10-Q

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

FORM 10-Q

(Mark One)
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 2010
OR
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: 000-50107

DAYBREAK OIL AND GAS, INC.
(Exact name of registrant as specified in its charter)

Washington	91-0626366
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
601 W. Main Ave., Suite 1012, Spokane, WA	99201
(Address of principal executive offices)	(Zip Code)

(509) 232-7674
(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (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. x Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yeso     No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer o
Non-accelerated filer o	(Do not check if a smaller reporting company)	Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes x No

At October 14, 2010 the registrant had 48,581,599 outstanding shares of $0.001 par value common stock.

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION
ITEM 1.	Financial Statements	3
	Balance Sheets at August 31, 2010 and February 28, 2009 (Unaudited)	3
	Statements of Operations for the Three and Six Months Ended August 31, 2010 and August 31, 2009 (Unaudited)	4
	Statements of Cash Flows for the Three and Six Months Ended August 31, 2010 and August 31, 2009 (Unaudited)	5
	Notes to Unaudited Financial Statements	6
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	28
ITEM 4T.	Controls and Procedures	28
PART II - OTHER INFORMATION
ITEM 1.	Legal Proceedings	29
ITEM 1A.	Risk Factors	29
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
ITEM 6.	Exhibits	29
Signatures		31

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PART I
FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

DAYBREAK OIL AND GAS, INC.
Balance Sheets - Unaudited
	As of August 31, 2010			As of February 28, 2010
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	17,379		$	247,951
Accounts receivable:
Oil and gas sales		177,732			257,110
Joint interest participants, net of allowance for doubtful accounts of $49,202 and $16,237 respectively		445,236			215,648
Receivables associated with assets held for sale, net of allowance for doubtful accounts of $38,012		—			303,097
Production revenue receivable		25,000			25,000
Prepaid expenses and other current assets		19,250			21,735
Total current assets		684,597			1,070,541
OIL AND GAS PROPERTIES, net of accumulated depletion, depreciation, amortization, and impairment, net of $805,217 and $1,783,258 respectively, successful efforts method
Proved properties		1,326,883			1,189,566
Unproved properties		35,530			21,233
VEHICLES AND EQUIPMENT, net of accumulated depreciation of $31,329 and $29,841, respectively		—			1,488
PRODUCTION REVENUE RECEIVABLE -LONG TERM		325,000			325,000
OTHER ASSETS		104,467			402,208
Total assets	$	2,476,477		$	3,010,036
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable and other accrued liabilities	$	1,473,321		$	1,240,909
Accounts payable - related parties		44,444			31,898
Liabilities associated with assets held for sale		—			110,124
Accrued interest		6,468			5,408
Total current liabilities		1,524,233			1,388,339
LONG TERM LIABILITIES:
Notes payable, net of discount of $107,787 and $110,056 respectively		487,213			454,944
Asset retirement obligation		44,621			53,318
Total liabilities		2,056,067			1,896,601
COMMITMENTS
STOCKHOLDERS’ EQUITY:
Preferred stock - 10,000,000 shares authorized, $0.001 par value;		—			—
Series A Convertible Preferred stock - 2,400,000 shares authorized, $0.001 par value, 6% cumulative dividends; 976,565 and 1,008,565 shares issued and outstanding respectively		977			1,009
Common stock- 200,000,000 shares authorized; $0.001 par value, 48,331,599 and 47,785,599 shares issued and outstanding respectively		48,333			47,786
Additional paid-in capital		22,318,069			22,255,802
Accumulated deficit		(21,946,969	)		(21,191,162	)
Total stockholders’ equity		420,410			1,113,435
Total liabilities and stockholders’ equity	$	2,476,477		$	3,010,036

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

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DAYBREAK OIL AND GAS, INC.
Statements of Operations - Unaudited
	For the Three Months Ended August 31,						For the Six Months Ended August 31,
	2010			2009			2010			2009
REVENUE:
Oil and gas sales	$	307,006		$	130,147		$	500,057		$	167,420
OPERATING EXPENSES:
Production costs		12,988			134,958			48,931			198,445
Exploration and drilling		71,463			66,460			144,283			103,925
Depreciation, depletion, amortization, and impairment		121,770			44,709			237,057			352,585
Gain on write-off of asset retirement obligation		—			—			(8,324	)		—
Bad debt expense		—			2,306			—			76,689
General and administrative		444,141			410,819			799,893			844,150
Total operating expenses		650,362			659,252			1,221,840			1,575,794
OPERATING LOSS		(343,356	)		(529,105	)		(721,783	)		(1,408,374	)
OTHER INCOME (EXPENSE):
Interest income		493			7,911			1,680			9,869
Interest expense		(23,420	)		(76	)		(46,661	)		(764	)
Total other income (expense)		(22,927	)		7,835			(44,981	)		9,105
LOSS FROM CONTINUING OPERATIONS		(366,283	)		(521,270	)		(766,764	)		(1,399,269	)
DISCONTINUED OPERATIONS
Income from discontinued operations (net of tax of $-0-)		40			50,249			731			60,092
Gain (loss) from sale of oil and gas properties (net of tax of $-0-)		(3,868	)		—			10,226			—
INCOME (LOSS) FROM DISCONTINUED OPERATIONS		(3,828	)		50,249			10,957			60,092
NET LOSS		(370,111	)		(471,021	)		(755,807	)		(1,339,177	)
Cumulative convertible preferred stock dividend requirement		(43,967	)		(51,289	)		(89,726	)		(102,578	)
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS	$	(414,078	)	$	(522,310	)	$	(845,533	)	$	(1,441,755	)
NET LOSS PER COMMON SHARE
Loss from continuing operations	$	(0.01	)	$	(0.01	)	$	(0.02	)	$	(0.03	)
Income (loss) from discontinued operations		—			—			—			—
NET LOSS PER COMMON SHARE - Basic and diluted	$	(0.01	)	$	(0.01	)	$	(0.02	)	$	(0.03	)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - Basic and diluted		48,070,962			47,311,964			47,927,501			46,763,866

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

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DAYBREAK OIL AND GAS, INC.
Statements of Cash Flows - Unaudited
	Six Months Ended August 31,
	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(755,807	)	$	(1,339,177	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock compensation		42,898			36,604
Gain on write-off of asset retirement obligation		(8,324	)		—
Gain on sale of oil and gas properties		(10,226	)		—
Depreciation, depletion, and impairment expense		237,057			353,030
Amortization of debt discount		7,553			—
Bad debt expense (recovery)		(5,047	)		76,689
Non cash interest income		(1,680	)		(8,148	)
Non cash general and administrative expense		—			21,676
Warrant expense for services		14,600			—
Changes in assets and liabilities:
Accounts receivable - oil and gas sales		79,378			(174,296	)
Accounts receivable - joint interest participants		(224,541	)		(648,888	)
Receivables associated with assets held for sale		303,097			—
Prepaid expenses and other current assets		2,485			(1,667	)
Other assets		299,421			—
Accounts payable and other accrued liabilities		162,622			(623,338	)
Accounts payable - related parties		12,546			—
Accrued interest		1,060			—
Net cash provided by (used in) operating activities		157,092			(2,307,515	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas properties		(417,664	)		(358,266	)
Proceeds from sale of oil and gas properties		—			512,500
Net cash provided by (used in) investing activities		(417,664	)		154,234
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable		30,000			—
Net cash provided by financing activities		30,000			—
NET DECREASE IN CASH AND CASH EQUIVALENTS		(230,572	)		(2,153,281	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		247,951			2,282,810
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	17,379		$	129,529
CASH PAID FOR:
Interest	$	38,048		$	764
Income taxes		—			—
SUPPLEMENTAL CASH FLOW INFORMATION:
Acquisition of additional working interest through assumption of liability	$	—		$	1,500,201
Unpaid additions to oil and gas properties	$	93,086		$	—
Addition to asset retirement obligation	$	7,584		$	14,629
Discount on notes payable	$	5,284		$	—
Conversion of preferred stock to common stock	$	96		$	—

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

5

DAYBREAK OIL AND GAS, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS

NOTE 1 — ORGANIZATION AND BASIS OF PRESENTATION

Organization

Originally incorporated on March 11, 1955, as Daybreak Uranium, Inc. under the laws of the State of Washington, the Company was organized to explore for, acquire, and develop mineral properties in the Western United States. In March 2005, management of the Company decided to enter the oil and gas exploration industry, and on October 25, 2005, the shareholders approved a name change from Daybreak Mines, Inc. to Daybreak Oil and Gas, Inc., (the “Company” or “Daybreak”) to better reflect the business of the Company.

All of the Company’s oil and gas production is sold under contracts which are market-sensitive. Accordingly, the Company’s financial condition, results of operations, and capital resources are highly dependent upon prevailing market prices of, and demand for, oil and natural gas. These commodity prices are subject to wide fluctuations and market uncertainties due to a variety of factors that are beyond the control of the Company. These factors include the level of global demand for petroleum products, foreign supply of oil and gas, the establishment of and compliance with production quotas by oil-exporting countries, the relative strength of the U.S. dollar, weather conditions, the price and availability of alternative fuels, and overall economic conditions, both foreign and domestic.

Basis of Presentation

The accompanying unaudited interim financial statements and notes for the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q for quarterly reports under Section 13 or 15 (d) of the Securities Exchange Act of 1934 (the “Exchange Act”). Accordingly, they do not include all of the information and footnote disclosures normally required by accounting principles generally accepted in the United States of America for complete financial statements.

In the opinion of management, all adjustments considered necessary for a fair presentation have been included and such adjustments are of a normal recurring nature. Operating results for the six months ended August 31, 2010 are not necessarily indicative of the results that may be expected for the fiscal year ending February 28, 2011.

These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual report on Form 10-K for the fiscal year ended February 28, 2010.

Use of Estimates

In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions. These estimates and assumptions may affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the reporting period. Actual results could differ materially from those estimates. The accounting policies most affected by management’s estimates and assumptions are as follows:

• The reliance on estimates of proved reserves to compute the provision for depreciation, depletion and amortization and to determine the amount of any impairment of proved properties;

• The valuation of unproved acreage and proved oil and gas properties to determine the amount of any impairment of oil and gas properties;

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• Judgment regarding the productive status of in-progress exploratory wells to determine the amount of any provision for abandonment; and

• Estimates regarding abandonment obligations.

Reclassifications

Certain reclassifications have been made to conform the prior period’s financial information to the current period’s presentation. These reclassifications had no effect on previously reported net loss or accumulated deficit.

NOTE 2 — GOING CONCERN

Financial Condition

The Company’s financial statements for the six months ended August 31, 2010 have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The Company has incurred net losses since inception and as of August 31, 2010 has an accumulated deficit of $21,946,969, which raises substantial doubt about the Company’s ability to continue as a going concern.

Management Plans to Continue as a Going Concern

The Company continues to implement plans to enhance Daybreak’s ability to continue as a going concern. The Company currently has a revenue interest in nine producing wells in our East Slopes Project located in Kern County, California (the “East Slopes Project”). The revenue from these wells has created a steady and reliable source of revenue for the Company.

On September 17, 2010, the Company exercised a preferential right to acquire an additional 16.67% working interest from another working interest owner in the East Slopes Project. This increase in the Company’s working interest is anticipated to add an additional $20,000 per month to the Company’s revenue based on historical production rates and prices from existing wells. With this purchase, Daybreak’s average net revenue interest in Kern County, California has increased from 21.83% to 29.33%. The Company anticipates revenues will continue to increase as it participates in the drilling of more wells in California. The Company plans to continue its development drilling program at a rate that is compatible with its cash flow and funding opportunities.

The Company’s sources of funds in the past have included the debt or equity markets and, while the Company does have positive cash flow from its oil and gas properties, it has not yet established a positive cash flow on a company-wide basis. The Company anticipates it may be necessary to rely on additional funding from the private or public capital markets in the future.

The Company’s financial statements as of August 31, 2010 do not include any adjustments that might result from the inability to implement or execute the plans to improve its ability to continue as a going concern.

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NOTE 3 — RECENT ACCOUNTING PRONOUNCEMENTS

In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2010-06, Improving Disclosures about Fair Value Measurements (ASU 2010-06). This update provides amendments to Subtopic 820-10 and requires new disclosures for 1) significant transfers in and out of Level 1 and Level 2 and the reasons for such transfers and 2) activity in Level 3 fair value measurements to show separate information about purchases, sales, issuances and settlements. In addition, this update amends Subtopic 820-10 to clarify existing disclosures around the disaggregation level of fair value measurements and disclosures for the valuation techniques and inputs utilized (for Level 2 and Level 3 fair value measurements). The provisions in ASU 2010-06 are applicable to interim and annual reporting periods beginning subsequent to December 15, 2009, with the exception of Level 3 disclosures of purchases, sales, issuances and settlements, which will be required in reporting periods beginning after December 15, 2010. The adoption of ASU 2010-06 did not impact the Company’s operating results, financial position or cash flows and related disclosures.

In February 2010, FASB issued ASU No. 2010-09, Amendments to Certain Recognition and Disclosure Requirements (ASU 2010-09). This update amends Subtopic 855-10 and gives a definition to the Securities and Exchange Commission (the “SEC”) filer, and requires SEC filers to assess for subsequent events through the issuance date of the financial statements. This amendment states that an SEC filer is not required to disclose the date through which subsequent events have been evaluated for a reporting period. ASU 2010-09 becomes effective upon issuance of the final update. The Company adopted the provisions of ASU 2010-09 for the period ended August 31, 2010.

NOTE 4 — CONCENTRATION OF CREDIT RISK

Substantially all of the Company’s accounts receivable result from crude oil sales or joint interest billings to third parties in the oil and gas industry. This concentration of customers and joint interest owners may impact the Company’s overall credit risk as these entities could be affected by similar changes in economic conditions as well as other related factors. Accounts receivable are generally not collateralized.

At the Company’s East Slopes Project, there are only one or two buyers available for the purchase of oil production. At August 31, 2010, one customer represented 100% of crude oil sales receivable in the aggregate.

In accordance with the accounting guidance which requires disclosures about segments of an enterprise and related information, a table disclosing the total amount of revenues from any single customer that exceeds 10% of total revenues follows:

	Three Months Ended August 31, 2010				Three Months Ended August 31, 2009
Customer	Revenue		Percentage		Revenue		Percentage
Plains Marketing	$	202,989	66.1	%	$	129,665	84.5	%
J.P. Oil**	$	104,017	33.9	%	$	-0-	0	%

	For the Six Months Ended August 31, 2010				For the Six Months Ended August 31, 2009
Customer	Revenue		Percentage		Revenue		Percentage
Plains Marketing	$	396,040	79.2	%	$	166,318	79.0	%
J.P. Oil**	$	104,017	20.8	%	$	-0-	0	%

**During the three months ended August 31, 2010, the Company received $104,017 in revenue related to the Krotz Springs Field in Louisiana as a one-time adjustment to revenue earned in calendar years 2007, 2008 and 2009 due to well production revenue misallocation.

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NOTE 5 — OIL AND GAS PROPERTIES

On March 19, 2010, the Company closed on the sale of its interest in the East Gilbertown Field in Choctaw County, Alabama to a third party with an effective date of March 1, 2010. There was no effect on net oil and gas property balances from the sale of this property since the Company had previously fully impaired its capitalized cost of approximately $257,000 in this property due to low oil prices in prior periods. In connection with the sale, the Company recognized a gain from sale of oil and gas properties for the six months ended August 31, 2010 of $10,226 which is presented under “Discontinued Operations” in the Statement of Operations and discussed in Note 7 below.

NOTE 6 — NOTES PAYABLE

On March 16, 2010, the Company closed its private placement of 12% Subordinated Notes (“Notes”) resulting in additional gross proceeds of $30,000 for the six months ended August 31, 2010. Gross proceeds from the private placement were $565,000 before the fiscal year end of February 28, 2010, for total gross proceeds of $595,000 from the issuance of the Notes. A total of 1,190,000 warrants were issued in conjunction with the private placement. The Notes are subject to an annual interest rate of 12%, payable semi-annually, and mature on January 29, 2015. On the maturity date, the Company may elect a mandatory conversion of the unpaid principal and interest into the Company’s common stock at a conversion rate equal to 75% of the average closing price of the Company’s common stock over the 20 consecutive trading days preceding December 31, 2014. As of August 31, 2010, Notes issued to a related party amounted to $250,000.

Two common stock purchase warrants were issued for every dollar raised through the private placement, which included 60,000 warrants being issued during the six months ended August 31, 2010. All warrants issued in conjunction with the Notes private placement have an exercise price of $0.14 and expire on January 29, 2015. The fair value of the warrants, as determined by the Black-Scholes option pricing model, was $5,284 using the following assumptions: a risk free interest rate of 2.37%; volatility of 144.1%; and dividend yield of 0.0%. The fair value of the warrants was recognized as a discount to debt and is being amortized over the term of the Notes using the effective interest method.

The Company analyzed the Notes and warrants for derivative accounting consideration and determined that derivative accounting does not apply to these instruments.

NOTE 7 — DISCONTINUED OPERATIONS

On March 19, 2010, the Company finalized the sale of its interest in the East Gilbertown Field in Choctaw County, Alabama. The East Gilbertown sale resulted in a gain from the sale of oil and gas properties for the six months ended August 31, 2010 of $10,226, primarily as a result of the elimination of the associated asset retirement obligation.

The following tables present the revenues and expenses related to the East Gilbertown Field for each of the three month and six month periods ended August 31, 2010 and August 31, 2009 which are presented on the Statement of Operations under the caption “Discontinued Operations”. The cost and expense information for both the three months and six months ended August 31, 2010 and 2009 reflect certain credits that result in this information being additions to revenue rather than deductions from revenue. Prior period income

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statement amounts applicable to the above projects have been reclassified and included under Income (loss) from discontinued operations.

	Three MonthsEndedAugust 31, 2010		Three MonthsEndedAugust 31, 2009
Oil sales revenue – East Gilbertown Field	$	—	$	23,239
Cost and expenses		40		27,010
Income from discontinued operations	$	40	$	50,249

	Six MonthsEndedAugust 31, 2010		Six MonthsEndedAugust 31, 2009
Oil sales revenue – East Gilbertown Field	$	—	$	43,205
Cost and expenses		731		16,887
Income from discontinued operations	$	731	$	60,092

NOTE 8 — SERIES A CONVERTIBLE PREFERRED STOCK

The Company is authorized to issue up to 10,000,000 shares of $0.001 par value preferred stock. The Company has designated 2,400,000 shares of the 10,000,000 preferred shares as “Series A Convertible Preferred Stock” (“Series A Preferred”), with a $0.001 par value. The Series A Preferred can be converted by the shareholder at any time into three shares of the Company’s common stock. On June 9, 2010, 32,000 shares of Series A Preferred stock were converted to 96,000 shares of common stock. Previously in February 2010, shareholders converted 45,000 shares of Series A Preferred stock into 135,000 shares of common stock. As of August 31, 2010, 27 shareholders have converted a total of 423,200 Series A Preferred shares into 1,269,600 shares of common stock. At August 31, 2010, there were 976,565 Series A Preferred shares outstanding that had not been converted into the Company’s common stock.

Holders of Series A Preferred earn a 6% annual cumulative dividend based on the original purchase price of the shares. Accumulated dividends do not bear interest; and as of August 31, 2010, the accumulated and unpaid dividends amounted to $879,146. Dividends may be paid in cash or common stock at the discretion of the Company and are payable upon declaration by the Board of Directors. Dividends are earned until the Series A Preferred is converted to common stock. No payment of dividends has been declared as of August 31, 2010.

The table below details the cumulative dividends on the Series A Preferred for each fiscal year since issuance and the interim six months of the current fiscal year:

Fiscal Period	Shareholders at Period End		Accumulated Dividends
Year Ended February 28, 2007		100	$	153,966
Year Ended February 29, 2008		90		237,752
Year Ended February 28, 2009		78		208,878
Year Ended February 28, 2010		74		188,824
Six Months Ended August 31, 2010		73		89,726
Total Accumulated Dividends			$	879,146

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NOTE 9 — WARRANTS

Warrants outstanding and exercisable as of August 31, 2010 are shown in the table below:

Description	Warrants		Exercise Price		Remaining Life (Years)		Exercisable Warrants Remaining
Spring 2006 Common Stock Private Placement (“PP”)		4,013,602	$	2.00		0.75		4,013,602
Placement Agent Warrants Spring 2006 PP		802,721	$	0.75		2.75		802,721
Placement Agent Warrants Spring 2006 PP		401,361	$	2.00		2.75		401,361
July 2006 Preferred Stock Private Placement		2,799,530	$	2.00		1.00		2,799,530
Placement Agent Warrants July 2006 PP		419,930	$	1.00		3.00		419,930
Convertible Debenture Term Extension		150,001	$	2.00		1.25		150,001
Placement Agent Warrants January 2008 PP		39,550	$	0.25		0.50		39,550
12% Subordinated Note Warrants		1,190,000	$	0.14		4.25		1,190,000
Warrants Issued in 2010 for Services		150,000	$	0.14		4.75		150,000
		9,966,695						9,966,695

During the six months ended August 31, 2010, a total of 60,000 warrants were issued, while before fiscal year end of February 28, 2010, 1,130,000 warrants were issued, leading to the issuance of a total of 1,190,000 warrants as part of the 12% Subordinated Notes private placement as discussed in Note 6 above.

Additionally during the six months ended August 31, 2010, 150,000 warrants were issued to a consultant as payment for additional services rendered. These warrants have an exercise price of $0.14 and expire on April 16, 2015. The fair value of the warrants, as determined by the Black-Scholes option pricing model, was $14,600 using the following assumptions: a risk free interest rate of 2.49%; volatility of 143.5%; and dividend yield of 0.0%.

No warrants were exercised or expired during the period. As of August 31, 2010 and February 28, 2010, there were 9,966,695 and 9,756,695 warrants issued and outstanding, respectively.

The outstanding warrants as of August 31, 2010, have a weighted average exercise price of $1.60; a weighted average remaining life of 1.64 years; and an intrinsic value of $-0-.

NOTE 10 — RESTRICTED STOCK and RESTRICTED STOCK UNIT PLAN

On April 6, 2009, the Board of Directors (the “Board”) of the Company approved the 2009 Restricted Stock and Restricted Stock Unit Plan (the “2009 Plan”) allowing the executive officers, directors, consultants and employees of the Company and its affiliates to be eligible to receive restricted stock and restricted stock unit awards. Subject to adjustment, the total number of shares of the Company’s common stock that will be available for the grant of Awards under the 2009 Plan may not exceed 4,000,000 shares; provided, that, for purposes of this limitation, any stock subject to an Award that is forfeited in accordance with the provisions of the 2009 Plan will again become available for issuance under the 2009 Plan.

On July 22, 2010, a total of 25,000 restricted shares were granted to the five non-employee directors, as approved by the Compensation Committee of the Board. These restricted shares were granted under the Company’s director compensation policy and pursuant to the 2009 Plan and fully vest equally over a period of three years or upon the retirement of the director from the Board.

On July 22, 2010, a total of 425,000 restricted shares of the Company’s common stock were granted to five employees of the Company, as approved by the Compensation Committee of the Board. These restricted shares were granted pursuant to the 2009 Plan and fully vest equally over a period of four years.

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At August 31, 2010, a total of 1,000,000 shares remained available for issuance pursuant to the 2009 Plan. A summary of the 2009 Plan issuances is shown below:

Grant Date	Shares Awarded		Vesting Period		Shares Vested		Shares Outstanding (Unvested)
4/7/2009		1,900,000		3 Years		633,331		1,266,669
7/16/2009		25,000		3 Years		8,330		16,670
7/16/2009		625,000		4 Years		156,250		468,750
7/22/2010		25,000		3 Years		0		25,000
7/22/2010		425,000		4 Years		0		425,000
		3,000,000				797,911		2,202,089

For the six months ended August 31, 2010 and 2009, the Company recognized compensation expense related to the above restricted stock grants of $42,898, and $36,604, respectively. Unamortized compensation expense amounted to $178,456 as of August 31, 2010.

NOTE 11 — INCOME TAXES

Reconciliation between actual tax expense (benefit) and income taxes computed by applying the U.S. federal income tax rate and state income tax rates to income from continuing operations before income taxes is as follows:

	Six Months Ended August 31, 2010			Six Months Ended August 31, 2009
Computed at U.S. and state statutory rates (40%)	$	(302,323	)	$	(558,562	)
Permanent differences		20,323			9,636
Changes in valuation allowance		282,000			548,926
Total	$	—		$	—

Tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred liabilities are presented below:

	August 31, 2010			February 28, 2010
Deferred tax assets:
Net operating loss carryforwards	$	5,619,829		$	5,114,269
Oil and gas properties		(100,498	)		123,062
Less valuation allowance		(5,519,331	)		(5,237,331	)
Total	$	—		$	—

At August 31, 2010, the Company had estimated net operating loss carryforwards for federal and state income tax purposes of approximately $14,049,572 which will begin to expire, if unused, beginning in 2024. The valuation allowance increased approximately $282,000 for the six months ended August 31, 2010 and increased by $891,047 for the year ended February 28, 2010. Section 382 of the Internal Revenue Code places annual limitations on the Company’s net operating loss (“NOL”) carryforward.

The above estimates are based on management’s decisions concerning elections which could change the relationship between net income and taxable income. Management decisions are made annually and could cause the estimates to vary significantly.

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NOTE 12 — COMMITMENTS AND CONTINGENCIES

Various lawsuits, claims and other contingencies arise in the ordinary course of the Company’s business activities. At the current time, the Company is not involved in any lawsuits or claims. While the ultimate outcome of any future contingency is not determinable at this time, management believes that any liability or loss resulting therefrom will not materially affect the financial position, results of operations or cash flows of the Company.

The Company, as an owner or lessee and operator of oil and gas properties, is subject to various federal, state and local laws and regulations relating to discharge of materials into, and protection of, the environment. These laws and regulations may, among other things, impose liability on the lessee under an oil and gas lease for the cost of pollution clean-up resulting from operations and subject the lessee to liability for pollution damages. In some instances, the Company may be directed to suspend or cease operations in the affected area. The Company maintains insurance coverage that is customary in the industry, although the Company is not fully insured against all environmental risks.

The Company is not aware of any environmental claims existing as of August 31, 2010. There can be no assurance, however, that current regulatory requirements will not change, or past non-compliance with environmental issues will not be discovered on the Company’s oil and gas properties.

NOTE 13 — SUBSEQUENT EVENTS

On September 17, 2010, the Company exercised a preferential right to acquire an additional 16.67% working interest in its East Slopes Project from another working interest owner for $517,000. The Company financed the additional working interest by issuing, to a third party, a one-year convertible secured promissory note for the principal amount of $750,000 (the “Loan”), subject to an annual interest rate of 10% per annum, which was prepaid at closing. The third party may convert up to 50% of the unpaid principal balance into unregistered Company common stock at a conversion price of $0.16 per share at any time prior to the Loan being paid in full.

The Company agreed to pay the third party a loan origination fee equal to 250,000 unregistered shares of the Company’s common stock within 60 days after September 17, 2010 or such later date as mutually agreed to between the Company and the third party. These shares were issued on October 8, 2010.

The loan is secured by a Mortgage, Deed of Trust, Assignment of Production, Security Agreement and Financing Statement on the Sunday and Bear leases in the Company’s East Slope Project. Furthermore, as a condition precedent to the Loan, the Company entered into a Technical and Consulting Services Agreement with the third party, whereby the Company will provide operating, engineering and technical consulting to the third party for a one-year period for the purpose of evaluating 22 wells in Hutchinson County, Texas for the third party. After six months, Daybreak, at its sole discretion, will have the right to obtain a 10% working interest in the 22 wells in Hutchinson County, Texas at no additional cost. As additional consideration for the loan the Company executed an Assignment of Net Profits Interest in favor of the third party, whereby the Company assigned two percent of the net profits realized by the Company on its leases in the East Slopes Project.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Statement Regarding Forward-Looking Statements

Certain statements contained in our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) are intended to be covered by the safe harbor provided for under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act.

Some statements contained in this Form 10-Q report relate to results or developments that we anticipate will or may occur in the future and are not statements of historical fact. All statements other than statements of historical facts contained in this MD&A report are inherently uncertain and are forward-looking statements. Words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will” and similar expressions identify forward-looking statements. Examples of forward-looking statements include statements about the following:

• Our future operating results,

• Our future capital expenditures,

• Our expansion and growth of operations, and

• Our future investments in and acquisitions of oil and natural gas properties.

We have based these forward-looking statements on assumptions and analyses made in light of our experience and our perception of historical trends, current conditions, and expected future developments. However, you should be aware that these forward-looking statements are only our predictions and we cannot guarantee any such outcomes. Future events and actual results may differ materially from the results set forth in or implied in the forward-looking statements. Important factors that could cause actual results to differ materially from our expectations include, but are not limited to, the following risks and uncertainties:

• General economic and business conditions,

• Exposure to market risks in our financial instruments,

• Fluctuations in worldwide prices and demand for oil and natural gas,

• Our ability to find, acquire and develop oil and gas properties,

• Fluctuations in the levels of our oil and natural gas exploration and development activities in a concentrated area,

• Risks associated with oil and natural gas exploration and development activities,

• Competition for raw materials and customers in the oil and natural gas industry,

• Technological changes and developments in the oil and natural gas industry,

• Legislative and regulatory uncertainties, including proposed changes to federal tax laws, drilling industry legal change, climate change legislation, and potential environmental liabilities,

• Our ability to continue as a going concern,

• Our ability to secure additional capital to fund operations, and

• Other factors discussed elsewhere in this Form 10-Q and in our public filings, press releases and discussions with Company management.

Should one or more of the risks or uncertainties described above or elsewhere in this Form 10-Q occur, or should underlying assumptions prove incorrect, our actual results and plans could differ materially from those expressed in any forward-looking statements. We specifically undertake no obligation to publicly update or revise any information contained in a forward-looking statement or any forward-looking statement in its entirety, whether as a result of new information, future events, or otherwise, except as required by law. All forward-looking statements attributable to us are expressly qualified in their entirety by this cautionary statement.

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Introduction and Overview

The following MD&A is management’s assessment of the historical financial and operating results of the Company for the three and six month periods ended August 31, 2010 and August 31, 2009 and of our financial condition as of August 31, 2010 and is intended to provide information relevant to an understanding of our financial condition, changes in our financial condition and results of operations and cash flows; and, should be read in conjunction with our unaudited financial statements and notes included elsewhere in this Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended February 28, 2010. Unless otherwise noted, all of this discussion refers to continuing operations in Kern County, California.

We are an independent oil and natural gas exploration, development and production company. Our basic business model is to increase shareholder value by finding and developing oil and gas reserves through exploration and development activities; and, selling the production from those reserves at a profit. To be successful, we must, over time, be able to find oil and gas reserves and then sell the resulting production at a price that is sufficient to cover our finding costs, operating expenses, administrative costs and interest expense, plus offer us a return on our capital investment.

Plan of Operation

Our longer-term success depends on, among many other factors, the acquisition and drilling of commercial grade oil and gas properties and on the prevailing sales prices for oil and natural gas along with associated operating expenses. The volatile nature of the energy markets makes it difficult to estimate future prices of oil and natural gas; however, any prolonged period of depressed prices would have a material adverse effect on our results of operations and financial condition. Our operations are focused on identifying and evaluating prospective oil and gas properties and funding projects that we believe have the potential to produce oil or gas in commercial quantities. We are in the process of developing a multi-well oilfield project in Kern County, California and have participated in the drilling of nine oil wells that have achieved commercial production. This project is comprised of three project areas: East Slopes, East Slopes North and the Expanded AMI project.

Kern County, California (East Slopes Project and East Slopes North Project)

On September 17, 2010, we finalized the acquisition of an additional 16.67% working interest from another working interest owner in the East Slopes Project. This increase in our working interest is anticipated to add an additional $20,000 per month to our revenue based on historical production rates and prices from existing wells. With this purchase our average net revenue interest in Kern County, California has increased from 21.83% to 29.33%.

East Slopes Project. The installation of permanent production facilities and electrical service to service the wells in the Sunday, Bear and Black property locations has been completed. Our 3-D seismic data evaluation is continuing and the reprocessing of the data to enhance the quality of prospects is expected to yield more than the current 8 to 10 exploration prospects already identified on this acreage. Refer to the discussion below for additional information on our producing properties in the East Slopes Project area.

The Company is now well positioned to expand its operations in the East Slopes Project having found three reservoirs at our Bear, Sunday, and Black locations. The Sunday location is now fully developed with three vertical wells and one horizontal well. At least one more development well is planned for our Bear location. The Bear reservoir is believed to be much larger than the Sunday reservoir. The Black reservoir is the smallest of the three reservoirs, and we will most likely drill only one developmental well. There are several other similar prospects on trend with the Bear and Black reservoirs exhibiting the same seismic characteristics. Some of these prospects, if successful, would utilize the Company’s existing production facilities. In addition to the current field development, there are several other exploratory prospects that have been identified from the seismic data, which we plan to drill in the future.

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Sunday Property

In November 2008, we made our initial oil discovery drilling the Sunday #1 well. The well was put on production in January 2009. Production is from the Vedder sand at approximately 2,000 feet. During 2009, we drilled three development wells including one horizontal well. The Sunday reservoir is now fully developed and we have no other plans to drill any more wells in this reservoir. With the acquisition of the additional 16.67% working interest in the East Slopes Project in September 2010, we have a 41.67% working interest with a 29.0% net revenue interest in the Sunday #1 well. We continue to have a 37.5% working interest with a 27% net revenue interest in each of the Sunday #2 and #3 wells. In the Sunday #4 well, we own a 37.5% working interest with a 30.1% net revenue interest.

Bear Property

In February 2009, we made our second oil discovery drilling the Bear #1 well which is approximately one mile northwest of our Sunday discovery. The well was put on production in May 2009. Production is from the Vedder sand at approximately 2,200 feet. In December 2009, we began a development program by drilling and completing the Bear #2 well. In April 2010, we successfully drilled and completed the Bear #3 and the Bear #4 wells. We plan to drill at least one more development well before the end of our fiscal year on February 28, 2011. With the acquisition of the additional 16.67% working interest in the East Slopes Project in September 2010, we have a 41.67% working interest with a 29.0% net revenue interest in each of the Bear wells and this property.

Black Property

The Black property was acquired through a farm-in arrangement with a local operator. The Black location is just south of the Bear location on the same fault system. During January 2010, we drilled the Black #1 well. The well was completed and put on production in January 2010. Production is from the Vedder sand at 2,150 feet. We have a 37.5% working interest with a 29.8% net revenue interest at this location.

Sunday Central Processing and Storage Facility

The oil produced from our acreage is considered heavy oil. The oil ranges from 13° to 15° API gravity. All of our oil from the Sunday, Bear and Black locations is processed, stored and sold from this facility. The oil must be heated to separate and remove the water to prepare it to be sold. We constructed these facilities during the Summer and Fall of 2009 and at the same time established electrical service for our field by constructing three miles of power lines. As a result, our average operating costs have been reduced from over $40 per barrel to under $10 per barrel of oil. By having this central facility and permanent electrical power, it ensures that our operating expenses are kept to a minimum.

Dyer Creek Prospect

This is a Vedder sand prospect located to the north of the Bear reservoir on the same trapping fault. Several wells have been drilled in this prospect with oil pay or shows in the Vedder sand. Several of the wells drilled in the 1960’s were abandoned due to sand control during testing. We plan to drill this prospect in our fiscal 2011 third quarter. We plan to twin a well that had 20 feet of oil pay in the Vedder sand that was never properly tested. There are abandoned production facilities on the lease that we expect may be utilized, but some repairs will need to be made and electrical lines will have to be extended from the Bear Property.

Ball Prospect

This is a Vedder sand prospect separated by a fault from the Dyer Creek Prospect. Our location will be structurally higher than an abandoned well that had oil pay in the Vedder sand. 3-D seismic indicates approximately 40 acres of closure, similar in size to the Bear Property. We plan to drill an exploratory well

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on this prospect during our fiscal 2011 third quarter. If successful, production from the Ball wells should be able to utilize the Dyer Creek production facility.

Bull Run Prospect

This is an Etchegoin and Santa Margarita sand prospect with drilling targets located between 800 and 1,200 feet deep. We plan to drill an exploratory well on this prospect before our fiscal year ending February 28, 2011. If successful, the Bull Run wells will require additional production facilities to handle the oil production.

The table below shows our net production volume, net revenue and net lease operating expenses (LOE) by property location for the three months and six months ended August 31, 2010 and August 31, 2009. Due to certain oil processing credits that we received during the three and six months ended August 31, 2010, our overall production costs for the Sunday #1 well and all the Bear wells during that time period were significantly less than the overall production costs for the other Sunday wells and the Black well. These oil processing credits ended September 1, 2010 with our acquisition of a portion of another working interest owner’s interest in this project.

	Three Months Ended				Six Months Ended
Location	August 31, 2010		August 31, 2009		August 31, 2010		August 31, 2009
Sunday
Production (Bbls)		1,962		1,658		3,516		2,424
Revenue	$	133,840	$	98,932	$	243,705	$	134,246
LOE Costs	$	11,938	$	51,920	$	29,726	$	80,195
Bear
Production (Bbls)		763		505		1,647		530
Revenue	$	52,030		30,733	$	115,025	$	32,072
LOE Costs	$	209	$	37,255	$	9	$	69,324
Black
Production (Bbls)		251		—		533		—
Revenue	$	17,119	$	—	$	37,310	$	—
LOE Costs	$	4,025	$	—	$	7,272	$	—
Infrastructure Costs	$	3,343	$	4,867	$	12,901	$	9,734
Total
Production (Bbls)		2,976		2,162		5,696		2,954
Revenue	$	202,989	$	129,665	$	396,040	$	166,318
LOE Costs	$	19,514	$	89,175	$	49,908	$	149,519
Average Sales Price	$	68.20	$	59.97	$	69.53	$	56.30
Average LOE Cost	$	6.56	$	41.24	$	8.76	$	50.61

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The table below shows our net sales volume, net revenue and net LOE for all California properties for the last five quarterly periods ended August 31, 2010.

	Three Months Ended August 31, 2009		Three Months Ended November 30, 2009		Three Months Ended February 28, 2010		Three Months Ended May 31, 2010		Three Months Ended August 31, 2010
Production (Bbls)		2,162		1,836		2,690		2,720		2,976
Revenue	$	129,665	$	118,816	$	184,224	$	193,051	$	202,989
LOE Costs	$	89,175	$	72,182	$	18,907	$	35,943	$	19,514
Average Sales Price	$	59.97	$	64.71	$	68.48	$	70.97	$	68.20
Average LOE Cost	$	41.25	$	39.31	$	7.03	$	13.21	$	6.56

As evidenced in the table above, quarterly LOE costs have generally declined since the start-up of our production facilities during the quarter ended November 30, 2009, even with the increased production resulting from the additional wells that have been drilled since November 2009.

East Slopes North Project. As part of the sale of a 25% working interest by us in May 2009 to a group of Texas companies, we acquired a 25% working interest in a 14,100 acre Seismic Option Area immediately to the north of our East Slopes Project area. We are considering plans to acquire a seismic survey over that area in 2011.

Tulare County, California (Expanded AMI Project)

Expanded AMI Project. This project in Tulare County, California is also located in the San Joaquin Basin. Since 2006, Daybreak and its partners have leased approximately 9,000 acres. Three prospect areas have been identified to the north of the East Slopes Project and East Slopes North Project areas in Kern County. A 3-D seismic survey over the prospect area is required before any exploration drilling can be done. We currently have a 50% working interest in this project area.

Liquidity and Capital Resources

Our primary financial resource is our base of oil reserves. Our ability to fund the planned capital expenditure program is dependent upon the level of prices we receive from oil sales; the success of our exploration and development program in Kern County, California; and the availability of capital resource financing. Factors such as changes in operating margins and the availability of capital resources could increase or decrease our ultimate level of expenditures during the next fiscal year.

The Company’s financial statements for the six months ended August 31, 2010 have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. We have incurred net losses since inception and as of August 31, 2010 have an accumulated deficit of $21,946,969, which raises substantial doubt about our ability to continue as a going concern.

For the last two years, we have been working to reposition Daybreak to better meet our corporate goals and objectives by selling our interest in projects that were not contributing to the strategic growth of the Company. These projects included the Saxet Deep Field in Texas and the East Gilbertown Field in Alabama. Additionally, we have discontinued participation in the KSU #59 well in the Krotz Springs Field in St. Landry Parish, Louisiana. These actions have allowed us to improve cash flow and move forward with the current exploration and development program in Kern County, California.

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Liquidity is the ability to convert assets into cash or to obtain cash. Short-term liquidity refers to the ability to meet short-term obligations of 12 months or less. Liquidity is a matter of degree and is expressed in terms of a ratio. Two common liquidity factors in financial statement analysis are: working capital and current ratio.

Our working capital (current assets minus current liabilities) and current ratio (current assets divided by current liabilities) are as follows:

	August 31, 2010			February 28, 2010
Current Assets	$	684,597		$	1,070,541
Current Liabilities		1,524,233			1,388,339
Working Capital	$	(839,636	)	$	(317,798	)
Current Ratio		0.45			0.77

While the working capital and current ratio are important in looking at the financial health of a business, numerous other factors may also affect the liquidity and capital resources of a company.

The changes in our capital resources at August 31, 2010 compared with February 28, 2010 are:

	August 31, 2010			February 28, 2010			Increase (Decrease)			Percentage Change
Cash	$	17,379		$	247,951		$	(230,572	)	(93.0	%)
Current Assets	$	684,597		$	1,070,541		$	(385,944	)	(36.1	%)
Total Assets	$	2,476,477		$	3,010,036		$	(533,559	)	(17.7	%)
Current Liabilities	$	1,524,233		$	1,388,339		$	135,894		9.8	%
Total Liabilities	$	2,056,067		$	1,896,601		$	159,466		8.4	%
Working Capital	$	(839,636	)	$	(317,798	)	$	(521,838	)	(164.2	%)

Our working capital decreased $521,838 from ($317,798) as of February 28, 2010 to ($839,636) as of August 31, 2010. This decrease in working capital was principally due to the drilling activity that has occurred during the six months ended August 31, 2010; the continuing reduction in the $1.5 million debt we assumed when we acquired the additional 25% working interest in California in March 2009; and meeting ongoing financial commitments reflected in our general and administrative (“G&A”) costs. As of August 31, 2010, approximately $334,213 was remaining to be paid from the default of our previous partners in California and is included in the accounts payable balance.

During the six months ended August 31, 2010, we reported an operating loss of approximately $721,783 as compared with an operating loss of approximately $1,408,374 from the comparative six month period ended August 31, 2009. This decrease in the operating loss of approximately $686,591 or 48.8% from the comparative period was achieved by increasing revenue and lowering operating costs. Revenue increased due to both an increase in production and an improvement in the sales price of oil. We increased production by 2,742 barrels of oil or 192.8% through sales from nine producing wells in comparison to sales from four producing wells in the six months ended August 31, 2009. The average price of oil increased by $13.23 to $69.53 per barrel or 23.5% for the six months ended August 31, 2010 in comparison to the six months ended August 31, 2009.

Operating expenses declined by 22.5% or $353,954 to $1,221,840 from $1,575,794 for the six months ended August 31, 2010 and 2009, respectively. Production costs and G&A expenses experienced the greatest reductions with a combined reduction of 24.2% or $270,460. This reduction was offset by an increase in exploration and drilling expenses.

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Cash Flows

Our sources of funds in the past have included the debt or equity markets and, while we have positive cash flow from our oil and gas properties, we have not yet established positive cash flow on a company-wide basis. We will need to rely on the debt or equity private or public markets, if available, to fund future operations. Our business model is focused on acquiring exploration or development properties and also acquiring existing producing properties. Our ability to generate future revenues and operating cash flow will depend on successful exploration and/or acquisition of oil and gas producing properties, which may very likely require us to continue to raise equity or debt capital from outside sources, if available.

Our expenditures consist primarily of exploration and drilling costs; production costs; geological and engineering services and acquiring mineral leases. Additionally, our expenses also consist of consulting and professional services, employee compensation, legal, accounting, travel and other G&A expenses which we have incurred in order to address necessary organizational activities.

The net funds provided by and (used in) each of our operating, investing and financing activities are summarized in the following table:

	Six Months Ended August 31, 2010			Six Months Ended August 31, 2009			Increase (Decrease)			Percentage Change
Net cash provided by (used in) operating activities	$	157,092		$	(2,307,515	)	$	2,464,607		106.8	%
Net cash provided by (used in) investing activities	$	(417,664	)	$	154,234		$	(571,898	)	(370.8	%)
Net cash provided by financing activities	$	30,000			—		$	30,000		100.0	%

Cash Flow Provided by (Used in) Operating Activities

Cash flow from operating activities is derived from the production of our oil and gas reserves and changes in the balances of receivables, payables or other non-oil property asset account balances. For the six months ended August 31, 2010, we had a positive cash flow from operating activities of $157,092, in comparison to a negative cash flow of ($2,307,515) for the six months ended August 31, 2009. This change was the result of an increase in oil revenues; a reduction in operating expenses; increased collections of outstanding receivable amounts; and refund of Operator bonds from states we are no longer operating in. Variations in cash flow from operating activities may impact our level of exploration and development expenditures.

Cash Flow Provided by (Used in) Investing Activities

Cash flow from investing activities is derived from changes in oil and gas property account balances. Cash used in investing activities for the six months ended August 31, 2010 was $417,664, an increase of $571,898 from the $154,234 provided by investing activities for the six months ended August 31, 2009. This change was primarily from the increase in our oil and gas property balances resulting from the successful drilling of the Bear #3 and Bear #4 wells in Kern County, California offset by our receipt of proceeds on the sale of the additional 25% working interest in California (acquired from certain defaulting working interest partners) during the six months ended August 31, 2009.

Cash Flow Provided by Financing Activities

Cash flow from financing activities is derived from changes in equity account balances excluding retained earnings or changes in long-term liability account balances. Cash flow provided by financing activities increased by $30,000 for the six months ended August 31, 2010, whereas no financing activity occurred in comparative six months ended August 31, 2009. This change for the six months ended August 31, 2010 is from funds received through the sale of a portion of the 12% Subordinated Notes in a private placement during the six months ended August 31, 2010.

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Daybreak has ongoing capital commitments to develop certain leases pursuant to their underlying terms. Failure to meet such ongoing commitments may result in the loss of the right to participate in future drilling on certain leases or the loss of the lease itself. These ongoing capital commitments may also cause us to seek additional capital from sources outside of the Company. A major source of capital for Daybreak in the past has been through the debt or equity in the private or public markets. The debt or equity markets, if available to us, will continue to be capital sources for Daybreak until sustained positive cash flow has been achieved. The current uncertainty in the credit and capital markets, may restrict our ability to obtain needed capital.

12% Subordinated Notes

On March 16, 2010 we closed a private placement of 12% Subordinated Notes (the “Notes”) resulting in total gross proceeds of $595,000. A total of $250,000 Notes were sold to a related party, the Company’s President and Chief Executive Officer. The terms and conditions of the related party Note were identical to the terms and conditions of the other participants’ Notes. The Notes are subject to an annual interest rate of 12%, payable semi-annually, and mature on January 29, 2015. On the maturity date, the Company may elect a mandatory conversion of the unpaid principal and interest into the Company’s common stock at a conversion rate equal to 75% of the average closing price of the Company’s common stock over the 20 consecutive trading days prior to December 31, 2014. Proceeds from the sale of the notes were used to meet operating expenses and fund a portion of our development drilling program in Kern County, California. This offering of securities was made pursuant to a private placement held under Regulation D promulgated under the Securities Act of 1933, as amended.

Changes in Financial Condition and Results of Operations

Cash Balance

We maintain our cash balance by increasing or decreasing our exploration and drilling expenditures as limited by availability of cash from operations and investments. Our cash balances were $17,379 and $247,951 as of August 31, 2010 and February 28, 2010, respectively. The decrease of approximately $230,572 was due to the costs of drilling of the Bear #3 and Bear #4 wells; payment of outstanding invoices acquired from certain original partners default; and payment of ongoing G&A expenses incurred through normal operations of the Company.

Operating Income (Loss)

During the six months ended August 31, 2010, we reported an operating loss of approximately $721,783 compared with an operating loss of approximately $1,408,374 from the comparative six month period ended August 31, 2009. This decrease of approximately $686,591 or 48.8% decline was a result of increased revenue from oil sales and lower operating expenses than in the comparative six month period ended August 31, 2009.

Net Income (Loss)

Since entering the oil and gas exploration industry, we have incurred recurring losses with negative cash flow and have depended on external financing and the sale of oil and gas assets to sustain our operations. A net loss of $755,807 was reported for the six months ended August 31, 2010, compared to a net loss of $1,339,177 for the six months ended August 31, 2009. The decrease in net loss of $583,370 or 43.6% for the six months ended August 31, 2010 primarily was due to an increase of $332,637 in revenue generated from oil sales; and a reduction of $353,954 in operating expenses in comparison to the six months ended August 31, 2009.

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Three Months Ended August 31, 2010 compared to the Three Months Ended August 31, 2009 - Continuing Operations

The following discussion compares our results for the three month periods ended August 31, 2010 and August 31, 2009. Unless otherwise referenced, these results only cover our continuing operations at the East Slopes Project in Kern County, California.

Revenues. Revenues are derived entirely from the sale of our share of oil production. We realized the first revenues from producing wells in California during February 2009. For the three months ended August 31, 2010, oil and gas revenues from continuing operations were $307,006 in comparison to $130,147 for the three months ended August 31, 2009. This represents an increase of $176,859 or 135.9%.

The revenues for the three months ended August 31, 2010 were from nine producing wells in California and a special one-time revenue adjustment in regards to the Krotz Springs well in Louisiana. The revenue adjustment of $104,017 represented additional gas revenue from May 2007 through December 2009. In California, our net share of production was 2,976 and 2,162 barrels with an average price of $68.20 per barrel and $59.97 for the three months ended August 31, 2010 and August 31, 2009, respectively. A table of our revenues follows:

	Three Months Ended August 31, 2010		Three Months Ended August 31, 2009
California - East Slopes Project	$	202,989	$	129,665
Louisiana - Krotz Springs		104,017		482
Total Revenues	$	307,006	$	130,147

Costs and Expenses. Operating expenses for the three months ended August 31, 2010 decreased by $8,890 or 1.3% compared to the three months ended August 31, 2009. A significant decrease of $121,970 or 90.4% occurred in production costs, but this was offset by an increase of $77,061 or 172.4% in depreciation, depletion and amortization (“DD&A”), which is directly related to the nine producing wells and production facilities in Kern County, California.

A table of our costs and expenses for the three months ended August 31, 2010 and August 31, 2009 follows:

	August 31, 2010		August 31, 2009
Production Costs	$	12,988	$	134,958
Exploration and Drilling		71,463		66,460
DD&A		121,770		44,709
G&A		444,141		413,125
Total Operating Expenses	$	650,362	$	659,252

Production costs include costs directly associated with the generation of oil and gas revenues, road maintenance and well workover costs. For the three months ended August 31, 2010, these costs decreased by $121,970 or 90.4% compared to the three months ended August 31, 2009. The decrease in production costs is directly related to the completion of our permanent production facilities rather than using rental equipment for production facilities. This decrease occurred even though there were nine wells producing in the three months ended August 31, 2010 in comparison to having four producing wells in the three months ended August 31, 2009. Another factor in reducing our production costs are the recurring credits that we receive on oil processing for certain wells due to one of our working interest partners not participating in the construction of the production facilities. These credits ended effective September 1, 2010 because of our acquisition of a portion of another working interest owner’s interest in this project. Production costs represented 2.0% of total operating expenses.

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Exploration and drilling costs include geological and geophysical (“G&G”) costs as well as leasehold maintenance costs and dry hole expenses. For the three months ended August 31, 2010 these costs increased $5,003 or 7.5%, in comparison to the three months ended August 31, 2009. Exploration costs increased because of a working interest partner choosing to not participate in certain leases. Exploration and drilling costs represented 11.0% of total operating expenses.

DD&A of equipment costs, proven reserves and property costs along with impairment are another component of operating expenses. DD&A expenses increased $77,061 or 172.4% for the three months ended August 31, 2010 compared to the three months ended August 31, 2009. This increase relates directly to the increased production from our nine producing wells. DD&A represented 18.7% of total operating expenses.

G&A expenses include management and employee salaries, legal and accounting expenses, director fees, bad debt expense, investor relations fees, travel expenses, insurance, SOX (Sarbanes-Oxley) compliance expenses and other administrative costs. For the three months ended August 31, 2010, G&A costs increased $31,016 or 7.5%, compared to the three months ended August 31, 2009. G&A expenses were higher in legal, marketing and fundraising costs for the three months ended August 31, 2010. We are continuing a program of reducing all of our G&A costs wherever possible. G&A costs represented 68.3% of total operating expenses from continuing operations.

Interest income for the three months ended August 31, 2010 decreased $7,418 or 93.8% compared to the three months ended August 31, 2009, due to lower average cash balances.

Interest expense for the three months ended August 31, 2010 increased $23,344 compared to the three months ended August 31, 2009, due to amortization of the debt discount and interest on the 12% Subordinated Notes that were sold from January 2010 through March 2010.

Due to the nature of our business, as well as the relative immaturity of the Company, we expect that revenues, as well as all categories of expenses, will continue to fluctuate substantially quarter-to-quarter and year-to-year. Production costs will fluctuate according to the number and percentage ownership of producing wells, as well as the amount of revenues being contributed by such wells. Exploration and drilling expenses will be dependent upon the amount of capital that we have to invest in future development projects, as well as the success or failure of such projects. Likewise, the amount of DD&A expense and impairment costs will depend upon the factors cited above. G&A costs will also fluctuate based on our current requirements, but will generally tend to increase as we expand the business operations of the Company.

Three Months Ended August 31, 2010 compared to the Three Months Ended August 31, 2009 - Discontinued Operations

Alabama (East Gilbertown Field)

On March 19, 2010, we closed the sale of our interest in the East Gilbertown Field to a third party with an effective date of March 1, 2010. The cost and expense information for the three months ended August 31, 2010 and 2009 reflect certain credits that result in this information being additions to revenue rather than deductions from revenue. Prior period income statement amounts applicable to the East Gilbertown Field have been reclassified and included under Income (loss) from discontinued operations. Because of the low prices for oil in prior periods, we had previously fully impaired our capitalized cost in this property.

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The following table presents the revenues and expenses related to the East Gilbertown Field for the three month periods ended August 31, 2010 and August 31, 2009.

	Three Months Ended August 31, 2010		Three Months Ended August 31, 2009
Oil sales revenue	$	—	$	23,239
Cost and expenses		40		27,010
Income from discontinued operations	$	40	$	50,249

Six Months Ended August 31, 2010 compared to the Six Months Ended August 31, 2009 - Continuing Operations

The following discussion compares our results for the six month periods ended August 31, 2010 and August 31, 2009. Unless otherwise referenced, these results only cover our continuing operations at the East Slopes Project in Kern County, California.

Revenues. Revenues are derived entirely from the sale of our share of oil production. For the six months ended August 31, 2010, oil and gas revenues from continuing operations were $500,057 in comparison to $167,420 for the six months ended August 31, 2009. This represents an increase of $332,637 or 198.7%.

The revenues for the six months ended August 31, 2010 include a special one-time revenue adjustment in regards to the Krotz Springs well in Louisiana. The revenue adjustment of $104,017 represented additional gas revenue from May 2007 through December 2009. In California, our net share of production was 5,696 and 2,954 barrels with an average price per barrel of $69.53 and $56.30 for the six months ended August 31, 2010 and August 31, 2009, respectively. A table of our revenues follows:

	Six Months Ended August 31, 2010		Six Months Ended August 31, 2009
California - East Slopes Project	$	396,040	$	166,318
Louisiana - Krotz Springs		104,017		1,102
Total Revenues	$	500,057	$	167,420

Costs and Expenses. Total operating expenses for the six months ended August 31, 2010 decreased by $353,954 or 22.5% compared to the six months ended August 31, 2009. Significant decreases occurred in production costs, DD&A and G&A in comparison to the six months ended August 31, 2009. We experienced an increase in exploration and drilling due to higher G&G costs for the six months ended August 31, 2010 in comparison to the six months ended August 31, 2009.

A table of our costs and expenses for the six months ended August 31, 2010 and August 31, 2009 follows:

	August 31, 2010			August 31, 2009
Production Costs	$	48,931		$	198,445
Exploration and Drilling		144,283			103,925
DD&A		237,057			352,585
Gain on Write-Off of Asset Retirement Obligation (“ARO”)		(8,324	)		—
Bad debt expense		—			76,689
G&A		799,893			844,150
Total Operating Expenses	$	1,221,840		$	1,575,794

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Production costs for the six months ended August 31, 2010 decreased by $149,514 or 75.3% compared to the six months ended August 31, 2009 primarily because of the completion of our production facilities. Production costs represented 4.0% of total operating expenses.

Exploration and drilling costs increased by $40,358 or 38.8% for the six months ended August 31, 2010 compared to the six months ended August 31, 2009 primarily because of higher leasing costs. Exploration and drilling costs represented 11.8% of total operating expenses.

DD&A and impairment expenses for the six months ended August 31, 2010 decreased $115,528 or 32.8% compared to the six months ended August 31, 2009. This decrease was due to extra impairment charges being recognized in California for the six months ended August 31, 2009. DD&A costs represented 19.4% of total operating expenses.

G&A costs and bad debt expense decreased $120,946, or 13.1%, for the six months ended August 31, 2010 compared to the six months ended August 31, 2009. Significant reductions were made in the areas of accounting, legal, bad debt expense and travel to achieve these savings. We are continuing to reduce our G&A expenses wherever possible. G&A costs represented 65.5% of total operating expenses.

Interest income for the six months ended August 31, 2010 decreased $8,189 or 83.0% compared to the six months ended August 31, 2009 due to lower average cash balances.

Interest expense increased $45,897 for the six months ended August 31, 2010 compared to the six months ended August 31, 2009 due to amortization of debt discount and interest on the 12% Subordinated Notes.

Six Months Ended August 31, 2010 compared to the Six Months Ended August 31, 2009 - Discontinued Operations

Alabama (East Gilbertown Field)

Prior period income statement amounts applicable to the East Gilbertown Field have been reclassified and included under Income (loss) from discontinued operations. The cost and expense information for the three months ended August 31, 2010 and 2009 reflect certain credits that result in this information being additions to revenue rather than deductions from revenue. Because of the low prices for oil in prior periods, we had previously fully impaired our capitalized cost in this property.

The following table presents the revenues and expenses related to the East Gilbertown Field for the six month periods ended August 31, 2010 and August 31, 2009.

	Six Months Ended August 31, 2010		Six Months Ended August 31, 2009
Oil sales revenue	$	—	$	43,205
Cost and expenses		731		16,887
Income from discontinued operations	$	731	$	60,092

Restricted Stock and Restricted Stock Unit Plan

On April 6, 2009, the Board approved the Restricted Stock and Restricted Stock Unit Plan (the “2009 Plan”) allowing the executive officers, directors, consultants and employees of Daybreak and its affiliates to be eligible to receive restricted stock and restricted stock unit awards. Subject to adjustment, the total number of shares of Daybreak’s common stock that will be available for the grant of awards under the 2009 Plan may not exceed 4,000,000 shares; provided, that, for purposes of this limitation, any stock subject to an award that

25

is forfeited in accordance with the provisions of the 2009 Plan will again become available for issuance under the 2009 Plan.

We believe that awards of this type further align the interests of our employees and our shareholders by providing significant incentives for these employees to achieve and maintain high levels of performance. Restricted stock and restricted stock units also enhance our ability to attract and retain the services of qualified individuals.

On July 22, 2010, a total of 25,000 restricted shares were granted to the five non-employee directors, as approved by the Compensation Committee of the Board. These restricted shares were granted under the Company’s director compensation policy and pursuant to the 2009 Plan and fully vest equally over a period of three years or upon the retirement of the Director from the Board.

On July 22, 2010, a total of 425,000 restricted shares of the Company’s common stock were granted to five employees of the Company, as approved by the Compensation Committee of the Board. These restricted shares were granted pursuant to the 2009 Plan and generally vest equally over a period of four years.

At August 31, 2010, a total of 1,000,000 shares remained available for issuance pursuant to the 2009 Plan. A summary of the 2009 Plan issuances is shown below:

Grant Date	Shares Awarded		Vesting Period		Shares Vested		Shares Outstanding
4/7/2009		1,900,000		3 Years		633,331		1,266,669
7/16/2009		25,000		3 Years		8,330		16,670
7/16/2009		625,000		4 Years		156,250		468,750
7/22/2010		25,000		3 Years		0		25,000
7/22/2010		425,000		4 Years		0		425,000
		3,000,000				797,911		2,202,089

For the three and six months ended August 31, 2010, the Company recognized compensation expense related to the above restricted stock grants of $22,126 and $42,898, respectively. Unamortized compensation expense amounted to $178,456 as of August 31, 2010.

Summary

We are continuing to execute the Company’s primary plan of developing Daybreak’s acreage position in Kern County, California. The production and operating infrastructure is now in place and operating. We will continue to focus our efforts on drilling development wells, as well as drilling several exploration wells over the next twelve months; which, coupled with the completion of our production and operating infrastructure and expectation for higher oil prices, will increase our net cash flow.

We anticipate the need to obtain funds for our future exploration and development activities through various methods, including issuing debt securities, equity securities, bank debt, or combinations of these instruments which could result in dilution to existing security holders and increased debt and leverage. We are pursuing financing alternatives; however no assurance can be given that we will be able to obtain any additional financing on favorable terms, if at all.

Critical Accounting Policies

Refer to Daybreak’s Annual Report on Form 10-K for the fiscal year ended February 28, 2010.

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Off-Balance Sheet Arrangements

As of August 31, 2010, we did not have any off-balance sheet arrangements or relationships with unconsolidated entities or financial partners that have been, or are reasonably likely to have, a material effect on our financial position or results of operations.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a smaller reporting company, we are not required to provide the information otherwise required by this Item.

ITEM 4T. CONTROLS AND PROCEDURES

Management’s Evaluation of Disclosure Controls and Procedures

As of the end of the reporting period, August 31, 2010, an evaluation was conducted by Daybreak management, including our President and Chief Executive and interim principal finance and accounting officer, as to the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(e) of the Exchange Act. Such disclosure controls and procedures are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within required time periods specified by the SEC rules and forms. Additionally, it is vital that such information is accumulated and communicated to our management including our President and Chief Executive Officer, in a manner to allow timely decisions regarding required disclosures. Based on that evaluation, our management concluded that our disclosure controls were effective as of August 31, 2010.

Changes in Internal Control over Financial Reporting

There have not been any changes in the Company’s internal control over financial reporting during the quarter ended August 31, 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Limitations

Our management does not expect that our disclosure controls or internal controls over financial reporting will prevent all errors or all instances of fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.

Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and any design may not succeed in achieving its stated goals under all potential future conditions.

Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitation of a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

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PART II
OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 1A. RISK FACTORS

As of the date of this filing, there have been no material changes from the risk factors previously disclosed in our “Risk Factors” in the Annual Report on Form 10-K for the year ended February 28, 2010.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

In February 2010 and on June 9, 2010, the Company issued 135,000 and 96,000 shares of common stock, respectively, to accredited investors pursuant to the terms of a Daybreak private placement offering held in July 2006, during which the accredited investors received shares of Daybreak Series A Convertible Preferred Stock, the terms of which are disclosed in the Company’s Amended and Restated Articles of Incorporation. The Series A Convertible Preferred Stock can be converted by the shareholder at any time into three shares of the Company’s common stock. Pursuant to the terms of the Series A Preferred Stock, the common stock was issued to the accredited investors upon the conversion of 45,000 and 32,000 shares of Series A Convertible Preferred Stock by the accredited investors, respectively, in reliance on an exemption from registration provided by Section 3(a)(9) of the Securities Act of 1933 relating to securities exchanged by the issuer with its existing security holders exclusively where no commission or other remuneration is paid or given directly or indirectly for soliciting such exchange.

On April 16, 2010, a consultant of the Company received 150,000 warrants as payment for additional services rendered to the Company, in reliance on an exemption from registration provided by Section 4(2) of the Securities Act of 1933. The 150,000 warrants give the consultant the right to purchase up to 150,000 shares of common stock for $0.14 per share at anytime on or before April 16, 2015.

ITEM 6. EXHIBITS

The following Exhibits are filed as part of the report:

Exhibit Number	Description
10.1(1)	Secured Convertible Promissory Note, dated September 17, 2010, by and between Daybreak Oil and Gas, Inc. and Well Works, LLC.
10.2(1)	Mortgage, Deed of Trust, Assignment of Production, Security Agreement and Financing Statement, dated September 17, 2010, by and between Daybreak Oil and Gas, Inc., as mortgagor, and Well Works, LLC, as trustee and beneficiary.
10.3(1)	Technical and Consulting Services Agreement, dated September 17, 2010, by and between Daybreak Oil and Gas, Inc. and Well Works, LLC.
10.4(1)	Assignment of Net Profits Interest, dated September 17, 2010, by and between Daybreak Oil and Gas, Inc., as assignor, and Well Works, LLC, as assignee.
10.5(2)	Asset Purchase and Sale Agreement with Chevron U.S.A. Inc., effective July 1, 2010.

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10.6(2)	Assignment of Oil and Gas Leases and Agreements among Chevron U.S.A. Inc., as assignor, and Daybreak Oil and Gas, Inc. and San Joaquin Investments, Inc., as assignees, effective July 1, 2010.
10.7(2)	Bill of Sale among Chevron U.S.A. Inc., as seller, and Daybreak Oil and Gas, Inc. and San Joaquin Investments, Inc., as buyers, effective July 1, 2010.
31.1(2)	Certification of principal executive and principal financial officer as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1(2)	Certification of principal executive and principal financial officer as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(1)	Previously filed as exhibits to Form 8-K on September 23, 2010, and incorporated by reference herein.
(2)	Filed herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

DAYBREAK OIL AND GAS, INC.
By:	/s/ JAMES F. WESTMORELAND
	James F. Westmoreland, its
	President, Chief Executive Officer and interim
	principal finance and accounting officer
	(Principal Executive Officer, Principal Financial
	Officer and Principal Accounting Officer)
Date: October 15, 2010

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EX-10.5

ASSET SALE AND PURCHASE AGREEMENT

BETWEEN

CHEVRON U.S.A. INC.

AND

EAST SLOPE VEDDER AREA

KERN COUNTY, CALIFORNIA

Effective Date: JULY 1, 2010

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ASSET SALE AND PURCHASE AGREEMENT
TABLE OF CONTENTS

SECTION	PAGE
AGREEMENT	1
DEFINITIONS, INTERPRETATION AND EXHIBITS	1
SALE AND PURCHASE OF ASSETS	10
CONDITIONS PRECEDENT TO CLOSING	13
CLOSING	15
REPRESENTATIONS AND WARRANTIES	18
DISCLAIMERS, WAIVERS AND ACKNOWLEDEGMENTS	19
PREFERENTIAL RIGHTS AND CONSENTS	22
TERMINATION	23
OBLIGATIONS AND BENEFITS AFTER EFFECTIVE DATE	24
INTERIM PERIOD	25
FINAL SETTLEMENT AND POST CLOSING MATTERS	28
OIL AND GAS IMBALANCES	31
CLAIMS, LIABILITIES AND INDEMNITIES	31
TAXATION	35
DECOMMISSIONING	36
ENVIRONMENTAL MATTERS	37
TITLE MATTERS	42
TERMINATION FOR AGGREGATE ALLEGED DEFECTS	45
RIGHT OF FIRST REFUSAL ON PRODUCTION	45
ANNOUNCEMENTS AND CONFIDENTIALITY	47
ADDITIONAL OBLIGATIONS	49
NOTICES	50
GOVERNING LAW AND RESOLUTION OF DISPUTES	50
THIRD PARTY RIGHTS	53
GENERAL PROVISIONS	53
EXHIBIT A – DESCRIPTION OF ASSETS	57
EXHIBIT B – ASSIGNMENT DOCUMENTS	58
EXHIBIT C – ACCOUNTING ADJUSTMENTS	80
EXHIBIT D – ALLOCATION OF PURCHASE PRICE	82

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EXHIBIT E – SEISMIC DATA AND FORM OF DATA LICENSE 83

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ASSET SALE AND PURCHASE AGREEMENT

This ASSET SALE AND PURCHASE AGREEMENT (“Agreement”) dated 1 July 2010 is made between CHEVRON U.S.A. INC., a Pennslyvania corporation, with its principal offices at 9525 Camino Media, Bakersfield, California (“Seller”) and with its principal offices at                        (“Buyer”).

RECITALS

A.	Seller desires to sell, and Buyer desires to purchase, the Assets described below on the terms and conditions set out in this Agreement.
B.	In consideration of the mutual promises set out in this Agreement, and other good and valuable consideration, the receipt and sufficiency of which is acknowledged, Seller and Buyer agree to be bound by the terms of this Agreement.

AGREEMENT

DEFINITIONS, INTERPRETATION AND EXHIBITS
1.1	Definitions. As used in this Agreement, these words or expressions have the following meanings:
	“Accounting Adjustments” means the adjustments to the Purchase Price calculated in accordance with Exhibit C – Accounting Adjustments.
	“Accrual Basis” means the basis of accounting under which costs and benefits are regarded as attributable to the period in which the liability for the costs is incurred, or the right to the benefits is earned, regardless of when invoiced, paid or received.
	“Additional Assets” means all of the following, to the extent that these items are transferable and pertain to the property(s) being sold:
	(A)	All Operations Contracts.
	(B)	Asset Documents.
	(C)	All permits, authorizations, well license or other rights under which the Assets are operated.
	(D)	All Data.
	The term “Additional Assets” does not include agreements, documents or data to the extent any of the following apply:
	(A)	The agreements, documents or data constitute Seller’s proprietary technology or interpretations.

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(B)	The agreements, documents or data are owned with, or licensed from third parties with contractual or legal restrictions on their deliverability or disclosure by Seller to any assignee that is not an affiliate of Seller.
“Adjusted Purchase Price” has the meaning given in Section 2.3.
“Affiliate” means any legal entity which controls, is controlled by, or is under common control with, another legal entity. An entity is deemed to “control” another if it owns directly or indirectly at least fifty percent of either of the following:
(A)	The shares entitled to vote at a general election of directors of such other entity.
(B)	The voting interest in such other entity if such entity does not have either shares or directors.
Affiliates of Seller expressly include Chevron Corporation.
“Agreement” means this Asset Sale and Purchase Agreement, including all attached Exhibits and Schedules.
“Alleged Environmental Defects” has the meaning given in Section 16.2.
“Alleged Title Defects” has the meaning given in Section 17.2.
“Areas” means the geographical area or areas described in Exhibit A – Description of Assets.
“Assets” means Seller’s undivided fifty percent interest in all of the following:
(A)	Rights to Petroleum Substances.
(B)	Facilities.
(C)	Wells.
(D)	Additional Assets.
(E)	Assigned Petroleum Substances.
(F)	Production and Pipeline Imbalances.
The term “Assets” does not include any Excluded Assets or Retained Interests identified in Exhibit A – Description of Assets.
“Asset Documents” means the agreements and documents through which the Rights to Petroleum Substances and all other rights related to the development and exploitation of the Rights to Petroleum Substances are derived, including the Leases, as set forth in Exhibit A – Discription of Assets.

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“Assigned Petroleum Substances” means all Petroleum Substances produced and severed from, or allocable, after severance, to the Leases, Units, Wells or the Areas on and after the Effective Date.
“Assignment Documents” means the documents listed in Exhibit B – Assignment Documents, which provide for the assignment, transfer or other conveyance of the Assets to Buyer.
“Benefits” has the meaning given in Section 9.1.
“Business Day” means a day other than Saturday or Sunday on which banks in Bakersfield California are generally open for the transaction of business in Dollars.
“Buyer Account” means the Buyer’s account with                           , or such other bank account for which Buyer provides to Seller all relevant details in writing at least three Business Days prior to the Closing Date.
“Buyer Parties” means Buyer, Buyer’s Affiliates, and the directors, officers, employees, contractors, and representatives of each of them.
“Casualty Loss” means damage to any of the physical Assets that results in a loss that meets all of the following conditions:
(A)	The loss occurs during the Interim Period.
(B)	The loss is not the result of normal wear and tear; mechanical failure; gradual structural deterioration of materials, equipment or infrastructure; wellbore downhole failure; or normal production decline mechanism, including all of the following:
	(1)	Wellbore failures arising or occurring during drilling or completion, or reworking or re-completion or production operations.
	(2)	Junked or lost holes or wellbores.
	(3)	Sidetracking or deviating a well.
	(4)	Production profile or reservoir changes.
(C)	The value of the loss exceeds US$50,000.00.
“Claim” means any claim, liability, loss, demand, damages, Encumbrance, cause of action of any kind, obligation, costs, judgment, penalty, interest and award (including recoverable legal counsel fees and costs of litigation of the Person asserting the Claim), whether arising by law, contract, tort, voluntary settlement or otherwise.
“Closing” means the consummation of the sale and purchase of the Assets in accordance with Section 0.

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“Closing Date” means the date on which the Closing occurs, which shall occur on 1 August 2010, or such other date as the Parties may agree in writing.
“Conditions Precedent” has the meaning given in Section 0.
“Confidential Information” means all Data and all other agreements, documents, reports and information pertaining to the Assets that Seller has furnished or disclosed to Buyer in connection with this Agreement, or acquired by Buyer in connection with the inspection, testing, inventory or sale of the Assets.
“Data” means all files, records, documentation and data in possession of Seller or its Affiliates that specifically relates to Seller’s ownership or rights in the Assets, including any correspondence, information and reports (including petroleum engineering, reservoir engineering, drilling, geological and all other kinds of technical data and samples, well-logs, and analyses in whatever form) lease files, land files, wells files, division order files, title opinions and abstracts, any environmental assessments, safety records, governmental filings, production reports, production logs, core materials and core sample reports and maps as such data is assembled in the normal course of business. The term “Data” does not include any of the following:
(A)	Any files, records, documentation or data that Seller may not sell, transfer or otherwise dispose of as a result of confidentiality obligations by which it is bound or which cannot be provided to Buyer because such transfer is prohibited by the agreement under which it was acquired.
(B)	Any corporate, financial, and tax records of Seller.
(C)	Engineering forecasts, evaluations and reserve estimates.
(D)	Interpretations of seismic data.
(E)	Any files, records, documentation or data that have been archived or managed pursuant to Seller’s record management policies, provided that Seller shall use reasonable efforts to make available to Buyer upon request any records in Seller’s possession that relate to the Assets and are required by Buyer for the purpose of responding to or defending any litigation or Claim relating to the Assets.
“Decommissioning Obligations” means any and all existing and future claims, costs, charges, expenses, liabilities and obligations associated with, and liability for, abandoning, decommissioning, removing or making safe all Wells and Facilities, whether such claims, costs, charges, expenses, liabilities and obligations are incurred under or pursuant to any of the Asset Documents or under statutory, common law, regulation, order, permit, judgment, decree or other obligation, and including any residual liability for anticipated or necessary continuing insurance, maintenance and monitoring costs. Decommissioning Obligations include all of the following:
(A)	The plugging, replugging and abandonment of all Wells, either active or inactive, situated on or in any of the Areas, Leases or Units.

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(B)	The removal, abandonment and disposal of structures, facilities, foundations, wellheads, tanks, pipelines, flowlines, pumps, compressors, separators, heater treaters, valves, fittings, platforms and equipment and machinery of any nature and all materials contained therein, located on or used in connection with the Assets.
(C)	The clearance, restoration and remediation of the lands, groundwater and waterbottoms covered or burdened by the Leases, Units, or otherwise affected by the Assets. The removal, remediation and abatement of any petroleum material, any contamination or pollution (including spilling, leaking, pumping, pouring, emitting, emptying, discharging, leaching, dumping, disposing or other release of any chemical substance, pollutant, contaminant, toxic substance, radioactive material, hazardous substance, NORM, waste, saltwater, cuttings, muds, crude oil, or petroleum product) of surface soils and water, subsurface soils, air, groundwater, or any vessel, piping, equipment, tubing or subsurface structure or strata associated with the Assets.
“Dispute” means any dispute or controversy arising out of this Agreement, including a dispute or controversy regarding the existence, construction, validity, interpretation, enforceability, termination or breach of this Agreement, whether based in contract, tort or otherwise.
“Dollars” or “US$” means United States Dollars.
“Effective Date” means the effective date of the sale of the Assets, which is 1 July 2010 as of 7:00 a.m. local time where the Assets are located.
“Encumbrances” means any charges, liens, mortgages, pledges, royalties or other security interests whatsoever, any agreement or arrangement to create any of the foregoing or any agreement or arrangement that would affect Seller’s ability to freely dispose of the Assets to Buyer.
“Environmental Laws” means all of the following:
(A)	The Occupational Safety and Health Act, 29 U.S.C.A. §651, et seq.; the Resource Conservation and Recovery Act, 42 U.S.C.A. §6901, et seq.; the Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C.A. §9601, et seq.; the Clean Water Act, 33 U.S.C.A. §1251 et seq.; the Clean Air Act, 42 U.S.C.A. §7401, et seq.; the Safe Drinking Water Act, 42 U.S.C.A. §3001, et seq.; the Toxic Substances Control Act, 15 U.S.C.A. §2601 et seq.; the Oil Pollution Act of 1990, 33 U.S.C.A. §2701 et seq.
(B)	All rules, regulations and orders adopted, amended or enacted under the foregoing statutes or applicable state statutes addressing similar matters, or state or federal statutes after the Effective Date and applicable to any waste material, produced water, tank bottoms, sludge, or constituents thereof, radioactive materials (including NORM) or hazardous substances on or included with the Assets or the presence, disposal, release or threatened release of all waste material, produced water, tank bottoms, sludge, or constituents thereof, radioactive materials (including NORM), or hazardous substances on, included

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	with, or emanating from or through the Assets into the atmosphere or in or upon land or any water course or body of water, whether above or below the ground.
(C)	All other federal, state and local environmental and oil and gas laws and regulations, as well as any amendments or supplements to such laws and regulations.
“Environmental Obligations” means any and all claims, costs, charges, expenses, liabilities and obligations incurred in respect of the Assets and in connection with removing and disposing of debris and cleaning up and decontaminating any joint property or any other property (including platforms, pipelines, plant, machinery, wells, facilities and all other offshore and onshore installations and structures) and for reinstating any area of land, foreshore or seabed, wherever situated, whether such claims, costs, charges, expenses, liabilities or obligations are incurred under or pursuant to any of the Asset Documents or under statutory, common law or other obligation. Environmental Obligations include any residual liability for anticipated or necessary continuing insurance, maintenance and monitoring costs.
“Excluded Assets” means the items listed as “Excluded Assets” in Exhibit A – Description of Assets.
“Exhibit” means a document referred to in Section 1.3(A).
“Facilities” means all of the following:
(A)	All physical assets that are used for production, mechanical separation, handling, gathering, storage, treatment, sale, disposal or other operations relating to Petroleum Substances within the Areas, including all of the following:
	(1)	All buildings, structures, facilities, foundations.
	(2)	All platforms, gathering lines, gas lines, water lines, flowlines and production and storage facilities.
	(3)	All equipment, machinery, fixtures, materials and improvements.
(B)	Any additional items, whether located within or beyond the Areas, that are identified as Facilities in Exhibit A – Description of Assets.
“Final Settlement Statement” means that statement referred to in Section 11.1.
“Government Entity” means any department, authority, commission, board, instrumentality or agency of any municipal, local, state, federal or other governmental authority (including regulatory authorities and administrative bodies) and any subdivision of the foregoing.
“Interim Period” means the period from and including the Effective Date until and including the Closing Date.

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“JOA” means any and all joint operating agreements or similar agreements relating to the Assets.
“Leases” means the leases, licenses, deeds, operating rights, working interests, permits, authorizations, net revenue interests and mineral interest, and other documents of title as set forth in Exhibit A – Discription of Assets, through which the holder is entitled to drill for, own or remove Petroleum Substances within, upon or under the Areas or through which that holder is (or is deemed to be) entitled to a share of Petroleum Substances removed from the Areas, and includes, if applicable, all renewals and extensions of those documents and all documents issued in substitution therefore.
“NORM” means naturally occurring radioactive materials.
“Obligations” has the meaning given in Section 9.1.
“Operations Contracts” means all contracts, agreements and documents other than Asset Documents.
“Operator” means the operator of the Assets appointed pursuant to the relevant Asset Documents, Operations Contracts or applicable laws, rules or orders of a Government Entity.
“Party” means each of Seller and Buyer and “Parties” means both of them.
“Permitted Encumbrances” means any of the following:
(A)	Encumbrances arising by operation of law, including any Claim by a Government Entity or Tax Authority arising by operation of law.
(B)	Any Encumbrance listed on Schedule 1.1(C).
(C)	Any encumbrances, non-participating royalties, overriding royalties, net profits interests, production payments or other burdens applicable to the Areas not disclosed on Schedule 1.1(C) if the net cumulative effect of such burdens does not operate to reduce the net revenue in any Asset to an amount less than the net revenue interest set forth in Exhibit A – Description of Assets or increase the working interest of any Asset from that set forth in Exhibit A – Description of Assets without a corresponding increase in the revenue interest.
(D)	The terms and conditions of any agreements with third parties governing the Areas and operations being conducted with respect thereto, including any preferential rights of purchase or any similar restriction applicable to any of the Assets which prior to Closing waivers or consents are obtained from the appropriate parties or the appropriate time period for asserting such rights has expired without an exercise of such rights.
(E)	Encumbrances granted or created in connection with the operations relating to the Asset Documents.

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(F)	Easements, rights of way, servitudes, permits, surface leases or other similar rights, provided they do not materially interfere with the operation or use of the Assets.
(G)	The right of a Government Entity to levy taxes on Petroleum Substances or the income or revenue therefrom.
(H)	Agreements for the sale of Petroleum Substances that are terminable on not more than thirty days’ notice, without an early termination penalty or other cost.
(I)	Regulations and any rights reserved to or vested in any Government Entity to control or regulate any of the Assets in any manner.
(J)	Undetermined or inchoate liens incurred or created as security in connection with the development or operation of any of the Assets for Seller’s share of the costs and expenses of those operations, which costs and expenses are not delinquent as of the Closing Date or liens which have expired as a matter of law.
(K)	Liens granted in the ordinary course of business to a public utility, municipality or Government Entity in respect of operations pertaining to any of the Assets.
(L)	Encumbrances associated with approvals, consents, notices or waivers routinely or customarily given after a conveyance or asset sale.
(M)	Alleged Title Defects or other deficiencies or irregularities that have been waived by Buyer in writing or not asserted on or before the Defect Notice Date.
“Person” means any person, company, consortium, association, entity, government, independent governmental organization, or any agency or subdivision of the government.
“Petroleum Substances” means any mineral, oil, hydrocarbon or natural gas existing in its natural condition in strata, including gas, well gas and any condensate, but not including coal, bituminous shale or other stratified deposits from which oil must be extracted by distillation.
“Preliminary Settlement Statement” means the statement referred to in Section 0.
“Prime Rate” means the Prime Rate in effect at Citibank, New York, New York, on the Effective Date.
“Production and Pipeline Imbalances” have the meaning given in Section 0.
“Purchase Price” means the amount payable by Buyer to Seller under Section 2.2, as adjusted pursuant to Section 2.3.
“Rights to Petroleum Substances” means Seller’s interest in and to the Leases and the Units, insofar as they pertain to the Areas.
“Seller Account” means the Seller’s account with                                  .

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	Further credit to Client Account No.                           , or such other bank account for which Seller provides to Buyer all relevant details in writing at least three Business Days prior to the Closing Date.
	“Seller Parties” means Seller, Seller’s Affiliates, and the directors, officers, employees, contractors and representatives of each of them.
	“Taxes” means (unless specifically provided otherwise) all income, capital, corporate, franchise, gross receipts, margins, turnover, production or severance, windfall profits, sales, use, value added, goods and services, other excise, ad valorem, occupation, real or personal property taxes, customs and other import or export duties, stamp duties, fees, assessments, withholdings or charges imposed by any Tax Authority and any penalties, interest and fines or additions attributable to or imposed on or with respect to any such assessments.
	“Tax Authority” means any revenue, customs or fiscal governmental, state, community, municipal or regional authority, body or Person competent to impose, administer or collect any Taxes in connection with the Assets, this Agreement or actions contemplated by this Agreement.
	“Third Party” means any Person other than Seller Parties or Buyer Parties.
	“Units” means any unitization, pooling, communitization agreements, declarations, designations or orders relating to the Leases, and all of Seller’s interest in and to the properties covered or units created thereby, to the extent attributable to the Leases.
	“Wells” means any Petroleum Substance wells, salt water disposal wells, injection wells and other wells and wellbores, including wellheads and well equipment located on the Leases and within the Areas or Units, whether or not abandoned or plugged to which Seller has right, title and interest as of the Effective Date.
1.2	Interpretation. Unless the context expressly requires otherwise, all of the following apply to the interpretation of this Agreement:
	(A)	The plural and singular words each include the other.
	(B)	The masculine, feminine and neuter genders each include the others.
	(C)	The word “or” is not exclusive.
	(D)	The words “includes” and “including” are not limiting.
	(E)	References to the Parties include their respective successors and permitted assignees.
	(F)	References to matters “arising” (or which “arise” or “arises”) “out of this Agreement” include matters which arise in connection with this Agreement or have a causal connection with or which flow from this Agreement or which

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		would not have arisen or occurred but for the entering into this Agreement or the performance of or failure to perform obligations under this Agreement.
	(G)	The headings in this Agreement are included for convenience and do not affect the construction or interpretation of any provision of, or the rights or obligations of a Party under, this Agreement.
	(H)	If a conflict exists between any provisions of this Agreement as they apply to a Party, the provision that imposes the more onerous obligation on that Party prevails to the extent of the conflict.
1.3	Exhibits.
	(A)	All of the Exhibits that are attached to the body of this Agreement are an integral part of, and are incorporated by reference into, this Agreement, including:
		(1)	Exhibit A – Description of Assets.
		(2)	Exhibit B – Assignment Documents.
		(3)	Exhibit C – Accounting Adjustments.
		(4)	Exhibit D – Allocation of Purchase Price.
		(5)	Exhibit E – Seismic Data and Form of Data License.
	(B)	If a conflict exists between the body of this Agreement and the Exhibits , the body prevails to the extent of the conflict.
	(C)	If a conflict exists between the Exhibits or within an Exhibit as they apply to a Party, the provision that imposes the more onerous obligation on that Party prevails to the extent of the conflict.
	(D)	If a conflict exists between this Agreement and any provision of the Assignment Documents, the provisions of this Agreement shall prevail.
SALE AND PURCHASE OF ASSETS
2.1	Agreement to Sell and Purchase. Seller agrees to sell the Assets to Buyer, and Buyer agrees to purchase the Assets from Seller, subject to the terms and conditions of this Agreement.
2.2	Purchase Price Amount. Buyer shall pay to Seller the amount of US$1,450,000.00 (the “Purchase Price”), adjusted as set forth in Section 2.3, as consideration for the sale for the Assets.
2.3	Adjustment to Purchase Price.
	(A)	The Purchase Price shall be adjusted in accordance with the following provisions of this Agreement:

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		(1)	The Accounting Adjustments set forth in Exhibit C – Accounting Adjustments, accomplished through the Preliminary Settlement Statement and the Final Settlement Statement.
		(2)	Section 7.2, with respect to the exercise of preferential rights by third parties.
		(3)	Section 10.4, with respect to Casualty Loss of Assets.
		(4)	Section 10.5, with respect to insurance matters.
		(5)	Section0 0, with respect to certain post-Closing adjustments.
		(6)	Section 0, with respect to Taxes.
		(7)	Section 16.2, with respect to Alleged Environmental Defects agreed upon by Seller and Buyer.
		(8)	Section 17.2, with respect to Alleged Title Defects agreed upon by Seller and Buyer.
		(9)	Any other amount agreed upon by Seller and Buyer.
	(B)	The Purchase Price, as adjusted by the items set forth above, is the “Adjusted Purchase Price.” The Adjusted Purchase Price shall be identified in the Preliminary Settlement Statement pursuant to Section 10.1 and the Final Settlement Statement pursuant to Section 11.1.
	(C)	Notwithstanding anything to the contrary in this Agreement, no item taken into account in calculating an adjustment under this Agreement will be taken into account in calculating any other adjustment so as to result in a Party making or receiving a payment twice in respect of any such item.
	(D)	No adjustments to the Purchase Price will result from any of the following:
		(1)	Actual or projected changes in production rates.
		(2)	Alternate interpretations of reserves.
		(3)	Normal wear and tear on facilities or equipment.
2.4	Allocation of Purchase Price.
	(A)	Buyer has submitted to Seller an allocation of the Purchase Price among the Assets as set forth in Exhibit D – Allocation of Purchase Price. Buyer represents it has made reasonable allocations, in good faith, and Seller may rely on the allocations for all purposes hereunder, including all of the following:
		(1)	To notify holders of preferential rights of Buyer’s offer.

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		(2)	As a basis for adjustments to the Purchase Price for any Alleged Environmental Defects, Casualty Losses or Alleged Title Defects.
		(3)	As otherwise provided in this Agreement.
	(B)	In the event any Claims are brought against Seller arising from or under or attributable or relating to Exhibit D – Allocation of Purchase Price, Buyer shall indemnify and defend Seller against any such Claims.
	(C)	Seller and Buyer agree to be bound by this allocation of the Purchase Price for all purposes (including all tax purposes), and each further agrees to consistently report and submit its returns to each applicable Tax Authority for all relevant years on the basis of this allocation.
	(D)	Seller and Buyer further agree as follows:
		(1)	The Purchase Price shall be further allocated for tax purposes among intangibles and tangibles comprising the Assets as follows: Twenty Five (25%) percent of the Purchase Price shall be attributed to the Leases, Units, and Contracts and Seventy Five (75%) percent of the Purchase Price shall be attributed to the Wells and Facilities.
		(2)	To timely file all reports required by the United States Internal Revenue Code of 1986, as amended, concerning the Purchase Price allocations.
2.5	Method of Payment. All payments under this Agreement shall be made in the following manner, unless otherwise agreed in writing between Seller and Buyer:
	(A)	Payments shall be in Dollars.
	(B)	Payments shall be made by bank wire transfer, in immediately available funds, paid without set-off, withholding or any deduction of any kind, including for any Taxes, banking, transfer or other costs or Claims.
	(C)	Payments shall be made directly into Seller’s Account or Buyer’s Account, as the case may be.
2.6	Tax-Deferred Exchange. Seller shall have the right to elect to effect a tax-deferred exchange under Internal Revenue Code §1031, as amended, at any time prior to the date of Closing. If Seller elects to do so, the following shall apply:
	(A)	The Parties shall cooperate to effect the tax-deferred exchange and Buyer shall execute escrow instructions, documents, agreements or instruments necessary to effect the exchange.
	(B)	Seller shall ensure that Buyer does not incur additional costs, expenses, fees or liabilities as a result of the requested exchange.
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		effect such exchange. If such Third Party is used, Seller may return the Deposit to Buyer and instruct Buyer to pay the Deposit to such Third Party. Seller shall remain responsible to Buyer for the full and prompt performance of the respective delegated obligations. Seller shall indemnify and defend Buyer from and against all claims, costs (including reasonable attorney’s fees) and liabilities resulting from any exchange undertaken under this Section 2.6.
2.7	Seismic Data License. Seller shall grant to Buyer a non-exclusive license to use the seismic data identified on Exhibit E – Seismic Data and Form of Data License, , in substantially the form set forth in Exhibit E – Seismic Data and Form of Data License, (the “Data License”), subject to each of the following conditions:
	(A)	Seller shall grant the Data License at no additional cost or consideration.
	(B)	Seller shall only license to Buyer seismic data for which Seller has a right to grant a license and for which Seller is able to obtain all necessary Third Party consents and waivers within sixty days after Closing without additional cost to Seller, using reasonable commercial efforts.
	(C)	The seismic data shall be licensed “AS IS, WHERE IS” with the express conditions and limitations set forth in the Data License.
	(D)	Any use of such seismic data by Buyer shall be at Buyer’s sole risk.
2.8	Buyer Guarantee. On or before the Effective Date, Buyer shall provide to Seller a guarantee to cover the Seller’s well and facilities abandonment liability for the eight existing wells and surface facilities. The guarantee shall be in the form of a bond, irrevocable letter of credit or such other form acceptable to Seller in the amount of $100,000.00 to guarantee its ability to pay for abandonment liability assumed under the terms of this Agreement.
CONDITIONS PRECEDENT TO CLOSING
3.1	Conditions Precedent to Seller’s Obligations. The following are the Conditions Precedent to Seller’s obligation to sell the Assets to Buyer pursuant to this Agreement, unless waived in writing by Seller:
	(A)	Buyer shall have performed and complied in all material respects with the terms and conditions of this Agreement required to be performed or complied with by it at or prior to Closing.
	(B)	No action or proceeding by or before any Government Entity shall have been instituted or threatened (and not subsequently dismissed, settled or otherwise terminated) which might restrain, prohibit or invalidate any of the transactions contemplated by this Agreement, other than an action or proceeding instituted or threatened by Seller or any of its Affiliates.
	(C)	Buyer’s representations and warranties set forth in Section 5.2 are true and correct in all material respects on the Closing Date.

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	(D)	The Buyer Guarantee shall have been duly executed and delivered and shall remain in full force and effect.
3.2	Conditions Precedent to Buyer’s Obligations. The following are the Conditions Precedent to Buyer’s obligation to purchase the Assets from Seller pursuant to this Agreement, unless waived in writing by Buyer:
	(A)	Seller shall have performed and complied in all material respects with the terms and conditions of this Agreement required to be performed or complied with by it at or prior to Closing.
	(B)	No action or proceeding by or before any Government Entity shall have been instituted or threatened (and not subsequently dismissed, settled or otherwise terminated) which might restrain, prohibit or invalidate any of the transactions contemplated by this Agreement, other than an action or proceeding instituted or threatened by Buyer or any of its Affiliates.
	(C)	Seller’s representations and warranties set forth in Section 5.1 are true and correct in all material respects on the Closing Date.
3.3	Conditions Precedent to Both Parties’ Obligations. The following are the Conditions Precedent to both Seller’s and Buyer’s respective obligation to consummate the transactions contemplated by this Agreement, unless waived in writing by both Parties:
	(A)	The receipt of all material approvals, consents, waivers or the execution of any necessary agreement or document (on terms reasonably satisfactory to Seller and Buyer) which may be required under the Asset Documents or by any applicable laws, regulations or Government Entity prior to the transfer of the Assets to Buyer, except for any consents and approvals of any Governmental Entity or authority customarily obtained subsequent to transfer of title.
	(B)	The execution of the Assignment Documents by all parties (if any) to those documents other than the Parties.
3.4	Fulfillment of Conditions Precedent.
	(A)	Each Party shall, and shall procure that each of its Affiliates shall, use reasonable endeavors to satisfy the Conditions Precedent, including the execution of all such other documents, acts and things as may be reasonably required in order to satisfy the Conditions Precedent. Each Party shall keep the other fully informed of its progress with regard to the satisfaction of the Conditions Precedent.
	(B)	Each Party shall promptly provide to the other Party all such information and documentation concerning that Party as may be necessary to enable the other Party to prepare and submit all necessary filings required by any Government Entity in connection with the transactions contemplated by this Agreement and otherwise to satisfy the Conditions Precedent.
3.5	Right to Terminate for Failure to Satisfy Conditions Precedent.

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	(A)	If Buyer has not satisfied one or more of the Conditions Precedents set forth in Section 3.1 by the Closing Date, and Seller has not waived such unsatisfied Condition Precedent(s), then Seller may terminate this Agreement.
	(B)	If Seller has not satisfied any of Conditions Precedent set forth in Section 3.2 by the Closing Date, and Buyer has not waived such Condition Precedent, then Buyer may terminate this Agreement.
	(C)	If any of the Conditions Precedent set forth in Section 3.3 are not satisfied by the Closing Date, either Party may terminate this Agreement.
	(D)	Either Party may terminate this Agreement under this Section 3.5 by giving notice to the other Party. Following such termination, if a Party used reasonable endeavors to satisfy the Conditions Precedent applicable to it in accordance with Section 3.4(A), it shall have no further rights or obligations to the other under this Agreement, except that both of the following applies:
		(1)	This Section 3.5 and Section 25.5 shall continue to apply.
		(2)	Any accrued rights or liabilities of a Party shall not be affected, except as may be provided in this Agreement.
CLOSING
4.1	Place of Closing. The Closing shall take place at 9525 Camino Media, Bakersfield, California or such other place as the Parties may agree in writing.
4.2	Date of Closing. The Closing shall occur on the Closing Date.
4.3	Effective Date of Transfer. The transfer and assignment of the Assets from Seller to Buyer shall be effective as of the Effective Date, provided that the Closing occurs. Possession of the Assets shall not pass to Buyer until the Closing occurs.
4.4	Closing Procedure. At Closing, the following shall take place in the following order:
	(A)	Seller shall deliver to Buyer the Assignment Documents validly executed by all the parties to those documents other than the Seller and Buyer, if applicable.
	(B)	Unless previously provided, the Parties shall provide each other with copies of the consents, approvals or waivers required to be obtained by them or their respective Affiliates prior to Closing in fulfillment of the Conditions Precedent.
	(C)	Each Party shall deliver to the other Party copies or, if requested, certified copies of a power of attorney or other appropriate corporate authorization authorizing the execution of this Agreement, the Assignment Documents and all other documents delivered in connection with the Closing.
	(D)	Buyer and Seller shall execute the Assignment Documents.

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	(E)	Buyer and Seller shall execute and acknowledge any such other instruments as are reasonably necessary to effectuate the transfer, sale or conveyance of the Assets to Buyer.
	(F)	Buyer shall deliver to Seller the Decommissioning Guarantee.
	(G)	If Buyer is to become operator, Seller shall supply Buyer with an appropriate governmental form as required by the Government Entity having jurisdiction and authority to change the name of operator from Seller to Buyer, for each Seller-operated Well (whether dry, inactive, injector or producing), Lease or any other well or Facilities, as may be required or defined by said agency, board or commission, located on the premises that form a part of the subject matter of this Agreement. All such forms shall be executed by Buyer or Seller as may be required prior to or during Closing. Buyer shall be responsible for any fee that is required by the Government Entity. At Seller’s option, either Buyer shall deliver its check payable to the Government Entity to Seller at Closing or this fee shall be credited to Seller in the applicable Final Settlement Statement. Seller shall mail the completed form and fee to the proper Government Entity after Closing.
	(H)	Buyer shall pay the Adjusted Purchase Price based upon the Preliminary Settlement Statement to Seller in accordance with Section 2.5.
	(I)	Seller shall deliver Buyer’s share of the Assignment Documents and other closing documents, retaining its share for Seller’s records.
4.5	Transfer of Title to Assets.
	(A)	Title to the Assets shall not pass until the Closing occurs.
	(B)	Neither Seller nor Buyer shall be obliged to complete the transfer of the Assets unless all those items set out in Section 4.4 are accomplished. This Section shall not prejudice any rights or remedies available to a Party in respect of any default by the other Party.
	(C)	Once the items set out in Section 4.4 are accomplished, the Assets shall be conveyed “AS IS, WHERE IS,” without warranty of title, unless otherwise specified in this Agreement, and subject to the express conditions and limitations contained in this Agreement.
	(D)	The Assets to be transferred to Buyer pursuant to this Agreement shall be transferred pursuant to the Assignment Documents.
4.6	Third Party Invoices After Closing.
	(A)	Seller is responsible for and required to pay only that portion of any charge or invoice received that is applicable to work performed or material received in the period prior to the Effective Date.

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	(B)	Buyer is responsible for and required to pay only that portion of any charge or invoice received that is applicable to work performed or material received in the period after the Effective Date.
	(C)	Each Party shall return charges and invoices to the billing party for rebilling to the other Party if such invoices are outside each Party’s applicable time period.
4.7	Post-Closing Procedures.
	(A)	Following Closing, the Parties shall execute, acknowledge and deliver, or cause to be executed, acknowledged and delivered, such instruments, and take such other action, as may be necessary or advisable to carry out their obligations under this Agreement, and under any document, certificate or other instrument delivered pursuant to this Agreement.
	(B)	If applicable, Seller shall deliver to Buyer copies of any Asset Documents and Data in the possession or control of Seller that was not delivered to Buyer prior to the Closing, no later than sixty days after the Closing Date, subject to all of the following:
		(1)	Seller is not required provide any document or Data that Seller determines, in its absolute discretion, was generated for Seller’s or Seller’s Affiliates’ internal purposes.
		(2)	Seller may require that Buyer execute a Data License in accordance with Section 2.7.
		(3)	Seller and its Affiliates shall not be required to provide any document or Data that would cause Seller or its Affiliates to breach any confidentiality or other contractual obligations.
	(C)	Buyer shall notify all pertinent operators, non-operators, oil or gas purchasers, Government Entities, lessors and royalty owners that it has purchased the Assets immediately after Closing.
	(D)	After Closing, Buyer shall notify the appropriate Tax Authorities that it owns the Assets in a timely manner, and shall promptly provide copies of such notices to Seller.
	(E)	Prior to Closing, Seller shall designate which Party is responsible for filing and recording of the Assignment Documents and any other instrument required to convey title of the Assets to Buyer in the appropriate government records. Regardless of which Party files, Buyer shall bear all costs and fees associated with such filing and recording, either directly or via credit to Seller in the Final Settlement Statement. The Party responsible for filing shall supply the other Party with a true and accurate photocopy of the recorded and filed Assignment Documents within a reasonable period of time after such documents are available.

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	(F)	Buyer shall be responsible for timely obtaining all consents and approvals of Government Entities customarily obtained subsequent to transfer of title and all associated costs and fees.
4.8	Costs and Expenses. Seller and Buyer shall each pay their own costs and expenses in relation to the preparation, negotiation and execution of this Agreement and the documents contemplated or executed pursuant to this Agreement.
REPRESENTATIONS AND WARRANTIES
5.1	Seller Representations and Warranties. Seller represents and warrants to Buyer that, except as disclosed on Schedule 5.1, as of the date hereof and as of Closing, the following statements are accurate:
	(A)	Formation. Seller is a corporation or company (as the case may be) duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, and is duly qualified to carry out its business in California.
	(B)	Authorization. Seller has full corporate or company power and authority to enter into and perform this Agreement, and has taken all actions necessary to authorize its execution, delivery and performance of this Agreement and the transactions contemplated by this Agreement have been duly and validly authorized by Seller.
	(C)	Valid and Binding Obligation. This Agreement has been duly executed and delivered by its authorized officer or other representative and constitutes its legal, valid and binding obligation enforceable in accordance with its terms, and no consent or approval of any other Person is required in connection with its execution, delivery and performance of this Agreement.
	(D)	No Conflict with Governing Documents. Neither this Agreement nor the performance of this Agreement constitutes a default, violation or conflict with the articles of incorporation, by-laws or governing documents of Seller.
	(E)	No Litigation or Arbitration Proceedings. Seller is not a party to any litigation or arbitration or administrative proceedings in relation to the Assets that might reasonably be expected to delay, prevent or materially hinder the consummation of the transactions contemplated hereby or materially adversely affect the title to or value of any of the Assets, except as disclosed in Schedule 5.1.
	(F)	No Brokers. Seller is not a party to, or in any way obligated under, nor does Seller have any knowledge of, any contract or outstanding claim for the payment of any broker’s or finder’s fee in connection with the origin, negotiation, execution, or performance of this Agreement for which Buyer will have any liability.
	For the purposes of this Section 5.1, Seller shall be deemed to be aware of matters within the knowledge of its senior supervisory employees responsible for the management and daily operation of the Assets and who could reasonably be expected to have knowledge of the relevant subject matter.

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5.2	Buyer Representations and Warranties. Buyer represents and warrants to Seller that, except as disclosed on Schedule 5.2, as of the date hereof and as of Closing, the following statements are accurate:
	(A)	Formation. Buyer is a corporation or company (as the case may be) duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, and is duly qualified to carry out its business in California.
	(B)	Authorization. Buyer has full corporate or company power and authority to enter into and perform this Agreement, and has taken all actions necessary to authorize its execution, delivery and performance of this Agreement and the transactions contemplated by this Agreement have been duly and validly authorized by Buyer.
	(C)	Valid and Binding Obligation. This Agreement has been duly executed and delivered by its authorized officer or other representative and constitutes its legal, valid and binding obligation enforceable in accordance with its terms, and no consent or approval of any other Person is required in connection with its execution, delivery and performance of this Agreement.
	(D)	No Conflict with Governing Documents. Neither this Agreement nor the performance of this Agreement constitutes a default, violation or conflict with the articles of incorporation, by-laws or governing documents of Buyer, or any license, permit or consent granted to or by Buyer, or any material provision of any agreement or instrument to which Buyer is a party and, to the best of Buyer’s knowledge, will not violate or be in conflict with any judgment, decree, order, statute, rule or regulation.
	(E)	Conflict of Interest. No event has occurred prior to the Effective Date which, had it occurred after the Effective Date, would constitute a violation of Section 21.1.
	(F)	No Brokers. Buyer is not a party to, or in any way obligated under, nor does Buyer have any knowledge of, any contract or outstanding claim for the payment of any broker’s or finder’s fee in connection with the origin, negotiation, execution, or performance of this Agreement for which Seller will have any liability.
	(G)	Buyer has sufficient technical and financial capacity to own and operate (as may correspond) the Assets and can provide sufficient evidence in this regard if so required by any Government Entity or third party.
DISCLAIMERS, WAIVERS AND ACKNOWLEDEGMENTS
6.1	DISCLAIMER. Except as otherwise expressly provided in this Agreement, the Seller makes all of the following disclaimers:
	(A)	All of the Assets are being sold “AS IS, WHERE IS” and with all faults.

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	(B)	Neither Seller nor any Seller Parties makes any warranty or representation, express or implied in fact or by law, with respect to any matter or thing and disclaims all liability and responsibility for any representation, warranty, collateral contract, statement, assurance, opinion or information made or communicated (orally or in writing) to Buyer (including those by any officer, director, employee, agent, adviser, consultant or representative of Seller or any Affiliate of Seller), including any representation or warranty relating to any of the following:
		(1)	The quantity, existence, quality, value or deliverability of Petroleum Substances or other minerals, or other reserves attributable to the Assets.
		(2)	The physical state, origin, quantity, quality, safety, title, compliance with government regulations, merchantability, fitness for any particular purpose or condition of any of the Assets including any property, plant and equipment used in the operation of any of the Assets or the production, transportation or sale of Petroleum Substances by or on behalf of Seller.
		(3)	Any geological, geophysical, technical, or engineering (including petroleum engineering) data, cost estimates, economic or other interpretations, forecasts or evaluations concerning the Assets.
		(4)	The amount of any future costs associated with Decommissioning Obligations or Environmental Obligations relating to the Assets, or the extent of any liability related to Decommissioning Obligations or Environmental Obligations.
		(5)	The accuracy or completeness of any Data, reports, records, projections, information or materials furnished or made available to Buyer at any time in connection with the sale of the Assets, including the quality, quantity or environmental condition of the Assets or any other matters contained in the Data or any other materials furnished or made available to Buyer by Seller or any Seller Parties. All such Data, records, reports, projections, information and other materials furnished by Seller or otherwise made available to Buyer are provided to Buyer as a convenience, and shall not create or give rise to any liability of or against Seller. Any reliance on or use of the same shall be at Buyer’s sole risk to the maximum extent permitted by law.
		(6)	The ability of Buyer to claim or recover any costs incurred by it or by Seller in accordance with the terms of the Asset Documents.
6.2	BUYER ACKNOWLEDGEMENTS, WAIVERS AND AGREEMENTS.
	(A)	Buyer acknowledges and agrees that at Closing, it shall accept all Assets in its then “AS IS, WHERE IS” condition and with all faults, with an expressed

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	acceptance and understanding of the disclaimers contained in this Agreement.
(B)	Buyer further acknowledges each of the following:
	(1)	That the Assets have been used for oil and gas exploration, drilling and producing operations, pipeline, transportation or gathering operations, and other related oilfield operations, including, possibly the injection, storage or disposal of produced water or waste materials incidental to or occurring in connection with such operations.
	(2)	That physical changes in the land, groundwater or subsurface may have occurred as a result of any such uses and that Buyer has entered into this Agreement on the basis of Buyer’s own investigation of, or right to investigate, the physical condition of the Assets, including the Facilities and equipment, and the surface and subsurface conditions.
	(3)	That Buyer assumes the risk that adverse physical conditions, including the presence of unknown, abandoned or unproductive oil wells, gas wells, equipment, pits, landfills, flowlines, pipelines, water wells, injection wells and sumps, which may or may not have been revealed by Buyer’s investigation, are located thereon or therein, and whether discovered, discoverable, hidden, known or unknown to Buyer as of Closing.
(C)	Buyer acknowledges each of the disclaimers set forth in Section 6.1, and acknowledges and affirms that it has not relied upon any representation, warranty, statement, opinion or information in entering into or carrying out the transactions contemplated by this Agreement and Buyer waives all rights and remedies which but for this Section 0 would or might have been available to it in respect of such representation, warranty, collateral contract, statement, assurance, opinion or information.
(D)	Buyer agrees to assume full responsibility for compliance with all obligations attributable, in any way, to the Assets and all laws, orders, rules and regulations concerning all of such conditions, discovered, discoverable, hidden, known or unknown, and further agrees to indemnify and defend, the Seller Parties for same, including defense, indemnification and hold harmless for any liability, attorney’s fees, fines, penalties or costs under all Environmental Laws, as defined in this Agreement or otherwise asserted.
(E)	Buyer agrees to comply with all covenants, terms, and provisions, express or implied, contained in the Leases and Operations Contracts ; and this Agreement is made expressly subject to all agreements, leases, easements, permits, commingling authorizations and other contracts relating to the Assets, whether or not specifically identified in this Agreement. Effective upon Closing, Buyer shall assume and be responsible for all obligations and liabilities of Seller accruing under such agreements after the Effective Date

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		and agrees to execute any instrument or document required by Seller to evidence such assumption.
	(F)	Buyer has made, or arranged for others to make, or has been afforded the opportunity to make, an inspection and inventory of the Assets and, if not performed, waives such right at and with Closing.
	(G)	Buyer affirms that it is relying on its own independent investigation, analysis and evaluation of the geological, geological engineering, economic or other interpretations, the costs of and prospects for further development in relation to the Assets including any future and current Taxes in relation to the Assets, except as expressly provided in this Agreement.
	(H)	Buyer acknowledges and agrees that Seller cannot and does not covenant, warrant or guarantee that Buyer shall become successor operator of the Assets or portions of the Assets which Seller may presently operate, since same may be subject to unit, pooling, communitization or operating agreements or other agreements which control the appointment of a successor operator.
	(I)	Buyer agrees to indemnify and defend Seller and its Affiliates from any liabilities in relation to Claims made by Buyer or any of its Affiliates in relation to the matters described in this Section 6.2.
PREFERENTIAL RIGHTS AND CONSENTS
7.1	Notice of Preferential Right of Purchase.
	(A)	If any portion of the Assets is subject to a preferential right of purchase or similar restriction, Seller shall promptly serve all notices that are required under the respective preferential purchase provisions. Unless otherwise agreed by Buyer, each such notice shall include a request for the timely exercise or waiver of any preferential or similar right to purchase any of the Assets.
	(B)	Seller shall use Buyer’s allocations set forth in Exhibit D – Allocation of Purchase Price to ascertain the value placed by Buyer on any of the Assets for which Seller is required to give a preferential right of purchase notice pursuant to this Section 7.1.
7.2	Exercise of Preferential Rights. If a Third Party gives notice of its intent to exercise a preferential right to purchase all of the Assets, all of the following apply:
	(A)	The Assets shall not be sold to Buyer and the Agreement shall be terminated if such Third Party purchases and closes on all of the Assets.

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	(B)	Any preferential purchase right must be exercised in the manner prescribed in the JOA or any other document concerning preferential purchase rights.
7.3	Third Party Failure to Purchase. If a Third Party gives notice of its intent to exercise a preferential right to purchase any of the Assets, but does not purchase any or all of the Assets impacted by the preferential purchase rights for any reason, either before or within a reasonable time after Closing, there shall promptly be an additional Closing between Seller and Buyer for that portion of the Assets. Such additional Closing shall take place pursuant to the terms of this Agreement, by which Seller shall transfer the affected portion of the Assets to Buyer and Buyer shall promptly pay Seller that portion of the Purchase Price attributable thereto (or in the case of a negative allocation, Seller shall refund the absolute value of the negative amount to Buyer, without interest).
7.4	Consents.
	(A)	If the sale of any portion of the Assets requires the consent of any Third Party, Seller shall promptly service all notices that are required under the respective consent provision. Unless otherwise agreed by Buyer, each such notice shall include a request for the granting of any consent that may be required.
	(B)	If a Third Party required to give, prior to Closing, a necessary material consent refuses to give that consent, then the failure to give consent shall be considered an Alleged Title Defect for the purposes of Section 0.
TERMINATION
8.1	Termination of Agreement. This Agreement may be terminated only under any of the following provisions of this Agreement:
	(A)	Pursuant to Section 3.5, by Seller or Buyer if the Conditions Precedent to such Party’s obligations have not been satisfied or waived.
	(B)	Pursuant to Section 10.4(D), by either Party in the event of a Casualty Loss of Assets.
	(C)	Pursuant to Section 0, by either Party in the event of Aggregate Alleged Defects in excess of the specified amount.
	(D)	Pursuant to Section 21.1(C), by Seller in the event of a violation by the other Party of the provisions that prohibit conflicts of interest in Section 21.1(A).
	(E)	Pursuant to Section 7.2 (A).
8.2	Remedies Upon Termination. In addition to any other specific provision in this Agreement, the following applies in the event of a termination of this Agreement:
	(A)	Buyer shall promptly return to Seller all original documents, data or materials delivered to Buyer by Seller, and destroy all copies and reproductions (both written and electronic) in its possession and in the possession of persons to whom it was disclosed.

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	(B)	If this Agreement is terminated by either Party under the provisions of Section 8.1, the Parties shall be released from their respective obligations under this Agreement and Seller shall return the Deposit, exclusive of interest, to Buyer.
	(C)	If Buyer, through no fault of Seller, fails, refuses, or is unable for any reason not permitted by this Agreement to close on this transaction, Seller may assert its right to specific performance, retain the Deposit and pursue any other right or remedy to which it might be entitled at law or in equity.
OBLIGATIONS AND BENEFITS AFTER EFFECTIVE DATE
9.1	Certain Definitions. In this Section 0, the following terms have the following meanings:
	(A)	“Obligations” means all costs, charges, and expenses arising out of or in respect of the Assets, except those that relate to:
		(1)	Claims, Liabilities and Indemnities (Section 0).
		(2)	Taxes (Section 0).
		(3)	Decommissioning Obligations (Section 0).
		(4)	Environmental Obligations (Section 0).
	(B)	“Benefits” means all sales invoices, receivables, revenue, receipts, rebates and any benefits arising out of or in respect of the Assets except those that relate to Taxes.
9.2	Allocation of Obligations and Benefits.
	(A)	Buyer and Seller agree to allocate certain Obligations and Benefits in respect of the Assets that arise after the Effective Date in accordance with the following provisions, subject to the Closing taking place:
		(1)	Seller shall be liable for all Obligations which relate to the period prior to the Effective Date on an Accrual Basis.
		(2)	Buyer shall be liable for all Obligations which relate to the period after the Effective Date on an Accrual Basis.
		(3)	Seller shall be entitled to all Benefits which relate to any period prior to the Effective Date on an Accrual Basis. If Buyer receives any Benefits which relate to such period, Buyer shall account to and reimburse Seller in respect of such Benefits.
		(4)	Buyer shall be entitled to all Benefits which relate to the period on or after to the Effective Date on an Accrual Basis. If Seller receives any Benefits in respect of such period, Seller shall account to and reimburse Buyer in respect of such Benefits.

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	(B)	This allocation of Obligations and Benefits shall be accomplished by the Accounting Adjustments set forth in Exhibit C – Accounting Adjustments. For amounts not captured by Exhibit C – Accounting Adjustments, Section 9.3 shall apply.
9.3	Payments in Respect of Obligations and Benefits. Any amount to be paid or reimbursed pursuant to Section 9.2 in respect of Benefits or Obligations that is not otherwise addressed by Accounting Adjustments shall be paid or reimbursed within ten Business Days of receipt of notification from the other Party. Any such payments shall be made to the Seller Account or Buyer Account, as appropriate.
INTERIM PERIOD
10.1	Preliminary Settlement Statement. No later than five Business Days prior to Closing Date, Seller shall prepare and deliver to Buyer a preliminary settlement statement (the “Preliminary Settlement Statement”) that sets forth all of the following:
	(A)	The Adjusted Purchase Price.
	(B)	The Accounting Adjustments.
	(C)	Any other adjustments pursuant to Section 2.3 estimated in good faith by Seller in respect of the Assets.
	The Preliminary Settlement Statement shall contain reasonable estimates where actual amounts are not known at the time. As actual costs and revenues are known, these amounts shall be taken into account in the Final Settlement Statement. The Preliminary Settlement Statement shall be prepared in accordance with generally accepted accounting principles generally used in the oil and gas industry.
10.2	Operations During Interim Period. During the Interim Period Seller, in its sole discretion, shall use, operate and maintain the Assets in substantially the same manner in which they have been used, operated and maintained prior to the Effective Date. In addition, to the extent Seller is permitted to do so under the Asset Documents and applicable confidentiality obligations, and to the extent that the following are reasonably within Seller’s control, Seller shall to do the following:
	(A)	Keep Buyer informed of all material acts, matters and things relating to the Assets.
	(B)	Not commit to any operation reasonably anticipated by Seller to require future capital expenditures by the owner of the Assets, for its proportionate share, in excess of US$50,000 without prior written consent of Buyer. In the event that an Authority for Expenditure (“AFE”) in excess of US$50,000 (for Seller’s proportionate share) is proposed or contemplated, Seller shall provide such AFE proposal to Buyer for Buyer’s election, with Seller’s recommendation. Buyer will independently evaluate any required AFE election and shall assume the cost and risk of any consequences resulting from Buyer’s election to participate or Buyer’s election to not participate in or not approve an operation. In the event that Buyer fails to communicate its election decision to Seller’s designated AFE

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		representative 48 hours prior to the AFE deadline (or 24 hours in the case of a 48-hour AFE), Buyer shall be deemed to have concurred with Seller’s recommendation. For the purposes of this Section 10.2 (B), electronic mail communication and facsimile notice to Buyer’s and Seller’s designated AFE recipients shall be permitted.
			Seller’s Designated AFE recipient:
			Ilia Lambert 661-654-7225
			Buyer’s Designated AFE recipient:
	(C)	Give Buyer, or any Person properly authorized by Buyer, reasonable access to all Data reasonably requested by Buyer, upon at least two Business Days’ prior written notice, subject to all of the following:
		(1)	Such information relates to the Assets or all material operations carried out in respect of the Assets.
		(2)	Reasonable access means access between the hours of 9:00 a.m. and 5:00 p.m. on any Business Day.
	(D)	Not sell, transfer, assign or encumber any of the Assets in any manner that would have a material adverse affect on the Assets, or agree to do the same, without Buyer’s prior written consent, except in respect of Permitted Encumbrances.
	(E)	Pay all expenses related to the Assets as they become due, where such expenses would be paid by a reasonably prudent party.
	(F)	Not propose, approve or participate in any material sole risk operation in respect of the Assets without Buyer’s prior written consent.
	(G)	Continue to maintain the Insurance Policies in full force and effect.
10.3	Exceptions to Seller’s Actions During Interim Period. The provisions set forth in Section 10.2(A) through 10.2(G) do not apply, and Seller is entitled to act, or refrain from acting, in such a manner as Seller elects without reference to Buyer or the provisions of this Section 10.2(A) through 10.2(G), in respect of any of the following circumstances:
	(A)	An act, omission or other matter expressly contemplated by this Agreement, including the taking of any steps necessary to satisfy the Conditions Precedent.
	(B)	An act, omission or other matter to be undertaken pursuant to any work program or budget approved, or deemed to have been approved, under and in accordance with the Asset Documents or as otherwise required by the Asset Documents.

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	(C)	An act, omission or other matter undertaken in the event of emergency or where otherwise necessary, in the opinion of Seller, to safeguard any assets of Seller, including the Assets.
10.4	Casualty Loss of Assets. In the event of a Casualty Loss of any of the Assets, all of the following applies:
	(A)	Seller shall promptly notify Buyer of all instances of Casualty Loss that occur and become known to Seller during the Interim Period.
	(B)	Seller and Buyer shall meet to negotiate an adjustment to the Purchase Price that would reflect the “Reduction in Value” of the Assets directly arising from such Casualty Loss. For this purpose, “Reduction in Value” is based on the principle that Seller should generally bear the costs of repairing the Assets to the state existing immediately prior to the Casualty Loss, but if such repair results in equipment or facilities that are newer than or upgraded or superior to that which existed immediately prior to the Casualty Loss, Buyer should bear a portion of such costs that is equitable under the circumstances because of the benefit to Buyer of such newer or upgraded or superior equipment or facilities. Except as to those Assets with a negative Buyer’s Allocation, no adjustment associated with a Casualty Loss shall exceed Buyer’s Allocation for the affected Asset. For any Asset with a negative Buyer’s Allocation, Buyer may give Seller written notice at least five business days prior to Closing and exclude from this Agreement the Asset subject to the Casualty Loss and increase the Purchase Price by an amount equal to Buyer’s negative Allocation for such Asset.
	(C)	If the Parties are unable to agree on an adjustment to the Purchase Price that reflects the Reduction in Value resulting from the Casualty Loss, the Parties shall proceed to Closing with the Purchase Price being reduced by Seller’s estimate of the Reduction in Value of the Assets as a result of the Casualty Loss. Either Party may, within sixty days after the Closing Date, initiate binding arbitration in accordance with Section 23.5 to resolve the Dispute, without being required to first engage in negotiations or mediation. Any claim for a Casualty Loss not referred to arbitration within sixty days after Closing shall be deemed waived.
	(D)	If the aggregate Casualty Losses and Asset exclusions, if any, under this Section 10.4 exceed fifty percent of the Purchase Price, either Party may, by written notice to the other at least five days prior to the Closing Date, terminate this Agreement. If either party exercises its option to terminate this Agreement pursuant to this Section 10.4(D), this Agreement shall become void and have no effect. Seller shall promptly return the Deposit to Buyer (exclusive of any interest earned), and neither party shall have any further right or duty to or claim against the other party under this Agreement, except as expressly provided to the contrary in this Agreement.
10.5	Insurance Matters.
	(A)	Buyer acknowledges and agrees to all of the following:

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		(1)	Prior to Closing, insurance covereage under and the rights to the Insurance Policies is for the sole benefit of Seller. After the Closing Date, no insurance coverage is provided under the Insurance Policies in respect of the Assets.
		(2)	After the Closing Date, no Claims regarding any matter whatsoever, whether or not arising from events occurring prior to the Closing Date, shall be made against or with respect to the Insurance Policies by the Buyer or its successors, or any Person subrogated to their rights.
	(B)	Seller shall retain and be entitled to any and all insurance proceeds and other payments associated with or attributable to any Casualty Loss which has been remedied by Seller or for which a Purchase Price adjustment has been made. With the acceptance by Buyer of a Purchase Price adjustment, Seller is to be fully subrogated, to the full extent of such Purchase Price adjustment, to any right or claim held or which may be held by Buyer or persons claiming under Buyer for such Casualty Loss.
	(C)	In the event that, at any time during the Interim Period, any circumstances arise in relation to the Assets which could found a Claim under the Insurance Policies, Seller shall, in consultation with Buyer, pursue such Claim.
	(D)	Any monies received or receivable by Seller under any Insurance Policy in relation to the Assets during the Interim Period or after Closing, where no Purchase Price adjustment was made, shall be applied in the following manner:
		(1)	If received prior to Closing, such proceeds shall be applied by Seller in making good the subject matter of the Claim and if and to the extent not so applied, shall be paid to Buyer at Closing.
		(2)	If received after Closing, such proceeds shall be paid to Buyer within twenty Business Days following receipt thereof as an adjustment by means of a reduction to the Purchase Price, net of any tax chargeable to Seller on the receipt. Seller is to be fully subrogated, to the full extent of such Purchase Price adjustment, to any right or claim held or which may be held by Buyer or persons claiming under Buyer for such Casualty Loss.
FINAL SETTLEMENT AND POST CLOSING MATTERS
11.1	Final Settlement Statement.
	(A)	On or before the Business Day following one hundred eighty days after Closing, Seller shall prepare and deliver to Buyer a statement (the “Final Settlement Statement”). The Final Settlement Statement shall include:

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		(1)	Any additional adjustments under Section 2.3 and any changes to the Accounting Adjustments that were set forth in the Preliminary Settlement Statement, showing the calculation of such changes.
		(2)	As a set-off, any resulting amount due to Buyer against any amount or sum that Buyer may otherwise owe to Seller under the terms of this Agreement or any other agreement between Buyer and Seller.
		(3)	Copies of Third Party vendor invoices in excess of US$10,000.00 each, or other evidence of expenses agreed to by Buyer and Seller.
	(B)	Within sixty days of receipt of the Final Settlement Statement, Buyer shall deliver to Seller a written notice, either agreeing to the amounts due as set out in the Final Settlement Statement or setting out any changes that Buyer proposes be made to the Final Settlement Statement. If no written notice is delivered within that period, Buyer shall be deemed to have agreed to the Final Settlement Statement and each Party shall pay in accordance with Section 11.1(C). If such a written notice is delivered within that period that proposes changes to the Final Settlement Statement, then the following shall apply:
		(1)	Any amount which is not subject to dispute shall be paid in accordance to Section 11.1(C).
		(2)	The Parties shall negotiate in good faith and use their reasonable endeavors to agree upon any disputed amounts due pursuant to the Final Settlement Statement no later than thirty days after Buyer’s submission of its written notice to Seller.
		(3)	In the event the Parties fail to agree upon the amounts due within thirty days after Buyer’s submission of its written notice to Seller, then the disputed amounts shall be resolved pursuant to Section 0.
	(C)	The payment owed by a Party to the other Party pursuant to the Final Settlement Statement shall be made within a period of ten Business Days after agreement by the Parties or determination pursuant to this Section 11.1, as the case may be.
11.2	Final and Binding. Subject to Section 11.1, the Final Settlement Statement shall be final and binding upon the Parties as to those Accounting Adjustments included therein. Buyer and Seller are not prohibited from settling additional accounting matters that may arise after the Final Settlement Statement as provided elsewhere is this Agreement, including but not limited to those provided in Sections 4.6 and 9.
11.3	Certain Payments After Final Settlement Statement. After the Final Settlement Statement has been agreed or determined, the following apply:
	(A)	If any refund or reduction of Taxes is received by a Party and if such receipts would have resulted in an adjustment being made to the Final Settlement Statement if they had been identified at the time at which the Final Settlement Statement was agreed or determined, then the Party receiving the refund or reduction shall reimburse the Party entitled to the amount.

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	(B)	If any payments of Taxes are paid by one Party which were not included in the Final Settlement Statement but which would have resulted in an adjustment being made to that Final Settlement Statement if such payments had been identified at the time at which the Final Settlement Statement was agreed or determined, then the Party which should have paid the Taxes shall reimburse the Party for that amount.
	(C)	Any payment under this Section 11.3 shall be treated as an adjustment to the Purchase Price. Any payments due shall be made in accordance with Section 9.3.
11.4	Audits.
	(A)	Any revenues, receipts, costs, charges, expenses, liabilities or obligations (including the cost of any audit) accruing in respect of the Assets that results from an audit pursuant to any Asset Document or Operations Contract or from any other subsequent adjustment in relation to the operation of, and expenditure attributable to, the Assets in the period prior to the Effective Date shall accrue to Seller. Any such adjustment in respect of the Interim Period shall represent a further adjustment to the Purchase Price in accordance with the principles of this Section 0 and Exhibit C – Accounting Adjustments.
	(B)	Where any such audit takes place after Closing, Buyer shall use all reasonable endeavors to enable Seller to make representations directly to any relevant Operator or failing that, shall itself make such representations on Sellers’ behalf in connection with such audit, and to notify Seller of any audit adjustment as soon as practicable after the results of such audit are known.
	(C)	If as a result of any audit adjustment, either Buyer or Seller is liable to pay any amount to the other, then, to the extent that the Purchase Price has not otherwise already been adjusted pursuant to the provisions of this Section 0and Exhibit C – Accounting Adjustments in respect thereof, or the amount has not otherwise been paid, such amount shall be paid to Buyer or Seller (as appropriate) within thirty days after the amount receivable or payable as a result of such an audit or other subsequent adjustment has been taken into account by the relevant Operator in the Operator’s billing statement.
11.5	Calculating Adjustments.
	(A)	No payment shall be made under this Section 0 in respect of any item to the extent that the Purchase Price has already been adjusted under Section 2.3 or Exhibit C – Accounting Adjustments in respect of that item.
	(B)	All of the calculations to be made pursuant to this Section0 shall be made on an Accrual Basis and in accordance with accounting principles currently generally accepted in the oil and gas industry in the United States and such principles shall be consistently applied for the purposes of any and all disputes between the Parties.
	(C)	Where responsibility for any liability or Asset has been allocated to a Party by adjustment to the Purchase Price under this Section 0 and Exhibit C –

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		Accounting Adjustments, no indemnity shall operate so as to give a Party multiple credits or multiple liability for such Asset or liability or to reallocate responsibility for such liability.
OIL AND GAS IMBALANCES
12.1	Buyer’s Acknowledgement. Buyer acknowledges that any imbalance amounts are derived from either Operator’s statements or Seller’s estimates based upon current production, prior sales history or contract information and such statements or estimates were provided to Buyer and were taken into consideration in Buyer’s Allocation of the Purchase Price.
12.2	Production Imbalances.
	(A)	“Production Imbalances” means any over-production or under-production with respect to oil or gas produced from or allocated to the Assets, where Seller as of the Effective Date is out of balance with:
		(1)	The Operator.
		(2)	Other working interest parties in the Assets.
		(3)	Third parties pursuant to a production handling agreement.
	(B)	Regardless of whether Seller is over-produced or under-produced as to its share of total oil, condensate or gas production, any balancing obligation or credit arising from such over- or under-production balance as of the Effective Date shall transfer to Buyer on the Effective Date, and Seller shall have no further liability therefore nor benefit therefrom (whichever the case may be), and as of the Effective Date, Buyer expressly assumes any such obligation or credit.
	(C)	If Seller is a party to an oil or gas balancing agreement, a production handling agreement or other reconciliation obligations pursuant to any operating agreement or commingling authority covering all or a portion of the Assets, Buyer shall assume all rights and duties of Seller pursuant thereto. If the Assets are not covered by a balancing agreement, a production handling agreement or other reconciliation obligations pursuant to any operating agreement or commingling authority, Buyer shall fulfill its obligations under this provision in accordance with applicable law.
	(D)	Buyer shall indemnify and defend Seller and Seller Parties against any and all Claims arising directly or indirectly out of Buyer’s failure to fulfill its obligations under this provision.
CLAIMS, LIABILITIES AND INDEMNITIES
13.1	INTENT OF INDEMNITY PROVISIONS. The Parties agree to allocate between them certain risks and responsibility for all Claims as set out below.

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13.2	BUYER ASSUMPTION OF RISK. Buyer accepts and assumes the risk of all of the following as of the Effective Date:
	(A)	Damage to all or any part of the Assets including obligations arising out of any latent physical or design defect in the field facilities existing or attributable to the period prior to Closing and which is not discovered until after the Closing Date.
	(B)	Any change in the condition of the Assets during the Interim Period resulting from the production of Petroleum Substances through normal depletion (including the watering out, sand infiltration, breakdown, or other loss or reduction of utility of any well).
	(C)	Any change in the value of the Assets resulting from the outcome of any pending exploration, development and production operations.
13.3	RELEASE AND DISCHARGE BY BUYER. Buyer releases and discharges Seller and Seller Parties from each Claim relating to the Assets or this Agreement of the nature described in Section 13.2, regardless of whether relating to periods before or after the Effective Date or whether the Claim is foreseeable or unforeseeable.
13.4	BUYER’S GENERAL INDEMNIFICATION.
	(A)	Buyer shall indemnify and defend Seller and Seller Parties against all Claims (except for those Claims identified on Schedule 5.1) whether relating to periods prior to or after the Effective Date, in any way arising out of, related to, or connected with any of the following:
		(1)	The Assets.
		(2)	Buyer’s or Seller’s ownership, operations or activities related to the Assets and the contracts and agreements pertaining thereto.
		(3)	Any of the obligations, responsibilities or liabilities assumed by Buyer under this Agreement, including Decommissioning Obligations in accordance with Section 15.2 and Environmental Obligations in accordance with Sections 16.4, 16.5 and 16.6.
	(B)	Buyer’s indemnity does not include the matters for which Seller agrees to indemnify Buyer pursuant to Section 13.5.
13.5	SELLER’S INDEMNIFICATION WITH REPECT TO CERTAIN ITEMS. Seller indemnifies Buyer and Buyer Parties against all Claims relating to periods prior to the Effective Date that relate to:
	(A)	The payment, underpayment or nonpayment of royalties, overriding royalties, production payments, net profits payments or other payments on production or the proper accounting or payment to parties for their interests therein.

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	(B)	The payment, underpayment or nonpayment of property, ad valorem, windfall profit, severance or other similar taxes relating to the Assets or the Seller.
	(C)	Claims identified on Schedule 5.1.
13.6	CONFLICT OF INTEREST. Buyer indemnifies Seller against Claims that arise out of or in connection with any inaccuracy of the representations set out in Section 5.2(E) or any violation of Section 21.1.
13.7	INDEMNITY OBLIGATIONS REGARDLESS OF CAUSE. The release and indemnity obligations set out in this Agreement apply regardless of the cause, notwithstanding the active, passive, contributory, concurrent, gross, sole or joint negligence of any Person indemnified, regardless of whether liability of any kind is imposed or sought to be imposed on any person indemnified, and whether any Claim is in tort, under contract, or otherwise at law.
13.8	LIMITATION ON CLASSES OF DAMAGES. Buyer and Seller mutually waive and release to the fullest extent permitted by applicable law, all of the following Claims for damages arising out of this Agreement, whether such Claims are made in connection with an indemnity specified in this Section 0, a breach of any obligation under this Contract or otherwise, except for Claims arising from the obligation of a Party to indemnify the other Party for Third Party Claims:
	(A)	Indirect or consequential loss, including all of the following:
		(1)	Loss of production, including production of petroleum or petroleum products.
		(2)	Loss of prospective economic advantage or benefit.
		(3)	Loss of business opportunity.
	(B)	Punitive or exemplary damages.
	(C)	Lost profits.
	The waiver and release under this Section 13.8 applies regardless of the active, passive, contributory, concurrent, gross, or sole negligence, intentional, wanton, or willful misconduct, strict liability without fault, regulatory liability, or other fault or responsibility of either Party.
13.9	DEFENSE OF CLAIMS.
	(A)	Whenever a Party (“Indemnifying Party”) indemnifies an indemnified party under this Agreement (“Indemnitee”) against Claims, the Indemnifying Party shall defend and hold the Indemnitee harmless against those Claims and against all reasonable costs, expenses and fees of any kind (including attorneys’ fees) incurred by the Indemnitee in defending those Claims.

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	(B)	If any Third Party notifies an Indemnitee of any Claim that the Third Party intends to bring or has brought (a “Third Party Claim”) which gives rise to a Claim for indemnification against the Indemnifying Party, then the Indemnitee shall promptly, and in any event within thirty Business Days after receiving notice of the Third Party Claim, notify the Indemnifying Party of the Third Party Claim in writing, giving reasonably detailed information concerning the Third Party Claim.
	(C)	The Indemnifying Party shall have the right to, if requested in writing by the Indemnitee, conduct the defense of the Third Party Claim at its sole cost. An Indemnitee has the right to reasonably object to counsel selected by the Indemnifying Party and select alternative counsel at the cost of the Indemnifying Party.
	(D)	Unless and until an Indemnifying Party assumes the defense of the Third Party Claim as provided in Section 13.9(C) the Indemnitee may defend against the Third Party Claim in any manner it reasonably deems appropriate at the cost of the Indemnifying Party.
	(E)	The Indemnifying Party shall not consent to the entry of any judgment or enter into any settlement with respect to the Third Party Claim without the prior written consent of the Indemnitee, which consent shall not be unreasonably withheld or delayed.
	(F)	Notwithstanding Section 13.9(D), the Indemnitee shall not consent to the entry of any judgment or enter into any settlement with respect to the Third Party Claim without the prior written consent of the Indemnifying Party, which consent shall not to be unreasonably withheld or delayed.
	(G)	If a Third Party Claim is made, each Party agrees to provide to the other Party and its authorized employees and its professional advisers all material technical, legal and financial information necessary or conducive to the proper defense of the Third Party Claim. Each Party shall keep all such information confidential and only use the information in connection with the Third Party Claim.
13.10	INDEMNIFICATION LIMITATION. If Seller is an Indemnifying Party under this Agreement, Seller’s indemnification obligation shall be limited by the following:
	(A)	Seller shall not be liable for any Claim for which the amount of such Claim does not exceed $10,000.00 (excluding interest, costs and expenses).
	(B)	The maximum aggregate liability of Seller’s indemnification obligation to Buyer and the Buyer Parties under this Agreement shall not exceed twenty-five percent of the Purchase Price..
13.11	INDEMNITY PAYMENTS. Indemnity payments shall be treated as an adjustment to the Purchase Price. All indemnity payments shall be made on an after tax basis, which for the purpose of this Section 13.11 means that in calculating the amount of an indemnity there shall be taken into account each of the following:

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	(A)	The amount by which any liability for Taxes of the Indemnitee is actually increased as a result of the indemnity payment being received.
	(B)	If any withholding tax is suffered on the payment of an indemnity payment, the Indemnifying Party shall pay such additional sum to the Indemnitee as will, after the deduction or withholding has been made, leave the Indemnitee with the same amount as it would have been entitled to receive in the absence of any such requirement to make a deduction or withholding.
	(C)	If the Indemnitee becomes entitled to a credit or repayment in respect of such withholding tax, it shall pay to the Indemnifying Party such amount as will leave the Indemnitee in no worse or better position than if the withholding had not been suffered.
TAXATION
14.1	Tax Obligations. The Parties agree to allocate their respective responsibilities and obligations for certain types of Taxes with respect to this Agreement as described in this Section 0.
14.2	Payment of Taxes.
	(A)	All real estate, use, occupation, ad valorem, personal property taxes and similar charges on any of the Assets shall be prorated as of the Effective Date.
		(1)	Seller is responsible for and shall pay all such taxes for all periods prior to the Effective Date and is entitled to all refunds, recoupments, rebates and credits for such items with regard to such periods.
		(2)	Buyer is responsible for and shall pay all such taxes for all periods on or after the Effective Date and is entitled to all refunds, recoupments, rebates and credits for such items with regard to such periods.
	(B)	Oil and gas production and severance taxes, windfall profits taxes, and any other similar taxes applicable to Petroleum Substances produced from or attributable to the Leases or Units.
		(1)	Seller is responsible for and shall pay all such taxes prior to the Effective Date and is entitled to all refunds, recoupments, rebates and credits for such items with regard to such periods.
		(2)	Buyer is responsible for and shall pay for all such taxes applicable to Assigned Petroleum Substances on and after the Effective Date and is entitled to all refunds, recoupments, rebates and credits for such items with regard to such periods.
	(C)	Sales, use and similar taxes arising out of the sale of the Assets.
		(1)	Buyer is responsible for and shall pay all such taxes.

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		(2)	At the Closing, Buyer shall pay Seller all state and local sales or use taxes applicable to that portion of the Assets which is tangible personal property, and Seller shall remit such amount to the appropriate taxing authority in accordance with applicable law.
		(3)	However, if Buyer holds a direct payment permit or other tax registration which is valid at the time of the Closing, Buyer shall assume all responsibility for remitting to the appropriate taxing authority the state and local sales and use taxes due, and shall provide Seller with any exemption certificates or other documentation required under applicable law in lieu of paying Seller the taxes due.
		(4)	Both parties shall reasonably cooperate to eliminate or reduce the assessment of such taxes with respect to any of the Assets. Any reasonable legal or other expenses incurred by Seller to reduce or avoid any of such taxes attributable to Buyer shall be paid or reimbursed by Buyer.
	(D)	Buyer shall indemnify and defend Seller and the Seller Parties with respect to any Claims for Taxes which are the obligation of Buyer under this Agreement, including any court costs and attorney’s and other advisor fees. In the event that the Effective Date is not within the same calendar month as the Closing Date, Buyer shall reimburse Seller for any interest and penalties due and owing on any late reported sales or other Taxes.
DECOMMISSIONING
15.1	Buyer Assumption of Decommissioning Obligations. As additional consideration for the sale and transfer of the Assets, Buyer shall assume and shall timely and fully satisfy all Decommissioning Obligations associated with the Assets.
15.2	Buyer Indemnity for Decommissioning Obligations. Buyer shall indemnify and defend Seller and its Affiliates against any and all Claims, whether based on any theory of liability, including tort, breach of contract (express or implied), breach of warranty (express or implied), strict liability, regulatory liability, or statutory liability, regardless of the sole, joint or concurrent negligence, strict liability, regulatory liability, statutory liability, breach of contract, breach of warranty, or other fault or responsibility of Seller or any other person or party, whether arising from, resulting from or related to Buyer’s failure to timely and fully satisfy the Decommissioning Obligations as set forth in this Agreement or as may be imposed by any applicable statutes, laws, rules, regulations, or orders.
15.3	Further Actions.
	(A)	Buyer further agrees to take whatever actions are necessary to protect Seller from being subjected to any such Claims, including removal, remediation and restoration, and shall comply with reasonable requests by Seller that Buyer take such actions.

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	(B)	Buyer shall provide to Seller such assistance as Seller may reasonably request in order to have Seller released from any notice issued to Seller in relation to the Assets pursuant to any applicable law.
15.4	Decommissioning Guarantee.
	(A)	Buyer shall furnish to Seller at Closing a duly executed decommissioning guarantee (the “Decommissioning Guarantee”) guaranteeing the performance by Buyer of the Decommissioning Obligations. The Decommissioning Guarantee shall meet the following criteria:
		(1)	The Decommissioning Guarantee must be in a form reasonably acceptable to Seller, subject to Seller’s prior approval.
		(2)	The Decommissioning Guarantee may be issued by a Third Party with a credit rating satisfactory to Seller in its sole discretion.
		(3)	The Decommissioning Guarantee may be an irrevocable standby letter of credit or performance bond that has no expiration or termination date.
		(4)	The Decommissioning Guarantee shall be in the amount of US$200,000.00.
		Buyer’s assumption of the Decommissioning Obligations is not limited by the amount of the Decommissioning Guarantee.
		Buyer shall maintain the Decommissioning Guarantee in full force and effect at all times and at Buyer’s sole cost, until Seller is satisfied that all Decommissioning Obligations, whether of Buyer or of its successors and assigns, have been fully performed. Seller in its sole discretion may reduce the amount of the Decommissioning Guarantee when Buyer has sufficiently satisfied all or part of the Decommissioning Obligations to warrant such a reduction, or as otherwise provided for in the Decommissioning Guarantee.
	(B)	Buyer shall not alter or replace any agreements relating to the provision of security or finance for decommissioning liabilities with respect to the Assets already existing at the Effective Date without the consent of the Seller, which consent shall not be unreasonably withheld or delayed.
	(C)	Buyer shall, whenever requested to do so by Seller, exercise and enforce its rights under all abandonment security arrangements with respect to the Assets to ensure that the funds or financial instruments comprised therein are called or applied in exclusively meeting the costs of decommissioning the field facilities as agreed, thereby providing assurance to Seller that such funds and instruments will be so applied.
ENVIRONMENTAL MATTERS
16.1	Environmental Review.

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	(A)	During the Interim Period, Buyer may request access to the Assets (if operated by Seller) and the non-privileged environmental data in Seller’s files pertaining to the Assets. Buyer may request Seller’s assistance in gaining access to Assets operated by others, but Buyer shall be responsible for contacting the operators of such Assets to arrange for review and inspection, at Buyer’s sole cost, risk and expense. In respect of these rights, Buyer acknowledges each of the following:
		(1)	Any access to Seller-operated Assets or Seller’s data is given as an accommodation only, at Buyer’s sole cost, risk and expense, that Seller makes no representations whatsoever as to the accuracy, completeness, or reliability of any such environmental information so, or otherwise, disclosed to or obtained by Buyer.
		(2)	Buyer relies and depends on and uses any and all such environmental information, review or inspection exclusively and entirely at its own risk and without any recourse to Seller whatsoever.
	(B)	Seller shall cooperate with Buyer to facilitate the performance by Buyer of any environmental testing that Buyer wishes to conduct at Buyer’s sole cost and risk during the Interim Period, which testing shall be conducted in a reasonable manner so as not interfere with Seller’s or operator’s operation of the Assets. Buyer acknowledges each of the following:
		(1)	Results of any such tests shall be kept strictly confidential, and shall not be disclosed to any other party, except to the extent disclosure is required under applicable law.
		(2)	At Seller’s sole option, Buyer shall either destroy the results of such tests for any of the Assets that Buyer does not purchase or deliver the results to Seller.
	(C)	Seller and Buyer shall cooperate to ensure that such testing is performed on an expedited and confidential basis before Closing.
16.2	Alleged Environmental Defects.
	(A)	Buyer shall notify Seller in writing by 15 July 2010 (the “Defect Notice Date”) if Buyer believes that the environment associated with the Assets contains an Alleged Environmental Defect, as defined below.
	(B)	An “Alleged Environmental Defect” is a violation of Environmental Laws to the extent that, as to each individual Alleged Environmental Defect, at least one of the following conditions applies:
		(1)	Prosecution, if instituted, would be reasonably likely to result in a penalty, fine or damage payment of US$25,000.00 or more.
		(2)	Performance of corrective work in respect of such Alleged Environmental Defect required by Environmental Laws would be

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			reasonably likely to result in expenditures of US$25,000.00 or more, net to Seller’s interest in the affected Asset.
	(C)	Such notification (the “Notice of Alleged Environmental Defect”) must include all of the following information:
		(1)	A detailed description of such claims.
		(2)	A copy of any environmental assessments, reports, data and information pertaining to such claims.
		(3)	Buyer’s calculation of the amount by which such claims have diminished the value of the Assets, which amount shall be determined by Buyer in good faith and in a commercially reasonable manner.
	(D)	The aggregate value of all Alleged Environmental Defects must exceed US$50,000.00 (“Alleged Environmental Defect Minimum Threshold”) before there shall be any Purchase Price Adjustment or further action required of Seller under this Section with respect to an Alleged Environmental Defect. Buyer shall in any event bear the cost of the first US$50,000.00 of Alleged Environmental Defects.
16.3	Remedies for Alleged Environmental Defect.
	(A)	With respect to each Alleged Environmental Defect asserted by Buyer in a Notice of Alleged Environmental Defect, if Seller requests, Seller and Buyer shall discuss and determine whether a particular matter constitutes an Alleged Environmental Defect. As to each claim of an Alleged Environmental Defect made by Buyer on or prior to the Defect Notice Date (and upon satisfaction of the Alleged Environmental Defect Minimum Threshold set forth in Section 16.2 above), Buyer and Seller shall endeavor to agree upon one of the following options:
		(1)	On or before the Closing, Seller and Buyer shall agree in writing whether Seller shall correct or make arrangements for the correction of such Alleged Environmental Defect. The Closing shall take place and the Purchase Price shall not be reduced in these circumstances. Seller shall indemnify and defend the Buyer and the Buyer Parties against all Claims attributable to such Alleged Environmental Defect.
		(2)	Buyer shall correct or make arrangements for the correction of such Alleged Environmental Defect after the Closing occurs. The Closing shall take place, provided that the Purchase Price shall be reduced by an amount mutually agreed by the Parties. Buyer shall indemnify and defend the Seller and the Seller Parties against all Claims attributable to such Alleged Environmental Defect.
		(3)	Buyer shall accept the Assets subject to such Alleged Environmental Defect and the Closing shall take place without any adjustment of the Purchase Price. Seller shall indemnify and defend Buyer and the Buyer

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			Parties against all Claims incurred by Buyer with respect to such Alleged Environmental Defect, up to, but in no event to exceed, the sum of US$50,000 (such amount being cumulative for any and all claims of Alleged Environmental Defect made by Buyer). Seller’s obligation to pay up to the aforementioned sum applies only after such Claims exceed US$50,000, which amount shall be borne by Buyer. In the event of a claim of an Alleged Environmental Defect and a demand for indemnification by Buyer hereunder, Seller reserves the right to jointly negotiate with Buyer and the agency or party, if any, making such claim the right of access to the affected site, the use of temporary storage and resources at such site, to the full extent held by Buyer, and the right to perform assessment, removal and remedial operations for such Alleged Environmental Defect, at its cost and risk, and any sums so expended by Seller shall be a credit against Seller’s indemnity obligation, if any, under this Section 16.3(A)(3).
	(B)	If Buyer and Seller are not able to agree on the selection of one of the remedies set forth in Section 16.3(A) above, then the remedies set forth in Section 16.3(A)(3) shall apply.
	(C)	Each Party shall cooperate with the other Party’s reasonable corrective work, and any operations unreasonably interfering with the corrective work shall cease until correction is completed.
16.4	Indemnity Provisions.
	(A)	The indemnities for Alleged Environmental Defects and for Claims related thereto, as provided for in this Section 16.4 by Buyer and Seller, as the case may be, shall include the obligation to indemnify and defend Buyer or Seller, as the case may be, and the Buyer Parties and Seller Parties, respectively, against any and all Claims (including expenses associated with investigation of claims, testing and assessment), whether based on any theory of liability, including negligence, tort, breach of contract (express or implied), breach of warranty (express or implied), strict liability, regulatory liability, or statutory liability, regardless of the sole, joint or concurrent negligence, strict liability, regulatory liability, statutory liability, breach of contract, breach of warranty, or other fault or responsibility of Buyer or Seller or any other person or party, arising under any obligations under this Agreement or imposed by any applicable statutes, laws, rules, regulations, or orders.
	(B)	The indemnities shall further include an agreement by the party providing the indemnification to take whatever actions are necessary to protect the party being indemnified from being subjected to any such Claims and to comply with reasonable requests by the party being indemnified to take such actions.
16.5	Post-Closing Environmental Indemnification by Buyer. As of the Closing, but subject to the provisions of Sections 16.3 and excluding any Claims identified in Schedule 5.1, Buyer specifically assumes and shall be responsible for all Environmental Obligations of Seller and the Seller Parties with respect to the Assets and shall indemnify and defend Seller and the Seller Parties from and against any and all Claims under any

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	Environmental Law with respect to the Assets, including any Environmental Obligations existing prior to or as of the Effective Date or relating to periods arising before the Effective Date.
	(A)	Furthermore, all future assignees and successors of Buyer shall indemnify and defend Seller and the Seller Parties from and against any and all Claims under any Environmental Law with respect to the Assets. Any conveyance, transfer or assignment of all or part of the Assets by Buyer, its successors or assigns, in which the grantee, transferee or assignee fails to expressly assume this obligation, shall be deemed null and void.
	(B)	Buyer further agrees to cause the provisions of this clause to be included in all subsequent sales or transfers of any interest in the Assets, and to cause all purchasers or transferees of the Assets to expressly acknowledge and assume all such obligations.
16.6	Buyer Indemnification Regarding NORM and other Hazardous Substances.
	(A)	It is expressly recognized by Buyer that the lands or water bottoms, along with surface facilities and production equipment located on the lands or water bottoms, having been used in connection with oil, gas, and water production, treatment, storage, and disposal activities, may contain NORM, asbestos and other hazardous substances as a result of these operations.
	(B)	After the Effective Date, the generation, formation, or presence of NORM, asbestos or other hazardous substances in or on the Assets shall be the sole responsibility of Buyer.
	(C)	Buyer and all future assignees and successors of Buyer shall indemnify and defend Seller and the Seller Parties from any and all Claims (including expenses associated with investigation of claims, testing and assessment), whether based on any theory of negligence, tort, breach of contract, breach of warranty, strict liability, regulatory liability or statutory liability, regardless of the sole, joint or concurrent negligence, breach of contract, breach of warranty, strict liability, regulatory liability, statutory liability, or other fault or responsibility of Seller or any other person or party, in any way arising from, resulting from or related to the presence of NORM, asbestos or other hazardous substances, whether such NORM, asbestos or other hazardous substance was in place before or after the Effective Date.
	(D)	Any conveyance, transfer or assignment of all or part of the Assets by Buyer, its successors or assigns, in which the grantee, transferee or assignee fails to expressly assume this obligation, shall be deemed null and void. Accordingly, lands or water bottoms, the Wells, and the Facilities transferred pursuant to this Agreement are transferred with the restriction that they shall be used only in connection with oil and gas producing activities associated with the Leases, and shall not be subsequently transferred by Buyer or Buyer’s assignee for unrestricted use unless the concentrations of NORM, asbestos or other hazardous substances associated therewith are independently determined by a competent laboratory and are found below the levels specified as allowable for unrestricted

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		transfer as set forth in any and all applicable laws, orders, rules or regulations of any Government Entity or court having jurisdiction.
	(E)	Buyer agrees to comply with all provisions of such laws, orders, rules or regulations applicable to said lands or water bottoms, the Wells, and the Facilities.
	(F)	Buyer further agrees to cause the provisions of this clause to be included in all subsequent sales or transfers of any interest in the Assets, and to cause all purchasers or transferees of the Assets to expressly acknowledge and assume all such obligations.
16.7	Waiver. Buyer waives for all purposes all objections associated with the environmental and physical and other condition of the Assets (including environmental contamination and Alleged Environmental Defect), unless raised by proper notice within the applicable time period set forth in Section 16.2 and made Seller’s responsibility under Section 16.3. Buyer, acting on behalf of itself and the Buyer Parties and their successors and assigns, irrevocably waives any and all claims, except Claims covered under Seller’s indemnities pursuant to Section 16.3, that they may now or hereafter have against Seller and the Seller Parties associated with the same.
TITLE MATTERS
17.1	Asset Title Review.
	(A)	During the Interim Period, Buyer shall have reasonable access, without express or implied warranty of any kind regarding the accuracy of such information, to copies of non-privileged information in Seller’s possession regarding Seller’s title to the Assets, which information Buyer may copy at its sole cost and expense, unless prohibited by agreement between Seller and a Third Party.
	(B)	Except as otherwise provided in this Agreement, Seller shall not be required to perform any additional title work. Any existing abstracts and title opinions have not been made, and will not be made, current by Seller.
	(C)	Buyer specifically agrees that any conclusions made from any examination done or caused to be done from Seller-furnished information regarding title have resulted and shall result from its own independent review, skill, knowledge and judgment only.
17.2	Alleged Title Defects.
	(A)	An “Alleged Title Defect” is any defect or deficiency in title, except for Permitted Encumbrances, that results in any of the following:
		(1)	Creates a lien, claim, encumbrance or other obligation affecting the interests of Seller in the Assets.
		(2)	Diminishes Seller’s net revenue interest (defined as Seller’s share of the proceeds from the sale of Petroleum Substances produced from and

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			allocable to the Assets, net of all royalties, overriding royalties, and other burdens on production) from that set forth on Exhibit A – Description of Assets.
		(3)	Increases Seller’s working interest (defined as Seller’s share of the costs of operation, development or production borne by the owner of such interest) from that set forth in Exhibit A – Description of Assets without a corresponding increase in Seller’s net revenue interest, or which creates an obligation to pay costs or expenses in an amount greater than such interest.
	(B)	If, prior to Closing, Buyer becomes aware of any matter Buyer considers to be an Alleged Title Defect as defined in Section 17.2(A), Buyer shall notify Seller in writing as soon as reasonably practicable after Buyer becomes aware of such Alleged Title Defect, but, in any event, by 15 July 2010 (the “Defect Notice Date”).
	(C)	Such notice (“Notice of Alleged Title Defect”) shall include all of the following information:
		(1)	A specific description of the matter Buyer asserts as an Alleged Title Defect.
		(2)	A specific description of the Asset or portion of the Assets that is affected by the Alleged Title Defect.
		(3)	Buyer’s calculation of the amount by which each Alleged Title Defect has diminished the value of the Assets, such amount to be determined by Buyer in good faith and in a commercially reasonable manner.
		(4)	All necessary and desirable supporting documentation, including any abstracts and title opinions or updates thereto that describe or explain the Alleged Title Defect.
	(D)	No adjustment to the Purchase Price for Alleged Title Defects shall be made unless and until, and only to the extent that both of the following occur:
		(1)	With respect to each Lease or parcel of land, the individual value of each Alleged Title Defect exceeds US$50,000.00.
		(2)	The value of all Alleged Title Defects exceeds US$50,000.00.
	(E)	Buyer shall in any event bear the cost of the first US$50,000.00 of all Alleged Title Defects.
17.3	Remedies for Title Failures.
	(A)	With respect to each Alleged Title Defect asserted by Buyer in a Notice of Alleged Title Defect, if Seller requests, Seller and Buyer shall discuss and determine whether a particular matter constitutes an Alleged Title Defect.

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	(B)	Prior to Closing, Seller shall have the right but not the obligation to cure any Alleged Title Defect asserted in such Notice at its own expense and by any reasonable means, including Seller indemnification, in which case the Closing shall take place without adjustment of the Purchase Price.
	(C)	If Seller fails to cure any Alleged Title Defect on or prior to Closing, it shall be deemed to be a title failure (“Title Failure”) as to the relevant Asset. Buyer and Seller shall negotiate in good faith to reach agreement regarding the value of any Title Failure, and, unless waived by Buyer, shall mutually agree to one of the following options with respect to each Title Failure, subject to the provisions of Section 0:
		(1)	If the Title Failure results from a difference in the net revenue interest for a Lease from that shown on Exhibit A – Description of Assets, the Closing shall take place, provided that the Purchase Price shall be reduced by an amount (the “Defect Amount”) determined by multiplying the amount of the Purchase Price allocated to the affected Lease by a fraction, the numerator of which shall be the difference between the actual net revenue interest being conveyed and the net revenue interest shown on Exhibit A – Description of Assets and the denominator of which shall be the net revenue interest shown on Exhibit A – Description of Assets.
		(2)	If the Title Failure results from a difference in the working interest for a Lease from that shown on Exhibit A – Description of Assets, the Closing shall take place, provided that the Purchase Price shall be reduced by a Defect Amount determined by multiplying the amount of the Purchase Price allocated to the affected Lease by a fraction, the numerator of which shall be the difference between the actual working interest being conveyed and the working interest shown on Exhibit A – Description of Assets and the denominator of which shall be the working interest shown on Exhibit A – Description of Assets.
		(3)	If the Title Failure is one other than described in Sections 17.3(C)(1) or 17.3(C)(2), the Defect Amount shall be an amount determined in good faith by the mutual agreement of Buyer and Seller, taking into account the portion of the Purchase Price to be allocated by agreement of Seller and Buyer to the portion of the Assets affected by the Title Failure, the legal effect of the Title Failure, and the potential economic effect of the Title Failure over the life of the Assets.
17.4	Waiver. Buyer waives for all purposes all objections associated with the title to the Assets (including Alleged Title Defects), unless raised by proper notice within the applicable time period set forth in Section 17.2 and not cured or settled under Section 17.3; and Buyer, acting on behalf of the Buyer Parties and their successors and assigns, irrevocably waives any and all claims they may have against Seller and the Seller Parties associated with the same.

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TERMINATION FOR AGGREGATE ALLEGED DEFECTS
18.1	“Aggregate Alleged Defects” means the total amount of Alleged Environmental Defects and Title Failures (if applicable).
18.2	If the total amount of Aggregate Alleged Defects is equal to or greater than US$50,000.00, then either Buyer or Seller may terminate this Agreement by giving notice to the other Party prior to Closing.
RIGHT OF FIRST REFUSAL ON PRODUCTION
19.1	Right of First Refusal. Seller reserves the option and right (Seller’s “Right of First Refusal”) to purchase or designate the purchaser of all or any part of the Petroleum Substances produced from or allocated to the Assets, except Petroleum Substances used for operating purposes for the Assets.
	(A)	Seller may exercise its Right of First Refusal at Closing by giving notice to Buyer prior to Closing. After the Closing, Seller may exercise its Right of First Refusal at any time during the term of the Leases by giving notice to Buyer in accordance with Section 19.3.
	(B)	For the Right of First Refusal for gas, Seller or its designee shall have the right to purchase the full stream of gas at or near the wellhead, if the gas is not processed, or the residue gas at the tailgate of the applicable processing plant, if the gas is to be processed.
	(C)	For the Right of First Refusal for oil, Seller also reserves the right to designate the transporter and mode of transportation.
	(D)	If Seller does not exercise its Right of First Refusal or elects to purchase part but not all of the Petroleum Substances (e.g. elects to purchase gas but not oil) the election will not constitute a waiver of Seller’s right to purchase Petroleum Substances at a later time and from time to time. Except to the extent of Seller’s election to purchase Petroleum Substances under this article, Seller will have no obligation to purchase or to furnish a market for all or any part of the Petroleum Substances.
	(E)	Seller may assign, at any time and from time to time, its preferential right to purchase to any subsidiary or affiliate or any partnership of which it is a partner. Upon assignment, the assignee will have the same rights as Seller under this article.
19.2	Effect of Pre-Existing Contract Obligations. Seller’s Right of First Refusal shall not apply to any oil or gas production that is covered by a Supply Contract which Buyer assumed from Seller or which Buyer was required by Seller to execute contemporaneously with this Agreement. Upon expiration of the original term or upon early termination of any such Supply Contract, Seller’s Right of First Refusal shall become fully applicable and Buyer shall notify Seller of such event in advance.

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19.3 Notification. If Seller exercises its Right of First Refusal prior to Closing, Seller and Buyer shall enter into the necessary purchase agreements. If Seller does not exercise its Right of First Refusal prior to or at Closing, Buyer shall notify Seller as soon as possible following a determination by Buyer that Buyer will have any Petroleum Substances produced from the Assets available for sale. Such notice shall include Buyer’s best estimate as to the quanity and quality of Petroleum Substances that will be available and the location at which Buyer proposes to sell such Petroleum Substances. Notices pertaining to Seller’s Right of First Refusal shall be given both by mail and electronically and addressed as follows, unless Seller has provided Buyer written notice of a change of address for production notices:

For Oil Production:

Chevron Products Company,

a division of Chevron U.S.A. Inc.

Attention: Equity/Lease Crude Team

Leader

1500 Louisiana St.

Houston, TX 77002

Facsimile: (832) 854-4866

cc: drle@chevron.com

19.4	Notification Procedure and Price Determination for Right of First Refusal for Gas.
	(A)	Buyer will include in its notice of available gas production either a request for an offer by Seller or Seller’s designee to purchase the gas production, or a bona fide offer from a Third Party that Buyer is willing to accept, and offer Seller or Seller’s designee an opportunity to match such bona fide Third Party offer and purchase the gas production on substantially equivalent terms as defined below.
	(B)	If Buyer requests a purchase offer from Seller, Buyer may in its notice establish a reasonable deadline for Seller or its designee to make a purchase offer, not less than twenty-one days from delivery of Buyer’s notice. If Seller or its designee elects not to submit an offer or fails to do so within this deadline, or if an offer submitted by Seller or Seller’s designee is unacceptable to Buyer, Buyer may seek Third Party offers. If Buyer seeks Third Party offers, the right of first refusal procedure described in Section 19.4(C) shall apply.
	(C)	If Buyer receives and is willing to accept a good faith Third Party offer to purchase the gas production, either before or after requesting an offer from Seller, then the following applies:
		(1)	Buyer shall submit a copy of the bona fide Third Party offer to Seller.
		(2)	Seller or Seller’s designee may elect to purchase gas production on substantially equivalent terms as the Third Party offer, by giving written notice to Buyer within twenty-one days after Seller’s receipt of Buyer’s submission of such offer. “Substantially equivalent terms” in this context means terms that are equal to price and length of term. Upon Seller electing to purchase the gas production under terms substantially

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			equivalent to the bona fide Third Party offer, Buyer shall accept the terms of Seller’s offer for the length of the term and cannot submit additional Third Party offers during that term.
		(3)	If Seller or Seller’s designee elects not to match the Third Party offer or fails to respond within the allotted time, Buyer may sell the gas production under the Third Party offer.
		(4)	Upon expiration of the original term of the Third Party offer, Seller’s Right of First Refusal is reinstated and the procedure set forth in this Section 19.4(C) shall be followed prior to any subsequent sale of gas production. Evergreen contracts shall supersede Seller’s Right of First Refusal only during the initial term of the Third Party offer.
19.5	Notification Procedure and Price Determination for Right of First Refusal for Oil.
	(A)	Seller may elect to purchase or designate the purchaser of the oil production at agreed upon terms, provided the price is market value in the field.
	(B)	Buyer shall notify Seller if Buyer receives a good faith offer from a responsible Third Party to purchase oil on an outright basis at the Lease. Seller may waive its Right of First Refusal or elect to purchase the oil on terms substantially equivalent to those offered to Buyer. “Substantially equivalent terms” in this context means terms that are equal to price and length of term.
	(C)	Upon Seller electing to purchase the oil under terms substantially equivalent to the good faith Third Party offer, Buyer shall accept the terms of the offer for the length of the term and cannot submit additional Third Party offers during that term.
	(D)	If Seller fails to exercise its Right of First Refusal, Buyer shall notify Seller if the then current oil sales arrangement is changed or terminated. In these circumstances, Seller has the Right of First Refusal on any subsequent Third Party offers. Failure of Seller to reply to such notice shall be construed to be a waiver. Following such waiver by Seller, if Buyer accepts such Third Party offer, the preferential right provided in this Section 0 will not be enforceable for the term of the Third Party offer (with the exception of evergreen contracts which shall supersede Seller’s Right of First Refusal only during the initial term of the Third Party offer). Seller’s Right of First Refusal shall be reinstated and the procedure set forth herein shall apply upon expiration of the term of the Third Party purchase.
ANNOUNCEMENTS AND CONFIDENTIALITY
20.1	Confidentiality.
	(A)	The terms of this Agreement shall be held confidential by the Parties and shall not be divulged in any way to any Third Party by any Party without the prior written approval of the other Parties, except as permitted by Section 20.2 or by

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		Seller in connection with serving preferential right to purchase notices pursuant to Section 7.
	(B)	Buyer shall keep all Confidential Information furnished or disclosed by Seller or acquired by Buyer in connection with the inspection, testing, inventory or sale of the Assets strictly confidential prior to Closing. Confidential Information subject to any JOA shall remain subject to those terms, after Closing.
	(C)	Buyer shall not disclose, trade or otherwise divulge the Confidential Information prior to Closing to any Person, except as permitted by Section 20.2, provided that prior to being given access to such information, such recipients have agreed to maintain the confidentiality of such Confidential Information.
	(D)	Prior to Closing, nothing in this Agreement shall terminate, modify or supersede the terms and provisions of the confidentiality agreement previously entered into between the Parties. Upon Closing, such confidentiality agreement shall terminate as to the Assets purchased by Buyer, except for those terms or provisions expressly surviving termination.
	(E)	If the Closing does not occur for any reason, the confidentiality agreement previously entered into between the Parties shall remain in full force and effect. Additionally, both of the following shall apply:
		(1)	Buyer agrees that all Confidential Information shall remain confidential, except to the extent such information is available in the public domain other than through a breach of Buyer’s confidentiality obligations, with Seller a Third Party beneficiary of any privilege held by Buyer.
		(2)	Buyer and any Person to whom Buyer has disclosed Confidential Information shall promptly return to Seller all Confidential Information and related materials and information, including any notes, summaries, compilations, analyses or other material derived from the inspection or evaluation of such material and information, without retaining copies, and destroy any information relating to the Assets and independently acquired by Buyer.
20.2	Permitted Disclosures. Each Party may disclose the terms of this Agreement, and Buyer may disclose the Confidential Information, to any of the following parties:
	(A)	Any Affiliate of such Party.
	(B)	Any legal, accounting, tax or other professional advisers of such Party.
	(C)	Any bank or financial institution or party providing equity funding from whom such Party is seeking or obtaining finance in connection with this Agreement.
	(D)	To the applicable authority to the extent required by any applicable statute, the Asset Documents or the requirements of any recognized stock exchange in compliance with its rules and regulations.

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	(E)	To any Government Entity lawfully requesting such information.
	(F)	To any court of competent jurisdiction acting in pursuance of its powers.
	(G)	To any party to any Asset Documents, if required to do so by such Asset Document.
	Prior to making any such disclosures to Persons under Sections 20.2(B), 20.2(C) or 20.2(G), the receiving Person must first sign an undertaking of confidentiality that is substantially the same as the confidentiality obligations in this Agreement.
20.3	Announcements.
	(A)	Except for mandatory notices or announcements required under applicable law, by the stock exchange upon which a Party’s or its Affiliate’s shares are quoted or any similar regulatory body of any other jurisdiction, any announcements regarding the consummation of the transaction contemplated by this Agreement shall be made pursuant to a text prepared jointly by Seller and Buyer, to which effect the Parties shall cooperate in good faith. Any press release in connection with the consummation of the transaction contemplated by this Agreement shall be made only after all mandatory notices have been properly given, and shall be released with the prior consent of the other Party. Except as required by any mandatory notice or announcement, the release of reserve estimates in any announcement is expressly prohibited.
	(B)	In the event a Party is required to make any mandatory notice or announcement, if practicable in the circumstances, it shall use its reasonable best efforts to allow the other Party reasonable time to comment on such notice or announcement in advance of its issuance.
20.4	Continuing Confidentiality Obligations. Notwithstanding the termination of this Agreement, the provisions of this Section 0 will continue to apply.
ADDITIONAL OBLIGATIONS
21.1	Conflict of Interest.
	(A)	Prohibition. No director, employee or agent of Buyer or any Buyer Party may engage in any of the following activities without Seller’s prior written consent:
		(1)	Give to or receive from any director, employee or agent of Seller or its Affiliates in connection with this Agreement, either of the following:
			(a)	Any gift, entertainment or other benefit of significant cost or value.
			(b)	Any commission, fee or rebate.

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		(2)	Enter into any business arrangement with any director, employee or agent of Seller or any Affiliate of Seller (other than as a representative of Seller or any Affiliate of Seller).
	(B)	Reporting Violations and Reimbursement. Buyer shall immediately notify the Seller of any violation of Section 21.1(A) or of the occurrence of any event prior to the Effective Date which, if it had occurred after the Effective Date, would constitute a violation of Section 21.1(A). In addition to any other remedies to which Seller may be legally entitled, Buyer shall reimburse or issue a credit to Seller equal to the value of the benefit received by or given to the director, employee or agent of Seller or any Affiliate of Seller as a consequence of that violation or event.
	(C)	Termination. Prior to Closing, Seller may, at its sole option, terminate this Agreement with immediate effect for any violation of Sections 21.1(A) or 21.1(B) or breach of the warranty set out in Section 5.2(E).
21.2	Audit Rights. Seller may audit relevant records of Buyer and any Buyer Party for the purpose of determining whether they have complied with Sections 21.1.
21.3	Data Privacy. Buyer will comply with all reasonable requests of Seller with respect to protecting personal data of Seller’s employees, customers, and suppliers it receives in connection with this Agreement, including the following Seller’s instructions in connection with processing such personal data; implementing adequate security measures to protect such personal data; not disclosing such personal data to any third party without Seller’s written permission; and complying with all applicable data privacy laws.
NOTICES
22.1	Notices.
	(A)	All notices required or permitted under this Agreement must be in writing and delivered by mail (postage prepaid) or by hand delivery to the address of the receiving Party set out in the signature page to this Agreement, unless otherwise specified in this Agreement. Notice may also be delivered by facsimile sent to the facsimile number of the receiving Party set out in the signature page to this Agreement provided that the original notice is promptly sent to the recipient by mail (postage prepaid) or by hand delivery. Notices sent by email are ineffective, except as otherwise specified in this Agreement.
	(B)	Notices are effective when received by the recipient during the recipient’s regular business hours.
	(C)	Notices which do not comply with the requirements of this Agreement are ineffective, and do not impart actual or any other kind of notice.
GOVERNING LAW AND RESOLUTION OF DISPUTES
23.1	Governing Law. This Agreement is governed by and interpreted under the laws of the State of California, without regard to its choice of law rules. The United Nations

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	Convention on Contracts for the International Sale of Goods, 1980 (known as “the Vienna Sales Convention”) does not apply to this Agreement.
23.2	Resolution of Disputes. The Parties shall exclusively and finally resolve any Dispute between them using direct negotiations, mediation and arbitration as set out in this Section 0, except as permitted in Section 10.4(C).
23.3	Direct Negotiations. If a Dispute arises, a Party shall initiate the resolution process by giving notice setting out in writing and in detail the issues in Dispute and the value of the Claim to the other Party. A meeting between the Parties, attended by individuals with decision-making authority, must take place within thirty days from the date the notice was sent in an attempt to resolve the Dispute through direct negotiations.
23.4	Mediation. If the Dispute cannot be settled by direct negotiations within thirty days of initiation of the resolution process, either Party may initiate mediation by giving notice to the other Party. The place of mediation is Houston, Texas.
23.5	Arbitration. If the Dispute is not resolved by mediation within thirty days from the date of the notice requiring mediation, or if the Dispute is unresolved within sixty days from the date requiring direct negotiations, then the Dispute shall be finally settled by binding arbitration and either Party may initiate such arbitration by giving notice to the other Party. The arbitration shall be conducted in accordance with the Institute for Conflict Prevention and Resolution Rules for Non-Administered Arbitration (“CPR”) Rules, except to the extent conflicts between the CPR Rules at present in force and the provisions of this Agreement, in which event the provisions of this Agreement prevail. The CPR is the appointing authority. The Place of arbitration is Houston, Texas.
23.6	The following provisions shall apply to any arbitration proceedings commenced pursuant to Section 23.5:
	(A)	The number of arbitrators shall be one if the monetary value of the Dispute is US$5,000,000 (or its currency equivalent) or less. The number of arbitrators shall be three if the monetary value is greater than US$5,000,000 or its currency equivalent.
	(B)	The arbitrator or arbitrators must remain neutral, impartial and independent regarding the Dispute and the Parties. If the number of arbitrators to be appointed is one, that arbitrator or the presiding arbitrator if the arbitrators are three, must be a lawyer experienced in the resolution of disputes with experience relating to the issues in dispute.
	(C)	The Parties shall submit true copies of all documents considered relevant with their respective statement of Claim or defense and any counterclaim or reply. Neither Party may compel the other to produce additional documents. However, the arbitrator or arbitrators may decide to require the submission of additional documents limited to specific, narrow and well-defined classes of documents that the arbitrator considers or arbitrators consider necessary for the arbitrator’s or arbitrators’ understanding and resolution of the Dispute. The maximum number of witnesses each Party may call to give evidence on its behalf, including by oral

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		testimony, declaration or witness statement, is three witnesses of fact and one expert witness.
	(D)	The Parties waive any Claim for, and the arbitrator has or arbitrators have no power to award, the damages waived and released under Section 13.8. The arbitrator has or arbitrators have no authority to appoint or retain expert witnesses for any purpose unless agreed to by the Parties. The arbitrator has or arbitrators have the power to rule on objections concerning jurisdiction, including the existence or validity of this arbitration clause and existence or the validity of this Agreement.
	(E)	All arbitration fees and costs (with the exception of translation costs as specified above) shall be borne equally regardless of which Party prevails. Each Party shall bear its own costs of legal representation and witness expenses.
	(F)	The arbitrator is or arbitrators are authorized to take any interim measures as the arbitrator considers or arbitrators consider necessary, including the making of interim orders or awards or partial final awards. An interim order or award may be enforced in the same manner as a final award using the procedures specified below.
	(G)	The arbitrator or arbitrators must render a reasoned award in writing. The award is final and binding.
	(H)	The Dispute should be resolved as quickly as possible. The arbitrator’s or arbitrators’ award must be issued within three months from the completion of the hearing, or as soon as possible thereafter.
23.7	Enforceability.
	(A)	The Parties waive irrevocably their right to any form of appeal, review or recourse to any court or other judicial authority, to the extent that such waiver may be validly made.
	(B)	Except for proceedings to preserve property pending determination by the arbitrator or arbitrators or to enforce an award, the mandatory exclusive venue for any judicial proceeding permitted in this Agreement is the court of competent jurisdiction in Bakersfield, California. The Parties consent to the jurisdiction of these courts and waive any defenses they have regarding jurisdiction. Proceedings to confirm an award may be filed as provided in this Section 23.7(B) at any time within one year after the award is made.
	(C)	Proceedings to enforce judgment entered on an award may be brought in any court having jurisdiction over the person or assets of the non-prevailing Party. The prevailing Party may seek, in any court having jurisdiction, judicial recognition of the award, or order of enforcement or any other order or decree that is necessary to give full effect to the award.
23.8	Confidentiality.

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	(A)	The Parties agree that any Dispute and any negotiations, mediation and arbitration proceedings between the Parties in relation to any Dispute shall be confidential and shall not be disclosed to any Third Party.
	(B)	The Parties further agree that any information, documents or materials produced for the purposes of, or used in, negotiations, mediation or arbitration of any Dispute shall be confidential and shall not be disclosed to any Third Party.
	(C)	Without prejudice to the foregoing, the Parties agree that disclosure may be made:
		(1)	In order to enforce any of the provisions of this Agreement, including without limitation, the Parties agreement to arbitrate, any arbitration order or award and any court judgment.
		(2)	To the auditors, legal advisers, insurers and Affiliates of that Party to whom the confidentiality obligations set out in this Agreement shall extend.
		(3)	Where that Party is under a legal or regulatory obligation to make such disclosure, but limited to the extent of that legal obligation.
		(4)	With the prior written consent of the other Party.
	(D)	The Parties agree to submit to the jurisdiction of the courts of Bakersfield, California, for the purposes of any proceedings to enforce this Section 23.8 and shall prevent any information, documents or materials belonging to a Party from being used or disclosed by that Party for any purpose.
THIRD PARTY RIGHTS
24.1	Except for Seller Parties or Buyer Parties, no Third Party has any rights under this Agreement or may enforce any provision in this Agreement.
GENERAL PROVISIONS
25.1	Prior Agreements. This Agreement comprises the complete and exclusive agreement between the Parties regarding the subject matter of this Agreement, and supersedes all oral and written communications, negotiations, representations or agreements in relation to that subject matter made or entered into before the Effective Date.
25.2	Amendment. No amendment to this Agreement is effective unless made in writing and signed by authorized representatives of both Parties.
25.3	Waiver. No waiver by either Party of this Agreement’s terms, provisions or conditions shall be effective unless specifically evidenced in writing and signed by or on behalf of the Party granting such waiver. A Party’s failure to pursue remedies for breach of this Agreement does not constitute a waiver by such Party of any breach of this Agreement or raise any defense against Claims against a Party for breach of this Agreement. The waiver or failure to require the performance of any covenant or obligation contained in

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	this Agreement or to pursue remedies for breach of this Agreement does not waive a later breach of that covenant or obligation.
25.4	Severability. Each provision of this Agreement is severable and if any provision is determined to be invalid, unenforceable or illegal under any existing or future law by a court or arbitrator of competent jurisdiction or by operation of any applicable law, this invalidity, unenforceability or illegality does not impair the operation of or affect those portions of this Agreement that are valid, enforceable and legal, so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any Party. Upon such determination that any term or other provision or part thereof is invalid, illegal or unenforceable, the Parties shall negotiate in good faith to modify this Agreement so as to effect the original intent of the Parties as closely as possible in an acceptable manner to the end that transactions contemplated hereby are fulfilled to the extent possible.
25.5	Survival. Despite consummation of the Closing or the termination of this Agreement for any reason, all provisions in this Agreement containing representations, warranties, releases, defense obligations and indemnities, and all provisions relating to audit, confidentiality, conflicts of interest, insurance, disclaimer of certain remedies, limitations of liability, ownership or use or return of Confidential Information, dispute resolution and governing law, and all causes of action which arose prior to completion or termination, survive indefinitely until, by their respective terms, they are no longer operative or are otherwise limited by an applicable statute of limitations. Subject to Section 0, each of the obligations and undertakings set out in this Agreement which is not fully performed at Closing shall continue in force after Closing.
25.6	Interest. Without prejudice to any other rights available to a Party hereunder or at law, if any amount payable hereunder is not paid when due, the defaulting Party shall pay interest on such amount from the due date of payment (after as well as before judgment) until the date of payment (both dates inclusive) at a rate equal to Prime Rate plus one percent calculated on a daily basis using simple interest.
25.7	Assignments. This Agreement shall be binding on and inure for the benefit of the rightful successors and permitted assigns of the Parties, but the rights, duties and obligations of Buyer under this Agreement shall not be assigned without Seller’s prior written consent to the assignment, which consent, in the event of an assignment by Buyer to an Affiliate, shall not be unreasonably delayed or withheld provided that if such Affiliate ceases to be an Affiliate of Buyer, it shall without delay assign this Agreement back to Buyer. Notwithstanding anything herein to the contrary, Buyer shall remain responsible to Seller for all obligations, indemnities and liabilities due Seller under this Agreement, unless and until expressly released by Seller.
25.8	Nominations and Accounting Responsibilities. From the first day of the first production month following Closing, Seller is relieved of all responsibility for, and Buyer shall (a) bear, and commence payment of, all burdens, fees and taxes on or relating to the Assets, and (b) perform all nomination, marketing, accounting, royalty payment, reporting, and other administrative responsibilities relating to the Assets.
25.9	Counterparts. This Agreement may be executed in any number of counterparts, each of which will be deemed an original of this Agreement, and which together will constitute

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	one and the same instrument; provided that neither Party shall be bound to this Agreement unless and until both Parties have executed a counterpart.
25.10	Drafting. Preparation of this Agreement has been a joint effort of the Parties and the resulting Agreement must not be construed more severely against one of the Parties than against the other.

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IMPORTANT NOTICE: THIS AGREEMENT CONTAINS PROVISIONS REGARDING INDEMNITIES AND WARRANTIES THAT EXPRESS THE AGREEMENT OF THE PARTIES CONCERNING CLAIMS ARISING OUT OF THIS AGREEMENT.

The Parties have executed this Agreement in triplicate as evidenced by the following signatures of authorized representatives of the Parties:

SELLER:		BUYER:
CHEVRON U.S.A. INC.
Signature:		Signature:
Name:	/s/ Lewis F. Bogan	Name:
Title:	Assistant Secretary	Title:
ADDRESS FOR NOTICES:		ADDRESS FOR NOTICES:
Chevron U.S.A. Inc.
9525 Camino Media
Bakersfield, CA 93311
Attention: Land Manager		Attention:
Facsimile: 66-1 654-7392		Facsimile:

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EXHIBIT A – DESCRIPTION OF ASSETS

1.	DESCRIPTION OF ASSETS
	1.1	Rights to Petroleum Substances.
		(A)	Leases: All of Seller’s Leases listed on Exhibit “B”
		(B)	Operations Contracts: The Operating Agreement dated September 1, 2008
2.	DESCRIPTION OF ANY EXCLUDED ASSETS
	2.1	All rights, titles, claims and interests of Seller related to the Assets for all periods prior to the Closing Date (i) under any policy or agreement of insurance or indemnity, (ii) under any bond, or (iii) to any insurance or condemnation proceeds or awards.
	2.2	Claims of Seller for any refund of or loss carry forwards with respect to (i) production, windfall profit, severance, ad valorem or any other Taxes attributable to the Assets for any period prior to the Effective Date, and (ii) income, capital, occupational, margin or franchise taxes.
	2.3	All amounts due or payable to Seller as adjustments to insurance premiums related to the Assets for all periods prior to the Closing Date.
	2.4	All of Seller’s intellectual property rights, patents, trade secrets, copyrights, names, marks and logos.
	2.5	All rights, obligations, benefits, awards, judgments, settlements, if any, applicable to any litigation pending in which Seller is a named claimant or plaintiff or holds beneficial rights or interests, to the extent related to periods prior to the Effective Date, to the extent, and only to the extent, that such claims, rights and other matters do not cause a material impairment in the value of the Assets to occur after the Effective Date.
	2.6	All of Seller’s mineral and surface fee covered by the Leases.
	2.7	Seller’s interest, if any, in any gas processing plant, separation facility or gas treating plant serving the Assets.
	2.8	All Third Party owned equipment and property located on or used in connection with the Assets, including contractor equipment and leased equipment.
	2.9	Unless specifically licensed to Buyer pursuant to Exhibit E, any and all proprietary or licensed raw or processed or re-processed geophysical data (including magnetic tapes, field notes, seismic lines, analyses and similar data or information) and all Seller’s proprietary software and any derivatives therefrom, data licensing agreements and seismic licenses between Seller and Third Parties, if any.

END OF EXHIBIT A

Chevron U.S.A. Inc./         ASPA
GUG Asset Sale and Purchase Agreement Dom Ltr (Rev4 May 2009))
Execution Version	57

EXHIBIT B – ASSIGNMENT DOCUMENTS

1.	LIST OF ASSIGNMENT DOCUMENTS
	Assignment of Operating Agreement dated September 1, 2008 among Chevron U.S.A. Inc, California Oil and Gas Corporation, Calstar Oil and Gas, LTD., Daybreak Oil and Gas, Inc, Consolidated Beacon Resources, LTD., Nomad Hydrocarbons, LTD and Nomad Hydrocarbons LLC.
	Assignment of Oil and Gas Leases listed on attached List of Leases to Asset Purchase and Sale Agreement between Chevron U.S.A. Inc. and              .

Chevron U.S.A. Inc./         ASPA
GUG Asset Sale and Purchase Agreement Dom Ltr (Rev4 May 2009))
Execution Version	58

EX-10.6

RECORDING REQUESTED BY AND

WHEN RECORDED MAIL TO:

CHEVRON U.S.A. INC.

9525 Camino Media

Bakersfield, California 93311

Attention: Land Manager

MAIL TAX STATEMENTS TO:

Daybreak Oil and Gas, Inc.

1414 South Friendswood Drive, suite 215

Friendswood, Texas 77546

Attn: James Westmoreland

ASSIGNMENT OF OIL AND GAS LEASES

AND AGREEMENTS

CHEVRON U.S.A. INC., a Pennsylvania corporation ("Assignor") and DAYBREAK OIL AND GAS, INC., AND SAN JOAQUIN INVESTMENTS, INC. ("Assignees"), agree as follows:

A. Assignment. For valuable consideration, receipt of which is hereby acknowledged, Assignor hereby assigns to Assignees, in the proportionate amounts set forth herein, all of Assignor's rights (to the extent transferable) and delegates to Assignees performance of all of Assignor’s obligations under the oil and gas leases and the Operating Agreement described in Schedule “A” attached hereto (the "Leases and Agreement"). Assignees accept the foregoing assignment and assumes and agrees to perform all of Assignor’s obligations under the Leases. This assignment and assumption is subject to all other matters appearing of record or that can be ascertained by an inspection of the property to which such Leases and Agreement apply (the “Property”). ASSIGNOR MAKES NO WARRANTIES, WHETHER EXPRESS OR IMPLIED, IN FACT OR BY LAW, AND WHETHER OF MERCHANTABILITY, FITNESS FOR ANY PURPOSE OR ANY OTHER KIND.

Daybreak Oil and Gas, Inc. 33.33%

San Joaquin Investments, Inc. 66.67%

Page 1 of 2

B. Asset Sale and Purchase Agreement. This Assignment is subject to that certain Asset Sale and Purchase Agreement by and between Assignor and                   dated effective July 1, 2010. In case of any conflict between the terms and provisions of the Asset Sale and Purchase Agreement and the terms and provisions of this Assignment, the terms and provisions of the Asset Sale and Purchase Agreement shall prevail. Notwithstanding the foregoing, third parties may rely upon this Assignment for the description of the Assets conveyed.

IN WITNESS WHEREOF, Assignor and Assignee have executed this Assignment effective as of July 1, 2010.

ASSIGNOR: CHEVRON U.S.A. INC.		ASSIGNEES: DAYBREAK OIL AND GAS, INC.
By:	/s/ Lewis F. Bogan	By	/s/ James F. Westmoreland
	Assistant Secretary	Title	President and Chief Executive Officer
		SAN JOAQUIN INVESTMENTS, INC.
		By	/s/
		Title	President

Page 1 of 2

EX-10.7

BILL OF SALE

CHEVRON U.S.A. INC. (“Seller”), for good and valuable consideration, including the assumption by DAYBREAK OIL AND GAS, INC., AND SAN JOAQUIN INVESTMENTS, INC. (“Buyer”) of certain obligations and liabilities described in that certain Asset Sale and Purchase Agreement effective July 1, 2010, by and between Seller and Buyer (the “ASPA”), hereby sells and transfers, subject to said ASPA, which is incorporated herein by reference for all purposes as if set forth in its entirety, to Buyer, all of Seller’s right, title and interest in and to the personal property ("Property") currently located on the lands described in the attached Exhibit “A” (“Premises”). The current location of the Property shall be the place of delivery by Seller to Buyer.

          Seller warrants that, to the best of its knowledge, it is the owner of the Property and sells and transfers the same to Buyer free and clear of all liens and encumbrances made by and through it.

          It is the intention of Seller and Buyer to convey all personal property, improvements and fixtures owned by Seller and located on and used or formerly used for operations on the Premises including, but not limited to, any wells, including any saltwater disposal wells, injection wells and other wells and wellbores, whether abandoned, plugged or unplugged, together with any equipment, fixtures, facilities, pipelines and gathering lines but excluding all vehicles, portable blow-out prevention equipment, well maintenance equipment, tools, third party personal property, leased equipment, office printers, office furniture and equipment.

          Seller makes no representations or warranties whatsoever as to the physical condition of the Property.

          Seller informs Buyer that (1) the Premises has been used for the production and storage of oil and gas for a number of years, (2) as a result of such production and storage of oil and gas, leakage or seepage of such hydrocarbons may have occurred, (3) some or all of the Property has been, or may have been, used for the production, storage or transportation of petroleum products, (4) due to the nature of the materials which may have been stored or transported on the Premises certain residues of such materials may still be contained in, or be present on, the Property; such residues may be flammable, poisonous, or hazardous, and (5) the Property should not be exposed to excessive heat or to open flame, nor should machining, welding or cutting of the Property be performed until and unless the Property is first thoroughly cleaned and all traces of hazardous substances removed.

BUYER HAS INVESTIGATED THE PHYSICAL CONDITION OF THE PROPERTY, IS ACQUIRING THE PROPERTY IN AN "AS IS, WHERE IS" CONDITION AND ASSUMES THE RISK THAT ADVERSE PHYSICAL CONDITIONS MAY NOT HAVE BEEN REVEALED BY BUYER'S OR SELLER'S INVESTIGATION OF THE PROPERTY PRIOR TO BUYER ACQUIRING SAID PROPERTY.

          Seller makes no representations or warranties as to operative or proposed governmental laws and regulations (including, but not limited to, zoning, operating permits, air quality emissions and other environmental and land use laws and regulations) to which the Property may be subject. Buyer has entered into the ASPA and takes possession of the Property on the basis of Buyer’s own review and investigation of the applicability and effect of such permits, laws and regulations, and Buyer assumes the risk that adverse matters may not have been revealed by Buyer’s investigation.

1

          This Bill of Sale is made pursuant to and upon the terms of the ASPA. Except as set out above, SELLER DISCLAIMS ALL EXPRESSED WARRANTIES OR IMPLIED WARRANTIES OF QUALITY, MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.

          The forgoing Bill of Sale shall not expand, limit, or modify any of the provisions of the ASPA, and to the extent of any conflict therewith, the terms of the ASPA shall prevail.

          In Witness Whereof Buyer and Seller have executed this Bill of Sale effective as of this 1st day of July, 2010.

SELLERS:

CHEVRON U.S.A. INC.

By	/s/ Lewis F. Bogan
	Assistant Secretary

BUYER:

DAYBREAK OIL AND GAS, INC.

By	/s/ James F. Westmoreland
Title	President and Chief Executive Officer

SAN JOAQUIN INVESTMENTS, INC.

By	/s/
Title	President

2

EX-31.1

Exhibit 31.1

Certification

I, James F. Westmoreland, certify that:
	(1)	I have reviewed this interim report on Form 10-Q of Daybreak Oil and Gas, Inc.
	(2)	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
	(3)	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
	(4)	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have:
		(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared;
		(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
		(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
		(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
	(5)	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
		(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
		(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: October 15, 2010

By /s/ JAMES F. WESTMORELAND

James F. Westmoreland, President, Chief Executive Officer

and interim principal finance and accounting officer

(Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer)

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EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Interim Report of Daybreak Oil and Gas, Inc. on Form 10-Q for the period ending August 31, 2010, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, the undersigned, in the capacity and on the date indicated below, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: October 15, 2010

By /s/ JAMES F. WESTMORELAND

James F. Westmoreland, President, Chief Executive Officer

and interim principal finance and accounting officer

(Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer)

33