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


                                   FORM 10-KSB

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

                     For the fiscal year ended May 31, 2006


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

<TABLE>
<CAPTION>
<S>                                      <C>                                   <C>
======================================== ===================================== =====================================
               DELAWARE                                0-21210                              84-0922335
               --------                                -------                              ----------
---------------------------------------- ------------------------------------- -------------------------------------
    (State or other jurisdiction of            (Commission File Number)         (IRS Employer Identification No.)
            incorporation)
======================================== ===================================== =====================================
</TABLE>


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


Securities registered under Section 12 (b) of the Exchange Act:

                                      NONE

Securities registered under Section 12 (g) of the Exchange Act:

                          COMMON STOCK $.0001 PAR VALUE


Check  whether  the issuer  (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 ___
<PAGE>

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure  will be contained,  to
the best of the  registrant's  knowledge,  in  definitive  proxy or  information
statements  incorporated  by  reference  in Part III of this Form  10-KSB or any
amendment to this Form 10-KSB. [x]

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

                              Yes ___             No _X_

State the issuer's revenues for the most recent fiscal year.  $407,304

State the aggregate market value of the voting and non-voting common equity held
by non-affiliates  computed by reference to the price at which the common equity
was sold,  or the average bid and asked  price of such  common  equity,  as of a
specified  date within the past 60 days. As of last trade on September 12, 2006:
$6,630,454 (132,609,081 shares at $.05 / share)

State the number of shares outstanding of each of the issuer's classes of common
equity,  as of the latest  practicable  date:  154,937,836  common  shares as of
September 12, 2006.



                                TABLE OF CONTENTS

                                     PART I

                                                                           Page

Item 1.    Description of Business............................................3
Item 2.    Description of Property............................................5
Item 3.    Legal Proceedings..................................................5
Item 4.    Submission of Matters to a Vote of Security Holders................5

                                       2
<PAGE>

                                     PART II

Item 5.    Market for Common Equity and Related
            Stockholder Matters...............................................6
Item 6.    Management's Discussion and Analysis of
            Financial Condition and Results of Operations.....................7
Item 7.    Financial Statements...............................................13
Item 8.    Changes In and Disagreements with Accountants
            on Accounting and Financial Disclosure............................14



                                    PART III

Item 9.    Directors, Executive Officers, Promoters and Control
            Persons; Compliance With Section 16(a) of the
            Exchange Act......................................................14
Item 10.   Executive Compensation.............................................17
Item 11.   Security Ownership of Certain Beneficial Owners
            and Management....................................................19
Item 12.   Certain Relationships and Related Transactions.....................21
Item 13.   Exhibits, and Reports on Form 8-K..................................23
Item 14.   Principal Accountant Fees and Services.............................24

PART I

Item 1. BUSINESS

The predecessor of Jacobs Financial Group, Inc. ("JFG" or the "Company"),  NELX,
Inc.,  was  incorporated  in the  State  of  Kansas  in  March  1983  as  Nelson
Exploration,  Inc. for the purpose of  acquiring,  dealing in, and if warranted,
developing oil and gas properties.  In October 1993 the Company changed its name
to NELX, Inc. Prior to May 2001, the Company owned certain non-producing oil and
gas properties as well as various real estate properties. Due to continuing lack
of capital partners for oil and gas exploration and/or real estate  development,
in fiscal year 1997 the Company  turned its attention to divesting its interests
in said properties.  For the next three years,  the principal  activities of the
Company  involved  disposing  of assets,  settling  claims and  liabilities  and
considering  potential  business  combinations  with  related  or  complementary
businesses. During fiscal year 2001, the Company's principal assets consisted of
a leasehold  interest in an  undeveloped  mineral spring in Arkansas and certain
oil and gas properties located in West Virginia. The oil and gas properties were
sold in May 2001.

On May 29, 2001,  the Company  acquired two  businesses,  FS  Investments,  Inc.
("FSI")  and  Jacobs & Company  ("Jacobs & Co." or "J&C"),  in  exchange  for 75
million shares of common stock of NELX. The  transaction  was accounted for as a
recapitalization of FSI and Jacobs & Co. effected by a reverse acquisition.  For
accounting purposes,  NELX was treated as the acquiree, and no goodwill or other
intangible asset was recorded.

FSI,  incorporated  in 1997 in West  Virginia,  is a  holding  company  that was
organized to develop  surety  business  through the formation or  acquisition of
subsidiaries   engaged  in  the  issuance  of  surety  bonds  collateralized  by
investment accounts that are professionally  managed by Jacobs & Co. Through its
wholly-owned  subsidiary,  Triangle Surety Agency,  Inc.  ("Triangle  Surety" or
"TSA"),  FSI is actively  engaged in the placement with  insurance  companies of
surety bonds, with an emphasis on clients engaged in regulated industries.

                                       3
<PAGE>

Jacobs  & Co.,  incorporated  in  1988  in West  Virginia,  is a SEC  registered
investment advisory firm whose executive offices are located in Charleston, West
Virginia.  Jacobs & Co.  provides  fee based  investment  advisory  services  to
institutions  and  individuals,  including the Jacobs & Company Mutual Fund (the
"J&C Fund" or the "Fund"),  which was  organized in June 2001 as a series of the
Advisors Series Trust. On June 27, 2005, the Fund was reorganized as a series of
Northern Lights Fund Trust.

Since the May 29, 2001 business combination,  the Company has expanded its focus
to include the ongoing  business and  activities  of FSI and Jacobs,  namely the
surety business and investment management and related services.

On or about  December 29, 2005,  NELX was merged with and into its  newly-formed
wholly-owned  subsidiary,  Jacobs Financial Group, Inc., a Delaware corporation.
JFG survived the merger as the  Registrant.  The merger effected a change in the
Registrant's name, a change in the state of incorporation of the Registrant from
Kansas to  Delaware,  an  amendment  to the  Articles  of  Incorporation  of the
Registrant and an amendment to the Bylaws of the Registrant.

On December 30, 2005, the Company acquired all of the outstanding  stock of West
Virginia Fire and Casualty  Company  (WVFCC),  an insurance  company licensed to
engage in business in West Virginia,  Ohio and Indiana. The acquisition followed
the approval of the  transaction  by the West Virginia  Department of Insurance,
which included  approval of the Company's  business plan to operate the acquired
insurance company as a surety.  The financing of the transaction  consisted of a
combination  of a private  placement of preferred  stock and warrants to acquire
common stock of the Company in exchange for cash totaling  $3,335,000,  of which
$2,900,000  (including a $40,000 deposit paid in prior periods) was used for the
acquisition of WVFCC. In addition,  approximately  $3,668,000 of indebtedness of
the Company was converted  into  preferred  stocks and  warrants.  Following the
acquisition,  the name of WVFCC was changed to First Surety Corporation  ("First
Surety" or "FSC").

The  acquisition of FSC allows the Company to pursue its business plan to market
and issue surety bonds utilizing programs developed by the Company's subsidiary,
FSI. FSI's  subsidiary,  Triangle  Surety,  serves as managing general agent for
First  Surety,  and  collateralized  accounts  required  as a  condition  of the
issuance  of surety  bonds under FSC's  programs  are managed by the  investment
advisory   subsidiary  of  the  Company,   Jacobs  &  Company.   The  successful
implementation  of the business  plan by the Company  will create three  primary
revenue  streams,  insurance  premium for the issuance of surety  bonds,  agency
commissions for the production and placement of bonds,  and investment  advisory
fees relating to the management of the collateral  accounts  securing the surety
bonds. The bonding programs offered are specialized in nature and will initially
be targeted to the coal and oil & gas industries.

The Company is  headquartered  in  Charleston,  West  Virginia,  and through its
wholly-owned  subsidiaries,  employs  a total of eight (8)  employees,  of which
seven (7) are full time employees.

                                       4

<PAGE>

Item 2. PROPERTIES

Through its wholly-owned  subsidiary,  Crystal Mountain Water, Inc. ("CMW"), the
Company has an undeveloped  leasehold interest in a mineral water spring located
near Hot Springs,  Arkansas. Under this leasehold arrangement,  CMW is obligated
for minimum lease payments in the amount of  approximately  $150 per month until
October  2006,  with  automatic  options  to extend  the  leasehold  for two (2)
additional  ten-year terms extending  through October 2026. CMW has the right to
cancel the lease upon sixty (60) days written  notice at any time.  The property
is presently not being  actively  explored or developed.  During the 2002 fiscal
year,  management  evaluated the lease and  determined the  development  was not
currently feasible.  Accordingly, the Company recorded an impairment of $116,661
to its  investment in the lease.  Opportunities  will continue to be explored as
they arise with respect to the development or sale of the leasehold interest.

The  Registrant,  through its insurance  subsidiary,  holds  investments in real
estate mortgages  (primarily single family first mortgage dwellings) through its
purchase of U. S. government agency mortgage-backed/asset-backed securities that
have  guaranteed  principal and interest by the U. S.  government.  There are no
limitations or restrictions  with respect to such  investments.  Other non U. S.
government guaranteed investments in mortgage-backed/asset-backed securities are
limited or restricted by policy so that the aggregate  investment  secured by or
evidencing a single interest in a single asset or single pool of assets does not
exceed 5% of assets.  Such  investments  are held  primarily  for income  versus
capital appreciation.

Although the Registrant,  through its insurance subsidiary, has no plans to make
investments in mortgage loans or income-producing real estate at this time, such
investments are limited by policy so as not to exceed 5% of assets.


Item 3. LEGAL PROCEEDINGS

None.


Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

                                       5
<PAGE>

                                     PART II

Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's  common stock is traded in the  over-the-counter  market under the
symbol JFGI (OTC Bulletin Board Symbol). The table below sets forth the high and
low price information for the Company's common stock for the periods  indicated.
Such prices are inter-dealer  prices,  without mark-up,  mark-down or commission
and may not represent actual transactions.

                                              HIGH                      LOW
                                              -----                     ----

Fiscal Year Ended May 31, 2006

         4th Quarter                           .09                       .03
         3rd Quarter                           .105                      .05
         2nd Quarter                           .105                      .006
         1st Quarter                           .0135                     .009


Fiscal Year Ended May 31, 2005

         4th Quarter                           .013                      .006
         3rd Quarter                           .013                      .007
         2nd Quarter                           .02                       .006
         1st Quarter                           .05                       .015

As of May 31,  2006,  there  were  approximately  925  holders  of record of the
Company's common stock.

The Company has neither declared nor paid any cash dividends on its common stock
during  the last  two  fiscal  years,  and it is not  anticipated  that any such
dividend will be declared or paid in the foreseeable future.

As of May 31, 2006, shares of the Company's common stock authorized for issuance
under the  Registrant's  2005 Stock  Incentive  Plan,  that was  approved by the
stockholders of the Company on December 8, 2005, are as follows:

                      EQUITY COMPENSATION PLAN INFORMATION
<TABLE>
<CAPTION>
-------------------------------------------- ------------------------------------------ ------------------------------------------
       Number of Shares to be Issued                     Weighted-Average                           Number of Shares
             Upon Exercise of                            Exercise Price of                         Remaining Available
            Outstanding Options                         Outstanding Options                        For Future Issuance
------------------------------------------- ------------------------------------------ ------------------------------------------
<S>             <C>                                           <C>                                      <C>
                24,400,000                                    .06877                                   10,600,000
-------------------------------------------- ------------------------------------------ ------------------------------------------
</TABLE>

                                       6
<PAGE>


Item 6. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

FISCAL 2006 DEVELOPMENTS

Since its acquisition of FSI and Jacobs in May 2001, the Company has focused its
efforts on the  expansion  of the ongoing  business  activities  FSI and Jacobs,
namely  insurance  (surety) and  investment  management  and advisory  services.
Central to its business  plan was the  acquisition  of an  insurance  company to
issue surety bonds utilizing  collateralized  surety programs  developed by FSI,
and marketed by Triangle Surety, with collateral accounts managed by Jacobs.

In May 2004,  the Company  entered  into an  Exclusivity  Agreement  with Celina
Mutual Insurance Company  ("Celina")  granting the Company an exclusive right to
acquire West Virginia Fire & Casualty Company  ("WVFCC");  and in July 2005, the
Company  entered  into a  definitive  purchase  agreement  with  Celina  for the
acquisition  of WVFCC  subject  to the  terms  and  conditions  set forth in the
agreement.

On December  30, 2005,  the Company  acquired  all of the  outstanding  stock of
WVFCC,  an insurance  company  licensed to engage in business in West  Virginia,
Ohio and Indiana.  The  acquisition  followed the approval of the transaction by
the West  Virginia  Department  of  Insurance,  which  included  approval of the
Company's  business plan to operate the acquired  insurance company as a surety.
The  financing  of the  transaction  consisted  of a  combination  of a  private
placement of preferred stock and warrants to acquire common stock of the Company
in exchange  for cash  totaling  $3,335,000,  of which  $2,900,000  (including a
$40,000 deposit paid in prior periods) was used for the acquisition of WVFCC. In
addition,  approximately $3,668,000 of indebtedness of the Company was converted
into preferred stocks and warrants. Following the acquisition, the name of WVFCC
was changed to First Surety Corporation (FSC).

The acquisition of WVFCC consisted of the purchase of marketable investments and
insurance licenses and did not include any existing policies or customer base as
the insurance  lines of business  offered by WVFCC are not insurance  lines that
the Company intends to pursue.  Since its  acquisition,  the Company has focused
its primary efforts on the initial  development and marketing of the business in
West  Virginia and laying  groundwork  for the future  expansion of the business
into other states.


RESULTS OF OPERATIONS  AND FINANCIAL  CONDITION AS OF AND FOR THE YEAR ENDED MAY
31, 2006

RESULTS OF OPERATIONS

The Company  experienced a loss of $1,874,186  (after  accretion of  mandatorily
redeemable  convertible preferred stock,  including accrued dividends) in fiscal
2006 as compared with a loss of $1,120,133 in fiscal 2005.  While total revenues
increased  from  $260,000  in fiscal  2005 to  $407,000  in fiscal  2006,  total
expenses  increased from $1,380,000 in fiscal 2005 to $1,901,000 in fiscal 2006.
The  increase in  revenues is  attributable  to the  acquisition  of FSC and the
surety  business it has secured since January 1, 2006.  The increase in expenses
is largely attributable to expenses incurred relating to the acquisition of FSC,
namely legal,  consulting  and  professional  expense  incurred in due diligence
efforts,   structuring  financing  for  the  transaction,  and  preparation  and

                                       7
<PAGE>

assistance with regulatory filings necessary to gain regulatory approval for the
acquisition.

FINANCIAL CONDITION

RESTRUCTURED FINANCING

In conjunction  with the  acquisition of FSC, a  restructuring  of the Company's
financing was accomplished  through the private placement of preferred stock and
warrants to acquire  common stock of the Company in exchange  for cash  totaling
$3,335,000.  $2,860,000 was used in the acquisition and funding of the insurance
subsidiary,  with the remaining  funds used to pay expenses  attributable to the
acquisition and the funding of on-going operations. Additionally,  approximately
$3,668,000 of indebtedness of the Company was converted into preferred stock and
warrants   reducing  the  Company's   borrowings  under   short-term   financing
arrangements to approximately $167,000.

As an  inducement  to the  initial  preferred  stock  shareholders,  warrants to
purchase  45,402,996 shares of common stock at an exercise price of one-tenth of
one cent ($.001) per share were issued with a five-year  expiration period. Such
warrants were valued at approximately  $533,000 using the Black-Scholes  pricing
model. Additionally,  the Series B preferred shares were issued at a twenty-five
percent  (25%)  discount  to the  stated  face  value  of  $1,000  per  share or
approximately  $2,217,650  in  total.  Additional  shares  of the  Series B were
subsequently  sold  at  a  discount  of  approximately  eight  percent  (8%)  or
approximately  $18,000.  Accordingly,  the recorded values of the Series A and B
preferred stock are being increased to their stated liquidation values using the
interest  method over a period of five years and such amounts are categorized as
accretion  of  mandatorily   redeemable  preferred  stock  in  the  consolidated
statement of operations.

The  preferred  stock  issued  consisted  of  non-voting  Series A and  Series B
redeemable  preferred stock; the Series A designation  being entitled to receive
cumulative dividends at the rate of 4.00% per annum and the Series B designation
being entitled to receive  cumulative  dividends at the rate of 8.00% per annum,
with both the Series A and B designations having equal ranking and preference as
to dividends  and  liquidation  rights and in priority to the  Company's  common
stockholders.  At this time, management has chosen to defer payment of dividends
to the  holders of the Series A and B  preferred  stock  until the  Company  has
sufficient cash flow from operations to service the obligation.

The Series A designation was designed for issuance to principals desiring surety
bonds  under FSC's  partially  collateralized  bonding  programs.  As  designed,
proceeds from the sale of Series A preferred  stock is  down-streamed  to FSC to
increase  its capital and  insurance  capacity,  unless used to redeem  Series B
preferred  stock (Company option to redeem) to the extent that proceeds from the
sale of  Series B  preferred  shares  was used in the  initial  acquisition  and
funding of FSC.  The Series A  designation  contains  a  conditional  redemption
feature  providing  for the  redemption of the Series A shares at any time after
the seventh (7th) anniversary of the Issue Date,  provided that the principal no
longer  requires  surety bonds issued by FSC.  Furthermore,  once redeemed,  the
principal will no longer be eligible to participate in partially  collateralized
bonding  programs offered by FSC. Surety bonds currently being issued by FSC are
for coal  mining and  reclamation  permits,  which are  long-term  in nature and
continually  evolve  whereby  outstanding  bonds are  periodically  released  as
properties  are mined and  reclaimed  and new bonds issued for  properties to be
mined in the future.  Accordingly,  this source of financing  was designed to be
long-term by nature.

                                       8
<PAGE>

The Series B  designation  was  designed  for  issuance to  investors in JFG and
contains both conversion  rights to common stock and redemption  features.  Each
share of the  Series B  preferred  stock is  convertible,  at the  option of the
holder,  into 1,000 shares of JFG common stock and can be converted at any time.
Additionally, the Series B preferred stock can be redeemed, at the option of the
holder,  at  full-face  value  plus  accrued  and unpaid  cumulative  dividends,
commencing  with the fifth (5th)  anniversary  of the original  issue date.  The
Company has the option to redeem the Series B preferred shares at any time after
the first (1st)  anniversary of the original  issue date,  subject to the holder
exercising  its  conversion  privileges  prior to the  stated  redemption  date.
Management's  ability to execute its business plan and increase the market value
of its common stock will largely determine whether the Series B preferred shares
are converted to common shares or eventually redeemed.

RESTRICTIONS ON USE OF ASSETS

Regulatory  approval of the  acquisition  of FSC by JFG was  provided  under the
condition  that no  dividends  or monies are to be paid to JFG from FSC  without
regulatory  approval.  Accordingly,  cash,  marketable  investments,  and  other
receivables  held by FSC are restricted from use to fund operations or meet cash
needs outside of the insurance company's domain. As of May 31, 2006, such assets
amounted to approximately $3.6 million.


CRITICAL ACCOUNTING POLICIES AND ESTIMATES

INTANGIBLE ASSETS

In exchange for the purchase  price of $2.9 million for the  acquisition of FSC,
the Company  received cash and  investments  held by FSC totaling $2.75 million,
with the difference  being  attributed to the 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 May 31, 2006.

FSC is currently  licensed to write coal  reclamation and mining surety bonds in
West Virginia. By nature,  reclamation of land that has been disturbed by mining
operations  is  a  highly  regulated   process  by  federal,   state  and  local
jurisdictions  and such bonds are  generally  long-term  in nature  with  mining
operations  and  reclamation  work being  conducted in unison as the property is
being mined.  Additionally,  no two  principals  and properties are alike due to
varied company structures and unique geography and geology of each site.

                                       9
<PAGE>

In underwriting  such bonds,  management  obtains  estimates of costs to reclaim
such  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 for the benefit of FSC as collateral for the surety
bond, to mitigate the exposure to significant loss. Should the principal default
in its obligation to reclaim the property as specified in the mining permit, FSC
would then use the funds held in the collateral  account to reclaim the property
or forfeit 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 held has experienced significant deterioration in value.

In establishing its reserves for losses and loss adjustment expense,  management
continually   reviews  its  exposure  to  loss  based  on  reports  provided  in
conjunction with the periodic monitoring and inspections performed, the value of
the  collateral  accounts  held for the  benefit  of FSC,  along  with  industry
averages and  historical  experience.  Initially,  management has estimated such
losses based on industry experience, adjusted for factors that are unique to the
Company's approach, and in consultation with consulting actuaries experienced in
the surety field.


LIQUIDITY AND GOING CONCERN

The  Company  has  experienced  significant  operating  losses of  approximately
$1,874,000  (after  accretion of mandatorily  redeemable  convertible  preferred
stock,  including accrued  dividends) and $1,120,000 for the years ended May 31,
2006  and  2005.  And  while   short-term   borrowings  at  year-end  have  been
substantially refinanced by conversion to preferred stock, the Company continues
to face significant  working capital  deficiencies and adequate funds to pay its
preferred stock dividend obligation. While management expects revenue growth and
cash flow to increase  significantly as its business plan is fully  implemented,
it is  anticipated  that  losses  will  continue  until FSC is able to develop a
substantial book of business.

In order to fully  implement  its business  plan,  management  continues to seek
additional  capital to increase the capacity of its insurance  subsidiary and to
fund continuing operations as the business is being fully developed. As a result
of being able to share  resources  (primarily  personnel) to minimize  operating
costs,  management  expects  FSC to be at  break-even  or cash flow  positive in
fiscal  2007,  although the use of its assets and profits are expected to remain
restricted  to its  stand-alone  operation by  regulatory  authority.  And while
growth of the FSC business  will provide  additional  cash flow to the Company's
other  subsidiaries,  Jacobs and Triangle Surety, it is anticipated that working
capital  deficiencies  will  need  to be  met  either  through  the  raising  of
additional  capital  or  borrowings.  However,  there can be no  assurance  that
additional  capital (or debt financing) will be available when and to the extent
required or, if  available,  on terms  acceptable  to the Company.  Accordingly,
concerns  as to the  Company's  ability  to  continue  as a  going  concern  are
substantial.   The  consolidated   financial   statements  do  not  include  any
adjustments that might result from the outcome of this uncertainty.

                                       10
<PAGE>


COMPARISON OF RESULTS OF OPERATIONS FOR FISCAL 2006 WITH 2005

The Company  experienced a loss of $1,874,186  (after  accretion of  mandatorily
redeemable  convertible preferred stock,  including accrued dividends) in fiscal
2006 as compared with a loss of $1,120,133 in fiscal 2005.

REVENUES

Revenues in fiscal 2006 amounted to $407,304 as compared with $260,347 in fiscal
2005. The overall increase in revenues is attributable to the acquisition of FSC
and the surety business it has secured since January 1, 2006.

Revenues from the investment  management segment, net of advisory referral fees,
were  $206,922  in  fiscal  2006 as  compared  with  $238,035  in  fiscal  2005,
representing a decrease of $31,113. As investment advisory fees are based on the
market  value of assets under  management,  some  fluctuation  will occur due to
overall market conditions. For the most part, however, such revenues will remain
relatively  constant from quarter to quarter with any large  fluctuations  being
attributable to the growth or loss of assets under  management.  The decrease in
revenues is substantially attributable to the loss of certain managed collateral
accounts  (and  related   personal   accounts)   resulting  from  expiration  or
non-renewal  of the surety bonds that such accounts  secured.  While the lack of
availability  of  bonding  in  the  marketplace   prevented  the  retention  and
replacement  of this  business,  the Company's  acquisition of FSC at the end of
2005,  with its primary focus being  directed  towards the  financial  assurance
market,  should help  alleviate  loss of business  such as occurred  during this
period in the future.

Revenues  from the issuance or placement  of surety  bonds  (earned  premium and
agency  commissions)  were  $147,201 in fiscal 2006 as compared  with $22,254 in
fiscal 2005, representing an increase of $124,947. Of this increase, $130,107 is
attributable  to the  acquisition  of FSC and the surety  business that has been
secured by its managing  general  agent,  Triangle  Surety,  with the  remaining
decrease of $5,160  representing  a decrease in  commissions  earned by Triangle
Surety in fiscal  2006.  While  ultimately  the revenue for this  segment of the
business is expected to be more "seasonable" from quarter to quarter, due merely
to the  timing  of the  issuance  or  renewal  of bonds  issued or placed by the
Company,  the increase during this period reflects the acquisition of FSC at the
end of December 2005 and commencement of operations of FSC in February 2006. Due
to the nature of surety bonds,  fluctuations  in revenue for comparable  periods
largely reflect the overall growth or loss of business.

Net  investment  income of $53,181  represents  the  earnings on the  investment
portfolio of FSC since its acquisition at the end of December 2005.

EXPENSES

Incurred  policy losses  represent  the  provision for loss and loss  adjustment
expense for  "incurred but not reported"  (IBNR) losses  attributable  to surety
bonds issued by FSC since its  acquisition in December 2005. Such estimates have
been based on industry  averages  adjusted  for  factors  that are unique to the
FSC's underwriting approach.

                                       11
<PAGE>

Insurance policy acquisition costs in the amount of $18,877 represent charges to
operations  for  underwriting  expense and premium  tax  attributable  to surety
polices  issued  by FSC and are  recognized  ratably  over the  period  in which
premiums are earned.

General and administrative  expenses for fiscal 2006 were $1,378,730 as compared
with   $902,444  for  fiscal  2005,   representing   an  increase  of  $476,286.
Approximately  $204,000 of this increase is largely  attributable to an increase
in various  professional  fees,  attributable  in  significant  part to expenses
incurred in the  negotiation,  documentation,  and consummation of the Company's
acquisition of FSC, including  regulatory  approval of such acquisition.  Salary
and compensation  expense increased  approximately  $89,000 relating to staffing
additions,   temporary  services,  and  increases  in  salaries  and  wages  and
approximately  $118,000  relating to stock option  compensation  expense.  Other
general and administrative expense in the amount of approximately $24,000 can be
attributed to the operation of FSC.

J&C is the investment  advisor to the Jacobs & Company Mutual Fund (the "Fund").
While  the Fund is  responsible  for its own  operating  expenses,  J&C,  as the
advisor,  has agreed to limit the Fund's aggregate annual operating  expenses to
2.00% of the average net assets.  Under this expense limitation  agreement,  J&C
absorbed $138,695 of the Fund's operating expenses in fiscal 2006 as compared to
$147,870 in fiscal 2005. As the Fund grows in size (of assets under management),
expenses  (in excess of the 2% level)  absorbed by J&C will  decrease  until the
Fund  reaches  sufficient  size to support  its  on-going  operating  costs.  In
contrast, as the Fund grows in size, revenues from investment advisory fees will
increase. Additionally, should the Fund's operating expense ratio fall below the
2.00% level,  the costs absorbed by the Company are now reimbursable to it for a
period of up to three years. In fiscal 2006, the Fund's investment advisory fees
amounted to $52,839 as compared to $72,479 in fiscal 2005.

Interest  expense in fiscal 2006  amounted to $345,031 as compared with $324,266
in fiscal  2005,  representing  an increase of $20,765.  The increase is largely
attributable  to increased debt levels  incurred during the year to fund ongoing
operations  and  additional   consideration  provided  in  connection  with  the
obtaining additional borrowings.

ACCRETION AND DIVIDENDS

Accretion of mandatorily redeemable convertible preferred stock in the amount of
$380,171 is  comprised  of  accretion  of discount in the amount of $195,659 and
accrued but unpaid dividends on preferred stock in the amount of 184,512.


                                       12


<PAGE>


Item 7. FINANCIAL STATEMENTS

The following financial statements are included herein in response to Item 7:

                                                                           PAGE

         Table of Contents                                                  F-1

         Report of Independent Registered Public Accounting Firm            F-2
            Report of Independent Registered Public Accounting Firm         F-2a

         FINANCIAL STATEMENTS

         Consolidated Balance Sheet                                         F-3
         Consolidated Statement of Operations                               F-4
         Consolidated Statement of Cash Flows                               F-5
         Consolidated Statement of Mandatorily Redeemable
                  Preferred Stock and Stockholders' Equity                  F-6
         Notes to Consolidated Financial Statements                         F-7

         SCHEDULES

         Schedule I - Summary of Investments - Other than
                  Investments in Related Parties                            F-31
         Schedule II - Condensed Financial Information of
                  Registrant                                                F-32
         Schedule III - Supplementary Insurance Information                 F-34
         Schedule VI - Supplemental Information                             F-35




                                       13
<PAGE>
                               TABLE OF CONTENTS


                                                                           PAGE

         Table of Contents                                                  F-1

         Report of Independent Registered Public Accounting Firm            F-2
            Report of Independent Registered Public Accounting Firm         F-2a

         FINANCIAL STATEMENTS

         Consolidated Balance Sheet                                         F-3
         Consolidated Statement of Operations                               F-4
         Consolidated Statement of Cash Flows                               F-5
         Consolidated Statement of Mandatorily Redeemable
                  Preferred Stock and Stockholders' Equity                  F-6
         Notes to Consolidated Financial Statements                         F-7

         SCHEDULES

         Schedule I - Summary of Investments - Other than
                  Investments in Related Parties                            F-31
         Schedule II - Condensed Financial Information of
                  Registrant                                                F-32
         Schedule III - Supplementary Insurance Information                 F-34
         Schedule VI - Supplemental Information                             F-35







                                      F-1
<PAGE>

Malin, Bergquist & Company, LLP
Certified Public Accountants & Business Advisors



             Report of Independent Registered Public Accounting Firm



To the Board of Directors
Jacobs Financial Group, Inc.
Charleston, West Virginia

We have audited the accompanying  balance sheet of Jacobs Financial Group,  Inc.
as of May 31, 2006, and the related consolidated  statement of operations,  cash
flows and changes in  stockholders'  equity  (deficit)  for the year then ended.
These financial  statements are the responsibility of the Company's  management.
Our  responsibility  is to express an  opinion on these  consolidated  financial
statements based on our audit.

We conducted  our audit in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements  are free of material  misstatement.  The Company is not  required to
have,  nor were we engaged to perform,  an audit of its  internal  control  over
financial reporting.  Our audit included  consideration of internal control over
financial  reporting  as  a  basis  for  designing  audit  procedures  that  are
appropriate  in the  circumstances,  but not for the  purpose of  expressing  an
opinion on the  effectiveness  of the Company's  internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a  test  basis,  evidence  supporting  the  amounts  and  disclosures  in the
financial statements. An audit also includes assessing the accounting principles
used and  significant  estimates made by  management,  as well as evaluating the
overall financial statement  presentation.  We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, the accompanying  consolidated  financial statements referred to
above present  fairly,  in all material  respects,  the  consolidated  financial
position of Jacobs  Financial  Group, Inc as of May 31, 2006, and the results of
their operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company  will  continue  as a  going  concern.  As  discussed  in  Note A to the
financial statements,  the Company's significant net working capital deficit and
operating  losses  raise  substantial  doubt  about its ability to continue as a
going  concern.  The financial  statements do not include any  adjustments  that
might result from the outcome of this uncertainty.



/s/Malin, Bergquist & Company, LLP

Pittsburgh, Pennsylvania
September 13, 2006


                                      F-2
<PAGE>
           REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




To the Board of Directors
Jacobs Financial Group, Inc.
Charleston, West Virginia


We have audited the  accompanying  consolidated  statements of operations,  cash
flows and changes in stockholders'  equity of Jacobs  Financial Group,  Inc. for
the year ended May 31, 2005. These financial  statements are the  responsibility
of the  Company's  management.  Our  responsibility  is to express an opinion on
these financial statements based on our audit.

We  conducted  our audit in  accordance  with  standards  of the Public  Company
Accounting  Oversight  Board (U.S.).  Those  standards  require that we plan and
perform the audit to obtain  reasonable  assurance  about  whether the financial
statements  are free of material  misstatement.  The Company is not  required to
have,  nor were we engaged to perform,  an audit of its  internal  control  over
financial reporting.  Our audit included  consideration of internal control over
financial  reporting  as  a  basis  for  designing  audit  procedures  that  are
appropriate  in the  circumstances,  but not for the  purpose of  expressing  an
opinion on the  effectiveness  of the Company's  internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a  test  basis,  evidence  supporting  the  amounts  and  disclosures  in the
financial statements. An audit also includes assessing the accounting principles
used and  significant  estimates made by  management,  as well as evaluating the
overall financial statement  presentation.  We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, the accompanying  consolidated  financial statements referred to
above present fairly,  in all material  respects,  the results of operations and
cash flows of Jacobs  Financial  Group,  Inc. for the year ended May 31, 2005 in
conformity with accounting principles generally accepted in the United States of
America.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company  will  continue  as a  going  concern.  As  discussed  in  Note A to the
financial statements,  the Company's significant net working capital deficit and
operating  losses  raise  substantial  doubt  about its ability to continue as a
going  concern.  The financial  statements do not include any  adjustments  that
might result from the outcome of this uncertainty.




/S/GORDON, HUGHES & BANKS, LLP
Greenwood Village, Colorado
July 21, 2005


                                      F-2a
<PAGE>
JACOBS FINANCIAL GROUP, INC.
CONSOLIDATED  BALANCE SHEET
<TABLE>
<CAPTION>



                                                                                                             MAY 31, 2006
                                                                                                         ------------------
ASSETS

INVESTMENTS AND CASH:

<S>                                                                                                       <C>
 Bonds held to maturity, at amortized costs                                                               $      1,029,964
  (market value at 05/31/06 $1,024,153)
 Mortgage-back securities held to maturity, at amortized costs                                                   1,360,778
  (market value at 05/31/06 $1,343,108)
 Short-term investments, at cost (approximates market value)                                                     1,196,111
 Cash                                                                                                                    -
                                                                                                         ------------------

                                                                   TOTAL INVESTMENTS AND CASH                    3,586,853

 Investment income due and accrued                                                                                  20,958
 Premiums and other accounts receivable                                                                             47,774
 Deferred policy acquisition costs                                                                                  70,399
 Furniture and equipment (net of accumulated depreciation of $101,500)                                              30,040
 Due from related party                                                                                            361,009
 Other assets                                                                                                       33,863
 Intangible assets                                                                                                 150,000
                                                                                                         ------------------

                                                                                 TOTAL ASSETS            $       4,300,896
                                                                                                         ==================


LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

 Reserve for losses and loss expenses                                                                     $         11,911
 Reserve for unearned premiums                                                                                     193,616
 Cash Overdraft                                                                                                    127,985
 Accrued expenses and professional fees                                                                            614,034
 Accounts payable                                                                                                  278,621
 Notes payable                                                                                                     158,232
 Accrued interest payable                                                                                           41,942
 Other liabilities                                                                                                 413,773
                                                                                                         ------------------

                                                                            TOTAL LIABILITIES                    1,840,114

SERIES A  PREFERRED  STOCK,  $.0001  par  value  per  share;  1  million  shares
authorized;  1,109 shares issued and  outstanding; stated  liquidation  value of
$1,000 per share                                                                                                 1,035,841

SERIES B PREFERRED STOCK,  $.0001 par value per share; 10,000 shares authorized;
9,095,599 shares issued and outstanding; stated liquidation value of $1,000 per
share                                                                                                            6,780,186
                                                                                                         ------------------

                                                 TOTAL MANDATORILY REDEEMABLE PREFERRED STOCK                    7,816,027

STOCKHOLDERS' EQUITY (DEFICIT)

 Common  stock,  $.0001  par value per  share;  490  million  shares  authorized;
  154,937,837  shares issued and  outstanding                                                                       15,494
 Additional  Paid In Capital                                                                                     1,856,929
 Accumulated deficit                                                                                            (7,227,668)
                                                                                                         ------------------

                                                          TOTAL STOCKHOLDERS' EQUITY (DEFICIT)                  (5,355,245)
                                                                                                         ------------------

                                          TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)           $       4,300,896
                                                                                                         ==================

</TABLE>


                 The accompanying notes are an integral part of
                    these consolidated financial statements.
                                      F-3
<PAGE>
JACOBS FINANCIAL GROUP, INC,
CONSOLIDATED STATEMENT OF OPERATIONS


<TABLE>
<CAPTION>


                                                                             YEAR ENDED MAY 31,
                                                                     --------------------------------
                                                                           2006              2005
                                                                     --------------    --------------
REVENUES:

<S>                                                                  <C>               <C>
 Investment advisory services                                        $     206,922     $     238,035
 Agency commissions                                                         91,799            22,254
 Insurance premiums                                                         55,402                 -
 Net investment income                                                      53,191                 -
 Net realized investment gains (losses)                                        (10)                -
 Other income                                                                    -                58
                                                                     --------------    --------------
                                        TOTAL REVENUES                     407,304           260,347


EXPENSES:

 Incurred policy losses                                                     11,911                 -
 Insurance policy acquisition costs                                         18,877                 -
 General and administrative                                              1,378,730           902,444
 Mutual fund costs                                                         138,695           147,870
 Interest                                                                  345,031           324,266
 Depreciation                                                                8,075             5,900
                                                                     --------------    --------------
                                        TOTAL EXPENSES                   1,901,319         1,380,480
                                                                     --------------    --------------

                                      NET INCOME (LOSS)                 (1,494,015)       (1,120,133)
                                                                     --------------    --------------

 Accretion of Mandatorily Redeemable Convertible
  Preferred Stock, including accrued dividends                            (380,171)                -
                                                                     --------------    --------------

 NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS               $  (1,874,186)    $  (1,120,133)
                                                                     ==============    ==============


BASIC AND DILUTIVE NET INCOME (LOSS) PER SHARE:

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


 WEIGHTED-AVERAGE SHARES OUTSTANDING                                   133,022,038       122,663,860
                                                                     ==============    ==============
</TABLE>

                 The accompanying notes are an integral part of
                    these consolidated financial statements.
                                      F-4
<PAGE>
JACOBS FINANCIAL GROUP, INC,
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>

                                                                          Year Ended May 31
                                                                      --------------------------
                                                                         2006            2005
                                                                      ------------  ------------

CASH FLOWS FROM OPERATING ACTIVITIES

<S>                                                                  <C>            <C>
 Net Income (Loss)                                                   $(1,494,015)   $ (1,120,133)

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

   Unearned premium                                                      193,616               -
   Stock option expense                                                  117,979
   Stock issued for debt forbearance and guarantees                       61,775          34,637
   Provision for loss reserves                                            11,911               -
   Amortization of premium                                                 9,336               -
   Depreciation                                                            8,075           5,900
   Realized gains (losses) on sale of securities                              10
   Premium and other receivables                                         (19,488)         13,697
   Accretion of Discount                                                 (20,274)              -
   Investment income due and accrued                                     (40,382)              -
   Deferred policy acquisition costs                                     (70,399)              -
   Change in operating assets and liabilities:
        Other assets                                                     (26,303)            236
        Accounts payable                                                 176,550          (8,038)
        Accrued expenses and other liabilities                           323,665         277,616
                                                                      ------------  ------------
              Net cash flows from (used in) operating activities        (767,944)       (796,085)

CASH FLOWS FROM INVESTING ACTIVITIES

 Advances to related party                                               361,009
 Redemption of short-term investments                                    656,317               -
 Repayment of mortgage-backed securities                                  89,672
 Costs of bonds acquired                                                (170,078)              -
 Costs of mortgage-backed securities                                  (1,389,911)
 Acquisition of insurance company                                     (2,860,000)              -
 Purchase of furniture and equipment                                     (27,456)         (3,050)
 Deposit                                                                       -         (25,000)
                                                                      ------------  ------------
              Net cash flows from (used in) investing activities      (3,340,447)        (28,050)

CASH FLOWS FROM FINANCING ACTIVITIES

 Proceeds from issuance of Series A preferred stock and warrants       1,109,000               -
 Proceeds from issuance of Series B preferred stock and warrants       3,191,921               -
 Proceeds from issuance of stock                                          18,079
 Proceeds from exercise of common stock warrants                          14,171               -
 Proceeds from short-term borrowings                                   1,038,531       1,610,614
 Repayment of short-term borrowings                                   (1,263,748)       (786,663)
                                                                      ------------  ------------
              Net cash flows from financing activities                 4,107,954         823,951

NET INCREASE (DECREASE) IN CASH                                             (437)           (184)

CASH AT BEGINNING OF PERIOD                                                  437             621
                                                                      ------------  ------------

CASH AT END OF PERIOD                                                 $        -    $        437
                                                                      ============  ============

SUPPLEMENTAL DISCLOSURES
 Interest paid                                                        $  188,022    $    223,055
 Income taxes paid                                                             -               -
 Non-cash investing and financing transactions:
  Additional consideration for issuance of debt                           61,775               -
  Accrued interest converted to notes payable                             20,740               -
  Notes payable converted to Series B preferred stock                  3,480,026
  Accrued interest converted to Series B preferred stock                 154,184
  Accounts payable converted to Series B preferred stock                  33,740

 Acquisition of business (See Note C)
</TABLE>

                 The accompanying notes are an integral part of
                    these consolidated financial statements.
                                      F-5
<PAGE>
CONSOLIDATED STATEMENT OF MANDATORILY REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEAR ENDED MAY 31, 2006

<TABLE>
<CAPTION>

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

                                                                                        STOCKHOLDERS' EQUITY (DEFICIT)
                                                       SERIES B
                                  SERIES A       MANDATORILY REDEEMABLE  -----------------------------------------------------------
                           MANDATORILY REDEEMABLE    CONVERTIBLE                              ADDITIONAL
                               PREFERRED STOCK     PREFERRED STOCK                             PAID-IN    ACCUMULATED
                             SHARES      AMOUNT  SHARES     AMOUNT      SHARES      AMOUNT     CAPITAL      DEFICIT        TOTAL
                            -------- ----------  -------   ---------  -----------  --------  ------------  -----------  -----------
<S>                         <C>      <C>         <C>       <C>        <C>          <C>       <C>           <C>          <C>
BALANCE, MAY 31, 2004               -          -        -           -  120,709,510  $ 12,071   $ 1,080,696 $(4,233,349) $(3,140,582)

Issuance of stock for debt
 forbearance and guarantee                                               1,954,350       195        34,442                   34,637

Net income (loss), year
 ended May 31, 2005                 -          -        -           -            -         -             -  (1,120,133)  (1,120,133)
                             -------- ----------  -------   ---------  -----------  --------  ------------  -----------  -----------

BALANCE, MAY 31, 2005               -          -        -           -  122,663,860    12,266     1,115,138  (5,353,482)  (4,226,078)

Issuance of Series A and
 Series B Preferred Stock and   1,109  1,025,957 9,095.599  6,409,899      225,000        23       551,072           -      551,095
 Common Stock Warrants

Issuance of common stock upon
 exercise of warrants               -          -        -           -   30,331,476     3,033        11,138           -       14,171

Accretion of mandatorily
 redeemable convertible
 preferred stock                    -      6,094        -     189,565            -         -             -     (195,659)   (195,659)

Issuance of common stock as
 additional consideration for
 financing arrangements                                                  1,717,500       172        61,602                   61,774

Accrued Dividends of
 mandatorily redeemable
 convertible preferred stock               3,790              180,722                                          (184,512)   (184,512)

Issuance of common stock
 options                                                                                           117,979                  117,979

Net Income (loss), year ended
  May 31, 2006                      -          -        -           -            -         -             -   (1,494,015) (1,494,015)
                             -------- ----------  -------   ---------  -----------  --------  ------------  -----------  -----------

BALANCE, MAY 31, 2006           1,109 $1,035,841 9,095.599 $6,780,186  154,937,836  $ 15,494  $  1,856,929  $(7,227,668)$(5,355,245)
                             ======== ==========  =======   =========  ===========  ========  ============  ===========  ===========
                             ----------------------------------------  -------------------------------------------------------------

</TABLE>





                 The accompanying notes are an integral part of
                    these consolidated financial statements.

                                      F-6
<PAGE>
                           JACOBS FINANCIAL GROUP INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE A - ORGANIZATION AND BUSINESS

ORGANIZATION AND NATURE OF BUSINESS

Jacobs Financial Group, Inc. (the "Company" or "JFG"),  formerly NELX, Inc., was
incorporated  in Kansas on March 25,  1983.  In 2001,  the Company  acquired two
wholly-owned subsidiaries located in Charleston, West Virginia: Jacobs & Company
("Jacobs") and FS Investments,  Inc. ("FSI").  Jacobs is a registered investment
advisory  firm that derives its revenue from  asset-based  fees.  Jacobs  serves
clients in approximately twenty states,  primarily in the eastern United States.
FSI,  through  its  wholly-owned   subsidiary   Triangle  Surety  Agency,   Inc.
("Triangle"),  is engaged in the business of placing surety bonds with insurance
companies for clients engaged in regulated industries, such as the extraction of
coal,  oil and gas. FSI receives  commission  income from the placement of these
bonds and is licensed in ten states  primarily in the eastern United States.  On
December 30, 2005,  the Company  acquired all of the  outstanding  stock of West
Virginia Fire & Casualty  Company  ("WVFCC"),  an insurance  company licensed to
engage  in  business  in  West  Virginia,   Ohio  and  Indiana.   Following  the
acquisition,  the name of WVFCC was changed to First Surety Corporation ("FSC").
FSC receives  insurance premium income in connection with the issuance of surety
bonds.  The  Company and its  subsidiaries  are  subject to the  business  risks
inherent with the financial services industry.

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
$1,874,000 and $1,120,000 for the years ended May 31, 2006 and 2005.  Losses are
expected to continue until FSC develops substantial business.  While improvement
is anticipated as the business plan is  implemented,  restrictions on the use of
FSC's  assets  (See Note D), 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.

                                      F-7
<PAGE>
                           JACOBS FINANCIAL GROUP INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Management  intends to  continue  with  steps it has taken to improve  cash flow
through  the  implementation  of its  business  plan.  Additionally,  management
continues  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 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated  financial  statements include the accounts of Jacobs Financial
Group,  Inc. and its  majority  owned  subsidiaries,  after the  elimination  of
intercompany transactions.

USE OF ESTIMATES

Preparation of financial  statements in conformity  with  accounting  principles
generally  accepted in the United States of America requires  management to make
estimates  and  assumptions  that affect the amounts  reported in the  financial
statements  and  accompanying  notes.  Significant  areas  requiring  the use of
management  estimates  are loss  reserves,  stock  options and the  valuation of
deferred  tax  benefits.  Actual  results  inevitably  will  differ  from  those
estimates, and such differences may be material to the financial statements.

RECENT ACCOUNTING PRONOUNCEMENTS

In December  2004,  the  Financial  Accounting  Standards  Board  (FASB)  issued
Statement  of  Financial  Accounting  Standard  ("SFAS")  No. 123R  "Share-Based
Payment" ("SFAS 123R"),  a revision to SFAS No. 123 "Accounting for Stock- Based
Compensation"  ("SFAS 123"),  and superseding APB Opinion No. 25 "Accounting for
Stock Issued to Employees" and its related  implementation  guidance.  SFAS 123R
establishes  standards for the  accounting for  transactions  in which an entity
exchanges  its equity  instruments  for goods or services,  including  obtaining
employee services in share-based payment transactions. SFAS 123R applies to all

                                      F-8
<PAGE>
                           JACOBS FINANCIAL GROUP INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

awards  granted  after  the  required  effective  date and to  awards  modified,
repurchased,  or cancelled  after that date.  Adoption of the provisions of SFAS
123R is effective as of the beginning of the first annual  reporting period that
begins after June 15,  2005.  JFG has adopted the  provisions  of SFAS 123R with
respect to its stock-based compensation plan (See Note L).

In  December  2004,  the FASB  issued  FASB  Statement  No.  153  "Exchanges  of
Nonmonetary  Assets-an  amendment  of  APB  Opinion  Non.  29".  This  Statement
addresses the  measurement of exchanges of nonmonetary  assets.  The guidance in
APB Opinion No. 29,  Accounting for  Nonmonetary  Transactions,  is based on the
principle that  exchanges of nonmonetary  assets should be measured based on the
fair value of the assets  exchanged.  The  guidance  in that  Opinion,  however,
included certain exceptions to that principle.  This Statement amends Opinion 29
to eliminate  the  exception  for  nonmonetary  exchanges of similar  productive
assets and replaces it with a general  exception  for  exchanges of  nonmonetary
assets  that do not  have  commercial  substance.  A  nonmonetary  exchange  has
commercial  substance  if the future  cash flows of the entity are  expected  to
change  significantly  as a result of the exchange.  This Statement is effective
for financial statements for fiscal years beginning after June 15, 2005. Earlier
application is permitted for nonmonetary asset exchanges  incurred during fiscal
years beginning after the date of this Statement is issued.  Management does not
expect the adoption of the provisions of SFAS No. 153 to have a material  impact
on the Company's results of operations or financial position.

In June 2005,  the FASB  issued  Statement  154,  "Accounting  Changes and Error
Corrections"  which  replaces APB Opinion 20 and FASB Statement 3. Statement 154
changes  the  requirements  for the  accounting  and  reporting  of a change  in
accounting principle. Opinion 20 previously required that most voluntary changes
in accounting principles be recognized by including the cumulative effect of the
new  accounting  principle in net income of the period of change.  Statement 154
now requires  retrospective  application  of changes in accounting  principle to
prior period financial statements,  unless it is impractical to determine either
the  period-specific  effects  or  the  cumulative  effect  of the  change.  The
statement  is  effective  for fiscal years  beginning  after  December 15, 2005.
Management  does not expect the  adoption of the  provisions  of SFAS No. 154 to
have a material  impact on the  Company's  results of  operations  or  financial
position.

                                       F-9
<PAGE>
                           JACOBS FINANCIAL GROUP INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In  February  2006,  FASB  issued SFAS No. 155  "Accounting  for Certain  Hybrid
Financial  Instruments-an  amendment of FASB  Statements No. 133 and 140".  This
statement  address  accounting  issues  relating  to  beneficial   interests  in
securitized  financial  assets.  This  Statement is effective  for all financial
instruments  acquired or issued after the beginning of an entity's  first fiscal
year that  begins  after  September  15,  2006.  Management  does not expect the
adoption  of the  provisions  of SFAS No. 155 to have a  material  impact on the
Company's results of operations or financial position.


In March 2006,  FASB issued SFAS No. 156  "Accounting for Servicing of Financial
Assets-an  amendment  of FASB  Statement  No.  140".  This  statement  addresses
accounting for separately  recognized servicing assets and servicing liabilities
when an entity undertakes a contract to service financial assets. This Statement
is to be adopted as of the  beginning of the first fiscal year that begins after
September 15, 2006. Management does not expect the adoption of the provisions of
SFAS No. 156 to have a material impact on the Company's results of operations or
financial position.


REVENUE RECOGNITION

Fees for investment  advisory  services are based on an agreed percentage of the
value of client  assets under  management  and are accrued  monthly based on the
market value of client assets.

Surety  premiums are earned pro rata over the term of the policies.  The reserve
for unearned premiums represents the portion of premiums written relating to the
unexpired  terms of  coverage.  The reserve for unearned  premium is  determined
using the monthly pro rata method.

Agency  commissions  for  surety  bond  services  are based on a  percentage  of
premiums  charged for bonds placed with  insurance  companies,  and are recorded
upon issuance or effective renewal date of the bonds. No significant  continuing
services subsequent to the issuance or renewal of surety bonds are required.

                                      F-10
<PAGE>
                           JACOBS FINANCIAL GROUP INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Policy  acquisition costs include costs that vary with and are primarily related
to the acquisition of new business.  Such costs generally  include  commissions,
underwriting expenses, and premium taxes and are deferred and amortized over the
period in which the related premiums are earned. The deferred policy acquisition
cost assets is reviewed for  recoverability  based on the  profitability  of the
underlying   surety  policy.   Investment  income  is  not  anticipated  in  the
recoverability of deferred policy acquisition costs.


INVESTMENTS

Debt  securities  are  designated  at purchase as  held-to-maturity,  trading or
available for sale.  Held-to-maturity  debt  securities are carried at amortized
cost where the Company has the ability and intent to hold these securities until
maturity.  Premiums and discounts  arising from the purchase of debt  securities
are  treated as yield  adjustments  over the  estimated  lives or call date,  if
applicable.

Debt and equity  securities that are bought and held principally for sale in the
near  future are  classified  as trading  securities  and are carried at current
market  values,   with  changes  in  market  value  being  recorded  in  current
operations.

Debt and equity  securities  that the Company may not have a positive  intent to
hold  until  maturity  and not  classified  as  trading,  are  considered  to be
available for sale and carried at current market values,  with unrealized  gains
and losses reflected as a separate  component of other  comprehensive  income in
consolidated shareholders' equity currently.

Short-term investments consist primarily of debt securities having maturities of
one year or less at date of purchase,  money-market  investment  funds and other
similar investments that have immediate availability.

Interest income with respect to fixed maturity  securities is accrued as earned.
Dividend income is generally recognized when receivable.

Realized  gains and losses are  determined  by  specific  identification  of the
security sold.

                                      F-11
<PAGE>
                           JACOBS FINANCIAL GROUP INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

ALLOWANCE FOR UNCOLLECTIBLE PREMIUM AND OTHER RECEIVABLES

The majority of our fee revenue is  generated by services  provided to companies
throughout the Eastern United States. We evaluate the need for a reserve for the
amount  of these  receivables  that may be  uncollectible,  based on  historical
collection activity adjusted for current  conditions.  Based on this evaluation,
management  believes that substantially all accounts receivable are collectible,
and therefore  has not  established  an allowance  for  estimated  uncollectible
accounts.

IMPAIRMENT

We evaluate  long-lived  assets for impairment  annually,  or whenever events or
changes in  circumstances  indicate that the assets may not be recoverable.  The
impairment is measured by calculating  the estimated  future cash flows expected
to be generated,  and comparing  this amount to the carrying value of the asset.
Cash flows are  calculated  utilizing  forecasts and  projections  and estimated
lives of the assets being  analyzed.  Should  actual  results  differ from those
forecasted and projected, we are subject to future impairment charges related to
these facilities.


FURNITURE AND EQUIPMENT

Furniture and equipment is recorded at cost. Maintenance and repairs are charged
to operations  when  incurred.  When property and equipment are sold or disposed
of, the asset account and related accumulated depreciation account are relieved,
and any  gain or loss is  included  in  operations.  The  cost of  property  and
equipment is depreciated  over the estimated useful lives of the related assets,
ranging from three to seven years, using the straight-line and  double-declining
balance methods, which approximates estimated economic depreciation.

                                      F-12
<PAGE>
                           JACOBS FINANCIAL GROUP INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

RESERVE FOR LOSSES AND LOSS EXPENSES

Losses and loss adjustment expenses represent  management's best estimate of the
ultimate net cost of all reported and unreported  losses incurred.  Reserves for
unpaid  losses and loss  adjustment  expenses  are  estimated  using  individual
case-basis  valuations in conjunction  with estimates  derived from industry and
Company  historical  experience.  These  estimates  and methods of  establishing
reserves are continually reviewed and updated.


INCOME TAXES

We currently have net operating loss ("NOL") carry-forwards that can be utilized
to offset future income for federal and state tax purposes.  These NOLs generate
a  significant  deferred  tax  asset.  However,  we have  recorded  a  valuation
allowance  against this deferred tax asset as we have determined that it is more
likely than not that we will not be able to fully  utilize the NOLs.  Should our
assumptions  regarding the utilization of these NOLs change,  we may reduce some
or all of this  valuation  allowance,  which would result in the  recording of a
deferred income tax benefit.


STOCK-BASED COMPENSATION

We have adopted the fair value method of accounting for stock-based compensation
recommended by SFAS No. 123R, Accounting for Stock-based Compensation.

The fair value of stock  options is  estimated at the grant date using the Black
Scholes  Option  Pricing  Model.  This model  requires  the input of a number of
assumptions, including expected dividend yields, expected stock price risk- free
interest  rates,  and an expected life of the options.  Although the assumptions
used to reflect management's best estimate,  they involve inherent uncertainties
based on market  conditions  generally  outside the control of the  Company.  If
future market  conditions are different than the assumptions  used,  stock-based
compensation expense could be significantly different.


EARNINGS (LOSS) PER SHARE

Basic earnings  (loss) per share of common stock are computed using the weighted
average number of shares  outstanding  during each period.  Diluted earnings per
share  are  computed  on the  basis  of the  average  number  of  common  shares
outstanding  plus the dilutive  effect of  convertible  debt,  stock options and
warrants.  In periods of net loss, there are no diluted earnings per share since
the result would be anti-dilutive.

                                      F-13
<PAGE>
                           JACOBS FINANCIAL GROUP INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

RECLASSIFICATIONS

Certain  amounts  in  the  2005  Consolidated  Financial  Statements  have  been
reclassified  to  be  consistent  with  the  presentation  in  the  Consolidated
Financial  Statements  as of May 31,  2006 and for the years  then  ended.  Such
reclassifications  resulted from the Company's  acquisition  of WVFCC (now FSC).
The Company's Consolidated Financial Statements include the assets,  liabilities
and results of operations of FSC  subsequent to its  acquisition on December 30,
2005. These  reclassifications  had no impact on previously reported net income,
cash flow from operations or changes in shareholder equity.



NOTE C-ACQUISITION

On December 30, 2005, the Company acquired all of the outstanding  stock of West
Virginia Fire and Casualty  Company  (WVFCC),  an insurance  company licensed to
engage in business in West Virginia,  Ohio and Indiana. The acquisition followed
the approval of the  transaction  by the West Virginia  Department of Insurance,
which included  approval of the Company's  business plan to operate the acquired
insurance company as a surety.  The financing of the transaction  consisted of a
combination  of a private  placement of preferred  stock and warrants to acquire
common stock of the Company in exchange for cash totaling  $3,335,000,  of which
$2,860,000  was used for the  acquisition of WVFCC.  In addition,  approximately
$3,668,000 of  indebtedness  of the Company was converted into preferred  stocks
and warrants.  Following the acquisition, the name of WVFCC was changed to First
Surety Corporation (FSC).

The  acquisition of FSC allows the Company to pursue its business plan to market
and issue surety bonds utilizing programs developed by the Company's subsidiary,
FS  Investments,  Inc. (FSI).  FSI's  subsidiary,  Triangle Surety Agency,  Inc.
(TSA),  serves as managing  general agent for First Surety,  and  collateralized
accounts  required as a  condition  of the  issuance  of surety  bonds under the
insurance  company's programs are managed by the investment  advisory subsidiary
of the Company, Jacobs & Company (J&C).


                                      F-14
<PAGE>
                           JACOBS FINANCIAL GROUP INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


The  successful  implementation  of the business plan by the Company will create
three  primary  revenue  streams,  insurance  premium for the issuance of surety
bonds,  agency  commissions  for the  production  and  placement  of bonds,  and
investment  advisory  fees  relating  to the  management  of the  collateralized
accounts securing the surety bonds. The bonding programs offered are specialized
in nature and will  initially be targeted to the coal and oil & gas  industries,
primarily in the Eastern United States.

The acquisition of WVFCC consisted of the purchase of marketable investments and
insurance licenses and did not include any existing policies or customer base as
the insurance  lines of business  offered by WVFCC are not insurance  lines that
the Company intends to pursue.  Accordingly,  pro forma information  relating to
the acquisition as if it had occurred as of the beginning of the reported period
has been omitted as it would not be meaningful.

NOTE D - INVESTMENTS

The Company's  insurance  subsidiary  (FSC) held the following  investments,  by
security type, with the positive intent and ability to hold to maturity:

                                                MAY 31, 2006
                                                ------------
                                               GROSS     GROSS
                              AMORTIZED     UNREALIZED  UNREALIZED   FAIR MARKET
                                 COST          GAINS     LOSSES         VALUE
                              ----------    ----------  ---------     ----------

   U. S. Government and
   government agencies        $1,029,964     $      -  $    5,811     $1,024,153

   U.S Government agency
   mortgage-backed
   securities                  1,360,778            -      17,670      1,343,108
                              ----------    ----------  ---------     ----------
                              $2,390,742      $     -  $   23,481     $2,367,261
                              ==========    ==========  =========     ==========



                                      F-15
<PAGE>
                           JACOBS FINANCIAL GROUP INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


The  amortized  cost and  estimated  market  values  of  investments  in  fixed-
maturities held-to-maturity at May 31, 2006 are as follows:

                                                     AMORTIZED       FAIR MARKET
                                                        COST             VALUE



         Due in one year or less                     $  508,723      $   506,720

         Due after one year through five years          521,241          517,433
                                                     ----------      -----------
                                                     $1,029,964      $ 1,024,153
                                                     ==========      ===========



U.S. government agency mortgaged-backed securities held by the Company as of May
31, 2006 have a  weighted-average  estimated  remaining life of twenty-three and
one-half  years.  Expected  maturities  may differ from  contractual  maturities
because   borrowers  of  the  underlying   mortgages  have  a  right  to  prepay
obligations.

Statutory deposits  consisting of securities with a carrying value of $1,029,964
were  deposited by the Company's  insurance  subsidiary  under  requirements  of
regulatory  authority.  In connection with regulatory  approval of the Company's
acquisition of its insurance  subsidiary,  certain  restrictions were imposed on
the ability of the Company to withdraw  funds from FSC without prior approval of
the Insurance Commissioner.  Accordingly,  investments and cash in the amount of
$3,591,569 as of May 31, 2006 are restricted to the use of FSC.

The Company held no investments classified as available-for-sale.

An analysis of net investment income follows:

                                                                    2006
                                                                ---------
                  Bonds-fixed maturities                        $  17,027
                  Mortgage-backed securities                        6,913
                  Short-term investments                           32,880
                                                                ---------

                  Total investment income                          56,820
                  Investment expenses                               3,629
                                                                ---------

                  Net investment income                         $  53,191
                                                                =========

                                      F-16

<PAGE>
                           JACOBS FINANCIAL GROUP INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


The realized  investment  gains  (losses) and increase  (decrease) in unrealized
appreciation of investments were as follows:

                                                                  2006
                                                               ---------

                 Realized gains (losses)
                   on investments:

                           Bonds-fixed maturities               $      -
                           Mortgage-backed securities                  -
                           Short-term investments                    (10)
                                                                ---------

                  Realized gains (losses)                       $    (10)
                                                                =========



                  Increase (decrease) in
                    unrealized appreciation
                    of investments:

                           Bonds-fixed maturities              $  (5,811)
                           Mortgage-backed securities            (17,670)
                                                               ----------

                  Increase (decrease) in
                    unrealized appreciation                    $ (23,481)
                                                               ==========





NOTE E-DEFERRED POLICY ACQUISITION COSTS

The following  reflects the policy  acquisition  costs deferred for amortization
against future income and the related amortization charged to operations.


                                                                  2006
                                                               ---------
         Balance at beginning of year                          $       -

         Acquisition costs deferred                               89,276

         Amortization charged to operations                      (18,877)
                                                                ---------
         Balance at end of year                                $  70,399
                                                                =========


                                      F-17


<PAGE>
                           JACOBS FINANCIAL GROUP INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE F - INTANGIBLES

As the result of the  acquisition  of the stock of FSC on December 30, 2005,  in
exchange for the purchase  price of  $2,900,000,  the Company  received cash and
investments  held by FSC  with a fair  market  value  of  $2,750,000,  with  the
difference of $150,000 being attributed to the 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 possible
impairment loss.


NOTE G-RESERVE FOR LOSSES AND LOSS EXPENSE

Reserves for unpaid  losses and loss  adjustment  expenses are  estimated  using
individual  case-basis  valuations in conjunction  with  estimates  derived from
industry and Company  historical  experience.  As of May 31, 2006, the Company's
insurance  subsidiary,  FSC, is licensed  to write coal  reclamation  and mining
surety bonds in West Virginia only. By nature, reclamation of land that has been
disturbed by mining operations is a highly regulated  process by federal,  state
and local jurisdictions and such bonds are generally long-term in nature with no
two principals or properties  being alike due to varied  company  structures and
unique  geography  and  geology  of  each  site.  In  underwriting  such  bonds,
management  obtains  estimates of costs to reclaim such properties in accordance
with the mining permit, as prepared by independent  outside  professionals hired
by FSC, in addition to other underwriting and financial risk considerations. FSC
requires  the  principal  to provide  cash  collateral  in amounts  deemed to be
sufficient  to reclaim the  disturbed  land and thus  mitigate  the  exposure to
significant loss. As a newly licensed insurance company,  FSC has experienced no
claims for  losses as of May 31,  2006 and thus  provisions  for losses and loss
adjustment  expense  have been based on  industry  averages  adjusted  for other
factors unique to the Company's approach.


NOTE H - NOTES PAYABLE TO INDIVIDUALS AND DUE FROM RELATED PARTY

At May 31, 2006,  the Company had unsecured  notes payable to  individuals  (all
common  shareholders)  amounting to $158,232.  Such notes have maturity dates of
less than one year or are payable on demand and bear interest at the rate of ten
percent (10.00%) per annum.

                                      F-18
<PAGE>

                           JACOBS FINANCIAL GROUP INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

During 2005 and 2006, the Company's  operating expenses were partially funded by
advances  from its largest  shareholder  and chief  executive  officer,  John M.
Jacobs.  The  funding  source for these  advances  originated  with  obligations
incurred by Mr. Jacobs with third-parties  (such obligations,  together with the
loans by Mr. Jacobs to the Company,  "back-to-back  loans") with interest  rates
ranging from 6.75% to 12%. To assure that  repayments of the various  borrowings
by the  Company  that  were  either  guaranteed  by Mr.  Jacobs or loaned to the
Company by Mr. Jacobs via such  back-to-back loan arrangements did not result in
a deemed loan to Mr.  Jacobs,  Mr. Jacobs  entered into an Assumption  Agreement
with the Company,  pursuant to which Mr. Jacobs assumes,  and agrees to hold the
Company harmless from, principal of specified indebtedness of the Company as and
when  necessary  to fully  offset what might  otherwise  be deemed an advance of
funds arising out of the Company's financing activities.

During  the  year  ended  May 31,  2006,  the  Company  made net  repayments  of
$1,170,546 on the  back-to-back  loans which was $508,036 more than the original
loans and interest  charges.  In accordance with the Assumption  Agreement,  the
Company assigned to Mr. Jacobs and Mr. Jacobs assumed responsibility for payment
of certain debt totaling  $101,326 and accounts payable totaling $365,000 during
the year ended May 31, 2006. The debt obligation was re-ssued in the name of Mr.
Jacobs;  and  therefore  the debt  amount was  relieved  and offset  against the
receivable  from Mr.  Jacobs.  Although the Company  assigned  accounts  payable
totaling $365,000 to Mr. Jacobs through the Assumption Agreement,  for financial
reporting purposed under generally accepted accounting principles,  the accounts
payable  amount  cannot be  derecognized  until  either  paid or released by the
creditor.  The Company did receive a release  after May 31, 2006 as is reflected
in subsequent  events Note T. The balance due from Mr. Jacobs as of May 31, 2006
is $361,009.

NOTE I - OTHER LIABILITIES

The Company had been delinquent in paying certain of its payroll tax obligations
for  periods  ending on or  before  December  31,  2005.  The  total  liability,
including an estimate for penalties and interest, is approximately  $387,500 and
is included  in the  Company's  financial  statements  under Other  Liabilities.
Management continues to seek financing  arrangements that will allow it to fully
satisfy this obligation in the near future.

                                      F-19
<PAGE>

                           JACOBS FINANCIAL GROUP INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE J - 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. The purchase of Series A Preferred Stock
is a condition of the qualification of such purchasers to participate in certain
surety bonding programs of FSC under which the participant's  obligations to FSC
are not fully  secured.  Holders of Series A  Preferred  Stock are  entitled  to
participate in the 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
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.

                                      F-20
<PAGE>

                           JACOBS FINANCIAL GROUP INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of May 31, 2006,  the Company has issued an additional 759 shares of Series A
Preferred Stock in exchange for cash  investments in the amount of $759,000.  As
of May 31,  2006 the  Company has chosen to defer  payment of  dividends  on the
Series A Preferred  Stock with such  accrued and unpaid  dividends  amounting to
$3,970 through March 31, 2006.

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  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
nonassessable  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 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.  As of May 31,  2006,  the Company has
issued an additional  225 shares of Series B Preferred  Stock and 225,000 shares
of the Company's common stock as additional consideration,  in exchange for cash
investments in the amount of $225,000. As of May 31, 2006 the

                                      F-21
<PAGE>
                           JACOBS FINANCIAL GROUP INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Company has chosen to defer payment of dividends on the Series B Preferred Stock
with such accrued and unpaid  dividends  amounting to $180,722 through March 31,
2006.

Management  consulted Statement of Financial  Accounting Standards (SFAS) Number
133,  "Accounting  for Derivative  Instruments and Hedging  Activity",  Emerging
Issues Task Force (EITF)  Number 00-19,  "Accounting  for  Derivative  Financial
Instruments  Indexed to, and Potentially Settled in, a Company's Own Stock", and
SFAS 150,  "Accounting  for Certain  Instruments  with  Characteristics  of Both
Liabilities  and Equity" in evaluating the accounting for preferred  securities.
Management determined that SFAS 150 is the appropriate accounting literature.

SFAS 150  requires  that an entity  classify as  liabilities  certain  financial
instruments  with  characteristics  of both  liabilities  and  equity.  SFAS 150
applies to certain freestanding  financial instruments that embody an obligation
for the entity that may require the entity to issue shares, redeem or repurchase
its shares.

The  Company's  Series A and B preferred  stock each have  mandatory  redemption
features that subject the Company to the analysis of equity versus liability. In
accordance  with SFAS  150,  both  Series A and B have  features  that  embody a
conditional obligation to redeem the instrument upon events not certain to occur
and accordingly, are not classified as liabilities until such events are certain
to occur.  With  respect to the Series A  Preferred  Stock,  such  condition  is
contingent upon the holder having no further need for surety bonds issued by the
Company's insurance subsidiary (FSC) under its partially  collateralized bonding
programs and, having no such surety bonds then outstanding.  With respect to the
Series B Preferred  Stock, in accordance with SFAS 150, if the stock provides an
option to the holder to convert to common  shares at a rate  equivalent  to fair
value, then the financial instruments are not mandatorily  redeemable during the
period in which the holder can convert the shares  into  common  shares.  As the
Series B  Preferred  Stock  contains a feature to convert to common  shares at a
fixed rate of $1.00 per share,  and such  conversion  rate appearing  reasonable
within the period prior to the redemption  date, the Company has determined that
both  the  Series  A  and  B  preferred  stocks  should  not  be  classified  as
liabilities.  However,  in accordance  with  Securities and Exchange  Commission
(SEC)  Issued  Topic No.  D- 98,  SEC Staff  Announcement,  "Classification  and
Measurement of Redeemable  Securities",  a company that issues  preferred shares
that are conditionally

                                      F-22
<PAGE>

                           JACOBS FINANCIAL GROUP INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

redeemable  (i.e., the shares are not within the scope of SFAS 150 because there
is  no  unconditional  obligation  to  redeem  the  shares  at  a  specified  or
determinable  date or upon an event certain to occur) is required to account for
the  conditionally  redeemable  preferred  shares in accordance  with Accounting
Series  Release  268,  which  states that the shares are to be  reflected on the
company's balance sheet between total  liabilities and  stockholders'  equity as
temporary equity.

NOTE K - STOCK WARRANTS

At May 31,  2006,  the Company had issued and  outstanding  warrants to purchase
16,904,664 shares of common stock.

On December 30, 2005, the Company issued warrants to purchase  45,402,996 shares
of common stock in  connection  with the Series A and B Preferred  Stock private
placements of which  14,904,664  remain  outstanding.  The exercise price of the
warrants is  one-tenth  of one cent ($.001) per share and expire on December 30,
2010.  The  warrants  were valued using the  Black-Scholes  pricing  model.  The
warrants  issued in connection  with the Series A Preferred Stock were valued at
$.08 per share or $83,043.  The warrants  issued in connection with the Series B
Preferred Stock were valued at $.01 per share or $449,972.

On September 29, 2003, the Company issued  warrants to purchase 2 million common
shares to a principal  vendor in connection  with  financing and  forbearance in
payment of certain trade obligations. The exercise price of the warrants is $.04
per share and expire  September  30, 2008.  The  warrants  were valued using the
Black-Scholes pricing model at $.02 per share or $39,966.

NOTE L-STOCK-BASED COMPENSATION

On October 12,  2005,  the board of directors  adopted its 2005 Stock  Incentive
Plan (the  "Plan") to allow the Company to make awards of stock  options as part
of  the  Company's  compensation  to  key  employees,   non-employee  directors,
contractors  and  consultants.  The Plan was  approved  by the  stockholders  on
December 8, 2005. The aggregate  number of shares of Common Stock issuable under
all awards under the Plan is 35,000,000. No awards may be granted under the Plan
after December 8, 2015.

                                      F-23
<PAGE>

                           JACOBS FINANCIAL GROUP INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On October 12, 2005, the board of directors approved a severance arrangement for
a long-time  employee of the Company  terminated  by reason of  disability.  The
arrangement  included (i) continuing  salary and benefits  through May 2006, and
(ii) an award of 1,000,000 options to acquire common shares at an exercise price
of four cents ($.04) per share.  The estimated  value of  continuing  salary and
benefits  was  approximately  $30,000,  and the  estimated  value of the options
awarded was approximately $13,500. The term of the award is five years.

On May 25, 2006, the  compensation  committee of the board of directors  awarded
23,400,000 of incentive  stock  options to acquire  common shares at an exercise
price of  seven  cents  ($.07)  per  share,  of which  5,500,000  shares  vested
immediately  and the  remaining  17,900,000  options  vesting over the next four
years.  Stock-based compensation expense attributable to such awards amounted to
approximately  $104,500  in fiscal  year  2005-2006.  Unrecognized  compensation
expense related to non-vested awards at May 31, 2006 was approximately  $340,250
and is  expected  to be  recognized  over the next four  years.  The term of the
awards is five years.

The following table summarizes option activity under the Plan for the year ended
May 31, 2006.

                                                 2006
                                                 ----
                                  WEIGHTED-AVG.
                                    EXERCISE             NO. OF SHARES
                                     PRICE               UNDER OPTION
         Balance at June 1                 n/a                    -
         Options granted               $.06877           24,400,000
         Options exercised                   -                    -
         Options canceled/expired            -                    -
                                     ---------         ------------
         Balance at May 31             $.06877           24,400,000
                                     =========         ============

         Exercisable at May 31         $.06538            6,500,000
                                     =========         ============



                                      F-24
<PAGE>
                           JACOBS FINANCIAL GROUP INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The company  estimates  the fair value of stock  options  using a  Black-Scholes
valuation  model,  consistent  with the  provisions of SFAS 123R. Key inputs and
assumptions  used to estimate the fair value of stock options  include the grant
price of the award, the expected option term, volatility of the company's stock,
the  risk-free  interest rate and the company's  dividend  yield.  The following
table presents the weighted-average assumptions used for the options granted.


              Option term (years)                4.76
              Volatility                          100%
              Risk-free interest rate            4.95%
              Dividend yield                     0.00%

              Weighted-average fair
              value per option granted         $0.019


NOTE M - INCOME TAXES

As  of  May  31,  2006,  the  Company  had  operating  loss   carryforwards   of
approximately $12 million.  These  carryforwards  begin expiring in 2012 and are
subject  to review  by the  Internal  Revenue  Service  and,  as a result of the
ownership  change  resulting from the 2001  acquisitions of FSI and Jacobs,  the
utilization of  approximately  $6.4 million of the operating loss  carryforwards
are substantially limited.

The Company has fully  reserved  the $4.1  million tax benefit of the  operating
loss  carryforward,  by a valuation  allowance of the same  amount,  because the
likelihood of realization of the tax benefit cannot be determined.

NOTE N-STOCKHOLDERS EQUITY

In fiscal 2005, confirming promises made to certain of its third-party financing
sources,  the Company  issued  1,954,350  shares of its common  stock to certain
holders  of  predominantly  demand  promissory  notes  in  consideration  of the
continuing  forbearance and guarantees granted by such note holders.  The shares
were valued at approximately  $.0178 per share based on quoted closing prices on
the dates the stock was committed, a total of $34,637.

In fiscal  2006,  the Company  issued  1,717,500  shares of its common  stock to
certain  individuals as  consideration in connection with arranging or providing
financing to the  Company.  The shares were valued at  approximately  $.0719 per
share based on quoted  closing  prices on the dates the stock was  committed,  a
total of $61,774.


                                      F-25

<PAGE>
                           JACOBS FINANCIAL GROUP INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE O-STATUTORY FINANCIAL DATA (UNAUDITED)

The  Company's  insurance  subsidiary  files  financial  statements  prepared in
accordance  with  statutory  accounting  practices  prescribed  or  permitted by
regulatory  authorities.  The principal  differences between statutory financial
statements  and  financial  statements  prepared in  accordance  with  generally
accepted accounting  principals are that statutory  financial  statements do not
reflect deferred policy acquisition costs and certain assets are non-admitted.

Statutory  surplus and net income for the Company's  insurance  subsidiary as of
May 31, 2006 and for the five-month period then ended are as follows:

                  Statutory Surplus               $ 3,334,198
                  Net Income (Loss)                  (144,246)

Statutory  surplus  exceeds the minimum capital  requirements  provided by state
law.


NOTE P - COMMITMENTS

LEASE COMMITMENTS

The Company leases certain office  equipment with combined  monthly  payments of
approximately  $700 that have varying  remaining  terms of less than five years.
The Company's lease of office,  parking space and storage space have lease terms
of one year or less at an  approximate  monthly rate of $3,800  through  January
2007.

The Company  leases an apartment for corporate use that has a remaining  term of
18 months at a monthly rate of $545.00 plus electric utilities.

The Company holds an  undeveloped  leasehold  interest in a mineral water spring
located near Hot Springs, Arkansas. Under the leasehold arrangement, the Company
makes  minimum  lease  payments  of $150 per month.  The  Company has options to
extend the leasehold  arrangement  through  October 2026 and also has a right to
cancel the lease at any time upon sixty (60) days written notice.

Rental expense for these lease  commitments  totaled  approximately  $49,500 and
$47,000 during 2006 and 2005.



                                      F-26
<PAGE>
                           JACOBS FINANCIAL GROUP INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Minimum  future lease  payments  under  non-cancelable  operating  leases having
remaining terms in excess of one year as of May 31, 2006 are:

                         2007                     $13,500
                         2008                      10,260
                         2009                       7,020
                         2010                       5,361




NOTE Q - FINANCIAL INSTRUMENTS

FAIR VALUE

The following methods and assumptions were used to estimate fair market value of
each class of financial instruments for which it is practicable to estimate that
value:

INVESTMENT SECURITIES

Fair values for investment securities (U.S. Government,  government agencies and
government agency mortgage-backed securities) held for investment purposes (held
to maturity)  are based on quoted market  prices or dealer  quotes.  If a quoted
market  prices is not  available,  fair value is estimated  using quoted  market
prices for similar securities.

OTHER FINANCIAL INSTRUMENTS

The  carrying  amount  of cash,  short-term  investments,  receivables,  prepaid
expenses,  notes  payable,  accounts  payable  and  accrued  expenses  and other
liabilities  approximate  fair value  because  of the  immediate  or  relatively
short-term maturity of these financial instruments.

CONCENTRATION OF CREDIT RISK

Statement of Financial  Accounting Standards No. 105, "Disclosure of Information
about  Financial   Instruments   with   Off-Balance-Sheet   Risk  and  Financial
Instruments  with  Concentrations  of  Credit  Risk",   requires  disclosure  of
significant concentration of credit risk regardless of the degree of such risk.


                                      F-27
<PAGE>

                           JACOBS FINANCIAL GROUP INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of  May  31,  2006  the  Company's  investment  securities  of  approximately
$2,391,000  are solely  comprised  of bonds  issued by the U.S.  government  and
government  agencies and  mortgage-backed  securities that are guaranteed by U.S
government  agencies.  Such  instruments  are generally  considered to be of the
highest credit quality investment available.

The  Company  transacts  the  majority  of  its  business  with  four  financial
institutions,  one for commercial  banking services and the others for brokerage
and  custodial  services.  Periodically,  the  amount on  deposit  in  financial
institutions   providing   commercial  banking  services  exceeds  the  $100,000
federally insured limit.  Management  believes these financial  institutions are
financially  sound.  With  respect  to  the  financial   institutions  providing
brokerage  and  custodial  services,  amounts on deposit  are  invested in money
market funds  comprised of high quality money market  instruments  consisting of
certificates of deposit, bankers' acceptances, prime commercial paper, corporate
obligations, municipal obligations and U.S. government securities.

Management  believes that  substantially  all receivables are  collectible,  and
therefore has not established an allowance for estimated uncollectible accounts.

NOTE R - SEGMENT REPORTING

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


                                      F-28
<PAGE>
                           JACOBS FINANCIAL GROUP INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>

                                                                                                      YEAR ENDED
INDUSTRY SEGMENT                                                                       MAY 31, 2006               MAY 31, 2005
----------------                                                                       ------------               ------------
REVENUES:
<S>                                                                                    <C>                        <C>
 Investment advisory                                                                   $    206,922               $    238,035
 Surety insurance                                                                           200,382                     22,254
 Corporate                                                                                        -                         58
                                                                                         ----------               ------------
 Total revenues                                                                        $    407,304               $    260,347
                                                                                         ==========               ============

OPERATING (LOSS):
 Investment advisory                                                                   $  (537,298)               $  (458,420)
 Surety insurance                                                                         (161,255)                  (183,932)
 Corporate                                                                                (795,462)                  (477,781)
                                                                                         ----------               ------------
 Total operating income (loss)                                                         $(1,494,015)               $(1,120,133)
                                                                                         ==========               ============

IDENTIFIABLE ASSETS:
 Investment advisory                                                                   $     40,271               $     40,384
 Surety insurance                                                                         3,858,319                      5,891
 Corporate                                                                                   41,297                     40,667
                                                                                         ----------               ------------
Total assets                                                                             $3,939,887               $     86,942
                                                                                         ==========               ============

CAPITAL ACQUISITIONS:
 Investment advisory                                                                   $        317               $      3,050
 Surety insurance                                                                            15,992                          -
 Corporate                                                                                   11,696                          -
                                                                                         ----------               ------------
 Total capital acquisitions                                                            $     28,005               $      3,050
                                                                                         ==========               ============

DEPRECIATION CHARGED TO
IDENTIFIABLE ASSETS:
 Investment advisory                                                                   $      5,900               $      5,900
 Surety insurance                                                                               965                          -
 Corporate                                                                                    1,210                          -
                                                                                         ----------               ------------

Total depreciation                                                                     $      8,075               $      5,900
                                                                                         ==========               ============
</TABLE>

                                      F-29

<PAGE>

                           JACOBS FINANCIAL GROUP INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE S - COMPREHENSIVE INCOME

There  are  no  adjustments   necessary  to  net  income  as  presented  in  the
accompanying   statements  of  operations  to  derive  comprehensive  income  in
accordance with SFAS No. 130, "Reporting Comprehensive Income."

NOTE T - EVENTS SUBSEQUENT TO MAY 31, 2006 (UNAUDITED)

On June 28, 2006, the Company  borrowed  $250,000 under an unsecured  short-term
line of credit facility with a commercial bank to provide  additional  operating
capital.  The credit facility  requires monthly interest  payments at a variable
interest rate based on the Wall Street Journal Prime rate plus five percent. The
loan matures on December 28, 2006.

On June 30, 2006, the Company  elected to continue to defer payment of dividends
on its  Series  A  Preferred  Stock  and  Series B  Preferred  stock  with  such
accumulated accrued and unpaid dividends amounting to $14,994 and $365,740 as of
June 30, 2006.

On September  13, 2006,  the Company  obtained a release from the obligee of the
$365,000  account  payable  that was assumed by John M.  Jacobs  pursuant to the
Assumption Agreement as described in Note H, with the effect that, in accordance
with the  terms of the  Assumption  Agreement,  Mr.  Jacobs  assumption  of such
account payable was off set against and eliminated the account receivable of the
Company from Mr. Jacobs.
























                                      F-30
<PAGE>
<TABLE>
<CAPTION>

                          JACOBS FINANCIAL GROUP, INC.
                                AND SUBSIDIARIES

----------------------------------------------------------------------------------------------------------------------------
 SUMMARY OF INVESTMENTS-
 OTHER THAN INVESTMENTS IN RELATED PARTIES                                                                    SCHEDULE I
----------------------------------------------------------------------------------------------------------------------------


                                                                                                                   AMOUNT
                                                                                                                  AT WHICH
 AT MAY 31, 2006                                                                                                SHOWN IN THE
                                                                        COST*                VALUE              BALANCE SHEET
                                                                      ------------         -------------       -----------------

 Fixed maturities:
  Bonds:
<S>                                                                   <C>                  <C>                 <C>
   United States government and government agencies and authorities      1,029,964             1,024,153            1,029,964
                                                                                 -                     -                    -
                                                                      ------------         -------------       -----------------
   Total fixed maturities                                                1,029,964             1,024,153            1,029,964

 Equity securities:
                                                                                 -                     -                    -
                                                                      ------------         -------------       -----------------
   Total equity securities                                                       -                     -                    -


 Mortgage-backed securities guaranteed by U.S. government agency         1,360,778             1,343,108            1,360,778

 Short-term investments, at cost (approximates market value)             1,196,111             1,196,111            1,196,111
                                                                      ------------         -------------       -----------------

   Total investments                                                     3,586,853             3,563,372            3,586,853
                                                                      ============         =============       =================
</TABLE>


 * Original cost of equity securities and, as to fixed maturities, original cost
 reduced by repayments and adjusted for  amortization of premiums and accrual of
 discounts









                                      F-31
<PAGE>
                          JACOBS FINANCIAL GROUP, INC.
                                AND SUBSIDIARIES

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
CONDENSED FINANCIAL INFORMATION OF REGISTRANT                                                 SCHEDULE II
----------------------------------------------------------------------------------------------------------


BALANCE SHEET - PARENT COMPANY ONLY
                                                                               MAY 31, 2006
                                                                             -------------------
 ASSETS:
<S>                                                                          <C>
  Accounts receivable from affiliates                                        $         4,904
  Prepaid expense and other assets                                                    25,907
  Furniture and equipment, net                                                        10,486
  Investment (deficit) in subsidiaries, equity method                             (2,395,987)
  Due from affiliates, net                                                         5,514,442
                                                                             -------------------

    Total assets                                                             $     3,159,752
                                                                             ===================

 LIABILITIES:
  Cash overdraft                                                             $        80,888
  Accounts payable                                                                     1,781
  Accrued expenses and professional fees                                             438,370
  Notes payable                                                                      158,232
  Other liabilities                                                                   19,699
                                                                             -------------------

    Total liabilities                                                                698,970

 MANDATORILY REDEEMABLE PREFERRED STOCK                                            7,816,027

 STOCKHOLDERS EQUITY:
  Common stock                                                                        15,494
  Additional paid in capital                                                       1,856,929
  Accumulated deficit                                                             (7,227,668)
                                                                             -------------------

    Total stockholders equity (deficit)                                           (5,355,245)
                                                                             -------------------

    Total liabilities and stockholders equity                                $     3,159,752
                                                                             ===================
</TABLE>


<TABLE>
<CAPTION>

STATEMENT OF INCOME - PARENT COMPANY ONLY
 YEAR ENDED MAY 31,
                                                                                  2006          2005
                                                                              --------------  -------------
 REVENUES
<S>                                                                           <C>             <C>
  Equity in undistributed net income (loss) of consolidated subsidiaries      $     (698,553) $   (642,353)

 EXPENSES:
  General and administrative                                                         615,331       199,006
  Interest                                                                           178,921       278,774
  Depreciation                                                                         1,210             -
                                                                              --------------  -------------

    Total expenses                                                                   795,462       477,780
                                                                              --------------  -------------

    Net income (loss)                                                             (1,494,015)   (1,120,133)

 Accretion of mandatorily redeemable convertible preferred stock,
  including accrued dividends                                                       (380,171)            -
                                                                               --------------  -------------

    Net income (loss) attributable to common stockholders                     $   (1,874,186) $ (1,120,133)
                                                                              ==============  =============

</TABLE>


                                      F-32
<PAGE>
<TABLE>
<CAPTION>
                          JACOBS FINANCIAL GROUP, INC.
                                AND SUBSIDIARIES


----------------------------------------------------------------------------------------------------------
CONDENSED FINANCIAL INFORMATION OF REGISTRANT                                                 SCHEDULE II
----------------------------------------------------------------------------------------------------------
STATEMENT OF CASH FLOWS - PARENT COMPANY ONLY
 YEAR ENDED MAY 31,

                                                                                  2006          2005
                                                                              --------------  -------------
 CASH FLOWS FROM OPERATING ACTIVITIES:

<S>                                                                           <C>             <C>
 Net income (loss)                                                            $  (1,494,015)  $(1,120,133)

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

  Equity in undistributed net loss of consolidated subsidiaries                     698,553       642,353
  Stock option compensation expense                                                 117,979             -
  Issuance of stock in lieu of interest                                              61,145        34,637
  Depreciation                                                                        1,210             -
  Change in other assets, accounts payable and accrued expense, net                 188,589       109,827
                                                                              --------------  -------------

        TOTAL CASH USED IN OPERATIONS                                              (426,539)     (333,316)


 CASH FLOWS FROM INVESTING ACTIVITIES:

  Deposit for acquisition of insurance company                                            -       (25,000)
  Acquisition of insurance company subsidiary                                    (2,860,000)            -
  Contributions to insurance company subsidiary                                    (744,000)            -
  Funds provided to affiliates for operations                                      (595,102)       (8,983)
  Purchase of furniture and equipment                                               (11,696)            -
                                                                              --------------  -------------

        TOTAL CASH USED IN INVESTING ACTIVITIES                                  (4,210,798)      (33,983)

 CASH FLOWS FROM FINANCING ACTIVITIES:

  Proceeds from issuance of mandatorily redeemable preferred stock                4,319,000             -
  Proceeds from exercise of stock warrants                                           14,801             -
  Proceeds from short-term borrowings                                               737,030       536,400
  Repayment of short-term borrowings                                               (433,931)     (169,185)
                                                                              --------------  -------------

        TOTAL CASH PROVIDED BY FINANCING ACTIVITIES                               4,636,900       367,215
                                                                              --------------  -------------

        CHANGE IN CASH                                                                 (437)          (84)

 Cash at beginning of year                                                              437           521
                                                                              --------------  -------------

 Cash at end of year                                                          $          -    $       437
                                                                              ==============  =============











                                      F-33
</TABLE>


<PAGE>
                          JACOBS FINANCIAL GROUP, INC.
                                AND SUBSIDIARIES

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
 SUPPLEMENTARY INSURANCE INFORMATION
 AS OF MAY 31, 2006 AND FOR THE YEARS ENDED MAY 31, 2006 AND 2005                                                      SCHEDULE III
------------------------------------------------------------------------------------------------------------------------------------



                                  RESERVE FOR
                                    LOSSES                    OTHER                                 AMORTIZATION
                                      AND                    POLICY                        CLAIMS       OF
                      DEFERRED    LOSS EXPENSES,               AND                       LOSSES AND   DEFERRED
                       POLICY        FUTURE                  CONTRACT             NET    SETTLEMENT     POLICY     OTHER       NET
                     ACQUISITION     POLICY      UNEARNED    CLAIMS   PREMIUM INVESTMENT  EXPENSES   ACQUISITION OPERATING  PREMIUMS
     SEGMENT            COSTS        CLAIMS      PREMIUMS    PAYABLE  REVENUE  INCOME     INCURRED      COSTS     EXPENSES   WRITTEN
----------------   -------------  -------------  ---------  --------- ------- ---------- ----------  ----------- --------- ---------
2006

<S>                   <C>           <C>          <C>           <C>    <C>      <C>        <C>        <C>            <C>    <C>
 Surety               $ 70,399      $ 11,911     $ 193,616     $ -    $ 55,402 $ 53,181   $ 11,911   $ 18,877       $ -    $ 249,018


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

2005

 Surety               $     -       $     -      $      -      $ -    $      - $      -   $      -   $      -       $ -    $       -

</TABLE>





















                                      F-34

<PAGE>
                          JACOBS FINANCIAL GROUP, INC.
                                AND SUBSIDIARIES
<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------------------------------------------
 SUPPLEMENTAL INFORMATION
 AS OF MAY 31, 2006 AND FOR THE YEARS ENDED MAY 31, 2006 AND 2005                                                        SCHEDULE VI
------------------------------------------------------------------------------------------------------------------------------------



Column A         Column B     Column C     Column D  Column E  Column F Column G     Column H        Column I    Column J   Column K

                             RESERVE FOR                                                              AMORTI-
                               LOSSES      DISCOUNT                              CLAIMS, LOSSES AND   ZATION
                                 AND        IF ANY,                              SETTLEMENT EXPENSES    OF
                 DEFERRED   LOSS EXPENSES, DEDUCTED                              INCURRED RELATED TO  DEFERRED   PAID CLAIMS
                  POLICY       FUTURE         IN                           NET                        POLICY     AND CLAIMS   NET
AFFILIATION     ACQUISITION    POLICY       COLUMN   UNEARNED  PREMIUM  INVESTMENT CURRENT  PRIOR   ACQUISITION  ADJUSTMENT PREMIUMS
WITH REGISTRANT    COSTS       CLAIMS         C      PREMIUMS  REVENUE   INCOME    YEAR     YEARS     COSTS       EXPENSES   WRITTEN
--------------- ----------- -------------  --------  --------  -------  ---------- ------- -------- -----------  ---------- --------
<S>             <C>         <C>            <C>       <C>       <C>      <C>        <C>     <C>      <C>          <C>        <C>
2006

Consolidated
 property
 casualty
 entities        $70,399      $ 11,911      $ -     $ 193,616  $ 55,402  $ 53,181  $ 11,911  $ -     $ 18,877     $ -      $ 249,018

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

2005

Consolidated
 property
 casualty
 entities        $ -          $ -           $ -     $ -        $ -       $ -       $ -       $ -     $ -          $ -      $ -

</TABLE>
















                                      F-35

<PAGE>


Item  8.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
FINANCIAL DISCLOSURE

In connection with the audits for the years ended May 31, 2006 and May 31, 2005,
there have been no disagreements  with  independent  accountants with respect to
any  matter  of  accounting   principles  or  practices,   financial   statement
disclosure, or auditing scope or procedure.

Item 8A. CONTROLS AND PROCEDURES

As required by Rule 13a-15 under the Securities  Exchange Act of 1934, as of the
end of the period  covered by the annual  report,  being May 31,  2006,  we have
carried out an  evaluation of the  effectiveness  of the design and operation of
the Company's  disclosure  controls and procedures.  This evaluation was carried
out  under  the  supervision  and  with  the   participation  of  the  Company's
management, including the Company's president and chief financial officer. Based
upon that evaluation,  the Company's  president and chief financial officer have
concluded that the Company's disclosure controls and procedures are effective as
of the end of the period  covered by this report.  There have been no changes in
our internal  controls over financial  reporting  that occurred  during the most
recent fiscal year that have materially  affected,  or are reasonably  likely to
materially affect our internal controls over financial reporting.


Item 8B. OTHER INFORMATION

None.

                                    PART III

Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; Compliance
With Section 16(a) of the Exchange Act.

The directors and  executive  officers of the Company,  their ages and positions
are as follows:

                                              COMPANY
         NAME              AGE                POSITION
----------------------     ---         ------------------------
John M. Jacobs             52          President and CEO
                                       Director

Frederick E. Ferguson      72          Director

C. David Thomas            53          Director


                                       14
<PAGE>

Robert J. Kenney           59          Vice President

Robert L. Neal             50          Chief Financial Officer


JOHN M. JACOBS

Mr.  Jacobs is the  founder  of Jacobs & Company  as the first  independent  SEC
registered  investment advisor in West Virginia,  a Certified Public Accountant,
and is licensed  as a property  and  casualty  insurance  agent in fifteen  (15)
states.  Mr.  Jacobs has served as a Director  and  President  of both  Jacobs &
Company and FS Investments,  Inc. since their  inception.  Prior to establishing
Jacobs & Company,  in 1988,  Mr. Jacobs was a practicing  public  accountant for
over thirteen  years,  during which he was a managing  partner of his accounting
firm and a business and personal  advisor to his clients.  Mr. Jacobs has served
as a director and President of JFG since May 2001.

FREDERICK E. FERGUSON

Mr. Ferguson is retired coal operator who has a diverse  experience with respect
to business and the coal industry. Prior to owning his own company, Mr. Ferguson
began the first half of his career as a state and federal mine inspector. During
the later half of his career,  Mr.  Ferguson  owned his own coal company and was
involved in all facets of mining  production.  He has served as a Director of FS
Investments,  Inc.  since its  inception in December  1997,  and has served as a
director of JFG since July 2002.

C. DAVID THOMAS

Mr.  Thomas is a licensed  resident  insurance  agent in West Virginia and holds
non-resident agent licenses in several other states. Mr. Thomas began his surety
career in 1976 with United  States  Fidelity and Guaranty  Company and served as
the surety  underwriter in the Charleston,  WV branch office until 1979. At that
time he joined George  Friedlander & Company,  a regional insurance agency based
in  Charleston,  WV, where he presently  serves as Vice President and Manager of
the Surety  Department.  Mr.  Thomas is a  shareholder  and  Director  of George
Friedlander & Company. He has served as a Director of FS Investments, Inc. since
its inception in December  1997,  and has served as a director of JFG since July
2002.

ROBERT J. KENNEY

Mr. Kenney joined FSI and Jacobs &Co. in 2000,  and is President of First Surety
Corporation and Vice President and Assistant  Portfolio  Manager of Jacobs & Co.
Previously,  Mr.  Kenney  served as Senior Vice  President  of  Triangle  Surety
Agency,  Inc. In addition,  he is a licensed  resident  insurance  agent in West
Virginia and also holds Series 63 and 65 securities  licenses.  Prior to joining
Triangle Surety and Jacobs & Co., Mr. Kenney had over 20 years experience in the
oil and gas industry with Columbia Energy Group. With Columbia,  Mr. Kenney held
various positions in Treasury,  Human Resources,  and Law Departments and served
as both Manager of Risk Management and Special Projects Manager.  Mr. Kenney was
elected Vice President of the Company during fiscal 2003.

                                       15

<PAGE>


ROBERT L. NEAL

Mr.  Neal  re-joined  JFG in  January  2006 as  Chief  Financial  Officer  after
previously  serving in a similar  capacity from June 2000 to May 2002.  Prior to
his re-joining JFG Mr. Neal served as President and CEO of West Virginia Capital
Corporation,  a statewide  community  development  corporation from June 2002 to
December  2005.  Prior to  that,  Mr.  Neal  had  over 20  years  of  management
experience  in banking and public  accounting.  Mr.  Neal is a Certified  Public
Accountant.

There  are no family  relationships  among any of the  Company's  directors  and
executive officers.

During  the past five  years,  there have been no  filings  of  petitions  under
federal  bankruptcy  laws,  or any state  insolvency  laws,  by or  against  any
business of which any director or executive officer of the Company was a general
partner or executive  officer at the time or within two years before the time of
such filing.

During the past five years, no director or executive  officer of the Company has
been  convicted in a criminal  proceeding or been subject to a pending  criminal
proceeding.

During the past five years, no director or executive  officer of the Company has
been the subject of any order,  judgement, or decree, not subsequently reversed,
suspended  or  vacated  by a court of  competent  jurisdiction,  permanently  or
temporarily enjoining, barring, suspending or otherwise limiting his involvement
in any type of business, securities or banking activities.

During the past five years, no director or executive  officer of the Company has
been  found  by a court  of  competent  jurisdiction  (in a civil  action),  the
Commission  or the  Commodity  Futures  Trading  Commission  to have  violated a
federal or state securities or commodities law.

The Board has determined  that John M. Jacobs is the Audit  Committee  Financial
Expert as such term is defined in Item 401 (h) of  Regulation  SK. Mr. Jacobs is
not  independent as that term is used in Item  7(d)(3)(iv) of Schedule 14A under
the Securities Exchange Act.

                                       16
<PAGE>


Item 10. EXECUTIVE COMPENSATION

The following table sets forth the  compensation  paid by the Company during the
fiscal  years  ended May 31,  2006,  May 31,  2005 and May 31, 2004 to the Chief
Executive Officer of the Company ("the Named Executive Officer"). Other than the
Chief  Executive  Officer,  no executive  officer of the Company  received total
compensation from the Company in excess of $100,000.
<TABLE>
<CAPTION>

----------------------------------------------------------------------------------------------------------------------------------
                                                   SUMMARY COMPENSATION TABLE
----------------------------------------------------------------------------------------------------------------------------------
                                                                                                LONG-TERM
                                                                                               COMPENSATION
------------------------------ ------------ ----------------------------------------------- ------------------- ------------------
                                                         ANNUAL COMPENSATION                      AWARDS
------------------------------ ------------ ------------- -------------- ------------------ ------------------- ------------------
                                                                           Other Annual                             All Other
     Name and Principal          Fiscal                                    Compensation           Stock           Compensation
          Position                Year       Salary ($)     Bonus ($)           ($)            Options (#)             ($)
------------------------------ ------------ ------------- -------------- ------------------ ------------------- ------------------
<S>                            <C>          <C>                <C>              <C>            <C>             <C>
   JOHN M. JACOBS, CEO (A)     2005-06      $ 150,000           -                -              12,500,000      $     16,037
                               2004-05      $ 150,000           -                -                  -           $      7,899
                               2003-04      $ 150,000           -                -                  -           $      6,216
------------------------------ ------------ ------------- -------------- ------------------ ------------------- ------------------
</TABLE>

(a) In fiscal years ended May 31, 2006 and May 31, 2005, compensation expense in
the  amounts of $15,750 and $12,000 was paid to the spouse of John M. Jacobs for
services rendered in addition to the amounts reflected in this table.

The  Company  had no long  term  incentive  compensation  plans  in the  form of
restricted stock awards,  stock  appreciation  rights  ("SARs"),  phantom stock,
stock  options,  warrants,  convertible  securities,  performance  units  and/or
performance  shares, or any other such instruments during the 2004-05 or 2003-04
fiscal  years.  In fiscal year  2005-06,  the Board of  Directors of the Company
adopted a Stock  Incentive  Plan  ("Plan")  on  October  12,  2005,  subject  to
stockholder   approval,   which  was  obtained  at  a  Special  Meeting  of  the
stockholders on December 8, 2006. The aggregate number of shares of Common Stock
issuable  under all awards under the Plan is  35,000,000.  The Plan provides for
incentive stock options and non-statutory stock options.

Other  compensation  for fiscal  years  2005-06,  2004-05 and 2003-04  represent
insurance premiums paid by the Registrant for the benefit of the named executive
officer.

Outside board members of JFG's wholly-owned subsidiary First Surety Corporation,
which  include  JFG  board  members,  are  compensated  at the  rate of $150 per
meeting.

                                       17

<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
                                              OPTIONS IN LAST FISCAL YEAR
-----------------------------------------------------------------------------------------------------------------------
                                                   Individual Grants
-----------------------------------------------------------------------------------------------------------------------
                                                                    % of Total
                                        Number of                    Options             Exercise or
                                  Securities Underlying        Granted to Employees          Base         Expiration
            Name                     Options Granted              In Fiscal Year            Price            Date
                                            #                                               ($/Sh)
------------------------------ ---------------------------- --------------------------- --------------- ---------------
<S>                                    <C>                            <C>                    <C>          <C>
JOHN M. JACOBS, CEO (A)                12,500,000                     51.23%                 .07          05/25/2011
------------------------------ ---------------------------- --------------------------- --------------- ---------------
</TABLE>

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
                                 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
                                          AND FY-END OPTION VALUES
-----------------------------------------------------------------------------------------------------------------------
                                                                           Number of                  Value of
                                                                     Securities Underlying           Unexercised
                                                                          Unexercised               In-the-Money
                                                                          Options at                 Options at
                                                                            FY-End                     FY-End
                                                                              (#)                        ($)
------------------------------ --------------------- ------------ ---------------------------- ------------------------
                                 Shares Acquired        Value            Exercisable/               Exercisable/
            Name                   On Exercise        Realized           Unexercisable              Unexercisable
                                       (#)               ($)
------------------------------ --------------------- ------------ ---------------------------- ------------------------
<S>                                    <C>               <C>             <C>                            <C>
JOHN M. JACOBS, CEO (A)                 -                 -               2,500,000/                     -/
                                                                          10,000,000                      -
------------------------------ --------------------- ------------ ---------------------------- ------------------------
</TABLE>














                                       18

<PAGE>

Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following  table sets forth the beneficial  ownership of common stock of the
Company as of August 20,  2006 by (i) each  person  known by the  Company to own
more than 5% of the Company's  common stock,  (ii) each of the directors,  (iii)
the Named Executive  Officer and (iv) all directors and executive  officers as a
group.  Unless  otherwise  noted,  such persons have sole voting and  investment
power with respect to such shares.
<TABLE>
<CAPTION>
         NAME AND ADDRESS OF                         AMOUNT AND NATURE OF
         BENEFICIAL OWNERSHIP                        BENEFICIAL OWNERSHIP (1)           PERCENT OF CLASS (2)
         --------------------                        ------------------------           --------------------
<S>     <C>                                          <C>                                <C>
         John M. Jacobs
         300 Summers Street, Suite 970
         Charleston, WV  25351                              22,853,127 (3)                      14.45%

         Fay S. Alexander
         6318 Timarron Cove Lane
         Burke, VA  22015-4073                              13,304,700  (4)                      8.47%

         Charles L. Stout
         Route 1, Box 41J
         Bridgeport, WV  26330                              13,175,000  (5)                      8.50%

         William D. Jones
         513 Georgia Avenue
         Chattanooga, TN  37403                             10,752,694  (6)                      6.87%

         Sue C. Hunt
         1508 Viewmont Drive
         Charleston, WV  25302                               8,611,588  (7)                      5.51%

         DIRECTORS

         Frederick E. Ferguson
         Rt. 3, Box 408
         Fayetteville, WV 25840                              1,600,000  (8)                      1.03%

         C. David Thomas
         P.O. Box 5157
         Charleston, WV 25361                                  917,295                           0.59%

         ALL EXECUTIVE OFFICERS
         AND DIRECTORS AS A GROUP (5 PERSONS)               28,215,422                          17.54%
</TABLE>

                                       19
<PAGE>

(1)  Beneficial  ownership is  determined  in  accordance  with the rules of the
     Securities  Exchange Commission and generally includes voting or investment
     power with respect to securities.  Shares of common stock issuable upon the
     exercise of options or  warrants  currently  exercisable  within 60 days of
     August  20,  2006 are  deemed  outstanding  for  computing  the  percentage
     ownership of the person holding such options or warrants but are not deemed
     outstanding for computing the percentage ownership of any other person.

(2)  Based on  154,937,837  shares of common stock issued and  outstanding as of
     August 20, 2006.

(3)  Includes  12,233,044  shares of common stock held in the name of FS Limited
     Partnership  ("FSLP") of which Mr. Jacobs is the sole general partner.  Mr.
     Jacobs  has the power to vote and to direct  the voting of and the power to
     dispose  and direct the  disposition  of the shares  beneficially  owned by
     FSLP. Includes 7,403,416 shares held in joint tenancy with spouse, Kathleen
     M. Jacobs.  Includes  2,500,000 in vested options to purchase Company stock
     exercisable  within  60 days of  August  20,  2006.  Includes  the right to
     convert Series B Preferred Stock holdings to 666,667 shares of common stock
     exercisable within 60 days of August 20, 2006.

(4)  Includes  9,900,000  shares of common  stock  held in the name of  Graphite
     Investment,  LLC  ("Graphite")  and  1,000,000  shares  held in the name of
     Southall Management  Corporation  ("Southall") of which Fay S. Alexander is
     President (both entities). Includes the right to convert Series B Preferred
     Stock holdings of Graphite and Southall to 1,190,000 shares of common stock
     exercisable within 60 days of August 20, 2006. Includes 214,700 shares held
     in joint tenancy with spouse, Dan C. Alexander.

(5)  Includes  25,000  shares  of  common  stock  held in the  name  of  Applied
     Mechanics  Corporation  of  which  Charles  L.  Stout  is  President  and a
     director,  12,150,000 shares held in joint tenancy with spouse,  Marilyn J.
     Stout, and 1,000,000 shares  beneficially owned by members of the immediate
     family.

(6)  Includes  9,060,000  shares  of common  stock  held in joint  tenancy  with
     spouse,  Cynthia B. Jones. Includes the right to convert Series B Preferred
     Stock  holdings to 282,116 shares of common stock (182,116 in joint tenancy
     with spouse)  exercisable  within 60 days of August 20, 2006.  Includes the
     right to  purchase  1,410,578  shares of  common  stock  (910,578  in joint
     tenancy with spouse)  pursuant to issued and outstanding  stock warrants at
     an exercise  price of  one-tenth of one cent per share  ("stock  warrants")
     exercisable within 60 days of August 20, 2006.

(7)  Includes 1,209,515 shares of common stock held in the Individual Retirement
     Account ("IRA") of spouse,  Douglas E. Hunt.  Includes the right to convert
     Series B Preferred Stock holdings to 200,000 shares of common stock and the
     right to purchase  1,000,000  shares of common stock pursuant to issued and
     outstanding  stock warrants  exercisable  within 60 days of August 20, 2006
     and held in the IRA of  Douglas  E.  Hunt.  Includes  the right to  convert
     Series B Preferred  Stock holdings to 33,679 shares of common stock and the
     right to purchase  168,395  shares of common  stock  pursuant to issued and
     outstanding  stock warrants  exercisable  within 60 days of August 20, 2006
     and held jointly with spouse.

                                       20

<PAGE>

(8)  Includes  750,000 shares of common stock held in joint tenancy with spouse,
     Sandra B. Ferguson.  Includes  130,000 shares held in the name of The Party
     Store,  Inc.  ("Party  Store") of which Fred E. Ferguson is President and a
     director.  Includes the right to convert Series B Preferred  Stock holdings
     held in the name Party Store to 120,000 shares of common stock  exercisable
     within 60 days of August 20, 2006.  Includes the right to purchase  600,000
     shares of common stock  pursuant to issued and  outstanding  stock warrants
     held in the name of Party Store at an exercise  price of  one-tenth  of one
     cent per share exercisable within 60 days of August 20, 2006.

There are no outstanding  arrangements that may result in a change in control of
the Company.


Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

For the past several  years the  Company's  operating  expenses  were  partially
funded by advances from its principal  shareholder and chief executive  officer,
John M.  Jacobs.  The  source of  funding  for these  advances  originated  with
obligations incurred by Mr. Jacobs with third parties (such obligations together
with the loans by Mr. Jacobs to the Company, "back-to-back loans

To assure that  repayments  of the various  borrowings  by the Company that were
either  guaranteed by Mr. Jacobs or loaned to the Company by Mr. Jacobs via such
back-to-back  loan  arrangements  did not result in a deemed loan to Mr. Jacobs,
Mr. Jacobs entered into an Assumption  Agreement  with the Company,  pursuant to
which  Mr.  Jacobs  assumes,  and  agrees  to hold the  Company  harmless  from,
principal  of  specified  indebtedness  of the Company as and when  necessary to
fully offset what might  otherwise be deemed an advance of funds  arising out of
the Company's financing activities.

During  the  year  ended  May 31,  2006,  the  Company  made net  repayments  of
$1,170,546 on the  back-to-back  loans which was $508,036 more than the original
loans and interest  charges.  In accordance with the Assumption  Agreement,  the
Company assigned to Mr. Jacobs and Mr. Jacobs assumed responsibility for payment
of certain debt totaling  $101,326 and accounts payable totaling $365,000 during
the year ended May 31, 2006.  The debt  obligation  was re-issued in the name of
Mr.  Jacobs;  and therefore the debt amount was relieved and offset  against the
receivable  from Mr.  Jacobs.  Although the Company  assigned  accounts  payable
totaling $365,000 to Mr. Jacobs through the Assumption Agreement,  for financial
reporting purposed under generally accepted accounting principles,  the accounts
payable  amount  cannot be  derecognized  until  either  paid or released by the
creditor.  The Company did receive a release after May 31, 2006. The balance due
from Mr. Jacobs as of May 31, 2006 is $361,009.

During  fiscal 2006,  Mr. Jacobs  invested  $500,000 for the purchase of 666.667
shares of the Company's Series B preferred stock and 3,333,333 stock warrants on
the same terms and conditions (see Item 6. Management's Discussion and Analysis)
as other initial  investors  that made  investments  in the  Company's  Series B
preferred  shares.  Such  warrants  were  exercised  in a  cashless  transaction
resulting in the issuance in 3,300,000 shares of the Company's common stock.

                                       21
<PAGE>


BORROWING FROM DIRECTOR

On three separate occasions,  dating from January 26, 2004 to March 5, 2004, the
Company borrowed funds totaling  $105,000 from a closely-held  company of one of
the Company's  directors,  Frederick B.  Ferguson.  Such  promissory  notes were
unsecured borrowings,  payable on demand with interest accruing at a rate of ten
percent  (10.00%) per annum,  which was  comparable to other Company  borrowings
from  individuals  that were obtained  from time to time.  At May 31, 2004,  the
principal  balance  outstanding on such notes  amounted to $98,002.  On July 19,
2004,  the  Company  borrowed  an  additional  $25,000  on the  same  terms  and
conditions as the previous notes. During fiscal 2005, repayments of principal on
said notes amounted to $6,455,  resulting in a principal  balance of $116,547 at
May 31, 2005.  Interest expense paid on said notes for the corresponding  period
amounted to $11,517.  In fiscal 2005,  130,000  shares of the  Company's  common
stock was issued to the  closely-held  company as additional  consideration  for
extending  such credit,  consistent  with  additional  consideration  (shares of
common stock) provided to other individuals extending credit to the Company.

During  fiscal  2006,  principal  in the amount of $90,000 was  converted to 120
shares of the Company's  Series B preferred  stock and 600,000 stock warrants on
the same terms and conditions (see Item 6. Management's Discussion and Analysis)
as other individuals that had made loans to the Company. Repayments of principal
on said notes amounted to $13,891,  resulting in a principal  balance of $12,656
at May 31,  2006.  Interest  expense  paid on said  notes for the  corresponding
period amounted to $7,468.

BORROWING FROM EXECUTIVE OFFICER

During  fiscal  2006,  as an  accommodation  to  assist  in the  closing  of the
transaction  for the purchase of WVFCC by the Company  from Celina,  the Company
borrowed  funds from one of its  executive  officers,  Robert J. Kenney,  in the
amount of $75,000 facilitated through a back-to-back borrowing from a commercial
bank.  Such funds were  repaid  within one week upon  receipt by the  Company of
pledged  funds  from  an  unrelated  third-party.  Interest  and  fees  paid  in
connection  with this  borrowing  amounted to $1,001 which were identical to the
amounts  incurred by the  executive  officer from the  commercial  bank.  75,000
shares of the  Company's  common  stock was issued to the  executive  officer as
additional  consideration for extending such credit,  consistent with additional
consideration  (shares of common stock) provided to other individuals  extending
credit to the Company.





                                       22
<PAGE>


Item 13. EXHIBITS

The following exhibits are filed as a part of this Annual Report.
<TABLE>
<CAPTION>

EXHIBIT NUMBER                                                                         PAGE

<S>    <C>                                                                             <C>
2.1    Agreement and Plan of Merger dated as of
       May 18, 2001 by and among NELX, Inc.,
       FSI Acquisition Corp. and FS Investments, Inc. (1)
2.2    Agreement and Plan of Merger dated as of
       May 18, 2001 by and among NELX, Inc.,
       J&C Acquisition Corp. and Jacobs & Company (1)
2.3    Agreement and Plan of Merger dated as of
       December 8, 2006 by and among NELX, Inc. and
       Jacobs Financial Group, Inc. (2)

       Company's plan(s) of acquisition, reorganization, arrangement,
       liquidation or succession

3.1    Company's Articles of Incorporation (3)
3.2    Company's By-laws (3)

16     Letter on change in certifying accountant (4)

21     Subsidiaries of Company                                                         EX 21

31.1   Certification of Chief Executive Officer pursuant to                            EX 31.1
       Rule13a-146.1 promulgated under the Securities Exchange Act of 1934

31.2   Certification of Chief Financial Officer pursuant to                            EX 31.2
       Rule 13a-146.1 promulgated under the Securities Exchange Act of 1934

32.1   Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1950,    EX 32.1
       as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2   Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1950,    EX 32.2
        As adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
</TABLE>

(1)  Incorporated by reference to the Company's Current Report On Form 8-K dated
     May 29, 2001.
(2)  Incorporated by reference to the Company's Definitive Proxy Statement dated
     November 7, 2005.
(3)  Incorporated by reference to the Company's Current Report on form 8-K dated
     December 29, 2005.
(4)  Incorporated by reference to the Company's Current Report on Form 8-K dated
     March 8, 2006.

                                       23
<PAGE>


Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES


AUDIT FEES

Billings for principal  accounting fees and services related to the annual audit
of  financial  statements,  review  of  financial  statements  included  in  the
Company's  Forms 10-QSB,  and services  provided by the accountant in connection
with statutory and  regulatory  filings for the year ended May 31, 2006 amounted
to  $33,458.  Management  estimates  that  additional  amounts  to be billed are
approximately $30,000.

Billings for principal  accounting fees and services related to the annual audit
of  financial  statements,  review  of  financial  statements  included  in  the
Company's Forms 10-QSB,  and  audit-specific  matters  relating to the financial
statements for the year ended May 31, 2005 amounted to $29,880.

AUDIT-RELATED SERVICES

Billings for assurance and related services by the principal accountant that are
reasonably related to the performance of the annual audit or review of financial
statements for the year ended May 31, 2006 amounted to $775.


TAX FEES

During fiscal 2006, billings for tax preparation services were $5,970.

During fiscal 2005, billings for tax preparation services were $5,750.


ALL OTHER FEES

There were no other fees billed by the principal accountant in fiscal years 2006
or 2005.


ADMINISTRATION OF AUDIT AND NON-AUDIT ENGAGEMENTS

The  Company  does not  have a  standing  audit  committee.  The  full  Board of
Directors  is  performing  the  functions of the audit  committee.  The Board of
Director's policy is to pre-approve all audit and permissible non-audit services
provided by the independent auditors. These services may include audit services,
audit-related  services,  tax  services  and  other  services.  Pre-approval  is
generally provided for up to one year and any pre-approval is detailed as to the
particular  service  or  category  of  services  and is  generally  subject to a
specific  budget.  The  independent  auditors  and  management  are  required to
periodically  report to the Board of Directors  regarding the extent of services
provided by the independent  auditors in accordance with this pre-approval,  and
the fees for the  services  performed to date.  The Board of Directors  may also
pre-approve  particular services on a case-by-case basis. The Board of Directors
pre-approved  each audit and  non-audit  service  rendered to the Company by its
independent  Auditors as set forth above and no services were approved using the
de minimus exception afforded by Rule 2-01(c)(7)(i)(C) of Regulation S-X.


                                       24
<PAGE>



SIGNATURES


In  accordance  with the Exchange  Act, this report has been signed below by the
following  persons on behalf of the  registrant and in the capacities and on the
dates indicated.


Dated:   September 13, 2006                        By:  /s/ John M. Jacobs
        ------------------------                   ----------------------------
                                                    John M. Jacobs
                                                    President and CEO
                                                    Director


Dated:   September 13, 2006                        By:  /s/ Robert L Neal
        ------------------------                   ----------------------------
                                                    Robert L. Neal
                                                    Chief Financial Officer


Dated:   September 13, 2006                        By: /s/ Frederick E. Ferguson
        ------------------------                   ----------------------------
                                                    Frederick E. Ferguson
                                                    Director


Dated:   September 13, 2006                        By: /s/ C. David Thomas
        ------------------------                   ----------------------------
                                                    C. David Thomas
                                                    Director




                                       25