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-  

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-   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-  

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-    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-   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-   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-  

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

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

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)

                                                     ================ 

================= =============

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

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

                                                     ================== 

================== ================

   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-   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:                                                                         Year Ended May 31,                                                                    2010               2009           Difference                                                            

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

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

================== ================== ===============

                                         -18-  

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.