Re: Exchange Option Agreement, East Slopes Project, San Joaquin Basin, California

When executed by you on behalf of Daybreak Oil and Gas, Inc. (“Daybreak”), in the space provided below, this letter shall constitute the agreement between Daybreak, O & G Energy Partners, LLC (“O & G”) and San Joaquin Investments, Inc. (“San Joaquin”), by which O & G and San Joaquin may acquire a 25% working interest in Daybreak’s leasehold position in the East Slopes Project in exchange for certain cash payments, the delivery of a production payment interest, and the assignment to Daybreak of a 25% interest in certain oil and gas leases and option agreements held by O & G and San Joaquin in the vicinity of the East Slopes Project.  Daybreak, O & G and San Joaquin are sometimes collectively referred to herein as the “Parties”, and individually as a “Party”.

1.       Daybreak Leases.   Daybreak represents that it owns and/or has a contractual right to acquire a fifty percent (50%) interest in oil and gas leases and options to acquire oil and gas leases covering approximately 21,000 gross and net acres in the East Slopes area of Kern County, California.  The remaining 50% interest in the Daybreak Leases is held by Chevron U.S.A., Inc. (“Chevron”), and Daybreak’s interest is subject to an agreement with Chevron wherein Daybreak earned the assignment of its interest in certain oil and gas leases originally acquired by Chevron by completion of a four well drilling program on the project (the “Chevron Agreement”).  Two of the four wells, known as the Sunday #1 and the Bear #1 have been completed or are in the process of being completed as producers on the Daybreak Leases.  Daybreak represents that the Daybreak Leases are free and clear of liens, claims and burdens, with the exception of the lessor’s royalty and overriding royalties aggregating 3% of 8/8, which are owned by, or which Daybreak has agreed to assign to Chet Pohle, Brian Hirst and Randy Metz (“Pohle, et al.”).  The Daybreak Leases also include a 320-acre parcel identified as the “Dyer Creek Prospect”, where the working interest is owned in the proportions of 25% by Daybreak, 25% by Consolidated Beacon, LLC (“Beacon”), and 50% by Chevron.  Should Beacon forfeit its interest in the Dyer Creek Prospect by non-consenting the drilling of a well thereon, the Beacon 25% working interest will be included in the interests which may be acquired by O & G and San Joaquin hereunder.  A schedule of the Daybreak Leases is attached hereto as Exhibit “A” .

2.       O & G/San Joaquin Leases .  O & G and San Joaquin represent, severally but not jointly, that each holds the contractual right to acquire a 50% interest in oil and gas leases and options to acquire oil and gas leases presently titled in Maverick Petroleum, Inc., covering approximately 14,100 gross and net acres in Kern County, California (the “O & G/San Joaquin Leases”).  The O & G/San Joaquin Leases are subject to the terms of a Letter Agreement dated October 27, 2008, between Bill Orr and San Joaquin JV (predecessors to O & G and San Joaquin), and, as provided therein, are subject to royalties and overriding royalties aggregating 21% of 8/8, including an overriding royalty interest to be assigned to Keystone Diversified Energy, Inc., pursuant to a Geological/Geophysical Consulting Services Agreement with San Joaquin JV dated October 8, 2008.  Otherwise, the O & G/San Joaquin Leases are free and clear of liens, claims and burdens.  A schedule of the O & G/San Joaquin Leases is attached hereto as Exhibit “B” .

3.       Option Period .  In consideration of the cash payment of $100.00 by O & G and San Joaquin to Daybreak, delivered contemporaneously with the execution of this agreement, O & G and San Joaquin are granted the exclusive right and option, for a period of 30 days from the date of acceptance hereof by Daybreak (the “Option Period”) in which to elect to acquire a 25% working interest in the Daybreak Leases in exchange for the payment of the cash sums and delivery of the assignments which are described below in Paragraph 4.  During the Option Period, O & G and San Joaquin shall have the right to conduct such due diligence examination of the Daybreak Leases and the interest of Daybreak therein as they shall elect, and in this connection, Daybreak shall deliver to the office of O & G, within five business days after the execution of this letter, copies of the due diligence items identified in Part 1 of Exhibit “C”, attached hereto.  During the Option Period, Daybreak shall also have the right to conduct such due diligence as it may desire with respect to the O & G/San Joaquin Leases, and the interest of O & G and San Joaquin therein, and in that regard, O & G and San Joaquin shall deliver to the office of Daybreak, within five business days from the execution of this letter agreement, copies of the due diligence items shown in Part 2 of Exhibit “C” .  The option afforded to O & G and San Joaquin herein may be exercised at any time during the Option Period by either O & G or San Joaquin delivering written notice (the “Option Notice”) to Daybreak, which may be delivered by mail, overnight courier, facsimile, email or hand delivery, on or before 5:00 p.m. on the 30th day after the day of acceptance hereof by Daybreak.  The failure to deliver the Option Notice within the time herein provided shall be deemed election by O & G and San Joaquin not to acquire an interest in the Daybreak Leases, and this agreement shall thereupon terminate without further liability by any Party to the other.

4.       Closing .  Within 15 days after the delivery of the Option Notice, the Parties shall conduct a closing at the offices of O & G, or such other location as may be mutually agreed upon by the Parties, at which the following shall occur: