UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549   FORM
10-Q   x
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
DECEMBER 31, 2010.  o
TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  For the
transition period
from   to  Commission File Number: 000-53311  JayHawk Energy, Inc. (Exact name of small business issuer as
specified in its charter)  Colorado
20-0990109(State or other jurisdiction
of incorporation or
organization)
(I.R.S. Employer
Identification
No.)  6240 E. Seltice Way, Suite C,
Post Falls, Idaho 83854(Address of principal executive
offices)  (208) 667-1328(Issuers Telephone
Number)   Indicate by check mark whether the issuer
(1) has filed all reports required to be filed by Section 13 or 15(d) of the
Exchange Act during the past 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.   x Yes   o No  Indicate by check mark whether the
registrant is a large accelerated file, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of "large accelerated
filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the
Exchange Act.  Large accelerated filer
o
Accelerated filer
oNon-accelerated filer (Do not check if a smaller
reporting company)
o
Smaller reporting company
x  Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).   o Yes
  x No  APPLICABLE ONLY TO CORPORATE
ISSUERS  State the number of shares outstanding of
each of the issuer's classes of common equity, as of the latest practical
date.  As of February 14, 2010, there were 51,295,825 shares of the
issuer's $.001 par value common stock issued and outstanding.       1    JAYHAWK
ENERGY, INC.  Quarterly Report on Form 10-Q for the Quarterly Period Ending December 31,
2010  TABLE OF CONTENTS  PART I. FINANCIAL INFORMATIONItem 1. Financial
StatementsConsolidated
Balance Sheets:December
31, 2010 (Unaudited) and September 30, 2010
3Consolidated
Statements of Operations:Three
Months Ended December 31, 2010 and 2009 (Unaudited)
4Consolidated
Statements of Cash Flows:Three
Months Ended December 31, 2010 and 2009 (Unaudited)
5Notes
to Consolidated Unaudited Financial Statements:December
31, 2010
6Item 2. Management Discussion and Analysis
20Item 3. Quantitative and Qualitative Disclosures
About Market Risk
22Item 4. Controls and Procedures
22PART II. OTHER INFORMATIONItem 1. Legal Proceedings
23Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds
23Item 3. Defaults Upon Senior Securities
23Item 4. Submission of Matters to a Vote of Security
Holders
23Item 5. Other Information
23Item 6. Exhibits
23Signatures
24               2    PART I - FINANCIAL
INFORMATION Item 1. Financial Statements     JayHawk Energy, Inc.Consolidated Balance SheetsDecember 31, 2010

September 30, 2010Assets
(Unaudited)Current
AssetsCash and cash
equivalents




$
         221,355

$
            56,280Trade accounts
receivable, less allowance for doubtful accounts of $niland
$nil at December 31, 2010 and September 30, 2010, respectively (Note
3)

87,721

225,415Other current
assets




3,498

4,344Total Current
Assets




312,574

286,039Plant, Property
and EquipmentUnproved oil and
gas properties, net of allowances for impairment  of $1,474,000and
accumulated amortization of $772,819 and $693,403 at December 31, 2010

1,930,795

2,126,445and
September 30, 2009, respectively.  (Note 4).Proved and
developed oil & gas properties, net allowances for impairment of
$811,339and
accumulated DD&A of  $2,151,036 and $2,027,269 at December 31,
2010and
September 30, 2010, respectively (Note 5)


6,546,811

6,647,808Computers,
office equipment, furniture and leasehold improvements, net of
allowancefor
depreciation of $28,294 and $25,296, respectively.

16,618

19,616Total Net Plant,
Property and Equipment



8,494,224

8,793,869Other Long-Term
Assets  (Note 6)



56,900

56,900Total
Assets




$       8,863,698

$        9,136,808Liabilities and Stockholders' EquityCurrent
LiabilitiesAccounts
payable




$
         946,157

$        1,096,564Due to other
working and royalty interests


62,650

135,384Other payables,
interest & taxes accrued



165,088

187,688Note payable in
less than one year (Note 7)


92,302

227,914Total Current
Liabilities




1,266,196

1,647,550Long Term
Liabilities  (Note 8)




1,082,071

1,161,074Total
Liabilities




2,348,267

2,808,624Commitments and
Contingencies (Note 15)



-

-Stockholders'
Equity (Deficit)Preferred Stock,
$.001 par value; 10,000,0000 shares authorized, no shares issuedand
outstanding.




-

-Common Stock,
$.001 par value; 200,000,000 shares authorized; 51,086,257 shares
issuedand
outstanding at December 31, 2010 and 48,980,326 shares issuedand
outstanding at September 30, 2010 (Note 9)


51,142

48,980Additional
paid-in capital




18,058,903

17,108,318Accumulated
deficit




(11,594,614)

(10,829,115)Total
Stockholders' Equity




6,515,430

6,328,183Total
Liabilities and Stockholders' Equity



$       8,863,698

$        9,136,808The accompanying notes are an integral part of these
consolidated financial statements          3     JayHawk Energy, Inc.Consolidated Statements of Operations
(Unaudited)For the three months ended December 31, 2010
For the three months ended December 31, 2009RevenueOil sales




$
           69,051

$
          170,307Gas sales




10,415

24,094Total Gross
Revenues




79,466

194,401Costs and
Operating ExpensesExploration
costs




-

-Production
costs-North Dakota



35,692

71,815Production
costs-Kansas




2,310

6,510Depreciation,
depletion, amortization and asset impairment expense

210,053

291,926General and
administrative




230,713

209,781Other
expense




366,196

52,203Total Costs and
Expenses




844,964

632,235Loss from
continuing operations before income tax


(765,499)

(437,834)Provision for
income taxes




-

-Deferred tax
benefit




-

-Net loss from
continuing operations



(765,499)

(437,834)Net loss and
total comprehensive loss



$
       (765,499)

$
         (437,834)Basic and
diluted loss per share (Note 10)



$
             (0.02)

$
               (0.01)Basic weighted
average number shares outstanding


50,422,875

44,825,148The accompanying notes are an integral part of these
consolidated financial statements                4     JayHawk Energy, Inc.Statements of Consolidated Cash
Flows (Unaudited)For the three months ended December
31, 2010
For the three months ended December
31, 2009CASH FLOWS FROM OPERATING ACTIVITIESNet loss from operations



$
        (765,499)

$
         (437,834)Adjustments to reconcile net loss to net cash
used:by operating activities:Depreciation, depletion, amortization and
impairment


206,180

-Accretion in annual asset retirement
obligations


3,873

3,201Amortization of discount on note payable



174,279

291,926Debt Conversion Expense



95,348

-Common stock issued in lieu of interest



37,500

-Common stock issued in consideration for
services


9,456

23,400Stock options expense



53,286

-(Increase) Decrease in accounts receivable,
net


137,695

15,952(Increase) Decrease in other current assets



845

1,090Increase (Decrease) in accounts payable



(34,172)

97,016Increase (decrease) in accruals and other current
liabilities


(230,946)

72,863Net cash used by operating activities



(312,155)

67,614CASH FLOWS FROM INVESTING ACTIVITIESProved oil and gas property additions



(22,770)

-Unproved oil and gas property additions



-

(20,380)Other property additions



-

-Net cash used by operating activities



(22,770)

(20,380)CASH FLOWS FROM FINANCING ACTIVITIESBorrowings with note payable



500,000

900,000Common stock issued for reduction of note
payable


-

-Net cash provided by financing
activities



500,000

900,000NET (DECREASE) IN CASH AND CASH
EQUIVALENTS

165,075

947,234CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR

56,280

5,658CASH AND CASH EQUIVALENTS AT END OF
YEAR

$
         221,355

$
           952,892Supplemental Disclosure of Cash Flows and Non-cash
Investing and Financing Activity:Income taxes paid



$
                   -

$
                    -Interest paid with common stock



$
           37,500

$
             96,000Cancelled contract for the acquisition of unproved
properties


$
         116,235

$
                    -The accompanying notes are an
integral part of these consolidated financial
statements   5     JAYHAWK ENERGY, INC. Condensed Notes to Consolidated Financial
Statements (Unaudited) For the Three Months ended December 31,
2010 Note 1 
Organization and Description of Business Nature of Operations JayHawk Energy, Inc. (the Company or
JayHawk) and its wholly owned subsidiary, is engaged in the acquisition,
exploration, development, production and sale of natural gas, crude oil and
natural gas liquids primarily from conventional reservoirs within North America.
 The Company incorporated in Colorado on April 5, 2004 as Bella Trading
Company, Inc.  During the second quarter ending June 30, 2007, the Company
changed management and entered the oil and gas business, and ceased all activity
in retail jewelry.  On June 21, 2007, the Company changed its name to
JayHawk Energy, Inc.  Since then, the Company has devoted its efforts
principally to the raising of capital, organizational infrastructure
development, the acquisition of oil and gas properties and exploration
activities.  To date, the Company has acquired three main properties, the
Uniontown in Kansas, the Crosby in North Dakota, and Girard in Kansas.  The
Company also formed a wholly owned subsidiary to transport natural gas in
Kansas, called Jayhawk Gas Transportation Company.  This is the basis for
which financial statements are consolidated. Note 2  Summary
of Significant Accounting Policies Basis of Presentation -These consolidated financial
statements, including notes, have been prepared in accordance with the
applicable rules of the Securities and Exchange Commission (the SEC) and do
not include all of the information and disclosures required by accounting
principles generally accepted in the United States ("U.S. GAAP") for complete
financial statements.  These consolidated financial statements are
unaudited but, in the opinion of management, reflect all adjustments necessary
for a fair presentation of the results for the periods reported.  All
such adjustments are of a normal recurring nature unless disclosed
otherwise.  JayHawk reports on operations using a fiscal year end of
September 30.  This report on Form 10-Q is for the first quarter of
the fiscal year to end September 30, 2011, the quarter ending December 31, 2010,
and comparable quarter ended December 31, 2009.  These financial
statements should be read in conjunction with the Company's audited consolidated
financial statements and notes thereto, included in the Companys Form 10-K for
the year ended September 30, 2010 as filed with the SEC.  Interim
operating results are not necessarily indicative of operating results for any
future interim period or for the full year. Going Concern As shown in the accompanying financial
statements,  the Company has incurred operating losses since inception.
 As of December 31, 2010, the Company has limited financial resources with
which to achieve the objectives and obtain profitability and positive cash
flows.  Achievement of the Company's objectives will be dependent upon the
ability to obtain additional financing, to locate profitable mineral properties
and generate revenue from current and planned business operations, and control
costs.  Jayhawk  plans to fund our future operations by joint
venturing, obtaining additional financing from investors, and attaining
additional commercial production.  However, there is no assurance that the
Company will be able to achieve these objectives. Joint Venture Operations In instances where the Companys
oil and gas activities are conducted jointly with others, the Companys accounts
reflect only its proportionate interest in such activities. Use of estimates -The preparation of financial statements
in accordance with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities as of the
date of the consolidated financial statements and the reported amounts of
revenues and expenses during the respective reporting periods.  A change in
accounting estimate is accounted for prospectively over the current and future
years. Income or loss per common share -Basic income per share is
calculated based on the weighted average number of common shares outstanding.
 Diluted income per share assumes exercise of stock options and warrants
and conversion of convertible debt and preferred securities, and preferred
securities, provided the effect is not antidilutive.  As each of the two
fiscal periods covered by these financial statements reflects net losses from
operations, all of the warrants have an anti-dilutive effect on per common share
amounts. Revenue and Cost Recognition - The Company uses the sales
method of accounting for oil and gas revenues. Under this method, revenues are
recognized based on the actual volumes of gas and oil sold to purchasers. The
volume sold may differ from the volumes the Company may be entitled to, based on
Jayhawk's  individual interest in the property.  Periodically,
imbalances between production and nomination volumes can occur for various
reasons.  In cases where imbalances have occurred, a production imbalance  6    JAYHAWK
ENERGY, INC. Condensed Notes to Consolidated Financial
Statements (Unaudited) For the Three Months ended December 31,
2010  Note 2  Summary of Significant Accounting Policies
(continued) receivable or
liability will be recorded.  Costs associated with production are
expensed in the period in which they are incurred. Revenue Source
-All of the Companys direct operating revenues originate from oil production
from its property in Crosby, North Dakota or from natural gas production from
its property in Girard Kansas. Each revenue stream is sold to a single customer
through month to month contracts.  While this creates a customer
concentration, there are alternate buyers of the production in the event the
sole customer is unable or unwilling to purchase. Cash equivalents -The Company considers all highly liquid
debt instruments purchased with maturity of three months or less to be cash
equivalents. Property, plant and equipment -JayHawk follows the method
of accounting for oil and gas property as promulgated in Accounting Standards
Codification (ASC) topic 932, Extractive Activities  Oil and Gas.  Under
this method of accounting, costs to acquire mineral interests in oil and natural
gas properties, to drill and equip exploratory wells that find proved reserves,
and to drill and equip development wells, are capitalized.  Costs to drill
exploratory wells that do not find proved reserves, geological and geophysical
costs and costs of carrying and retaining unproved properties are expensed. Jayhawk Energy calculates depletion, depreciation and amortization
(DD&A) of capitalized cost of proved oil and gas properties on a
field-by-field basis using the units-of-production method based upon proved
reserves. In computing DD&A the Company will take into consideration
restoration, dismantlement and abandonment cost and the anticipated proceeds
from equipment salvage.  When applicable, Jayhawk will apply the provisions
of ASC topic 410, Accounting for Asset Retirement Obligations, which provides
guidance on accounting for dismantlement and abandonment cost (see Note 9).  Support equipment and other property, plant and equipment related
to oil and gas production are depreciated on a straight-line basis over their
estimated useful lives which range from 5 to 35 years.  Property, plant and
equipment unrelated to oil and gas producing activities is recorded at cost and
depreciated on a straight-line basis over the estimated useful lives of the
assets, which range from 3 to 25 years. Impairment of Long-Lived Assets -The Company evaluates its
long-term assets annually for impairment or when circumstances or events occur
that may impact the fair value of the assets.  The fair value of
 property is primarily evaluated based upon the present value of expected
revenues directly associated with those assets.  An impairment loss would
be recognized if the carrying amount of a capitalized asset is not recoverable
and exceeds its fair value. Management believes that there have not been
any circumstances that have warranted the recognition of losses due to the
impairment of long-lived assets as of December 31, 2010. Sales of Producing and Non-producing Property- The Company
accounts for the sale of a partial interest in a proved property as normal
retirement. The Company recognizes no gain or loss as long as this treatment
does not significantly affect the unit-of-production depletion rate. Jayhawk
recognizes a gain or loss for all other sales of producing properties and
include the gain or loss in the results of operations.  The Company
accounts for the sale of a partial interest in an unproved property as a
recovery of cost when substantial uncertainty exists as to recovery of the cost
applicable to the interest retained. A gain on the sale is recognized to the
extent that the sales price exceeds the carrying amount of the unproved
property. The Company recognizes a gain or loss for all other sales of
non-producing properties and include the gain or loss in the results of
operations. Asset Retirement Obligation- The Company follows ASC topic
410, Accounting for Asset Retirement Obligations, which requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred if a reasonable estimate of fair value can
be made.  The associated asset retirement costs will be capitalized as part
of the carrying amount of the long-lived asset.  The carrying value of a
property associated with the capitalization of an asset retirement cost will be
included in proved oil and gas property in the balance sheets.  The future
cash outflows for oil and gas property associated with settling the asset
retirement obligations will be accrued in the balance sheets, and will be
excluded from ceiling test calculations.  The asset retirement obligation
will consist of costs related to the plugging of wells and removal of facilities
and equipment on its oil and gas properties (see Note 8).    7    JAYHAWK
ENERGY, INC. Condensed Notes to Consolidated Financial
Statements (Unaudited) For the Three Months ended December 31,
2010  Note 2  Summary of Significant Accounting Policies
(continued) Income Tax and Accounting for Uncertainty - Income taxes
are determined using the liability method in accordance with ASC topic 740.
 Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using the enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in the period that
includes the enactment date. In addition, a valuation allowance is established
to reduce any deferred tax asset for which it is determined that it is more
likely than not that some portion of the deferred tax asset will not be
realized. ASC Topic 740 recognizes that the ultimate deductibility of
positions taken or expected to be taken on tax returns is often uncertain.
 It provides guidance on when tax positions claimed by an entity can be
recognized and guidance on the dollar amount at which those positions are
recorded.  In order to recognize the benefits associated with a tax
position taken the entity must conclude that the ultimate allowability of the
deduction is more likely than not.  If the ultimate allowability of the tax
position exceeds 50% (more likely than not), the benefit associated with the
position is recognized at the largest dollar amount that has more than a 50%
likelihood of being realized upon ultimate settlement.  Differences between
tax positions taken in a tax return and recognized in accordance with the
guidance will generally result in (1) an increase in income taxes currently
payable or a reduction in an income tax refund receivable or (2) an increase in
a deferred tax liability or a decrease in a deferred tax asset, or both (1) and
(2). Stock Options Granted
to Employees and Non-employees -The Company follows financial accounting
standards that require the measurement of the value of employee services
received in exchange for an award of an equity instrument based on the
grant-date fair value of the award.  For employees, directors and officers,
the fair value of the awards are expensed over the vesting period.  The
current vesting period for all options is eighteen months.  Non-employee stock-based
compensation is granted at the Board of Directors discretion to award select
consultants for exceptional performance.  Prior to issuance of the awards,
the Company was not under any obligation to issue the stock options.
 Subsequent to the award, the recipient was not obligated to perform any
services.  Therefore, the fair value of these options was expensed on the
grant date, which was also the measurement date. Under the fair value recognition provisions of this statement,
share-based compensation cost is measured at the grant date based on the value
of the award and is recognized as expense over the vesting period. Determining
the fair value of share-based awards at the grant date requires judgment.
 In addition, judgment is also required in estimating the amount of
share-based awards that are expected to be forfeited.  If actual results
differ significantly from these estimates, stock-based compensation expense and
results of operations could be materially impacted. Short term benefits and compensated absences - Wages, salaries, bonuses and social
security contributions are recognized as an expense in the year in which the
associated services are rendered by employees. Short term accumulating
compensated absences such as paid annual leave are recognized when services are
rendered by employees that increase their entitlement to future compensated
absences. The company has not accrued compensated absences because the amount
cannot be reasonably estimated. New Accounting Pronouncements - In January 2010, the
FASB issued Accounting Standards Update No. 2010-03 Extractive Activities  Oil
and Gas, Accounting Standards Codification (ASC) Topic 932: Oil and Gas Reserve
Estimation and Disclosures.  The objective is to align the oil and gas
reserve estimation and disclosure requirements of ASC Topic 932 with the
requirements in the SEC final rule Modernization of the Oil and Gas Reporting
Requirements described in the preceding paragraph.  This includes updating
the reserve estimation requirements for changes in practice and technology that
have occurred over the last several decades and expanding the disclosure
requirements for equity method investments.  The amendments in this Update
2010-03 are effective for interim and annual periods ending on or after December
31, 2009, and should be applied on a prospective basis.  The Company
adopted this Update without a material effect on its results of operations and
financial position.      8    JAYHAWK
ENERGY, INC. Condensed Notes to Consolidated Financial
Statements (Unaudited) For the Three Months ended December 31,
2010  Note 3 - Trade Accounts Receivable  At December 31, 2010
trade accounts receivable represents those amounts the Company is owed for its
oil and gas production delivered during the month of December 2010 and amounts
due from other working interests for their respective percentages of joint
operating costs and drilling costs.  Amounts receivable for December oil
and gas deliveries were received in January 2011. Amounts receivable for September oil and
natural gas deliveries, $6,533 were also received in October 2010. Specifically,
trade accounts receivable are detailed as follows: December 31, 2010
September 30, 2010Due for crude oil delivered in December and
September 2010

73,938

193,297Due for natural gas delivered in December and
September 2010

6,163

6,533Due from joint operating agreement working
interests

7,620

25,585TOTAL:



$
            87,721

$
            225,415  Note 4 
Unproved Properties The total of JayHawk's investment in unproved properties at
December 31, 2010 and September 30, 2010 consists of the following capitalized
costs respectively: December 31, 2010
September 30, 2010NameKansas Uniontown Project


$
       2,494,479

$
         2,494,479Less: allowance for impairment

(1,474,000)

(1,474,000)Less: accumulated amortization

(269,087)

(256,487)Net investment in Uniontown Project

$
          751,392

$
            763,992Kansas Girard Project


$
       1,652,284

$
         1,652,284Less: accumulated amortization

(485,346)

(436,916)Net investment in Girard Project

$
       1,166,938

$
         1,215,368North Dakota Project


$
            30,850

$
            147,085Less: accumulated amortization

(18,386)

-Net investment in North Dakota
Project

$
            12,465

$
            147,085Total Unproved Oil and Gas Properties

$
       1,930,795

$
         2,126,445  As discussed in Note 2, the Company amortizes lease bonuses paid
to acquire specific acreage over the life of the lease, generally three years,
through the lease expiration date.    9    JAYHAWK
ENERGY, INC. Condensed Notes to Consolidated Financial
Statements (Unaudited) For the Three Months ended December 31,
2010 Note 5  Proved
and Developed Oil & Gas Properties The capitalized cost, net of depreciation, depletion and
amortization (DD&A) of the proved oil and gas properties was $6,546,811 at
December 31, 2010, and $6,647,808 at September 30, 2010.  These net
capitalized costs are comprised of the following; detailed by property: December 31, 2010
September 30, 2010Crosby, North Dakota PropertiesProved Reserves



$
          2,357,753

$
            2,357,753Field Equipment



1,224,580

1,224,580Capitalized Drilling Costs


1,952,181

1,929,410Less Allowance for Impairment

(811,339)

(811,339)Less Accumulated DD&A


(1,687,886)

(1,608,152)Net Capitalized Costs


$
          3,035,289

$
            3,092,252Girard, Kansas PropertiesField Equipment



$
             705,903

$
               705,903Capitalized Drilling Costs


662,899

662,899Less Accumulated DD&A


(145,369)

(130,364)Net Capitalized Costs


$
          1,223,433

$
            1,238,438JayHawk Gas TransportationField Equipment



$
          2,605,871

$
            2,605,871Less Accumulated DD&A


(317,781)

(288,753)Net Capitalized Costs


$
          2,288,090

$
            2,317,118Total Proved Oil and Gas Properties

$
          6,546,811

$
            6,647,808  Ceiling Test The Company has performed ceiling tests to
determine that the carrying amounts in its financial statements do not exceed
the net present value of the reserve estimates for the respective properties, of
Crosby, North Dakota and Girard, Kansas.  For the Girard properties
management determined that the net values reflected in the financial statements
did not exceed the net discounted present value of the reserves estimated by the
independent reserve engineers. Impairment of Crosby Project:  JayHawk periodically
reviews and assesses its' proved properties to determine whether or not they
have been impaired.  A property is considered impaired if the carrying
amount of a long-lived asset is not recoverable and exceeds its fair value.
 The carrying amount of a long-lived assets is not recoverable if it
exceeds the sum of the undiscounted cash flows expected to result from the use
and eventual disposition of the asset.  The impairment loss shall be
measured as the amount by which the carrying amount of the long-lived asset
exceeds its fair value.  Based upon estimates provided by independent
reserve engineers, Management has determined an impairment of $811,339 exists on
the Crosby property. The impairment allowance was established to approximate the
write-down of the impairment loss for the period ending September 30, 2010.   10    JAYHAWK
ENERGY, INC. Condensed Notes to Consolidated Financial
Statements (Unaudited) For the Three Months ended December 31,
2010 Note 6  Other Long-Term
Assets Other assets consists of
various deposits.  Detail is disclosed in the following table: December 31, 2010
September 30, 2010Rental Security
Deposit



$
              1,500

$
               1,500Bond Deposit -
State of Kansas


5,400

5,400Bond Deposit -
State of North Dakota


50,000

50,000Total




$
            56,900

$
             56,900 Note 7  Notes Payable due in
less than one year On September 1, 2010 the Company entered into a short-term
promissory note with a vendor for its balance of accounts payable.  The
initial principal balance of $272,373 is due and payable in six (6) equal
payments of $46,729 including interest at a rate of 12% per annum.  The
final payment is due February 25, 2011. Note 8 -
Long-term Liabilities Long-term liabilities at December 31, 2010 are comprised of an
asset retirement obligation of $158,801 and convertible debentures of $673,270,
net of discounts for the imputed fair value of common stock purchase warrants
attached to the debentures and the imputed fair value of the conversion feature
of the debentures.  The composition of long-term liabilities existing at
December 31, 2010 and September 30, 2010 is reflected in the following
table: December 31, 2010
September 30, 2010Asset retirement obligation (Note 9)


$
          158,801

$
          154,928Investment in Joint Venture Girard


250,000

250,000Long-term notes (debentures) payable face
value


1,631,500

1,497,000Less: Unamortized discount(s)Imputed fair value of common
stock purchase warrants


(461,976)

(285,887)Imputed fair value of beneficial
conversion feature


(496,254)

(454,967)Total long-term liabilities



$
       1,082,071

$
       1,161,074 During the year ended September 30, 2010, the Company issued 10%
convertible debentures with a face value of $1,500,000.  The first tranche
of the total financing, with a face value of $900,000, was issued during the
first quarter end December 31, 2009.  In April of the third quarter ended
June 30, 2010 additional debentures with a face value of $600,000 were issued.
 All of the debentures have a two year maturity and were issued with
attached common stock purchase warrants.  The effective interest rate on
the debentures is 10% per annum.  Interest of $42,394 was expensed and is
included in "Other expense" on the Consolidated Statements of Operations for the
three months ended December 31, 2010.  Interest accrued at year end of
$37,500 is included on the Consolidated Balance Sheets  in "Other payables,
interest and taxes accrued". The debentures are convertible at any time after the original
issue date into a number of shares of the Companys common stock, determined by
dividing the amount to be converted by a conversion price of  $0.30 per
share.  Additionally, the attached common share purchase warrants, expire
42 months from the original issue date and permit the holders two exercisable
options.  The warrant were exercisable by purchase of the Companys common
stock for cash at an exercise price of $0.45, or alternatively, in a cashless
exercise, the number of shares being determined in accordance with a
predetermined formula based on the Companys then current stock price. During the second quarter ended March 31, 2010, the holders of the
debentures and the common stock purchase warrants associated with the first
$900,000 issuance, exercised all 3,000,000 warrants to acquire 2,111,388 shares
of the Companys common stock in two separate cashless exercises on January 6
and January 27.  Warrants attached to the debentures issued in April 2010  11    JAYHAWK
ENERGY, INC. Condensed Notes to Consolidated Financial
Statements (Unaudited) For the Three Months ended December 31,
2010 Note 8 -
Long-term Liabilities (continued) ($600,000 face
amount) total 2,000,000 and remain to be exercised at the election of the
debenture holders at an exercise price of $0.45 per share. During the quarter
ending December 31, 2010, the Company entered into a Securities Purchase
Agreement with certain institutional investors wherein the Company agreed to
sell and the purchasers agreed to purchase $500,000 of Secured Convertible
Debentures (Debentures).  The Debentures provide for interest to be paid
quarterly, at the rate of 10 percent per annum, and are due two years from the
date of this initial closing. The Debentures are secured by a lien on the
Companys assets, including its  properties in North Dakota but not
including certain assets of the Company in Kansas.  The Debentures are
convertible at any time after the original issue date into a number of shares of
the registrants common stock, determined by dividing the amount to be converted
by a conversion price of $0.18 per share, or an aggregate of 2,777,778 shares.
 In addition to the Debentures the purchasers were issued an aggregate of
1,805,556 common share purchase warrants, each having a term of 42 months,
expiring April of 2014, and giving the purchasers the right to purchase
JayHawks common shares at an exercise price of $0.45 per share. The debentures are secured by all assets of the Company except
those specifically excluded in the agreement which include all Kansas properties
and related assets. Interest accrued at December 31, 2010 of $37,820 is included
on the Consolidated Balance Sheets  in "Other payables, interest and taxes
accrued". Long term notes (debentures) will mature as follows: Year ending September 30,2011




$
                  -2012




1,631,50020132014




-2015




-$
       1,631,500 In accordance with ASC Topic 470, the Company allocated the
proceeds to detachable warrants and convertible instruments based upon their
relative fair values of the debt instrument without the warrants and the
warrants themselves at the time of issuance.  The fair value of the
warrants was determined following the guidance of ASC Topic 718; using the
Black-Scholes option model (using a risk free interest rate of .06%, volatility
of 99.3%, exercise price of $0.30, current market values of $0.43 and $0.70 per
share and an expected life of 3.5 years) with the value allocated to the
warrants reflected in Stockholders Equity and a debt discount.  Based upon
the respective fair values as of the original agreement dates $1,500,000 was
allocated to discounts associated with the common stock purchase warrants and
the beneficial conversion features.  Giving effect to the monthly
amortization of the discount, the exercise of all purchase warrants associated
with the first $600,000 tranche, and the conversion of $368,500 in principal
conversion, $511,810 of the discount remains to be amortized over the remaining
life of the debentures.  This $511,810 consists of the remaining
unamortized imputed fair value of the common stock purchase warrants of $238,766
and imputed fair value of the beneficial conversion feature of $273,044.
 These amounts are and will continue to be amortized over the remaining
life of the underlying convertible debentures. The Company also allocated the proceeds associated with the
October 26, 2010 debenture financing to detachable warrants and convertible
instruments based upon their relative fair values of the debt instrument without
the warrants and the warrants themselves at the time of issuance.  The fair
value of the warrants was determined following the guidance of ASC Topic 718;
using the Black-Scholes option model (using a risk free interest rate of 2.63%,
volatility of 288.24%, exercise price of $0.45, current market values of $0.18
per share and an expected life of 3.5 years) with the value allocated to the
warrants reflected in Stockholders Equity and a debt discount.  Based upon
the respective fair values as of the original agreement dates $500,000 was
allocated to discounts associated with the common stock purchase warrants and
the beneficial conversion features.  Giving effect to the monthly
amortization of the discount, $446,420 of the discount remains to be amortized
over the remaining life of the debentures.  12    JAYHAWK
ENERGY, INC. Condensed Notes to Consolidated Financial
Statements (Unaudited) For the Three Months ended December 31,
2010 Note 8 -
Long-term Liabilities (continued) This $446,420
consists of the remaining unamortized imputed fair value of the common stock
purchase warrants of $223,210 and imputed fair value of the beneficial
conversion feature of $223,210.  These amounts are and will continue to be
amortized over the remaining life of the underlying convertible debentures. Note 9 - Asset
Retirement Obligation In the period in which an asset retirement
obligation is incurred or becomes reasonably
estimable, the Company recognizes the fair value of the liability if there is a
legal obligation to dismantle the asset and reclaim or remediate the property at
the end of its useful life. The Company estimates the timing of the asset
retirement based on an economic life determined by reference to similar
properties and/or reserve reports.  The liability amounts are based on
future retirement cost estimates and incorporate many assumptions such as
expected economic recoveries of oil and gas, time to abandonment, future
inflation rates and the adjusted risk-free rate of interest. When the liability
is initially recorded, the Company capitalizes the cost by increasing the
related property balances. This initial capitalized cost is depreciated or
depleted over the useful life of the asset. The Company has identified potential asset retirement obligations
at the Girard, Kansas and Crosby, North Dakota operating sites.  These
retirement obligations are determined based on the estimated cost to comply with
abandonment regulations established by the Kansas Corporation Commission and the
State of North Dakota.  The Company's engineers have estimated the cost, in
today's dollars, to comply with these regulations.  These estimates have
been projected out to the anticipated retirement date 15 years in the future, at
an assumed inflation rate of 1.5%.  The anticipated future cost of
remediation efforts in North Dakota, and Kansas, are $204,685, and $281,547,
respectively.  These amounts were discounted back at an assumed interest
rate of 10%, to arrive at a net present value of the obligation. The amount of
the annual increase in the obligation is charged to "accretion expense" and for
 the year ending September 30, 2011, is computed to be $14,084,
respectively. The ending balance of the asset retirement obligation at December
31, 2010 is $158,801.  The asset retirement obligation is included in the
Balance Sheet classification "Long-term Liabilities."  The following table
summarizes the change in the asset retirement obligation since the beginning of the fiscal year
ending September 30, 2010: December 31, 2010
September 30, 2010Beginning balance



$
             154,928

$
           140,844Liabilities incurred



-

-Liabilities settled



-

-Accretion expense



3,873

14,084Revision to estimated cash flows

-

-Totals




$
             158,801

$
           154,928  Note 10 - Common Stock Issuances and Private Placements:  The following
transactions reflect issuances of shares of the Companys common stock and are
presented by date of completion in chronological order.  Transactions
described as private placements were completed in reliance upon that certain
exemption from the registration and prospectus delivery requirements of the
Securities Act of 1933, which exemption is specified by the provisions of
Section 5 of that act and Regulation S.    13    JAYHAWK
ENERGY, INC. Condensed Notes to Consolidated Financial
Statements (Unaudited) For the Three Months ended December 31,
2010 Note 10 - Common Stock
(continued) Three Months Ending December
31, 2010 October 1, 2010 - The Company issued 124,999 shares
of  common stock in lieu of paying interest with cash, to holders of
 10% convertible debentures described in Note 8.  The interest totaled
$37,500 and was converted to shares at a price of $0.30 per common share. October 20, 2010 -The Company issued 111,000 shares of
common stock to one of the holders of a 10% convertible debentures, in
agreement with the terms thereof described in Note 8, who elected to convert the
principal amount of $20,000 to 111,000 shares.   These shares were
valued at $0.18 per share. October 21, 2010 -The Company issued 200,000 shares of
common stock to one of the holders of a 10% convertible debentures, in
agreement with the terms thereof described in Note 8, who elected to convert the
principal amount of $36,000 to 200,000 shares.   These shares were
valued at $0.18 per share. October 25, 2010 -The Company issued 1,125,000 shares of
common stock to three of the holders of a 10% convertible debentures, in
agreement with the terms thereof described in Note 8, who elected to convert the
principal amount of $202,500  to 1,125,000 shares.   These shares
were valued at $0.18 per share. October 27, 2010 -The Company issued 150,000 shares of
common stock to one of the holder of a 10% convertible debentures, in agreement
with the terms thereof described in Note 8, who elected to convert the principal
amount of $27,000 to 150,000 shares.   These shares were valued at
$0.18 per share. November 8, 2010 -The Company issued 55,556 shares of
common stock to one of the holders of a 10% convertible debentures, in
agreement with the terms thereof described in Note 8, who elected to convert the
principal amount of $10,000 to 55,556 shares.   These shares were
valued at $0.18 per share. November 24, 2010 -The Company issued 55,556 shares of
common stock to one of the holders of a 10% convertible debentures, in
agreement with the terms thereof described in Note 8, who elected to convert the
principal amount of $10,000 to 55,556 shares.   These shares were
valued at $0.18 per share. November 30, 2010 -The Company issued 55,556 shares of
common stock to one of the holders of a 10% convertible debentures, in
agreement with the terms thereof described in Note 8, who elected to convert the
principal amount of $10,000 to 55,556 shares.   These shares were
valued at $0.18 per share. December 7, 2010 -The Company issued 283,709 shares of
common stock to one of the holders of a 10% convertible debentures, in
agreement with the terms thereof described in Note 8, who elected to convert the
principal amount of $50,000 to 277,777 shares plus accrued interest of $944 to
5,932 shares.  These shares were valued at $0.18 per share. NOTE 11 - Stock Based Compensation  The Companys board of directors
approved a stock option plan on August 11, 2009.   The purpose of the
Plan is to provide employees and consultants of the Corporation and its
Subsidiaries with an increased incentive to make significant and extraordinary
contributions to the long-term performance and growth of the Corporation and its
Subsidiaries, to join the interests of employees and consultants with the
interests of the shareholders of the Corporation, and to facilitate attracting
and retaining employees and consultants of exceptional ability.
   The total number of shares available for grant under the terms
of the Plan is 4,000,000.  The stock option price shall be the Fair Market
Value of the share at the date of issuance, but may be changed by the Board of
Directors or designee from time to time.  The stock options are
non-transferable and shall expire not more than five (5) years from the date of
the granting.    14    JAYHAWK
ENERGY, INC. Condensed Notes to Consolidated Financial
Statements (Unaudited) For the Three Months ended December 31,
2010  NOTE 11 - Stock Based Compensation (continued)  The Company recognizes compensation
expense using the straight-line method of amortization.  Historically, the
Company has issued new shares to satisfy exercises of stock options and the
Company expects to issue new shares to satisfy any future exercises of stock
options.  During the year ended September 30,
2010, the Company granted  2,790,000 stock options to employees,
contractors, board members and consultants exercisable at a price of $0.20 per
share until September 2015.  At December 31, 2010, the Company had
2,790,000 options granted and outstanding.  The following table reflects the
summary of stock options outstanding at December 31, 2010 and changes during the
three months ended December 31, 2010: Number of shares under options
Weighted Average Exercise Price Per Share
Weighted Average Fair Value
Aggregate Intrinsic ValueBalance
outstanding, September 30, 2009



-

$
                -

$
                -

$
                -Forfeited




-

-

-

-Exercised




-

-

-

-Granted




2,790,000

0.20

558,000

438,873Balance
outstanding, September 30, 2010



2,790,000

0.20

558,000

$        438,873Forfeited




-

-

-

-Exercised




-

-

-

-Granted




-

-

-

-Balance
outstanding, December 31, 2010



2,790,000

$
             0.20

$        558,000

$        438,873  The fair value of
each option award is estimated on the date of grant using the Black-Scholes
option-pricing model using the assumptions noted in the following table.
 Expected volatilities are based on historical volatility of the Companys
stock.  The Company uses historical data to estimate option volatility
within the Black-Scholes model.  The expected term of options granted
represents the period of time that options granted are expected to be
outstanding, based upon past experience and future estimates and includes data
from the Plan.  The risk-free rate for periods within the expected term of
the option is based upon the U.S. Treasury yield curve in effect at the time of
grant.  The Company currently does not foresee the payment of dividends in
the near term.Changes in the subjective
input assumptions can materially affect the fair value estimate and, therefore,
the existing models do not necessarily provide a reliable measure of the fair
value of the Companys stock options  The fair value of the stock options
granted was estimated using the Black-Scholes option-pricing model and is
amortized over the vesting period of the underlying options.  The
assumptions used to calculate the fair value are as follows:    Year Ended September 30,
2010Dividend yield




-Expecteed volatility




99.30%Risk free interest rate




1.43%Expected life (years)




5 years        15    JAYHAWK
ENERGY, INC. Condensed Notes to Consolidated Financial
Statements (Unaudited) For the Three Months ended December 31,
2010  NOTE 11 - Stock Based Compensation (continued)  A summary of the status of the
Companys nonvested stock options outstanding at December 31, 2010 is presented
as follows: Number of options

Weighted Average Grant Date Fair
Value Per Share
Weighted Average Grant Date Fair
ValueNonvested, September 30, 2009




-


$
                    -

$
                    -Granted




2,790,000


0.20

558,000Vested




(1,275,000)


0.20

(255,000)Forfeited




-


-

-Nonvested, September 30, 2010




1,515,000


0.20

303,000Granted




-


-

-Vested




-


-

-Forfeited




-


-

-Nonvested, December 31, 2010




1,515,000


$
                0.20

$
          303,000  As of December
31, 2010, there was $185,027 of total unrecognized compensation cost related to
nonvested share-based compensation arrangements granted under the Plan.
 That cost is expected to be recognized over a weighted-average period of
 1.1  years.  The total fair value of options vested at December
31, 2010 was $303,000. Note 12 - Share
Purchase Warrants When warrants to purchase common stock at a specified exercise
price are sold the proceeds received are allocated between the value of the
stock and the value of the warrants.  To make this allocation,  the
Black-Scholes option pricing model is utilized.  This is a subjective
exercise involving the use of various estimates, including the risk-free
interest rate, the option or contract life, and the expected volatility of the
underlying security. In conjunction with the issuance of the $500,000 note payable,
described in Note 8, 55,335 warrants were issued for services provided in
execution of the debentures.  The warrants were valued at $9,456 using the
Black-Scholes option pricing model with the following assumptions:  risk
free interest rate of 0.067, volatility of 99%, exercise price of $0.28, current
market price of $0.45 per share and an expected life of 3.5 years.  The
warrants were expensed in the period ending December 31, 2010 and included in
"Other expense" on the Consolidated Statement of Operation. A summary of the Company's share purchase warrants outstanding at
December 31, 2010 is presented as follows: Broker Warrants
Broker Warrant Exercise
Price
Share Purchase Warrants
Warrant Exercise
PriceBalance, September 30, 2010




166,000

$
             0.45

2,000,000

$
             0.45Granted




55,335

$
             0.18

2,777,778

$
             0.18Exercised




-

-

-

-Forfeited




-

-

-

-Balance, December 31, 2010




221,335



4,777,778  16       JAYHAWK ENERGY, INC. Condensed Notes to Consolidated Financial
Statements (Unaudited) For the Three Months ended December 31,
2010 Note 13  Loss
per Common Share The Company follows ASC 260, Earnings Per Share which requires the
reporting of basic and diluted earnings/loss per share.  We calculate basic
loss per share by dividing the net loss by the weighted average number of
outstanding common shares during the period.  We calculate diluted loss per
share by dividing net loss by the weighted average number of outstanding common
shares, including all potentially dilutive securities during the period.
 For the periods ending December 31, 2010 and September 30, 2010 the
weighted average number of shares was 50,422,875 and 47,512,481, respectively.
 Additionally, all of the outstanding options and warrants have an
anti-dilutive effect on the per common share amounts. Note 14 -
Related Party Transactions On July 1, 2008, the Company subleased office space for $1,500 per
month from Marlin Property Management, LLC an entity owned by the spouse of
Jayhawk Energy's CEO.  The Company believes this office space and
facilities are sufficient to meet the Company's present needs, and do not
anticipate any difficulty securing alternative or additional space, as needed,
on terms acceptable to the Company.  In April 2009, the Company
renegotiated the monthly payment to $1,000 per month. Effective October 1, 2010,
lease payments returned to the previous amount of $1,500 per month. Accordingly,
our commitment to make these lease payments for the fiscal year ending September
30, 2011 is $18,000. Note 15 - Income
Tax The Company follows the
guidance of Topic 740, Income Taxes, to account for income taxes, which requires
the establishment of deferred tax assets and liabilities for the recognition of
future deductions or taxable amounts and operating loss and tax credit carry
forwards. Deferred federal income tax expense or benefit is recognized as a
result of the change in the deferred tax asset or liability during the year
using the currently enacted tax laws and rates that apply to the period in which
they are expected to affect taxable income. Valuation allowances are
established, if necessary, to reduce deferred tax assets to the amounts that
will more likely than not be realized.  Additionally, the Company follows
the guidance provided by ASC Topic 740 which recognizes that the ultimate
deductibility of positions taken or expected to be taken on a tax return is
often uncertain.  It provides guidance on when tax positions claimed by an
entity can be recognized (See Note 2, Summary of Significant Accounting Policies
 Income Tax Accounting for Uncertainty).  The Company's provision
for income taxes reflects the U.S. federal income taxes calculated at the
maximum federal corporate statutory rate of 34%, U.S. state taxes calculated at
the statutory rate of 4.15% net of any federal income tax benefit calculated at
their combined rates of 19.15% net of any U.S. federal income tax benefits.
These rates are the Company's effective tax rates. At December 31, 2010, the Company have available for federal
income tax purposes a net operating loss carry-forward of approximately
$6,852,770, expiring at various times from 2025 through 2028 that may be used to
offset future taxable income. Therefore, we have provided no provision for
income tax.  The computation and reconciliation with the operating losses
from inception is disclosed in the following table for the fiscal years ending
September 30, 2007 through 2010 and the three months ending December 31,
2010:       17     JAYHAWK ENERGY, INC. Condensed Notes to Consolidated Financial
Statements (Unaudited) For the Three Months ended December 31,
2010 Note 15 - Income
Tax (continued) 3 months ended December 31, 20102007

2008

2009

2010Net operating
loss before taxes:


$ (257,713)

$ (3,128,342)

$ (2,277,632)

$ (5,161,381)

$
        (765,499)Add back
temporary differences:Allowance for
impairment


-

1,474,000

-

811,339

-Excess
depreciation and amortization

-

129,106

370,776

-

-Expenses not
deducted currently


-

-

102,804

200,560

53,286Add back
permanent differences:


-

-

-

-

-Accretion and
amortization of note









-discount


-

-

522,248

759,146

269,628Other


40,000

4,154

750

-

-Net operating
loss to carry-forward


$ (217,713)

$ (1,521,082)

$ (1,281,054)

$ (3,390,336)

$
        (442,585) Deferred tax assets have been recognized for this net operating
loss carry-forward of approximately $578,300 at December 31, 2010.  This
has been calculated using effective tax rates of 34%.  We have not recorded
a benefit from the net operating loss carryforward because realization of the
benefit is uncertain and, therefore, a valuation allowance of $578,300 has
been provided for the deferred tax assets. The following table reports the carry
forward by year and the related deferred tax assets by year from April 5, 2004
(inception) through December 31, 2010: Tax Year End



NOL Carry-forward
Deferred Tax AssetSeptember 30, 2006 (from inception)

$
                32,433

$
                  11,027September 30, 2007

185,280

62,995September 30, 2008

1,521,082

517,168September 30, 2009

1,281,054

435,558September 30, 2010

3,390,336

1,152,714September 30, 2011 (to date)


442,585

150,479Total available



$
           6,852,770

$
             2,329,942Less: Valuation Allowance




(2,329,942)Net Deferred Tax Asset




$
                         - The Company analyzed its tax positions taken on it Federal and
State tax returns for the open tax years ending September 30, 2007, 2008, 2009
and 2010.  The Company determined that there are no uncertain tax positions
and that the Company should prevail upon examination by the taxing
authorities. At December 31, 2010, the Company has net operating loss carry
forwards of approximately $6,850,000, which expire in the years 2023 to 2030.
 The change in the allowance account from September 30, 2010 to December
31, 2010 was $150,749. Although the Company believes its estimates are reasonable, no
assurance can be given that the final tax outcome of these matters will not be
different than that which is reflected in the tax provisions.  Ultimately,
the actual tax benefits to be realized will be based on future taxable earnings
levels, which are difficult to predict. The Company may be assessed penalties and interest related to the
underpayment of income taxes.  Such assessments would be treated as a
provision of income tax expense on the Company's financial statements.
 Through the period ended, no income tax expense has been realized as a
result of the Company's operations and no income tax penalties and interest have
been accrued related to uncertain tax positions.  The Company files income
tax returns in the U.S. federal jurisdiction and in the State of Idaho.
 These filings are subject to a three year statute of limitations.
 Our evaluation of income tax positions included the fiscal years ended  18     JAYHAWK ENERGY, INC. Condensed Notes to Consolidated Financial
Statements (Unaudited) For the Three Months ended December 31,
2010 Note 15 - Income
Tax (continued) September 30, 2010,
2009, 2008 and 2007 which could be subject to agency examinations as of December
31, 2010.  No filings are currently under examination.  No adjustments
have been made to reduce the Company's estimated income tax benefit at fiscal
year end.  Any valuations relating to these income tax provisions will
comply with U.S. generally accepted accounting principles.  Note 15  Commitments and
Contingencies On July 1, 2008, the Company leased office space for a period of
three years for a fixed monthly rental of $1,500. Accordingly, our commitment to
make these lease payments for the fiscal year ending September 30, 2011 is
$18,000. Note 16  Subsequent Events January 10, 2011 -The Company issued 154,012 shares of
common stock to one of the holders of a 10% convertible debentures, in
agreement with the terms thereof referenced above in Note 8, who elected to
convert the principal amount of $25,000  plus accrued interest of $2,722
 to 154,012 shares.  These shares were all valued at $0.18 per
share.                  19    Item
2.  Managements Discussion and Analysis of Financial Condition and
Results of Operations   Results of Operations for the three ended December 31,
2010 and 2009  Management's Discussion
and Analysis of Financial Condition and Results of Operations should be read in
conjunction with the Consolidated Financial Statements and supplemental
information presented in our Annual Report for the period ending September 30,
2010, on Form 10-K, and the Forms 8-K and Forms 10-Q issued in the periods
subsequent to September 30, 2010.  Certain sections of Management's
Discussion and Analysis of Financial Condition and Results of Operations include
forward-looking statements concerning trends or events potentially affecting our
business.  These statements typically contain words such as
"anticipates," "believes," "estimates," "expects," "plans," "probable,"
"should," "could," "would," or similar words indicating that future outcomes are
uncertain.  In accordance with the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995, these statements are
accompanied by cautionary language identifying important factors, though not all
such factors, which could cause future outcomes to differ materially from those
set forth in the forward-looking statements.  Oil and Gas Properties During the year ending September 30, 2010, JayHawk drilled two
vertical wells on the Crosby property in order to develop the Mississippian
reservoir further within the pool.  The wells exhibited marginal production
potential after attempts to stimulate flow and are currently shut-in.  One
of these wells will be converted to water disposal in order to reduce operating
expense.  The second well is being considered for horizontal drilling to
test the potential for Bakken reservoir production on the land in which the
Company has acquired the Bakken drilling rights. The
second well which the Company is considering would test the Bakken
formation.  JayHawk, in its acquisition of leases during 2010, acquired
Bakken rights along with the Mississippian rights in section 28-164N-97W at the
Crosby property.  Activity in the Bakken has been moving northward from the
well developed Bakken fields in Mountrail and McKenzie Counties to the
south.  Recent drilling into the Bakken shale  formation and the
underlying Three Forks shale have yielded promising production results within 10
miles of the Crosby pool.  The
Company is also looking at strategies to redeploy redundant production equipment
on the property in order to streamline the production system and to increase
overall efficiency. Revenues For the three months ending December 31, 2010
and 2009, revenues, reported as JayHawk's net working interest were $206,038 and
$333.869 respectively.  The comparative volume of oil and gas delivered and
the average prices received during each of the two respective three month
periods of 2010 and 2009, are disclosed in the following table: Volumes



Average Prices


Gross Revenue2010

2009

2010

2009

2010

2009Oil Sales (in
barrels)


3,011

4,928

$
         62.53

$
           60.98

$      188,270

$       300,492Gas Sales (in
thousand cubic feet)


4,915

8,459

$
           3.62

$
              3.95

17,768

33,377Total Gross
Receipts










206,038

333,869Less:working
& royalty interests










(126,573)

(130,185)Less:severance
taxes










(9,154)

(21,981)Net Revenues
to JayHawk










$ 79,465

$ 203,684  Volumes of oil delivered
during the three month period ending December 31, 2010 are lower than the same
period in 2009 due to production operations being temporarily stopped by weather
conditions during the 2010 period.  Field prices (after delivery charges)
fluctuated from a low of $56.92 to a high of $69.80 during the three month
period ending December 31, 2010.  During the quarter ending December 31,
2009, these same field prices, after delivery charges, fluctuated between a low
of $57.52 to a high of $63.46.  Beginning in November of 2009, the gross
gas revenue are reduced by a 42.5% interest distributed to our joint venture
partner in Girard, Kansas.  Oil Revenues As
commented in Note 2 of the Condensed Notes to Consolidated Financial Statements
above, the Company recognizes revenues only to the extent of its net working
interest, which is the remainder after deduction of the outside working and
royalty interests and the deduction of severance and production taxes.  For the three month
period ending December 31, 2010, JayHawk sold a gross 3,011 Bbls.  This
production was sold at average prices of $62.52/Bbl.  During the comparable
period ending December 30, 2009 the quarterly sales volumes were 4,928 Bbls.
 Average prices received per barrel of crude oil were $60.97 for the three
months ending December 31, 2009.  Gas Revenues 
During the first quarter ending December 31, 2009,  the Company entered
into an agreement whereby 42.5 percent of the gas revenues generated from the
Girard properties were assigned to a joint venture partner in exchange for
$250,000.   20    Prices received for our gas production continue to be volatile.
 During the three months ending December 31, 2010,  they have
fluctuated between a low of $2.815 per mcf. and a high of $4.35 per mcf.  Production and
Operating Expenses Total operating expenses for the three months ended
December 31, 2010 and 2009 were $844,946 and $632,235, respectively.  The
expenses are segregated as follows: Quarter End December 31,
2009Quarter EndDecember 31, 2010Crosby, ND

Girard, KS

G&A

Total

TotalDirect Regional Costs




$
      35,692

$
          2,310

$
                   -

$
      38,002

$
           78,325Depreciation, depletion and amortization




99,750

107,306

2,997

210,053

291,926General and administrative expenses




-

-

230,713

230,713

209,781Other net (income) and expense




-

-

366,196

366,196

52,203Totals




$
     135,442

$
      109,616

$
      599,907

$     844,964

$
         632,235  Total production
expenses for the North Dakota oil  operations were $35,692 for the three
months ended December 31, 2010.  These expenses are approximately 50% less
than incurred in the comparative periods ending December 31, 2009.  The
Knudsen and Jenks wells  have been taken offline  and will remain
offline for the forseeable future during the aforementioned conversion to a
water disposal and the contemplated horizontal drill site.  These wells
were producing significant unanticipated volumes of water.  Consequently,
associated operating expenses on the Knudsen and Jenks wells have been
minimized. As well, overall oil volume and associated revenue has decreased from
the prior year by a similar percentage.  Also, the comparable three month
period during the first quarter 2010, included several weeks of negligible
production activities due to unfavorable weather conditions.  Relative to the
Companys Kansas natural gas activities, throughout the three month period
ending December 31, 2010, in accordance with the joint operating agreement, the
joint venture partner has paid the majority of all costs associated with those
operations.  This accounts for the reduction in production costs reflected
between the comparable three month period ending December 31, 2010 and 2009.  Production Expenses include direct costs and expenses such as field labor, fuel, power, well
repair and maintenance, and saltwater disposal.  The direct production
expenses are reported net of amounts charged to our non-operating partners for
their working interest share of applicable costs and expenses.  General and
Administrative Expenses include the cost of head office administration and
the salaries and wages paid senior management and administrative staff.  A
comparative analysis of the general and administrative expense for the three
month period ending December 31, 2010 and 2009 is provided in the following
table: Three Months Ending
Three Months EndingDecember 31, 2010

December 31, 2009Compensation and payroll taxes



$
              143,595

$
                77,841Legal, professional and consulting fees



39,815

101,952Audit and public company expense




14,760

4,797Insurance




12,041

3,539All other corporate general and
administrative



20,502

22,031Total




$
              230,713

$
              210,161  General and
administrative expenses incurred for the corporate office and management
increased primarily as a result of stock option expense incurred for the period
ending December 31, 2010  that was not in effect during the comparable
period ending December 31, 2009.  Other net (income)
expense  for the three month period ending December 31, 2010 and 2009, are
detailed below.  Interest expense, discount amortization, financing costs
and the non-cash costs of debt conversion are more fully discussed in Note 7 to
the Condensed Notes to the Financial Statements.   21     Three Months Ending
Three Months EndingDecember 31, 2010

December 31, 2009Net interest and financing costs



$
                43,680

$
                25,759Debt conversion expense




95,348

-Debenture discount amortization and expense



174,279

-All other miscellaneous (income) &
expense



52,889

26,444Total




$
              366,196

$
                52,203  Net interest and
financing costs are higher for the three months ending December 31, 2010
compared to the same period ending December 31, 2009 primarily as a result of
the Company carrying a larger debt load.  As well, debenture discount
amortization and debt conversion expense are directly related to the associated
increase in long-term liabilities and conversion of a portion of the debt during
the three months ended December 31, 2010, whereas during the comparable three
months ending December 31, 2009, the company did not carry a debt load for the
majority of the period.  Cash Flows, Liquidity and Capital Resources  As of December 31, 2010
our current assets totaled $312,574 consisting of cash, $221,355, accounts
receivable, $87,721, and prepaid expenses, $3,498.  At the same time the
Company's current liabilities were $1,266,196.  This working capital
shortage impairs the Company's ability to continue operating as a going concern.
 Future success and independence will be dependent upon the Company's
ability to obtain sufficient additional financing and upon achieving profitable
future operations.  At this time there is no assurance that the Company
will be able to achieve these objectives.  Net cash used by
operating activitiestotaled $312,155 for the three months ending
December 31, 2010, compared to $67,614 provided by operating activities for the
three month period ending December 31, 2009.  During the three month period
end December 31, 2010 accounts payable decreased by $34,172.  Net cash used in
investing activities totaled $22,770 during the three months ending December 31,
2010 as compared to $20,380 in the same period ending December 31, 2009.  Cash
in the amount of $500,000 was provided by financing activities during the three
months ending December 31, 2010.  During the comparable period ending
December 31, 2009, $900,000 was provided by financing activities.  Also see
Note 8, Long-term Liabilities, in the Condensed Notes to Consolidated Financial
Statements.  The net change in cash
and cash equivalents is the sum of cash provided by operating and financing
activities and used in investing activities, or a net total of $165,075 which is
the increase in the Company's cash balance of $56,280 existing at September 30,
2010, to the cash balance at December 31, 2010 of $221,355.  Off-Balance Sheet Arrangements  We have no off-balance sheet
arrangements.  Item 3. Quantitative and Qualitative Disclosures
About Market Risk  We have no investments, trading or
non-trading, that would be sensitive to market risk.  Item 4. Controls and Procedures  (a) Evaluation of
disclosure controls and procedures - We maintain controls and procedures
designed to ensure that information required to be disclosed in the reports that
we file or submit under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
rules and forms of the Securities and Exchange Commission.  Based upon the
evaluation of those controls and procedures performed as of December 31, 2010,
the date of this report, our chief executive officer concluded that our
disclosure controls and procedures were effective to allow timely decisions
regarding required disclosure.   22    (b) Changes in internal controls  Our management,
including the CEO and CFO, identified no change in our internal control over
financial reporting that occurred during the Companys fiscal quarter ended
December 31, 2010 that has materially affected, or is reasonably likely to
materially affect, the Companys internal  control over financial
reporting.   PART II  OTHER INFORMATION  Item 1. Legal Proceedings.  None.  Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds.  None.  Item 3.  Defaults Upon Senior
Securities  None.  Item 4.  Submission of Matters to Vote of
Security Holders  None.  Item 5.  Other Information  None.  Item 6.  Exhibits  31.1          Rule
13a - 14(a) / 15d - 14(a) Certification of CEO  32.1          Section
1350 Certification of CEO                           23       SIGNATURES  In accordance with the requirements of the
Securities Exchange Act of 1934, the registrant caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.  JayHawk Energy, Inc.,
a Colorado corporationDate: February 14, 2011
By:
/s/ Lindsay E. GorrillLindsay E. Gorrill
Principal Executive Officer,
President and a Director       24