Ned and Dan Kelly went into hiding in the bush. They were later joined by two friends, Joe Byrne and Steve Hart. On 25 October 1878, two groups of police set out to find the Kellys. They knew the two brothers were hiding in the Wombat Ranges, a mountain range between Greta and Mansfield. One group started south from Greta led by Senior Constable Strahan. Strahan said he would shoot the Kellys down like dogs. A second group led by Sergeant Michael Kennedy set off from Mansfield heading north. Three other policemen were with him: Constables Thomas McIntyre, Thomas Lonigan, and Michael Scanlon. They set up a camp at Stringybark Creek in a thick forest area.
Kennedy and Scanlon went searching for the Kellys, while Lonigan and McIntyre remained at the camp. The Kellys were living in a hut nearby at Bullock Creek. They heard noises and discovered the police camp. They decided to capture the policemen and take their guns and horses. Ned and Dan went to the police camp and told them to surrender. Constable McIntyre put his arms up, but Lonigan got out his gun. Ned Kelly shot him dead. When the other two police returned to camp, McIntyre told them to surrender. When Scanlon went for his gun Kelly also shot him dead. Kennedy ran shooting from tree to tree with Kelly chasing him. Kelly shot him twice, in the armpit and in the chest. Kelly later said that Kennedy "...appeared to be suffering very much and in great agony...I did not wish to leave him alone to linger out in such pain.". Ned put his gun against Kennedy's chest and shot him again. Ned Kelly went back to the camp to get Kennedy's cloak which he then placed over the body. McIntyre escaped during the confusion and went back to Mansfield to tell everyone what had happened.
The Victorian government passed a law on 30 October 1878, to make the Kelly gang outlaws. This meant they no longer had any legal rights and could be shot by anyone. Anyone who could capture any member of the gang, alive or dead, would be paid a reward of £500, or £2,000 for all four men. At this time the police did not know that Hart and Byrne were members of the gang. The gang were seen at several places around north east Victoria. They tried to cross the Murray River to go into New South Wales, but the water was too deep. The police had several large groups hunting for them.
On 10 December 1878, the gang robbed the Australian National Bank at Euroa. They had stopped at Faithful Creek station (a farm) and held the people there prisoners. They locked 22 people including farm workers, hawkers (traveling salesmen) and visitors into a storeroom. Joe Byrne kept guard while the rest of the gang went into Euroa. They went to the bank and said they had a message from McCauley, the farm manager. They got into the bank and held up the bank's manager Robert Scott, along with two tellers (bank workers). After taking all the money, the gang forced Scott, his wife, family, maids and tellers to go with them back to Faithful Creek. They were locked up with the other hostages.
The outlaws gave a display of horse riding and tricks which entertained and surprised their hostages. After having supper, and telling the people not to leave the farm for another three hours, the gang left. The crime was carried out without injury and the gang stole £2,000.
The police increased the reward on the Kelly Gang. More police were sent to guard banks in the country. Friends of the Kellys were locked in gaol. The gang crossed the Murray River and rode north into New South Wales. They arrived in Jerilderie on Saturday 8 February 1879. They broke into the local police station and locked the two policemen, Richards and Devine, in the police cells. The outlaws put on police uniforms and mixed with the local people. They said that they were extra police from Sydney, who had come to guard the town from the Kelly gang. Ned Kelly took his horse to the blacksmith to get new horseshoes and told the man to send the bill to the New South Wales police force. On Monday the gang rounded up various people and forced them into the back room of the Royal Mail Hotel. While Dan Kelly and Steve Hart kept the hostages busy with "drinks on the house" (free drinks), Ned Kelly and Joe Byrne went to the telegraph office and cut down some of the poles and cut the wires. They then went and robbed the local bank of about £2,414. Kelly also burned all the townspeople's mortgage deeds in the bank. When the gang left the town they were singing about two earlier bushrangers, Ben Hall and Dan Morgan: "Hurrah for the good old times of Morgan and Ben Hall."
For the next 18 months the police were not able to find the Kelly gang. They punished anyone they thought might be helping the gang. More than 20 people were locked up in the Beechworth Prison for three months only because they were said to be friends of the gang. None of these people were ever charged with a crime. The government thought the Kelly gang might try and free their friends, so they put up large iron gates on the entrance to the prison.
Months before going to Jerilderie, and with help from Joe Byrne, Ned Kelly dictated a long letter (56 pages). The letter told his story, about how he became a bushranger, and the treatment of his family by the police. It also told the story of the treatment of Irish Catholics by the police and the English and Irish Protestant farmers. He even said there might be a revolution by people in north east Victoria to set up their own republic.
The "", as it is called, is a document of about 8,300 words and has become a famous piece of Australian literature. Kelly had written an earlier letter on 14 December 1878, to Donald Cameron, a member of the Parliament of Victoria, but it had been ignored. The Jerilderie Letter was never published. Kelly tried to find the editor of the local newspaper and get him to print the letter. He finally gave the letter to Edward Living, a teller at the bank. Living kept the letter, which was not re-discovered until 1930. It was then published by the "Melbourne Herald". The handwritten letter was given to the State Library of Victoria in 2000. Kelly's words are colorful, rough and full of metaphors. He said the police were "... big ugly fat-necked wombat headed big bellied magpie legged narrow hipped splay footed sons of Irish bailiffs or English landlords ...".
The gang decided that Aaron Sherritt, Joe Byrne's best friend, was a police spy. On the night of 26 June 1880, Dan Kelly and Joe Byrne went to Sherritt's house in the Woolshed Valley near Beechworth and killed him. The four policemen who were protecting him at the time hid under the bed and did not report the murder until the next day. The outlaws knew that the police would send extra men to Beechworth by train to try and capture them. Ned Kelly and Hart arrived in Glenrowan on 27 June, and took 70 hostages at the Glenrowan Inn (hotel). They knew that a train loaded with police was on its way. They forced railway workers at Glenrowan to pull up the rail tracks to make the train crash. The bushrangers, wearing homemade armour, would then capture any of the policemen that were alive after the crash. With the police out of the way, the Kelly Gang would then go into Benalla and rob the bank. The captured police would be released when Ellen Kelly, William Williamson, and William Skillion, were let out of gaol.