing.

On September  10, 2011,  the Company  issued  7,043,710  shares of the Company's
common stock in  connection  with the  semi-annual  issuance of shares under the
bridge-financing arrangements (see Note D).

On  September  30,  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
$31,960,  $87,699 and  $210,936,  respectively.  As of September  30, 2011,  the
accumulated  accrued and unpaid dividend amounted to $526,881,  $1,616,151,  and
$3,866,848, respectively.








                                      F-25
<PAGE>

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

During fiscal 2011 and the three-month period ended August 31, 2011, the Company
has focused its primary  efforts on the  development and marketing of its surety
business  in  West  Virginia  and  Ohio,   arranging  for  potential   strategic
relationships  that will  accelerate the  progression of the Company's  business
plan  and  raising  additional  capital  to  increase  the  capital  base of its
insurance subsidiary, First Surety Corporation ("FSC"), to facilitate entry into
other state markets.

RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIOD ENDED AUGUST 31, 2011

The Company  experienced income from operations for the three-month period ended
August 31, 2011 of $187,634 as compared  with a loss from  operations of $22,035
for the corresponding period ended August 31, 2010.

REVENUES

Revenues from operations for the  three-month  period ended August 31, 2011 were
$656,764 as compared with $339,063 for the corresponding period ended August 31,
2010. The overall increase in revenues is largely  attributable to the continued
growth of the surety  business of FSC, as well the  receipt of a  cumulative  No
Claims Bonus from its  reinsurers for the years ended June 30, 2010 and June 30,
2011.  In  addition,  for the three  month  period  ending  August 31,  2010 net
investment  income  was less than usual due to the  receipt  of large  principal
payments on mortgage backed securities,  which resulted in large amortization of
premiums recognized in that period.

INVESTMENT ADVISORY REVENUES

Quarterly  revenues from the Company's  investment  management segment (Jacobs &
Company or J&C), net of advisory referral fees, were $74,970 for the three-month
period  ended  August 31, 2011 as compared  with  $54,170 for the  corresponding
period ended August 31, 2010.  Investment  advisory fees are based on the market
value of assets under  management,  some  fluctuation  will occur due to overall
market  conditions.  For the most  part,  however,  such  revenues  will  remain
relatively  constant from quarter to quarter with any large  fluctuations  being
attributable to the growth or decline of assets under management.

INSURANCE AND INVESTMENT REVENUES

Quarterly  revenues from the Company's surety insurance  segment,  consisting of
FSC and Triangle Surety Agency,  Inc ("TSA"),  were $581,149 for the three-month
period ended  August 31, 2011 as compared  with  $283,260 for the  corresponding
period ended August 31,  2010.  Revenues  attributable  to premium  earned,  net
investment income and commissions earned are as follows:

                                      -3-

<PAGE>

                                                 Three-month Period Ended
                                                         August 31,
                                                   2011              2010
                                            ----------------- -----------------

Premium earned                              $        267,544  $        183,756
Commissions earned                                    18,214            15,234
No Claims Bonus from Reinsurers                      213,281                 -
Net investment income                                 70,017            33,251
Net realized investment gains                         12,093            51,019
                                            ----------------- -----------------
                                     Total  $        581,149  $        283,260
                                            ================= =================

Premium  revenue is  recognized  ratably over the term of the policy  period and
thus is relatively stable from period to period with fluctuations for comparable
periods  generally  reflecting the overall growth or loss of business.  Whereas,
commission  revenue,  which is dependent on the timing of issuance or renewal of
bonds, is expected to be somewhat more "seasonable" from quarter-to-quarter with
fluctuations  for comparable  periods  largely  reflecting the overall growth or
loss of business.  The  increase in premium  earned for the  three-month  period
ended August 31, 2011 in comparison to the  corresponding  period from the prior
year is a result of growth in bonds issued for new and existing clients.

On August 31, 2011 the Company's insurance subsidiary,  FSC, recorded receipt of
$213,281 from its reinsurers  representing  cumulative No Claims Bonus under the
terms of its  reinsurance  treaty for the claim  years  ending June 30, 2010 and
June 30, 2011.

Investment income should remain relatively  consistent,  but can fluctuate based
on interest  rates and market  conditions as well as the average assets held for
investment.  The increase in  corresponding  periods  reflects growth in average
assets held for  investment in FSC's  investment  portfolio  from  approximately
$6.974 million for the three-month period ended August 31, 2010 to approximately
$7.653  million for the  three-month  period  ended  August 31, 2011 offset by a
decrease in investment yield from approximately 3.72% for the three-month period
ended August 31, 2010 to  approximately  3.47% for the three-month  period ended
August 31, 2011. In addition,  the amortization of premium for larger than usual
principal  payments on mortgage backed securities during the three-month  period
ended August 31, 2010 resulted in decreased investment income.

During the  three-month  period ending August 31, 2011, the Company sold certain
US Government  agency  mortgage  backed  securities and equity  investments  for
$120,908,  resulting in realized  gains of $12,093.  In the  three-month  period
ending  August  31,  2010,  the  Company  sold  certain  available  for  sale US
Government  agency  mortgage  backed  securities  for  $840,684,  resulting in a
realized gain of $51,019.


                                      -4-
<PAGE>

EXPENSES

INCURRED POLICY LOSSES

The Company has experienced no claims for losses as of August 31, 2011. However,
"incurred but not reported"  (IBNR)  policy  losses for the  three-month  period
ended  August 31, 2011 and 2010  amounted  to $60,413 and $42,327  respectively.
Such  amounts  represent  the  provision  for loss and loss  adjustment  expense
attributable to surety bonds issued by FSC. Such estimates are based on industry
averages adjusted for factors that are unique to FSC's underwriting approach and
are  constantly  reviewed for adequacy  based on current  market  conditions and
other factors unique to FSC's business.  For each of these periods,  IBNR policy
losses were approximately 23% of earned premium.

POLICY ACQUISITION COSTS

Insurance  policy  acquisition  costs of $84,919 and $59,981 for the three-month
periods  ended  August 31,  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  32% and 33% for the  periods  ended  August  31,  2011  and  2010
respectively.

GENERAL AND ADMINISTRATIVE

<TABLE>
<CAPTION>
General and administrative expenses for the three-month periods ended August 31,
2011 and 2010 were $321,105 and $255,398 respectively,  representing an increase
of $65,707, and were comprised of the following:



                                                                 Three-month Period Ended
                                                                        August 31,
                                                           -------------------------------------
                                                                 2011               2010             Difference
                                                           ------------------ ------------------ -------------------
<S>                                                        <C>                <C>                <C>
Salaries and related costs                                 $         145,730  $         112,548  $           33,182
General office expense                                                28,301             28,377                 (76)
Legal and other professional fees and costs                           54,602             25,326              29,276
Audit, accounting and related services                                34,307             25,543               8,764
Travel, meals and entertainment                                       22,891              9,660              13,231
Other general and administrative                                      35,274             53,944             (18,670)
                                                           ------------------ ------------------ -------------------
                         Total general and administrative  $         321,105  $         255,398  $           65,707
                                                           ================== ================== ===================

</TABLE>


                                      -5-
<PAGE>
<TABLE>
<CAPTION>


Salaries and related costs, net of deferred internal policy  acquisition  costs,
increased approximately $33,000 and are comprised of the following:

                                                                Three-month Period Ended
                                                                       August 31,
                                                         --------------------------------------
                                                                   2011                 2010           Difference
                                                          ---------------------  -----------------  ----------------
<S>                                                       <C>                    <C>                <C>
Salaries and taxes                                        $          132,766     $      128,546     $         4,220
Commissions                                                           50,047              7,631              42,416
Stock option expense                                                     370             13,452             (13,082)
Fringe benefits                                                       21,341             14,262               7,079
Key-man insurance                                                     12,224             10,988               1,236
Deferred payroll costs                                               (71,018)           (62,331)             (8,687)
                                                          ---------------------  -----------------  ----------------
                         Total salaries and related costs $          145,730     $      112,548     $        33,182
                                                          =====================  =================  ================
</TABLE>


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.  In addition,  the Company adopted a new policy
that broadens the pool of policies that  generate  commissions.  The decrease in
stock  option  expense is  attributable  to the final  vesting from the award of
stock options on June 30, 2009,  which had the majority of options vested in the
first year of the award.

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

                                                                Three-month Period Ended
                                                                       August 31,
                                                          ---------------------------------------
                                                                 2011               2010              Difference
                                                          ---------------------  ----------------  -----------------
<S>                                                       <C>                    <C>               <C>
General corporate services                                $            3,866     $        8,589    $        (4,723)
Coal reclamation consulting                                            7,916              6,420               1,496
Statutory examination costs                                            7,675                  -               7,675
Acquisition and financing related costs                                7,645             10,317              (2,672)
Acquisition and financing related costs - due diligence               27,500                  -              27,500
                                                          ---------------------  ----------------  -----------------
                  Total legal and other professional fees $           54,602     $       25,326    $         29,276
                                                          =====================  ================  =================
</TABLE>


The  decrease  in general  corporate  services  results  primarily  from  timing
differences  and less  assistance  required in connection with the filing of the
Company's  annual report with the  Securities  and Exchange  Commission.  In the
three-month period ending August 31, 2011, the Company incurred costs associated
with a statutory  examination  of its insurance  subsidiary by the West Virginia
Insurance 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
$7,645 and $10,317 for the  three-month  periods ended August 31, 2011 and 2010,
respectively.  The  Company  incurred  $27,500  in  costs  associated  with  the
performance  of due  diligence  by third  parties for the benefit of an investor
considering a substantial investment in the Company.

                                      -6-
<PAGE>

The  increase in travel,  meals and  entertainment  expense for the  three-month
period  ended  August 31,  2011 as  compared  to the  corresponding  2010 period
related  primarily  to  expanded  efforts  by  management  to  obtain  financing
necessary for the Company's business and penetration of additional markets.

Other general and administrative expense decreased approximately $19,000 for the
three-month  period ended August 31, 2011 as compared to the corresponding  2010
period.  This decrease in is due to  non-recurring  training and conferences for
staff  in the  prior  year,  decreased  licenses  and fees  for FSC  related  to
obtaining  a U.S.  Treasury  Listing,  and  overall  decreases  in several  less
significant items.

INTEREST EXPENSE

Interest  expense for the three-month  period ended August 31, 2011 was $229,573
as compared  with $204,368 for the  corresponding  period ended August 31, 2010.
Components of interest expense are comprised of the following:

<TABLE>
<CAPTION>
                                                                    Three-month Period Ended
                                                                           August 31,
                                                               -----------------------------------
                                                                     2011              2010           Difference
                                                               ----------------- ----------------- -----------------
<S>                                                            <C>               <C>                <C>
Interest expense on bridge-financing                           $        149,973  $        149,973   $             -
Expense of common shares issued or to be issued in
connection with bridge financing and other arrangements                  32,308            24,358             7,950
Interest expense on demand and term notes                                47,292            28,448            18,844
Other finance charges                                                         -             1,589            (1,589)
                                                               ----------------- ----------------- -----------------
                                       Total interest expense  $        229,573  $        204,368   $        25,205
                                                               ================= ================= =================
</TABLE>


The  increase in the expense of common  shares  issued (or to be issued) for the
three-month  period  ended  August 31,  2011,  as compared to the  corresponding
period of the  previous  year is  attributable  to the  issuance of common stock
representing  the  additional 2% stock  dividend for the quarter ending June 30,
2011 to the  holders  of Series B  Preferred  shares  that had  requested  to be
redeemed upon maturity.  Interest expense on demand and term notes increased due
to increased borrowings and increased interest rate on some of those borrowings.

ACCRETION AND DIVIDENDS

Accretion of  mandatorily  redeemable  convertible  preferred  stock issued at a
discount and accrued dividends for three-month periods ended August 31, 2011 and
2010 are as follows:

                                      -7-

<PAGE>
<TABLE>
<CAPTION>

                                                                            Three-month Period Ended
                                                                                   August 31,
                                                                      --------------------------------------
                                                                              2011                 2010           Difference
                                                                      ---------------------  ----------------  -----------------

<S>                                                                   <C>                    <C>               <C>
Accretion of discount                                                 $                -     $        4,626    $         (4,626)
Accrued dividends - mandatorily redeemable preferred stock                        31,300             30,079               1,221
Accrued dividends - equity preferred stock                                       204,564            188,985              15,579
                                                                      ---------------------  ----------------  -----------------
                            Total accretion and dividends             $          235,864     $      223,690    $         12,174
                                                                      =====================  ================  =================
</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,  for the
three-month  period ending  August 31, 2011,  accretion of $125 and dividends of
$84,977  associated  with the Series B remaining  after that date are deductions
from net income and not included in the table  above.  The decrease in accretion
of discount and accrued  dividends on  mandatorily  redeemable  preferred  stock
results  from  application  of the  interest  or  constant  yield  method to the
discount initially recorded with the mandatorily redeemable preferred stock over
a period of five years from the date of issuance of the stock,  and  recognition
in  December  2010 of the  final  month's  accretion  of  discount  on  Series A
Preferred stock. Series C equity stock accrues dividends at the same rate as the
Series B for which it was  exchanged  but is separated in the table above due to
Series C not being mandatorily redeemable. Series C does not accrete.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

INTANGIBLE ASSETS

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

RESERVE FOR LOSSES AND LOSS EXPENSES

Reserves  for  unpaid  losses  and loss  adjustment  expenses  of the  insurance
subsidiary are estimated using individual  case-basis  valuations in conjunction
with estimates derived from industry and company experience. FSC has experienced
no claims for losses as of August 31, 2011.

FSC is  licensed to write coal permit and  miscellaneous  fixed-liability  limit
surety  bonds in West  Virginia  and Ohio.  Coal  permit  bonds are  required by
regulatory agencies to assure the reclamation of land that has been disturbed by
mining operations, and accordingly, is a highly regulated process by federal and
state  agencies.  Such  bonds are  generally  long-term  in nature  with  mining

                                      -8-
<PAGE>

operations  and  reclamation  work conducted in unison as the property is mined.
Additionally,  no two  principals and properties are alike due to varied company
structures and unique geography and geology of each site.

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

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

In establishing its reserves for losses and loss adjustment expense,  management
routinely  reviews  its  exposure  to loss  based  on  periodic  monitoring  and
inspection  reports,  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  operating  losses of  approximately  $22,000 and
$458,000  for the fiscal  years ended May 31, 2011 and 2010,  respectively.  The
Company's losses increase when accretion of mandatorily  redeemable  convertible
preferred stock and accrued dividends on mandatorily  redeemable preferred stock
are taken into account,  to  approximately  $1,440,090  and  $2,338,531  for the
fiscal  years ended May 31,  2011 and 2010,  respectively.

For the  three-month  period  ended  August 31, 2011 the  Company had  operating
income  of  approximately   $188,000,   which,  when  accretion  of  mandatorily
redeemable  convertible  preferred  stock and accrued  dividends on  mandatorily
redeemable  preferred  stock  are  taken  into  account,  results  in a loss  of
approximately  $158,000.  The Company had  positive  cash flow of  approximately
$315,000 from operating  activities for the three-month  period ended August 31,
2011.  A  substantial  portion of the  Company's  cash flow is  generated by its
insurance subsidiary and is subject to certain withdrawal restrictions.  Despite
the continued reduction of operating expenses,  the Company has not been able to
pay certain amounts due to professionals  and others,  continues to be unable to

                                      -9-
<PAGE>

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 when its business plan is
fully  implemented,  it is anticipated that losses will continue and the Company
will be cash constrained until FSC develops a more substantial book of business.

The Company is  restricted  in its  ability to withdraw  monies from FSC without
prior approval of the Insurance  Commissioner.  Of the Company's investments and
cash of  $8,049,886  as of August 31, 2011,  $8,049,304  is  restricted  to FSC.
Furthermore,  capital received  pursuant to the sale of Series A preferred stock
of the Company must be contributed  by the Company into the surplus  accounts of
FSC.

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

Expansion  of  FSC's  business  to  other  states  is a key  component  to fully
implementing  the Company's  business plan. In fiscal 2009, the Company was able
to increase the capital of FSC,  reactivate FSC's insurance  license in Ohio and
obtain  authority to issue surety bonds in that state.  However,  management has
found that entry into other states (as a surety) has been difficult  without the
benefit of more substantial capital and reserves due to FSC's status as a recent
entry into this market and the financial  condition of the Company.  This is the
case notwithstanding the reinsurance  agreement entered into by FSC with Lloyd's
of London and the resulting  increase in bonding capacity.  Management  believes
that if FSC's  capital  and  surplus  reserves  were  more  substantial  and the
financial  condition  of the Company was to  stabilize,  entry into other states
would be less challenging.  Accordingly,  management continues to pursue avenues
that will  provide  additional  capital  to its  insurance  subsidiary  and fund
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 possible sureties licensed in states other than West Virginia and
Ohio that comprise significant markets for the bonding programs of FSC and would
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
effectively provide access to the state market without formal entry.

As a means of alleviating  obligations  associated  with the Company's  Series B
Preferred  Stock,  which by its  terms  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

                                      -10-
<PAGE>

the  recapitalization.  Management  believes the  recapitalization  improves the
Company's prospects for engaging in a larger financing and will assist FSC as it
applies to enter other state markets.

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  reaches a more  substantial
level. Although the growth of FSC provides additional cash flow to the Company's
other  subsidiaries,  Jacobs and Triangle Surety, it is anticipated that working
capital deficiencies will continue and need to be met either through the raising
of additional  capital or  borrowings.  However,  there can be no assurance that
additional  capital (or debt financing) will be available when and to the extent
required or, if  available,  on terms  acceptable  to the Company.  Accordingly,
concerns  as to the  Company's  ability  to  continue  as a  going  concern  are
substantial.   The  consolidated   financial   statements  do  not  include  any
adjustments that might result from the outcome of this uncertainty.

The  Company's  exposure  to the  subprime  mortgage  risk is minimal due to its
investment in mortgage-backed  securities being 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 means for
the bond repayment.  REFCORP was created by the Financial  Institutions  Reform,
Recovery  and  Enforcement  Act of  1989  ("FIRREA")  to  provide  funds  to the
Resolution  Trust  Corporation  ("RTC") in order to help resolve the Savings and
Loan failures.  REFCORP  operates as a United States  Treasury  agency under the
direction of the RTC Oversight Board, whose chair is the secretary of the United
States Treasury,  and its obligations are ultimately backed by the United States
government.

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

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

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

We  maintain   disclosure  controls  and  procedures  designed  to  ensure  that
information  required to be disclosed  in the reports that the Company  files or
submits  under  the  Securities   and  Exchange  Act  is  recorded,   processed,
summarized,  and reported  within the time periods  specified in the SEC's rules
and forms,  and that such  information is accumulated  and  communicated  to the
Company's management,  including its Chief Executive Officer and Chief Financial
Officer,   as  appropriate,   to  allow  timely  decisions   regarding  required
disclosures.  Our  management,  with the  participation  of its Chief  Executive
Officer and Chief  Financial  Officer,  has evaluated the  effectiveness  of our
disclosure  controls  and  procedures  as defined in Rules  13a-15(e)  under the
Securities  Exchange Act of 1934, as of August 31, 2011. As previously  reported
in our  Annual  Report on Form 10-K for the year  ended  May 31,  2011,  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

                                      -11-
<PAGE>

entries,  elimination entries and the financial statement consolidation process.
Based upon their  evaluation,  the Chief  Executive  Officer and Chief Financial
Officer concluded that the Company's  disclosure controls and procedures,  as of
August 31, 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
August 31,  2011 and May 31,  2011 and the  results of its  operations  and cash
flows for the three month period  ended  August 31, 2011 and 2010 in  conformity
with U.S. generally accepted accounting principals (GAAP).

                          PART II - OTHER INFORMATION


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

None.

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

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

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

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

In the three months ended August 31, 2011,  1,032,000  common shares were issued
as additional consideration to various lenders in private placements pursuant to
short-term  borrowings.  In the three months  ended  August 31, 2011,  1,372,949
common shares were issued as additional 2% stock  dividend for holders of Series
B Preferred  shares that had requested to be redeemed upon maturity.  Subsequent
to August 31, 2011,  7,043,710  common shares were issued to the Bridge  lenders
and 70,000 common shares were issued as additional consideration for borrowings.

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.

                                      -12-
<PAGE>

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 $2,333,600.

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

None.

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

None.

<TABLE>
<CAPTION>
ITEM 6. EXHIBITS
----------------

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

--------------------------------------------------------------------------------------------------------------------
      (1)   Incorporated by reference to the Company's Current Report on form 8-K dated December 29, 2005.
      (2)   Incorporated by reference to the Company's Current Report on form 8-K dated February 8, 2008.
      (3)   Incorporated by reference to the Company's Current Report on form 8-K dated June 6, 2008
      (4)   Incorporated by reference to the Company's Current Report on form 8-K dated June 24, 2008
      (5)   Incorporated by reference to the Company's Current Report on form 8-K dated August 20, 2008
      (6)   Incorporated by reference to the Company's Current Report on form 8-K dated November 13, 2008
</TABLE>


                                      -13-
<PAGE>



SIGNATURES


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


Date: October 24, 2011                     JACOBS FINANCIAL GROUP, INC.
                                 -----------------------------------------------
                                                 (Registrant)
                              By:
                                 /s/John M. Jacobs
                                 -----------------------------------------------
                                 John M. Jacobs, President



























                                      -14-