Jayhawk Energy 10K/A 2008 Annual report (amended)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

AMENDMENT NO. 1 TO FORM 10-KSB

ON FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended September 30, 2008

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From _____ to _____

Commission File Number 000-53311

JayHawk Energy, Inc.

(Exact name of small business issuer as specified in its charter)

Colorado	20-0990109
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)
6240 E. Seltice Way, Suite C Post Falls, Idaho (Address of principal executive office)	83854 (Postal Code)
(208) 667-1328 (Issuer's telephone number)

Securities registered under Section 12(b) of the Exchange Act: None

Securities registered under Section 12(g) of the Exchange Act: Common Stock, $0.001 par value

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

Yes [ ] No [ x ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to Form 10-KSB.

Yes [ ] No [ x ] Delinquent filers are disclosed herein.

The Company had $1,199,837 in revenue during the year.

The aggregate market value of the Common Stock held by non-affiliates (as affiliates are defined in Rule 12b-2 of the Exchange Act) of the registrant, computed by reference to the average of the high and low sale price on December 04, 2008, was $14,135,864.

As of December 04, 2008 there were 42,835,950 shares of issuer’s common stock outstanding.

JAYHAWK ENERGY, INC.

FORM 10-KSB

For the Fiscal Year Ended September 30, 2008

Unless the context otherwise indicates, references to "JayHawk," "the Registrant," "the Corporation," "we, "our," or "us" in this Annual Report on Form 10-KSB are references to JayHawk Energy, Inc., including its wholly-owned subsidiary, JayHawk Gas Transportation Corporation.

TABLE OF CONTENTS

Part I		Page
Item 1	Description of Business	1
Item 2	Description of Property	6
Item 3	Legal Proceedings	6
Item 4	Submission of Matters to a Vote of Security Holders	7

Part II		Page
Item 5	Market for Common Equity and Related Stockholder Matters	7
Item 6	Management's Discussion and Analysis or Plan of Operation	8
Item 7	Financial Statements	11
Item 8	Changes In and Disagreements With Accountants on Accounting and Financial Disclosure	33
Item 8A	Controls and Procedures	34
Item 8A(T)	Management's Annual Report on Internal Control Over Financial Reporting.	34
Item 8B	Other Information	34

Part III		Page
Item 9	Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act.	35
Item 10	Executive Compensation	36
Item 11	Security Ownership of Certain Beneficial Owners and Management	37
Item 12	Certain Relationships and Related Transactions	37
Item 13	Exhibits	38
Item 14	Principal Accountant Fees and Services	38
Item 15	Signatures	39

EXPLANATORY NOTE

JayHawk Energy, Inc. (the Company) is filing this Amendment No. 1 to form 10-KSB on Form 10-K/A (this Amendment) to amend its Annual Report on Form 10-KSB for the fiscal year ended September 30, 2008, which was originally filed with the Securities Exchange Commission on December 30, 2008 (the "Initial Filing").

This Amendment, amends Item 6, Management's Discussion and Analysis and Note 1, of the Item 8's, Notes to the Consolidated Financial Statements, and adds certain supplementary information required by SFAS 69, concerning "Disclosures about Oil and Gas Producing Activities. Additionally, Item 8A has been amended to more fully comply with Rule 13a-15 of the Securities Exchange Act of 1934 and add Item 8A(T) Managements Annual Report on Internal Control Over Financial Reporting. Paragraphs numbered 4 of Exhibits 31.1 and 31.2, Certifications pursuant to section 302 of the Sarbanes-Oxley Act by the Chief Executive Officer and Chief Financial Officer, respectively, have been amended.

Pursuant to Rule 12-15 under the Securities Exchange Act of 1934, as amended (the Exchange Act) the Company has filed the certifications required by Rule 13a-14(a) or 15d-14(a) of the Exchange Act. This Amendment should be read in conjunction with the Company's other filings made with the Securities and Exchange Commission subsequent to the date of the Initial Filing.

PART I

DISCLOSURES REGARDING FORWARD-LOOKING STATEMENTS

Portions of this Annual Report of JayHawk Energy, Inc. on Form 10-KSB, and the information appearing under "Legal Proceedings" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," generally, and specifically therein under the captions "Liquidity and Capital Resources" contain forward-looking statements and involve uncertainties that could materially affect the expected results of operations, liquidity, cash flows and business prospects. Words such as "estimate," "may," "might," "anticipates," "believes," "expects," "plans," “intends," “objectives” and similar expressions that convey the uncertainty of future events or outcomes generally identify forward-looking statements. The reader should not place undue reliance on these forward-looking statements, which speak only to the date of this report.

ITEM 1. DESCRIPTION OF BUSINESS

In this report, JayHawk, the Company, we, and our, refers to JayHawk Energy, Inc., a Colorado Corporation, and its wholly owned subsidiary, JayHawk Gas Transportation Corporation. JayHawk's executive offices are located at 6240 E. Seltice Way, Suite C, Post Falls, Idaho 83854. Our telephone number is (208) 667-1328. JayHawk reports its operations using a fiscal year ending September 30 and the operations reported on this Form 10-KSB, are presented on a consolidated basis. In this report on Form 10-KSB, the language "this fiscal year, or current fiscal year" refers to the 12-month period ending September 30, 2008.

Business Development

JayHawk Energy, Inc. was incorporated in Colorado on April 5, 2004 as Bella Trading Company, Inc. We were originally formed to offer for sale, traditional ethnic and contemporary jewelry, as well as accessories, imported from Nepal and Thailand. During the third quarter of the fiscal year ending September 30, 2007, we decided to change management, enter the oil and gas business, and cease all activity in the retail jewelry industry. At that time we changed our name to JayHawk Energy, Inc. and shifted our focus to the acquisition, exploration, development, production and sale of natural gas, crude oil, and natural gas liquids, primarily from conventional reservoirs within North America.

Simultaneously with this change in focus (July 25, 2007) we initiated the new business strategy with the acquisition of certain oil, gas and mineral leases totaling approximately 35,000 gross acres, located in Bourbon County, Kansas (Southeast Kansas) within the Cherokee basin, referred to as the Uniontown properties. This acreage is leased for the development of coal-bed methane and conventional oil and gas reserves. Wells within the leased area were drilled by previous operators with mud logs and cores taken to identify coal properties and gas contents. There have been at least 11 gas bearing coals identified within the Cherokee Group from depths of 250 – 750 feet, with typical thicknesses of 1 to 4 feet, yielding total net coal thickness ranges from 20 to 38 feet. Gas contents have been measured between 22 – 124 standard cubic feet per ton. No production tests have yet been conducted.

We continued our development strategy in the 2nd quarter (January) of the year ending September 30, 2008 acquiring a 65% gross working interest in 5 producing oil wells located in the Williston Basin of North Dakota, along with the right to develop the oil, gas and mineral resources on 15,500 acres of leases in this same area. Since acquisition in January, and through September 30, 2008 these five wells have produced in excess of 20,000 Bbls of crude oil and generated revenues, net of royalties, to JayHawk of $1.1 million.

During March and April of this current fiscal year we augmented our initial investment in Southeast Kansas with the acquisition of additional assets, including: leased acreage, a 16 mile natural gas pipeline, and 34 gas wells. During July and August of 2008 the Company completed drilling, casing and tying-in of an additional 20 gas wells.

Each of the brief descriptions of the transactions mentioned here, under this subheading of “Business Development,” is discussed in greater detail under Management’s Discussion and Analysis. We have not undergone bankruptcy, receivership, or any similar proceeding. Our common stock is publicly traded over-the-counter and quoted on the OTC Bulletin Board under the symbol “JYHW.OB.” At September 30, 2008, we remain an early stage oil and gas company led by an experienced management team focused on exploration and production of oil and natural gas.

Employees

During the period ending 30 September 2008 JayHawk employed as regular, full-time employees, 5 individuals. The Company's daily activity, operations and employees were segmented geographically into three areas. Administrative and executive functions are carried out by three individuals located in Post Falls, Idaho. Gas production operations, were carried out by two individuals located in Girard, Kansas. Additionally, we utilized the services of an independent contractor for our land and lease administration, who was also located in Girard, Kansas. Oil production operations are overseen by a our V.P. of Operations and a field superintendent located in the Williston Basin area of North Dakota. Both of these individuals were compensated as independent contractors. Going forward, and for the foreseeable future, we plan to outsource our geological, geophysical, and petroleum engineering requirements to independent consultants.

Business Strategy

Our strategy is to increase shareholder value through strategic acquisitions, drilling and development and by prudently managing our balance sheet. We are focused on the acquisition, development and exploitation of oil and natural gas properties. We believe in creating opportunities for our shareholders through acquisition and through the “drill-bit.” Our immediate business plan is to focus our efforts on further developing the as yet undeveloped acreage in Southeast Kansas and to drill one or more wells in the Candak, North Dakota property. Our main priority will be given to projects with near term cash flow potential, although consideration will be given to projects that may not be as advanced from a technical standpoint but demonstrate the potential for significant upside.

Competitive Business Conditions

We are a junior oil and gas exploration company. We compete with other companies for financing and for the acquisition of new oil and gas properties. Many of the oil and gas exploration companies with whom we compete have greater financial and technical resources than those available to us. Accordingly, these competitors may be able to spend greater amounts on acquisitions of oil and gas properties of merit, on exploration of their properties and on development of their properties. In addition, they may be able to afford more geological expertise in the targeting and exploration of oil and gas properties. This competition could result in competitors having properties of greater quality and interest to prospective investors who may finance additional exploration and development. This competition could have an adverse impact on our ability to achieve the financing necessary for us to conduct further exploration of our acquired properties.

We will also compete with other junior oil and gas exploration companies for financing from a limited number of investors that are prepared to make investments in junior oil and gas exploration companies. The presence of competing junior oil and gas exploration companies may have an adverse impact on our ability to raise additional capital in order to fund our exploration programs if investors are of the view that investments in competitors are more attractive based on the merit of the oil and gas properties under investigation and the price of the investment offered to investors.

We also compete with other junior and senior oil and gas companies for available resources, including, but not limited to, professional geologists, camp staff, helicopter or float planes, mineral exploration supplies and drill rigs.

Patents and Trademarks

We do not own, either legally or beneficially, any patent or trademark.

Governmental Regulations

Our oil and gas operations are subject to various federal, state and local governmental regulations. Matters subject to regulation include discharge permits for drilling operations, drilling and abandonment bonds, reports concerning operations, the spacing of wells, pooling of properties and taxation. From time to time, regulatory agencies have imposed price controls and limitations on production by restricting the rate of flow of oil and gas wells below actual production capacity in order to conserve supplies of oil and gas. The production, handling, storage, transportation and disposal of oil and gas, by-products thereof, and other substances and materials produced or used in connection with oil and gas operations are also subject to regulation under federal, state and local laws and regulations relating primarily to the protection of human health and the environment. To date, we have incurred no cost related to complying with these laws, for remediation of existing environmental contamination and for plugging and reclamation of our oil and gas exploration property. The requirements imposed by such laws and regulations are frequently changed and subject to interpretation, and we are unable to predict the ultimate cost of compliance with these requirements or their effect on our operations.

Reports to Security Holders

We file our quarterly and audited annual reports with the Securities and Exchange Commission (SEC), which the public may read and copy at the Public Reference Room at 450 Fifth Street, N.W., Washington D.C. 20459. SEC filings, including supplemental schedules and exhibits, can also be accessed free of charge through the SEC website at www.sec.gov. Our website is located at www.jayhawkenergy.com, and can be used to access recent news releases and Securities and Exchange Commission (SEC) filings, including our quarterly and audited annual reports, and other items of interest. Our website, and the information on our website, including other links contained on our website, are not incorporated into this Report.

Risks Related to our Business

JayHawk is subject to various risks and uncertainties in the course of its business. The following summarizes some, but not all, of the risks and uncertainties that may adversely affect our business, financial condition or results of operations.

Commodity Price Risk: Our estimated proved reserves, revenue, operating cash flows, and operating margins are highly dependent on the prices of crude oil and natural gas. A substantial or extended decline in oil or natural gas prices would reduce our operating results and cash flows and could impact our rate of growth and carrying value of our assets. Prices for liquid hydrocarbons and natural gas are very volatile. Our revenues, operating results and ability to grow in the future are highly dependent on the prices we receive for our oil and natural gas. Many factors beyond our control influence the price we receive for our production. These include, but are not limited to, general economic conditions worldwide, political instability in other parts of the world, changes in weather patterns, price and availability of alternative sources of energy, and government regulation.

Technical Risk: Our exploration and development operations are subject to many risks which may affect our ability to profitably extract oil and natural gas reserves or achieve targeted returns. In addition, continued growth requires that we acquire and successfully develop additional oil and natural gas reserves.

Our exploration and development activities will depend in part on the evaluation of data obtained through geophysical testing and geological analysis, as well as test drilling activity. The results of such studies and tests are subjective, and no assurances can be given that exploration and development activities based on positive analysis will produce oil or natural gas in commercial quantities or costs. As developmental and exploratory activities are performed, further data required for evaluation of our oil and natural gas interests will become available. The exploration and development activities that will be undertaken by us are subject to greater risks than those associated with the acquisition and ownership of producing properties. The drilling of development wells, although generally consisting of drilling to reservoirs believed to be productive, may result in dry holes or a failure to produce oil and natural gas in commercial quantities. Moreover, any drilling of exploratory wells is subject to significant risk of dry holes.

Our commercial success depends on our ability to find, acquire, develop and commercially produce oil and natural gas reserves. Without the continual addition of new reserves, any existing reserves and the production there from will decline over time as such existing reserves are depleted. A future increase in our reserves will depend not only on our ability to explore and develop any properties we may have from time to time, but also on our ability to select and acquire suitable producing properties or prospects. No assurance can be given that we will be able to continue to locate satisfactory properties for acquisition or participation. Moreover, if such acquisitions or participations are identified, we may determine that current markets, terms of acquisition and participation or pricing conditions make such acquisitions or participations economically disadvantageous. There is no assurance that commercial quantities of oil and natural gas will be discovered or acquired by us.

Catastrophic Risk: Our oil and natural gas operations are subject to unforeseen operating hazards, which may damage or destroy assets. Although we maintain a level of insurance coverage consistent with industry practices against property or casualty losses unique circumstances to any particular event may make the coverage inadequate. Oil and natural gas exploration, development and production operations are subject to all the risks and hazards typically associated with such operations, including hazards such as fire, explosion, blowouts, sour gas releases and spills, each of which could result in substantial damage to oil and natural gas wells, production facilities, other property and the environment or in personal injury.

Competitive Risk: The petroleum industry is highly competitive and very capital intensive. If we are unable to successfully compete with the large number of oil and natural gas producers in our industry, we may not be able to achieve profitable operations. We encounter competition from numerous companies in each of our activities, including acquiring rights to explore for crude oil and natural gas. Our competitors include oil and natural gas companies that have substantially greater financial resources, staff and facilities than us. Our ability to increase reserves in the future will depend not only on our ability to explore and develop our existing properties, but also on our ability to select and acquire suitable producing properties or prospects for exploratory drilling. Competitive factors in the distribution and marketing of oil and natural gas include price and methods and reliability of delivery. Competition may also be presented by alternate fuel sources.

Environment Risk: We are subject to various regulatory requirements, including environmental regulations, and may incur substantial costs to comply and remain in compliance with those requirements. Our oil and gas operations are subject to environmental hazards such as oil spills, produced water spills, gas leaks and ruptures and discharges of substances or gases that could expose us to substantial liability. Our operations are also subject to numerous laws and regulations at the federal, state and local levels, including regulation relating to matters such as the exploration for and the development, production, marketing, pricing, transmission and storage of oil and natural gas, as well as environmental and safety matters. Failure to comply with applicable regulations could result in fines or penalties being owed to third parties or governmental entities, the payment of which could have a material adverse effect on our financial condition or results of operations. Our operations are subject to significant laws and regulations, which may adversely affect our ability to conduct business or increase our costs.

Environmental legislation provides for, among other things, restrictions and prohibitions on spills, releases or emissions of various substances produced in association with oil and natural gas operations. The legislation also requires that wells and facility sites be operated, maintained, abandoned and reclaimed to the satisfaction of the applicable regulatory authorities. Compliance with such legislation can require significant expenditures and a breach may result in the imposition of fines and penalties.

The discharge of oil, natural gas or other pollutants into the air, soil or water may give rise to liabilities to governments and third parties and may require us to incur costs to remedy such discharge. No assurance can be given that environmental laws will not result in a curtailment of production or a material increase in the costs of production, development or exploration activities or otherwise adversely affect our financial condition, results of operations or prospects. We could incur significant liability for damages, clean-up costs and/or penalties in the event of discharges into the environment, environmental damage caused by us or previous owners of our property or non-compliance with environmental laws or regulations. In addition to actions brought by governmental agencies, we could face actions brought by private parties or citizens groups. Any of the foregoing could have a material adverse effect on our financial results.

Market Risk: The marketability and price of oil and natural gas that may be acquired or discovered by us will be affected by numerous factors beyond our control. Our ability to market our natural gas may depend upon our ability to acquire space on pipelines that deliver natural gas to commercial markets. We may also be affected by deliverability uncertainties related to the proximity of our reserves to pipelines and processing facilities, by operational problems with such pipelines and facilities, and by government regulation relating to price, taxes, royalties, land tenure, allowable production, the export of oil and natural gas and by many other aspects of the oil and natural gas business.

Financial Risks: Our business may be harmed if we are unable to retain our interests in existing leases. All of our properties are held under interests in oil and gas mineral leases, some of which expire within the next twelve months. If we fail to meet the specific requirements of each lease, especially future drilling and production requirements, the lease may be terminated or otherwise expire. We cannot be assured that we will be able to meet our obligations under each lease. The termination or expiration of our working interest relating to any lease would harm our business, financial condition and results of operations.

Estimation Risks: Our reserve estimates, like all estimates, are subject to numerous uncertainties and may be inaccurate. There are numerous uncertainties inherent in estimating quantities of oil or natural gas reserves and cash flows to be derived from, including many factors beyond our control. The reserve and associated cash flow information set forth herein represents estimates only. In general, estimates of economically recoverable oil and natural gas reserves and the future net cash flows therefrom are based upon a number of variable factors and assumptions, such as historical production from the properties, production rates, ultimate reserve recovery, timing and amount of capital expenditures, marketability of oil and natural gas, royalty rates, the assumed effects of regulation by governmental agencies and future operating costs, all of which may vary from actual results. All such estimates are to some degree speculative, and classifications of reserves are only attempts to define the degree of speculation involved. For those reasons, estimates of the economically recoverable oil and natural gas reserves attributable to any particular group of properties, classification of such reserves based on risk of recovery and estimates of future net revenues expected therefrom prepared by different engineers, or by the same engineers at different times, may vary. Our actual production, revenues, taxes and development and operating expenditures with respect to our reserves will vary from estimates thereof and such variations could be material.

Estimates of proved or unproved reserves that may be developed and produced in the future are often based upon volumetric calculations and upon analogy to similar types of reserves rather than actual production history. Estimates based on these methods are generally less reliable than those based on actual production history. Subsequent evaluation of the same reserves based upon production history and production practices will result in variations in the estimated reserves and such variations could be material.

Default Risks: Our properties are held in the form of licenses, leases and working interests in operating agreements and leases. If we or the holder of a lease fail to meet the specific requirements of the lease, license or operating agreement the specifice instrument may terminate or expire. There can be no assurance that any of the obligations required to maintain each license or lease will be met, although we exercise our commercially reasonable efforts to do so. The termination or expiration of our licenses or leases or the working interests relating to a license or lease may have a material adverse effect on our results of operations and business.

Risk of Loss of Key Personnel: Our success depends in large measure on certain key personnel, including our President, Chief Executive Officer, Chief Financial Officer, and VP of Operations. The loss of the services of such key personnel could have a material adverse effect on us. Although we are looking into acquiring key person insurance, we do not currently have such insurance in effect for these key individuals. In addition, the competition for qualified personnel in the oil and natural gas industry is intense and there can be no assurance that we will be able to continue to attract and retain all personnel necessary for the development and operation of our business.

Our common stock is subject to the “penny stock” rules of the Securities and Exchange Commission and the trading market in our securities is limited, which makes transactions in our stock cumbersome and may reduce the value of an investment in our stock. The Securities and Exchange Commission (the “SEC”) has adopted Rule 3a51-1 which establishes the definition of a “penny stock,” for the purposes relevant to us, as any equity security that (i) has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, or (ii) is not registered on a national securities exchange or listed on an automated quotation system sponsored by a national securities exchange. For any transaction involving a penny stock, unless exempt, Rule 15g-9 of the Securities and Exchange Act of 1934, as amended, requires:

	•	that a broker or dealer approve a person’s account for transactions in penny stocks; and
	•	the broker or dealer receives from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.

In order to approve a person’s account for transactions in penny stocks, the broker or dealer must:

	•	obtain financial information and investment experience objectives of the person; and
	•	make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.

The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SECrelating to the penny stock market, which, in highlight form:

	•	sets forth the basis on which the broker or dealer made the suitability determination; and
	•	attests that the broker or dealer received a signed, written agreement from the investor prior to the transaction.

Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading, and about the commissions payable to both the broker-dealer and the registered representative. Current quotations for the securities and the rights and remedies and to be available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. Generally, brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our stock.

The market valuation of energy companies, such as us, frequently fluctuate due to factors unrelated to the past or present operating performance of such companies. Our market valuation may fluctuate significantly in response to a number of factors, many of which are beyond our control, including:

	•	changes in securities analysts’ estimates of our financial performance, although there are currently no analysts covering our stock;
	•	fluctuations in stock market prices and volumes, particularly among securities of energy companies;
	•	changes in market valuations of similar companies;
	•	announcements by us or our competitors of significant contracts, new technologies, acquisitions, commercial relationships, joint ventures or capital commitments;
	•	variations in our quarterly operating results;
	•	fluctuations in oil and natural gas prices; and
	•	additions or departures of key personnel.

Dividends: Investors should not look to dividends as a source of income. In the interest of reinvesting initial profits back into our business, we do not intend to pay cash dividends in the foreseeable future. Consequently, any economic return will initially be derived, if at all, from appreciation in the fair market value of our stock, and not as a result of dividend payments.

ITEM 2. DESCRIPTION OF PROPERTY.

Our principal executive offices were relocated from Broomfield, CO., in July of 2008, and are now located at 6240 E. Seltice Way, Suite C, Post Falls, Idaho 83854. JayHawk began leasing this office space of approximately 900 sq. ft. on July 01, 2008. The monthly rental payment is $1,500, and was negotiated in an arm's length transaction from Marlin Property Management, Inc., a related party. The Company closed its former office located in Broomfield, CO., in September of 2008. We believe that our current office space and facilities are sufficient to meet our present needs and do not anticipate the need to secure any additional space. Further, we have the following oil and gas properties in connection with our principal business activities:

S.E. Kansas Properties:

Uniontown Project: On July 25, 2007, we acquired the Uniontown project consisting of mineral leases that include approximately 35,000 gross acres in Bourbon County, Kansas within the Cherokee basin, and are leased for the development of coal-bed methane and conventional oil and gas reserves (more fully described in Management's Discussion and Analysis). Wells within the leased area were drilled by previous operators with mud logs and cores taken to identify coal properties and gas contents. There have been at least 11 gas bearing coals identified within the Cherokee Group from depths of 250 – 750 feet, with typical thicknesses of 1 to 4 feet, yielding total net coal thickness ranges from 20 to 38 feet. Gas contents have been measured between 22 – 124 scf/ton. No production tests have yet been conducted.

Girard Project: Adjacent to the Uniontown Project is the Girard Project in Crawford County Kansas which we acquired on March 31, 2008. With this transaction (more fully described in Management's Discussion and Analysis) JayHawk acquired a 16-mile pipeline and 34 wells, of which 7 were tied into the pipeline. This acquisition provided JayHawk infrastructure necessary for future development of existing and acquired leased acreage, and during July and August of 2008 we completed drilling and casing an additional 20 gas wells. Our acreage position in both Bourbon and Crawford counties of Kansas was enhanced again with the acquisition from Missouri Gas Partners of certain oil, gas and mineral rights to 11,462 leased acres in June of 2008. As at September 30, 2008, we have 20 producing gas wells tied-in to the pipeline. At September 30, 2008 we had a total of 44,216 leased acres in Kansas, and are producing and selling an average of 125 MCF daily of coal bed methane gas. Since June of the current year through year-end our gas production and sales has contributed $92 thousand in gross revenues.

JayHawk Gas Transportation Company: On March 31, 2008 the Company acquired a 16 mile pipeline, in addition to other assets (see Notes 4 and 8, of Notes to Financial Statements). Management anticipates that the pipeline will play a significant part in JayHawk's future development. As such, in May the Company established a 100% owned and controlled subsidiary, "JayHawk Gas Transportation Corporation" to hold and manage the assets associated with the pipeline. This pipeline is tied into a 2 million cubic foot sales pipeline and allows for substantial growth.

North Dakota Properties:

Candak Project: On January 16, 2008, we acquired a 65% working interest in five producing oil wells located in the Candak- Williston Basin area, of North Dakota. In addition to the five producing wells, we acquired certain oil, gas, and mineral rights in a 15,500-acre land position. This transaction is more fully described in Management's Discussion and Analysis. We have been pleased with the success of these five producing wells, from which we have produced and sold in excess of 20,000 Bbls., gross, with production averaging approximately 75 Bbls daily. During the nine months from date of acquisition, these 5 wells have generated revenues to JayHawk of $1.1 million.

ITEM 3. LEGAL PROCEEDINGS.

JayHawk is the subject of, or a party to, two known, pending or threatened, legal actions. Following is a discussion of each:

1. The Company is responding to allegations in a potential legal action. The company may be named as the defendant in a legal proceeding brought by L&S Well Service, LLC (the plaintiff) in the District Court of Crawford County, Kansas. The potential plaintiff may allege breach of a verbal contract, alleging that the Company had committed to have L&S Well Service drill 60 wells, and subsequently cancelled the request for such services, after L&S purchased the necessary materials to complete the work. The Company denies that any commitment was made, that there was an offer and acceptance or any consideration given. Further the plaintiff was advised within 24 hours of the discussion that the drilling program was being cancelled. The Company does not consider this case to have merit and will vigorously defend itself against the allegations. It is unknown what relief the plaintiff may be seeking.

2. On July 22, 2008 SemCrude, LLC filed a Chapter 11 bankruptcy proceeding in the United States Bankruptcy Court, District of Delaware. For the months of June and July of 2008, SemCrude, as was customary, took the production from JayHawk's Candak, North Dakota properties and failed to compensate the Company before filing their bankruptcy petition. JayHawk has retained legal representation to recover the maximum possible from the amount owed the Company, which is $283,485. We have been advised that we can anticipate recovering 100% of the value of the July production, but may only recover 20% of the value of the June production. Accordingly, we have provided an allowance for doubtful collections of 80% of the June receivable, $95,811.

From time to time, we may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.

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

There were no matters submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report Form 10-KSB.

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

Market Information

Our common stock is quoted on the OTC Bulletin Board under the symbol "JYHW.OB". For the periods indicated, the following table sets forth the high and low bid prices per share of common stock. These prices represent inter-dealer quotations without retail markup, markdown, or commission and may not necessarily represent actual transactions.

	2008				2007
	High		Low		High		Low
4th Quarter end September 30					$	2.43	$	1.80
1st Quarter end December 31	$	2.71	$	1.66		1.90		1.80
2nd Quarter end March 31		2.27		0.94
3rd Quarter end June 30		2.54		1.64
4th Quarter end September 30		2.14		0.71

Holders

As of September 30, 2008, there were 56 stockholders of record who owned 42,810,928 shares of common stock. The number of record holders was determined from the records of our transfer agent and does not include beneficial owners of common stock whose shares are held in the names of various security brokers, dealers, and registered clearing agencies. The transfer agent of our common stock is Corporate Stock Transfer Company at 3200 Cherry Creek Drive South, Suite #340, Denver, Colorado, 80209.

Description of Securities

The authorized capital stock of the Company consists of 200,000,000 of the common stock, at $0.001 par value, and 10,000,000 shares of preferred stock, at $0.001 par value. The shares of preferred stock may be issued in one or more series. The designations, powers, rights, preferences, qualifications, restrictions, and limitations of each series of preferred stock shall be established from time to time by the Board of Directors in accordance with Colorado law.

Dividends

Holders of common and preferred stock are entitled to receive dividends as may be declared by the Board of Directors. The Board of Directors is not restricted from paying any dividends but is not obligated to declare a dividend. No dividends have ever been declared and it is not anticipated that dividends will ever be paid, but will be dependent upon our financial condition, results of operations, capital requirements, and such other factors as the Board of Directors deem relevant.

ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS

The following information should be read in conjunction with the consolidated financial statements and the notes thereto contained elsewhere in this report. The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Information in this Item 6, "Management's Discussion and Analysis or Plan of Operation," and elsewhere in this 10-KSB that does not consist of historical facts, are "forward-looking statements."

Statements accompanied or qualified by, or containing words such as "may," "will," "should," "believes," "expects," "intends," "plans," "projects," "estimates," "predicts," "potential," "outlook," "forecast," "anticipates," "presume," and "assume" constitute forward-looking statements, and as such, are not a guarantee of future performance. The statements involve factors, risks and uncertainties including those discussed in the “Risk Factors” section contained elsewhere in this report, the impact or occurrence of which can cause actual results to differ materially from the expected results described in such statements. Consequently, investors should not place undue reliance on forward-looking statements as predictive of future results. The Company disclaims any obligation to update the forward-looking statements in this report.

Overview

This overview is presented in chronological order as to dates the respective transactions were completed. It should be read in conjunction with the "Notes to Financial Statements" presented in Item 4, specifically Note 7 relative to Common Stock, and Note 3 relative to Asset Impairments.

On June 21, 2007, we changed our name from Bella Trading Company, Inc. to JayHawk Energy, Inc. and shifted our focus from the retail jewelry industry to the oil and gas business. Our new business plan was to acquire oil and gas properties for exploration and development with the intent to bring the projects to feasibility at which time we would either contract out the operations or joint venture the project to qualified interested parties.

We implemented this plan with the acquisition on July 25, 2007 of certain oil, gas, and mineral leases to approximately 35,000 gross acres located in Bourbon County, Kansas (“Uniontown project”). The assets were purchased from Armstrong Investments for a total purchase price of $2.2 million.

On January 16, 2008, JayHawk purchased from JED Oil (USA) Inc. a 65% working interest in 5 producing oil wells located in the Williston Basin of North Dakota, along with the right to develop the oil, gas and mineral resources on 15,500 acres of leases in this same area. In consideration for these properties JayHawk paid JED Oil $3.5 million in cash. The cash used to complete this transaction was raised in the private placement transaction more fully described in Note 8 of the "Notes to Financial Statements." Because of the significance of this acquisition, Securities and Exchange rules and regulations define operations of these five wells (the Candak properties) to be "predecessor operations and an acquired business". As such, the Securities and Exchange Commission, through Article 8-04 of Regulation S-X, requires a complete set of audited financial statements of the acquired business operations to be provided for at least the two most recent fiscal years.

As a consequence of the previous operator being in bankruptcy proceedings and having limited staff, sufficient evidential material was unavailable to our external auditors to prepare complete financial statements reflecting the carved out operations of the five wells. These would be required for the period from October 1, 2006 through September 30, 2007 and from October 1, 2007 through January 16, 2008, the date of the acquisition. We did not have any previous relationship with the prior operator and there were no ongoing arrangements with the prior operator. Failure to provide this information will preclude the Company from completing a registration statement with the Securities and Exchange Commission prior to having sufficient historical financial information on these operations for a two year period. This condition should be met with the completion of the fiscal year ending September 30, 2009.

On March 31, 2008, JayHawk closed a transaction, initiated with an agreement dated February 18, 2008, with Galaxy Energy, Inc. whereby JayHawk acquired a 16 mile pipeline, associated easements, oil, gas and mineral leases to approximately 6,500 gross acres, 34 gas wells, compressor, and other field equipment. In consideration for these assets JayHawk exchanged $1 million in cash and 1 million shares of our common stock (See Note 8 of the "Notes to Financial Statements").

On April 18, 2008, JayHawk entered into an agreement to acquire from Titan West Energy, oil and natural gas rights to 1,336 gross acres and 14 completed but non-producing gas wells, in exchange for $300 thousand in cash and 50,000 shares of the Registrants common stock (See Note 7 of the "Notes to Financial Statements).

On June 30, 2008, the Company agreed to purchase oil, gas and mineral leases on 11,462 gross acres, located in Crawford and Bourbon counties Kansas, and 5 completed and cased gas wells. In consideration for these assets JayHawk paid $140 thousand in cash and was obligated to issue 286,550 shares of its common stock as the leases were assigned at the rate of 25 shares per acre (See Note 8 of the "Notes to Financial Statements").

On July 22, 2008, The former purchaser of our North Dakota crude oil production, SemCrude, L.P. , filed a Chapter 11 bankruptcy proceeding in the United States Bankruptcy Court, District of Delaware. At the time of their filing we had not been paid for the crude oil they had taken from our properties for the months of June and July. As a consequence, we have an outstanding receivable exceeding $283 thousand. Our cash position has decreased and our accounts payable have increased by corresponding amounts. During the last quarter of the year ending September 30, 2008, our financial condition has deteriorated substantially and our current cash position is not sufficient to fund our cash requirements during the next twelve months, including operations and capital expenditures. However, we intend to seek out joint venture opportunities and/or obtain equity and/or debt financing efforts to support our current and proposed oil and gas operations and capital expenditures. We may sell interests in our current and acquired property. We cannot assure that continued funding will be available.

Our forecast for the period for which our financial resources will be adequate to support our operations involves risks and uncertainties and actual results could fail as a result of a number of factors. We cannot guaranty that additional funding will be available on favorable terms, if at all.

We have not entered into commodity swap arrangements or hedging transactions, and although we have no current plans to do so, we may enter into commodity swap and/or hedging transactions in the future in conjunction with oil and gas production. We have no off-balance sheet arrangements.

Our future financial results continue to depend primarily on (1) our ability to discover or purchase commercial quantities of oil and gas; (2) the market price for oil and gas; (3) our ability to continue to source and screen potential projects; and (4) our ability to fully implement our exploration and development program with respect to these and other matters. We cannot assure that we will be successful in any of these activities or that the prices of oil and gas prevailing at the time of production will be at a level allowing for profitable production.

Results of Operations

Previous Operations: On June 21, 2007, we changed our name from Bella Trading Company, Inc. to JayHawk Energy, Inc. and shifted our focus from the retail jewelry industry to the oil and gas business. Until June of 2007 JayHawk had no investments in oil and gas properties. Consequently, the reader should keep in mind that comparisons of operations between the two fiscal periods presented herein may not be meaningful. The Company was not engaged in the oil and gas business until the last quarter of the 2007 fiscal year and no cash flows were generated by oil and gas sales until the second quarter of this current fiscal year.

Revenues: We had no sales from our oil and gas business for the twelve-month period ended September 30, 2007, and prior operations in the jewelry business were discontinued. Prior to discontinuing the jewelry business in June of 2007 the former Bella Trading Company had gross revenues of $242. For the twelve-month period ended September 30, 2008 we report gross revenues of $1,199,837 from sales of oil and natural gas, $1,108,055 and $91,782, respectively. Our sales of crude oil commenced in January 2008 and our first natural gas sales were recognized in June.

Operating Expenses: Total operating expenses for the twelve months ended September 2008 and 2007 were $4,328,179 and $170,004, respectively.

Depreciation, depletion, amortization, and asset impairment expense of $2,214,668 includes a provision of $1,474,000 as a valuation allowance for those leases associated with the unproved properties described as the Uniontown project (Note 3) and the annual accretion of the asset retirement obligation, explained in Note 7. For the 12 months ended September 30, 2007, there was no depreciation, depletion or amortization expense. The aggregate for the period ended September 30, 2008 is detailed as follows:

	September 30, 2008
Asset Impairment Expense	$	1,474,000
Unproved Property Amortization Expense (Note 5)		114,535
Proved Property Depreciation and Depletion (Note 6)		613,158
Accretion in annual Asset Retirement Obligation (Note 9)		11,640
Depreciation of Office Equipment		1,335
Total	$	2,214,668

As discussed in generally in Note 1, and specifically in Note 3, of "Notes to the Financial Statements," JayHawk periodically reviews and assesses its unproved properties to determine if they have been impaired. Throughout the 2nd and 3rd quarters of the year ending September 30, 2008, management made a review of the portfolio of leases acquired in the Uniontown transaction of July 2007, and concluded, based on geology and proximity to our pipeline, to permit approximately half of the original Uniontown leases acquired, to expire. Further, given the Company's inability at this time to fund development of any acreage, we have provided a valuation for potential loss equal to two-thirds, 67%, of the original cost of this leased acreage. Under U.S. Generally Accepted Accounting Principles, losses on write-downs of assets are not considered extraordinary losses. Accordingly, this amount is included in operating expenses.

General and administrative expenses of $1,541,787 for the twelve months end September 30, 2008, compare to $170,004 for the twelve-month period end September 30, 2007. General and administrative expenses are detailed as follows (presented in order of significance):

Salaries, Wages and Compensation to Independent Contractors	$	558,443
Consulting & Professional Fees		217,123
Legal Fees		197,714
Audit Fees		97,349
All other operating expenses combined		471,158
Total General and Administrative Expenses	$	1,541,787

Other Income and Expense is the aggregate of net interest expense, bad debt expense and amounts charged to other joint interests, in accordance with the applicable joint operating agreement. Interest expense of $16,000, representing two months of accrued interest at 12% on the $800,000 note payable (Note 8) net of $9,729 of interest income. For the year ended September 30, 2007, our interest expense was approximately $11 thousand, net of interest earned.

Bad Debt Expense included in Other Income and Expense includes the anticipated loss on the SemCrude receivable, discussed in Note 3, and the amount of Canadian Government Service Tax anticipated to be unrecoverable. Detail of “Other Income and Expense” is presented in the following table:

	Year Ended Sept. 30, 2008			Year Ended Sept. 30, 2007
Net Interest Expense	$	6,271		$	11,000
Bad Debt Expense		105,311			-
Billed to joint operating partners		(47,575	)		-
Loss on abandonment of fixed asset		476			-
Total:	$	64,483		$	11,000

Liquidity and Capital Resources: At September 30, 2008, the balance of our cash and cash equivalents was $82,683, and our accounts receivable and other current assets, (net of an allowance for doubtful accounts) totaled $429,889. Subsequent to year-end, in October, we received $181 thousand from the current purchaser of our crude oil production, representing proceeds of August sales, included in accounts receivable at year-end.

Our current liabilities exceed our current assets by $593,766, whereas at September 30, 20007, our working capital, defined as current assets less current liabilities was a positive $483,578. The deterioration apparent in our liquidity is attributable to primarily one factor; the non-collection of the proceeds from our June and July oil sales. As discussed under Item 3, Legal Proceedings, the purchaser of our crude oil production, SemCrude, LLC, routinely took the June and July production just prior to filing for bankruptcy protection, prior to, and without paying, for the product taken. Our accounts receivable before the provision for potential bad debts, have increased by a corresponding amount of $283 thousand. As these funds would normally be used to pay our day-to-day operating costs, and have not been available for this, our accounts payable have increased accordingly.

To fully carry out our business plans we need to raise a substantial amount of additional capital, or obtain industry joint venture financing, which we are currently seeking. We can give no assurance that we will be able to raise such capital. We have limited financial resources until such time that we are able to generate such additional financing or cash flow from operations. Our ability to establish profitability and positive cash flow is dependent upon our ability to exploit our mineral holdings, generate revenue from our planned business operations and control our exploration cost. Should we be unable to raise adequate capital or to meet the other above objectives, it is likely that we would have to substantially curtail our business activity, and that our investors would incur substantial losses of their investment.

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As reflected in the accompanying financial statements we are an independent oil and gas company with a limited operating history and losses since inception. These factors, among others, may indicate that the Company will be unable to continue as a going concern for reasonable period of time.

The financial statements do not include any adjustments relating to the recoverability and classification of assets and liabilities that might be necessary should the Company be unable to continue as a going concern. Our continuation as a going concern is dependent upon our ability to obtain additional operating capital, and ultimately, to attain profitability. We intend to acquire additional operating capital through equity offerings to fund our business plan. There is no assurance that we will be successful in raising additional funds.

Cash Flows: Net cash used in operating activities totaled $745,528 in the period ending September 30, 2008, compared to $172,191 in 2007. The increase in cash used primarily reflects a higher level of activity in all areas of operations with associated expenditures and increasing levels of accounts receivable.

During the twelve months ending September 30, 2008 we used $6,396,807 in investment activities (acquisition of assets) while at the same time increasing cash flows from financing activities in the amount of $6,699,901. Comparable cash flows used in investing activities and provided by financing activities of $2,200,573, and $2,849,980, respectively in 2007.

Commitments: At September 30, 2008 the Company has no commitments to make any capital expenditures. Any potential future capital expenditures will be dependent on concluding adequate and successful financing arrangements.

The Company is obligated under its office lease agreement, expiring July 1, 2011, to make payments of $1,500 per month. The total commitment by year is $18,000 for the period ending September 30, 2009 and 2010, and $13,500 in 2011 (see Note 9).

ITEM 7. FINANCIAL STATEMENTS.

JAYHAWK ENERGY, INC.

INDEX TO FINANCIAL STATEMENTS

			Page
Report of Independent Registered Public Accounting Firm			12
Balance Sheets			13
Statements of Operations			14
Statements of Changes in Stockholders' Equity			15
Statements of Cash Flows			16
Notes to Financial Statements			17

Report of Independent Registered Public Accounting Firm

To the Board of Directors and the Stockholders of

JayHawk Energy, Inc.

We have audited the accompanying consolidated balance sheets of JayHawk Energy, Inc. ("the Company”) as of September 30, 2008 and 2007, and the consolidated statements of operations and comprehensive income, stockholder’s equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our 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 an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluation of the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 30, 2008 and 2007, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

As discussed in Note 1 to the consolidated financial statements, the Company’s ability to continue as a going concern is dependent on obtaining sufficient working capital to fund future operations. Management’s plan in regard to these matters is also described in Note 1. These financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Calgary, Canada			/s/ Meyers Norris Penny LLP
December 23, 2008			Chartered Accountants

JayHawk Energy, Inc.

Consolidated Balance Sheets

	As at September 30, 2008			As at September 30, 2007
Assets:
Cash and cash equivalents	$	82,683		$	525,117
Trade accounts receivable, less allowance for doubtful
accounts of $95,800 in 2008 and $nil in 2007. (Note 3)		413,862			-
Other current assets net of doubtful collections of $9,500 (Note 4).		16,027			-
Total Current Assets		512,572			525,117

Plant, Property and Equipment
Unproved oil and gas properties, net of allowances
for impairment of $1,474,000 and accumulated amortization of $114,535 in 2008 (Note 5)		2,555,910			2,200,000
Proved and developed oil & gas properties, net of
Accumulated depreciation, depletion and amortization of $613,159 (Note 6)		6,991,043			-
Computers, office equipment, furniture and
leasehold improvements, net of allowance for
Depreciation of $1,335 in 2008, and $nil in 2007		32,365			573
Total Net Plant, Property and Equipment		9,579,318			2,200,573

Other Long-Term Assets (Note 7)		247,586			-

Total Assets	$	10,339,476		$	2,725,690

Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable	$	381,197			40,000
Working and royalty interests due		106,003			-
Accrued liabilities		114,475			-
Accrued taxes and interest		32,625			1,539
Convertible promissory note (Note 8)		472,038			-
Total Current Liabilities		1,106,338			41,539

Asset Retirement Obligations (Note 9)		128,040			-

Total Liabilities		1,234,378			41,539
Commitments and contingencies (Note 18)

Stockholders' Equity
Common Stock, $.001 par value; 200,000,000 shares
authorized; shares issued and outstanding 42,810,929
(2007 – 36,882,659) (Note 10)		42,812			36,883
Additional paid-in capital		12,400,782			2,904,981
Stock issuance obligation (Note 10)		47,559
Accumulated deficit		(3,386,055	)		(257,713	)
Total Stockholders' Equity		9,105,098			2,684,151

Total Liabilities and Stockholders' Equity		10,339,476		$	2,725,690

See Accompanying Notes to the Consolidated Financial Statements

JayHawk Energy, Inc.

Consolidated Statements of Operations

And Comprehensive Loss

	Year Ended September 30, 2008			Year Ended September 30, 2007
Revenue
Oil Sales	$	1,108,055		$	-
Gas Sales		91,782			-
Total Gross Revenues	$	1,199,837		$	-

Costs and Operating Expenses
Exploration and Production - Kansas		226,552			-
Exploration and Production - North Dakota		280,689			-
Depreciation, depletion, amortization and asset impairment expense		2,214,668			-
General and Administrative		1,541,787			170,004
Other Income and Expense		64,483			-
Total Costs and Expenses		4,328,179			170,004

Loss from continuing operations before income tax	$	(3,128,342	)	$	(170,004	)

Provision for income taxes		-			-
Net loss from continuing operations	$	(3,128,342	)	$	(170,004	)

Revenues from discontinued operations		-			242
Expenses from discontinued operations		-			55,518
Loss from discontinued operations		-			(55,276	)

Net loss and total comprehensive loss	$	(3,128,342	)	$	(225,280	)

Basic and diluted loss per share (Note 12)	$	(0.08	)	$	(0.00	)

Basic weighted average number shares outstanding		40,226,900			80,509,702

See Accompanying Notes to the Consolidated Financial Statements

JayHawk Energy, Inc.

Consolidated Statements of Changes in Stockholder's Equity

	Common Shares Note 8			Stock Par Value			Additional Paid-In Capital			Retained Earnings or (Deficit)			Stock Issuance Obligation			Total
Balance September 30, 2004		66,000,000		$	66,000		$	(49,000	)	$	(4,537	)	$	-		$	12,463
Office space contributed by an officer		-			-			1,200			-			-			1,200
Net loss and total comprehensive loss		-			-			-			(3,135	)		-			(3,135	)
Balance at September 30, 2005		66,000,000		$	66,000		$	(47,800	)	$	(7,672	)	$	-		$	10,528

July 2006, issuance		24,000,000			24,000			56,000			-			-			80,000
Less offering costs		-			-			(20,795	)		-			-			(20,795	)
Office space contributed by an officer		-			-			1,200			-			-			1,200
Net loss and total comprehensive income		-			-			-			(24,761	)		-			(24,761	)
Balance at September 30, 2006		90,000,000		$	90,000		$	(11,395	)		(32,433	)	$	-		$	46,172
July 25, 2007 Private placement		2,882,659			2,883			2,879,776			-			-			2,882,659
Cancellation of officer's stock		(56,000,000	)		(56,000	)		36,000			-			-			(20,000	)
Office space contributed by an officer		-			-			600			-			-			600
Net loss and total comprehensive loss		-			-			-			(225,280	)		-			(225,280	)
Balance at September 30, 2007		36,882,659		$	36,883		$	2,904,981			(257,713	)	$	-		$	2,684,151
January 16, 2008 Private placement		2,666,667			2,667			3,997,333			-			-			4,000,000
March 13, 2008 issuance for services		50,000			50			109,950			-			-			110,000
March 31, 2008 issuance		1,024,727			1,025			2,325,105			-			-			2,326,130
April 16, 2008 issuance, exercise of warrants		900,000			900			899,100			-			-			900,000
April 15, 2008 issuance, exercise of warrants		599,939			600			599,339			-			-			599,939
May 5, 2008 issuance for services		25,000			25			57,975			-			-			58,000
May 7, 2008 issuance for services		50,000			50			113,950			-			-			114,000
May 9, 2008 issuance, exercise of warrants		399,962			400			399,562			-			-			399,962
May 14, 2008 issuance obligation		-			-			-			-			519,011			519,011
July 3, 2008 issuance		211,975			212			471,240			-			(471,452	)		-
July 30, 2008 Warrant and Note Valuation		-			-			522,247			-			-			522,247
Net loss and total comprehensive loss		-			-			-			(3,128,342	)		-			(3,128,342	)
Balance at September 30, 2008		42,810,929		$	42,812		$	12,400,782		$	(3,386,055	)	$	47,559		$	9,105,098

See Accompanying Notes to the Consolidated Financial Statements

JayHawk Energy, Inc.

Consolidated Statement of Cash Flows

	Year Ended September 30, 2008			Year Ended September 30, 2007
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss from operations	$	(3,128,342	)	$	(225,280	)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation, depletion and amortization		729,028			-
Provisions for doubtful collection of receivables		105,311			-
Provision for lease impairments		1,474,000			-
Accretion in annual asset retirement obligation		11,640			-
Common stock issued in consideration for services		58,000			-
Loss on disposition of asset		573			-
(Increase) decrease in accounts receivable		(509,672	)		-
(Increase) decrease in other current assets		(25,527	)		-
(Increase) decrease in other long-term assets		(53,300	)		-
Increase (decrease) in accounts payable		341,197			53,089
Increase in working and royalty interests due		106,003			-
Increase in accruals and other current liabilities		145,561			-
Net cash used by operating activities		(745,528	)		(172,191	)

CASH FLOWS FROM INVESTING ACTIVITIES
Proved oil and gas property additions		(4,418,662	)		-
Unproved oil and gas property additions		(1,944,445	)		(2,200,000	)
Other property additions		(33,701	)		(573	)
Net cash used in investing activities		(6,396,807	)		(2,200,573	)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the sale of common stock		5,899,901			2,299,980
Borrowings with note payable		800,000			550,000
Net cash provided by financing activities		6,699,901			2,849,980

NET CHANGE IN CASH AND CASH EQUIVALENTS		(442,434	)		477,216

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		525,117			47,901

CASH AND CASH EQUIVALENTS AT END OF YEAR	$	82,683		$	525,117

Supplemental Disclosure of Cash Flow and Non-cash Investing and Financing Activity:

Property acquisitions paid in common stock	$	3,069,140		$	-
Payments on notes payable in common stock		-			582,679

See Accompanying Notes to the Consolidated Financial Statements

JayHawk Energy, Inc.

Notes to the Consolidated Financial Statements

September 30, 2008

Note 1 – Nature of business and going concern

Nature of Operations

JayHawk Energy, Inc. (“the Company” or “we” or “our” or “us”) and its wholly owned subsidiary, is engaged in the acquisition, exploration, development, production and sale of natural gas, crude oil and natural gas liquids primarily from conventional reservoirs within North America. We incorporated in Colorado on April 5, 2004 as Bella Trading Company, Inc. During the second quarter ending June 30, 2007, we changed management and entered the oil and gas business, and ceased all activity in retail jewelry. On June 21, 2007, we changed our name to JayHawk Energy Inc. Since then, we have devoted our efforts principally to the raising of capital, organizational infrastructure development, and the acquisition of oil and gas properties for the purpose of future extraction of resources. To date, we have acquired three main properties, the Uniontown in Kansas, the Candak in North Dakota, and Girard in Kansas. We also formed a wholly owned subsidiary to transport our gas in Kansas, called Jayhawk Gas Transportation Company. This is the basis for which our financial statements are consolidated.

Omitted Financial Information

On January 16, 2008, JayHawk purchased from JED Oil (USA) Inc. a 65% working interest in 5 producing oil wells located in the Williston Basin of North Dakota, along with the right to develop the oil, gas and mineral resources on 15,500 acres of leases in this same area." Because of the significance of this acquisition, Securities and Exchange rules and regulations define operations of these five wells (the Candak properties) to be "predecessor operations and an acquired business". As such, the Securities and Exchange Commission, through Article 8-04 of Regulation S-X, requires a complete set of audited financial statements of the acquired business operations to be provided for at least the two most recent fiscal years.

Going Concern

As shown in the accompanying financial statements, we have incurred operating losses since inception. As of September 30, 2008, we have limited financial resources with which to achieve our objectives and obtain profitability and positive cash flows. This will be dependent upon our ability to obtain additional financing, to locate profitable mineral properties and generate revenue from our current and planned business operations, and control costs. We plan to fund our future operations by joint venturing, obtaining additional financing from investors, and attaining additional commercial production. However, there is no assurance that we will be able to achieve these objectives.

The Oil & Gas Industry is Highly Competitive

The oil & gas industry is highly competitive. We compete with oil and natural gas companies and other individual producers and operators, many of which have longer operating histories and substantially greater financial and other resources than we do. We compete with companies in other industries supplying energy, fuel and other needs to consumers. Many of these companies not only explore for and produce crude oil and natural gas, but also carry on refining operations and market petroleum and other products on a worldwide basis. Our larger competitors, by reason of their size and relative financial strength, can more easily access capital markets than we can and may enjoy a competitive advantage in the recruitment of qualified personnel. They may be able to absorb the burden of any changes in laws and regulation in the jurisdictions in which we do business and handle longer periods of reduced prices of gas and oil more easily than we can. Our competitors may be able to pay more for productive oil and natural gas properties and may be able to define, evaluate, bid for and purchase a greater number of properties and prospects than we can. Our ability to acquire additional properties in the future will depend upon our ability to conduct efficient operations, evaluate and select suitable properties, implement advanced technologies and consummate transactions in a highly competitive environment.

Government and Environmental Regulation

Our business is governed by numerous laws and regulations at various levels of government. These laws and regulations govern the operation and maintenance of our facilities, the discharge of materials into the environment and other environmental protection issues. The laws and regulations may, among other potential consequences, require that we acquire permits before commencing drilling, restrict the substances that can be released into the environment with drilling and production activities, limit or prohibit drilling activities on protected areas such as wetlands or wilderness areas, require that reclamation measures be taken to prevent pollution from former operations, require remedial measures to mitigate pollution from former operations, such as plugging abandoned wells and remediation of contaminated soil and groundwater, and require remedial measures to be taken with respect to property designated as a contaminated site. Under these laws and regulations, we could be liable for personal injury, clean-up costs and other environmental and property damages, as well as administrative, civil and criminal penalties. We maintain limited insurance coverage for sudden and accidental environmental damages as well as environmental damage that occurs over time. However, we do not believe that insurance coverage for the full potential liability of environmental damages is available at a reasonable cost. Accordingly, we could be liable, or could be required to cease production on properties, if environmental damage occurs. The costs of complying with environmental laws and regulations in the future may harm our business. Furthermore, future changes in environmental laws and regulations could occur that may result in stricter standards and enforcement, larger fines and liability, and increased capital expenditures and operating costs, any of which could have a material adverse effect on our financial condition or results of operations.

JayHawk Energy, Inc.

Notes to the Consolidated Financial Statements

September 30, 2008

Note 1 – Nature of business and going concern (continued)

Our Ability to Produce Sufficient Quantities of Oil & Gas from Our Properties May Be Adversely Affected by a Number of Factors Outside of Our Control

The business of exploring for and producing oil and gas involves a substantial risk of investment loss. Drilling oil wells involves the risk that the wells may be unproductive or that, although productive, that the wells may not produce oil or gas in economic quantities. Other hazards, such as unusual or unexpected geological formations, pressures, fires, blowouts, loss of circulation of drilling fluids or other conditions may substantially delay or prevent completion of any well. Adverse weather conditions can also hinder drilling operations. A productive well may become uneconomic due to pressure depletion, water encroachment, mechanical difficulties, etc, which impair or prevent the production of oil and/or gas from the well. There can be no assurance that oil and gas will be produced from the properties in which we have interests. In addition, the marketability of any oil and gas that we acquire or discover may be influenced by numerous factors beyond our control. These factors include the proximity and capacity of oil and gas pipelines and processing equipment, market fluctuations of prices, taxes, royalties, land tenure, allowable production and environmental protection. We cannot predict how these factors may affect our business.

In addition, the success of our business is dependent upon the efforts of various third parties that we do not control. We rely upon various companies to assist us in identifying desirable oil and gas prospects to acquire and to provide us with technical assistance and services. We also rely upon the services of geologists, geophysicists, chemists, engineers and other scientists to explore and analyze oil prospects to determine a method in which the oil prospects may be developed in a cost-effective manner. In addition, we rely upon the owners and operators of oil drilling equipment to drill and develop our prospects to production. Although we have developed relationships with a number of third-party service providers, we cannot assure that we will be able to continue to rely on such persons. If any of these relationships with third-party service providers are terminated or are unavailable on commercially acceptable terms, we may not be able to execute our business plan.

Market Fluctuations in the Prices of Oil & Gas Could Adversely Affect Our Business

Prices for oil and natural gas tend to fluctuate significantly in response to factors beyond our control. These factors include, but are not limited to actions of the Organization of Petroleum Exporting Countries and its maintenance of production constraints, the U.S. economic environment, weather conditions, the availability of alternate fuel sources, transportation interruption, the impact of drilling levels on crude oil and natural gas supply, and the environmental and access issues that could limit future drilling activities for the industry. Changes in commodity prices may significantly affect our capital resources, liquidity and expected operating results. Price changes directly affect revenues and can indirectly impact expected production by changing the amount of funds available to reinvest in exploration and development activities. Reductions in oil and gas prices not only reduce revenues and profits, but could also reduce the quantities of reserves that are commercially recoverable. Significant declines in prices could result in charges to earnings due to impairment. Changes in commodity prices may also significantly affect our ability to estimate the value of producing properties for acquisition and divestiture and often cause disruption in the market for oil producing properties, as buyers and sellers have difficulty agreeing on the value of the properties. Price volatility also makes it difficult to budget for and project the return on acquisitions and development and exploitation of projects. We expect that commodity prices will continue to fluctuate significantly in the future.

Risks of Penny Stock Investing

The Company's common stock is considered to be a "penny stock" because it meets one or more of the definitions in the Exchange Act Rule 3a51-1, a Rule made effective on July 15, 1992. These include but are not limited to the following: (i) the stock trades at a price less than five dollars ($5.00) per share; (ii) it is NOT traded on a "recognized" national exchange; (iii) it is NOT quoted on the NASD's automated quotation system (NASDAQ), or even if so, has a price less than five dollars ($5.00) per share; OR (iv) is issued by a company with net tangible assets less than $2,000,000, if in business more than three years continuously, or $5,000,000, if in business less than a continuous three years, or with average revenues of less than $6,000,000 for the past three years. The principal result or effect of being designated a "penny stock" is that securities broker-dealers cannot recommend the stock but must trade in it on an unsolicited basis.

JayHawk Energy, Inc.

Notes to the Consolidated Financial Statements

September 30, 2008

Note 1 – Nature of business and going concern (continued)

Section 15(g) of the Securities Exchange Act of 1934, as amended, and Rule 15g-2 promulgated there under by the Commission require broker-dealers dealing in penny stocks to provide potential investors with a document disclosing the risks of penny stocks and to obtain a manually signed and dated written receipt of the document before effecting any transaction in a penny stock for the investor's account. These rules may have the effect of reducing the level of trading activity in the secondary market, if and when one develops. Potential investors in the Company's common stock are urged to obtain and read such disclosure carefully before purchasing any shares that are deemed to be "penny stock." Moreover, Commission Rule 15g-9 requires broker-dealers in penny stocks to approve the account of any investor for transactions in such stocks before selling any penny stock to that investor. This procedure requires the broker-dealer to (i) obtain from the investor information concerning his or her financial situation, investment experience and investment objectives; (ii) reasonably determine, based on that information, that transactions in penny stocks are suitable for the investor and that the investor has sufficient knowledge and experience as to be reasonably capable of evaluating the risks of penny stock transactions; (iii) provide the investor with a written statement setting forth the basis on which the broker-dealer made the determination in (ii) above; and (iv) receive a signed and dated copy of such statement from the investor, confirming that it accurately reflects the investor's financial situation, investment experience and investment objectives. Pursuant to the Penny Stock Reform Act of 1990, broker-dealers are further obligated to provide customers with monthly account statements. Compliance with the foregoing requirements may make it more difficult for investors in the Company's stock to resell their shares to third parties or to otherwise dispose of them in the market or otherwise.

Note 2 – Summary of Significant Accounting Policies

Basis of Presentation – The accompanying financial statements as of and for the periods ended September 30, 2008 and 2007 are presented in accordance with generally accepted accounting principles in the United States of America (“US GAAP”). The accompanying financial statements of the Company have also been prepared pursuant to the rules of the Securities and Exchange Commission (the “SEC”). The financial statements and notes herein are a fair presentation of the Company’s financial position, results of operations, and cash flows for the periods presented.

Basis of Consolidation – These consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, JayHawk Gas Transportation Company, Inc. All intercompany accounts and transactions have been eliminated.

Joint Venture Operations – In instances where the Company’s oil and gas activities are conducted jointly with others, the Company’s accounts reflect only its proportionate interest in such activities.

Use of estimates - The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the respective reporting periods. Included in these estimates are assumptions about allowances for valuation of deferred tax assets. Accounts receivable are stated after evaluation as to their collectability and an appropriate allowance for doubtful accounts is provided where considered necessary. The provision for asset retirement obligation, depletion, as well as management’s impairment assessment on its oil and gas properties and other long lived assets are based on estimates and by their nature, these estimates are subject to measurement uncertainty and the effect on the financial statements of changes in these estimates, in future periods, could be significant. These estimates and assumptions are reviewed periodically and, as adjustments become necessary, they are reported in earnings in the periods in which they become known.

Loss per common share - Basic loss per share is calculated based on the weighted average number of common shares outstanding. Diluted loss per share assumes exercise of stock options and warrants and conversion of convertible debt and preferred securities, and preferred securities, provided the effect is not antidilutive. As each of the two fiscal periods covered by these financial statements reflect net losses from operations, all of our warrants have an anti-dilutive effect on per common share amounts.

Revenue Recognition - We use the sales method of accounting for oil and gas revenues. Under this method, revenues are recognized based on the actual volumes of gas and oil sold to purchasers. The volume sold may differ from the volumes we are entitled to, based on our individual interest in the property. Periodically, imbalances between production and nomination volumes can occur for various reasons. In cases where imbalances have occurred, a production imbalance receivable or liability will be recorded. Costs associated with production are expensed in the period in which they are incurred.

JayHawk Energy, Inc.

Notes to the Consolidated Financial Statements

September 30, 2008

Note 2 – Summary of Significant Accounting Policies (continued)

Accounts Receivable – When volumes of crude oil or gas are delivered to the purchaser we record a receivable based on the volumes delivered and field prices on the particular day of delivery. Subsequently these amounts may be adjusted for various technical factors affecting volumes such as temperature, pressure and content of basic sediment and water. When it becomes evident that amounts receivable become uncollectible we establish a valuation allowance and record a provision for bad debts in our statement of operations. Our sales of crude oil and natural gas are delivered into a market with a very concentrated group of purchasers. As more specifically detailed in Note 3, the single former purchaser of our crude filed for bankruptcy protection in July 2008. We have not been paid for the June and July deliveries.

Property, plant and equipment - JayHawk uses the successful-efforts method of accounting for oil and gas property as defined under Statement of Financial Accounting Standards (SFAS) No. 19, Financial Accounting and Reporting by Oil and Gas Producing Companies (“FAS 19”). Under this method of accounting, costs to acquire mineral interests in oil and natural gas properties, to drill and equip exploratory wells that find proved reserves, and to drill and equip development wells, are capitalized. Costs to drill exploratory wells that do not find proved reserves, geological and geophysical costs and costs of carrying and retaining unproved properties are expensed.

We provide depletion, depreciation and amortization (DD&A) of capitalized cost of proved oil and gas property on a field-by-field basis using the units-of-production method based upon proved reserves. In computing DD&A we take into consideration restoration, dismantlement and abandonment cost and the anticipated proceeds from equipment salvage.

When applicable, we apply the provisions of Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations, which provides guidance on accounting for dismantlement and abandonment cost.

Support equipment and other property, plant and equipment related to oil and gas production are depreciated on a straight-line basis over their estimated useful lives which range from 5 to 35 years. Property, plant and equipment unrelated to oil and gas producing activities is recorded at cost and depreciated on a straight-line basis over the estimated useful lives of the assets, which range from 3 to 25 years.

We review our long-lived assets for impairment at least annually or when events or changes in circumstances indicate that impairment may have occurred in accordance with SFAS 144. In the impairment test we compare the expected undiscounted future net revenue on a field-by-field basis with the related net capitalized cost at the end of each period. Should the net capitalized cost exceed the undiscounted future net revenue of a property, we will write down the cost of the property to fair value, which we will determine using discounted future net revenue. We will provide an impairment allowance on a property-by-property basis when we determine that the unproved property will not be developed.

Impairment of Unproved (Non-Producing) Property - Unproved properties will be assessed periodically, to determine whether or not they have been impaired. We provide an impairment allowance on unproved property at any time we determine that a property will not be developed. At September 30, 2008, we decided, based on geology and proximity to our pipeline to permit approximately one-third of the original leases acquired in the Uniontown acquisition of July 25, 2007, to expire without renewal. Accordingly, an allowance for impairment in the amount of $1,474,000 was made.

Sales of Producing and Non-producing Property - We account for the sale of a partial interest in a proved property as normal retirement. We recognize no gain or loss as long as this treatment does not significantly affect the unit-of-production depletion rate. We recognize a gain or loss for all other sales of producing properties and include the gain or loss in the results of operations. We account for the sale of a partial interest in an unproved property as a recovery of cost when substantial uncertainty exists as to recovery of the cost applicable to the interest retained. We recognize a gain on the sale to the extent that the sales price exceeds the carrying amount of the unproved property. We recognize a gain or loss for all other sales of non-producing properties and include the gain or loss in the results of operations.

JayHawk Energy, Inc.

Notes to the Consolidated Financial Statements

September 30, 2008

Note 2 – Summary of Significant Accounting Policies (continued)

Share Based Payments – The Company records compensation expense in the Consolidated Financial Statements for shared based payments using the fair value method pursuant to Financial Accounting Standards Board Statement (“FASB”) No. 123R. The fair value of share-based compensation to employees will be determined using an option pricing model at the time of grant. Fair value for common shares issued for goods or services rendered by non-employees are measured based on the fair value of the goods or services received. Stock-based compensation expense is included in general and administrative expense with a corresponding increase to Contributed Surplus. Upon the exercise of the stock options, consideration paid together with the previously recognized contributed surplus is recorded as an increase in share capital.

Asset Retirement Obligation - We follow the SFAS No. 143, “Accounting for Asset Retirement Obligations,” which requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs will be capitalized as part of the carrying amount of the long-lived asset. The carrying value of a property associated with the capitalization of an asset retirement cost will be included in proved oil and gas property in the balance sheets. The future cash outflows for oil and gas property associated with settling the asset retirement obligations will be accrued in the balance sheets, and will be excluded from ceiling test calculations. Our asset retirement obligation will consist of costs related to the plugging of wells and removal of facilities and equipment on its oil and gas properties.

Income Tax - Income taxes are determined using the asset and liability method in accordance with SFAS No. 109, Accounting for Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. In addition, a valuation allowance is established to reduce any deferred tax asset for which it is determined that it is more likely than not that some portion of the deferred tax asset will not be realized.

Non-Monetary Transactions - The Company periodically enters into non-monetary transactions. These transactions are recorded based on the fair value of the asset, goods or services received or surrendered, whichever is more clearly evident and at such time as the earnings process is complete. When material non-monetary transactions occur, the Company discloses the transaction and basis for valuing the transaction in the period the transaction occurs.

New Accounting Pronouncements

Business Combination. In December 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 141(R), “Business Combinations” (FAS 141(R)), which establishes accounting principles and disclosure requirements for all transactions in which a company obtains control over another business. Statement 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Management is evaluating the potential impact of this statement on our financial statements.

Non-Controlling Interests in Consolidated Financial Statements In December 2007, the FASB issued SFAS No. 160. "Non-controlling Interests in Consolidated Financial Statements" (FAS 160). This Statement amends Accounting Research Bulletin No. 51, Consolidated Financial Statements, to establish accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. FAS 160 is effective for fiscal years beginning after December 15, 2008. Management is evaluating the potential impact of this statement on our financial statements.

Disclosures about Derivative instruments and Hedging Activities In March 2008, the FASB issued Statement No. 161 (FAS 161), “Disclosures about Derivative Instruments and Hedging Activities, an amendment of SFAS No. 133,” which requires additional disclosures about the objectives of using derivative instruments, the method by which the derivative instruments and related hedged items are accounted for under SFAS No.133 and its related interpretations, and the effect of derivative instruments and related hedged items on financial position, financial performance and cash flows. FAS 161 also requires disclosure of the fair values of derivative instruments and their gains and losses in a tabular format. FAS 161 will be effective for our second quarter of fiscal 2009 beginning December 29, 2008. We are in the process of determining the effects the adoption of FAS 161 will have on our financial statement disclosures.

JayHawk Energy, Inc.

Notes to the Consolidated Financial Statements

September 30, 2008

Note 2 – Summary of Significant Accounting Policies (continued)

New Accounting Pronouncements (continued)

The Hierarchy of Generally Accepted Accounting Principles In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles" (FAS 162). FAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements that are presented in conformity with generally accepted accounting principles in the United States. This statement is not expected to change existing practices but rather reduce the complexity of financial reporting. This statement will go into effect 60 days after the Securities and Exchange Commission approves related auditing rules.

Accounting for Uncertainty in Income Taxes. In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), an interpretation of FASB Statement No. 109, “Accounting for Income Taxes”. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Interpretation requires that the Corporation recognize in the financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. FIN 48 also provides guidance on recognition, classification, interest and penalties, accounting in interim periods and disclosure. The provisions of FIN 48 are effective beginning January 1, 2007 with the cumulative effect of the change in accounting principle recorded as an adjustment to the opening balance of deficit. We have taken no positions in our tax returns, which we believe would not be sustained upon audit.

Fair Value Measurements. In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“FAS 157”), which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years, and is applicable beginning in the first quarter of 2009. Management is currently evaluating the impact that FAS 157 will have on our financial statements.

The Fair Value Option for Financial Assets and Financial Liabilities. In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115”, (“FAS 159”) which permits entities to choose to measure many financial instruments and certain other items at fair value at specified election dates. A business entity is required to report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. This statement is expected to expand the use of fair value measurement. FAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years, and is applicable beginning in the first quarter of 2009. Management is still evaluating the impact that FAS 159 will have on our financial statements, but presently considers, historical cost to be a more appropriate measure of an investment in a financial instrument.

Determination of the Useful Life of Intangible Assets – In April 2008, the FASB issued FASB Staff Position No. 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions that are used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets”, and requires enhanced related disclosures FSP 142-3 must be applied prospectively to all intangible assets acquired as of and subsequent to fiscal years beginning after December 15, 2008, the Company’s fiscal year 2010. The Company is currently in the process of determining the effect, if any, that the adoption of FSP 142-3 may have on its consolidated financial position, results of operations or cash flows.

JayHawk Energy, Inc.

Notes to the Consolidated Financial Statements

September 30, 2008

Note 3 - Trade Accounts Receivable

Trade accounts receivable represents those amounts the Company is owed for its' oil and gas production delivered during the months of June, July, and September 2008, less an allowance for doubtful accounts. Also included in the aggregate is an amount receivable from other working interests billed for their percentages of joint operating costs, the total of which was received during the month of October 2008. Specifically, it is detailed as follows:

	2008			2007
Due for crude oil delivered in June & July - SemCrude	$	283,486		$	-
Less: Allowance for doubtful collections		( 95,810	)		-
Due for crude oil delivered in September		181,340			-
Due for natural gas delivered in September		19,356			-
Due from joint operating agreement working interests		25,490			-
	$	413,862		$	-

The previous purchaser of our North Dakota crude oil, SemCrude, took delivery of JayHawk's June and July production and before compensating the Company filed a Chapter 11 bankruptcy proceeding. Management believes that the Company will receive all the proceeds for the June sales but has established an allowance for 80% of the value of the June deliveries, equivalent to $95,810, charging bad debt expense for an equal amount. August and September crude oil production was delivered to a new purchaser who had paid for the August production by September 30, 2008 and paid for the September deliveries subsequently in October. Amounts receivable for September natural gas deliveries and those amounts due from our joint operating agreement partners were also received in October.

Note 4- Other Current Assets

Other current assets is comprised of the following at September 30, 1008 and 2007:

	2008			2007
Employee payroll advances	$	3,000		$	-
Refundable Canadian goods and service tax		14,138			-
Less: Allowance for doubtful recovery		(9,500	)		-
Billable to joint operating agreement interests		8,389			-
Total Other Current Assets	$	16,027		$	-

Note 5 – Unproved Properties and Impairment

The total of JayHawk's investment in unproved properties consists of the capitalized costs of the following property acquisitions during the twelve-month periods ending September 2008 and 2007:

Name	2008			2007
Land acquisition and retention	$	4,144,445		$	2,200,000
Less: Accumulated amortization		(114,535	)		-
Less: Allowance for impairment in value		(1,474,000	)		-
Total Net Investment in Unproved Properties	$	2,555,910		$	2,200,000

Impairment of Uniontown Project: In addition to amortizing the capitalized lease costs, JayHawk periodically reviews and assesses its' unproved properties to determine whether or not they have been impaired. A property is considered impaired if it will not or cannot be developed. At that time an allowance is established to revalue the capitalized cost and a provision of equal amount is provided as an operating expense. Management made a review of the portfolio of leases acquired in the Uniontown transaction of July 2007 and decided based on geology and proximity to our pipeline to permit approximately one-third of the original leases acquired to expire without renewal. Further, given the Company's inability at this time to fund development of any acreage, justification exists at September 30, 2008 for the creation of an impairment valuation. The management has estimated the allowance at two-thirds, 67 percent, of the original investment equaling 1,474,000.

JayHawk Energy, Inc.

Notes to the Consolidated Financial Statements

September 30, 2008

Note 6 – Proved and Developed Oil & Gas Properties

On January 16, 2008, we acquired the Candak project from JED Oil (USA) Inc. located in the Williston Basin of North Dakota. The Candak property provides stable production of approximately 75 Bbls of light crude oil daily, from five existing wells. Along with the acquisition of the wells, including tangible assets, we acquired a 15,500 acre land position for a total purchase price of $3.5 million.

On March 31, 2008 the Company acquired a 16-mile pipeline, in addition to other assets, from Galaxy Energy. In May of 2008, the Company established a 100% owned and controlled subsidiary, “JayHawk Gas Transportation Corporation” to hold and manage the assets associated with the pipeline.

Concurrent with the Galaxy Energy acquisition of the pipeline, we acquired certain leased acreage adjacent to the pipeline, and seven tied-in gas wells. During July and August, the Company completed drilling and tying in 20 additional wells, which now comprise the Girard, Kansas production.

Proved oil and gas properties of $6,991,043 net of depreciation, depletion, and amortization (DD&A) is comprised of the following detailed by property:

			Accumulated		Net Book
	Cost		DD&A		Value
Proved Oil and Gas Properties
Candak, North Dakota
Proved Reserves	$	2,357,752	$	427,963	$	1,929,789
Field Equipment		1,200,248		110,078		1,090,170
Total Candak, North Dakota		3,558,000		538,041		3,019,959

Girard, Kansas Properties
Field Equipment		634,706		18,076		616,629
Capitalized Drilling Costs		807,227		-		807,227
Total Girard, Kansas		1,441,932		18,076		1,423,856

JayHawk Gas Transportation Company
Field Equipment		2,604,270		57,041		2,547,229
Total proved oil and gas properties	$	7,604,202	$	613,159	$	6,991,043

During the year ended September 30, 2008, the Company changed the depreciation rates on their equipment, pipeline and field equipment to rates that reflect the estimated useful life of the assets as compared to previous estimations of the assets used in the first three quarters if the 2008 fiscal year. The change in estimate resulted in additional depreciation expense of $22,000, up to that recorded in the third quarter ended June 30, 2008. A change in accounting estimate is accounted for prospectively over the current and future years.

JayHawk Energy, Inc.

Notes to the Consolidated Financial Statements

September 30, 2008

Note 7 – Other Long-Term Assets

Other assets consist of various deposits and the unamortized portion of the discount on the convertible promissory note more fully described in Note 8. There was no amount reported as other assets at September 30, 2007. Detail of the aggregate $247,586 reflected at September 30, 2008 is disclosed in the following table:

	2008		2007
Rental Security Deposit	$	1,500	$	-
Bond Deposit – State of Kansas		1,800		-
Bond Deposit – State of North Dakota		50,000		-
Unamortized note Discount (see Notes 8 and 11)		194,286		-
	$	247,586	$	-

Note 8 - Note Payable

On July 30, 2008 JayHawk signed a convertible promissory note in the amount of $800,000 for cash received of an equal amount. The note has a one-year maturity and bears an interest rate of 12 percent. The interest is accrued monthly, but is not payable until maturity along with the principal on July 30, 2009. The holder of the note has the right, at its sole discretion, to convert the outstanding principal balance and unpaid accrued interest to shares of the Company's common stock, at any time at the conversion price of $1.75.

In conjunction with the promissory note the holder was granted 400,000 warrants, at an exercise price of $2.10 per share, to convert to shares of the Company’s common stock scheduled to expire on July 30, 2010. In accordance with SFAS 133 we allocated the proceeds of the note between Notes Payable and Stockholder’s equity based on the respective fair values as of the agreement date. The fair values were determined using the Black-Scholes option model more fully described in Note 11 – Share Purchase Warrants. The note payable portion was $472,038 and equity portion was $327,962. A discount on the note payable (see Note 7), which will be amortized ratably over the life of the note, was also recorded in the amount of $194,286.

Note 9 - Asset Retirement Obligation

In the period in which an asset retirement obligation is incurred or becomes reasonably estimable, JayHawk Energy recognizes the fair value of the liability if there is a legal obligation to dismantle the asset and reclaim or remediate the property at the end of its useful life. We estimate the timing of the asset retirement based on an economic life determined by reference to similar properties and/or reserve reports. The liability amounts are based on future retirement cost estimates and incorporate many assumptions such as expected economic recoveries of oil and gas, time to abandonment, future inflation rates and the adjusted risk-free rate of interest. When the liability is initially recorded, the Company capitalizes the cost by increasing the related property balances. This initial capitalized cost is depreciated or depleted over the useful life of the asset.

JayHawk Energy, Inc.

Notes to the Consolidated Financial Statements

September 30, 2008

Note 9 - Asset Retirement Obligation (continued)

The Company has identified potential asset retirement obligations at the Girard, Kansas and Candak, North Dakota operating sites. These retirement obligations are determined based on the estimated cost to comply with abandonment regulations established by the Kansas Corporation Commission and the State of North Dakota. The Company's engineers have estimated the cost, in today's dollars, to comply with these regulations. These estimates have been projected out to the anticipated retirement date 15 years in the future, at an assumed inflation rate of 1.5 percent. The anticipated future cost of remediation efforts in North Dakota and Kansas are $204,685 and $281,547, respectively. These amounts were discounted back at an assumed interest rate of 10 percent, to arrive at a net present value of the obligation. The amount of the annual increase in the obligation is charged to "accretion expense" and for the period ending September 30, 2008, was computed to be $11,640 .

	2008		2007
Beginning balance	$	-	$	-
Liabilities incurred		116,400		-
Liabilities settled		-		-
Accretion expense		11,640		-
Revision to estimated cash flows		-		-
	$	128,040	$	-

Note 10 - Common Stock

Increase in Authorized Shares: On June 21, 2007, we increased the authorized number of shares of common stock from 50,000,000 shares to 200,000,000 shares. The changes became effective with the filing of a Certificate of Amendment to our Articles of Incorporation with the Colorado Secretary of State. Our purpose in increasing its authorized common stock was to allow flexibility in future financings and stock issuances. Shareholders holding a majority of our outstanding common stock approved those actions at a meeting of shareholders on June 21, 2007, held in accordance with the relevant sections of the Colorado Revised Statutes.

Stock Split. Effective after the increase in authorized shares, our Board of Directors approved a 15 for 1 stock split of the issued and outstanding common stock to be effective through the issuance of 14 shares for each share of common stock outstanding as of the record date. Our intent of the stock split is to increase the marketability and liquidity of our common stock. The pay date was June 25, 2007 for shareholders of record on June 21, 2007. After the split, the total number of our issued and outstanding shares of common stock was 90,000,000 shares. Our common stock remains at $.001 par value.

Issuances and Private Placements: The following transactions reflecting increases and decreases in the number of shares of the Company's common stock are presented by date of completion in chronological order. Transactions described as private placements were completed in reliance upon that certain exemption from the registration and prospectus delivery requirements of the Securities Act of 1933, which exemption is specified by the provisions of Section 5 of that act and Regulation S.

July 25, 2007 - Concurrent with the purchase of our Uniontown Project, we completed a private placement for gross proceeds of approximately $2,882,659. Specifically, we sold 2,882,659 Units at a purchase price of $1.00 per Unit, each Unit consisting of (a) one share of common stock, $.001 par value per share and (b) one warrant (see Note 11) which will provide to the holder the right to purchase one share of our common stock at a purchase price of $1.00 and which shall expire in two years. Approximately 562,679 of the Units of the private placement were issued to Berrigan Portfolio, Inc. to repay the principal and interest accrued as of July 25, 2007, on the promissory note dated April 12, 2007, between us and Berrigan Portfolio, Inc. and 20,000 of the Units were issued to Berrigan Portfolio, Inc. to reimburse Berrigan for expenses of approximately $20,000 paid on the Company's behalf.

Additionally on July 25, 2007, Sara Preston, our former officer and director, agreed to have 56,000,000 shares of her common stock cancelled in exchange for $20,000, in addition to the remaining inventory of our former jewelry business valued at approximately $1,500.

JayHawk Energy, Inc.

Notes to the Consolidated Financial Statements

September 30, 2008

Note 10 - Common Stock (continued)

January 16, 2008 - The Company completed a private placement valued at approximately $4 million, selling 2,666,667 Units, comprised of (a) one share of common stock, $.001 par value per share, and (b) one warrant (see Note 11) granting the holder the right to purchase one share of Registrant's common stock at a purchase price of $1.60. Each unit was sold for $1.50 and the warrants will expire one year from the date of the subscription. This private placement was done concurrent with the acquisition of the Candak, North Dakota properties and the funds received were used for consideration given in the exchange.

March 13, 2008 - The Company issued 50,000 shares valued at $2.20 per share to Titan West Energy, Inc. for the acquisition of certain oil and natural gas rights and interests in other related operating assets.

March 31, 2008 - In consideration for the acreage and assets acquired from Galaxy Energy, Inc., the Registrant paid $1 million in cash and issued 1,024,727 shares of common stock. These shares were valued at $2.27. Simultaneously with this transaction a stock issuance obligation was recognized, for the issuance of 900,000 shares of our common stock, representing the exercise of certain warrants to purchase shares of common stock at an exercise price of $1.00 per share (see Note 11). The proceeds of this warrant exercise of $900,000 was used to close the purchase of the Galaxy assets.

April 15, 2008 - The Company issued 599,939 shares to shareholders who exercised an equivalent number of warrants at an exercise price of $1.00 per share (see Note 11). The proceeds of this warrant exercise was used for general working capital.

May 05, 2008 - JayHawk issued 25,000 shares of its common stock to a consultant in exchange for services provided. The shares were valued at $2.32 as of the date of the agreement.

May 07, 2008 - The Company issued 50,000 shares of its common stock to Titan West Energy, Inc. for the acquisition of certain oil and natural gas rights and interests in other related operating assets. These shares were valued at $2.28 per share.

May 09, 2008 - We issued 399,962 shares of our common stock to a shareholder who exercised certain warrants to purchase shares at an exercise price of $1.00 per share. We used the proceeds for working capital.

June 30, 2008 - The Company recorded a stock issuance obligation to Missouri Gas Partners for 234,200 shares of common stock, computed at 25 shares per acre for 9,368 acres of oil, gas and mineral leases. These shares were to be physically issued as the individual leases were renewed by Missouri Gas Partners. The shares were valued at $2.22 per share and a stock issuance obligation was recorded in the amount of $519,011.

July 03, 2008 - The Company physically issued 211,975 shares of common stock to Missouri Gas Partners for renewal of oil, gas and mineral leases covering 8,479 acres at 25 shares per acre. The stock issuance obligation was reduced by a corresponding $471,452, representing the 211,975 shares valued at the $2.22 per share used in computing the original obligation. At September 30, 2008, the remaining stock issuance obligation is $47,559.

JayHawk Energy, Inc.

Notes to the Consolidated Financial Statements

September 30, 2008

Note 11 - Share Purchase Warrants

In the two private placements described above (Note 10 - Common Stock) when units representing both shares of common stock and warrants to purchase common stock at a specified exercise price are sold, the proceeds received are allocated between the value of the stock and the value of the warrants. To make this allocation we use the Black-Scholes option pricing model. This is a subjective exercise involving the use of various estimates, including the risk-free interest rate, the option or contract life, and the expected volatility of the underlying security.

To determine the amount to allocate to the warrants in the private placement of July 25, 2007 we assumed a risk free interest rate of 4.74 percent, the life of the option was 2 years, and an expected volatility of 99.34%. At an exercise price of $1.00 per share, this yielded a warrant value of approximately $0.54 per warrant for a total value of $1,557,414 for the 2,882,659 warrants issued in this transaction, also the amount outstanding at the quarter end of December 31, 2007. A similar exercise was performed for the warrant valuation in the private placement of January 16, 2008, where the exercise period was one year and the exercise price $1.60. In this transaction the warrants expired in one year (365 days) and were exercisable at $1.60 per share. Based on this model, a fair value of $0.66 was assigned to each warrant, or $1,759,884 to the total 2,666,667 warrants.

In conjunction with the issuance of the $800,000 note payable, described in Note 8, the Company issued the holder of the note a warrant agreement whereby, for a period of two years (expiring July 30, 2010) the holder could convert 400,000 warrants at an exercise price of $2.10 per share to shares of the Company’s common stock.

The fair value of the warrants is allocated to the recipients based on the percentage of the proceeds due to each party in relation to the total proceeds received. The following table discloses the allocation between shares and warrants of the total shares of common stock issued and outstanding:

	2008		2007
Shares of common stock issued and outstanding		42,810,929		36,882,659
Shares to be issued upon exercise of warrants		3,649,425		2,882,659
Total shares of common stock outstanding upon exercise of warrants		46,460,354		39,765,318

Note 12 – Loss per Common Share

We have adopted SFAS No. 128, Earnings Per Share. SFAS No. 128 requires the reporting of basic and diluted earnings/loss per share. We calculate basic loss per share by dividing the net loss by the weighted average number of outstanding common shares during the period. We calculate diluted loss per share by dividing net loss by the weighted average number of outstanding common shares, including all potentially dilutive securities during the period. For the periods ending September 30, 2008 and 2007 the weighted average number of shares were 40,226,990 and 80,509,702, respectively. Additionally, all of our outstanding warrants have an anti-dilutive effect on our per common share amounts.

Note 13 - - Related Party Transactions

On July 01, 2008, we subleased office space for $4,500 for the year from Marlin Property Management, LLC an entity owned by the spouse of our CEO. We believe this office space and facilities are sufficient to meet our present needs, and do not anticipate any difficulty securing alternative or additional space, as needed, on terms acceptable to us. At September 30, 2007, we subleased office space from our former Chief Financial Officer for the amount of $7,200 for the year. Both of these transactions occurred within the normal course of business and the exchanged consideration was negotiated in good faith and agreed between the respective related parties.

Note 14 - Discontinued Operations

On June 21, 2007, we changed our name from Bella Trading Company, Inc. to JayHawk Energy, Inc. and shifted our focus from the retail jewelry industry to the oil and gas business. Bella was incorporated on April 5, 2004 but did not begin operations until August of 2004. From inception until the third quarter 2007, Bella had gross revenues from the sale of merchandise of approximately $19,000 and expenses of $107,000. During the third quarter ending June 30, 2007, we decided to change management, enter the oil and gas business, and cease all activity in the retail jewelry industry.

JayHawk Energy, Inc.

Notes to the Consolidated Financial Statements

September 30, 2008

Note 15 - Income Tax

We account for income taxes pursuant to SFAS No. 109, Accounting for Income Taxes, which requires the establishment of deferred tax assets and liabilities for the recognition of future deductions or taxable amounts and operating loss and tax credit carry forwards. Deferred federal income tax expense or benefit is recognized as a result of the change in the deferred tax asset or liability during the year using the currently enacted tax laws and rates that apply to the period in which they are expected to affect taxable income. Valuation allowances are established, if necessary, to reduce deferred tax assets to the amounts that will more likely than not be realized.

The Company's provision for income taxes reflects the U.S. federal income taxes calculated at the federal corporate statutory rate of 35%, U.S. state taxes calculated at the statutory rate of 4.63% net of any federal income tax benefit calculated at their combined rates of 38.93% net of any U.S. federal income tax benefits. These rates are our effective tax rates.

For the year ended September 30, 2008	2008			2007
Net loss before income taxes		(3,128,342	)		(225,280	)
Statutory federal corporate tax rate		38.93	%		33.50	%
Tax recovery		(1,217,864	)		(75,481	)

Change in valuation allowance		1,236,909			75,481
Change in enacted tax rates		(19,045	)		-

Provision for income taxes		-			-

At September 30, 2008 we have available for federal income tax purposes a net operating loss carry-forward of approximately $932,362 expiring at various times from 2025 through 2027 that may be used to offset future taxable income. Therefore we have provided no provision for income tax.

We have deferred tax assets of approximately $1,318,869 at September 30, 2008 (2007 – $81,282) from combined federal and state effective tax rates. We have not recorded a benefit from our deferred assets, as the realization of the benefit is uncertain. We have therefore provided a valuation allowance of equal amount for the deferred tax assets.

For the year ended September 30, 2008	2008			2007
Non-capital loss carry-forward	$	932,362		$	81,282
Asset retirement obligation		49,846			-
Property, plant and equipment		335,984			-

Total differed tax asset		1,318,192			81,282

Cumulative valuation allowance		(1,318,192	)		(81,282	)

Net Deferred Tax Asset	$	-		$	-

Note 16 – Credit Concentration

The Company to a concentration of credit risk consists primarily of trade accounts receivable with oil and natural gas marketers. Such credit risks are considered by management to be limited due to the financial resources of those Companies.

The purchaser of our North Dakota crude oil, SemCrude, took delivery of JayHawk's June and July production and before compensating the Company filed a Chapter 11 bankruptcy proceeding. Management believes that the Company will receive all the proceeds for the July sales but has established an allowance for 80% of the value of the June deliveries, equivalent to $95,810, charging bad debt expense for an equal amount. At June 30, 2008 66% of the accounts receivable balance was due from Semcrude. Subsequent crude oil production was delivered to a new purchaser where in the credit risk still remains at 42% of the total balance at June 30, 2008.

JayHawk Energy, Inc.

Notes to the Consolidated Financial Statements

September 30, 2008

Note 17 - Subsequent Events

On October 31, 2008 we issued 25,000 shares of the Company's common stock, $0.001 par value, in exchange for consulting services.

Note 18 – Commitments and Contingencies

There is no pending litigation or proceeding involving any director or officer of the Company for which indemnification is being sought. On July 1, 2008, we leased our office space for a period of three years for a fixed monthly rental of $1,500. Accordingly, our commitment to make these lease payments for the years ending September 30, 2009, 2010, and 2011, is $18,000, $18,000, and $13,500, respectively.

Note 19 – Comparative Figures

Certain comparative figures have been reclassified to conform with current year presentation.

SUPPLEMENTARY OIL AND GAS DISCLOSURES

(Unaudited)

The supplementary oil and gas data that follows is presented in accordance with FAS No. 69, Disclosures about Oil and Gas Producing Activities, and includes (1) costs incurred, capitalized costs and results of operations relating to oil and gas producing activities, (2) net proved oil and gas reserves, and (3) a standardized measure of discounted future net cash flows relating to proved oil and gas reserves, including a reconciliation of changes therein.

COSTS INCURRED, CAPITALIZED COSTS, AND RESULTS OF OPERATIONS

RELATING TO OIL AND GAS OPERATIONS

1. Costs Incurred in Oil and Gas Producing Activities (in $000's)

	12 Months End
	September 30
	2008		2007
Property acquisitions
Unproved properties	$	1,944	$	2,200
Proved properties (includes wells, equipment and
related facilities acquired with proved reserves)		6,161		−
Exploration		−		−
Production and development capital expenditures		1,327		−

2. Capitalized Costs Relating to Oil and Gas Producing Activities (in $000's)

	At September 30
	2008			2007
Unproved properties	$	4,144		$	2,200
Proved properties		2,358			−
Wells, equipment and related facilities		5,246			−
Total capitalized costs		11,748			2,200
Less: Allowance for depreciation, depletion, amortization and lease impairment		(2,202	)		−
Net capitalized costs	$	9,546		$	2,200

3. Results of Operations for Oil and Gas Producing Activities

The results of operations shown below exclude non-oil producing activities, corporate overhead items, interest expense and other gains and losses. Therefore, these results are on a different basis than results of operations reported upon in management's discussion and analysis.

For the twelve months ending September 30, 2007, there were no oil and gas producing activities. All operations were conducted within the United States. The Company produces crude oil in North Dakota and natural gas in southeast Kansas. Because of limited funding, exploration activities are not being conducted at this time. The following presentation is for the twelve months ending September 30, 2008:

	North Dakota		Kansas			Combined
	Oil		Gas

Operating revenue	$	1,108,055	$	91,782		$	1,199,837
Costs and expenses
Production expenses		280,689		226,552			507,241
Exploration expenses		−		−			−
General and administrative expenses		117,726		215,593			333,319
Depreciation, depletion and amortization		538,041		189,652			727,693
Total costs and expenses		936,456		631,797			1,568,253

Results of operations before income taxes	$	171,599		(540,015	)		(368,416	)
Provision for income taxes		−		−			−
Results of operations	$	171,599	$	(540,015	)	$	(368,416	)

Oil and Gas Reserves

The Company's oil and gas reserves are calculated in accordance with SEC standards and definitions as set forth in Rule 4-10 of Regulation S-X and the requirements of the SFAS 69. Proved developed oil and gas reserves are reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Proved undeveloped oil and gas reserves are those that are expected to be recovered from new wells on undrilled acreage.

The Company's reserve estimation and reporting process involves an annual independent third party reserve determination and appraisal. The reserve estimates reported below are determined independently by the consulting firm of McDaniel & Associates Consultants Ltd. and are consistent with internal estimates. The Company provided McDaniel & Associates with engineering, geological and geophysical data, actual production histories and other information necessary for the reserve determination.

All of JayHawk Energy's oil and gas reserves are within the continental United States in the states of North Dakota and Kansas. Based on this evaluation described in the preceding paragraph, the Company's net interest in proved developed and proved developed and undeveloped reserves is disclosed in the following table; in thousands of barrels (Bbls):

	Proved
	Developed			Proved
	and Undeveloped			Developed
	Reserves			Reserves
	Net			Net
At October 1, 2007		−			−
Revisions of previous estimates		−			−
Purchases of minerals in place		72			72
Production & sales of minerals in place		(13	)		(13	)
At September 30, 2008		58			58

Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves

Future net cash flows are calculated by applying year-end oil and gas prices (adjusted for price changes provided by contractual arrangements) to estimated future production of proved oil and gas reserves, less estimated future development and production costs, which are based on year-end costs and existing economic assumptions. The discounted future net cash flow estimates required by FAS No. 69 do not include exploration expenses, interest expense or corporate general and administrative expenses. The selling prices of crude oil and natural gas are highly volatile. The year-end prices, which are required to be used for the discounted future net cash flows may not be representative of future selling prices. The future net cash flow estimates could be materially different if other assumptions were used. As this is the first year for presenting a standardized measure of discounted cash flows relating to the Company's proved oil and gas reserves, there are no changes in the measuring process. The following table presents in $ 000's, the estimated future cash flows related to the Company's proved oil and gas reserves:

Future revenues	$	4,125.7
Less:
Future production costs		1,653.7
Future development costs		−−
Future income tax expense		−−
Total cash outflows		1,653.7
Future net cash flows		2,472.0
Less: Discount at 10% annual rate		892.3
Standardized measure of discounted future net cash flows	$	1,579.7

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

On November 28, 2007, we dismissed Cordovano and Honeck LLP as our independent registered public accounting firm. Cordovano and Honeck LLP had previously been engaged as the principal accountant to audit our financial statements. The decision to dismiss Cordovano and Honeck LLP and engage Meyers Norris Penny LLP was approved by our Board of Directors on November 28, 2007.

We engaged Meyers Norris Penny LLP as its new independent auditors, effective as of November 28, 2007, to audit our financial statements for the year ended September 30, 2007, and to perform procedures related to the financial statements included in our current reports on Form 8-K and quarterly reports on Form 10-QSB.

The reports of Cordovano and Honeck LLP on our financial statements for each of the years ended September 30, 2006 and 2005, contained an explanatory paragraph relating to our ability to continue as a going concern. Other than this report modification, the reports of Cordovano and Honeck LLP on our financial statements as of and for each of the past two fiscal years did not contain any adverse opinion or disclaimer of opinion, and were not modified as to uncertainty, audit scope, or accounting principles.

During our two most recent fiscal years and the subsequent interim period through November 28, 2007, the date of dismissal, there were no disagreements with Cordovano and Honeck LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which, if not resolved to the satisfaction of Cordovano and Honeck LLP, would have caused it to make reference to the subject matter of the disagreement(s) in connection with its reports. There were no “reportable events” as that term is described in Item 304(a)(1)(v) of Regulation S-B during our two most recent fiscal years and the subsequent interim period through November 28, 2007, the date of dismissal.

Other than in connection with the engagement of Meyers Norris Penny LLP by us, during our most recent fiscal year and the subsequent interim period prior to November 28, 2007, we did not consult Meyers Norris Penny LLP regarding either: (i) the application of accounting principles to a specified transaction, completed or proposed, or the type of audit opinion that might be rendered on our financial statements, or (ii) any matter that was either the subject of a disagreement as defined in Item 304(a)(1)(iv) of Regulation S-B or the related instructions thereto or a “reportable event” as described in Item 304(a)(1)(v) of Regulation S-B.

ITEM 8A – CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures

Our management, with the participation of our Audit Committee, our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 promulgated under the Securities Exchange Act of 1934, as of September 30, 2008. Based on the evaluation, management has concluded that our disclosure controls and procedures were effective.

(b) Changes in internal control over financial reporting

During the fourth quarter of the fiscal year ending September 30, 2008, there were no changes in our internal control over financial reporting that have materially affected, or were reasonable likely to materially affect, our internal control over financial reporting.

ITEM 8A(T) - MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING.

The Board of Directors, Chief Executive Officer, and Chief Financial Officer of JayHawk Energy, Inc. are responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15 of the Securities Exchange Act of 1934. JayHawk's internal control system is designed to provide reasonable assurance to management and the Board of Directors regarding the reliability of financial reporting and fair presentation of published financial statements.

The management of JayHawk assessed the effectiveness of the Company's internal control over financial reporting as of September 30, 2008. In making this assessment, it used criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework. Based on this assessment, management believes that, as of September 30, 2008, JayHawk's internal control over financial reporting was effective.

This annual report does not include an attestation report of the company's independent registered public accounting firm as to the effectiveness of JayHawk's internal controls over financial reporting due to a transition period established by rules of the Securities and Exchange Commission. Our independent registered public accounting firm will be engaged to express an opinion on the effectiveness of our internal controls over financial reporting for the fiscal year end September 30, 2009.

ITEM 8B – OTHER INFORMATION

None.

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.

DIRECTORS AND EXECUTIVE OFFICERS

Name	Age	Position
Lindsay E. Gorrill	46	Chief Executive Officer and Director
Thomas G. Ryman	61	Chief Financial Officer
Darren Schoenroth	38	Vice President, Operations
Mathew J. Wayrynen	46	Chairman of the Board and of Compensation Committee
Don Siemens	62	Director, Chairman of Audit Committee
Jeffrey W. Bright	44	Director, Chairman of Nominating Committee
Marshall D. Goldberg	54	Director, Chairman of Reserve Reporting Committee

Directors are elected to serve until the next annual meeting of stockholders and until their successors are elected and qualified. Directors are compensated at the rates of $8,000 per year. The Chairmen of the Audit Committee is compensated an additional $4,000 per year. Each other committee chairman is compensated an additional $2,000 per year. Officers are elected by the Board of Directors and serve until their successors are appointed by the Board of Directors. Biographical resumes of each officer and director are set forth below.

Lindsay E. Gorrill - President & CEO

Mr. Lindsay Gorrill is a C.A. and has university degrees in Finance and Marketing. Mr. Gorrill has a background in acquisitions, company building, financial markets and world exposure. Previously he was the president and CEO of Berkley resources, an oil and gas company based in Vancouver, BC. Mr. Gorrill has 17 years experience in the resource sector and 15 years experience in successful international company building.

Darren Schoenroth - Vice President, Operations

Mr. Schoenroth has over 20 years of experience in the oil and gas industry. He brings to JayHawk a proven successful track record of identifying, bringing on and increasing oil and gas production. His expertise is in optimization, stimulations, production enhancement, secondary recoveries, and in horizontal and slant well bore technology.

Thomas G. Ryman - Chief Financial Officer

Mr. Ryman was appointed Chief Financial Officer on September 30, 2008, subsequent to the resignation of Mr. Joseph Young, our previous Chief Financial Officer. Mr. Ryman is a Certified Public Accountant with over 20 years experience in the financial reporting and management functions, formerly serving with Aviation Group, Inc., as Controller, and Cities Service Oil Company, as International Controller. Mr. Ryman served as an auditor with Arthur Andersen & Co. after earning his BS in Accounting from the University of Baltimore.

Mathew J. Wayrynen - Director

Mr. Wayrynen was appointed to the Board of Directors on April 30, 2008. Mr. Wayrynen is a citizen of Canada. He also serves as a director of Quinto Technology (since 2002), as a director of Avino Silver & Gold Mines, Ltd. (since 2004) and as CEO of Berkley Resources, Inc. (since 2003). Prior to these positions Mr. Wayrynen was a broker with Golden Capital Securities, located in Vancouver, British Columbia. Mr. Wayrynen is not an officer or director of any other U.S. reporting company.

Don Siemens - Director

Mr. Siemens was appointed to the Board of Directors on June 30, 2008. Mr. Siemens is a citizen of Canada and is a self-employed corporate finance consultant. Mr. Siemens is a Chartered Accountant with over 27 years of experience in public company practice, holding senior executive positions in the industry. He has expertise in mergers and acquisitions and providing advisory services to both Canadian and U.S. corporations. Mr. Siemens is not an officer or director of any other U.S. reporting entity.

Jeffrey W. Bright - Director

Mr. Bright was appointed to the Board of Directors on April 30, 2008. Mr. Bright is a citizen of Canada. Mr. Bright has worked as an attorney since 2003, with the firm of Gowling, Lafleur, & Henderson, LLP, located in Calgary Alberta, Canada. He is a member of the Association of International Petroleum Negotiators, the Canadian Association of Petroleum Producers, and the Canadian and American Bar Associations. Mr. Bright is not an officer or director of any other U.S. reporting entity.

Marshall D-Goldberg - Director

Mr. Goldberg was appointed to the Board of Directors on July 29, 2008. Mr. Goldberg is a citizen of Canada. He has been employed as a geologist and consultant providing related services in Calgary, Alberta, Canada since 1980. Since 1997, Mr. Goldberg has been the President of Marlin Consulting Corporation (not to be confused with Marlin Property Management) providing services to oil and gas companies. Mr. Goldberg is a member of the Canadian and American Societies of Professional Geologists as well as the Association of Professional Engineers, Geologists and Geophysicists of Alberta.

COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934

Section 16(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) requires the Company's directors and executive officers, and persons who own more than ten percent of a registered class of the Company's equity securities, to file with the Commission initial reports of ownership and reports of changes in ownership of the Company's Common Stock and other equity securities of the Company. Officers, directors and greater than ten percent shareholders are required by the Commission's regulations to furnish the Company with copies of all Section 16(a) forms they filed.

We have been provided with copies of all forms (3, 4 and 5) filed by officers, directors, or ten percent shareholders within three days of such filings. Based on our review of such forms that we received, or written representations from reporting persons that no Forms 5s were required for such persons, we believe that, during all prior fiscal periods, all Section 16(a) filing requirements have been satisfied on a timely basis for members of the Board of Directors and Executive Officers.

Code of Ethics

Our Board of Directors has adopted a Code of Business Conduct and Ethics Compliance Program and an Insider Trading Policy providing guidelines with respect to transactions in Company securities and is applicable to all directors, officers, employees and consultants who receive or have accesses to material non-public Company information.

Corporate Governance

The Board does not have an executive committee or any committee performing a similar function. The Board is in the process of forming an audit committee, of which a majority of the members will be comprised of independent directors. There have been no material changes to the procedures by which our stockholders may recommend nominees to the board of directors.

ITEM 10. EXECUTIVE COMPENSATION.

We had two executive officers who earned more than $100,000 during the 12 months ending September 30, 2008. Each individual's total compensation consisted only of cash paid as salary or as a monthly fee to an independent contractor. The following amounts were paid to the respective individuals.

Lindsay E. Gorrill	Chief Executive Officer	$155,000
Darren Schoenroth	Vice President of Operations	$210,000

Employment Agreements with Executive Officers

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The following table sets forth certain information regarding beneficial ownership of our common stock as of September 30, 2007:

· by each person who is known by us to beneficially own more than 5% of our common stock;

· by each of our officers and directors; and

· by all of our officers and directors as a group.

NAME AND ADDRESS OF OWNER	TITLE OF CLASS	NUMBER OF SHARES OWNED (1)		PERCENTAGE OF CLASS (2)
Lindsay E. Gorrill	Common Stock		4,000,000		9.3	%
370 Interlocken Blvd Suite 400
Broomfield, CO 800021

All Officers and Directors	Common Stock		4,000,000		9.3	%
(1) Beneficial Ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of common stock subject to options or warrants currently exercisable or convertible, or exercisable or convertible within 60 days of September 30, 2007 are deemed outstanding for computing the percentage of the person holding such option or warrant but are not deemed outstanding for computing the percentage of any other person. (2) Percentage based on 42,810,929 shares of common stock outstanding as of September 30, 2008.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Since the beginning of our prior fiscal year, there have been no transactions, or proposed transactions, which have materially affected or will materially affect us in which any director, executive officer or beneficial holder of more than 10% of the outstanding common stock, or any of their respective relatives, spouses, associates or affiliates, has had or will have any direct or material indirect interest. We have no policy regarding entering into transactions with affiliated parties.

ITEM 13. EXHIBITS.

Exhibit No.

Description

3.1	Articles of Incorporation, filed as an exhibit to the registration statement on Form SB-2 filed with the Securities and Exchange Commission (the "Commission") on December 7, 2004, and incorporated herein by reference.

3.2	Certificate of Amendment to Articles of Incorporation, filed as an exhibit to the 8-K filed with the Commission on June 25, 2007, and incorporated herein by reference.

3.3	Bylaws, filed as an exhibit to the registration statement on Form SB-2 filed with the Commission on December 7, 2004, and incorporated herein by reference.

10.1	Promissory Note of April 12, 2007 with Berrigan Portfolio, Inc., filed as an exhibit to the 8-K filed with the Commission on April 17, 2007, and incorporated herein by reference.

10.2	Asset Purchase and Sale agreement of July 25, 2007 with Armstrong Investments, Inc., filed as an exhibit to the 8-K filed with the Commission on July 26, 2007, and incorporated herein by reference.

10.3	Form of Warrant Agreement of July 25, 2007 with Armstrong Investments, Inc. and Berrigan Portfolio, Inc., filed as an exhibit to the 8-K filed with the Commission on July 26, 2007, and incorporated herein by reference.

31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended

31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14 and Rule 15d 14(a), promulgated under the Securities and Exchange Act of 1934, as amended

32.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer)

32.2	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer)

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

Audit Fees

The aggregate fees billed by our auditors, for professional services rendered for the audit of the Company's annual financial statements for the years ended September 30, 2008 and 2007, and for the reviews of the financial statements included in the Company's Quarterly Reports on Form 10-QSB during the fiscal years were $85,918 and $50,724, respectively.

All Other Fees

No other fees have been billed in the last two years for products and services provided by the principal accountant other than the services reported pursuant to the above portions of this Item 14.

Our board of directors acts as the audit committee and had no “pre-approval policies and procedures” in effect for the auditors’ engagement for the audit years 2008 and 2007.

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	JAYHAWK ENERGY, INC.

Date: April 22, 2009	By:	/s/ LINDSAY E. GORRILL
		Lindsay E. Gorrill Chief Executive Officer, President, and Chairman of the Board

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.

Signature	Position	Date

/s/ LINDSAY E. GORRILL	Chief Executive Officer, President, and Chairman of the Board	April 22, 2009
Lindsay E. Gorrill

/s/ THOMAS G. RYMAN	Chief Financial Officer	April 22, 2009
Thomas G. Ryman

Jayhawk Energy (JYHW) Inactive 10-K/A2008 FY Annual report (amended)