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


                                    FORM 10-K

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

                     For the fiscal year ended May 31, 2010

                         Commission file number 0-21210

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


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


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

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

         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


Indicate  by check mark if  registrant  is a  well-known  seasoned  insurer,  as
defined in rule 405 of the Securities Act.

               Yes[ ]                              No[X]

<PAGE>

Indicate by check mark if registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.

               Yes[ ]                              No[X]

Indicate by a check mark 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[ ]

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not 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-K or any amendment to this Form 10-K.       [X]

Indicate by check mark whether the registrant is a large  accelerated  filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.

Large accelerated filer    [  ]        Accelerated filer                   [   ]
Non-accelerated filer      [  ]        Smaller reporting company           [ X ]


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

               Yes[ ]                              No[X]

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 the
last  business day of the  registrant's  most recently  completed  second fiscal
quarter.  As of November  30,  2009:  $849,861  (207,283,086  shares at $.0041 /
share)

Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest  practicable date:  222,072,297  shares of common
stock as of September 13, 2010.

<PAGE>
                               TABLE OF CONTENTS


                                                                           Page
                                                                           ----
           PART I

Item 1     Business                                                          4
Item 1A    Risk Factors                                                      5
Item 2     Properties                                                        5
Item 3     Legal Proceedings                                                 5
Item 4     Submission of Matters to a Vote of Security Holders               5

           PART II

Item 5     Market for Registrant's Common Equity, Related Stockholder
           Matters and Issuer Purchases of Equity Securities                 6
Item 6     Selected Financial Data                                           8
Item 7     Management's Discussion and Analysis of Financial Condition and
           Results of Operations                                             8
Item 7A    Quantitative and Qualitative Disclosures About Market Risk        19
Item 8     Financial Statements and Supplementary Data                       20
Item 9     Changes in and Disagreements With Accountants on Accounting and
           Financial Disclosure                                              21
Item 9A(T) Controls and Procedures                                           21
Item 9B    Other Information                                                 22

           PART III

Item 10    Directors, Executive Officers and Corporate Governance            23
Item 11    Executive Compensation                                            25
Item 12    Security Ownership of Certain Beneficial Owners and Management
           and Related Stockholder Matters                                   28
Item 13    Certain Relationships and Related Transactions and Director
           Independence                                                      31
Item 14    Principal Accounting Fees and Services                            32

           PART IV

Item 15    Exhibits, Financial Statement Schedules                           33




<PAGE>

PART I
------

Item 1. BUSINESS
----------------

The predecessor of Jacobs Financial Group, Inc. (the "Registrant",  "JFG" or the
"Company"), NELX, Inc., was incorporated in the State of Kansas in March 1983 as
Nelson  Exploration,  Inc. In October 1993 the Company changed its name to NELX,
Inc.  On or  about  December  29,  2005,  NELX  was  merged  with  and  into its
newly-formed wholly-owned subsidiary, JFG, 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,  and  amendments  to the Articles of  Incorporation  and Bylaws of the
Registrant.  The Company holds four wholly owned  subsidiaries,  FS Investments,
Inc.  ("FSI"),  Jacobs & Company  ("Jacobs  & Co."),  First  Surety  Corporation
("FSC") and Crystal Mountain Water, Inc. ("CMW").

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.

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,  companies  and  individuals.  In June 2001,  the Jacobs & Company
Mutual Fund (the "Fund") was organized as a series of the Advisors Series Trust.
On June 27, 2005, the Fund was  reorganized as a series of Northern  Lights Fund
Trust.  The Fund's assets were  liquidated in November 2009 and  distribution of
proceeds to the Fund's shareholders was made on December 1, 2009.

On December  31, 2005 the Company  acquired  the former West  Virginia  Fire and
Casualty Company (WVFC),  subsequently  renamed First Surety  Corporation (FSC),
from The Celina Mutual Insurance Company (Celina).  The acquisition consisted of
the  purchase of  marketable  investments  and  insurance  licenses  and did not
include any  existing  policies or customer  base as the  insurance  lines being
offered by WVFC were not insurance lines that new ownership  intended to pursue.
FSC is a West  Virginia  domiciled  property and casualty  company with licenses
(multi-line) in West Virginia,  Indiana and Ohio,  targeting  primarily coal and
oil & gas industry  surety markets in the Eastern  United  States.  In 2006, the
Company was licensed for the surety line of business in West Virginia.  In 2008,
the  Company's  license  for surety was  expanded  to include  Ohio,  however no
policies were written in Ohio in 2008.

CMW has an undeveloped leasehold interest in a mineral water spring located near
Hot Springs, Arkansas.

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

                                      -4-
<PAGE>

Item 1A.RISK FACTORS
--------------------

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

Item 2. PROPERTIES
------------------

Through  its  wholly-owned  subsidiary,  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  $180 per month with automatic options to extend the
leasehold 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 stock of CMW has been
pledged  to a group of  lenders  as  collateral  (See Item 7  "Bridge-financing,
Commitments and Material Agreements").

Item 3. LEGAL PROCEEDINGS
-------------------------

None


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

Three new members have been  appointed  to the JFG Board of Directors  since the
last annual meeting, held in December 2005, and will serve until the next called
meeting of shareholders which is not yet scheduled.  Mr. Fred Ferguson,  a board
member  of the  Company  and  FSC,  died on May 21,  2010.  The  vacancy  on the
Company's board remains unfilled.


                                      -5-
<PAGE>

PART II
-------

Item 5.  MARKET FOR  COMMON  EQUITY,  RELATED  STOCKHOLDER  MATTERS,  AND ISSUER
PURCHASES OF EQUITY SECURITIES.
--------------------------------------------------------------------------------

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, 2010

         4th Quarter                       .012            .003
         3rd Quarter                       .015            .005
         2nd Quarter                       .026            .006
         1st Quarter                       .04             .003


FISCAL YEAR ENDED MAY 31, 2009

         4th Quarter                       .045            .001
         3rd Quarter                       .01             .003
         2nd Quarter                       .01             .003
         1st Quarter                       .01             .003



As of May 31,  2010,  there  were  approximately  899  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.

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.  For  further  information,  see  Notes  C  and  O to  the
Consolidated Financial Statements and "Restrictions on Use of Assets" within the
section  of  "Capital   Resources  and  Financial   Condition"  of  Management's
Discussion  and  Analysis  of  Financial  Condition  and  Results of  Operations
contained in Part II Item 7 of this Annual Report on Form 10-K.

                                      -6-
<PAGE>

As of May 31, 2010, 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

----------------------------- -------------------------- ----------------------
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
----------------------------- -------------------------- ----------------------
         32,600,000                    .05822                   2,400,000
----------------------------- -------------------------- ----------------------

There are no other equity compensation plans not approved by stockholders of the
Company.

UNREGISTERED SALES OF EQUITY SECURITIES

In the year  ended May 31,  2010,  10 shares of Series A  Preferred  Stock  were
issued pursuant to ongoing  bonding  programs of FSC in exchange for cash in the
amount of $10,000.

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

In the year ended May 31, 2010, 6,804.936 shares of Series C Preferred Stock and
13,609,872  Common  shares were issued in a private  placement to holders of the
Company's  Series B  Preferred  Stock that  elected to exchange  their  Series B
Preferred stock.

The  Certificate of  Designations,  Powers,  Preferences  and Rights of Series C
Preferred  Stock adopted by the Board of Directors of the Company on October 29,
2009 is set forth as Exhibit 4.3.

In the  year  ended  May 31,  2010,  1,675,000  common  shares  were  issued  as
additional  consideration to various lenders in private  placements  pursuant to
short term borrowings. 2,963,668 common shares were issued to holders exercising
the  company's  warrants.  16,532,559  common  shares  were issued to the Bridge
lenders. Subsequent to May 31, 2010, 1,395,000 common shares have been issued in
private placements to various individuals  pursuant to short term borrowings and
6,213,285 common shares were issued to the Bridge lenders.

The Registrant's Common Shares are issued under the restrictions of Rule 144 and
bear a legend to that effect.

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

                                      -7-
<PAGE>

Item 6. SELECTED FINANCIAL DATA
-------------------------------

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

Item 7. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
--------------------------------------------------------------------------------

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

RESULTS OF OPERATIONS  AND FINANCIAL  CONDITION AS OF AND FOR THE YEAR ENDED MAY
31, 2010

RESULTS OF OPERATIONS

The  Company  experienced  a loss (after  accretion  of  mandatorily  redeemable
convertible  preferred  stock, and accrued  dividends on mandatorily  redeemable
preferred  stock and equity  preferred  stock) of  $2,713,193  in fiscal 2010 as
compared  with a loss (after  accretion of  mandatorily  redeemable  convertible
preferred  stock,  including  accrued  dividends)  of $3,057,687 in fiscal 2009.
While total revenues increased from  approximately  $1,194,000 in fiscal 2009 to
approximately $1,372,000 in fiscal 2010, total operating expenses decreased from
approximately  $2,039,000 in fiscal 2009 to  approximately  $1,830,000 in fiscal
2010,  resulting  in a decrease  in the loss from  operations  of  approximately
$386,000.

The increase in revenues is largely attributable to new business acquired by FSC
and increased  investment  holdings and the gain on sales of investments of FSC.
The decrease in expenses is attributable to decreased general and administrative
expense  related  to  reduction  in  professional  legal  fees  incurred  in the
Company's pending acquisition agreements and ongoing efforts to raise additional
capital to expand its business and penetrate new markets.

Interest  expense  increased  from  approximately  $605,000  in  fiscal  2009 to
approximately  $957,000  in  fiscal  2010.  This was  mainly  due to  additional
borrowings  incurred in relation to the  Company's  efforts to raise  additional
capital financing and to provide financing of current operations, as well as the
increased  expense of common shares  issued in connection  with bridge loans and
other financing  arrangements,  and the higher interest rate on bridge loans due
to the forbearance agreement.

In the  twelve-month  period  ending May 31, 2010,  the Company,  upon advice of
legal counsel,  removed certain dormant accounts payable in the aggregate amount
of $200,240 based upon the conclusion  that none of the accounts  represented an
obligation  that is legally  enforceable  against the Company.  Such removal was
recorded as a gain on debt extinguishment.

                                      -8-
<PAGE>
CAPITAL RESOURCES AND FINANCIAL CONDITION

MANDATORILY REDEEMABLE PREFERRED STOCK

In conjunction with the acquisition of FSC at December 31, 2005, a restructuring
of the Company's financing was accomplished through the private placement of 350
shares of Series A Preferred stock and 3,980 shares of Series B Preferred stock,
each  accompanied by 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 of December
30, 2005.

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,  although  to the extent  that
proceeds  from the sale of Series B  preferred  shares  was used in the  initial
acquisition  and funding of FSC, the Company was allowed to use such proceeds to
redeem  Series B preferred  stock  (Company  option to redeem) or for funding of
on-going  operations.  Effective  June  1,  2007,  the  Company  agreed  to  the
requirement of the West Virginia  Insurance  Department to downstream all future
proceeds from sales of Series A preferred stock in order to increase capital and
reserves of the insurance subsidiary to more substantial levels.

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  primarily for
coal  mining  and  reclamation  permits,  which  are  long-term  in  nature  and
continually  evolving 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.

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
choosing to exercise 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.

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

                                      -9-
<PAGE>

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  four and  one-half  percent
(4.5%) or approximately $36,000.

In November  2009, as a means of  alleviating  obligations  associated  with the
Company's  Series B Preferred  Stock,  which by its terms  matures at the end of
2010,  management  proposed  a  recapitalization  to assist in  stabilizing  the
financial position of the Company.  The Board deemed it advisable to designate a
Series C Preferred Stock, with 10,000 authorized  shares.  The  Recapitalization
consisted  of the  exchange of 6,804.936  Series B Shares for a  combination  of
Series C  Shares  and  Common  Stock  Shares.  For  each  Series  B  Share,  the
participating  holder  received  (i) one Series C Share and (ii) 2,000 shares of
JFG Common Stock.  The accumulated  dividend  rights and preferences  associated
with the Series B Shares transferred  undiminished to the corresponding Series C
Shares. This exchange amounted to $6,269,051 of carrying value of Series B stock
being exchanged for Series C and Common Stock. 13,609,872 shares of Common Stock
were issued to the Series C Stock holders at the rate of 2,000 Common shares for
each exchanged Series B Stock,  with the related cost associated with the Common
issuance  offsetting  the Series C carrying  value by $265,120.  The shares were
valued at  approximately  $.01948 per share based on the average  quoted closing
price of the Company's  stock for the 20-day period  proceeding  the date of the
transaction.  Series C stock may be  redeemed by the Company but does not have a
fixed maturity date and is considered  permanent equity.  Holders of over 70% of
the  outstanding  Series  B  Preferred  Shares  elected  to  participate  in the
recapitalization.  The carrying value of the Series B Preferred  Shares that did
not convert are listed in the  Liabilities  section of the  Balance  Sheet,  and
therefore the accretion and dividends  associated  with the Series B stock after
November 30, 2009 are deductions from net income.  The remaining Series B shares
are  continuing to be accreted from carrying  value to the face amount for the 5
year  period from the date of  issuance.  Series C stock has no  accretion.  The
recorded  values of the Series A  preferred  stock is 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 Series A designation is entitled to receive cumulative dividends at the rate
of 4.00% per annum and the Series B and Series C  designations  are  entitled to
receive cumulative  dividends at the rate of 8.00% per annum, with the Series A,
B and C  designations  having equal  ranking and  preference as to dividends and
liquidation  rights and in priority to the Company's  common  stockholders.  The
accrued  (but  undeclared)  dividends  associated  with the  Series  C  exchange
amounted to $2,295,624 and are included in the total amount exchanged for Series
C Shares.

Unlike the Series B Shares with their fixed  maturity  date, the Series C Shares
are permanent  equity,  with accruing  dividends only  increasing the preference
amount that must be  satisfied  before  junior  securities  may  participate  in
dividends or on liquidation. Accordingly, the effect of the accrual of dividends
with  respect  to the  Series  C Shares  on the  Company's  balance  sheet is to
increase  the  aggregate  claim  of the  Series C Shares  on the  equity  of the
corporation and to increase the deficit in common equity, while having no effect
on the net equity of the corporation as a whole. The entitlement of the Series C
Shares to a priority in relation to junior  securities with respect to dividends
and on liquidation does not create an obligation by the Company and therefore no
liability  is  recorded  until the  dividends  are  declared by the Board of the
Company.  The Series C Shares are pari passu with the Series A Shares and Series
B Shares and no dividends or other distributions will be paid upon Common Shares
or any other  class of Shares  that is junior in priority to the Series C Shares
while  dividends are in arrears.  At this time,  management  has chosen to defer

                                      -10-
<PAGE>

payment of  dividends  to the holders of the Series A, B and C Preferred  Shares
until the  Company  has  sufficient  cash flow from  operations  to service  the
obligation.

BRIDGE-FINANCING, COMMITMENTS AND MATERIAL AGREEMENTS

Of primary  importance to the Company's  ability to fully implement its business
plan is the  expansion  of that  business  into  additional  states.  Regulatory
approval  and  licensing  is required  for each state where FSC seeks to conduct
business.  Management  found  entry into  additional  states  (as a surety)  was
proving difficult  without the benefit of more substantial  capital and reserves
due to FSC's status as a recent entry into this market. Accordingly,  management
began pursuing avenues that would provide  additional capital to facilitate such
expansion.

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

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

                                      -11-

<PAGE>

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, 2010, such assets
amounted to approximately $6.96 million.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

INVESTMENTS

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

INSURANCE PREMIUMS

Insurance  premiums  are  recognized  as  revenue  ratably  over the term of the
related  policies in proportion to the insurance  protection  provided.  Premium
revenues are net of amounts ceded to reinsurers. Unearned premiums represent the
portion of  premiums  written,  before  ceded  reinsurance  which is shown as an
asset,  applicable to the unexpired  terms of policies in force  determined on a
pro rata basis.

Insurance  premium  receivables are presented net of an estimated  allowance for
doubtful  accounts,  which is based on a  periodic  evaluation  of the aging and
collectability of premium receivables.

DEFERRED POLICY ACQUISITION COSTS

Policy  acquisition  costs,  consisting of commissions,  premium taxes and other
underwriting  expenses  which  vary  with,  and are  primarily  related  to, the
production of business,  are deferred and amortized as a charge to income as the
related premiums are earned. The Company periodically tests that deferred policy
acquisition costs are recoverable based on the expected  profitability  embedded
in the reserve for unearned premium. If the expected  profitability is less than
the balance of deferred  policy  acquisition  costs, a charge to income is taken
and the  deferred  policy  acquisition  cost  balance  is  reduced to the amount
determined to be recoverable. Anticipated investment income is considered in the
determination of the recoverability of deferred policy acquisition costs.

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

                                      -12-
<PAGE>

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, 2010.

FSC is currently licensed to write coal permit and miscellaneous fixed-liability
limit surety bonds in West Virginia and Ohio.  Coal permit bonds are required by
regulatory agencies to assure the reclamation of land that has been disturbed by
mining operations, and accordingly, is a highly regulated process by federal and
state  agencies.  Such  bonds are  generally  long-term  in nature  with  mining
operations  and  reclamation  work being  conducted in unison as the property is
mined.  Additionally,  no two  principals and properties are alike due to varied
company structures and unique geography and geology of each site.

In underwriting coal reclamation bonds, management obtains estimates of costs to
reclaim the  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 and if FSC is not otherwise able to recover
under its contractual rights to indemnification.

Miscellaneous   fixed-liability   limit   surety  bonds  are   generally   fully
collateralized  by the principal's cash investment into a collateral  investment
account,  managed by the Company's investment advisory subsidiary (Jacobs & Co.)
that  mitigates  FSC's  exposure to loss.  Losses can occur should the principal
default on the  performance  required by the bond and the collateral held in the
investment account experience 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 along with
industry  averages and  historical  experience.  Management  has estimated  such
losses based on industry experience, adjusted for factors that are unique to the
Company's approach, and in consultation with consulting actuaries experienced in
the surety field.

LIQUIDITY AND GOING CONCERN

The Company has  experienced  operating  losses (after  accretion of mandatorily
redeemable  convertible  preferred stock,  and accrued  dividends on mandatorily
redeemable   preferred  stock  and  equity  preferred  stock)  of  approximately
$2,713,000  and  $3,058,000  for the fiscal  years  ended May 31, 2010 and 2009,
respectively.  Despite  increased revenue and the continued decline of operating

                                      -13-
<PAGE>

expenses,  the  Company  has  not  been  able  to  pay  certain  amounts  due to
professionals  and others and continues to be unable to pay its preferred  stock
dividend  obligation,  certain payroll taxes and withholdings  from 2009, and to
cure  its  defaults  in  certain  quarterly  payments  due its  bridge-financing
lenders.  A substantial  portion of the Company's  cash flow is generated by its
insurance  subsidiary and is subject to certain withdrawal  restrictions.  While
management expects revenue growth and cash flow to increase significantly as its
business plan is fully implemented,  it is anticipated that losses will continue
and the  Company  will be  cash  constrained  until  FSC is  able to  develop  a
substantial book of business.

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

Expansion  of  FSC's  business  to  other  states  is a key  component  to fully
implementing  the Company's  business plan. In fiscal 2009, the Company was able
to increase the capital of FSC and reactivate  FSC's  insurance  license in Ohio
and obtain  authority to issue surety bonds in that state.  However,  management
has found that entry into other states (as a surety) has been difficult  without
the benefit of more  substantial  capital and  reserves due to FSC's status as a
recent entry into this market and the financial  condition of the Company.  This
is the case  notwithstanding the reinsurance  agreement entered into by FSC with
Lloyd's of London and the  resulting  increase in bonding  capacity.  Management
believes that if FSC's  capital and surplus  reserves  were  significantly  more
substantial  and the financial  condition of the Company was  stabilized,  entry
into other states would be less challenging.  Accordingly,  management continues
to pursue avenues that can provide  additional  capital to increase the capacity
of its insurance subsidiary and to fund continuing operations as the business is
being fully developed. In addition, as an alternative means of addressing access
to markets,  management is seeking to establish a  relationship  with any one of
several  possible  sureties  that are  licensed in those  states other than West
Virginia and Ohio that comprise  significant markets for the bonding programs of
FSC and could issue surety  bonds that are  underwritten  and  reinsured by FSC.
Under such a  "fronting"  arrangement,  the need for  additional  capital at the
level of FSC to facilitate entry to other state markets would become  secondary,
since the  payment  of a  fronting  fee to the  insurance  company  with  active
licenses would provide access to the state market without formal entry.

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

                                      -14-
<PAGE>

Company's  prospects for engaging in a larger  financing,  will assist FSC as it
applies to enter  other state  markets,  and will be an impetus to the growth of
the Company's business.

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

COMPARISON OF RESULTS OF OPERATIONS FOR FISCAL 2010 WITH 2009

The  Company  experienced  a loss (after  accretion  of  mandatorily  redeemable
convertible  preferred  stock, and accrued  dividends on mandatorily  redeemable
preferred  stock and equity  preferred  stock) of  $2,713,193  in fiscal 2010 as
compared with a loss of $3,057,687  (after  accretion of mandatorily  redeemable
convertible preferred stock, including accrued dividends) in fiscal 2009.

REVENUES

Revenues in fiscal 2010 amounted to  $1,371,783  as compared with  $1,194,077 in
fiscal 2009.  The increase in revenues is largely  attributable  to new business
acquired by FSC and increased  investment  holdings of FSC and gains on sales of
those investment holdings.

Revenue from the investment  management segment,  net of advisory referral fees,
was  $262,635  in  fiscal  2010  as  compared  with  $233,297  in  fiscal  2009,
representing  an increase of $29,337.  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  year to  year  with  any  large  fluctuations  being
attributable to the growth or loss of assets under  management.  The increase in
revenues is primarily attributable to growth in individually managed funds...

Revenue  from the  surety  insurance  segment,  consisting  of FSC and TSA,  was
$1,095,213  for fiscal 2010 as compared with $957,067 for fiscal 2009.  Revenues
attributable to the insurance segment are as follows:

                                                 Year Ended May 31,
                                                2010            2009
                                          --------------- ---------------

   Premiums and commissions               $   780,808       $ 660,222
   Net investment income                      273,577         288,747
   Net realized investment gains               40,828           8,098
                                          --------------- ---------------

                                   Total  $ 1,095,213       $ 957,067
                                          =============== ===============


                                      -15-
<PAGE>

Premium  revenue is  recognized  ratably over the term of the policy  period and
thus is relatively stable from period to period with fluctuations for comparable
periods  generally  reflecting the overall growth or loss of business.  Whereas,
commission  revenue,  which is dependent on the timing of issuance or renewal of
bonds, is expected to be somewhat more "seasonable" from quarter-to-quarter with
fluctuations  for comparable  periods  largely  reflecting the overall growth or
loss of  business.  Commission  income  for the year  ending  2010  was  $11,900
compared to $13,349 for 2009. Investment income is expected to remain relatively
consistent  from period to period,  but can fluctuate  based on interest  rates,
market conditions,  growth or loss of business, and investment funds expended in
the payment of claims.

The increase in revenues  reflected above is  attributable  to increased  surety
business that has been secured in fiscal 2010.  Gross premium  written in fiscal
2010  amounted to  $1,114,197  as compared to $905,519 and is  reflective of the
growth  experienced in this segment of the business for the comparable  periods.
However, net premium written (written premium less deductions ceded reinsurance)
in fiscal 2010  amounted to $728,938 as compared  with  $813,345 in fiscal 2009,
due to a full  year of ceded  premium  in 2010  compared  to 2  months  in 2009.
Commission  income earned for the  placement of bonds with outside  insurers has
remained relatively stagnant.

FSC's  investment  holdings in fiscal 2010 averaged  $6.553  million as compared
with $5.986 million for fiscal 2009, with investment yields decreasing  slightly
from 5.0% to 4.1%.

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.  Incurred  policy losses for fiscal 2010 have been recorded
as  $178,531  or 23.2% of earned  premium as  compared  to  $186,007 or 28.5% of
earned premium for fiscal 2009.  IBNR loss estimates have been based on industry
averages  adjusted  for  factors  that  are  unique  to the  FSC's  underwriting
approach.  As of May 31, 2010 FSC has not  received any claims for losses on any
bonds  underwritten  since business began in 2006,  therefore its actuaries have
approved  reducing  the  percentage  of premiums  reserved  for IBNR due to this
historical pattern.

Insurance  policy   acquisition   costs  represent  charges  to  operations  for
underwriting,  commissions and premium tax attributable to surety polices issued
by FSC and are recognized  ratably over the period in which premiums are earned.
In fiscal 2010 such costs  amounted  to  $249,478 or 32.4% of earned  premium as
compared  with  $152,964  or 23.5% in fiscal  2009.  The  increase of $96,514 in
expenses is  attributable  to costs  associated to the increase in gross premium
written,  while the  increase as a  percentage  is  attributable  to reduced net
premium earned after ceding of premium to reinsurers.

General and administrative  expenses for fiscal 2010 were $1,316,211 as compared
with  $1,564,224  for fiscal 2009,  representing  a decrease of $248,013 and are
comprised of the following:

                                      -16-
<PAGE>
<TABLE>
<CAPTION>

                                     Year Ended May 31,
                                                         2010              2009         Difference
                                                    ---------------- ----------------- ------------
<S>                                                 <C>              <C>               <C>
Salaries and related costs                          $     710,750    $     550,646     $    160,104
General office expense                                    111,203          103,830            7,373
Legal and other professional fees                         171,535          486,878         (315,343)
Audit, accounting and related services                    110,431          126,359          (15.928)
Travel, meals and entertainment                            49,214           58,589           (9,375)
Other general and administrative                          163,078          237,922          (74,844)
                                                    ---------------- ----------------- -------------
                  Total general and administrative  $   1,316,211    $   1,564,224     $   (248,013)
                                                    ================ ================= =============
</TABLE>

Salaries and related costs, net of deferred internal policy  acquisition  costs,
increased approximately $160,104 and are comprised of the following:

<TABLE>
<CAPTION>
                                     Year Ended May 31,
                                                          2010               2009             Difference
                                                    ------------------ ------------------  ---------------
<S>                                                  <C>                <C>                <C>
Salaries and wages                                   $     469,341      $     528,699      $      (59,358)
Commissions                                                 44,374             26,131              18,243
Payroll taxes                                               42,372             45,262              (2,890)
Stock option expense                                       251,631             11,462             240,169
Fringe benefits                                             54,027             63,531              (9,504)
Key-man life insurance                                      54,994             57,522              (2,528)
Deferred policy acquisition costs                         (205,989)          (181,961)            (24,028)
                                                    ------------------ ------------------ ----------------
                  Total salaries and related costs   $     710,750      $     550,646      $      160,104
                                                    ================== ================== ================
</TABLE>

Decreases in salaries  and wages relate to decreased  staff and lower salary for
staff  replaced  during the last month of 2009.  The  increase  in stock  option
expense is attributable to the awarding of 10,000,000  shares of incentive stock
options on June 30, 2009. Group health benefits  decreased  slightly due to less
employees being covered in 2010.  Commissions  increase due to a large number of
new bonds being written in 2010.

The  decrease  in  legal  and  professional  fees of  $315,343  is due to  fewer
resources expended in 2010 in the areas of acquisition and expansion.

Other less  significant  decreases were  experienced in audit,  travel and other
general administrative  expenses categories in fiscal 2010 as compared to fiscal
2009, also due to fewer resources expended in acquisition efforts.

Jacobs & Co. was the investment advisor to the Jacobs & Company Mutual Fund (the
"Fund").  The Fund was  initially  established  by Jacobs & Co. to  provide  the
ability to manage smaller  accounts in a more efficient and  diversified  manner
and provide an investment  vehicle that would fit within the  Company's  broader
business plan of issuing smaller bonds under its collateralized surety programs.
The delays incurred by the Company in  accomplishing a financing that would make
possible the full implementation of the Company's business plan coupled with the

                                      -17-
<PAGE>

Fund's lackluster performance during the interim period contributed to a gradual
decline in assets and the fixed cost  maintenance  of the Fund was a significant
expense to the Company.  The Fund's independent Board of Trustees had determined
that  unless the Fund  experienced  a  significant  growth in assets it would be
necessary to liquidate  the Fund.  Growth in assets was not  accomplished.  As a
result,  the Board of Trustees  directed the liquidation of the Fund's assets in
November  and the  distribution  of the proceeds to the Fund's  shareholders  on
December 1, 2009.

While the Fund was responsible for its own operating expenses,  Jacobs & Co., as
the  investment  advisor,  had  agreed  to limit  the  Fund's  aggregate  annual
operating  expenses  to 2%  of  the  average  net  assets.  Under  this  expense
limitation  agreement,  Jacobs & Co.  absorbed  $75,038 of the Fund's  operating
expenses in 2010 as compared to $122,758 in 2009. Due to the Fund's liquidation,
there were no revenues and minimal expenses  attributable to the fund subsequent
to December 1, 2009. The cumulative  reimbursement due the Fund by J&C as of May
31, 2010 was $54,866.

GAIN ON EXTINGUISHMENT OF DEBT

During the year ended May 31, 2010,  the Company,  upon advice of legal counsel,
removed certain dormant  accounts  payable in the aggregate  amount of $200,240,
based upon the conclusion  that none of accounts  represented an obligation that
is legally enforceable against the Company.  Such removal was recorded as a gain
on debt extinguishment.

INTEREST EXPENSE AND INTEREST INCOME

Interest  expense for fiscal 2010 was  $956,973  as  compared  with  $605,045 in
fiscal 2009. The increase in interest  expense is primarily  attributable to the
bridge-financing  arrangement forbearance agreement and increased debt and stock
issued  as  incentive  for debt in 2010.  Components  of  interest  expense  are
comprised of the following:
<TABLE>
<CAPTION>
                                                                      Year Ended May 31,
                                                                   2010               2009           Difference
                                                            ------------------ ------------------ --------------
<S>                                                         <C>                <C>                <C>
Interest expense on bridge financing                        $     583,829      $     349,016      $    234,813
Expense of common shares issued or to be issued in
connection with bridge financing arrangements                     233,683            149,738            83,945
Expense of common shares issued or to be issued in
connection with issued debt                                        28,275             14,733            13,542
Interest expense on demand and term notes                         102,046             77,460            24,586
Other finance charges                                               9,140             14,098            (4,958)
                                                           ------------------ ------------------ ---------------
                                   Total interest expense  $      956,973     $      605,045     $     351,928
                                                           ================== ================== ===============
</TABLE>


                                      -18-
<PAGE>

PREFERRED STOCK ACCRETION AND DIVIDENDS

Accretion of mandatorily  redeemable convertible preferred stock is comprised of
accretion  of discount and accrued but unpaid  dividends  on preferred  stock as
follows:

                                                    Year Ended May 31,
                                                  2010              2009
                                             ----------------- ----------------
Accretion of discount                        $     273,369     $     567,811
Accrued dividends - mandatorily redeemable
 preferred stock                                   607,706         1,041,499
Accrued dividends - equity preferred stock         374,662                 -
                                             ----------------- ----------------

                                             $   1,255,737     $   1,609,310
                                             ================= ================

The Series B class of stock is treated as a liability  as of  November  30, 2009
when the majority was exchanged for Series C equity stock. Therefore,  accretion
of $86,932 and  dividends  of $155,708  associated  with the Series B after that
date are  deductions  from net income and not included in the table  above.  The
decrease in the  accretion of discount  results from this  exclusion of Series B
subsequent  to November 30, 2009 as well as the  application  of the interest or
constant  yield  method to the initial  discount  recorded  with  respect to the
mandatorily redeemable preferred stock over a period of five years from the date
of issuance of the stock.  Series C equity stock  accrues  dividends at the same
rate as the Series B it was exchanged for,  however it is separated in the table
above  due to  Series  C not  being  mandatorily  redeemable.  Series C does not
accrete.

OFF BALANCE SHEET ARRANGEMENTS

The Company does not have any off-balance  sheet  arrangements  that have or are
reasonably likely to have a current or future effect on the Company's  financial
condition,  changes in financial  condition,  revenues or  expenses,  results of
operations,  liquidity,  capital  expenditures  or  capital  resources  that  is
material to investors.


Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
-------------------------------------------------------------------

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



                                      -19-
<PAGE>

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
---------------------------------------------------

The following financial statements are included herein in response to Item 8:

                                                                        Page
                                                                 ---------------
Table of Contents                                                        F-1

Report of Independent Registered Public Accounting Firm                  F-2

FINANCIAL STATEMENTS

Consolidated Balance Sheets                                              F-3
Consolidated Statements of Operations                                    F-4
Consolidated Statements of Comprehensive Income (Loss)                   F-5
Consolidated Statements of Cash Flows                                    F-6
Consolidated Statements of Mandatorily Redeemable Preferred
 Stock and Stockholders' Equity (Deficit)                                F-7
Notes to Consolidated Financial Statements                               F-10

SCHEDULES

Schedule I - Summary of Investments - Other than Investments
 in Related Parties                                                      F-39

Schedule II - Condensed Financial Information of Registrant              F-40

Schedule III - Supplementary Insurance Information                       F-42

Schedule IV - Supplementary Insurance Information - Reinsurance          F-43

Schedule VI - Supplemental  Information                                  F-44







                                      -20-
<PAGE>
Item  9.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
FINANCIAL DISCLOSURE
--------------------------------------------------------------------------------

In connection with the audits for the years ended May 31, 2010 and May 31, 2009,
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 9A(T). CONTROLS AND PROCEDURES
-----------------------------------

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

In  connection  with the  preparation  of this  Annual  Report on Form 10-K,  an
evaluation was carried out by JFG's management,  with the participation of JFG's
Chief Executive  Officer and Chief Financial  Officer,  of the  effectiveness of
JFG's  disclosure  controls and  procedures  (as defined in Rules  13a-15(e) and
15d-15(e)  under the Securities  Exchange Act of 1934 (Exchange  Act)) as of May
31,  2010.  Disclosure  controls  and  procedures  are  designed  to ensure that
information  required to be  disclosed in reports  filed or submitted  under the
Exchange Act is recorded,  processed,  summarized  and reported  within the time
frames specified in SEC rules and forms and that such information is accumulated
and communicated to management,  including the Chief Executive Officer and Chief
Financial Officer, to allow timely decisions regarding required disclosures.

During the evaluation of disclosure  controls and procedures as of May 31, 2010,
control  deficiencies  were identified  that  constitute a material  weakness in
internal control over financial  reporting.  Such control deficiencies relate to
the use of  internally  developed  non-integrated  accounting  systems,  lack of
internal  review of  account  reconciliations,  and lack of  internal  review of
general  journal  entries,  elimination  entries  and  the  financial  statement
consolidation  process.  As a result,  JFG's Chief  Executive  Officer and Chief
Financial Officer  concluded that as of May 31, 2010, JFG's disclosure  controls
and  procedures  were  ineffective.  Changes will be  considered  as  additional
financial resources and accounting staff become available.

Notwithstanding the above, JFG believes the consolidated financial statements in
this Annual Report on Form 10-K fairly present, in all material respects,  JFG's
financial  condition  as of May  31,  2010  and  2009,  and the  results  of its
operations  and  cash  flows  for the  years  ended  May 31,  2010  and  2009 in
conformity with U.S. generally accepted accounting principals (GAAP).

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of JFG is  responsible  for  establishing  and  maintaining  adequate
internal control over financial reporting. JFG's internal control over financial
reporting is a process under the  supervision of JFG's Chief  Executive  Officer
and Chief Financial Officer,  designed to provide reasonable assurance regarding
the  reliability of financial  reporting and the  preparation of JFG's financial
statements for external purposes in accordance with GAAP.

Because of its inherent  limitations,  internal control over financial reporting
may not prevent or detect misstatements.  Also, projections of any evaluation of

                                      -21-
<PAGE>

effectiveness  to future  periods are subject to risk that  controls  may become
inadequate because of change in conditions, or the degree of compliance with the
policies and procedures may deteriorate.

JFG  management  conducted an assessment of the  effectiveness  of the Company's
internal  control over  financial  reporting as of May 31, 2010.  In making this
assessment,  management  used  the  criteria  set  forth  by  the  Committee  of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control -
Integrated  Framework.  Based on this assessment,  management concluded that the
Company's internal control over financial  reporting was not effective as of May
31, 2010. A material weakness is a control deficiency, or combination of control
deficiencies,  that  results  in more than a remote  likelihood  that a material
misstatement  of  our  annual  or  interim  financial  statements  would  not be
prevented or detected.

JFG  management   identified  control   deficiencies  that,  in  the  aggregate,
constitute a material  weakness in internal control over financial  reporting as
of May 31,  2010.  Such  control  deficiencies  relate to the use of  internally
developed non-integrated  accounting systems, lack of internal review of account
reconciliations,  and  lack of  internal  review  of  general  journal  entries,
elimination entries and the financial statement consolidation process.

Changes are to be considered as additional  financial  resources and  accounting
staff become available. Management believes that overall controls over financial
reporting are in place,  but may not, at this time, be sufficient to effectively
mitigate this material weakness.

This  annual  report  does not include an  attestation  report of the  company's
registered  public  accounting  firm regarding  internal  control over financial
reporting.  Management's  report was not subject to attestation by the company's
registered  public accounting firm pursuant to exemption rules of the Securities
and Exchange  Commission  that permit the company to provide  only  management's
report in this annual report.


Item 9B. OTHER INFORMATION
--------------------------

None


                                      -22-
<PAGE>

PART III
--------

Item 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERANCE
---------------------------------------------------------------

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

          NAME                   AGE                      POSITION
-------------------------       -----         -------------------------------
     John M. Jacobs               56          President and CEO/CFO, Director
     C. David Thomas              57                      Director
     Mario J. Marra               56                      Director
  Bradley W. Tuckwiller           57                      Director
    Eric D. Ridenour              38                      Director
    Robert J. Kenney              63                   Vice President


JOHN M. JACOBS

Mr.  Jacobs  is the  founder  of Jacobs & Co.,  an  independent  SEC  registered
investment advisor, 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 & Co. and FS Investments, Inc. since their
inception.  Prior to  establishing  Jacobs  & Co.,  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.

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.

MARIO J. MARRA

Mr.  Marra holds a Masters in Business  Administration  from the  University  of
Findlay and is the  production  supervisor  for the  Bridgeport WV facility of a
multinational  aerospace  and  building  industries  company  where  he has been
employed since 1986. Mr. Marra joined the JFG board in June 2009.

BRADLEY W. TUCKWILLER

Mr.  Tuckwiller is a licensed  resident  insurance  agent in West Virginia.  Mr.
Tuckwiller   served  in  various  bank  management  and  credit   administration
capacities  for a small  regional  bank based in West Virginia from 1977 through

                                      -23-
<PAGE>

2001,  concluding as Executive Vice President.  Mr. Tuckwiller is the owner of a
consulting  firm,  providing  assistance in financial and regulatory  compliance
matters.  He has served as a Director of Jacobs and Company  since January 2008,
Director of First Surety  Corporation  since June 2010 and Director of JFG since
June 2009.

ERIC D. RIDENOUR

Mr. Ridenour is a Certified  Public  Accountant and has been employed since 2003
in the Charlotte,  NC office of a national  wealth  management  firm that serves
several hundred wealthy families.  Mr. Ridenour serves as a Managing Director of
that firm.  His prior employer was Deloitte & Touche from 1996 to 2003 where his
most recent position was Senior Manager.  Mr. Ridenour was appointed as Director
of JFG in December 2009.

ROBERT J. KENNEY

Mr. Kenney has been Vice  President of the Company since 2003. 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. Mr. Kenney is a
licensed resident  insurance agent in West Virginia and also holds Series 63 and
65  securities  licenses.  Prior to joining the  Company 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.

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,  judgment, 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.


                                      -24-

<PAGE>

COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

During the most recent  fiscal year,  the Company is not aware of any  director,
officer or  beneficial  owner of more than 10 percent  of the  Company's  common
stock at any time during the fiscal  year that failed to file on a timely  basis
reports required by Section 16(a) of the Exchange Act.

CODE OF ETHICS

The Company adopted a Code of Business  Conduct and Ethics ("Code") that applies
to the  Employees,  Officers and  Directors  of Jacobs  Financial  Group,  Inc.,
Triangle Surety Agency,  Inc. and First Surety Corporation on November 13, 2007.
Further, the Code contains additional guidelines and standards for the Company's
principal  executive officer and senior financial officer. A copy of the Code of
Business  Conduct  and Ethics can be  obtained,  without  charge,  upon  written
request as follows:

                           Jacobs Financial Group, Inc.
                           Attn: Compliance Director
                           300 Summers Street, Suite 970
                           Charleston, WV  25301

Jacobs & Co., as an investment  advisor,  has its own compliance policy that was
revised and updated in  September  2006 and is  specifically  designed to assure
compliance by Jacobs & Co. and its employees with the Investment Advisors Act of
1940 and the rules promulgated thereunder.

AUDIT (COMMITTEE) FINANCIAL EXPERT

The Board has determined that John M. Jacobs is the Audit (Committee)  Financial
Expert as such term is  defined  in Item  407(d)(5)(ii)  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.

Item 11. EXECUTIVE COMPENSATION
-------------------------------

SUMMARY COMPENSATION TABLE

The following table sets forth the  compensation  paid by the Company during the
fiscal years ended May 31, 2010 and 2009 to the Principal  Executive Officer and
the two most highly  compensated  executive  officers of the Company (the "Named
Executive Officers").
<TABLE>
<CAPTION>
------------------- -------- --------------- ---------- ----------- --------------- ------------------- --------------------
                                                                                           ALL
                                                          STOCK         OPTION            OTHER
    NAMES AND                    SALARY        BONUS      AWARDS        AWARDS         COMPENSATION            TOTAL
PRINCIPAL POSITION   YEAR         ($)           ($)        ($)       ($) (1) (2)         ($) (3)                ($)
------------------- -------- --------------- ---------- ----------- --------------- ------------------- --------------------
<S>                 <C>      <C>             <C>        <C>         <C>             <C>                 <C>
John M. Jacobs,        2010       $ 125,000          -           -      $  147,311         $    32,259          $   304,750
CEO                    2009       $ 150,000                             $   10,731         $    23,235          $   183,966
------------------- -------- --------------- ---------- ----------- --------------- ------------------- --------------------
Robert J. Kenney,      2010       $  75,000          -           -      $   55,830                   -          $   130,830
VP                     2009       $  75,000                             $    6,336                   -          $    81,336
------------------- -------- --------------- ---------- ----------- --------------- ------------------- --------------------
</TABLE>

                                      -25-
<PAGE>

(1)  On May 25,  2006,  the  compensation  committee  of the board of  directors
     awarded  12,500,000,  and  5,000,000 of incentive  stock options to acquire
     common  shares at an exercise  price of seven cents ($.07) per share to Mr.
     Jacobs and Mr. Kenney,  respectively,  which vest as set forth in the table
     below. The term of the options is five years and expires in May 2011.

------------------------- ------------------------------------------------
      Vesting date                  Incentive Stock Option Awards
------------------------- ------------------------------------------------
                             John M. Jacobs         Robert J. Kenney
------------------------- ---------------------- -------------------------
May 25, 2006                    2,500,000               2,000,000
------------------------- ---------------------- -------------------------
January 1, 2007                 2,500,000
------------------------- ---------------------- -------------------------
May 25, 2007                                            1,000,000
------------------------- ---------------------- -------------------------
January 1, 2008                 2,500,000
------------------------- ---------------------- -------------------------
May 25, 2008                                            1,000,000
------------------------- ---------------------- -------------------------
January 1, 2009                 2,500,000
------------------------- ---------------------- -------------------------
May 25, 2009                                            1,000,000
------------------------- ---------------------- -------------------------
January 1, 2010                 2,500,000
------------------------- ---------------------- -------------------------

(2)  On June 30,  2009,  the  compensation  committee  of the board of directors
     awarded  5,000,000,  and  2,000,000 of incentive  stock  options to acquire
     common  shares at an exercise  price of four cents  ($.04) per share to Mr.
     Jacobs and Mr. Kenney,  respectively,  which vest as set forth in the table
     below. The term of the options is five years and expires in June 2014.

------------------------- ------------------------------------------------
      Vesting date                  Incentive Stock Option Awards
------------------------- ------------------------------------------------
                             John M. Jacobs         Robert J. Kenney
------------------------- ---------------------- -------------------------
June 30, 2009                   2,500,000               1,000,000
------------------------- ---------------------- -------------------------
June 30, 2010                   2,500,000               1,000,000
------------------------- ---------------------- -------------------------

The amounts  shown in this column  represent the dollar  amount  recognized  for
financial  reporting purposes during the fiscal year for the fair value of stock
options received by the named individuals,  excluding the effects of forfeitures
relating to service-based  vesting  conditions.  The assumptions used to compute
the fair  value are  disclosed  in "Note L,  Stock-Based  Compensation",  to the
audited financial statements included herein under Part II Item 8.

(3)  Other  compensation  includes  insurance premiums paid by the Registrant on
     behalf of the named  executive  officer  under  verbal  agreement  with the
     Executive Officer.

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

The following table sets forth for each of our Named Executive  Officers certain
information regarding unexercised options and stock awards as of May 31, 2010.

                                      -26-
<PAGE>
<TABLE>
<CAPTION>
---------------- -----------------------------------------------------------------------------------
                                                   OPTION AWARDS
---------------- -----------------------------------------------------------------------------------
                                                         EQUITY
                                     NUMBER OF       INCENTIVE PLAN
                    NUMBER OF        SECURITIES      AWARDS; NUMBER
                   SECURITIES        UNDERLYING      OF SECURITIES
                   UNDERLYING       UNEXERCISED        UNDERLYING
                   UNEXERCISED      OPTIONS (#)       UNEXERCISED        OPTION
                   OPTIONS (#)     UNEXERCISABLE        UNEARNED        EXERCISE         OPTION
     NAME          EXERCISABLE                        OPTIONS (#)       PRICE ($)      EXPIRATION
                                                                                          DATE
---------------- ---------------- ----------------- ----------------- -------------- ---------------
<S>              <C>              <C>               <C>               <C>            <C>
    John M.        12,500,000            -                 -              $.07         05/25/2011
  Jacobs, CEO
---------------- ---------------- ----------------- ----------------- -------------- ---------------
    John M.         2,500,000        2,500,000             -              $.04         06/30/2014
  Jacobs, CEO
---------------- ---------------- ----------------- ----------------- -------------- ---------------
   Robert J.
  Kenney, VP        5,000,000            -                 -              $.07         05/25/2011
---------------- ---------------- ----------------- ----------------- -------------- ---------------
   Robert J.
  Kenney, VP        1,000,000        1,000,000             -              $.04         06/30/2014
---------------- ---------------- ----------------- ----------------- -------------- ---------------
</TABLE>

OTHER EXECUTIVE COMPENSATION PLANS

The Company has no plans that provide for the payment of retirement benefits, or
benefits that will be paid  primarily  following  retirement,  including but not
limited  to  tax-qualified   defined  benefit  plans,   supplemental   executive
retirement  plans,  tax-qualified  defined  contribution  plans and nonqualified
defined contribution plans.

The Company has no contract, agreement, plan or arrangement,  whether written or
unwritten,  that  provides  for  payment(s)  to a named  executive  officer  at,
following,   or  in  connection  with  the  resignation,   retirement  or  other
termination of a named executive officer,  or a change in control of the Company
or a change in the named executive officer's responsibilities following a change
in control.

DIRECTOR COMPENSATION

Directors of JFG are not compensated for board meetings or other duties as board
members.

Non-employee  board members of FSC,  which include some JFG board  members,  are
compensated at the rate of $150 per meeting.

The following table sets forth compensation  received by non-employee  directors
for the fiscal year ended May 31, 2010.

---------------------------- --------------------------------------- -----------
           NAME                 FEES EARNED OR PAID IN CASH ($)      TOTAL ($)
---------------------------- --------------------------------------- -----------
   Frederick E. Ferguson                      $450                      $450
---------------------------- --------------------------------------- -----------
      C. David Thomas                         $450                      $450
---------------------------- --------------------------------------- -----------
     Linda G. Aguilar                         $450                      $450
---------------------------- --------------------------------------- -----------


                                      -27-
<PAGE>

Item 12.  SECURITY  OWNERSHIP OF CERTAIN  BENEFICIAL  OWNERS AND  MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
--------------------------------------------------------------------------------

The following  tables set forth the beneficial  ownership of common stock of the
Company as of  September  9, 2010 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  Officers 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.

 TITLE OF        NAME AND ADDRESS OF            BENEFICIAL          PERCENT OF
   CLASS           BENEFICIAL OWNER            OWNERSHIP (1)         CLASS (2)
------------ ------------------------------ ------------------- ---------------

MORE THAN 5.00% BENEFICIAL OWNERSHIP
------------------------------------

Common       John M. Jacobs                     40,247,746 (3)         18.65%
             300 Summers St. Suite 970
             Charleston, WV  285301

Common       Ungurean, Charles C.               19,207,265              8.90%
             8400 Dunsinane Drive
             Dublin, OH 43017

Common       Charles L. Stout                   13,175,000 (4)          6.11%
             Route 1, Box 41J
             Bridgeport, WV  26330

Common       Fay S. Alexander                   13,256,041 (5)          6.14%
             6318 Timarron Cove Lane
             Burke, VA  22015-4073

Common       William D. Jones                   12,520,392 (6)          5.80%
             513 Georgia Avenue
             Chattanooga, TN  37403

Common       A Thomas Falbo                     12,351,937 (9)          5.72%
             2700 E. DuPont Ave.
             Belle, WV  25015

Common       Sue C. Hunt                        12,384,240 (7)          5.74%
             1508 Viewmont Drive
             Charleston, WV  25302





                                      -28-
<PAGE>
 TITLE OF        NAME AND ADDRESS OF            BENEFICIAL          PERCENT OF
   CLASS           BENEFICIAL OWNER            OWNERSHIP (1)         CLASS (2)
------------ ------------------------------ ------------------- ---------------

DIRECTORS AND NAMED EXECUTIVE OFFICERS
--------------------------------------

             John M. Jacobs                    40,247,746 (3)         18.65%
Common       300 Summers St. Suite 970
             Charleston, WV  285301

             C. David Thomas                      992,295                *
Common       P. O., Box 5157
             Charleston, WV  25361

             Robert J. Kenney                   7,920,000 (8)          3.67%
Common       809 Sherwood Drive
             Charleston, WV  25314

             Mario J. Marra                       989,795                *
Common       204 Olive Street
             Bridgeport, WV 26330

             Bradley W. Tuckwiller              5,869,152              2.72%
Common       P O Box 1294
             Lewisburg, WV 24901

             Eric D. Ridenour                   8,089,536 (10)         3.75%
Common       Two Morrocroft Centre
             4064 Colony Road, Suite 195
             Charlotte, NC 28211

             ALL DIRECTORS AND EXECUTIVE
Common       OFFICERS AS A GROUP               64,108,524             29.71%
-----------------------
*  Represents  beneficial  ownership  of less than one percent of the  Company's
common stock.

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
     September  9, 2010 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  215,784,012  shares of common stock issued and  outstanding as of
     September 9, 2010.

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  785,000  shares  of  common  stock  held in the name of JF
     Limited  Partnership  ("JFLP")  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

                                      -29-
<PAGE>

     owned by JFLP. Includes 5,068,416 shares held in joint tenancy with spouse,
     Kathleen  M.  Jacobs.  Includes  15,000,000  in vested  options to purchase
     Company stock exercisable within 60 days of September 9, 2010. Includes the
     right to convert Series C Preferred  Stock holdings to 6,733,340  shares of
     common  stock  exercisable  within 60 days of  September  9, 2010.  John M.
     Jacobs  is the CEO and also a member  of the  board  of  directors  for the
     Registrant.

4)   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,  12,000,000 shares held in joint tenancy with spouse,  Marilyn J.
     Stout, and 1,000,000 shares  beneficially owned by members of the immediate
     family.

5)   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 2,141,341 shares of common stock
     exercisable  within 60 days of September 9, 2010.  Includes  214,700 shares
     held in joint tenancy with spouse, Dan C. Alexander.

6)   Includes  9,060,000  shares  of common  stock  held in joint  tenancy  with
     spouse,  Cynthia B. Jones. Includes the right to convert Series C Preferred
     Stock  holdings  to  2,821,160  shares of common  stock  (182,116  in joint
     tenancy  with  spouse)  exercisable  within 60 days of  September  9, 2010.
     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 September 9, 2010.

7)   Includes 2,643,302 shares of common stock held in the Individual Retirement
     Account ("IRA") of spouse,  Douglas E. Hunt.  Includes the right to convert
     Series C Preferred  Stock  holdings to  2,000,000  shares of common  stock.
     Includes the right to convert Series C Preferred  Stock holdings to 336,790
     shares of common stock held jointly with spouse  exercisable within 60 days
     of September 9, 2010.

8)   Includes  75,000  shares of common stock held in joint tenancy with spouse,
     Lee Anne  Kenney.  Includes  335,000  shares  of common  stock  held in the
     Individual  Retirement  Account  ("IRA")  of,  Robert J.  Kenney.  Includes
     510,000  shares of common stock held in the Individual  Retirement  Account
     ("IRA") of spouse, Lee Anne Kenney. Includes 7,000,000 in vested options to
     purchase Company stock exercisable within 60 days of September 9, 2010.

9)   Includes  748,000 shares of common stock held in joint tenancy with spouse,
     Vicke  R.  Falbo.  Includes  6,518,667  shares  of  common  stock  held  in
     Montgomery Equipment Company, Inc., of which he is president.  Includes the
     right to convert Series C Preferred  Stock holdings to 4,666,670  shares of
     common stock exercisable within 60 days of September 9, 2010.

10)  Includes  562,346 shares of common stock held in joint tenancy with spouse,
     Mary K.  Ridenour.  Includes  937,504  shares of common  stock  held in the
     Individual  Retirement  Account of Eric D. Ridenour.  Includes the right to
     convert  Series C Preferred  Stock  holdings to 2,811,730  shares of common
     stock held in joint  tenancy  with  spouse.  Includes  the right to convert
     Series C Preferred Stock holdings to 810,670 shares of common stock held in
     the Individual Retirement Account of Eric D. Ridenour exercisable within 60
     days of September 9, 2010.

                                      -30-
<PAGE>

Item  13.  CERTAIN   RELATIONSHIPS  AND  RELATED   TRANSACTIONS,   AND  DIRECTOR
INDEPENDENCE
--------------------------------------------------------------------------------

For the past several  years the  Company's  operating  expenses  were  partially
funded by advances from its largest  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") 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 fiscal 2009, advances to the Company from Mr. Jacobs amounted to $437,388
and  repayments  to Mr.  Jacobs  amounted to $454,777.  As of May 31, 2009,  the
balance due to Mr.  Jacobs from the  Company was $2,281.  The largest  aggregate
amount outstanding to Mr. Jacobs in fiscal 2009was $294,546.

During  fiscal  2010,  advances  to the  Company  from Mr.  Jacobs  amounted  to
$710,435,  which  included  assumption of company debt in the amount of $185,652
and  repayments  to Mr.  Jacobs  amounted to $706,412.  As of May 31, 2010,  the
balance due to Mr.  Jacobs from the  Company was $7,104.  The largest  aggregate
amount outstanding to Mr. Jacobs in fiscal 2010 was $178,444.

The rate of interest on such amounts due from and  obligations due to Mr. Jacobs
was 12% for both the 2009 and 2010 fiscal years.

As of September 10, 2010, $12,574 was owed by the Company to Mr. Jacobs.

DIRECTOR'S INDEPENDENCE

The board of directors  ("Board") is comprised of five members,  John M. Jacobs,
Bradley W. Tuckwiller,  Mario J. Marra,  Eric D. Ridenour,  and C. David Thomas.
Mr. John M. Jacobs, who serves as Chief Executive Officer for the Company,  Eric
D.  Ridenour,  who is the  holder  of notes  from the  Company,  and  Bradley  W
Tuckwiller, who is owed fees for consulting services, are not independent within
the meaning of The Nasdaq Stock Market, Inc. listing standards.

There were no transactions,  relationships or arrangements with Mr. Marra or Mr.
Thomas that would affect their independence.

                                      -31-


<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-Q, and services provided by the accountant in connection with
statutory  and  regulatory  filings for the year ended May 31, 2010  amounted to
$108,824.

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-Q, and services provided by the accountant in connection with
statutory  and  regulatory  filings for the year ended May 31, 2009  amounted to
$89,098.

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, 2010  amounted  to $3,164.  There were no
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, 2009.

FEES FOR TAX PREPARATION SERVICES

During fiscal 2010,  billings for tax preparation  services were $9,221.  During
fiscal 2009, billings for tax preparation services were $10,666.

ALL OTHER FEES

Billings for other  services  related to  potential  financing  transactions  in
amounted to $4,863 in fiscal 2009.  There were no billings for services  related
to potential financing transactions in 2010.

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.

                                      -32-

<PAGE>
PART IV
-------

Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
-------------------------------------------------

(a)(1) The  following  financial  statements  are included in response to Item 8
herein:

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

FINANCIAL STATEMENTS

Consolidated Balance Sheets                                             F-3
Consolidated Statements of Operations                                   F-4
Consolidated Statements of Comprehensive Income (Loss)                  F-5
Consolidated Statements of Cash Flows                                   F-6
Consolidated Statements of Mandatorily Redeemable Preferred
 Stock and Stockholders Equity (Deficit)                                F-7
Notes to Consolidated Financial Statements                              F-10


(a)(2) The following  financial  statement schedules are included in response to
Item 8 herein:

                                                                        Page
                                                                     ----------
SCHEDULES

Schedule I - Summary of Investments - Other than Investments
 in Related Parties                                                     F-39

Schedule II - Condensed Financial Information of Registrant             F-40

Schedule III - Supplementary Insurance Information                      F-42

Schedule IV -  Supplementary Insurance Information - Reinsurance        F-43

Schedule VI - Supplemental  Information                                 F-44










                                      -33-

<PAGE>
JACOBS FINANCIAL GROUP, INC.
TABLE OF CONTENTS



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

FINANCIAL STATEMENTS

Consolidated Balance Sheets                                             F-3
Consolidated Statements of Operations                                   F-4
Consolidated Statements of Comprehensive Income (Loss)                  F-5
Consolidated Statements of Cash Flows                                   F-6
Consolidated Statements of Mandatorily Redeemable Preferred
 Stock and Stockholders Equity (Deficit)                                F-7
Notes to Consolidated Financial Statements                              F-10

SCHEDULES

Schedule I - Summary of Investments - Other than Investments
 in Related Parties                                                     F-39

Schedule II - Condensed Financial Information of Registrant             F-40

Schedule III - Supplementary Insurance Information                      F-42

Schedule IV -  Supplementary Insurance Information - Reinsurance        F-43

Schedule VI - Supplemental  Information                                 F-44








                                      F-1

<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 balance sheets of Jacobs Financial
Group,  Inc. and  subsidiaries  (the "Company") as of May 31, 2010 and 2009, and
the related consolidated statements of operations,  comprehensive income (loss),
cash flows, and mandatorily  redeemable preferred stock and stockholders' equity
(deficit)  for the years then ended.  Our audits  also  included  the  financial
statement schedules listed in the Index as Item 15. These consolidated financial
statements  and  financial  statement  schedules are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
consolidated financial statements and financial statement schedules based on our
audits.

We conducted our audits 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 also  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the  financial   statements,   assessing  the  accounting  principles  used  and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the consolidated  financial  position of the
Company as of May 31, 2010 and 2009,  and the results of its  operations and its
cash flows for the years then ended in  conformity  with  accounting  principles
generally accepted in the United States of America.  Also, in our opinion,  such
financial  statement  schedules,  when  considered  in  relation  to  the  basic
consolidated  financial  statement  taken as a  whole,  present  fairly,  in all
material respects, the information set forth therein.

The accompanying  consolidated  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
-----------------------------
Malin, Bergquist & Co., LLP
Pittsburgh, PA
September 13, 2010













                                      F-2

<PAGE>
JACOBS FINANCIAL GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                                         MAY 31, 2010      MAY 31, 2009
                                                                                        --------------   ----------------
<S>                                                                                     <C>              <C>
ASSETS

INVESTMENTS AND CASH:
Bonds and mortgaged-back securities available for sale, at market value                 $   6,618,472    $       908,766
(amortized cost - 5/31/10 $6,413,857; 05/31/09 $866,855)
Mortgage-back securities held to maturity, at amortized costs                                       -          5,085,300
(market value - 5/31/10 $0; 05/31/09 $5,157,936)
Short-term investments, at cost (approximates market value)                                   264,079            387,753
Cash                                                                                           74,571             80,038
                                                                                        --------------   ----------------
                                          TOTAL INVESTMENTS AND CASH                        6,957,122          6,461,857

Investment income due and accrued                                                              31,833             28,124
Premiums and other accounts receivable                                                        147,466             61,184
Prepaid reinsurance premium                                                                   214,385             87,114
Funds deposited with Reinsurers                                                               122,568                  -
Deferred policy acquisition costs                                                             128,453            143,173
Furniture and equipment, net of accumulated depreciation
 of $144,102 and $133,493, respectively                                                        18,380             23,169
Other assets                                                                                   27,832             43,517
Intangible assets                                                                             150,000            150,000
                                                                                        --------------   ----------------
                                                        TOTAL ASSETS                    $   7,798,039    $     6,998,138
                                                                                        ==============   ================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Reserve for losses and loss expenses                                                    $     611,190    $       432,658
Reserve for unearned premiums                                                                 618,095            530,795
Accrued expenses and professional fees payable                                                613,301            470,099
Accounts payable                                                                              150,673            268,066
Related party payable                                                                          96,160             75,009
Term note payable to related party                                                            360,000            360,000
Demand notes payable to related party                                                          82,104             78,081
Notes payable                                                                               4,159,119          3,614,791
Accrued interest payable                                                                      651,983            277,305
Accrued interest payable to related party                                                      71,481             26,609
Ceded reinsurance payable                                                                           -             92,173
Other liabilities                                                                             212,995             78,470

MANDATORILY  REDEEMABLE  SERIES B PREFERRED  STOCK,  $.0001 PAR VALUE PER SHARE;
3,136.405 SHARES AUTHORIZED;  2,817.004 AND 9,621.940 (PRE EXCHANGE TO SERIES C)
SHARES  ISSUED  AND  OUTSTANDING  AT MAY  31,  2010  AND MAY  31,  2009;  STATED
LIQUIDATION VALUE OF $1,000 PER SHARE                                                       3,826,882                  -
                                                                                        --------------   ----------------
                                                        TOTAL LIABILITIES                  11,453,983          6,304,056

SERIES A  PREFERRED  STOCK,  $.0001  PAR  VALUE  PER  SHARE;  1  MILLION  SHARES
AUTHORIZED;  2,675 AND 2,665 SHARES ISSUED AND  OUTSTANDING  AT MAY 31, 2010 AND
MAY 31, 2009, RESPECTIVELY; STATED LIQUIDATION VALUE OF $1,000 PER SHARE                    3,005,266          2,860,670

SERIES  B  PREFERRED  STOCK,  $.0001  PAR  VALUE  PER  SHARE;  3,136.405  SHARES
AUTHORIZED; 2,817.004 AND 9,621.940 (PRE EXCHANGE TO SERIES C) SHARES ISSUED AND
OUTSTANDING AT MAY 31, 2010 AND MAY 31, 2009; STATED LIQUIDATION VALUE OF $1,000
PER SHARE                                                                                           -         11,429,440
                                                                                        --------------   ----------------
                             TOTAL MANDATORILY REDEEMABLE PREFERRED STOCK                   3,005,266         14,290,110

COMMITMENTS AND CONTINGENCIES (SEE NOTES)

STOCKHOLDERS' EQUITY (DEFICIT)

Series C Preferred Stock,  $.0001 par value per share; 10,000 shares authorized;
6,804.936 and 0 shares issued and  outstanding at May 31, 2010 and May 31, 2009,
respectively; includes $2,670,286 accrued Series C dividends                                8,701,217                  -

Common  stock,  $.0001  par value per  share;  490  million  shares  authorized;
214,464,012  and  179,682,912  shares issued and outstanding at May 31, 2010 and
May 31, 2009, respectively                                                                     21,446             17,968

Additional paid in capital                                                                  3,404,431          2,626,236
Accumulated deficit                                                                       (18,992,919)       (16,279,725)
Accumulated other comprehensive income (loss)                                                 204,615             39,493
                                                                                        --------------   ----------------
                                 TOTAL STOCKHOLDERS' EQUITY (DEFICIT)                      (6,661,210)       (13,596,028)
                                                                                        --------------   ----------------
                           TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)         $   7,798,039    $     6,998,138
                                                                                        ==============   ================
</TABLE>
                            See accompanying notes.
                                      F-3
<PAGE>
JACOBS FINANCIAL GROUP, INC,
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
                                                                                              YEAR ENDED MAY 31,
                                                                                         ------------------------------
                                                                                             2010             2009
                                                                                         -------------   --------------
<S>                                                                                      <C>             <C>
REVENUES:

Investment advisory services                                                             $    262,635    $    233,298
Insurance premiums and commissions                                                            780,808         660,222
Net investment income                                                                         273,577         288,747
Net realized investment gains (losses)                                                         40,828           8,098
Other income                                                                                   13,935           3,712
                                                                                         -------------   --------------
                                                          TOTAL REVENUES                    1,371,783       1,194,077

OPERATING EXPENSES:

Incurred policy losses                                                                        178,531         186,007
Insurance policy acquisition costs                                                            249,478         152,964
General and administrative                                                                  1,316,211       1,564,224
Mutual fund costs                                                                              75,038         122,758
Depreciation                                                                                   10,609          12,562
                                                                                         -------------   --------------
                                                TOTAL OPERATING EXPENSES                    1,829,867       2,038,515
                                                                                         -------------   --------------

                                       NET INCOME (LOSS) FROM OPERATIONS                     (458,084)       (844,438)

Gain on debt extinguishment                                                                   200,240               -
Accrued dividends and accretion of Series B Mandatorily
 Redeemable Preferred Stock                                                                  (242,639)              -
Interest expense                                                                             (956,973)       (605,045)
Interest and dividend income                                                                        -           1,107
                                                                                         -------------   --------------
                                                        NET INCOME (LOSS)                  (1,457,456)     (1,448,376)

Accrued dividends on Series C Preferred Stock equity                                         (374,662)              -
Accretion of Mandatorily Redeemable Convertible
 Preferred Stock, including accrued dividends                                                (881,075)     (1,609,311)
                                                                                         -------------   --------------

                   NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS                 $ (2,713,193)   $ (3,057,687)
                                                                                         =============   ==============
BASIC AND DILUTIVE NET INCOME (LOSS) PER SHARE:

NET INCOME (LOSS) PER SHARE                                                              $      (0.01)   $      (0.02)
                                                                                         =============   ==============

WEIGHTED-AVERAGE SHARES OUTSTANDING                                                       200,089,422     173,788,315
                                                                                         =============   ==============
</TABLE>
                            See accompanying notes.
                                      F-4
<PAGE>
JACOBS FINANCIAL GROUP, INC,
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
<TABLE>
<CAPTION>
                                                                             YEAR MONTHS ENDED
                                                                                   MAY 31,
                                                                              2010           2009
                                                                          ------------   -------------
<S>                                                                       <C>            <C>
COMPREHENSIVE INCOME (LOSS):

 Net income (loss) attributable to common stockholders                    $(2,713,193)   $ (3,057,687)

OTHER COMPREHENSIVE INCOME (LOSS):

 Reclassification of investments from Held to Maturity
  to Avaialble for Sale                                                       175,479               -

 Net unrealized gain (loss) of available-for-sale investments
  arising during period                                                        15,794          41,108

 Reclassification adjustment for realized (gain) loss included
  in net income                                                               (26,151)         (8,098)
                                                                          ------------   -------------
 Net unrealized gain (loss) attributable to available-for-sale
  investments recognized in other comprehensive income                        165,122          33,010
                                                                          ------------   -------------

      COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS     $(2,548,071)   $ (3,024,677)
                                                                          ============   =============
</TABLE>


                             See accompanying notes.
                                      F-5
<PAGE>
JACOBS FINANCIAL GROUP, INC,
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                                      YEAR ENDED MAY 31,
                                                                                      2010          2009
                                                                                 -------------  -------------
<S>                                                                              <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES

 Net Income (Loss)                                                               $ (1,457,456)  $ (1,448,376)

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

 Unearned premium                                                                     (39,971)       166,473
 Stock option expense                                                                 251,632         11,451
 Stock issued (or to be issued) in connection with financing arrangements             261,958        192,607
 Accrual of Series B preferred stock dividends                                        155,708              -
 Accretion of Series B preferred stock                                                 86,931              -
 Provision for loss reserves                                                          178,532        186,007
 Amortization of premium                                                               71,996         44,286
 Depreciation                                                                          10,609         12,562
 Accretion of discount                                                                 (9,217)       (13,072)
 Realized (gain) loss on sale of securities                                           (42,926)       (12,511)
 Gain on extinguishment of debt                                                      (200,239)             -
 Change in operating assets and liabilities:
   Other assets                                                                        18,103        252,837
   Premium and other receivables                                                      (86,282)       (13,831)
   Investment income due and accrued                                                   (2,860)        (7,770)
   Deferred policy acquisition costs                                                   14,720        (67,233)
   Related party accounts payable                                                      21,150         14,442
   Accounts payable and cash overdraft                                                 82,846        (31,519)
   Accrued expenses and other liabilities                                             482,536        489,307
                                                                                 -------------  -------------
              NET CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES                     (202,230)      (224,340)

CASH FLOWS FROM INVESTING ACTIVITIES

(Increase) decrease in short-term investments                                         123,674        788,303
Costs of bonds acquired                                                                     -       (356,101)
Costs of mortgaged-backed securities acquired                                      (2,378,290)    (2,851,803)
Redemption of bonds upon call or maturity                                                   -         20,000
Sale of securities available for sale                                                 404,958        107,639
Repayment of mortgage-backed securities                                             1,490,926      1,034,407
Purchase of furniture and equipment                                                    (5,819)        (6,563)
                                                                                 -------------  -------------
              NET CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES                     (364,551)    (1,264,118)

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from related party debt                                                      691,764        606,858
Repayment of related party debt                                                      (687,741)      (454,777)
Proceeds from borrowings                                                            1,017,500      1,252,500
Repayment of borrowings                                                              (473,172)      (319,725)
Proceeds from issuance of Series A preferred stock                                     10,000        435,000
Proceeds from exercise of common stock warrants                                         2,963              -
                                                                                 -------------  -------------
             NET CASH FLOWS FROM FINANCING ACTIVITIES                                 561,314      1,519,856

NET INCREASE (DECREASE) IN CASH                                                        (5,467)        31,398

CASH AT BEGINNING OF PERIOD                                                            80,038         48,640
                                                                                 -------------  -------------

CASH AT END OF PERIOD                                                            $     74,571   $     80,038
                                                                                 =============  =============
SUPPLEMENTAL DISCLOSURES

 Interest paid                                                                   $    292,689   $    181,037
 Income taxes paid                                                                          -              -

 Non-cash investing and financing transaction:
 Additional consideration paid for issuance of debt                                   261,958        192,607

</TABLE>
                           See accompanying notes.
                                       F-6
<PAGE>
JACOBS FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENT OF MANDATORILY REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE TWELVE MONTH PERIOD ENDED MAY 31, 2009
<TABLE>
<CAPTION>
                                                              ----------------------------------------------------------------------
                                                                                STOCKHOLDERS' EQUITY (DEFICIT)
                                                              ----------------------------------------------------------------------
                      SERIES A               SERIES B
               MANDATORILY REDEEMABLE  MANDATORILY REDEEMABLE                                                ACCUMULATED
                                           CONVERTIBLE                              ADDITIONAL                  OTHER
                  PREFERRED STOCK        PREFERRED STOCK                             PAID-IN    ACCUMULATED COMPREHENSIVE
                 SHARES     AMOUNT      SHARES      AMOUNT      SHARES      AMOUNT    CAPITAL     DEFICIT       INCOME      TOTAL
                                                                                                                (LOSS)
               ---------------------------------------------- ----------------------------------------------------------------------
               -------- -----------  ---------  -----------   -----------  -------  -----------  ------------- ------- -------------
<S>            <C>      <C>          <C>        <C>           <C>          <C>      <C>          <C>           <C>     <C>
BALANCE,
MAY 31, 2008      2,230  $ 2,308,933  9,621.940  $ 9,936,866  166,091,242  $16,610  $ 2,423,537 $(13,222,039)  $ 6,483 $(10,775,409)

Issuance of
Series A            435      435,000          -            -            -        -            -            -         -            -
and B
Preferred
Stock and
common stock

Issuance of
common stock          -            -          -            -   13,591,670    1,358      104,684            -         -      106,042
as additional
consideration
for financing
arrangements

Less expense
previously
recognized           -            -          -            -             -        -      (38,958)           -         -      (38,958)

Accretion of
mandatorily
redeemable
convertible
preferred stock      -       16,939          -      550,874             -        -            -     (567,812)        -     (567,812)

Accrued
dividends
of mandatorily
redeemable
convertible
preferred stock      -       99,798          -      941,700             -        -            -   (1,041,498)        -   (1,041,498)

Expense of
common shares
to be issued
in connection
with financing
arrangements         -            -          -            -             -        -      125,511            -         -      125,511

Common stock
option expense       -            -          -            -             -        -       11,462            -         -       11,462

Unrealized net
gain on available
for sale securities  -            -          -            -             -        -            -            -    33,010       33,010

Net income
(loss), year
ended
May 31, 2009         -            -          -            -             -        -            -    (1,448,376)       -   (1,448,376)
               -------- -----------  ---------  -----------   -----------  -------  -----------  ------------- ------- -------------
BALANCE,
MAY 31, 2009     2,665  $ 2,860,670  9,621.940  $11,429,440   179,682,912  $17,968  $ 2,626,236  $(16,279,725) $39,493 $(13,596,028)
               ---------------------------------------------- ----------------------------------------------------------------------
</TABLE>
                           See accompanying notes.
                                       F-7
<PAGE>
JACOBS FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENT OF MANDATORILY REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE TWELVE MONTH PERIOD ENDED MAY 31, 2010


                                   SERIES A                SERIES B
                             MANDATORILY REDEEMABLE  MANDATORILY REDEEMABLE
                                                        CONVERTIBLE
                                PREFERRED STOCK        PREFERRED STOCK
                               SHARES     AMOUNT      SHARES      AMOUNT

                              ----------------------------------------------
                              --------  -----------  ---------  ------------
BALANCE,
MAY 31, 2009                     2,665  $ 2,860,670  9,621.940  $11,429,440

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

Issuance of common stock
as additional consideration
for financing arrangements           -            -          -            -

Exercise of warrants                 -            -          -            -

Accretion of mandatorily
redeemable convertible
preferred stock                      -       17,881          -      255,487

Accrued dividends
of mandatorily
redeemable convertible
preferred stock                      -      116,715          -      490,991

Accrued dividends
of Series C equity
preferred stock                      -            -          -            -

Exchange of Series C Preferred
Stock for Series B
Mandatorily Redeemable
Convertible Preferred Stock          -            - (6,804,936)  (8,591,675)

Reclassification of Series B
from temporary equity
to liabilities                       -            - (2,817.004)  (3,584,243)

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

Common stock
option expense                       -            -          -            -

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

Net income (loss), year
ended May 31, 2010                   -            -          -            -
                               -------  -----------  ---------  ------------
BALANCE,
MAY 31, 2010                     2,675  $ 3,005,266          -  $         -
                               ---------------------------------------------
                                                                (CONTINUED)
                           See accompanying notes.
                                       F-8
<PAGE>
JACOBS FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENT OF MANDATORILY REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE TWELVE MONTH PERIOD ENDED MAY 31, 2010 (CONTINUED)
<TABLE>
<CAPTION>
                                ----------------------------------------------------------------------------------------------------
                                                                STOCKHOLDERS' EQUITY (DEFICIT)
                                ----------------------------------------------------------------------------------------------------
                                                                             SERIES C
                                          COMMON SHARES                   PREFERRED STOCK
                                -------------------------------------   --------------------
                                                                                                          ACCUMULATED
                                                           ADDITIONAL                                        OTHER
                                                            PAID-IN                 AMOUNT   ACCUMULATED COMPREHENSIVE
                                      SHARES      AMOUNT    CAPITAL       SHARES   AND APIC    DEFICIT       INCOME        TOTAL
                                                                                                             (LOSS)
                                ----------------------------------------------------------------------------------------------------
<S>                             <C>              <C>     <C>             <C>       <C>       <C>          <C>          <C>
BALANCE,
MAY 31, 2009                       179,682,912    17,968 $ 2,626,236           -        $ -  $(16,279,725)   $ 39,493  $(13,596,028)

Issuance of Series A and B
Preferred Stock and common stock             -         -           -           -          -             -           -             -

Issuance of common stock as
additional consideration for
financing arrangements              18,207,560     1,820     348,184           -          -             -           -       350,004

Exercise of warrants                 2,963,668       297       2,668           -          -             -           -         2,965

Accretion of mandatorily
redeemable convertible
preferred stock                              -         -           -           -          -      (273,368)          -      (273,368)

Accrued dividends of mandatorily
redeemable convertible
preferred stock                              -         -           -           -          -      (607,706)          -      (607,706)

Accrued dividends of Series C
equity preferred stock                       -         -           -           -    374,664      (374,664)          -             -

Exchange of Series C Preferred
Stock for Series B Mandatorily
Redeemable Convertible
Preferred Stock                     13,609,872     1,361     263,759   6,804.936  8,326,553             -           -     8,591,673

Reclassification of Series B
from temporary equity
to liabilities                               -         -           -           -          -             -           -             -

Increase (Decrease) in accrual
of common shares to be issued in
connection with financing
arrangements                                 -         -     (88,047)          -          -             -           -       (88,047)

Common stock option expense                  -         -     251,631           -          -             -           -       251,631

Unrealized net gain (loss) on
available for sale securities                -         -           -           -          -             -     165,122       165,122

Net income (loss), year
ended May 31, 2010                           -         -           -           -          -    (1,457,456)          -    (1,457,456)
                                ----------------------------------------------------------------------------------------------------
BALANCE,
MAY 31, 2010                       214,464,012  $ 21,446 $ 3,404,431   6,804.936 $ 8,701,217 $(18,992,919)  $ 204,615  $ (6,661,210)
                                ----------------------------------------------------------------------------------------------------
</TABLE>
                           See accompanying notes.
                                       F-9
<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 all the
outstanding  stock of two  corporations  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
investment  advisory fees. 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.  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 were not insurance lines that
the Company intended to pursue. 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  in 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  (after  accretion  of
mandatorily redeemable convertible preferred stock, including accrued dividends)
of approximately  $2,713,000 and $3,058,000 for the years ended May 31, 2010 and
2009. Losses are expected to continue until FSC develops a more substantial book
of business.  While improvement is anticipated as the Company's business plan is
implemented, restrictions on the use of FSC's assets (See Note C), 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.

Management  intends 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.

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

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
---------------------------------------------------

PRINCIPLES OF CONSOLIDATION

The consolidated  financial  statements include the accounts of Jacobs Financial
Group,  Inc.  and its  wholly  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.

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 recorded as  receivables  when due and 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.
Advance  premiums  represent  renewal  premiums paid in advance of the effective
renewal date.

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.

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.

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

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.

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

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.

ALLOWANCE FOR UNCOLLECTIBLE PREMIUM AND OTHER RECEIVABLES

The majority of our fee revenue is  generated by services  provided to companies
and individuals 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.  Premium and
other  receivables  are  charged-off  when deemed  uncollectible.  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 discounting 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
long-lived assets.

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.

STOCK-BASED COMPENSATION

We have adopted the fair value method of accounting for stock-based compensation
required by ASC 718, 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 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.

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.

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.

RECLASSIFICATIONS

Certain  amounts  in  the  2009  Consolidated  Financial  Statements  have  been
reclassified  to  be  consistent  with  the  presentation  in  the  Consolidated
Financial  Statements  as of May 31,  2010 and for the year  then  ended.  These
reclassifications  had no impact on  previously  reported net income,  cash flow
from operations or changes in shareholder equity.

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

RECENT ACCOUNTING PRONOUNCEMENTS

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

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

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

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

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

In August  2009,  the  Financial  Accounting  Standards  Board  ("FASB")  issued
Accounting   Standards  Update  2009-04,   "Accounting  for  Redeemable   Equity
Instruments - Amendment to Section 480-10-S99". This updates Section 480-10-S99,
"Distinguishing  Liabilities  from  Equity",  to reflect the SEC  staff's  views
regarding the application of Accounting Series Release No. 268, "Presentation in
Financial Statements of "Redeemable Preferred Stocks." The exchange for Series B
Preferred shares into Series C shares as elected by those shareholders  utilizes
the view of the SEC in  classifying  the  Series C  Preferred  shares as equity.

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

There is no stated maturity on the Series C Preferred  shares and at the time of
redemption  the Company  will  accrete  changes in the  redemption  value at the
appropriate  time.  These amounts will be adjusted at the end of each  reporting
period as applicable.

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

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

NOTE C - INVESTMENTS
--------------------

The Company held the following  investments,  by security  type,  that have been
classified as available-for-sale and carried at market value at May 31, 2010:
<TABLE>
<CAPTION>

                                                  Gross Unrealized       Gross Unrealized
                            Amortized Cost              Gains                 Losses            Fair Market Value
                         ---------------------- ---------------------- ---------------------- ----------------------
<S>                      <C>                    <C>                    <C>                    <C>
Mortgage Backed          $           6,413,856  $             208,315  $               3,700  $           6,818,472
Securities
                         ---------------------- ---------------------- ---------------------- ----------------------
                         $           6,413,856  $             208,315  $               3,700  $           6,818,472
                         ====================== ====================== ====================== ======================
</TABLE>

The Company held the following  investments,  by security  type,  that have been
classified as available-for-sale and carried at market value at May 31, 2009:
<TABLE>
<CAPTION>
                                                   Gross Unrealized       Gross Unrealized
                           Amortized Cost               Gains                 Losses             Fair Market Value
                         ---------------------- ---------------------- ---------------------- ----------------------
<S>                      <C>                    <C>                    <C>                    <C>
State and municipal
securities               $             352,816  $              28,570  $                   -  $             381,386

Equity securities                       10,280                      -                  2,418                  7,862

Mortgage Backed
Securities               $             514,039  $              13,342  $                   -  $             527,381
                         ---------------------- ---------------------- ---------------------- ----------------------
                         $             877,135  $              41,912  $               2,418  $             916,629
                         ====================== ====================== ====================== ======================
</TABLE>

Equity  securities  consisted of an  investment in the amount of $25,000 made in
2007 in the Jacobs & Company  Mutual Fund by its  investment  advisor,  Jacobs &
Company,  and recorded in other assets at market  value.  Dividends  paid by the
Fund at  calendar  year-end  2007 and 2008 were  reinvested.  In March  2009,  a

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

partial  withdrawal of $11,000 was made. In November 2009 the remaining  cost of
$10,280  was  withdrawn  for  $8,182  and a loss of  $2,098.  The total  amounts
withdrawn reflect a loss in market value.

In December 2009, all state and municipal  securities,  totaling $362,033,  were
sold for $404,958 resulting in a gain of $42,926.

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

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

The Company held the following investments,  by security type, with the positive
intent and ability to hold to maturity:
<TABLE>
<CAPTION>

                                                                MAY 31, 2009
                         -------------------------------------------------------------------------------------------
                            Amortized Cost        Gross Unrealized       Gross Unrealized       Fair Market Value
                                                        Gains                 Losses
                         ---------------------- ---------------------- ---------------------- ----------------------
<S>                      <C>                    <C>                    <C>                    <C>
U.S Government agency
mortgage-backed
securities               $           5,085,300  $              79,739  $               7,103  $           5,157,936
                         ====================== ====================== ====================== ======================
</TABLE>

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

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

     O    Level 1 - Quoted prices for identical instruments in active markets.
     O    Level 2 - Quoted  prices for similar  instruments  in active  markets;
          quoted prices for identical or similar instruments in markets that are
          not active;  and  model-derived  valuations  in which all  significant
          inputs are observable in active markets.
     O    Level 3 - Valuations derived from valuation techniques in which one or
          more significant inputs are unobservable.

                                      F-16
<PAGE>
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

FIXED INCOME SECURITIES

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

EQUITY SECURITIES

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

SHORT-TERM INVESTMENTS

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

ASSETS MEASURED AT FAIR VALUE ON A RECURRING BASIS ARE SUMMARIZED BELOW:
<TABLE>
<CAPTION>

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


</TABLE>
<TABLE>
<CAPTION>

                                                                                         May 31, 2009
                                                              -------------------------------------------------------------------
                                                                        Fair Value Measurements Using
                                                              --------------------------------------------------     Assets At
                                                                  Level 1          Level 2          Level 3         Fair Value
                                                              ---------------- ---------------- ---------------- ----------------
<S>                                                           <C>              <C>              <C>              <C>
         Assets:
         Fixed income securities at fair value                $             -  $       908,766  $             -  $       908,766
         Equity securities at fair value                                7,862                -                -            7,862
         Short-term investments at fair value                         387,753                -                -          387,753
                                                              ---------------- ---------------- ---------------- ----------------
         Total Assets                                         $       395,615  $       908,766  $             -  $     1,304,381
</TABLE>

                                      F-17
<PAGE>

JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company had no assets or  liabilities  measured at fair value on a recurring
basis using significant  unobservable inputs (Level 3) at either May 31, 2010 or
at May 31, 2009.

Statutory deposits  consisting of securities with a carrying value of $1,056,245
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
$6,956,987  and $  6,440,387  as of May 31,  2010 and  2009,  respectively,  are
restricted to the use of FSC.

Principal repayments on U.S. government agency mortgaged-backed  securities held
by the Company as of May 31, 2010 are estimated as follows:

                                                               Fair Market
                                           Amortized Cost         Value
                                         ------------------ ------------------
Due in one year or less                  $       2,025,267  $       2,081,486

Due after one year through five years            3,211,413          3,322,997

Due after five years through ten years             943,577            979,352

Due after ten years                                233,600            234,637
                                         ------------------ ------------------
                                         $       6,413,857  $       6,618,472
                                         ================== ==================

Estimated  repayments are forecast based on varying  prepayment  speeds for each
particular security held assuming that interest rates remain constant.  Expected
repayments  will  differ  from  actual  repayments   because  borrowers  of  the
underlying mortgages have a right to prepay obligations.

An analysis of net investment income follows:

                                                2010               2009
                                          ------------------ ------------------
Bonds - fixed maturities                  $           9,217  $          15,006

Mortgage-backed securities                          264,508            267,993

Short-term investments                                  146              7,842
                                          ------------------ ------------------
               Total investment income              273,871            290,841
                                          ------------------ ------------------
Investment expense                                      294              2,094
                                          ------------------ ------------------
                 Net investment income    $         273,577  $         288,747
                                          ================== ==================

The increases  (decrease)  in unrealized  appreciation  of  investments  were as
follows:
                                                     2010              2009
                                               ----------------- ---------------

Bonds-fixed maturities                         $        (28,570  $       21,478

Mortgage-backed securities                              118,637         111,757
Equity securities                                         2,418          (1,810)
                                               ----------------- ---------------
Increase (decrease) in unrealized appreciation $         92,485  $      131,425
                                               ================= ===============

                                      F-18
<PAGE>
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The gross gains and gross losses realized on available-for-sale  securities were
as follows:

                                                       Gross          Gross
                                          Gross       Realized       Realized
                                        Proceeds       Gains         Losses
                                     ------------- -------------- --------------
2010
       Bonds-fixed maturities        $    404,958  $      42,926  $           -
       Mortgage-backed securities               -              -              -
       Equity securities                    8,182              -          2,098
                                     ------------- -------------- --------------

                    Total            $    413,140  $      42,926  $       2,098
                                     ============= ============== ==============
2009
       Bonds-fixed maturities        $    107,639  $      12,577  $           -
       Mortgage-backed securities               -              -              -
       Equity securities                   11,000              -         (4,413)
                                     ------------- -------------- --------------

                    Total            $    118,639  $      12,577  $      (4,413)
                                     ============= ============== ==============

The following  table  summarizes the gross  unrealized  losses and fair value on
investment securities aggregated by major investment category and length of time
that  individual  securities  have been in a continuous loss position at May 31,
2010 and May 31, 2009.

<TABLE>
<CAPTION>
                               Less than 12 Months             12 Months or More                    Total
                          ------------------------------- ---------------------------- --------------------------------
                               Cost         Unrealized       Cost        Unrealized         Fair         Unrealized
                               (a)            Losses          (a)          Losses          Value           Losses
                          --------------- --------------- ------------ --------------- --------------- ----------------
<S>                       <C>             <C>             <C>          <C>             <C>             <C>
2010

Mortgage-backed
securities                $      945,394  $        3,699  $         -  $            -  $      941,685  $       3,699
                          --------------- --------------- ------------ --------------- --------------- ----------------

                   Total  $      945,394  $        3,699  $         -  $            -  $      941,685  $       3,699
                          =============== =============== ============ =============== =============== ================

2009

Mortgage-backed
securities                $      686,543  $        7,103  $         -  $            -  $      679,440  $       7,103
Equity securities                      -               -       10,280           2,418           7,861          2,418
                          --------------- --------------- ------------ --------------- --------------- ----------------

                   Total  $      686,543  $        7,103  $    10,280  $        2,418  $      687,301  $       9,521
                          =============== =============== ============ =============== =============== ================
</TABLE>
---------------
     (a) For bonds-fixed maturities and mortgage-backed  securities,  represents
amortized costs.

                                      F-19
<PAGE>
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of May 31, 2010,  the company held 5  mortgage-backed  securities  with gross
unrealized  losses  of  $3,699,  all of which  have  been in a  continuous  loss
position  for less  than 12  months.  These  securities  consist  of  fixed-rate
securities issued by Government  National Mortgage  Association  (GNMA) that are
sensitive to movements  in market  interest  rates.  The  unrealized  losses are
considered  temporary  since the Company has the ability to hold the  securities
until maturity if needed.

NOTE D-DEFERRED POLICY ACQUISITION COSTS
----------------------------------------

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

                                                    2010             2009
                                            ------------------ -----------------

  Balance at beginning of year              $         143,173  $         75,940
  Acquisition costs deferred                          242,090           220,496
  Amortization charged to operations                 (256,810)         (153,263)
                                            ------------------ -----------------

                      Total                 $         128,453  $        143,173
                                            ================== =================

NOTE E - OTHER ASSETS
---------------------

Included  in  other  assets  as  of  May  31,  2009  are  advance  deposits  for
professional fees relating to pending  acquisitions and certain equity financing
matters (see Note  P-Commitments)  the Company endeavored to undertake in fiscal
2009. As of May 31, 2010 and 2009, such balances are comprised of the following:

                                                            2010      2009
                                                         ---------- ---------
Advance deposits for professional fees                   $      -   $  1,311
Mutual fund investment at market                                -      7,862
Prepaid expense and other deposits                         27,832     34,344
                                                         ---------- ---------
                                                  Total  $ 27,832   $ 43,517
                                                         ========== =========

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, or more frequently if circumstances
indicate  that a  possible  impairment  has  occurred,  for  recoverability  and
possible  impairment loss. No impairment has been recorded in fiscal years ended
May 31, 2010 and 2009.

                                      F-20
<PAGE>
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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, 2010, the Company's
insurance subsidiary, FSC, is only licensed to write surety in West Virginia and
Ohio and has focused its primary  efforts  towards  coal permit bonds while also
providing other  miscellaneous  surety bonds that are  substantially  secured by
collateral  consisting  of  investment  accounts  that are  managed  by  Jacobs.
Reclamation  of land  that has been  disturbed  by mining  operations  is highly
regulated by federal and state  agencies and the  required  bonds are  generally
long-term in nature with mining  operations  and  reclamation  work conducted in
unison as the  property  is being  mined.  Additionally,  no two  principals  or
properties are alike due to varied company  structures and unique  geography and
geology of each site. In underwriting such bonds,  management  obtains estimates
of costs to reclaim the properties  subject of the permit(s) in accordance  with
those  mining  permit(s),  as  prepared  by  independent  outside  professionals
experienced  in this  field  of work  and  hired by FSC,  in  addition  to other
underwriting  and financial risk  considerations.  FSC requires the principal to
provide cash in amounts deemed sufficient to reclaim the disturbed land and thus
mitigate the exposure to significant  loss.  Such cash is invested in investment
collateral  accounts  managed  by  Jacobs  utilizing   conservative   investment
strategies. Inspections of mining activity and reclamation work are performed on
a regular basis with initial costs estimates being updated periodically.  Should
the  principal  default in the  obligation to reclaim the property in accordance
with the mining  permit,  FSC would  then use the funds  held in the  collateral
account to reclaim the  property or would be required to forfeit the face amount
of the bond to the agency to which the bond is  issued.  Losses can occur if the
costs  of  reclamation  exceed  estimates  obtained  at the  time  the  bond was
underwritten or upon subsequent re-evaluations,  if sufficient collateral is not
obtained and increased if necessary,  or if  collateral  held has  experienced a
significant  deterioration in value. FSC has experienced no claims for losses as
of May 31, 2010 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, and in consultation with consulting actuaries experienced in
the surety field.

At May 31, the reserve for losses and loss expenses consisted of:


                                                   2010               2009
                                           ------------------ ------------------

   Balance at beginning of year            $         432,658  $         246,651
   Incurred policy losses-current year               178,532            186,007
   Incurred policy losses-prior year                       -                  -
   Amounts paid-current year losses                        -                  -
   Amounts paid-prior year losses                          -                  -
                                           ------------------- -----------------

   Balance at end of year                  $         611,190   $        432,658
                                           =================== =================


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

NOTE H - NOTES PAYABLE
----------------------

At May 31, 2010 and 2009, the Company had the following  unsecured notes payable
to individuals and a commercial bank:

                                                           2010           2009
                                                      ------------- ------------

Unsecured demand notes payable to individuals and
others; interest rate fixed @ 10.00% ($75,000 to
related party)                                         $  1,057,000 $    380,000

Unsecured    short-term    advances   from   principal
shareholder and chief executive officer; interest rate
fixed @ 12.00% (Also See Note T -
Related Party Transactions)                                   7,104        3,081

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

Unsecured term note payable to commercial  bank in the
original  amount  of  $250,000  and  payable  in equal
monthly payments of $5,738; interest rate
fixed @ 13.25% maturing January 31, 2012                     37,119      169,791
                                                       ------------ ------------

                    Total                              $  4,601,223 $  4,052,872
                                                       ============ ============

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

Beginning  September  10,  2008,  because  a  qualified  financing  had not been
completed,  the Company became required under the terms of the bridge  financing
to issue 2.80% of the Company's  outstanding common shares and shall issue 2.80%


                                      F-22
<PAGE>
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

of the Company's  outstanding common shares upon each six-month anniversary date
thereof until  retirement of the notes.  On September 10, 2008,  March 10, 2009,
September 10, 2009, and March 10, 2010,  4,870,449,  5,010,640,  5,354,642,  and
6,005,925 common shares, respectively, were issued to those noteholders.

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

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


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

                                                                 2010
                                                           -------------

       Fiscal year 2010-2011 (including demand notes)      $  4,601,223
       Fiscal year 2011-2012                                          -
       Fiscal year 2012-2013                                          -
       Fiscal year 2013-2014                                          -
       Fiscal year 2014-2015                                          -
       Fiscal year 2015-2016                                          -
                                                           -------------

                                          Total            $  4,601,223
                                                           =============

NOTE I - OTHER LIABILITIES
--------------------------

In the  twelve-month  period  ending May 31, 2010,  the Company,  upon advice of
legal counsel,  removed certain dormant accounts payable in the aggregate amount
of $200,240,  based upon the  conclusion  that none of accounts  represented  an
obligation  that is legally  enforceable  against the Company.  Such removal was
recorded as a gain on debt extinguishment.

                                      F-23
<PAGE>
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of May 31, 2010, the Company had accrued and withheld  approximately $155,000
in Federal  payroll taxes and  approximately  $24,000 in West  Virginia  payroll
withholdings.  These  amounts have not been  remitted  and are still  payable at
September 13, 2010, as well as penalties and interest of approximately  $28,000.
These amounts are reflected in the accompanying  financial statements as accrued
expenses, and management intends to pay this obligation as soon as possible.

NOTE 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.  Holders of Series A Preferred Stock are
entitled to  participate in FSC's  partially  collateralized  bonding  programs,
subject to continuing  satisfaction  of  underwriting  criteria,  based upon the
bonding capacity of FSC attributable to capital reserves of FSC established with
the   subscription   proceeds  (i.e.,   bonding  capacity  equal  to  ten  times
subscription  proceeds)  and for so long as the  subscriber  holds the  Series A
shares.  Holders of the Series A Preferred  Stock are entitled to receive,  when
and  as  declared  by the  board  of  directors,  cumulative  preferential  cash
dividends at a rate of four  percent of the $1,000  liquidation  preference  per
annum  (equivalent  to a fixed  annual  rate of $40 per  share).  The  Series  A
Preferred Stock ranks senior to the Company's  common stock, and pari passu with
the Company's  Series B Preferred  and Series C Preferred  Stock with respect to
dividend  rights and rights upon  liquidation,  dissolution or winding up of the
Company.  The holder may  redeem  the Series A  Preferred  Stock on or after the
seventh  anniversary  of the  Issue  Date,  if the  holder  provides  a  written
statement to the Company that it will no longer  require  surety bonds issued by
the Company's  insurance  subsidiary  (FSC) under its  partially  collateralized
bonding programs and, if no such surety bonds are then outstanding, the Company,
at the option of the  holder,  will  redeem  all or any  portion of the Series A
Preferred  Stock of such  holder  at a price  per  share  equal to the  Series A
Preferred  Stock Issue Price plus all accrued and unpaid  dividends with respect
to the shares of the Series A Preferred Stock of such holder to be redeemed. The
conditional  redemption  shall  not be  available  to any  holder  of  Series  A
Preferred  Stock  for  so  long  as  surety  bonds  of the  Company's  insurance
subsidiary issued on a partially collateralized basis remain outstanding for the
benefit of such  holder,  and upon  redemption,  such holder  shall no longer be
eligible to participate in the partially  collateralized bonding programs of the
insurance subsidiary.  The Company is authorized to issue up to 1,000,000 shares
of the Series A  Preferred  Stock.  As of May 31,  2010,  the Company has issued
2,675 shares of Series A Preferred Stock in exchange for cash investments in the
amount of  $2,675,000,  of which 10 shares  were  issued in fiscal  2010 and 435
shares were issued in fiscal 2009.  As of May 31, 2010 the Company has chosen to
defer payment of dividends on the Series A Preferred Stock with such accrued and
unpaid dividends amounting to $341,153 through May 31, 2010.

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

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

Company's  acquisition  of FSC.  Holders  of the  Series B  Preferred  Stock are
entitled to receive, when and as declared by the board of directors,  cumulative
preferential cash dividends at a rate of eight percent of the $1,000 liquidation
preference per annum  (equivalent to a fixed annual rate of $80 per share).  The
Series B Preferred  Stock ranks  senior to the  Company's  common stock and pari
passu with the Company's  Series A Preferred  and Series C Preferred  Stock with
respect to dividend rights and rights upon  liquidation,  dissolution or winding
up of the Company.  Each share of the Series B Preferred Stock is convertible at
the option of the holder,  at any time after the original issue date, into 1,000
fully  paid  and  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.  The Company has not
issued any  additional  shares of Series B  Preferred  Stock  during this fiscal
year.

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

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

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

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

                                      F-25
<PAGE>
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     4. Dividends.

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

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

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

The Series C Shares issued in the Recapitalization  have the same 8.0% per annum
compounding dividend preference and carry over from the Series B Shares the same
accrued but unpaid  dividends.  While  dividends  had never been declared on the
Series B shares,  they had been accrued,  increasing the dividend preference and
the redemption price and liquidity  preference of such shares and increasing the
liability  represented  thereby  based upon the Series B Shares  fixed  maturity
date.  The  accrued  (but  undeclared)  dividends  associated  with the Series C

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

exchange  amounted to $2,295,624 and are included in the total amount  exchanged
for Series C Shares.  Unlike the Series B Shares with their fixed maturity date,
the  Series  C  Shares  are  permanent  equity,  with  accruing  dividends  only
increasing the preference amount that must be satisfied before junior securities
may participate in dividends or on liquidation.  Accordingly,  the effect of the
accrual  of  dividends  with  respect  to the  Series C Shares on the  Company's
balance sheet is to increase the  aggregate  claim of the Series C Shares on the
equity of the  corporation  and to increase the deficit in common equity,  while
having  no  effect  on  the  net  equity  of the  corporation  as a  whole.  The
entitlement  of the  Series  C  Shares  to a  priority  in  relation  to  junior
securities  with  respect to  dividends  and on  liquidation  does not create an
obligation  to the Company and  therefore  no  liability  is recorded  until the
dividends are declared by the Board of the Company. The Series C Shares are pari
passu with the  Corporation's  Series A Preferred  Stock and Series B Shares (to
the  extent  any  remain  outstanding  following  the  Recapitalization)  and no
dividends or other  distributions  will be paid upon Common  Shares or any other
class of Shares  that is junior in  priority  to the  Series C  Preferred  while
dividends are in arrears. In addition,  the Series C Shares are convertible into
Common Shares of JFG at the option of the holders at a conversion price of $0.10
per Share.  The  Series C Shares  may be  redeemed  by the  Corporation,  at its
option, when it is in a financial position to do so.

For the year  ending  May 31,  2010,  6,804.936  shares of  Series B Stock  were
surrendered and exchanged for 6,804.936 shares of Series C Stock.  This exchange
amounted to $6,269,051 of carrying  value of Series B stock being  exchanged for
Series C and Common Stock.  13,609,872 shares of Common Stock were issued to the
Series C Stock  holders at the rate of 2,000  Common  shares for each  exchanged
Series B Stock,  with the  related  cost  associated  with the  Common  issuance
offsetting  the Series C carrying  value by $265,120.  The shares were valued at
approximately $.01948 per share based on the average quoted closing price of the
Company's  stock for the 20-day period  proceeding the date of the  transaction.
Series C stock may be redeemed by the Company but does not have a fixed maturity
date and,  thus, is classified as permanent  equity.  Holders of over 70% of the
outstanding   Series  B  Preferred   Shares   elected  to   participate  in  the
recapitalization.  Those  Series B  Preferred  Shareholders  that  chose  not to
convert at this time are listed in the Liabilities section of the Balance Sheet,
and therefore the  accretion  and dividends  associated  with the Series B stock
after November 30, 2009 are deductions  from net income.  As the redemption date
on the Series B shares got closer,  it became apparent that it was unlikely that
the shares would be converted  to common at $1.00,  and thus the  classification
was changed.  The remaining  Series B shares are  continuing to be accreted from
carrying  value  to the  face  amount  for the 5 year  period  from  the date of
issuance. Series C stock has no accretion.

As of May 31, 2010 the Company has chosen to defer  payment of  dividends on the
Series B and Series C Preferred  Stock with such  accrued  and unpaid  dividends
amounting to $1,119,020 and $2,670,286 through May 31, 2010.

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.

                                      F-27
<PAGE>
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.
Accordingly,  the Company has determined that only the Series A 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  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,  2010,  the Company had issued and  outstanding  warrants to purchase
10,107,897 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 10,107,897 remain  outstanding.  The exercise price of the
warrants is  one-tenth of one cent  ($.001) per share.  The  warrants  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.

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

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  ending in May 2010.  The term of the options is five years and expires in
May 2011. As of May 31, 2009, the awarded options had been reduced to 21,300,000
due to changes in  employment  status for two  employees.  Subsequent to May 31,
2009, 1,500,000 vested options expired,  leaving 19,800,000 options awarded, all
of which are vested.

On December  28,  2006,  the  compensation  committee  of the board of directors
awarded  2,100,000 of incentive  stock  options to acquire  common  shares at an
exercise  price of four cents ($.04) per share,  of which 450,000  shares vested
immediately  and the  remaining  1,650,000  options  vesting over the next three
years ending in December 2009. The term of the options is five years and expires
in December  2011. As of May 31, 2009,  the awarded  options had been reduced to
1,800,000 due to changes in employment  status. As of May 31, 2010, all of these
options have vested.

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

The following  table  summarizes  option  activity under the Plan for the fiscal
year ended May 31, 2010.

                                     2010
                                              Number    Weighted-Avg.
                            Weighted-Avg.   Of Shares    Remaining     Aggregate
                              Exercise        Under         Life       Intrinsic
                                Price         Option      (Years)        Value

                            ------------- ------------- ------------- ----------
Balance at June 1, 2009     $  .06652      24,100,000
Options granted                .04000      10,000,000
Options exercised                   -               -

Options canceled/expired       .07000       1,500,000
                            ------------- -------------
Balance, May 31, 2010       $  .05822      32,600,000
                            ============= =============

Exercisable at May 31, 2010 $  .06176      27,300,000       1.53      $     -
                            ============= =============
Expected to vest            $  .04000       5,300,000       4.08      $     -
                            ============= =============


                                      F-29
<PAGE>
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following  table  summarizes  activity and pricing  information for the non-
vested shares under the Plan for the year ended May 31, 2010.

                           2010

                                                            Number
                                    Weighted-Average          Of
                                       Grant Date         Non-vested
                                       Fair Value           Shares
                                    ---------------- -------------------

Balance at June 1, 2009
                                    $       .01818          2,750,000
Options granted                             .02962         10,000,000
Options vested                              .02540        ( 7,450,000)
Options canceled/expired
                                                 -
                                    ---------------- -------------------

Balance at May 31, 2010             $       .02962          5,300,000
                                    ================ ===================


No options  were  granted in fiscal  2009.  There were no options  exercised  in
fiscal  2010 or  2009.  The  total  fair  value of  shares  vested  amounted  to
approximately $189,000 and $93,000 in fiscal 2010 and 2009 respectively.

Stock-based  compensation  expense  attributable  to  such  awards  amounted  to
approximately  $252,000  and $11,000 in fiscal years ended May 31, 2010 and 2009
respectively.  Unrecognized compensation expense related to non-vested awards at
May 31, 2010 was approximately $17,156 and is expected to be recognized over the
next year.

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.

NOTE M - INCOME TAXES
---------------------

Deferred  tax assets and  liabilities  are recorded for the effects of temporary
differences  between  the tax basis of an asset or  liability  and its  reported
amount in the consolidated  financial  statement.  Such differences  include the
income  recognition of a portion of the unearned premium  reserve,  accruals not
currently  deductible  relating to stock  option  expense  and  certain  accrued
expenses that are not paid within  specified time frames by the Internal Revenue
Service,  and the deductibility of deferred policy acquisition costs paid. As of
May 31, 2010,  the Company had operating  loss carry  forwards of  approximately
$16.5  million.  These carry forwards begin expiring in 2015 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 carry forwards
are substantially limited.

The Company has fully  reserved  the $5.6  million tax benefit of the  operating
loss carry  forward,  by a valuation  allowance of the same amount,  because the
likelihood of realization of the tax benefit cannot be determined.

                                      F-30
<PAGE>
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE N-STOCKHOLDERS EQUITY
--------------------------

In fiscal 2010,  the Company  issued  1,675,000  shares of the Company's  common
stock as additional  consideration  in  connection  with  short-term  and demand
borrowing   arrangements   totaling   $500,000.   The  shares   were  valued  at
approximately  $.0169 per share based on the average quoted closing price of the
Company's stock for the 20-day period proceeding the date of the transaction and
totaled $28,275.

In fiscal 2010, warrants totaling 2,963,668 were exercised for cash and issuance
of 2,963,668 common shares of the Company.

In fiscal 2010,  the Company  issued  5,354,642  shares of the Company's  common
stock in connection with the  semi-annual  issuance of shares under terms of the
bridge-financing arrangement. The shares were valued at approximately $.0146 per
share based on the average quoted  closing price of the Company's  stock for the
20-day period proceeding the date of the transaction and totaled $78,178.

In fiscal 2010,  the Company  issued  6,005,925  shares of the Company's  common
stock in connection with the  semi-annual  issuance of shares under terms of the
bridge-financing  arrangement.  The shares were valued at approximately  $.00912
per share based on the average quoted  closing price of the Company's  stock for
the 20-day period proceeding the date of the transaction and totaled $54,774.

In fiscal 2010,  the Company  issued  5,171,993  shares of the Company's  common
stock in  connection  with the  forbearance  agreement  of the  bridge-financing
arrangement  (See Note H). The shares  were valued at  approximately  $.0365 per
share based on the average quoted  closing price of the Company's  stock for the
20-day period proceeding the date of the transaction and totaled $188,778.

In fiscal 2010, the Company  issued  13,609,872  shares of the Company's  common
stock in connection with the exchange of Series B Preferred  Shares for Series C
Preferred Shares (See Note J).

In fiscal 2009, the Company issued 595,000 shares of the Company's  common stock
as additional  consideration  in connection with short-term and demand borrowing
arrangements totaling $435,000. The shares were valued at approximately $.024761
per share based on the average quoted  closing price of the Company's  stock for
the 20-day period proceeding the date of the transaction and totaled $14,733.

In fiscal 2009,  the Company  issued  3,115,581  shares of the Company's  common
stock in connection with the second round of bridge-financing  arrangements (see
Note H) totaling $940,000.  The shares were valued at approximately $.009027 per
share based on the average quoted  closing price of the Company's  stock for the
20-day period proceeding the date of the transaction and totaled $28,126.

In fiscal 2009,  the Company  issued  5,010,640  shares of the Company's  common
stock in connection with the  semi-annual  issuance of shares under terms of the
bridge-financing  arrangement.  The shares were valued at approximately $.004350
per share based on the average quoted  closing price of the Company's  stock for
the 20-day period proceeding the date of the transaction and totaled $21,796.

In fiscal 2009,  the Company  issued  4,870,449  shares of the Company's  common
stock in connection with the  semi-annual  issuance of shares under terms of the
bridge-financing  arrangement.  The shares were valued at approximately $.008498
per share based on the average quoted  closing price of the Company's  stock for
the 20-day period proceeding the date of the transaction and totaled $41,389.

                                      F-31
<PAGE>
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE O-STATUTORY FINANCIAL DATA (UNAUDITED)
-------------------------------------------

The Company's  insurance  subsidiary  files calendar year  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  notreflect   deferred  policy  acquisition  costs  and  certain  assets  are
non-admitted.

Statutory  surplus as of May 31, 2010 and 2009 and net income for the  Company's
insurance  subsidiary  the  calendar  year ended  December 31, 2009 and 2008 and
five-month periods ended May 31, 2010 and 2009 are as follows:

     Statutory Surplus        May 31, 2010                       $ 5,869,182
     Statutory Surplus        May 31, 2009                       $ 5,439,269
     Net Income               Calendar year 2009                     279,136
     Net Income               Calendar year 2008                     177,018
     Net Income               Five-month period 2010                  72,782
     Net Income               Five-month period 2009                  76,395


Statutory  surplus  exceeds the minimum  capital  requirements  provided by West
Virginia state law of $2.0 million.

Under the Consent Order issued by the Commissioner of the State of West Virginia
for the acquisition of the insurance subsidiary by the Company, no dividends can
be  declared or paid from the  insurance  subsidiary  without the prior  written
approval of the Insurance Commissioner.


NOTE P - COMMITMENTS AND CONTINGENCIES
--------------------------------------

ACQUISITION COMMITMENTS AND MATERIAL AGREEMENTS

On  February  8, 2008,  the  Company  entered  into an  agreement  (the  "Merger
Agreement") with Reclamation Surety Holding Company,  inc. ("RSH") to acquire by
merger (the "Merger") all of the business and assets of RSH, including the stock
of RSH's  subsidiaries,  Cumberland  Surety,  Inc  ("Cumberland")  and NewBridge
Services,  Inc.  ("NewBridge") for a purchase price of $3,400,000,  less certain
indebtedness of RSH ("the Merger  Consideration").  Upon execution of the Merger
Agreement, the Company made a nonrefundable deposit in the amount of $50,000 for
the  benefit of the RSH  shareholders,  such  amounts  to be applied  toward the
Merger  Consideration  at closing.  On June 24,  2008,  the Company  amended its
Merger Agreement with Reclamation  Surety Holding  Company,  Inc.  releasing the

                                      F-32
<PAGE>
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

deposit to the sellers and extending the date for closing until October 31, 2008
after which time either party may  terminate the Merger  Agreement.  Discussions
continue with RSH, and the Merger Agreement has not been terminated. Among other
conditions,  closing  was  subject to the  closing  by the  Company of an equity
financing. RSH and subsidiaries perform surety underwriting services and service
surety bonding programs. The acquisition was expected to add a substantial depth
of experience and expertise to the Company.

On August 20, 2008,  the Company  entered into a stock  purchase  agreement (the
"Agreement") with National  Indemnity  Company  ("NICO"),  pursuant to which the
Company  agreed to  acquire  100% of the  outstanding  stock of Unione  Italiana
Reinsurance  Company  of  America  ("Unione").  Such  agreement  was  amended on
November 13, 2008 to clarify certain definitions and calculation of the purchase
price,  in addition to extending  until  December 31, 2008 the date by which the
Company must satisfy the  financing  condition  prior to closing and which after
time either party may terminate the Agreement. The Company was unable to provide
certification  to NICO that the Company had cash  available  or had  existing or
committed  borrowing  facilities  ("Financing  Certificate") which together were
sufficient to enable it to consummate the  acquisition of Unione by December 31,
2008.  Under  the  terms of the  Agreement,  as  amended,  NICO had the right to
terminate the Agreement at its  discretion  and retain the good faith deposit of
$75,000.  By letter  dated  January  15,  2010,  NICO  exercised  this  right of
termination.

LEASE COMMITMENTS

The Company leases certain office  equipment with combined  monthly  payments of
approximately  $615 that have varying  remaining  terms of less than five years.
The Company leases office,  parking and storage space under month-to-month lease
arrangements that approximate $3,905 each month.

The Company leases an apartment for corporate use that has a remaining term of 6
months at a monthly rate of $560.00 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 $180 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  $63,452 and
$66,092 during 2010 and 2009.

Minimum  future lease  payments  under  non-cancelable  operating  leases having
remaining terms in excess of one year as of May 31, 2010 are:

     Fiscal year 2010-2011                 10,362
     Fiscal year 2011-2012                  7,002
                                       ------------
                      Total              $ 17,364
                                       ============

                                      F-33
<PAGE>
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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,
government agency  mortgage-backed  securities,  state and municipal securities,
and equity  securities)  held for investment  purposes  (available-for-sale  and
held-to-maturity)  are based on quoted  market  prices  or dealer  quotes.  If a
quoted  market  price 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,  short-term  and  demand  notes  payable,  accounts  payable,  accrued
expenses and other  liabilities  approximate fair value because of the immediate
or relatively short-term maturity of these financial instruments.  Fair value of
term  notes  payable,   including  notes  payable  under  the   bridge-financing
arrangement,  were  deemed to  approximate  their  carrying  value  based on the
Company's  incremental  borrowing  rates for similar  types of  borrowings  with
maturities consistent with those remaining for the debt being valued.

The carrying  values and fair values of the Company's  financial  instruments at
May 31, 2010 and 2009 are as follows:
<TABLE>
<CAPTION>

                                                             2010                                 2009
                                              ------------------------------------ ------------------------------
                                                  Carrying            Fair             Carrying            Fair
                                                   Amount             Value             Amount            Value
                                              ----------------- ------------------ ----------------- ------------
<S>                                           <C>               <C>                <C>               <C>
ASSETS
Bonds available for sale                      $ 6,618,472       $ 6,618,472        $   908,766       $   908,766
Mortgage-backed securities held to maturity             -                 -          5,085,300         5,157,936
Cash and short-term investments                   338,650           338,650            467,791           467,791
Premiums and other receivables                    179,299           179,299             89,308            89,308
Equity securities (included in other assets)            -                 -              7,862             7,862

LIABILITIES
Notes payable                                   4,601,223         4,601,223          4,052,872         4,052,872
Accounts payable and advance premiums             246,833           246,833            343,075           343,075
Accrued expenses and other liabilities          1,549,760         1,549,760            944,656           944,656
</TABLE>



                                      F-34
<PAGE>
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE R - OTHER RISKS, UNCERTAINTIES AND CONCENTRATIONS
------------------------------------------------------

CONCENTRATION OF CREDIT RISK

As of  May  31,  2010  the  Company's  investment  securities  of  approximately
$6,883,000 are solely comprised of  mortgage-backed  securities and money-market
mutual  funds  that  invest   principally  in  obligations  issued  by  the  U.S
government,  its agencies or  instrumentalities.  Such instruments are generally
considered to be of the highest credit quality investment available.

The  Company  transacts  the  majority  of its  business  with  three  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  $250,000
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  that  invest   principally  in  obligations  issued  by  the  U.S
government, its agencies or instrumentalities.

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

CONCENTRATION IN PRODUCTS, MARKETS AND CUSTOMERS

The  Company's  insurance  subsidiary  currently  writes only the surety line of
business,  is licensed to write  surety only in West  Virginia  and Ohio and has
focused its primary efforts towards coal permit bonds. Such business,  including
investment  advisory  fees  from  managed  collateral  accounts,  accounted  for
approximately  82% and 65% of the  Company's  fiscal  2010  and  2009  revenues,
respectively.  Furthermore,  the Company provides surety bonds to companies that
share common  ownership  interests that  constitute 60% and 52% of the Company's
fiscal 2010 and 2009 revenues, respectively, as follows:
<TABLE>
<CAPTION>

                                               2010                                 2009
                                ------------------------------------- ----------------------------------
                                                      Investment                          Investment
                                     Surety            Advisory           Surety           Advisory
                                     Premium             Fees            Premium             Fees
                                ------------------ ----------------- ----------------- -----------------
<S>                             <C>                <C>               <C>               <C>
Customer group # 1              $   277,000        $    73,000       $   259,000       $    71,000
Customer group # 2                  262,000             46,000           248,000            40,000
Customer group # 3                  167,000              1,400                 -                 -
                                ------------------ ----------------- ----------------- -----------------
                         TOTAL      706,000            120,400           507,000           111,000
                                ================== ================= ================= =================
</TABLE>


                                      F-35
<PAGE>
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE S - 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.

                                                 YEAR ENDED
INDUSTRY SEGMENT                        MAY 31, 2010      MAY 31, 2009
-------------------------------      ----------------- -----------------
REVENUES:
 Investment advisory                 $      361,412    $      232,853
 Surety insurance                         1,210,611           961,480
 Corporate                                        -               851
                                     ----------------- -----------------
 Total revenues                      $    1,572,023    $    1,195,184
                                     ================= =================

OPERATING INCOME (LOSS):
 Investment advisory                 $      113,005    $     (136,830)
 Surety insurance                           536,938           313,556
 Corporate                               (2,107,399)       (1,625,102)
                                     ----------------- -----------------
 Total operating income (loss)       $   (1,457,456)   $   (1,448,376)
                                     ================= =================

IDENTIFIABLE ASSETS:
 Investment advisory                 $       51,097    $       49,752
 Surety insurance                         7,724,941         6,916,041
 Corporate                                   22,001            32,345
                                     ----------------- -----------------
 Total assets                        $    7,798,039    $    6,998,138
                                     ================= =================

CAPITAL ACQUISITIONS:
 Investment advisory                 $            -    $            -
 Surety insurance                             5,819                 -
 Corporate                                        -             6,563
                                     ----------------- -----------------
 Total capital acquisitions          $        5,819    $        6,563
                                     ================= =================

DEPRECIATION CHARGED TO
IDENTIFIABLE ASSETS:
 Investment advisory                 $           45    $           50
 Surety insurance                             7,282             7,513
 Corporate                                    3,282             4,999
                                     ----------------- -----------------
 Total Depreciation                  $       10,609    $       12,562
                                     ================= =================

INTEREST EXPENSE:
 Investment advisory                 $            -    $        1,023
 Surety insurance                                 -                23
 Corporate                                  956,973           603,999
                                     ----------------- -----------------
 Total interest expense              $      956,973    $      605,045
                                     ================= =================


                                      F-36
<PAGE>
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE T - RELATED PARTY TRANSACTIONS
-----------------------------------

BORROWING AND OTHER TRANSACTIONS OF LARGEST SHAREHOLDER AND CEO

For the past several  years the  Company's  operating  expenses  were  partially
funded by advances from its largest  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") 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 fiscal 2009, advances to the Company from Mr. Jacobs amounted to $437,388
and  repayments  to Mr.  Jacobs  amounted to $454,777.  As of May 31, 2009,  the
balance due to Mr.  Jacobs from the  Company was $2,281.  The largest  aggregate
amount outstanding to Mr. Jacobs in fiscal 2009was $294,546.

During  fiscal  2010,  advances  to the  Company  from Mr.  Jacobs  amounted  to
$710,435,  which included  assumption of company debt in the amount of $185,652,
and  repayments  to Mr.  Jacobs  amounted to $706,412.  As of May 31, 2010,  the
balance due Mr. Jacobs was $7,104.  The largest aggregate amount  outstanding to
Mr. Jacobs in fiscal 2010 was $178,444.

The rate of interest on such amounts due from and  obligations due to Mr. Jacobs
was 12% for both the 2009 and 2010 fiscal years.

As of September 10, 2010, $12,574 was owed by the Company to Mr. Jacobs.

OTHER RELATED PARTIES

During the years ended May 31, 2010 and May 31, 2009, a company owned by a board
member provided  consulting  services.  This company provided  services totaling
$62,100 and $62,531 in 2010 and 2009.  Amounts  owed to this company at year end
are treated as related party payables in the amounts  $96,160 and $75,009 at May
31, 2010 and 2009.

During  the  year  ended  May 31,  2009,  the  company  borrowed  money  from an
individual  that  became a board  member  during  2010.  Loans in the  amount of
$110,000 were  borrowed as part of the second round bridge  financing and demand
loans in the  amounts of $150,000  were  borrowed  and paid back in 2009.  Total
amounts owed to this board member at May 31, 2010 consisted of $75,000 in demand
notes and $360,000 in bridge financing.  Total amounts owed to this board member
at May 31, 2009  consisted  of $75,000 in demand  notes and  $250,000 in initial
bridge financing.

NOTE U - REINSURANCE
--------------------

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

                                      F-37
<PAGE>
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Effective  April 1, 2009, FSC entered into a reinsurance  agreement with various
syndicates  at Lloyd's of London and one Bermuda based  reinsurer  ("Reinsurer")
for its coal reclamation surety bonding programs.  The reinsurance  agreement is
an excess of loss  contract  which  protects  the Company  against  losses up to
certain limits over stipulated amounts, has an initial term of 39 months and can
be terminated by either party by written notice of at least 90 days prior to any
July 1. The contract  calls for the first year of the agreement to consist of 15
months with premium due within 30 days of the end of the first  Agreement  Year,
June 1, 2010,  at a rate of 35% of gross written  premium,  subject to a minimum
premium $490,000.  At May 31, 2010 and 2009, the Company had prepaid reinsurance
premiums of $214,385 and $87,114 and ceded  reinsurance  payable/(deposited)  of
($122,568) and $92,173.  During 2010,  the amounts  deposited with the Reinsurer
were greater than the ceded premium written,  resulting in a net deposit instead
of a payable.

There were no ceded  losses and lae expenses for the years ended May 31, 2010 or
2009.

The  effects of  reinsurance  on premium  written and earned for fiscal 2010 and
2009 are as follows;

              2010 Written    2010 Earned     2009 Written    2009 Earned
              --------------- --------------- --------------- -------------
    Direct    $  1,114,197    $  1,026,896    $    905,519    $    651,933
    Ceded     $    385,259    $    257,987    $     92,174    $      5,060
              --------------- --------------- --------------- -------------
    Net       $    728,938    $    768,909    $    813,345    $    646,873


NOTE V - EVENTS SUBSEQUENT TO MAY 31, 2010
------------------------------------------

Subsequent to May 31, 2010,  the Company  obtained new borrowings of $9,500 from
individuals  to fund ongoing  operation and made  repayments  of $159,500.  Such
borrowings were obtained under demand notes bearing interest at the rate of 10%.

Additionally,  the Company  obtained  various  borrowings  from  individuals and
businesses  totaling  $295,000 at the rate of 10%, which mature in September and
October 2010.  These  borrowings  included the issuance of 895,000 shares of its
common stock as additional consideration.  Additionally,  there were advances to
the Company from its largest  shareholder  and CEO  amounting to $320,420,  with
repayments totaling $314,950.

On June 30,  2010,  the  Company  awarded  500,000  shares to an  individual  as
compensation for services instrumental to advancing the Company's business plan,
including introductions and negotiations with reinsurers, investors and insurers
with the potential to provide license authority in additional  states. In August
2010, these shares were issued.

On September 10, 2010, in accordance with the Bridge  financing  agreement,  the
Company  became  obligated  to issue in the  aggregate  6,213,285  shares of its
common stock to the holders of such notes.

On June 30, 2010, the Company  elected to continue to defer payment of dividends
on its  Series  A  Preferred  Stock,  Series B  Preferred  Stock,  and  Series C
Preferred Stock with such accumulated  accrued and unpaid dividends amounting to
$371,232, $1,197,525, and $2,859,271 as of June 30, 2010.


                                      F-38
<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, 2010                                                                                              SHOWN IN THE
                                                                        COST*                VALUE            BALANCE SHEET
                                                                      -------------       -------------       --------------
<S>                                                                   <C>                 <C>                 <C>

 Fixed maturities:
 Bonds:
 United States Government and government agencies and authorities     $          -        $          -        $           -
 States, municipalities, and political subdivisions                              -                   -                    -
                                                                      -------------       -------------       --------------
 Total fixed maturities                                                          -                   -                    -

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


 Mortgage-backed securities guaranteed by U.S. government agency         6,413,856           6,618,472            6,618,472

 Short-term investments, at cost (approximates market value)               264,079             264,079              264,079
                                                                      -------------       -------------       --------------

 Total investments                                                    $  6,677,935        $  6,882,551        $   6,882,551
                                                                      ============        ============        ==============


 * 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
</TABLE>






















                                      F-39

<PAGE>
<TABLE>
<CAPTION>
                                            JACOBS FINANCIAL GROUP, INC.
                                                  AND SUBSIDIARIES
--------------------------------------------------------------------------------------------------------------------
CONDENSED FINANCIAL INFORMATION OF REGISTRANT                                                            SCHEDULE II
--------------------------------------------------------------------------------------------------------------------
BALANCE SHEETS - PARENT COMPANY ONLY
                                                                                 MAY 31, 2010          MAY 31, 2009
                                                                                --------------        --------------
<S>                                                                             <C>                   <C>
 Assets:
 Cash                                                                           $    (16,526)         $     (2,028)
 Accounts receivable from affiliates                                                       -                     -
 Prepaid expense and other assets                                                     15,696                24,822
 Furniture and equipment, net                                                          6,269                 9,551
 Investment in subsidiaries, equity method                                         5,360,750             4,661,611
 Due from affiliates, net                                                            718,054               989,836
                                                                                --------------        --------------
 Total assets                                                                   $  6,084,243          $  5,683,792
                                                                                ==============        ==============
 LIABILITIES:
 Accounts payable                                                                    $ 6,710               $ 6,460
 Accrued expenses and professional fees                                              519,187               365,859
 Related party payable                                                               159,907                93,884
 Notes payable                                                                     4,159,119             3,614,791
 Related party note payable                                                          442,104               437,281
 Due to affiliates                                                                         -               176,000
 Other liabilities                                                                   830,893               334,929
 Series B Preferred Stock                                                          3,826,882                     -
                                                                                --------------        --------------
        Total liabilities                                                          9,944,802             5,029,204

 MANDATORILY REDEEMABLE PREFERRED STOCK                                            3,005,266            14,290,109

 STOCKHOLDERS EQUITY:
 Common stock                                                                         21,446                17,968
 Additional paid in capital                                                        3,404,431             2,626,236
 Series C Stock                                                                    8,701,217                     -
 Accumulated deficit                                                             (18,992,919)          (16,279,725)
                                                                                --------------        --------------
        Total stockholders equity (deficit)                                       (6,865,825)          (13,635,521)
                                                                                --------------        --------------
                 Total liabilities and stockholders equity                      $  6,084,243          $  5,683,792
                                                                                ==============        ==============
STATEMENTS OF INCOME - PARENT COMPANY ONLY
 YEAR ENDED MAY 31,
                                                                                     2010                  2009
                                                                                --------------        --------------
 REVENUES
 Equity in undistributed net income (loss) of consolidated subsidiaries         $    513,139          $     95,178
 Tax benefit to parent from subsidiary attributable to
 utilization of net operating loss carryforwards                                     148,174                81,549
 Interest income                                                                           -                   851
                                                                                --------------        --------------
        Total revenues                                                               661,313               177,578

 EXPENSES:
 General and administrative                                                          904,505             1,016,956
 Interest                                                                            968,343               603,999
 Accrued dividends on stock liability                                                242,639                     -
 Depreciation                                                                          3,282                 4,999
                                                                                --------------        --------------
        Total expenses                                                             2,118,769             1,625,954
                                                                                --------------        --------------

 Net income (loss)                                                                (1,457,456)           (1,448,376)

 Accrued dividends on equity stock                                                  (374,662)                    -
 Accretion of mandatorily redeemable convertible preferred stock,
 including accrued dividends                                                        (881,075)           (1,609,311)
                                                                                --------------        --------------
 Net income (loss) attributable to common stockholders                          $ (2,713,193)         $ (3,057,687)
                                                                                ==============        ==============
</TABLE>
                                      F-40
<PAGE>
<TABLE>
<CAPTION>
                                            JACOBS FINANCIAL GROUP, INC.
                                                  AND SUBSIDIARIES

--------------------------------------------------------------------------------------------------------------------
CONDENSED FINANCIAL INFORMATION OF REGISTRANT                                                            SCHEDULE II
--------------------------------------------------------------------------------------------------------------------

STATEMENTS OF CASH FLOWS - PARENT COMPANY ONLY
 YEAR ENDED MAY 31,
                                                                                     2010                  2009
                                                                                --------------        --------------
<S>                                                                             <C>                   <C>
 CASH FLOWS FROM OPERATING ACTIVITIES:

 Net income (loss)                                                              $ (1,457,456)         $ (1,448,376)

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

 Equity in undistributed net loss of consolidated subsidiaries                      (513,139)              (95,177)
 Accrual of preferred stock dividend                                                 155,708                     -
 Accretion of preferred stock                                                         86,931                     -
 Stock option compensation expense                                                   251,632                11,462
 Stock issued in connection with financing arrangements                              261,958               231,554
 Depreciation                                                                          3,282                 4,999
 Loss on disposal of equipment                                                             -                     -
 Change in other assets, accounts payable and accrued expense, net                   724,690               568,504
                                                                                --------------        --------------

 TOTAL CASH USED IN OPERATIONS                                                      (486,394)             (727,034)

 CASH FLOWS FROM INVESTING ACTIVITIES:

 Contributions to insurance company subsidiary                                      (186,000)             (759,000)
 Funds provided to affiliates for operations                                          95,782               (40,871)
 Purchase of furniture and equipment                                                       -                (6,563)
                                                                                --------------        --------------

 TOTAL CASH USED IN INVESTING ACTIVITIES                                             (90,218)             (806,434)

 CASH FLOWS FROM FINANCING ACTIVITIES:

 Proceeds from issuance of mandatorily redeemable preferred stock                     10,000               435,000
 Proceeds from exercise of stock warrants                                              2,963                     -
 Redemption of mandatorily redeemable preferred stock                                      -                     -
 Proceeds from borrowings                                                          1,017,500             1,252,500
 Repayment of borrowings                                                            (473,172)             (319,725)
 Proceeds from short-term borrowings from related party                              691,764               606,057
 Repayment of short-term borrowings to related party                                (686,941)             (454,777)
                                                                                --------------        --------------

 TOTAL CASH PROVIDED BY FINANCING ACTIVITIES                                         562,114             1,519,055
                                                                                --------------        --------------

 CHANGE IN CASH                                                                      (14,498)              (14,413)

 Cash at beginning of year                                                            (2,028)               12,385
                                                                                --------------        --------------

 Cash at end of year                                                            $    (16,526)         $     (2,028)
                                                                                ==============        ==============
</TABLE>
                                      F-41
<PAGE>
<TABLE>
<CAPTION>
                                                    JACOBS FINANCIAL GROUP, INC.
                                                          AND SUBSIDIARIES

------------------------------------------------------------------------------------------------------------------------------------
 SUPPLEMENTARY INSURANCE INFORMATION
 AS OF MAY 31, 2010 AND 2009 AND FOR THE YEARS THEN ENDED                                                               SCHEDULE III
------------------------------------------------------------------------------------------------------------------------------------


                       RESERVE FOR
                         LOSSES
                          AND                     OTHER                                         AMORTIZATION
                          LOSS                   POLICY                                CLAIMS        OF
           DEFERRED     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
--------- -----------  ----------- ---------    --------    ---------   ----------   ----------  -----------    ---------  ---------
<S>       <C>          <C>         <C>          <C>         <C>         <C>          <C>         <C>            <C>        <C>

2010

Surety     $ 128,453    $ 611,190   $ 618,095       $ -     $ 768,909   $ 273,577     $ 178,531   $ 256,810        $ -     $ 728,938


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

2009

Surety     $ 143,173    $ 432,658   $ 530,794       $ -     $ 646,873   $ 288,747     $ 186,007   $ 153,263        $ -     $ 813,345

</TABLE>


































                                      F-42
<PAGE>
<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------------------------------------
 SUPPLEMENTAL INSURANCE INFORMATION - REINSURANCE
 AS OF MAY 31, 2010 AND 2009 AND FOR THE YEARS THEN ENDED                                                          SCHEDULE IV
------------------------------------------------------------------------------------------------------------------------------

                                                                                       CEDED TO OTHER
2010                                                            GROSS AMOUNT             COMPANIES             NET AMOUNT

                                                            ---------------------    -------------------   -------------------
<S>                                                         <C>                      <C>                   <C>
Premiums written:
         Property and casualty insurance                    $          1,114,197     $          385,259    $          728,938

                                                            ---------------------    -------------------   -------------------
         Total premiums written                             $          1,114,197     $          385,259    $          728,938
                                                            =====================    ===================   ===================

Premiums earned:
         Property and casualty insurance                    $          1,026,896     $          257,987    $          768,909

                                                            ---------------------    -------------------   -------------------
         Total premiums earned                              $          1,026,896     $          257,987    $          768,909
                                                            =====================    ===================   ===================



                                                                                       CEDED TO OTHER
2009                                                            GROSS AMOUNT             COMPANIES             NET AMOUNT

                                                            ---------------------    -------------------   -------------------
Premiums written:
         Property and casualty insurance                    $            905,519     $           92,174    $          813,345

                                                            ---------------------    -------------------   -------------------
         Total premiums written                             $            905,519     $           92,174    $          813,345
                                                            =====================    ===================   ===================

Premiums earned:
         Property and casualty insurance                    $            651,933     $            5,060    $          646,873

                                                            ---------------------    -------------------   -------------------
         Total premiums earned                              $            651,933     $            5,060    $          646,873
                                                            =====================    ===================   ===================


</TABLE>






















                                      F-43
<PAGE>
<TABLE>
<CAPTION>
                                                    JACOBS FINANCIAL GROUP, INC.
                                                          AND SUBSIDIARIES


------------------------------------------------------------------------------------------------------------------------------------
 SUPPLEMENTAL INFORMATION
 AS OF MAY 31, 2010 AND 2009 AND FOR THE YEARS THEN ENDED                                                               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
                                LOSSES                                             CLAIMS, LOSSES
                                  AND    DISCOUNT                                  AND SETTLEMENT  AMORTIZATION
                                 LOSS     IF ANY,                                EXPENSES INCURRED     OF
                    DEFERRED   EXPENSES, DEDUCTED                                    RELATED TO      DEFERRED   PAID CLAIMS
                     POLICY      FUTURE     IN                           NET                          POLICY    AND CLAIMS     NET
AFFILIATION WITH  ACQUISITION    POLICY   COLUMN  UNEARNED  PREMIUM  INVESTMENT  CURRENT    PRIOR  ACQUISITION  ADJUSTMENT  PREMIUMS
   REGISTRANT        COSTS       CLAIMS     C     PREMIUMS  REVENUE    INCOME      YEAR     YEARS     COSTS      EXPENSES    WRITTEN
----------------- ----------- ---------- -------- --------- -------- ---------- ---------  -------  ---------   ----------- --------
<S>               <C>         <C>        <C>      <C>       <C>      <C>        <C>        <C>     <C>          <C>         <C>

2010

Consolidated
property-casualty
entities             $128,453 $ 611,190    $ -    $618,095 $ 768,909 $ 273,577  $ 178,531    $ -    $ 256,810       $ -     $728,938


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

2009

Consolidated
property-casualty
entities             $143,173 $ 432,658    $ -    $530,795 $ 646,873 $ 288,747  $ 186,007    $ -    $ 153,263       $ -     $813,345

</TABLE>




























                                      F-44

<PAGE>

(b) The following exhibits are filed as a part of this Annual Report.

                                EXHIBITS

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)
3.1  Company's Articles of Incorporation (3)
3.2  Company's By-laws (3)
3.3  Certificate of the Designations, Powers, Preferences and Rights of Series A
     Preferred Stock of Jacobs Financial Group (3)
3.4  Certificate of the Designations, Powers, Preferences and Rights of Series B
     Preferred Stock of Jacobs Financial Group (3)
4.1  Certificate of the Designations, Powers, Preferences and Rights of Series A
     Preferred Stock of Jacobs Financial Group (3)
4.2  Certificate of the Designations, Powers, Preferences and Rights of Series B
     Preferred Stock of Jacobs Financial Group (3)
10.1 Stock Purchase Agreement with National Indemnity Company to purchase Unione
     Italiana Insurance Company of America dated August 20, 2008 (11)
10.2 Engagement  Agreement  between Friedman,  Billings,  Ramsey & Co., Inc. and
     Jacobs Financial Group, Inc. dated December 5, 2007 (7) (9)
10.3 Agreement to acquire by merger  Reclamation  Surety  Holding,  Inc. (5) (6)
     (10)
21.1 Subsidiaries of the Registrant
31.1 Certification    of   Chief    Executive    Officer    pursuant   to   Rule
     13a-14(a)/15d-14(a) promulgated under the Securities Exchange Act of 1934
31.2  Certification    of   Chief   Financial    Officer    pursuant   to   Rule
      13a-14(a)/15d-14(a) promulgated under the Securities Exchange Act of 1934
32.1 Certification  of Chief  Executive  Officer  pursuant to 18 U.S.C.  Section
     1350, 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
     1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.1 Form of Subscription Agreement and Promissory Note (4)
99.2 Form of Amended Subscription Agreement and Promissory Note (8)
99.3 Form of Subscription Agreement and Promissory Note (Second Round) (8)
----------------------------

     (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 September 10, 2007.
     (5)  Incorporated by reference to the Company's  Current Report on Form 8-K
          dated December 14, 2007.
     (6)  Incorporated by reference to the Company's  Current Report on Form 8-K
          dated February 8, 2008.
     (7)  Incorporated  by reference to the Company's  Quarterly  Report on Form
          10-QSB for the quarterly period ended February 29, 2008
     (8)  Incorporated by reference to the Company's  Current Report on Form 8-K
          dated May 30, 2008
     (9)  Incorporated by reference to the Company's  Current Report on Form 8-K
          dated April 15, 2008
     (10) Incorporated by reference to the Company's  Current Report on Form 8-K
          dated June 24, 2008
     (11) Incorporated by reference to the Company's  Current Report on Form 8-K
          dated August 26, 2008
     (12) Incorporated by reference to the Company's  Current Report on Form 8-K
          dated November 20, 2008
     (13) Incorporated by reference to the Company's  Current Report on Form 8-K
          dated March 23, 2009
     (14) Incorporated by reference to the Company's  Current Report on Form 8-K
          dated June 16, 2009
     (15) Incorporated by reference to the Company's  Current Report on Form 8-K
          dated July 7, 2009


                                      -34-
<PAGE>

SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  registrant  has duly  caused  this report to be signed on its
behalf by the undersigned, thereunto duly authorized.


                                     JACOBS FINANCIAL GROUP, INC.

Dated:   September 13, 2010          By: /s/ John M. Jacobs
                                     -------------------------------------------
                                         John M. Jacobs
                                         President and CEO
                                         Director
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, 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, 2010                        By:/s/ John M. Jacobs
        ------------------------                   ----------------------------
                                                     John M. Jacobs
                                                     President and CEO
                                                     Director

Dated:   September 13, 2010                        By:/s/ John M. Jacobs
        ------------------------                   ----------------------------
                                                     John M. Jacobs
                                                     Chief Financial Officer

Dated:   September 13, 2010                        By:/s/ Mario J. Marra
        ------------------------                   ----------------------------
                                                     Mario J. Marra
                                                     Director

Dated:   September 13, 2010                        By:/s/ C. David Thomas
        ------------------------                   ----------------------------
                                                     C. David Thomas
                                                     Director

Dated:   September 13, 2010                        By:/s/ Eric D. Ridenour
        ------------------------                   ----------------------------
                                                     Eric D. Ridenour
                                                     Director

Dated:   September 13, 2010                        By:/s/ Bradley W. Tuckwiller
        ------------------------                   ----------------------------
                                                     Bradley W. Tuckwiller
                                                     Director

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