---

---

|                                  
|----------------------------------
|UNITED STATES                     
|SECURITIES AND EXCHANGE COMMISSION
|Washington,
D.C. 20549            
|FORM 10-K                         

|                                                       |                                                                                         
|------------------------------------------------------ | ----------------------------------------------------------------------------------------
|(Mark One)                                            
|x                                                      | ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|                                                       |                                                                                         
|For
the fiscal year ended February 28, 2011           
|                                                       |                                                                                         
|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)                          

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

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

Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $.001 par value

Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act.


Yes o No þ


Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Act.


Yes o No þ


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.


Yes þ No o


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 during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post
such files).


Yes o No o


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


þ


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 | Smaller reporting company þ

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


Yes o No þ


The
aggregate market value of the voting and non-voting stock held by
non-affiliates of the registrant, based on the closing price of $0.0845 on
August 31, 2010, as reported by the Over-the-Counter Bulletin Board was
$3,658,312.

At
May 26, 2011, the registrant had 48,791,599 outstanding shares of $0.001 par
value common stock.

DOCUMENTS INCORPORATED BY REFERENCE:

Part
III of this Form 10-K incorporates by reference certain portions of the
registrants definitive proxy statement on Schedule 14A, which will be filed
with the Commission not later than 120 days after the close of the fiscal year
covered by this report on Form 10-K, or if the Registrants Schedule 14A is not
filed within such period, will be included in an amendment to this Report on
Form 10-K which will be filed within such 120 day period.

---

---



TABLE OF CONTENTS

|                  |  |                                                                                                              |  |      | 
|----------------- |  | ------------------------------------------------------------------------------------------------------------ |  | ---- | 
|                  |  |                                                                                                              |  | PAGE
|                  |  |                                                                                                              |  |     
|PART I            |  | 4                                                                                                            | 
|                  |  |                                                                                                              | 
|ITEM 1.           |  | BUSINESS                                                                                                     |  | 4    | 
|                  |  |                                                                                                              |  |      | 
|ITEM 1A.          |  | RISK FACTORS                                                                                                 |  | 8    | 
|                  |  |                                                                                                              |  |      | 
|ITEM 1B.          |  | UNRESOLVED
STAFF COMMENTS                                                                                    |  | 16   | 
|                  |  |                                                                                                              |  |      | 
|ITEM 2.           |  | PROPERTIES                                                                                                   |  | 17   | 
|                  |  |                                                                                                              |  |      | 
|ITEM 3.           |  | LEGAL
PROCEEDINGS                                                                                            |  | 26   | 
|                  |  |                                                                                                              |  |      | 
|ITEM 4.           |  | REMOVED AND
RESERVED                                                                                         |  | 26   | 
|                  |  |                                                                                                              |  |      | 
|PART II           |  | 27                                                                                                           | 
|                  |  |                                                                                                              | 
|ITEM 5.           |  | MARKET FOR
REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES |  | 27   | 
|                  |  |                                                                                                              |  |      | 
|ITEM 6.           |  | SELECTED
FINANCIAL DATA                                                                                      |  | 34   | 
|                  |  |                                                                                                              |  |      | 
|ITEM 7.           |  | MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                        |  | 35   | 
|                  |  |                                                                                                              |  |      | 
|ITEM 7A.          |  | QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                   |  | 48   | 
|                  |  |                                                                                                              |  |      | 
|ITEM 8.           |  | FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA                                                                  |  | 49   | 
|                  |  | Balance Sheets
As of February 28, 2011 and 2010                                                              |  | 50   | 
|                  |  | Statements of
    Operations For the Years Ended February 28, 2011 and 2010                                  |  | 51   | 
|                  |  | Statements of
Changes in Stockholders Equity For the Years Ended February 28, 2010
and 2011                 |  | 52   | 
|                  |  | Statements of
Cash Flows For the Years Ended February 28, 2011 and 2010                                      |  | 53   | 
|                  |  |                                                                                                              |  |      | 
|ITEM 9.           |  | CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                         |  | 70   | 
|                  |  |                                                                                                              |  |      | 
|ITEM 9A.          |  | CONTROLS AND
PROCEDURES                                                                                      |  | 71   | 
|                  |  |                                                                                                              |  |      | 
|ITEM 9B.          |  | OTHER
INFORMATION                                                                                            |  | 72   | 
|                  |  |                                                                                                              |  |      | 
|PART III          |  | 73                                                                                                           | 
|                  |  |                                                                                                              |  |     
|ITEM 10.          |  | DIRECTORS,
EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE                                                      |  | 73   | 
|                  |  |                                                                                                              |  |      | 
|ITEM 11.          |  | EXECUTIVE
COMPENSATION                                                                                       |  | 73   | 
|                  |  |                                                                                                              |  |      | 
|ITEM 12.          |  | SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS               |  | 73   | 
|                  |  |                                                                                                              |  |      | 
|ITEM 13.          |  | CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE                                    |  | 73   | 
|                  |  |                                                                                                              |  |      | 
|ITEM 14.          |  | PRINCIPAL
ACCOUNTANTING FEES AND SERVICES                                                                    |  | 73   | 
|                  |  |                                                                                                              |  |      | 
|PART IV           |  | 74                                                                                                           | 
|                  |  |                                                                                                              | 
|ITEM 15.          |  | EXHIBITS,
FINANCIAL STATEMENT SCHEDULES                                                                      |  | 74   | 
|                  |  |                                                                                                              |  |      | 
|GLOSSARY OF
TERMS |  | 76                                                                                                           | 
|                  |  |                                                                                                              | 
|SIGNATURES        |  | 79                                                                                                           | 

---



CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING
STATEMENTS

This annual report on Form 10-K contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. These forward-looking statements are
based on our current expectations, assumptions, estimates and projections for
the future of our business and our industry and are not statements of
historical fact. 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,                                                                                            
| |   |                                                                                                                                                                 
| |  | Fluctuations in the levels of our oil and natural gas exploration and
development activities,                                                                   
| |   |                                                                                                                                                                 
| |  | Our ability to find, acquire and develop oil and gas properties,                                                                                                
| |   |                                                                                                                                                                 
| |  | 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 law and 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-K and in our other
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-K 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.

3

---



PART I

ITEM 1. BUSINESS

Historical Background

Daybreak Oil and Gas, Inc. (referred to herein as we, our,
Daybreak or the Company) was originally incorporated in the State of
Washington on March 11, 1955 as Daybreak Uranium, Inc. The Company was
established for the purpose of mineral exploration and development on claims or
leased lands throughout the Western United States. In August 1955, we acquired
the assets of Morning Sun Uranium, Inc. By the late 1950s, we had ceased to be
a producing mining company and thereafter engaged in mineral exploration only.
In May 1964, to reflect the diversity of our mineral holdings, we changed our name
to Daybreak Mines, Inc. By February 1967, we had ceased all exploration
operations. After that time, our activities were confined to annual assessment
and maintenance work on our Idaho mineral properties and other general and
administrative functions. In November 2004, we sold our last remaining mineral
rights covering approximately 340 acres in Shoshone County, Idaho.

Effective March 1, 2005, we undertook a new business direction for the
Company; that of an exploration and development company in the oil and gas
industry. In October of 2005, to better reflect this new direction of the
Company, our shareholders approved changing our name to Daybreak Oil and Gas,
Inc. Our Common Stock is quoted on the OTC Bulletin Board (OTC:BB) market under
the symbol DBRM.OB.

Our corporate office is located at 601 W. Main Ave., Suite 1012,
Spokane, Washington 99201-0613. Our telephone number is (509) 232-7674. Our
regional operations office is located at 1414 S. Friendswood Dr., Suite 215,
Friendswood, Texas 77546. The telephone number of our office in Friendswood is
(281) 996-4176.

Oil and Gas Overview

Our focus is to pursue oil and gas drilling opportunities through joint
ventures with industry partners as a means of limiting our drilling risk.
Prospects are generally brought to us by other oil and gas companies or
individuals. We identify and evaluate prospective oil and gas properties to
determine both the degree of risk and the commercial potential of the project.
We seek projects that offer a mix of low risk with a potential of steady
reliable revenue as well as projects with a higher risk, but that may also have
a larger return. We strive to use modern 3-D seismic technology to help us
identify potential oil and gas reservoirs and to mitigate our risk. We seek to maximize
the value of our asset base by exploring and developing properties that have
both production and reserve growth potential.

In some instances, we strive to be operator of our oil and gas
properties. As the operator, we are more directly in control of the timing,
costs of drilling, completion and production operations on our projects.

Competition

We compete with independent oil and gas companies for exploration
prospects, property acquisitions and for the equipment and labor required to
operate and develop these properties. Many of our competitors have
substantially greater financial and other resources than we have. These
competitors may be able to pay more for exploratory prospects and may be able
to define, evaluate, bid for and purchase a greater number of properties and
prospects than we can.

We conduct all of our drilling, exploration and production activities
onshore in the United States. All of our oil and gas assets are located in the
United States and all of our revenues are from sales to customers within the
United States.

4

---



Significant Customers

At our property locations with continuing operations in California and
discontinued operations in Alabama, we have oil and gas sales contracts with
one dominant purchaser in each respective area. If these purchasers are unable
to resell their products or if they lose a significant sales contract then we
may incur difficulties in selling our oil and gas. The price we receive for oil
sales is based on prices quoted on the New York Mercantile Exchange (NYMEX)
for spot West Texas Intermediate (WTI) contracts, less deductions which vary
by grade of crude oil sold. For the years ended February 28, 2011 and 2010, the
monthly average discount from WTI pricing on oil sales in California was 7.9%
and 11.7% respectively. At February 28, 2011, one customer represented 100.0%
of crude oil and natural gas sales receivables.

The revenue from any single customer that exceeds 10% of total revenue
is set forth in the table below.

|            |  |            |  |                       |  |                                      |         |                                      |      |         |   |            |  |      |  
|----------- |  | ---------- |  | --------------------- |  | ------------------------------------ | ------- | ------------------------------------ | ---- | ------- | - | ---------- |  | ---- | -
|            |  |            |  |                       |  | For the
Year Ended
February 28, 2011 |         | For the
Year Ended
February 28, 2010 |     
|            |  |            |  |                       |  |                                      |         |                                      |     
|Project     |  | Location   |  | Customer              |  | Revenue                              |         | Percentage                           |      | Revenue |   | Percentage | 
|            |  |            |  |                       |  |                                      |         |                                      |      |         |   |            | 
|            |  |            |  |                       |  |                                      |         |                                      |      |         |   |            |  |      |  
|East Slopes |  | California |  | Plains Marketing      |  | $                                    | 975,479 |                                      | 90.4 | %       | $ | 469,357    |  | 84.5 | %
|            |  |            |  |                       |  |                                      |         |                                      |      |         |   |            |  |      |  
|Gilbertown* |  | Alabama    |  | Hunt Crude Oil Supply |  | $                                    | -0-     |                                      | -0-  | %       | $ | 84,353     |  | 15.2 | %

*Discontinued
operation, we did not have any revenue from the East Gilbertown Field during
the year ended February 28, 2011.

Title to Properties

As is customary in the oil and natural gas industry, we make only a
cursory review of title to undeveloped oil and natural gas leases at the time
we acquire them. However, before drilling operations commence, we search the
title, and remedy material defects, if any, before we actually begin drilling
the well. To the extent title opinions or other investigations reflect title
defects, we (rather than the seller or lessor of the undeveloped property)
typically are obligated to cure any such title defects at our expense. If we
are unable to remedy or cure any title defects, so that it would not be prudent
for us to commence drilling operations on the property, we could suffer a loss
of our entire investment in the property. We believe that we have good title to
our oil and natural gas properties, some of which are subject to immaterial
encumbrances, easements, and restrictions.

Regulation

The exploration and development of oil and gas properties are subject
to various types of federal, state and local laws and regulations. These laws
and regulations govern a wide range of matters, including the drilling and
spacing of wells, allowable rates of production, restoration of surface areas,
plugging and abandonment of wells and specific requirements for the operation
of wells. Failure to comply with such laws and regulations can result in
substantial penalties.

Laws and regulations relating to our business frequently change so we
are unable to predict the future cost or impact of complying with such laws.
Future laws and regulations, including changes to existing laws and
regulations, could adversely affect our business. These regulatory burdens
generally do not affect us any differently than they affect other companies in
our industry with similar types, quantities and locations of production.

Operational Hazards and Insurance

Our operations are subject to the usual hazards incident to the
drilling and production of oil and gas, such as blowouts, cratering,
explosions, uncontrollable flows of oil, gas or well fluids, fires and
pollution and other environmental risks. These hazards can cause personal injury and loss
of life, severe damage to and destruction of property and equipment, pollution
or environmental damage and suspension of operation. In addition, the presence
of unanticipated pressures or irregularities in formations, miscalculations, or
accidents may cause our drilling activities to be unsuccessful and result in a
total loss of our investment.

5

---



We maintain insurance of various types to cover our operations with
policy limits and retention liability customary in the industry. We believe the
coverage and types of insurance we maintain are adequate. The occurrence of a
significant adverse event, the risks of which are not fully covered by
insurance, could have a material adverse effect on our financial condition and
results of operations. We cannot give any assurances that we will be able to
maintain adequate insurance in the future at rates we consider reasonable.

Employees and Consultants

At February 28, 2011, we had six full-time employees and one part-time
employee. Additionally, we regularly use the services of three consultants on
an as-needed basis for accounting, technical, oil field, geological, and
administrative services. None of our employees are subject to a collective
bargaining agreement. In our opinion, relations with our employees are good. We
may hire more employees in the next fiscal year as needed. All other services
are currently contracted for with independent contractors. We have not obtained
key man life insurance on any of our officers or directors.

Long Term Success

Our success depends on the successful acquisition, exploration and
development of commercial grade oil and gas properties as well as the prevailing
prices for oil and natural gas to generate future revenues and operating cash
flow. Oil and natural gas prices have been extremely volatile in recent years
and are affected by many factors outside of our control. 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.
Such pricing factors are largely beyond our control, and may result in
fluctuations in our earnings. We believe there are significant opportunities
available to us in the oil and gas exploration and development industry.

Availability of SEC Filings

You may read and copy any materials we file with the U.S. Securities
and Exchange Commission (the SEC) at the SECs Public Reference Room at 100 F
Street, NE, Washington, DC 20549, on official business days during the hours of
10:00 am to 3:00 pm. You can obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an
Internet site that contains reports, proxy and information statements, and
other information regarding issuers that file electronically with the SEC. The
address of that site is http://www.sec.gov.

Website / Available Information

Our website can be found at www.daybreakoilandgas.com. Our
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on
Form 8-K and amendments to those reports filed with or furnished to the SEC,
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the
Exchange Act) can be accessed free of charge on our web site at www.daybreakoilandgas.com
under the Shareholder/Financial section of our web site within the SEC
Filings subsection as soon as is reasonably practicable after we
electronically file such material with, or otherwise furnish it to, the SEC.

We have adopted an Ethical Business Conduct Policy Statement to provide
guidance to our directors, officers and employees on matters of business
conduct and ethics, including compliance standards and procedures. We also have
adopted a Code of Ethics for Senior Financial Officers that applies to our
principal executive officer, principal financial officer, principal accounting
officer and controller. Our Ethical Business Conduct Policy Statement and Code of Ethics for Senior Financial Officers are
available under the Shareholder/Financial section of our web site at www.daybreakoilandgas.com
within the heading Corporate Governance. We intend to promptly disclose via a
Current Report on Form 8-K or via an update to our web site, information on any
amendment to or waiver of these codes with respect to our executive officers
and directors. Waiver information disclosed via the web site will remain on the
web site for at least 12 months after the initial disclosure of a waiver.

6

---



Our Corporate Governance Guidelines and the charters of our Audit
Committee, Nominating and Corporate Governance Committee, and Compensation
Committee are also available in the Shareholder/Financial section of our web
site at www.daybreakoilandgas.com within the heading Corporate
Governance. In addition, copies of our Ethical Business Conduct Policy
Statement, Code of Ethics for Senior Financial Officers, Corporate Governance
Guidelines and the charters of the Committees referenced above are available at
no cost to any shareholder who requests them by writing or telephoning us at
the following address or telephone number:

| |  |                               
| |  | ------------------------------
| |  | Daybreak Oil
and Gas, Inc.    
| |  | 601 W. Main
Ave., Suite 1012  
| |  | Spokane, WA
99201-0613        
| |  | Attention:
Corporate Secretary
| |  | Telephone:
(509) 232-7674     

Information contained on or connected to our web site is not
incorporated by reference into this Annual Report on Form 10-K and should not
be considered part of this report or any other filing that we make with the
SEC.

7

---



ITEM 1A. RISK
FACTORS

The following risk factors together with other information set forth in
this Annual Report on Form 10-K, should be carefully considered by current and
future investors in our securities. An investment in our securities involves
substantial risks. If any of the following risks actually occur, our financial
condition and our results of operations could be materially and adversely
affected. Additional risks and uncertainties not presently known to us may also
impair our business operations. In any such case, the trading price of our
Common Stock could decline, and you could lose all, or a part, of your
investment.

We have a limited
operating history on which to base an investment decision.

We have a limited history of oil and gas production and have minimal
proven reserves. To date, while we have positive cash flow from our continuing
operations in California, we have not yet generated sustainable positive cash
flow or earnings on a company-wide basis. We cannot provide any assurances that
we will ever operate profitability. As a result of our limited operating
history, we are more susceptible to business risks. These risks include
unforeseen capital requirements, failure to establish business relationships,
and competitive disadvantages against larger and more established companies.

The oil and gas
business is highly competitive, placing Daybreak at an operating disadvantage.

We expect to be at a competitive disadvantage in (a) seeking to acquire
suitable oil and or gas drilling prospects; (b) undertaking exploration and
development; and (c) seeking additional financing. We base our preliminary
decisions regarding the acquisition of oil and or gas prospects and undertaking
of drilling ventures upon general and inferred geology and economic assumptions.
This public information is also available to our competitors.

In addition, we compete with large oil and gas companies with longer
operating histories and greater financial resources than us. These larger
competitors, by reason of their size and greater financial strength, can more
easily:

| |   |                                                                                      
| | - | -------------------------------------------------------------------------------------
| |  | access
 capital markets;                                                             
| |   |                                                                                      
| |  | recruit more
 qualified personnel;                                                   
| |   |                                                                                      
| |  | absorb the
 burden of any changes in laws and regulation in applicable jurisdictions;
| |   |                                                                                      
| |  | handle
 longer periods of reduced prices of gas and oil;                             
| |   |                                                                                      
| |  | acquire and
 evaluate larger volumes of critical information;                        
| |   |                                                                                      
| |  | compete for
 industry-offered business ventures.                                     

These
disadvantages could create negative results for our business plan and future
operations.

Oil and gas prices
are volatile. Declines in commodity prices in the past have adversely affected,
and in the future may adversely affect, our financial condition, liquidity,
results of operations, cash flows, access to capital markets, and ability to
grow.

Our revenues, operating results, liquidity, cash flows, profitability
and valuation of proved reserves depend substantially upon the market prices of
oil and natural gas. Product prices affect our cash flow available for capital
expenditures and our ability to access funds through the capital markets. If
commodity prices decline in the future, the decline could have adverse effects
on our reserves and availability of funds.

The prices we receive for our oil and natural gas depend upon factors
beyond our control, including among others:

| |   |                                                             
| | - | ------------------------------------------------------------
| |  | changes in
 the supply of and demand for oil and natural gas
| |   |                                                             
| |  | market
 uncertainty                                         
| |   |                                                             
| |  | the level of
 consumer product demands                      

8

---



| |   |                                                   
| | - | --------------------------------------------------
| |  | hurricanes
 and other weather conditions          
| |   |                                                   
| |  | domestic
 governmental regulations and taxes      
| |   |                                                   
| |  | the foreign
 supply of oil and natural gas        
| |   |                                                   
| |  | overall
 domestic and foreign economic conditions.

These factors make it very difficult to predict future commodity price
movements with any certainty. Oil prices and natural gas prices do not
necessarily fluctuate in direct relation to each other.

Our ability to reach
and maintain profitable operating results is dependant on our ability to find,
acquire, and develop oil and gas properties.

Our future performance depends upon our ability to find, acquire, and
develop oil and gas reserves that are economically recoverable. Without
successful exploration and acquisition activities, we will not be able to
develop reserves or generate production revenues to achieve and maintain
profitable operating results. No assurance can be given that we will be able to
find, acquire or develop these reserves on acceptable terms. We also cannot
assure that commercial quantities of oil and gas deposits will be discovered
that are sufficient to enable us to recover our exploration and development
costs. Although certain management personnel have significant experience in the
oil and gas industry, we have not yet established a history of locating and
developing properties that have economically feasible oil and gas reserves.

Our oil and gas
exploration and production, and related activities are subject to extensive
environmental regulations, and to laws that can give rise to substantial
liabilities from environmental contamination.

Our operations are subject to extensive federal, state and local
environmental laws and regulations, which impose limitations on the discharge
of pollutants into the environment, establish standards for the management,
treatment, storage, transportation and disposal of hazardous materials and of
solid and hazardous wastes, and impose obligations to investigate and remediate
contamination in certain circumstances. Liabilities to investigate or remediate
contamination, as well as other liabilities concerning hazardous materials or
contamination such as claims for personal injury or property damage, may arise
at many locations, including properties in which we have an ownership interest
but no operational control, properties we formerly owned or operated, and sites
where our wastes have been treated or disposed of, as well as at properties
that we currently own or operate. Such liabilities may arise even where the
contamination does not result from any noncompliance with applicable
environmental laws. Under a number of environmental laws, such liabilities may
also be joint and several, meaning that we could be held responsible for more
than our share of the liability involved, or even the entire share.
Environmental requirements generally have become more stringent in recent
years, and compliance with those requirements more expensive.

We have incurred expenses in connection with environmental compliance,
and we anticipate that we will continue to do so in the future. Failure to
comply with extensive applicable environmental laws and regulations could
result in significant civil or criminal penalties and remediation costs. Some
of our properties may be affected by environmental contamination that may
require investigation or remediation. In addition, claims are sometimes made or
threatened against companies engaged in oil and gas exploration and production
by owners of surface estates, adjoining properties or others alleging damage
resulting from environmental contamination and other incidents of operation.
Compliance with, and liabilities for remediation under, these laws and
regulations, and liabilities concerning contamination or hazardous materials,
may adversely affect our business, financial condition and results of
operations.

Certain U.S. federal
income tax deductions currently available with respect to oil and gas
exploration and development may be eliminated as a result of proposed
legislation.

9

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Legislation has been proposed that would, if enacted into law, make
significant changes to United States federal income tax laws, including the
elimination of certain key U.S. federal income tax incentives currently available to oil and natural gas exploration and production companies.
These changes include, but are not limited to: (1) the repeal of the percentage
depletion allowance for oil and natural gas properties, (2) the elimination of
current deductions for intangible drilling and development costs, (3) the
elimination of the deduction for certain domestic production activities, and
(4) an extension of the amortization period for certain geological and
geophysical expenditures. It is unclear whether any such changes will be
enacted and, if enacted, how soon any such changes could become effective. The
passage of this legislation or any other similar changes in U.S. federal income
tax laws could eliminate or postpone certain tax deductions that are currently
available with respect to oil and gas exploration and development, and any such
change could negatively impact the value of an investment in our Common Stock
as well as affect our financial condition and results of operations.

The adoption of
climate change legislation by Congress could result in increased operating
costs and reduced demand for the oil we produce.

In December 2009, the EPA determined that emissions of carbon dioxide,
methane and other greenhouse gases present an endangerment to public health and
the environment because emissions of such gases are, according to the EPA,
contributing to warming of the earths atmosphere and other climatic changes.
Based on these findings, the EPA has begun adopting and implementing
regulations to restrict emissions of greenhouse gases under existing provisions
of the federal Clean Air Act. The EPAs rules relating to emissions of
greenhouse gases from large stationary sources of emissions are currently
subject to a number of legal challenges, but the federal courts have thus far
declined to issue any injunctions to prevent the EPA from implementing, or
requiring state environmental agencies to implement, the rules. The EPA has
also adopted rules requiring the reporting of greenhouse gas emissions from
specified large greenhouse gas emission sources in the United States including
petroleum refineries, as well as certain onshore oil and natural gas production
facilities.

Moreover, the United States Congress has from time to time considered
adopting legislation to reduce emissions of greenhouse gases and almost
one-half of the states have already taken legal measures to reduce emissions of
greenhouse gases primarily through the planned development of greenhouse gas
emission inventories and/or regional greenhouse gas cap and trade programs.
Most of these cap and trade programs work by requiring major sources of
emissions to acquire and surrender emission allowances. The number of
allowances available for purchase is reduced each year in an effort to achieve
the overall greenhouse gas emission reduction goal. Although our current
facilities are not subject to the EPAs greenhouse gases reporting rules, the
EPA has indicated that it is evaluating whether the rule should be applied to
oil and gas production activities, perhaps on a field-wide basis.

The adoption of legislation or regulatory programs to reduce emissions
of greenhouse gases could require us to incur increased operating costs, such
as costs to purchase and operate emissions control systems, to acquire
emissions allowances or comply with new regulatory or reporting requirements.
Any such legislation or regulatory programs could also increase the cost of
consuming, and thereby reduce demand for, the oil we produce. Consequently,
legislation and regulatory programs to reduce emissions of greenhouse gases
could have an adverse effect on our business, financial condition and results
of operations. Finally, it should be noted that some scientists have concluded
that increasing concentrations of greenhouse gases in the Earths atmosphere
may produce climate changes that have significant physical effects, such as
increased frequency and severity of storms, droughts, and floods and other
climatic events. If any such effects were to occur, they could have an adverse
effect on our financial condition and results of operations.

To execute our
business plan we will need to develop current projects and expand our
operations requiring significant capital expenditures which we may be unable to
fund.

We have a history of net losses and expect that our operating losses
will continue over the next 12 months as we continue to implement our business
plan. Our business plan contemplates the development of our current exploration projects and the expansion of our business by identifying,
acquiring, and developing additional oil and gas properties.

10

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We need to rely on external sources of financing to meet the capital
requirements associated with the development of our current properties and the
expansion of our oil and gas operations. We plan to obtain the funding we need
through debt and equity markets. There is no assurance that we will be able to
obtain additional funding when it is required or that it will be available to
us on commercially acceptable terms.

We may make offers to acquire oil and gas properties in the ordinary
course of our business. If these offers are accepted, our capital needs will
increase substantially. If we fail to obtain the funding that we need when it
is required, we may have to forego or delay potentially valuable opportunities
to acquire new oil and gas properties. In addition, without the necessary
funding, we may default on existing funding commitments to third parties and
forfeit or dilute our rights in existing oil and gas property interests.

When we make the
determination to invest in oil or gas properties we rely upon geological and
engineering estimates which involve a high level of uncertainty.

Geologic and engineering data are used to determine the probability
that a reservoir of oil or natural gas exists at a particular location. This
data is also used to determine whether oil and natural gas are recoverable from
a reservoir. Recoverability is ultimately subject to the accuracy of data
including, but not limited to, geological characteristics of the reservoir,
structure, reservoir fluid properties, the size and boundaries of the drainage
area, reservoir pressure, and the anticipated rate of pressure depletion. Also
the increasing costs of production operations may render some deposits
uneconomic to extract.

The evaluation of these and other factors is based upon available
seismic data, computer modeling, well tests and information obtained from
production of oil and natural gas from adjacent or similar properties. There is
a high degree of risk in proving the existence and recoverability of reserves.
Actual recoveries of proved reserves can differ materially from original
estimates. Accordingly, reserve estimates may be subject to downward
adjustment. Actual production, revenue and expenditures will likely vary from
estimates, and such variances may be material.

Our financial
condition will deteriorate if we are unable to retain our interests in our
leased oil and gas properties.

All of our properties are held under interests in oil and gas mineral
leases. If we fail to meet the specific requirements of any lease, such lease
may be terminated or otherwise expire. We cannot be assured that we will be
able to meet our obligations under each lease. The termination or expiration of
our working interests (interests created by the execution of an oil and gas
lease) relating to these leases would impair our financial condition and
results of operations.

We will need significant additional funds to meet capital calls,
drilling and other production costs in our effort to explore, produce, develop
and sell the natural gas and oil produced by our leases. We may not be able to
obtain any such additional funds on acceptable terms.

Title deficiencies
could render our oil and gas leases worthless; thus damaging the financial
condition of our business.

The existence of a material title deficiency can render a lease
worthless, resulting in a large expense to our business. We rely upon the
judgment of oil and gas lease brokers who perform the field work and examine
records in the appropriate governmental office before attempting to place a
specific mineral interest under lease. This is a customary practice in the oil
and gas industry.

11

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We anticipate that we, or the person or company acting as operator
(the individual or company responsible for the exploration, exploitation and
production of an oil or natural gas well or lease, usually pursuant to the
terms of a joint operating agreement among the various parties owning the
working interest in the well) on the properties that we lease, will examine
title prior to any well being drilled. Even after taking these precautions,
deficiencies in the marketability of the title to the leases may still arise.
Such deficiencies may render some leases worthless, negatively impacting our
financial condition.

If we as operators,
or the operator of our oil and gas projects fail to maintain adequate
insurance, our business could be exposed to significant losses.

Our oil and gas projects are subject to risks inherent in the oil and
gas industry. These risks involve explosions, uncontrollable flows of oil, gas
or well fluids, pollution, fires, earthquakes and other environmental issues.
These risks could result in substantial losses due to injury and loss of life,
severe damage to and destruction of property and equipment, pollution and other
environmental damage. As protection against these operating hazards we maintain
insurance coverage to include physical damage and comprehensive general
liability. However, we are not fully insured in all aspects of our business.
The occurrence of a significant event on any project against which we are not
adequately covered by insurance could have a material adverse effect on our
financial position.

In the projects in which we are not the operator, we require the
operator to maintain insurance of various types to cover our operations with
policy limits and retention liability customary in the industry. The occurrence
of a significant adverse event on any of these projects if they are not fully
covered by insurance could result in the loss of all or part of our investment.
The loss of any such project investment could have a material adverse effect on
our financial condition and results of operations.

We may lose key
management personnel which could endanger the future success of our oil and gas
operations.

Our President and Chief Executive Officer, who is also acting as our
interim principal finance and accounting officer; our Senior Vice-President,
Exploration and two directors each have substantial experience in the oil and
gas business. The loss of any of these individuals, could adversely affect our
business. If one or more members of our management team dies, becomes disabled
or voluntarily terminates employment with us, there is no assurance that a
suitable or comparable substitute will be found.

We may be unable to
continue as a going concern in which case our securities will have little or no
value.

Our financial statements for the year ended February 28, 2011 were
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 which raises substantial doubt about our
ability to continue as a going concern. In the event we are not able to
continue operations, an investor will likely suffer a complete loss of their
investment in our securities.

We have experienced
significant operating losses in the past and there can be no assurance that we
will become profitable in the future.

We have reported a net loss of approximately $1,215,747 for the year
ended February 28, 2011, and we have an accumulated deficit through February
28, 2011 of $22,406,909. Without successful exploration and development of our
properties any investment in Daybreak could become devalued or worthless.

12

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In the past, we have
disclosed material weakness in our internal controls and procedures which could
erode investor confidence, jeopardize our ability to obtain insurance and limit
our ability to attract qualified persons to serve at Daybreak.

As of the end of the reporting period, February 28, 2011, an evaluation
was conducted by Daybreak management, including our Chief Executive Officer,
also serving as our interim principal finance and accounting officer, as to the
effectiveness of the design and operation of our internal controls over
financial reporting pursuant to Rule 13a-15(e) of the Exchange Act. Based on
that evaluation, our management concluded that our internal controls over
financial reporting were effective as of February 28, 2011.

When the evaluation of our internal controls over financial reporting
was conducted for the year ended February 28, 2009, a determination was made
that our internal controls were not effective as of that date. This evaluation
is more fully described in our Annual Report on Form 10-K for the year ended
February 28, 2009.

We have since initiated the following changes in our internal control
over financial reporting:

| |   |                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | developed an additional level of authoritative accounting resource
 and review to be used in the recognition of extraordinary non-cash
 transactions;
| |   |                                                                                                                                                      
| |  | additional training was designed to reinforce existing resources;                                                                                    
| |   |                                                                                                                                                      
| |  | management added an additional level of oversight for approval of
 non-routine non-cash transactions; and                                            
| |   |                                                                                                                                                      
| |  | a third party was engaged to assist in efforts to document and test
 financial reporting controls.                                                   

Failure to comply with rules regarding internal controls and procedures
may make it more difficult for us to obtain certain types of insurance,
including director and officer liability insurance. We may be forced to accept
reduced policy limits and coverage and/or incur substantially higher costs to
obtain the same or similar coverage. The impact of these events could also make
it more difficult for us to attract and retain qualified persons to serve on
our Board of Directors, on committees of our Board of Directors, or as
executive officers.

The market price of
our Common Stock could be volatile, which may cause the investment value of our
stock to decline.

Our Common Stock is quoted on the Over-the-Counter Bulletin Board
(OTC:BB) market under the symbol DBRM.OB.

The Bulletin Board market is characterized by low trading volume.
Because of this limited liquidity, shareholders may be unable to sell their
shares at or above the cost of their purchase prices. The trading price of our
shares has experienced wide fluctuations and these shares may be subject to similar
fluctuations in the future.

The trading price of our Common Stock may be affected by a number of
factors including events described in these risk factors, as well as our
operating results, financial condition, announcements of drilling activities,
general conditions in the oil and gas exploration and development industry, and
other events or factors.

In recent years, broad stock market indices, in general, and smaller
capitalization companies, in particular, have experienced substantial price
fluctuations. In a volatile market, we may experience wide fluctuations in the
market price of our Common Stock. These fluctuations may have a negative effect
on the market price of our Common Stock.

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Pursuant to SEC rules our Common Stock is
classified as a penny stock increasing the risk of investment in these
shares.

Our Common Stock is designated as a penny stock and thus may be more
illiquid than shares traded on an exchange or on NASDAQ. Penny stocks generally
are any non-NASDAQ or non-exchange listed equity securities with a price of
less than $5.00, subject to certain exceptions.

The penny stock reporting and disclosure requirements may have the
effect of reducing the level of trading activity in the secondary market for a
stock that is subject to these rules. The market liquidity for the shares could
be severely and adversely affected by limiting the ability of broker-dealers to
sell these shares.

The resale of shares
offered in private placements could depress the value of the shares.

Shares of our Common Stock have been offered and sold in private
placements at significant discounts to the trading price of the Common Stock at
the time of the offering. Sales of substantial amounts of Common Stock eligible
for future sale in the public market, or the availability of shares for sale,
including shares issued upon exercise of outstanding warrants, could adversely
affect the prevailing market price of our Common Stock and our ability to raise
capital by an offering of equity securities.

Privately placed issuances
of our Common Stock, preferred stock and warrants have and may continue to
dilute ownership interests which could have an adverse effect on our stock
prices.

Our authorized capital stock consists of 200,000,000 shares of Common
Stock and 10,000,000 shares of preferred stock. As of February 28, 2011, there
were 48,791,599 shares of Common Stock and 906,565 shares of Series A
Convertible Preferred stock outstanding.

Historically we have, and likely will continue to issue additional
shares of our Common Stock in connection with the compensation of personnel,
future acquisitions, private placements, or for other business purposes. Future
issuances of substantial amounts of these equity securities could have a
material adverse effect on the market price of our Common Stock, and would
result in further dilution of the ownership interests of our existing
shareholders.

Preferred Stock has been issued with greater
rights than the Common Stock issued which may dilute and depress the investment
value of the Common Stock investments.

The Board of Directors has the power to issue shares without
shareholder approval, and such shares can be issued with such rights,
preferences, and limitations as may be determined by our Board of Directors.

The rights of the holders of Common Stock are subject to and may be
adversely affected by the rights and preferences afforded to the holders of
these preferred shares. The rights and preferences of the issued preferred
shares include:

| |   |                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | conversion
 into Common Stock of the Company anytime the preferred shareholder may wish;                                                                                       
| |   |                                                                                                                                                                                
| |  | cumulative
 dividends in the amount of 6% of the original purchase price per annum,
 payable upon declaration by the board of directors;                                       
| |   |                                                                                                                                                                                
| |  | the ability
 to vote together with the Common Stock with a number of votes equal to the
 number of shares of Common Stock to be issued upon conversion of the
 Preferred Stock.

The issuance of these preferred shares could make it less likely that
shareholders receive a premium for their shares of Common Stock as a result of
any attempt to acquire the Company. Further, this issuance could adversely
affect the market price of, and the voting and other rights, of the holders of
outstanding shares of Common Stock.

14

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We may seek to raise additional funds in the
future through debt financing which may impose operational restrictions and may
further dilute existing ownership interests.

We expect to seek to raise additional capital in the future to help
fund our acquisition, development, and production of oil and natural gas
reserves. Debt financing, if available, may require restrictive covenants which
may limit our operating flexibility. Future debt financing may also involve
debt instruments that are convertible into or exercisable for Common Stock. The
conversion of the debt to equity financing may dilute the equity position of
our existing shareholders.

The amount of our
outstanding indebtedness continues to increase and our ability to make payments
towards such indebtedness could have adverse consequences on future operations.

Our outstanding indebtedness at February 28, 2011 was $1,345,000, which
constituted a $750,000 secured promissory note (Loan) and the $595,000
principal amount outstanding on the 12% Subordinated Notes (Notes). Our level
of indebtedness affects our operations in a number of ways. The Loan and the
Notes contain covenants that result in a substantial portion of our cash flow
from operations being dedicated to the payment of interest on our indebtedness.
Accordingly, these funds will not be available for other purposes, such as
future exploration, development or acquisition activities. Our ability to meet
our debt service obligations and reduce our total indebtedness will depend upon
our future performance. Our future performance, in turn, is dependent upon many
factors that are beyond our control such as general economic, financial and
business conditions. We cannot guarantee that our future performance will not
be adversely affected by such economic conditions and financial, business and
other factors.

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 Slopes Project. If the Company were to default on
this Loan, the Company would lose two of its primary leases.

We do not anticipate paying dividends on our
Common Stock which could devalue the market value of these securities.

We have not paid any cash dividends on our Common Stock since our
inception. We do not anticipate paying cash dividends in the foreseeable
future. Any dividends paid in the future will be at the complete discretion of
our Board of Directors. For the foreseeable future, we anticipate that we will
retain any revenues which we may generate from our operations. These retained
revenues will be used to finance and develop the growth of the Company.
Prospective investors should be aware that the absence of dividend payments
could negatively affect the market value of our Common Stock.

15

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ITEM 1B.
UNRESOLVED STAFF COMMENTS

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

16

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ITEM
2. PROPERTIES

During the year ended February 28, 2011, we were involved in an onshore
oil project in Kern County, California. In the year ended February 28, 2010, we
were involved in onshore oil and gas projects in Alabama, California and
Louisiana. Our involvement in the Alabama and Louisiana projects has ended and
information presented on these projects is intended to meet disclosure
requirements or be for comparative purposes only. Unless otherwise noted, all
of our discussion refers only to our continuing operations in California. We
have not filed any estimates of total, proved net oil or gas reserves with any
federal agency other than this report to the SEC for the fiscal year ended
February 28, 2011. Throughout this Annual Report on Form 10-K, oil is shown in
barrels (Bbls), and natural gas is shown in thousands of cubic feet (Mcf)
unless otherwise specified.

California (East Slopes Project, East Slopes
North Project and Expanded AMI Project)

Kern and Tulare Counties. In May 2005, we
agreed to jointly explore an area of mutual interest (AMI) in the southeastern part of the San Joaquin Basin near
Bakersfield, California. As our exploration work has continued, this project
has been divided into three major areas referred to as the East Slopes
Project and the East Slopes North Project, both located in Kern County, and
the Expanded AMI Project located in Tulare County. Drilling targets are
porous and permeable sandstone reservoirs which exist at depths of 1,200 feet
to 4,000 feet.

East Slopes Project, Kern County, California. 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. Since the
purchase of the additional working interest our average monthly revenue from
the five wells affected by this purchase has increased by approximately 75.8%
or $19,345 per month over the last six months of the year ended February 28,
2011. With this purchase of additional working interest and the completion of
two additional wells in October 2010, the average net revenue interest in our
eleven producing wells in Kern County, California is now 29.85%. Our average
working interest is 40.15% for these same wells.

The installation of electrical power service to our permanent
production facilities for the Sunday, Bear and Black property locations was
completed in September 2010. In March 2011, we completed the installation of
electrical service to our production facilities and wells at the Dyer Creek
Field location. 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 eight to ten 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.

We believe the Company is now well positioned to expand its operations
in the East Slopes Project. We currently have production from five reservoirs
at our Bear, Sunday, Black, Ball and Dyer Creek locations. The Sunday and Bear
locations each have four producing wells. The Black reservoir is the smallest
of all currently producing reservoirs, and we will most likely drill only one
or two more development wells. The Dyer Creek and Ball reservoirs were put on
production in late October 2010. There are several other similar prospects on
trend with the Bear, Black and Dyer Creek 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.

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
estimated to be approximately 34.6 acres in size with the potential for at
least three more development wells to be drilled in the future. 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 #4H well, we own a 37.5% working interest
with a 30.1% net revenue interest.

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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. The Bear reservoir is
estimated to be approximately 62 acres in size with the potential for at least
three more development wells to be drilled in the future including one planned
for the summer of 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 in 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. The Black #1 well was completed and put on production in
January 2010. Production is from the Vedder sand at 2,150 feet. The Black
reservoir is estimated to be approximately 13.4 acres in size with the
potential for at least two more development wells to be drilled in the future.
We have a 37.5% working interest with a 29.8% net revenue interest at this
property.

Sunday Central Processing and Storage Facility

The oil produced from our acreage is considered heavy oil. The oil
ranges from 14° to 16°
API gravity. All of our oil from the Sunday, Bear and Black locations is
processed, stored and sold from the Sunday Central Processing and Storage
Facility. The oil must be heated to separate and remove 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 $32 per barrel to below $20 per barrel of oil after
accounting for the loss of certain oil processing credits that ceased with our
purchase of an additional 16.67% working interest in September 2010. By having
this central facility and permanent electrical power available, we are ensuring
that our operating expenses are kept to a minimum.

Ball Property

The Ball #1-11 well was put on production in late October 2010. Our 3-D
seismic indicates a reservoir approximately 37.5 acres in size with the
potential for at least two development wells to be drilled in the future
including one in the summer of 2011. Production from the Ball #1-11 well is
being processed at the Dyer Creek production facility. We have a 41.67% working
interest with a 34.69% net revenue interest at this property.

Dyer Creek Property

The Dyer Creek #67X-11 well was also put on production in late October
2010. This well is producing from the Vedder sand and is located to the north
of the Bear reservoir on the same trapping fault. The Dyer Creek reservoir has
the potential for at least one development well in the future. Production from
the Dyer Creek #67X-11 well is also being processed at the Dyer Creek production
facility. We have a 41.67% working interest with a 34.69% net revenue interest
at this property.

18

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Dyer Creek Processing and Storage Facility

The Dyer Creek Processing and Storage Facility serves the Dyer Creek
and Ball properties and includes previously abandoned infrastructure that we
have refurbished. We have completed the installation of electrical service to
this location, thereby reducing operating costs by eliminating the use of
rental equipment. Our oil processing costs at this facility should now decline
significantly. The oil produced into this facility has similar API gravity to
the oil at the Sunday production facility and the oil must also be heated to
separate and remove water in preparation for sale.

Bull Run Prospect

This prospect is located in the southern portion of our acreage
position. The drilling targets are the Etchegoin and Santa Margarita sands
located between 800 and 1,200 feet deep. We plan to drill an exploratory well
on this prospect during the summer of 2011. Based on wells drilled by previous
operators and our recently reprocessed 3-D seismic data, we estimate that the
Bull Run Prospect is approximately 280 acres in size with a gross reserve
potential of 6 million barrels of oil. The Bull Run wells will require a pilot
steam flood and additional production facilities. We have a 41.67% working
interest in this prospect.

Glide-Kendall Prospect

This prospect is located in the southern portion of our acreage
position. The drilling targets are the Olcese and Eocene sands between 1,000
and 2,000 feet deep. We plan to drill an exploratory well in the fall of 2011.
We estimate that the Glide Kendall prospect is 200 acres in size with a gross
reserve potential of 500,000 barrels of oil. We have a 41.67% working interest
in this prospect.

Sherman Prospect

This prospect is located in the southern portion of our acreage
position. The drilling targets are the Olcese and Etchegoin sands between 1,000
and 2,000 feet deep. We plan to drill an exploratory well in early 2012. We
estimate that the Sherman Prospect is 100 acres in size with a gross reserve
potential of 300,000 barrels of oil. We have a 41.67% working interest in this
prospect.

Baker Prospect

This prospect is located in the northern portion of our acreage
position approximately one mile south of our Sunday property. This drilling
target is the Vedder sand which is approximately 2,000 feet deep. We plan to
drill an exploratory well in early 2012. We estimate that the Baker prospect is
70 acres in size with a gross reserve potential of 200,000 barrels of oil. We
have a 41.67% working interest in this prospect.

Breckenridge-Chimney Prospect

This prospect is located in the central portion of our acreage
position. The drilling targets are the Vedder and Eocene sands between 2,000 and
2,500 feet deep. We plan to drill an exploratory well in 2012. We estimate that
the Breckenridge-Chimney prospect is 60 acres in size with a gross reserve
potential of 1.5 million barrels of oil. We have a 41.67% working interest in
this prospect.

Tobias Prospect

This prospect is located in the central portion of our acreage
position. The drilling targets are the Vedder and Eocene sands between 2,000
and 2,500 feet deep. We plan to drill an exploratory well in 2012. We estimate
that the Tobias prospect is 60 acres in size with a gross reserve potential of
700,000 barrels of oil. We have a 41.67% working interest in this prospect.

19

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We plan to spend approximately $1,800,000 in new capital investments
within the East Slopes Project area in the current fiscal year.

Production, Revenue and LOE

Our net production volume, net revenue and net lease operating expenses
(LOE) by property location for the three months and years ended February 28,
2010 and February 28, 2011 in Kern County, California is set forth in the table
below. Due to certain oil processing credits that we received from December
2009 through August 2010, our overall production costs for the Sunday #1 well
and all four Bear wells during that time period were significantly less than
the overall production costs for the other Sunday wells and the Black #1 well.
These oil processing credits ended September 1, 2010 with our acquisition of a
portion of a third partys working interest in this project. Initial LOE costs
for the Ball and Dyer Creek locations were higher than average during the first
four months of production because of the use of rental equipment to supply
power to the wells and production facilities. Electrical power installation has
now been completed for these wells and the associated production facility.

|                     |  |                    |         |                     |   |                   |  |                   |         |  |   |         | 
|-------------------- |  | ------------------ | ------- | ------------------- | - | ----------------- |  | ----------------- | ------- |  | - | ------- | 
|                     |  | Three Months Ended |         | Twelve Months Ended |  
|Location             |  | February 28, 2011  |         | February 28, 2010   |   | February 28, 2011 |  | February 28, 2010 |        
|                     |  |                    |         |                     |   |                   |  |                   |        
|Sunday               |  |                    |         |                     |   |                   |  |                   |         |  |   |         | 
|Production (Bbls)    |  |                    | 1,585   |                     |   | 1,843             |  |                   | 6,852   |  |   | 5,812   | 
|Revenue              |  | $                  | 133,390 |                     | $ | 125,930           |  | $                 | 505,888 |  | $ | 359,921 | 
|LOE Costs            |  | $                  | 15,605  |                     | $ | 12,397            |  | $                 | 67,650  |  | $ | 135,137 | 
|                     |  |                    |         |                     |   |                   |  |                   |         |  |   |         | 
|Bear                 |  |                    |         |                     |   |                   |  |                   |         |  |   |         | 
|Production (Bbls)    |  |                    | 1,354   |                     |   | 649               |  |                   | 4,365   |  |   | 1,470   | 
|Revenue              |  | $                  | 114,110 |                     |   | 44,635            |  | $                 | 330,196 |  |   | 95,778  | 
|LOE Costs            |  | $                  | 15,645  |                     | $ | 677               |  | $                 | 26,710  |  | $ | 81,695  | 
|                     |  |                    |         |                     |   |                   |  |                   |         |  |   |         | 
|Black                |  |                    |         |                     |   |                   |  |                   |         |  |   |         | 
|Production (Bbls)    |  |                    | 252     |                     | $ | 198               |  |                   | 1,077   |  |   | 198     | 
|Revenue              |  | $                  | 21,179  |                     | $ | 13,659            |  | $                 | 79,903  |  | $ | 13,659  | 
|LOE Costs            |  | $                  | 4,349   |                     | $ | 1,514             |  | $                 | 15,466  |  | $ | 1,514   | 
|                     |  |                    |         |                     |   |                   |  |                   |         |  |   |         | 
|Ball                 |  |                    |         |                     |   |                   |  |                   |         |  |   |         | 
|Production (Bbls)    |  |                    | 230     |                     |   |                  |  |                   | 277     |  |   |        | 
|Revenue              |  | $                  | 19,270  |                     | $ |                  |  | $                 | 22,970  |  | $ |        | 
|LOE Costs            |  | $                  | 10,862  |                     | $ |                  |  | $                 | 16,901  |  | $ |        | 
|                     |  |                    |         |                     |   |                   |  |                   |         |  |   |         | 
|Dyer Creek           |  |                    |         |                     |   |                   |  |                   |         |  |   |         | 
|Production (Bbls)    |  |                    | 384     |                     |   |                  |  |                   | 438     |  |   |        | 
|Revenue              |  | $                  | 32,426  |                     | $ |                  |  | $                 | 36,522  |  | $ |        | 
|LOE Costs            |  | $                  | 10,245  |                     | $ |                  |  | $                 | 15,442  |  | $ |        | 
|                     |  |                    |         |                     |   |                   |  |                   |         |  |   |         | 
|Infrastructure Costs |  | $                  | 5,818   |                     | $ | 4,319             |  | $                 | 31,065  |  | $ | 22,261  | 
|                     |  |                    |         |                     |   |                   |  |                   |         |  |   |         | 
|Total                |  |                    |         |                     |   |                   |  |                   |         |  |   |         | 
|Production (Bbls)    |  |                    | 3,805   |                     |   | 2,690             |  |                   | 13,009  |  |   | 7,480   | 
|Revenue              |  | $                  | 320,375 |                     | $ | 184,224           |  | $                 | 975,479 |  | $ | 469,358 | 
|LOE Costs            |  | $                  | 62,524  |                     | $ | 18,907            |  | $                 | 173,234 |  | $ | 240,607 | 
|                     |  |                    |         |                     |   |                   |  |                   |         |  |   |         | 
|Average Sales Price  |  | $                  | 84.20   |                     | $ | 68.50             |  | $                 | 74.98   |  | $ | 62.75   | 
|                     |  |                    |         |                     |   |                   |  |                   |         |  |   |         | 
|Average LOE Cost     |  | $                  | 16.43   |                     | $ | 7.03              |  | $                 | 13.32   |  | $ | 32.17   | 

20

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Reserves

All of our estimated proved reserves of 237,820 barrels of oil at March
1, 2011 were derived from engineering reports prepared by Lonquist & Co.
LLC (Lonquist) of Austin and Houston, Texas in accordance with generally
accepted petroleum engineering and evaluation principles and definitions and
guidelines established by the SEC.

Lonquist is an independent petroleum engineering consulting firm
registered in the State of Texas, and Tereasa Montemayor, a Senior Petroleum
Engineer, is the technical person at Lonquist primarily responsible for
evaluating the proved reserves covered by their report. Ms. Montemayor
graduated from the University of Texas at Austin with a degree in Petroleum
Engineering. She is a member in good standing of the Society of Petroleum
Engineers and has over 23 years experience in evaluating oil and gas reserves.
Ms. Montemayor has been employed by Lonquist for over four years, most recently
as a reservoir engineer since 2009. The services provided by Lonquist are not
audits of our reserves but instead consist of complete engineering evaluations of
the respective properties. For more information about the evaluations performed
by Lonquist, refer to the copy of their report filed as an exhibit to this
Annual Report on Form 10-K.

Our internal controls over the reserve reporting process are designed to
result in accurate and reliable estimates in compliance with applicable
regulations and guidance. Internal reserve preparation for the Company is
performed by Robert Martin, the Senior Vice-President - Exploration. Mr. Martin
is a 1977 graduate of McGill University in Montreal, Quebec, Canada with an
Honors Bachelor of Science Degree in Geological Science and is a member, in
good standing, of the Association of Professional Engineers Geologists and
Geophysicists of Alberta (APEGGA) and entitled to the designation Professional
Geologist in Alberta. Mr. Martin has over 30 years of experience in petroleum
exploration and management.

Although we believe that the estimates of reserves prepared by Mr.
Martin have been prepared in accordance with professional engineering standards
consistent with SEC and FASB guidelines, we engage an independent petroleum
engineering consultant to prepare an annual evaluation of our estimated proved
reserves. We provide to Lonquist for their analysis all pertinent data needed to
properly evaluate our reserves. Mr. Martin consults regularly with Lonquist
during the reserve estimation process to review properties, assumptions, and
any new data available. Additionally, the Companys senior management reviewed
and approved all Daybreak reserve report information contained in this Annual
Report on Form 10-K.

Under current SEC standards, proved reserves are those quantities of
oil and natural gas, which, by analysis of geoscience and engineering data, can
be estimated with reasonable certainty to be economically producible from a
given date forward, from known reservoirs, and under existing economic
conditions, operating methods, and government regulations. The term reasonable
certainty implies a high degree of confidence that the quantities of oil
and/or natural gas actually recovered will equal or exceed the estimate.
Reasonable certainty can be established using techniques that have been proved
effective by actual production from projects in the same reservoir or an
analogous reservoir or by other evidence using reliable technology that
establishes reasonable certainty. Reliable technology is a grouping of one or
more technologies (including computational methods) that have been field tested
and have demonstrated to provide reasonably certain results with consistency
and repeatability in the formation being evaluated or in an analogous
formation.

In order to establish reasonable certainty with respect to our
estimated proved reserves, we employ technologies that have been demonstrated
to yield results with consistency and repeatability. The technical data used in
the estimation of our proved reserves include, but are not limited to,
electrical logs, radioactivity logs, core analyses, geologic maps and available
downhole and production data, seismic data and well test data. Generally, oil
and gas reserves are estimated using, as appropriate, one or more of these
available methods: production decline curve analysis, analogy to similar
reservoirs or volumetric calculations. Reserves attributable to producing wells
with sufficient production history are estimated using appropriate decline curves or other performance relationships. Reserves
attributable to producing wells with limited production history and for
undeveloped locations are estimated using performance from analogous wells in
the surrounding area and technical data to assess the reservoir continuity. In
some instances, particularly in connection with exploratory discoveries,
analogous performance data is not available, requiring us to rely primarily on
volumetric calculations to determine reserve quantities. Volumetric
calculations are primarily based on data derived from geologic-based seismic
interpretation, open-hole logs and completion flow data. When using production
decline curve analysis or analogy to estimate proved reserves, we limit our
estimates to the quantities of oil and gas derived through volumetric
calculations.

21

---



The accuracy of any reserve estimate is a function of the quality of
available geological, geophysical, engineering and economic data, the precision
of the engineering and geological interpretation and judgment. The estimates of
reserves and future cash flows are based on various assumptions and are
inherently imprecise. Although we believe these estimates are reasonable,
actual future production, cash flows, taxes, development expenditures,
operating expenses and quantities of recoverable oil and natural gas reserves
may vary substantially from these estimates. Also, the use of a 10% discount
factor for reporting purposes may not necessarily represent the most
appropriate discount factor, given actual interest rates and risks to which our
business or the oil and natural gas industry in general are subject.

Our estimated quantities of proved oil reserves as of February 28, 2011
are set forth in the table below. All of our proved reserves are located in
Kern County, California.

|                 |  |           |         | 
|---------------- |  | --------- | ------- | 
|Reserve Category |  | Oil (Bbl) |        
|                 |  |           |        
|                 |  |           |         | 
|Developed        |  |           | 88,840  | 
|Undeveloped      |  |           | 148,980 | 
|                 |  |           |         | 
|Total Proved     |  |           | 237,820 | 
|                 |  |           |         | 

Changes in our estimated proved developed oil reserves for the year
ended February 28, 2011 are set forth in the table below.

|                                 |  |                       |  
|-------------------------------- |  | --------------------- | -
|                                 |  | Proved Reserves (Bbl) |  
|                                 |  |                       |  
|Balance as of February 28,
 2010 |  | 38,647                |  
|Extensions and discoveries       |  | 23,507                |  
|Revisions                        |  | 21,549                |  
|Purchases of minerals-in-place   |  | 18,146                |  
|Production                       |  | (13,009               | )
|                                 |  |                       |  
|Balance as of February 28,
 2011 |  | 88,840                |  
|                                 |  |                       |  

Extensions and discoveries. Extensions and discoveries for the year
ended February 28, 2011 added 23,507 barrels of oil of proved reserves,
replacing 180.7% of our fiscal year production. These additions resulted
primarily from our development drilling program in the Bear Field and new
discoveries in the Ball Field. Of the total reserve additions, proved developed
reserves accounted for 100% of the extensions and discoveries.

Revisions. Net upward revisions of 21,549 barrels of
oil resulted from new information derived by additional interpretation of
existing 3-D seismic data.

Purchases of minerals-in-place. In September 2010, we acquired from a
third party an additional 16.67% working interest in five producing oil wells
in Kern County, California. This purchase resulted in a 18,146 barrel increase
in our proved oil reserves.

22

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The following table summarizes changes in our
estimated proved undeveloped reserves for the year ended February 28, 2011.

|                                 |  |                                    |  
|-------------------------------- |  | ---------------------------------- | -
|                                 |  | Proved Undeveloped
 Reserves (Bbl) |  
|                                 |  |                                    |  
|Balance as of February 28,
 2010 |  | 23,507                             |  
|Extensions and discoveries       |  | 148,980                            |  
|Revisions                        |  |                                   |  
|Reclassified to proved developed |  | (23,507                            | )
|                                 |  |                                    |  
|Balance as of February 28,
 2011 |  | 148,980                            |  
|                                 |  |                                    |  

We added 148,980 barrels of proved undeveloped oil reserves from
extensions and discoveries in Kern County, California. We also converted 23,507
barrels of proved undeveloped reserves to proved developed reserves as of
February 28, 2011. We have no amounts of proved undeveloped reserves that have
remained undeveloped for a period greater than five years.

East Slopes North Project, Kern County,
California.This acreage is located immediately north of our East Slopes Project
area in Kern County, California. We have currently dropped plans to hold this
acreage and conduct a seismic survey on this acreage while we concentrate on
developing additional prospects in the East Slopes Project.

Tulare County, California. The Expanded AMI
  Project, also located in the San Joaquin Basin, is in Tulare County and is a
  separate project area from the East Slopes Project in Kern County. We have
  currently dropped plans to hold and develop this acreage while we concentrate
on developing additional prospects in the East Slopes Project.

Alabama
(East Gilbertown Field)  Discontinued Operations

Choctaw County. In December 2006, we acquired
a working interest in an existing oilfield project, the East Gilbertown Field,
which produces relatively heavy oil (approximately 18° API). During the year
ended February 28, 2010 we made the decision to exit this project. On March 15,
2010, we finalized the sale to a third party of our 12.5% working interest in
this field. For the year ended February 28, 2011, we did not receive any oil
sales revenue from this project. In connection with the sale, the Company
recognized a gain from sale of oil and gas properties for the year ended
February 28, 2011 of $10,285 which is presented under Discontinued Operations
in the Statement of Operations. This sale has allowed us to focus on projects
that better meet our corporate goals and objectives.

Louisiana (Krotz Springs Field)  Past
Operations

St. Landry Parish. The Krotz Springs Field is
a gas play with production coming from a Cockfield Sands reservoir. When
production commenced in May of 2007, the unitized field operator of the Krotz
Springs Field became the operator of this well. During the year ended February
28, 2010, we withdrew from this project and effectively ended all further
involvement in this project. In the year ended February 28, 2011 we received
approximately $104,017 from the Field Operator as a one-time adjustment to gas
sales revenue that occurred from May 2007 through December 2009. This revenue
is included in the Oil and Gas Sales caption on the Statement of Operations.

Summary
Operating Data

The production volume shown in the following table is our net share of
annual production in each project for the past three fiscal years. One barrel
of oil equivalent (BOE) is roughly equivalent to 6,000 cubic feet or 6
Mcf of gas. Our involvement in the Alabama and Louisiana projects has
ended and information presented on these discontinued projects is intended to
only meet disclosure requirements. We do not have any fixed delivery commitment
for oil or gas at any project.

23

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|                              |  |                                 |        |      |  |       |  |  |        | 
|----------------------------- |  | ------------------------------- | ------ | ---- |  | ----- |  |  | ------ | 
|                              |  | For the Year Ended February 28, |       
|                              |  |                                 |       
|                              |  | 2011                            |        | 2010 |  | 2009  | 
|                              |  |                                 |        |      |  |       | 
|Oil and
 Gas Production Data: |  |                                 |        |      |  |       |  |  |        | 
|Oil (Bbls)                    |  |                                 |        |      |  |       |  |  |        | 
|California                    |  |                                 | 13,009 |      |  | 7,480 |  |  | 44     | 
|Alabama                       |  |                                 |       |      |  | 1,739 |  |  | 2,344  | 
|Louisiana                     |  |                                 |       |      |  |      |  |  | 24     | 
|                              |  |                                 |        |      |  |       |  |  |        | 
|Subtotal                      |  |                                 | 13,009 |      |  | 9,219 |  |  | 2,412  | 
|Gas (Mcf)                     |  |                                 |        |      |  |       |  |  |        | 
|Louisiana                     |  |                                 |       |      |  | 1,327 |  |  | 14,882 | 
|Total (BOE)                   |  |                                 |        |      |  |       |  |  |        | 
|California                    |  |                                 | 13,009 |      |  | 7,480 |  |  | 44     | 
|Alabama                       |  |                                 |       |      |  | 1,739 |  |  | 2,344  | 
|Louisiana                     |  |                                 |       |      |  | 221   |  |  | 2,504  | 
|                              |  |                                 |        |      |  |       |  |  |        | 
|Total                         |  |                                 | 13,009 |      |  | 9,440 |  |  | 4,892  | 
|                              |  |                                 |        |      |  |       |  |  |        | 

The oil and gas sales revenue shown in the table below is our net share
of annual revenue in each project for the past three fiscal years.

|                                                                                                                                                                                                                     |  |                                 |           |      |   |         |  |   |         | 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | --------- | ---- | - | ------- |  | - | ------- | 
|                                                                                                                                                                                                                     |  | For the Year Ended February 28, |          
|                                                                                                                                                                                                                     |  |                                 |          
|                                                                                                                                                                                                                     |  | 2011                            |           | 2010 |   | 2009    | 
|                                                                                                                                                                                                                     |  |                                 |           |      |   |         | 
|Oil and
 Gas Revenue:                                                                                                                                                                                                |  |                                 |           |      |   |         |  |   |         | 
|California                                                                                                                                                                                                           |  | $                               | 975,479   |      | $ | 469,357 |  | $ | 1,290   | 
|Alabama                                                                                                                                                                                                              |  |                                 |          |      |   | 84,353  |  |   | 148,741 | 
|Louisiana*                                                                                                                                                                                                           |  |                                 | 104,017   |      |   | 2,085   |  |   | 51,881  | 
|                                                                                                                                                                                                                     |  |                                 |           |      |   |         |  |   |         | 
|Total                                                                                                                                                                                                                |  | $                               | 1,079,496 |      | $ | 555,795 |  | $ | 201,912 | 
|                                                                                                                                                                                                                     |  |                                 |           |      |   |         |  |   |         | 
|                                                                                                                                                                                                                     |  |                                 |           |      |   |         |  |   |         | 
|*During the year ended
 February 28, 2011 we received approximately $104,017 from the field operator
 in Louisiana as a one-time adjustment to gas sales revenue that occurred from
 May 2007 through December 2009.

The table below shows the average sales price we received for oil and
natural gas in aggregate from each project area on a BOE basis for the past
three fiscal years.

|                |  |                                 |       |      |   |       |  |   |       | 
|--------------- |  | ------------------------------- | ----- | ---- | - | ----- |  | - | ----- | 
|                |  | For the Year Ended February 28, |      
|                |  |                                 |      
|                |  | 2011                            |       | 2010 |   | 2009  | 
|                |  |                                 |       |      |   |       | 
|Average
 Price: |  |                                 |       |      |   |       |  |   |       | 
|Oil (BOE)       |  |                                 |       |      |   |       |  |   |       | 
|California      |  | $                               | 74.98 |      | $ | 62.75 |  | $ | 29.13 | 
|Alabama         |  | $                               |      |      | $ | 48.51 |  | $ | 63.44 | 
|Louisiana       |  | $                               |      |      | $ | 8.70  |  | $ | 20.98 | 
|Average         |  | $                               | 74.98 |      | $ | 51.95 |  | $ | 41.47 | 

The table below shows the average cost of production for the past three
fiscal years on a BOE basis.

|                                 |  |                                 |       |      |   |        |  |   |        | 
|-------------------------------- |  | ------------------------------- | ----- | ---- | - | ------ |  | - | ------ | 
|                                 |  | For the Year Ended February 28, |      
|                                 |  |                                 |      
|                                 |  | 2011                            |       | 2010 |   | 2009   | 
|                                 |  |                                 |       |      |   |        | 
|Average
 Production Costs (BOE): |  |                                 |       |      |   |        |  |   |        | 
|California                       |  | $                               | 13.32 |      | $ | 32.17  |  | $ | 354.08 | 
|Alabama                          |  | $                               |      |      | $ | 52.14  |  | $ | 39.43  | 
|Louisiana                        |  | $                               |      |      | $ | 115.39 |  | $ | 15.66  | 
|Overall Average                  |  | $                               | 13.32 |      | $ | 33.40  |  | $ | 26.01  | 

24

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The table below shows the developed and undeveloped oil and gas lease
acreage held by us as of February 28, 2011. Undeveloped acres are on lease
acreage that wells have not been drilled or completed to a point that would
permit the production of commercial quantities of oil and gas. Gross acres are
the total number of acres in which we have an interest. Net acres are the sum
of our fractional interests owned in the gross acres.

|           |  |           |  |             |  |        |  |       |  |        |  |      
|---------- |  | --------- |  | ----------- |  | ------ |  | ----- |  | ------ |  | -----
|           |  | Developed |  | Undeveloped |  | Total 
|           |  |           |  |             |  |       
|           |  | Gross     |  | Net         |  | Gross  |  | Net   |  | Gross  |  | Net  
|           |  |           |  |             |  |        |  |       |  |        |  |      
|           |  |           |  |             |  |        |  |       |  |        |  |      
|California |  | 440       |  | 185         |  | 20,760 |  | 8,650 |  | 21,200 |  | 8,835

The table below summarizes our productive oil and gas wells as of
February 28, 2011. Productive wells are producing wells and wells capable of
production. Gross wells are the total number of wells in which we have an
interest. Net wells are the sum of our fractional interests owned in the gross
wells.

|                         |  |       |  |    
|------------------------ |  | ----- |  | ---
|Property Location        |  | Gross |  | Net
|                         |  |       |  |    
|Kern
 County, California |  | 11    |  | 4.4
|                         |  |       |  |    
|Total                    |  | 11    |  | 4.4

The table below shows our exploratory and development well drilling
activity for the past three fiscal years. We had no drilling activity in either
of our Alabama or Louisiana projects during this time.

|                        |  |                                        |  |                                        |  |                                        |  |     |  |            |  |    
|----------------------- |  | -------------------------------------- |  | -------------------------------------- |  | -------------------------------------- |  | --- |  | ---------- |  | ---
|                        |  | For the
 Year Ended
 February 28, 2011 |  | For the
 Year Ended
 February 28, 2010 |  | For the
 Year Ended
 February 28, 2009
|                        |  |                                        |  |                                        |  |                                       
|Property
Location       |  | Productive                             |  | Dry                                    |  | Productive                             |  | Dry |  | Productive |  | Dry
|                        |  |                                        |  |                                        |  |                                        |  |     |  |            |  |    
|Kern County, California |  |                                        |  |                                        |  |                                        |  |     |  |            |  |    
|Exploratory             |  | 2                                      |  |                                       |  | 1                                      |  |    |  | 2          |  | 2  
|Developmental           |  | 2                                      |  |                                       |  | 4                                      |  |    |  |           |  |   
|                        |  |                                        |  |                                        |  |                                        |  |     |  |            |  |    
|Total                   |  | 4                                      |  |                                       |  | 5                                      |  |    |  | 2          |  | 2  

25

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ITEM 3. LEGAL
PROCEEDINGS

Neither the Company, nor any of our officers or directors is a party to
any material legal proceeding or litigation, and such persons know of no
material legal proceeding or contemplated or threatened litigation. There are
no judgments against us or our officers or directors. None of our officers or
directors has been convicted of a felony or misdemeanor relating to securities
or performance in corporate office.

ITEM 4. REMOVED AND RESERVED

26

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PART II

ITEM 5. MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES

Our Common Stock is quoted in the over-the-counter market on the OTC
Bulletin Board under the symbol DBRM.OB. The following table shows the high
and low closing sales prices for our Common Stock for the two most recent
fiscal years. The quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions. The
information is derived from information received from online stock quotation
services.

|               |  |                              |      |                              |  |       |  |     |      |  |  |      | 
|-------------- |  | ---------------------------- | ---- | ---------------------------- |  | ----- |  | --- | ---- |  |  | ---- | 
|               |  | Year Ended February 28, 2011 |      | Year Ended February 28, 2010 | 
|               |  |                              |      |                              | 
|               |  | High                         |      | Low                          |  | High  |  | Low |     
|               |  |                              |      |                              |  |       |  |     |     
|First Quarter  |  |                              | 0.12 |                              |  | 0.09  |  |     | 0.12 |  |  | 0.07 | 
|Second Quarter |  |                              | 0.10 |                              |  | 0.07  |  |     | 0.15 |  |  | 0.09 | 
|Third Quarter  |  |                              | 0.13 |                              |  | 0.07  |  |     | 0.14 |  |  | 0.10 | 
|Fourth Quarter |  |                              | 0.13 |                              |  | 0.085 |  |     | 0.14 |  |  | 0.10 | 

As of May 26, 2011, the Company had 2,221 shareholders of record. This
number does not include an indeterminate number of shareholders whose shares
are held by brokers in street name.

Transfer Agent

The transfer agent for our Common Stock is Computershare Trust Company,
N.A., 250 Royall Street, Canton, MA 02021. Their web site address is:
www.computershare.com.

Dividend Policy

The Company has not declared or paid cash dividends or made
distributions in the past, and the Company does not anticipate that it will pay
cash dividends or make distributions in the foreseeable future.

Sales of Unregistered Securities

Subordinated Notes

On January 13, 2010, we commenced a private placement of 12%
Subordinated Notes (the Notes). We sold $595,000 of Notes to 13 accredited
investors through the closing date of March 16, 2010. One of the accredited
investors, a related party, is our Company President and Chief Executive
Officer. The terms and conditions of the related party Note were identical to
the terms and conditions of other participants Notes.

Interest on the Notes accrues at 12% per annum, payable semi-annually.
The note principal is payable in full at the expiration of the term of the
Notes, which is January 29, 2015. Should the Board of Directors, on January 29,
2015, decide that the payment of the principal and any unpaid interest would
impair the financial condition or operations of the Company, the Company may
then 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.

27

---



Two Common Stock purchase warrants were issued for every dollar raised
through the private placement resulting in a total of 1,190,000 warrants being
issued through March 16, 2010. The warrants expire on January 29, 2015 and have
an exercise price of $0.14. The fair value of the warrants issued with the
Notes, as determined by the Black-Scholes option pricing model, was $116,557
using the following weighted-average assumptions: a risk free interest rate of 2.33%; volatility of
147.6%; 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. Amortization expense for the year ended February 28, 2011 amounted to
$16, 234. Unamortized debt discount amounted to $99,106 as of February 28,
2011. The Company analyzed the Notes and warrants for derivative accounting
consideration and determined that derivative accounting does not apply to these
instruments.

Proceeds from the fundraising 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.

Common Stock Issuances

On September 17, 2010, we exercised a preferential right to acquire an
additional 16.67% working interest in the East Slopes Project in Kern County,
California from another working interest owner. The Company financed the
additional working interest by issuing, to an accredited 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. Interest expense related to the Loan for the year
ended February 28, 2011 was $37,500. Unamortized interest expense amounted to
$37,500 as of February 28, 2011.

We issued 250,000 shares of the Companys Common Stock to the third
party as a loan origination fee. These shares were issued on October 8, 2010.
The closing price of the Companys Common Stock on September 17, 2010 was
$0.095 and the stock issuance was valued at $23,750 which was deferred and is
being amortized over the term of the Loan. Amortization expense for the year
ended February 28, 2011 was $11,875. Unamortized loan origination fee expense
amounted to $11,875 as of February 28, 2011.

The Company analyzed the share issuance for derivative accounting
consideration and determined that derivative accounting does not apply to this
transaction. The shares were issued in reliance on an exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as
amended.

Private Placement Sale

On May 22, 2008, Daybreak closed an unregistered offering of its Common
Stock through a private placement under the securities transaction exemption
Regulation D Rule 506 of the Securities Act of 1933. Shares were offered at
$0.25 per share to accredited investors only as defined in Regulation D under
the Securities Act of 1933. For the year ended February 28, 2009, a total of
60,000 shares of unregistered Common Stock were sold directly by the Company to
two accredited investors for $15,000. Net proceeds were used to meet leasehold
expenses in California and general and administrative (G&A) expenses.

Common Stock Warrants

For the year ended February 28, 2011, a total of 39,550 warrants
expired. These warrants were issued to a placement agent from a private
placement of our Common Stock that occurred in the year ended February 28,
2008.

During the year ended February 28, 2011, a total of 210,000 warrants
were issued by the Company. A total of 60,000 warrants were issued as a part of
the private placement of the Subordinated Notes discussed above. The remaining
150,000 warrants were issued to a consultant for services rendered and expire
on April 16, 2015 with an exercise price of $0.14. The fair value of the
warrants issued to the consultant, 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%.

28

---



There were no warrants exercised during the year ended February 28,
2011. As of February 28, 2011 and 2010, there were 9,927,145 and 9,756,695
warrants issued and outstanding, respectively.

Warrants
outstanding and exercisable as of February 28, 2011 are set forth in the table
below:

|                                             |  |          |           |                |   |                         |  |                                  |      |  |  |           | 
|-------------------------------------------- |  | -------- | --------- | -------------- | - | ----------------------- |  | -------------------------------- | ---- |  |  | --------- | 
|Description                                  |  | Warrants |           | Exercise Price |   | Remaining Life
 (Years) |  | Exercisable
 Warrants
 Remaining |     
|                                             |  |          |           |                |   |                         |  |                                  |     
|Spring 2006 Common Stock
 Private Placement  |  |          | 4,013,602 |                | $ | 2.00                    |  |                                  | 0.25 |  |  | 4,013,602 | 
|Placement Agent Warrants -
 Spring 2006 PP   |  |          | 802,721   |                | $ | 0.75                    |  |                                  | 2.25 |  |  | 802,721   | 
|Placement Agent Warrants -
 Spring 2006 PP   |  |          | 401,361   |                | $ | 2.00                    |  |                                  | 2.25 |  |  | 401,361   | 
|July 2006 Preferred Stock
 Private Placement |  |          | 2,799,530 |                | $ | 2.00                    |  |                                  | 0.50 |  |  | 2,799,530 | 
|Placement Agent Warrants -
 July 2006 PP     |  |          | 419,930   |                | $ | 1.00                    |  |                                  | 2.50 |  |  | 419,930   | 
|Convertible Debenture Term
 Extension        |  |          | 150,001   |                | $ | 2.00                    |  |                                  | 0.75 |  |  | 150,001   | 
|12% Subordinated Notes                       |  |          | 1,190,000 |                | $ | 0.14                    |  |                                  | 3.75 |  |  | 1,190,000 | 
|Warrants Issued for
 Services                |  |          | 150,000   |                | $ | 0.14                    |  |                                  | 4.25 |  |  | 150,000   | 
|                                             |  |          |           |                |   |                         |  |                                  |      |  |  |           | 
|                                             |  |          | 9,927,145 |                |   |                         |  |                                  |      |  |  | 9,927,145 | 
|                                             |  |          |           |                |   |                         |  |                                  |      |  |  |           | 

The outstanding warrants as of February 28, 2011, have a weighted
average exercise price of $1.61; a weighted average remaining life of 1.14
years; and an intrinsic value of $-0-.

Securities Authorized for Issuance under
Equity Compensation Plan

The table below sets forth information regarding outstanding restricted
stock awards for the fiscal year ended February 28, 2011. The Company has not
awarded any restricted stock units. The Company has no qualified or
nonqualified stock option plans and has no outstanding stock options.

Equity Compensation Plan Information

|                                                               |  |                                                                                                |           |                                                                                    |   |                                                                                                 |  |  |           |    
|-------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------- | --------- | ---------------------------------------------------------------------------------- | - | ----------------------------------------------------------------------------------------------- |  |  | --------- | ---
|Plan Category                                                  |  | Number of securities to
 be issued upon exercise
 of outstanding options,
 warrants and rights |           | Weighted-
 average exercise
 price of
 outstanding
 options,
 warrants and
 rights |   | Number of securities
 remaining available for
 future issuance under
 equity compensation plans | 
|                                                               |  |                                                                                                |           |                                                                                    |   |                                                                                                 | 
|Equity compensation plans
 approved by security holders        |  |                                                                                                |          |                                                                                    |   |                                                                                                |  |  |          |    
|Equity compensation plans
 not approved by security holders(1) |  |                                                                                                | 3,000,000 |                                                                                    | $ | 0.10                                                                                            |  |  | 1,000,000 | (2)
|                                                               |  |                                                                                                |           |                                                                                    |   |                                                                                                 | 
|Total                                                          |  |                                                                                                | 3,000,000 |                                                                                    | $ | 0.10                                                                                            |  |  | 1,000,000 | (2)
|                                                               |  |                                                                                                |           |                                                                                    |   |                                                                                                 | 

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | On
 April 6, 2009, the Board of Directors approved the 2009 Restricted Stock and
 Restricted Stock Unit Plan, as described in detail below, under the heading
 2009 Restricted Stock and Restricted Stock Unit Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|(2) | Reflects
 initial 4,000,000 shares in the 2009 Restricted Stock and Restricted Stock
 Unit Plan, reduced by (i) 900,000 shares of restricted stock awarded to the
 Companys non-employee directors in recognition of their leadership and
 contribution during the restructuring and transformation of the Company
 during the year ended February 28, 2009; (ii) 1,000,000 shares of restricted
 stock awarded to our current President and Chief Executive Officer and our
 former interim President and Chief Executive Officer in recognition of past
 service as executive officers during the year ended February 28, 2009; (iii)
 425,000 and 625,000 shares of restricted stock awarded to employees during
 the years ended February 28, 2011 and 2010 respectively; and (iv) 25,000
 shares of restricted stock awarded to non-employee directors under our
 director compensation plan for the years ended February 28, 2011 and 2010
 respectively.

29

---



2009 Restricted Stock and Restricted Stock
Unit Plan

On April 6, 2009, the Board of Directors 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 (Plan Participants) to be eligible to receive restricted stock and
restricted stock units awards, as a means of providing Plan Participants with a
continuing proprietary interest in the Company. There are no predeterminations
established for restricted stock or restricted stock units to be awarded to our
named executive officers or employees.

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.

Under the 2009 Plan, we may grant up to 4,000,000 shares. The Board
delegated the administration of the 2009 Plan to the Compensation Committee.
The Compensation Committee has the power and authority to select Plan
Participants and grant awards of restricted stock and restricted stock units
(Awards) to such Plan Participants pursuant to the terms of the 2009 Plan.
Awards may be in the form of actual shares of restricted Common Stock or
hypothetical restricted Common Stock Units having a value equal to the fair
market value of an identical number of shares of Common Stock. Unless otherwise
provided by the Compensation Committee in an individual Award agreement, Awards
under the 2009 Plan vest 25% on each of the first four anniversaries of the
date of grant and the unvested portion of any Award will terminate and be
forfeited upon termination of the Plan Participants employment or service.

Subject to the terms of the 2009 Plan and the applicable Award
agreement, the recipients of restricted stock generally will have the rights
and privileges of a shareholder with respect to the restricted stock, including
the right to vote the shares and to receive dividends, if applicable. The
recipients of restricted stock units will not have the rights and privileges of
a shareholder with respect to the shares underlying the restricted stock unit
award until the award vests and the shares are received. The Compensation Committee
may, at its discretion, withhold dividends attributed to any particular share
of restricted stock, and any dividends so withheld will be distributed to the
Plan Participant upon the release of restrictions on such shares in cash, or at
the sole discretion of the Compensation Committee, in shares of Common Stock
having a fair market value equal to the amount of such dividends. Awards under
the 2009 Plan may not be assigned, alienated, pledged, attached, sold or
otherwise transferred or encumbered by a Plan Participant other than by will or
by the laws of descent and distribution.

Change in Control

Unless otherwise provided in an Award agreement, in the event of a
Change in Control (as defined in the 2009 Plan) of the Company, the
Compensation Committee may provide that the restrictions pertaining to all or
any portion of a particular outstanding Award will expire at a time prior to
the change in control. To the extent practicable, any actions taken by the
Compensation Committee to accelerate vesting will occur in a manner and at a
time that will allow affected Plan Participants to participate in the change in
control transaction with respect to the Common Stock subject to their Awards.

Amendment and Termination

The Board at any time, and from time to time, may amend or terminate
the 2009 Plan; provided, however, that such amendment or termination shall not
be effective unless approved by the Companys shareholders to the extent
shareholder approval is necessary to comply with any applicable tax or regulatory
requirements. In addition, any such amendment or termination that would
materially and adversely affect the rights of any Plan Participant shall not to
that extent be effective without the consent of the affected Plan Participant.
The Compensation Committee at any time, and from time to time, may amend the
terms of any one or more Awards; provided, however, that the Compensation Committee may not
effect any amendment which would materially and adversely affect the rights of
any Plan Participant under any Award without the consent of such Plan
Participant.

30

---



At February 28, 2011, a total of 1,000,000 shares remained available
for issuance pursuant to the 2009 Plan. A summary of the 2009 Plan issuances is
set forth in the table 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       |  |                                 |        |  |  | 25,000    | 
|7/22/2010   |  |                 | 425,000   |                 |  | 4
 Years       |  |                                 |        |  |  | 425,000   | 
|            |  |                 |           |                 |  |                |  |                                 |         |  |  |           | 
|            |  |                 | 3,000,000 |                 |  |                |  |                                 | 797,911 |  |  | 2,202,089 | 
|            |  |                 |           |                 |  |                |  |                                 |         |  |  |           | 

For the year ended February 28, 2011, we recognized compensation
expense related to the above restricted stock grants of $88,508. Unamortized
compensation expense amounted to $133,272 as of February 28, 2011.

Common Stock

The Company is authorized to issue 200,000,000 shares of Common Stock
with a par value of $0.001 of which 48,791,599 shares were issued and
outstanding as of February 28, 2011. In comparison, at February 28, 2010, a
total of 47,785,599 shares were issued and outstanding. This increase of
1,006,000 shares was due to the conversion of 102,000 shares of Series A Preferred
Stock to 306,000 shares of Common Stock; the issuance of 250,000 shares in
conjunction with the Loan to a third party as a part of our acquisition of
additional working interest in Kern County, California; and the granting of
restricted stock awards to non-employee directors (25,000 shares) and employees
(425,000 shares) of the Company. All shares of Common Stock are equal to each
other with respect to voting, liquidation, dividend and other rights. Owners of
shares of Common Stock are entitled to one vote for each share of Common Stock
owned at any shareholders meeting. Holders of shares of Common Stock are
entitled to receive such dividends as may be declared by the Board of Directors
out of funds legally available therefore; and upon liquidation, are entitled to
participate pro rata in a distribution of assets available for such a
distribution to shareholders.

There are no conversion, preemptive, or other subscription rights or
privileges with respect to any shares of our Common Stock. Our stock does not
have cumulative voting rights, which means that the holders of more than 50% of
the shares voting in an election of directors may elect all of the directors if
they choose to do so. In such event, the holders of the remaining shares
aggregating less than 50% would not be able to elect any directors.

Preferred Stock

The Company is authorized to issue up to 10,000,000 shares of Preferred
Stock with a par value of $0.001. Our Preferred Stock may be entitled to
preference over the Common Stock with respect to the distribution of assets of
the Company in the event of liquidation, dissolution, or winding-up of the
Company, whether voluntarily or involuntarily, or in the event of any other
distribution of assets of the Company among its shareholders for the purpose of
winding-up its affairs. The authorized but unissued shares of Preferred Stock
may be divided into and issued in designated series from time to time by one or
more resolutions adopted by the Board of Directors. The directors in their sole
discretion shall have the power to determine the relative powers, preferences,
and rights of each series of Preferred Stock.

31

---



On June 30, 2006, the Board of Directors designated 2,400,000 of these
Preferred Stock shares as Series A Convertible Preferred Stock. In July 2006,
we completed a private placement of the Series A Convertible Preferred Stock
that resulted in the issuance of 1,399,765 shares to 100 accredited investors.
At February 28, 2011, there were 906,565 shares issued and outstanding, that had
not been converted into our Common Stock. During the year ended February 28,
2011, there were a total of 102,000 shares of Series A Convertible Preferred
Stock that were converted to 306,000 shares of our Common Stock.

As of February 28, 2011, 30 accredited investors have converted 493,200
Series A Convertible Preferred shares into 1,479,600 shares of Daybreak Common
Stock. Conversions of Series A Convertible Preferred that have occurred since
the Series A Convertible Preferred was first issued in July 2006 are set forth
in the table below.

|                              |  |                                                           |         |                                                  |  |                              |  |  |    | 
|----------------------------- |  | --------------------------------------------------------- | ------- | ------------------------------------------------ |  | ---------------------------- |  |  | -- | 
|Fiscal Period                 |  | Shares of Series
 A Preferred
 Converted to
 Common Stock |         | Shares of
 Common Stock
 Issued from
 Conversion |  | Number ofAccreditedInvestors | 
|                              |  |                                                           |         |                                                  |  |                              | 
|Year Ended February 29,
 2008 |  |                                                           | 102,300 |                                                  |  | 306,900                      |  |  | 10 | 
|Year Ended February 28,
 2009 |  |                                                           | 237,000 |                                                  |  | 711,000                      |  |  | 12 | 
|Year Ended February 28,
 2010 |  |                                                           | 51,900  |                                                  |  | 155,700                      |  |  | 4  | 
|Year Ended February 28,
 2011 |  |                                                           | 102,000 |                                                  |  | 306,000                      |  |  | 4  | 
|                              |  |                                                           |         |                                                  |  |                              |  |  |    | 
|Totals                        |  |                                                           | 493,200 |                                                  |  | 1,479,600                    |  |  | 30 | 

Series A Convertible Preferred Stock

The following is a summary of the rights and preferences of the Series
A Convertible Preferred Stock.

Conversion:

The preferred shareholder shall have the right to convert the Series A
Convertible Preferred Stock into the Companys Common Stock at any time. Each
share of Series A Convertible Preferred Stock is convertible into three shares
of Common Stock.

Automatic Conversion:

The Series A Convertible Preferred Stock shall be automatically
converted into Common Stock if the Common Stock into which the Series A
Convertible Preferred Stock are convertible are registered with the SEC and at
any time after the effective date of the registration statement the Companys
Common Stock closes at or above $3.00 per share for 20 out of 30 trading days.

Dividend:

Holders of Series A Convertible Preferred Stock shall be paid
dividends, in the amount of 6% of the original purchase price per annum.
Dividends may be paid in cash or Common Stock at the discretion of the Company.
Dividends are cumulative from the date of the final closing of the private
placement, whether or not in any dividend period or periods we have assets
legally available for the payment of such dividends. Accumulations of dividends
on shares of Series A Convertible Preferred Stock do not bear interest.
Dividends are payable upon declaration by the Board of Directors.

Cumulative dividends earned for each fiscal year since issuance are set
forth in the table below.

|                  |  |                            |     |                       |   |         | 
|----------------- |  | -------------------------- | --- | --------------------- | - | ------- | 
|Fiscal
Year Ended |  | Shareholders
at
Period End |     | Accumulated
Dividends |  
|                  |  |                            |     |                       |  
|February 28, 2007 |  |                            | 100 |                       | $ | 155,333 | 
|February 29, 2008 |  |                            | 90  |                       |   | 242,165 | 
|February 28, 2009 |  |                            | 78  |                       |   | 209,974 | 
|February 28, 2010 |  |                            | 74  |                       |   | 190,460 | 
|February 28, 2011 |  |                            | 70  |                       |   | 173,893 | 
|                  |  |                            |     |                       |   |         | 
|                  |  |                            |     |                       | $ | 971,825 | 
|                  |  |                            |     |                       |   |         | 

32

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Voting Rights:

The holders of the Series A Convertible Preferred Stock will vote
together with the Common Stock and not as a separate class except as
specifically provided or as otherwise required by law. Each share of the Series
A Convertible Preferred Stock shall have a number of votes equal to the number
of shares of Common Stock then issuable upon conversion of such shares of
Series A Convertible Preferred Stock.

33

---



ITEM 6. SELECTED FINANCIAL DATA

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

34

---



ITEM 7.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

The following managements discussion and analysis (MD&A) is
managements assessment of the historical financial and operating results of
Daybreak during the period covered by the financial statements. This MD&A
should be read in conjunction with the audited financial statements and the
related notes and other information included elsewhere in this Annual Report on
Form 10-K.

Safe Harbor Provision

Certain statements contained in our Managements Discussion and
Analysis of Financial Condition and Results of Operations 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. All statements other
than statements of historical facts contained in this MD&A report,
including statements regarding our current expectations and projections about
future results, intentions, plans and beliefs, business strategy, performance,
prospects and opportunities, are inherently uncertain and are forward-looking
statements. For more information about forward looking statements, please refer
to the section labeled Cautionary Statement About Forward-Looking Statements
at the beginning of this Annual Report on Form 10-K.

Introduction and Overview

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.

We have a limited operating history of oil and gas production and
minimal proven reserves, production and cash flow. To date, we have had limited
revenues and have not been able to generate sustainable positive earnings on a
Company-wide basis. Our management cannot provide any assurances that Daybreak
will ever operate profitably. As a result of our limited operating history, we
are more susceptible to the numerous business, investment and industry risks
that have been described in Item 1A. Risk Factors of this Annual Report on Form
10-K.

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 currently in the process
of developing a multi-well oilfield project in Kern County, California.

During the past three fiscal years, we have been involved in the drilling
and completion of eleven wells that have achieved commercial production in Kern
County, California. To improve our overall cash flow, we have changed our focus
to concentrate on operations in California and have divested our interests in
Alabama and Louisiana.

35

---



Liquidity and Capital Resources

Our primary financial resource is our base of oil reserves. Our ability
to fund our capital expenditure program is dependent upon the price levels we
receive from our oil sales; the success of our exploration and development
program in Kern County, California; and the availability of capital resource
financing. In the next fiscal year, we plan on spending approximately
$1,800,000 in new capital investments, however our actual expenditures may vary
significantly from this estimate if our plans for exploration and development
activities change during the year. 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 changes in our capital resources at February 28, 2011 compared with
February 28, 2010 are:

|                        |  |                   |            |                   |   |                    |   |                  |           |   |  |       |   
|----------------------- |  | ----------------- | ---------- | ----------------- | - | ------------------ | - | ---------------- | --------- | - |  | ----- | --
|                        |  | February 28, 2011 |            | February 28, 2010 |   | Increase(Decrease) |   | PercentageChange |          
|                        |  |                   |            |                   |   |                    |   |                  |          
|Cash                    |  | $                 | 57,380     |                   | $ | 247,951            |   | $                | (190,571  | ) |  | (76.9 | %)
|Current Assets          |  | $                 | 593,275    |                   | $ | 1,070,541          |   | $                | (477,266  | ) |  | (44.6 | %)
|Total Assets            |  | $                 | 3,313,180  |                   | $ | 3,010,036          |   | $                | 303,144   |   |  | 10.1  | % 
|Current Liabilities     |  | $                 | 2,672,124  |                   | $ | 1,388,339          |   | $                | 1,283,785 |   |  | 92.5  | % 
|Total Liabilities       |  | $                 | 3,223,140  |                   | $ | 1,896,601          |   | $                | 1,326,539 |   |  | 69.9  | % 
|Working Capital Deficit |  | $                 | (2,078,849 | )                 | $ | (317,798           | ) | $                | 1,761,051 |   |  | 554.1 | % 

Our working capital deficit increased by $1,761,051, from ($317,798) as
of February 28, 2010 to ($2,078,849) as of February 28, 2011. This increase in
the deficit was due to the amount of successful drilling activity that we
undertook in California; the refurbishing of a production facility and power
installation cost for the production facilities utilized by our wells in
California; and the assumption of the debt created through the default of
certain original working interest partners in the East Slopes Project. The use
of these associated production facilities has lowered our operating costs
substantially and should assist us in maintaining a positive cash flow from our
East Slope operations in Kern County, California during the next fiscal year.

We have repositioned Daybreak to better meet our corporate goals and
objectives by disposing of assets that impeded our cash flow and growth in the
East Slopes Project. In the last few years we have disposed of properties in
Alabama, Louisiana and Texas. These actions have allowed us to move forward
with our drilling and exploration program in Kern County.

Our business is capital intensive. Our ability to grow is dependent
upon favorably obtaining outside capital and generating cash flows from
operating activities necessary to fund our investment activities. There is no
assurance that we will be able to achieve profitability. Since our future
operations will continue to be dependent on successful exploration and
development activities and our ability to seek and secure capital from external
sources, should we be unable to achieve sustainable profitability this could
cause any equity investment in the Company to become worthless.

Major sources of funds in the past for us have included the debt or
equity markets. While we have achieved positive cash flow from operations in
Kern County, California, we will have to rely on these capital markets to fund
future operations and growth. Our business model is focused on acquiring
exploration or development properties as well as existing production. 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.

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. The current uncertainty in the credit and capital markets, and
the economic downturn, may restrict our ability to obtain needed capital.

36

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We anticipate it will be necessary to rely on additional funding from
the capital markets in the current fiscal year.

Cash
Flows

Changes in the net funds provided by or (used in) each of our
operating, investing and financing activities are set forth in the table below:

|                                                    |  |                   |            |                   |   |                    |   |                  |            |   |  |         |   
|--------------------------------------------------- |  | ----------------- | ---------- | ----------------- | - | ------------------ | - | ---------------- | ---------- | - |  | ------- | --
|                                                    |  | February 28, 2011 |            | February 28, 2010 |   | Increase(Decrease) |   | PercentageChange |           
|                                                    |  |                   |            |                   |   |                    |   |                  |           
|Net cash provided by (used in) operating activities |  | $                 | 184,673    |                   | $ | (2,699,671         | ) | $                | 2,884,344  |   |  | 106.8   | % 
|Net cash provided by (used in) investing activities |  | $                 | (1,155,244 | )                 | $ | 99,812             |   | $                | (1,255,056 | ) |  | (1257.4 | %)
|Net cash provided by financing activities           |  | $                 | 780,000    |                   | $ | 565,000            |   | $                | 215,000    |   |  | 38.1    | % 

Cash Flow Used in Operating Activities

Cash flow from operating activities is
derived from the production of our oil reserves and changes in the balances of
receivables, payables, or other non-oil property asset account balances. For
the year ended February 28, 2011, we had a positive cash flow from operating
activities of $184,673, in comparison to a negative cash flow of ($2,699,671)
for the year ended February 28, 2010. This change of $2,884,344 was the result
of an increase in oil revenues; a reduction in operating expenses; collections
of outstanding receivable amounts on assets held for sale; and an increase in
our payables balances. Variations in cash flow from operating activities may
impact our level of exploration and development expenditures.

Our expenditures consist primarily of exploration and drilling costs;
production costs; geological, geophysical and engineering services and
acquisition of mineral leases. 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.

Cash Flow Provided by Investing Activities

Cash flow from investing activities is
derived from changes in oil and gas property balances and Other Assets account
balances. Cash used in investing activities for the year ended
February 28, 2011 was ($1,155,244), an increase of $1,255,056 from the $99,812
provided by investing activities for the year ended February 28, 2010. This
change primarily reflects the purchase of additional working interest in five
of our producing wells and the successful drilling and completion of four
additional wells all in our East Slopes Project in Kern County, California. We
converted two Operator bonds in Alabama and Louisiana that were no longer
needed since our involvement in any projects in those states has now ceased.
This conversion resulted in a decrease of approximately $275,000 plus accrued interest
in the Other Assets account balance.

Cash Flow Provided by Financing Activities

Cash flow from financing activities is
derived from changes in long-term liability account balances or in equity
account balances excluding retained earnings. Cash flow provided
by financing activities was $780,000 for the year ended February 28, 2011. This
is in comparison to $565,000 provided by financing activities for the year
ended February 28, 2010. The $750,000 in funds that was borrowed for the
purchase of the additional working interest in our East Slopes Project and the
remaining $30,000 from the private placement of 12% Subordinated Notes are the
two components of our financing activities. Both of these borrowings are
described below. We anticipate it will be necessary to rely on additional
funding from the capital markets in the current fiscal year.

37

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12%
Subordinated Notes

On January 13, 2010, we commenced a private placement of 12%
Subordinated Notes (the Notes). On March 16, 2010, the Company closed its private
placement of Notes to 13 accredited investors resulting in total gross proceeds
of $595,000. Interest on the Notes accrues at 12% per annum, payable
semi-annually. The note principal is payable in full at the expiration of the
term of the Notes, which is January 29, 2015. Should the Board of Directors, on
January 29, 2015, decide that the payment of the principal and any unpaid
interest would impair the financial condition or operations of the Company, the
Company may then 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.

In conjunction with the Notes private placement a total of 1,190,000
common stock purchase warrants were issued at a rate of two warrants for every
dollar raised through the private placement. The  warrants 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 $116,557 using the following weighted average assumptions: a
risk free interest rate of 2.33%; volatility of 147.6%; 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. Amortization expense for the year ended February 28, 2011 amounted to
$16,234. Unamortized debt discount amounted to $99,106 as of February 28, 2011.

Proceeds from 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.

One-Year
Note Payable

On September 17, 2010, we exercised a preferential right to acquire an
additional 16.67% working interest in our East Slopes Project from another
working interest owner. We financed the additional working interest purchase 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 the Companys Common
Stock at a conversion price of $0.16 per share at any time prior to the Loan
being paid in full. Interest expense related to the Loan for the year ended
February 28, 2011 was $37,500. Unamortized interest expense amounted to $37,500
as of February 28, 2011.

We issued 250,000 shares of the Companys Common Stock to the third
party as a loan origination fee. The fair value of these shares amounted to
$23,750 which was deferred and is being amortized over the term of the Loan.
Amortization expense for the year ended February 28, 2011 was $11,875.
Unamortized loan origination fee expense amounted to $11,875 as of February 28,
2011.

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 our East Slope Project. Furthermore, as a condition precedent to the
Loan, we entered into a Technical and Consulting Services Agreement with the
third party, whereby we 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.

As additional consideration for the Loan we executed an Assignment of
Net Profits Interest in favor of the third party, whereby we assigned two
percent of the net profits realized by us on our leases in the East Slopes
Project. The fair value of the two percent net profits interest was determined
to be $60,210 and has been recognized as a discount to the debt to be amortized
over the term of the Loan. Amortization expense for the
year ended February 28, 2011 amounted to $30,105. Unamortized debt
discount amounted to $30,105 as of February 28, 2011.

38

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Warrants
Issued for Services

During the year ended February 28, 2011, a total of 150,000 warrants
were issued to a consultant for services. 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%.

Changes
in Financial Condition

We maintain our cash balance by increasing or decreasing our
exploration and drilling expenditures as limited by availability of cash from
operations or from financing activities. The cash balance for the year ended
February 28, 2011 declined to $57,380. This was a decrease of $190,571 from the
cash balance at February 28, 2010, of $247,951. This decrease was primarily due
to successful drilling activities and the refurbishing of production facilities
for the Ball and Dyer Creek wells in California and on-going G&A expenses.

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 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 April 7, 2009, the Compensation Committee of the Board awarded
1,000,000 restricted shares of our Common Stock to a current and a former
executive officer of Daybreak. These shares were granted pursuant to the 2009
Plan and fully vest equally over a period of three years.

On April 7, 2009, the Compensation Committee of the Board awarded
900,000 restricted shares of our Common Stock to the five non-employee
Directors of Daybreak. These shares were granted pursuant to the 2009 Plan and
fully vest equally over a period of three years.

On July 16, 2009, the Compensation Committee of the Board awarded
25,000 restricted shares of our Common Stock to the five non-employee Directors
as a part of our director compensation plan. These shares were granted pursuant
to the 2009 Plan and fully vest equally over a period of three years.

On July 16, 2009, the Compensation Committee of the Board awarded
625,000 restricted shares of our Common Stock to four employees of Daybreak.
These shares were granted pursuant to the 2009 Plan and fully vest equally over
a period of four years.

On July 22, 2010, the Compensation Committee of the Board awarded
25,000 restricted shares of our Common Stock to the five non-employee Directors
as a part of our director compensation plan. These shares were granted pursuant
to the 2009 Plan and fully vest equally over a period of three years.

39

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On July 22, 2010, the Compensation Committee of the Board awarded
425,000 restricted shares of our Common Stock to five employees of Daybreak.
These shares were granted pursuant to the 2009 Plan and fully vest equally over
a period of four years.

At February 28, 2011, a total of 1,000,000 shares remained available
for issuance pursuant to the 2009 Plan.

A summary of the 2009 Plan issuances is set forth in the table 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 |               |  |                              |  |  | 25,000    | 
|7/22/2010  |  |                | 425,000   |                | 4
Years |               |  |                              |  |  | 425,000   | 
|           |  |                |           |                |         |               |  |                               |  |  |           | 
|           |  |                | 3,000,000 |                |         |               |  | 797,911                       |  |  | 2,202,089 | 
|           |  |                |           |                |         |               |  |                               |  |  |           | 

For the year ended February 28, 2011, we recognized compensation
expense related to the above restricted stock grants of $88,508. Unamortized
compensation expense amounted to $133,272 as of February 28, 2011.

Oil
Reserves

Daybreaks proved oil reserves increased 175,665 barrels of oil, or
282% to 237,820 barrels of oil for the year ended February 28, 2011 compared to
62,155 barrels of oil for the year ended February 28, 2010. Proved developed
reserves increased by 50,192 barrels of oil, or 56%, to 88,840 barrels of oil
for the year ended February 28, 2011, compared to 38,648 barrels of oil for the
year ended February 28, 2010. Proved undeveloped reserves increased by 125,473
barrels of oil, or 84% to 148,980 barrels of oil for the year ended February
28, 2011, compared to 23,507 barrels of oil for the year ended February 28,
2010. Our reserves were fully engineered by Lonquist & Co. LLC (Lonquist)
of Austin and Houston, Texas in accordance with generally accepted petroleum
engineering and evaluation principles and definitions and guidelines
established by the SEC.

Results
of Operations

Revenues from our East Slopes Project in Kern County, California for
the year ended February 28, 2011 increased $506,122, or 107.8%, to $975,479 in
comparison to revenues of $469,357 for the year ended February 28, 2010. The
average price of a barrel of oil for the year ended February 28, 2011 was
$74.98 in comparison to $62.75 for the year ended February 28, 2010. The
increase of $12.23 in the average price of a barrel of oil accounted for
$91,480 or 19.5% of the revenue increase for the year ended February 28, 2011.
Oil production increased by 5,529 barrels, or 73.9%, for the year ended
February 28, 2011 in comparison to the year ended February 28, 2010 and accounted
for the other $414,641, or 80.5%, of the revenue increase for the year ended
February 28, 2011.

Our loss from continuing operations declined to approximately $1.2
million for the year ended February 28, 2011 in comparison to the approximate
$2.4 million loss from continuing operations for the year ended February 28,
2010. This decrease in the operating loss of approximately $1.2 million was due
to an improvement in revenues of approximately $608,054, or 129%, and a
decrease in operating expenses of approximately $696,644, or 24.5%, for the
year ended February 28, 2011 in comparison to the year ended February 28, 2010.

40

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Selected Financial Information

During the year ended February 28, 2011, we received oil sales revenue
from eleven wells in our East Slopes Project in Kern County, California. Our
commitment to improving corporate profitability remains unchanged, and we have
reduced both the net loss from continuing operations and the overall net loss
for the year ended February 28, 2011 in comparison to the year ended February
28, 2010. The net loss experienced for the year ended February 28, 2011 of
approximately $1.2 million was an improvement of approximately $1.1 million, or
46.2%, from the net loss of approximately $2.3 million for the year ended February
28, 2010. The decline in our net loss for the year ended February 28, 2011 in
comparison to the year ended February 28, 2010, is a result of both an increase
in our oil sales revenue and a decrease in our overall expenses.

Our balance sheet at February 28, 2011 shows total assets of $3,313,180
comprised primarily of $57,380 in cash; accounts receivable (including oil
sales, joint interest participants, production revenue and refunds) of
$791,387; and oil and gas properties (net of Depreciation, Depletion,
Amortization (DD&A)) of $2,290,001. This compares with the February 28,
2010 balances for cash of $247,951; accounts receivable of $1,125,855; and, oil
and gas properties of $1,210,799. The above changes can be attributed to the
success of our exploratory and development drilling program and the acquisition
of additional working interest in our East Slopes Project in Kern County.

At February 28, 2011, we had total liabilities of $3,223,140, comprised
of accounts payable (including trade, related parties and liabilities
associated with assets held for sale) of $1,952,229, short-term and long-term
notes payable of $1,215,789 and $55,122 in asset retirement obligation (ARO),
as compared with the February 28, 2010 balances for total liabilities of $1,896,601,
comprised of $1,388,339 in accounts payable; $454,944 in notes payable and
$53,318 in ARO.

Our Common Stock issued and outstanding increased by 1,006,000 shares
to 48,791,599 for the year ended February 28, 2011 in comparison to 47,785,599
for the year ended February 28, 2010. This increase was a result of conversions
from our Series A Convertible Preferred Stock (306,000 shares); awards of
restricted stock made under the 2009 Plan (450,000) to executive officers,
non-employee directors and employees; and loan origination fees (250,000).
Series A Convertible Preferred Stock issued and outstanding decreased by
102,000 shares to 906,565 shares as of February 28, 2011, compared to 1,008,565
shares as of February 28, 2010.

Accumulated Deficit

Our financial statements for the year ended February 28, 2011 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. Our
financial statements also state that the Company has incurred significant
operating losses that raise substantial doubt about our ability to continue as
a going concern. The accompanying financial statements do not include any
adjustments that might result from this uncertainty. The increase in the
accumulated deficit from $21,191,162 as of February 28, 2010, to $22,406,909 as
of February 28, 2011 was due to the $1,215,747 net loss for the year ended
February 28, 2011. The loss from continuing operations for the year ended
February 28, 2011 decreased by $1,140,701 to $1,226,763, in comparison to the
$2,367,464 loss from the year ended February 28, 2010. In effect, this was a
decrease on our loss from continuing operations by approximately 48.2%. We
expect to continue this trend of a decrease in the net operating loss in the
current year because of increased production due to more wells producing and
lower operating costs at our East Slopes Project.

Management Plans to Continue as a Going
Concern

We continue to implement plans to enhance Daybreaks ability to
continue as a going concern. The Company currently has a net revenue interest
in eleven producing wells in our East Slopes Project located in
Kern County, California. The revenue from these wells has created a
steady and reliable source of revenue for the Company.

41

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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. Since the purchase of the additional working interest
our average monthly revenue from the five wells affected by this purchase has
increased by 75.76%, or approximately $19,345 per month, over the last six
months of the year ended February 28, 2011. With this purchase of additional
working interest and the completion of two additional wells in October 2010 our
average net revenue interest in our eleven producing wells in Kern County,
California is now 29.85%. Our average working interest is 40.15% for these same
wells.

We anticipate revenues will continue to increase as the Company
participates in the drilling of more wells in the East Slopes Project. The
Company plans to continue its development drilling program at a rate that is
compatible with its cash flow and funding opportunities.

On January 13, 2010, we commenced a private placement of 12%
Subordinated Notes. We sold $595,000 of Notes to 13 accredited investors. The
private placement concluded on March 16, 2010. See the discussion above titled
12% Subordinated Notes for more information on this private placement.

On September 17, 2010, we financed an additional working interest
purchase in our East Slopes Project 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. See the discussion above titled One Year Note Payable for more
information on this Loan.

On March 15, 2010, we finalized the sale of
our 12.5% working interest in the East Gilbertown Field in Choctaw County,
Alabama. This sale helped us by improving our cash reserves and allowed us to
focus on our East Slopes Project.

As a result of these transactions and the results of our successful
drilling activity, our liquidity will continue to improve. Our 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. We anticipate it may
be necessary to rely on additional funding from the private or public debt or
equity markets in the future. However, we cannot offer any assurance that we
will be successful in executing the aforementioned plans to continue as a going
concern.

Fiscal
Year 2011 Compared to Fiscal Year 2010  Continuing Operations

This discussion comparing the year ended
February 28, 2011 results with the year ended February 28, 2010 results covers
our continuing operations in Kern County, California known as our East Slopes
Project.

Kern County, California. The East Slopes Project is located in the
southeastern part of the San Joaquin Basin near Bakersfield, California.
Since January 2009, we have participated in the drilling of thirteen wells in
this project. Eleven of those wells have been successful and have been placed
on production. Drilling targets are porous and permeable sandstone reservoirs
which exist at depths of 1,200 feet to 3,000 feet. Refer to our discussion in
Item 2. Properties, in this Annual Report on Form 10-K for more information on
our East Slopes Project.

St. Landry Parish. The Krotz Springs Field is
a gas play with production coming from a Cockfield Sands reservoir. We were the
operator for this project during the drilling and completion phases. When
production commenced in May of 2007, the unitized field operator of the Krotz
Springs Field became the operator of this well. In December 2009, we withdrew
from this project and effectively ended all further involvement in this
project.

42

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Revenues.The table below shows the revenues
derived entirely from the sale of our share of oil and gas production from our
continuing operations. Prior to February 2009, we had no revenues from our East
Slopes Project.

The table set forth below shows our revenues for the year 2011 compared
to the year 2010:

|                          |  |      |           |      |   |         | 
|------------------------- |  | ---- | --------- | ---- | - | ------- | 
|                          |  | 2011 |           | 2010 |  
|                          |  |      |           |      |  
|California  East Slopes  |  | $    | 975,479   |      | $ | 469,357 | 
|Louisiana  Krotz Springs |  |      | 104,017   |      |   | 2,085   | 
|                          |  |      |           |      |   |         | 
|Total Revenues            |  | $    | 1,079,496 |      | $ | 471,442 | 
|                          |  |      |           |      |   |         | 

For the year ended February 28, 2011, the East Slopes Project
represented 90.4% of total revenues. The Krotz Springs Field in Louisiana
revenues represented 9.6% of total revenues. This Louisiana revenue represented
a one-time adjustment by the unitized field operator to gas sales revenue
earned from May 2007 through December 2009. For the year ended February 28,
2011, total revenues from continuing operations increased by $608,054, or
29.0%, in comparison with the year ended February 28, 2010. The revenues we recorded
in California for the year ended February 28, 2011 represented an average net
revenue interest of 29.85% in eleven producing wells.

The Daybreak net sales volume from eleven wells at our East Slopes
Project for the year ended February 28, 2011 was 13,009 barrels, in comparison
to 7,480 barrels from seven wells for the year ended February 28, 2010. We
experienced twelve months of production from seven wells; ten months of
production from two wells; and four months of production from the other two
most recently drilled wells. This compares to 12 months of production from one
well; ten months of production from a second well; eight months of production
from two more wells; three months of production from one well; and one month of
production for the final two wells for the year ended February 28, 2010. The
average sales price of a barrel of oil for the year ended February 28, 2011 was
$74.98, in comparison to $62.75 in the year ended February 28, 2010.

Costs and Expenses. Total operating expenses
declined by 24.5%, or $696,644, for the year ended February 28, 2011, as
compared to the year ended February 28, 2010. We experienced a decrease in
every category of our operating expenses for the year ended February 28, 2011
even though we had more wells producing than in the prior year.

The table set forth below shows our costs and expenses for the year
2011 compared to the year 2010:

|                            |  |                                  |           |                                  |   |           | 
|--------------------------- |  | -------------------------------- | --------- | -------------------------------- | - | --------- | 
|                            |  | For Year Ended
February 28, 2011 |           | For Year Ended
February 28, 2010 |  
|                            |  |                                  |           |                                  |  
|Production Costs            |  | $                                | 172,250   |                                  | $ | 269,820   | 
|Exploration and Drilling    |  |                                  | 184,255   |                                  |   | 301,912   | 
|DD&A                        |  |                                  | 307,023   |                                  |   | 550,755   | 
|Gain on Write-Off of ARO    |  |                                  | (8,324    | )                                |   |          | 
|Bad debt expense (recovery) |  |                                  | (3,928    | )                                |   | 113,528   | 
|G&A                         |  |                                  | 1,494,969 |                                  |   | 1,606,874 | 
|                            |  |                                  |           |                                  |   |           | 
|Total Operating Expenses    |  | $                                | 2,146,245 |                                  | $ | 2,842,889 | 

Operating expenses incurred by the Company include production costs
associated directly with the generation of oil and gas revenues (also including
well workover projects and plugging and abandonment activities); unsuccessful
exploratory drilling and lease rentals; DD&A charges; and G&A expenses
(including legal and accounting expenses, director and management fees,
investor relations expenses, and other G&A costs).

43

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Production costs decreased $97,570, or 36.2%, for the year ended
February 28, 2011 and relate directly to the eleven wells that were operating
at our East Slopes Project during the year ended February 28, 2011, in
comparison to the seven wells that we operated for the year ended February 28,
2010. The primary reason for this reduction in production costs is the full
year utilization of our permanent production facilities, thus reducing our
costs of preparing oil for sale by eliminating the need for rental equipment.
Production costs represented 8.0% of total operating expenses.

Exploration and drilling expenses decreased $117,657, or 39.0%, for the
year ended February 28, 2011, in comparison to the year ended February 28, 2010.
The majority of this decrease was due to lower lease cost as we dropped acreage
in California that was deemed to be lacking in drillable prospects. For the
years ended February 28, 2011 and 2010, we did not drill any dry holes.
Exploration and drilling expenses represented 8.6% of total operating expenses.

DD&A expenses decreased $243,732, or 44.3%, for the year ended
February 28, 2011, in comparison to the year ended February 28, 2010. This
decrease relates directly to lower amortization rates of our reserves as we
have increased the amount of our proven reserves from our development drilling
program in the East Slopes Project. Additionally, for the year ended February
28, 2010 we recorded impairment charges of $341,871. DD&A expenses
represented 14.3% of total operating expenses.

Gain on write-off of ARO decreased by $8,324 for the year ended
February 28, 2011. This gain was directly related to the write off of the asset
retirement obligation of our Krotz Springs project in Louisiana. Gain on
write-off of ARO represented (0.4%) of total operating expenses.

Bad debt expense decreased $117,456, or 103.5%, for the year ended
February 28, 2011, in comparison to the year ended February 28, 2010. For the
year ended February 28, 2011, we recovered $3,928 on accounts previously
written off. Bad debt expense represented (0.2%) of total operating expense.

G&A costs decreased $111,905, or 7.0%, for the year ended February
28, 2011, in comparison to the year ended February 28, 2010. This decrease was
due to increased efforts to limit our overall administrative costs. Significant
reductions were achieved in travel and in shareholder meeting and
communications expenses. These reductions were partially offset by an increase
in insurance costs. Additionally, accounting and legal fees were reduced by
approximately $48,443 for the year ended February 28, 2011.

Interest income decreased $11,361, or 84.2%, for the year ended
February 28, 2011, in comparison to the year ended February 28. 2010. This
decrease relates directly to lower average cash balances for the year ended
February 28, 2011.

Interest expense increased by $152,636 for the year ended February 28,
2011, in comparison to the year ended February 28, 2010. The increase in
interest expense is directly related to interest on short-term and long-term
borrowing that occurred during the year ended February 28, 2011.

Due to the nature of our business, 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 will depend upon the factors cited
above, as well as numerous other factors including general market conditions.
An immediate goal for this current year is to improve cash flow to cover the
current level of G&A expenses and to fund our development drilling in
California.

44

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Fiscal
Year 2011 Compared to Fiscal Year 2010  Discontinued Operations

This discussion comparing the year ended
February 28, 2011 results with year ended February 28, 2010 results covers our
discontinued operations in the East Gilbertown Field in Alabama.

Effective March 1, 2010, Daybreak assigned
its interest in the East Gilbertown Field in Alabama to a third party. The
cost and expense information for the years ended February 28, 2011 and 2010
reflects certain credits that result in this information being additions to
revenue rather than deductions from revenue.

In accordance with the guidance governing
accounting for impairment
or disposal of long-lived assets, net
results of operations for the East Gilbertown Field are set forth in the table
below. The East Gilbertown Field information is presented on the Statement of
Operations in the caption Discontinued Operations under the appropriate
fiscal year.

|                                           |  |                             |     |                             |   |         | 
|------------------------------------------ |  | --------------------------- | --- | --------------------------- | - | ------- | 
|                                           |  | Year EndedFebruary 28, 2011 |     | Year EndedFebruary 28, 2010 |  
|                                           |  |                             |     |                             |  
|Oil sales revenue  East Gilbertown Field  |  | $                           |    |                             |  | 84,353  | 
|Cost and expenses                          |  |                             | 731 |                             |   | 23,246  | 
|                                           |  |                             |     |                             |   |         | 
|Income (loss) from discontinued operations |  | $                           | 731 |                             | $ | 107,599 | 
|                                           |  |                             |     |                             |   |         | 

Summary

We are continuing to execute the Companys
business 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 year; which,
coupled with the completion of our production and operating infrastructure and
with the 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.

Off-Balance Sheet Arrangements

As of February 28, 2011, we did not have any
relationships with unconsolidated entities or financial partners, such as
entities often referred to as structured finance or special purpose entities,
which have been established for the purpose of facilitating off-balance sheet
arrangements or other contractually narrow or limited purposes. As such, we are
not materially exposed to any financing, liquidity, market or credit risk that
could arise if we had engaged in such relationships.

Critical
Accounting Policies

Managements discussion and analysis of our financial condition and
results of operations are based on our financial statements, which have been
prepared in conformity with accounting principles generally accepted in the
United States of America. The preparation of these financial statements
requires management to make estimates, judgments and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period.

45

---



On an ongoing basis, we evaluate our estimates, including those related
to revenue recognition, bad debts, cancellation costs associated with long term
commitments, investments, intangible assets, assets subject to disposal, income
taxes, service contracts, contingencies and litigation. We base our estimates
on historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making estimates and judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Estimates, by
their nature, are based on judgment and available information. Therefore,
actual results could differ from those estimates and could have a material
impact on our financial statements, and it is possible that such changes could
occur in the near term.

Oil and Gas Properties

We use the successful efforts method of accounting for oil and gas
property acquisition, exploration, development, and production activities.
Costs to acquire mineral interests in oil and gas properties, to drill and
equip exploratory wells that find proved reserves, and to drill and equip
development wells are capitalized as incurred. Costs to drill exploratory wells
that are unsuccessful in finding proved reserves are expensed as incurred. In
addition, the geological and geophysical costs, and costs of carrying and
retaining unproved properties are expensed as incurred. Costs to operate and
maintain wells and field equipment are expensed as incurred.

Capitalized proved property acquisition costs are amortized by field
using the unit-of-production method based on proved reserves. Capitalized
exploration well costs and development costs (plus estimated future dismantlement,
surface restoration, and property abandonment costs, net of equipment salvage
values) are amortized in a similar fashion (by field) based on their proved
developed reserves. Support equipment and other property and equipment are
depreciated over their estimated useful lives.

Pursuant to Financial Accounting Standards Board Codification (ASC)
Topic 360, Property,
Plant and Equipment, we review proved oil and natural gas
properties and other long-lived assets for impairment. These reviews are predicated
by events and circumstances, such as downward revision of the reserve estimates
or commodity prices, that indicate a decline in the recoverability of the
carrying value of such properties. We estimate the future cash flows expected
in connection with the properties and compare such future cash flows to the
carrying amount of the properties to determine if the carrying amount is
recoverable. When the carrying amounts of the properties exceed their estimated
undiscounted future cash flows, the carrying amounts of the properties are
reduced to their estimated fair value. The factors used to determine fair value
include, but are not limited to, estimates of proved reserves, future commodity
prices, the timing of future production, future capital expenditures and a
risk-adjusted discount rate. The charge is included in DD&A.

Unproved oil and gas properties that are individually significant are
also periodically assessed for impairment of value. An impairment loss for
unproved oil and gas properties is recognized at the time of impairment by
providing an impairment allowance.

On the retirement or sale of a partial unit of proved property, the
cost is charged to accumulated DD&A with a resulting gain or loss
recognized in income.

Deposits and advances for services expected to be provided for
exploration and development or for the acquisition of oil and gas properties
are classified as long term other assets.

Revenue Recognition

We use the sales method to account for sales of crude oil and natural
gas. Under this method, revenues are recognized based on actual volumes of oil
and gas sold to purchasers. The volumes sold may differ from the volumes to
which we are entitled based on our interests in the properties. These
differences create imbalances, which are recognized as a liability only when
the imbalance exceeds the estimate of remaining reserves. We had no significant
imbalances as of February 28, 2011 and 2010.

46

---



Suspended Well Costs

We account for any suspended well costs in accordance with FASB ASC
Topic 932, Extractive
Activities  Oil and Gas(ASC 932).ASC 932 states that
exploratory well costs should continue to be capitalized if: (1) a sufficient
quantity of reserves are discovered in the well to justify its completion as a
producing well and (2) sufficient progress is made in assessing the reserves
and the economic and operating feasibility of the well. If the exploratory well
costs do not meet both of these criteria, these costs should be expensed, net
of any salvage value. Additional annual disclosures are required to provide
information about managements evaluation of capitalized exploratory well
costs.

In addition, ASC 932 requires annual disclosure of: (1) net changes
from period to period of capitalized exploratory well costs for wells that are
pending the determination of proved reserves, (2) the amount of exploratory
well costs that have been capitalized for a period greater than one year after
the completion of drilling and (3) an aging of exploratory well costs suspended
for greater than one year, designating the number of wells the aging is related
to. Further, the disclosures should describe the activities undertaken to
evaluate the reserves and the projects, the information still required to
classify the associated reserves as proved and the estimated timing for
completing the evaluation.

Share Based Payments

Share based awards are accounted for under FASB Topic ASC 718, Compensation-Stock
Compensation (ASC 718). ASC 718 requires compensation costs for
all share based payments granted to be based on the grant date fair value. The
value of the portion of the award that is ultimately expected to vest is
recognized as expense ratably over the requisite service periods.

47

---



ITEM 7A.
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.

48

---



ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM

To the Board
of Directors and Shareholders of
Daybreak Oil and Gas, Inc.
Spokane, Washington

We have audited the accompanying balance sheets of Daybreak Oil and
Gas, Inc. as of February 28, 2011 and 2010 and the related statements of
operations, stockholders equity, and cash flows for the years then ended.
These financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform an audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Companys internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Daybreak Oil and
Gas, Inc. as of February 28, 2011 and 2010 and the results of its operations
and its cash flows for the years then ended, in conformity with accounting
principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that
Daybreak Oil and Gas, Inc. will continue as a going concern. As discussed in
Note 2 to the financial statements, Daybreak Oil and Gas, Inc. suffered losses
from operations and has negative operating cash flows, which raises substantial
doubt about its ability to continue as a going concern. Managements plans
regarding those matters are also described in Note 2. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.

/s/
MaloneBailey, LLP
www.malonebailey.com
Houston, Texas

May 26, 2011

49

---



|                                
|--------------------------------
|DAYBREAK
 OIL AND GAS, INC.     
|Balance Sheets                  
|As of February 28, 2011 and 2010
|                                

|                                                                                                                                                                       |  |      |             |      |   |             |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----------- | ---- | - | ----------- | -
|                                                                                                                                                                       |  | 2011 |             | 2010 |  
|                                                                                                                                                                       |  |      |             |      |  
|ASSETS                                                                                                                                                                 |  |      |             |      |   |             |  
|CURRENT ASSETS:                                                                                                                                                        |  |      |             |      |   |             |  
|Cash and cash equivalents                                                                                                                                              |  | $    | 57,380      |      | $ | 247,951     |  
|Accounts receivable:                                                                                                                                                   |  |      |             |      |   |             |  
|Oil and gas sales                                                                                                                                                      |  |      | 185,836     |      |   | 257,110     |  
|Joint interest participants, net of allowance for doubtful accounts
 of $33,346 and $16,237 respectively                                                               |  |      | 163,551     |      |   | 215,648     |  
|Receivables associated with assets held for sale, net of allowance
 for doubtful accounts of $38,012 in 2010                                                           |  |      |            |      |   | 303,097     |  
|Production revenue receivable                                                                                                                                          |  |      | 25,000      |      |   | 25,000      |  
|Refunds                                                                                                                                                                |  |      | 91,632      |      |   |            |  
|Prepaid expenses and other current assets                                                                                                                              |  |      | 69,876      |      |   | 21,735      |  
|                                                                                                                                                                       |  |      |             |      |   |             |  
|Total current assets                                                                                                                                                   |  |      | 593,275     |      |   | 1,070,541   |  
|OIL AND GAS PROPERTIES, net of accumulated depletion, depreciation,
 amortization, and impairment, of $871,666 and $1,783,258 respectively,
 successful efforts method |  |      |             |      |   |             |  
|Proved properties                                                                                                                                                      |  |      | 1,837,431   |      |   | 1,189,566   |  
|Unproved properties                                                                                                                                                    |  |      | 452,570     |      |   | 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                                                                                                                                                           |  |      | 104,904     |      |   | 402,208     |  
|                                                                                                                                                                       |  |      |             |      |   |             |  
|Total assets                                                                                                                                                           |  | $    | 3,313,180   |      | $ | 3,010,036   |  
|                                                                                                                                                                       |  |      |             |      |   |             |  
|                                                                                                                                                                       |  |      |             |      |   |             |  
|LIABILITIES
 AND STOCKHOLDERS EQUITY                                                                                                                                  |  |      |             |      |   |             |  
|CURRENT LIABILITIES:                                                                                                                                                   |  |      |             |      |   |             |  
|Accounts payable and other accrued liabilities                                                                                                                         |  | $    | 1,790,382   |      | $ | 1,240,909   |  
|Accounts payable-related parties                                                                                                                                       |  |      | 156,370     |      |   | 31,898      |  
|Liabilities associated with assets held for sale                                                                                                                       |  |      |            |      |   | 110,124     |  
|Accrued interest                                                                                                                                                       |  |      | 5,477       |      |   | 5,408       |  
|Notes payable, net of discount, $30,105                                                                                                                                |  |      | 719,895     |      |   |            |  
|                                                                                                                                                                       |  |      |             |      |   |             |  
|Total current liabilities                                                                                                                                              |  |      | 2,672,124   |      |   | 1,388,339   |  
|LONG TERM LIABILITIES:                                                                                                                                                 |  |      |             |      |   |             |  
|Notes payable, net of discount of $99,106 and $110,056 respectively                                                                                                    |  |      | 495,894     |      |   | 454,944     |  
|Asset retirement obligation                                                                                                                                            |  |      | 55,122      |      |   | 53,318      |  
|                                                                                                                                                                       |  |      |             |      |   |             |  
|Total liabilities                                                                                                                                                      |  |      | 3,223,140   |      |   | 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; 906,565 shares and
 1,008,565 shares issued and outstanding respectively                                                    |  |      | 907         |      |   | 1,009       |  
|Common stock- 200,000,000 shares authorized; $0.001 par value,
 48,791,599 and 47,785,599 shares issued and outstanding respectively                                   |  |      | 48,792      |      |   | 47,786      |  
|Additional paid-in capital                                                                                                                                             |  |      | 22,447,250  |      |   | 22,255,802  |  
|Accumulated deficit                                                                                                                                                    |  |      | (22,406,909 | )    |   | (21,191,162 | )
|                                                                                                                                                                       |  |      |             |      |   |             |  
|Total stockholders equity                                                                                                                                             |  |      | 90,040      |      |   | 1,113,435   |  
|                                                                                                                                                                       |  |      |             |      |   |             |  
|Total liabilities and stockholders equity                                                                                                                             |  | $    | 3,313,180   |      | $ | 3,010,036   |  
|                                                                                                                                                                       |  |      |             |      |   |             |  

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

50

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|                                              
|----------------------------------------------
|DAYBREAK
 OIL AND GAS, INC.                   
|Statements of Operations                      
|For the Years Ended February 28, 2011 and 2010
|                                              

|                                                              |  |                    |            |                    |   |            |  
|------------------------------------------------------------- |  | ------------------ | ---------- | ------------------ | - | ---------- | -
|                                                              |  | Years Ended        |           
|                                                              |  |                    |           
|                                                              |  | February 28,
 2011 |            | February 28,
 2010 |  
|                                                              |  |                    |            |                    |  
|REVENUE:                                                      |  |                    |            |                    |   |            |  
|Oil and gas sales                                             |  | $                  | 1,079,496  |                    | $ | 471,442    |  
|                                                              |  |                    |            |                    |   |            |  
|OPERATING EXPENSES:                                           |  |                    |            |                    |   |            |  
|Production costs                                              |  |                    | 172,250    |                    |   | 269,820    |  
|Exploration and drilling                                      |  |                    | 184,255    |                    |   | 301,912    |  
|Depreciation, depletion, amortization, and impairment         |  |                    | 307,023    |                    |   | 550,755    |  
|Gain on write-off of asset retirement obligation              |  |                    | (8,324     | )                  |   |           |  
|Bad debt expense (recovery)                                   |  |                    | (3,928     | )                  |   | 113,528    |  
|General and administrative                                    |  |                    | 1,494,969  |                    |   | 1,606,874  |  
|                                                              |  |                    |            |                    |   |            |  
|Total operating expenses                                      |  |                    | 2,146,245  |                    |   | 2,842,889  |  
|                                                              |  |                    |            |                    |   |            |  
|                                                              |  |                    |            |                    |   |            |  
|OPERATING LOSS                                                |  |                    | (1,066,749 | )                  |   | (2,371,447 | )
|                                                              |  |                    |            |                    |   |            |  
|                                                              |  |                    |            |                    |   |            |  
|OTHER INCOME (EXPENSE):                                       |  |                    |            |                    |   |            |  
|Interest income                                               |  |                    | 2,126      |                    |   | 13,487     |  
|Interest expense                                              |  |                    | (162,140   | )                  |   | (9,504     | )
|                                                              |  |                    |            |                    |   |            |  
|Total other income (expense)                                  |  |                    | (160,014   | )                  |   | 3,983      |  
|                                                              |  |                    |            |                    |   |            |  
|                                                              |  |                    |            |                    |   |            |  
|LOSS FROM CONTINUING OPERATIONS                               |  |                    | (1,226,763 | )                  |   | (2,367,464 | )
|                                                              |  |                    |            |                    |   |            |  
|DISCONTINUED OPERATIONS                                       |  |                    |            |                    |   |            |  
|Income from discontinued operations (net of tax of $-0-)      |  |                    | 731        |                    |   | 107,599    |  
|Gain from sale of oil and gas properties (net of tax of $-0-) |  |                    | 10,285     |                    |   |           |  
|                                                              |  |                    |            |                    |   |            |  
|INCOME FROM DISCONTINUED OPERATIONS                           |  |                    | 11,016     |                    |   | 107,599    |  
|                                                              |  |                    |            |                    |   |            |  
|                                                              |  |                    |            |                    |   |            |  
|NET LOSS                                                      |  |                    | (1,215,747 | )                  |   | (2,259,865 | )
|                                                             
|Cumulative convertible preferred stock dividend requirement   |  |                    | (173,893   | )                  |   | (188,824   | )
|                                                              |  |                    |            |                    |   |            |  
|                                                              |  |                    |            |                    |   |            |  
|NET LOSS AVAILABLE TO COMMON SHAREHOLDERS                     |  | $                  | (1,389,640 | )                  | $ | (2,448,689 | )
|                                                              |  |                    |            |                    |   |            |  
|                                                              |  |                    |            |                    |   |            |  
|NET INCOME (LOSS) PER COMMON SHARE                            |  |                    |            |                    |   |            |  
|Loss from continuing operations                               |  | $                  | (0.03      | )                  | $ | (0.05      | )
|Income from discontinued operations                           |  |                    | 0.00       |                    |   | 0.00       |  
|                                                              |  |                    |            |                    |   |            |  
|NET LOSS PER COMMON SHARE - Basic and diluted                 |  | $                  | (0.03      | )                  | $ | (0.05      | )
|                                                              |  |                    |            |                    |   |            |  
|                                                              |  |                    |            |                    |   |            |  
|WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING -        |  |                    |            |                    |   |            |  
|Basic and diluted                                             |  |                    | 48,300,733 |                    |   | 47,207,830 |  
|                                                              |  |                    |            |                    |   |            |  

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

51

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|                                               
|-----------------------------------------------
|DAYBREAK OIL AND GAS, INC.                     
|Statements
 of Changes in Stockholders Equity 
|For the
 Years Ended February 28, 2010 and 2011
|                                               

|                                                  |  |                                     |           |              |   |                          |   |                    |            |       |   |        |  |   |            |   |   |             |   |   |            |  
|------------------------------------------------- |  | ----------------------------------- | --------- | ------------ | - | ------------------------ | - | ------------------ | ---------- | ----- | - | ------ |  | - | ---------- | - | - | ----------- | - | - | ---------- | -
|                                                  |  | Series A ConvertiblePreferred Stock |           | Common Stock |   | AdditionalPaid-InCapital |   | AccumulatedDeficit |            | Total |  
|                                                  |  |                                     |           |              |   |                          |   |                   
|                                                  |  | Shares                              |           | Amount       |   | Shares                   |   | Amount             |            |       |   |       
|                                                  |  |                                     |           |              |   |                          |   |                    |            |       |   |        |  |   |           
|                                                  |  |                                     |           |              |   |                          |   |                    |            |       |   |        |  |   |            |   |   |             |   |   |            |  
|BALANCE, FEBRUARY 28, 2009                        |  |                                     | 1,060,465 |              | $ | 1,061                    |   |                    | 45,079,899 |       | $ | 45,081 |  | $ | 22,047,360 |   | $ | (18,931,297 | ) | $ | 3,162,205  |  
|Issuance
      of common stock for:               |  |                                     |           |              |   |                          |   |                    |            |       |   |        |  |   |            |   |   |             |   |   |            |  
|Company stock plan                                |  |                                     |          |              |   |                         |   |                    | 2,550,000  |       |   | 2,550  |  |   | 75,596     |   |   |            |   |   | 78,146     |  
|Conversion of preferred stock                     |  |                                     | (51,900   | )            |   | (52                      | ) |                    | 155,700    |       |   | 155    |  |   | (103       | ) |   |            |   |   |           |  
|Issuance of warrants related to private placement |  |                                     |          |              |   |                         |   |                    |           |       |   |       |  |   | 21,676     |   |   |            |   |   | 21,676     |  
|Warrants
 issued in connection with debt          |  |                                     |          |              |   |                         |   |                    |           |       |   |       |  |   | 111,273    |   |   |            |   |   | 111,273    |  
|Net loss                                          |  |                                     |          |              |   |                         |   |                    |           |       |   |       |  |   |           |   |   | (2,259,865  | ) |   | (2,259,865 | )
|                                                  |  |                                     |           |              |   |                          |   |                    |            |       |   |        |  |   |            |   |   |             |   |   |            |  
|BALANCE, FEBRUARY 28, 2010                        |  |                                     | 1,008,565 |              | $ | 1,009                    |   |                    | 47,785,599 |       | $ | 47,786 |  | $ | 22,255,802 |   | $ | (21,191,162 | ) | $ | 1,113,435  |  
|                                                  |  |                                     |           |              |   |                          |   |                    |            |       |   |        |  |   |            |   |   |             |   |   |            |  
|Issuance
 of common stock for:                    |  |                                     |           |              |   |                          |   |                    |            |       |   |        |  |   |            |   |   |             |   |   |            |  
|Company stock plan                                |  |                                     |          |              |   |                         |   |                    | 450,000    |       |   | 450    |  |   | 88,058     |   |   |            |   |   | 88,508     |  
|Conversion of preferred stock                     |  |                                     | (102,000  | )            |   | (102                     | ) |                    | 306,000    |       |   | 306    |  |   | (204       | ) |   |            |   |   |           |  
|Loan origination fees                             |  |                                     |           |              |   |                          |   |                    | 250,000    |       |   | 250    |  |   | 23,500     |   |   |            |   |   | 23,750     |  
|Debt
 discount on notes payable                   |  |                                     |          |              |   |                         |   |                    |           |       |   |       |  |   | 65,494     |   |   |            |   |   | 65,494     |  
|Warrants issued in connection with fundraising    |  |                                     |          |              |   |                         |   |                    |           |       |   |       |  |   | 14,600     |   |   |            |   |   | 14,600     |  
|Net loss                                          |  |                                     |          |              |   |                         |   |                    |           |       |   |       |  |   |           |   |   | (1,215,747  | ) |   | (1,215,747 | )
|                                                  |  |                                     |           |              |   |                          |   |                    |            |       |   |        |  |   |            |   |   |             |   |   |            |  
|BALANCE, FEBRUARY 28, 2011                        |  |                                     | 906,565   |              | $ | 907                      |   |                    | 48,791,599 |       | $ | 48,792 |  | $ | 22,447,250 |   | $ | (22,406,909 | ) | $ | 90,040     |  
|                                                  |  |                                     |           |              |   |                          |   |                    |            |       |   |        |  |   |            |   |   |             |   |   |            |  

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

52

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|                                               
|-----------------------------------------------
|DAYBREAK OIL AND GAS, INC.                     
|Statements
 of Cash Flows                      
|For the
 Years Ended February 28, 2011 and 2010
|                                               

|                                                                             |  |                    |            |                    |   |            |  
|---------------------------------------------------------------------------- |  | ------------------ | ---------- | ------------------ | - | ---------- | -
|                                                                             |  | Years Ended        |           
|                                                                             |  |                    |           
|                                                                             |  | February 28,
 2011 |            | February 28,
 2010 |  
|                                                                             |  |                    |            |                    |  
|                                                                            
|CASH
 FLOWS FROM OPERATING ACTIVITIES:                                       |  |                    |            |                    |   |            |  
|Net loss                                                                     |  | $                  | (1,215,747 | )                  | $ | (2,259,865 | )
|Adjustments to reconcile net loss to net cash used in operating
 activities: |  |                    |            |                    |   |            |  
|Stock compensation                                                           |  |                    | 88,508     |                    |   | 78,146     |  
|Gain on write-off of asset retirement obligation                             |  |                    | (8,324     | )                  |   |           |  
|Gain on sale of oil and gas properties                                       |  |                    | (10,285    | )                  |   |           |  
|Depreciation, depletion, and impairment expense                              |  |                    | 307,023    |                    |   | 551,430    |  
|Amortization of debt discount                                                |  |                    | 46,339     |                    |   | 1,217      |  
|Amortization of loan origination fees                                        |  |                    | 11,875     |                    |   |           |  
|Bad debt expense (recovery)                                                  |  |                    | (3,928     | )                  |   | 113,528    |  
|Non cash interest income                                                     |  |                    | (2,124     | )                  |   | (11,754    | )
|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                                      |  |                    | 71,274     |                    |   | (243,379   | )
|Accounts receivable - joint interest participants                            |  |                    | 56,025     |                    |   | (147,491   | )
|Accounts receivable - refunds                                                |  |                    | (91,632    | )                  |   |           |  
|Receivables associated with assets held for sale                             |  |                    | 303,097    |                    |   |           |  
|Prepaid expenses and other current assets                                    |  |                    | (36,266    | )                  |   | (18,845    | )
|Accounts payable and other accrued liabilities                               |  |                    | 529,697    |                    |   | (789,742   | )
|Accounts payable - related parties                                           |  |                    | 124,472    |                    |   |           |  
|Accrued interest                                                             |  |                    | 69         |                    |   | 5,408      |  
|                                                                             |  |                    |            |                    |   |            |  
|Net cash provided by (used in) operating activities                          |  |                    | 184,673    |                    |   | (2,699,671 | )
|                                                                             |  |                    |            |                    |   |            |  
|                                                                             |  |                    |            |                    |   |            |  
|CASH
 FLOWS FROM INVESTING ACTIVITIES:                                       |  |                    |            |                    |   |            |  
|Disposition of other assets                                                  |  |                    | 299,428    |                    |   |           |  
|Additions to oil and gas properties                                          |  |                    | (1,454,672 | )                  |   | (662,688   | )
|Proceeds from sale of oil and gas properties                                 |  |                    |           |                    |   | 762,500    |  
|                                                                             |  |                    |            |                    |   |            |  
|Net cash provided by (used
 in) investing activities                         |  |                    | (1,155,244 | )                  |   | 99,812     |  
|                                                                             |  |                    |            |                    |   |            |  
|                                                                             |  |                    |            |                    |   |            |  
|CASH
 FLOWS FROM FINANCING ACTIVITIES:                                       |  |                    |            |                    |   |            |  
|Proceeds from issuance of notes payable                                      |  |                    | 780,000    |                    |   | 565,000    |  
|                                                                             |  |                    |            |                    |   |            |  
|                                                                             |  |                    |            |                    |   |            |  
|NET DECREASE IN CASH AND CASH EQUIVALENTS                                    |  |                    | (190,571   | )                  |   | (2,034,859 | )
|                                                                            
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                             |  |                    | 247,951    |                    |   | 2,282,810  |  
|                                                                             |  |                    |            |                    |   |            |  
|                                                                            
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                                   |  | $                  | 57,380     |                    | $ | 247,951    |  
|                                                                             |  |                    |            |                    |   |            |  
|                                                                             |  |                    |            |                    |   |            |  
|CASH PAID
 FOR:                                                              |  |                    |            |                    |   |            |  
|Interest                                                                     |  | $                  | 141,357    |                    | $ | 4,096      |  
|Income taxes                                                                 |  | $                  |           |                    | $ |           |  
|                                                                            
|SUPPLEMENTAL
 CASH FLOW INFORMATION:                                         |  |                    |            |                    |   |            |  
|Acquisition of additional working interest through assumption of
 liability  |  | $                  |           |                    | $ | 1,454,372  |  
|Unpaid additions to oil and gas properties                                   |  | $                  | 271,979    |                    | $ | 361,994    |  
|Addition to asset retirement obligation, net                                 |  | $                  | 14,561     |                    | $ |           |  
|Discount on notes payable - Long term                                        |  | $                  | 5,284      |                    | $ |           |  
|Discount on notes payable - Short term                                       |  | $                  | 60,210     |                    | $ |           |  
|Conversion of preferred stock to common stock                                |  | $                  | 306        |                    | $ | 155        |  
|Stock issued for loan origination fees                                       |  | $                  | 23,750     |                    | $ |           |  
|Debt discount from warrants issued with debt                                 |  | $                  |           |                    | $ | 111,273    |  

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

53

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NOTE 1  ORGANIZATION:

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

All
of the Companys oil and gas production is sold under contracts that 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.

NOTE 2  GOING CONCERN:

Financial Condition

Daybreaks
financial statements for the year ended February 28, 2011 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. Daybreak has
incurred net losses since inception and has accumulated a deficit of
$22,406,909 and a working capital deficit of $2,078,849, 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 its ability to continue as a
going concern. Daybreak currently has a net revenue interest in eleven
producing wells in its 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. Since the purchase of the additional working interest
Daybreaks average monthly revenue from the five wells affected by this
purchase has increased by 75.76% or approximately $19,345 per month over the
last six months of the year ended February 28, 2011. With this purchase of
additional working interest and the completion of two additional wells in
October 2010 the Companys average net revenue interest in eleven producing
wells in Kern County, California is now 29.85%. The Companys average working
interest is 40.15% for these same wells.

Daybreak
anticipates revenues will continue to increase as the Company participates in
the drilling of more wells in the East Slopes Project. The Company plans to
continue its development drilling program at a rate that is compatible with its
cash flow and funding opportunities.

On
January 13, 2010, Daybreak commenced a private placement of 12% Subordinated
Notes. The Company sold $595,000 of Notes to 13 accredited investors. The
private placement concluded on March 16, 2010.

On
September 17, 2010, the Company financed an additional working interest purchase
in its East Slopes Project 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.

54

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On
March 15, 2010, the Company finalized the sale of its 12.5% working interest in
the East Gilbertown Field in Choctaw County, Alabama. This sale helped the
Company by improving its cash reserves and allowed Daybreak to focus on its
East Slopes Project.

Sources
of funds in the past for the Company 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. Daybreak anticipates it may be necessary to rely on additional funding
from the private or public debt or equity markets in the future. However, the
Company cannot offer any assurance that it will be successful in executing the
aforementioned plans to continue as a going concern.

Daybreaks
financial statements as of February 28, 2011 do not include any adjustments
that might result from the inability to implement or execute Daybreaks plans
to improve our ability to continue as a going concern.

NOTE 3  SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES:

Cash and Cash Equivalents

Cash
equivalents include demand deposits with banks and all highly liquid
investments with original maturities of three months or less.

The
Company routinely maintains balances in financial institutions where deposits
are guaranteed by the Federal Deposit Insurance Corporation (FDIC). As of
February 28, 2011, the Company had no cash deposits in excess of FDIC insured
limits at various financial institutions.

Accounts Receivable

The
Company routinely assesses the recoverability of all material trade and other
receivables. The Company accrues a reserve on a receivable when, based on the
judgment of management, it is probable that a receivable will not be collected
and the amount of any reserve may be reasonably estimated. Actual write-offs
may exceed the recorded allowance. As of February 28, 2011 and 2010 the Company
has recognized an allowance for doubtful accounts of $33,346 and $16,237
respectively.

Oil and Gas Properties

The
Company uses the successful efforts method of accounting for oil and gas
property acquisition, exploration, development, and production activities.
Costs to acquire mineral interests in oil and gas properties, to drill and
equip exploratory wells that find proved reserves, and to drill and equip
development wells are capitalized as incurred. Costs to drill exploratory wells
that are unsuccessful in finding proved reserves are expensed as incurred. In
addition, the geological and geophysical costs, and costs of carrying and
retaining unproved properties are expensed as incurred. Costs to operate and
maintain wells and field equipment are expensed as incurred.

Capitalized
proved property acquisition costs are amortized by field using the
unit-of-production method based on estimated proved reserves. Capitalized
exploration well costs and development costs (plus estimated future
dismantlement, surface restoration, and property abandonment costs, net of
equipment salvage values) are amortized in a similar fashion (by field) based
on their estimated proved developed reserves. Support equipment and other
property and equipment are depreciated over their estimated useful lives.

55

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Pursuant
to the provisions of Financial Accounting Standards B Codification (ASC)
Topic 360, Property, Plant and Equipment
the Company reviews proved oil and natural gas properties and other long-lived
assets for impairment. These reviews are predicated by events and
circumstances, such as downward revision of the reserve estimates or commodity
prices that indicate a decline in the recoverability of the carrying value of
such properties. The Company estimates the future cash flows expected in
connection with the properties and compares such future cash
flows to the carrying amount of the properties to determine if the carrying
amount is recoverable. When the carrying amounts of the properties exceed their
estimated undiscounted future cash flows, the carrying amounts of the
properties are reduced to their estimated fair value. The factors used to
determine fair value include, but are not limited to, estimates of proved
reserves, future commodity prices, the timing of future production, future
capital expenditures and a risk-adjusted discount rate. These estimates of
future product prices may differ from current market prices of oil and gas. Any
downward revisions to managements estimates of future production or product
prices could result in an impairment of the Companys oil and gas properties in
subsequent periods. Unproved oil and gas properties that are individually
significant are also periodically assessed for impairment of value. An
impairment loss for unproved oil and gas properties is recognized at the time
of impairment by providing an impairment allowance.

Asset
impairments of $-0- and $341,871 were recorded for the years ended February 28,
2011 and 2010, respectively which is included in Depreciation, Depletion,
Amortization (DD&A) in the statements of operations.

On
the retirement or sale of a partial unit of proved property, the cost is
charged to accumulated DD&A with a resulting gain or loss recognized in
income.

Property and Equipment

Fixed
assets are stated at cost. Depreciation on vehicles is provided using the
straight line method over expected useful lives of three years. Depreciation on
machinery and equipment is provided using the straight line method over
expected useful life of three years. Depreciation of production facilities is
recorded using the unit-of-production method based on estimated reserves.

Long Lived Assets

The
Company reviews long-lived assets and identifiable intangibles whenever events
or circumstances indicate that the carrying amounts of such assets may not be
fully recoverable. The Company evaluates the recoverability of long-lived
assets by measuring the carrying amounts of the assets against the estimated
undiscounted cash flows associated with these assets. If this evaluation
indicates that the future undiscounted cash flows of certain long-lived assets
are not sufficient to recover the assets carrying value, the assets are
adjusted to their fair values (based upon discounted cash flows).

Fair Value of Financial Instruments

The
carrying value of short-term financial instruments including cash, receivables,
prepaid expenses, accounts payable, and other accrued liabilities approximated
their fair values due to the relatively short period to maturity for these
instruments. The long-term notes payable approximate fair value since the
related rates of interest approximate current market rates.

Share Based Payments

Stock
awards are accounted for under FASB ASC Topic 718, Compensation-Stock Compensation (ASC 718).Under ASC 718, compensation for all
share-based payment awards is based on estimated fair value at the grant date.
The value of the portion of the award that is ultimately expected to vest is
recognized as expense on a straight-line basis over the requisite service
periods, if any.

The
Company estimates the fair value of stock purchase warrants (Warrants) on the
grant date using an option-pricing model. The Company uses the Black-Scholes
option pricing model (Black-Scholes Model) as its method of valuation for
Warrant awards granted during the year. The Companys determination of fair
value of Warrant awards on the date of grant using an option-pricing model is
affected by the Companys stock price, as well as assumptions regarding a
number of subjective variables. These variables include, but are not limited
to, the Companys expected price volatility over the term of the awards and
discount rates assumed.

56

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Loss per Share of Common Stock

Basic loss per share of Common Stock is calculated by dividing net loss
available to common stockholders by the weighted average number of common
shares issued and outstanding during the year. Diluted net loss per share is computed
based on the weighted average number of common shares outstanding, increased by
dilutive Common Stock equivalents. Common Stock equivalents are excluded from
the calculations when their effect is anti-dilutive.

Concentration of
Credit Risk

Substantially all of the Companys accounts receivable result from
crude oil and natural gas sales or joint interest billings to its working
interest partners. 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. Allowances for
doubtful accounts at February 28, 2011 and 2010 relate to amounts due from joint
interest owners.

At the Companys Kern County, California project, there is only one
buyer for the purchase of oil production. At February 28, 2011, one customer
represented 100.0% of crude oil sales receivable.

A table disclosing the total amount of revenues from any single
customer that exceeds 10% of total revenues follows:

|             |  |            |  |                       |  |                                       |         |                                       |  |         |   |            |         |  |  |      |  
|------------ |  | ---------- |  | --------------------- |  | ------------------------------------- | ------- | ------------------------------------- |  | ------- | - | ---------- | ------- |  |  | ---- | -
|             |  |            |  |                       |  | For the Year Ended
 February 28, 2011 |         | For the Year Ended
 February 28, 2010 | 
|             |  |            |  |                       |  |                                       |         |                                       | 
|Project      |  | Location   |  | Customer              |  | Revenue                               |         | Percentage                            |  | Revenue |   | Percentage |        
|             |  |            |  |                       |  |                                       |         |                                       |  |         |   |            |        
|East
 Slopes |  | California |  | Plains Marketing      |  | $                                     | 975,479 |                                       |  | 90.4    | % | $          | 469,357 |  |  | 84.5 | %
|             |  |            |  |                       |  |                                       |         |                                       |  |         |   |            |         |  |  |      |  
|Gilbertown*  |  | Alabama    |  | Hunt Crude Oil Supply |  | $                                     | -0-     |                                       |  | -0-     | % | $          | 84,353  |  |  | 15.2 | %

* Discontinued operation, we did not have any revenue from the East Gilbertown
Field during the year ended February 28, 2011

Revenue Recognition

The Company uses the sales method to account for sales of crude oil and
natural gas. Under this method, revenues are recognized based on actual volumes
of oil and gas sold to purchasers. The volumes sold may differ from the volumes
to which the Company is entitled based on its interests in the properties.
These differences create imbalances that are recognized as a liability only
when the imbalance exceeds the estimate of remaining reserves. The Company had
no significant imbalances as of February 28, 2011 and 2010.

Reclamation Bonds

Included in other assets as of February 28, 2011, are funds which have
been pledged as collateral in connection with asset retirement obligations for
future plugging, abandonment and site remediation. The amount pledged for an
operator bond in California is approximately $100,000 plus accrued interest.
The pledging of these funds is required by any state in which the Company operates.

Asset Retirement Obligation

The Company follows the provisions of FASB ASC Topic 410, Asset
Retirement and Environmental Obligations (ASC 410), which addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. This standard requires that the Company recognize the fair value of a
liability for an asset retirement obligation (ARO) in the period in which it
is incurred. The ARO is capitalized as part of the carrying value of the assets
to which it is associated, and depreciated over the useful life of the asset.
The ARO and the related asset retirement cost are recorded when an asset is
first drilled, constructed or purchased. The asset retirement cost is
determined and discounted to present value using a credit-adjusted risk-free
rate. After initial recording, the liability is increased for the passage of
time, with the increase being reflected as accretion expense in the
statements of operations. Subsequent adjustments in the cost estimate are
reflected in the ARO liability and the amounts continue to be amortized over
the useful life of the related long-lived assets.

57

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Suspended Well Costs

The Company accounts for any suspended well costs in accordance with
FASB ASC Topic 932, Extractive Activities  Oil and Gas (ASC 932). ASC 932
states that exploratory well costs should continue to be capitalized if: (1) a
sufficient quantity of reserves are discovered in the well to justify its completion
as a producing well and (2) sufficient progress is made in assessing the
reserves and the economic and operating feasibility of the well. If the
exploratory well costs do not meet both of these criteria, these costs should
be expensed, net of any salvage value. Additional annual disclosures are
required to provide information about managements evaluation of capitalized
exploratory well costs.

In addition, ASC 932 requires annual disclosure of: (1) net changes
from period to period of capitalized exploratory well costs for wells that are
pending the determination of proved reserves, (2) the amount of exploratory
well costs that have been capitalized for a period greater than one year after
the completion of drilling and (3) an aging of exploratory well costs suspended
for greater than one year, designating the number of wells the aging is related
to. Further, the disclosures should describe the activities undertaken to
evaluate the reserves and the projects, the information still required to
classify the associated reserves as proved and the estimated timing for
completing the evaluation.

Income Taxes

On March 1, 2007, the Company adopted the provisions of FASB ASC Topic
740, Income Taxes (ASC 740). As required under ASC 740, the Company
accounts for income taxes using an asset and liability approach, which requires
the recognition of deferred tax assets and liabilities for the expected future
tax consequences of temporary differences between the financial statements and
tax bases of assets and liabilities at the applicable tax rates. A valuation
allowance is utilized when it is more likely than not, that some portion of, or
all of the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on
the date of enactment.

ASC 740 prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return. Under ASC 740, the Company recognizes
tax benefits only for tax positions that are more likely than not to be
sustained upon examination by tax authorities. The amount recognized is
measured as the largest amount of benefit that is greater than 50 percent
likely to be realized upon settlement. A liability for unrecognized tax
benefits is recorded for any tax benefits claimed in our tax returns that do
not meet these recognition and measurement standards.

Use of Estimates and Assumptions

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
reported amounts of revenues and expenses during the reporting periods. 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;                                               
|
| |  | Judgment
 regarding the productive status of in-progress exploratory wells to determine
 the amount of any provision for abandonment; and                                                
|
| |  | Estimates
 regarding the timing and cost of future abandonment obligations.                                                                                                              

58

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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 has adopted the
provisions of ASU 2010-09.

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 4  ACCOUNTS
RECEIVABLE:

Accounts receivable consists primarily of
receivables from the sale of oil and gas production by the Company and
receivables from the Companys working interest partners in oil and gas
projects in which the Company acts as Operator of the project.

Oil and gas sales receivables balances at
February 28, 2011 and 2010 represent oil sales that occurred during the months
of February 2011 and 2010, respectively.

Joint interest participant receivables
balances at February 28, 2011 and 2010 represent amounts due from working
interest partners net of an allowance for doubtful accounts of $33,346 and $
16,237, respectively. The allowance for doubtful accounts balance at February
28, 2011 includes $32,035 related to partner receivables from projects in which
the Company no longer participates. The Company is still in the process of
trying to collect from these working interest partners.

Production revenue receivable balances, both
current and long-term, of $350,000 represent amounts due the Company from a
portion of the sale price of a 25% working interest in East Slopes Project in
Kern County, California that was acquired through the default of certain
original working interest partners in the project.

Refund receivables balance is comprised of
refunds for franchise tax and legal expenses that the Company is due at
February 28, 2011.

59

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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 year ended February 28, 2011 of $10,285 which is
presented under Discontinued Operations in the Statement of Operations and
discussed in Note 8 below. The gain resulted mainly from the extinguishment of
certain liabilities associated with the Gilbertown interest.

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 purchase resulted in an increase to the
gross balances of proved oil and gas properties of approximately $61,869 and
unproved oil and gas properties of approximately $421,464.

Oil and gas properties, at cost:

|                                                                |  |                   |           |                   |   |           |  
|--------------------------------------------------------------- |  | ----------------- | --------- | ----------------- | - | --------- | -
|                                                                |  | February 28, 2011 |           | February 28. 2010 |  
|                                                                |  |                   |           |                   |  
|Proved leasehold costs                                          |  | $                 | 8,975     |                   | $ | 6,720     |  
|Unproved leasehold costs                                        |  |                   | 452,570   |                   |   | 17,350    |  
|Costs of wells and development                                  |  |                   | 422,694   |                   |   | 285,896   |  
|Capitalized exploratory well costs                              |  |                   | 2,229,511 |                   |   | 1,439,126 |  
|Capitalized asset retirement costs                              |  |                   | 47,909    |                   |   | 33,349    |  
|                                                                |  |                   |           |                   |   |           |  
|Total cost of oil and gas properties                            |  |                   | 3,161,659 |                   |   | 1,782,441 |  
|Accumulated depletion, depreciation amortization and impairment |  |                   | (871,658  | )                 |   | (571,642  | )
|                                                                |  |                   |           |                   |   |           |  
|Oil and gas properties, net                                     |  | $                 | 2,290,001 |                   | $ | 1,210,799 |  
|                                                                |  |                   |           |                   |   |           |  

Asset Retirement Obligation

The Companys financial statements reflect the provisions of ASC 410.
The ARO primarily represents the estimated present value of the amount the
Company will incur to plug, abandon and remediate its producing properties at
the end of their productive lives, in accordance with applicable state laws.
The Company determines the ARO on its oil and gas properties by calculating the
present value of estimated cash flows related to the liability. As of February
28, 2011 and 2010, ARO obligations were considered to be long term based on the
estimated timing of the anticipated cash flows. For the years ended February
28, 2011 and 2010, the Company recognized accretion expense of $5,519 and
$3,325, respectively, which is included in DD&A in the statement of operations.

Changes in the asset retirement obligations for the year ended February
28, 2011are set forth in the table below.

|                                                    |  |   |         |  
|--------------------------------------------------- |  | - | ------- | -
|Asset retirement
 obligation, beginning of period   |  | $ | 53,318  |  
|Accretion expense                                   |  |   | 5,519   |  
|Asset retirement additions                          |  |   | 35,305  |  
|Change in asset retirement
 estimates               |  |   | (20,744 | )
|Asset retirement
 obligation, due to sale of assets |  |   | (18,276 | )
|                                                    |  |   |         |  
|Asset retirement
 obligation, end of period         |  | $ | 55,122  |  
|                                                    |  |   |         |  

60

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NOTE 6 ACCOUNTS PAYABLE:

On March 1, 2009, the Company became the operator for its East Slopes
Project located in Kern County, California. Additionally, the Company then
assumed certain original defaulting partners approximate $1.5 million
liability representing a 25% working interest in the drilling and completion costs
associated with the East Slopes Project four earning wells program. The Company
subsequently sold the 25% working interest on June 11, 2009. Approximately
$329,834 of the $1.5 million default remains unpaid and is included in the
February 28, 2011 accounts payable balance.

NOTE 7 NOTES PAYABLE:

Short-Term

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. The Company financed the additional working
interest purchase 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. Interest
expense related to the Loan for the year ended February 28, 2011 was $37,500.
Unamortized interest expense amounted to $37,500 as of February 28, 2011.

The third party may convert up to 50% of the unpaid principal balance
into the Companys Common Stock at a conversion price of $0.16 per share at any
time prior to the Loan being paid in full.

The Company also issued 250,000 shares of the Companys Common Stock to
the third party as a loan origination fee. The fair value of these shares
amounted to $23,750 which was deferred and amortized over the term of the Loan.
Amortization expense for the year ended February 28, 2011 was $11,875.
Unamortized loan origination fee expense amounted to $11,875 as of February 28,
2011.

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 Slopes 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.

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. The fair value of the two percent net
profits interest was determined to be $60,210 and has been recognized as a
discount to the debt to be amortized over the term of the Loan. Amortization
expense for the year ended February 28, 2011 amounted to $30,105. Unamortized
debt discount amounted to $30,105 as of February 28, 2011.

The Company analyzed the Loan for derivative accounting consideration
and determined that derivative accounting does not apply to this instrument.

Long-Term

12% Subordinated Notes

On January 13, 2010 the Company commenced a private placement of 12%
Subordinated Notes (Notes). On March 16, 2010, the Company closed its private
placement of Notes to 13 accredited investors resulting in total gross proceeds
of $595,000. The note principal is payable in full at the expiration of the
term of the Notes, which is January 29, 2015. 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. A total of $250,000 in
Notes was 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.

61

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Two Common Stock purchase warrants were issued for every dollar raised
through the private placement resulting in 1,190,000 warrants being issued
through the year ended February 28, 2011. The warrants 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 $116,557 using the
following weighted-average assumptions: a risk free interest rate of 2.33%;
volatility of 147.6%; 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. Amortization expense
related to the Notes debt discount for the year ended February 28, 2011
amounted to $16,234. Unamortized debt discount amounted to $99,106 as of
February 28, 2011.

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

NOTE 8 
DISCONTINUED OPERATIONS:

On March 15, 2010, the Company finalized the sale of its 12.5% working
interest in the East Gilbertown Field located in Choctaw County, Alabama by
assigning its interest to a third party.

The table below set forth the revenues and expenses related to the East
Gilbertown Field for the years ended February 28, 2011 and 2010. The cost and
expense information for the years ended February 28, 2011 and 2010 reflects
certain credits that result in this information being additions to revenue
rather than deductions from revenue.

|                                           |  |      |     |      |   |         | 
|------------------------------------------ |  | ---- | --- | ---- | - | ------- | 
|                                           |  | 2011 |     | 2010 |  
|                                           |  |      |     |      |  
|Oil sales revenue  East
 Gilbertown Field |  | $    |    |      | $ | 84,353  | 
|Cost and expenses                          |  |      | 731 |      |   | 23,246  | 
|                                           |  |      |     |      |   |         | 
|Income
 from discontinued operations       |  | $    | 731 |      | $ | 107,599 | 
|                                           |  |      |     |      |   |         | 

NOTE 9 
STOCKHOLDERS EQUITY:

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 total 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.

62

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At February 28, 2011, there were 906,565 shares issued and outstanding,
held by accredited investors that had not been converted into the Companys
Common Stock. During the year ended February 28, 2011, there were a total of
102,000 shares of Series A Preferred that were converted to 306,000 shares of
Common Stock. As of February 28, 2011, there have been 30 accredited investors
convert 493,200 Series A Preferred shares into 1,479,600 shares of Daybreak Common Stock. The conversions of
Series A Preferred that have occurred since the Series A Preferred was first issued in July 2006 is set forth in the table
below.

|                             |  |                                                            |         |                                                    |  |                                   |  |  |    | 
|---------------------------- |  | ---------------------------------------------------------- | ------- | -------------------------------------------------- |  | --------------------------------- |  |  | -- | 
|Fiscal
 Period               |  | Shares of
 Series
 A Preferred
 Converted to
 Common Stock |         | Shares of
 Common Stock 
 Issued from 
 Conversion |  | Number of 
 Accredited
 Investors | 
|                             |  |                                                            |         |                                                    |  |                                   | 
|Year Ended February 29, 2008 |  |                                                            | 102,300 |                                                    |  | 306,900                           |  |  | 10 | 
|Year Ended February 28, 2009 |  |                                                            | 237,000 |                                                    |  | 711,000                           |  |  | 12 | 
|Year Ended February 28, 2010 |  |                                                            | 51,900  |                                                    |  | 155,700                           |  |  | 4  | 
|Year Ended February 28, 2011 |  |                                                            | 102,000 |                                                    |  | 306,000                           |  |  | 4  | 
|                             |  |                                                            |         |                                                    |  |                                   |  |  |    | 
|Totals                       |  |                                                            | 493,200 |                                                    |  | 1,479,600                         |  |  | 30 | 

Holders of Series A Preferred earn a dividend, in the amount of 6% of
the original purchase price per year. Accumulated dividends do not bear
interest; and as of February 28, 2011 dividends amounted to $971,825. Dividends
can be paid in cash or 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 dividends have been
declared as of February 28, 2011.

Cumulative dividends earned for each fiscal year since issuance is set
forth in the table below.

|                  |  |                             |     |                        |   |         | 
|----------------- |  | --------------------------- | --- | ---------------------- | - | ------- | 
|Fiscal Year Ended |  | Shareholders
 at Period End |     | Accumulated
 Dividends |  
|                  |  |                             |     |                        |  
|February 28, 2007 |  |                             | 100 |                        | $ | 155,333 | 
|February 29, 2008 |  |                             | 90  |                        |   | 242,165 | 
|February 28, 2009 |  |                             | 78  |                        |   | 209,974 | 
|February 28, 2010 |  |                             | 74  |                        |   | 190,460 | 
|February 28, 2011 |  |                             | 70  |                        |   | 173,893 | 
|                  |  |                             |     |                        |   |         | 
|                  |  |                             |     |                        | $ | 971,825 | 
|                  |  |                             |     |                        |   |         | 

Common Stock

The Company is authorized to issue up to 200,000,000 shares of $0.001
par value Common Stock of which 48,791,599 shares were issued and outstanding
as of February 28, 2011. For the year ended February 28, 2011 a total of
1,006,000 shares were issued.

Share issuances of the Companys Common Stock for the year ended
February 28, 2011, are set forth in the table below.

|                                  |  |               |           | 
|--------------------------------- |  | ------------- | --------- | 
|Reason for Issuances              |  | Shares Issued |          
|                                  |  |               |          
|Conversion of Series A
 Preferred |  |               | 306,000   | 
|Loan origination fees             |  |               | 250,000   | 
|2009 Stock Plan                   |  |               | 450,000   | 
|                                  |  |               |           | 
|                                  |  |               | 1,006,000 | 
|                                  |  |               |           | 

The 250,000 shares of the Companys Common Stock issued for loan
origination fees relates to the purchase of an additional 16.67% working
interest in the Companys East Slopes Project in Kern County, California as
discussed in Note 5 and Note 7 above.

Common Stock Issued through Restricted Stock
and Restricted Stock Unit Plan

On April 6, 2009, the
Board 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. Refer to the discussion in
Note 11 for the issuances made under the 2009 Plan.

63

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NOTE 10  WARRANTS:

Warrants
outstanding and exercisable as of February 28, 2011 are set forth in the table
below:

|                                            |  |          |           |                 |   |                         |  |                                  |      |  |  |           | 
|------------------------------------------- |  | -------- | --------- | --------------- | - | ----------------------- |  | -------------------------------- | ---- |  |  | --------- | 
|Description                                 |  | Warrants |           | Exercise
 Price |   | Remaining
 Life (Years) |  | Exercisable
 Warrants
 Remaining |     
|                                            |  |          |           |                 |   |                         |  |                                  |     
|Spring 2006 Common Stock Private Placement  |  |          | 4,013,602 |                 | $ | 2.00                    |  |                                  | 0.25 |  |  | 4,013,602 | 
|Placement Agent Warrants - Spring 2006 PP   |  |          | 802,721   |                 | $ | 0.75                    |  |                                  | 2.25 |  |  | 802,721   | 
|Placement Agent Warrants - Spring 2006 PP   |  |          | 401,361   |                 | $ | 2.00                    |  |                                  | 2.25 |  |  | 401,361   | 
|July 2006 Preferred Stock Private Placement |  |          | 2,799,530 |                 | $ | 2.00                    |  |                                  | 0.50 |  |  | 2,799,530 | 
|Placement Agent Warrants - July 2006 PP     |  |          | 419,930   |                 | $ | 1.00                    |  |                                  | 2.50 |  |  | 419,930   | 
|Convertible Debenture Term Extension        |  |          | 150,001   |                 | $ | 2.00                    |  |                                  | 0.75 |  |  | 150,001   | 
|12% Subordinated Notes                      |  |          | 1,190,000 |                 | $ | 0.14                    |  |                                  | 3.75 |  |  | 1,190,000 | 
|Warrants Issued for Services                |  |          | 150,000   |                 | $ | 0.14                    |  |                                  | 4.25 |  |  | 150,000   | 
|                                            |  |          |           |                 |   |                         |  |                                  |      |  |  |           | 
|                                            |  |          | 9,927,145 |                 |   |                         |  |                                  |      |  |  | 9,927,145 | 
|                                            |  |          |           |                 |   |                         |  |                                  |      |  |  |           | 

For the year ended February 28, 2011, a total of 39,550 warrants
expired. These warrants were issued to a placement agent from a private
placement of Common Stock that occurred in the year ended February 28, 2008.

During the year ended February 28, 2011, a total of 210,000 warrants
were issued by the Company. A total of 60,000 warrants were issued as a part of
the private placement of the Subordinated Notes discussed in Note 7 above. The
remaining 150,000 warrants were issued to a consultant for services rendered
and expire on April 16, 2015 with an exercise price of $0.14. 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%.

There were no warrants exercised during the year ended February 28,
2011. As of February 28, 2011 and February 28, 2010, there were 9,927,145 and
9,756,695 warrants issued and outstanding, respectively.

The outstanding warrants as of February 28, 2011, have a weighted
average exercise price of $1.61; a weighted average remaining life of 1.14
years; and an intrinsic value of $-0-.

NOTE 11  RESTRICTED
STOCK and RESTRICTED STOCK UNIT PLAN:

On April 6, 2009, the
Board approved 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.

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

On April 7, 2009, the Compensation Committee of the Board awarded
1,000,000 restricted shares of the Companys Common Stock to a current and a
former executive officer of the Company. These shares were granted pursuant to
the 2009 Plan and fully vest equally over a period of three years.

On April 7, 2009, the Compensation Committee of the Board awarded
900,000 restricted shares of the Companys Common Stock, to the five non-employee
members of the Board of Directors. These shares were granted pursuant to the
2009 Plan and fully vest equally over a period of three years.

64

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On July 16, 2009, the Compensation Committee of the Board awarded
25,000 restricted shares of the Companys Common Stock to the five non-employee
directors, as part of the director compensation plan. These shares were granted
pursuant to the 2009 Plan and fully vest equally over a period of three years.

On July 16, 2009, the Compensation Committee of the Board awarded
625,000 restricted shares of the Companys Common Stock, to four employees of
the Company. These shares were granted pursuant to the 2009 Plan and fully vest
equally over a period of four years.

On July 22, 2010, the Compensation Committee of the Board awarded
25,000 restricted shares of its Common Stock to the five non-employee Directors
as a part of the director compensation plan. These shares were granted pursuant
to the 2009 Plan and fully vest equally over a period of three years.

On July 22, 2010, the Compensation Committee of the Board awarded
425,000 restricted shares of its Common Stock to five employees of Daybreak.
These shares were granted pursuant to the 2009 Plan and fully vest equally over
a period of four years.

At February 28, 2011, a total of 1,000,000 shares remained available
for issuance pursuant to the 2009 Plan. A summary of the 2009 Plan issuances is
set forth in the table 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        |  |  |               |  |  | 25,000                          | 
|7/22/2010   |  |  | 425,000         |  |  | 4
 Years        |  |  |               |  |  | 425,000                         | 
|            |  |  |                 |  |  |                 |  |  |                |  |  |                                 | 
|            |  |  | 3,000,000       |  |  |                 |  |  | 797,911        |  |  | 2,202,089                       | 
|            |  |  |                 |  |  |                 |  |  |                |  |  |                                 | 

For the year ended February 28, 2011, the Company recognized
compensation expense related to the above restricted stock grants of $88,508.
Unamortized compensation expense amounted to $133,272 as of February 28, 2011.

NOTE 12  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 rate
to income from continuing operations before income taxes is as follows:

|                                                  |  |                   |          |  
|------------------------------------------------- |  | ----------------- | -------- | -
|                                                  |  | February 28, 2011 |         
|                                                  |  |                   |         
|Computed at U.S. and State
 statutory rates (40%) |  | $                 | (486,300 | )
|Permanent Differences                             |  |                   | 14,731   |  
|Changes in valuation
 allowance                   |  |                   | 471,569  |  
|                                                  |  |                   |          |  
|Total                                             |  | $                 | -0-      |  

65

---



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

|                                 |  |                   |            |                   |   |            |  
|-------------------------------- |  | ----------------- | ---------- | ----------------- | - | ---------- | -
|                                 |  | February 28, 2011 |            | February 28, 2010 |  
|                                 |  |                   |            |                   |  
|Deferred tax assets:             |  |                   |            |                   |   |            |  
|Net operating loss carryforwards |  | $                 | 5,900,491  |                   | $ | 5,114,269  |  
|Oil and gas properties           |  |                   | (226,994   | )                 |   | 123,062    |  
|Stock based compensation         |  |                   | 35,403     |                   |   |           |  
|Less valuation allowance         |  |                   | (5,708,900 | )                 |   | (5,237,331 | )
|                                 |  |                   |            |                   |   |            |  
|Total                            |  | $                 | -0-        |                   | $ | -0-        |  

At February 28, 2011, the Company had a net operating loss (NOL)
carryforwards for federal and state income tax purposes of approximately
$14,751,228, which will begin to expire, if unused, beginning in 2024. The
valuation allowance increased by approximately $471,569 and $891,046 for the
years ended February 28, 2011 and February 28, 2010, respectively. Section 382
Rule of the Internal Revenue Code will place annual limitations on the
Companys NOL carryforward.

The above estimates are based upon managements decisions concerning
certain 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.

NOTE 13 
COMMITMENTS AND CONTINGENCIES:

Various lawsuits, claims and other contingencies arise in the ordinary
course of the Companys business activities. While the ultimate outcome of the
aforementioned contingencies are 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
February 28, 2011. 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.

66

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NOTE
14  SUPPLEMENTARY INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)

All of the Companys continuing operations are directly related to oil
and natural gas producing activities located in California.

Capitalized Costs Relating to Oil and Gas
Producing Activities

|                                                                     |  |                           |           |                           |   |           |  
|-------------------------------------------------------------------- |  | ------------------------- | --------- | ------------------------- | - | --------- | -
|                                                                     |  | As of 
 February 28, 2011 |           | As of 
 February 28, 2010 |  
|                                                                     |  |                           |           |                           |  
|Proved leasehold costs                                               |  |                           |           |                           |   |           |  
|Mineral Interests                                                    |  | $                         | 7,848     |                           | $ | 6,720     |  
|Wells, equipment and facilities                                      |  |                           | 2,701,241 |                           |   | 1,754,488 |  
|                                                                     |  |                           |           |                           |   |           |  
|Total Proved Properties                                              |  |                           | 2,709,089 |                           |   | 1,761,208 |  
|                                                                     |  |                           |           |                           |   |           |  
|Unproved properties                                                  |  |                           |           |                           |   |           |  
|Mineral Interests                                                    |  |                           | 431,895   |                           |   | 17,350    |  
|Uncompleted wells, equipment and facilities                          |  |                           | 20,675    |                           |   | 3,883     |  
|                                                                     |  |                           |           |                           |   |           |  
|Total unproved properties                                            |  |                           | 452,570   |                           |   | 21,233    |  
|                                                                     |  |                           |           |                           |   |           |  
|Less accumulated depreciation, depletion amortization and impairment |  |                           | (871,658  | )                         |   | (571,642  | )
|                                                                     |  |                           |           |                           |   |           |  
|Net capitalized costs                                                |  | $                         | 2,290,001 |                           | $ | 1,210,799 |  
|                                                                     |  |                           |           |                           |   |           |  

Costs Incurred in Oil and Gas Producing
Activities

|                                   |  |                                    |           |                                    |   |           | 
|---------------------------------- |  | ---------------------------------- | --------- | ---------------------------------- | - | --------- | 
|                                   |  | 12 Months Ended
 February 28, 2011 |           | 12 Months Ended
 February 28, 2010 |  
|                                   |  |                                    |           |                                    |  
|Acquisition of proved properties   |  | $                                  | 1,128     |                                    | $ | 6,720     | 
|Acquisition of unproved properties |  |                                    | 431,337   |                                    |   | 21,233    | 
|Development costs                  |  |                                    | 946,753   |                                    |   | 948,271   | 
|Exploration costs                  |  |                                    | 184,255   |                                    |   | 301,912   | 
|                                   |  |                                    |           |                                    |   |           | 
|Total costs incurred               |  | $                                  | 1,563,473 |                                    | $ | 1,278,136 | 

Results of Operations from Oil and Gas
Producing Activities

|                                                               |  |                                    |           |                                    |   |          |  
|-------------------------------------------------------------- |  | ---------------------------------- | --------- | ---------------------------------- | - | -------- | -
|                                                               |  | 12 Months Ended
 February 28, 2011 |           | 12 Months Ended
 February 28, 2010 |  
|                                                               |  |                                    |           |                                    |  
|Oil and gas revenues                                           |  | $                                  | 1,079,496 |                                    | $ | 471,442  |  
|Production costs                                               |  |                                    | (172,250  | )                                  |   | (269,820 | )
|Exploration expenses                                           |  |                                    | (184,255  | )                                  |   | (301,912 | )
|Depletion, depreciation, amortization and impairment           |  |                                    | (307,023  | )                                  |   | (550,755 | )
|                                                               |  |                                    |           |                                    |   |          |  
|Result of oil and gas producing operations before income taxes |  |                                    | 415,968   |                                    |   | (651,045 | )
|Provision for income taxes                                     |  |                                    |           |                                    |   |          |  
|                                                               |  |                                    |           |                                    |   |          |  
|Results of oil and gas producing activities                    |  | $                                  | 415,968   |                                    | $ | (651,045 | )
|                                                               |  |                                    |           |                                    |   |          |  

67

---



Proved Reserves

The Companys proved oil and natural gas reserves have been estimated
by the certified independent engineering firm, Lonquist & CO. LLC. Proved
reserves are the estimated quantities that geologic and engineering data
demonstrate with reasonable certainty to be recoverable in future years from
known reservoirs under existing economic and operating conditions. Proved
developed reserves are the quantities expected to be recovered through existing
wells with existing equipment and operating methods when the estimates were
made. Due to the inherent uncertainties and the limited nature of reservoir
data, such estimates are subject to change as additional information becomes
available. The reserves actually recovered and the timing of production of
these reserves may be substantially different from the original estimate.
Revisions result primarily from new information obtained from development
drilling and production history; acquisitions of oil and natural gas
properties; and changes in economic factors. Our proved reserves are summarized
in the table below:

|                                       |  |               |         |               |  |         |  
|-------------------------------------- |  | ------------- | ------- | ------------- |  | ------- | -
|                                       |  | Oil (Barrels) |         | BOE (Barrels) | 
|                                       |  |               |         |               | 
|Proved reserves:                       |  |               |         |               |  |         |  
|February 28, 2009                      |  |               | 17,250  |               |  | 17,250  |  
|Revisions(1)                           |  |               | (10,414 | )             |  | (10,414 | )
|Extensions and discoveries             |  |               | 45,184  |               |  | 45,184  |  
|Production                             |  |               | (3,142  | )             |  | (3,142  | )
|Purchases (sales) of minerals-in-place |  |               | 13,277  |               |  | 13,277  |  
|                                       |  |               |         |               |  |         |  
|February 28, 2010                      |  |               | 62,155  |               |  | 62,155  |  
|Revisions(2)                           |  |               | 24,880  |               |  | 24,880  |  
|Extensions and discoveries             |  |               | 145,648 |               |  | 145,648 |  
|Production                             |  |               | (13,009 | )             |  | (13,009 | )
|Purchases (sales) of minerals-in-place |  |               | 18,146  |               |  | 18,146  |  
|                                       |  |               |         |               |  |         |  
|February 28, 2011                      |  |               | 237,820 |               |  | 237,820 |  
|                                       |  |               |         |               |  |         |  

| |     |                                                                                                                                                                                                                                      
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | The revisions of previous
 estimates for the year ended February 28, 2010, resulted from a revised lower
 estimate of reserve value after continued reservoir production.                                                            
|
| | (2) | The revisions of previous
 estimates for the year ended February 28, 2011, resulted from a revised
 increased estimate of reserve value after continued reservoir production and
 increased hydrocarbon prices in the energy markets.

The Companys
proved reserves are set forth in the table below.

|                  |  |  |              |  |  |              |  |  |                |  |  |              |  |  |              |  |  |              | 
|----------------- |  |  | ------------ |  |  | ------------ |  |  | -------------- |  |  | ------------ |  |  | ------------ |  |  | ------------ | 
|                  |  |  | Developed    |  |  | Undeveloped  |  |  | Total Reserves | 
|                  |  |  |              |  |  |              |  |  |                | 
|                  |  |  | Oil 
 (Bbls) |  |  | BOE 
 (Bbls) |  |  | Oil 
 (Bbls)   |  |  | BOE 
 (Bbls) |  |  | Oil 
 (Bbls) |  |  | BOE 
 (Bbls) | 
|                  |  |  |              |  |  |              |  |  |                |  |  |              |  |  |              |  |  |              | 
|February 28, 2009 |  |  | 8,625        |  |  | 8,625        |  |  | 8,625          |  |  | 8,625        |  |  | 17,250       |  |  | 17,250       | 
|February 28, 2010 |  |  | 38,648       |  |  | 38,648       |  |  | 23,507         |  |  | 23,507       |  |  | 62,155       |  |  | 62,155       | 
|February 28, 2011 |  |  | 88,840       |  |  | 88,840       |  |  | 148,980        |  |  | 148,980      |  |  | 237,820      |  |  | 237,820      | 

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

The following information is based on the Companys best estimate of
the required data for the Standardized Measure of Discounted Future Net Cash
Flows as of February 28, 2011 and 2010 in accordance with ASC 932, Extractive
Activities  Oil and Gas which requires the use of a 10% discount rate. This
information is not the fair market value, nor does it represent the expected
present value of future cash flows of the Companys proved oil and gas
reserves.

Future cash inflows for the years ended February 28, 2010 and 2011 were
estimated as specified by the SEC through calculation of an average price based
on the 12-month unweighted arithmetic average of the first-day-of-the-month
price for the period from March through February during each respective fiscal
year. The resulting net cash flows are reduced to present value by applying a
10% discount factor.

68

---



|                                                                                        |  |                   |            |                   |   |           |  
|--------------------------------------------------------------------------------------- |  | ----------------- | ---------- | ----------------- | - | --------- | -
|                                                                                        |  | 12 Months Ended   |           
|                                                                                        |  |                   |           
|                                                                                        |  | February 28, 2011 |            | February 28, 2010 |  
|                                                                                        |  |                   |            |                   |  
|Future cash inflows                                                                     |  | $                 | 18,138,730 |                   | $ | 3,657,798 |  
|Future production costs (1)                                                             |  |                   | (6,896,130 | )                 |   | (809,091  | )
|Future development costs                                                                |  |                   | (1,667,310 | )                 |   | (345,567  | )
|Future income tax expenses (2)                                                          |  |                   |            |                   |   |           |  
|                                                                                        |  |                   |            |                   |   |           |  
|Future net cash flows                                                                   |  |                   | 9,575,290  |                   |   | 2,503,140 |  
|10% annual discount for estimated timing of cash flows                                  |  |                   | (4,215,510 | )                 |   | (527,212  | )
|                                                                                        |  |                   |            |                   |   |           |  
|Standardized measure of discounted future net cash flows at the end of
 the fiscal year |  | $                 | 5,359,780  |                   | $ | 1,975,928 |  
|                                                                                        |  |                   |            |                   |   |           |  

| |     |                                                                                                                                                                              
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Production costs include
 oil and gas operations expense, production ad valorem taxes, transportation
 costs and G&A expense supporting the Companys oil and gas operations.
| |     |                                                                                                                                                                              
| | (2) | The Company has sufficient
 tax deductions and allowances related to proved oil and gas reserves to
 offset future net revenues.                                             

Average oil
prices are set forth in the table below.

|                      |  |                             |       | 
|--------------------- |  | --------------------------- | ----- | 
|                      |  | Average Price
 Oil (Barrel) |      
|                      |  |                             |      
|February 28, 2011 (1) |  | $                           | 76.27 | 
|February 28, 2010 (1) |  | $                           | 58.86 | 
|February 28, 2009     |  | $                           | 35.40 | 

| |     |                                                                                                                                                                                                                          
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Average
 prices for February 28, 2011 and 2010 were based on 12-month unweighted
 arithmetic average of the first-day-of-the-month prices for the period from
 March through February during each respective fiscal year.

Future production and development costs, which include dismantlement
and restoration expense, are computed by estimating the expenditures to be
incurred in developing and producing the Companys proved crude oil and natural
gas reserves at the end of the year, based on year-end costs, and assuming
continuation of existing economic conditions.

Sources of Changes in Discounted Future Net Cash
Flows

Principal changes in the aggregate standardized measure of discounted
future net cash flows attributable to the Companys proved crude oil and
natural gas reserves, as required by ASC 932, at fiscal year-end are set forth
in the table below.

|                                                                                       |  |                   |           |                   |   |           |  
|-------------------------------------------------------------------------------------- |  | ----------------- | --------- | ----------------- | - | --------- | -
|                                                                                       |  | 12 Months Ended   |          
|                                                                                       |  |                   |          
|                                                                                       |  | February 28, 2011 |           | February 28, 2010 |  
|                                                                                       |  |                   |           |                   |  
|Standardized measure of discounted future net cash flows at the
 beginning of the year |  | $                 | 1,975,928 |                   | $ | 356,279   |  
|Extensions, discoveries and improved recovery, less related costs                      |  |                   | 3,053,440 |                   |   | 1,849,004 |  
|Revisions of previous quantity estimates                                               |  |                   | 560,714   |                   |   | (333,444  | )
|Purchase of minerals in place                                                          |  |                   | 513,643   |                   |   |          |  
|Net changes in prices and production costs                                             |  |                   | (491,475  | )                 |   | 270,243   |  
|Accretion of discount                                                                  |  |                   | 197,593   |                   |   | 35,628    |  
|Sales of oil produced, net of production costs                                         |  |                   | (802,245  | )                 |   | (207,641  | )
|Development costs incurred during the period                                           |  |                   | 597,796   |                   |   | 112,343   |  
|Changes in future development costs                                                    |  |                   | (256,408  | )                 |   | (142,978  | )
|Changes in timing of future production                                                 |  |                   | 10,794    |                   |   | 36,494    |  
|Net changes in income taxes                                                            |  |                   |          |                   |   |          |  
|                                                                                       |  |                   |           |                   |   |           |  
|Standardized measure of discounted future net cash flows at the end of
 the year       |  | $                 | 5,359,780 |                   | $ | 1,975,928 |  
|                                                                                       |  |                   |           |                   |   |           |  

69

---



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

70

---



ITEM 9A. CONTROLS
AND PROCEDURES

Managements
Evaluation of Disclosure Controls and Procedures

As of the end of the reporting period, February 28, 2011, an evaluation
was conducted by Daybreak management, including our President and Chief
Executive Officer, also serving as our 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 February
28, 2011.

Internal Control
Over Financial Reporting

The Companys internal control over financial reporting is a process
designed 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.

Our internal controls over financial reporting include those policies
and procedures that:

| |    |                                                                                                                                                                                                                                                                                                                              
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1) | pertain to the maintenance of records that, in reasonable detail,
 accurately and fairly reflect the transactions and dispositions of our
 assets;                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                              
| | 2) | provide reasonable assurance that transactions are recorded as
 necessary to permit preparation of financial statements in accordance with
 generally accepted accounting principles, and that our receipts and
 expenditures are being made in accordance with authorizations of management
 and our Board of Directors; and
| |    |                                                                                                                                                                                                                                                                                                                              
| | 3) | provide reasonable assurance regarding prevention or timely detection
 of any unauthorized acquisition, use or disposition of assets that could have
 a material effect on the financial statements.                                                                                                                         

Because of the inherent limitations due to, for example, the potential
for human error or circumvention of controls, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with policies or procedures may deteriorate.

Managements Report
on Internal Control Over Financial Reporting

Daybreak management including our President and Chief Executive
Officer, also serving as our interim principal finance and accounting officer
is responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act. Our management assessed the effectiveness of our internal control
over financial reporting as of February 28, 2011. In making this assessment,
management used certain criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.
Based on such assessment and those criteria, management believes that the
Company maintained effective internal control over financial reporting as of
February 28, 2011.

This annual report does not include an attestation report of the
Companys registered public accounting firm regarding internal control over
financial reporting. Managements report was not subject to attestation by the
Companys registered public accounting firm pursuant to SEC rules that permit
the company to provide only managements report in this annual report.

71

---



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 February 28, 2011 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.

ITEM 9B. OTHER
INFORMATION

None.

72

---



PART III

Certain information required by Part III is omitted from this Annual
Report on Form 10-K because we will file a definitive proxy statement pursuant
to Regulation 14A (the Proxy Statement), not later than 120 days after the
end of the fiscal year covered by this Form 10-K, and certain information to be
included therein is incorporated herein by reference, or if the Registrants Schedule 14A is
not filed within such period, will be included in an amendment to this Report
on Form 10-K which will be filed within such 120 day period.

ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

This Item is incorporated by reference to our definitive proxy
statement on Schedule 14A, which will be filed with the Commission not later than 120 days after
the close of the fiscal year covered by this report on Form 10-K, or if the
Registrants Schedule 14A is not filed within such period, will be included in
an amendment to this Report on Form 10-K which will be filed within such 120
day period.

ITEM 11.
EXECUTIVE COMPENSATION

This Item is incorporated by reference to our definitive proxy
statement on Schedule 14A, which will be filed with the Commission not later than 120 days after
the close of the fiscal year covered by this report on Form 10-K, or if the
Registrants Schedule 14A is not filed within such period, will be included in
an amendment to this Report on Form 10-K which will be filed within such 120
day period.

ITEM 12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS

This Item is incorporated by reference to our definitive proxy
statement on Schedule 14A, which will be filed with the Commission not later than 120 days after
the close of the fiscal year covered by this report on Form 10-K, or if the
Registrants Schedule 14A is not filed within such period, will be included in
an amendment to this Report on Form 10-K which will be filed within such 120
day period.

ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

This Item is incorporated by reference to our definitive proxy
statement on Schedule 14A, which will be filed with the Commission not later than 120 days after
the close of the fiscal year covered by this report on Form 10-K, or if the
Registrants Schedule 14A is not filed within such period, will be included in
an amendment to this Report on Form 10-K which will be filed within such 120
day period.

ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES

This Item is incorporated by reference to our definitive proxy
statement on Schedule 14A, which will be filed with the Commission not later
than 120 days after the close of the fiscal year covered by this report on Form
10-K, or if the Registrants Schedule 14A is not filed within such period, will
be included in an amendment to this Report on Form 10-K which will be filed
within such 120 day period.

73

---



PART IV

ITEM 15. EXHIBITS,
FINANCIAL STATEMENT SCHEDULES

The following
Exhibits are filed as part of the report:

|      |                                                                                                                                           
|----- | ------------------------------------------------------------------------------------------------------------------------------------------
|3.01  | Amended and Restated Articles of Incorporation of Daybreak Oil and
 Gas, Inc. dated July 17, 2009 (18)                                    
|      |                                                                                                                                           
|3.02  | Amended and Restated Bylaws (1)                                                                                                           
|      |                                                                                                                                           
|4.01  | Specimen Stock Certificate (2)                                                                                                            
|      |                                                                                                                                           
|4.02  | Designations of Series A Convertible Preferred Stock (3)                                                                                  
|      |                                                                                                                                           
|4.03  | Warrant for the purchase shares of Common Stock, March 2006 private
 placement (4)                                                        
|      |                                                                                                                                           
|4.04  | Registration rights agreement, March 2006 private placement (4)                                                                           
|      |                                                                                                                                           
|4.05  | Warrant for the purchase shares of Common Stock, July 2006 private
 placement (5)                                                         
|      |                                                                                                                                           
|4.06  | Registration rights agreement, July 2006 private placement (5)                                                                            
|      |                                                                                                                                           
|4.07  | Additional warrant to purchase shares of Common Stock associated with
 the Spring 2006 and the July 2006 private placement offerings (2)  
|      |                                                                                                                                           
|4.08  | 2009 Restricted Stock and Restricted Stock Unit Plan (6)*                                                                                 
|      |                                                                                                                                           
|4.09  | Form of Restricted Stock Award Agreement (6)*                                                                                             
|      |                                                                                                                                           
|4.10  | Form of Restricted Stock Unit Award Agreement (6)*                                                                                        
|      |                                                                                                                                           
|4.11  | Form of 12% Subordinated Note due 2015 (17)                                                                                               
|      |                                                                                                                                           
|4.12  | Form of Warrant in connection with 12% Subordinated Notes (17)                                                                            
|      |                                                                                                                                           
|10.01 | Development agreement with Chicago Mill Joint Venture for Louisiana
 project (7)                                                          
|      |                                                                                                                                           
|10.02 | Prospect review and non-competition agreement for California project (7)                                                                  
|      |                                                                                                                                           
|10.03 | Joint Venture Agreement with Nomad Hydrocarbons, Ltd. for California
 project (7)                                                         
|      |                                                                                                                                           
|10.04 | Prospect review agreement for California project (7)                                                                                      
|      |                                                                                                                                           
|10.05 | Development agreement with Vision Exploration for Krotz Springs 3D
 Prospect (7)                                                          
|      |                                                                                                                                           
|10.06 | Subscription agreement and letter of investment intent, March 2006
 private placement (4)                                                 
|      |                                                                                                                                           
|10.07 | Pipeline license agreement for Tuscaloosa project in Louisiana (7)                                                                        
|      |                                                                                                                                           
|10.08 | Subscription agreement and letter of investment intent, July 2006
 private placement (5)                                                  
|      |                                                                                                                                           
|10.09 | Purchase of additional mineral interest in Tuscaloosa project in
 Louisiana (8)                                                           
|      |                                                                                                                                           
|10.10 | Farmout agreement with Monarch Gulf Exploration, Inc. (9)                                                                                 
|      |                                                                                                                                           
|10.11 | Oil and gas lease with Anadarko E&P Company, L.P. (10)                                                                                    
|      |                                                                                                                                           
|10.12 | Drilling contract with Energy Drilling for two wells in Louisiana (11)                                                                    
|      |                                                                                                                                           
|10.13 | Seismic Option Farmin Agreement with Chevron U.S.A. (12)                                                                                  
|      |                                                                                                                                           
|10.14 | Joint Development Participation Agreement for Tuscaloosa project in
 Louisiana (13)                                                       
|      |                                                                                                                                           
|10.15 | Purchase and Sale Agreement with Lasso Partners, LLC (14)                                                                                 
|      |                                                                                                                                           
|10.16 | Letter of Agreement to amend the Purchase and Sale Agreement with
 Lasso Partners, LLC (15)                                               
|      |                                                                                                                                           
|10.17 | Purchase of Tuscaloosa interest from Kirby Cochran (14)                                                                                   
|      |                                                                                                                                           
|10.18 | Purchase of Tuscaloosa interest from 413294 Alberta Ltd. (Robert N.
 Martin) (14)                                                         
|      |                                                                                                                                           
|10.19 | Purchase of Tuscaloosa interest from Tempest Energy, Inc (Eric L.
 Moe) (14)                                                              
|      |                                                                                                                                           
|10.20 | Letter of Agreement on North Shuteston Assignment of Interest (14)                                                                        
|      |                                                                                                                                           
|10.21 | Exchange Option Agreement with O&G Energy Partners and San
 Joaquin Investments, Inc. (16)                                                
|      |                                                                                                                                           
|10.22 | Form of Subscription Agreement (17)                                                                                                       
|      |                                                                                                                                           
|10.23 | Purchase and Sale Agreement with Arabella Enterprises for the sale of
 working interest in the East Gilbertown Field in Alabama (18)      
|      |                                                                                                                                           
|10.24 | Partial Release of Production Payment between O&G Energy
 Partners, LLC and Daybreak Oil and Gas, Inc. (18)                               
|      |                                                                                                                                           
|10.25 | Asset Sale and Purchase Agreement with Chevron U.S.A. Inc. effective July 1, 2010. (19)                                                   
|      |                                                                                                                                           
|10.26 | Assignment of Oil and Gas Leases and Agreements Among Chevron U.S.A.
 Inc., San Joaquin Investments, Inc. and Daybreak Oil & Gas, Inc.(19)
|      |                                                                                                                                           
|10.27 | Bill of Sale among Chevron U.S.A. Inc., San Joaquin Investments, Inc.
 and Daybreak Oil & Gas, Inc.(19)                                   

74

---



|      |                                                                                                                                                     
|----- | ----------------------------------------------------------------------------------------------------------------------------------------------------
|10.28 | Secured Convertible Promissory Note from Daybreak Oil & Gas, Inc.
 to Well Works, LLC (20)                                                          
|      |                                                                                                                                                     
|10.29 | Mortgage, Deed of Trust, Assignment of Production, Security Agreement
 and Financing Statement from Daybreak Oil & Gas, Inc. to Well Works, LLC (20)
|      |                                                                                                                                                     
|10.30 | Technical and Consulting Services Agreement between Daybreak Oil
 & Gas, Inc. to Well Works, LLC (20)                                               
|      |                                                                                                                                                     
|10.31 | Assignment of Net Profits Interest from Daybreak Oil & Gas, Inc.
 to Well Works, LLC (20)                                                           
|      |                                                                                                                                                     
|23.1  | Consent of Lonquist & Co. LLC. (21)                                                                                                                 
|      |                                                                                                                                                     
|23.2  | Consent of MaloneBailey, LLP (21)                                                                                                                   
|      |                                                                                                                                                     
|31.1  | Certification of principal executive and principal financial officer
 as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(21)     
|      |                                                                                                                                                     
|32.1  | Certification of principal executive and principal financial officer
 as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (21)    
|      |                                                                                                                                                     
|99.1  | Reserves Report of Lonquist & Co. LLC, independent petroleum
 engineering consulting firm, as of March 1, 2011.(21)                                 

|
|
|

|     |                                                                                                                                                                                                                                   
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1)  | Previously filed as exhibit to Form 8-K on April 9, 2008, and
 incorporated by reference herein.                                                                                                                                  
|     |                                                                                                                                                                                                                                   
|(2)  | Previously filed as exhibits to Form 10-K on May 28, 2009, and
 incorporated by reference herein.                                                                                                                                 
|     |                                                                                                                                                                                                                                   
|(3)  | Previously filed as exhibit to Form SB-2 on July 18, 2006, and
 incorporated by reference herein. (filed as part of the Articles of Amendment
 to the Articles of Incorporation of Daybreak Oil & Gas, Inc. dated June
 30, 2006.)
|     |                                                                                                                                                                                                                                   
|(4)  | Previously filed as exhibits to Form SB-2 on July 18, 2006, and
 incorporated by reference herein.                                                                                                                                
|     |                                                                                                                                                                                                                                   
|(5)  | Previously filed as exhibits to Form 10-KSB on September 21, 2007,
 and incorporated by reference herein.                                                                                                                         
|     |                                                                                                                                                                                                                                   
|(6)  | Previously filed as exhibits to Form S-8 filed on April 7, 2009 and
 incorporated by reference herein.                                                                                                                            
|     |                                                                                                                                                                                                                                   
|(7)  | Previously filed as exhibits to Form SB-2/A on December 28, 2006, and
 incorporated by reference herein.                                                                                                                          
|     |                                                                                                                                                                                                                                   
|(8)  | Previously filed as exhibit to Form 8-K on September 28, 2006, and
 incorporated by reference herein.                                                                                                                             
|     |                                                                                                                                                                                                                                   
|(9)  | Previously filed as exhibit to Form 8-K on October 26, 2006, and incorporated
 by reference herein.                                                                                                                               
|     |                                                                                                                                                                                                                                   
|(10) | Previously filed as exhibit to Form 8-K on November 7, 2006, and
 incorporated by reference herein.                                                                                                                               
|     |                                                                                                                                                                                                                                   
|(11) | Previously filed as exhibit to Form 8-K on November 17, 2006, and
 incorporated by reference herein.                                                                                                                              
|     |                                                                                                                                                                                                                                   
|(12) | Previously filed as exhibit to Form 8-K on July 16, 2007, and
 incorporated by reference herein.                                                                                                                                  
|     |                                                                                                                                                                                                                                   
|(13) | Previously filed as exhibit to Form 8-K on July 20, 2007, and
 incorporated by reference herein.                                                                                                                                  
|     |                                                                                                                                                                                                                                   
|(14) | Previously filed as exhibits to Form 10-KSB filed on May 27, 2008,
 and incorporated by reference herein.                                                                                                                         
|     |                                                                                                                                                                                                                                   
|(15) | Previously filed as exhibit to Form 8-K on May 2, 2008, and
 incorporated by reference herein.                                                                                                                                    
|     |                                                                                                                                                                                                                                   
|(16) | Previously filed as exhibit to Form 8-K on June 16, 2009, and
 incorporated by reference herein.                                                                                                                                  
|     |                                                                                                                                                                                                                                   
|(17) | Previously filed as exhibits to Form 8-K on February 3, 2010, and
 incorporated by reference herein.                                                                                                                              
|     |                                                                                                                                                                                                                                   
|(18) | Previously filed as exhibit to Form 10-K on May 28, 2010, and
 incorporated by reference herein.                                                                                                                                  
|     |                                                                                                                                                                                                                                   
|(19) | Previously filed as exhibit to Form 10-Q on October 15, 2010, and
 incorporated by reference herein.                                                                                                                              
|     |                                                                                                                                                                                                                                   
|(20) | Previously filed as exhibit to Form 8-K on September 23, 2010, and
 incorporated by reference herein.                                                                                                                             
|     |                                                                                                                                                                                                                                   
|(21) | Filed herewith.                                                                                                                                                                                                                   

*Contract or compensatory plan or arrangement
in which directors and/or officers may participate.

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GLOSSARY OF TERMS

The following are abbreviations and definitions of terms commonly used
in the oil and gas industry and this Form 10-K.

3-D seismic. An
advanced technology method of detecting accumulations of hydrocarbons
identified by the collection and measurement of the intensity and timing of
sound waves transmitted into the earth as they reflect back to the surface.

BOE. A barrel of oil
equivalent (BOE) is the standard convention used to express oil and gas volumes
on a comparable oil equivalent basis. Gas equivalents are determined under the
relative energy content method by using the ratio of 6.0 Mcf of gas to 1.0 Bbl
of oil or natural gas liquid.

Bbl. One barrel, or
42 U.S. gallons of liquid volume.

Completion. The
installation of permanent equipment for the production of oil or gas.

DD&A. Refers to
depreciation, depletion and amortization of the Companys property and
equipment.

Development well. A
well drilled within the proved area of an oil or gas reservoir to the depth of
a stratigraphic horizon known to be productive.

Dry hole. A well
found to be incapable of producing hydrocarbons in sufficient quantities to
justify completion as an oil or gas well.

Exploratory well. A
well drilled to find a new field or to find a new reservoir in a field
previously found to be productive of oil or natural gas in another reservoir.

Gross acres or wells.
Refers to the total acres or wells in which the Company has a working interest.

Horizontal drilling.
A drilling technique that permits the operator to contact and intersect a
larger portion of the producing horizon than conventional vertical drilling
techniques and may, depending on the horizon, result in increased production
rates and greater ultimate recoveries of hydrocarbons.

Net acres or wells.
Refers to the gross sum of fractional working interest ownership in gross acres
or wells.

Net production. Oil
and gas production that is owned by the Company, less royalties and production
due others.

NYMEX. New York
Mercantile Exchange, the exchange on which commodities, including crude oil and
natural gas futures contracts, are traded.

Oil. Crude oil or
condensate.

Operator. The
individual or company responsible for the exploration, development and production
of an oil or gas well or lease.

Productive wells.
Producing wells and wells mechanically capable of production.

Proved Developed Reserves.
Proved reserves that can be expected to be recovered (i) through existing wells
with existing equipment and operating methods or in which the cost of the
required equipment is relatively minor compared to the cost of a new well, and
(ii) through installed extraction equipment and infrastructure operational at
the time of the reserves estimate if the extraction is by means not involving a
well.

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Proved reserves.
Proved oil and gas reserves are those quantities of oil and gas, which, by
analysis of geoscience and engineering data, can be estimated with reasonable
certainty to be economically producible - from a given date forward from known
reservoirs, and under existing economic conditions, operating methods, and
government regulations  prior to the time at which contracts providing the
right to operate expire, unless evidence indicates that renewal is reasonably
certain, regardless of whether deterministic or probabilistic methods are used
for the estimation. The project to extract the hydrocarbons must have commenced
or the operator must be reasonably certain that it will commence the project
within a reasonable time. (i) The area of the reservoir considered as proved
includes: (A) The area identified by drilling and limited by fluid contacts, if
any, and (B) Adjacent undrilled portions of the reservoir that can, with
reasonable certainty, be judged to be continuous with it and to contain
economically producible oil or gas on the basis of available geoscience and
engineering data. (ii) In the absence of data on fluid contacts, proved
quantities in a reservoir are limited by the lowest known hydrocarbons (LKH) as
seen in a well penetration unless geoscience, engineering, or performance data
and reliable technology establishes a lower contact with reasonable certainty.
(iii) Where direct observation from well penetrations has defined a highest
known oil (HKO) elevation and the potential exists for an associated gas cap,
proved oil reserves may be assigned in the structurally higher portions of the
reservoir only if geoscience, engineering, or performance data and reliable
technology establish the higher contact with reasonable certainty. (iv)
Reserves which can be produced economically through application of improved
recovery techniques (including, but not limited to, fluid injection) are
included in the proved classification when: (A) Successful testing by a pilot project
in an area of the reservoir with properties no more favorable than in the
reservoir as a whole, the operation of an installed program in the reservoir or
an analogous reservoir, or other evidence using reliable technology establishes
the reasonable certainty of the engineering analysis on which the project or
program was based; and (B) The project has been approved for development by all
necessary parties and entities, including government entities.

Proved undeveloped reserves (PUD).
Undeveloped oil and gas reserves are reserves of any category that are expected
to be recovered from new wells on undrilled acreage, or from existing wells
where a relatively major expenditure is required for recompletion. (i) Reserves
on undrilled acreage shall be limited to those directly offsetting development
spacing areas that are reasonably certain of production when drilled, unless
evidence using reliable technology exists that establishes reasonable certainty
of economic producibility at greater distances. (ii) Undrilled locations can be
classified as having undeveloped reserves only if a development plan has been
adopted indicating that they are scheduled to be drilled within five years,
unless the specific circumstances, justify a longer time. (iii) Under no circumstances
shall estimates for undeveloped reserves be attributable to any acreage for
which an application of fluid injection or other improved recovery technique is
contemplated, unless such techniques have been proved effective by actual
projects in the same reservoir or an analogous reservoir, or by other evidence
using reliable technology establishing reasonable certainty.

Royalty. An interest
in an oil and gas lease that gives the owner of the interest the right to
receive a portion of the production from the leased acreage (or of the proceeds
of the sale thereof), but generally does not require the owner to pay any
portion of the costs of drilling or operating the wells on the leased acreage.
Royalties may be either landowners royalties, which are reserved by the owner
of the leased acreage at the time the lease is granted, or overriding
royalties, which are usually reserved by an owner of the leasehold in
connection with a transfer to a subsequent owner.

SEC. The United
States Securities and Exchange Commission.

Standardized measure of discounted future net
cash flows. Present value of proved reserves, as
adjusted to give effect to (i) estimated future abandonment costs, net of
the estimated salvage value of related equipment, and (ii) estimated
future income taxes.

Undeveloped acreage.
Leased acreage on which wells have not been drilled or completed to a point
that would permit the production of economic quantities of oil or gas,
regardless of whether such acreage contains proved reserves.

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Working interest. An
interest in an oil and gas lease that gives the owner of the interest the right
to drill for and produce oil and gas on the leased acreage and requires the
owner to pay a share of the costs of drilling and production operations. The
share of production to which a working interest is entitled will be smaller
than the share of costs that the working interest owner is required to bear to
the extent of any royalty burden.

Workover. Operations
on a producing well to restore or increase production.

78

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SIGNATURES

Pursuant to
the requirements of Section 13 or 15(d) 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                    
| |                             | Date: May
 26, 2011                    

Pursuant to
the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.

|    |                                                   |  |  |                      |                     
|--- | ------------------------------------------------- |  |  | -------------------- | --------------------
|By: | /s/ JAMES F.
 WESTMORELAND                        |  |  | By:                  | /s/ DALE B.
 LAVIGNE
|    |                                                   |  |  |                      |                     
|    | James F.
 Westmoreland                            |  |  | Dale B.
 Lavigne    
|    | Director /
 President and Chief Executive Officer |  |  | Director /
 Chairman
|    | Date: May
 26, 2011                               |  |  | Date: May
 26, 2011 
|    |                                                   |  |  |                      |                     
|By: | /s/ TIMOTHY
 R. LINDSEY                           |  |  | By:                  | /s/ WAYNE G.
 DOTSON
|    |                                                   |  |  |                      |                     
|    | Timothy R.
 Lindsey                               |  |  |                      | Wayne G.
 Dotson    
|    | Director                                          |  |  |                      | Director            
|    | Date: May
 26, 2011                               |  |  |                      | Date: May
 26, 2011 
|    |                                                   |  |  |                      |                     
|By: | /s/ RONALD
 D. LAVIGNE                            |  |  | By:                  | /s/ JAMES F.
 MEARA 
|    |                                                   |  |  |                      |                     
|    | Ronald D.
 Lavigne                                |  |  |                      | James F.
 Meara     
|    | Director                                          |  |  |                      | Director            
|    | Date: May
 26, 2011                               |  |  |                      | Date: May
 26, 2011 

79

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