UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)

[X]
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended February 28, 2007

[   ]
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period ______ to _______

Commission file number 000-50107

DAYBREAK OIL AND GAS, INC.
(Name of small business issuer 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)

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

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

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

Check whether issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.        ¨

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 ¨

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [   ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act:
Large accelerated filer ¨                                                       Accelerated filer ¨                                            Non-accelerated filer þ

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

The registrant’s revenues for its most recent fiscal year were $629,345.

The aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant, based on the closing price of $0.50 on September 14, 2007, as reported by the Over the Counter Bulletin Board was $ 16,576,211 .

At September 14, 2007, the registrant had 41,171,299 outstanding shares of $0.001 par value common stock.

1
TABLE OF CONTENTS

   
PAGE
     
PART  I     
4
     
  ITEM 1.    DESCRIPTION OF BUSINESS
4
       
  ITEM 2.   DESCRIPTION OF PROPERTIES
22
       
  ITEM 3.   LEGAL PROCEEDINGS
29
       
  ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
29
       
PART  II    
30
     
 
ITEM 5.    
MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
SMALL BUSINESS ISSUER PURCHASE OF EQUITY SECURITIES
30
       
  ITEM 6.   MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
51
       
  ITEM 7.   FINANCIAL INFORMATION
62
       
 
ITEM 8.  
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
109
       
  ITEM 8A.   CONTROLS AND PROCEDURES
110
       
  ITEM 8B.   OTHER INFORMATION
112
       
PART  III    
113
       
  ITEM 9.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
113
       
  ITEM 10. EXECUTIVE COMPENSATION
118
       
  ITEM 11.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
122
       
  ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
124
       
  ITEM 13. EXHIBITS
134
       
  ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
136
       
  SIGNATURES  
137
 
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CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS
 
We believe that some statements contained in this Prospectus relate to results or developments that we anticipate will or may occur in the future 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:


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.  Factors that might cause such a difference include:


 

 
 

 
 

 
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PART  I

ITEM 1.  DESCRIPTION OF BUSINESS

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, the Company had ceased to be a producing mining company and thereafter engaged in mineral exploration. In May 1964, to reflect the diversity of its mineral holdings, the Company changed its name to Daybreak Mines, Inc. The trading symbol for the Company became DBRM.

Our subsequent efforts in the acquisition, exploration and development of potentially viable commercial properties were unsuccessful. By February 1967, we had ceased active 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 mineral rights in approximately 340 acres in Shoshone County, Idaho.

Overview

Effective March 1, 2005, we undertook a new business direction for the Company as an exploration and development company in the oil and gas industry. As of this date, we have become an early stage energy company. Currently, we are developing prospects in Alabama, California, Louisiana and Texas. 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 trading symbol continues to be DBRM.

We are actively pursuing oil and gas opportunities through joint ventures with industry partners as a means of limiting our drilling risk.  Our 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 are currently developing projects that have a mix of low risk with a potential of steady reliable revenue as well as projects with a higher risk of success, but that may also have a large return.  We seek to maximize the value of our asset base by exploring and developing properties that have both production and reserve growth potential.

In November 2006, we became the operator of our Tuscaloosa project located in northeast Louisiana. In June 2007, we became the operator of the East Gilbertown Field in Choctaw County, Alabama. By being the operator on oil and gas projects, we are more directly in control of the costs of drilling, completion and production on our projects. Additionally, by being the operator, we are increasing the expertise of Daybreak personnel in the oil and gas industry. In the past, we have always relied on others for drilling, delivering any gas or oil we discover, and negotiating all sales contracts.

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To date, we have drilled seven “exploratory wells” (wells drilled to discover new oil or gas reservoirs in an unproved area); one developmental well (a well drilled within the proved area of an oil or gas reservoir to a depth known to be productive); and five “re-entry wells” (wells that were previously plugged or abandoned, but will now have the cement abandonment plugs drilled out of the original borehole to test potential zones of production). One exploratory well in northeast Louisiana was successfully completed and commenced production on June 17, 2006.  This is the Tensas Farms et al “F-1” well.

Two other exploratory wells, (the Tensas Farms et al “F-3” and the Tensas Farms et al “B-1”)  located in Louisiana on the Tuscaloosa Project were drilled in November and December of 2006.  The “F-3” well has been completed and has been producing since March 2007. An initial completion was attempted on the “B-1” well, but the well has not been placed into production.  The B-1 log information is being reviewed and the well may require stimulation to achieve acceptable flow rates.

The development well was drilled in the Krotz Springs Field and commercial production began in May of 2007. The other four exploratory wells were drilled in Texas (1) in December of 2005; in Alberta, Canada (1) in June 2006, and in central Louisiana (2) in December 2006 and May 2007, were dry holes (a well that does not encounter commercial amounts of gas or oil).

We purchased our interest in the Saxet Field in Corpus Christi, Texas in November 2005 and commenced activities to re-enter five of the existing wells on this property in May 2006.  Of the five re-entry wells, three have been successful and are currently producing oil and/or natural gas.  The other two re-entry wells are being used as salt water disposal wells.

We acquired our interest in the East Gilbertown Field in Alabama in December 2006, and have participated in the workover of three wells, resulting in an increase in the average daily production of this field.

During the fiscal year ended February 28, 2007, we have received net production revenue of $477,224 from our Louisiana wells in the Tuscaloosa Project; $150,910 from our Texas wells in the Saxet Field; and $1,211 from our wells in Alabama at the Gilbertown Field. Funding for these activities has been primarily accomplished through (1) loans from our directors, shareholders and others and (2) the sales of our common and preferred stock through Rule 506 Regulation D private placement offerings.  Net positive cash flow from completed producing wells is expected to increase in the current fiscal year.

Historical Business Development

In September 2001, the Board of Directors authorized a private placement of the Company’s common stock to raise $55,000. Additionally, our shareholders approved increasing the authorized common stock of the Company to 200,000,000 shares and also authorized the creation of 10,000,000 shares of preferred stock.

In July of 2003, a private placement was conducted to raise an additional $25,000. The proceeds of the offering were utilized to pay expenses relating to the Company’s ongoing reporting requirements under the Securities Exchange Act of 1934.

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In May of 2004, the Company’s stock moved from being quoted on the “pink sheet” market to the “OTC” (over-the-counter) bulletin board market.

Effective March 1, 2005, we undertook a new business direction for the Company as an exploration and development company in the oil and gas industry. As of this date, we became an exploration stage energy company.

Between March 22, 2005 and August 31, 2005, we borrowed a total of $168,821 from six officers, directors or shareholders to fund operating capital needs.

In April of 2005, we signed two oil and gas exploration and development agreements for exploration projects located in Texas (Ginny South and Pearl Projects).

From June through December 2005, we conducted a private placement of our common stock. The proceeds were used to pay for lease, exploration and drilling expenses of the Company as well as working capital.  Net proceeds to the Company were $1,087,500.

In July 2005, we entered into an exploration agreement with an industry partner and three Geotechnical professionals to jointly develop an AMI (Area of Mutual Interest) located in the San Joaquin Basin of California (East Slopes Project).

In September 2005, we entered into an exploration agreement to jointly develop an AMI located in northeast Louisiana (Tuscaloosa Project).

In November 2005, we agreed to participate in a five well re-entry program in the Saxet Deep Field in Corpus Christi, Texas.

In December 2005, drilling equipment for our first well finally moved onsite in San Patricio County, Texas. We had encountered many delays in the start of this project including the arrival of both Hurricanes Katrina and Rita.

In December 2005, we borrowed $60,000 to help finance exploration activities as well as increase operating capital.

In January 2006, drilling equipment moved onsite at our second drilling project. This was the Tensas Farms et al “F-1” location on the Tuscaloosa Project in NE Louisiana. Additionally in January, a seventh director was appointed to the Board of Directors. This individual was Terrence Dunne, an existing shareholder and 10% control person at the time.

Between January 25, 2006 and February 8, 2006, we borrowed a total of $806,700 from seven shareholders to help finance exploration activities as well as increase operating capital.

Between February 24, 2006 and March 6, 2006, we borrowed $325,001 from four shareholders to meet operating capital needs.

On March 8, 2006, we and our partners purchased a 50% mineral right interest in 28,000 acres that were located within the original AMI of the Tuscaloosa Project located in NE Louisiana.

6
From March through May 2006, we conducted a private placement of our common stock that raised net proceeds of $5,188,257 for use in lease, exploration, drilling and to meet working capital needs.

On March 30, 2006, we agreed to jointly participate in an exploration project at the Krotz Springs Field located in St. Landry Parish, Louisiana.

In May 2006, we started the first re-entry of five wells in the Saxet Deep Field near the Corpus Christi, Texas airport. We also agreed to jointly participate in an exploration projects located in St. Landry Parish, Louisiana (North Shuteston) and in Alberta, Canada (40 Mile Coulee). In an effort to conserve cash flow, we financed our 40% ownership in the pipeline that is connected to the “F-1” well on the Tuscaloosa Project in NE Louisiana.

In July 2006, we conducted a private placement of our preferred stock that raised net proceeds of $3,626,204 for use in lease, exploration, drilling and to meet working capital needs.

In August 2006, we finalized an agreement with Green River Drilling of Venus, Texas, for the refurbishment of a drilling rig that Daybreak would have a right for the exclusive use of the drilling rig for a three year period. From August through November 2006, we advanced Green River $800,000 for the refurbishment of the rig. In May 2007, Green River sold the drilling rig and the advanced funds plus interest were returned to Daybreak. Additionally in August, an eighth director was appointed to the Board of Directors. This individual was Eric Moe, our Chief Executive Officer.

In December 2006, we agreed to jointly participate in an oilfield re-entry project in East Gilbertown Field located in Choctaw County, Alabama. Additionally, we drilled two more exploratory wells located in Tensas and Franklin Parishes, Louisiana. The “F-3” well (Tensas Parish) has been completed and has been producing since March 2007. The “B-1” well (Franklin Parish) was completed, but has not yet been placed into production.  The well log information is being reviewed and the well may require stimulation to achieve acceptable flow rates.

In January 2007, we commenced drilling of the Haas-Hirsch No. 1 well located in the Krotz Springs Field in St. Landry Parish, Louisiana. This well was perforated and opened to testing in May 2007. Additionally in January, a ninth director was appointed to the Board of Directors. This individual was Tim Lindsey, who has over thirty years experience in global oil and gas exploration, production, technology and business development.

In May 2007, we commenced procedures to attempt to resolve mechanical problems associated with the Tuscaloosa Project “F-1” well.  Our efforts resulted in the successful re-establishment of production from this well in mid-July 2007.  However, as a result of an issue encountered with the gas sales agreement covering this well, the F-3 well and the pipeline connected to both of these wells, both the F-1 well and the F-3 well were, in late July 2007,  temporarily shut in pending resolution of the sales contract issues and/or the securing of an alternative market for the natural gas produced by these two wells.

Competition

We compete with independent oil and gas companies for property acquisitions and for the equipment and labor required to operate and develop these properties.  Most 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.

7
In addition, larger competitors may be able to absorb the burden of any changes in federal, state and local laws and regulations more easily than we can, which could adversely affect our competitive position.

Further, our competitors may have technological advantages and may be able to implement new technologies more rapidly than we can.  Our ability to explore for natural gas and oil prospects and to acquire additional properties in the future will depend on our ability to conduct operations, to evaluate and select suitable properties and to consummate transactions in this highly competitive environment.  In addition, most of our competitors have operated for a much longer time than we have and have demonstrated the ability to operate through industry cycles.

Significant Customers

At each of our property locations in Alabama, Louisiana and Texas, we have oil and gas sales contracts with one dominant purchaser in each respective area.  Due to the availability of distribution pipelines or sole distributors, we do not have the option of choosing to whom we will sell our oil and gas products. If these purchasers should not be able to resell their products or if they lose a sales contract then we might not have a market for our products.

In the case of the Tuscaloosa project, both the F-1 well and the F-3 well have previously supplied gas to a single customer pursuant to a gas supply agreement.  As a result of an issue encountered with the gas sales agreement covering the F-1 well, the F-3 well and the pipeline connected to these wells, both the F-1 well and the F-3 well were, in August 2007, temporarily shut-in pending resolution of the sales contract issues and/or the securing of an alternative market for the natural gas produced by these two wells.  In combination, these two wells contributed approximately 75% of total revenues during the fiscal year ended February 28, 2007.

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 commences, we search the title, and remedy any material defects 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.

Long Term Success

Our success depends on (1) the successful acquisition, drilling and development of commercial grade oil and gas properties and (2) 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 our control.  This 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 significant opportunities are available to us in the oil and gas exploration and development industry.

8
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 requirements for the operation of wells.
 
Laws and regulations relating to our business frequently change, and future laws and regulations, including changes to existing laws and regulations, could adversely affect our business.
 
RISK FACTORS

The following risk factors together with other information set forth in this Form 10-KSB, should be carefully considered by current and future investors in our securities. An investment in these 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.
 
Risks related to investment in our Company
 
Our auditors have expressed an opinion that our significant operating losses raise substantial doubt about our ability to continue as a going concern

The Company’s financial statements for the year ended February 28, 2007 and 2006, have been audited by our current independent registered public accountant. Both of these reports include an explanatory paragraph stating that the financial statements have been prepared assuming the Company will continue as a going concern.  The report also states that the Company has incurred significant operating losses that raise substantial doubt about its ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from this uncertainty.  If the Company cannot continue as a going concern, your investment in the Company could become devalued or worthless.

The Company reported a net loss of $8,392,030 for the fiscal year ended February 28, 2007, and a cumulative net loss from inception through February 28, 2007 of $12,864,071.

We are an early stage oil and gas exploration company with 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, we have had limited revenues and have not yet generated positive earnings.  The Company 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.

9
The resale of shares offered in private placements could depress the value of the shares.

Shares of the Company’s 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.

If we are unable to obtain additional capital we will not be able to fund all drilling projects that we have committed to for the next twelve months

Although our first well commenced production on June 17, 2006, we have generated limited revenue from operations.  We are dependent upon our ability to raise additional capital over the next twelve months to meet future drilling commitments.  There is no guarantee that we will be successful in our efforts in the debt and equity markets to raise the funds necessary to fund these commitments.  If we are unable to raise the additional funds, we will be unable to proceed with these planned drilling projects.

We have paid our officers and directors significant amounts in the form of salaries, consulting fees, and stock which could have an adverse affect on our net operating results and earnings per share

In our fiscal year ending February 28, 2006, we paid our officers and directors a total of $60,050 in cash for services.  During this same period, we granted these individuals 2,783,000 shares of  unregistered common stock with a fair value of $2,010,730 at the grant date for services.

For the fiscal year ended February 28, 2007, we paid our officers and director a total of $553,941 in cash for services.  During this same period, we granted these individuals 1,050,000 shares of unregistered common stock with a fair value of $2,206,500 at the grant date for services.

These payments were all approved by the Compensation Committee of the Board of Directors.  The Compensation Committee approved these payments and salaries after conducting an analysis of salaries paid to individuals who perform similar functions in comparably-sized companies.  The Board of Directors has the power to approve the payment of salaries and bonuses without receiving approval of the shareholders.  All compensation payments are accounted for as administrative expenses.  These compensation payments have had, and may continue to have, an adverse impact on our net results from operations, and earnings (or losses) per share.

We are an exploration stage company implementing a new business plan making it difficult to evaluate our chance for success

We are an exploration stage company with a limited operating history upon which to base an evaluation of our current business and future prospects.  We started in the oil and gas exploration and development industry in March of 2005.  We are in the early stages of the implementation of our business plan.  Based on this limited history, investors do not have a proven basis to determine the probability of our business success.



10
The oil and gas business is highly competitive placing us 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 any oil and or gas prospect and undertaking drilling ventures upon general and inferred geology.  This public information is also available to our competitors.

In addition, we compete with large oil and gas companies which have longer operating histories and greater financial resources than we do.  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.
These disadvantages could create negative results for our business plan and future operations.

We cannot guarantee financial results, making it more difficult to raise additional capital

Since our inception, we have suffered recurring losses from operations and have depended on external financing to sustain our operations.  During the year ended February 28, 2007, we reported a net loss of $8,392,030. If exploration efforts are unsuccessful in establishing proved reserves and exploration activities cease, the amounts accumulated as unproved costs will be charged against earnings as impairments.  Potential investors may be dissuaded from investing in the Company based on historical results.

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 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 our Company’s President has significant experience in the oil and gas industry, we do not have an established history of locating and developing properties that have economically feasible oil and gas reserves.

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 expenses will increase substantially 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.

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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 also intend to 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 and 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.

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.  The probability of the existence and recoverability of reserves is less than 100% and actual recoveries of proved reserves can differ materially from 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 each lease, the lease may be terminated or otherwise expire.  We cannot assure you 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 terms acceptable to us, or at all.

Title deficiencies could render our oil and gas leases worthless; thus damaging the financial condition of the 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 in examining records in the appropriate governmental office before attempting to place under lease a specific mineral interest.  This is a customary practice in the oil and gas industry.

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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 the financial condition of the Company.

Reliance on certain third party vendors for outsourced services could be detrimental to our business plan

To maximize the use of our otherwise limited capital and human resources, we intend to rely on third party vendors for outsourced drilling, exploration and other operational services.  This practice could allow us to achieve cost savings and operational efficiencies.  However, the use of outsourced resources could expose us to greater risk should we be unable to source critical vendors on a cost budgeted and timely basis.

Furthermore, the use of outsourced resources could minimize our ability to control the work product and accountability of such vendors.  If any of these relationships with third-party service providers are terminated or are unavailable on commercially acceptable terms, our business plan will be adversely affected.

If we as operators, or our operators 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, fires, pollution, 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.  For projects in which we function as the operator, the occurrence of a significant event 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 this project investment could have a material adverse effect on our financial condition and results of operations.







13
We have limited control over the activities on properties we do not operate, which could reduce or negate the expected returns on these investments

We conduct our oil and gas exploration and development activities in joint ventures with others.  We have reserved the right to participate in management decisions, but do not have ultimate decision-making authority.

In many cases, success in the operation of our properties will be dependent on the expertise and financial resources of our joint venture partners and third-party operators.  Our dependence on the operator and other working interest owners resulting in our limited ability to control the operation could adversely affect the realization of our expected returns and lead to unexpected future costs.

We are not in control of our own oil and gas distribution systems and are therefore dependent on the sales contracts of oil and gas resellers to provide a market for us, which could result in our not being able to produce from our wells

In each of our producing projects, there is only one distributor available to purchase our oil and gas production. If that reseller were to lose a sales contract or customer then we might not be able to produce an otherwise productive well because of a lack of a market in which to sell oil or gas. Additionally, we are subject to the traditional seasonal energy demands that are found in the oil and gas industry.

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

Our Company President and one Director have substantial experience in the oil and gas business.  The rest of the management team has little or no experience in managing or conducting oil and gas operations.  The loss of any of these individuals, particularly our President or this Director 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.

Our cash on deposit exceeds the FDIC insurance limits exposing the uninsured balances to possible loss

Some of our bank accounts periodically exceed the $100,000 limit of FDIC insurance for deposits.  In the unlikely event that our bank should fail, it is possible that we will lose some of our funds on deposit.

We have disclosed material weakness in our disclosure controls and procedures which could erode investor confidence, jeopardize our ability to obtain insurance, and limit our ability to attract qualified persons to serve the Company

In our fiscal 2006 and 2007 annual and quarterly SEC filings, we have disclosed material weaknesses in our disclosure controls and procedures.  Predicated by the identification of these weaknesses, we have carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures.

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Based upon those evaluations, we concluded that our disclosure controls and procedures need improvement and were not adequately effective to ensure timely reporting under the Exchange Act.  We are working to correct this situation as quickly and effectively as possible.

We will be required to evaluate our internal controls under Section 404 of the Sarbanes-Oxley Act of 2002 (“SOX”), and any adverse results from such evaluation could result in a loss of investor confidence in our financial reports and have an adverse effect on the price of our shares of common stock.

Pursuant to Section 404 of SOX, beginning with our annual report on Form 10-KSB for the fiscal year ended February 29, 2008, we will be required to furnish a report by management on our internal controls over financial reporting.  This report will contain among other matters, an assessment of the effectiveness of our internal control over financial reporting, including a statement as to whether or not our internal control over financial reporting is effective.  This assessment must include disclosure of any material weaknesses in our internal control over financial reporting identified by our management.  This report must also contain a statement that our auditors have issued an attestation report on our management’s assessment of these internal controls.  Public Company Accounting Oversight Board Auditing Standard No. 2 provides the professional standards for auditors to attest to, and report on, our management’s assessment of the effectiveness of internal control over financial reporting under Section 404.

We cannot be certain that we will be able to complete our assessment, testing and any required remediation in a timely fashion.  During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that such internal control is effective.  If we are unable to assert that our internal control over financial reporting is effective (or if our auditors are unable to attest that our management’s report is fairly stated or they are unable to express an opinion on the effectiveness of our internal controls), we could lose investor confidence in the accuracy and completeness of our financial reports, which could have a material adverse effect on our stock price.

Failure to comply with the new rules 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 generally quoted on the OTC Bulletin Board, however since July 2007, our stock has been quoted in the OTC pink sheet market because of SEC filing delinquencies. Both the pink sheet market and the bulletin board market are characterized by low trading volume.  Because of this limited liquidity, stockholders 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 the risk factors set forth in this 10-KSB report, 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.

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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.

Privately placed issuances of our common stock 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  September 14 , 2007, there were 41,171,299 shares of common stock outstanding.  On May 19, 2006, the Company closed on a private placement sale of 4,013,602 units at $1.50 per unit resulting in gross proceeds of $6,020,404.  Each unit sold was comprised of two shares of common stock and one common stock purchase warrant.  The 118 investors in this private placement were issued 8,027,206 shares of common stock and 4,013,602 common stock warrants. The placement agent for the offering earned an additional 1,204,082 common stock warrants. At the time of the offering, the common stock component prices of the private placement units were significantly lower than the trading price of our common stock. As of February 28, 2007, the Company’s authorized equity allows for 159,122,770 shares of authorized and unissued common stock.  In addition to the completed private placement, we may in the future, issue additional previously authorized and unissued common stock.  These events may result in the further dilution of the ownership interests of our present shareholders and purchasers of common stock offered in this prospectus.

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 existing stock ownership.

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

Our articles of incorporation currently authorize the issuance of 10,000,000 shares of $0.001 par value preferred stock.  In June 2006, the Board of Directors authorized 2,400,000 shares of preferred stock to be designated as Series A Convertible Preferred stock. 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.  On July 18, 2006, the Company closed on a private placement sale of 1,399,765 units at $3.00 per unit resulting in gross proceeds of $4,199,291.  Each unit sold was comprised of one Series A Convertible Preferred share and two common stock purchase warrants.  Each Series A Convertible Preferred share can be converted to three common stock shares at any time. The 100 investors in this private placement were issued a total of 1,399,765 Series A Convertible Preferred shares and 2,799,527 common stock warrants. The placement agent for the offering earned an additional 419,930 common stock warrants. As of February 28, 2007, 1,399,765 shares of Series A Convertible preferred stock were issued and outstanding.
 
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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;
  • automatic convertibility into common stock if after the effective date of  the registration statement the Company’s common stock closes at or above $3.00 per share for twenty (20) out of thirty trading days (30) days;
  • 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 the Series A Convertible Preferred shares could delay, discourage, hinder or preclude an unsolicited acquisition of our Company.  In addition, the issuance of these preferred shares could make it less likely that shareholders receive a premium for their shares as a result of any such 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.

Although we have no current plans to issue any additional preferred stock, future issuances of preferred stock may also have more advantageous features than our common stock in terms of dividends, liquidation and voting rights.

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.  As mentioned above, the conversion of the debt to equity financing may dilute the equity position of our shareholders.

Principal stockholders and directors control the Company through substantial voting power

Our two largest principal beneficial stockholders, along with the ten directors or officers of the Company own and control about 37% percent of our outstanding common stock.  There are a large number (over 2,000) of stockholders who own less than 50,000 shares each and there are over 1,600 stockholders with invalid addresses (owning approximately 3,000,000 shares).

Our stockholders do not have the right to cumulative voting in the election of our directors.  Cumulative voting could allow a minority group to elect at least one director to our board.  Because there is no provision for cumulative voting, a minority group will not be able to elect any directors.  Conversely, if our principal beneficial stockholders and directors wish to act in concert, they would be able to vote to appoint directors of their choice, and otherwise directly or indirectly, control the direction and operation of the Company.




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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.

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 “penny stock” and thus may be more illiquid than shares traded on an exchange or on NASDAQ.  The SEC has adopted rules (Rules 15g-2 through l5g-6 of the Exchange Act) which define “penny stocks” and regulate broker-dealer practices in connection with transactions with these stocks.  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 rules” require a broker-­dealer to:
  • deliver a standardized risk disclosure document prepared by the SEC;
  • provide the customer with current bid and offer quotations for the penny stock;
  • include the compensation of the broker-dealer and its salesperson in the transaction;
  • provide monthly account statements showing the market value of each penny stock held in the customers account;
  • make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction.
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.  In addition, the ability of purchasers in this offering to sell their stock in any secondary market could be adversely restricted.

Due to limited and sporadic trading volume, investors may not be able to resell their shares of common stock at favorable times and prices

Although our common stock has been quoted on the OTC Bulletin Board for several years, the trading in our stock has been limited and sporadic.  In the fiscal year ended February 28, 2007, the average weekly volume of trading was less than 400,000 shares.  Although trading volume has increased over the past fiscal year, it has still been sporadic.  The trading volume during this period has ranged from several hundred thousand shares to as few as no shares traded on certain days.  A consistently active trading market for our common stock may never be developed, or sustained if it emerges.  In addition, the price of our common stock on the OTC Bulletin Board has been extremely volatile.  For example, in the past fiscal year, the closing sale price has fluctuated between a low of $0.94 and a high of $2.95.  Low volume or lack of demand for these securities may make it more difficult for you to sell such shares at a price or at a time that would be favorable.  We cannot assure you that you will be able to sell your shares at an attractive price relative to the price you are paying or that you will be able to sell these securities in a timely fashion.
 
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An investment in the common stock of our Company will not provide any federal income tax benefits for the shareholders

Investors should be aware that they will not receive any of the federal income tax benefits available to individuals investing as limited partners in oil and gas partnership programs.  Any income tax advantages will inure solely to the benefit of the Company and will not be passed through to any stockholders.

Risks Related to Our Industry

We are subject to complex laws and regulations that can negatively impact the cost, manner and feasibility of conducting our business

Our business is governed by numerous laws and regulations at various levels of government.  These laws and regulations govern the operation and maintenance of our facilities, the discharge of materials into the environment and other environmental protection issues.  These laws and regulations may, among other potential consequences, require that we:

  • acquire permits before the commencement of drilling;
  • restrict the substances that can be released into the environment with drilling and production activities;
  • limit or prohibit drilling activities on protected areas;
  • require that reclamation measures be taken to prevent pollution from former operations;
  • require remedial measures to be taken with respect to contaminated property.
The costs of complying with environmental laws and regulations could negatively impact our financial condition and results of operations.  Future changes in environmental laws and regulations could occur that may result in stricter standards and enforcement which could further negatively impact our business.

The volatility of oil and natural gas prices could adversely affect our business

Our future revenues, profitability and growth of our investments in oil and gas properties depend to a large degree on prevailing oil and gas prices.  These prices tend to fluctuate significantly in response to factors beyond our control.  These factors include, but are not limited to, the continued threat of escalating war in the Middle East and actions of the Organization of Petroleum Exporting Countries and its maintenance of production constraints.  Additional factors include, the U.S. economic environment, weather conditions, the availability of alternate fuel sources, transportation interruption, the impact of drilling levels on crude oil and natural gas supply, and environmental issues.  The prices for oil and natural gas have varied substantially over time and may in the future decline.  These prices have been and are likely to remain unstable.  Significant declines in these prices owing to this instability will adversely affect our business and consequently our stockholders.

The success of our business is dependent on our ability to produce sufficient quantities of oil and gas which may be adversely affected by a number of factors outside of our control

The business of exploring for and producing oil and gas involves a substantial risk of investment loss.  Drilling oil and gas wells involves the risk that the wells may be unproductive or that, although productive, that the wells may not produce oil and/or gas in economic quantities.  
 
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Other hazards, such as unusual or unexpected geological formations, pressures, fires, blowouts, loss of circulation of drilling fluids may substantially delay or prevent completion of any well.  Adverse weather conditions can also hinder drilling operations.  In addition, a “productive well” (a well that is producing oil or gas or that is capable of production) may become uneconomic due to pressure depletion, water encroachment, mechanical difficulties, etc, which impair or prevent the production of oil and/or gas from the well.

There can be no assurance that oil and gas will be produced from the properties in which we have interests.  Further, the marketability of any oil or gas that we acquire or discover may be influenced by numerous factors beyond our control.  We cannot predict how these factors may affect our business.

The unavailability or high cost of drilling rigs and related equipment could adversely affect our ability to execute our exploration and exploitation plans on a timely and economic basis

Increased oil and natural gas prices have stimulated increased demand and resulted in escalated prices for drilling rigs, crews, and associated equipment, supplies and services.  This demand has created a shortage of drilling rigs and crews as the number of wells being drilled have vastly increased.  The inability to secure drilling rigs and crews may delay development of properties in which we acquire an interest, resulting in the untimely and costly expiration of certain leases.  Drilling delays and the loss of leases could have a material negative effect on our business operations and financial condition.

Employees and Consultants

As of March 1, 2006, we had employment contracts with three individuals. These employees are: Eric Moe, Chief Executive Officer; Bennett Anderson, Chief Operating Officer; and Thomas Kilbourne, Controller/Treasurer. We had a management contract with a private consulting firm, 413294 Alberta, Ltd., that supplies the services of our company President, Robert Martin.

As of March 1, 2007, these employment and consulting contracts became written contracts. Additionally, we have consulting contracts with two Daybreak Directors; Tim R. Lindsey and Jeffrey Dworkin. We also have a consulting contract with Michael Hooper for outside accounting services. These employment and consulting contracts are annual contracts that coincide with our fiscal year.

On June 1, 2007, we became the operator of the Gilbertown Field in Alabama and hired three employees for that field. On June 18, 2007, we hired an administrative staff person for the corporate office. We may hire more employees in the next fiscal year as needed. All other services are currently contracted for with independent contractors. The Company has not obtained key man life insurance on any of its officers or directors.    

The Daybreak Oil and Gas, Inc. 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 16225 Park Ten Place, Suite 500, Houston, Texas 77084. The telephone number of our office in Houston is (281) 994-4021.
 
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Availability of SEC Filings

You may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549. 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

Our website can be found at www.daybreakoilandgas.com. Our Annual Report on Form 10-KSB, Quarterly Reports on Form 10-QSB, Current Reports on Form 8-K and amendments to those reports filed or furnished with the U.S. Securities and Exchange Commission, or SEC, pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, or the Exchange Act, can be accessed free of charge by linking directly from our website under the “SEC Filings” button to the SEC’s Edgar Database. These filings will be available as soon as reasonably practicable after we electronically file such material with, or furnish it to the SEC. Information contained on our website is not part of this report.

Successful Efforts Accounting

We utilize the successful efforts method to account for our crude oil and natural gas operations. Under this method of accounting, all costs associated with oil and gas lease acquisition costs, successful exploratory wells and all development wells are capitalized and amortized on a unit-of-production basis over the remaining life of proved developed reserves and proved reserves on a field basis. Unproved leasehold costs are capitalized pending the results of exploration efforts. Exploration costs, including geological and geophysical expenses, exploratory dry holes and delay rentals, are charged to expense when incurred.











 
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ITEM 2.   DESCRIPTION OF PROPERTIES

We have onshore oil and gas projects underway throughout the United States. We have not filed any estimates of total, proved net oil or gas reserves with any Federal agency for the fiscal year ended February 28, 2007. These project areas that we are involved in are as follows:

Louisiana

Franklin and Tensas Parishes .  Known as the Tuscaloosa Project, this exploration project is targeting the Tuscaloosa Basal Sand at depths between 8,000 and 9,500 feet.  We and our partners have access to a 3-D seismic survey covering an “Area of Mutual Interest” (AMI; an area outlined on a map, that may accompany an exploration, or drilling agreement) of 55 square miles.  We have identified eight potential drilling locations, some having the potential to produce at multiple depths.  Through seven different transactions, we have jointly acquired leases on approximately 20,288 net undeveloped acres within the AMI.  This project is considered to be primarily a gas “play” (a term applied to a portion of the exploration and production cycle following the identification by geologists and geophysicists of areas with potential oil and gas reservoirs) with some “condensate” ( a hydrocarbon mixture that is transparent and is a liquid at surface pressure) production.

Project Development

In September 2006, we successfully completed the acquisition of an additional eight percent (8%) working interest (an obligation to pay a certain percentage of the costs of drilling, completing and producing any oil or gas found) in the Tuscaloosa Project.

On July 5, 2007, Daybreak and its partners entered into a Joint Development Participation Agreement (“JDPA”) with three companies for a drilling program in the Tuscaloosa project area in Louisiana. The JDPA does not effect any prior agreement for well ownership or production revenue and infrastructure that is already in place. Daybreak will have a 29.5% interest in all future lease rentals.

Field Development

“F-1”  Well
In January 2006, Daybreak and our partners drilled the Tensas Farms et al F-1 well.  The well was completed and placed into production on June 17, 2006.  The “F” Prospect has up to three additional locations we anticipate drilling to fully develop the property.  We paid 88% of the working interest costs of drilling and completion for this well. To date, we have contributed $1,432,169 to this project in drilling, completion, pipeline, production and workover costs.

In May 2006, we financed our working interest in the gas pipeline that is connected to the F-1 well.  This financing agreement was with Hooper Oil and Gas Partners, LLC, a company controlled by Keith Hooper, a Daybreak shareholder (greater than 5% at the time).

In January 2007, we and our partners started a “squeeze job” (process of pumping cement into space in the well bore around the production casing so that the cement will form a seal) of the F-1 well to correct the technical issues we had with water production. The squeeze was not successful in controlling water production. We have now secured a permit for water disposal down the annulus.

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In May 2007, we commenced implementation of an alternative plan to re-establish production from this well.  We believe that we successfully implemented this plan and re-established production by mid-July 2007.  However, as described above, in August, production from this well was halted once again, pending resolution of certain gas contract issues.

“F-3” Well
In December 2006, Daybreak and our partners drilled the Tensas Farms et al F-3 well.  The well was completed and placed into production in February 2007.  We paid 48% of the working interest costs of drilling and completion for this well. We have a 36% net revenue interest (NRI) in this well. To date, we have contributed $984,629 to this project in drilling, completion and flowline costs.

“B-1”Well
In December 2006, Daybreak and our partners drilled the Tensas Farms et al B-1 well.  Production casing was set and an initial completion attempted with no flow achieved in February 2007. The well log information is being reviewed and the well may require stimulation to achieve acceptable flow rates. Production infrastructure and facilities have not been installed at this location. We paid 88% of the working interest costs of drilling and completion for this well. To date, we have contributed $1,190,001 to this project in drilling and completion costs.

“A-1” and “F-2” Wells
In June 2007, we received permits to drill our next two wells in the Tuscaloosa Project. We started drilling the A-1 prospect on August 27, 2007. The second prospect, the F-2 will be drilled immediately after the first well is completed. We also have plans to extend our exploration activities by drilling one Paluxy and one Chalk exploration well respectively. These last two wells will be drilled contingent upon final technical and commercial analysis. We will again be the operator of these projects.

Reserves
In accordance with standard SEC pricing guidelines, net proved developed non-producing reserves for the F-1 well have been estimated at 58.8 MMcf (million cubic feet) and 10,284 Bbl (barrels). Net proved developed non-producing reserves for the F-3 well have been estimated at 103.7 MMcf and 13,158 Barrels.

Outlook
In November 2006, Daybreak became the operator of record for the Tuscaloosa Project.  We are planning on drilling additional wells within both the AMI area and new prospect areas. This will allow us to develop the entire project.  In the current fiscal year, we are planning for as many as six more wells to be drilled. These wells will allow us to continue exploration of the Basal Tuscaloosa Sands as well as both Selma Chalk and Paluxy areas of interest. We are considering funding our share of the drilling costs through the use of an outside drilling fund; by farming out part of our interest in future wells; and, from operating capital.

St. Landry Parish.   The Krotz Springs Prospect is primarily a deep gas play with reservoirs located at approximately 11,000 feet.  We and our partners have jointly leased 9,600 acres in this prospect area. We have limited access to a 3-D interpretation that shows potential gas reservoirs primarily in the Cockfield Sands. Daybreak was the operator on this project during the drilling and completion phases. Since production started in May of 2007, the unit operator of the Krotz Springs Field has now become the operator for this well. Total project drilling and completion costs were approximately $9.2 Million.
 
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Daybreak has a 12.5% working interest in this project. Our NRI is 9.125%. As of February 28, 2007, we had spent $532,108 in leasehold, drilling and completion costs associated with this project. We have the option of participating in the drilling of an additional five wells in the Krotz Springs Field. Each succeeding well must be drilled within six months of the completion of the prior well. Current production is being evaluated prior to committing to further drilling.

In the North Shuteston prospect, we have leased 318 acres.  We plan to drill a low risk 3-D seismic supported shallow amplitude anomaly at a depth of 2,300 feet.  This anomaly is related to a Miocene Age Sand.  Drilling and land costs are estimated to be about $563,000 with completion and well site facilities estimated at $502,000.  As of May 1, 2007, we have assumed the full (100%) working interest in this project. We will be looking for an industry partner to farmout part of our working interest in this project.  As of February 28, 2007, we spent $73,395 in leasehold costs associated with this project. We intend to secure a drilling partner for this project in the current fiscal year.

Avoyelles Parish.   This Prospect is a Cretaceous target positioned beneath an existing oilfield that has produced over 28 million barrels of oil.  The project will initially focus on the broad northeast flank of the Cretaceous structure, targeting the Massive Sand of the Lower Tuscaloosa and the Fractured Lower (Austin) Chalk.  Plans call for a 3-D seismic survey covering about 36 square miles.  Assuming an industry partner is secured, we plan to acquire the 3-D seismic before the end of the current fiscal year.  This is primarily a deep gas play. Gross project costs are estimated to be $1,000,000 for land, $3,000,000 for 3-D Seismic and $6,000,000 for drilling the first well.  Drilling will probably take place in 2008. We have jointly acquired leases or permits on approximately 2,002 gross undeveloped acres within the AMI. Daybreak has a 35% working interest in this project.  We plan to secure one or more joint venture partners to help in funding this project. As of February 28, 2007, we had spent $404,484 (net) in leasehold, seismic and project management costs associated with this project.

Winn Parish. In the North Colgrade Prospect we have drilled two exploratory wells targeting the Wilcox gas sands at a depth of approximately 3,000 feet. In October 2006, we paid $71,060 for a 19% working interest and 14.25% NRI in the first well the, Weyerhaeuser No. 1. In December 2006, drilling began on this well. Total drilling costs were estimated to be $374,000. Target depth was achieved and logging took place in early December. It was decided by the joint venture participants to not complete this well because of water encroachment. Accordingly, we have recognized $71,060 of dry hole expense in our financial statements in the fourth quarter of the fiscal year ended February 28, 2007.

By participating in this project, we earned the right to participate for the same working interest and net revenue interest in additional wells on this prospect. On April 20, 2007, we paid $33,233 for a 19% working interest in the Weyerhaeuser No. 2 well, which was drilled as an offset to gas shows encountered on the Weyerhaeuser No. 1. Drilling commenced on May 9, 2007, total depth was reached on May 11, 2007. After logging it was decided by the joint venture participants to not complete this well. Accordingly, we will recognize $33,233 of dry hole expense in our financial statements in the first quarter of the current fiscal year ending February 28, 2008.




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Texas

Nueces County.  In November 2005, we agreed to jointly participate in a five well re-entry project in the Saxet Deep Field on a developed 320 acre lease.  The Saxet Deep Field has previously been produced as an oil field.  The project is within the city limits of Corpus Christi, Texas. Daybreak has a 19% working interest in all wells in this project. Our NRI is 14.25% on production from these wells.

In May 2006, we started the re-work of the first well, the Weil 8-C well. This well was successfully reworked and placed into production in August 2006. In August and September 2006, we re-entered and started to produce from both the Weil 3-C and Weil 7-C wells. Two other wells the Weil 2-C and Weil 6-C were re-entered in September and October and are now being used as salt water disposal wells.

As of February 28, 2007, we have spent $496,708 in leasehold, workover, pipeline and production facility costs associated with this project.

Reserves
Net proved developed producing reserves for the Saxet Field have conservatively been estimated at 49.3MMcf and 596 Bbl in accordance with standard SEC pricing guidelines.

Caldwell County .  In January 2006, we agreed to jointly redevelop an existing oilfield in the Upper Gulf Coast of Texas.  The target was the Edwards Limestone area.  We anticipated having three horizontal wells and one salt water disposal well in the first set of wells. The re-entry cost for the four wells was estimated to be approximately $5,000,000. Our drilling plans were contingent on securing one or more joint venture partners to complete funding of this project. We have been unable to complete funding for this project and our option on the project has expired as of December 31, 2006. To date, we have expended $13,210 in consulting and travel expenses for this project.

Other Areas .  In April 2005, we joined a land bank, whose funds were used to acquire leases for the Pearl Prospect.  The Pearl Prospect is an onshore site located on the Texas Gulf Coast.  As a member of the land bank, Daybreak is entitled to a one-third of one percent (.333333 of 1%) of 8/8ths “overriding royalty interest” (a revenue interest created out of the working interest.  Like the royalty interest it entitles the owner to a portion of the gross oil and gas revenue free and clear of all costs of drilling, completion and production except severance taxes) in an anticipated 747.14 acre lease on the Pearl Prospect.  Our option to participate in the working interest in the Prospect expired in January 2006.  We have contributed $100,000 in cash and $37,000 in unregistered common stock, based on the grant date of the stock,  to meet our contractual agreements.

California

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.  We initially paid a $12,500 fee to secure the project and the geological concepts.  Our agreement calls for us to also pay another $5,000 fee upon the completion of each sub-regional lead that is developed for 3-D seismic survey.  Additionally, we will pay another $5,000 fee upon the spud of the first well in each prospect area.

25
Eight prospect areas have been identified and we are actively leasing lands in six of those areas.  We have now jointly leased about 25,633 undeveloped acres.  We anticipate running a seismic survey before year end in the Kern County prospect area.  We are also planning to drill at least three wells in Kern County before the fiscal year end.  Drilling costs are estimated to be about $250,000 per well with an estimated depth of 3,500 feet.  Daybreak has a 50% of the working interest in this project.  As of February 28, 2007, we have spent $378,616 in leasehold and seismic costs associated with this project.

On July 12, 2007, we announced that a seismic option farmout agreement had been signed between Chevron U.S.A. Inc., (“Chevron”) and Daybreak and its partners (“Daybreak et al”) covering part of the Kern County area in the East Slopes project. This agreement requires Chevron to pay for the cost of a seismic program on the Chevron and Daybreak et al lands. After the seismic is shot and interpreted, Chevron will have earned a fifty percent (50%) interest in the Daybreak et al lands. After Daybreak et al pay for the costs of the first three wells; they will have earned a fifty percent (50%) interest in the Chevron lands in the same project area. The seismic and drilling are expected to be completed before the end of the 2007 calendar year.

Alabama (East Gilbertown Field)

Choctaw County. In December 2006, we became involved in an existing oil field project, the East Gilbertown Field (“Gilbertown”) that produces heavy oil (oil that has a high sulfur content). This field has nineteen wellbores which are capable of production. Since joining this project, the average daily production increased to about 60 BOPD (Barrels of Oil per Day). This has been accomplished through a series of workovers on the producing wellbores.

Working Interest Participation
From December 2006 through March 2007, we incrementally increased our working interest in this project from 2.5% to 12.5%.

Reserves
Net Proved developed producing reserves for the East Gilbertown Field have conservatively been estimated at 5,289 Bbl in accordance with standard SEC pricing guidelines.

Outlook
Immediate plans are to continue the workovers on nonproducing wellbores and build production to over 100 BOPD. On June 1, 2007, we became the operator of the East Gilbertown Field. Future plans are to continue to increase production in the field by bringing more non-producing wellbores back into production. Additionally, we are developing an expanded drilling plan for this field to take advantage of unexplored geological areas.

Canada

Alberta, Province . In June 2006, we acquired an interest in the Forty Mile Coulee project located in South Central Alberta, Canada, near the Alberta Badlands. The target was the Sunburst formation. We paid 150,000 shares of unregistered common stock (with a restated value of $420,000) for our interest. We paid $61,960 in additional drilling costs for this project.  This well was logged and then abandoned because of water encroachment. Accordingly, we recognized $481,960 of dry hole expense in our financial statements in the fourth quarter of the current fiscal year.

26
In December 2006, we repurchased the 150,000 shares that had been issued to Big Sky Western Canada for $150,000, which was the issued value and paid an additional $10,000 in plug and abandon (P&A) costs. We did this as part of an agreement whereby we were released from any future plug and abandon or environmental liability related to this project.

Summary Operating Data

The production and revenue shown in the following table is Daybreak’s net share of production and revenue based on the Net Revenue Interest (NRI) in each project as of February 28, 2007. Oil is shown in barrels (“Bbl”), and of natural gas is shown in thousands of cubic feet (“Mcf”).

       
Oil
   
Gas
 
State
 
Field
 
Net Barrels
   
Net Revenue
   
Net Mcf
   
Net Revenue
 
Louisiana
 
Tuscaloosa
   
3,602
    $
237,434
     
36,283
    $
237,126
 
                                     
Texas
 
Saxet
   
246
    $
13,187
     
22,082
    $
139,493
 
                                     
Alabama
 
Gilbertown
   
55
    $
1,971
     
-
     
-
 
Total
       
3,903
    $
252,592
     
58,365
    $
376,619
 


The following table shows the average sales price per unit of oil and natural gas as well as the average cost of production in barrels of oil equivalent (“BOE”), for the past three fiscal years.. One barrel of oil is roughly equivalent to 6,000 cubic feet of natural gas. Oil is shown in barrels (“Bbl”), and of natural gas is shown in thousands of cubic feet (“Mcf”).
 
   
Years Ended February 28,
 
   
2007
   
2006
   
2005
 
Average Sales Price:
                 
     Gas (per Mcf)
  $ 5.68     $
-
    $
-
 
     Oil  (per Bbl)
  $ 63.01     $
-
    $
-
 
                         
Average Cost of Production:
                       
     Oil  (per Bbl)
  $ 24.81     $
-
    $
-
 


The following table shows the developed and undeveloped oil and gas lease acreage held by us as of February 28, 2007. Undeveloped acres are acres on which 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.

27


 
 
Developed Acres
   
Undeveloped Acres
 
Location
 
Gross
   
Net
   
Gross
   
Net
 
Alabama
   
2,025
     
51
             
Texas
   
320
     
46
     
2,586
     
143
 
Louisiana
   
2,000
     
960
     
30,096
     
19,328
 
California
                   
25,633
     
12,817
 
     Total
   
4,345
     
1,057
     
58,315
     
32,288
 


The following table summarizes our productive oil and gas wells as of February 28, 2007. 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.
 
State
 
Field
 
Gross
   
Net
 
Louisiana
 
Tuscaloosa
   
3
     
2.23
 
                     
Texas
 
Saxet
   
3
     
0.43
 
                     
Alabama
 
Gilbertown
   
14
     
0.26
 
Total
       
20
     
2.92
 


The following table shows our exploratory well drilling activity for fiscal years ended February 28, 2006 and February 28, 2007.

   
Fiscal Year 2007
 
Fiscal Year 2006
 
State
 
Productive
   
Dry
 
Productive
 
Dry
 
Louisiana
   
3
     
1
 
-
 
-
 
                         
Texas
   
-
     
-
 
- 
 
  1
 
                           
Canada
   
-
     
1
 
- 
 
-
 


 
28
ITEM 3.  LEGAL PROCEEDINGS

We are not the subject of any pending legal claims or litigation.














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

During the fourth quarter of the fiscal year ended February 28, 2007, we did not have any matters submitted to a vote of our security holders of the Company.





29
PART  II

ITEM 5.  MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASE OF EQUITY SECURITIES

In the past our stock has been quoted in the NASDAQ over the counter OTC.BB market under the symbol “DBRM.”  However since July 2007, our stock has been quoted in the OTC pink sheet market, due to SEC filing delinquencies. The following table shows the high and low closing sales prices for the Common Stock for the three most recent fiscal years. The quotations reflect inter-dealer prices, without retail mark-up, markdown or commission and may not represent actual transactions. The information is derived from information received from online stock quotation services.


Fiscal Year Ending February 28, 2005
 
High Closing
   
Low Closing
 
First Quarter  
$
0.15
    $
0.08
 
Second Quarter
  $
0.14
    $
0.12
 
Third Quarter
  $
0.16
    $
0.12
 
Fourth Quarter
  $
0.95
    $
0.12
 


Fiscal Year Ending February 28, 2006
 
High Closing
   
Low Closing
 
First Quarter
  $
0.83
    $
0.25
 
Second Quarter
  $
0.34
    $
0.23
 
Third Quarter
  $
0.65
    $
0.27
 
Fourth Quarter
  $
3.03
    $
0.45
 


Fiscal Year Ending February 28, 2007
 
High Closing
   
Low Closing
 
First Quarter
  $
2.95
    $
1.66
 
Second Quarter
  $
2.77
    $
1.85
 
Third Quarter
  $
1.92
    $
1.02
 
Fourth Quarter
  $
1.30
    $
0.94
 


Fiscal Year Ending February 28, 2008
 
High Closing
   
Low Closing
 
First Quarter
  $
0.95
    $
0.48
 
Second Quarter
  $
0.70
    $
0.39
 

 
30
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.

As of February 28, 2007, the Company had 2,365 shareholders of record. This number does not include an indeterminate number of shareholders whose shares are held by brokers in street name.

Recent Sales of Unregistered Securities

Convertible Debentures
 
●
From March 19, 2005 through August 31, 2005, we borrowed $168,821 from six shareholders, officers or directors through a series of twenty-seven convertible debentures to finance our operating activities.  These convertible debentures had the following features: one year term, six percent interest rate and the notes were convertible after six months to unregistered common stock.
 
A conversion rate of $0.25 per share was selected because a private placement offering of our common stock was being planned at the same time for that price. Both the principal and the accrued interest were eligible for conversion to unregistered common stock.

During the fiscal year ended February 28, 2006, twenty-four of the convertible debentures representing $136,821 in principal were converted resulting in 566,135 shares of unregistered common stock being issued to satisfy the principal and interest obligations. By February 28, 2007, all twenty-seven of the debentures were converted resulting in a total of 703,675 shares of unregistered common stock being issued to satisfy principal and interest obligations. The convertible debenture, shares issued upon conversion of the debenture and shares issued for interest were issued pursuant to a Section 4(2) exemption from registration under the Securities Act of 1933, as amended.

In accordance with EITF 00-27 and 98-5, the Company determined that the debentures issued integrated a beneficial conversion feature (BCF). The Company recorded a discount of $73,511 to reflect the BCF feature on the debentures at the date of issuance. Utilizing the effective interest method, these discounts have been amortized over the period commencing from the issuance date to the date of stated redemption (i.e. maturity) of the debt in accordance with EITF 00-27.  The discount of $73,511 was fully amortized at February 28, 2007.

The Company has evaluated the application of SFAS No. 133 and EITF 00-19 for the consideration of embedded derivatives with respect to the conversion feature of the convertible debentures relative to the guidance of these pronouncements, the Company has concluded that these debentures did not contain embedded derivatives.

31
The following is a listing of the twenty-seven convertible debentures that occurred:

1) On March 19, 2005, Terrence Dunne (appointed a director in January 2006 and CFO in April 2006), a shareholder and 10% control person (at the time), loaned the Company $623 to finance ongoing operating expenses.  On the day of the loan, the closing price of our stock was $0.47.  On November 28, 2005, Mr. Dunne converted the note plus interest into unregistered common stock.  He was issued 2,593 shares of stock from this conversion.  On the day of the conversion, the closing price of our stock was $0.52.  Based on the closing price, the value of the principal in the conversion was $1,296.

2) On March 22, 2005, Terrence Dunne (appointed a director in January 2006 and CFO in April 2006), a shareholder and 10% control person (at the time), loaned the Company $10,216 to finance ongoing operating expenses. On the day of the loan, the closing price of our stock was $0.50.  On November 28, 2005, Mr. Dunne converted the note plus interest into unregistered common stock.  He was issued 42,503 shares of stock from this conversion.  On the day of the conversion, the closing price of our stock was $0.52.  Based on the closing price, the value of the principal in the conversion was $21,249.

3) On March 23, 2005, Dale Lavigne, a director and shareholder, loaned the Company $15,000 to finance ongoing operating expenses. On the day of the loan, the closing price of our stock was $0.48.  On November 28, 2005, Mr. Lavigne converted the note plus interest into unregistered common stock.  He was issued 62,397 shares of stock from this conversion.  On the day of the conversion, the closing price of our stock was $0.52.  Based on the closing price, the value of the principal in the conversion was $31,200.

4) On March 23, 2005, Ronald Lavigne, a director and shareholder, loaned the Company $3,000 to finance ongoing operating expenses. On the day of the loan, the closing price of our stock was $0.48.  On November 28, 2005, Mr. Lavigne converted the note plus interest into unregistered common stock.  He was issued 12,479 shares of stock from this conversion.  On the day of the conversion, the closing price of our stock was $0.52.  Based on the closing price, the value of the principal in the conversion was $6,240.

5) On March 25, 2005, Thomas Kilbourne, a director, Treasurer and shareholder loaned the Company $3,000 to finance ongoing operating expenses. On the day of the loan, the closing price of our stock was $0.37.  On November 28, 2005, Mr. Kilbourne converted the note plus interest into unregistered common stock.  He was issued 12,475 shares of stock from this conversion.  On the day of the conversion, the closing price of our stock was $0.52.  Based on the closing price, the value of the principal in the conversion was $6,240.

6) On March 25, 2005, Robert O’Brien, a shareholder and ten percent (10%) control person (at the time), loaned the Company $15,000 to finance ongoing operating expenses. On the day of the loan, the closing price of our stock was $0.37.  On August 31, 2006, Mr. O’Brien converted the note plus interest into unregistered common stock.  He was issued 65,168 shares of stock from this conversion.  On the day of the conversion, the closing price of our stock was $1.92.  Based on the closing price, the value of the principal in the conversion was $125,123.

7) On April 25, 2005, Terrence Dunne (appointed a director in January 2006 and CFO in April 2006), a shareholder and 10% control person (at the time), loaned the Company $8,000 to finance ongoing operating expenses. On the day of the loan, the closing price of our stock was $0.35.  
 
32
On November 28, 2005, Mr. Dunne converted the note plus interest into unregistered common stock.  He was issued 33,105 shares of stock from this conversion.  On the day of the conversion, the closing price of our stock was $0.52.  Based on the closing price, the value of the principal in the conversion was $16,640.

8) On April 25, 2005, Dale Lavigne, a director and shareholder, loaned the Company $8,000 to finance ongoing operating expenses. On the day of the loan, the closing price of our stock was $0.35.  On November 28, 2005, Mr. Lavigne converted the note plus interest into unregistered common stock.  He was issued 33,105 shares of stock from this conversion.  On the day of the conversion, the closing price of our stock was $0.52.  Based on the closing price, the value of the principal in the conversion was $16,640.

9) On April 26, 2005, Ronald Lavigne, a director and shareholder, loaned the Company $3,000 to finance ongoing operating expenses. On the day of the loan, the closing price of our stock was $0.35.  On November 28, 2005, Mr. Lavigne converted the note plus interest into unregistered common stock.  He was issued 12,412 shares of stock from this conversion.  On the day of the conversion, the closing price of our stock was $0.52.  Based on the closing price, the value of the principal in the conversion was $6,240.

10) On April 26, 2005, Thomas Kilbourne, a director, Treasurer and shareholder, loaned the Company $3,000 to finance ongoing operating expenses. On the day of the loan, the closing price of our stock was $0.35.  On November 28, 2005, Mr. Kilbourne converted the note plus interest into unregistered common stock.  He was issued 12,412 shares of stock from this conversion.  On the day of the conversion, the closing price of our stock was $0.52.  Based on the closing price, the value of the principal in the conversion was $6,240.

11) On May 26, 2005, Terrence Dunne (appointed a director in January 2006 and CFO in April 2006), a shareholder and 10% control person (at the time), loaned the Company $3,982 to finance ongoing operating expenses. On the day of the loan, the closing price of our stock was $0.33.  On November 30, 2005, Mr. Dunne converted the note plus interest into unregistered common stock.  He was issued 16,418 shares of stock from this conversion.  On the day of the conversion, the closing price of our stock was $0.52.  Based on the closing price, the value of the principal in the conversion was $8,283.

12) On May 31, 2005, Thomas Kilbourne, a director, Treasurer and shareholder, loaned the Company $3,000 to finance ongoing operating expenses. On the day of the loan, the closing price of our stock was $0.32.  On November 30, 2005, Mr. Kilbourne converted the note plus interest into unregistered common stock.  He was issued 12,361 shares of stock from this conversion.  On the day of the conversion, the closing price of our stock was $0.52.  Based on the closing price, the value of the principal in the conversion was $6,240.

13) On June 16, 2005, Terrence Dunne (appointed a director in January 2006 and CFO in April 2006), a shareholder and 10% control person (at the time), loaned the Company $10,000 to finance ongoing operating expenses. On the day of the loan, the closing price of our stock was $0.33.  On February 10, 2006, Mr. Dunne converted the note plus interest into unregistered common stock.  He was issued 41,558 shares of stock from this conversion.  On the day of the conversion, the closing price of our stock was $1.70.  Based on the closing price, the value of the principal in the conversion was $68,000.

33
14) On July 8, 2005, Golconda Mining Company, a shareholder, loaned the Company $10,000 to finance ongoing operating expenses. On the day of the loan, the closing price of our stock was $0.32.  On January 25, 2006, Golconda Mining Company converted the note plus interest into unregistered common stock.  They were issued 41,315 shares of stock from this conversion.  On the day of the conversion, the closing price of our stock was $1.54.  Based on the closing price, the value of the principal in the conversion was $61,600.

15) On July 27, 2005, Terrence Dunne (appointed a director in January 2006 and CFO in April 2006), a shareholder and 10% control person (at the time), loaned the Company $13,000 to finance ongoing operating expenses. On the day of the loan, the closing price of our stock was $0.25.  On February 10, 2006, Mr. Dunne converted the note plus interest into unregistered common stock.  He was issued 53,675 shares of stock from this conversion.  On the day of the conversion, the closing price of our stock was $1.70.  Based on the closing price, the value of the principal in the conversion was $88,400.

16) On July 27, 2005, Thomas Kilbourne, a director, Treasurer and shareholder, loaned the Company $6,500 to finance ongoing operating expenses. On the day of the loan, the closing price of our stock was $0.25.  On February 10, 2006, Mr. Kilbourne converted the note plus interest into unregistered common stock.  He was issued 26,838 shares of stock from this conversion.  On the day of the conversion, the closing price of our stock was $1.70.  Based on the closing price, the value of the principal in the conversion was $44,200.

17) On July 27, 2005, Robert O’Brien, a shareholder and ten percent (10%) control person (at the time), loaned the company $12,000 to finance ongoing operating expenses. On the day of the loan, the closing price of our stock was $0.25.   On August 31, 2006, Mr. O’Brien converted the note plus interest into unregistered common stock.  He was issued 51,156 shares of stock from this conversion.  On the day of the conversion, the closing price of our stock was $1.92.  Based on the closing price, the value of the principal in the conversion was $98,220.

18) On August 1, 2005, Dale Lavigne, a director and shareholder, loaned the Company $5,000 to finance ongoing operating expenses. On the day of the loan, the closing price of our stock was $0.30.    On February 10, 2006, Mr. Lavigne converted the note plus interest into unregistered common stock.  He was issued 20,628 shares of stock from this conversion.  On the day of the conversion, the closing price of our stock was $1.70.  Based on the closing price, the value of the principal in the conversion was $34,000.

19) On August 1, 2005, Thomas Kilbourne, a director, Treasurer and shareholder, loaned the Company $500 to finance ongoing operating expenses. On the day of the loan, the closing price of our stock was $0.30.   On February 10, 2006, Mr. Kilbourne converted the note plus interest into unregistered common stock.  He was issued 2,063 shares of stock from this conversion.  On the day of the conversion, the closing price of our stock was $1.70.  Based on the closing price, the value of the principal in the conversion was $3,400.

20) On August 2, 2005, Ronald Lavigne, a director and shareholder, loaned the Company $5,000 to finance ongoing operating expenses. On the day of the loan, the closing price of our stock was $0.28.  On February 10, 2006, Mr. Lavigne converted the note plus interest into unregistered common stock.  He was issued 20,625 shares of stock from this conversion.  On the day of the conversion, the closing price of our stock was $1.70.  Based on the closing price, the value of the principal in the conversion was $34,000.
 
34
21) On August 22, 2005, Thomas Kilbourne, a director, Treasurer and shareholder, loaned the Company $5,000 to finance ongoing operating expenses. On the day of the loan, the closing price of our stock was $0.44.   On February 28, 2006, Mr. Kilbourne converted the note plus interest into unregistered common stock.  He was issued 20,625 shares of stock from this conversion.  On the day of the conversion the closing price of our stock was $2.25.  Based on the closing price, the value of the principal in the conversion was $45,000.

22) On August 24, 2005, Terrence Dunne (appointed a director in January 2006 and CFO in April 2006), a shareholder and 10% control person (at the time), loaned the Company $6,000 to finance ongoing operating expenses. On the day of the loan, the closing price of our stock was $0.42. On February 28, 2006, Mr. Dunne converted the note plus interest into unregistered common stock.  He was issued 24,742 shares of stock from this conversion.  On the day of the conversion, the closing price of our stock was $2.25.  Based on the closing price, the value of the principal in the conversion was $54,000.

23) On August 26, 2005, Terrence Dunne (appointed a director in January 2006 and CFO in April 2006), a shareholder and 10% control person (at the time), loaned the Company $6,000 to finance ongoing operating expenses. On the day of the loan, the closing price of our stock was $0.40. On February 28, 2006, Mr. Dunne converted the note plus interest into unregistered common stock.  He was issued 24,734 shares of stock from this conversion.  On the day of the conversion, the closing price of our stock was $2.25. Based on the closing price, the value of the principal in the conversion was $54,000.

24) On August 26, 2005, Robert O’Brien, a shareholder and ten percent (10%) control person (at the time), loaned the Company $5,000 to finance ongoing operating expenses. On the day of the loan, the closing price of our stock was $0.40. On August 31, 2006, Mr. O’Brien converted the note plus interest into unregistered common stock.  He was issued 21,216 shares of stock from this conversion.  On the day of the conversion, the closing price of our stock was $1.92.  Based on the closing price, the value of the principal in the conversion was $40,735.

25) On August 31, 2005, Ronald Lavigne, a director and shareholder, loaned the Company $2,500 to finance ongoing operating expenses. On the day of the loan, the closing price of our stock was $0.37. On February 28, 2006, Mr. Lavigne converted the note plus interest into unregistered common stock. He was issued 10,298 shares of stock from this conversion. On the day of the conversion, the closing price of our stock was $2.25.  Based on the closing price, the value of the principal in the conversion was $22,500.

26) On August 31, 2005, Thomas Kilbourne, a director, Treasurer and shareholder, loaned the Company $2,500 to finance ongoing operating expenses. On the day of the loan, the closing price of our stock was $0.37. On February 28, 2006, Mr. Kilbourne converted the note plus interest into unregistered common stock.  He was issued 10,298 shares of stock from this conversion. On the day of the conversion, the closing price of our stock was $2.25.  Based on the closing price, the value of the principal in the conversion was $22,500.

27) On August 31, 2005, Terrence Dunne (appointed a director in January 2006 and CFO in April 2006), a shareholder and 10% control person (at the time), loaned the Company $4,000 to finance ongoing operating expenses. On the day of the loan, the closing price of our stock was $0.37. On February 28, 2006, Mr. Dunne converted the note plus interest into unregistered common stock.  He was issued 16,476 shares of stock from this conversion.  
 
35
On the day of the conversion, the closing price of our stock was $2.25. Based on the closing price, the value of the principal in the conversion was $36,000.

●
Between January 25, 2006 and February 8, 2006, the Company borrowed a total of $806,700 from seven shareholders in eight loans to finance exploration activities as well as increase operating capital. The term of these convertible debentures was for one year at a 10% interest rate.  The debentures were convertible to unregistered common stock after 61 days from the date of issuance.  The conversion rate was $0.50 per share.

As of February 28, 2007, all of these debentures had been converted to unregistered common stock. The convertible debenture, shares issued upon conversion of the debenture and shares issued for interest were issued pursuant to a Section 4(2) exemption from registration under the Securities Act of 1933, as amended.

In accordance with EITF 00-27 and 98-5, the Company determined that the debentures issued integrated a beneficial conversion feature (BCF). The Company recorded a discount of $806,700 to reflect the BCF feature at the date of issuance. Utilizing the effective interest method, these discounts have been amortized over the period commencing on the issuance date to the date of stated redemption (i.e. maturity) of the debt in accordance with EITF 00-27.   The discount of $806,700 was fully amortized at February 28, 2007.

The Company has evaluated the application of SFAS No. 133 and EITF 00-19 for the consideration of embedded derivatives with respect to the conversion feature of the convertible debentures relative to the guidance of these pronouncements, the Company has concluded that these debentures did not contain embedded derivatives

The following is a list of the eight convertible debentures that occurred:

1) On January 25, 2006, Michael Schneider, a shareholder loaned the Company $50,000 to finance ongoing operating expenses. The loan agreement term was for one year at a 10% interest rate. The loan could be converted to unregistered common stock at the end of the term. The conversion rate was $0.50 per share. On January 25, 2007, Mr. Schneider converted the debenture plus interest into unregistered common stock. He was issued 102,055 shares of stock from this conversion. On the day of the conversion the closing price of our stock was $1.14. Based on the closing price, the value of the principal in the conversion was $114,000..

2) On January 27, 2006, Thomas Hallett, a shareholder loaned the Company $175,000 to finance ongoing operating expenses. On the day of the loan, the closing price of our stock was $1.60.  On February 27, 2007, Mr. Schneider converted the debenture plus interest into unregistered common stock.  He was issued 385,000 shares of stock from this conversion.  On the day of the conversion, the closing price of our stock was $.95.  Based on the closing price, the value of the principal in the conversion was $332,500.

3) On January 27, 2006, the Hooper Group, a shareholder and company controlled by Keith Hooper a greater than 5% shareholder (at the time), loaned the Company $200,000 to finance ongoing operating expenses. On the day of the loan, the closing price of our stock was $1.60.  On February 27, 2007, the Hooper Group converted the debenture plus interest into unregistered common stock.  They were issued 440,000 shares of stock from this conversion.  
 
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On the day of the conversion, the closing price of our stock was $.95.  Based on the closing price, the value of the principal in the conversion was $380,000.

4) On January 30, 2006, W. Stanley Hooper, a shareholder loaned the Company $100,000 to finance ongoing operating expenses. On the day of the loan, the closing price of our stock was $1.63.  On February 27, 2007, Mr. Hooper converted the debenture plus interest into unregistered common stock.  He was issued 220,000 shares of stock from this conversion.  On the day of the conversion, the closing price of our stock was $.95.  Based on the closing price, the value of the principal in the conversion was $190,000.

5) On February 1, 2006, Daniel McKinney, a shareholder loaned the Company $101,700 to finance ongoing operating expenses. On the day of the loan, the closing price of our stock was $1.59. On February 27, 2007, Mr. Schneider converted the debenture plus interest into unregistered common stock. He was issued 223,740 shares of stock from this conversion.  On the day of the conversion, the closing price of our stock was $.95.  Based on the closing price, the value of the principal in the conversion was $193,230.

6) On February 1, 2006, Moreland Properties, a shareholder and company controlled by W. Douglas Moreland loaned the Company $50,000 to finance ongoing operating expenses. On the day of the loan, the closing price of our stock was $1.59.  On February 27, 2007, Moreland Properties converted the debenture plus interest into unregistered common stock.  They were issued 110,000 shares of stock from this conversion. On the day of the conversion, the closing price of our stock was $.95.  Based on the closing price, the value of the principal in the conversion was $95,000.

7) On February 2, 2006, James McQuade, a shareholder loaned the Company $100,000 to finance ongoing operating expenses. On the day of the loan, the closing price of our stock was $1.55. On February 27, 2007, James McQuade converted the debenture plus interest into unregistered common stock. He was issued 220,000 shares of stock from this conversion. On the day of the conversion, the closing price of our stock was $.95. Based on the closing price, the value of the principal in the conversion was $190,000.

 8) On February 8, 2006, Michael Schneider, a shareholder loaned the Company $30,000 to finance ongoing operating expenses. On the day of the loan, the closing price of our stock was $1.52. On February 27, 2007, Mr. Schneider converted the debenture plus interest into unregistered common stock. He was issued 66,000 shares of stock from this conversion. On the day of the conversion, the closing price of our stock was $.95. Based on the closing price, the value of the principal in the conversion was $57,000.

●
In February and March 2006, we borrowed $325,001 from four shareholders to finance operating capital needs. Three of the loans were in the form of convertible debentures. The fourth loan was in the form of a loan agreement. The term of all four loans, was for one year at a 10% interest rate. They were convertible to unregistered common stock after 61 days from the date of issuance. The conversion rate is $0.75 per share.

As of February 28, 2007, the loan agreement had been converted but none of the convertible debentures had been converted to unregistered common stock. The loan agreement shares issued upon conversion of the loan and shares issued for interest were issued pursuant to a Section 4(2) exemption from registration under the Securities Act of 1933, as amended.

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In December 2006, the three convertible debenture holders agreed to extend the term of the debentures to August 31, 2007. In consideration of the term extension, they were issued 150,001 warrants exercisable at $2.00 for a period of five years. The warrants were valued at $119,283 using the Black-Scholes option pricing model. The assumptions used in the Black-Scholes valuation model were: a risk fee interest rate of 4.7%; the current stock price at date of issuance of $1.04 per share; the exercise price of the warrants of $2.00; the term of five years; volatility of 117%; and dividend yield of 0.0%. The value of the warrants was recognized at the time of issuance as a discount against the existing convertible debentures and is being amortized using the effective interest method until maturity.

On April 30, 2007, one of the convertible debenture holders converted to Daybreak unregistered common stock. A total of 37,169 shares were issued to satisfy the principal and interest obligation.

On August 31, 2007, the remaining two convertible debenture holders agreed to extend the term of the debentures to October 31, 2007. In consideration of the term extension they received 112,000 warrants. The warrants were valued at $35,386 using the Black-Scholes option pricing model. The assumptions used in the Black-Scholes valuation model were: a risk fee interest rate of 4.1 %; the current stock price at date of issuance of $0.53 per share; the exercise price of the warrants of $0.53; the term of two years; volatility of 114%; and dividend yield of 0.0%.

In accordance with EITF 00-27 and 98-5, the Company determined that the debentures issued integrated a beneficial conversion feature (BCF). The Company has recorded a discount of $325,001 to reflect the BCF feature over this period. The beneficial conversion features were recognized as discounts on the debentures at the date of issuance. Utilizing the effective interest method, these discounts have been amortized over the period commencing on the issuance date to the date of stated redemption (i.e. maturity) of the debt in accordance with EITF 00-27 rather than EITF 98-5. The discount of $325,001 was fully amortized at February 28, 2007.

The Company has evaluated the application of SFAS No. 133 and EITF 00-19 for the consideration of embedded derivatives with respect to the conversion feature of the convertible debentures relative to the guidance of these pronouncements, the Company has concluded that these debentures did not contain embedded derivatives

The following is a list of the loan agreement and the three convertible debentures that occurred:

1) On February 24, 2006, Genesis Financial, Inc., a shareholder loaned the Company $100,000 in a Loan Agreement to finance ongoing operating expenses. On the day of the loan, the closing price of our stock was $2.50. On June 6, 2006, Genesis Financial converted the note plus interest into unregistered common stock. They were issued 137,023 shares of stock from this conversion. On the day of the conversion, the closing price of our stock was $2.30.  Based on the closing price, the value of the principal in the conversion was $306,666. The convertible note, shares issued upon conversion of the loan agreement and shares issued for interest were issued pursuant to a Section 4(2) exemption from registration under the Securities Act of 1933, as amended.

2) On February 27, 2006, Daniel McKinney, a shareholder loaned the Company $125,001 in a Convertible Debenture to finance ongoing operating expenses. On the day of the loan, the closing price of our stock was $2.21.  
 
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On December 28, 2006, Mr. McKinney agreed to extend the term of the debenture to August 31, 2007. In consideration of this extension, he was issued 83,333 warrants. On August 31, 2007, Mr. KcKinney agreed to extend the term of the debenture to October 31, 2007. In consideration of this extension, he was issued 70,000 warrants. The convertible note and warrants issued upon extension of the term of the note were issued pursuant to a Section 4(2) exemption from registration under the Securities Act of 1933, as amended.

3) On February 28, 2006, James McQuade, a shareholder loaned the Company $75,000 in a Convertible Debenture to finance ongoing operating expenses. On the day of the loan, the closing price of our stock was $2.25. On December 29, 2006, Mr. McQuade agreed to extend the term of the debenture to August 31, 2007. In consideration of this extension, he was issued 50,000 warrants. On August 31, 2007, Mr. McQuade agreed to extend the term of the debenture to October 31, 2007. In consideration of this extension, he was issued 42,000 warrants. The convertible note and warrants issued upon extension of the term of the note were issued pursuant to a Section 4(2) exemption from registration under the Securities Act of 1933, as amended.

4) On March 6, 2006, Michael Schneider, a shareholder loaned the Company $25,000 in a Convertible Debenture to finance ongoing operating expenses. On the day of the loan, the closing price of our stock was $2.65. On January 16, 2007, Mr. Schneider agreed to extend the term of the debenture to August 31, 2007. In consideration of this extension, he was issued 16,668 warrants.  On April 30, 2007, Mr. Schneider converted the note plus interest into unregistered common stock.  He was issued 37,169 shares of stock from this conversion. On the day of the conversion, the closing price of our stock was $0.56. Based on the closing price, the value of the principal in the conversion was $18,667. The convertible debenture, warrants, shares issued upon conversion of the debenture and shares issued for interest were issued pursuant to a Section 4(2) exemption from registration under the Securities Act of 1933, as amended.

Warehousing Line of Credit and Convertible Promissory Note

●
On December 19, 2005, we received an advance of $60,000 on a warehousing line of credit from Genesis Financial Inc., to finance operating activities. This warehousing line of credit for $180,000 was set up to fund the completion costs of the Ginny South Prospect in Texas.  When the exploratory well was plugged and abandoned, the remaining balance of this line of credit was not utilized and was therefore cancelled.

The $60,000 advance, in the form of a Convertible Promissory Note, had no stated interest and had the option to convert the note into Daybreak’s common stock at any time until the June 30, 2006 maturity date of the note. In February 2006, the $60,000 advance on the line of credit, as secured by the Convertible Promissory Note, was converted into unregistered common stock of Daybreak which resulted in 240,000 shares of stock being issued. The shares issued upon conversion of the line of credit were issued pursuant to a Section 4(2) exemption from registration under the Securities Act of 1933, as amended.

No discount was recorded for the imputed interest rate on the Convertible Promissory Note as a beneficial conversion feature of $60,000 was recognized upon issuance in accordance with EITF 00-27 and 98-5. The beneficial conversion feature was recognized as a discount on the Convertible Promissory Note and amortized utilizing the effective interest method, over the period commencing on the issuance date to the date of stated redemption (i.e. maturity) of the debt in accordance with EITF 00-27.
 
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Upon conversion, the remaining discount was recognized as interest and the Convertible Promissory Note was cancelled. Financing costs for the Convertible Promissory Note were paid by issuing 66,000 shares of unregistered common stock to Genesis Financial and the director who guaranteed Convertible Promissory Note as explained below. The common stock fair value of $38,380 was recognized as interest expense on the date of grant and the fair value was determined using Daybreak’s trading price on the date of grant.

●
On December 19, 2005, we issued 30,000 shares of unregistered common stock to Terrence Dunne (appointed CFO in April 2006) for his personal guarantee on the Genesis Financial Convertible Promissory Note. The fair value of the common stock shares was determined using our trading price on the date of grant and were recorded as interest expense. The shares issued for services were issued pursuant to a Section 4(2) exemption from registration under the Securities Act of 1933, as amended.

Private Placements

●
Commencing on June 7, 2005 and closing on December 19, 2005, we conducted a private placement offering of our common stock for $0.25 per share. Gross proceeds of $1,100,000 were raised from the sale and generated net proceeds of $1,087,500. A total of forty-three (43) investors participated in this private placement. From this offering, 4,400,000 shares of unregistered common stock were issued. We did not engage a placement agent for this offering, instead all the shares were sold directly by the Company. The trading prices of the common stock during the private placement period ranged from a low of $ 0.23 per share to a high of $ 0.65 per share. The proceeds from this offering were allocated to the following expenditures:

Mineral rights acquisition;
Drilling wells;
Seismic exploration;
General and administrative expenses;
Legal and accounting expenses.

The shares were offered and sold pursuant to a Regulation D exemption from the registration requirements of the Securities Act of 1933, as amended. The shares were offered and sold only to accredited investors.

●
Commencing on March 3, 2006 and closing on May 19, 2006, we conducted a private placement offering of our common stock. Bathgate Capital Partners LLC, of Denver, Colorado was the placement agent. We offered “units” for sale, which were comprised of two shares of common stock and one common stock purchase warrant (warrant). The units sold for $1.50 per unit, gross proceeds from the sale were $6,020,404, which equated to 4,013,602 units. Our net proceeds were $5,188,257 and the placement agent’s commission and other expenses equaled $832,147.

A total of 118 investors participated in this private placement. From the offering, 8,027,206 shares of unregistered common stock and 4,013,602 warrants were issued. The warrants were valued at $1,779,172 using the Black-Scholes option pricing model. The assumptions used in the Black-Scholes valuation model were: a risk fee interest rate of 4.99%; the current stock price at date of issuance of $2.70 per share; the exercise price of $2.00; an expected term of five (5) years; volatility of 112%; and dividend yield of 0.0%.
 
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The Warrants were exercisable for a period of five (5) years after the closing date at an exercise price of $2.00 per share. Daybreak may call the warrants for redemption if (a) the average of the closing sale price of the common stock is at or above $3.00 for twenty (20) out of thirty (30) trading days prior to the date the warrants are called, and (b) the warrant shares are registered under the Securities Act. The Warrants were valued using the Black-Scholes option pricing model. The assumptions used in the Black-Scholes valuation model were: a risk fee interest rate of 4.99%; the current stock price at date of issuance of $2.70 per share; the exercise price of the warrants; an expected term of five (5) years; volatility of 112%; and dividend yield of 0.0%. As of February 28, 2007, no subscriber warrants had been exercised.

Bathgate Capital Partners, of Denver, Colorado was the placement agent. A son of Dale Lavigne (the Chairman and a director of Daybreak) is an employee of Bathgate Capital Partners. The Placement Agent was paid a sales commission of 10% of the gross proceeds of the private placement and a non-accountable expense allowance of 3% of the gross proceeds totaling $790,402. Additionally, the Placement Agent was paid a due diligence fee of $15,000. For every ten (10) units sold, the Placement Agent earned three (3) common stock warrants, two of which are exercisable at $0.75 per share and one of which is exercisable at $2.00 per share. The Placement Agent warrants are exercisable for a period of seven (7) years. The placement agent earned 1,204,082 warrants, of which 802,721 are exercisable at $0.75 per share and were determined to have a fair value of $2,043,752. The remaining 401,361 warrant shares are exercisable at $2.00 per share and were determined to have a fair value of $973,970. The placement agent warrants were valued using the Black-Scholes option pricing model. The assumptions used in the Black-Scholes valuation model were: a risk fee interest rate of 4.99%; the current stock price at date of issuance of $2.70 per share; the exercise price of the warrants; an expected term of seven years; volatility of 112%; and dividend yield of 0.0%. As of February 28, 2007, no placement agent warrants had been exercised.

Both the subscriber warrants and the placement agent warrants have a cashless exercise provision and contain customary anti-dilution provisions. The cashless exercise provision allows for the holder of the warrants to receive a number shares equal to the quotient of a) the product of the number warrants held and the amount by which Daybreaks market traded stock price exceeds the exercise price of the warrants on the date of exercise, divided by b) the market traded stock price. The anti-dilution provisions permit the adjustment of the number of shares issuable upon exercise of the warrants in the event of stock splits, stock dividends, stock reversals and sales of substantially all of the Company’s assets.

Daybreak agreed to register the shares on a “best efforts” basis.  If Daybreak was unable to file the registration statement within the filing timeline, Daybreak would have had to issue 4,013,602 additional warrants at an exercise price of the lower of (a) the average closing sale price of its common stock for twenty of the thirty trading days immediately preceding the date the registration statement should have been filed, or (b) $1.50 per common share. Daybreak did file the registration statement within the filing timeline. No additional warrants were required to be issued.

Daybreak evaluated the application of SFAS No. 133 and EITF 00-19 with respect to the conversion feature and the registration rights for consideration of embedded derivatives and concluded that the preferred stock and registration rights instruments did not have embedded derivatives.
 
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The relative fair value of the Common Stock and the Common Stock Purchase Warrants was as follows:
 
 
Description
 
Shares
   
Relative Fair
Value Amount
 
Common Stock
   
8,027,206
    $
4,241,232
 
Common Stock Purchase Warrants
   
4,013,602
     
1,779,172
 
Total Proceeds
           
6,020,404
 
Placement fees
            (832,147 )
Net Proceeds
          $
5,188,257
 
 

The trading prices of our common stock during the private placement period ranged from a low of $ 1.66 per share to a high of $ 2.80 per share.  The proceeds from this offering were allocated to the following expenditures:

Land acquisition;
Drilling additional wells;
Connecting well to pipeline;
Seismic exploration;
General and administrative expenses;
Legal and accounting expenses.

This private placement offering was made pursuant to a Rule 506 exemption from registration promulgated under Regulation D of the Securities Act of 1933, as amended. All offerees and purchasers in this private placement were accredited investors.

●
Commencing on July 7, 2006 and closing on July 18, 2006, we conducted a private placement of our Series A Convertible Preferred Stock. Bathgate Capital Partners LLC, of Denver, Colorado was the placement agent. We offered “units” for sale which were comprised of one share of our Series A Convertible Preferred stock and two common stock purchase warrants for $3.00 per unit. Gross proceeds from the sale were $4,199,291 which equated to 1,399,765 units. Our net proceeds were $3,626,204 and the placement agent’s commission and other expenses equaled $573,091.

A total of 100 investors participated in this private placement. From the offering, 1,399,765 shares of Series A Convertible Preferred stock and 2,799,527 common stock warrant shares were issued. Holders of Series A Convertible Preferred stock earn a dividend, in the amount of 6% of the original purchase price per year. Accumulated dividends do not bear interest.  Dividends are payable upon declaration by the Board of Directors and none have been declared. The Series A Preferred can be converted by the shareholder at any time into three shares of Daybreak’s common stock. If Daybreak’s common stock is registered under the Securities Act of 1933, the Series A Preferred shall be automatically converted into common stock at any time after the effective date of the registration statement if Daybreak’s common stock closes at or above $3.00 per share for twenty (20) out of thirty trading days (30) days.

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The Warrants included in the private placement, are exercisable for a period of five (5) years after the closing date at an exercise price of $2.00 per share. In accordance with EITF 98-5, Daybreak valued the warrants and the beneficial conversion feature of the preferred stock.  Accordingly, Daybreak recorded a discount for the warrants and beneficial conversion feature (BCF), of $4,199,295. The discount is attributable to the fair value of the Warrants and the intrinsic value of the conversion feature of the preferred stock. The value of the BCF was recognized and measured separately by allocating to additional paid-in capital the proceeds equal to the $1,489,222 relative fair value of the Warrants and the $2,710,073 intrinsic value of the conversion feature. Daybreak also recorded a deemed dividend to reflect the full amortization of the discount of the value of the Warrants and conversion features of $4,199,295. The fair value of each Warrant granted was estimated using the Black-Scholes pricing model. The assumptions used in the Black-Scholes valuation model were: a risk fee interest rate of 4.99%; the current stock price at date of issuance of $2.20 per share; the exercise price of the warrants at $1.00; an expected term of five years; volatility of 113%; and dividend yield of 0.0%. As of February 28, 2007, no warrants had been exercised.

Bathgate Capital Partners, of Denver, Colorado (Bathgate) was the placement agent.  A son of Dale Lavigne (the Chairman and a director of Daybreak) is an employee of Bathgate. Bathgate was paid a sales commission of 10% of the gross proceeds of the private placement and a non-accountable expense allowance of 3% of the gross proceeds totaling $547,589. For every $30.00 invested, Bathgate earned three (3) common stock purchase warrants exercisable at $1.00 per share. The warrants are exercisable for a period of five (5) years. A total of 419,930 warrants were issued to Bathgate from this private placement and were valued at $816,374. The placement agent warrants were valued using the Black-Scholes option pricing model. The assumptions used in the Black-Scholes valuation model were: a risk fee interest rate of 4.99%; the current stock price at date of issuance of $2.20 per share; the exercise price of the warrants at $1.00; an expected term of five years; volatility of 113%; and dividend yield of 0.0%.  As of February 28, 2007, no placement agent warrants had been exercised.

Both the subscriber warrants and the placement agent warrants contain anti-dilution provisions. The anti-dilution provisions permit the adjustment of the number of shares issuable upon exercise of the warrants in the event of stock splits, stock dividends, stock reversals and sales of substantially all of the Company’s assets. The placement agent warrants contain a cashless exercise provision. The cashless exercise provision allows for the holder of the warrants to receive a number shares equal to the quotient of a) the product of the number warrants held and the amount by which Daybreaks market traded stock price exceeds the exercise price of the warrants on the date of exercise, divided by b) the market traded stock price.

Daybreak has agreed to register the Series A Preferred shares on a “best efforts” basis.  If Daybreak is unable to file the registration statement within the filing timeline, Daybreak will have to issue 1,399,765 additional warrants at an exercise price of $2.00 per share. Daybreak is required to file the Series A Preferred shares registration statement within sixty (60) days of the effective date of the registration statement required for the May of 2006 common stock private placement.
 



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Daybreak evaluated the application of SFAS No. 133 and EITF 00-19 with respect to the conversion feature and the registration rights for consideration of embedded derivatives and concluded that the preferred stock and registration rights instruments did not have embedded derivatives.

The relative fair values of the Series A Convertible Preferred Shares and the Common Stock Purchase Warrants were as follows:
 
Description
 
Shares
   
Relative Fair
Value Amount
 
Series A Convertible Preferred
   
1,399,765
    $
2,710,073
 
Common Stock Purchase Warrants
   
2,799,530
     
1,489,222
 
Total Proceeds
           
4,199,295
 
Offering Costs
            (573,091 )
Net Proceeds
          $
3,626,204
 

 
A son of Dale Lavigne (the Chairman and a director of the Company) is an employee of Bathgate Capital Partners. The trading prices of the common stock during the private placement period ranged from a low of $2.20 per share to a high of $2.35 per share The proceeds from this offering were allocated to the following expenditures:

Completions of wells;
Connecting wells to pipelines;
Drilling additional wells;
Working capital.

This offering was made pursuant to a Rule 506 exemption from registration promulgated under Regulation D of the Securities Act of 1933, as amended. All offerees and purchasers in this private placement were accredited investors.

Stock for Services

In accordance with the current interpretation of FAS 123(R) the value of the below listed transaction has been expensed as of the grant date of each transaction as reflected in our restated financial statements. The shares issued for services were issued pursuant to a Section 4(2) exemption from registration under the Securities Act of 1933, as amended.

On April 27, 2005, we issued 350,000 shares of unregistered common stock to AnMac Enterprises (a company owned by Michael McIntyre) for Investor Relations (“IR”) consulting services from March 1, 2005 through February 28, 2006. On the grant date of March 1, 2005, the closing price of our stock was $0.79. Based on the closing price the value of this stock issuance was $276,500.
 
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On April 27, 2005, we issued 500,000 shares of unregistered common stock to Eric Moe (appointed CEO in March 2006) for Investor Relations (“IR”) consulting services from March 1, 2005 through February 28, 2006. On the grant date of March 1, 2005, the closing price of our stock was $0.79. Based on the closing price the value of this stock issuance was $395,000.

On May 11, 2005, we issued 1,100,000 shares of unregistered common stock to 413294 Alberta, Ltd., of Calgary, Alberta to supply the services of Robert Martin, as our Company President. On the grant date of March 1, 2005, the closing price of our stock was $0.79. Based on the closing price the value of this stock issuance was $869,000.

On May 25, 2005, we issued 300,000 shares of unregistered common stock to Irwin Renneisen for IR consulting services. On the grant date of May 18, 2005, the closing price of our stock was $0.38. Based on the closing price the value of this stock issuance was $114,000. In August 2005, the 300,000 shares were returned to us and on August 25, 2005, we issued Irwin Renneisen 30,000 shares of restricted common stock. On the revised grant date of August 25, 2005, the closing price of our stock was $0.44. Based on the closing price the value of this stock issuance was $13,200.

On October 5, 2005, we issued 1,000,000 shares of unregistered common stock to Eric Moe (appointed CEO in March 2006) for IR consulting services. On the grant date of September 27, 2005, the closing price of our stock was $0.56. Based on the closing price the value of this stock issuance was $560,000.

On October 27, 2005, we issued 1,667 shares of unregistered common stock to Laura Crist as partial payment for marketing services for our web site.

On October 27, 2005, we issued 10,000 shares of unregistered common stock to Gregory Lipsker as payment for legal services.

On November 30, 2005, we issued 400,000 shares of unregistered common stock to Terrence Dunne, (appointed a director in January 2006 and CFO in April 2006), a shareholder and 10% control person (at the time), for management services. On the grant date of September 27, 2005, the closing price of our stock was $0.56. Based on the closing price the value of this stock issuance was $224,000.

On January 17, 2006, we issued 300,000 shares of unregistered common stock to Dale Lavigne (Chairman), for management services. On the grant date of September 27, 2005, the closing price of our stock was $0.56. Based on the closing price the value of this stock issuance was $168,000.

On January 17, 2006, we issued 300,000 shares of unregistered common stock to Ronald Lavigne (director) for management services. On the grant date of September 27, 2005, the closing price of our stock was $0.56. Based on the closing price the value of this stock issuance was $168,000.

On January 17, 2006, we issued 400,000 shares of unregistered common stock to Thomas Kilbourne (Treasurer) for management services. On the grant date of September 27, 2005, the closing price of our stock was $0.56. Based on the closing price the value of this stock issuance was $224,000.

On January 17, 2006, we issued 600,000 shares of unregistered common stock to Kirby Cochran, a shareholder for IR consulting services. On the grant date of January 13, 2006, the closing price of our stock was $0.55. Based on the closing price the value of this stock issuance was $330,000.

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On February 17, 2006, we issued 100,000 shares of unregistered common stock to Bennett Anderson, a shareholder for consulting services. On the grant date of February 17, 2006, the closing price of our stock was $2.23. Based on the closing price the value of this stock issuance was $223,000.

On May 3, 2006, we issued 70,000 shares of unregistered common stock to Gregory Donelson for consulting services. On the grant date of December 14, 2005, the closing price of our stock was $0.61. Based on the closing price the value of this stock issuance was $42,700.

On May 10, 2006, we issued 150,000 shares of unregistered common stock to AnMac Enterprises (a company owned by Michael McIntyre) for Investor Relations (“IR”) consulting work from March 1, 2006 through February 28, 2007. On the grant date of March 1, 2006, the closing price of our stock was $2.39. Based on the closing price the value of this stock issuance was $358,500.

On May 26, 2006, we issued 250,000 shares of unregistered common stock to 413294 Alberta, Ltd., of Calgary, Alberta to supply the services of Robert Martin, as our Company President. On the grant date of March 1, 2006, the closing price of our stock was $2.39. Based on the closing price the value of this stock issuance was $597,500.

On May 26, 2006, we issued 250,000 shares of unregistered common stock to Eric Moe, CEO, for management services from March 1, 2006 through February 28, 2007. On the grant date of March 1, 2006, the closing price of our stock was $2.39. Based on the closing price the value of this stock issuance was $597,500.

On May 26, 2006, we issued 100,000 shares of unregistered common stock to Thomas Kilbourne, Treasurer and a director for management services from March 1, 2006 through February 28, 2007. On the grant date of March 1, 2006, the closing price of our stock was $2.39. Based on the closing price the value of this stock issuance was $239,000.

On August 31, 2006, we issued another 250,000 shares of unregistered common stock to Eric Moe, CEO and a director. The shares were issued as additional compensation. On the grant date of August 3, 2006, the closing price of our stock was $2.05. Based on the closing price the value of this stock issuance was $512,500.

On February 23, 2007, we issued 200,000 shares of unregistered common stock to Tim Lindsey, a director for consulting services from January 2, 2007, through February 28, 2008. On the grant date of January 2, 2007, the closing price of our stock was $1.30. Based on the closing price the value of this stock issuance was $260,000.

Stock for Directors Services

In accordance with the current interpretation of FAS 123(R) the value of the below listed transaction has been expensed as of the grant date of each transaction as reflected in our restated financial statements. The shares issued for services were issued pursuant to a Section 4(2) exemption from registration under the Securities Act of 1933, as amended.


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On November 30, 2005, we issued 18,000 shares of unregistered common stock to each of the six members of the Board of Directors. These directors were 413295 Alberta Ltd. (Robert Martin), Mike Curtis, Dale Lavigne, Jeff Dworkin, Ronald Lavigne and Thomas Kilbourne. On the grant date of October 25, 2005, the closing price of our stock was $0.55. Based on the closing price the value of each stock issuance was $9,900.

On November 30, 2005, we issued 9,000 shares of unregistered common stock worth to each of the six members of the Board of Directors for director’s fees for the third quarter of the current fiscal year. These directors were 413295 Alberta Ltd. (Robert Martin), Mike Curtis, Dale Lavigne, Jeff Dworkin, Ronald Lavigne and Thomas Kilbourne. On the grant date of November 30, 2005, the closing price of our stock was $0.52. Based on the closing price the value of each stock issuance was $4,680.

On February 28, 2006, we issued 3,000 shares of unregistered common stock worth to each of the seven members of the Board of Directors for director’s fees for the fourth quarter of the current fiscal year. These directors were 413295 Alberta Ltd. (Robert Martin), Mike Curtis, Dale Lavigne, Jeff Dworkin, Ronald Lavigne, Terrence Dunne and Thomas Kilbourne. On the grant date of February 28, 2006, the closing price of our stock was $2.25. Based on the closing price the value of each stock issuance was $6,750.

Stock for Oil and Gas Properties

In accordance with the current interpretation of FAS 123(R) the value of the below listed transaction has been expensed as of the grant date of each transaction as reflected in our restated financial statements. The shares issued for services were issued pursuant to a Section 4(2) exemption from registration under the Securities Act of 1933, as amended.

On August 31, 2005, we issued 100,000 shares of unregistered common stock to Margaret Perales of MPG Petroleum as consideration for participation in the Pearl Prospect located in Texas. On the grant date of August 31, 2005, the closing price of our stock was $0.37. Based on the closing price the value of this stock issuance was $37,000.

On October 27, 2005, we issued 600,000 shares of unregistered common stock to Sam Pfiester, Trustee for the Chicago Mill Joint Venture (CMJV) in the Tuscaloosa project in Louisiana. On the grant date of September 29, 2005, the closing price of our stock was $0.63. Based on the closing price the value of this stock issuance was $378,000.

On May 31, 2006, we issued 150,000 shares of unregistered common stock to Big Sky Western Canada of Calgary, Alberta, Canada as consideration for our participation in the 40 Mile Coulee project in Alberta, Canada. On the grant date of May 30, 2006, the closing price of our stock was $2.80. Based on the closing price the value of this stock issuance was $420,000. On December 8, 2006, we repurchased the original 150,000 shares from Big Sky Western Canada for the original book value of $1.00 per share as part of the settlement of the plug and abandonment negotiations on the 40 Mile Coulee project. The shares were consequently cancelled.

On September 22, 2006, we issued 72,500 shares of unregistered common stock to Strike Oil & Minerals, Corp., as part of our purchase of an additional eight percent (8%) working interest in the Tuscaloosa project in Louisiana. On the grant date of September 22, 2006, the closing price of our stock was $1.50. Based on the closing price the value of this stock issuance was $108,750.
 
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Subsequent Issuances

On March through August, 2007, eight shareholders, owning a total of 82,000 shares of our Series A Convertible Preferred Stock, from our July 2006 private placement, chose to convert their preferred shares to common stock. In accordance with the terms of the private placement agreement under which the preferred stock was purchased, each preferred share was converted to three shares of common stock resulting in 246,000 shares of common stock being issued.

On March 6, 2006, Michael Schneider, a shareholder loaned the Company $25,000 to finance ongoing operating expenses. The convertible debenture agreement term was for one year at a 10% interest rate. The debenture could be converted to unregistered common stock at the end of the term. The conversion rate was set at $0.75 per share. On April 30, 2007, Mr. Schneider converted the debenture plus interest into unregistered common stock. He was issued 37,169 shares of common stock from this conversion. On the day of the conversion the closing price of our stock was $0.56. Based on the closing price the value of the principal in the conversion was $18,667. The convertible notes, shares issued upon conversion of the notes and shares issued in consideration of services were issued pursuant to a Section 4(2) exemption from registration under the Securities Act of 1933, as amended.

Securities Authorized for Issuance under Equity Compensation Plan

We have no agreements with any employees or consultants for issuing options, warrants or rights on our stock. We have however, issued unregistered restricted common stock in the past as a part of our employment and consulting contracts. These instances are explained in the detail immediately above.

Common Stock

The Company is authorized 200,000,000 shares of Common Stock with a par value of $0.001 of which 29,458,221 were issued as of February 28, 2006. At February 28, 2007, a total of 40,877,230 shares were issued and outstanding. 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 fifty percent (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 fifty percent (50%) would not be able to elect any directors.

Preferred Stock

The Company is authorized 10,000,000 shares of Preferred Stock with a par value of $0.001 of which none had been issued as of February 28, 2006. 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.  
 
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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.

On June 30, 2006, in action by the Board of Directors, 2,400,000 of theses preferred shares were designated as Series A Convertible Preferred. In July 2006, we completed a private placement of the Series A Convertible Preferred that resulted in the issuance of 1,399,765 shares.
 
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 Preferred Stock is convertible into three (3) 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 Securities and Exchange Commission 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 twenty (20) out of thirty trading days (30) 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, 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.

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 herein 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.

Debt Securities

From March 23, 2005 through August 31, 2005, in a series of twenty-seven loans, we borrowed from six officers, directors or shareholders, a total of $168,821 to finance ongoing operations. These convertible debentures were for a term of one year; had a 6% interest rate and both the principal and interest could be converted to unregistered common stock after a minimum period of six months.
 
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The conversion rate was $0.25 per share. During the fiscal year ended February 28, 2006, twenty-four of the twenty-seven loans were converted to unregistered common stock resulting in 566,134 unregistered shares being issued. During the fiscal year ended February 28, 2007, the remaining three convertible debentures were converted to unregistered common stock resulting in 137,541 unregistered shares being issued.

From January 25, 2006 through February 8, 2006, in a series of eight loans, we borrowed from seven shareholders a total of $806,700 to finance ongoing operations. These convertible debentures were for a term of one year; had a 10% interest rate and both the principal and interest could be converted to unregistered common stock after a minimum period of sixty-one days. The conversion rate was $0.50 per share. During the fiscal year ended February 28, 2007, all eight loans were converted to unregistered common stock resulting in 468,592 unregistered shares being issued.

From February 24, 2006 through March 6, 2006, in a series of four loans, we borrowed from four existing shareholders a total of $325,001 to finance ongoing operations. These loans were in the form of convertible debentures (3) and a loan agreement with the following features. The term was for a period of one year; the interest rate was 10%; the notes could be converted to our common stock after a holding period of 61 days; and the conversion rate is $0.75 per share. The loan agreement balance of $100,000 plus interest was converted to unregistered common stock on June 6, 2006. In December 2006, all three convertible debenture holders agreed to extend the term of the notes to August 31, 2007. This agreement for the term extension did not affect the debenture holders rights to convert to common stock at any time. We issued 150,001 warrants to these debenture holders as consideration for extending the term of the notes. The fair market value of these warrants was $119,283. On April 30, 2007, one debenture holder chose to convert his note to unregistered common stock. He was issued 37,169 shares of stock from this conversion. On August 31, 2007, the remaining two convertible debenture holders agreed to extend the term of the debentures to October 31, 2007. We issued 112,000 warrants to these debenture holders as consideration for extending the term of the notes. The warrants were valued at $35,386 using the Black-Scholes option pricing model.  The assumptions used in the Black-Scholes valuation model were: a risk fee interest rate of 4.1 %; the current stock price at date of issuance of $0.53 per share; the exercise price of the warrants of $0.53; the term of two years; volatility of 114%; and dividend yield of 0.0%.

The following table shows that convertible debentures that were outstanding as of February 28, 2007.


Interest
Rate
Conversion
Price
Redeemable
After
Loans Outstanding
Outstanding
Principal
10%
0.75
61 Days
3
$     225,001



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ITEM 6.  MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

The following management’s discussion and analysis (“MD&A”) is management’s assessment of the historical financial and operating results of Daybreak Oil and Gas, Inc. (the “Company” or “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 10-KSB report.

Additional information relating to Daybreak is available on EDGAR at www.edgar-online.com or our web site at www.daybreakoilandgas.com . Our stock is quoted on the NASDAQ over the counter (OTC.BB) market under the symbol DBRM.OB.

Safe Harbor Provision

Certain statements contained in our Management’s Discussion and Analysis of Financial Condition or Plan of Operation 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 Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts contained in this report, including statements regarding our current expectations and projections about future results, business strategy, performance, prospects and opportunities, are forward-looking statements. To understand about forward looking statements, please refer the section labeled forward looking statements at the beginning of this 10-KSB report.

Overview

As an early stage energy company concentrating on oil and gas exploration and development; our expenditures consist primarily of geological and engineering services, acquiring mineral leases, exploration and drilling costs and travel. Our expenses also consist of consulting and professional services, compensation, legal and accounting and general and administrative expenses which we have incurred in order to address necessary organizational activities.

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 developing projects in Alabama, California, Louisiana and Texas. Since November of 2006, we have been involved as the operator of two project areas in Louisiana and in June of 2007, we became the operator of the Gilbertown project in Alabama. In the past we have relied on our working interest partners to negotiate all drilling, and sales contracts. Over the last fiscal year, we have been involved in the drilling/workover and/or completion of thirteen (13) wells in Alabama, Louisiana, Texas and in Alberta, Canada. We have achieved or increased commercial production in eight (8) of these wellbores.

Long Term Success

Our success depends on the acquisition and drilling of commercial grade oil and gas properties and the prevailing prices for oil and natural gas. Oil and natural gas prices have been extremely volatile in recent years and are affected by many factors outside our control. This 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.

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Restated Financial Statements

In the process of responding to comments from the SEC (Securities and Exchange Commission) in regards to the SB-2 registration statement that we filed for the Spring 2006 private placement, we determined that it would be necessary to restate previously filed financial statements. The restated financial statements are included as a footnote to the financial statements that are included in this 10-KSB report. The four (4) quarters for the fiscal year ended February 28, 2006; the twelve months ended February 28, 2006; and the first three (3) quarters for the fiscal year ended February 28, 2007 (the "Restated Periods") are being restated. The determination to restate the financial statements for the Restated Periods is based on a reassessment of the following non-cash transactions:

  • Pursuant to SFAS No. 123(R), an adjustment was recorded utilizing the market trading price on the date of grant as the more readily determinable fair value of stock issued for compensation to management and directors during the Restated Periods; and
  • Pursuant to SFAS No. 123(R), an adjustment was recorded utilizing the market trading price on the date of grant as the more readily determinable fair value of stock issued for investor relations services during the Restated Periods; and
  • Pursuant to SFAS No. 123(R), an adjustment was recorded utilizing the market trading price on the date of grant as the more readily determinable fair value of stock issued for oil and gas properties during the Restated Periods; and
  • Pursuant to EITF 00-27 and 98-5, the recognition of a beneficial conversion feature (BCF) inherent in the convertible debentures issued during the Restated Periods.  The recognition results in the recording of a discount to reflect the BCF and the recording of interest expense related to the discount.
Pursuant to SFAS No. 123R the guidelines for recording stock based compensation issued to officers and directors support that the more readily determinable fair value of these shares should be based on the publicly traded share price of our shares at the grant date. The valuation of stock based compensation has been further addressed by the recent issuance of SFAS No. 157. This latest pronouncement also implies that shares issued to officers and directors for compensation should be valued at the publicly traded share price. Both of these pronouncements state that the valuation method can be applied even when, as in our case, compensation was issued to officers and directors in the form of unregistered shares which cannot be sold by the recipients until a full year has elapsed from their issuance. Accordingly, we have restated the impact of these share based payments to reflect the use of the publicly traded share price.

Again pursuant to SFAS No. 123(R), the guidelines for recording common stock issued for investor relations services and the acquisition of interests in oil and gas properties suggest that the more readily determinable fair value of these shares should be based on the publicly traded share price of our shares at the grant or acquisition date. SFAS No. 157 also suggests that when shares are issued for services or properties, they should be valued at the publicly traded share price. Accordingly, we have restated the impact of the share based payments for services and oil and gas properties to reflect the use of the publicly traded share price.
 
We also reviewed our prior determination of the fair value of shares resulting from the potential conversion of debt and concluded that we did not appropriately accounted for discounts in accordance with SFAS 123(R) and EITF 98-05. We have calculated the intrinsic value of the embedded beneficial conversion feature present in the convertible debt using quoted closing market prices on the date of each of the transactions.
 
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This calculation has determined that $1,138,701 in discounts should have been assigned to the convertible debt issuances at their respective inception. These discounts will be amortized over the period commencing on the issuance date to the earliest conversion date of the debt.
 
The accompanying financial statements for the twelve month period ended February 28, 2006, have been restated to effect the changes described above.

Selected Financial Information
 
Since our inception, we have incurred recurring losses from operations with negative cash flow and have depended on external financing to sustain our operations. During the fiscal year ended February 28, 2007, we reported losses of $8,392,030. There is no assurance that we will be able to achieve profitability.
 
Our balance sheet on February 28, 2007, shows total assets of $9,211,466 comprised primarily of oil and gas properties (net of Depreciation, Depletion, Amortization and Impairment) of $4,552,850, cash and marketable securities for $2,356,213, note receivable (including interest) for $828,336 and accounts receivable (including trade, related parties and joint interest participants) of $799,970. This compares with the February 28, 2006 balances for oil and gas properties of $1,132,400; cash and marketable securities for $814,360 and deposits on equipment of $250,000.
 
At February 28, 2007, we had total liabilities of $2,544,884, comprised mainly of $2,110,458 in accounts payable, $134,999 in notes payable (net of discount), $200,000 in pipeline financing obligation as compared with the February 28, 2006 balances for accounts payable of $28,646 and notes payable (net of discount) of $89,468.

Our common stock issued and outstanding has increased by 11,419,009 shares during the last fiscal year primarily as a result of the private placement from the spring of 2006. Preferred stock changed from zero at February 28, 2006, because of the July private placement of our Series A Convertible Preferred stock. The issued and outstanding shares increased to 1,399,765 at February 28, 2007, from the private placement.

Accumulated Deficit

The increase in the restated accumulated deficit during the exploration stage from $4,472,041 to $12,864,071 was due to the $8,392,030 operating loss from the fiscal year ended February 28, 2007. This included $1,196,640 of exploration and drilling expenses.

Cash Flows

1)
Cash flow from operating activities for the fiscal year ended February 28, 2007, was ($531,274) compared to ($393,185) for the same period ending February 28, 2006. This was primarily caused by our operating loss of $8,392,030 as compared to $4,472,041 from the prior year. Principal operating activities in 2007 included a $1.6 million impairment of oil and gas properties related to the Tensas Farms F-1 and F-3 wells in Louisiana and $1.2 million of interest expense related primarily to accretion of debt discount.
2)
Cash flow from investing activities for the fiscal year ended February 28, 2007, was ($8,936,257) compared to ($1,223,900) for the same period ending February 28, 2006. This difference was due to an increase in our investments in oil and gas properties of ($5,904,956) compared with ($973,900) from the prior fiscal year. Additional increases came from the deposits in money market funds ($2,356,213) and additions to notes receivable ($800,000).
 
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3)
Cash flow from financing activities for the fiscal year ended February 28, 2007, was $9,039,461 compared to $2,423,022 for the same period ending February 28, 2006. This difference was due to proceeds from the sale of our common stock of $5,188,257 as compared to the sale of common stock from the prior year of 1,087,500. Another $3,626,204 was received from proceeds of the convertible preferred stock in July 2006. Additionally, for the fiscal year ended February 28, 2007, the pipeline cost for the F-1 well in Louisiana was financed for $200,000.

Liquidity and Capital Resources
 
Liquidity and Working Capital
 
Liquidity is defined as the ability to convert assets into cash or to obtain cash. Short-term liquidity refers to the ability to meet short-term obligations of 12 months or less. Liquidity is a matter of degree and is expressed in terms of a ratio. Two common liquidity ratios in financial statement analysis are: Current Ratio and Working Capital.
 
Current ratio is defined as current assets divided by current liabilities. Working capital is defined as current assets minus current liabilities.
 
   
February 28,
   
February 28,
 
   
2007
   
2006
 
Current Assets
  $
4,537,634
    $
1,074,610
 
Current Liabilities
  $
2,445,457
    $
118,114
 
Working Capital
  $
2,092,177
    $
956,496
 
                 
Current Ratio
   
1.86
     
9.10
 


While these two ratios are important, numerous other factors may also affect the liquidity and capital resources of the Company. Working capital did increase from $956,496 as of February 28, 2006, to $2,292,177 as of February 28, 2007. This increase was principally due to the two private placements of our stock that were held during the fiscal year ended February 28, 2007.

Our business is capital intensive. Our ability to grow is dependent upon our ability to obtain outside capital and generate cash flows from operating activities to necessary to fund our investment activities. As of February 28, 2007, we have not yet demonstrated the ability to generate significant and sustainable cash flow from producing wells developed as a result of our prior exploration and development activities. Our independent registered auditors have expressed a substantial doubt regarding our ability to continue as a going concern.

Our only source of funds in the past has been through the debt or equity markets. Since we have not yet established profitable operations, this is also expected to be our source of funds in the foreseeable future.  Our business model is focused on acquiring developmental properties and also 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 will very likely require the Company to continue to raise equity or debt capital from sources outside of the Company.  
 
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The Company 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 certain leases.  These ongoing capital commitments may also cause the Company to seek additional capital from sources outside of the Company.
 
Since our future operations will continue to be heavily dependent on our ability to seek and secure capital from exterior sources, should we be unable to continue to find new capital from such sources, the Company may not be able to survive as a going concern, and any equity investment in the Company could become worthless or substantially impaired in value.
 
Since our inception, we have suffered recurring losses from operations with negative cash flow and have depended on external financing to sustain our operations. During the fiscal year ended February 28, 2007, we reported losses of $8.1 million. There is no assurance that the Company can ever achieve sustainable profitability.  Failure to achieve sustainable profitability could prevent the Company from continuing as a going concern, and could cause any equity investment in the Company to become worthless.
 
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.

On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, bad debt, cancellations 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.

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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 SFAS No. 144, “Impairment or Disposal of Long-Lived Assets”, 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. Asset impairments of $1,606,292 and $-0- were recorded for the years ended February 28, 2007 and February 28, 2006, respectively. The charge is included in depreciation, depletion and amortization.

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 depreciation, depletion, and amortization 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.  As of February 28, 2007 $70,266 had been advanced for services.

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 its 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, 2007 and February 28, 2006.
 
Suspended Well Costs

On April 4, 2005, the Financial Accounting Standards Board, (FASB) issued FASB Staff Position No. 19-1,"Accounting for Suspended Well Costs" (FSP No. 19-1). This staff position amends SFAS No. 19, "Financial Accounting and Reporting by Oil and Gas Producing Companies" and provides guidance concerning exploratory well costs for companies that use the successful efforts method of accounting. Daybreak adopted FSP No. 19-1 for the fiscal years ended February 28, 2007 and 2006.

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The FSP 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, the FSP 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

Prior to February 28, 2005, we accounted for opur stock based compensation plans under the recognition and measurement provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees” and related Interpretations, (“APB 25”) as permitted by SFAS No. 123, “Accounting for Stock Based Compensation” (“SFAS 123”).

Effective March 1, 2005, we adopted the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”) for our stock based compensation plans under the recognition and measurement provisions of SFAS 123.  No awards granted prior to March 1, 2005 were modified or settled in cash during fiscal 2006.

Effective March 1, 2006, we adopted the fair value recognition provisions of SFAS No. 123R, “Share Based Payment” and related Interpretations (“SFAS 123R”).

Under both SFAS 123 and SFAS 123R, compensation cost for all share based payments granted on or subsequent to March 1, 2005 are based on the grant date fair value estimated in accordance with the provisions of SFAS 123 and SFAS 123R, for the respective fiscal years. Compensation cost is recognized on a straight line basis over the requisite service period for the entire award in accordance with the provisions of SFAS 123R.  If at any date the portion of the grant-date fair value of the award that is vested is greater than that amount recognized on a straight line basis, the amount of the vested grant date fair value is recognized.

We account for transactions in which we issue equity instruments to acquire goods or services from non-employees in accordance with the provisions of SFAS No. 123R (as amended).  These transactions are accounted for based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable.

Restatements

We have restated our financial statements in accordance with SFAS No. 154, “Accounting Changes and Error Corrections” . The financial statements were restated for the first three (3) quarters for the fiscal year ended February 28, 2006, for the twelve months ended February 28, 2006 and for the first three (3) quarters for the fiscal year ended February 28, 2007 (the “restated periods”).
 
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The financial statements were restated to reflect adjustments to non-cash transactions involving (1) the valuation of common stock issued for management and director compensation, (2) the valuation of common stock issued for investor relations services, (3) the valuation of common stock issued for the acquisition of oil and gas properties, and (4) the recognition of beneficial conversion features inherent in the convertible debentures issued during the restated periods.

In addition, the financial statements included herein were prepared as if the Company will continue as a going concern.  An assumption otherwise may materially change the information included in the financial statements as well as the information included in the Management’s discussion and analysis of our financial condition and results of operations.

Fiscal Year 2007 compared to Fiscal Year 2006

Revenues.   Our revenues are derived entirely from the sale of our share of oil and gas production from our producing wells.  The Company realized its first revenues from producing wells in August 2006.  Prior to that date, the Company had no revenues.  Accordingly, fiscal year 2007 revenues of $629,346 compares favorably to no revenues in the fiscal year 2006.  During the fiscal year 2007, the Company recorded revenues from its interest in nineteen (19) producing wells.  While these results are encouraging, the Company continues to experience mechanical and technical production problems with certain major wells, particularly the F-1 well in the Tuscaloosa Prospect in Louisiana.  This well contributed approximately 75% of total revenues in the fiscal year 2007.

The F-1 well was shut in pending the resolution of certain technical issues in November, 2006.  Production on this property was re-established for a short period of time in February, 2007.  The F-1 well was shut in again in late February 2007, pending resolution of certain gas sales and sales contract issues.  The Company believes that these issues can be resolved and the production from this property can be re-established during the current year. However, there is no assurance that these efforts will be successful.

Cost and Expenses:

A table of our costs and expenses for the fiscal year 2007 compared to the fiscal year 2006 follows:
 
   
Fiscal Year
   
Fiscal Year
 
   
2007
   
2006
 
Production Costs
  $
373,766
    $
-
 
Exploration Costs
   
1,196,640
     
327,469
 
Depreciation, Depletion,
               
Amortization & Impairment
   
2,398,048
     
-
 
General & Administrative
   
3,936,868
     
3,902,872
 
     Total Operating Expenses
  $
7,905,322
    $
4,230,341
 


Expenses incurred by the Company include production costs associated directly with the generation of oil and gas revenues, exploration and drilling costs related to the development of oil and gas properties and general and administrative expenses, including legal and accounting expenses, management and director fees, investor relations expenses, and other general and administrative costs.

58
The increase in production costs from $0 in the fiscal year 2006 to $373,766 in the fiscal year 2007 relates entirely to the existence of revenues in fiscal year of 2007.

Exploration and drilling expenses increased substantially from $327,469 in fiscal year 2006 to $1,196,640 in fiscal year 2007 due primarily to an increase in the number of wells in progress.  The Company participated in the development of 11 wells during the fiscal year 2007, compared to 2 wells in the comparable period of the prior year.

The increase in depreciation, depletion, amortization and impairment to $2,398,048 in the fiscal year 2007 from $0 for the fiscal year 2006, relates mainly to $787,401 for oil and gas properties as a result of production, and an impairment of proved oil and gas properties of $1,606,292.

Legal and accounting fees increased in fiscal year 2007 compared to the prior year period primarily as a result of the two private placements conducted by the Company as well as the preparation of the registration on the common stock from the private placement.

Other administrative expenses, including management and directors fees, investor relations fees and other general and administrative expenses were basically unchanged in fiscal year 2007 compared to fiscal year 2006.
 
  Interest income was $101,697 in fiscal year 2007 compared to $362 in fiscal year 2006 due primarily to higher average cash and investment balances.

Interest expense increased substantially to $1,223,298 in fiscal year 2007 compared to $242,062 in fiscal year 2006. This was a result of an increase in debt to fund operations and related amortization of debt discounts using the effective interest method. The discounts were recorded on convertible promissory notes as a result of intrinsic beneficial conversion features.

Due to the nature of its business, as well as the relative immaturity of the business, the Company expects 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 dependant the amount of capital that the Company has to invest in future development projects, as well as the success or failure of such projects. Likewise, the amount of depreciation, depletion, amortization expense and impairment costs will depend upon the factors cited in the prior sentence, as well as numerous other factors including general market conditions.

Other Liquidity Factors

The Company has certain convertible debentures in the amount of $200,001 that, along within accrued interest, were due on August 31, 2007. On August 31, we paid the accrued interest and the debenture holders agreed to extend the term of the debentures until October 31, 2007.  In addition, the Company has current notes payable to a related party in the amount of $200,000 that can be accelerated under certain conditions. By August 31, 2007, we had reduced the balance of the note payable by $158,245.
 
59
Summary

Our ability to continue as a going concern depends in large part on our ability to raise substantial funds for use in our planned exploration and development activities, and upon the success of our fundraising activities.

We intend to obtain the funds for our planned exploration and development activities by various methods, which might include the issuance of equity securities or obtaining joint venture partners. No assurance can be given that we will be able to obtain any additional financing on favorable terms, if at all.

Raising additional funds by issuing common or preferred stock will further dilute our existing stockholders. Currently, this is the only method that has been available to create the cash resources necessary to fund the growth of our company.

Off-Balance Sheet Arrangements

As of February 28, 2007, 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.
 
Exploration and Drilling

In December 2006, we became involved in the Gilbertown Field in Gilbertown, Alabama, an existing oil field that produces heavy or “sour” oil. Immediate plans are to continue the workovers on nonproducing wellbores and build production to over 100 BOPD. On June 1, 2007, we became the operator of the East Gilbertown Field.

In California we have now jointly leased about 25,633 undeveloped acres.  We are looking for potential fields in the 1MMBbl range based upon size and analogous production. Production in the region is typically from shallow depths of 1,000 feet to 3,000 feet. The oil is generally of low to medium gravity. On June 21, 2007, Daybreak and our partners (“Daybreak”), entered into a Seismic Option Farmout Agreement with Chevron U.S.A. Inc. (“Chevron”), for a seismic and drilling program in the East Slopes (Kern County) project area in California. By paying the full cost of the seismic program Chevron will earn a 50% interest in the lands and a 50% working interest for the drilling of future wells in the project area. Daybreak will earn a 50% interest in the Chevron lands located in the same project area, by paying 100% of the cost of the first three initial test wells to be drilled on the jointly held lands. The three initial test wells must be drilled within nine months of the seismic data interpretation being completed. Current plans are to have the seismic program completed and three wells drilled before the end of this year. Well costs are estimated to be $250,000 each at a depth of 2,500 to 3,000 feet.

In the Tuscaloosa project in Louisiana, we are currently proceeding with a multi-well (4) drilling program. This program commenced in August 2007. We are drilling two Tuscaloosa wells back to back. We then will be drilling a Chalk and a Paluxy play based upon results of the Tuscaloosa drilling. Our F-1 well has had the technical issues resolved and will return to production in the third quarter of the year. The F-3 well has been producing since March and has been performing as anticipated. In August 2007, the F-3 well was shut-in due to downstream gas distributor issues, but has returned to production in September.
 
60
In the Krotz Springs Field, in central Louisiana, we completed the Haas-Hirsch No. 1 well in May and commenced production. As part of the farm-out agreement, Daybreak was no longer the operator of this well once production began. Consequentially the well has been renamed the KSU #59. Production levels have been consistent since production began.

In the Saxet Field in Texas, we have had three wells producing since August 2006. These rework wells continue to perform at levels that we anticipated. We are working with our partners to lower the monthly operating costs to increase the overall productivity of the field.

Drilling Rig

In August 2006, we entered into an agreement with Green River Drilling for a drilling rig. Daybreak advanced funds to refurbish the rig and then would have first right on use of the rig for three years. We felt it was necessary to enter this arrangement because of the shortage of available rigs for drilling in Louisiana. We advanced a total of $800,000 to Green River for the refurbishing of the rig.
 
In March 2007, Green River Drilling commenced drilling its first well with the drilling rig that the Company had contributed in the refurbishing of. In May 2007, Daybreak was informed by Green River Drilling that they intended to sell the drilling rig to a third party. The sale was completed and on June 11, 2007, Daybreak received a total of $846,668 which included the principal of $800,000 and accrued interest in the amount of $46,668 in satisfaction of the note receivable.
 
Summary

We continue to be excited about the future outlook for Daybreak Oil and Gas. We have two premier properties that are currently being developed one in California and the Tuscaloosa project in Louisiana. Additionally, we have several projects in the planning stages that should enhance shareholder value within the next fiscal year. We will continue to build on our goal of becoming cash flow positive in this fiscal year.

We intend to obtain the funds for our planned exploration and development activities by various methods, which might include the issuance of equity securities or obtaining joint venture partners. No assurance can be given that we will be able to obtain any additional financing on favorable terms, if at all. Raising additional funds by issuing common or preferred stock will further dilute our existing stockholders. Currently, this is the only method that has been available to create the cash flow necessary to fund the growth of our company.




 
 
 
61
ITEM 7.  FINANCIAL INFORMATION


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and
Stockholders of Daybreak Oil and Gas, Inc.
(An Exploration Stage Company)

We have audited the accompanying balance sheets of Daybreak Oil and Gas, Inc. (an exploration stage company) as of February 28, 2007 and 2006 and the related statements of operations, stockholders’ equity, and cash flows for each of the two years then ended and for the period from March 1, 2005 (inception) to February 28, 2007.  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. The financial statements for the period from March 1, 2005 (inception) through February 28, 2007 include total revenues of $629,346 and a net loss of $12,864,071.

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. 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, 2007 and 2006 and the results of operations and cash flows for the for the periods described above, in conformity with accounting principles generally accepted in the United States of America.

We also have audited the adjustments described in Note 10 that were applied to restate the February 28, 2006 financial statements to correct an error. In our opinion, such adjustments are appropriate and have been properly applied.

The accompanying financial statements have been prepared assuming that Daybreak Oil and Gas, Inc. will continue as a going concern. As discussed in Note 3 to the financial statements, the Company has incurred losses since inception, which raises substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters also are described in Note 3.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 

Malone & Bailey PC
www.malone-bailey.com
Houston, Texas
September 20, 2007



62
 
Daybreak Oil and Gas, Inc.
(An Exploration Stage Company, Date of Inception March 1, 2005)
 
Balance Sheets
As of February 28, 2007 and 2006
 
                         
ASSETS
 
2007
   
2006
(Restated)
 
CURRENT ASSETS:            
Cash    
  $
377,957
    $
806,027
 
Restricted cash
   
-
     
8,333
 
Investment in marketable securities, at market,  cost of $2,356,213
   
2,356,213
     
-
 
Accounts receivable:
               
Oil and gas sales
   
56,906
     
-
 
Related party participants
   
41,357
     
-
 
Joint interest participants
   
799,970
     
-
 
Notes receivable (including accrued interest of $28,336)
   
828,336
     
-
 
Prepaid expenses and other current assets
   
76,895
     
250
 
Deposit on equipment
   
-
     
250,000
 
Deferred financing costs, net of amortization
   
-
     
10,000
 
Total current assets
   
4,537,634
     
1,074,610
 
                 
OIL AND GAS PROPERTIES, net of accumulated depletion, depreciation, amortization and impairment, successful efforts method
   
4,552,850
     
1,132,400
 
VEHICLES AND EQUIPMENT, net of accumulated depreciation of $4,355
   
18,556
     
-
 
OTHER ASSETS        
102,426
     
-
 
Total assets    
  $
9,211,466
    $
2,207,010
 
                   
  LIABILITIES AND STOCKHOLDERS’ EQUITY
               
CURRENT LIABILITIES:                
Account payable and other accrued liabilities
  $
2,110,458
    $
28,646
 
Notes payable – related party
   
200,000
     
-
 
Convertible debentures, net of discount of $ 90,002 and $1,049,233 respectively
   
134,999
     
89,468
 
Total current liabilities
   
2,445,457
     
118,114
 
OTHER LIABILITIES:                
Asset retirement obligation
   
99,427
     
-
 
Total liabilities
   
2,544,884
     
118,114
 
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, authorized; 1,399,765 and -0-  shares issued and outstanding, respectively
   
1,400
     
-
 
Common stock – 200,000,000 shares authorized, $0.001 par value; 40,877,230 and 29,458,221 shares issued and outstanding, respectively
   
40,877
     
29,458
 
Additional paid-in capital
   
20,224,411
     
7,267,514
 
Accumulated deficit
    (736,035 )     (736,035 )
Deficit accumulated during the exploration stage
    (12,864,071 )     (4,472,041 )
Total stockholders’ equity
   
6,666,582
     
2,088,896
 
Total liabilities and stockholders’ equity
  $
9,211,466
    $
2,207,010
 
 
The accompanying notes are an integral part of these financial statements.
63
 
DAYBREAK OIL AND GAS, INC.
(An Exploration Stage Company)
Statements of Operations
For the Years ended February 28, 2007 and 2006 and for the Period
from Inception (March 1, 2005) to February 28, 2007
             
   
Year Ended
   
From Inception
 
   
February 28,
   
Through February 28,
 
   
2007
   
2006
(Restated)
   
2007
 
REVENUE:
                 
Oil and gas sales
  $
629,346
    $
-
    $
629,346
 
                         
OPERATING EXPENSES:
                       
Production costs
   
373,766
     
-
     
373,766
 
Exploration expenses
   
1,196,640
     
327,469
     
1,524,109
 
Depreciation, depletion, amortization and impairment
   
2,398,048
     
-
     
2,398,048
 
General and administrative
   
3,936,868
     
3,902,872
     
7,839,740
 
Total operating expenses
   
7,905,322
     
4,230,341
     
12,135,663
 
                         
LOSS FROM OPERATIONS
    (7,275,976 )     (4,230,341 )     (11,506,317 )
                         
OTHER INCOME (EXPENSE):
                       
Interest income
   
101,697
     
362
     
102,059
 
Dividend income
   
5,547
     
-
     
5,547
 
Interest expense
    (1,223,298 )     (242,062 )     (1,465,360 )
Total other income (expense)
    (1,116,054 )     (241,700 )     (1,357,754 )
NET LOSS
  $ (8,392,030 )   $ (4,472,041 )   $ (12,864,071 )
                         
Cumulative convertible preferred stock
                       
dividend requirement
    (155,316 )    
-
      (155,316 )
Deemed dividend
    (4,199,295 )    
-
      (4,199,295 )
                         
NET LOSS AVAILABLE TO COMMON
                       
SHAREHOLDERS
  $ (12,746,641 )   $ (4,472,041 )   $ (17,218,682 )
                         
NET LOSS PER COMMON SHARE – Basic                        
and diluted
  $ (0.34 )     (0.19 )        
                         
WEIGHTED AVERAGE NUMBER OF
                       
COMMON SHARES OUTSTANDING –
                       
Basic and diluted
   
37,045,509
     
23,175,905
         
 
The accompanying notes are an integral part of these financial statements.
64
 
DAYBREAK OIL AND GAS, INC.
(An Exploration Stage Company)
Statement of Changes in Stockholders' Equity
For the Period from Inception (March 1, 2005) through February 28, 2007
 
   
Series A Convertible
                           
Deficit Accumulated
       
   
Preferred Stock
   
Common Stock
   
Additional
         
During Exploration
       
                           
Paid-In
   
Accumulated
   
Exploration
       
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Deficit
   
Stage
   
Total
 
                                                 
 BALANCE, March 1, 2005
   
-
    $
-
     
18,199,419
    $
18,199
    $
709,997
    $ (736,035 )   $
-
    $ (7,839 )
                                                                 
 Issuance of common stock for:
                                                               
 Cash
   
-
     
-
     
4,400,000
     
4,400
     
1,083,100
     
-
     
-
     
1,087,500
 
 Services
                   
5,352,667
     
5,353
     
3,622,176
                     
3,627,529
 
 Oil and gas properties
   
-
     
-
     
700,000
     
700
     
411,300
     
-
     
-
     
412,000
 
 Conversion of convertible debentures and interest payable
   
-
     
-
     
806,135
     
806
     
200,728
     
-
     
-
     
201,534
 
  Discount on convertible notes payable
   
-
     
-
     
-
     
-
     
1,240,213
     
-
     
-
     
1,240,213
 
                                                                 
 Net loss
   
-
     
-
     
-
     
-
     
-
     
-
      (4,472,041 )     (4,472,041 )
                                                                 
 BALANCE, FEBRUARY 28, 2006
     (Restated)
   
-
     
-
     
29,458,221
     
29,458
     
7,267,514
      (736,035 )     (4,472,041 )    
2,088,896
 
                                                                 
 Issuance of common stock for:
                                                               
 Cash
   
-
     
-
     
8,027,206
     
8,027
     
5,180,230
     
-
     
-
     
5,188,257
 
 Services
   
-
     
-
     
1,270,000
     
1,270
     
2,606,430
     
-
     
-
     
2,607,700
 
 Oil and gas properties
   
-
     
-
     
222,500
     
223
     
528,527
     
-
     
-
     
528,750
 
 Conversion of convertible debentures
   
-
     
-
     
2,049,303
     
2,049
     
1,022,473
     
-
     
-
     
1,024,522
 
                                                                 
Purchase and cancellation of common stock:
                    (150,000 )     (150 )     (149,850 )                     (150,000 )
                                                                 
 Issuance of preferred stock for:
                                                               
 Cash
   
1,399,765
     
1,400
     
-
     
-
     
3,624,804
     
-
     
-
     
3,626,204
 
  Discount on convertible notes payable
   
-
     
-
     
-
     
-
     
25,000
     
-
     
-
     
25,000
 
 Extension warrants on convertible notes payable
   
-
     
-
     
-
     
-
     
119,283
     
-
     
-
     
119,283
 
 Discount on preferred stock
   
-
     
-
     
-
     
-
     
4,199,295
     
-
     
-
     
4,199,295
 
 Deemed dividend on preferred stock
   
-
     
-
     
-
     
-
      (4,199,295 )    
-
     
-
      (4,199,295 )
                                                                 
 Net loss
   
-
     
-
     
-
     
-
     
-
     
-
      (8,392,030 )     (8,392,030 )
                                                                 
 BALANCE, FEBRUARY 28, 2007
   
1,399,765
    $
1,400
     
40,877,230
    $
40,877
    $
20,224,411
    $ (736,035 )   $ (12,864,071 )   $
6,666,582
 
 
The accompanying notes are an integral part of these financial statements.
65
 
DAYBREAK OIL AND GAS, INC.
(An Exploration Stage Company)
Statements of Cash Flows
For the Years ended February 28, 2007 and 2006 and for the Period
from Inception (March 1, 2005) through February 28, 2007
 
           
Year Ended
   
From Inception
 
           
February 28,
   
Through February 28,
 
           
2007
   
2006
(Restated)
   
2007
 
 CASH FLOWS FROM OPERATING ACTIVITIES
                 
 Net Loss
  $ (8,392,030 )   $ (4,472,041 )   $ (12,864,071 )
 Adjustments to reconcile net loss to net cash
                       
 used in operating activities:
                       
 Common stock issued for services
   
2,607,700
     
3,627,529
      6,235,229  
 Depreciation, Depletion, Amortization and Impairment
 expense
   
2,398,048
     
-
      2,398,048  
 Exploration expense – dry wells
   
563,020
     
253,500
      816,520  
 Non cash interest expense and accretion
   
1,109,484
     
195,694
      1,305,178  
 Non cash interest income
    (28,585 )    
-
      (28,585 )
 Changes in assets and liabilities:
                       
 Restricted cash
   
8,333
      (8,333 )    
-
 
 Accounts receivable - oil and gas sales
    (56,906 )    
-
      (56,906 )
 Accounts receivable – related party participants
    (41,357 )             (41,357 )
 Accounts receivable – joint interest participants
    (799,970 )             (799,970 )
 Prepaid expenses and other current assets
    (76,645 )    
191
      (76,454 )
 Deferred financing costs
   
10,000
      (10,000 )    
-
 
 Accounts payable and other accrued liabilities
   
2,167,634
     
20,275
     
2,187,909
 
Other assets
    (77,177 )    
-
      (77,177 )
            Net cash used in operating activities
    (608,451 )     (393,185 )     (1,001,636 )
                         
                         
 CASH FLOWS FROM INVESTING ACTIVITIES:
                       
Investment in marketable securities
    (2,356,213 )    
-
      (2,356,213 )
 Purchase of reclamation bond
    (25,000 )    
-
      (25,000 )
 
The accompanying notes are an integral part of these financial statements.
66

 
 Refund (deposit) on equipment
   
250,000
      (250,000 )    
-
 
 Additions to note receivable
    (800,000 )    
-
      (800,000 )
 Purchase of oil and gas properties
    (5,904,956 )     (973,900 )     (6,878,856 )
 Purchase of fixed assets
    (22,911 )    
-
      (22,911 )
            Net cash used in investing activities
    (8,859,080 )     (1,223,900 )     (10,082,980 )
                         
 CASH FLOWS FROM FINANCING ACTIVITIES:
                       
 Proceeds from sales of preferred stock, net
   
3,626,204
     
-
     
3,626,204
 
 Proceeds from sales of common  stock, net
   
5,188,257
     
1,087,500
     
6,275,757
 
 Proceeds from related party notes payable
   
200,000
     
-
     
200,000
 
 Proceeds from borrowings
   
25,000
     
1,335,521
      1,360,521  
            Net cash provided by financing activities
   
9,039,461
     
2,423,021
      11,462,482  
                         
 NET INCREASE IN CASH AND EQUIVALENTS
    (428,070 )    
805,936
     
377,866
 
                         
CASH AT BEGINNING OF PERIOD
   
806,027
     
91
      91  
                         
 CASH AT END OF PERIOD
  $
377,957
    $
806,027
    $
377,957
 
                         
CASH PAID FOR:
                       
Interest
  $
13,769
     
-
    $
13,769
 
Income Taxes
   
-
     
-
      -  
 
The accompanying notes are an integral part of these financial statements.
67
 
 SUPPLEMENTAL CASH FLOW INFORMATION:
                       
Common stock issued for services
  $
2,607,700
    $
3,627,529
    $
6,235,229
 
Common stock issued for oil and gas properties
   
528,750
     
412,000
      940,750  
Common stock repurchased and cancelled
    (150,000 )    
-
      (150,000 )
Common stock issued on conversion of convertible debentures and interest
   
1,024,522
     
201,534
      1,226,056  
Discount on convertible notes payable
   
25,000
     
1,240,213
      1,265,213  
Extension warrants on convertible notes payable
  $
119,283
    $
-
    $
119,283
 
                         
                         
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
The accompanying notes are an integral part of these financial statements.
68
Daybreak Oil and Gas, Inc.
(An Exploration Stage Company, Date of Inception March 1, 2005)
Notes to Financial Statements
 
NOTE 1 — ORGANIZATION AND BASIS OF PRESENTATION:

Organization

Originally incorporated as Daybreak Uranium, Inc., (the “Company”), under the laws of the State of Washington on March 11, 1955, the Company 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 industry. On October 25, 2005, the shareholders approved a name change to Daybreak Oil and Gas, Inc. (“Daybreak”), to better reflect the business of the Company.

Basis of Presentation

The accompanying audited financial statements of Daybreak have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission.

Exploration Stage Company

On March 1, 2005 (the inception date), Daybreak commenced oil and gas exploration activities. As of February 28, 2007, Daybreak has not produced significant revenues from its oil and gas operations. Accordingly, Daybreak’s activities have been accounted for as those of an “Exploration Stage Enterprise” as set forth in SFAS No. 7, “Accounting for Development Stage Entities.” Among the disclosures required by SFAS No. 7 are that Daybreak’s financial statements be identified as those of an exploration stage company. In addition, the statements of operations, stockholders equity (deficit) and cash flows are required to disclose all activity since Daybreak’s date of inception.

Daybreak will continue to prepare its financial statements and related disclosures in accordance with SFAS No. 7 until such time that Daybreak’s oil and gas properties have generated significant revenues.

Use of Estimates

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

NOTE 2 — 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. For the fiscal years ending February 28, 2007 and February 28, 2006, Daybreak’s cash deposits exceeded the Federal Deposit Insurance Corporation insurance limits by $277,957 and $706,027 respectively.

69
  Daybreak Oil and Gas, Inc.
(An Exploration Stage Company, Date of Inception March 1, 2005)
Notes to Financial Statements
 
Restricted Cash

Daybreak classifies cash balances as “restricted cash” when cash is restricted as to withdrawal or usage. Daybreak did not have any cash balances designated as restricted at February 28, 2007. The restricted cash balance at February 28, 2006, was composed of a total of $8,333 which had been deposited into a joint venture account. The funds were designated to be utilized in connection with a joint venture agreement with Oracle Operating, LLC.

Investment in Marketable Securities

Daybreak determines the appropriate classification of its investments in debt securities at the time of purchase and reevaluates such determinations at each balance-sheet date. Daybreak classifies all investments in marketable debt securities as trading securities as they are bought and held principally for the purpose of selling them in the near term.  These securities are reported at fair value, with realized and unrealized gains and losses recognized in earnings. The fair value of all securities is determined by quoted market prices.  These investments are not insured by the Federal Deposit Insurance Corporation.

Accounts and Notes Receivable

Daybreak routinely assesses the recoverability of all material trade and other receivables. Daybreak 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.  No allowance for doubtful accounts was considered necessary at February 28, 2007 and February 28, 2006.

Oil and Gas Properties

Daybreak 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 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 SFAS No. 144, “Impairment or Disposal of Long-Lived Assets”, Daybreak 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. Daybreak 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.

70
  Daybreak Oil and Gas, Inc.
(An Exploration Stage Company, Date of Inception March 1, 2005)
Notes to Financial Statements
 
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. Asset impairments of $1,606,292 and $-0- were recorded for the years ended February 28, 2007 and February 28, 2006, respectively. The charge is included in depreciation, depletion and amortization.

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 depreciation, depletion, and amortization 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.  As of February 28, 2007 $70,266 had been advanced for services.

Property and Equipment

Fixed assets are stated at cost. Depreciation on vehicles is provided using the straight line method over expected useful lives of thee years. Depreciation on machinery and equipment is provided using the straight line method over expected useful lives of three years.

Long Lived Assets

Daybreak reviews long-lived assets and identifiable intangibles whenever events or circumstances indicate that the carrying amounts of such assets may not be fully recoverable. Daybreak 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.

Debt

Daybreak accounts for debt at fair value and recognizes interest expense for accrued interest payable under the terms of the debt.  Principal and interest payments due within one year are classified as current, whereas principal and interest payments for periods beyond one year are classified as long term.  Beneficial conversion features of debt are valued and the related amounts recorded as discounts on the debt.  Discounts are amortized to interest expense using the effective interest method to the earliest date of conversion of the debt.

Fair Value of Financial Instruments

The amounts of financial instruments including cash, deposits, deferred financing costs, prepaid expenses, accounts payable, convertible debentures, notes payable and interest payable approximated their fair values as of February 28, 2007 and February 28, 2006.

71
  Daybreak Oil and Gas, Inc.
(An Exploration Stage Company, Date of Inception March 1, 2005)
Notes to Financial Statements
 
Share−Based Payments

Prior to February 28, 2005, Daybreak accounted for its stock−based compensation plans under the recognition and measurement provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees” and related Interpretations, (“APB 25”) as permitted by SFAS No. 123, “Accounting for Stock−Based Compensation” (“SFAS 123”).

Effective March 1, 2005, Daybreak adopted the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”) for its stock−based compensation plans under the recognition and measurement provisions of SFAS 123.  No awards granted prior to March 1, 2005 were modified or settled in cash during fiscal 2006.

Effective March 1, 2006, Daybreak adopted the fair value recognition provisions of SFAS No. 123R, “Share−Based Payment” and related Interpretations (“SFAS 123R”).

Under both SFAS 123 and SFAS 123R, compensation cost for all share−based payments granted on or subsequent to March 1, 2005 are based on the grant−date fair value estimated in accordance with the provisions of SFAS 123 and SFAS 123R, for the respective fiscal years. Compensation cost is recognized on a straight−line basis over the requisite service period for the entire award in accordance with the provisions of SFAS 123R.  If at any date the portion of the grant-date fair value of the award that is vested is greater than that amount recognized on a straight line basis, the amount of the vested grant-date fair value is recognized.

Daybreak accounts for transactions in which it issues equity instruments to acquire goods or services from non employees in accordance with the provisions of SFAS No. 123R (as amended).  These transactions are accounted for based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable.

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. Common stock equivalents, including common stock issuable upon the conversion of loans and interest payable, are excluded from the calculations when their effect is anti-dilutive. At February 28, 2007 and February 28, 2006, the potential dilutive effect of converting notes payable and related interest to shares was determined to be anti-dilutive, and therefore their effect is excluded from the calculation of diluted weighted average shares.

Concentration of Credit Risk

Substantially all of Daybreak’s accounts receivable result from natural gas and crude oil sales or joint interest billings to third parties in the oil and gas industry, operating in the United States. This concentration of customers and joint interest owners may impact Daybreak’s overall credit risk as these entities could be affected by similar changes in economic conditions as well as other related factors.

 
72
  Daybreak Oil and Gas, Inc.
(An Exploration Stage Company, Date of Inception March 1, 2005)
Notes to Financial Statements
 
Accounts receivable are generally not collateralized.  Historically, Daybreak has not experienced credit losses on its accounts receivable. At each of Daybreak’s three producing projects, there is only one customer for the purchase of oil or gas production. At the Tuscaloosa project in Louisiana, both the F-1 well and the F-3 well have previously supplied gas to a single customer pursuant to a gas supply agreement.  As a result of an issue encountered with the gas sales agreement covering the F-1 well, the F-3 well and the pipeline connected to these wells, both the F-1 well and the F-3 well were, in August 2007, temporarily shut-in pending resolution of the sales contract issues and/or the securing of an alternative market for the natural gas produced by these two wells.  In combination, these two wells contributed approximately 75% of total revenues during the fiscal year ended February 28, 2007. At February 28, 2007, three customers represented 100% of crude oil and natural gas sales receivable.

Revenue Recognition

Daybreak 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 Daybreak is entitled based on its interests in the properties.  These differences create imbalances which are recognized as a liability only when the imbalance exceeds the estimate of remaining reserves. Daybreak had no significant imbalances as of February 28, 2007 and February 28, 2006.
 
Reclamation Bonds

Included in other assets at February 28, 2007, is a $25,000 certificate of deposit which has been pledged to the State of Louisiana in connection with asset retirement obligations for future plugging, abandonment and site remediation. The pledging of this bond was necessitated by Daybreak’s emerging status as an oil and gas property operator in the State of Louisiana.

Environmental Matters and Asset Retirement Obligation

Daybreak owns and has previously owned mineral property interests (which it has explored for commercial mineral deposits) on public and private lands in various states in the western United States. Daybreak and its properties are subject to a variety of federal and state regulations governing land use and environmental matters. Management believes it has been in substantial compliance with all such regulations. Management is also unaware of any pending action or proceeding relating to regulatory matters that would effect the financial position of Daybreak.

SFAS No. 143, “Accounting for Asset Retirement Obligations,” addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs.  This statement requires that Daybreak recognizes 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.  An 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 interest accretion expense in the statements of operations.  

73
  Daybreak Oil and Gas, Inc.
(An Exploration Stage Company, Date of Inception March 1, 2005)
Notes to Financial Statements
 
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 asset.

Suspended Well Costs

On April 4, 2005, the Financial Accounting Standards Board, (FASB) issued FASB Staff Position No. 19-1,"Accounting for Suspended Well Costs" (FSP No. 19-1). This staff position amends SFAS No. 19, "Financial Accounting and Reporting by Oil and Gas Producing Companies" and provides guidance concerning exploratory well costs for companies that use the successful efforts method of accounting. Daybreak adopted FSP No. 19-1 for the fiscal years ended February 28, 2007 and 2006.

The position 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, the FSP 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.

Provisions for Taxes

Daybreak has adopted SFAS No. 109 “Accounting for Income Taxes”. Pursuant to this pronouncement, income taxes are accounted for using an asset and liability approach. SFAS No. 109 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.

Recent Accounting Pronouncements

Daybreak does not expect the adoption of any recently issued accounting pronouncements to have a significant effect on its material position or results of operation.

74
  Daybreak Oil and Gas, Inc.
(An Exploration Stage Company, Date of Inception March 1, 2005)
Notes to Financial Statements
 
Reclassifications

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

Restatements

Daybreak has restated its financial statements in accordance with SFAS No. 154, “Accounting Changes and Error Corrections” . The financial statements were restated for the first three (3) quarters for the fiscal year ended February 28, 2006, for the twelve months ended February 28, 2006 and for the first three (3) quarters for the fiscal year ended February 28, 2007 (the “restated periods”). The financial statements were restated to reflect adjustments to non-cash transactions involving (1) the valuation of common stock issued for management and director compensation, (2) the valuation of common stock issued for investor relations services, (3) the valuation of common stock issued for the acquisition of oil and gas properties, and (4) the recognition of beneficial conversion features inherent in the convertible debentures issued during the restated periods.

NOTE 3 — GOING CONCERN:

Financial Condition

Daybreak's financial statements for the year ended February 28, 2007, 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 during the exploration stage of $12,864,071. Daybreak had a working capital surplus of $2,292,177 at February 28, 2007.

Management Plans to Continue as a Going Concern

Daybreak intends to implement plans to enhance Daybreak’s ability to continue as a going concern.  Daybreak received the proceeds and interest from the $800,000 note receivable after February 28, 2007.  Daybreak intends to market a Joint Development Program in the Tuscaloosa project which should ensure Daybreak’s continuation of that drilling program. The potential of increased revenue from production will create positive operational cash flows for the wells in Alabama, Louisiana and Texas. The partnership with Chevron U.S.A., Inc. will limit the financial risk and enhance Daybreak’s ability to pursue potentially profitable seismic and drilling programs on the California oil and gas properties. In addition, Daybreak believes it has the ability to secure additional debt and equity funding, if necessary.

Daybreak cannot offer any assurances that it will be successful in executing the aforementioned plans to continue as a going concern. Daybreak’s financial statements at February 28, 2007 do not include any adjustments that might result from the inability to implement or execute Daybreak’s plans to continue as a going concern.




75
  Daybreak Oil and Gas, Inc.
(An Exploration Stage Company, Date of Inception March 1, 2005)
Notes to Financial Statements
 
NOTE 4 – INVESTMENTS IN MARKETABLE SECURITIES:

Daybreak periodically invests excess cash on hand in marketable securities with the intent to sell the securities in the near term as cash requirements determine.  At February 28, 2007, Daybreak held $2,356,213 in a brokerage account which was invested in mutual funds that invested in fixed income securities with relatively low market risk.  These securities are classified as trading securities under the provisions of SFAS No. 115 “ Accounting for Certain Investments in Debt and Equity Securities”.   During the year ended February 28, 2007, Daybreak earned $57,503 in interest income from these investments.  The market value of the securities as at February 28, 2007 was equal to their book value and no trading gains or losses occurred during the year.

NOTE 5 - NOTES RECEIVABLE - DRILLING RIG AGREEMENT:

On August 24, 2006 and November 14, 2006, Daybreak executed promissory note agreements (“Note Agreements”) with Green River Drilling, LLC (“Green River”) to advance funds for the refurbishment of a drilling rig. As set forth in the Note Agreements, Daybreak would have a preferred use of the drilling rig on its projects for a three year period. Daybreak advanced a total of $800,000 to Green River through November 30, 2006.  The $600,000 Note Agreement dated August 24, 2006, provides for annual interest of 8% and payments of $46,000. These payments are to commence on the latter of December 2006 or the second full month following initial operation. These payments are to continue until the note is fully paid.  As of February 28, 2007, operations had not commenced and no payments had been received.  The $200,000 Note Agreement dated November 14, 2006, provides for annual interest of 8% and is due on May 15, 2007.  Additionally, Daybreak would have the option to purchase a forty-nine percent (49%) interest in Green River for a total of $800,000 under the Note Agreements.

NOTE 6 — OIL AND GAS PROPERTIES:

Oil and gas properties, at cost:

   
Year Ended
   
Year Ended
 
   
February 28, 2007
   
February 28, 2006
 
Proved leasehold costs
  $
2,092,107
    $
-
 
Unproved leasehold costs
   
902,420
     
1,082,400
 
Costs of wells and development
   
2,035,943
     
50,000
 
Unevaluated capitalized exploratory well costs 
   
1,822,619
     
-
 
Capitalized asset retirement costs
   
93,457
     
-
 
    Total cost of oil and gas properties
   
6,946,546
     
1,132,400
 
Accumulated depletion, depreciation,
     amortization and impairment
    (2,393,693 )    
-
 
Oil and gas properties, net
  $
4,552,853
    $
1,132,400
 



76
  Daybreak Oil and Gas, Inc.
(An Exploration Stage Company, Date of Inception March 1, 2005)
Notes to Financial Statements
 
Suspended Well Costs

As of March 1, 2005, the Company adopted FASB Staff Position FAS 19-1, "Accounting for Suspended Well Costs." Upon adoption of the FSP, the Company evaluated all existing capitalized exploratory well costs under the provisions of the FSP. The Company had no capitalized exploratory wells costs at the time of adoption of FAS 19-1 or as of February 28, 2006.  The following table reflects the net changes in capitalized exploratory well costs during 2007, and does not include amounts that were capitalized and subsequently expensed in the same period.

   
2007
   
2006
 
Beginning balance at March 1 of fiscal year
  $
-
    $
-
 
Total Exploration Well Additions
   
3,608,297
     
253,500
 
Reclassifications to wells, facilities, and equipment based on the determination of proved reserves
    (1,222,658 )        
Capitalized exploratory well costs charged to expense
    (563,020 )     (253,500 )
Ending Balance at February 28 of fiscal year
  $
1,822,619
    $
-
 

The following table provides an aging of capitalized exploratory well costs based on the date the drilling was completed and the number of projects for which exploratory well costs have been capitalized for a period greater than one year since the completion of drilling:

Fiscal year
 
2007
 
Capitalized exploratory well costs that have been capitalized for a period of one year or less
  $
1,822,619
 
Balance at February 28 of fiscal year
  $
1,822,619
 

Impairment of oil and gas properties

In accordance with Statement of Financial Accounting Standards No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets” , if impairment is necessary, the asset carrying value is written down to fair value.  Cash flow pricing estimates are based on existing proved reserve and production information and pricing assumptions that management believes are reasonable.  Unproved oil and gas properties that are individually significant are periodically assessed for impairment by providing an impairment allowance if the net book value of the property is not fully recoverable.  During the fiscal year ended February 28, 2007, Daybreak expensed $1,606,292 as impairment on proved properties.
 
Asset Retirement Obligation

Daybreak’s financial statements reflect the provisions of Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations”. Our asset retirement obligation (“ARO”) primarily represents the estimated present value of the amount Daybreak will incur to plug, abandon and remediate its producing properties at the end of their productive lives, in accordance with applicable state laws. Daybreak determines the ARO on its oil and gas properties by calculating the present value of estimated cash flows related to the liability.  At February 28, 2007, the liability for ARO was $99,427, all of which is considered long term.  

77
  Daybreak Oil and Gas, Inc.
(An Exploration Stage Company, Date of Inception March 1, 2005)
Notes to Financial Statements
 
The asset retirement obligations are recorded as current or non-current liabilities based on the estimated timing of the anticipated cash flows.  For the year ended February 28, 2007 and 2006, Daybreak has recognized accretion expense of $5,970 and $0, respectively.
 
The following table describes the changes in the asset retirement obligations for the year ended February 28, 2007.
 
Asset retirement obligations, beginning of period
  $
-
 
Fair value of  liabilities assumed in acquisitions
   
103,457
 
Liabilities contributed at formation
   
-
 
Liabilities related to property sales
   
-
 
Adjustment due abandonment in year
    (10,000 )
Accretion expense
   
5,970
 
      Asset retirement obligations, end of period
  $
99,427
 

NOTE 7 — CONVERTIBLE DEBENTURES:

During the fiscal years ended February 28, 2006 and February 28, 2007, there were three issuances of Convertible Debentures to various accredited individual investors by Daybreak.  The convertible debentures had a one year maturity date and were convertible into shares of Daybreak’s unregistered common stock at conversion prices of $0.25, $0.50 and $0.75, respectively.  In December of 2005, Daybreak issued a convertible promissory note (“Convertible Promissory Note”) to an accredited investor pursuant to a warehousing line of credit arrangement with a related party.  The Convertible Promissory Note was convertible into unregistered common stock at a conversion price of $0.25.

The following table summarizes the activity related to the Convertible Debentures and the Convertible Promissory Note:

Description
 
Interest Rate
 
Dates of Maturity
 
2007
   
2006
 
Principal balance, beginning of year
          $
1,138,701
    $
-
 
                         
Principal issuances
                       
     $0.25 Convertible Debentures
   
6%
 
03/22/06 to 08/31/06
   
-
     
168,821
 
     $0.50 Convertible Debentures
   
10%
 
01/26/07 to 02/26/07
   
-
     
806,700
 
     $0.75 Convertible Debentures
   
10%
 
02/26/07 to 10/31/07
   
25,000
     
300,001
 
     $0.25 Convertible Promissory Note
   
0%
 
06/30/06
   
-
     
60,000
 
Total issuances during the year ended
             
1,163,701
     
1,335,522
 
                           
Principal converted during the year
                         
     $0.25 Convertible Debentures
              (32,000 )     (136,821 )
     $0.50 Convertible Debentures
              (806,700 )        
     $0.75 Convertible Debentures
              (100,000 )        
     $0.25 Convertible Promissory Note
                      (60,000 )
Principal balance, end of year
             
225,001
     
1,138,701
 
Unamortized discount, end of year
              (90,002 )     (1,049,233 )
   Total debt, net of discount
            $
134,999
    $
89,468
 

78
  Daybreak Oil and Gas, Inc.
(An Exploration Stage Company, Date of Inception March 1, 2005)
Notes to Financial Statements
 
Twenty-Six (26) of the 6% interest $0.25 convertible debentures for a total of $158,821 were with related parties.

One (1) of the 10% interest $0.50 convertible debentures for a total of $200,000 was with Hooper Group, LLC, an entity controlled Keith Hooper a Daybreak shareholder (greater than 5%).

Under the warehousing line of credit Convertible Promissory Note, Daybreak was advanced $60,000 and had the option to request an additional $120,000 upon completion of the Ginny South prospect.  The Convertible Promissory Note was guaranteed by a director of the company.  The Convertible Promissory Note had no stated interest and had the option to convert the note into Daybreak’s common stock.  All advances under the Convertible Promissory Note could be converted into common stock of the Company at or prior to the maturity date.

No discount was recorded for the imputed interest rate on the Convertible Promissory Note as a beneficial conversion feature of $60,000 was recognized upon issuance in accordance with EITF 00-27 and 98-5. The beneficial conversion feature was recognized as a discount on the Convertible Promissory Note and amortized utilizing the effective interest method, over the period commencing on the issuance date to the date of stated redemption of the debt in accordance with EITF 00-27.

In February 2006, the $60,000 advance on the line of credit, as secured by the Convertible Promissory Note, was converted into common stock of Daybreak.  Upon conversion the remaining discount was recognized as interest and the Convertible Promissory Note was cancelled.  Financing costs for the Convertible Promissory Note were paid by issuing 66,000 shares of unregistered common stock to the issuer and another related party.  The common stock fair value of $38,380 was recognized as interest expense on the date of grant and the fair value was determined using Daybreak’s trading price on the date of grant.

The holders of the $0.25 Convertible Debentures had the option to convert their debentures (including accrued interest of 6%) into Daybreak’s common stock at any time after six months had elapsed from the date of issuance. In accordance with EITF 00-27 and 98-5, beneficial conversion features of $73,511 were recognized upon issuance of the debentures. The beneficial conversion features were recognized as discounts on the debentures at the date of issuance and amortized using the effective interest method to the earliest of the maturity date or the date conversion.  As of February 28, 2007, the entire issuance of the $0.25 convertible debentures had been converted into unregistered common stock and the $73,511 discount had been recognized.

The holders of the $0.50 Convertible Debentures had the option to convert their debentures (including accrued interest of 10%) into Daybreak’s common stock at any time after sixty-one (61) days had elapsed from the date of issuance. In accordance with EITF 00-27 and 98-5, beneficial conversion features of $806,700 were recognized upon issuance of the debentures. The beneficial conversion features were recognized as discounts on the debentures at the date of issuance and amortized using the effective interest method to the earliest of the maturity date or the date of conversion. As of February 28, 2007, the entire issuance of the $0.50 convertible debentures had been converted into unregistered common stock and the $806,700 discount had been recognized.

79
  Daybreak Oil and Gas, Inc.
(An Exploration Stage Company, Date of Inception March 1, 2005)
Notes to Financial Statements

The holders of the $0.75 Convertible Debentures had the option to convert their debentures (including accrued interest of 10%) into Daybreak’s common stock at any time after sixty-one (61) days had elapsed from the date of issuance. In accordance with EITF 00-27 and 98-5, beneficial conversion features of $325,001 were recognized upon issuance of the debentures. The beneficial conversion features were recognized as discounts on the debentures at the date of issuance and amortized using the effective interest method to the earliest of the maturity date or the date of conversion. As of February 28, 2007, $100,000 of the $0.75 convertible debentures, including accrued interest of 10%, had been converted into unregistered common stock and the $325,001 discount had been recognized.

In December 2006, the three remaining holders of the $0.75 convertible debentures, agreed to extend the due date of the debentures to August 31, 2007. In consideration of the term extension the debenture holders were issued a total of 150,001 warrants. The warrants were valued at $119,283 using the Black-Scholes option pricing model. The assumptions used in the Black-Scholes valuation model were: a risk fee interest rate of 4.7%; the current stock price at date of issuance of $1.04 per share; the exercise price of the warrants of $2.00; the term of five years; volatility of 117%; and dividend yield of 0.0%. The value of the warrants was recognized at the time of issuance as a discount against the existing convertible debentures and is being amortized using the effective interest method until maturity.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
80
  Daybreak Oil and Gas, Inc.
(An Exploration Stage Company, Date of Inception March 1, 2005)
Notes to Financial Statements

On April 30, 2007, one of the convertible debenture holders converted to Daybreak unregistered common stock. A total of 37,169 shares were issued to satisfy the debt. On August 31, 2007, the remaining two debenture holders agreed to extend the term of the debentures to October 31, 2007. In consideration of this extension they received 112,000 warrants. The warrants were valued at $35,386 using the Black-Scholes option pricing model. The assumptions used in the Black-Scholes valuation model were: a risk fee interest rate of 4.1 %; the current stock price at date of issuance of $0.53 per share; the exercise price of the warrants of $0.53; the term of two years; volatility of 114%; and dividend yield of 0.0%. The value of the warrants was recognized at the time of issuance as a discount against the existing convertible debentures and is being amortized using the effective interest method until maturity.

Daybreak has evaluated the application of SFAS No. 133 and EITF 00-19 for the consideration of embedded derivatives with respect to the conversion features for each of the Convertible Debentures and the Convertible Promissory Note.  Daybreak has concluded that the instruments did not contain embedded derivatives.

NOTE 8 — RELATED PARTY TRANSACTIONS:

Office Lease

On August 3, 2006, the Board of Directors approved the rental of office space for Daybreak offices from Terrence Dunne & Associates, a company owned by Terrence Dunne (CFO and a director). Originally, Daybreak occupied approximately 700 square feet and paid $600 per month.  In October 2006, the rent increased to $700 per month.  In March 2007, to accommodate an increase in the administrative staff size Daybreak expanded the amount of office space rented to approximately 850 square feet. This increase in space resulted in a monthly rent of $1,000. In May 2007, Daybreak again increased their office size and is now paying $1,250 per month for approximately 1,000 square feet. This office lease is currently on a month to month basis.

Financing of Gas Pipeline

On May 24, 2006, Daybreak financed its forty percent (40%) working interest in the Tuscaloosa project gas pipeline through a financing arrangement with Hooper Oil & Gas Partners, LLC (“Hooper O&G”). This pipeline services the Tensas Farms et al F-1 well in Tensas Parish, Louisiana. Hooper O&G is a company controlled by Keith A. Hooper (a greater than 5% shareholder).

Daybreak has accounted for this agreement as a financing arrangement in the form of a note payable. The principal of the note is $200,000. Daybreak is obligated to pay $5,000 per quarter in interest until the principal is paid in full. Daybreak is also required to pay an additional 1% interest fee based on Daybreak’s original net revenue interest (“NRI”) on the production revenue of the F-1 well for the life of the project. Daybreak is obligated to repay the note between the sixth (6th) and the thirtieth (30th) month after the operation of the pipeline has commenced. Under the agreement, title transferred to Hooper O & G, however Hooper O&G is obligated to sell the interest and title back to Daybreak and cannot sell the interest to any other party.

81
  Daybreak Oil and Gas, Inc.
(An Exploration Stage Company, Date of Inception March 1, 2005)
Notes to Financial Statements

Daybreak is required to commence repayment of the loan if production from the F-1 well should cease for any cause for a period exceeding sixty days. From June 14, 2007 through September 7, 2007, Daybreak made principal payments totaling $170,000. The balance of the loan is now past due. The accelerated repayment schedule was triggered by the temporary shut-in status of the F-1 well, due to technical issues with water production.  Daybreak and Hooper O& G have agreed to make final payment on the note by November 30, 2007.

Common Stock and Cash for Services

Under SFAS No. 123R the guidelines for recording stock issued for goods or services require the fair value of the shares granted be based on the fair value of the goods or services received or the publicly traded share price of Daybreak’s registered shares on the date the shares were granted (irrespective of the fact that the shares granted were unregistered), whichever is more readily determinable. This position has been further clarified by the recent issuance of SFAS No. 157. Accordingly, Daybreak has elected an early application of these newly enacted guidelines. Daybreak has determined that the fair value of all common stock issued for goods or services is more readily determinable based on the publicly traded share price on the date of grant.

From March 1, 2005 through February 28, 2007, Daybreak had contracts with 413294 Alberta, Ltd. to compensate Robert Martin as President of Daybreak. In the fiscal year ended February 28, 2006, 413294 Alberta, Ltd. was paid a total of $40,050 and 1,100,000 shares of unregistered common stock valued at $869,000. For the fiscal year ended February 28, 2007, 413294 Alberta, Ltd. was paid a total of $161,500 and 250,000 shares of unregistered common stock valued at $597,500. The shares of common stock were expensed at the grant date.

From March 1, 2005 through February 28, 2007, Daybreak had contracts with Jeffrey Dworkin (Director) for services in regards to public company corporate governance and oil and gas mineral rights and leases. In the fiscal year ended February 28, 2006, Mr. Dworkin was paid a total of $12,000. For the fiscal ended February 28, 2007, Mr. Dworkin was paid a total of $36,191.

From March 1, 2005 through February 28, 2006, Bennett Anderson (COO) was compensated for consulting services with 100,000 shares of unregistered common stock valued at $223,000. For the fiscal year ended February 28, 2007, Mr. Anderson was paid $98,500 in cash for services.

From January 2, 2007 through February 28, 2007, Daybreak had a contract with Tim Lindsey (Director) to facilitate long range strategic planning and advise Daybreak in business and exploration matters in the oil and gas industry. Under the terms of his contract, Mr. Lindsey was granted 200,000 shares of unregistered common stock valued at $260,000. The contract provides compensation for services on a daily rate and no payments have been made under the contract as of February 28, 2007.

During the fiscal year ended February 28, 2006, Terrence Dunne (Director) was granted 30,000 shares of unregistered common stock valued at $17,400 for services relating to the issuance of the Convertible Promissory Note.


82
  Daybreak Oil and Gas, Inc.
(An Exploration Stage Company, Date of Inception March 1, 2005)
Notes to Financial Statements

During the fiscal year ending February 28, 2006, Daybreak granted the following officers and directors shares of unregistered common stock for services. Terrence Dunne and Thomas Kilbourne each received 400,000 shares each valued at $224,000 respectively. Dale Lavigne and Ronald Lavigne each received 300,000 shares each valued at $168,000 respectively. A total of seven directors received 183,000 shares of unregistered common stock valued at $134,730 for directors’ fees.

During the fiscal year ended February 28, 2007, Eric Moe (CEO) was compensated $103,500 in cash and granted 500,000 shares of unregistered common stock valued at $1,100,000.

During the fiscal year ended February 28, 2007, Thomas Kilbourne (Treasurer) was compensated $84,500 in cash and granted 100,000 shares of unregistered common stock valued at $239,000.

During the fiscal year ending February 28, 2007, Daybreak paid nine directors a total of $69,750 cash for directors’ fees.

Convertible Debentures

Of the $168,821 $0.25 Convertible Debentures issued in the fiscal year ended February 28, 2006, $158,821 were issued to five individuals who were considered to be related parties at the time. In the fiscal year ended February 28, 2006, twenty-three of the related party convertible debentures representing $126,821 in principal were converted, resulting in 524,820 shares of unregistered common stock being issued to satisfy the principal and interest obligations. By February 28, 2007, all twenty-six of related party convertible debentures were converted resulting in a total of 662,360 shares of unregistered common stock being issued to satisfy principal and interest obligations.
 
Of the $806,700 in convertible debenture of the 10% interest $0.75 series, $200,000 was from Hooper Group, LLC , an entity controlled by Keith Hooper a Daybreak shareholder (greater than 5%). In the fiscal year ended February 28, 2007, these notes were converted for 440,000 shares of unregistered common stock to satisfy the principal and interest obligations.

NOTE 9 — STOCKHOLDERS’ EQUITY:

Series A Convertible Preferred Stock

Daybreak is authorized to issue up to 10,000,000 shares of $0.001 par value preferred stock.   Daybreak 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. During the year ended February 28, 2007, Daybreak conducted a private placement sale of Series A Preferred (the “July 2006 Preferred Stock Private Placement”). Each sale unit consisted of one share of Series A Preferred and two common stock purchase warrants. The units were sold for $3.00 per unit, with a total of 1,399,765 units sold; resulting in gross proceeds of $4,199,295. Daybreak received net proceeds of $3,626,204 after placement agent fees, commissions and other offering costs of $573,091.



83
  Daybreak Oil and Gas, Inc.
(An Exploration Stage Company, Date of Inception March 1, 2005)
Notes to Financial Statements

The Series A Preferred can be converted by the shareholder at any time into three shares of Daybreak’s common stock. If Daybreak’s common stock is registered under the Securities Act of 1933, the Series A Preferred shall be automatically converted into common stock at any time after the effective date of the registration statement if Daybreak’s common stock closes at or above $3.00 per share for twenty (20) out of thirty trading days (30) days.  Holders of Series A Convertible Preferred stock earn a dividend, in the amount of 6% of the original purchase price per year. Accumulated dividends do not bear interest.  Dividends are payable upon declaration by the Board of Directors and none have been declared.

The Warrants included in the private placement, are exercisable for a period of five (5) years after the closing date at an exercise price of $2.00 per share. In accordance with EITF 98-5, Daybreak valued the warrants and the beneficial conversion feature of the preferred stock.  Accordingly, Daybreak recorded a discount for the warrants and beneficial conversion feature (BCF), of $4,199,295. The discount is attributable to the fair value of the Warrants and the intrinsic value of the conversion feature of the preferred stock.  The value of the BCF was recognized and measured separately by allocating to additional paid-in capital the proceeds equal to the $1,489,222 relative fair value of the Warrants and the $2,710,073 intrinsic value of the conversion feature.  Daybreak also recorded a deemed dividend to reflect the full amortization of the discount of the value of the Warrants and conversion features of $4,199,295.   The fair value of each Warrant granted was estimated using the Black-Scholes pricing model. The assumptions used in the Black-Scholes valuation model were: a risk fee interest rate of 4.99%; the current stock price at date of issuance of $2.20 per share; the exercise price of the warrants at $1.00; an expected term of five years; volatility of 113%; and dividend yield of 0.0%.  As of February 28, 2007, no subscriber warrants had been exercised.

Bathgate Capital Partners, of Denver, Colorado (Bathgate) was the placement agent.  A son of Dale Lavigne (the Chairman and a director of Daybreak) is an employee of Bathgate. Bathgate was paid a sales commission of 10% of the gross proceeds of the private placement and a non-accountable expense allowance of 3% of the gross proceeds totaling $547,589. For every $30.00 invested, Bathgate earned three (3) common stock purchase warrants exercisable at $1.00 per share. The warrants are exercisable for a period of five (5) years. A total of 419,930 warrants were issued to Bathgate from this private placement and were valued at $816,374. The placement agent warrants were valued using the Black-Scholes option pricing model. The assumptions used in the Black-Scholes valuation model were: a risk fee interest rate of 4.99%; the current stock price at date of issuance of $2.20 per share; the exercise price of the warrants at $1.00; an expected term of five years; volatility of 113%; and dividend yield of 0.0%. As of February 28, 2007, no placement agent warrants had been exercised.

Both the subscriber warrants and the placement agent warrants contain customary anti-dilution provisions. The anti-dilution provisions permit the adjustment of the number of shares issuable upon exercise of the warrants in the event of stock splits, stock dividends, stock reversals and sales of substantially all of the Company’s assets. The placement agent warrants also contain a cashless exercise provision. The cashless exercise provision allows for the holder of the warrants to receive a number shares equal to the quotient of a) the product of the number of warrants held and the amount by which Daybreaks market traded stock price exceeds the exercise price of the warrants on the date of exercise, divided by b) the market traded stock price.

84
  Daybreak Oil and Gas, Inc.
(An Exploration Stage Company, Date of Inception March 1, 2005)
Notes to Financial Statements

Daybreak has agreed to register the Series A Preferred shares on a “best efforts” basis.  If Daybreak is unable to file the registration statement within the filing timeline, Daybreak will have to issue 1,399,765 additional warrants at an exercise price of $2.00 per share. Daybreak is required to file the Series A Preferred shares registration statement within sixty (60) days of the effective date of the registration statement required for the May 2006 common stock private placement.
 
Daybreak evaluated the application of SFAS No. 133 and EITF 00-19 with respect to the conversion feature and the registration rights for consideration of embedded derivatives and concluded that the preferred stock and registration rights instruments did not have embedded derivatives.

The relative fair values of the Series A Convertible Preferred Shares and the Common Stock Purchase Warrants were as follows:
 
 
Description
 
Shares
   
Relative Fair
Value Amount
 
Series A Convertible Preferred
   
1,399,765
    $
2,710,073
 
Common Stock Purchase Warrants
   
2,799,530
     
1,489,222
 
Total Proceeds
           
4,199,295
 
Offering Costs
            (573,091 )
Net Proceeds
          $
3,626,204
 


Common Stock

Daybreak is authorized to issue up to 200,000,000 shares of $0.001 par value common stock. During the year ended February 28, 2007, Daybreak conducted a private placement sale of common stock from March 3, 2006 to May 19, 2006 (the “May 2006 Common Stock Private Placement”). Each sale unit consisted of two shares of common stock and one common stock purchase warrant (warrant). The units sold for $1.50 per unit, with a total of 4,013,602 units sold; resulting in gross proceeds of $6,020,404 (net proceeds of $5,188,257 after placement costs).

The Warrants are exercisable for a period of five (5) years after the closing date at an exercise price of $2.00 per share. Daybreak may call the warrants for redemption if (a) the average of the closing sale price of the common stock is at or above $3.00 for twenty (20) out of thirty (30) trading days prior to the date the warrants are called, and (b) the warrant shares are registered under the Securities Act.  The Warrants were valued using the Black-Scholes option pricing model. The assumptions used in the Black-Scholes valuation model were: a risk fee interest rate of 4.99%; the current stock price at date of issuance of $2.70 per share; the exercise price of the warrants; an expected term of five (5) years; volatility of 112%; and dividend yield of 0.0%.

Bathgate Capital Partners, of Denver, Colorado was the placement agent.  A son of Dale Lavigne (the Chairman and a director of Daybreak) is an employee of Bathgate Capital Partners. The Placement Agent was paid a sales commission of 10% of the gross proceeds of the private placement and a non-accountable expense allowance of 3% of the gross proceeds totaling $790,402.

85
  Daybreak Oil and Gas, Inc.
(An Exploration Stage Company, Date of Inception March 1, 2005)
Notes to Financial Statements
 
Additionally, the Placement Agent was paid a due diligence fee of $15,000. For every ten (10) units sold, the Placement Agent earned three (3) common stock warrants, two of which are exercisable at $0.75 per share and one of which is exercisable at $2.00 per share. The Placement Agent warrants are exercisable for a period of seven (7) years. The placement agent earned 1,204,082 warrants, of which 802,721 are exercisable at $0.75 per share and were determined to have a fair value of $2,043,752. The remaining 401,361 warrant shares are exercisable at $2.00 per share and were determined to have a fair value of $973,970.  The placement agent warrants were valued using the Black-Scholes option pricing model. The assumptions used in the Black-Scholes valuation model were: a risk fee interest rate of 4.99%; the current stock price at date of issuance of $2.70 per share; the exercise price of the warrants; an expected term of seven years; volatility of 112%; and dividend yield of 0.0%.  As of February 28, 2007, no placement agent warrants had been exercised.

Both the subscriber warrants and the placement agent warrants have a cashless exercise provision and contain customary anti-dilution provisions. The cashless exercise provision allows for the holder of the warrants to receive a number shares equal to the quotient of a) the product of the number of warrants held and the amount by which the market traded stock price exceeds the exercise price of the warrants on the date of exercise, divided by b) the market traded stock price. The anti-dilution provisions permit the adjustment of the number of shares issuable upon exercise of the warrants in the event of stock splits, stock dividends, stock reversals and sales of substantially all of the Company’s assets.

Daybreak agreed to register the shares on a “best efforts” basis.  If Daybreak was unable to file the registration statement within the filing timeline, Daybreak would have had to issue 4,013,602 additional warrants at an exercise price of the lower of (a) the average closing sale price of its common stock for twenty of the thirty trading days immediately preceding the date the registration statement should have been filed, or (b) $1.50 per common share. Daybreak did file the registration statement within the filing timeline. No additional warrants were required to be issued.

Daybreak evaluated the application of SFAS No. 133 and EITF 00-19 with respect to the conversion feature and the registration rights for consideration of embedded derivatives and concluded that the common stock and registration rights instruments did not have embedded derivatives.

The relative fair value of the Common Stock and the Common Stock Purchase Warrants was as follows:
 
 
Description
 
Shares
   
Relative Fair
Value Amount
 
Common Stock
   
8,027,206
    $
4,241,232
 
Common Stock Purchase Warrants
   
4,013,602
     
1,779,172
 
Total Proceeds
           
6,020,404
 
Placement fees
            (832,147 )
Net Proceeds
          $
5,188,257
 

86
  Daybreak Oil and Gas, Inc.
(An Exploration Stage Company, Date of Inception March 1, 2005)
Notes to Financial Statements
 
During the fiscal year ended February 28, 2005, Daybreak conducted a private placement sale of common stock from June 7, 2005 through December 19, 2005 (the “December 2005 Common Stock Private Placement”). The shares were sold directly by Daybreak and were offered at $0.25 per share to accredited investors only. Gross proceeds were $1,100,000, with net proceeds of $1,087,500. A total of forty-three (43) investors participated in this private placement. From this offering, 4,400,000 shares of unregistered common stock were issued.

Common Stock for Services

Under SFAS No. 123R the guidelines for recording stock issued for goods or services require the fair value of the shares granted be based on the fair value of the goods or services received or the publicly traded share price of Daybreak’s registered shares on the date the shares were granted (irrespective of the fact that the shares granted were unregistered), whichever is more readily determinable. This position has been further clarified by the recent issuance of SFAS No. 157. Accordingly, Daybreak has elected an early application of these newly enacted guidelines. Daybreak has determined that the fair value of all common stock issued for goods or services is more readily determinable based on the publicly traded share price on the date of grant.

During the fiscal year ended February 28, 2007, Daybreak paid for investor relations and consulting services with 220,000 shares of unregistered common stock valued at $401,200.

During the fiscal year ended February 28, 2006, Daybreak paid for investor relations services with 2,539,667 shares of unregistered common stock valued at $1,599,400.

Common Stock Issued for Convertible Debentures and Interest Payable

During the fiscal year ended February 28, 2007, non-related parties converted debentures representing $770,139 in principal, resulting in 1,471,763 shares of unregistered common stock being issued to satisfy the principal and interest obligations. 

During the fiscal year ended February 28, 2006, non-related parties converted debentures representing $74,713 in principal, resulting in 281,315 shares of unregistered common stock being issued to satisfy the principal and interest obligations

Common Stock Issued for Oil and Gas Property Interests

Under SFAS No. 123R the guidelines for recording stock issued for goods or services require the fair value of the shares granted be based on the fair value of the goods or services received or the publicly traded share price of Daybreak’s registered shares on the date the shares were granted (irrespective of the fact that the shares granted were unregistered), whichever is more readily determinable. This position has been further clarified by the recent issuance of SFAS No. 157. Accordingly, Daybreak has elected an early application of these newly enacted guidelines. Daybreak has determined that the fair value of all common stock issued for goods or services is more readily determinable based on the publicly traded share price on the date of grant.

During the fiscal year ended February 28, 2007, Daybreak purchased oil and gas properties valued at $420,000 by issuing 150,000 shares of its unregistered common for the 40 Mile Coulee project in Alberta, Canada.  On December 8, 2006, Daybreak repurchased these same 150,000 shares for an agreed amount of $150,000 as part of an agreement to release Daybreak from any further plugging and abandonment liabilities related to this project.

87
  Daybreak Oil and Gas, Inc.
(An Exploration Stage Company, Date of Inception March 1, 2005)
Notes to Financial Statements

During the fiscal year ended February 28, 2007, Daybreak purchased an additional eight percent (8%) working interest in the Tuscaloosa project in Louisiana from Strike Oil & Minerals, Corp. for $205,883 in cash and 72,500 shares of unregistered common stock valued at $108,750.

During the fiscal year ended February 28, 2006, Daybreak issued 100,000 shares of unregistered common stock valued at $37,000 to Margaret Perales of MPG Petroleum for oil and gas property acquisition costs in the Pearl Prospect, located in Texas.

During the fiscal year ended February 28 2006, Daybreak issued 600,000 shares of unregistered common stock valued at $375,000 to Sam Pfiester (Trustee, Chicago Mill Joint Venture), for oil and gas property acquisition in the Tuscaloosa project in Louisiana.

NOTE 10 – WARRANTS:

For the year ended February 28, 2006 there were no warrants issued or outstanding.

Warrants outstanding and exercisable as of February 28, 2007 are:
 
         
Exercise
   
Remaining
   
Exercisable Warrants
 
Description
 
Warrants
   
Price
   
Life (Years)
   
Remaining
 
May  2006 Common Stock Private Placement
   
4,013,602
    $
2.00
     
4.25
     
4,013,602
 
Placement Agent Warrants May 2006 PP
   
802,721
    $
0.75
     
6.25
     
802,721
 
Placement Agent Warrants May 2006 PP
   
401,361
    $
2.00
     
6.25
     
401,361
 
July 2006 Preferred Stock Private Placement
   
2,799,530
    $
2.00
     
4.50
     
2,799,530
 
Placement Agent Warrants July 2006 Preferred Stock PP
   
419,930
    $
1.00
     
4.50
     
419,930
 
Convertible Debenture Term Extension
   
150,001
    $
2.00
     
4.75
     
150,001
 
     
8,587,145
                     
8,587,145
 


During the year ended February 28, 2007, no warrants were exercised. For the year ended February 28, 2006 there were no warrants issued or outstanding. The intrinsic value of the warrants at February 28, 2007 were $152,517.

88
  Daybreak Oil and Gas, Inc.
(An Exploration Stage Company, Date of Inception March 1, 2005)
Notes to Financial Statements

NOTE 11 – RESTATEMENT:

Daybreak has determined that it is necessary to restate previously filed financial statements. The restated financial statements will include the four (4) quarters for the fiscal year ended February 28, 2006, the 12 months ended February 28, 2006, and the first three (3) quarters for the fiscal year ended February 28, 2007 (the "Restated Periods"). The determination to restate the financial statements for the Restated Periods is based on a reassessment of the following non-cash transactions:

  • Pursuant to SFAS No. 123(R), an adjustment was recorded utilizing the market trading price on the date of grant as the more readily determinable fair value of stock issued for compensation to management and directors during the Restated Periods; and
  • Pursuant to SFAS No. 123(R), an adjustment was recorded utilizing the market trading price on the date of grant as the more readily determinable fair value of stock issued for investor relations services during the Restated Periods; and
  • Pursuant to SFAS No. 123(R), an adjustment was recorded utilizing the market trading price on the date of grant as the more readily determinable fair value of stock issued for oil and gas properties during the Restated Periods; and
  • Pursuant to EITF 00-27 and 98-5, the recognition of a beneficial conversion feature (BCF) inherent in the convertible debentures issued during the Restated Periods.  The recognition results in the recording of a discount to reflect the BCF and the recording of interest expense related to the discount.

Pursuant to SFAS No. 123R the guidelines for recording stock based compensation issued to officers and directors support that the more readily determinable fair value of these shares should be based on the publicly traded share price of Daybreak’s registered shares at the grant date. The valuation of stock based compensation has been further addressed by the recent issuance of SFAS No. 157. This latest pronouncement also implies that shares issued to officers and directors for compensation should be valued at the publicly traded share price. Both of these pronouncements forward that the aforementioned valuation method can be applied even when, as in Daybreak’s case, compensation was issued to officers and directors in the form of unregistered shares which cannot be sold by the recipients until a full year has elapsed from their issuance. Accordingly, Daybreak has restated the impact of these share based payments to reflect the use of the publicly traded share price.

Again pursuant to SFAS No. 123(R), the guidelines for recording common stock issued for investor relations services and the acquisition of interests in oil and gas properties suggest that the more readily determinable fair value of these shares should be based on the publicly traded share price of Daybreak’s registered shares at the grant or acquisition date. SFAS No. 157 also suggests that when shares are issued for services or properties, they should be valued at the publicly traded share price. Accordingly, Daybreak has restated the impact of the share based payments for services and oil and gas properties to reflect the use of the publicly traded share price.
 
Daybreak has reviewed its prior determination of the fair value of shares resulting from the potential conversion of debt and concluded that it has not appropriately accounted for discounts in accordance with SFAS 123(R) and EITF 98-05.  Daybreak has calculated the intrinsic value of the embedded beneficial conversion feature present in the convertible debt using quoted closing market prices on the date of each of the transactions.

89
  Daybreak Oil and Gas, Inc.
(An Exploration Stage Company, Date of Inception March 1, 2005)
Notes to Financial Statements
 
This calculation has determined that $1,138,701 in discounts should have been assigned to the convertible debt issuances at their respective inception. These discounts will be amortized over the period commencing on the issuance date to the earliest conversion date of the debt.
 
The accompanying financial statements for the twelve month period February 28, 2006, have been restated to effect the changes described above. The impact of those adjustments for the following periods is summarized as follows:

  • The three months ended May 31, 2006 and May 31, 2005; and
  • The six months ended August 31, 2006 and August 31, 2005; and
  • The nine months ended November 30, 2006 and November 30, 2005; and
  • The twelve months ended February 28, 2006.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
90
  Daybreak Oil and Gas, Inc.
(An Exploration Stage Company, Date of Inception March 1, 2005)
Notes to Financial Statements
 
As of May 31, 2005 (Unaudited):
 
As
Originally
Reported
   
Adjustments
     
As
Restated
 
Total current assets
  $
401,521
    $ (365,623 )  1)   $
35,898
 
Oil and gas properties, net of accumulated
   depletion, successful efforts method
   
-
     
-
       
-
 
     Total assets
   
401,521
      (365,623 )      
35,898
 
                           
Total current liabilities
  $
101,244
    $ (39,064 )  2)   $
62,180
 
                           
Preferred stock
   
-
     
-
       
-
 
Common stock
   
20,149
     
-
       
20,149
 
Additional paid-in capital
   
1,195,547
     
1,053,000
   1)        
             
46,611
   2)    
2,295,158
 
Accumulated deficit
    (915,419 )    
179,384
   3)     (736,035 )
Deficit accumulated during the exploration stage
   
-
      (1,426,170 )       -  
              (179,384 )  3)     (1,605,554 )
     Total stockholders’ equity
   
300,277
      (326,559 )       (26,282 )
     Total liabilities and stockholders’ equity
  $
401,521
    $ (365,623 )     $
35,898
 
 
   
THREE MONTHS ENDED
 
For the three months ended May 31, 2005 (Unaudited):
 
As
Originally
Reported
   
Adjustments
     
As
Restated
 
Revenue
  $
-
    $
-
      $
-
 
                           
Expenses
                         
     General and administrative
   
179,383
     
1,418,623
   1)    
1,598,006
 
Total expenses
   
179,383
     
1,418,623
       
1,598,006
 
                           
Loss from operations
    (179,383 )     (1,418,623 )       (1,598,006 )
                           
Other expenses:
                         
     Interest expense
   
-
      (7,547 )  2)     (7,547 )
                           
Net loss
  $ (179,383 )   $ (1,426,170 )     $ (1,605,553 )
                           
Net loss available to common shareholders
  $ (179,383 )   $ (1,426,170 )     $ (1,605,553 )
                           
Net loss per common share
  $ (0.01 )   $ (0.07 )     $ (0.08 )
                           
Weighted-average common shares outstanding
  $
18,969,528
    $
1,196,130
   4)   $
20,165,658
 

1)  
To recognize previously deferred expense for stock based compensation and adjust the valuation of stock based compensation and services provided by third parties utilizing the market price on the date of grant.
2)  
To record discount related to the beneficial conversion feature and record the amortization of discount on convertible debt using the effective interest rate method.
3)  
To reclassify deficit accumulated during exploration stage.
4)  
To adjust weighted average shares outstanding and earnings per share as a result of recognizing certain issuances as of the date of satisfaction of all necessary conditions to issuance.
 
91
  Daybreak Oil and Gas, Inc.
(An Exploration Stage Company, Date of Inception March 1, 2005)
Notes to Financial Statements
 
As of August 31, 2005 (Unaudited):
 
As
Originally
Reported
   
Adjustments
     
As Restated
 
Total current assets
  $
244,671
    $ (243,747 )  1)   $
924
 
Oil and gas properties, net of accumulated
   depletion, successful efforts method
   
378,500
     
12,000
   4)    
390,500
 
     Total assets
  $
623,171
    $ (231,747 )     $
391,424
 
                           
Total current liabilities
  $
224,787
    $ (52,722 )  2)   $
172,065
 
                           
Preferred stock
   
-
     
-
       
-
 
Common stock
   
21,295
     
-
       
21,295
 
Additional paid-in capital
   
1,480,901
     
1,058,700
   1)     -  
             
73,511
   2)        
             
12,000
   4)    
2,625,112
 
Accumulated deficit
    (1,103,812 )    
367,777
   3)     (736,035 )
Deficit accumulated during the exploration
     stage
   
-
      (1,323,236 )          
              (367,777 )  3)     (1,691,013 )
     Total stockholders’ equity
   
398,384
      (179,025 )      
219,359
 
     Total liabilities and stockholders’ equity
  $
623,171
    $ (231,747 )     $
391,424
 
                           










 
92
  Daybreak Oil and Gas, Inc.
(An Exploration Stage Company, Date of Inception March 1, 2005)
Notes to Financial Statements
 
For the three and six months ended August 31, 2005 (Unaudited):
       
         
   
THREE MONTHS ENDED
   
SIX MONTHS ENDED
 
   
As
 Originally
Reported
   
Adjustments
     
As
Restated
   
As
Originally Reported
   
Adjustments
     
As
Restated
 
Revenue
  $
-
    $
-
      $
-
    $
-
    $
-
      $
-
 
                                                     
Expenses
                                                   
     General and administrative
   
188,393
      (116,176 ) 1)    
72,217
     
367,776
     
1,302,447
  1)    
1,670,223
 
Total expenses
   
188,393
      (116,176 )      
72,217
     
367,776
     
1,302,447
       
1,670,223
 
                                                     
Loss from operations
    (188,393 )    
116,716
        (72,217 )     (367,776 )     (1,302,447 )       (1,670,223 )
                                                     
Other income and expenses:
                                                   
     Interest income
   
-
     
-
       
-
     
-
     
-
       
-
 
     Interest expense
   
-
      (13,242 ) 2)     (13,242 )    
-
      (20,789 ) 2)     (20,789 )
           Total other income and
                 expenses
   
-
      (13,242 )       (13,242 )    
-
      (20,789 )       (20,789 )
Net loss
  $ (188,393 )   $
102,934
      $ (85,459 )   $ (367,776 )   $ (1,323,236 )     $ (1,691,012 )
                                                     
  Net loss available to common
       shareholders
  $ (188,393 )   $
102,934
      $ (85,459 )   $ (367,776 )   $ (1,323,236 )     $ (1,691,012 )
                                                     
Net loss per common share
  $ (0.01 )   $
0.01
      $ (0.00 )   $ (0.02 )   $ (0.06 )     $ (0.08 )
                                                     
  Weighted-average common
       shares outstanding
   
20,553,897
    $ (361,391 ) 5)    
20,192,506
     
19,772,310
     
406,772
  5)    
20,179,082
 
                                                     
                                                     
                                       
                             


1)  
To recognize previously deferred expense for stock based compensation and adjust the valuation of stock based compensation and services provided by third parties utilizing the market price on the date of grant.
2)  
To record discount related to the beneficial conversion feature and record the amortization of discount on convertible debt using the effective interest rate method.
3)  
To reclassify deficit accumulated during exploration stage.
4)  
To adjust the valuation of the stock based acquisition of oil and gas properties utilizing the market trading price on the date of grant.
5)   
To adjust weighted average shares outstanding and earnings per share as a result of recognizing certain issuances as of the date of satisfaction of all necessary conditions to issuance.

 
93
  Daybreak Oil and Gas, Inc.
(An Exploration Stage Company, Date of Inception March 1, 2005)
Notes to Financial Statements
 
As of November 30, 2005 (Unaudited):
                   
   
As
Originally
Reported
   
Adjustments
     
As
Restated
 
Total current assets
  $
683,539
    $ (171,875 ) 1)   $
511,664
 
Oil and gas properties, net of accumulated
   depletion, successful efforts method
   
586,833
     
237,000
  4)    
823,833
 
     Total assets
  $
1,270,372
    $
65,125
      $
1,335,497
 
                           
Total current liabilities
  $
248,172
      (20,941 ) 2)    
227,231
 
                           
Preferred stock
   
-
     
-
       
-
 
Common stock
   
26,755
               
26,755
 
Additional paid-in capital
   
2,838,506
     
1,849,680
  1)        
             
73,511
  2)        
             
237,000
  4)    
4,988,697
 
Accumulated deficit
    (1,843,061 )    
1,107,026
  3)     (736,035 )
Deficit accumulated during the exploration
     stage
   
-
      (2,074,125 )          
              (1,107,026 ) 3)     (3,181,151 )
                           
     Total stockholders’ equity
  $
1,022,200
    $
86,066
      $
1,108,266
 
     Total liabilities and stockholders’ equity
  $
1,270,372
    $
65,125
      $
1,335,497
 
                           












 
94
  Daybreak Oil and Gas, Inc.
(An Exploration Stage Company, Date of Inception March 1, 2005)
Notes to Financial Statements
 
For the three and nine months ended November 30, 2005 (Unaudited):        
   
THREE MONTHS ENDED
   
NINE MONTHS ENDED
 
   
As
Originally Reported
   
Adjustments
     
As
 Restated
   
As
Originally Reported
   
Adjustments
     
As
 Restated
 
Revenue
  $
-
    $
-
      $
-
    $
-
    $
-
      $
-
 
                                                     
Expenses
                                                   
     Exploration and drilling
   
58,400
     
-
       
58,400
     
70,900
     
-
       
70,900
 
     General and administrative
   
681,170
     
719,108
  1)    
1,400,278
     
1,036,446
     
2,021,555
  1)    
3,058,001
 
Total expenses
   
739,570
     
719,108
       
1,458,678
     
1,107,346
     
2,021,555
       
3,128,901
 
                                                     
Loss from operations
    (739,570 )     (719,108 )       (1,458,678 )     (1,107,346 )     (2,021,555 )       (3,128,901 )
                                                     
Other income and expenses:
                                                   
     Interest income
   
321
     
-
       
321
     
321
     
-
       
321
 
     Interest expense
   
-
      (31,781 ) 2)     (31,781 )    
-
      (52,570 ) 2)     (52,570 )
     
321
      (31,781 )       (31,781 )    
321
      (52,570 )       (52,249 )
Net loss
  $ (739,249 )   $ (750,889 )     $ (1,490,138 )   $ (1,107,025 )   $ (2,074,125 )     $ (3,181,150 )
                                                     
 Net loss available to common
    shareholders
  $ (739,249 )   $ (750,889 )     $ (1,490,138 )   $ (1,107,025 )   $ (2,074,125 )     $ (3,181,150 )
                                                     
Net loss per common share
  $ (0.03 )   $ (0.03 )     $ (0.06 )   $ (0.05 )   $ (0.10 )     $ (0.15 )
                                                     
  Weighted-average common
       shares outstanding
   
23,471,326
     
446,149
  5)    
23,917,475
     
20,997,432
     
418,718
  5)    
21,416,150
 
 
 
1)  
To recognize previously deferred expense for stock based compensation and adjust the valuation of stock based compensation and services provided by third parties utilizing the market trading price on the day of grant
2)  
To record discount related to the beneficial conversion feature and record the amortization of discount on convertible debt using the effective interest rate method.
3)  
To reclassify deficit accumulated during exploration stage.
4)  
To adjust the valuation of the stock based acquisition of oil and gas properties utilizing the market trading price on the date of grant.
5)  
To adjust weighted average shares outstanding and earnings per share as a result of recognizing certain issuances as of the date of satisfaction of all necessary conditions to issuance.





 
95
  Daybreak Oil and Gas, Inc.
(An Exploration Stage Company, Date of Inception March 1, 2005)
Notes to Financial Statements
 
As of February 28, 2006 (Unaudited):
                   
   
As
Originally
Reported
   
Adjustments
     
As
Restated
 
Total current assets
  $
1,074,610
    $
-
      $
1,074,610
 
Oil and gas properties, net of accumulated
   depletion, successful efforts method
   
895,400
     
237,000
  3)    
1,132,400
 
     Total assets
  $
1,970,010
    $
237,000
      $
2,207,010
 
                           
Total current liabilities
  $
1,167,347
    $ (1,049,233 ) 2)   $
118,114
 
                           
Preferred stock
   
-
     
-
       
-
 
Common stock
   
29,458
     
-
       
29,458
 
Additional paid-in capital
   
3,534,522
     
2,234,180
  1)        
             
1,261,812
  2)        
             
237,000
  3)    
7,267,514
 
Accumulated deficit
    (736,035 )    
-
        (736,035 )
Deficit accumulated during the exploration
     stage
    (2,025,282 )     (2,446,759 )       (4,472,041 )
     Total stockholders’ equity
  $
802,663
    $
1,286,233
      $
2,088,896
 
     Total liabilities and stockholders’ equity
  $
1,970,010
    $
237,000
      $
2,207,010
 
                           







 
 
 
 
 
96
  Daybreak Oil and Gas, Inc.
(An Exploration Stage Company, Date of Inception March 1, 2005)
Notes to Financial Statements
 
For the three and twelve  months ended February 28, 2006 (Unaudited):    
       
   
THREE MONTHS ENDED
   
TWELVE MONTHS ENDED
 
   
As
 Originally Reported
   
Adjustments
     
As
Restated
   
As
Originally Reported
   
Adjustments
     
As
Restated
 
Revenue
  $
-
    $
-
      $
-
    $
-
    $
-
      $
-
 
                                                     
Expenses
                                                   
     Exploration and drilling
   
256,569
     
-
       
256,569
     
327,469
     
-
       
327,469
 
     General and administrative
   
632,246
     
212,625
  1)    
844,871
     
1,688,692
     
2,234,180
  1)    
3,902,872
 
Total expenses
   
888,815
     
212,625
       
1,101,440
     
1,996,161
     
2,234,180
       
4,230,341
 
                                                     
Loss from operations
    (888,815 )     (212,625 )       (1,101,440 )     (1,996,161 )     (2,234,180 )       (4,230,341 )
                                                     
Other income and expenses:
                                                   
     Interest income
   
41
     
-
       
41
     
362
     
-
       
362
 
     Interest expense
    (29,483 )     (160,009 ) 2)     (189,492 )     (29,483 )     (212,579 ) 2)     (242,062 )
      (29,442 )     (160,009 )       (189,451 )     (29,121 )     (212,579 )       (241,700 )
Net loss
    (918,257 )   $ (372,634 )     $ (1,290,891 )   $ (2,025,282 )   $ (2,446,759 )     $ (4,472,041 )
                                                     
 Net loss available to common
     shareholders
  $ (918,257 )   $ (372,634 )     $ (1,290,891 )   $ (2,025,282 )   $ (2,446,759 )     $ (4,472,041 )
                                                     
Net loss per common share
  $ (0.03 )   $ (0.02 )     $ (0.05 )   $ (0.09 )   $ (0.10 )     $ (0.19 )
                                                     
  Weighted-average common
     shares outstanding
   
28,767,159
      (214,226 ) 4)    
28,552,933
     
22,709,564
     
466,341
  4)    
23,175,905
 


1)  
To recognize previously deferred expense for stock based compensation and adjust the valuation of stock based compensation and services provided by third parties utilizing the market trading price on the day of grant.
2)  
To record discount related to the beneficial conversion feature and record the amortization of discount on convertible debt using the effective interest rate method.
3)  
To adjust the valuation of the stock based acquisition of oil and gas properties utilizing the market trading price on the date of grant.
4)  
To adjust weighted average shares outstanding and earnings per share as a result of recognizing certain issuances as of the date of satisfaction of all necessary conditions to issuance.




 
97
  Daybreak Oil and Gas, Inc.
(An Exploration Stage Company, Date of Inception March 1, 2005)
Notes to Financial Statements
 
 
As of May 31, 2006 (Unaudited):
 
As
Originally
Reported
   
Adjustments
     
As
Restated
 
Total current assets
  $
5,187,468
    $ (421,875 ) 1)   $
4,765,593
 
Oil and gas properties, net of accumulated
   depletion, successful efforts method
   
2,507,310
     
507,000
  3)    
3,014,310
 
     Total assets
  $
7,694,778
    $
85,125
      $
7,779,903
 
                           
Total current liabilities
  $
1,263,583
    $ (787,704 ) 2)   $
475,879
 
Other liabilities
   
207,519
     
-
       
207,519
 
     Total liabilities
   
1,471,102
      (787,704 )      
683,398
 
                           
Preferred stock
   
-
               
-
 
Common stock
   
38,456
     
-
       
38,456
 
Additional paid-in capital
   
9,468,280
     
3,464,880
  1)        
             
1,286,812
  2)        
             
507,000
  3)    
14,726,972
 
Accumulated deficit
    (736,035 )    
-
        (736,035 )
Deficit accumulated during the exploration stage
    (2,547,025 )     (2,234,180 ) 1)        
              (212,579 ) 2)        
              (1,939,104 )       (6,932,888 )
     Total stockholders’ equity
   
6,223,676
     
872,829
       
7,096,505
 
          Total liabilities and stockholders’ equity
  $
7,694,778
    $
85,125
      $
7,779,903
 

   
THREE MONTHS ENDED        
 
For the three months ended May 31, 2006 (Unaudited):
 
As
Originally
Reported
   
Adjustments
     
As
Restated
 
Revenue
  $
-
    $
-
      $
-
 
                           
Expenses
                         
     General and administrative
   
495,044
     
1,652,575
  1)    
2,147,619
 
Total expenses
   
495,044
     
1,652,575
       
2,147,619
 
                           
Loss from operations
    (495,044 )     (1,652,575 )       (2,147,619 )
                           
Other expenses:
                         
     Interest expense
    (26,699 )     (286,529 ) 2)     (313,228 )
          Total other expenses
    (26,699 )     (286,529 )       (313,228 )
Net loss
  $ (521,743 )   $ (1,939,104 )     $ (2,460,847 )
                           
Net loss available to common shareholders
  $ (521,743 )   $ (1,939,104 )     $ (2,460,847 )
                           
Net loss per common share
  $ (0.02 )   $ (0.06 )     $ (0.08 )
                           
Weighted-average common shares outstanding
   
30,684,522
     
731,239
  4)    
31,415,761
 

1)  
To recognize previously deferred expense for stock based compensation and adjust the valuation of stock based compensation and services provided by utilizing the market trading price on the day of grant.
2)  
To record discount related to the beneficial conversion feature and record the amortization of discount on convertible debt using the effective interest rate method.
3)  
To adjust the valuation of the stock based acquisition of oil and gas properties utilizing the market trading price on the date of grant.
4)  
To adjust weighted average shares outstanding and earnings per share as a result of recognizing certain issuances as of the date of satisfaction of all necessary conditions to issuance.
 
98
  Daybreak Oil and Gas, Inc.
(An Exploration Stage Company, Date of Inception March 1, 2005)
Notes to Financial Statements
 
As of August 31, 2006 (Unaudited):
                   
   
As
Originally
Reported
   
Adjustments
     
As Restated
 
Total current assets
  $
7,934,597
    $ (495,535 ) 1)   $
7,439,062
 
Oil and gas properties, net of accumulated
   depletion, successful efforts method
   
3,369,678
     
550,500
  3)    
3,920,178
 
Vehicles and equipment, net of accumulated
   depreciation
   
21,670
     
-
       
21,670
 
     Total assets
  $
11,325,945
    $
54,965
      $
11,380,910
 
                           
Total current liabilities
  $
1,161,146
    $ (452,245 )     $
708,901
 
Other liabilities
   
207,519
     
-
       
207,519
 
     Total liabilities
   
1,368,665
      (452,245 )      
916,420
 
                           
Preferred stock
   
1,400
     
-
       
1,400
 
Common stock
   
38,980
     
-
       
38,980
 
Additional paid-in capital
   
13,492,210
     
3,727,381
  1)        
             
1,286,812
  2)        
             
550,500
  3)    
19,056,903
 
Accumulated deficit
    (736,035 )    
-
        (736,035 )
Deficit accumulated during the exploration
    stage
    (2,839,275 )     (2,234,180 ) 1)        
              (212,579 ) 2)        
              (2,610,724 )       (7,896,758 )
     Total stockholders’ equity
   
9,957,280
     
507,210
       
10,464,490
 
     Total liabilities and stockholders’ equity
  $
11,325,945
    $
54,965
      $
11,380,910
 

 
99
  Daybreak Oil and Gas, Inc.
(An Exploration Stage Company, Date of Inception March 1, 2005)
Notes to Financial Statements
 
For the three and six months ended August 31, 2006 (Unaudited):        
   
THREE MONTHS ENDED
   
SIX MONTHS ENDED
 
   
As
Originally Reported
   
Adjustments
     
As
 Restated
   
As
Originally Reported
   
Adjustments
     
As
Restated
 
Revenue
  $
270,099
    $
-
      $
270,099
    $
270,099
    $
-
      $
270,099
 
                                                     
Expenses
                                                   
     Exploration and drilling
   
72,338
     
-
       
72,338
     
72,338
     
-
       
72,338
 
     General and administrative
   
467,716
     
336,161
  1)    
803,877
     
962,760
     
1,988,736
  1)    
2,951,496
 
Total expenses
   
540,054
     
336,161
       
876,215
     
1,035,098
     
1,988,736
       
3,023,834
 
                                                     
Loss from operations
    (269,955 )     (336,161 )       (606,116 )     (764,999 )     (1,988,736 )       (2,753,735 )
                                                     
Other income and expenses:
                                                   
     Interest income
   
5,590
               
5,590
     
5,590
     
-
       
5,590
 
     Interest expense
    (27,886 )     (335,459 ) 2)     (363,345 )     (54,585 )     (621,988 ) 2)     (676,573 )
      (22,296 )     (335,459 )       (357,755 )     (48,995 )     (621,988 )       (670,983 )
Net loss
    (292,251 )   $ (671,620 )     $ (963,871 )   $ (813,994 )   $ (2,610,724 )     $ (3,424,718 )
                                                     
Deemed dividend – Beneficial conversion feature
   
-
      (4,199,295 )       (4,199,295 )    
-
      (4,199,295 )       (4,199,295 )
  Net loss available to common
      shareholders
  $ (292,251 )   $ (4,870,915 )     $ (5,163,166 )   $ (813,994 )   $ (6,810,019 )     $ (7,624,013 )
                                                     
Net loss per common share
  $ (0.01 )   $ (0.12 )     $ (0.13 )   $ (0.02 )   $ (0.20 )     $ (0.22 )
                                                     
 Weighted-average common
      shares outstanding
   
38,583,519
     
81,789
  4)    
38,665,308
     
34,634,021
     
354,475
  4)    
34,988,496
 

 
1)  
To recognize previously deferred expense for stock based compensation and adjust the valuation of stock based compensation and services provided by third parties utilizing the market trading price on the day of grant.
2)  
To record discount related to the beneficial conversion feature and record the amortization of discount on convertible debt using the effective interest rate method.
3)  
To adjust the valuation of the stock based acquisition of oil and gas properties utilizing the market trading price on the date of grant.
4)  
To adjust weighted average shares outstanding and earnings per share as a result of recognizing certain issuances as of the date of satisfaction of all necessary conditions to issuance.


 
100
  Daybreak Oil and Gas, Inc.
(An Exploration Stage Company, Date of Inception March 1, 2005)
Notes to Financial Statements
 
As of November 30, 2006 (Unaudited):
 
As
Originally
Reported
   
Adjustments
     
As
Restated
 
Total current assets
  $
4,407,286
    $
-
      $
4,407,286
 
Oil and gas properties, net of accumulated
   depletion, successful efforts method
   
4,195,434
     
273,250
  3)    
4,468,684
 
Note receivable – non current portion
   
533,298
     
-
       
533,298
 
Vehicles and equipment, net of accumulated
     depreciation
   
20,422
     
-
       
20,422
 
Other assets
   
1,442,310
     
-
       
1,442,310
 
     Total assets
  $
10,598,750
    $
273,250
      $
10,872,000
 
                           
Total current liabilities
  $
863,062
    $
464,178
  2)   $
1,521,559
 
Other liabilities
   
207,518
     
-
       
207,518
 
     Total liabilities
   
1,070,580
     
464,178
       
1,729,077
 
                           
Preferred stock
   
1,400
     
-
       
1,400
 
Common stock
   
39,052
     
-
       
39,052
 
Additional paid-in capital
   
15,686,343
     
2,624,880
  1)        
             
255,111
  2)        
             
543,250
  3)    
19,109,584
 
Accumulated deficit
    (736,035 )    
-
        (736,035 )
Deficit accumulated during the exploration stage
    (5,462,590 )     (2,234,180 ) 1)     (9,271,078 )
              (212,579 ) 2)        
              (1,167,410 )          
     Total stockholders’ equity
   
9,528,170
      (385,247 )      
9,142,923
 
     Total liabilities and stockholders’ equity
  $
10,598,750
    $
273,250
      $
10,872,000
 
                           











 
101
  Daybreak Oil and Gas, Inc.
(An Exploration Stage Company, Date of Inception March 1, 2005)
Notes to Financial Statements
 
For the three and nine  months ended November 30, 2006 (Unaudited):      
   
THREE MONTHS ENDED
   
NINE MONTHS ENDED
 
   
As
Originally Reported
   
Adjustments
     
As
Restated
   
As
Originally Reported
   
Adjustments
     
As
Restated
 
Revenue
  $
218,590
    $
-
      $
218,590
    $
488,689
    $
-
      $
488,689
 
                                                     
Expenses
                                                   
     Production costs
   
59,736
     
-
       
59,736
     
91,669
     
-
       
91,669
 
     Exploration and drilling
   
452,239
     
270,000
  3)    
722,239
     
492,644
     
270,000
  3)    
762,644
 
     Depreciation and depletion
   
19,884
     
-
       
19,884
     
20,920
     
-
       
20,920
 
     General and administrative
   
478,725
      (122,656 ) 1)    
356,069
     
2,915,828
     
390,700
  1)    
3,306,528
 
Total expenses
   
1,010,584
     
147,344
       
1,157,928
     
3,521,061
     
660,700
       
4,181,761
 
                                                     
Loss from operations
    (791,994 )     (147,344 )       (939,338 )     (3,032,372 )     (660,700 )       (3,693,072 )
                                                     
Other income and expenses:
                                                   
     Interest income
   
36,517
     
-
       
36,517
     
42,107
     
-
       
42,107
 
     Dividend income
   
5,208
     
-
       
5,208
     
5,208
     
-
       
5,208
 
     Interest expense
    (250,881 )     (31,506 ) 2)     (282,387 )     (452,251 )     (506,710 ) 2)     (958,961 )
      (209,156 )     (31,506 )       (240,662 )     (404,936 )     (506,710 )       (911,646 )
Net loss
  $ (1,001,150 )   $ (178,850 )     $ (1,180,000 )   $ (3,437,308 )   $ (1,167,410 )     $ (4,604,718 )
                                                     
Cumulative convertible preferred
     stock dividend requirement
    (93,142 )    
-
        (93,142 )     (93,142 )    
-
        (93,142 )
Deemed dividend – beneficial
     conversion feature
   
-
     
-
       
-
      (4,199,295 )    
-
        (4,199,295 )
 Net loss available to common
     shareholders
  $ (1,094,292 )   $ (178,850 )     $ (1,273,142 )   $ (7,729,745 )   $ (1,167,410 )     $ (8,897,155 )
                                                     
Net loss per common share
  $ (0.03 )   $
-
      $ (0.03 )   $ (0.21 )   $ (0.04 )     $ (0.25 )
                                                     
  Weighted-average common
      shares outstanding
   
39,031,776
     
3,983
  4)    
39,035,759
     
36,082,883
      (215,043 ) 4)    
36,297,926
 
                                                     

 
1)  
To recognize previously deferred expense for stock based compensation and adjust the valuation of stock based compensation and services provide by third parties utilizing the market trading price on the day of grant.
2)  
To record discount related to the beneficial conversion feature and record the amortization of discount on the convertible debt using the effective interest rate method.
3)  
To adjust the valuation of the stock based acquisition of oil and gas properties utilizing the market trading price on the date of grant.
4)  
To adjust weighted average shares outstanding and earnings per share as a result of recognizing certain issuances as of the date of satisfaction of all necessary conditions to issuance.

 
102
  Daybreak Oil and Gas, Inc.
(An Exploration Stage Company, Date of Inception March 1, 2005)
Notes to Financial Statements

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:
 
   
2007
 
Computed at U.S. and State statutory rates (40%)
  $ (3,356,800 )
Permanent differences
   
1,500,200
 
Changes in valuation allowance
   
1,856,600
 
  Total
  $
-
 

 
Tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred liabilities are presented below:
 
Deferred tax assets:
 
2007
   
2006 (Restated)
 
  Net operating loss carryforwards
  $
1,734,000
    $
825,200
 
  Oil and gas properties
   
947, 800
     
-
 
Less valuation allowance
    (2,681,800 )     (825,200 )
Total
  $
-
    $
-
 

 
At February 28, 2007, Daybreak had a net operating loss carryforwards for federal and state income tax purposes of approximately $4,335,000, which will begin to expire, if unused, beginning in 2024.  The valuation allowance increased by approximately $1,856,600 and $810,000 for the years ended February 28, 2007 and 2006, respectively.  Section 382 Rule will place annual limitations on Daybreak’s net operating loss (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.

 

 
 
103
  Daybreak Oil and Gas, Inc.
(An Exploration Stage Company, Date of Inception March 1, 2005)
Notes to Financial Statements
 
NOTE 13 – SUBSEQUENT EVENTS

In May 2007, Daybreak was informed by Green River Drilling that they intended to sell the drilling rig to a third party. The sale was completed and on June 11, 2007, Daybreak received a total of $846,668 which included the principal of $800,000 and accrued interest in the amount of $46,668 in satisfaction of the note receivable.

On June 4, 2007, Daybreak as Operator for the drilling and completion of the Haas-Hirsch No. 1 well, located in the Krotz Springs Field in St. Landry Parish, Louisiana, sent a notice of default to one of the working interest participants for delinquency in meeting their financial commitments in the drilling and completion of the Haas-Hirsch No. 1 well. As of May 31, 2007, this working interest participant was delinquent $743,469. On August 9, 2007, the Company received a $100,000 payment on this delinquency. If the working interest participant is unable to meet its commitments, their working interest percentage will be offered to the other participants in the well. If the other working interest participants decline to increase their ownership Daybreak will become liable for this delinquency and will assume a larger working interest in the project. As of February 28, 2007, there was no delinquency from this working interest participant. Daybreak has been informed by this participant of their intention to meet all financial commitments.

On June 21, 2007, Daybreak and its partners (“Daybreak et al”), entered into a Seismic Option Farmout Agreement with Chevron U.S.A. Inc. (“Chevron”), for a seismic and drilling program in the East Slopes (Kern County) project area in California. By paying the full cost of the seismic program Chevron will earn a 50% interest in the lands and a 50% working interest for the drilling of future wells in the project area. Daybreak et al will earn a 50% interest in the Chevron lands located in the same project area, by paying 100% of the cost of the first three initial test wells to be drilled on the jointly held lands. The three initial test wells must be drilled within nine months of the seismic data interpretation being completed.

On July 5, 2007, Daybreak and its partners (“Daybreak et al”), entered into a Joint Development Participation Agreement (“JDPA”) with three companies for a drilling program in the Tuscaloosa project area in Louisiana. This JDPA plans on four wells being drilled within the next year. The Daybreak working interest will range from 24.5% to 29.5% on each well. The JDPA does not effect any prior agreement for wells and production infrastructure that is already in place. Daybreak will have a 29.5% interest in all future lease rentals.

On August 31, 2007, the remaining two debenture holders of the $0.75 convertible debentures agreed to extend the term of the debentures to October 31, 2007. In consideration of this extension they received 112,000 warrants. The warrants were valued at $35,386 using the Black-Scholes option pricing model.  The assumptions used in the Black-Scholes valuation model were: a risk fee interest rate of 4.1 %; the current stock price at date of issuance of $0.53 per share; the exercise price of the warrants of $0.53; the term of two years; volatility of 114%; and dividend yield of 0.0%.
 
104
  Daybreak Oil and Gas, Inc.
(An Exploration Stage Company, Date of Inception March 1, 2005)
Notes to Financial Statements

SUPPLEMENTARY INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)

All of the Company’s operations are directly related to oil and natural gas producing activities located in Louisiana, Texas and Alabama.


Capitalized Costs Relating to Oil and Gas Producing Activities
 
   
As of February 28,
 
   
2007
   
2006
 
Proved properties
           
   Mineral interests
  $
2,092,107
    $
-
 
   Wells, equipment and facilities
   
2,129,400
     
-
 
Total proved properties
   
4,221,507
     
-
 
                 
Unproved properties
               
  Mineral interests
   
902,420
     
1,132,400
 
  Uncompleted wells, equipment and facilities
   
1,822,619
     
-
 
Total unproved properties
   
2,725,038
     
1,132,400
 
                 
                 
Less accumulated depreciation, depletion, amortization and impairment
    (2,393,693 )    
-
 
Net Capitalized Costs
  $
4,552,852
    $
1,132,400
 

 
Costs Incurred in Oil and Gas Producing Activities
 
   
TWELVE MONTHS ENDED
FEBRUARY 28,
 
   
2007
   
2006
 
Acquisition of proved properties
  $
428,669
    $
-
 
Acquisition of unproved properties
   
1,486,901
     
1,132,400
 
Development costs
   
859,688
     
-
 
Exploration costs
   
4,241,917
     
327,469
 
Total Costs Incurred
  $
7,017,175
    $
1,459,869
 






 
105
  Daybreak Oil and Gas, Inc.
(An Exploration Stage Company, Date of Inception March 1, 2005)
Notes to Financial Statements

Results of Operations from Oil and Gas Producing Activities

   
TWELVE MONTHS ENDED
FEBRUARY 28,
 
   
2007
   
2006
 
Oil and gas revenues
  $
629,346
    $
-
 
Production costs
    (373,766 )    
-
 
Exploration expenses
    (1,196,640 )     (327,469 )
Depletion, depreciation, and impairment
    (2,393,693 )    
-
 
Result of oil and gas producing operations before income taxes
    (3,334,753 )     (327,469 )
Provision for income taxes
   
-
     
-
 
Results of Oil and Gas Producing Operations
  $ (3,334,753 )   $ (327,469 )


Proved Reserves

The Company’s proved oil and natural gas reserves have been estimated by independent petroleum engineers.  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.  Due to the inherent uncertainties and the limited nature of reservoir data, such estimates are subject to change as addition 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.   The Company had no proved reserves in fiscal 2006.  The fiscal 2007 proved reserves are summarized in the table below:


   
Crude Oil and Natural Gas Liquid
Bbls
   
Natural Gas
Mcf
 
Proved reserves as of February 28, 2007:
           
Beginning of the period
   
-
     
-
 
Revisions of previous estimates
   
-
     
-
 
Improved recovery
   
-
     
-
 
Purchase of minerals in place
   
6,390
     
78,171
 
Extensions and discoveries
   
27,044
     
199,976
 
Production
    (4,009 )     (66,347 )
Sale of minerals in place
   
-
     
-
 
End of the period
   
29,425
     
211,800
 

 
106
  Daybreak Oil and Gas, Inc.
(An Exploration Stage Company, Date of Inception March 1, 2005)
Notes to Financial Statements

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, 2007 and 2006 in accordance with SFAS No. 69, “Disclosures About Oil and Gas Producing Activities” 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.
 
   
February 28,
 
   
2007
   
2006
 
             
Future cash inflows
  $
3,270,219
    $
-
 
Future production costs (1)
    (889,817 )    
-
 
Future development costs
    (170,762 )    
-
 
Future income tax expenses (2)
   
-
     
-
 
Future net cash flows
   
2,209,640
     
-
 
10% annual discount for estimated timing of cash flows
    (269,273 )    
-
 
Standardized measure of discounted future net cash flows at the end of the year
  $
1,940,367
    $
-
 
 
(1)  
Production costs include oil and gas operations expense, production ad valorem taxes, transportation costs and general and administrative 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.
 
Future cash inflows are computed by applying year-end prices, adjusted for location and quality differentials on a property-by-property basis, to year-end quantities of proved reserves, except in those instances where fixed and determinable price changes are provided by contractual arrangements at year-end. The discounted future cash flow estimates do not include the effects of the Company’s derivative instruments, if any. See the following table for average prices.
 
   
February 28,
 
   
2007
   
2006
 
             
Average crude oil price per Bbl
  $
56.71
     
n/a
 
Average natural gas price per Mcf
  $
7.56
     
n/a
 

 
107
  Daybreak Oil and Gas, Inc.
(An Exploration Stage Company, Date of Inception March 1, 2005)
Notes to Financial Statements
 
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.
 
Future income tax expenses are computed by applying the appropriate year-end statutory tax rates to the estimated future pretax net cash flows relating to the Company’s proved crude oil and natural gas reserves, less the tax bases of the properties involved. The future income tax expenses give effect to tax credits and allowances, but do not reflect the impact of general and administrative costs and exploration expenses of ongoing operations relating to the Company’s proved crude oil and natural gas reserves.
 
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 SFAS No. 69, at year end are set forth in the table below.
 
   
Twelve months ended February 28,
 
   
2007
   
2006
 
Standardized measure of discounted future net cash flows at the beginning of the year
  $
-
    $
-
 
Extensions, discoveries and improved recovery, less related costs
   
1,806,060
     
-
 
Revisions of previous quantity estimates
   
-
     
-
 
Changes in estimated future development costs
   
-
     
-
 
Purchases (sales) of minerals in place
   
389,887
     
-
 
Net changes in prices and production costs
   
-
     
-
 
Accretion of discount
   
-
     
-
 
Sales of oil and gas produced, net of production costs
    (255,580 )    
-
 
Development costs incurred during the period
   
-
     
-
 
Change in timing of estimated future production and other
   
-
     
-
 
Net change in income taxes
           
-
 
Standardized measure of discounted future net cash flows at the end of the year
  $
1,940,367
    $
-
 





 
108

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

During the fiscal years ended February 28, 2003 and February 29, 2004, the Board of Directors of the Company engaged the firm of DeCoria, Maichel & Teague PS (DMT) as our independent registered public accounting firm to perform annual audits. In those reports there were no adverse opinions or disclaimers of opinion nor were they modified as to uncertainty, audit scope or accounting principles, with the exception of a statement regarding the uncertainty of our Company’s ability to continue as a going concern.
 
Because of a pending merger with a company in California, the firm of DMT resigned on January 7, 2005 as our independent accountant. On January 12, 2005 we engaged the firm of Kabani & Company, as our independent auditors to provide the requisite audit services for the Company.
 
On April 20, 2005, the Board of Directors dismissed the firm of Kabani & Company as our independent auditors. Since the pending merger in California did not occur, the Board of Directors felt that it was important to have a local independent auditor to perform our annual audits. The firm of Kabani & Company did not report on any financial statements for the Company. While they were engaged by us, they did review our Quarterly Report on Form 10-QSB for the period ending November 30, 2004.
 
On May 24, 2005, Daybreak reported that we had again engaged the firm of DeCoria, Maichel & Teague PS (DMT) to act as our independent auditor and perform the requisite audit services for the fiscal years ended February 28, 2005. DMT performed the annual audit for the fiscal years ended February 28, 2005 and February 28, 2006. In those reports there were no adverse opinions or disclaimers of opinion nor were they modified as to uncertainty, audit scope or accounting principles, with the exception of a statement regarding the uncertainty of our Company’s ability to continue as a going concern.

On November 8, 2006, the Registrant’s independent auditor, DeCoria, Maichel & Teague PS (DMT) was dismissed based on a recommendation from the Audit Committee. There were no disagreements with DMT on any matter of accounting principals, financial statement disclosure, or auditing scope or procedures, however the Audit Committee recognized a need to engage an independent registered public accounting firm with more specific expertise with the oil and gas industry.
 
On November 8, 2006, the Board of Directors, engaged the firm of Malone & Bailey, PC of Houston, Texas, as the Company’s independent registered public accountants to perform annual audits for the Company. In the process of responding to comments from the Securities and Exchange Commission in regards to the SB-2 registration statement that we filed for the Spring 2006 private placement, Daybreak determined that it would be necessary to restate previously filed financial statements for the fiscal year ended February 28, 2006. The restatement of financial statements involved transactions of a non-cash nature for the determination of the fair value of common stock issuances and the recognition and accounting treatment of a beneficial conversion feature in regards to the convertible debentures that Daybreak had issued. As a consequence of the need for the restatement, Malone & Bailey was also engaged to conduct an audit of the fiscal year ended February 28, 2006 as well as February 28, 2007.
 
109

ITEM 8A.  CONTROLS AND PROCEDURES

(a)           Evaluation of Disclosure Controls and Procedures

As of the end of the reporting period, February 28, 2007, an evaluation was conducted by Daybreak management of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(e) of the Securities  Exchange Act of 1934 (the "Exchange Act"). Such disclosure  controls  and  procedures are  designed to insure 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 Securities & Exchange Commission rules and forms. Additionally, it is vital that such information is accumulated and communicated to our management in a manner to allow timely decisions regarding required disclosure.

Based upon that evaluation, our management concluded that our disclosure controls needed improvement and were not adequately effective as of February 28, 2007, to ensure timely reporting with the Securities and Exchange Commission.

Material weakness identified included:

The Company’s corporate governance and disclosure controls and procedures do not provide reasonable assurance that material transactions are timely and accurately reported in our Periodic Reports that we file with the Securities and Exchange Commission.
 
We have restated previously filed financial statements for the four (4) quarters for the fiscal year ended February 28, 2006, the 12 months ended February 28, 2006, and the first three (3) quarters for the fiscal year ended February 28, 2007.  The nature of the restatements is disclosed in this 10-K filing as Note 11 to the financial statements.  The material weaknesses giving rise to the restatements were due to errors in applying GAAP in regards to a) properly valuing and recording share based payments, and b) properly valuing and recognizing beneficial conversion features, relative fair value of warrants and related discounts on convertible debt and preferred stock issuances.  These deficiencies were identified as a result of comment letters received from the Securities and Exchange Commission (SEC) in response to our previously filed SB-2 Registration Statement.  Our Independent Registered Accountants also noted these deficiencies during the audit of our financials statements for the fiscal years ended February 28, 2007 and February 28, 2006, respectively.
 
In particular, the Company does not have adequate controls over the timely filing of our required quarterly 10-QSB and year end 10-KSB reports. For the fiscal year ended February 28, 2007, we were forced to file a 12b-25 “Notification of Late Filing” report for the quarters ended August 31, 2006 and November 30, 2006.

Additionally, the filing of our third quarter 10-QSB was delayed beyond the extended due date and this resulted in an “E” being placed behind our trading symbol until the delinquent report was filed. For the fiscal year end 10-KSB report, the filing of the 12b-25 report itself was delinquent. This resulted in a second “E” in less than 12 months being placed behind our trading symbol.

Our 10-KSB report for the fiscal year ended February 28, 2007, should have been filed on May 29, 2007. We were unable to complete the 10-KSB in the time allotted because the restatement of our previously filed financial statements was not completed. Consequently we filed a 12b-25 “Notification of Late Filing” report, believing that we would complete the restatement and audit process within the filing extension period.
 
110
We were not successful in meeting that goal. On July 2, 2007, our stock was dropped from being quoted on the OTC Bulletin Board market to the OTC pink sheet market. We will be eligible to apply to return to the OTC bulletin Board market when we become current in our SEC filings.

Our first quarter 10-QSB report for the fiscal year ending February 29, 2008 should have been filed on July 16, 2007. We were not successful in making this filing deadline because the audit of our prior fiscal year ended February 28, 2006 was not completed.

Due to the amount of administrative staff of the Company, certain beneficial control methods are not available for our implementation. This is especially true when evaluating an effective separation of duties and responsibilities in the corporate office.
 
(b)           Changes in Internal Control.

As required by Rule 13a-15(d), the Company’s management also conducted evaluations of our internal controls over financial reporting to determine whether any changes occurred during the fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

The Company’s 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 principals. 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.

During the preparation of the Company’s financial statements, as of February 28, 2007, the Company concluded that the current system of disclosure controls and procedures are still not effective. A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.

Controls failed to ensure that common stock transactions were disclosed in a timely manner on Form 8-K, Current Reports. On March 10, 2006, we commenced a Regulation D Rule 506 common stock offering. The Securities and Exchange Commission’s rules and regulations require that we report certain issuances of unregistered equity securities on a Current Report Form 8-K.  Our Regulation D offering was an unregistered offering of equity securities. In our filings on April 5, 2006 and again May 26, 2006, of Form 8-K that reported the sales of our equity securities, we were late by one day in meeting the timely filing requirements for 8-K reporting. In both instances, this was because of our internal control procedures for review and approvals of 8-K filings were not properly executed.

As a result of our evaluations, the Company has initiated the changes in internal control described below. It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events.
 
111
Changes Implemented to Correct Material Weaknesses:

  • We have revised our operation procedures relating to management’s issuance of common stock and the timely disclosure of unregistered equity transactions.
  • We have increased administrative staff to assist in the more timely preparation of all required reporting documents
(c)           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 8B.  OTHER INFORMATION

None





 
112

PART  III

ITEM 9.   DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
 
DIRECTORS
     
       
Name
Age
Position(s) w/the Company Director Since
Dale B. Lavigne
 75
Director/Chairman March 1965
Robert N. Martin
 52
Director/President December 2004
Eric L. Moe
 43
Director / CEO August 2006
Jeffrey R. Dworkin
 49
Director/Secretary December 2004
Terrence J. Dunne
 58
Director/Chief Financial Officer January 2006
Thomas C. Kilbourne
 55
Director/Treasurer/Controller January 2001
Michael Curtis
 52
Director December 2004
Ronald D. Lavigne
 52
Director July 1999
Tim R. Lindsey
 55
Director January 2007
       
       
EXECUTIVE  OFFICERS
     
       
Bennett W. Anderson
46
Chief Operating Officer March 2006

 
Robert N. Martin, a Professional Geologist, is the President and a Director of the Company.  Mr. Martin graduated from McGill University with a Bachelor of Science degree. Prior to becoming the President of the Company in December 2004, Mr. Martin was the President of LongBow Energy Corporation from October 2003 until October 2004.  From September 2000 until November 2002, Mr. Martin was the Vice President of Exploration for New Energy West LTD. of Calgary, Alberta.   Mr. Martin is a member of the Association of Professional Geologists, Geophysicists and Engineers of Alberta and a member of the Canadian Society of Petroleum Geologists.

Eric L. Moe   became the CEO of the Company on March 1, 2006 and was appointed a director on August 1, 2006. Mr. Moe has over 21 years experience in the finance field. He has served as a registered representative with several NASD member securities firms; and a Senior Partner, Vice President and branch manager of a registered broker dealer. Since 1998, Mr. Moe has been consulting to both private and public companies specializing in mergers and acquisitions and is currently providing investor relationship services to several public companies. During his career, Mr. Moe has assisted in helping over 20 private companies become public companies. Additionally, he has assisted in raising over $100,000,000 in equity and debt financing. Mr. Moe attended Eastern Washington University.

Dale B. Lavigne is Chairman of the Board and a Director of the Company.  Mr. Lavigne has been a director of the Company since 1965 and served as the Company’s President from 1989 until December 2004.  Mr. Lavigne graduated from the University of Montana with a B. S. Degree in Pharmacy. For the past 47 years, Mr. Lavigne has been the Chairman and a Director of the Osburn Drug Company, Inc., a 4-store chain of retail pharmacies in North Idaho.  Mr. Lavigne is also a Director and Officer of Metropolitan Mines, Inc., a reporting publicly-held, inactive mineral exploration company. Mr. Lavigne is also a director and officer of various other public non-reporting inactive mineral exploration companies.  Mr. Lavigne is the former Chairman of the First National Bank of North Idaho; a former member of the Gonzaga University Board of Regents; former President of the Silver Valley Economic Development Corporation and a former member of the Governor's Task Force on Rural Idaho. Mr. Lavigne is the father of Ronald B. Lavigne and the father-in-law of Thomas C. Kilbourne.

113
Bennett W. Anderson serves as Chief Operating Officer. Mr. Anderson most recently served as a Senior Vice President with Novell, Inc. from 1998-2002. His duties included product direction, strategy and market direction, and training and support for the field sales staff. He led 25 product managers in supporting products and suites with revenues of $60,000,000 and an annual growth rate of 80%. He also managed 300 engineers to develop more than 20 core technologies. From 1978 to 1982 Mr. Anderson worked as a rig hand and was involved in drilling over a dozen wells in North Dakota. He holds a B.S. degree from Brigham Young University in Computer Science and graduated with University Honors of Distinction.

Michael Curtis is a Director of the Company.  Since January 1998, Mr. Curtis has been the president of Cardwell Capital Corporation, a private investment and trading company that invests in private and public corporations in the North American Markets.

Terrence J. Dunne serves as Chief Financial Officer and a Director of the Company. For more than the past five years Mr. Dunne has operated Terrence J. Dunne & Associates, a sole proprietorship which provides bookkeeping, income tax return preparation and business consulting services for small businesses. Mr. Dunne received his BBA, MBA and Masters in Taxation degrees from Gonzaga University.

Mr. Dunne is an officer and/or director of the following companies:

1) Mr. Dunne is currently both a Director and the President of Hanover Gold Company, Inc. In 2006, Mr. Dunne purchased 2,200,000 shares of Hanover Gold for $0.25 per share as part of a Regulation D-506 private placement. Hanover Gold currently trades on the OTC Bulletin Board market.

2) In 2006, Mr. Dunne, became a Director and Chief Financial Officer (CFO) of Gold Crest Mines, Inc. formerly known as Silver Crest Mines, Inc. Mr. Dunne currently owns approximately 8,000,000 shares of Gold Crest.  Gold Crest is an exploration stage gold mining company that currently trades on the OTC pink sheet market.

3) In late 2006, Mr. Dunne became a director of Superior Silver Mines, Inc., an inactive mining company that trades on the OTC pink sheet market. Mr. Dunne currently owns approximately 177,000 shares in the company.


Jeffrey R. Dworkin is a Director and Corporate Secretary of the Company.  Mr. Dworkin graduated from Queens University with a Bachelor of Arts Degree and the London School of Economics and Politics with a Bachelor of Laws degree.  Prior to becoming a the Secretary and a Director, Mr. Dworkin worked in the oil and gas industry as a private consultant. He was previously employed by LongBow Energy Corp., a junior oil and gas company listed on the TSX Venture Exchange, and assisted in the raising of approximately Cdn$3 MM.  Mr. Dworkin declared personal bankruptcy under Canadian law on September 3, 2003 and was discharged on June 3, 2004.

Thomas C. Kilbourne is the Controller/Treasurer and a Director of the Company and is formerly its Chief Financial Officer.  Mr. Kilbourne has been an officer and director of the Company since January 2001. He graduated from the University of Montana with a BS Degree in Business Administration and Finance.  
114
Mr. Kilbourne has been the Chief Financial Officer and a Director of the Osburn Drug Company since 1999. Prior to that time, he had been the General Manager of Tabor’s/Modern Drug in Wallace, Idaho since 1980. Mr. Kilbourne is also a director and officer of various other public non-reporting inactive mineral exploration companies. Mr. Kilbourne is the son-in-law of Dale Lavigne and the brother-in-law of Ronald Lavigne.

Ronald D. Lavigne is a Director of the Company.  Mr. Lavigne has served as a Director of the Company since July of 1999.  Mr. Lavigne graduated from the University of Montana with a BS Degree in Pharmacy.  Mr. Lavigne is the President and a Director of the Osburn Drug Company.  Mr. Lavigne is also a director and officer of various other public non-reporting inactive mineral exploration companies, and is the son of Dale Lavigne and the brother-in-law of Thomas Kilbourne.
 
Tim R. Lindsey is a Director of the Company.  Mr. Lindsey has over thirty years of technical and executive leadership in exploration, production, technology, and business development in the United States, Canada, Africa, Europe, Latin America and Asia – Pacific.
 
From March 2005 to the present, Mr. Lindsey has been a Principal of Lindsey Energy and Natural Resources an independent consulting firm specializing in energy and mining industry issues. From September 2003 to March 2005, Mr. Lindsey held the positions of Vice-President, Exploration and Senior Vice-President, Exploration with the Houston Exploration Company (NYSE:THX), a Houston-based independent natural gas and oil company engaged in the exploration, development, exploitation and acquisition of domestic natural gas and oil properties. From October 1975 to February 2003, Mr. Lindsey was employed with Marathon Oil Corporation (NYSE: MRO), a Houston-based company engaged in the worldwide exploration and production of crude oil and natural gas, as well as the domestic refining, marketing and transportation of petroleum products. During his 27 year tenure with Marathon, Mr. Lindsey held a number of positions including senior management roles in both domestic and international exploration and business development. He also serves as a Director for Challenger Energy Corp., a Calgary-based oil and gas company focused on projects offshore Trinidad and Tobago; and, offshore Nova Scotia.  
 
Mr. Lindsey obtained his Bachelor of Science Degree in Geology from Eastern Washington University in 1973, and completed his graduate studies in Economic Geology from the University of Montana in 1975.  In addition, he completed the Advanced Executive Program from the Kellogg School of Management at Northwestern University in 1990. Mr. Lindsey is a member of the American Association of Petroleum Geologists and the Rocky Mountain Association of Geologists.
 
Directors’ Term of Office
 
Directors hold office until the next annual meeting of shareholders and the election and qualification of their successors. Officers are elected annually by our board of directors and serve at the discretion of the board of directors.
 
Board Meetings
 
During the fiscal year ended February 28, 2007, there were twelve regular meetings of the Board of Directors. All directors attended at least 75% of these meetings with the exception of Michael Curtis.
 
115
Director Compensation
 
For the fiscal year ended February 28, 2007, directors of the Company were compensated for their services at a rate of $750 per month. Director fees were paid in cash on a quarterly basis.
 
Committees of the Board of Directors
 
Audit Committee
 
The Audit Committee is responsible for monitoring the integrity of the Company’s financial reporting standards and practices and its financial statements, overseeing the Company’s compliance with ethics and compliance policies and legal and regulatory requirements, and selecting, compensating, overseeing, and evaluating the Company’s independent auditors.

The members of the Audit Committee are Dale Lavigne, Terrence Dunne and Ronald Lavigne. None of these Audit Committee members is independent as defined in the listing standards of the American Stock Exchange and the rules of the Securities and Exchange Commission. The Board has determined that Terrence Dunne does qualify as an “audit committee financial expert” on the Audit Committee, as that term is defined in the rules of the Securities and Exchange Commission.

In forming our Board of Directors, we sought out individuals who would be able to guide our operations based on their business experience, both past and present, or their education. Our business model is not complex and our accounting issues are straightforward. Responsibility for our operations is centralized within management. We rely on the assistance of others, such as our accountant, to help us with the preparation of our financial information. We recognize that having a person who possesses all of the attributes of an independent audit committee financial expert would be a valuable addition to our Board of Directors, however, we are not, at this time, able to compensate such a person therefore, we may find it difficult to attract such a candidate.

Nominating Committee

The entire Board of Directors serves as the nominating committee. The nominating committee does not have a charter.

Compensation Committee

The members of the Compensation Committee are Dale Lavigne, Terrence Dunne and Michael Curtis. The compensation committee does not have a charter.

None of the foregoing Directors or Executive Officers has, during the past five years:
 
(a) Had any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time. Mr. Jeffrey Dworkin declared personal bankruptcy under Canadian law on September 3, 2003 and was discharged on June 3, 2004
 
(b) Been convicted in a criminal proceeding or subject to a pending criminal proceeding;
 
116
(c) Been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; and
 
(d) Been found by a court of competent jurisdiction (in a civil action), the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.
 
Compliance with Section 16(a) of the Exchange Act . Our officers, directors and persons owning more than 10% of our common stock are obligated to file reports of ownership and changes in ownership with the Securities and Exchange Commission under Section 16(a) of the Securities Exchange Act of 1934. To our knowledge, based solely upon review of the copies of such reports received or written representations from the reporting persons, we believe that during our fiscal year ended February 28, 2007 our directors, executive officers and persons who own more than 10% of our common stock complied with all Section 16(a) filing requirements with the exception of the following:

Ronald Lavigne (1 Report, 1 Transaction)

Code of Ethics . The Company has adopted a Code of Ethics that applies to the Company's executive officers and directors. The Company will provide, without charge, a copy of the Code of Ethics on the written request of any person addressed to the Company at, Daybreak Oil and Gas, Inc. 601 W. Main Ave., Suite 1012; Spokane, WA 99201. Our code of ethics can also be viewed on our Company website.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
117
ITEM 10.  EXECUTIVE COMPENSATION

In our fiscal year ending February 28, 2005, we paid no compensation to any director or officer.

In our fiscal year ending February 28, 2006, we paid our officers and directors a total of $60,050 in cash for management and consulting services.  During this same period, we granted these individuals 2,783,000 shares of our unregistered common stock for director, management and consulting services.  This stock had a restated fair value of $2,010,730 at the grant date.  During the period of these issuances the trading price of this stock ranged from a low of $.33 per share to a high of $2.25 per share.

In our fiscal year ending February 28, 2007, we paid our officers and director a total of $553,941 in cash for director, management and consulting services.  During this same period, we granted these individuals 1,050,000 shares of our unregistered common stock for management and consulting services.  This stock had a restated fair value of $2,206,500 at the grant date.  During the period of these issuances, the trading price of this stock ranged from a low of $1.66 per share to a high of $2.95 per share.

Executive Summary Compensation Table
 
Name and Principal Position
 Position
Fiscal Year Ended February 28
 
Salary
   
Stock Awards
   
Total
 
Robert Martin (1) (2) (3)
President
2007
  $
161,500
    $ 597,500 (3)   $
759,000
 
 
 
2006
  $
40,050
    $ 869,000 (2)   $
909,050
 
 
 
2005
  $
-
    $
-
    $
-
 
Eric Moe (4) (5) (6) (7)
Chief Executive Officer (4)
2007
  $
103,500
    $ 1,110,000 (7)   $
1,213,500
 
 
 
2006
  $ 32,000 (5)   $ 955,000 (6)   $
987,000
 
 
 
2005
  $
-
    $
-
    $
-
 
Dale Lavigne (8)
Chairman
2007
  $
-
    $
-
    $
-
 
 
 
2006
  $
-
      168,000 (8)   $
168,000
 
 
 
2005
  $
-
    $
-
    $
-
 
Terrence Dunne (9)
Chief Financial Officer
2007
  $
-
    $
-
    $
-
 
 
 
2006
  $
-
    $ 224,000 (9)   $
224,000
 
 
 
2005
  $
-
    $
-
    $
-
 
Bennett Anderson (10)
Chief Operating Officer
2007
  $
98,500
    $
-
    $
98,500
 
 
 
2006
  $
5,000
      223,000 (10)   $
228,000
 
 
 
2005
  $
-
    $
-
    $
-
 
Thomas Kilbourne (9) (11)
Treasurer and Controller
2007
  $
84,500
    $ 239,000 (11)   $
323,500
 
 
 
2006
  $
-
    $ 224,000 (9)   $
224,000
 
 
 
2005
  $
-
    $
-
    $
-
 
Jeffrey Dworkin
Secretary
2007
  $
36,191
    $
-
    $
36,191
 
 
 
2006
  $
12,000
    $
-
    $
12,000
 
 
 
2005
  $
-
    $
-
    $
-
 
 
118
 
Ronald Lavigne (8)
Director
2007
  $
-
    $
-
    $
-
 
 
 
2006
  $
-
    $ 168,000 (8)   $
168,000
 
 
 
2005
  $
-
    $
-
    $
-
 
Tim Lindsey (12)
Director
2007
  $
-
    $ 260,000 (12)   $
260,000
 
 
 
2006
  $
-
    $
-
    $
-
 
 
 
2005
  $
-
    $
-
    $
-
 
Totals
 
2007
  $
484,191
    $
2,206,500
    $
2,690,691
 
   
2006
  $ 89,050 (5)   $ 2,831,000 (6)   $
2,920,050
 
   
2005
  $
-
    $
-
    $
-
 

(1)
Payments for Mr. Martin’s services are paid directly to 413294 Alberta Ltd., a Canadian Company.
(2)
Includes $869,000 that was paid with 1,100,000 shares of unregistered common stock.
(3)
Includes $597,500 that was paid with 250,000 shares of unregistered common stock.
(4)
For the fiscal year ended February 28, 2006, Mr. Moe was employed as an investor relations (IR) consultant to Daybreak
(5)
Includes $29,000 that was paid for investor relations (IR) consulting to Mr. Moe in fiscal year 2006.
(6)
Includes $955,000 that was paid with 1,500,000 shares of unregistered common stock for IR consulting to Mr. Moe in fiscal year 2006.
(7)
Includes $1,110,000 that was paid with 500,000 shares of unregistered common stock.
(8)
Includes $168,000 that was paid with 300,000 shares of unregistered common stock.
(9)
Includes $224,000 that was paid with 400,000 shares of unregistered common stock.
(10)
Includes $223,000 that was paid with 100,000 shares of unregistered common stock.
(11)
Includes $239,000 that was paid with 100,000 shares of unregistered common stock.
(12)
Includes $260,000 that was paid with 200,000 shares of unregistered common stock.













119
Director Summary Compensation Table
 
Name and Principal Position
 Position
Fiscal Year Ended February 28
 
Fees
   
Stock Awards
   
Total
 
Robert Martin (1) (2) (4)
Director
2007
  $ 9,000 (4)   $
-
    $
9,000
 
 
 
2006
  $
-
    $ 21,330 (2)    
21,330
 
 
 
2005
  $
-
    $
-
    $
-
 
Eric Moe (4)
Director (9)
2007
  $ 5,250 (4)   $
-
    $
5,250
 
 
 
2006
  $
-
    $
-
    $
-
 
 
 
2005
  $
-
    $
-
    $
-
 
Dale Lavigne (2) (4)
Chairman and Director
2007
  $ 9,000 (4)   $
-
    $
9,000
 
 
 
2006
  $
-
    $ 21,330 (2)   $
21,330
 
 
 
2005
  $
-
    $
-
    $
-
 
Terrence Dunne (3) (4)
Director
2007
  $ 9,000 (4)   $
-
    $
9,000
 
 
 
2006
  $
-
    $ 6,750 (3)   $
6,750
 
 
 
2005
  $
-
    $
-
    $
-
 
Thomas Kilbourne (2) (4)
Director
2007
    9,000 (4)   $
-
    $
9,000
 
 
 
2006
  $
-
    $ 21,330 (2)   $
21,330
 
 
 
2005
  $
-
    $
-
    $
-
 
Jeffrey Dworkin (2) (4)
Director
2007
  $ 9,000 (4)   $
-
    $
9.000
 
 
 
2006
  $
-
    $ 21,330 (2)   $
21,330
 
 
 
2005
  $
-
    $
-
    $
-
 
Ronald Lavigne (2) (4)
Director
2007
  $ 9,000 (4)   $
-
    $
9,000
 
 
 
2006
  $
-
    $ 21,330 (2)   $
21,330
 
 
 
2005
  $
-
    $
-
    $
-
 
Michael Curtis (2) (4)
Director
2007
  $ 9,000 (4)   $
-
    $
9,000
 
 
 
2006
  $
-
    $ 21,330 (2)   $
21,330
 
 
 
2005
  $
-
    $
-
    $
-
 
Tim Lindsey (6)
Director
2007
  $ 1,500 (6)   $
-
    $
1,500
 
 
 
2006
  $
-
    $
-
    $
-
 
 
 
2005
  $
-
    $
-
    $
-
 
Totals
 
2007
  $
69,750
    $
-
    $
69,750
 
   
2006
  $
-
    $
134,730
    $
134,730
 
   
2005
  $
-
    $
-
    $
-
 
 
(1)
Payments for Mr. Martin’s services are paid directly to 413294 Alberta Ltd., a Canadian Company.
(2)
Directors fees of $21,330 that were paid with 30,000 shares of unregistered common stock.
(3)
Directors fees of $6,750 that were paid with 3,000 shares of unregistered common stock.
(4)
Directors fees of $9,000 that were paid in cash.
(5)
Directors fees of $5,250 that were paid in cash.
(6)
Directors fees of $1,500 that were paid in cash.
 
120
Employment Contracts

In the fiscal year from March 1, 2006 through February 28, 2007, we had verbal employment contracts with three individuals. These employees were: Eric Moe, CEO (Chief Executive Officer); Bennett Anderson, COO (Chief Operating Officer); and Thomas Kilbourne, Controller/Treasurer. Additionally, we had a verbal contract with a private consulting firm, 413294 Alberta, Ltd., that supplies the services of our company President, Robert Martin. These employment and consulting contracts are annual contracts that coincide with our fiscal year. The terms of these contracts were basically the same as the written contracts from the preceding fiscal year. All other services are currently contracted for with independent contractors. The Company has not obtained key man life insurance on any of its officers or directors.

For the fiscal year from March 1, 2007 through February 28, 2008, we have written employment contracts with Eric Moe, CEO; Bennett Anderson, COO; and Thomas Kilbourne, Controller/Treasurer. Additionally, we have written consulting contract with 413294 Alberta, Ltd. to provide the services of Robert Martin as President; Jeffrey Dworkin to provide assistance with oil and gas mineral leases and corporate governance; and Tim Lindsey to provide assistance with developing oil and gas properties and corporate development.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
121
ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information on beneficial ownership in the table and the footnotes thereto is based upon the Company's records and, in the case of holders of more than 5% of the Company's stock, the most recent Forms 3 and 4 filed by each such person or entity and information supplied to the Company by such person or entity. Unless otherwise indicated, to the Company’s knowledge each person has sole voting power and sole investment power with respect to the shares shown.

Security Ownership of Certain Beneficial Owners

As of the close of business on September 14, 2007, based on information available to the Company, the following persons own beneficially more than 5% of any class of the outstanding voting securities of Daybreak Oil and Gas, Inc.


Title of Class
Name and Address of Beneficial Owner
Amount and Nature of Beneficial Ownership
Percent of Class (1)
Common Stock
Terrence J. Dunne
3,803,804
9.24
 
601 W. Main Ave
   
 
Suite  1017
   
 
Spokane, WA 99201
   
Common Stock
Keith A. Hooper (2)
3,176,077
7.71
 
1529 W. Adams St.
   
 
Chicago, IL  60607
   
Common Stock
Robert O' Brien
2,878,953
6.99
 
1511 S. Riegel CT.
   
 
Spokane, WA 99212
   
_________________________

(1)
Percent of class is based upon 41,171,299 shares of common stock outstanding on September 14, 2007.
(2)
Includes 2,936,077 shares held directly or as a trustee by Mr. Hooper; 240,000 shares held indirectly by Hooper Group a Company controlled by Mr. Hooper.

 

122
 
The following table sets forth, as of September 14, 2007, information regarding the beneficial ownership of our common stock with respect to each of our executive officers, each of our directors, known by us to own beneficially more than 5% of the common stock, and all of our directors and executive officers as a group. The term "executive officer" is defined as the President, Chief Executive Officer, Chief Financial Officer, Secretary, Treasurer and the Chief Operating Officer. Each individual or entity named has sole investment and voting power with respect to shares of common stock indicated as beneficially owned by them, subject to community property laws, where applicable, except where otherwise noted. The percentage of common stock beneficially owned is based on 41,171,299   shares of common stock outstanding as of September 14, 2007.
 
 
Name of
Title or
Amount and Nature
Percent
Title of Class
Beneficial Owner
Position
of Beneficial Ownership
of Class (1)
         
Common Stock
Robert N. Martin
President & Director
1,380,000
3.35%
         
Common Stock
Dale B. Lavigne
Chairman & Director
822,555
2.00%
         
Common Stock
Eric L. Moe
CEO & Director
1,104,600
2.68%
         
Common Stock
Bennett W. Anderson
COO
300,000
0.73%
         
Common Stock
Terrence J. Dunne
CFO & Director
3,803,804
9.24%
         
Common Stock
Jeffrey R. Dworkin
Secretary & Director
30,000
0.07%
         
Common Stock
Thomas C. Kilbourne
Treasurer & Director
930,072
2.26%
     
.
 
Common Stock
Ronald D. Lavigne
Director
688,814
1.67%
         
Common Stock
Michael Curtis
Director
30,000
0.07%
         
Common Stock
Tim R. Lindsey
Director
200,000
0.49%
     Total
Ten (10) individuals
 
9,289,845
22.56%

 
 
 
 
 
 
 
 
 
 
 

 
123
ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
For the fiscal years ended February 28, 2005 and February 28, 2004 there were no related party transactions.
 
During the fiscal year ended February 28, 2006, we had the following related party transactions:
 
Convertible Debentures
 
From March 19, 2005 until August 31, 2005, five shareholders of whom three were directors and the other two were 10% control persons (at the time) made twenty-six loans to the Company totaling $158,821 in convertible debentures to finance our operating activities. These convertible debentures had the following features: one year term, six percent interest rate and the notes were convertible after six months to unregistered common stock. The conversion rate of $0.25 per share was selected because a private placement offering of our common stock was being planned at the same time for that same price. Both the principal and the accrued interest were eligible for conversion to unregistered common stock.

In the fiscal year ended February 28, 2006, twenty-three of the convertible debentures representing $126,821 in principal were converted resulting in 524,820 shares of unregistered common stock being issued to satisfy the principal and interest obligations. By February 28, 2007, all twenty-six of the debentures were converted resulting in a total of 662,360 shares of unregistered common stock being issued to satisfy principal and interest obligations. The convertible note, shares issued upon conversion of the note and shares issued for interest were issued pursuant to a Section 4(2) exemption from registration under the Securities Act of 1933, as amended.

In accordance with EITF 00-27 and 98-5, the Company determined that the debentures issued integrated a beneficial conversion feature (BCF). The Company has recorded a discount of $73,511 to reflect the BCF feature over this period. The beneficial conversion features were recognized as discounts on the debentures at the date of issuance. Utilizing the effective interest method, these discounts have been amortized over the period commencing on the issuance date to the date of stated redemption (i.e. maturity) of the debt in accordance with EITF 00-27 rather than EITF 98-5. The discount of $73,511 was fully amortized at February 28, 2007.

The Company has evaluated the application of SFAS No. 133 and EITF 00-19 for the consideration of embedded derivatives with respect to the conversion feature of the convertible debentures relative to the guidance of these pronouncements, the Company has concluded that these debentures did not contain embedded derivatives.

The following is a listing of the twenty-six loans from related parties that occurred:

1) On March 19, 2005, Terrence Dunne (appointed a director in January 2006 and CFO in April 2006), a shareholder and 10% control person (at the time), loaned the Company $623 to finance ongoing operating expenses.  On the day of the loan, the closing price of our stock was $0.47.  On November 28, 2005, Mr. Dunne converted the note plus interest into unregistered common stock.  He was issued 2,593 shares of stock from this conversion.  On the day of the conversion, the closing price of our stock was $0.52.  Based on this price the value of the principal in the conversion was $1,296

2) On March 22, 2005, Terrence Dunne (appointed a director in January 2006 and CFO in April 2006), a shareholder and 10% control person (at the time), loaned the Company $10,216 to finance ongoing operating expenses. On the day of the loan, the closing price of our stock was $0.46. On November 28, 2005, Mr. Dunne converted the note plus interest into unregistered common stock.  
 
124
He was issued 42,503 shares of stock from this conversion.  On the day of the conversion, the closing price of our stock was $0.52.  Based on this price the value of the principal in the conversion was $21,249.

3) On March 23, 2005, Dale Lavigne, a director and shareholder, loaned the Company $15,000 to finance ongoing operating expenses. On the day of the loan, the closing price of our stock was $0.48. On November 28, 2005, Mr. Lavigne converted the note plus interest into unregistered common stock. He was issued 62,397 shares of stock from this conversion.  On the day of the conversion, the closing price of our stock was $0.52.  Based on this price the value of the principal in the conversion was $31,200.

4) On March 23, 2005, Ronald Lavigne, a director and shareholder, loaned the Company $3,000 to finance ongoing operating expenses. On the day of the loan, the closing price of our stock was $0.48. On November 28, 2005, Mr. Lavigne converted the note plus interest into unregistered common stock. He was issued 12,479 shares of stock from this conversion.  On the day of the conversion, the closing price of our stock was $0.52.  Based on this price the value of the principal in the conversion was $6,240.

5) On March 25, 2005, Thomas Kilbourne, a director, Treasurer and shareholder loaned the Company $3,000 to finance ongoing operating expenses. On the day of the loan, the closing price of our stock was $0.50.  On November 28, 2005, Mr. Kilbourne converted the note plus interest into unregistered common stock.  He was issued 12,475 shares of stock from this conversion. On the day of the conversion, the closing price of our stock was $0.52.  Based on this price the value of the principal in the conversion was $6,240.

6) On March 25, 2005, Robert O’Brien, a shareholder and ten percent (10%) control person (at the time), loaned the Company $15,000 to finance ongoing operating expenses. On the day of the loan, the closing price of our stock was $0.50. On August 31, 2006, Mr. O’Brien converted the note plus interest into unregistered common stock. He was issued 65,168 shares of stock from this conversion. On the day of the conversion, the closing price of our stock was $1.92.  Based on this price the value of the principal in the conversion was $125,123.

7) On April 25, 2005, Terrence Dunne (appointed a director in January 2006 and CFO in April 2006), a shareholder and 10% control person (at the time), loaned the Company $8,000 to finance ongoing operating expenses. On the day of the loan, the closing price of our stock was $0.35.  On November 28, 2005, Mr. Dunne converted the note plus interest into unregistered common stock.  He was issued 33,105 shares of stock from this conversion.  On the day of the conversion, the closing price of our stock was $0.52.  Based on this price the value of the principal in the conversion was $16,640.

8) On April 25, 2005, Dale Lavigne, a director and shareholder, loaned the Company $8,000 to finance ongoing operating expenses. On the day of the loan, the closing price of our stock was $0.35. On November 28, 2005, Mr. Lavigne converted the note plus interest into unregistered common stock. He was issued 33,105 shares of stock from this conversion.  On the day of the conversion, the closing price of our stock was $0.52.  Based on this price the value of the principal in the conversion was $16,640.

9) On April 26, 2005, Ronald Lavigne, a director and shareholder, loaned the Company $3,000 to finance ongoing operating expenses. On the day of the loan, the closing price of our stock was $0.35. On November 28, 2005, Mr. Lavigne converted the note plus interest into unregistered common stock. He was issued 12,412 shares of stock from this conversion.  On the day of the conversion, the closing price of our stock was $0.52.  Based on this price the value of the principal in the conversion was $6,240. 

125
10) On April 26, 2005, Thomas Kilbourne, a director, Treasurer and shareholder, loaned the Company $3,000 to finance ongoing operating expenses. On the day of the loan, the closing price of our stock was $0.35.  On November 28, 2005, Mr. Kilbourne converted the note plus interest into unregistered common stock.  He was issued 12,412 shares of stock from this conversion. On the day of the conversion, the closing price of our stock was $0.52.  Based on this price the value of the principal in the conversion was $6,240.

11) On May 26, 2005, Terrence Dunne (appointed a director in January 2006 and CFO in April 2006), a shareholder and 10% control person (at the time), loaned the Company $3,982 to finance ongoing operating expenses. On the day of the loan, the closing price of our stock was $0.33.  On November 30, 2005, Mr. Dunne converted the note plus interest into unregistered common stock.  He was issued 16,418 shares of stock from this conversion. On the day of the conversion, the closing price of our stock was $0.52.  Based on this price the value of the principal in the conversion was $8,283.

12) On May 31, 2005, Thomas Kilbourne, a director, Treasurer and shareholder, loaned the Company $3,000 to finance ongoing operating expenses. On the day of the loan, the closing price of our stock was $0.32.  On November 30, 2005, Mr. Kilbourne converted the note plus interest into unregistered common stock.  He was issued 12,361 shares of stock from this conversion. On the day of the conversion, the closing price of our stock was $0.52.  Based on this price the value of the principal in the conversion was $6,240.

13) On June 16, 2005, Terrence Dunne (appointed a director in January 2006 and CFO in April 2006), a shareholder and 10% control person (at the time), loaned the Company $10,000 to finance ongoing operating expenses. On the day of the loan, the closing price of our stock was $0.33. On February 10, 2006, Mr. Dunne converted the note plus interest into unregistered common stock. He was issued 41,558 shares of stock from this conversion. On the day of the conversion, the closing price of our stock was $1.70.  Based on this price the value of the principal in the conversion was $68,000.

14) On July 27, 2005, Terrence Dunne (appointed a director in January 2006 and CFO in April 2006), a shareholder and 10% control person (at the time), loaned the Company $13,000 to finance ongoing operating expenses. On the day of the loan, the closing price of our stock was $0.25. On February 10, 2006, Mr. Dunne converted the note plus interest into unregistered common stock.  He was issued 53,675 shares of stock from this conversion. On the day of the conversion, the closing price of our stock was $1.70.  Based on this price the value of the principal in the conversion was $88,400.

15) On July 27, 2005, Thomas Kilbourne, a director, Treasurer and shareholder, loaned the Company $6,500 to finance ongoing operating expenses. On the day of the loan, the closing price of our stock was $0.25. On February 10, 2006, Mr. Kilbourne converted the note plus interest into unregistered common stock. He was issued 26,838 shares of stock from this conversion. On the day of the conversion, the closing price of our stock was $1.70.  Based on this price the value of the principal in the conversion was $44,200.

16) On July 27, 2005, Robert O’Brien, a shareholder and ten percent (10%) control person (at the time), loaned the Company $12,000 to finance ongoing operating expenses. On the day of the loan, the closing price of our stock was $0.25.  On August 31, 2006, Mr. O’Brien converted the note plus interest into unregistered common stock. He was issued 51,156 shares of stock from this conversion.  On the day of the conversion, the closing price of our stock was $1.92.  Based on this price the value of the principal in the conversion was $98,220.

126
17) On August 1, 2005, Dale Lavigne, a director and shareholder, loaned the Company $5,000 to finance ongoing operating expenses. On the day of the loan, the closing price of our stock was $0.30. On February 10, 2006, Mr. Lavigne converted the note plus interest into unregistered common stock.  He was issued 20,628 shares of stock from this conversion.  On the day of the conversion, the closing price of our stock was $1.70.  Based on this price the value of the principal in the conversion was $34,000.

18) On August 1, 2005, Thomas Kilbourne, a director, Treasurer and shareholder, loaned the Company $500 to finance ongoing operating expenses. On the day of the loan, the closing price of our stock was $0.30.   On February 10, 2006, Mr. Kilbourne converted the note plus interest into unregistered common stock.  He was issued 2,063 shares of stock from this conversion.  On the day of the conversion, the closing price of our stock was $1.70.  Based on this price the value of the principal in the conversion was $3,400.

19) On August 2, 2005, Ronald Lavigne, a director and shareholder, loaned the Company $5,000 to finance ongoing operating expenses. On the day of the loan, the closing price of our stock was $0.28.  On February 10, 2006, Mr. Lavigne converted the note plus interest into unregistered common stock.  He was issued 20,625 shares of stock from this conversion.  On the day of the conversion, the closing price of our stock was $1.70.  Based on this price the value of the principal in the conversion was $34,000.

20) On August 22, 2005, Thomas Kilbourne, a director, Treasurer and shareholder, loaned the Company $5,000 to finance ongoing operating expenses. On the day of the loan, the closing price of our stock was $0.44. On February 28, 2006, Mr. Kilbourne converted the note plus interest into unregistered common stock. He was issued 20,625 shares of stock from this conversion. On the day of the conversion the closing price of our stock was $2.25.  Based on this price the value of the principal in the conversion was $45,000.

21) On August 24, 2005, Terrence Dunne (appointed a director in January 2006 and CFO in April 2006), a shareholder and 10% control person (at the time), loaned the Company $6,000 to finance ongoing operating expenses. On the day of the loan, the closing price of our stock was $0.42. On February 28, 2006, Mr. Dunne converted the note plus interest into unregistered common stock.  He was issued 24,742 shares of stock from this conversion. On the day of the conversion, the closing price of our stock was $2.25.  Based on this price the value of the principal in the conversion was $54,000.

22) On August 26, 2005, Terrence Dunne (appointed a director in January 2006 and CFO in April 2006), a shareholder and 10% control person (at the time), loaned the Company $6,000 to finance ongoing operating expenses. On the day of the loan, the closing price of our stock was $0.40. On February 28, 2006, Mr. Dunne converted the note plus interest into unregistered common stock. He was issued 24,734 shares of stock from this conversion. On the day of the conversion, the closing price of our stock was $2.25.  Based on this price the value of the principal in the conversion was $54,000.

23) On August 26, 2005, Robert O’Brien, a shareholder and ten percent (10%) control person (at the time), loaned the Company $5,000 to finance ongoing operating expenses. On the day of the loan, the closing price of our stock was $0.40.  On August 31, 2006, Mr. O’Brien converted the note plus interest into unregistered common stock.  He was issued 21,216 shares of stock from this conversion. On the day of the conversion, the closing price of our stock was $1.92.  Based on this price the value of the principal in the conversion was $40,735.

24) On August 31, 2005, Ronald Lavigne, a director and shareholder, loaned the Company $2,500 to finance ongoing operating expenses. On the day of the loan, the closing price of our stock was $0.37.    On February 28, 2006, Mr. Lavigne converted the note plus interest into unregistered common stock.
 
127
He was issued 10,298 shares of stock from this conversion.  On the day of the conversion, the closing price of our stock was $2.25.  Based on this price the value of the principal in the conversion was $22,500

25) On August 31, 2005, Thomas Kilbourne, a director, Treasurer and shareholder, loaned the Company $2,500 to finance ongoing operating expenses. On the day of the loan, the closing price of our stock was $0.37.  On February 28, 2006, Mr. Kilbourne converted the note plus interest into unregistered common stock. He was issued 10,298 shares of stock from this conversion. On the day of the conversion, the closing price of our stock was $2.25.  Based on this price the value of the principal in the conversion was $22,500.

26) On August 31, 2005, Terrence Dunne (appointed a director in January 2006 and CFO in April 2006), a shareholder and 10% control person (at the time), loaned the Company $4,000 to finance ongoing operating expenses. On the day of the loan, the closing price of our stock was $0.37. On February 28, 2006, Mr. Dunne converted the note plus interest into unregistered common stock.  He was issued 16,476 shares of stock from this conversion. On the day of the conversion, the closing price of our stock was $2.25.  Based on this price the value of the principal in the conversion was $36,000.

Stock for Services

On May 11, 2005, we issued 1,100,000 shares of unregistered common stock to 413294 Alberta, Ltd., of Calgary, Alberta to supply the services of Robert Martin, as our Company President. On the grant date of March 1, 2005, the closing price of our stock was $0.79. Based on the closing price the value of this stock issuance was $869,000. In conforming to the current interpretation of FAS 123(R) the value of this transaction has now been expensed as of the grant date as reflected in our restated financials. The shares issued for services were issued pursuant to a Section 4(2) exemption from registration under the Securities Act of 1933, as amended.

On November 30, 2005, we issued 400,000 shares of unregistered common stock to Terrence Dunne, (appointed a director in January 2006 and CFO in April 2006), a shareholder and 10% control person (at the time), for management services. On the grant date of September 27, 2005, the closing price of our stock was $0.56. Based on the closing price the value of this stock issuance was $224,000. In conforming to the current interpretation of FAS 123(R) the value of this transaction has now been expensed as of the grant date as reflected in our restated financials. The shares issued for services were issued pursuant to a Section 4(2) exemption from registration under the Securities Act of 1933, as amended.

On December 19, 2005, we issued 30,000 shares of unregistered common stock to Terrence Dunne (appointed CFO in April 2006) for his personal guarantee on the Genesis Financial warehousing line of credit. On the grant date the closing price of our stock was $0.58. In conforming to the current interpretation of FAS 123(R) the value of this transaction has now been adjusted as reflected in our restated financials. The shares issued for services were issued pursuant to a Section 4(2) exemption from registration under the Securities Act of 1933, as amended

On January 17, 2006, we issued 300,000 shares of unregistered common stock to Dale Lavigne (Chairman), a director and shareholder for management services. On the grant date of September 27, 2005, the closing price of our stock was $0.56. Based on the closing price the value of this stock issuance was $168,000. In conforming to the current interpretation of FAS 123(R) the value of this transaction has now been expensed as of the grant date as reflected in our restated financials. The shares issued for services were issued pursuant to a Section 4(2) exemption from registration under the Securities Act of 1933, as amended.

128
On January 17, 2006, we issued 300,000 shares of unregistered common stock to Ronald Lavigne, a director and shareholder for management services. On the grant date of September 27, 2005, the closing price of our stock was $0.56. Based on the closing price the value of this stock issuance was $168,000. In conforming to the current interpretation of FAS 123(R) the value of this transaction has now been expensed as of the grant date as reflected in our restated financials. The shares issued for services were issued pursuant to a Section 4(2) exemption from registration under the Securities Act of 1933, as amended.

On January 17, 2006, we issued 400,000 shares of unregistered common stock to Thomas Kilbourne (Treasurer), a director and shareholder for management services. On the grant date of September 27, 2005, the closing price of our stock was $0.56. Based on the closing price the value of this stock issuance was $224,000. In conforming to the current interpretation of FAS 123(R) the value of this transaction has now been expensed as of the grant date as reflected in our restated financials. The shares issued for services were issued pursuant to a Section 4(2) exemption from registration under the Securities Act of 1933, as amended.

On February 17, 2006, we issued 100,000 shares of unregistered common stock to Bennett Anderson, a shareholder for management fees. On the grant date of February 17, 2006, the closing price of our stock was $2.23. Based on the closing price the value of this stock issuance was $223,000. In conforming to the current interpretation of FAS 123(R) the value of this transaction has now been expensed as of the grant date as reflected in our restated financials. The shares issued for services were issued pursuant to a Section 4(2) exemption from registration under the Securities Act of 1933, as amended.

Stock for Investor Relations Services

On April 27, 2005, we issued 500,000 shares of unregistered common stock to Eric Moe (appointed CEO in March 2006) for Investor Relations (“IR”) services. On the grant date of March 1, 2005, the closing price of our stock was $0.79. Based on the closing price the value of this stock issuance was $395,000. In conforming to the current interpretation of FAS 123(R) the value of this transaction has now been expensed as of the grant date as reflected in our restated financials. The shares issued for services were issued pursuant to a Section 4(2) exemption from registration under the Securities Act of 1933, as amended.

On April 27, 2005, we issued 350,000 shares of unregistered common stock to AnMac Enterprises (a company owned by Michael McIntyre) for Investor Relations (“IR”) services. On the grant date of March 1, 2005, the closing price of our stock was $0.79. Based on the closing price the value of this stock issuance was $276,500. In conforming to the current interpretation of FAS 123(R) the value of this transaction has now been expensed as of the grant date as reflected in our restated financials. The shares issued for services were issued pursuant to a Section 4(2) exemption from registration under the Securities Act of 1933, as amended.

On May 25, 2005, we issued 300,000 shares of unregistered common stock to Irwin Renneisen for IR consulting services. On the grant date of May 18, 2005, the closing price of our stock was $0.38. Based on the closing price the value of this stock issuance was $114,000. In August 2005, the 300,000 shares were returned to us and on August 25, 2005, we issued Irwin Renneisen 30,000 shares of restricted common stock. On the revised grant date of August 25, 2005, the closing price of our stock was $0.44. Based on the closing price the value of this stock issuance was $13,200. In conforming to the current interpretation of FAS 123(R) the value of this transaction has now been expensed as of the grant date as reflected in our restated financials.
 
129
The shares issued for services were issued pursuant to a Section 4(2) exemption from registration under the Securities Act of 1933, as amended.

On October 5, 2005, we issued 1,000,000 shares of unregistered common stock to Eric Moe (appointed CEO in March 2006) for Investor Relations (IR) services. On the grant date of September 27, 2005, the closing price of our stock was $0.56. Based on the closing price the value of this stock issuance was $560,000. In conforming to the current interpretation of FAS 123(R) the value of this transaction has now been expensed as of the grant date as reflected in our restated financials. The shares issued for services were issued pursuant to a Section 4(2) exemption from registration under the Securities Act of 1933, as amended.

On January 17, 2006, we issued 600,000 shares of unregistered common stock to Kirby Cochran, a shareholder for IR consulting services. On the grant date of January 13, 2006, the closing price of our stock was $0.55. Based on the closing price the value of this stock issuance was $330,000. In conforming to the current interpretation of FAS 123(R) the value of this transaction has now been expensed as of the grant date as reflected in our restated financials. The shares issued for services were issued pursuant to a Section 4(2) exemption from registration under the Securities Act of 1933, as amended.

Stock for Directors Services

On November 30, 2005, we issued 18,000 shares of unregistered common stock to each of the six members of the Board of Directors. These shares were issued for work that had been done beyond their regular director duties. These directors were 413295 Alberta Ltd. (Robert Martin), Mike Curtis, Dale Lavigne, Jeff Dworkin, Ronald Lavigne and Thomas Kilbourne. On the grant date of October 25, 2005, the closing price of our stock was $0.55. Based on the closing price the value of each stock issuance was $9,900. In conforming to the current interpretation of FAS 123(R) the value of this transaction has now been adjusted as reflected in our restated financials. The shares issued for services were issued pursuant to a Section 4(2) exemption from registration under the Securities Act of 1933, as amended.

On November 30, 2005, we issued 9,000 shares of unregistered common stock worth to each of the six members of the Board of Directors for director’s fees for the third quarter of the current fiscal year. These directors were 413295 Alberta Ltd. (Robert Martin), Mike Curtis, Dale Lavigne, Jeff Dworkin, Ronald Lavigne and Thomas Kilbourne. On the grant date of November 30, 2005, the closing price of our stock was $0.52. Based on the closing price the value of each stock issuance was $4,680. In conforming to the current interpretation of FAS 123(R) the value of this transaction has now been adjusted as reflected in our restated financials. The shares issued for services were issued pursuant to a Section 4(2) exemption from registration under the Securities Act of 1933, as amended.

On February 28, 2006, we issued 3,000 shares of unregistered common stock worth to each of the seven members of the Board of Directors for director’s fees for the fourth quarter of the current fiscal year. These directors were 413295 Alberta Ltd. (Robert Martin), Mike Curtis, Dale Lavigne, Jeff Dworkin, Ronald Lavigne, Terrence Dunne and Thomas Kilbourne. On the grant date of February 28, 2006, the closing price of our stock was $2.25. Based on the closing price the value of each stock issuance was $6,750. In conforming to the current interpretation of FAS 123(R) the value of this transaction has now been adjusted as reflected in our restated financials. The shares issued for services were issued pursuant to a Section 4(2) exemption from registration under the Securities Act of 1933, as amended.

During the fiscal year ended February 28, 2007, we had the following related party transactions:

130
Stock for Services

On May 26, 2006, we issued 250,000 shares of unregistered common stock to 413294 Alberta, Ltd., of Calgary, Alberta to supply the services of Robert Martin, as our Company President. These shares were initially valued at $0.75 per share and expensed throughout the fiscal year as monthly management fee costs. On the grant date of March 1, 2006, the closing price of our stock was $2.39. Based on the closing price the value of this stock issuance was $597,500. In conforming to the current interpretation of FAS 123(R) the value of this transaction has now been expensed as of the grant date as reflected in our restated financials. The shares issued for services were issued pursuant to a Section 4(2) exemption from registration under the Securities Act of 1933, as amended.

On May 26, 2006, we issued 250,000 shares of unregistered common stock to Eric Moe, CEO, for management services from March 1, 2006 through February 28, 2007. These shares were initially valued at $0.75 per share and expensed throughout the fiscal year as monthly management fee costs. On the grant date of March 1, 2006, the closing price of our stock was $2.39. Based on the closing price the value of this stock issuance was $597,500. In conforming to the current interpretation of FAS 123(R) the value of this transaction has now been expensed as of the grant date as reflected in our restated financials. The shares issued for services were issued pursuant to a Section 4(2) exemption from registration under the Securities Act of 1933, as amended.

On May 26, 2006, we issued 100,000 shares of unregistered common stock to Thomas Kilbourne, Treasurer and a director for management services from March 1, 2006 through February 28, 2007. These shares were initially valued at $0.75 per share and were expensed throughout the fiscal year as monthly management fee costs. On the grant date of March 1, 2006, the closing price of our stock was $2.39. Based on the closing price the value of this stock issuance was $239,000. In conforming to the current interpretation of FAS 123(R) the value of this transaction has now been expensed as of the grant date as reflected in our restated financials. The shares issued for services were issued pursuant to a Section 4(2) exemption from registration under the Securities Act of 1933, as amended.

On August 31, 2006, we issued another 250,000 shares of unregistered common stock to Eric Moe, CEO and a director. The shares were issued as additional compensation. These shares were initially valued at $1.00 per share and expensed throughout the fiscal year as monthly management fee costs. On the grant date of August 3, 2006, the closing price of our stock was $2.05. Based on the closing price the value of this stock issuance was $512,500. In conforming to the current interpretation of FAS 123(R) the value of this transaction has now been expensed as of the grant date as reflected in our restated financials. The shares issued for services were issued pursuant to a Section 4(2) exemption from registration under the Securities Act of 1933, as amended.

On February 23, 2007, we issued 200,000 shares of unregistered common stock to Tim Lindsey, a director for consulting services from January 2, 2007, through February 28, 2008. On the grant date of January 2, 2007, the closing price of our stock was $1.30. Based on the closing price the value of this stock issuance was $260,000. In conforming to the current interpretation of FAS 123(R) the value of this transaction has been expensed as of the grant date. The shares issued for services were issued pursuant to a Section 4(2) exemption from registration under the Securities Act of 1933, as amended.

Stock for Investor Relations Services

On May 10, 2006, we issued 150,000 shares of unregistered common stock to AnMac Enterprises (a company owned by Michael McIntyre) for Investor Relations (“IR”) consulting services from March 1, 2006 through February 28, 2007.
 
131
On the grant date of March 1, 2006, the closing price of our stock was $2.39. Based on the closing price the value of this stock issuance was $358,500. In conforming to the current interpretation of FAS 123(R) the value of this transaction has now been expensed as of the grant date as reflected in our restated financials. The shares issued for services were issued pursuant to a Section 4(2) exemption from registration under the Securities Act of 1933, as amended.

Office Lease

On August 3, 2006, the Board of Directors approved the rental of office space from Terrence Dunne & Associates, a company owned by Terrence Dunne (CFO and a director). Originally, we occupied approximately 700 square feet and paid $600 per month. In October 2006, the rent increased to $700 per month. In March 2007, to accommodate an increase in the administrative staff size we expanded the amount of office space rented to approximately 850 square feet. This increase in space resulted in a monthly rent of $1,000. In May 2007, we again increased our office size and is now paying $1,250 per month for approximately 1,000 square feet. This office lease is currently on a month to month basis.

Financing of Gas Pipeline

On May 24, 2006, Daybreak financed its forty percent (40%) working interest in the Tuscaloosa project gas pipeline through a financing arrangement with Hooper Oil & Gas Partners, LLC (“Hooper O&G”). This pipeline services the Tensas Farms et al F-1 well in Tensas Parish, Louisiana. Hooper O&G is a company controlled by Keith A. Hooper, a 5% shareholder of the Company (at the time).

We have accounted for this agreement as a financing arrangement in the form of a note payable. The principal of the note is $200,000. We are obligated to pay $5,000 per quarter in interest until the principal is paid in full. Daybreak is also required to pay an additional 1% interest fee based on our original net revenue interest (“NRI”) on the production revenue of the F-1 well for the life of the project.

We are required to commence repayment of the loan if production from the F-1 well should cease for any cause for a period exceeding sixty days. From June 14, 2007 through September 7, 2007, we made principal payments totaling $170,000. The balance of the loan is now past due. The accelerated repayment schedule was triggered by the temporary shut-in status of the F-1 well, due to technical issues with water production.  Daybreak and Hooper O& G have agreed to make final payment on the note by November 30, 2007.

Oil and Gas Properties

On September 12, 2006, Daybreak approved the individual participation of Bennett Anderson (COO) in the North Colgrade project. This project was drilled in December 2006, in Winn Parish, Louisiana. We had a 19% working interest in this project and was not the operator of the project. Mr. Anderson had a 1% working interest in the project. Both Daybreak and Bennett Anderson have participated in the drilling of two wells on this prospect. Neither well has been commercially successful. The wells have been plugged and abandoned.

 
132
On October 30, 2006, Daybreak approved the individual participation of Robert Martin (President and Director) and Eric Moe (CEO and Director) in the Tuscaloosa Project in northeast Louisiana. Both Robert Martin and Eric Moe participated in the drilling of the Tensas Farms B-1 and Tensas Farms F-3 wells. We have an approximate 88% and 48% working interest in the B-1 and F-3 wells respectively. Mr. Martin and Mr. Moe each have a 1% working interest in the project. The F-3 well began commercial production on March 23, 2007. In February of 2007, the B-1 well had production casing set and initial completion attempted resulting in no flow.

On January 10, 2007, Daybreak approved the individual participation of Terrence Dunne (CFO and Director) in the Krotz Springs project for the Haas-Hirsch No. 1 well in St. Landry Parish Louisiana. We were the operator of this project during the drilling phase which began in January 2007. We have a 12.5% working interest in this project. Terrence Dunne has a 2.5% working interest in the project. Upon the conclusion of drilling and the completion stage of this project we ceased to function as the operator of the project.

Consulting Contracts

From March 1, 2005 through February 28, 2007, the Company had a consulting contract with 413294 Alberta, Ltd. to provide the services of Robert Martin as President of the Company. For the fiscal year ended February 28, 2006, 413294 Alberta, Ltd. was paid a total of $40,050. For the fiscal year ended February 28, 2007, 413294 Alberta, Ltd. was paid a total of $161,500. Additionally, 413294 Alberta, Ltd. was reimbursed for Mr. Martin’s actual expenses.

From March 1, 2005 through February 28, 2007, the Company had a consulting contract with Jeffrey Dworkin (a Director) for services in regards to public company corporate governance and oil and gas mineral rights and leases. For the fiscal year ended February 28, 2006, Mr. Dworkin was paid a monthly retainer of $1,000 for a total of $12,000. From August 1, 2006 through February 28, 2007, he was paid a monthly retainer of $1,500 and billed his services at a rate of $150 per hour for a total of $36,191. Since March 1, 2007, Mr. Dworkin is paid $150 per hour with no monthly retainer. Additionally, Mr. Dworkin has been reimbursed for his actual expenses.

On January 2, 2007, the Company signed a consulting contract with Tim Lindsey (a Director) to facilitate long range strategic planning and advise the Company in business and exploration matters in the oil and gas industry. Under the terms of his contract, Mr. Lindsey was granted 200,000 shares of unregistered common stock. These shares were valued at $260,000 and expensed in the fiscal year ended February 28, 2007. The contract further provides that Mr. Lindsey will provide his services at a rate of $1,500 per day as needed. For the fiscal year ended February 28, 2007, the Company had not incurred any additional fees for the services of Mr. Lindsey.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
133
ITEM 13.  EXHIBITS

The following Exhibits are filed as part of the report:

1.01
Placement agent agreement for the sale of securities in March 2006 (19)
1.02
Placement agent agreement for the sale of securities in July 2006
3.01
(i)
Articles of Incorporation (1)
(ii)
By-Laws (2)
3.02
(i)
Amend Articles of Incorporation for name change (18)
3.03
(i)
Amend Articles of Incorporation defining Series A Preferred Convertible Stock (19)
4.01
Registration statement of securities (16)
7.01
Non-Reliance on previously filed financial statements (27)
10.01
Quitclaim mining deed with Silver Crown Mining of mineral rights in Idaho  (26)
10.02
Agreement with Crosspoint Holdings, Inc. for the purchase of Series A Preferred Stock (6)
10.03
Consulting Agreement with 413294 Alberta Ltd. effective March 1, 2005
10.04
Consulting Agreement with AnMac Enterprises effective March 1, 2005
10.05
Consulting Agreement with Eric Moe effective March 1, 2005
10.06
Expiration of Series A Stock Purchase Agreement with Crosspoint Holdings, Inc., (10)
10.07
Drilling agreement with MPG Petroleum for Ginny South project. (11)
10.08
Agreement with MPG Petroleum to join land bank for Pearl Prospect (12)
10.09
Consulting agreement with Summitt Ventures for management services (15)
10.10
Development agreement with Chicago Mill Joint Venture for Louisiana project (26)
10.11
Prospect review and non-competition agreement for California project (26)
10.12
Joint Venture Agreement with Nomad Hydrocarbons, Ltd. for California project (26)
10.13
Development agreement with Oracle Operating Co. for Texas project (26)
10.14
Prospect review agreement for California project (26)
10.15
Development agreement with Vision Exploration for Louisiana project (26)
10.16
Farmin agreement with Big Sky Western Canada for well in Alberta, Canada  (26)
10.17
Development agreement with Vision Exploration for prospect in Louisiana (26)
10.18
Subscription agreement and letter of investment intent, March 2006 private placement (19)
10.19
Warrant for the purchase shares of common stock, March 2006 private placement (19)
10.20
Registration rights agreement, March 2006 private placement (19)
10.21
Pipeline license agreement for Tuscaloosa project in Louisiana  (26)
10.22
Subscription agreement and letter of investment intent, July 2006 private placement
10.23
Warrant for the purchase shares of common stock, July 2006 private placement
10.24
Registration rights agreement, July 2006 private placement
10.25
Development agreement with Frank Davis Exploration for prospect in Louisiana  (26)
10.26
Agreement for refurbishing and operating of drilling rig (20)
10.27
Consulting Agreement with Jeffrey Dworkin dated August 1, 2006
10.28
Office Rent Agreement with Terrence Dunne & Associates dated August 1, 2006
10.29
Consulting Agreement with Michael Hooper dated August 3, 2006
10.30
Purchase of additional mineral interest in Tuscaloosa project in Louisiana  (21)
10.31
Farmout agreement with Monarch Gulf Exploration, Inc. (2 2 )
10.32
Oil and gas lease with Anadarko E&P Company, L.P.   (23 )
10.33
Drilling contract with Energy Drilling for two wells in Louisiana  (2 5 )
10.34
Consulting Agreement with Tim Lindsey effective January 2, 2007
10.35
Consulting Agreement with 413294 Alberta Ltd. effective March 1, 2007
10.36
Consulting Agreement with Jeffrey Dworkin effective March 1, 2007
10.37
Consulting Agreement with Michael Hooper effective March 1, 2007
10.38
Employment Agreement with Eric Moe, CEO effective March 1, 2007
 
134
 
10.39
Employment Agreement with Bennett Anderson effective March 1, 2007
10.40
Employment Agreement Thomas Kilbourne effective March 1, 2007
10.41
Office Rent Agreement with Terrence Dunne & Associates effective May 1, 2007
10.42
Seismic farmout agreement with Chevron U.S.A.   (28)
10.43
Joint Development Participation Agreement for Tuscaloosa project in Louisiana  (29)
14.01
Code of Ethics (3)
14.02
Code of Ethics for President, CEO and Senior Financial Officers (4)
14.03
Code of Ethics, Revised (5)
16.01
Change in Certifying Accountant (8)
16.02
Change in Certifying Accountant (9)
16.03
Change in Certifying Accountant (13)
16.04
Change in Certifying Accountant (14)
16.05
Change in Certifying Accountant (24)
17.01
Resignation of Current Executive Officers and Directors (7)
19.01
Definitive proxy statement in conjunction with annual meeting (17)

Section 1350 Certifications
31.1
Certification of Eric L. Moe
31.2
Certification of Thomas C. Kilbourne

Section 1350 Certifications
32.1
Certification of Eric L. Moe
32.2
Certification of Thomas C. Kilbourne

99.1
Audit Committee Pre-Approval Policies (4)

(1)
Previously filed as exhibit to Form 10-SB on November 22, 2002, and incorporated by reference herein.
(2)
Previously filed as exhibit to Form 10-SB on November 22, 2002, and incorporated by reference herein.
(3)
Previously filed as exhibit to Form 10-KSB on June 30, 2003, and incorporated by reference herein.
(4)
Previously filed as exhibit to Form 10-KSB/A on March 19, 2004, and incorporated by reference herein.
(5)
Previously filed as exhibit to Form 10-KSB on May 19, 2004, and incorporated by reference herein.
(6)
Previously filed as exhibit to Form 8-K on November 5, 2004, and incorporated by reference herein.
(7)
Previously filed as exhibit to Form 8-K on December 14, 2004, and incorporated by reference herein.
(8)
Previously filed as exhibit to Form 8-K on January 19, 2005, and incorporated by reference herein.
(9)
Previously filed as exhibit to Form 8-K/A on February 24, 2005, and incorporated by reference herein.
(10)
Previously filed as exhibit to Form 8-K on April 7, 2005, and incorporated by reference herein.
(11)
Previously filed as exhibit to Form 8-K on April 21, 2005, and incorporated by reference herein.
(12)
Previously filed as exhibit to Form 8-K on April 28, 2005, and incorporated by reference herein.
(13)
Previously filed as exhibit to Form 8-K on May 19, 2005, and incorporated by reference herein.
(14)
Previously filed as exhibit to Form 8-K on May 31, 2005, and incorporated by reference herein.
(15)
Previously filed as exhibit to Form 10-KSB on June 15, 2005, and incorporated by reference herein.
(16)
Previously filed as exhibit to Form S-8 on August 19, 2005, and incorporated by reference herein.
(17)
Previously filed as exhibit to Form DEF 14A on September 28, 2005, and incorporated by reference herein.
(18)
Previously filed as exhibit to Form 8-K on November 1, 2005, and incorporated by reference herein.
(19)
Previously filed as exhibit to Form SB-2 on July 18, 2006, and incorporated by reference herein.
(20)
Previously filed as exhibit to Form 8-K on September 6, 2006, and incorporated by reference herein.
(21)
Previously filed as exhibit to Form 8-K on September 28, 2006, and incorporated by reference herein.
(22)
Previously filed as exhibit to Form 8-K on October 26, 2006, and incorporated by reference herein.
(23)
Previously filed as exhibit to Form 8-K on November 7, 2006, and incorporated by reference herein.
(24)
Previously filed as exhibit to Form 8-K on November 15, 2006, and incorporated by reference herein.
(25)
Previously filed as exhibit to Form 8-K on November 17, 2006, and incorporated by reference herein.
(26)
Previously filed as exhibit to Form SB-2/A on December 28, 2006, and incorporated by reference herein.
(27)
Previously filed as exhibit to Form 8-K on June 25, 2007, and incorporated by reference herein.
(28)
Previously filed as exhibit to Form 8-K on July 16, 2007, and incorporated by reference herein.
(29)
Previously filed as exhibit to Form 8-K on July 20, 2007, and incorporated by reference herein.

135
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
Audit Fees
 
The following table presents fees for professional audit services performed by Malone & Bailey, PC for the audit of our annual financial statements for the fiscal years ended February 28, 2007 and February 28, 2006 and DeCoria, Maichel & Teague ("DMT") for the fiscal year ended February 28, 2006 and fees billed for other services rendered by them during those periods.
 
   
2007
   
2006
 
Audit Fees
  $
210,723
    $
56,798
 
Audit Related Fees
   
26,784
     
0
 
Tax Fees
           
3,250
 
All Other Fees
  $
2,643
     
0
 
     Total
  $
240,150
    $
60,048
 
 
Audit Fees consist of fees billed for professional services rendered for the audit of our financial statements and review of the interim financial statements included in quarterly reports and services that are normally provided by our independent accountants in connection with statutory and regulatory filings or engagements.
 
Audit Related Fees
 
Audit-Related Fees consist of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our consolidated financial statements and are not reported under “Audit Fees.” Additionally, fees billed in connection with the filing of our SB-2 registration statement are included in this category.
 
Tax Fees
 
Tax Fees consists of fees billed for professional services for tax compliance, tax advice and tax planning. These services include assistance regarding federal and state tax compliance, tax audit defense, customs and duties, and mergers and acquisitions.
 
Other Fees
 
All Other Fees consist of fees billed for products and services provided by the prior principal accountant, DMT, other than those services described above.
 
Audit Committee Pre-Approval Policies and Procedures
 
Our Audit Committee Charter requires the prior approval of all audit and non-audit services provided by our independent auditors. All of the services for which fees are listed above were pre-approved by our Board of Directors.
 
136
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/ Eric L. Moe  
    Eric L. Moe, its  
    Chief Executive Officer  
    Date:  September 20, 2007  

     
       
 
By:
/s/ Thomas C. Kilbourne  
    Thomas C. Kilbourne, its  
    Principal Accounting Officer  
    Date:  September 20, 2007  

 
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/ Robert N. Martin
  By:
/s/ Dale B. Lavigne
 
 
Robert N. Martin
   
Dale B. Lavigne
 
 
Director / President
   
Director / Chairman
 
  Date:  September 20, 2007     Date:  September 20, 2007  

           
By:
/s/ Eric L. Moe
  By:
/s/ Jeffrey R. Dworkin
 
 
Eric L. Moe
   
Jeffrey R. Dworkin
 
 
Director / CEO
   
Director / Secretary
 
  Date:  September 20, 2007     Date:  September 20, 2007  

           
By:
/s/ Ronald D. Lavigne
  By:
/s/ Michael Curtis
 
 
Ronald D. Lavigne
   
Michael Curtis
 
 
Director 
   
Director
 
  Date:  September 20, 2007     Date:  September 20, 2007  

           
By:
/s/ Tim R. Lindsey
  By:
/s/ Terrence J. Dunne
 
 
Tim R. Lindsey
   
Terrence J. Dunne
 
 
Director
   
Director / CFO
 
  Date:  September 20, 2007     Date:  September 20, 2007  

           
By:
/s/ Thomas C. Kilbourne
       
 
Thomas C. Kilbourne
       
 
Director / Treasurer
   
 
 
  Date:  September 20, 2007        
 
 
137
Exhibit 1.02

PLACEMENT AGENT AGREEMENT

June 28, 2006

Board of Directors
Daybreak Oil & Gas, Inc.
601 W. Main Avenue, Suite 1017
Spokane, WA  99201

Gentlemen:

Bathgate Capital Partners LLC (the "Placement Agent"), hereby confirms its agreement with you (the "Company") as follows:

SECTION 1
Description of Securities

The Company proposes to offer and sell to qualified investors Units (“Units”) of the Company's securities at an offering price of $3.00 per Unit, and on terms as set forth herein.  Each Unit is comprised of the one share of the Company’s convertible preferred stock (“Preferred Stock”) and two warrants (“Warrant”) to purchase a share of Common Stock.  As used in this Agreement, the term "Memorandum" refers to a Private Placement Memorandum dated June 28, 2006.

SECTION 2
Representations and Warranties of the Company

In order to induce the Placement Agent to enter into this Agreement, the Company hereby represents and warrants to and agrees with the Placement Agent as follows:

2.01.            Private Placement Memorandum .  The Memorandum with respect to the Units and all exhibits thereto, copies of which have heretofore been delivered by the Company to the Placement Agent, has been carefully prepared by the Company in conformity with Regulation D ("Regulation D") promulgated pursuant to the Securities Act of 1933, as amended (the "Act"), and with comparable provisions of the securities laws of such states as may be reasonably requested by the Placement Agent.  The Memorandum refers to certain of the Company’s filing with the Securities and Exchange Commission (“SEC”) under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”) (hereinafter referred to as the “SEC Filings”).  The Memorandum and the SEC Filings do not include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, the Company does not make any representations or warranties as to information contained in or omitted from the Memorandum in reliance upon written information furnished on behalf of the Placement Agent specifically for use therein.  Any additional written information authorized by the Company to be provided to prospective purchasers shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading.

 
 
Daybreak Oil and Gas, Inc.
June 28, 2006
Page 2
 
2.02.            Financial Statements .  DeCoria, Maichel & Teague, P.S.., who has audited and/or reviewed the financial statements in the SEC Filings, is an independent certified public accountant.  The financial statements of the Company, together with related Schedules and Notes as set forth in the SEC  Filings, present fairly the financial position and the results of operations of the Company at the represented dates and for the represented periods to which they apply; such financial statements have been prepared in accordance with generally accepted accounting principles which have been consistently applied throughout the periods concerned except as otherwise stated therein.

2.03.            No Material Adverse Change .  Except as may be reflected in or contemplated by the Memorandum, subsequent to the dates as of which information is given in the Memorandum, and prior to the Closing Date (as defined hereinafter), (i) there shall not be any material adverse change in the business, properties, options to lease, leases, financial condition, management, or otherwise of the Company or in the Company's business taken as a whole, (ii) there shall not have been any material transaction entered into by the Company other than transactions in the ordinary course of business; (iii) the Company shall not have incurred any material obligations, contingent or otherwise, which are not disclosed in the Memorandum; (iv) there shall not have been nor will there be any change in the capital stock or adverse change in the short-term or long-term debt (except current payments) of the Company; and (v) the Company has not and will not have paid or declared any dividends or other distributions.

2.04.            No Defaults .  The Company is not in default in the performance of any obligation, agreement or condition contained in any debenture, note or other evidence of indebtedness or any indenture or loan agreement of the Company, other than as set forth in the Memorandum.  The execution and delivery of this Agreement and the consummation of the transactions herein contemplated, and compliance with the terms of this Agreement will not conflict with or result in a breach of any of the terms, conditions or provisions of, or constitute a default under, the articles of incorporation or bylaws of the Company, or any note, indenture, mortgage, deed of trust, or other agreement or instrument to which the Company is a party or by which it or any of its property is bound, or any existing law, order, rule, regulation, writ, injunction, or decree or any government, governmental instrumentality, agency or body, arbitrator, tribunal or court, domestic or foreign, having jurisdiction over the Company or its property.  The consent, approval, authorization, or order of any court or governmental instrumentality, agency or body is not required for the consummation of the transactions herein contemplated except such as may be required under the Act or under the securities laws of any state or jurisdiction.

2.05.            Organization and Standing .  The Company is, and at the Closing Date will be, duly organized and validly existing in good standing as a corporation under the laws of its state of Washington and with full power and authority to own its property and conduct its business, present and proposed, as described or referred to in the Memorandum; the Company has full power and authority to enter into this Agreement and to issue the securities comprising the Unit; and the Company is duly qualified and in good standing as a foreign corporation in all jurisdictions in which the character of the property owned or leased or the nature of the business transacted by it makes such qualification necessary.  The Company has paid all fees required by the jurisdiction of organization and any jurisdiction in which it is qualified as a foreign corporation.

2.06.            Capitalization .  Prior to the Closing Date, the capitalization of the Company shall be as described in the Memorandum.

 
 
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2.07.            Legality of Units   The Units and the Shares have been duly and validly authorized and, when issued or sold and delivered against payment therefor as provided in this Agreement, will be validly issued, fully paid and nonassessable.  The Warrants, when paid for and issued, will be valid, binding and legally enforceable obligation of the Company.  The securities comprising the Units will conform in all material respects to all statements with regard thereto in the Memorandum.  A sufficient number of shares of Common Stock of the Company has been reserved for issuance upon exercise of the Warrants and the Placement Agent’s Warrants.

2.08.            Prior Sales .  No securities of the Company have been sold by the Company or by, or on behalf of, or for the benefit of, any person or persons controlling, controlled by, or under common control with the Company at any time prior to the date hereof, except as set out in the Memorandum.  No prior securities sales by the Company or any affiliate are required to be integrated with the proposed sale of the Units such that the availability of Regulation D or any other claimed exemption from the registration requirements of the Act would be made unavailable to the offer and sale of the Units.

2.09.            Litigation .  There is and at the Closing Date there will be no action, suit or proceeding before any court or governmental agency, authority or body pending or to the knowledge of the Company threatened which might result in judgments against the Company, or its officers, directors, employees or agents which the Company is obligated to indemnify, not adequately covered by insurance and which collectively might result in any material adverse change in the condition (financial or otherwise), the business or the prospects of the Company or would materially affect the properties or assets of the Company.

2.10.            Finder .  No person has acted as a finder in connection with the transactions contemplated herein, and the Company will indemnify the Placement Agent with respect to any claim for finder's fees in connection herewith.  The Company further represents that it has no management or financial consulting or advisory agreement with anyone except as set forth in the Memorandum.  The Company additionally represents that no officer, director, or 5% or greater shareholder of the Company is, directly or indirectly, associated with a National Association of Securities Dealers, Inc. member broker-dealer, other than such persons as the Company has advised the Placement Agent in writing are so associated.

2.11.            Contracts .  Each contract to which the Company is a party and to which reference is made in the Memorandum and/or the SEC Filings has been duly and validly executed, is in full force and effect in all material respects in accordance with their respective terms, and none of such contracts has been assigned by the Company; and the Company knows of no present situation or condition or fact which would prevent compliance with the terms of such contracts, as amended to date.  Except for amendments or modifications of such contracts in the ordinary course of business, the Company has no intention of exercising any right which it may have to cancel any of its obligations under any of such contracts, and has no knowledge that any other party to any of such contracts has any intention not to render full performance under such contracts.

2.12.            Tax Returns .  The Company has filed all federal, state and municipal tax returns which are required to be filed, and has paid all taxes shown on such returns and on all assessments received by it to the extent such taxes have become due.  All other taxes with respect to which the Company is obligated have been paid or adequate accruals have been set up to cover any such unpaid taxes, including all federal and state withholding and FICA payments.

 
 
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2.13.            Property .  Except as otherwise set forth in the Memorandum and the SEC Filings, the Company has good title, free and clear of all liens, encumbrances and defects, except liens for current taxes not due and payable, to all property and assets that are described in the Memorandum and the SEC Filings as being owned by the Company, subject only to such exceptions as are not material and do not adversely affect the present or prospective business of the Company.  All of the claims, options to lease, leases and subleases material to the business of the Company under which the Company holds or uses any real or personal property, including those described or referred to in the Memorandum and the SEC Filings, are in full force and effect, and the Company is not in default in respect of any of the terms or provisions of any such claims, options to lease, leases or subleases, and no claim of any sort has been asserted by anyone adverse to the Company's rights under any such claims, options to lease, leases or subleases or affecting or questioning the Company's rights to the continued possession of the claimed, optioned, leased or subleased property covered by such claim, options to lease, lease or sublease.

2.14.            Authority .  The execution and delivery by the Company of this Agreement has been duly authorized, and this Agreement is the valid, binding and legally enforceable obligation of the Company.

2.15.            Use of Proceeds .  The Company will apply the proceeds from the sale of the Units to the purposes set forth in the Memorandum.  The Company will also establish procedures to ensure proper application and stewardship of such proceeds.

2.16.            No Limitations on Payment of Dividends .  Except as otherwise set forth in the Memorandum, there are no limitations, either contractual or otherwise, nor will the Company enter into any agreement with any other party, which prevents or limits the Company's ability to declare or pay dividends on its Common Stock.

SECTION 3
Issue, Sale and Delivery of the Units

3.01.            Placement Agent Appointment .  The Company hereby appoints the Placement Agent as its exclusive agent until July 10, 2006, which period may be extended to July 18, 2006, by mutual consent of the Company and the Placement Agent (the "Escrow Date"), to solicit purchasers for 730,000 Units on a "best efforts, all-or-none" basis and thereafter to solicit purchasers for an additional 1,2750,000 Units on a "best efforts" basis until the offering is terminated as provided herein; and the Placement Agent, on the basis of the representations and warranties herein contained, but subject to the terms and conditions herein set forth, accepts such appointment and agrees to use its best efforts to find purchasers for the Units at the price of $3.00 per Unit, provided that the Company reserves the right to reject in good faith any prospective investor ("Investor") and no commission shall be payable to the Placement Agent in respect of any proposed sale to any rejected Investor.  No other person will be or has been authorized to solicit purchasers for the Units, except those persons selected by the Placement Agent.  Each Investor must subscribe for at least 10,000 Units ($30,000), and must certify to the Company that such investor is an "Accredited Investor" as defined in Rule 501(a) of Regulation D.  Notwithstanding the above, the Company and the Placement Agent may mutually agree to accept a subscription for fewer than 10,000 Units.

3.02.            Escrow Account .  It is hereby agreed between the Company and the Placement Agent that unless 730,000 Units ("Escrow Units") are sold and paid for by Investors by the Escrow Date, this Agreement shall automatically be terminated and the entire proceeds received from the sale of the Units shall be returned to the Investors, without deduction therefrom or interest thereon.  

 
 
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If the Escrow Units are sold by the Escrow Date, the Company and the Placement Agent may continue the offering until all of the Units are sold or until they agree to terminate the offering.  The proceeds from the sale of at least the first 730,000 Units ($2,190,000) shall be promptly deposited in an escrow account ("Escrow Account") entitled “Daybreak Oil and Gas, Inc. Escrow Account" with AMG Guaranty Trust, N.A. (the "Escrow Agent").  The agreement establishing the Escrow Account ("Escrow Agreement") shall be in form and content satisfactory to counsel for the Placement Agent and the Company.  The proceeds from any sale of Units after the First Closing (hereinafter defined) may continue to be deposited to the Escrow Account.  If the Escrow Account is not used for such purpose, the Company promptly shall pay the commission provided in Section 3.05 and the non-accountable expense allowance as provided in Section 3.07 to the Placement Agent.

3.03.            Subscription Agreement .  Each Investor desiring to purchase Units will be required to complete and execute a Subscription Agreement and, if applicable, other offering documents.  The Placement Agent shall have the right to review such documents for each Investor and to reject the tender of any Investor that it deems not acceptable.  All documents concerning any Investor the Placement Agent has not rejected will be promptly forwarded to the Company at the address set forth below.  The Company, upon receipt of the documents, will determine within three (3) business days whether it wishes to accept the Investor.  Payment for the Units subscribed for in the Subscription Agreements that have been accepted by the Company is to be delivered to the Company on the Closing Date (as hereinafter defined).

3.04.            Subscription Acceptance .  The acceptance of subscriptions for Units tendered by Investors will be conditional upon (i) the tendering of Subscriptions for at least 650,000 Units ("Minimum Subscriptions") by the Escrow Date, and (ii) the receipt, on the Closing Date, of the net proceeds from subscribers for the Minimum Subscriptions ("Minimum Payments") less commissions due the Placement Agent as provided hereinafter.  If subscriptions are received for more than 2,000,000 Units, the Company may (a) accept subscriptions for up to an additional 400,000 Units, and/or (b) accept one subscription over another and/or (c) allocate available Units among subscribers as it deems appropriate.

3.05.            Compensation of Placement Agent .  In consideration for the Placement Agent's execution of this Agreement, and for the performance of its obligations hereunder, the Company agrees to pay the Placement Agent a commission of ten percent (10%) of the gross proceeds received from the sale of the Units; provided, in the event Minimum Subscriptions are not received or Minimum Payments are not made and the offering is terminated, the Placement Agent shall not receive any commission.  Any commissions payable to the Placement Agent under this paragraph shall be payable on the Closing Date or as otherwise provided herein.

3.06.            Non-Accountable Expense Allowance .  The Placement Agent shall receive a non-accountable expense allowance equal three percent (3%) ($.09 per Unit) of the gross proceeds from Units sold and paid for, payable at each Closing.

3.07.            Payment .  Payment for Units sold shall be made by the Escrow Agent to the Company at such place as may be agreed on among the Company and the Placement Agent, at such a time and on such a date, as shall be fixed by agreement between the parties, which in no case shall be later than eight (8) days after the Sales Termination Date.  The delivery of the Units against payment therefore is defined as the "Closing" and the time and date thereof are defined as the "Closing Date."  The first Closing Date will be held when the Minimum Payments are received ("First Closing").  

 
 
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It is anticipated that there may be additional Closings as additional funds are received, and the final Closing will be referred to as the "Final Closing."  The Final Closing could also be the First Closing in the event that no Units are sold after the First Closing.  As soon as practicable after each Closing Date, the Company shall deliver by mail to each Investor a certificate for the securities underlying the Units that have been purchased and which contains a legend conforming to the requirements of Rule 502(d)(3) under the Act.

3.08.            Obligations of Placement Agent .  The Company agrees that the obligations of the Placement Agent under this Agreement: (i) shall not preclude the Placement Agent from contemporaneously participating in the offering or underwriting of securities of other issuers; (ii) shall not impose any obligation on the Placement Agent to require its registered representatives to offer or to sell the Units, (iii) shall require the Placement Agent to make an effort to find purchasers for the Units only to the extent the Placement Agent is motivated to do so by the compensation and other provisions of this Agreement, (iv) shall not otherwise limit or prevent the Placement Agent from carrying on its customary business as a securities broker-dealer, and (v) shall not require the Placement Agent to engage in any conduct which violates any law or industry standard of conduct applicable to the Placement Agent.

3.09.            Representations and Warranties .  The parties hereto each represent that as of each Closing Date the representations and warranties herein contained and the statements contained in all the certificates heretofore or simultaneously delivered by any party to another, pursuant to this Agreement, shall in all material respects be true and correct.

3.10.            Form D .  The Placement Agent agrees that it will timely supply the Company from time to time with all information required from the Placement Agent for the completion of Form D to be filed with the Securities and Exchange Commission and such additional information as the Company may reasonably request to be supplied to the securities authorities of such states in which the Units have been qualified for sale or are exempt from qualification or registration.  A copy of all such filings shall be delivered to the Placement Agent and counsel for the Placement Agent promptly prior to their being filed.

SECTION 4
Offering of the Units on Behalf of the Company

4.01.            Agent .  In offering the Units for sale, the Placement Agent shall offer the Units solely as an agent for the Company, and such offer shall be made upon the terms and subject to the conditions set forth herein and in the Memorandum.  The Placement Agent shall commence making such offers as an agent for the Company as soon after the date of the Memorandum (the "Offering Date") as it in its sole discretion may deem advisable; provided, however, that if the Placement Agent does not commence such offering within ten (10) business days after the Offering Date, it shall promptly advise the Company.

4.02.            Selected Dealers .  The Placement Agent may offer and sell the Units for the account of the Company through registered broker-dealers selected by it ("Selected Dealers") and pursuant to a form of Selected Dealer Agreement between the Placement Agent and the Selected Dealers, pursuant to which the Placement Agent may allow such concession (out of its commissions) as it may determine.  Such Agreement shall provide that the Selected Dealers are acting as agents of the Company.  On such sale or allotment by the Placement Agent of any of the Units to Selected Dealers, the Placement Agent shall require the Selected Dealer selling any such Units to agree to offer and sell the same on the terms and conditions of offering set forth in the Memorandum and in this Agreement.

 
 
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SECTION 5
Memorandum

5.01.            Delivery and Form of Memorandum .  The Company will procure, at its expense, as many copies of the Memorandum as the Placement Agent may reasonably require for the purposes contemplated by this Agreement and shall deliver said copies of the Memorandum within two (2) business days after execution of this Agreement at addresses, and in the quantity at each address, as specified by the Placement Agent.  Each Memorandum shall be of a size and format as determined by the Placement Agent and shall be suitable for mailing and other distribution.

5.02.            Amendment of Memorandum .  If during the offering any event occurs or any event known to the Company relating to or affecting the Company shall occur as a result of which the Memorandum as then amended or supplemented would include an untrue statement of a material fact, or omits to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, or if it is necessary at any time after the Offering Date to amend or supplement the Memorandum to comply with the Act, the Company will immediately notify the Placement Agent thereof and the Company will prepare such further amendment to the Memorandum or supplemental or amended Memorandum or Memoranda as may be required and furnish and deliver to the Placement Agent, all at the cost of the Company, a reasonable number of copies of the supplemental or amended Memorandum which as so amended or supplemented will not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the Memorandum not misleading in the light of the circumstances existing at the time it is delivered.

5.03.            Use of Memorandum .  The Company authorizes the Placement Agent and the Selected Dealers, if any, in connection with the offer and sale of the Units and all dealers to whom any of the Units may be sold by the Placement Agent or by any Selected Dealer, to use the Memorandum as from time to time amended or supplemented, in connection with the offering and sale of the Units and in accordance with the provisions of the Act, the Rules and Regulations thereunder and applicable state securities laws.

SECTION 6
Covenants of the Company

The Company covenants and agrees with the Placement Agent that:

6.01.            Notification of Changes .  After the date hereof, the Company will not at any time, whether before or after the date of the Memorandum, make any amendment or supplement to the Memorandum of which amendment or supplement the Placement Agent shall not have previously been advised and a copy of which shall not have previously been furnished to the Placement Agent a reasonable time period prior to the proposed date of such amendment or supplement, or which the Placement Agent or counsel for the Placement Agent shall have reasonably objected to in writing solely on the grounds that it is not in compliance with the Act or the Rules and Regulations or with other federal or state laws.

6.02.            Proceeding .  The Company will promptly advise the Placement Agent, and will confirm such advice in writing, upon the happening of any event which, in the judgment of the Company, makes any material statement in the Memorandum untrue or which requires the making of any changes in the Memorandum in order to make the statements therein not misleading, and upon the refusal of any state

 
 
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securities administrator or similar official to qualify, or the suspension of the qualification of the Units for offering or sale in any jurisdiction where the Units are not exempt from qualification or registration, or of the institution of any proceedings for the suspension of any exemption or for any other purposes.  The Company will use every reasonable effort to prevent any such refusal to qualify or any such suspension and to obtain as soon as possible the lifting of any such order, the reversal of any such refusal, and the termination of any such suspension.

6.03.            Blue Sky Filings .  As a condition of closing, the Company will take whatever action is necessary in connection with filing or maintaining any appropriate exemption from qualification or registration under the applicable laws of such states as may be selected by the Placement Agent and agreed to by the Company, and continue such qualifications and exemptions in effect so long as required for the purposes of the offer and sale of the Units.

6.04.            Agreement to Provide Information .  The Company, at its own expense, will prepare and give and will continue to give such financial statements and other information to and as may be required by the Commission or the governmental authorities of states in which the Units may be registered, qualified or exempt from qualification or registration.

6.05.            Costs of Offering .  The Company will pay, whether or not the transactions contemplated hereunder are consummated or this Agreement is terminated, all costs and expenses incident to the performance of its obligations under this Agreement, including all expenses incident to the authorization and issuance of the Units, any taxes incident to the initial sale of the Units hereunder, the fees and expenses of the Company's counsel and accountants, the costs and expenses incident to the preparation and printing of the Memorandum and any amendments or supplements thereto, the cost of preparing and printing all exhibits to the Memorandum, the cost of furnishing to the Placement Agent copies of the Memorandum as herein provided, and the cost of any filing with the Commission or pursuant to state securities laws, including all filing fees.

6.06.            Use of Proceeds .  The Company will apply the proceeds from the sale of the Units to the purposes set forth in the Memorandum.

6.07.            Due Diligence .  Prior to the First Closing, the Company will cooperate with the Placement Agent in such investigation as the Placement Agent may make or cause to be made of the properties, business, management and operations of the Company in connection with the offering of the Units, and the Company will make available to the Placement Agent in connection therewith such information in its possession as the Placement Agent may reasonably request.

6.08.            Documentation .  Prior to the First Closing, the Company will deliver to the Placement Agent true and correct copies of the articles and bylaws of the Company and of the minutes of all meetings of the directors and shareholders of the Company held since January 1, 2002; true and correct copies of all material contracts to which the Company is a party; and such other documents and information as is reasonably requested by the Placement Agent.  To the extent such documents had previously been provided, only amendments or updates need be furnished.

6.09.            Management Cooperation .  The Company shall provide the Placement Agent, at any time, an opportunity to meet with and question management of the Company and authorize management of the Company to speak at such meetings as the Placement Agent reasonably requests.

 
 
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6.10.            Information to Investors .  The Company shall make available to each Investor at a reasonable time prior to his purchase of the Units the opportunity to ask questions and receive answers concerning the terms and conditions of the offering, and to obtain any additional information that the Company has or that it can acquire without unreasonable effort or expense that is necessary to verify the accuracy of information furnished to the Investors.

6.11.            Compliance with Conditions Precedent .  The Company will use all reasonable efforts to comply or cause to be complied with the conditions precedent to the several obligations of the Placement Agent specified in this Agreement.

6.12.            Reports .  The Company agrees to file with the Commission, and states where required, all reports on Form D in accordance with the provisions of Regulation D promulgated under the Act and to promptly provide copies of such reports to the Placement Agent and its counsel.

SECTION 7
Indemnification

7.01.            Indemnification by Company .  The Company agrees to indemnify, defend and hold harmless the Placement Agent, its agents, managers, members, representatives, guarantors, sureties and each person who controls the Placement Agent within the meaning of either Section 15 of the Act or Section 20 of the Securities Exchange Act of 1934 ("Indemnified Persons") from and against any and all losses, claims, damages, liabilities or expenses, joint or several, (including reasonable legal or other expenses incurred by each such person in connection with defending or investigating any such claims or liabilities, whether or not resulting in any liability to such Indemnified Persons) which they or any of them may incur under the Act, or any state securities law and the Rules and Regulations or the rules and regulations under any state securities laws or any other statute or at common law or otherwise and to reimburse such Indemnified Persons for any legal or other expense (including the cost of any investigation and preparation) incurred by any of them in connection with any litigation, whether or not resulting in any liability, but only insofar as such losses, claims, damages, liabilities and expenses arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the Memorandum, the SEC Filings, or any amendment or supplement thereto, or any authorized sales literature or any application or other document filed with the Commission or in any state or other jurisdiction in order to obtain and exemption from the securities registration requirements for the Units under the securities laws thereof, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or the failure to comply with the security registration requirement of the Act or any applicable state law; provided, however, that the indemnity agreement contained in this Section 7.01 shall not apply to amounts paid in settlement of any such litigation if such settlements are effected without the consent of the Company, nor shall it apply to any Indemnified Persons in respect of any such losses, claims, damages, liabilities or actions arising out of or based upon any such untrue statement or alleged untrue statement, or any such omission or alleged omission, if such statement or omission was made in reliance upon information furnished in writing to the Company by such Indemnified Persons specifically for use in connection with the preparation of the Memorandum or any such amendment or supplement thereto.  This indemnity agreement is in addition to any other liability that the Company may otherwise have to the Indemnified Persons.

 
 
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7.02.            Notification to Company .  The Indemnified Persons agree to notify the Company promptly of the commencement of any litigation or proceeding against the Indemnified Persons, of which it may be advised, in connection with the offer and sale of any of the Units of the Company, and to furnish to the Company at its request copies of all pleadings therein and permit the Company to be an observer therein and apprise it of all the developments therein.  In case of commencement of any action in which indemnity may be sought from the Company on account of the indemnity agreement contained in Section 7.01, the Indemnified Persons within ten (10) days after the receipt of written notice of the commencement of any action against the Indemnified Persons shall notify the Company in writing of the commencement thereof.  The failure to notify the indemnifying party shall not relieve it of any liability that it may have to an Indemnified Party, except to the extent that the indemnifying party did not otherwise have knowledge of the commencement of the action and the indemnifying party’s ability to defend against the action was prejudiced by such failure.  Such failure shall not relieve the indemnifying party from any other liability that it may have to the Indemnified Party.  In case any such action shall be brought against the Indemnified Persons of which the Indemnified Persons shall have notified the Company of the commencement thereof, the Company shall be entitled to participate in (and to the extent that it shall wish, to direct) the defense thereto at its own expense, but such defense shall be conducted by counsel of recognized standing and reasonably satisfactory to the Indemnified Persons in such litigation.  After notice that the Company elects to direct the defense, the Company will not be liable for any legal or other expenses incurred by the Indemnified Persons without the prior written consent of the Company.  The Company shall not be liable for amounts paid in settlement of any litigation if such settlement was effected without its consent.

7.03.            Indemnification by Placement Agent .  The Placement Agent agrees to indemnify and hold harmless the Company, its agents, officers, directors, representatives, guarantors, sureties and each person who controls the Company within the meaning of either Section 15 of the Act or Section 20 of the Securities Exchange Act of 1934 from and against any and all losses, claims, damages, liabilities or expenses, joint or several, (including reasonable legal or other expenses incurred by each such person in connection with defending or investigating any such claims or liabilities, whether or not resulting in any liability to such person) which they or any of them may incur under the Act, or any state securities law and the Rules and Regulations or the rules and regulations under any state securities laws or any other statute or at common law or otherwise and to reimburse persons indemnified as above for any legal or other expense (including the cost of any investigation and preparation) incurred by any of them in connection with any litigation, whether or not resulting in any liability, but only insofar as such losses, claims, damages, liabilities and litigation arise out of or are based upon any statement in or omission from the Memorandum or any amendment or supplement thereto, or any application or other document filed with the Commission or in any state or other jurisdiction in order to qualify the Units under the securities laws thereof, or any information furnished pursuant to Section 3.10 hereof, if such statements or omissions were made in reliance upon information furnished in writing to the Company by the Placement Agent or on its behalf specifically for use in connection with the preparation of the Memorandum or amendment or supplement thereto or application or document filed.  This indemnity agreement is in addition to any other liability which the Placement Agent may otherwise have to the Company and other indemnified persons.

7.04.            Notification to Placement Agent .  The Company and other Indemnified Persons agree to notify the Placement Agent promptly of commencement of any litigation or proceedings against the Placement Agent or other Indemnified Persons, in connection with the offer and sale of any of the Units and to furnish to the Placement Agent, at its request, copies of all pleadings therein and permit the Placement Agent to be an observer therein and apprise the Placement Agent of all developments therein, all at the Company's expense.  In case of commencement of any action in which indemnity may be sought from the Placement Agent on account of the indemnity agreement contained in Section 7.03,

 
 
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the Company or other Indemnified Persons shall notify the Placement Agent of the commencement thereof in writing within ten (10) days after the receipt of written notice of the commencement of any action against the Company or against any other person indemnified, shall notify the Placement Agent in writing of such notification.  The failure to notify the indemnifying party shall not relieve it of any liability that it may have to an Indemnified Party, except to the extent that the indemnifying party did not otherwise have knowledge of the commencement of the action and the indemnifying party’s ability to defend against the action was prejudiced by such failure.  Such failure shall not relieve the indemnifying party from any other liability that it may have to the Indemnified Party.  .  In case any such action shall be brought against the Company or any other person indemnified of which the Company shall have notified the Placement Agent of the commencement thereof, the Placement Agent shall be entitled to participate in (and to the extent that it shall wish, to direct) the defense thereto at its own expense, but such defense shall be conducted by counsel of recognized standing and reasonably satisfactory to the Company or other persons indemnified in such litigation.  After notice that the Placement Agent elects to direct the defense, the Placement Agent will not be liable for any legal or other expenses incurred by the indemnified party without the prior written consent of the Placement Agent.  The Placement Agent shall not be liable for amounts paid in settlement of any litigation if such settlement was effected without its consent.

7.05.            Indemnification of Selected Dealers .  The Company agrees to indemnify Selected Dealers, if any, and its agents, officers, directors, representatives, guarantors and sureties on substantially the same terms and conditions as it indemnifies the Placement Agent and Indemnified Persons pursuant to Section 7.01 provided that each such Selected Dealer agrees in writing with the Placement Agent to indemnify the Company and its agents, officers, directors, representatives, guarantors and sureties on substantially the same terms and conditions as the Placement Agent indemnifies the Company in Section 7.03.  The Company hereby authorizes the Placement Agent to enter into agreements with Selected Dealers providing for such indemnity by the Company.

7.06.            Contribution .  If the indemnification provided for in Sections 7.01, 7.03 and 7.05 is unavailable to an indemnified party in respect of any losses, claims, damages or liabilities referred to therein, then each indemnifying party under either such paragraph, in lieu of indemnifying such indemnified party thereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities:  (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and by the Placement Agent or Selected Dealer on the other from the offering and sale of the Units, or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company on the one hand and of the Placement Agent or Selected Dealer on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations.  The relative benefits received by the Company on the one hand and the Placement Agent or Selected Dealer on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company bears to the total commissions received by the Placement Agent or Selected Dealer, as in each case set forth in the Memorandum.  The relative fault of the Company and of the Placement Agent or Selected Dealer shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the Company or by the Placement Agent or Selected Dealer and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission.

 
 
Daybreak Oil and Gas, Inc.
June 28, 2006
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The Company and the Placement Agent agree that it would not be just and equitable if contribution pursuant to this Section 7 were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph.  The amount paid or payable by an indemnified party as a result of the losses, claims, damages and liabilities referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim.  Notwithstanding the provisions of this Section 7, the Placement Agent shall not be required to contribute any amount in excess of the amount by which the total price at which the Units sold by it and distributed exceeds the amount of any damages which such Placement Agent otherwise has been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission.  No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution hereunder from any person who was not guilty of such fraudulent misrepresentation.

7.07.            Limitation of Legal Expenses .  Notwithstanding anything herein to the contrary, the indemnification for legal expenses included in Sections 7.01, 7.03 And 7.05 shall be limited to the legal expenses of one law firm, except in the event of a bona fide conflict of interest, in which event such legal expenses shall be limited to the legal expenses of two law firms.

SECTION 8
Effectiveness of Agreement

8.01.           This Agreement shall become effective upon execution by all parties hereto.

SECTION 9
Conditions of the Placement Agent's Obligations

The Placement Agent's obligations to act as agent of the Company hereunder shall be subject to the accuracy of the representations and warranties on the part of the Company herein contained, to the performance by the Company of all its agreements herein contained, to the fulfillment of or compliance by the Company with all covenants and conditions hereof, and to the following additional conditions:

9.01.            No Material Changes .  Except as contemplated herein or as set forth in the Memorandum, during the period subsequent to the date of the last balance sheet included in the Memorandum the Company:  (a) shall have conducted its business in the usual and ordinary manner as the same was being conducted on the date of the last balance sheet included in the Memorandum, and (b) except in the ordinary course of its business, the Company shall not have incurred any material liabilities, claims or obligations (direct or contingent) or disposed of any material portion of its assets, or entered into any material transaction or suffered or experienced any materially adverse change in its condition, financial or otherwise.  The capitalization and short term debt of the Company shall be substantially the same as at the date of the latest balance sheet included in the Memorandum, without considering the proceeds from the sale of the Units, other than as may be set forth in the Memorandum, and except as the financial statements of the Company reflect the result of continued losses from operations consistent with prior periods.

9.02.            Authorization .  The authorization for the issuance of the securities comprising the Units and the use of the Memorandum and all corporate proceedings and other legal matters incident thereto and to this Agreement shall be reasonably satisfactory in all respects to counsel to the Placement Agent.

 
 
Daybreak Oil and Gas, Inc.
June 28, 2006
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9.03.            Opinion .  The Company shall have furnished to the Placement Agent the opinion, dated each Closing Date and addressed to the Placement Agent, from counsel to the Company, to the effect that based upon a review by them of the Memorandum, the Company's certificate of incorporation, bylaws, and relevant corporate proceedings and contracts, and examination of such statutes they deem necessary and such other investigation by such counsel as they deem necessary to express such opinion:

(a)           The Company has been duly incorporated and validly exists as a corporation in good standing under the laws of the State of Washington and has the corporate power and authority to own its properties and to carry on its business as described in the Memorandum.

(b)           The Company is duly qualified and in good standing as a foreign corporation authorized to do business in all jurisdictions in which the character of the properties owned or held under lease or the nature of the business conducted requires such qualification and in which the failure to qualify would have a materially adverse effect on the business of the Company.

(c)           On the basis of a review of the contents of the Memorandum and related matters, and based upon the advice of the Company, but without independent verification by such counsel of the accuracy, completeness or fairness of the statements contained in the Memorandum thereto, and without expressing any opinion as to the financial statements or other financial data contained therein:  (i) nothing has come to such counsel's attention which leads them to believe that the Memorandum, as amended or supplemented by any amendments or supplements thereto made by the Company prior to completion of the Offering, does not comply as to form in all material respects with the requirements of applicable laws; (ii) they do not know of any contract or other document required to be described in or filed as an exhibit to the Memorandum which is not so described or filed; and (iii) to the best of their knowledge, no order suspending the Offering has been issued and no proceedings for that purpose have been instituted or are pending or contemplated by any applicable regulatory authority.

(d)           The authorized and outstanding capital stock of the Company is as set forth in the Memorandum; the Units, Shares Warrants, and Placement Agent's Warrants conform in all material respects to the statements concerning them in the Memorandum; the outstanding common stock of the Company contains no preemptive rights; the Units, Shares, Warrants and Placement Agent's Warrants have been, and the shares of Common Stock issuable upon exercise of the Warrants and Placement Agent's Warrants, will be, duly and validly authorized and, upon issuance thereof and payment therefore in accordance with this Agreement, validly issued, fully paid and nonassessable, and will not be subject to the preemptive rights of any shareholder of the Company.

(e)           The Warrants and Placement Agent's Warrants have been duly and validly authorized and, when accepted and delivered by the Company, will be valid and binding obligations of the Company, enforceable in accordance with their respective terms.

(f)           A sufficient number of shares of Common Stock have been duly reserved for issuance upon the exercise of the Warrants and the Placement Agent's Warrants.

(g)           The issuance and sale of the Units, the Shares, the Warrants, and the Placement Agent's Warrants, the consummation of the transactions herein contemplated, and the compliance

 
 
Daybreak Oil and Gas, Inc.
June 28, 2006
Page 14
 
with the terms of this Agreement will not conflict with or result in a breach of any of the terms, conditions, or provisions of or constitute a default under the certificate of incorporation or bylaws of the Company; nor, to their knowledge, will they conflict with or result in a breach of any of the terms, conditions, or provisions of any note, indenture, mortgage, deed of trust, or other agreement or instrument to which the Company is a party or by which the Company or any of its property is bound; or any existing law (provided this paragraph shall not relate to federal or state securities laws), order, rule, regulation, writ, injunction, or decree known to such counsel of any government, governmental instrumentality, agency, body, arbitration tribunal, or court, domestic or foreign, having jurisdiction over the Company or its property.

(h)           This Agreement has been duly authorized and executed by the Company and is a valid and binding agreement of the Company.

As to all factual matters, including without limitation the issuance of stock certificates and receipt of payment therefor, the states in which the Company transacts business and the adoption of resolutions reflected by the Company's minute book, such counsel may rely on the certificate of an appropriate officer of the Company.  Counsel's opinion as to the validity and enforceability of any and all contracts and agreements referenced herein may exclude any opinion as to the validity or enforceability of any indemnification or contribution provisions thereof, or as the validity or enforceability of any such contract or agreement may be limited by bankruptcy or other laws relating to or affecting creditors' rights generally and by equitable principles.

9.04.            Officers' Certificate .  The Company shall furnish to the Placement Agent a certificate signed by the President and Chief Financial Officer of the Company, dated as of each Closing Date, to the effect that:

(a)           The representations and warranties of the Company in this Agreement are true and correct in all material respects at and as of the date of the certificate, and the Company has complied in all material respects with all the agreements and has satisfied in all material respects all the conditions on its part to be performed or satisfied at or prior to the date of the certificate.

(b)           Each has carefully examined the Memorandum and any amendments and supplements thereto and the SEC Filings referred to in the Memorandum, and to the best of their knowledge the Memorandum and any amendments and supplements thereto, and/or the SEC Filings, contain all statements required to be stated therein, and all statements contained therein are true and correct, and neither the Memorandum nor any amendment or supplement thereto, nor the SEC Filings, include any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading and, during the Offering, the Memorandum will be amended or supplemented to include all information necessary to be included in the Memorandum so that it does not become inaccurate or misleading.

(c)           No order prohibiting the offer or sale of the Units has been issued and, to the best of the knowledge of the respective signers, no proceeding for that purpose has been initiated or is threatened by the Commission or any applicable state.

(d)           Except as set forth in the Memorandum, since the respective dates of the periods for which information is given in the Memorandum and prior to the date of the certificate,

 
 
Daybreak Oil and Gas, Inc.
June 28, 2006
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(i) there has not been any materially adverse change, financial or otherwise, in the affairs or condition of the Company, and (ii) the Company has not incurred any material liabilities, direct or contingent, or entered into any material transactions, otherwise than in the ordinary course of business.

(e)           Subsequent to the date of the Memorandum, no dividends or distribution whatever have been declared and/or paid on or with respect to the Common Stock of the Company.

9.05.            State Qualification or Exemption .  The Company shall use its best efforts to secure an exemption from registration or qualification in those states in which the Units are sold, and the offer and sale of the Units shall not be subject to any stop order or other proceeding on the Closing Date.

9.06.            Satisfactory Form of Documents .  All opinions, letters, certificates and evidence mentioned above or elsewhere in this Agreement shall be deemed to be in compliance with the provisions hereof only if they are in form and substance satisfactory to counsel to the Placement Agent, whose approval shall not be unreasonably withheld.

9.07.            Adverse Events .  Between the date hereof and each Closing Date, the Company shall not have sustained any loss on account of fire, explosion, flood, accident, calamity or any other cause, of such character as materially adversely affects its business or property considered as an entity, whether or not such loss is covered by insurance.

9.08.            Litigation .  Between the date hereof and each Closing Date, there shall be no litigation instituted or threatened against the Company and there shall be no proceeding instituted or threatened against the Company before or by any federal or state commission, regulatory body or administrative agency or other governmental body, domestic or foreign, wherein an unfavorable ruling, decision or finding would materially adversely affect the business, franchises, licenses, operations or financial condition or income of the Company.

9.09.            Certificates .  Any certificate signed by an officer of the Company and delivered to the Placement Agent shall be deemed a representation and warranty by the Company to the Placement Agent as to the statements made therein.

SECTION 10
Termination

10.01.                       Failure to Comply with Agreement .  This Agreement may be terminated by either party hereto by notice to the other party in the event that such party shall have failed or been unable to comply with any of the terms, conditions or provisions of this Agreement required by the Company or the Placement Agent to be performed, complied with or fulfilled by it within the respective times herein provided for, unless compliance therewith or performance or satisfaction thereof shall have been expressly waived by the non-defaulting party in writing.

10.02.                       Government Restrictions .  This Agreement may be terminated by either party by notice to the other party at any time if, in the judgment of either party, payment for and delivery of the Units are rendered impracticable or inadvisable because:  (i) additional material governmental restrictions not in force and effect on the date hereof shall have been imposed upon the trading in securities generally, or

 
 
Daybreak Oil and Gas, Inc.
June 28, 2006
Page 16
 
minimum or maximum prices shall have been generally established on the New York Stock Exchange, the Chicago Board of Trade or the Commodity Futures Trading Commission, or trading in securities generally on such Exchange, Board, or Commission shall have been suspended, or a general moratorium shall have been established by federal or state authorities; or (ii) a war or other national calamity shall have occurred; or (iii) the condition of any matter affecting the Company or any other circumstance is such that it would be undesirable, impracticable or inadvisable in the judgment of the Placement Agent to proceed with this Agreement or with the sale of the Units.

10.03.                       Liability on Termination .  Any termination of this Agreement pursuant to this Section 10 shall be without liability of any character (including, but not limited to, loss of anticipated profits or consequential damages on the part of any party thereto); except that the Company and the Placement Agent shall be obligated to pay, respectively, all losses, claims, damages or liabilities, joint or several, under Section 7.01 in the case of the Company, Section 7.03 in the case of the Placement Agent and Section 7.06 as to all parties.

SECTION 11
Placement Agent's Representations and Warranties

The Placement Agent represents and warrants to and agrees with the Company that:

11.01.                       Registration .  The Placement Agent is registered as a broker-dealer with the Securities and Exchange Commission, and is a member in good standing of the National Association of Securities Dealers, Inc. ("NASD").  The Placement Agent is registered or otherwise qualified to sell the Units in each state in which the Placement Agent sells such Units or is exempt from such registration or qualification.

11.02.                       Ability to Act as Agent .  There is not now pending or, to the knowledge of the Placement Agent, threatened against the Placement Agent any action or proceeding of which the Placement Agent has been advised, either in any court of competent jurisdiction, before the NASD, the Securities and Exchange Commission or any state securities commission concerning the Placement Agent's activities as a broker or dealer, nor has the Placement Agent been named as a "cause" in any action or proceeding, any of which may be expected to have a material adverse effect upon the Placement Agent's ability to act as agent to the Company as contemplated herein.

11.03.                       Right to Terminate Agreement .  In the event any action or proceeding of the type referred to in Section 11.02 above (except for actions referred to in the Memorandum) shall be instituted or, to the knowledge of the Placement Agent, threatened against the Placement Agent at any time prior to the effective date hereunder, or in the event there shall be filed by or against the Placement Agent in any court pursuant to any federal, state, local or municipal statute, a petition in bankruptcy or insolvency or for reorganization or for the appointment of a receiver or trustee of its assets or if the Placement Agent makes an assignment for the benefit of creditors, the Company shall have the right on three (3) days' written notice to the Placement Agent to terminate this Agreement without any liability to the Placement Agent of any kind.

 
 
Daybreak Oil and Gas, Inc.
June 28, 2006
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SECTION 12
Placement Agent's Warrants

12.01.                       Warrants .  If at least 650,000 Units are sold, the Company shall sell to the Placement Agent, for a total of $100, warrants to purchase shares of Common Stock ("Placement Agent's Warrants") on the basis of three warrants for each 10 Units sold in the Offering.  Each Placement Agent's Warrant will entitle the holder to purchase one share of Common Stock, exercisable at $1.00 per share.  The Placement Agent's Warrants will be exercisable for a period of seven (7) years after their issuance; and if the Placement Agent's Warrants are not exercised during this term, they shall, by their terms, automatically expire.  The Company shall set aside and at all times have available a sufficient number of shares of its Common Stock to be issued upon the exercise of the Placement Agent's Warrants.

12.02.                       Registration Rights .  The Company understands and agrees that if, at any time during the eight-year period commencing the Closing Date, it should file a Registration Statement with the Commission pursuant to the Act, for a public offering of securities, either for the account of the Company or for the account of any other person, the Company at its own expense, will offer to holders of Placement Agent's Warrants or shares of common stock previously issued upon the exercise thereof, the opportunity to register or qualify for public offering the Placement Agent's Warrants and shares of common stock underlying the Placement Agent's Warrants or the shares so issued.  This paragraph is not applicable to a Registration Statement filed with the Securities and Exchange Commission on Forms S-4 or S-8 or any other inappropriate forms; nor does it apply to the public offering contemplated in the Memorandum with regard to the registration of the Warrant Shares.

In addition to the rights above provided, the Placement Agent’s Warrant will be subject to the Registration Rights Agreement that is Exhibit B of the Memorandum.

12.03.                       Other Provisions .  The Placement Agent’s Warrant shall also contain customary anti-dilution provisions and a cashless exercise provision.

SECTION 13
Notice

Except as otherwise expressly provided in this Agreement:

13.01.                       Notice to Company .  Whenever notice is required by the provisions of this Agreement to be given to the Company, such notice shall be in writing addressed to the Company as provided below:

Daybreak Oil and Gas, Inc.
601 W. Main Ave., Suite 1017
Spokane, Washington 99201
Attn:  President

13.02.                       Notice to Placement Agent .  Whenever notice is required by the provisions of this Agreement to be given to the Placement Agent, such notice shall be given in writing addressed to the Placement Agent as follows:

 
 
Daybreak Oil and Gas, Inc.
June 28, 2006
Page 18

Bathgate Capital Partners LLC
5350 S. Roslyn Street, Suite 400
Greenwood Village, CO 80111
Attn:  Vicki D.  E. Barone, Senior Managing Partners


SECTION 14
Miscellaneous

14.01.                       Benefits .  This Agreement is made solely for the benefit of the Placement Agent, the Company, their respective agents, officers, directors, managers, members, representatives, guarantors, sureties and any controlling person referred to in Section 15 of the Act or Section 20 of the Securities Exchange Act of 1934, and their respective successors and assigns, and no other person shall acquire or have any right under or by virtue of this Agreement.  The term "successor" or the term "successors and assigns" as used in this Agreement shall not include any purchasers, as such, of any of the Units.

14.02.                       Survival .  The respective indemnities, agreements, representations, warranties, covenants and other statements of the Company or the Company's officers, as set forth in or made pursuant to this Agreement and the indemnity agreements of the Company and the Placement Agent contained in Section 7 hereof shall survive and remain in full force and effect, regardless of (i) any investigation made by or on behalf of the Company or the Placement Agent or any affiliated persons thereof or any controlling person of the Company or of the Placement Agent, (ii) delivery of or payment for the Units and (iii) the Closing Date, and any successor of the Company, the Placement Agent and Selected Dealers, or any controlling person, or other person indemnified by section 7, as the case may be, shall be entitled to the benefits hereof.

14.03.                       Governing Law .  The laws of the State of Colorado hereof will govern the validity, interpretation, and construction of this Agreement and of each part.  The parties agree that any dispute that arises between them relating to this Agreement or otherwise shall be submitted for resolution in conformity with the Securities Arbitration Rules of the American Arbitration Association.  The parties agree that the situs of an arbitration hearing before the arbitrators shall be in Denver, Colorado, and each party shall request such situs.

14.04.                       Counterparts .  This Agreement may be executed in any number of counterparts, each of which will constitute an original.

Please confirm that the foregoing correctly sets forth the Agreement between you and the Placement Agent.

                 
  Very truly yours,  
     
  BATHGATE CAPITAL PARTNERS LLC  
       
 
By:
/s/ Vickie D. Barone  
    Vickie D.  Barone, Senior Managing Partner  
       
       


 
 
Daybreak Oil and Gas, Inc.
June 28, 2006
Page 19
 
We hereby confirm as of the date hereof that the above letter sets forth the Agreement between the Placement Agent and us.
 
  DAYBREAK OIL AND GAS, INC.  
July 3, 2007      
Date
By:
/s/ Eric L. Moe  
    Eric L. Moe, CEO  
       
       

Exhibit 10.03
 
CONSULTING  AGREEMENT

 
THIS AGREEMENT made effective March 1, 2005 (the "Effective Date").
 
BETWEEN:

Daybreak Mines, Inc., a body corporate, incorporated pursuant to the laws of the State of Washington

(hereinafter referred to as the "Corporation")
 
OF THE FIRST PART -
and -

 
413294 Alberta Ltd., a body corporate, incorporated pursuant to the laws of the Province of Alberta

(hereinafter referred to as the "Consultant")
 
OF THE SECOND PART

 
WHEREAS the Corporation wishes to engage the services and expertise of the Consultant on the terms and conditions hereinafter set forth, and the Consultant wishes to accept such an engagement;
 
NOW THEREFORE in consideration of the covenants of each of the parties given to the other and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows:

1.
SERVICES
 
1.1
Effective as of the Effective Date, the Corporation engages the Consultant, and the Consultant accepts an engagement with the Corporation to render the consulting services for the Corporation as set out in Schedule A. During the term of this Agreement, the Consultant shall provide the services of Robert Martin who shall devote such of his time, attention and abilities to the business of the Corporation as may be necessary for the proper exercise of the Consultant's duties hereunder. Nothing in this Agreement shall be interpreted or construed as creating or establishing a relationship of employer and/or employee between the Corporation and Robert Martin.

2.
DUTIES
 
2.1
The Consultant shall make the services of Mr. Robert Martin available, as requested, to perform this Agreement.   The Consultant agrees that Robert Martin shall be entitled to render services to others in the oil and gas industry during the term of this consulting agreement.
 
2.2
The Consultant's duties shall be to provide the services more particularly set forth on Schedule "A" hereto.
 
2.3
The Consultant warrants and represents that it is duly qualified to perform its duties hereunder, and further covenants that in performing its duties hereunder, it will not engage in activity that is in violation of applicable securities laws or subject the Corporation to liability thereunder.
 
 
 
 
 
3.
COMPENSATION

The Corporation agrees to compensate the Consultant as set out in Schedule "B" attached hereto.

4.
CONFIDENTIALITY
 
4.1
The Consultant acknowledges the Corporation will have reporting and disclosure obligations under all applicable securities legislation. The Consultant covenants and agrees that it shall not any time, during or after the termination of the Consultant's engagement by the Corporation, reveal, divulge, or make known to any person (other than the Corporation or its affiliates) or use for its own account any customer's lists, trade secrets, or secret or confidential information used by the Corporation or its Affiliates during the Consultant's engagement by any of them and made known (whether or not with the knowledge and permission of the Corporation, whether or not developed, devised or otherwise created in whole or in part by the efforts of the Consultant, and whether or not a matter of public knowledge unless as a result of authorized disclosure) to the Consultant by reason of its engagement by the Corporation of any of its Affiliates. The Consultant further covenants and agrees that all knowledge and information, which is acquired or developed for the Corporation or any of its Affiliates by the Consultant, is the property of the Corporation. The Consultant further covenants and agrees that it shall retain all such knowledge and information which it shall acquire and develop during such engagement respecting such customer lists, trade secrets and secret or confidential information in trust for the sole benefit of the Corporation, its affiliates, and their successors and assigns.
 
4.2
The Consultant shall promptly communicate and disclose to the Corporation all observations made and data obtained by it in the course of its engagement by the Corporation.  All written materials, records and documents created by the Consultant or coming into its possession concerning the business or affairs of the Corporation or any of its Affiliates shall, upon the termination of this Agreement, promptly be returned to the Corporation. Upon the request of the Corporation until termination of its engagement by the Corporation, the Consultant shall render to the Corporation or to any Affiliate  designated by it such reports of the activities undertaken by the Consultant or conducted under the Consultant's direction for the Corporation and its Affiliates as the Corporation may request.
 
4.3
Any breach of Confidentiality as outlined above will be prosecuted to the full extent of the law, and reported to the Consultant's applicable regulatory Board.

5.
TERM
 
5.1
This Agreement shall be for a term commencing March 1 ,   2005 and terminating February 28, 2006. Either party may terminate this Agreement at any time without notice in the event of a fundamental breach of the terms of this Agreement by the other party.
 
 
 
 
 
6.
CHANGE OF CONTROL, SALE OF CORPORATION, SALE OF ASSETS OF THE CORPORATION
 
6.1
The Corporation acknowledges the valuable services that the Consultant has provided and will continue to provide to the Corporation in providing the services of Robert Martin in his capacity as an officer thereof and an authorized representative thereof.
 
6.2
The  Corporation  acknowledges  that  in  the   event  of   a  change  of  control  of  the Corporation or a sale of any of the assets of the Corporation, there is a possibility that the service of the Consultant would no longer be required and that this contract might be determined.
 
6.3
The directors of the Corporation have determined that it would be in the best interests of the Corporation to induce the Consultant to provide the services of Robert Martin to the Corporation by indicating that, in the event of a change of control of the Corporation or the sale of assets, the Consultant would have certain automatic and guaranteed rights.

 
6.4
"Takeover of the control of the Corporation" means:
 
(a)
any change in the holding, either direct or indirect, of shares of the Corporation, or     any      reconstruction,      reorganization,      recapitalization,      consolidation, amalgamation, merger, arrangement or other transaction, that results in a person who was, or a group of persons acting in concert who were, not previously in a position to exercise effective control ot the Corporation (or any Associate or Affiliate of any such person or group of persons), being in a position to exercise such effective control either in respect of the Corporation or the successor to the Corporation (and for the purposes of this Agreement, a person or group of persons acting in concert, or any Associate or Affiliate of any such person or group of persons, holding shares of the Corporation, or snares of the successor to the Corporation, in excess of the number that would entitle the holders thereof to cast twenty (25%)  percent or more of the votes attaching to all shares of the Corporation, or to shares of the successor to the Corporation, shall be deemed to be in a position to exercise elective control of the Corporation, or the successor to the Corporation, as the case may be); and
 
(b)
the exercise of such effective control to cause or result in the election or appointment of two or more directors of the Corporation, or of the successor to the Corporation, who were not previously directors of the Corporation.
 
7.
NOTICES

Any notices delivered or received between either party shall be deemed to have been received:
 
(a)
if it was delivered in person, on the date it was delivered;
(b)
if it was sent by electronic facsimile transmission, on the date it was delivered;
(c)
it was sent by mail, on the day it was received to the following address:
 
 
 
 
 
Daybreak Mines, Inc.
Spokane, Washington
Attention:  Treasurer
 
413294 Alberta Ltd.
621 B  37 th Street SW
Calgary AB T3C 1R8
Attention;   Robert Martin
Cell Phone 403 660-9639

 
8.
MODIFICATION OF AGREEMENT
 
8.1
Any modification of this Agreement must be made in writing signed by the Consultant and an officer of the Corporation or it shall have no effect and shall be void,
 
9.
GOVERNING LAW

This Agreement shall be governed by and construed in accordance with the laws of the State of Washington and the parties agree to attorn to the jurisdiction of the courts of the State of Washington.
 
10.
HEADINGS

The headings utilized in this Agreement are for convenience only and are not to be construed in any way as additions or limitations of the covenants and agreements contained in this Agreement.
 
11.
ENTIRE AGREEMENT

The covenants in this Agreement shall be construed as an agreement independent of any other provision in this Agreement. The parties acknowledge that it is their intention that the provisions of this Agreement be binding only to the extent that they may be lawful under the existing applicable laws and in the event that any provision of this Agreement is determined by a court of law to be overly broad or unenforceable, the remaining valid provisions shall remain in full force and effect. This Agreement constitutes the sole agreement between the parties hereto for services to be performed as herein described and the mutual covenants contained herein constitute due and adequate consideration for the full performance by each party of its obligations under this Agreement and any and all previous agreements, written or oral, expressed or implied, between the parties or on their releases and forever discharges the other of and from all manner of action, causes of action, claims or demands whatsoever under or in respect of any agreement.

12.
GENERAL MATTERS
 
12.1
The waiver by any party hereto of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach of the same or of any other provisions of this Agreement.
 
 
 
 
 
12.2
This Agreement shall be binding upon the parties hereto and shall enure to the benefit of and be enforceable by each of the parties hereto and their respective successors and assigns.
 
IN WITNESS WHEREOF the parties hereto have executed this Agreement as of the 1st day of March , 2005.

  Daybreak Mines, Inc.     413294 Alberta Ltd.  
           
per:
/s/ Dale B. Lavigne, President
  per:
/s/ Robert N. Martin, President
 

 
 


 


 


 


 


 


 
 
 
 
SCHEDULE "A"

 
Services:

Provide the services of President, of the Corporation and, in this regard, to have responsibility for the, direction, control and operation of the Corporation with the obligation, duty, authority and power to do all acts and things as are customarily done by persons holding the position of President, fn corporations of similar size to the Corporation and to do all acts and things as are reasonably necessary for the efficient and proper operation and development of the Corporation, reporting to the Board of Directors of the Company.

 


 


 


 


 

 
 
 
 
 
SCHEDULE “B”

Remuneration
Exhibit 10.04


CONSULTING SERVICES AGREEMENT

DAYBREAK MINES, INC. AND ANMAC ENTERPRISES INC.


This Agreement is made effective the 1st day of March 2005, between DayBreak Mines, Inc. (the “Company”) and AnMac Enterprises Inc. (the “Consultant”) located at 1496 Bramwell Road, West Vancouver B.C. Canada V7 2N9

WHEREAS, the Company desires to be assured of the association and services of the Consultant in order to avail itself of the Consultant’s experience, skills, abilities, knowledge and background to facilitate long range strategic planning and to advise the Company in business and/or financial matters and is therefore willing to engage the Consultant upon the terms and conditions set forth herein.

WHEREAS, the Consultant agrees to be engaged and retained by the Company and upon the terms and conditions set forth herein.

NOW THEREFORE, in consideration of the foregoing, of the mutual promises hereinafter set forth and for other good and valuable consideration, the receipt and suffiency of which are hereby acknowledged, the parties hereto agree as follows:

1.
Engagement

The Company hereby engages the Consultant on a non exclusive basis, and the Consultant hereby accepts the engagement to become a consultant to the Company and to render such advice, consultation, information and services to the directors and officers of the Company regarding general financial and business matters, including but not limited to:

A.
mergers and acquisitions;

B.
due diligence studies, reorganizations, divestitures;

C.
capital structures, banking methods and systems;



D.
periodic reporting as to developments concerning the general financial markets and public securities markets and industry which may be relevant or of interest or concern to the Company or the Company’s business.

E.
guidance and assistance in available alternatives for accounts receivable financing and/or other asset financing;

F.
DTC/volume/transfer record analysis; and

G.
investor relations assisting with broker information services.

It shall be expressly understood that Consultant shall have no power to bind the Company to any contract or obligation or to transact any business in the Company’s name or on behalf of the Company in any manner.

2.
Term

The term of this Agreement shall commence on the date hereof and continue for twelve (12) months. The Agreement may be extended upon agreement by both parties.

3.
Compensation and fees

The Company shall pay to the Consultant:

a)
a monthly salary of $3000.00 for 12 months payable by the 25 th of each month.

b)
the Consultant will receive 350,000 shares of restricted stock for the first year of service. The shares will have the standard piggyback registration rights, which shall be subject to reasonable restrictions (such as lock-ups and pro-rata cut backs in the amount of shares to be registered) at the request of either the Company or any underwriter or placement agent whom the Company has engaged.

All Securities shall be issued to the Consultant in accordance with an applicable exemption from registration or, at the option of the Company, pursuant to a valid registration statement. Unless and until such securities are registered by the Company or an applicable exemption to registration is available (such as safe harbor provided by Rule 144) the Consultant will not sell or transfer the securities.
 
 
4.
Exclusivity, Performance and Confidentiality

The services of the Consultant hereunder shall not be exclusive, and Consultant and its agents may perform similar or different services for other persons or entities whether or not they are competitors of the Company. The Consultant shall be required to expend only such time as is necessary to service the Company in a commercially reasonable manner. The Consultant acknowledges and agrees that confidential and valuable information proprietary to the Company and obtained during its engagement by the Company shall not be directly or indirectly, disclosed without the prior written consent of the Company, unless and until such information is otherwise known to the public generally or is not otherwise secret and confidential.

5.
Independent Contractor

In its performance hereunder, the Consultant and its agents shall be independent contractors. The Consultant shall complete the services required hereunder according to his own means and methods of work, shall be in the exclusive charge and control of the Consultant and shall not be subject to the control or supervision of the Company, except as to the results of the work or the extent necessary for the Company to verify the Consultant’s compliance with applicable laws and regulations to which the Company may be subject.  The Company acknowledges that nothing in this Agreement shall be construed to require the Consultant to provide services to the Company at any specific time, or in any specific place or manner.

6.
Waiver

No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision and no waiver shall constitute a continuing waiver. No waiver shall be binding unless executed in writing by the party making the waiver.

7.
Complete Agreement

No supplement, modification or amendment of the Agreement shall be binding unless executed in writing by all parties. This Agreement constitutes the entire agreement between the parties and supersedes any prior agreements or negotiations.

8.
General Provisions

A.
This Agreement shall in all respects be interpreted, enforced and governed  under the laws of State of Washington. The language and all parts of this  Agreement shall be in all cases construed as a whole and not strictly for or against any individual party.
 
 
B.
Any dispute arising under in any way related to this agreement shall be submitted to binding arbitration by the American Arbitration Association in accordance with the Association’s commercial rules then in effect. The arbitration may be conducted in person, by telephone or online as agreed by all parties. The arbitration shall be binding on the parties and the arbitration award may be confirmed by ant court of competent jurisdiction.

9.
Counterparts and Telefacsimile

This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original and all of which shall constitute one agreement. A telefacsimile of this Agreement may be relied upon as full and sufficient evidence as an original.

IN WITNESS WHEREOF, the parties hereto have entered into this Agreement effective the 1 st day of March 2005.
 

 
DayBreak Mines, Inc.     AnMac Enterprises Inc.  
         
         
/s/ Robert N. Martin
   
/s/ Michael McIntyre
 
     
 
 
Robert Martin, President
   
Michael McIntyre, President
 
         
Date:        3/01/05             Date:        3/01/05          









Exhibit 10.05



CONSULTING SERVICES AGREEMENT

DAYBREAK MINES, INC. AND ERIC L. MOE


This Agreement is made effective the 1st day of March 2005, between DayBreak Mines, Inc. (the “Company”) and Eric L. Moe (the “Consultant”) located at 8305 North Colton Place, Spokane, WA. 99208

WHEREAS, the Company desires to be assured of the association and services of the Consultant in order to avail itself of the Consultant’s experience, skills, abilities, knowledge and background to facilitate long range strategic planning and to advise the Company in business and/or financial matters and is therefore willing to engage the Consultant upon the terms and conditions set forth herein.

WHEREAS, the Consultant agrees to be engaged and retained by the Company and upon the terms and conditions set forth herein.

NOW THEREFORE, in consideration of the foregoing, of the mutual promises hereinafter set forth and for other good and valuable consideration, the receipt and suffiency of which are hereby acknowledged, the parties hereto agree as follows:

1.
Engagement

The Company hereby engages the Consultant on a non exclusive basis, and the Consultant hereby accepts the engagement to become a consultant to the Company and to render such advice, consultation, information and services to the directors and officers of the Company regarding general financial and business matters, including but not limited to:

A.
mergers and acquisitions;

B.
due diligence studies, reorganizations, divestitures;

C.
capital structures, banking methods and systems;


 
 
 

D.
periodic reporting as to developments concerning the general financial markets and public securities markets and industry which may be relevant or of interest or concern to the Company or the Company’s business.

E.
guidance and assistance in available alternatives for accounts receivable financing and/or other asset financing;

F.
DTC/volume/transfer record analysis; and

G.
investor relations assisting with broker information services.

It shall be expressly understood that Consultant shall have no power to bind the Company to any contract or obligation or to transact any business in the Company’s name or on behalf of the Company in any manner.

2.
Term

The term of this Agreement shall commence on the date hereof and continue for twelve (12) months. The Agreement may be extended upon agreement by both parties.

3.
Compensation and fees

The Company shall pay to the to Consultant:

a)
a  monthly salary of $2000.00 for 12 months payable by the 25 th of each month.

b)
the Consultant will receive 500,000 shares of restricted stock for the first year of service. The shares will have the standard piggyback registration rights, which shall be subject to reasonable restrictions (such as lock-ups and pro-rata cut backs in the amount of shares to be registered) at the request of either the Company or any underwriter or placement agent whom the Company has engaged.

All Securities shall be issued to the Consultant in accordance with an applicable exemption from registration or, at the option of the Company, pursuant to a valid registration statement. Unless and until such securities are registered by the Company or an applicable exemption to registration is available (such as safe harbor provided by Rule 144) the Consultant will not sell or transfer the securities.
 
 
 
 
 
4.
Exclusivity, Performance and Confidentiality

The services of the Consultant hereunder shall not be exclusive, and Consultant and its agents may perform similar or different services for other persons or entities whether or not they are competitors of the Company. The Consultant shall be required to expend only such time as is necessary to service the Company in a commercially reasonable manner. The Consultant acknowledges and agrees that confidential and valuable information proprietary to the Company and obtained during its engagement by the Company shall not be directly or indirectly, disclosed without the prior written consent of the Company, unless and until such information is otherwise known to the public generally or is not otherwise secret and confidential.

5.
Independent Contractor

In its performance hereunder, the Consultant and its agents shall be independent contractors. The Consultant shall complete the services required hereunder according to his own means and methods of work, shall be in the exclusive charge and control of the Consultant and shall not be subject to the control or supervision of the Company, except as to the results of the work or the extent necessary for the Company to verify the Consultant’s compliance with applicable laws and regulations to which the Company may be subject.  The Company acknowledges that nothing in this Agreement shall be construed to require the Consultant to provide services to the Company at any specific time, or in any specific place or manner.

6.
Waiver

No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision and no waiver shall constitute a continuing waiver. No waiver shall be binding unless executed in writing by the party making the waiver.

7.
Complete Agreement

No supplement, modification or amendment of the Agreement shall be binding unless executed in writing by all parties. This Agreement constitutes the entire agreement between the parties and supersedes any prior agreements or negotiations.

8.
General Provisions

A.
This Agreement shall in all respects be interpreted, enforced and governed under the laws of State of Washington. The language and all parts of this  Agreement shall be in all cases construed as a whole and not strictly for or against any individual party.
 
 
 
 
 
B.
Any dispute arising under in any way related to this agreement shall be submitted to binding arbitration by the American Arbitration Association in accordance with the Association’s commercial rules then in effect. The arbitration may be conducted in person, by telephone or online as agreed by all parties. The arbitration shall be binding on the parties and the arbitration award may be confirmed by ant court of competent jurisdiction.

9.
Counterparts and Telefacsimile

This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original and all of which shall constitute one agreement. A telefacsimile of this Agreement may be relied upon as full and sufficient evidence as an original.

IN WITNESS WHEREOF, the parties hereto have entered into this Agreement effective the 1 st day of March 2005.

DayBreak Mines, Inc.
         
/s/ Robert Martin
   
/s/ Eric L. Moe
 
 
   
 
 
Robert Martin, President
   
Eric L. Moe
 
         
Date:         3/01/05              Date:         3/01/05           

             









Exhibit 10.22
 
EXHIBIT A

 
BROKER'S NAME:______________________________________
 
IMPORTANT: PLEASE READ CAREFULLY BEFORE SIGNING. SIGNIFICANT REPRESENTATIONS ARE CALLED FOR HEREIN.
 
SUBSCRIPTION AGREEMENT
and LETTER OF INVESTMENT INTENT
 
Daybreak Oil & Gas, Inc.
601 W. Main Ave., Suite 1017 
Spokane, WA 99201-0613

Gentlemen:
 
The undersigned (the "Subscriber") hereby tenders this subscription for the purchase of units ("Units" or the "Securities") consisting of shares of common stock ("Shares") of Daybreak Oil & Gas, Inc. (the "Company") and warrants to purchase Shares. The Units are described in the Company's Private Placement Memorandum dated June 30,2006 (the "Memorandum"). The Subscriber understands that a subscription for the Securities may be rejected for any reason and that, in the event that this subscription is rejected, the funds delivered herewith will be promptly returned, without interest thereon or deduction therefrom. By execution below, the Subscriber acknowledges that the Company is relying upon the accuracy and completeness of the representations contained herein in complying with their obligations under applicable securities laws.
 
1. Subscription Commitment. The Subscriber acknowledges that the minimum subscription is $30,000. The Subscriber hereby subscribes for the purchase of the number of Securities specified below and, as full payment therefor, agrees to pay in cash, the amount set forth below by check made payable to "Daybreak Oil & Gas Escrow Account," or by wire transfer to the escrow account of the Company.
 
 
  Number of Units  
At $3.00 per Unit for
an aggregate of $.
 
 
The Subscriber understands that this subscription is not binding on the Company until accepted by the Company, which acceptance is at the discretion of the Company and is to be evidenced by the Company's execution of this Subscription Agreement where indicated. If the subscription is rejected, or if the Minimum Offering of 730,000 Units ($2,190,000) is not achieved within the offering period set forth in the Memorandum (the "Offering Period"), the Company shall return to the Subscriber, without interest or deduction, any payment tendered by the Subscriber, and the Company and the Subscriber shall have no further obligation to each other hereunder. Unless and until rejected by the Company, or the Minimum Offering is not achieved within the Offering Period, this subscription shall be irrevocable by the Subscriber. The Subscriber understands that the Company may, in the event that the offering to which the Memorandum relates is oversubscribed, reduce this subscription in any amount and to any extent, whether or not pro rata reductions are made of any other investor's subscription.
 
2. Representations and Warranties. In order to induce the Company to accept this subscription, the Subscriber hereby represents and warrants to, and covenants with, the Company as follows:
 
(a)     The Subscriber has received and had the opportunity to review the Memorandum and has been given access to full and complete information regarding the Company and has utilized such access to the

 
Daybreak Oil & Gas, Inc.
Subscription Agreement
 
1
 
 
Subscriber's satisfaction for the purpose of obtaining such information regarding the Company as the Subscriber has reasonably requested; and, particularly, the Subscriber has been given reasonable opportunity to ask questions of, and receive answers from, representatives of the Company concerning the terms and conditions of the offering of the Securities and to obtain any additional information, to the extent reasonably available;
(b)    Except for the Memorandum, the Subscriber has not been furnished with any other materials or literature relating to the offer and sale of the Securities; except as set forth in the Memorandum, no representations or warranties have been made to the Subscriber by the Company, any selling agent of the Company, or any agent, employee, or affiliate of the Company or such selling agent.
 
(c)    The Subscriber believes that an investment in the securities is suitable for the Subscriber based upon the Subscriber investment objectives and financial needs. The Subscriber (i) has adequate means for providing for the Subscriber's current financial needs and personal contingencies; (ii) has no need for liquidity in this investment; (iii) at the present time, can afford a complete loss of such investment; and (iv) does not have an overall commitment to investments which are not readily marketable that is disproportionate to the Subscriber's net worth, and the Subscriber's investment in the Securities will not cause such overall commitment to become excessive.
 
(d)    The Subscriber, in reaching a decision to subscribe, has such knowledge and experience in financial and business matters that the Subscriber is capable of reading and interpreting financial statements and evaluating the merits and risk of an investment in the Securities and has the net worth to undertake such risks.
 
(e)    The Subscriber was not offered or sold the Securities, directly or indirectly, by means of any form of general advertising or general solicitation, including, but not limited to, the following:  (1) any advertisement, article, notice or other communication published in any newspaper, magazine, or similar medium of or broadcast over television or radio; or (2) to the knowledge of the undersigned, any seminar or meeting whose attendees had been invited by any general solicitation or general advertising.
 
(f)    The Subscriber has obtained, to the extent the Subscriber deems necessary, the Subscriber's own personal professional advice with respect to the risks inherent in the investment in the securities, and the suitability of an investment in the Securities in light of the Subscriber's financial condition and investment needs;
 
(g)    The Subscriber recognizes that the Securities as an investment involves a high degree of risk, including those set forth under the caption "Risk Factors" in the Executive Summary.
 
(h)      The information contained in this agreement is true, complete and correct in all material respects as of the date hereof; the Subscriber understands that the Company's determination that the exemption from the registration provisions of the Securities Act of 1933, as amended (the "Act"), which is based upon non-public offerings and applicable to the offer and sale of the Securities, is based, in part, upon the representations, warranties, and agreements made by the Subscriber herein; and the Subscriber consents to the disclosure of any such information, and any other information furnished to the Company, to any governmental authority, self-regulatory organization, or, to the extent required by law, to any other person.
 
(i)      The Subscriber realizes that (i) the purchase of the Securities is a long-term investment; (ii) the purchaser of the Securities must bear the economic risk of investment for an indefinite period of time because the Securities have not been registered under the Securities Act of 1933 or under the securities laws of any state and, therefore, the Securities cannot be resold unless they are subsequently registered under said laws or exemptions from such registrations are available; (iii) there is presently no public market for the Securities and the Subscriber may be unable to liquidate the Subscriber's investment in the event of an emergency, or pledge the Securities as collateral for a loan; and (iv) the transferability of the Securities is

 
Daybreak Oil & Gas, Inc.
Subscription Agreement
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restricted and (A) requires conformity with the restrictions contained in paragraph 2 below and (B) legends will be placed on the certificate(s) representing the Securities referring to the applicable restrictions on transferability; and

 
(j)      The Subscriber certifies, under penalties of perjury, that the Subscriber is NOT subject to the backup withholding provisions of Section 3406(a)(i)(C) of the Internal Revenue Code.
 
(k)      Stop transfer instructions will be placed with the transfer agent for the Securities, and a legend may be placed on any certificate representing the Securities substantially to the following effect:
 
THIS SECURITY HAS NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), IN RELIANCE UPON THE EXEMPTIONS FROM REGISTRATION PROVIDED IN THE ACT AND REGULATION D UNDER THE ACT. AS SUCH, THE PURCHASE OF THIS SECURITY WAS NECESSARILY WITH THE INTENT OF INVESTMENT AND NOT WITH A VIEW FOR DISTRIBUTION. THEREFORE, ANY SUBSEQUENT TRANSFER OF THIS SECURITY OR ANY INTEREST THEREIN WILL BE UNLAWFUL UNLESS IT IS REGISTERED UNDER THE ACT OR UNLESS AN EXEMPTION FROM REGISTRATION IS AVAILABLE. FURTHERMORE, IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY OR ANY INTEREST THEREIN, WITHOUT THE OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY THAT THE PROPOSED TRANSFER OR SALE DOES NOT AFFECT THE EXEMPTIONS RELIED UPON BY THE COMPANY IN ORIGINALLY DISTRIBUTING THE SECURITY AND THAT REGISTRATION IS NOT REQUIRED.
 
3. Restricted Nature of the Securities. The Subscriber has been advised and understands that (a) the Securities have not been registered under the Securities Act of 1933 or applicable state securities laws and that the securities are being offered and sold pursuant to exemptions from such laws; (b) the Memorandum may not have been filed with or reviewed by certain state securities administrators because of the limited nature of the offering; (c) the Company is under no obligation to register the Securities under the Act or any state securities laws, or to take any action to make any exemption from any such registration provisions available. The Subscriber represents and warrants that the Securities are being purchased for the Subscriber's own account and for investment purposes only, and without the intention of reselling or redistributing the same; the Subscriber has made no agreement with others regarding any of the Securities; and the Subscriber's financial condition is such that it is not likely that it will be necessary to dispose of any of such Securities in the foreseeable future. The Subscriber is aware that, in the view of the Securities and Exchange Commission, a purchase of such securities with an intent to resell by reason of any foreseeable specific contingency or anticipated change in market value, or any change in the condition of the Company, or in connection with a contemplated liquidation settlement of any loan obtained for the acquisition of such securities and for which such securities were pledged, would represent an intent inconsistent with the representations set forth above. The Subscriber further represents and agrees that if, contrary to the foregoing intentions, the Subscriber should later desire to dispose of or transfer any of such securities in any manner, the Subscriber shall not do so unless and until (i) said Securities shall have first been registered under the Act and all applicable securities laws; or (ii) the Subscriber shall have first delivered to the Company a written notice declaring such holder's intention to effect such transfer and describe in sufficient detail the manner and circumstances of the proposed transfer, which notice shall be accompanied either by a written opinion of legal counsel who shall be reasonably satisfactory to the Company, which opinion shall be addressed to the Company and reasonably satisfactory in form and substance to the Company's counsel, to the effect that the proposed sale or transfer is exempt from the registration provisions of the Act and all applicable state securities laws, or by a "no action" letter from the Securities and Exchange Commission to the effect that the transfer of the Securities without registration will not result in recommendation by the staff of the Commission that action be taken with respect thereto.

 
 
Daybreak Oil & Gas, Inc.
Subscription Agreement
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4.    Residence. The Subscriber represents and warrants that the Subscriber is a bona fide resident of, is domiciled in and received the offer and made the decision to invest in the Securities in the state set forth on the signature page hereof, and the Securities are being purchased by the Subscriber in the Subscriber's name solely for the Subscriber's own beneficial interest and not as nominee for, or on behalf of, or for the beneficial interest of, or with the intention to transfer to, any other person, trust or organization, except as specifically set forth in paragraph 15 of this Subscription Agreement and Letter of Investment Intent.
 
5.    Investor Qualification. The Subscriber represents and warrants that the Subscriber or the purchaser of the Securities named in paragraph 15 comes within at least one category marked below, and that for any category marked the Subscriber has truthfully set forth the factual basis or reason the Subscriber comes within that category. ALL INFORMATION IN RESPONSE TO THIS PARAGRAPH WILL BE KEPT STRICTLY CONFIDENTIAL. The Subscriber agrees to furnish any additional information which the Company deems necessary in order to verify the answers set forth below.
 
 
Category I
The Subscriber is an individual (not a partnership, corporation, etc.) whose individual net worth, or joint net worth with the Subscriber's spouse, presently exceeds $1,000,000.
   
  Explanation. In calculation of net worth the Subscriber may include equity in personal property and real estate, including the Subscriber's principal residence, cash, short term investments, stocks and securities. Equity in personal property and real estate should be based on the fair market value of such property less debt secured by such property.
   
Category II The Subscriber is an individual (not a partnership, corporation, etc.) who had an individual net income in excess of $200,000 in each of the last two years, or joint income with his/her spouse in excess of $300,000 in each of the last two years, and has a reasonable expectation of reaching the same income level in the current year.
   
Category III The Subscriber is an executive officer or director of the Company.
   
Category IV The Subscriber is a bank; savings and loan; insurance company; registered broker or dealer; registered investment company; registered business development company; licensed small business investment company ("SBIC"); or employee benefit plan within the meaning of Title I of ERISA whose plan fiduciary is either a bank, savings and loan, insurance company or registered investment advisor or whose total assets exceed $5,000,000; or a self-directed employee benefit plan with investment decisions made solely by persons that are accredited investors.
   
 
(describe entity)
   
Category V The Subscriber is a private business development company as defined in Section 202(a)(22) of the Investment Advisers Act of 1940.
 
Daybreak Oil & Gas, Inc.
Subscription Agreement
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Category VI
The Subscriber is an entity with total assets in excess of $5,000,000 which was not formed for the purpose of investing in the Units and which is one of the following:
 
a corporation;
or a partnership;
or a business trust; or
a tax-exempt organization described in Section 501(cX3) of the Internal Revenue Code of 1986, as amended.
   
Category VII
The Subscriber is a trustee for a trust that is revocable by the grantor at any time (including an IRA) and the grantor qualifies under either Category I or Category II above. A copy of the declaration of trust or trust agreement and a representation as to the net worth or income of the grantor is enclosed.
   
Category VIII
The Subscriber is an entity all the equity owners of which are "accredited investors" within one or more of the above categories, other than Category IV or Category V. [If relying upon this category alone, each equity owner must complete a separate copy of this Agreement.]
   
 
(describe entity)
   
Category DC The Subscriber is a trust with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the Securities, whose purchase is directed by a person who has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective investment.
 
6.          Additional Representations.    The undersigned, if other than an individual, makes the following additional representations:
 
(a)   The Subscriber was not organized for the specific purpose of acquiring the Securities;

and
 
(b)   This Subscription Agreement and Letter of Investment Intent has been duly authorized by all necessary action on the part of the Subscriber, has been duly executed by an authorized officer or representative of the Subscriber, and is a legal, valid and binding obligation of the Subscriber enforceable in accordance with its terms.
 
7. Sophistication. The Subscriber further represents and warrants that he has such knowledge and experience in financial and business matters so as to be capable of evaluating the merits and risks of an investment in the Securities and protecting the Subscriber's own interests in this transaction, and does not desire to utilize the services of any other person in connection with evaluating such merits and risks.

 
 
Daybreak Oil & Gas, Inc.
Subscription Agreement
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8.    Reliance on Representations.     The Subscriber understands the meaning and legal consequences of the representations, warranties, agreements, covenants, and confirmations set out above and agrees that the subscription made hereby may be accepted in reliance thereon. The Subscriber agrees to indemnify and hold harmless the Company and any selling agent (including for this purpose their employees, and each person who controls either of them within the meaning of Section 20 of the Securities Exchange Act of 1934, as amended) from and against any and all loss, damage, liability or expense, including reasonable costs and attorney's fees and disbursements, which the Company, or such other persons may incur by reason of, or in connection with, any representation or warranty made herein not having been true when made, any misrepresentation made by the Subscriber or any failure by the Subscriber to fulfill any of the covenants or agreements set forth herein, in the Purchaser Questionnaire or in any other document provided by the Subscriber to the Company.
 
9.    Transferabilitv and Assignability. Neither this Subscription Agreement nor any of the rights of the Subscriber hereunder may be transferred or assigned by the Subscriber. The Subscriber agrees that the Subscriber may not cancel, terminate, or revoke this Subscription Agreement or any agreement of the Subscriber made hereunder (except as otherwise specifically provided herein) and that this Subscription Agreement shall survive the death or disability of the Subscriber and shall be binding upon the Subscriber's heirs, executors, administrators, successors, and assigns.
 
10.    Escrow Account. Until such time as the Minimum Units have been accepted, the cash received for the subscriptions will be held in a non-interest bearing account ("Escrow Account") in the name of the Company at AMG Guaranty Trust, NA.   Subscribers may not withdraw funds from the Escrow Account, and subscriptions may not be revoked, canceled or terminated by the subscriber. Subsequent to acceptance by the Company of subscriptions for at least 1,000,000 Units (the "Minimum Units"), the Escrow Account will be terminated, and additional Offering proceeds relating to accepted subscriptions may be utilized by the Company immediately upon acceptance by the Company. If the Minimum Units are not sold prior to the expiration of the Offering Period, the Offering will terminate and the Company will withdraw the Offering, whereupon each Subscriber will receive a refund of any subscription paid, without deduction. Upon such termination of the Offering by the Company, the Subscriber's subscription will be automatically canceled and the undersigned will have no further rights or obligations under this Agreement, and the Company and the Placement Agent shall have no liability or other obligation to the Subscriber.

 
11.        NASD Membership - Individual Investor. Are you a member of the NASD, 1 a person associated with a member 2 of the NASD, or an affiliate of a member?
 
Yes_____                        No_____               
 
1            The NASD defines a "member" as being either any broker or dealer admitted to membership in the NASD or any officer or partner of such a member, or the executive representative of such a member or the substitute for such representative.
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2            The NASD defines a "person associated with a member" as being every sole proprietor, general or limited partner, officer, director or branch manager or such member, or any natural person occupying a similar status or performing similar functions, or any natural person engaged in the investment banking or securities business who is directly or indirectly controlling or controlled by such member (for example, any employee), whether or not any such person is registered or exempt from registration without the NASD. Thus, "person associated with a member" includes a sole proprietor, general or limited partner, officer, director or branch manager or an organization of any kind (whether a corporation, partnership or other business entity) which itself is a "member" or a "person associated with a member." ha addition, an organization of any kind is a "person associated with a member" if its sole proprietor or anyone of its general or limited partners, officers, director or branch managers is a "member" or "person associated with a member."

 
 
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Subscription Agreement
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If "Yes," please list any members of the NASD with whom you are associated or affiliated.
 
NASD Membership - Corporate Investor, If you are a Corporation, are any of your officers, directors or 5% shareholders a member of the NASD, a person associated with a member of the NASD, or an affiliate of a member?
 
Yes_____                        No_____               
 
If "Yes," please list the name of the respective officer, director or 5% shareholder and any members of the NASD with whom they are associated or affiliated.
 
12.            Survival. The representations and warranties of the Subscriber set forth herein shall survive the sale of the Units pursuant to this Subscription Agreement.
 
13.    Notices. All notices or other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered personally or mailed by certified or registered mail, return receipt requested, postage prepaid, as follows: if to the Subscriber, to the address set forth below; and if to the Company to the address at the beginning of this letter, or to such other address as the Company or the Subscriber shall have designated to the other by like notice.
 
14.    (Applicable to FLORIDA   residents only.) The Subscriber has been informed and recognizes that (a) the Units have not been registered under the Florida Securities Act, and (b) under Section 517.061 (12) of the Florida Securities Act, the Subscriber may void the sale of any Securities within three (3) days after the tender of this Subscription Agreement and payment hereunder to the Company.
 
15.    Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same document.

 
IN NO EVENT WILL THE COMPANY, THE PLACEMENT AGENT, OR ANY OF THEIR AFFILIATES OR THE PROFESSIONAL ADVISORS ENGAGED BY THEM BE LIABLE IF FOR ANY REASON RESULTS OF OPERATIONS OF THE COMPANY ARE NOT AS PROJECTED IN THE DOCUMENTS. INVESTORS MUST LOOK SOLELY TO, AND RELY ON, THEIR OWN ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES OF INVESTING IN THE SECURITIES.
 
16.           Title. Manner in Which Title is To Be Held.
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Place an "X" in one space below:

(a)             Individual Ownership
(b)             Community Property
(c)             Joint Tenant with Right of Survivorship (both parties must sign)
(d)             Partnership
(e)             Tenants in Common
(f)             Corporation
(g)             Trust
(h)             Other (Describe):

 
 
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Please print above the exact name(s) in which the Securities are to be held.

 
17.    State of Residence . My state of residence and the state in which I received the offer to invest and made the decision to invest in the Securities is                                                                                           .
 
18.    Date of Birth. My date of birth is:                                                                                 

 
SIGNATURE PAGE ON NEXT PAGE

 


 


 


 


 


 
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Subscription Agreement
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SIGNATURES

The Subscriber hereby represents he has read this entire Subscription Agreement and the Memorandum dated                      , 2006.
 
Dated:                                       

 
INDIVIDUAL

 
     
    Address to Which Correspondence Should be Directed
     
     
Signature (Individual)   City, State and Zip Code
     
     
Signature (All record holders should sign)   Tax Identification or Social Security Number
     
     
Name(s) Typed or Printed    Telephone Number
     
 
 
 
  COPY OF DRIVER'S LICENSE OR PASSAPORT REQUIRED IF NON-BCP CUSTOMER

 


 


 


 


 
 

Daybreak Oil & Gas, Inc.
Subscription Agreement
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CORPORATION, PARTNERSHIP, TRUST, RETIREMENT ACCOUNT OR OTHER ENTITY

 
     
Name of Entity   Address to Which Correspondence Should be Directed
     
By:    
* Signature   City, State and Zip Code
     
Its:     
Title   Tax Identification or Social Security Number
     
   
Name Typed or Printed   Telephone Number
     
 
* If Securities are being subscribed for by an entity, the Certificate of Signatory must also be completed.

 
CERTIFICATE OF SIGNATORY To be completed if Securities are being subscribed for by an entity.
 
I,                                                                             , am the                                                                                of                                                                                                     (the "Entity").
 
I certify that I am empowered and duly authorized by the Entity to execute and carry out the terms of the Subscription Agreement and Letter of Investment Intent and to purchase and hold the Securities, and certify that the Subscription Agreement and Letter of Investment Intent has been duly and validly executed on behalf of the Entity and constitutes a legal and binding obligation of the Entity.

 
IN WITNESS WHEREOF, I have hereto set may hand this                        day of                 , 2006.

 
   
  Signature
 

 
COPY OF SIGNER'S DRIVER'S LICENSE OR PASSAPORT REQUIRED FOR NON-BCP CUSTOMERS

 


 
 

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Subscription Agreement
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ACCEPTANCE

 
This Subscription Agreement is accepted as of                                                                                , 2006.
 
  Daybreak Oil & Gas, Inc.  
       
 
By:
/s/   
    Authorized Officer  
       
   
Date: ______________________
 
 

 
 
 

 


 


 


 


Daybreak Oil & Gas, Inc.
Subscription Agreement
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Exhibit 10.23
EXHIBIT C FORM OF WARRANT

This Warrant and the underlying shares of Common Stock represented by this Certificate have not been registered under the Securities Act of 1933 (the "Act"), and are "restricted securities" as that term is defined in Rule 144 under the Act. The securities may not be offered for sale, sold or otherwise transferred except pursuant to an effective registration statement under the Act, or pursuant to an exemption from registration under the Act, the availability of which is to be established to the satisfaction of the Company.

Warrant No. 2006­

WARRANT TO PURCHASE SHARES OF COMMON STOCK

Warrant to Purchase                                                   Shares
(subject to adjustment as set forth herein)

Exercise Price $2.00 Per Share
(subject to adjustment as set forth herein)

VOID AFTER 3:00 P.M., PACIFIC TIME, ON _,2011
 
THIS CERTIFIES THAT [INVESTOR'S NAME], [INVESTOR'S ADDRESS] is entitled to purchase from Daybreak Oil and Gas, Inc., a Washington corporation (hereinafter called the "Company") with its principal office located at 601 West Main Street, Suite 1017, Spokane, Washington 99201, at any time after the issuance of this warrant, but before 3: 00 P.M., Pacific Time, on --' 2011 (the "Termination Date"), at the purchase price of $2.00 per share (the "Exercise Price"), the number of shares (the "Shares") of the Company's Common Stock (the "Common Stock") set forth above. The number of Shares purchasable upon exercise of this Warrant and the Exercise Price per Share shall be subject to adjustment from time to time as set forth in Section 4 below.

Section 1.   Definitions.

The following terms used in this agreement shall have the following meanings (unless otherwise expressly provided herein):

The "Act. " The Securities Act of 1933, as amended.

The "Commission." The Securities and Exchange Commission.

The "Company." Daybreak Oil and Gas, Inc.

"Common Stock." The Company's Common Stock.
 
"Current Market Price." The Current Market Price shall be determined as follows:

(a) if the security at issue is listed on a national securities exchange or admitted to unlisted trading privileges on such an exchange or quoted on either the National Market System or the Small Cap Market of the automated quotation service operated by The Nasdaq Stock Market, Inc. ("Nasdaq"), the current value shall be the last reported sale price of that security on such exchange or system on the day for which the Current Market Price is to be determined or, if no such sale is made on such day, the average of the highest closing bid and lowest asked price for such day on such exchange or system; or

(b) if the security at issue is not so listed or quoted or admitted to unlisted trading privileges, the Current Market Value shall be the average of the last reported highest bid and lowest asked prices quoted on the Nasdaq Electronic Bulletin Board, or, if not so quoted, then by the National Quotation Bureau, Inc. on the last business day prior to the day for which the Current Market Price is to be determined; or

(c) if the security at issue is not so listed or quoted or admitted to unlisted trading privileges and bid and asked prices are not reported, the current market value shall be determined in such reasonable manner as may be prescribed from time to time by the Board of Directors of the Company, subject to the objection and arbitration procedure as described in Section 7 below.

"Expiration Date."    J 2011.

"Holder" or "Warrantholder." The person to whom this Warrant is issued, and any valid transferee thereof pursuant to Section 3.1 below.

"NASD." The National Association of Securities Dealers, Inc.

"Nasdaq." The automated quotation system operated by the Nasdaq Stock Market, Inc.

"Termination of Business. " Any sale, lease or exchange of all, or substantially all, of the Company's assets or business or any dissolution, liquidation or winding up of the Company.

"Warrants." The warrants issued in accordance with the terms of this Agreement and any Warrants issued in substitution for or replacement of such warrants, including those evidenced by a certificate or certificates originally issued or issued upon division, exchange, substitution or transfer pursuant to this Agreement.

"Warrant Securities."    The Common Stock purchasable upon exercise of a Warrant including the Common Stock underlying unexercised portions of a Warrant.

Section 2.   Term of Warrants; Exercise of Warrant.
 
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2.1.     Exercise of Warr ant. Subject to the terms of this Agreement, the Holder shall have the right, at any time prior to 5:00 p.m., Spokane Time, on the Expiration Date, to purchase from the Company up to the number of fully paid and nonassessable Shares to which the Holder may at the time be entitled to purchase pursuant to this Agreement, upon surrender to the Company, at its principal office, of the Warrant to be exercised, together with the purchase form attached hereto as Exhibit 1. duly filled in and signed, and upon payment to the Company of the Exercise Price for the number of Shares in respect of which such Warrants are then exercised, but in no event for less than 100 Shares (unless fewer than an aggregate of 100 shares are then purchasable under all outstanding Warrants held by a Holder).

2.2.   Exercise Price. The exercise price ("Exercise Price) is $2.00 per Share, as modified in accordance with Section 4, below.

2.3.     Issuance of Shares. Upon such surrender of the Warrants and payment of such Exercise Price as aforesaid, the Company shall issue and cause to be delivered with all reasonable dispatch to or upon the written order of the Holder and in such name or names as the Holder may designate, a certificate or certificates for the number of full Shares so purchased upon the exercise of the Warrant, together with cash, as provided in Section 13 hereof, in respect of any ftactional Shares otherwise issuable upon such surrender.

2.4 .    Upon receipt of the Warrant by the company as described in Sections 2.1. above, the Holder shall be deemed to be the holder of record of the Shares issuable upon such exercise, notwithstanding that the transfer books of the Company may then be closed or that certificates representing such Shares may not have been prepared or actually delivered to the Holder.

Section 3.   Transferability and Form of Warrant

3.1.    Limitation on Transfer. Any assignment or transfer of a Warrant shall be made by the presentation and surrender of the Warrant to the Company at its principal office or the office of its transfer agent, if any, accompanied by a duly executed Assignment Form. Upon the presentation and surrender of these items to the Company, the Company, at its sole expense, shall execute and deliver to the new Holder or Holders a new Warrant or Warrants, in the name of the new Holder or Holders as named in the Assignment Form, and the Warrant presented or surrendered shall at that time be canceled.

3.2.    Exchange of Certificate. Any Warrant may be exchanged for another certificate or certificates entitling the Warrantholder to purchase a like aggregate number of Shares as the certificate or certificates surrendered then entitled such Warrantholder to purchase. Any Warrantholder desiring to exchange a Warrant shall make such request in writing delivered to the Company, and shall surrender, properly endorsed, with signatures guaranteed, the certificate evidencing the Warrant to be so exchanged. Thereupon, the Company shall execute and deliver to the person entitled thereto a new Warrant as so requested.

3.3.   Mutilated, Lost, Stolen, or Destroyed Certificate. In case the certificate or certificates evidencing the Warrants shall be mutilated, lost, stolen or destroyed, the Company shall, at the request of the Warrantholder, issue and deliver in exchange and substitution for and upon
 
3
cancellation of the mutilated certificate or certificates, or in lieu of and substitution for the certificate or certificates lost, stolen or destroyed, a new Warrant or certificates of like tenor and representing an equivalent right or interest, but only upon receipt of evidence satisfactory to the Company of such loss, theft or destruction of such Warrant and a bond of indemnity, if requested, also satisfactory in form and amount, at the applicant's cost. Applicants for such substitute Warrant shall also comply with such other reasonable regulations and pay such other reasonable charges as the Company may prescribe.

Section 4.   Adjustment of Number of Shares.

The number and kind of securities purchasable upon the exercise of the Warrants and the Warrant Price shall be subj ect to adj ustment from time to time upon the happening of certain events, as follows:

4.1.   Adjustments. The number of Shares purchasable upon the exercise of the Warrants shall be subject to adjustments as follows:

(a) In case the Company shall (i) pay a dividend in Common Stock or make a distribution to its stockholders in Common Stock, (ii) subdivide its outstanding Common Stock, (iii) combine its outstanding Common Stock into a smaller number of shares of Common Stock, or (iv) issue by classification of its Common Stock other securities of the Company, the number of Shares purchasable upon exercise of the Warrants immediately prior thereto shall be adjusted so that the Warrantholder shall be entitled to receive the kind and number of Shares or other securities of the Company which it would have owned or would have been entitled to receive immediately after the happening of any of the events described above, had the Warrants been exercised immediately prior to the happening of such event or any record date with respect thereto. Any adjustment made pursuant to this subsection 4.1. (a) shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event.

(b) In case the Company shall issue rights, options, warrants, or convertible securities to all or substantially all holders of its Common Stock, without any charge to such holders, entitling them to subscribe for or purchase Common Stock at a price per share which is lower at the record date mentioned below than the then Current Market Price, the number of Shares thereafter purchasable upon the exercise of each Warrant shall be determined by multiplying the number of Shares theretofore purchasable upon exercise of the Warrants by a fraction, of which the numerator shall be the number of shares of Common Stock outstanding immediately prior to the issuance of such rights, options, warrants or convertible securities plus the number of additional shares of Common Stock offered for subscription or purchase, and of which the denominator shall be the number of shares of Common Stock outstanding immediately prior to the issuance of such rights, options, warrants, or convertible securities plus the number of shares which the aggregate offering price of the total number of shares offered would purchase at such Current Market Price. Such adjustment shall be made whenever such rights, options, warrants, or convertible securities are issued, and shall become effective immediately and retroactively to the record
 
4
date for the determination of stockholders entitled to receive such rights, options, warrants, or convertible securities.

(c) In case the Company shall distribute to all or substantially all holders of its Common Stock evidences of its indebtedness or assets (excluding cash dividends or distributions out of earnings) or rights, options, warrants, or convertible securities containing the right to subscribe for or purchase Common Stock (excluding those referred to in subsection 4.1 (b) above), then in each case the number of Shares thereafter purchasable upon the exercise of the Warrants shall be determined by multiplying the number of Shares theretofore purchasable upon exercise of the Warrants by a fraction, of which the numerator shall be the then Current Market Price on the date of such distribution, and of which the denominator shall be such Current Market Price on such date minus the then fair value (determined as provided in subparagraph ( e) below) of the portion of the assets or evidences of indebtedness so distributed or of such subscription rights, options, warrants, or convertible securities applicable to one share. Such adjustment shall be made whenever any such distribution is made and shall become effective on the date of distribution retroactive to the record date for the determination of stockholders entitled to receive such distribution.

(d) No adjustment in the number of Shares purchasable pursuant to the Warrants shall be required unless such adjustment would require an increase or decrease of at least one percent in the number of Shares then purchasable upon the exercise of the Warrants or, if the Warrants are not then exercisable, the number of Shares purchasable upon the exercise of the Warrants on the first date thereafter that the Warrants become exercisable; provided, however, that any adjustments which by reason of this subsection (4.1 (d» are not required to be made immediately shall be carried forward and taken into account in any subsequent adjustment.

(e) Whenever the number of Shares purchasable upon the exercise of the Warrant is adjusted, as herein provided, the Exercise Price payable upon exercise of the Warrant shall be adjusted by multiplying such Exercise Price immediately prior to such adjustment by a fraction, of which the numerator shall be the number of Warrant Shares purchasable upon the exercise of the Warrant immediately prior to such adjustment, and of which the denominator shall be the number of Warrant Shares so purchasable immediately thereafter.

(f) Whenever the number of Shares purchasable upon exercise of the Warrants is adjusted as herein provided, the Company shall cause to be promptly mailed to the Warrantholder by first class mail, postage prepaid, notice of such adjustment and a certificate of the chief financial officer of the Company setting forth the number of Shares purchasable upon the exercise of the Warrants after such adjustment, a brief statement of the facts requiring such adjustment and the computation by which such adjustment was made.

(g) For the purpose of this Section 4.1, the term "Common Stock" shall mean (i) the class of stock designated as the Common Stock of the Company at the date of this Agreement, or (ii) any other class of stock resulting from successive changes or reclassifications of such Common Stock consisting solely of changes in par value, or from par value to no par value, or from no par value to par value. In the event that at any time, as
 
                                    
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a result of an adjustment made pursuant to this Section 4, the Warrantholder shall become entitled to purchase any securities of the Company other than Common Stock, (y) if the Warrantholder's right to purchase is on any other basis than that available to all holders of the Company's Common Stock, the Company shall obtain an opinion of an independent investment banking firm valuing such other securities and (z) thereafter the number of such other securities so purchasable upon exercise of the Warrants shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Shares contained in this Section 4.

(h) Upon the expiration of any rights, options, warrants, or conversion privileges, if such shall have not been exercised, the number of Shares purchasable upon exercise of the Warrants, to the extent the Warrants have not then been exercised, shall, upon such expiration, be readjusted and shall thereafter be such as they would have been had they been originally adjusted (or had the original adjustment not been required, as the case may be) on the basis of (i) the fact that the only shares of Common Stock so issued were the shares of Common Stock, if any, actually issued or sold upon the exercise of such rights, options, warrants, or conversion privileges, and (ii) the fact that such shares of Common Stock, if any, were issued or sold for the consideration actually received by the Company upon such exercise plus the consideration, if any, actually received by the Company for the issuance, sale or grant of all such rights, options, warrants, or conversion privileges whether or not exercised; provided, however, that no such readjustment shall have the effect of decreasing the number of Shares purchasable upon exercise of the Warrants by an amount in excess of the amount of the adjustment initially made in respect of the issuance, sale, or grant of such rights, options, warrants, or conversion rights.

4.2.    No Adjustment for Dividends. Except as provided in Section 4.1, no adjustment in respect of any dividends or distributions out of eamings shall be made during the term of the Warrants or upon the exercise of the Warrants.

4.3.    No Adjustment in Certain Cases. No adjustments shall be made pursuantto Section 4 hereof in connection with the issuance of the Common Stock upon exercise of the Warrants. No adjustments shall be made pursuant to Section 4 hereof in connection with grant or exercise of presently authorized or outstanding options to purchase, or the issuance of shares of Common Stock under the Company's director or employee benefit plan.

4.4.    Preservation ofPurchase Rights upon Reclassification, Consolidation, etc. In case of any consolidation of the Company with or merger of the Company into another corporation, or in case of any sale or conveyance to another corporation of the property, assets, or business of the Company as an entirety or substantially as an entirety, the Company or such successor or purchasing corporation, as the case may be, shall execute with the Warrantholder an agreement that the Warrantholder shall have the right thereafter upon payment of the Exercise Price in effect immediately prior to such action to purchase, upon exercise of the Warrants, the kind and amount of shares and other securities and property which it would have owned or have been entitled to receive after the happening of such consolidation, merger, sale, or conveyance had the Warrants been exercised immediately prior to such action. In the event of a merger described in Section 368(a)(2)(E) of the Internal Revenue Code of 1986, in which the Company is the surviving

 
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corporation, the right to purchase Shares under the Warrants shall terminate on the date of such merger and thereupon the Warrants shall become null and void, but only if the controlling corporation shall agree to substitute for the Warrants, its warrants which entitle the holder thereof to purchase upon their exercise the kind and amount of shares and other securities and property which it would have owned or been entitled to receive had the Warrants been exercised immediately prior to such merger. Any such agreements referred to in this Section 4.4 shall provide for adjustments, which shall be as nearly equivalent as may be practicable to the adjustments provided for in Section 4 hereof The provisions of this Section (4.4) shall similarly apply to successive consolidations, mergers, sales, or conveyances.

4.5.    Par Value ofShares of Common Stock. Before taking any action which would cause an adjustment effectively reducing the portion of the Exercise Price allocable to each Share below the par value per share of the Common Stock issuable upon exercise of the Warrants, the Company will take any corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue fully paid and nonassessable Common Stock upon exercise of the Warrants.

4.6.    Independent Public Accountants. The Company may retain a firm of independent public accountants of recognized national standing (which may be any such firm regularly employed by the Company) to make any computation required under this Section 4, and a certificate signed by such firm shall be conclusive evidence of the correctness of any computation made under this Section 4.

4.7.    Statement on Warrants. Irrespective of any adjustments in the number of securities issuable upon exercise of the Warrants, Warrants theretofore or thereafter issued may continue to express the same number of securities as are stated in the similar Warrants initially issuable pursuant to this Agreement. However, the Company may, at any time in its sole discretion (which shall be conclusive), make any change in the form of Warrant that it may deem appropriate and that does not affect the substance thereof; and any Warrant thereafter issued, whether upon registration of transfer of, or in exchange or substitution for, an outstanding Warrant, may be in the form so changed.

4.8.   Treasury Stock. For purposes of this Section 4, shares of Common Stock owned or held at any relevant time by, or for the account of, the Company, in its treasury or otherwise, shall not be deemed to be outstanding for purposes of the calculations and adjustments described.

Section 5.   Payment of Exercise Price

The payment of the Exercise Price shall be made in cash or by check or any combination thereof
 
 
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Section 6.    Redemption

6.1   Right to Redeem. The Company may, at its option, redeem the Warrants in whole or in part on a pro rata basis for a redemption price of $.05 per Warrant (the "Redemption Price") on 15 days prior written notice to the Warrant Holders. The right to redeem the Warrants may be exercised by the Company only in the event (i) the average of the closing sale prices of the Company's common stock is at or above $3.00 per share for twenty (20) out of the thirty (30) trading preceding the date the Warrants are called, (ii) the Warrant Securities can be resold pursuant to an effective registration statement under the Act, (iii) the expiration of the 15 days notice period is within the Exercise Period. In the event the Company exercises its right to redeem the Warrants, the Expiration Date will be deemed to be, and the Warrants will be exercisable until the close of business on, the date fixed for redemption in such notice (the "Redemption Date"). If any Warrant called for redemption is not exercised by such time, it will cease to be exercisable and the Warrant Holder thereof will be entitled only to the Redemption Price.

6.2    Termination ofRights. From and after the Redemption Date, all rights of the holders of record of redeemed Warrants (except the right to receive the Redemption Price) shall terminate.

6.3   Payment of Redemption Price. The Company shall pay to the holders of record of redeemed Warrants all amounts to which the holders of record of such redeemed Warrants who shall have surrendered their Warrants are entitled.

Section 7.   Notice to Holders.

If, prior to the expiration of this Warrant either by its terms or by its exercise in full, any of the following shall occur:

(a) the Company shall declare a dividend or authorize any other distribution on its Common Stock; or

(b) the Company shall authorize the granting to the shareholders of its Common Stock of rights to subscribe for or purchase any securities or any other similar rights; or

(c) any reclassification, reorganization or similar change of the Common Stock, or any consolidation or merger to which the Company is a party, or the sale, lease, or exchange of any significant portion of the assets of the Company; or

(d) the voluntary or involuntary dissolution, liquidation or winding up of the Company; or
 
(e) any purchase, retirement or redemption by the Company of its Common Stock;

then, and in any such case, the Company shall deliver to the Holder or Holders written notice thereof at least 30 days prior to the earliest applicable date specified below with respect to which notice is to be given, which notice shall state the following:

 
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(x) the date on which a record is to be taken for the purpose of such dividend, distribution or rights, or, if a record is not to be taken, the date as of which the shareholders of Common Stock of record to be entitled to such dividend, distribution or rights are to be determined;

(y) the date on which such reclassification, reorganization, consolidation, merger, sale, transfer, dissolution, liquidation, winding up or purchase, retirement or redemption is expected to become effective, and the date, if any, as of which the Company's shareholders of Common Stock of record shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reclassification, reorganization, consolidation, merger, sale, transfer, dissolution, liquidation, winding up, purchase, retirement or redemption; and

(z) if any matters referred to in the foregoing clauses (x) and (y) are to be voted upon by shareholders of Common Stock, the date as of which those shareholders to be entitled to vote are to be determined.

Section 8.   Officers' Certificate.

Whenever the Exercise Price or the aggregate number of Warrant Securities purchasable pursuant to this Warrant shall be adjusted as required by the provisions of Section 4 above, the Company shall promptly file with its Secretary or an Assistant Secretary at its principal office, and with its transfer agent, if any, an officers' certificate executed by the Company's President and Secretary or Assistant Secretary, describing the adjustment and setting forth, in reasonable detail, the facts requiring such adjustment and the basis for and calculation of such adjustment in accordance with the provisions of this Warrant. Each such officers' certificate shall be made available to the Holder or Holders of this Warrant for inspection at all reasonable times, and the Company, after each such adjustment, shall promptly deliver a copy of the officers' certificate relating to that adjustment to the Holder or Holders of this Warrant. The officers' certificate described in this Section 8 shall be deemed to be conclusive as to the correctness of the adjustment reflected therein if, and only if, no Holder of this Warrant delivers written notice to the Company of an objection to the adjustment within 30 days after the officers' certificate is delivered to the Holder or Holders of this Warrant. The Company will make its books and records available for inspection and copying during normal business hours by the Holder so as to permit a determination as to the correctness of the adjustment. If written notice of an objection is delivered by a Holder to the Company and the parties cannot reconcile the dispute, the Holder and the Company shall submit the dispute to arbitration pursuant to the provisions of Section 20 below. Failure to prepare or provide the officers' certificate shall not modify the parties' rights hereunder.

Section 9.   Reservation of Warrant Securities.

There has been reserved, and the Company shall at all times keep reserved so long as the Warrants remain outstanding, out of its authorized and unissued Common Stock, such number of shares of Common Stock as shall be subject to purchase under the Warrants. Every transfer agent for the Common Stock and other securities of the Company issuable upon the exercise of the Warrants will be irrevocably authorized and directed at all times to reserve such number of authorized shares and other securities as shall be requisite for such purpose. The Company will keep a copy of this Agreement on file with every transfer agent for the Common Stock and other

 
9
securities of the Company issuable upon the exercise of the Warrants. The Company will supply every such transfer agent with duly executed stock and other certificates, as appropriate, for such purpose and will provide or otherwise make available any cash which may be payable as provided in Section 14 hereof

Section 10.   Restrictions on Transfer; Registration Rights.

10.1. Restrictions on Transfer. The Warrantholder agrees that prior to making any disposition of the Warrants or the Shares, the Warrantholder shall give written notice to the Company describing briefly the manner in which any such proposed disposition is to be made; and no such disposition shall be made if the Company has notified the Warrantholder that in the opinion of counsel reasonably satisfactory to the Warrantholder, there is no applicable exemption from the registration requirements under the Act available for the disposition, and a registration statement or other notification or post-effective amendment thereto (hereinafter collectively a "Registration Statement") under the Act is required with respect to such disposition and no such Registration Statement has been filed by the Company with, and declared effective, if necessary, by, the Commission.

10.2. Registration Right. The Warrant Securities are subj ect to the terms of a Registration Rights Agreement. Upon request, a copy of the Registration Rights Agreement is available, without charge, from the Company.

Section 11.   Payment of Taxes.

The Company will pay all documentary stamp taxes, if any, attributable to the initial issuance of the Warrants or the securities comprising the Shares; provided, however, the Company shall not be required to pay any tax which may be payable in respect of any transfer of the Warrants or the securities comprising the Shares.

Section 12.   Transfer to Comply With the Securities Act of 1933

This Warrant, the Warrant Securities, and all other securities issued or issuable upon exercise of this Warrant, may not be offered, sold or transferred, in whole or in part, except in compliance with the Act, and except in compliance with all applicable state securities laws. The Company may cause substantially the following legends, or their equivalents, to be set forth on each certificate representing the Warrant Securities, or any other security issued or issuable upon exercise of this Warrant, not theretofore distributed to the public or sold to underwriters, as defmed by the Act, for distribution to the public pursuant to Section 8 above:

(a) "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE .SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD, EXCHANGED, HYPOTHECATED OR TRANSFERRED IN ANY MANNER EXCEPT IN COMPLIANCE WITH THE AGREEMENT PURSUANT TO WHICH THEY WERE ISSUED."
 
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(b) Any legend required by applicable state securities laws.

Any certificate issued at any time in exchange or substitution for any certificate bearing such legends (except a new certificate issued upon completion of a public distribution pursuant to a registration statement under the Securities Act of 1933, as amended (the "Act"), or the securities represented thereby) shall also bear the above legends unless, in the opinion of the Company's counsel, the securities represented thereby need no longer be subject to such restrictions.

Section 13.   Fractional Shares

No fractional shares or scrip representing fractional shares shall be issued upon the exercise of all or any part of this Warrant. With respect to any fraction of a share of any security called for upon any exercise of this Warrant, the Company shall pay to the Holder an amount in money equal to that fraction multiplied by the Current Market Price of that share.

Section 14.   No Rights as Stockholder; Notices to Warrantholder.

Nothing contained in this Agreement or in the Warrants shall be construed as conferring upon the Warrantholder or its transferees any rights as a stockholder of the Company, including the right to vote, receive dividends, consent or receive notices as a stockholder in respect to any meeting of stockholders for the election of directors of the Company or any other matter. The Company covenants, however, that for so long as this Warrant is at least partially unexercised, it will furnish any Holder of this Warrant with copies of all reports and communications furnished to the shareholders of the Company. In addition, if at any time prior to the expiration of the Warrants and prior to their exercise, anyone or more of the following events shall occur:

(a) any action which would require an adjustment pursuant to Section 4.1 (except subsections 4. 1 (e) and 4. 1 (h) or 4.4; or

(b) a dissolution, liquidation, or winding up of the Company (other than in connection with a consolidation, merger, or sale of its property, assets, and business as an entirety or substantially as an entirety) shall be proposed:

then the Company shall give notice in writing of such event to the Warrantholder, as provided in Section 17 hereof, at least 20 days prior to the date fixed as a record date or the date of closing the transfer books for the determination of the stockholders entitled to any relevant dividend, distribution, subscription rights or other rights or for the determination of stockholders entitled to vote on such proposed dissolution, liquidation, or winding up. Such notice shall specify such record date or the date of closing the transfer books, as the case may be. Failure to mail or receive notice or any defect therein shall not affect the validity of any action taken with respect thereto.
 
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Section 15.   Charges Due Upon Exercise.

The Company shall pay any and all issue or transfer taxes, including, but not limited to, all federal or state taxes, that may be payable with respect to the transfer of this Warrant or the issue or delivery of Warrant Securities upon the exercise of this Warrant.

Section 16.   Warrant Securities to be Fully Paid

The Company covenants that all Warrant Securities that may be issued and delivered to a Holder of this Warrant upon the exercise of this Warrant and payment of the Exercise Price will be, upon such delivery, validly and duly issued, fully paid and nonassessable.

Section 17.   Notices

Any notice pursuant to this Agreement by the Company or by a Warrantholder or a holder of Shares shall be in writing and shall be deemed to have been duly given if delivered or mailed by certified mail, return receipt requested:

(i)   If to a Warrantholder or a holder of Shares, addressed to the address set forth above.

(ii)   If to the Company addressed to it at 601 W. Main Ave., Suite 1017, Spokane, Washington 99201, Attention: Secretary.

Each party may from time to time change the address to which notices to it are to be delivered or mailed hereunder by notice in accordance herewith to the other party.

Section 18.   Merger or Consolidation of the Company.

The Company will not merge or consolidate with or into any other corporation or sell all or substantially all of its property to another corporation, unless the provisions of Section 4.4 are complied with.

Section 19.   Applicable Law

This Warrant shall be governed by and construed in accordance with the laws of the State of Washington, and courts located in Spokane County, Washington shall have exclusive jurisdiction over all disputes arising hereunder.

Section 20.   Arbitration.

The Company and the Holder, and by receipt of this Warrant or any Warrant Securities, all subsequent Holders or holders of Warrant Securities, agree to submit all controversies, claims, disputes and matters of difference with respect to this Warrant, including, without limitation, the application of this Section 20 to arbitration in Spokane, Washington, according to the rules and practices of the American Arbitration Association from time to time in force; provided, however, that if such rules and practices conflict with the applicable procedures of Washington courts of

 
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general jurisdiction or any other provisions of Washington law then in force, those Washington rules and provisions shall govern. This agreement to arbitrate shall be specifically enforceable. Arbitration may proceed in the absence of any party if notice of the proceeding has been given to that party. The parties agree to abide by all awards rendered in any such proceeding. These awards shall be final and binding on all parties to the extent and in the manner provided by the rules of civil procedure enacted in Washington. All awards may be filed, as a basis of judgment and of the issuance of execution for its collection, with the clerk of one or more courts, state or federal, having jurisdiction over either the party against whom that award is rendered or its property. No party shall be considered in default hereunder during the pendency of arbitration proceedings relating to that default.

Section 21.   Acceptance of Terms; Successors.

By its acceptance of this Warrant Certificate, the Holder accepts and agrees to comply with all of the terms and provisions hereof. All the covenants and provisions of this Warrant Certificate by or for the benefit of the Company or the Holder shall bind and inure to the benefit of their respective successors and assigns hereunder.

Section 22.   Miscellaneous Provisions

(a) Subject to the terms and conditions contained herein, this Warrant shall be binding on the Company and its successors and shall inure to the benefit of the original Holder, its successors and assigns and all holders of Warrant Securities and the exercise of this Warrant in full shall not terminate the provisions of this Warrant as it relates to holders of Warrant Securities.

(b) If the Company fails to perform any of its obligations hereunder, it shall be liable to the Holder for all damages, costs and expenses resulting from the failure, including, but not limited to, all reasonable attorney's fees and disbursements.

(c) This Warrant cannot be changed or terminated or any performance or condition waived in whole or in part except by an agreement in writing signed by the party against whom enforcement of the change, termination or waiver is sought; provided, however, that any provisions hereof may be amended, waived, discharged or terminated upon the written consent of the Company and the Company.

(d) If any provision of this Warrant shall be held to be invalid, illegal or unenforceable, such provision shall be severed, enforced to the extent possible, or modified in such a way as to make it enforceable, and the invalidity, illegality or unenforceability shall not affect the remainder of this Warrant.

(e) The Company agrees to execute such further agreements, conveyances, certificates and other documents as may be reasonably requested by the Holder to effectuate the intent and provisions of this Warrant.

(f) Paragraph headings used in this Warrant are for convenience only and shall not be taken or construed to define or limit any of the terms or provisions of this Warrant. Unless

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otherwise provided, or unless the context shall otherwise require, the use of the singular shall include the plural and the use of any gender shall include all genders.

Dated _________________
 
  DAYBREAK OIL AND GAS, INC.  
       
 
By:
   
    Terrence J. Dunne, Chief Financial Officer  
       
       


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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EXHIBIT 1

PURCHASE FORM

Dated ___________________

The undersigned hereby irrevocably elects to exercise the Warrant represented by this Warrant Certificate to the extent of purchasing                                                                        Shares of Daybreak Oil and Gas, Inc., and hereby tenders payment of the exercise price thereof.

INSTRUCTIONS FOR REGISTRATION OF STOCK

Name __________________________________________
          (please type or print in block letters)

Address______________________________________________
 
_____________________________________________________


ASSIGNMENT FORM

FOR VALUE RECEIVED, ________________________________ , hereby sells, assigns and transfers unto

Name __________________________________________
          (please type or print in block letters)

Address______________________________________________
 
_____________________________________________________
 
 
the right to purchase Shares of Daybreak Oil and Gas, Inc represented by this Warrant Certificate to the extent of ___________________ Shares as to which such right is exercisable and does hereby irrevocably constitute and appoint ____________________________________ attorney, to transfer the same on the books of the Company with full power of substitution in the premises.

 
         
         
Signature
   
Dated
 
 
   
 
 

Notice: the signature on this assignment must correspond with the name as it appears upon the face of this Warrant Certificate in every particular, without alteration or enlargement or any change whatever.
 
 

 
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Exhibit 10.24
EXHIBIT B REGISTRATION RIGHTS AGREEMENT
 
This Registration Rights Agreement (this "AGREEMENT") is made and entered into as of July ___ 2006, by and among Daybreak Oil and Gas, Inc., a  corporation (the "COMPANY"), and the investors signatory hereto (each a "INVESTOR" and collectively, the "INVESTORS").
 
This Agreement is made pursuant to Subscription Agreements between the Company and each Investor (the "SUBSCRIPTION AGREEMENT").
 
The Company and the Investors hereby agree as follows:
 
1. Definitions. Capitalized terms used and not otherwise defined herein that are defined in the Subscription Agreement will have the meanings given such terms in the Subscription Agreement. As used in this Agreement, the following terms have the respective meanings set forth in this Section 1:

"ADDITIONAL WARRANTS" has the meaning set forth in Section 2( d). "ADVICE" has the meaning set forth in Section 6(d).
 
"EFFECTIVE DATE" means the date that the Registration Statement filed pursuant to Section 2( a) or 2(b) is first declared effective by the Commission.
 
"EFFECTIVENESS PERIOD" has the meaning set forth in Section 2(a).
 
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
 
"FILING DATE" means (a) with respect to the initial Registration Statement required to be filed under Section 2(a), the latter of the 60th day following the Closing Date or within thirty (30) days after the effective date of the registration statement relating to our private placement offering dated March 3, 2006; and (b) with respect to any additional Registration Statements that may be required pursuant to Section 2(b)' the 45th day following (x) if such Registration Statement is required because the Commission shall have notified the Company in writing that certain Registrable Securities were not eligible for inclusion on a previously filed Registration Statement, the date or time on which the Commission shall indicate as being the first date or time that such Registrable Securities may then be included in a Registration Statement, or (y) if such Registration Statement is required for a reason other than as described in (x) above, the date on which the Company first knows, or reasonably should have known, that such additional Registration Statement( s) is required; and (c) with respect to a Registration Statement required to be filed under Section 2(c), the 30th day following the date on which the Company becomes eligible to utilize Form S-3 to register the resale of Common Stock.
 
"HOLDER" or "HOLDERS" means the holder or holders, as the case may be, from time to time of Registrable Securities.
 
"INDEMNIFIED PARTY" has the meaning set forth in Section 5( c).
 
"INDEMNIFYING PARTY" has the meaning set forth in Section 5( c).

­
 
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"LOSSES" has the meaning set forth in Section 5(a).
 
"OFFERING" means that private offering of shares and warrants, offered together as Units, made pursuant to the Placement Agent Agreement.

"PLACEMENT AGENT AGREEMENT' means that agreement dated June 30, 2006, between the Company and Bathgate Capital Partners LLC relating to the offering of Units of the Company's securities.

"PROCEEDING" means an action, claim, suit, investigation or proceeding (including, without limitation, an investigation or partial proceeding, such as a deposition), whether commenced or threatened.
 
"PROSPECTUS" means the prospectus included in a Registration Statement (including, without limitation, a prospectus that includes any information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A promulgated under the Securities Act), as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Registrable Securities covered by a Registration Statement, and all other amendments and supplements to the Prospectus, including post-effective amendments, and all material incorporated by reference or deemed to be incorporated by reference in such Prospectus.
 
"REGISTRABLE SECURITIES" means: (i) the Shares, (ii) the Warrant Shares, (iii) any securities issued or issuable upon any stock split, dividend or other distribution, recapitalization or similar event, or any conversion price adjustment with respect to any of the securities referenced in (i) or (ii) above.
 
"REGISTRATION STATEMENT" means the initial registration statement required to be filed in accordance with Section 2(a) and any additional registration statement(s) required to be filed under Section 2(b) and 2( c), including (in each case) the Prospectus, amendments and supplements to such registration statements or Prospectus, including pre- and post-effective amendments, all exhibits thereto, and all material incorporated by reference or deemed to be incorporated by reference therein.

"RULE 144" means Rule 144 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule.
 
"RULE 415" means Rule 415 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule.
 
"RULE 424" means Rule 424 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule.
 
"SECURITIES ACT" means the Securities Act of 1933, as amended.
 
 
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"SHARES" means the shares of Common Stock issued or issuable to the Investors pursuant to the Subscription Agreement.
 
"WARRANTS" means the Common Stock purchase warrants issued or issuable to the Investors pursuant to the Subscription Agreement and the Placement Agent Warrants issued pursuant to the Placement Agent Agreement.
 
"WARRANT SHARES" means the shares of Common Stock issued or issuable upon exercise of the Warrants and the Additional Warrants.
 
"WASHINGTON COURTS" means the state and federal courts sitting in the City and County of Spokane.

2. Registration.
 
(a) On or prior to each Filing Date, the Company shall prepare and file with the Commission a Registration Statement covering the resale of all Registrable Securities not already covered by an existing and effective Registration Statement, for an offering to be made on a continuous basis pursuant to Rule 415, on Form SB-2 (or on such other form appropriate for such purpose). Such Registration Statement shall contain (except if otherwise required pursuant to written comments received from the Commission upon a review of such Registration Statement) the "Plan of Distribution" attached hereto as Annex A. The Company shall cause such Registration Statement to be declared effective under the Securities Act as soon as possible but, in any event, no later than its Effectiveness Date, and shall use its reasonable best efforts to keep the Registration Statement continuously effective under the Securities Act until the date which is the earlier of (i) eight years after its Effective Date, (ii) such time as all of the Registrable Securities covered by such Registration Statement have been publicly sold by the Holders, or (iii) such time as all of the Registrable Securities covered by such Registration Statement may be sold by the Holders pursuant to Rule 144(k) as determined by the counsel to the Company pursuant to a written opinion letter to such effect, addressed and acceptable to the Company's transfer agent and the affected Holders (the "EFFECTIVENESS PERIOD").

(b) If for any reason the Commission does not permit all of the Registrable Securities to be included in the Registration Statement filed pursuant to Section 2( a), or for any other reason any outstanding Registrable Securities are not then covered by an effective Registration Statement, then the Company shall prepare and file by the Filing Date for such Registration Statement, an additional Registration Statement covering the resale of all Registrable Securities not already covered by an existing and effective Registration Statement for an offering to be made on a continuous basis pursuant to Rule 415, on Form SB-2 (or on such other form appropriate for such purpose). Each such Registration Statement shall contain (except if otherwise required pursuant to written comments received from the Commission upon a review of such Registration Statement) the "Plan of Distribution" attached hereto as Annex A. The Company shall cause each such Registration Statement to be declared effective under the Securities Act as soon as possible but, in any event, by its Effectiveness Date, and shall use its reasonable best efforts to keep such Registration Statement continuously effective under the Securities Act during the entire Effectiveness Period.
 
(c) Promptly following any date on which the Company becomes eligible to use a registration statement on Form S-3 to register the Registrable Securities for resale, the Company
 
 
 
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shall file a registration statement on Form S-3 covering the Registrable Securities (or a post-effective amendment on Form S-3 to the then effective Registration Statement) and shall cause such Registration Statement to be declared effective as soon as possible thereafter, but in any event prior to the Effectiveness Date therefor. Such Registration Statement shall contain (except if otherwise required pursuant to written comments received from the Commission upon a review of such Registration Statement) the "Plan of Distribution" attached hereto as Annex A. The Company shall cause such Registration Statement to be declared effective under the Securities Act as soon as possible but, in any event, by its Effectiveness Date, and shall use its reasonable best efforts to keep such Registration Statement continuously effective under the Securities Act during the entire Effectiveness Period.

(d) If a Registration Statement is not filed on or prior to its Filing Date (if the Company files a Registration Statement without affording the Holders the opportunity to review and comment on the same as required by Section 3(a) hereof, the Company shall not be deemed to have satisfied this clause (i)(such failure or breach being referred to as an "EVENT" and the date on which such Event occurs, being referred to as the "EVENT DATE"), then in addition to any other rights the Holders may have hereunder or under applicable law, the Company shall issue to the holders of the Registrable Securities, as liquidated damages and not as a penalty, warrants ("ADDITIONAL WARRANTS"). The number of Additional Warrants that shall be issued to a Holder is equivalent to one Additional Warrant for every Unit purchased such Holder. The Additional Warrants will have a per share exercise price equal to $2.00 per share. The Additional Warrants will be exercisable for five years, and will be in the same form as the warrants issued as part of the Units in the Offering.
 
(e) Each Holder agrees to furnish to the Company a completed Questionnaire in the form attached to this Agreement as Annex B (a "SELLING HOLDER QUESTIONNAIRE"). The Company shall not be required to include the Registrable Securities of a Holder in a Registration Statement and shall not be required to issue any Additional Warrants or other damages under Section 2( d) to any Holder who fails to furnish to the Company a fully completed Selling Holder Questionnaire at least two Trading Days prior to the Filing Date (subject to the requirements set forth in Section 3(a».
 
3. Registration Procedures. In connection with the Company's registration obligations hereunder, the Company shall:
 
(a) Not less than four Trading Days prior to the filing of the Registration Statement or any related Prospectus or any amendment or supplement thereto, the Company shall furnish to each Holder copies of the "Selling Stockholders" section of such document, the "Plan of Distribution" and any risk factor contained in such document that addresses specifically this transaction or the Selling Stockholders, as proposed to be filed which documents will be subject to the review of such Holder. The Company shall not file a Registration Statement, any Prospectus or any amendments or supplements thereto in which the "Selling Stockholder" section thereof differs from the disclosure received from a Holder in its Selling Holder Questionnaire (as amended or supplemented).
 
(b) Prepare and file with the Commission such amendments, including post-effective amendments, to each Registration Statement and the Prospectus used in connection therewith as may be necessary to keep such Registration Statement continuously effective as to the applicable Registrable Securities for its Effectiveness Period and prepare and file with the Commission such
 

 
 
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additional Registration Statements in order to register for resale under the Securities Act all of the Registrable Securities; (ii) cause the related Prospectus to be amended or supplemented by any required Prospectus supplement, and as so supplemented or amended to be filed pursuant to Rule 424; (iii) respond as promptly as reasonably possible to any comments received from the Commission with respect to each Registration Statement or any amendment thereto and, as promptly as reasonably possible provide the Holders true and complete copies of all correspondence from and to the Commission relating to such Registration Statement that would not result in the disclosure to the Holders of material and non-public information conceming the Company; and (iv) comply in all material respects with the provisions of the Securities Act and the Exchange Act with respect to the Registration Statements and the disposition of all Registrable Securities covered by each Registration Statement.

(c) Notify the Holders as promptly as reasonably possible (and, in the case of (i)(A) below, not less than three Trading Days prior to such filing) and (if requested by any such Person) confirm such notice in writing no later than one Trading Day following the day (i)(A) when a Prospectus or any Prospectus supplement or post-effective amendment to a Registration Statement is proposed to be filed; (B) when the Commission notifies the Company whether there will be a "review" of such Registration Statement and whenever the Commission comments in writing on such Registration Statement (the Company shall provide true and complete copies thereof and all written responses thereto to each of the Holders that pertain to the Holders as a Selling Stockholder or to the Plan of Distribution, but not information which the Company believes would constitute material and non-public information); and (C) with respect to each Registration Statement or any post-effective amendment, when the same has become effective; (ii) of any request by the Commission or any other Federal or state governmental authority for amendments or supplements to a Registration Statement or Prospectus or for additional information; (iii) of the issuance by the Commission of any stop order suspending the effectiveness of a Registration Statement covering any or all of the Registrable Securities or the initiation of any Proceedings for that purpose; (iv) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction, or the initiation or threatening of any Proceeding for such purpose; and (v) of the occurrence of any event or passage of time that makes the financial statements included in a Registration Statement ineligible for inclusion therein or any statement made in such Registration Statement or Prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires any revisions to such Registration Statement, Prospectus or other documents so that, in the case of such Registration Statement or the Prospectus, as the case may be, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading.
 
(d) Use its reasonable best efforts to avoid the issuance of, or, if issued, obtain the withdrawal of (i) any order suspending the effectiveness of a Registration Statement, or (ii) any suspension of the qualification (or exemption from qualification) of any of the Registrable Securities for sale in any jurisdiction, at the earliest practicable moment.
 
(e) Furnish to each Holder, without charge, at least one conformed copy of each Registration Statement and each amendment thereto and all exhibits to the extent requested by such
 

 
 
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Person (including those previously furnished) promptly after the filing of such documents with the Commission.

(f) Promptly deliver to each Holder, without charge, as many copies of each Prospectus or Prospectuses (including each form of prospectus) and each amendment or supplement thereto as such Persons may reasonably request. The Company hereby consents to the use of such Prospectus and each amendment or supplement thereto by each of the selling Holders in connection with the offering and sale of the Registrable Securities covered by such Prospectus and any amendment or supplement thereto.
 
(g) Prior to any public offering of Registrable Securities, to register or qualify or cooperate with the selling Holders in connection with the registration or qualification (or exemption from such registration or qualification) of such Registrable Securities for offer and sale under the securities or Blue Sky laws of all jurisdictions within the United States, to keep each such registration or qualification (or exemption therefrom) effective during the Effectiveness Period and to do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of the Registrable Securities covered by the Registration Statements.
 
(h) Cooperate with the Holders to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be delivered to a transferee pursuant to the Registration Statements, which certificates shall be free, to the extent permitted by the Subscription Agreement, of all restrictive legends, and to enable such Registrable Securities to be in such denominations and registered in such names as any such Holders may request.
 
(i) Upon the occurrence of any event contemplated by Section 3(c)(v), as promptly as reasonably possible, prepare a supplement or amendment, including a post-effective amendment, to the affected Registration Statements or a supplement to the related Prospectus or any document incorporated or deemed to be incorporated therein by reference, and file any other required document so that, as thereafter delivered, no Registration Statement nor any Prospectus will contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading.
 
4. Registration Expenses. All fees and expenses incident to the performance of or compliance with this Agreement by the Company shall be borne by the Company whether or not any Registrable Securities are sold pursuant to a Registration Statement. The fees and expenses referred to in the foregoing sentence shall include, without limitation, (i) all registration and filing fees (including, without limitation, fees and expenses (A) with respect to filings required to be made with any Trading Market on which the Common Stock is then listed for trading, and (B) in compliance with applicable state securities or Blue Sky laws), (ii) printing expenses (including, without limitation, expenses of printing certificates for Registrable Securities and of printing prospectuses if the printing of prospectuses is reasonably requested by the holders of a majority of the Registrable Securities included in the Registration Statement), (iii) messenger, telephone and delivery expenses, (iv) fees and disbursements of counsel for the Company , (v) Securities Act liability insurance, if the Company so desires such insurance, and (vi) fees and expenses of all other Persons retained by the Company in connection with the consummation of the transactions contemplated by this Agreement. In addition, the Company shall be responsible for all of its internal expenses incurred in connection
 
 
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with the consummation of the transactions contemplated by this Agreement (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit and the fees and expenses incurred in connection with the listing of the Registrable Securities on any securities exchange as required hereunder.
 
5. Indemnification.

(a) Indemnification by the Company. The Company shall, notwithstanding any termination of this Agreement, indemnify and hold harmless each Holder, the officers, directors, agents, investment advisors, partners, members and employees of each of them, each Person who controls any such Holder (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) and the officers, directors, agents and employees of each such controlling Person, to the fullest extent permitted by applicable law, from and against any and all losses, claims, damages, liabilities, costs (including, without limitation, reasonable costs of preparation and reasonable attorneys' fees) and expenses (collectively, "LOSSES"), as incurred, arising out of or relating to any untrue or alleged untrue statement of a material fact contained in any Registration Statement, any Prospectus or any form of prospectus or in any amendment or supplement thereto or in any preliminary prospectus, or arising out of or relating to any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein (in the case of any Prospectus or form of prospectus or supplement thereto, in light of the circumstances under which they were made) not misleading, except to the extent, but only to the extent, that (1) such untrue statements or omissions are based solely upon information regarding such Holder furnished in writing to the Company by such Holder expressly for use therein, or to the extent that such information relates to such Holder or such Holder's proposed method of distribution of Registrable Securities and was reviewed and expressly approved in writing by such Holder expressly for use in the Registration Statement, such Prospectus or such form of Prospectus or in any amendment or supplement thereto (it being understood that the Holder has approved Annex A hereto for this purpose) or (2) in the case of an occurrence of an event of the type specified in Section 3(c)(ii)-(v), the use by such Holder of an outdated or defective Prospectus after the Company has notified such Holder in writing that the Prospectus is outdated or defective and prior to the receipt by such Holder of an Advice or an amended or supplemented Prospectus, but only if and to the extent that following the receipt of the Advice or the amended or supplemented Prospectus the misstatement or omission giving rise to such Loss would have been corrected. The Company shall notify the Holders promptly of the institution, threat or assertion of any Proceeding of which the Company is aware in connection with the transactions contemplated by this Agreement.
 
(b) Indemnification by Holders. Each Holder shall, severally and not jointly, indemnify and hold harmless the Company, its directors, officers, agents and employees, each Person who controls the Company (within the meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the directors, officers, agents or employees of such controlling Persons, to the fullest extent permitted by applicable law, from and against all Losses, as incurred, arising solely out of or based solely upon: (x) such Holder's failure to comply with the prospectus delivery requirements of the Securities Act or (y) any untrue statement of a material fact contained in any Registration Statement, any Prospectus, or any form of prospectus, or in any amendment or supplement thereto, or arising solely out of or based solely upon any omission of a material fact required to be stated therein or necessary to make the statements therein not misleading to the extent, but only to the extent that, (1) such untrue statements or omissions are based solely upon information
 

 
 
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regarding such Holder furnished in writing to the Company by such Holder expressly for use therein, or to the extent that such information relates to such Holder or such Holder's proposed method of distribution of Registrable Securities and was reviewed and expressly approved in writing by such Holder expressly for use in the Registration Statement (it being understood that the Holder has approved Annex A hereto for this purpose), such Prospectus or such form of Prospectus or in any amendment or supplement thereto or (2) in the case of an occurrence of an event of the type specified in Section 3( c )(ii )-(v), the use by such Holder of an outdated or defective Prospectus after the Company has notified such Holder in writing that the Prospectus is outdated or defective and prior to the receipt by such Holder of an Advice or an amended or supplemented Prospectus, but only if and to the extent that following the receipt of the Advice or the amended or supplemented Prospectus the misstatement or omission giving rise to such Loss would have been corrected. In no event shall the liability of any selling Holder hereunder be greater in amount than the dollar amount of the net proceeds received by such Holder upon the sale of the Registrable Securities giving rise to such indemnification obligation.
 
(c) Conduct of Indemnification Proceedings. If any Proceeding shall be brought or asserted against any Person entitled to indemnity hereunder (an "INDEMNIFIED PARTY"), such Indemnified Party shall promptly notify the Person from whom indemnity is sought (the "INDEMNIFYING PARTY") in writing, and the Indemnifying Party shall assume the defense thereof, including the employment of counsel reasonably satisfactory to the Indemnified Party and the payment of all fees and expenses incurred in connection with defense thereof; provided, that the failure of any Indemnified Party to give such notice shall not relieve the Indemnifying Party of its obligations or liabilities pursuant to this Agreement, except (and only) to the extent that it shall be finally determined by a court of competent jurisdiction (which determination is not subject to appeal or further review) that such failure shall have proximately and materially adversely prejudiced the Indemnifying Party.
 
An Indemnified Party shall have the right to employ separate counsel in any such Proceeding and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party or Parties unless: (1) the Indemnifying Party has agreed in writing to pay such fees and expenses; (2) the Indemnifying Party shall have failed promptly to assume the defense of such Proceeding and to employ counsel reasonably satisfactory to such Indemnified Party in any such Proceeding; or (3) the named parties to any such Proceeding (including any impleaded parties) include both such Indemnified Party and the Indemnifying Party, and such Indemnified Party shall have been advised by counsel that a conflict of interest is likely to exist if the same counsel were to represent such Indemnified Party and the Indemnifying Party (in which case, if such Indemnified Party notifies the Indemnifying Party in writing that it elects to employ separate counsel at the expense of the Indemnifying Party, the Indemnifying Party shall not have the right to assume the defense thereof and such counsel shall be at the expense of the Indemnifying Party). The Indemnifying Party shall not be liable for any settlement of any such Proceeding effected without its written consent, which consent shall not be unreasonably withheld. No Indemnifying Party shall, without the prior written consent of the Indemnified Party (which consent shall not be unreasonably withheld), effect any settlement of any pending Proceeding in respect of which any Indemnified Party is a party, unless such settlement includes an unconditional release of such Indemnified Party from all liability on claims that are the subject matter of such Proceeding.

 
 
-8-
 
All fees and expenses of the Indemnified Party (including reasonable fees and expenses to the extent incurred in connection with investigating or preparing to defend such Proceeding in a manner not inconsistent with this Section) shall be paid to the Indemnified Party, as incurred, within ten Trading Days of written notice thereof to the Indemnifying Party (regardless of whether it is ultimately determined that an Indemnified Party is not entitled to indemnification hereunder; provided, that the Indemnifying Party may require such Indemnified Party to undertake to reimburse all such fees and expenses to the extent it is finally judicially determined that such Indemnified Party is not entitled to indemnification hereunder).
 
(d) Contribution. If a claim for indemnification under Section 5( a) or 5(b) is unavailable to an Indemnified Party (by reason of public policy or otherwise), then each Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such Losses, in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party and Indemnified Party in connection with the actions, statements or omissions that resulted in such Losses as well as any other relevant equitable considerations. The relative fault of such Indemnifying Party and Indemnified Party shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission of a material fact, has been taken or made by, or relates to information supplied by, such Indemnifying Party or Indemnified Party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such action, statement or omission. The amount paid or payable by a party as a result of any Losses shall be deemed to include, subject to the limitations set forth in Section 5(c), any reasonable attorneys' or other reasonable fees or expenses incurred by such party in connection with any Proceeding to the extent such party would have been indemnified for such fees or expenses if the indemnification provided for in this Section was available to such party in accordance with its terms.
 
The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 5( d) were determined by pro rata allocation or by any other method of allocation that does not take into account the equitable considerations referred to in the immediately preceding paragraph. Notwithstanding the provisions of this Section 5( d), no Holder shall be required to contribute, in the aggregate, any amount in excess of the amount by which the proceeds actually received by such Holder from the sale of the Registrable Securities subject to the Proceeding exceeds the amount of any damages that such Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission.
 
The indemnity and contribution agreements contained in this Section are in addition to any liability that the Indemnifying Parties may have to the Indemnified Parties.
 
6. Miscellaneous.

(a) Remedies. In the event of a breach by the Company or by a Holder, of any of their obligations under this Agreement, each Holder or the Company, as the case may be, in addition to being entitied to exercise all rights granted by law and under this Agreement, including recovery of damages, will be entitled to specific performance of its rights under this Agreement. The Company and each Holder agree that monetary damages would not provide adequate compensation for any losses incurred by reason of a breach by it of any of the provisions of this Agreement and hereby

 
 
-9-
 
further agrees that, in the event of any action for specific performance in respect of such breach, it shall waive the defense that a remedy at law would be adequate.
 
(b) No Piggyback on Registrations. Except as and to the extent specified in Schedule 3. 1 (v) to the Subscription Agreement, neither the Company nor any of its security holders (other than the Holders in such capacity pursuant hereto) may include securities of the Company in a Registration Statement other than the Registrable Securities.
 
(c) Compliance. Each Holder covenants and agrees that it will comply with the prospectus delivery requirements of the Securities Act as applicable to it in connection with sales of Registrable Securities pursuant to the Registration Statement.
 
(d) Discontinued Disposition. Each Holder agrees by its acquisition of such Registrable Securities that, upon receipt of a notice from the Company of the occurrence of any event of the kind described in Section 3( c), such Holder will forthwith discontinue disposition of such Registrable Securities under the Registration Statement until such Holder's receipt of the copies of the supplemented Prospectus and/or amended Registration Statement or until it is advised in writing (the "ADVICE") by the Company that the use of the applicable Prospectus may be resumed, and, in either case, has received copies of any additional or supplemental filings that are incorporated or deemed to be incorporated by reference in such Prospectus or Registration Statement. The Company may provide appropriate stop orders to enforce the provisions of this paragraph.
 
(e) Piggy-Back Registrations. If at any time during the Effectiveness Period there is not an effective Registration Statement covering all of the Registrable Securities and the Company shall determine to prepare and file with the Commission a registration statement relating to an offering for its own account or the account of others under the Securities Act of any of its equity securities, other than on Form S-4 or Form S-8 (each as promulgated under the Securities Act) or their then equivalents relating to equity securities to be issued solely in connection with any acquisition of any entity or business or equity securities issuable in connection with stock option or other employee benefit plans, then the Company shall send to each Holder written notice of such determination and, if within fifteen days after receipt of such notice, any such Holder shall so request in writing, the Company shall include in such registration statement all or any part of such Registrable Securities such holder requests to be registered, subject to customary underwriter cutbacks applicable to all holders of registration rights.
 
(f) Amendments and Waivers. The provisions of this Agreement, including the provisions of this Section 6(f), may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the same shall be in writing and signed by the Company and the Holders of no less than a majority in interest of the then outstanding Registrable Securities. Notwithstanding the foregoing, a waiver or consent to depart from the provisions hereof with respect to a matter that relates exclusively to the rights of certain Holders and that does not directly or indirectly affect the rights of other Holders may be given by Holders of at least a majority of the Registrable Securities to which such waiver or consent relates.
 
(g) Notices. Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earliest of (a) the date of transmission, if such notice or communication is delivered via facsimile (provided the sender receives a machine-generated confirmation of successful transmission) at the
 

 
 
-10-
 
facsimile number specified in this Section prior to 6:30 p.m. (New York City time) on a Trading Day, (b) the next Trading Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified in this Section on a day that is not a Trading Day orlater than 6: 3 0 p. m. (New York City time) on any Trading Day, ( c) the Trading Day following the date of mailing, if sent by U. S. nationally recognized overnight courier service, or (d) upon actual receipt by the party to whom such notice is required to be given. The address for such notices and communications shall be as follows:

If to the Company:
 
Daybreak Oil and Gas, Inc.
601 W. Main Ave., Suite 1017
Spokane, W A 99201-0613
Attention: Chief Financial Officer

If to an Investor:                                           
 
To the address set forth under such
Investor's name on the signature pages hereto.

If to any other Person who is then the registered Holder:
 
To the address of such Holder as it appears in the stock transfer books of the Company or such other address as may be designated in writing hereafter, in the same manner, by such Person.
 

(h) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and permitted assigns of each of the parties and shall inure to the benefit of each Holder. The Company may not assign its rights or obligations hereunder without the prior written consent of each Holder. Each Holder may assign their respective rights hereunder in the manner and to the Persons as permitted under the Subscription Agreement.
 
(i) Execution and Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and, all of which taken together shall constitute one and the same Agreement. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid binding obligation of the party executing (or on whose behalf such signature is executed) the same with the same force and effect as if such facsimile signature were the original thereof.
 
(j) Governing Law. All questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of Washington, without regard to the principles of conflicts oflaw thereof. Each party agrees that all Proceedings concerning the interpretations, enforcement and defense of the transactions contemplated by this Agreement (whether brought against a party hereto or its respective Affiliates, employees or agents) will be commenced in the Washington Courts. Each party hereto hereby irrevocably submits to the exclusive jurisdiction of the Washington Courts for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any Proceeding, any claim that it is not personally subject to the jurisdiction of any Washington Court, or that such Proceeding has been commenced in an improper or inconvenient forum. Each party hereto hereby irrevocably waives personal service of process and consents to process being
 

 
 
-11-
 
served in any such Proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. Each party hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any Proceeding arising out of or relating to this Agreement or the transactions contemplated hereby. If either party shall commence a Proceeding to enforce any provisions of this Agreement, then the prevailing party in such Proceeding shall be reimbursed by the other party for its attorney's fees and other costs and expenses incurred with the investigation, preparation and prosecution of such Proceeding.
 
(k) Cumulative Remedies. The remedies provided herein are cumulative and not exclusive of any remedies provided by law.
 
(1) Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their reasonable efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable.
 
(m) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof.
 
(n) Independent Nature of Investors' Obligations and Rights. The obligations of each Investor under this Agreement are several and not joint with the obligations of each other Investor, and no Investor shall be responsible in any way for the performance of the obligations of any other Investor under this Agreement. Nothing contained herein or in any Transaction Document, and no action taken by any Investor pursuant thereto, shall be deemed to constitute the Investors as a partnership, an association, a j oint venture or any other kind of entity, or create a presumption that the Investors are in any way acting in concert or as a group with respect to such obligations or the transactions contemplated by this Agreement or any other Transaction Document. Each Investor acknowledges that no other Investor will be acting as agent of such Investor in enforcing its rights under this Agreement. Each Investor shall be entitled to independently protect and enforce its rights, including without limitation the rights arising out of this Agreement, and it shall not be necessary for any other Investor to be joined as an additional party in any Proceeding for such purpose. The Company acknowledges that each of the Investors has been provided with the same Registration Rights Agreement for the purpose of closing a transaction with multiple Investors and not because it was required or requested to do so by any Investor.

 
 
-12-
 
IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement as of the date first written above.
 
 
DAYBREAK OIL AND GAS, INC.
 
       
Date
By:
/s/   
    Name: Robert Martin  
    Title: President  
       



[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK SIGNATURE PAGES OF INVESTORS TO FOLLOW]


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
-13-
 
IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement as of the date first written above.
 
 
           
  (print name)        
           
By:        
 
(Signature)
   
 
 
Title:
 
   
 
 

 
ADDRESS FOR NOTICE

c/o:

Street:

City/State/Zip:

Attention:

Tel:

Fax:
 
Email:
 
 
 
 
 
 
 
 
 
 

 
 
-14-
 
Annex A

Plan of Distribution

The Selling Stockholders and any of their pledgees, donees, transferees, assignees and successors-in­interest may, from time to time, sell any or all of their shares of Common Stock on any stock exchange, market or trading facility on which the shares are traded or in private transactions. These sales may be at fixed or negotiated prices. The Selling Stockholders may use anyone or more of the following methods when selling shares:

The Selling Stockholders may also sell shares under Rule 144 under the Securities Act, if available, rather than under this prospectus.
 
Broker-dealers engaged by the Selling Stockholders may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the Selling Stockholders (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated. The Selling Stockholders do not expect these commissions and discounts to exceed what is customary in the types of transactions involved.
 
The Selling Stockholders may from time to time pledge or grant a security interest in some or all of the Shares owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell shares of Common Stock from time to time under this prospectus, or under an amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act of 1933 amending the list of selling stockholders to include the pledgee, transferee or other successors in interest as selling stockholders under this prospectus. upon the Company being notified in writing by a Selling Stockholder that any material arrangement has been entered into with a broker-dealer for the sale of Common Stock through a block trade,
 
 
 
 
special offering, exchange distribution or secondary distribution or a purchase by a broker or dealer, a supplement to this prospectus will be filed, if required, pursuant to Rule 424(b) under the Securities Act, disclosing (i) the name of each such Selling Stockholder and of the participating broker­dealer(s), (ii) the number of shares involved, (iii) the price at which such the shares of Common Stock were sold, (iv)the commissions paid or discounts or concessions allowed to such broker­dealer(s), where applicable, (v) that such broker-dealer(s) did not conduct any investigation to verify the information set out or incorporated by reference in this prospectus, and (vi) other facts material to the transaction. In addition, upon the Company being notified in writing by a Selling Stockholder that a donee or pledgee intends to sell more than 500 shares of Common Stock, a supplement to this prospectus will be filed if then required in accordance with applicable securities law.
 
The Selling Stockholders also may transfer the shares of Common Stock in other circumstances, in which case the transferees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus.
 
The Selling Stockholders and any broker-dealers or agents that are involved in selling the shares may be deemed to be "underwriters" within the meaning of the Securities Act in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. Discounts, concessions, commissions and similar selling expenses, if any, that can be attributed to the sale of Securities will be paid by the Selling Stockholder and/or the purchasers. Each Selling Stockholder has represented and warranted to the Company that it acquired the securities subject to this registration statement in the ordinary course of such Selling Stockholder's business and, at the time of its purchase of such securities such Selling Stockholder had no agreements or understandings, directly or indirectly, with any person to distribute any such securities.
 
The Company has advised each Selling Stockholder that it may not use shares registered on this Registration Statement to cover short sales of Common Stock made prior to the date on which this Registration Statement shall have been declared effective by the Commission. If a Selling Stockholder uses this prospectus for any sale of the Common Stock, it will be subject to the prospectus delivery requirements of the Securities Act. The Selling Stockholders will be responsible to comply with the applicable provisions of the Securities Act and Exchange Act, and the rules and regulations thereunder promulgated, including, without limitation, Regulation M, as applicable to such Selling Stockholders in connection with resales of their respective shares under this Registration Statement.
 
The Company is required to pay all fees and expenses incident to the registration of the shares, but the Company will not receive any proceeds from the sale of the Common Stock. The Company has agreed to indemnify the Selling Stockholders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act.
 

 
 
 
 
 
 
 
 
 
 
 
A-2
 
Annex B

DAYBREAK OIL AND GAS, INC.
 
SELLING SECURITYHOLDER QUESTIONNAIRE
 
The undersigned beneficial owner of common stock (the "COMMON STOCK") of Daybreak Oil and Gas, Inc. (the "COMPANY") understands that the Company has filed or intends to file with the Securities and Exchange Commission (the "COMMISSION") a Registration Statement for the registration and resale of the Registrable Securities, in accordance with the terms of the Registration Rights Agreement, dated as of ~ 2006 (the "REGISTRATION RIGHTS AGREEMENT"), among the Company and the Investors named therein. A copy of the Registration Rights Agreement is available from the Company upon request at the address set forth below. All capitalized terms used and not otherwise defined herein shall have the meanings ascribed thereto in the Registration Rights Agreement.
 
The undersigned hereby provides the following information to the Company and represents and warrants that such information is accurate:
 
QUESTIONNAIRE
 
1.
NAME.
 
(a)
Full Legal Name of Selling Securityholder

(b)
Full Legal Name of Registered Holder (if notthe same as (a) above) through which Registrable Securities Listed in Item 3 below are held:

(c)
Full Legal Name of Natural Control Person (which means a natural person who directly or indirectly alone or with others has power to vote or dispose of the securities covered by the questionnaire):

2.
ADDRESS FOR NOTICES TO SELLING SECURITYHOLDER:

Telephone:
Fax:
Contact Person:
 
 
 
 
 
3.
BENEFICIAL OWNERSHIP OF REGISTRABLE SECURITIES:

Type and Principal Amount of Registrable Securities beneficially owned:

4.
BROKER-DEALER STATUS:

(a) Are you a broker-dealer? Yes ___ No ___
 
Note: If yes, the Commission's staffhas indicated that you should be identified as an underwriter in the Registration Statement.
 
(b) Are you an affiliate of a broker-dealer? Yes ___ No ___

(c) If you are an affiliate of a broker-dealer, do you certify that you bought the Registrable Securities in the ordinary course of business, and at the time of the purchase of the Registrable Securities to be resold, you had no agreements or understandings, directly or indirectly, with any person to distribute the Registrable Securities? Yes ___ No ___

Note: If no, the Commission's staffhas indicated that you should be identified as an underwriter in the Registration Statement.

5.
BENEFICIAL OWNERSHIP OF OTHER SECURITIES OF THE COMPANY OWNED BY THE SELLING SECURITYHOLDER.

Except as set forth below in this Item 5, the undersigned is not the beneficial or registered owner of any securities of the Company other than the Registrable Securities listed above in Item 3.
 
Type and Amount of Other Securities beneficially owned by the Selling Securityholder:

6.
RELATIONSHIPS WITH THE COMPANY:

Except as set forth below, neither the undersigned nor any of its affiliates, officers, directors or principal equity holders (owners of5% of more of the equity securities of the undersigned) has held any position or office or has had any other material relationship with the Company (or its predecessors or affiliates) during the past three years.

 
B-2
 
State any exceptions here:
 
 
 
The undersigned agrees to promptly notify the Company of any inaccuracies or changes in the information provided herein that may occur subsequent to the date hereof and prior to the Effective Date for the Registration Statement.
 
By signing below, the undersigned consents to the disclosure of the information contained herein in its answers to Items 1 through 6 and the inclusion of such information in the Registration Statement and the related prospectus. The undersigned understands that such information will be relied upon by the Company in connection with the preparation or amendment of the Registration Statement and the related prospectus.
 
IN WITNESS WHEREOF the undersigned, by authority duly given, has caused this Notice and Questionnaire to be executed and delivered either in person or by its duly authorized agent.

Dated:____________________
Beneficial Owner:
 
       
 
By:
   
    Signature  
       
    Title:  
       


PLEASE FAX A COPY OF THE COMPLETED AND EXECUTED NOTICE AND QUESTIONNAIRE, AND RETURN THE ORIGINAL BY OVERNIGHT MAIL, TO:
 
Workland & Witherspoon, PLLC
601 W. Main Ave., Suite 714
Spokane, W A 99201

B-3
Exhibit 10.27

CONSULTING SERVICES AGREEMENT BETWEEN:

DAYBREAK OIL AND GAS, INC. (Hereinafter the "Company")

AND

JEFFREY R. DWORKIN (Hereinafter the "Consultant')

 
WHEREAS, the Company desires to be assured of the association and services of the Consultant in order to avail itself of the Consultant's experience, skills, abilities, knowledge and background as an public oil and gas industry executive and to advise the Company in public oil and gas industry business and/or financial matters and is therefore willing to engage the Consultant upon the terms and conditions set forth herein.

WHEREAS, the Consultant agrees to be engaged and retained by the Company and upon the terms and conditions set forth herein.

NOW THEREFORE, in consideration of the foregoing, and for other good and valuable consideration, the receipt and suffiency of which are hereby acknowledged, the parties hereto agree as follows:

1.   Engagement

The Company hereby engages the Consultant on a non exclusive basis, and the Consultant hereby accepts the engagement to become a consultant to the Company and to render such advice, consultation, information and services to the directors and officers of the Company regarding public oil and gas industry business matters and public company corporate governance matters.

It shall be expressly understood that Consultant shall have no power to bind the Company to any contract or obligation or to transact any business in the Company's name or on behalf of the Company in any manner.

2.   Term

The term of this Agreement shall commence on the date hereof and continue for Seven (7) months. The Agreement may be extended upon agreement by both parties.

3.           Compensation and fees

The Company shall pay to the Consultant:

a)
Consulting Fees in the amount of one hundred fifty ($150.00) dollars per hour for time spent on the business of the Company including but not limited to telephone conversations, personal conferences, strategy development and planning, letter and document preparation and review, research and drafting.
b)
the Consultant will also be paid for expenses incurred or advanced on your behalf.
c)
The Consultant will also be paid a monthly miscellaneous expense fee of $1,500.00 per month.

4.           Exclusivity, Performance and Confidentiality

The services of the Consultant hereunder shall not be exclusive, and Consultant and its agents may perform similar or different services for other persons or entities whether or not they are competitors of the Company. The Consultant shall be required to expend only such time as is necessary to service the Company in a commercially reasonable manner. The Consultant acknowledges and agrees that confidential and valuable information proprietary to the Company and obtained during its engagement by the Company shall not be directly or indirectly, disclosed without the prior written consent of the Company, unless and until such information is otherwise known to the public generally or is not otherwise secret and confidential.

5.           Independent Contractor

In its performance hereunder, the Consultant and its agents shall be independent contractors. The Consultant shall complete the services required hereunder according to his own means and methods of work, shall be in the exclusive charge and control of the Consultant and shall not be subject to the control or supervision of the Company, except as to the results of the work or the extent necessary for the Company to verify the Consultant's compliance with applicable laws and regulations to which the Company may be subject. The Company acknowledges that nothing in this Agreement shall be construed to require the Consultant to provide services to the Company at any specific time, or in any specific place or manner.

6.      Waiver

No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision and no waiver shall constitute a continuing waiver. No waiver shall be binding unless executed in writing by the party making the waiver.

7.      Complete Agreement

No supplement, modification or amendment of the Agreement shall be binding unless executed in writing by all parties. This Agreement constitutes the entire agreement between the parties and supersedes any prior agreements or negotiations.

8.      General Provisions

 
a.
This Agreement shall in all respects be interpreted, enforced and governed under the laws of State of Washington. The language and all parts of this Agreement shall be in all cases construed as a whole and not strictly for or against any individual party.

 
b.
Any dispute arising under in any way related to this agreement shall be submitted to binding arbitration by the American Arbitration Association in accordance with the Association's commercial rules then in effect. The arbitration may be conducted in person, by telephone or online as agreed by all parties. The arbitration shall be binding on the parties and the arbitration award may be confirmed by ant court of competent jurisdiction.

9.      Counterparts and facsimile

This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original and all of which shall constitute one agreement. A telefacsimile of this Agreement may be relied upon as full and sufficient evidence as an original.

IN WITNESS WHEREOF, the parties hereto have entered into this Agreement effective the 1 st day of August 2006.

 
Daybreak Oil and Gas, Inc.
 
     
       
    /s/ JEFFREY R. DWORKIN  
    Jeffrey R. Dworkin  
       
    Date:     8/1/06        

/s/ Thomas C. Kilbourne, Treasurer
 

 

Exhibit 10.28
Daybreak Oil and Gas, Inc.
601 West Main Ave    Suite 1017                Spokane, WA   99201
Off: (509) 232-7674                            Fax: (509) 455-8483



OFFICE LEASE AGREEMENT

BETWEEN:  TERRANCE J. DUNNE & ASSOCIATES INC. (The Tenant)

AND

DAYBREAK OIL AND GAS, INC. (The Subtenant)


WHEREAS, the Tenant leases a total of 3,136 rentable square feet from Joshua Green Corporation (The Landlord) pursuant to a Lease Renewal and Modification Agreement (Schedule “A”) dated April 27, 2006 at a rental rate of $16.00 per square foot for the term commencing on May 1, 2006 and ending on April 30, 2007;

AND WHEREAS, the Subtenant has agreed to sublease from the Tenant certain offices and storage space from the Tenant consisting of approximately 400 square feet plus use of common area (Schedule “B”).

NOW THEREFORE, in consideration of the foregoing, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

1.
Term

The term of this Agreement shall commence on the first day of August 2006 and expire on the last day of April 2007. This Agreement may be extended upon agreement by both parties.

2.
Rent

The Subtenant shall pay to the Tenant $600.00 on the first day of each month during the term of this Agreement. If this Agreement is extended the rent shall be modified in accordance with Schedule “C”.

3.
Mutual Covenants

The Tenant agrees to comply with the terms and conditions of the Lease Renewal and Modification Agreement and to pay the rent to the Landlord in the amounts and at the times as stipulated therein and to refrain from such acts as would cause the Landlord to terminate the Lease.

 
 
 
The Subtenant agrees to conduct its’ business and affairs in such manner so as to comply with the terms and conditions of Lease Agreement dated February 1, 2002 between the Tenant and the Landlord as amended or renewed.

4.
Waiver

No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision and no waiver shall constitute a continuing waiver. No waiver shall be binding unless executed in writing by the party making the waiver.

5.
Complete Agreement

No supplement, modification or amendment of the Agreement shall be binding unless executed in writing by all parties. This Agreement constitutes the entire agreement between the parties and supersedes any prior agreements or negotiations.

6.
General Provisions

a.
This Agreement shall in all respects be interpreted, enforced and governed under the laws of State of Washington. The language and all parts of this Agreement shall be in all cases construed as a whole and not strictly for or against any individual party.

b.
Any dispute arising under in any way related to this agreement shall be submitted to binding arbitration by the American Arbitration Association in accordance with the Association’s commercial rules then in effect. The arbitration may be conducted in person, by telephone or online as agreed by all parties. The arbitration shall be binding on the parties and the arbitration award may be confirmed by ant court of competent jurisdiction.


IN WITNESS WHEREOF, the parties hereto have entered into this Agreement effective the 1 st day of August 2006.
 
Daybreak Oil and Gas, Inc.     Terrence J. Dunne & Associates  
         
         
/s/ Thomas C. Kilbourne
   
/s/ Terrence J. Dunne
 
Thomas C. Kilbourne, Treasurer 
   
Terrence J. Dunne
 
 
   
 
 
         
Date:            8/01/06                  Date:            8/01/06               




 
 
 
SCHEDULE  B

Daybreak Office Space Allocation



Office
Approx Length / Width
Square Footage
   
Suite 1017 – Front Office
17’ x 9’
153
Suite 1012 – S.W. Corner Office
9.5’ x 12’
114
Suite 1012 – S. W. Storage Area
10’ x 5’
50
Suite 1012 – Conference Room
13’ x 11’
72  (1/2 footage)
Total Daybreak Footage
 
389
     
     
$16.00 per Square Foot  
$ 6224.00
     
Divided by 12 Months  
     518.67
Common Area Factor  
       81.33
Total Monthly Rent
 
$   600.00
     


 

Schedule C

Future Monthly Rent

Provided this Agreement is extended beyond April 30, 2007 the monthly rent shall be as follows:

May 1, 2007 through April 30, 2008                                                                                                $625.00 per month

May 1, 2008 through April 30, 2009                                                                                                $650.00 per month
Exhibit 10.29
 
Daybreak Oil and Gas, Inc.
601 West Main Ave    Suite 1017                Spokane, WA   99201
Off: (509) 232-7674                            Fax: (509) 455-8483


CONSULTING SERVICES AGREEMENT

BETWEEN:     DAYBREAK OIL AND GAS, INC. (The Company)

AND

MICHAEL J. HOOPER (The Consultant)


WHEREAS, the Company desires to be assured of the association and services of the Consultant in order to avail itself of the Consultant’s experience, skills, abilities, knowledge and background as an accounting and accounting systems analyst and is therefore willing to engage the Consultant upon the terms and conditions set forth herein.

WHEREAS, the Consultant agrees to be engaged and retained by the Company and upon the terms and conditions set forth herein.

NOW THEREFORE, in consideration of the foregoing, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

1.       Engagement

The Company hereby engages the Consultant on a non exclusive basis, and the Consultant hereby accepts the engagement to become a consultant to the Company and to render such advice, consultation, information and services to the directors and officers of the Company regarding general financial and business matters, including but not limited to:
It shall be expressly understood that Consultant shall have no power to bind the Company to any contract or obligation or to transact any business in the Company’s name or on behalf of the Company in any manner.




2.       Term

The term of this Agreement shall commence on the date hereof and continue for seven (7) months. The Agreement may be extended upon agreement by both parties.

It is agreed and understood by both parties that the Consultant may have provided services to the Company prior to the effective date of this Agreement. In such case, the Consultant will submit an invoice for services rendered in the manner provided in Section 3 herein and subject to approval by the Treasurer or Chief Financial Officer, the Company shall pay such invoice.

3.       Compensation

The Company shall pay to the Consultant consulting fees in the amount of $40.00 per hour plus any expenses incurred or advanced on behalf of the Company.

The Consultant agrees to submit invoices to the Company on or before the last day of each month, which invoice will contain the following information:
The Company agrees to pay the invoice within a reasonable period of time following its examination and review by the Treasurer or Chief Financial Officer.

4.       Exclusivity, Performance and Confidentiality

The services of the Consultant hereunder shall not be exclusive, and Consultant and its agents may perform similar or different services for other persons or entities whether or not they are competitors of the Company. The Consultant shall be required to expend only such time as is necessary to service the Company in a commercially reasonable manner. The Consultant acknowledges and agrees that confidential and valuable information proprietary to the Company and obtained during its engagement by the Company shall not be directly or indirectly, disclosed without the prior written consent of the Company, unless and until such information is otherwise known to the public generally or is not otherwise secret and confidential.


5.       Independent Contractor

In its performance hereunder, the Consultant shall be an independent contractor. The Consultant shall complete the services required hereunder according to his own means and methods of work, shall be in the exclusive charge and control of the Consultant and shall not be subject to the control or supervision of the Company, except as to the results of the work or the extent necessary for the Company to verify the Consultant’s compliance with applicable laws and regulations to which the Company may be subject.  The Company acknowledges that nothing in this Agreement shall be construed to require the Consultant to provide services to the Company at any specific time, or in any specific place or manner.

6.       Waiver

No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision and no waiver shall constitute a continuing waiver. No waiver shall be binding unless executed in writing by the party making the waiver.

7.       Complete Agreement

No supplement, modification or amendment of the Agreement shall be binding unless executed in writing by all parties. This Agreement constitutes the entire agreement between the parties and supersedes any prior agreements or negotiations.

8.       General Provisions
 
a.      This Agreement shall in all respects be interpreted, enforced and governed under the laws of State of Washington. The language and all parts of this Agreement shall be in all cases construed as a whole and not strictly for or against any individual party.

b.       Any dispute arising under in any way related to this agreement shall be submitted to binding arbitration by the American Arbitration Association in accordance with the Association’s commercial rules then in effect. The arbitration may be conducted in person, by telephone or online as agreed by all parties. The arbitration shall be binding on the parties and the arbitration award may be confirmed by any court of competent jurisdiction.


IN WITNESS WHEREOF, the parties hereto have entered into this Agreement effective the 1 st day of August 2006.
 
DayBreak Oil and Gas, Inc.        
         
 /s/ Thomas C. Kilbourne    
/s/ Michael J. Hooper
 
Thomas C. Kilbourne, Treasurer
   
Michael J. Hooper
 
 
   
 
 
Date:        8/01/06             Date:        8/01/06          

Exhibit 10.34
CONSULTING SERVICES AGREEMENT

This Consulting Services Agreement (“Agreement”) is made as of the __2nd day of January, 2007 to the _29th day of February, 2008, by and between Daybreak Oil and Gas, Inc., (“Daybreak”), a Washington corporation, and Timothy R. Lindsey, doing business as Lindsey Energy and Natural Resources (“Consultant”), 18331 Langsbury Drive, Houston, Texas 77084.

Whereas , Daybreak desires to be assured of the association and services of the Consultant in order to avail itself of the Consultant’s experience, skills, abilities, knowledge and background to facilitate long range strategic planning and to advise Daybreak in business and/or exploration matters, and

Whereas , Daybreak wishes to engage Consultant to provide advisory and other services for Daybreak and Consultant wishes to accept such engagement, all on the terms and conditions set forth herein.

Whereas , the Board of Directors of the Company considers it to be in the best interests of the Company to enter into this Agreement with the Consultant and this Agreement has been duly approved by the Board of Directors of the Company;

Now therefore , in consideration of the mutual promises herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows:

1.             Engagement.   Daybreak hereby engages the Consultant on a non-exclusive basis, and the Consultant hereby accepts the engagement, to become a consultant to Daybreak and to render such advice, consultation, information, and services to the directors and officers of Daybreak regarding the exploration for and production of gas and oil energy including but not limited to:

(a)           assess current capital allocation in existing exploration and production operations and to identify and develop future core areas for growth;

(b)           create strategic exploration, acquisition, exploitation and development portfolio and to balance capital spending to enhance current financial returns while providing significant future reserves and production growth;

(c)           review and interpret physical data such as maps, seismic sections, digital data bases, drilling reports, well files, gravity surveys, geochemical surveys and regional maps; and

(d)           carry out exploration work in order to ascertain whether particular projects contain commercially exploitable gas and oil resources and make recommendations to the Board of Directors and officers of the Company.

CONSULTING SERVICES AGREEMENT                                                                  
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The Consultant will report to the person or positions designated by the Company to whom the Consultant will be reporting and will discharge such duties and responsibilities as are assigned to the Consultant from time to time.

2.            Term.   The term of this Agreement shall commence on February ____, 2007 and continue in effect until February ____, 2008.  Notwithstanding the foregoing, this Agreement may be terminated prior to the end of the term by either Daybreak or Consultant, for any reason or for no reason, upon thirty (30) days written notice to the other party.  In the event of termination, Consultant shall be entitled to all fees and other consideration contained in this Agreement earned and accrued to the effective date of termination.

3.            Compensation.

(a)           Monetary.  In exchange for his commitment to provide services to Daybreak under Section One above, Daybreak agrees to pay Consultant a daily work rate in the amount of One Thousand Five Hundred Dollars ($1,500.00) per day rate plus out of pocket expenses.

The Consultant shall submit invoices to the Corporation for each month or portion thereof for which services are provided during the period covered by the invoice and also including any proper claim for travel expenses.  Each invoice shall indicate the period covered, the month or portion of a month worked, the rate and the total charge for consulting services.

The Company will reimburse the Consultant, at actual cost, for out-of-pocket expenses incurred in accordance with the Corporation’s standard practice for the reimbursement of reasonable travel expenses incurred by its contractors or its own personnel.  The Corporation will also reimburse the Consultant for any reasonable long distance telephone, fax or photocopying charges incurred by the Consultant.  Expenses claimed must be supported by the applicable receipts.

(b)            Restricted Shares.

(i)            Grant and Issuance .  As consideration for Consultant’s employment with Daybreak, Daybreak grants and issues to Consultant Two Hundred Thousand (200,000) unregistered and restricted common shares of its stock valued at $1.00 per share (“Granted Shares”).  In addition, the term “Granted Shares” shall include any shares of stock received by Consultant from any stock split, stock dividend, combination of shares, or any other change or exchange for other securities by reclassification, reorganization, merger, consolidation, recapitalization, or otherwise, derived from the Two Hundred Thousand (200,000) unregistered and restricted common shares granted and issued pursuant to Section 3.b of this Agreement.  The Company acknowledges that the shares of Common Stock to be issued pursuant to this Agreement (collectively the “Shares”) have not been registered under the Securities Act of 1933 (the “Act”), and accordingly are “restricted shares” within the meaning of Rule 144 of the Act.  The Shares shall be restricted and as such the Shares may not be resold or transferred unless the Company has received an opinion of counsel reasonably satisfactory to the Company that such resale or transfer is exempt from the registration requirements of the Act.

CONSULTING SERVICES AGREEMENT                                                                  
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(ii)            Rights as Shareholder .  During the term of this Agreement, Consultant will have all the rights of a shareholder with respect to Granted Shares, including the right to vote them and to receive all dividends and other distributions paid with respect to them, provided however that the shares shall be subject to the restrictions provided for in Section 3.b of this Agreement.

(iii)            Not Transferable .  Consultant may not sell, exchange, transfer, pledge, hypothecated, or otherwise dispose of (“Transfer”) Granted Shares to anyone other than Daybreak during the term of this Agreement, and Granted Shares may only be Transferred to Daybreak if Consultant forfeits Granted Shares pursuant to Section 3.b.iv of this Agreement.

(iv)            Forfeiture .  If Consultant’s employment is terminated, except as provided below, either by Consultant or by Daybreak prior to the expiration of the term of this Agreement, Consultant shall forfeit and endorse over to Daybreak a proportionate number of Granted Shares based upon the number of months remaining on the term of this Agreement as compared to the entire term of this Agreement.  If Consultant’s employment is terminated prior to the end of a month, it is shall be presumed that the month of termination is a remaining month on the term of this Agreement.

Example 1.  The term of this Agreement is twelve (12) months.  If Consultant’s employment is terminated effective as of the end of the fifth month of employment, Consultant has completed five (5) months of employment and there are seven (7) months remaining on the term of this Agreement.  As such, Consultant forfeits 7/12 ths of the Granted Shares and must endorse those shares of stock over to Daybreak for no consideration.

Example 2.  Same facts as in Example 1, except Consultant’s employment was terminated five (5) days into the eighth month of employment, Consultant has only completed seven (7) months of employment and there are six (5) months remaining on the term of this Agreement.  As such, Consultant forfeits 7/12 ths of the Granted Shares and must endorse those shares of stock over to Daybreak for no consideration.

In the event of the death of the Consultant, the parties agree that the Consultant shall not forfeit any of the granted shares issued to the Consultant by Daybreak under the terms of this Agreement.

(v)            Legend .  Stock certificates representing Granted Shares shall be imprinted with a legend in substantially the same form set forth herein stating that the shares represented thereby may not be sold, exchanged, transferred, pledged, hypothecated, or otherwise disposed of except as otherwise provided in this Agreement.

CONSULTING SERVICES AGREEMENT                                                                  
-3-
 

THIS SECURITY HAS NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), IN RELIANCE UPON THE EXEMPTIONS FROM REGISTRATION PROVIDED IN THE ACT AND REGULATION D UNDER THE ACT.  AS SUCH, THE ACQUISITION OF THIS SECURITY WAS NECESSARILY WITH THE INTENT OF INVESTMENT AND NOT WITH A VIEW FOR DISTRIBUTION.  THEREFORE, ANY SUBSEQUENT TRANSFER OF THIS SECURITY OR ANY INTEREST THEREIN WILL BE UNLAWFUL UNLESS IT IS REGISTERED UNDER THE ACT OR UNLESS AN EXEMPTION FROM REGISTRATION IS AVAILABLE.  FURTHERMORE, IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY OR ANY INTEREST THEREIN, WITHOUT THE OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY THAT THE PROPOSED TRANSFER OR SALE DOES NOT AFFECT THE EXEMPTIONS RELIED UPON BY THE COMPANY IN ORIGINALLY DISTRIBUTING THE SECURITY AND THAT REGISTRATION IS NOT REQUIRED.

(vi)            Stock Splits, Dividends, etc .  If, due to a stock split, stock dividend, combination of shares, or any other change or exchange for other securities by reclassification, reorganization, merger, consolidation, recapitalization, or otherwise, Consultant, as the owner of the Granted Shares subject to the restrictions hereunder, shall be entitled to new, additional, or different shares of stock or securities, the certificate or certificates for, or otherwise evidence of, such new, additional, or different shares or securities, together with a stock power or other instrument of transfer appropriately endorsed, also shall be endorsed with a legend as provided in Section 3.b.v of this Agreement.

4.            Independent Contractor Status .  In the performance of the work contemplated in this Agreement, Consultant is an independent contractor with the authority to control and direct the performance of the details of the work, Daybreak being interested only in the results obtained.  Consultant is not an agent or employee of Daybreak for any purpose, and the employees of Consultant are not entitled to any of the benefits that Daybreak provides for its employees.  Consultant shall be responsible for payment of all taxes, including federal, state, and local taxes arising out of its activities under this Agreement, including, but not limited to, income tax, social security tax, and unemployment insurance tax that might be due.  It is understood that Daybreak does not agree to use Consultant exclusively.  Nothing in this Agreement shall constitute or be construed as a creation of a partnership or joint venture between Consultant and Daybreak, or their successors or assigns.  The parties acknowledge and agree that Consultant, its principals, associates and employees, are not engaged in the practice of law nor are they engaged in providing legal advice or counsel in connection with their representation of Daybreak.  

CONSULTING SERVICES AGREEMENT                                                                  
-4-
 
The parties further acknowledge and agree that any association or referral with or to any law firm by or with Consultant shall not be considered or construed to be the practice of law by Consultant in connection with such association or referral.

5.            Confidential Information .  In the course of providing services for Daybreak, each of Daybreak and Consultant may learn or discover information that is identified by the other as non-public, proprietary information.  Each of Daybreak and Consultant agrees that, during the term of engagement and for a period of twenty-four (24) months thereafter, it will not, directly or indirectly, disclose or use any such information of the other party (“Confidential Information”) without the consent of such party.  Confidential Information shall not include: information which is currently in the public domain or hereafter enters the public domain without the fault or involvement of the receiving party; information known to the receiving party prior to its disclosure by other party and information disclosed to a receiving party from a source (other than the other party) having a lawful right to make such disclosure to the receiving party, or information required to be disclosed under any court order or governmental directive. The terms of this Agreement shall be treated as Confidential Information by both parties.

6.            Summons/Subpoenas .  In the event that Consultant or any party acting on behalf of Consultant (Consultant and any such person being a “Subpoenaed Party”) receives a subpoena or summons requesting that the Subpoenaed Party produce documents or records containing Confidential Information of Daybreak or otherwise pertaining to the services rendered hereunder or testify concerning such Confidential Information of Daybreak or services, the Subpoenaed Party will immediately notify Daybreak.  Daybreak may, within the time permitted for the Subpoenaed Party to respond to any such requests, initiate such legal action seeking a protective order or other relief as Daybreak deems appropriate to protect information from disclosure.  If Daybreak takes no action within the time permitted for the Subpoenaed Party to respond or if Daybreak’s actions do not result in a judicial order preventing the Subpoenaed Party from supplying or disclosing the requested information or testifying, the Subpoenaed Party may comply with the request.  Daybreak agrees to reimburse and pay the Subpoenaed Party for all costs and expenses incurred by the Subpoenaed Party (or such person) in connection with any such summons or subpoenas concerning Daybreak, including reasonable attorney’s fees and time spent by the Subpoenaed Party ‘s personnel, billed at their regular rates.

7.            Indemnification .  Each party agrees to indemnify and hold the other party, its officers and employees, harmless against any and all claims, lawsuits, judgments, costs, liens, losses, expenses, fees (including reasonable attorney’s fees and costs of defense), proceedings, actions, demands, causes of action, liability and suits of any kind and nature, including but not limited to, personal injury (including death), property damage, or other harm for which recovery damages is sought that may arise out of or be occasioned or caused by each party’s negligent act, error or omission or the negligent act, error or omission of any agent, officer, director, representative, employee, consultant or subconsultant of each party and their respective officers, agents, employees, directors and representatives while in the exercise of performance of the rights or duties under this Agreement.

CONSULTING SERVICES AGREEMENT                                                                  
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8.            General .

(a)           This Agreement shall be interpreted and construed in accordance with the laws of the State of Washington without giving effect to principles of conflict of law.  Any action arising in connection with this Agreement must be brought in Spokane County Superior Court, Spokane, Washington.  By this Agreement, the parties confer jurisdiction over the subject matter of and parties to this Agreement.  The party who prevails in any such action will be entitled to an award of the reasonable costs and attorneys’ fees incurred in the action.

(b)           The terms and conditions set forth in this Agreement are intended by Daybreak and Consultant to constitute the final and complete statement of their agreement, and all prior proposals, communications, negotiations, understandings, and representations relating to the subject matter of this Agreement, whether verbal or written, are hereby superseded.  No modification or amendment of this Agreement shall be effected unless the same is in writing and signed by both parties.

(c)           Any notice required or desired to be given under this Agreement shall be given in writing and sent by certified mail, return receipt requested, addressed as follows:

i.           To Daybreak:

Daybreak Oil and Gas, Inc.
Thomas C. Kilbourne
1012 Washington Mutual Financial Center
601 West Main Avenue
Spokane, Washington 99201

ii.           To Consultant:

Timothy R. Lindsey
18331 Langsbury Drive
Houston, Texas 77084

Notice shall be effective upon receipt.

(d)           Consultant consents in advance to Daybreak’s right to assign this Agreement to any successor in interest that expressly assumes Daybreak’s obligations hereunder in writing.  Consultant may not assign its rights and obligations under this Agreement.

(e)           Each of the sections contained herein shall be and remain separate from, independent of, and severable from all and any other sections herein except as otherwise indicated by the context of this Agreement.  Any decision or declaration that one or more of the sections or subsections are null and void shall have no effect on the remaining sections or subsections of this Agreement.

(f)           Upon any termination of employment, Consultant shall within ten (10) business days, deliver or cause to be delivered to the Company all books, documents, effects, monies received in trust, or other property belonging to the Company or its subsidiaries for which the Company or its subsidiaries are liable to others, which are in possession, charge, control, or custody of the Consultant.

CONSULTING SERVICES AGREEMENT                                                                  
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(g)           This Agreement shall inure to the benefit of and be binding upon the Consultant and its heirs, executors, legal personal representatives, and administrators, and upon the Company.

(h)           This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and together shall constitute a single agreement.  Facsimile signatures shall be good and sufficient evidence of signature for all purposes of this Agreement.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the 2nd day of January, 2007.

COMPANY:
Daybreak Oil and Gas, Inc.


By:  /s/ Thomas C. Kilbourne               
       Thomas C. Kilbourne, Treasurer

CONSULTANT:


/s/ Tim R. Lindsey                                  
Timothy R. Lindsey
 
 
 
 
 
 
 
 
 
 
 
 
 
CONSULTING SERVICES AGREEMENT
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Exhibit 10.36
CONSULTING SERVICES AGREEMENT

This Consulting Services Agreement (“Agreement”) is entered into effective the 1 st day of March, 2007, by and between Daybreak Oil and Gas, Inc., (“Daybreak”), a Washington corporation, and Jeffrey R. Dworkin located in Calgary, Alberta, Canada.

Whereas , Daybreak desires to be assured of the association and services of the Consultant in order to avail itself of the Consultant’s experience, skills, abilities, knowledge and background to facilitate long range strategic planning and to advise Daybreak in business and/or exploration matters, and

Whereas , Daybreak wishes to engage Consultant to provide advisory and other services for Daybreak and Consultant wishes to accept such engagement, all on the terms and conditions set forth herein.

Whereas , the Board of Directors of the Company considers it to be in the best interests of the Company to enter into this Agreement with the Consultant and this Agreement has been duly approved by the Board of Directors of the Company;

Whereas, the Consultant shall make his services available, as requested, to perform this Agreement;

Now therefore , in consideration of the mutual promises herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows:

1.             Engagement.   Daybreak hereby engages the Consultant and the Consultant hereby accepts the engagement, to become a consultant to Daybreak and to render such advice, consultation, information, and services to the directors and officers of Daybreak regarding public company corporate governance and legal knowledge of oil and gas industry contracts including but not limited to:

(a)           assist in creation and implementation of corporate governance standards

(b)           review and advise on oil and gas mineral rights leases;

The Consultant will report to the person or positions designated by the Company to whom the Consultant will be reporting and will discharge such duties and responsibilities as are assigned to the Consultant from time to time.

The Consultant represents that he is duly qualified to perform the duties hereunder and further covenant that in performing his duties hereunder, he will not engage in activity that is in violation of applicable security laws or subject the Corporation to liability thereunder.

2.            Term.   The term of this Agreement shall commence on March 1, 2007 and continue in effect until February 29, 2008.  Notwithstanding the foregoing, this Agreement may be terminated prior to the end of the term by either Daybreak or Consultant, for any reason or for no
 
CONSULTING SERVICES AGREEMENT
-1-
reason, upon thirty (30) days written notice to the other party.  In the event of termination, Consultant shall be entitled to all fees and other consideration contained in this Agreement earned and accrued to the effective date of termination.

3.            Compensation.

(a)           Monetary.  In exchange for his commitment to provide services to Daybreak under Section One above, Daybreak agrees to pay Consultant a hourly rate in the amount of One Hundred Fifty Dollars ($150.00) plus out of pocket expenses. The Consultant shall submit invoices to the Corporation for each month or portion thereof for which services are provided during the period covered by the invoice and also including any proper claim for travel expenses.  Each invoice shall indicate the period covered, the month or portion of a month worked, the rate and the total charge for consulting services.

During the term of this agreement, Consultant is entitled to reimbursement for reasonable business expenses incurred on behalf of Daybreak in accordance with the standard practice for the reimbursement policies and procedures established by Daybreak. All out-of-pocket expenses submitted for reimbursement, shall be done in a timely manner. Such timely manner shall be defined as the expense reimbursement request shall be received by Daybreak no later than sixty (60) days after the date of the expense receipt or the occurrence of such expense. Any expense receipt dated sixty (60) days earlier than the expense reimbursement request is received shall not be eligible for reimbursement by Daybreak. If any receipt for a charge on a Company credit card is not submitted to Daybreak within sixty (60) days of the transaction date, the transaction amount can be charged back to the Consultant or be deducted from the Consultant’s next invoice. Compensation provided Consultant under this Agreement takes into account Consultant’s personal obligation to incur and pay certain additional expenses required of Consultant as a consultant of Daybreak for which Daybreak is under no obligation to reimburse Consultant.

4.            Independent Contractor Status .  In the performance of the work contemplated in this Agreement, Consultant is an independent contractor with the authority to control and direct the performance of the details of the work, Daybreak being interested only in the results obtained.  Consultant is not an agent or employee of Daybreak for any purpose, and the employees of Consultant are not entitled to any of the benefits that Daybreak provides for its employees.  Consultant shall be responsible for payment of all taxes, including federal, state, and local taxes arising out of its activities under this Agreement, including, but not limited to, income tax, social security tax, and unemployment insurance tax that might be due.  It is understood that Daybreak does not agree to use Consultant exclusively.  Nothing in this Agreement shall constitute or be construed as a creation of a partnership or joint venture between Consultant and Daybreak, or their successors or assigns.  The parties acknowledge and agree that Consultant, its principals, associates and employees, are not engaged in the practice of law nor are they engaged in providing legal advice or counsel in connection with their representation of Daybreak.  The parties further acknowledge and agree that any association or referral with or to any law firm by or with Consultant shall not be considered or construed to be the practice of law by Consultant in connection with such association or referral.
 
CONSULTING SERVICES AGREEMENT
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5.            Confidential Information .  In the course of providing services for Daybreak, each of Daybreak and Consultant may learn or discover information that is identified by the other as non-public, proprietary information.  Each of Daybreak and Consultant agrees that, during the term of engagement and for a period of twenty-four (24) months thereafter, it will not, directly or indirectly, disclose or use any such information of the other party (“Confidential Information”) without the consent of such party.  Confidential Information shall not include: information which is currently in the public domain or hereafter enters the public domain without the fault or involvement of the receiving party; information known to the receiving party prior to its disclosure by other party and information disclosed to a receiving party from a source (other than the other party) having a lawful right to make such disclosure to the receiving party, or information required to be disclosed under any court order or governmental directive. The terms of this Agreement shall be treated as Confidential Information by both parties.

6.            Summons/Subpoenas .  In the event that Consultant or any party acting on behalf of Consultant (Consultant and any such person being a “Subpoenaed Party”) receives a subpoena or summons requesting that the Subpoenaed Party produce documents or records containing Confidential Information of Daybreak or otherwise pertaining to the services rendered hereunder or testify concerning such Confidential Information of Daybreak or services, the Subpoenaed Party will immediately notify Daybreak.  Daybreak may, within the time permitted for the Subpoenaed Party to respond to any such requests, initiate such legal action seeking a protective order or other relief as Daybreak deems appropriate to protect information from disclosure.  If Daybreak takes no action within the time permitted for the Subpoenaed Party to respond or if Daybreak’s actions do not result in a judicial order preventing the Subpoenaed Party from supplying or disclosing the requested information or testifying, the Subpoenaed Party may comply with the request.  Daybreak agrees to reimburse and pay the Subpoenaed Party for all costs and expenses incurred by the Subpoenaed Party (or such person) in connection with any such summons or subpoenas concerning Daybreak, including reasonable attorney’s fees and time spent by the Subpoenaed Party ‘s personnel, billed at their regular rates.

7.            Indemnification .  Each party agrees to indemnify and hold the other party, its officers and employees, harmless against any and all claims, lawsuits, judgments, costs, liens, losses, expenses, fees (including reasonable attorney’s fees and costs of defense), proceedings, actions, demands, causes of action, liability and suits of any kind and nature, including but not limited to, personal injury (including death), property damage, or other harm for which recovery damages is sought that may arise out of or be occasioned or caused by each party’s negligent act, error or omission or the negligent act, error or omission of any agent, officer, director, representative, employee, consultant or subconsultant of each party and their respective officers, agents, employees, directors and representatives while in the exercise of performance of the rights or duties under this Agreement.

8.            General .

(a)           This Agreement shall be interpreted and construed in accordance with the laws of the State of Washington without giving effect to principles of conflict of law.  Any action arising in connection with this Agreement must be brought in Spokane County Superior Court, Spokane, Washington.  By this Agreement, the parties confer jurisdiction over the subject matter of and parties to this Agreement.  The party who prevails in any such action will be entitled to an award of the reasonable costs and attorneys’ fees incurred in the action.
 
CONSULTING SERVICES AGREEMENT
-3-

(b)           The terms and conditions set forth in this Agreement are intended by Daybreak and Consultant to constitute the final and complete statement of their agreement, and all prior proposals, communications, negotiations, understandings, and representations relating to the subject matter of this Agreement, whether verbal or written, are hereby superseded.  No modification or amendment of this Agreement shall be effected unless the same is in writing and signed by both parties.

(c)           Any notice required or desired to be given under this Agreement shall be given in writing and sent by certified mail, return receipt requested, addressed as follows:

i.           To Daybreak:

Daybreak Oil and Gas, Inc.
Thomas C. Kilbourne
1012 Washington Mutual Financial Center
601 West Main Avenue
Spokane, Washington 99201

ii.           To Consultant:

Jeffrey R. Dworkin
1001 13 th Ave S.W.
# 320
Calgary, AB  Canada T2R 0RL5

Notice shall be effective upon receipt.

(d)           Consultant consents in advance to Daybreak’s right to assign this Agreement to any successor in interest that expressly assumes Daybreak’s obligations hereunder in writing.  Consultant may not assign its rights and obligations under this Agreement.

(e)      Each of the sections contained herein shall be and remain separate from, independent of, and severable from all and any other sections herein except as otherwise indicated by the context of this Agreement.  Any decision or declaration that one or more of the sections or subsections are null and void shall have no effect on the remaining sections or subsections of this Agreement.

(f)      Upon any termination of employment, Consultant shall within ten (10) business days, deliver or cause to be delivered to the Company all books, documents, effects, monies received in trust, or other property belonging to the Company or its subsidiaries for which the Company or its subsidiaries are liable to others, which are in possession, charge, control, or custody of the Consultant.
 
CONSULTING SERVICES AGREEMENT
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(g)      This Agreement shall inure to the benefit of and be binding upon the Consultant and its heirs, executors, legal personal representatives, and administrators, and upon the Company.
 
(h)       This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and together shall constitute a single agreement.  Facsimile signatures shall be good and sufficient evidence of signature for all purposes of this Agreement.

(i)      The waiver by any party hereto of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach of the same or of any other provisions of this Agreement

The parties have executed this Agreement as of the    31    day of May, 2007.

COMPANY:
Daybreak Oil and Gas, Inc.


By:  /s/ Thomas C. Kilbourne                              
       Thomas C. Kilbourne, Treasurer

CONSULTANT:
Jeffrey R. Dworkin


By:  /s/ Jeffrey R. Dworkin                                   
      Jeffrey R. Dworkin
 
 
 
 
 
CONSULTING SERVICES AGREEMENT
-5-
 
Exhibit 10.37
CONSULTING SERVICES AGREEMENT

This Consulting Services Agreement (“Agreement”) is made as of the 1st day of March, 2007 to the 28th day of February, 2008, by and between Daybreak Oil and Gas, Inc., (“Daybreak”), a Washington corporation, and Michael J. Hooper, an individual.

Whereas , Daybreak desires to be assured of the association and services of the Consultant in order to avail itself of the Consultant’s experience, skills, abilities, knowledge and background as an Accounting and Accounting Systems Analyst, and

Whereas , Daybreak wishes to engage Consultant to provide advisory and other services for Daybreak and Consultant wishes to accept such engagement, all on the terms and conditions set forth herein.

Whereas , the Board of Directors of the Company considers it to be in the best interests of the Company to enter into this Agreement with the Consultant and this Agreement has been duly approved by the Board of Directors of the Company;

Now therefore , in consideration of the mutual promises herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows:

1.             Engagement.   Daybreak hereby engages the Consultant on a non-exclusive basis, and the Consultant hereby accepts the engagement, to become a consultant to Daybreak and to render such advice, consultation, information, and services to the directors and officers of Daybreak regarding accounting system design, accounting input and organization, management reports, internal control procedures and related matters.

The Consultant will report to the person or positions designated by the Company to whom the Consultant will be reporting and will discharge such duties and responsibilities as are assigned to the Consultant from time to time.

The Consultant warrants that he is duly qualified to perform the duties hereunder and further covenants that in performing his duties hereunder, he will not engage in any activity that is in violation of applicable security laws or subject the Corporation to liability thereunder.

It shall be expressly understood that the Consultant shall have no power to bind the Company to any contract or obligation or to transact any business in the Company’s name or on behalf of the Company in any manner.

2.            Term.   The term of this Agreement shall commence on March 1, 2007 and continue in effect until February 29, 2008.  Notwithstanding the foregoing, this Agreement may be terminated prior to the end of the term by either Daybreak or Consultant, for any reason or for no reason, upon thirty (30) days written notice to the other party.  In the event of termination, Consultant shall be entitled to all fees and other consideration contained in this Agreement earned and accrued to the effective date of termination.

CONSULTING SERVICES AGREEMENT
-1-
3.            Compensation.

(a)           Monetary.  In exchange for his commitment to provide services to Daybreak under Section One above, Daybreak agrees to pay Consultant an hourly rate in the amount of Forty Dollars ($40.00) per hour plus out of pocket expenses incurred or advanced on behalf of the Company.

The Consultant shall submit invoices to the Corporation for each month or portion thereof for which services are provided during the period covered by the invoice and also including any proper claim for travel expenses.  Each invoice shall indicate the period covered, the month or portion of a month worked, the rate and the total charge for consulting services.

The Company agrees to pay the invoice within a reasonable period of time following its examination and review by the Treasurer or Chief Financial Officer.

The Company will reimburse the Consultant, at actual cost, for out-of-pocket expenses incurred in accordance with the Corporation’s standard practice for the reimbursement of reasonable travel expenses incurred by its contractors or its own personnel.  The Corporation will also reimburse the Consultant for any reasonable long distance telephone, fax or photocopying charges incurred by the Consultant.  Expenses claimed must be supported by the applicable receipts.

4.            Independent Contractor Status .  In the performance of the work contemplated in this Agreement, Consultant is an independent contractor with the authority to control and direct the performance of the details of the work, Daybreak being interested only in the results obtained.  Consultant is not an agent or employee of Daybreak for any purpose, and the employees of Consultant are not entitled to any of the benefits that Daybreak provides for its employees.  Consultant shall be responsible for payment of all taxes, including federal, state, and local taxes arising out of its activities under this Agreement, including, but not limited to, income tax, social security tax, and unemployment insurance tax that might be due.  It is understood that Daybreak does not agree to use Consultant exclusively.  Nothing in this Agreement shall constitute or be construed as a creation of a partnership or joint venture between Consultant and Daybreak, or their successors or assigns.  The parties acknowledge and agree that Consultant, its principals, associates and employees, are not engaged in the practice of law nor are they engaged in providing legal advice or counsel in connection with their representation of Daybreak.  The parties further acknowledge and agree that any association or referral with or to any law firm by or with Consultant shall not be considered or construed to be the practice of law by Consultant in connection with such association or referral.

5.            Confidential Information .  In the course of providing services for Daybreak, each of Daybreak and Consultant may learn or discover information that is identified by the other as non-public, proprietary information.  Each of Daybreak and Consultant agrees that, during the term of engagement and for a period of twenty-four (24) months thereafter, it will not, directly or indirectly, disclose or use any such information of the other party (“Confidential Information”) without the consent of such party.  Confidential Information shall not include: information which is currently in the public domain or hereafter enters the public domain without the fault or

CONSULTING SERVICES AGREEMENT
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involvement of the receiving party; information known to the receiving party prior to its disclosure by other party and information disclosed to a receiving party from a source (other than the other party) having a lawful right to make such disclosure to the receiving party, or information required to be disclosed under any court order or governmental directive. The terms of this Agreement shall be treated as Confidential Information by both parties.

6.            Summons/Subpoenas .  In the event that Consultant or any party acting on behalf of Consultant (Consultant and any such person being a “Subpoenaed Party”) receives a subpoena or summons requesting that the Subpoenaed Party produce documents or records containing Confidential Information of Daybreak or otherwise pertaining to the services rendered hereunder or testify concerning such Confidential Information of Daybreak or services, the Subpoenaed Party will immediately notify Daybreak.  Daybreak may, within the time permitted for the Subpoenaed Party to respond to any such requests, initiate such legal action seeking a protective order or other relief as Daybreak deems appropriate to protect information from disclosure.  If Daybreak takes no action within the time permitted for the Subpoenaed Party to respond or if Daybreak’s actions do not result in a judicial order preventing the Subpoenaed Party from supplying or disclosing the requested information or testifying, the Subpoenaed Party may comply with the request.  Daybreak agrees to reimburse and pay the Subpoenaed Party for all costs and expenses incurred by the Subpoenaed Party (or such person) in connection with any such summons or subpoenas concerning Daybreak, including reasonable attorney’s fees and time spent by the Subpoenaed Party ‘s personnel, billed at their regular rates.

7.            Indemnification .  Each party agrees to indemnify and hold the other party, its officers and employees, harmless against any and all claims, lawsuits, judgments, costs, liens, losses, expenses, fees (including reasonable attorney’s fees and costs of defense), proceedings, actions, demands, causes of action, liability and suits of any kind and nature, including but not limited to, personal injury (including death), property damage, or other harm for which recovery damages is sought that may arise out of or be occasioned or caused by each party’s negligent act, error or omission or the negligent act, error or omission of any agent, officer, director, representative, employee, consultant or subconsultant of each party and their respective officers, agents, employees, directors and representatives while in the exercise of performance of the rights or duties under this Agreement.

8.            General .

(a)           This Agreement shall be interpreted and construed in accordance with the laws of the State of Washington without giving effect to principles of conflict of law.  Any action arising in connection with this Agreement must be brought in Spokane County Superior Court, Spokane, Washington.  By this Agreement, the parties confer jurisdiction over the subject matter of and parties to this Agreement.  The party who prevails in any such action will be entitled to an award of the reasonable costs and attorneys’ fees incurred in the action.

(b)           The terms and conditions set forth in this Agreement are intended by Daybreak and Consultant to constitute the final and complete statement of their agreement, and all prior proposals, communications, negotiations, understandings, and representations relating to the subject matter of this Agreement, whether verbal or written, are hereby superseded.  No modification or amendment of this Agreement shall be effected unless the same is in writing and signed by both parties.

CONSULTING SERVICES AGREEMENT
-3-
(c)           Any notice required or desired to be given under this Agreement shall be given in writing and sent by certified mail, return receipt requested, addressed as follows:

i.           To Daybreak:

Daybreak Oil and Gas, Inc.
Thomas C. Kilbourne
1012 Washington Mutual Financial Center
601 West Main Avenue
Spokane, Washington 99201

ii.           To Michael J. Hooper:

Michael J. Hooper
601 W. Main Avenue   Suite 1017
Spokane, WA 99201

Notice shall be effective upon receipt.

(d)      Consultant consents in advance to Daybreak’s right to assign this Agreement to any successor in interest that expressly assumes Daybreak’s obligations hereunder in writing.  Consultant may not assign its rights and obligations under this Agreement.

(e)      Each of the sections contained herein shall be and remain separate from, independent of, and severable from all and any other sections herein except as otherwise indicated by the context of this Agreement.  Any decision or declaration that one or more of the sections or subsections are null and void shall have no effect on the remaining sections or subsections of this Agreement.

(f)      Upon any termination of employment, Consultant shall within ten (10) business days, deliver or cause to be delivered to the Company all books, documents, effects, monies received in trust, or other property belonging to the Company or its subsidiaries for which the Company or its subsidiaries are liable to others, which are in possession, charge, control, or custody of the Consultant.

(g)      This Agreement shall inure to the benefit of and be binding upon the Consultant and its heirs, executors, legal personal representatives, and administrators, and upon the Company.
 
(h)       This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and together shall constitute a single agreement.  Facsimile signatures shall be good and sufficient evidence of signature for all purposes of this Agreement.

CONSULTING SERVICES AGREEMENT
-4-

(i)      The waiver by any party hereto of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach of the same or of any other provisions of this Agreement

IN WITNESS WHEREOF, the parties have executed this Agreement as of the 28th day of February, 2007.


COMPANY:
Daybreak Oil and Gas, Inc.


By: /s/ Thomas C. Kilbourne                  
       Thomas C. Kilbourne, Treasurer


CONSULTANT:
Michael J. Hooper


By: /s/ Michael J. Hooper                        
      Michael J. Hooper
 
 
 
 
 
 
 
 
CONSULTING SERVICES AGREEMENT
-5-
Exhibit 10.38
EMPLOYMENT AGREEMENT

 
THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into effective the 1 st day of March, 2007, between Daybreak Oil and Gas Inc., a Washington corporation ("Daybreak, Employer, Company") and Eric L. Moe, ("Employee").

It is agreed as follows:

1. Employment. Employer employs Employee, and Employee accepts employment, upon the terms and conditions set forth in this Agreement.

2. Term. This Agreement begins on March 1, 2007, and continues until May 31, 2007, unless terminated earlier by either party in compliance with this Agreement's provisions governing termination. After May 31, 2007, employment will be month to month subject to approval each month, by the Daybreak Board of Directors.

3. Compensation.

a. Salary. Employer will pay Employee a monthly salary of Ten Thousand Five Hundred ($10,500) dollars during the term of this Agreement. The salary will be paid in accordance with Employer's existing payroll policies for comparable employees. Employee's compensation will be subject to prospective review by Employer in its sole discretion.

b. Fringe Benefits. Employee may receive bonuses during the term of employment as determined by Employer, in its sole discretion. Employee will be entitled to participate in all other fringe benefit programs applicable to comparable employees of Employer. Employer may amend, eliminate, or add to the existing fringe benefit programs in its sole discretion.

4. Duties. Employee will be employed initially as Chief Executive Officer (CEO) of Daybreak, and in such additional or other capacities and offices as may be assigned by the Board of Directors from time to time. The Employee warrants and represents that he is duly qualified to perform the duties hereunder and further covenants that in performing his duties hereunder, he will not engage in any activity that is in violation of applicable security laws or subject the Corporation to liability thereunder.

It shall be expressly understood that the Employee shall have no power to bind the Company to any contract or obligation on behalf of Daybreak in any manner without approval of the Board of Directors.

 
 
 
5. Other Employment. Without the prior consent of Daybreak, Employee is prohibited from directly or indirectly, during the term of this Agreement, rendering services of a business, professional, or commercial nature to any other person, firm or corporation, whether or not the services are rendered for compensation.

6. Vacation Benefits. Employee is entitled to vacation periods with full pay in accordance with established Daybreak policy. Vacation will be scheduled by mutual agreement; however, Employee will be allowed sufficient discretion in scheduling to assure the vacation benefit may be used.

7. Expenses. During the term of employment, Employee is entitled to reimbursement for reasonable business expenses incurred on behalf of Daybreak in accordance with the standard practice for the reimbursement policies and procedures established by Employer. All out-of-pocket expenses submitted for reimbursement, shall be done in a timely manner. Such timely manner shall be defined as the expense reimbursement request shall be received by Employer no later than sixty (60) days after the date of the expense receipt or the occurrence of such expense. Any expense receipt dated sixty (60) days earlier than the expense reimbursement request is received shall not be eligible for reimbursement by Daybreak. If any receipt for a charge on a Company credit card is not submitted to Employer within sixty (60) days of the transaction date, the transaction amount can be charged back to the Employee or be deducted from the Employee’s next payroll check. Compensation provided Employee under this Agreement takes into account Employee's personal obligation to incur and pay certain additional expenses required of Employee as an employee of Employer for which Daybreak is under no obligation to reimburse Employee.

8. Employment at Will. This is an agreement for employment of indefinite duration. The employment relationship may be terminated at will by either party. Termination by either party must be made by written notice to the other party given at least 7 days in advance of the termination date. Upon termination, Employee will be paid accrued unpaid salary prorated in accordance with Employer's general policies and procedures.

9. Employer Business. All business revenues and fees produced or transacted through the efforts of Employee are the sole property of Daybreak. Employee will have no right to the business or to share in any revenues or fees resulting from the conduct of the business other than the compensation provided for in this Agreement.

10. Confidential Information.

a. Disclosure Prohibited. Employee acknowledges that, in the course of this employment, Employee will become acquainted with confidential information belonging to Daybreak. Employee may not, at any time during the period of Employee's employment or thereafter, except as authorized in writing by Daybreak, directly or indirectly, use, disclose, reproduce, or in any other way publicly or privately disseminate any "Confidential Information" as defined.

 
 
 
b. Definition. "Confidential Information" means all information not generally known to the public, which relates to the business of Daybreak or any third parties doing business with Daybreak. By way of example, confidential information includes, but is not limited to, information relating to oil and gas plays, development information on oil and gas prospects, fundraising plans, customers and customer lists, pricing, contracts, costs and other financial information, merchandising and marketing techniques, inventions, plans specifications, and products disclosed to or known by Employee in connection with his employment by Employer.

11. Protection of Daybreak Property. All records, files, manuals, lists of customers, blanks, forms, materials, supplies, computer programs, and other materials furnished to Employee by Daybreak, used on its behalf, or generated or obtained during the course of this employment remain the property of Daybreak. Employee is only a holder of this property for the sole use and benefit of Employer and will safely keep and preserve such property, except as consumed in the normal business operation of Employer. Upon termination of this employment, Employee will immediately deliver to Daybreak, or its authorized representative, all of Daybreak's property, including all copies, remaining in Employee's possession or control.

12. Remedies. The parties recognize that irreparable injury will result to Daybreak and its business and property if Employee breaches the covenant of confidentiality contained in Section 10 of this Agreement. It is agreed that if Employee breaches the covenant of confidentiality, Daybreak will be entitled to an injunction to restrain further breach of that covenant by Employee or any of Employee's partners, agents, employers and employees, or any persons acting for or with Employee, in addition to any other remedies Daybreak may have.

13. Assignability. These contractual obligations of Employee are personal and neither the rights nor obligations under this Agreement may be assigned or transferred by Employee to any other person. This Agreement will bind and benefit any successor of Employer, whether by merger, sale of assets, reorganization or other form of business acquisition, disposition, or business reorganization.

14. Amendment. This Agreement contains the entire understanding of the parties. This Agreement may be changed only by a written document signed by Employee and Daybreak.

15. Notices. All notices and other communications required or permitted to be given by this Agreement must be in writing and must be given and will be deemed received if and when either hand-delivered and a signed receipt is given, or mailed by registered or certified U.S. mail, return receipt requested, postage prepaid, and if to Employer to:

 
 
 

Daybreak Oil and Gas, Inc.
601 W. Main Avenue  Suite 1012
Spokane, WA 99201

And, if to Employee to:

Eric L. Moe
8305 North Colton Place
Spokane, WA 99201

Either party may change the address to which notice to it is to be addressed by notifying the other party of the change.

16. Enforcement. This Agreement is to be construed in accordance with the laws of the State of Washington. Any action arising in connection with this Agreement must be brought in Spokane County Superior Court, Spokane, Washington. By this Agreement, the parties confer jurisdiction over the subject matter of and parties to this Agreement. The party who prevails in any such action will be entitled to an award of the reasonable costs and attorneys' fees incurred in the action.

IN WITNESS WHEREOF, the parties have executed this Agreement.
 
  "EMPLOYER"     “EMPLOYEE”  
           
  Daybreak Oil and Gas Inc.,        
  a Washington corporation        
           
           
By:
/s/ Thomas C. Kilbourne
   
/s/ Eric L. Moe
 
Its:
Treasurer
   
Eric L. Moe
 
       
 
 

Exhibit 10.39
EMPLOYMENT AGREEMENT

 
THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into effective the 1 st day of March, 2007, between Daybreak Oil and Gas Inc., a Washington corporation (“Daybreak”, "Employer", “Company”) and Bennett W. Anderson, ("Employee").

It is agreed as follows:

1. Employment. Employer employs Employee, and Employee accepts employment, upon the terms and conditions set forth in this Agreement.

2. Term. This Agreement begins on March 1, 2007, and continues until February 28, 2008, unless terminated earlier by either party in compliance with this Agreement's provisions governing termination.

3. Compensation.

a. Salary. Employer will pay Employee a monthly salary of Ten Thousand Five Hundred ($10,500) dollars during the term of this Agreement. The salary will be paid in accordance with Employer's existing payroll policies for comparable employees. Employee's compensation will be subject to prospective review by Employer in its sole discretion.

b. Fringe Benefits. Employee may receive bonuses during the term of employment as determined by Employer, in its sole discretion. Employee will be entitled to participate in all other fringe benefit programs applicable to comparable employees of Employer. Employer may amend, eliminate, or add to the existing fringe benefit programs in its sole discretion.

4. Duties. Employee will be employed initially as Chief Operating Officer of Daybreak, and in such additional or other capacities and offices as may be assigned by the Board of Directors from time to time. The Employee warrants and represents that he is duly qualified to perform the duties hereunder and further covenants that in performing his duties hereunder, he will not engage in any activity that is in violation of applicable security laws or subject the Corporation to liability thereunder.

It shall be expressly understood that the Employee shall have no power to bind the Company to any contract or obligation on behalf of Daybreak in any manner without approval of the Board of Directors.

5. Other Employment. Without the prior express written authorization of Daybreak, Employee is prohibited from directly or indirectly, during the term of this Agreement, rendering services of a business, professional, or commercial nature to any other person, firm or corporation, whether or not the services are rendered for compensation.
 
Employment Agreement: 1 of 4
 
 

6. Vacation Benefits. Employee is entitled to vacation periods with full pay in accordance with established Daybreak policy. Vacation will be scheduled by mutual agreement; however, Employee will be allowed sufficient discretion in scheduling to assure the vacation benefit may be used.

7. Expenses. During the term of employment, Employee is entitled to reimbursement for reasonable business expenses incurred on behalf of Daybreak in accordance with the standard practice for the reimbursement policies and procedures established by Employer. All out-of-pocket expenses submitted for reimbursement, shall be done in a timely manner. Such timely manner shall be defined as the expense reimbursement request shall be received by Employer no later than sixty (60) days after the date of the expense receipt or the occurrence of such expense. Any expense receipt dated sixty (60) days earlier than the expense reimbursement request is received shall not be eligible for reimbursement by Daybreak. If any receipt for a charge incurred on a Company credit card is not submitted to Employer within sixty (60) days of the transaction date, the transaction amount can be charged back to the Employee or be deducted from the Employee’s next payroll check. Compensation provided Employee under this Agreement takes into account Employee's personal obligation to incur and pay certain additional expenses required of Employee as an employee of Employer for which Daybreak is under no obligation to reimburse Employee.

8. Employment at Will. This is an agreement for employment of indefinite duration. The employment relationship may be terminated at will by either party. Termination by either party must be made by written notice to the other party given at least 7 days in advance of the termination date. Upon termination, Employee will be paid accrued unpaid salary prorated in accordance with Employer's general policies and procedures.

9. Employer Business. All business revenues and fees produced or transacted through the efforts of Employee are the sole property of Daybreak. Employee will have no right to the business or to share in any revenues or fees resulting from the conduct of the business other than the compensation provided for in this Agreement.

10. Confidential Information.

a. Disclosure Prohibited. Employee acknowledges that, in the course of this employment, Employee will become acquainted with confidential information belonging to Daybreak. Employee may not, at any time during the period of Employee's employment or thereafter, except as authorized in writing by Daybreak, directly or indirectly, use, disclose, reproduce, or in any other way publicly or privately disseminate any "Confidential Information" as defined.
 
Employment Agreement: 2 of 4
 
 
 
b. Definition. "Confidential Information" means all information not generally known to the public, which relates to the business of Daybreak or any third parties doing business with Daybreak. By way of example, confidential information includes, but is not limited to, information relating to oil and gas plays, development information on oil and gas prospects, fundraising plans, customers and customer lists, pricing, contracts, costs and other financial information, merchandising and marketing techniques, inventions, plans specifications, and products disclosed to or known by Employee in connection with his employment by Employer.

11. Protection of Daybreak Property. All records, files, manuals, lists of customers, blanks, forms, materials, supplies, computer programs, and other materials furnished to Employee by Daybreak, used on its behalf, or generated or obtained during the course of this employment remain the property of Daybreak. Employee is only a holder of this property for the sole use and benefit of Employer and will safely keep and preserve such property, except as consumed in the normal business operation of Employer. Upon termination of this employment, Employee will immediately deliver to Daybreak, or its authorized representative, all of Daybreak’s property, including all copies, remaining in Employee's possession or control.

12. Remedies. The parties recognize that irreparable injury will result to Daybreak and its business and property if Employee breaches the covenant of confidentiality contained in Section 10 of this Agreement. It is agreed that if Employee breaches the covenant of confidentiality, Daybreak will be entitled to an injunction to restrain further breach of that covenant by Employee or any of Employee's partners, agents, employers and employees, or any persons acting for or with Employee, in addition to any other remedies Daybreak may have.

13. Assignability. These contractual obligations of Employee are personal and neither the rights nor obligations under this Agreement may be assigned or transferred by Employee to any other person. This Agreement will bind and benefit any successor of Employer, whether by merger, sale of assets, reorganization or other form of business acquisition, disposition, or business reorganization.

14. Amendment. This Agreement contains the entire understanding of the parties. This Agreement may be changed only by a written document signed by Employee and Daybreak.

15. Notices. All notices and other communications required or permitted to be given by this Agreement must be in writing and must be given and will be deemed received if and when either hand-delivered and a signed receipt is given, or mailed by registered or certified U.S. mail, return receipt requested, postage prepaid, and if to Employer to:

Daybreak Oil and Gas, Inc.
601 W. Main Ave.  Suite 1012
Spokane, WA 99201

 
Employment Agreement: 3 of 4
 
 

And, if to Employee to:

Bennett W. Anderson
1023 E. 760 South
Orem, UT 84097

Either party may change the address to which notice to it is to be addressed by notifying the other party of the change.

16. Enforcement. This Agreement is to be construed in accordance with the laws of the State of Washington. Any action arising in connection with this Agreement must be brought in Spokane County Superior Court, Spokane, Washington. By this Agreement, the parties confer jurisdiction over the subject matter of and parties to this Agreement. The party who prevails in any such action will be entitled to an award of the reasonable costs and attorneys' fees incurred in the action.

IN WITNESS WHEREOF, the parties have executed this Agreement.

 
  "EMPLOYER"     “EMPLOYEE”  
           
  Daybreak Oil and Gas Inc.,        
  a Washington corporation        
           
           
By:
/s/ Thomas C. Kilbourne
   
/s/ Bennett W. Anderson
 
           
 
Its: Treasurer
   
Bennett W. Anderson
 
 
 
 
 
 
 
 
 
 
 
Employment Agreement: 4 of 4

Exhibit 10.40
EMPLOYMENT AGREEMENT

 
THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into effective the 1 st day of March, 2007, between Daybreak Oil and Gas Inc., a Washington corporation (“Daybreak”, "Employer", “Company”) and Thomas C. Kilbourne, ("Employee").

It is agreed as follows:

1. Employment. Employer employs Employee, and Employee accepts employment, upon the terms and conditions set forth in this Agreement.

2. Term. This Agreement begins on March 1, 2007, and continues until February 28, 2008, unless terminated earlier by either party in compliance with this Agreement's provisions governing termination.

3. Compensation.

a. Salary. Employer will pay Employee a monthly salary of Eight Thousand Five Hundred ($8,500) dollars during the term of this Agreement. The salary will be paid in accordance with Employer's existing payroll policies for comparable employees. Employee's compensation will be subject to prospective review by Employer in its sole discretion.

b. Fringe Benefits. Employee may receive bonuses during the term of employment as determined by Employer, in its sole discretion. Employee will be entitled to participate in all other fringe benefit programs applicable to comparable employees of Employer. Employer may amend, eliminate, or add to the existing fringe benefit programs in its sole discretion.

4. Duties. Employee will be employed initially as Controller and Treasurer of Daybreak, and in such additional or other capacities and offices as may be assigned by the Board of Directors from time to time. The Employee warrants and represents that he is duly qualified to perform the duties hereunder and further covenants that in performing his duties hereunder, he will not engage in any activity that is in violation of applicable security laws or subject the Corporation to liability thereunder.

It shall be expressly understood that the Employee shall have no power to bind the Company to any contract or obligation on behalf of Daybreak in any manner without approval of the Board of Directors.

5. Other Employment. Without the prior express written authorization of Daybreak, Employee is prohibited from directly or indirectly, during the term of this Agreement,
 
Employment Agreement: 1 of 4
 
 
rendering services of a business, professional, or commercial nature to any other person, firm or corporation, whether or not the services are rendered for compensation.

6. Vacation Benefits. Employee is entitled to vacation periods with full pay in accordance with established Daybreak policy. Vacation will be scheduled by mutual agreement; however, Employee will be allowed sufficient discretion in scheduling to assure the vacation benefit may be used.

7. Expenses. During the term of employment, Employee is entitled to reimbursement for reasonable business expenses incurred on behalf of Daybreak in accordance with the standard practice for the reimbursement policies and procedures established by Employer. All out-of-pocket expenses submitted for reimbursement, shall be done in a timely manner. Such timely manner shall be defined as the expense reimbursement request shall be received by Employer no later than sixty (60) days after the date of the expense receipt or the occurrence of such expense. Any expense receipt dated sixty (60) days earlier than the expense reimbursement request is received shall not be eligible for reimbursement by Daybreak. If any receipt for a charge incurred on a Company credit card is not submitted to Employer within sixty (60) days of the transaction date, the transaction amount can be charged back to the Employee or be deducted from the Employee’s next payroll check. Compensation provided Employee under this Agreement takes into account Employee's personal obligation to incur and pay certain additional expenses required of Employee as an employee of Employer for which Daybreak is under no obligation to reimburse Employee.

8. Employment at Will. This is an agreement for employment of indefinite duration. The employment relationship may be terminated at will by either party. Termination by either party must be made by written notice to the other party given at least 7 days in advance of the termination date. Upon termination, Employee will be paid accrued unpaid salary prorated in accordance with Employer's general policies and procedures.

9. Employer Business. All business revenues and fees produced or transacted through the efforts of Employee are the sole property of Daybreak. Employee will have no right to the business or to share in any revenues or fees resulting from the conduct of the business other than the compensation provided for in this Agreement.

10. Confidential Information.

a. Disclosure Prohibited. Employee acknowledges that, in the course of this employment, Employee will become acquainted with confidential information belonging to Daybreak. Employee may not, at any time during the period of Employee's employment or thereafter, except as authorized in writing by Daybreak, directly or indirectly, use, disclose, reproduce, or in any other way publicly or privately disseminate any "Confidential Information" as defined.
 
Employment Agreement: 2 of 4
 
 

b. Definition. "Confidential Information" means all information not generally known to the public, which relates to the business of Daybreak or any third parties doing business with Daybreak. By way of example, confidential information includes, but is not limited to, information relating to oil and gas plays, development information on oil and gas prospects, fundraising plans, customers and customer lists, pricing, contracts, costs and other financial information, merchandising and marketing techniques, inventions, plans specifications, and products disclosed to or known by Employee in connection with his employment by Employer.

11. Protection of Daybreak Property. All records, files, manuals, lists of customers, blanks, forms, materials, supplies, computer programs, and other materials furnished to Employee by Daybreak, used on its behalf, or generated or obtained during the course of this employment remain the property of Daybreak. Employee is only a holder of this property for the sole use and benefit of Employer and will safely keep and preserve such property, except as consumed in the normal business operation of Employer. Upon termination of this employment, Employee will immediately deliver to Daybreak, or its authorized representative, all of Daybreak’s property, including all copies, remaining in Employee's possession or control.

12. Remedies. The parties recognize that irreparable injury will result to Daybreak and its business and property if Employee breaches the covenant of confidentiality contained in Section 10 of this Agreement. It is agreed that if Employee breaches the covenant of confidentiality, Daybreak will be entitled to an injunction to restrain further breach of that covenant by Employee or any of Employee's partners, agents, employers and employees, or any persons acting for or with Employee, in addition to any other remedies Daybreak may have.

13. Assignability. These contractual obligations of Employee are personal and neither the rights nor obligations under this Agreement may be assigned or transferred by Employee to any other person. This Agreement will bind and benefit any successor of Employer, whether by merger, sale of assets, reorganization or other form of business acquisition, disposition, or business reorganization.

14. Amendment. This Agreement contains the entire understanding of the parties. This Agreement may be changed only by a written document signed by Employee and Daybreak.

15. Notices. All notices and other communications required or permitted to be given by this Agreement must be in writing and must be given and will be deemed received if and when either hand-delivered and a signed receipt is given, or mailed by registered or certified U.S. mail, return receipt requested, postage prepaid, and if to Employer to:

Daybreak Oil and Gas, Inc.
601 W. Main Ave.  Suite 1012
Spokane, WA 99201
 
Employment Agreement: 3 of 4
 
 


And, if to Employee to:

Thomas C. Kilbourne
P.O. Box 953
Osburn, ID 83849

Either party may change the address to which notice to it is to be addressed by notifying the other party of the change.

16. Enforcement. This Agreement is to be construed in accordance with the laws of the State of Washington. Any action arising in connection with this Agreement must be brought in Spokane County Superior Court, Spokane, Washington. By this Agreement, the parties confer jurisdiction over the subject matter of and parties to this Agreement. The party who prevails in any such action will be entitled to an award of the reasonable costs and attorneys' fees incurred in the action.

IN WITNESS WHEREOF, the parties have executed this Agreement.
 
"EMPLOYER"   “EMPLOYEE”  
           
Daybreak Oil and Gas Inc.,        
a Washington corporation        
           
           
By:
/s/ Terrence J. Dunne
   
/s/ Thomas C. Kilbourne
 
Its:
Chief Financial Officer
   
Thomas C. Kilbourne
 
 
 
   
Title
 


Employment Agreement: 4 of 4
Exhibit 10.41
Daybreak Oil and Gas, Inc.
601 West Main Ave    Suite 1017                Spokane, WA   99201
Off: (509) 232-7674                            Fax: (509) 455-8483



OFFICE LEASE AGREEMENT

BETWEEN:  TERRANCE J. DUNNE & ASSOCIATES INC. (The Tenant)

AND

DAYBREAK OIL AND GAS, INC. (The Subtenant)


WHEREAS, the Tenant leases a total of 3,136 rentable square feet from Joshua Green Corporation (The Landlord) pursuant to a Lease Renewal and Modification Agreement for the term commencing on May 1, 2007 and ending on April 30, 2008;

AND WHEREAS, the Subtenant has agreed to sublease from the Tenant certain offices and storage space from the Tenant consisting of approximately 1,000 square feet plus use of common area (Schedule “B”).

NOW THEREFORE, in consideration of the foregoing, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

1.
Term

The term of this Agreement shall commence on the first day of May 2007 and shall be on a month to month basis. This Agreement may be extended upon agreement by both parties.

2.
Rent

The Subtenant shall pay to the Tenant $1,250.00 on the first day of each month during the term of this Agreement. If this Agreement is extended the rent shall be modified in accordance with Schedule “C”.

3.
Mutual Covenants

The Tenant agrees to comply with the terms and conditions of the Lease Renewal and Modification Agreement and to pay the rent to the Landlord in the amounts and at the times as stipulated therein and to refrain from such acts as would cause the Landlord to terminate the Lease.

 
 
 
The Subtenant agrees to conduct its’ business and affairs in such manner so as to comply with the terms and conditions of Lease Agreement dated February 1, 2002 between the Tenant and the Landlord as amended or renewed.

4.
Waiver

No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision and no waiver shall constitute a continuing waiver. No waiver shall be binding unless executed in writing by the party making the waiver.

5.
Complete Agreement

No supplement, modification or amendment of the Agreement shall be binding unless executed in writing by all parties. This Agreement constitutes the entire agreement between the parties and supersedes any prior agreements or negotiations.

6.
General Provisions

a.
This Agreement shall in all respects be interpreted, enforced and governed under the laws of State of Washington. The language and all parts of this Agreement shall be in all cases construed as a whole and not strictly for or against any individual party.

b.
Any dispute arising under in any way related to this agreement shall be submitted to binding arbitration by the American Arbitration Association in accordance with the Association’s commercial rules then in effect. The arbitration may be conducted in person, by telephone or online as agreed by all parties. The arbitration shall be binding on the parties and the arbitration award may be confirmed by ant court of competent jurisdiction.


IN WITNESS WHEREOF, the parties hereto have entered into this Agreement effective the 1 st day of May 2007.
 
Daybreak Oil and Gas, Inc.     Terrence J. Dunne & Associates  
         
         
/s/ Thomas C. Kilbourne
   
/s/ Terrence J. Dunne
 
Thomas C. Kilbourne, Treasurer 
   
Terrence J. Dunne
 
 
   
Title
 
         
Date:        5/01/07          Date:        5/01/07       

Exhibit 31.1
 
Certification
I, Eric L. Moe , certify that:

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

Date:   September 20, 2007


By: /s/  ERIC L MOE                          
Eric L. Moe , Chief Executive Officer

 
Exhibit 31.2
 

Certification
I, Thomas C. Kilbourne, certify that:

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

Date:   September 20, 2007


By: /s/ THOMAS C. KILBOURNE                               
Thomas C. Kilbourne, Principal Accounting Officer
Exhibit 32.1

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

In connection with the Annual Report of Daybreak Oil and Gas, Inc., (the "Company") on Form 10-KSB for the period ending February 28, 2007, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Eric L. Moe, Chief Executive Officer of Daybreak Oil and Gas, Inc. Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 
Date:   September 20, 2007

 
By: /s/  ERIC L MOE                           
Eric L. Moe, Chief Executive Officer
 





 

 

 
Exhibit 32.2

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

In connection with the Annual Report of Daybreak Oil and Gas, Inc., (the "Company") on Form 10-KSB for the period ending February 28, 2007, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Thomas C. Kilbourne , Principal Accounting Officer of Daybreak Oil and Gas, Inc. Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 
Date:   September 20, 2007

 
By: /s/  THOMAS C. KILBOURNE
Thomas C. Kilbourne , Principal Accounting Officer