##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-KSB/A
 AMENDMENT NO. 1
  þ
    
    ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended February 29, 2008
 o
    
    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.
  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)
    o
 þ o
   Large accelerated filer o
    
    Accelerated filer
o
    
    Non-accelerated filer þ
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ
      o þ




---



##### Table of Contents



EXPLANATORY NOTE
     2




---



##### 



TABLE OF CONTENTS
 PAGEPART I
    
    
    5ITEM 1. DESCRIPTION OF BUSINESS
    
    
    5ITEM 2. DESCRIPTION OF PROPERTIES
    
    
    24ITEM 3. LEGAL PROCEEDINGS
    
    
    29ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    29PART II
    
    
    30ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER
PURCHASE OF EQUITY SECURITIES
    
    
    30ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
    
    
    53ITEM 7. FINANCIAL INFORMATION
    
    
    67ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
    
    
    100ITEM 8A. CONTROLS AND PROCEDURES
    
    
    100ITEM 8B. OTHER INFORMATION
    
    
    102PART III
    
    
    103ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION
16(A) OF THE EXCHANGE ACT
    
    
    103ITEM 10. EXECUTIVE COMPENSATION
    
    
    103ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
    
    
    103ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
    
    
    103ITEM 13. EXHIBITS
    
    
    104ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    106SIGNATURES
    
    
    107Certification of Timothy R. LindseyCertification of James F. WestmorelandCertification of Timothy R. LindseyCertification of James F. Westmoreland
  3




---



##### Table of Contents



CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS
  
    
    Our future operating results,
    
    Our future capital expenditures,
    
    Our expansion and growth of operations, and
    
    Our future investments in and acquisitions of oil and natural gas properties.
  
    
    General economic and business conditions,
    
    Exposure to market risks in our financial instruments,
    
    Fluctuations in worldwide prices and demand for oil and natural gas,
    
    Fluctuations in the levels of our oil and natural gas exploration and
development activities,
    
    Risks associated with oil and natural gas exploration and development
activities,
    
    Competition for raw materials and customers in the oil and natural gas industry,
    
    Technological changes and developments in the oil and natural gas industry,
    
    Regulatory uncertainties and potential environmental liabilities,
    
    Additional matters discussed under Risk Factors.
 4




---



##### Table of Contents



PART I
 
 ITEM 1. DESCRIPTION OF BUSINESS
 Background
   Oil and Gas Overview
    5




---



##### Table of Contents



Historical Business Development
             6




---



##### Table of Contents



7




---



##### Table of Contents



8




---



##### Table of Contents



Competition
  Significant Customers
  Title to Properties
  Long Term Success
  Regulation
  9




---



##### Table of Contents



RISK FACTORS
  Risks related to investment in our Company
 We have experienced significant operating losses in the past and there can be no assurance that we
will become profitable in the future even with the sale of our Tuscaloosa property
  We are an early stage oil and gas exploration company with a limited operating history on which to
base an investment decision
  The resale of shares offered in private placements could depress the value of the shares
  10




---



##### Table of Contents



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
     We are an exploration stage company implementing a new business plan making it difficult to
evaluate our chance for success
  The oil and gas business is highly competitive placing us at an operating disadvantage
   
    
    access capital markets;
 
    
    recruit more qualified personnel;
 
    
    absorb the burden of any changes in laws and regulation in applicable jurisdictions;
 
    
    handle longer periods of reduced prices of gas and oil;
 
    
    acquire and evaluate larger volumes of critical information;
 
    
    compete for industry-offered business ventures.
  11




---



##### Table of Contents



We cannot guarantee financial results, making it more difficult to raise additional capital
  Our ability to reach and maintain profitable operating results is dependant on our ability to find,
acquire, and develop oil and gas properties
  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
    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
  12




---



##### Table of Contents



Our financial condition will deteriorate if we are unable to retain our interests in our leased oil
and gas properties
   Title deficiencies could render our oil and gas leases worthless; thus damaging the financial
condition of our business
   Reliance on certain third party vendors for outsourced services could be detrimental to our
business plan
  13




---



##### Table of Contents



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
   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 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
  14




---



##### Table of Contents



We may lose key management personnel which could endanger the future success of our oil and gas
operations
  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
       15




---



##### Table of Contents



The market price of our common stock could be volatile, which may cause the investment value of our
stock to decline
     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
     16




---



##### Table of Contents



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
    
    
    conversion into common stock of the Company anytime the preferred shareholder may wish;
 17




---



##### Table of Contents




    
    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.
   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
  Principal shareholders and directors control the Company through substantial voting power
   We do not anticipate paying dividends on our common stock which could devalue the market value of
these securities
  18




---



##### Table of Contents



Pursuant to SEC Rules our common stock is classified as a penny stock increasing the risk of
investment in these shares
  
    
    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
customers 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.
  Due to limited and sporadic trading volume, investors may not be able to resell their shares of
common stock at favorable times and prices
  An investment in the common stock of our Company will not provide any federal income tax benefits
for the shareholders
  19




---



##### Table of Contents



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
  
    
    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 volatility of oil and natural gas prices could adversely affect our business
  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
  20




---



##### Table of Contents



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
  Employees and Consultants
      21




---



##### Table of Contents



Availability of SEC Filings
  Website / Available Information
 www.daybreakoilandgas.com www.daybreakoilandgas.com
 www.daybreakoilandgas.com www.daybreakoilandgas.com
 
 22




---



##### Table of Contents



23




---



##### Table of Contents



ITEM 2. DESCRIPTION OF PROPERTIES
  Alabama (East Gilbertown Field)
 Choctaw County.
  Reserves
  California
 East Slopes Project in Kern and Tulare Counties
    24




---



##### Table of Contents



Louisiana
 Tuscaloosa Project in Tensas and Franklin Parishes
 Reserves
  The Krotz Springs Project in St. Landry Parish
 Reserves
  The North Shuteston Prospect
 25




---



##### Table of Contents



Avoyelles Parish.
 Texas
 Nueces County
    Reserves
  26




---



##### Table of Contents



Total Reserves
  Summary Operating Data
  Oil
    
    GasNet
    
    Net
    
    Net
    
    NetState
    
    Field
    
    Barrels
    
    Revenue
    
    Mcf
    
    RevenueLouisiana
    
    Tuscaloosa
    
    
    4,231
    
    
    $
    359,012
    
    
    
    37,641
    
    
    $
    291,742Krotz Springs
    
    
    89
    
    
    
    7,141
    
    
    
    7,777
    
    
    
    67,599Texas
    
    Saxet
    
    
    236
    
    
    
    17,679
    
    
    
    22,063
    
    
    
    155,222Alabama
    
    Gilbertown
    
    
    2,235
    
    
    
    119,209
    
    
    
    
    
    
    
    Total
    
    
    
    
    6,791
    
    
    $
    503,041
    
    
    
    67,481
    
    
    $
    514,563
  Years Ended,February 29,
    
    February 28,2008
    
    2007Average Sales Price:Gas (per Mcf)
    
    $
    7.63
    
    
    $
    6.62Oil (per Bbl)
    
    $
    74.84
    
    
    $
    65.10Average Cost of Production:Oil (per Bbl)
    
    $
    25.12
    
    
    $
    24.81
 27




---



##### Table of Contents



Developed Acres
    
    Undeveloped AcresLocation
    
    Gross
    
    Net
    
    Gross
    
    NetAlabama
    
    
    2,025
    
    
    
    253
    
    
    
    
    
    
    
    Texas
    
    
    320
    
    
    
    81
    
    
    
    
    
    
    
    Louisiana
    
    
    6,762
    
    
    
    2,803
    
    
    
    13,524
    
    
    
    5,606California
    
    
    
    
    
    
    
    
    
    
    25,633
    
    
    
    12,817Total
    
    
    9,107
    
    
    
    3,137
    
    
    
    39,157
    
    
    
    18,423
  State
    
    Field
    
    Gross
    
    NetLouisiana
    
    Tuscaloosa
    
    
    3
    
    
    
    1.25Krotz Springs
    
    
    1
    
    
    
    0.13Texas
    
    Saxet
    
    
    3
    
    
    
    0.76Alabama
    
    Gilbertown
    
    
    19
    
    
    
    2.38Total
    
    
    
    
    26
    
    
    
    4.5
  Fiscal Year 2008
    
    Fiscal Year 2007State
    
    Productive
    
    Dry
    
    Productive
    
    DryLouisiana
    
    
    2
    
    
    
    1
    
    
    
    2
    
    
    
    1Texas
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Canada
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
 28




---



##### Table of Contents



ITEM 3. LEGAL PROCEEDINGS
 th
    
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  29




---



##### Table of Contents



PART II
 
 ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASE
OF EQUITY SECURITIES
  Fiscal Year Ending
    
    High
    
    LowFebruary 28, 2007
    
    Closing
    
    ClosingFirst Quarter
    
    $
    2.95
    
    
    $
    1.66Second Quarter
    
    $
    2.77
    
    
    $
    1.85Third Quarter
    
    $
    1.92
    
    
    $
    1.02Fourth Quarter
    
    $
    1.30
    
    
    $
    0.94
 Fiscal Year Ending
    
    High
    
    LowFebruary 29, 2008
    
    Closing
    
    ClosingFirst Quarter
    
    $
    0.95
    
    
    $
    0.48Second Quarter
    
    $
    0.70
    
    
    $
    0.39Third Quarter
    
    $
    0.62
    
    
    $
    0.35Fourth Quarter
    
    $
    0.45
    
    
    $
    0.25
 Dividend Policy
   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:
 30




---



##### Table of Contents



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




---



##### Table of Contents



32




---



##### Table of Contents



33




---



##### Table of Contents



34




---



##### Table of Contents




    
    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
 35




---



##### Table of Contents



36




---



##### Table of Contents




    
    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 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.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 free 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 was 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
free 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 was amortized using the effective
interest method until maturity.On October 31, 2007, one of the two remaining convertible debenture holders chose to receive
a payoff of $76,756.87 representing the principal plus accumulated interest of the
convertible debenture. The other convertible debenture holder agreed to extend the term of
 37




---



##### Table of Contents



his debenture until January 31, 2008. In consideration of the term extension he received
90,000 warrants. The warrants were valued at $25,587 using the Black-Scholes option pricing
model. The assumptions used in the Black-Scholes valuation model were: a risk free interest
rate of 3.9 %; the current stock price at date of issuance of $0.40 per share; the exercise
price of the warrants of $0.25; the term of two years; volatility of 121.64%; 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 was amortized using the effective
interest method until maturity.On January 31, 2008, the remaining convertible debenture holder received a payoff of
$128,151.71 representing the principal plus accumulated interest of the convertible
debenture.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
    38




---



##### Table of Contents



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.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
 39




---



##### Table of Contents



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 (former Chief Financial Officer and director) 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 an
unregistered offering through 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:
 
 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 free 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%.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
 40




---



##### Table of Contents



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 free 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. Joseph Lavigne, 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 free
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.In February 2008, Daybreak issued goodwill common stock warrants to the participants of
the Spring 2006 private placement. The warrants were issued as a goodwill gesture to
investors in the two 2006 private placements due to the inability to complete the respective
registration statements; recognizing, this was a result of regulatory process delays rather
than any fault of the Company. Each participant was offered one goodwill warrant for every
unit that had been purchased in exchange waiving their rights under the Registration Rights
Agreement. On November 6, 2007, the date our Board approved issuing these goodwill
 41




---



##### Table of Contents



warrants, the closing price of our stock was $0.40 As of May 9, 2008, we have received
Registration Rights waiver letters from approximately 80% of the participants in this
private placement. The warrants will expire on February 14, 2010, have an exercise price of
$0.65 and contain a cashless exercise provision. We have currently issued 3,162,934 goodwill
warrants to these investors. A total of 4,013,602 warrants could be issued and were valued
at $847,186 using the Black-Scholes option pricing model. The assumptions used in the
Black-Scholes valuation model were: a risk free interest rate of 3.7 %; a term of two years;
volatility of 121.67%; and dividend yield of 0.0%.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 value of the Common Stock and the Common Stock Purchase Warrants was as
follows:
 Relative FairDescription
    
    Shares
    
    
    Value AmountCommon Stock
    
    
    8,027,206
    
    
    $
    4,241,232Common Stock Purchase Warrants
    
    
    4,013,602
    
    
    
    1,779,172Total Proceeds
    
    
    
    
    
    
    6,020,404Placement 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:
 
 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
 42




---



##### Table of Contents



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.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 free 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. Joseph
Lavigne, 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 free 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
 43




---



##### Table of Contents



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 agreed to register the Series A Preferred shares on a best efforts basis. If
Daybreak was unable to file the registration statement within the filing timeline, Daybreak
would have to issue 1,399,765 additional warrants at an exercise price of $2.00 per share.
Daybreak was required to file the registration statement within sixty (60) days after the
registration statement for the common stock private placement from the May of 2006 became
effective. Daybreak did file the registration statement on time and no additional warrant
issuances were required.In February 2008, Daybreak issued goodwill common stock warrants to the participants of
the July 2006 private placement. The warrants were issued as a goodwill gesture to investors
in the two 2006 private placements due to the inability to complete the respective
registration statement; recognizing, this was a result of regulatory process delays rather
than any fault of the Company. Each participant was offered one goodwill warrant for every
unit that had been purchased in exchange waiving their rights under the Registration Rights
Agreement. On November 6, 2007, the date our Board approved issuing these goodwill
warrants, the closing price of our stock was $0.40 As of May 9, 2008, we have received
Registration Rights waiver letters from approximately 84% of the participants in this
private placement. The warrants will expire on February 14, 2010, have an exercise price of
$0.65 and contain a cashless exercise provision. We have currently issued 1,170,264 goodwill
warrants to these investors. A total of 1,399,765 warrants could be issued and were valued
at $295,498 using the Black-Scholes option pricing model. The assumptions used in the
Black-Scholes valuation model were: a risk free interest rate of 3.7 %; a term of two years;
volatility of 121.67%; and dividend yield of 0.0%.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:
 Relative FairDescription
    
    Shares
    
    
    Value AmountSeries A Convertible Preferred
    
    
    1,399,765
    
    
    $
    2,710,073Common Stock Purchase Warrants
    
    
    2,799,530
    
    
    
    1,489,222Total Proceeds
    
    
    
    
    
    
    4,199,295Offering Costs
    
    
    
    
    
    
    (573,091
    )Net Proceeds
    
    
    
    
    
    $
    3,626,204
 44




---



##### Table of Contents



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:
 
 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.From March 26, 2007 through February 29, 2008, ten (10) Series A Convertible Preferred
shareholders, owning a total of 102,300 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 306,900 shares of common stock being issued.
    
    Commencing on October 19, 2007 and closing on December 28, 2007, we conducted an
unregistered offering through a private placement of our common stock under the securities
transaction exemption Regulation D Rule 506 of the Securities Act of 1933. Shares were
offered at $0.25 per share to accredited investors only as defined in Regulation D under
the Securities Act of 1933. The shares were sold directly by Daybreak and no placement
agent was involved in the offering. A total of 2,497,000 shares of unregistered common
stock were sold to thirteen (13) investors resulting in $624,250 in gross proceeds.
Offering expenses were approximately $6,500. Net proceeds were used to meet our drilling
commitments in the Tuscaloosa project and general and administrative expenses.
    
    Commencing on January 2, 2008 we began conducting an unregistered offering through a
private placement of our common stock under the securities transaction exemption Regulation
D Rule 506 of the Securities Act of 1933. Shares are offered at $0.25 per share to
accredited investors only as defined in Regulation D under the Securities Act of 1933.
The shares are being sold directly by Daybreak and also through a placement agent. As of
February 29, 2008, a total of 605,000 shares of unregistered common stock have been sold to
seven (7) investors resulting in $151,250 in gross proceeds. The Placement Agent was paid
a sales commission of 10% of the gross proceeds of their firms sales of the private
placement and a non-accountable expense allowance of 3% of the gross proceeds of their
firms sales totaling $23,112.50. Net proceeds have been used to meet our drilling
commitments in the Tuscaloosa project and general and administrative expenses.
 Stock for Services
  45




---



##### Table of Contents



46




---



##### Table of Contents



47




---



##### Table of Contents



Stock for Directors Services
     Stock for Oil and Gas Properties
   48




---



##### Table of Contents



Common Stock Warrants
  Securities Authorized for Issuance under Equity Compensation Plan
  Common Stock
  49




---



##### Table of Contents



Preferred Stock
   Series A Convertible Preferred Stock
  Conversion:
  Automatic Conversion:
  50




---



##### Table of Contents



Dividend:
  Voting Rights:
  Debt Securities
    51




---



##### Table of Contents



52




---



##### Table of Contents



ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
   Safe Harbor Provision
  Plan of Operation
    53




---



##### Table of Contents



Selected Financial Information
     Accumulated Deficit
  Cash Flows
 Cash flow from operating activities
 Cash flow from investing activities
 54




---



##### Table of Contents



Cash flow from financing activities
 Liquidity and Capital Resources
 Liquidity and Working Capital
   February 29,
    
    
    February 28,2008
    
    
    2007Current Assets
    
    $
    1,049,217
    
    
    $
    4,537,634Current Liabilities
    
    $
    316,253
    
    
    $
    2,445,457Working Capital
    
    $
    732,964
    
    
    $
    2,092,177Current Ratio
    
    
    3.32
    
    
    
    1.86
   55




---



##### Table of Contents



Critical Accounting Policies
   Oil and Gas Properties
  56




---



##### Table of Contents



Revenue Recognition
  Suspended Well Costs
  57




---



##### Table of Contents



Share Based Payments
      58




---



##### Table of Contents



Fiscal Year 2008 compared to Fiscal Year 2007  Continuing Operations
  Revenues.
  Fiscal Year
    
    
    Fiscal Year2008
    
    
    2007Alabama  Gilbertown
    
    $
    119,209
    
    
    $
    2,110Louisiana  Krotz Springs
    
    
    74,740
    
    
    
    Texas  Saxet Field
    
    
    172,901
    
    
    
    152,678Total Revenues
    
    $
    366,850
    
    
    $
    154,788
   Costs and Expenses:
  Fiscal Year
    
    
    Fiscal Year2008
    
    
    2007Production Costs
    
    $
    326,849
    
    
    $
    107,931Exploration Costs
    
    
    654,765
    
    
    
    1,196,640Depreciation, Depletion,
Amortization & Impairment
    
    
    2,333,571
    
    
    
    2,398,048General & Administrative
    
    
    1,729,156
    
    
    
    3,936,868Total Operating Expenses
    
    $
    5,044,341
    
    
    $
    7,639,487
  59




---



##### Table of Contents



Fiscal Year 2008 compared to Fiscal Year 2007  Discontinued Operations
  60




---



##### Table of Contents



Revenues. The
  Fiscal Year
    
    
    Fiscal Year2008
    
    
    2007Tensas Farms F-1
    
    $
    59,333
    
    
    $
    472,526Tensas Farms F-3
    
    
    383,211
    
    
    
    2,032Tensas Farms A-1
    
    
    208,210
    
    
    
    Total Revenues
    
    $
    650,754
    
    
    $
    474,558
   Costs and Expenses:
  Fiscal Year
    
    
    Fiscal Year2008
    
    
    2007Production Costs
    
    $
    279,391
    
    
    $
    265,835Exploration Costs
    
    
    62,500
    
    
    
    Total Operating Expenses
    
    $
    341,891
    
    
    $
    265,835
 61




---



##### Table of Contents



Oil and Gas Projects Update
 Alabama (East Gilbertown Field)
 Choctaw County.
  California
 East Slopes Project in Kern and Tulare Counties
   62




---



##### Table of Contents



Louisiana
   St. Landry Parish.
  Avoyelles Parish.
 63




---



##### Table of Contents



Texas
 Nueces County
    Other Liquidity Factors
  nd rd
  64




---



##### Table of Contents



Management and Board of Directors Restructuring
     Off-Balance Sheet Arrangements
  65




---



##### Table of Contents



Summary
  66




---



##### Table of Contents



ITEM 7. FINANCIAL INFORMATION
  
    
  67




---



##### Table of Contents



Daybreak Oil and Gas, Inc.
(An Exploration Stage Company, Date of Inception March 1, 2005)
Balance Sheets
As of February 29, 2008 and February 28, 2007
 2008
    
    
    2007ASSETSCURRENT ASSETS:Cash
    
    $
    59,133
    
    
    $
    377,957Investment in marketable securities, at market, cost of $155,445 and $2,356,213
respectively
    
    
    155,445
    
    
    
    2,356,213Accounts receivable:Oil and gas sales
    
    
    311,277
    
    
    
    56,906Joint interest participants
    
    
    502,420
    
    
    
    799,970Related party participants
    
    
    
    
    
    
    41,357Notes receivable (including accrued interest of $28,336)
    
    
    
    
    
    
    828,336Prepaid expenses and other current assets
    
    
    20,942
    
    
    
    76,895Total current assets
    
    
    1,049,217
    
    
    
    4,537,634OIL AND GAS PROPERTIES, net of accumulated depletion, depreciation, amortization
and impairment, successful efforts method
    
    
    169,521
    
    
    
    1,054,029VEHICLES AND EQUIPMENT, net of accumulated depreciation of $13,310 and
$4,355 respectively
    
    
    18,019
    
    
    
    18,556Assets held for sale
    
    
    1,634,471
    
    
    
    3,498,821Joint interest receivable  long term
    
    
    500,000
    
    
    
    OTHER ASSETS
    
    
    289,809
    
    
    
    102,426Total assets
    
    $
    3,661,037
    
    
    $
    9,211,466LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable and other accrued liabilities
    
    $
    316,253
    
    
    $
    2,110,458Note payable  related party
    
    
    
    
    
    
    200,000Convertible debentures, net of discount of $90,002
    
    
    
    
    
    
    134,999Total current liabilities
    
    
    316,253
    
    
    
    2,445,457OTHER LIABILITIESAsset retirement obligation
    
    
    119,207
    
    
    
    99,427Total liabilities
    
    
    435,460
    
    
    
    2,544,884COMMITMENTSSTOCKHOLDERS 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; 1,297,465 and 1,399,764
shares issued and outstanding respectively
    
    
    1,298
    
    
    
    1,400Common stock   200,000,000 shares authorized; $0.001 par value, 44,293,299
and 40,877,230 shares issued and outstanding respectively
    
    
    44,294
    
    
    
    40,877Additional Paid-In Capital
    
    
    21,046,264
    
    
    
    20,224,411Accumulated deficit
    
    
    (736,035
    )
    
    
    (736,035
    )Deficit accumulated during the exploration stage
    
    
    (17,130,244
    )
    
    
    (12,864,071
    )Total stockholders equity
    
    
    3,225,577
    
    
    
    6,666,582Total liabilities and stockholders equity
    
    $
    3,661,037
    
    
    $
    9,211,466
  68




---



##### Table of Contents



DAYBREAK OIL AND GAS, INC.
(An Exploration Stage Company)
Statements of Operations
For the Years ended February 29, 2008 and February 28, 2007 and for the Period
from Inception (March 1, 2005) to February 29, 2008
 From InceptionYears Ended
    
    
    ThroughFebruary 29,
    
    
    February 28,
    
    
    February 29,2008
    
    
    2007
    
    
    2008REVENUE:Oil and gas sales
    
    $
    366,850
    
    
    $
    154,788
    
    
    $
    521,638OPERATING EXPENSES:Production costs
    
    
    326,849
    
    
    
    107,931
    
    
    
    434,780Exploration and drilling
    
    
    654,765
    
    
    
    1,196,640
    
    
    
    2,241,374Depreciation, depletion, amortization, and
impairment
    
    
    2,333,571
    
    
    
    2,398,048
    
    
    
    4,731,619General and administrative
    
    
    1,729,156
    
    
    
    3,936,868
    
    
    
    9,765,098Total operating expenses
    
    
    5,044,341
    
    
    
    7,639,487
    
    
    
    17,172,871OPERATING LOSS
    
    
    (4,677,491
    )
    
    
    (7,484,699
    )
    
    
    (16,651,233
    )OTHER INCOME (EXPENSE):Administrative income
    
    
    139,131
    
    
    
    
    
    
    
    139,131Interest income
    
    
    43,550
    
    
    
    101,697
    
    
    
    145,607Dividend income
    
    
    3,691
    
    
    
    5,547
    
    
    
    9,238Interest expense
    
    
    (208,893
    )
    
    
    (1,223,298
    )
    
    
    (1,478,049
    )Total other income (expense)
    
    
    (22,521
    )
    
    
    (1,116,054
    )
    
    
    (1,184,073
    )LOSS FROM CONTINUING OPERATIONS
    
    
    (4,700,012
    )
    
    
    (8,600,753
    )
    
    
    (17,835,306
    )Income from discontinued operations
    
    
    433,839
    
    
    
    208,723
    
    
    
    705,062NET LOSS
    
    
    (4,266,173
    )
    
    
    (8,392,030
    )
    
    
    (17,130,244
    )Cumulative convertible preferred stock dividend
requirement
    
    
    (395,923
    )
    
    
    (155,316
    )
    
    
    (551,239
    )Deemed dividend  Beneficial conversion feature
    
    
    
    
    
    
    (4,199,295
    )
    
    
    (4,199,295
    )NET LOSS AVAILABLE TO COMMON SHAREHOLDERS
    
    $
    (4,662,096
    )
    
    $
    (12,746,641
    )
    
    $
    (21,880,778
    )NET LOSS PER COMMON SHARELoss from continuing operations
    
    $
    (0.12
    )
    
    $
    (0.35
    )Income from discontinued operations
    
    
    0.01
    
    
    
    0.01NET LOSS PER COMMON SHARE  Basic and diluted
    
    $
    (0.11
    )
    
    $
    (0.34
    )WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING  Basic and diluted41,292,659
    
    
    
    37,045,509
  69




---



##### Table of Contents



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
 DeficitAccumulatedSeries A Convertible
    
    
    
    
    
    
    
    
    
    
    Additional
    
    
    
    
    
    
    During thePreferred Stock
    
    
    Common Stock}
    
    
    Paid-In
    
    
    Accumulated
    
    
    ExplorationShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    Stage
    
    
    TotalBALANCE, March 1, 2005 (Exploration
stage date of inception)
    
    
    
    
    
    $
    
    
    
    
    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
    
    
    
    
    
    
    
    
    
    
    
    1,087,500Services
    
    
    
    
    
    
    
    
    
    
    5,352,667
    
    
    
    5,353
    
    
    
    3,622,176
    
    
    
    
    
    
    
    
    
    
    
    3,627,529Oil and gas properties
    
    
    
    
    
    
    
    
    
    
    700,000
    
    
    
    700
    
    
    
    411,300
    
    
    
    
    
    
    
    
    
    
    
    412,000Conversion of convertible
debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    and interest payable
    
    
    
    
    
    
    
    
    
    
    806,135
    
    
    
    806
    
    
    
    200,728
    
    
    
    
    
    
    
    
    
    
    
    201,534Discount on convertible notes payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,240,213
    
    
    
    
    
    
    
    
    
    
    
    1,240,213Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,472,041
    )
    
    
    (4,472,041
    )BALANCE, FEBRUARY 28, 2006
    
    
    
    
    
    
    
    
    
    
    29,458,221
    
    
    
    29,458
    
    
    
    7,267,514
    
    
    
    (736,035
    )
    
    
    (4,472,041
    )
    
    
    2,088,896Issuance of common stock for:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cash
    
    
    
    
    
    
    
    
    
    
    8,027,206
    
    
    
    8,027
    
    
    
    5,180,230
    
    
    
    
    
    
    
    
    
    
    
    5,188,257Services
    
    
    
    
    
    
    
    
    
    
    1,270,000
    
    
    
    1,270
    
    
    
    2,606,430
    
    
    
    
    
    
    
    
    
    
    
    2,607,700Oil and gas properties
    
    
    
    
    
    
    
    
    
    
    222,500
    
    
    
    223
    
    
    
    528,527
    
    
    
    
    
    
    
    
    
    
    
    528,750Conversion of convertible
debentures
    
    
    
    
    
    
    
    
    
    
    2,049,303
    
    
    
    2,049
    
    
    
    1,022,473
    
    
    
    
    
    
    
    
    
    
    
    1,024,522Purchase 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
    
    
    
    
    
    
    
    
    
    
    
    3,626,204Discount on convertible
notes payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,000
    
    
    
    
    
    
    
    
    
    
    
    25,000Extension warrants on
convertible notes payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    119,283
    
    
    
    
    
    
    
    
    
    
    
    119,283Discount on preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,199,295
    
    
    
    
    
    
    
    
    
    
    
    4,199,295Deemed 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
    )
    
    $
    6,666,582Issuance of common stock for:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cash
    
    
    
    
    
    
    
    
    
    
    3,062,000
    
    
    
    3,062
    
    
    
    728,754
    
    
    
    
    
    
    
    
    
    
    
    731,816Services
    
    
    
    
    
    
    
    
    
    
    10,000
    
    
    
    10
    
    
    
    4,490
    
    
    
    
    
    
    
    
    
    
    
    4,501Conversion of convertible
debentures
    
    
    
    
    
    
    
    
    
    
    37,169
    
    
    
    38
    
    
    
    27,840
    
    
    
    
    
    
    
    
    
    
    
    27,878Extension warrants on
convertible notes payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    60,973
    
    
    
    
    
    
    
    
    
    
    
    60,973Conversion of preferred
stock
    
    
    (102,300
    )
    
    
    (102
    )
    
    
    306,900
    
    
    
    307
    
    
    
    (204
    )
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,266,173
    )
    
    
    (4,266,173
    )BALANCE, FEBRUARY 29, 2008
    
    
    1,297,465
    
    
    $
    1,298
    
    
    
    44,293,299
    
    
    $
    44,294
    
    
    $
    21,046,264
    
    
    $
    (736,035
    )
    
    $
    (17,130,244
    )
    
    $
    3,225,577
  70




---



##### Table of Contents



DAYBREAK OIL AND GAS, INC.
(An Exploration Stage Company)
Statements of Cash Flows
For the Years ended February 29, 2008 and February 28, 2007 and for the Period
from Inception (March 1, 2005) through February 29, 2008
 From InceptionYears Ended
    
    
    March 1, 2005February 29,
    
    
    February 28,
    
    
    Through February 29,2008
    
    
    2007
    
    
    2008CASH FLOWS FROM OPERATING ACTIVITIESNet Loss
    
    $
    (4,266,173
    )
    
    $
    (8,392,030
    )
    
    $
    (17,130,244
    )Adjustments to reconcile net loss to net cash
used in operating activities:Common stock issued for services
    
    
    4,500
    
    
    
    2,607,700
    
    
    
    6,239,729Depreciation, depletion, amortization and impairment expense
    
    
    2,333,571
    
    
    
    2,398,048
    
    
    
    4,731,619Exploration expense  dry wells
    
    
    33,233
    
    
    
    563,020
    
    
    
    849,753Non cash interest expense and accretion
    
    
    164,873
    
    
    
    1,209,529
    
    
    
    1,470,051Non cash interest and dividend income
    
    
    (28,108
    )
    
    
    (28,585
    )
    
    
    (56,693
    )Changes in assets and liabilities:Restricted cash
    
    
    
    
    
    
    8,333
    
    
    
    Investment in marketable securities
    
    
    2,200,768
    
    
    
    (2,356,213
    )
    
    
    (155,445
    )Accounts receivable  oil and gas sales
    
    
    (254,371
    )
    
    
    (56,906
    )
    
    
    (311,277
    )Accounts receivable  related party participants
    
    
    41,357
    
    
    
    (41,357
    )
    
    
    Accounts receivable  joint interest participants
    
    
    (702,450
    )
    
    
    (799,970
    )
    
    
    (1,502,420
    )Prepaid expenses and other current assets
    
    
    55,954
    
    
    
    (76,645
    )
    
    
    (20,500
    )Deferred financing costs
    
    
    
    
    
    
    10,000
    
    
    
    Accounts payable and other accrued liabilities
    
    
    (1,385,367
    )
    
    
    1,604,626
    
    
    
    802,542Joint interest receivable  long term
    
    
    500,000
    
    
    
    
    
    
    
    500,000Other assets
    
    
    
    
    
    
    (77,177
    )
    
    
    (77,177
    )Net cash (used) in operating activities
    
    
    (1,302,213
    )
    
    
    (3,427,627
    )
    
    
    (4,660,062
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of reclamation bond
    
    
    (250,000
    )
    
    
    (25,000
    )
    
    
    (275,000
    )Refund on equipment
    
    
    
    
    
    
    250,000
    
    
    
    
  71




---



##### Table of Contents



From InceptionYears Ended
    
    
    March 1, 2005February 29,
    
    
    February 28,
    
    
    Through February 29,2008
    
    
    2007
    
    
    2008Additions to note receivable
    
    
    
    
    
    
    (800,000
    )
    
    
    (800,000
    )Decrease in oil and gas properties
    
    
    (2,036,888
    )
    
    
    (5,441,993
    )
    
    
    (8,915,744
    )Purchase of fixed assets
    
    
    (8,930
    )
    
    
    (22,911
    )
    
    
    (31,841
    )Proceeds from sale of oil and gas properties
    
    
    2,000,000
    
    
    
    
    
    
    
    2,000,000Proceeds from note receivable
    
    
    800,000
    
    
    
    
    
    
    
    800,000Additions to oil and gas prepayments
    
    
    72,392
    
    
    
    
    
    
    
    72,392Net cash provided by (used) in investing
activities
    
    
    576,574
    
    
    
    (6,039,904
    )
    
    
    (7,150,193
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from sales of preferred stock, net
    
    
    
    
    
    
    3,626,204
    
    
    
    3,626,204Proceeds from sales of common stock, net
    
    
    731,816
    
    
    
    5,188,257
    
    
    
    7,007,573Proceeds from related party notes payable
    
    
    
    
    
    
    200,000
    
    
    
    200,000Proceeds (repayments) from borrowings
    
    
    (325,001
    )
    
    
    25,000
    
    
    
    1,035,520Net cash provided by financing activities
    
    
    406,815
    
    
    
    9,039,461
    
    
    
    11,869,297NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS
    
    
    (318,824
    )
    
    
    (428,070
    )
    
    
    59,042CASH AND EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    377,957
    
    
    
    806,027
    
    
    
    91CASH AT END OF PERIOD
    
    $
    59,133
    
    
    $
    377,957
    
    
    $
    59,133CASH PAID FOR:Interest
    
    $
    41,327
    
    
    $
    13,769
    
    
    $
    55,096Income taxesSUPPLEMENTAL CASH FLOW INFORMATION:Common stock issued for services
    
    $
    4,500
    
    
    $
    2,607,700
    
    
    $
    6,239,729Common stock issued for oil and gas properties
    
    
    
    
    
    
    528,750
    
    
    
    940,750Common stock repurchased and cancelled
    
    
    
    
    
    
    (150,000
    )
    
    
    (150,000
    )Common stock issued on conversion of convertible debentures
and interest
    
    
    27,878
    
    
    
    1,024,522
    
    
    
    1,253,934Discount on convertible notes payable
    
    
    60,973
    
    
    
    25,000
    
    
    
    1,326,186Extension warrants on convertible notes payable
    
    
    
    
    
    
    119,283
    
    
    
    119,283Conversion of preferred stock to common stock
    
    $
    185
    
    
    $
    
    
    
    $
    185
  72




---



##### Table of Contents



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
  Basis of Presentation
  Exploration Stage Company
   Use of Estimates
  NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
 Cash and Cash Equivalents
  73




---



##### Table of Contents



Daybreak Oil and Gas, Inc. (An Exploration Stage Company, Date of Inception March 1, 2005)
Notes to Financial Statements
 Restricted Cash
  Investment in Marketable Securities
  Accounts and Notes Receivable
  Oil and Gas Properties
    74




---



##### Table of Contents



Daybreak Oil and Gas, Inc. (An Exploration Stage Company, Date of Inception March 1, 2005)
Notes to Financial Statements
       Property and Equipment
  Long Lived Assets
  Debt
  75




---



##### Table of Contents



Daybreak Oil and Gas, Inc. (An Exploration Stage Company, Date of Inception March 1, 2005)
Notes to Financial Statements
 Fair Value of Financial Instruments
  Share Based Payments
      Loss per Share of Common Stock
  Concentration of Credit Risk
  76




---



##### Table of Contents



Daybreak Oil and Gas, Inc. (An Exploration Stage Company, Date of Inception March 1, 2005)
Notes to Financial Statements
    Revenue Recognition
  Reclamation Bonds
  77




---



##### Table of Contents



Daybreak Oil and Gas, Inc. (An Exploration Stage Company, Date of Inception March 1, 2005)
Notes to Financial Statements
 Environmental Matters and Asset Retirement Obligation
   Suspended Well Costs
    78




---



##### Table of Contents



Daybreak Oil and Gas, Inc. (An Exploration Stage Company, Date of Inception March 1, 2005)
Notes to Financial Statements
 Provisions for Taxes
  Recent Accounting Pronouncements
  Reclassifications
  NOTE 3  INVESTMENTS IN MARKETABLE SECURITIES:
 Accounting for Certain Investments in Debt and
Equity Securities.
 NOTE 4  ACCOUNTS RECEIVABLE  JOINT INTEREST PARTICIPANTS:
  79




---



##### Table of Contents



Daybreak Oil and Gas, Inc. (An Exploration Stage Company, Date of Inception March 1, 2005)
Notes to Financial Statements
 NOTE 5  NOTES RECEIVABLE  DRILLING RIG AGREEMENT:
  NOTE 6  OIL AND GAS PROPERTIES:
  Year Ended
    
    
    Year EndedFebruary 29, 
2008
    
    
    February 28, 
2007Proved leasehold costs
    
    $
    299,571
    
    
    $
    125,000Unproved leasehold costs
    
    
    104,700
    
    
    
    165,261Costs of wells and development
    
    
    1,732,958
    
    
    
    574,933Unevaluated capitalized exploratory well costs
    
    
    
    
    
    
    599,442Capitalized asset retirement costs
    
    
    22,740
    
    
    
    25,711Total cost of oil and gas properties
    
    
    2,159,969
    
    
    
    1,490,347Accumulated depletion, depreciation,
amortization and impairment
    
    
    (1,990,448
    )
    
    
    (436,318
    )Oil and gas properties, net
    
    $
    169,521
    
    
    $
    1,054,029
 Suspended Well Costs
  2008
    
    2007Beginning balance at March 1 of fiscal year
    
    $
    599,442
    
    
    $
    Total Exploration Well Additions
    
    
    33,233
    
    
    
    2,385,120Reclassifications to wells, facilities, and
equipment based on the determination of proved
reserves
    
    
    (599,442
    )
    
    
    (1,222,658
    )Capitalized exploratory well costs charged to expense
    
    
    
    
    
    
    (563,020
    )Ending Balance at February 29 of fiscal year
    
    $
    33,233
    
    
    $
    599,442
 80




---



##### Table of Contents



Daybreak Oil and Gas, Inc. (An Exploration Stage Company, Date of Inception March 1, 2005)
Notes to Financial Statements
  Fiscal year
    
    2008Capitalized exploratory well costs that have been capitalized for
a period of one year or less
    
    $
    33,233Balance at February 29 of fiscal year
    
    $
    33,233
 Impairment of oil and gas properties
 ,
 Asset Retirement Obligation
   Asset retirement obligations, beginning of period
    
    $
    99,427Accretion expense
    
    
    9,943Asset retirement addition
    
    
    9,837Asset retirement obligations, end of period
    
    $
    119,207
 81




---



##### Table of Contents



Daybreak Oil and Gas, Inc. (An Exploration Stage Company, Date of Inception March 1, 2005)
Notes to Financial Statements
 NOTE 7  DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE:
  2008
    
    2007Oil and gas sales revenues  Tuscaloosa project
    
    $
    650,754
    
    
    $
    474,558Cost and Expenses
    
    
    (216,915
    )
    
    
    (265,835
    )Income from discontinued operations
    
    $
    433,839
    
    
    $
    208,723
  Year Ended
    
    
    Year EndedFebruary 29,
    
    
    February 28,2008
    
    
    2007Proved leasehold costs
    
    $
    1,556,423
    
    
    $
    1,967,107Unproved leasehold costs
    
    
    310,657
    
    
    
    737,156Costs of wells and development
    
    
    1,393,790
    
    
    
    1,461,010Unevaluated capitalized exploratory well costs
    
    
    896,067
    
    
    
    1,223,177Capitalized asset retirement costs
    
    
    57,567
    
    
    
    67,746Total cost of oil and gas properties
    
    
    4,214,504
    
    
    
    5,456,196Accumulated depletion, depreciation,
amortization and impairment
    
    
    (2,580,033
    )
    
    
    (1,957,375
    )Oil and gas properties, net
    
    $
    1,634,471
    
    
    $
    3,498,821
  2008
    
    2007Beginning balance at March 1 of fiscal year
    
    $
    1,223,177
    
    
    $
    Total Exploration Well Additions
    
    
    517,316
    
    
    
    1,223,177Sales of exploratory wells
    
    
    (844,426
    )
    
    
    Ending Balance at February 29 of fiscal year
    
    $
    896,067
    
    
    $
    1,223,177
 82




---



##### Table of Contents



Daybreak Oil and Gas, Inc. (An Exploration Stage Company, Date of Inception March 1, 2005)
Notes to Financial Statements
 NOTE 8  CONVERTIBLE DEBENTURES:
   InterestDescription
    
    Rate
    
    Dates of Maturity
    
    2008
    
    2007Principal balance, beginning of year
    
    
    
    
    
    
    
    
    
    $
    134,999
    
    
    $
    1,138,701Principal issuances$0.25 Convertible Debentures
    
    
    6
    %
    
    03/22/06 to 08/31/06
    
    
    
    
    
    
    $0.50 Convertible Debentures
    
    
    10
    %
    
    01/26/07 to 02/26/07
    
    
    
    
    
    
    $0.75 Convertible Debentures
    
    
    10
    %
    
    02/26/07 to 10/31/07
    
    
    
    
    
    
    25,000$0.25 Convertible Promissory Note
    
    
    0
    %
    
    
    06/30/06
    
    
    
    
    
    
    
    Total issuances during the year ended
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,163,701Principal converted during the year$0.25 Convertible Debentures
    
    
    6
    %
    
    
    
    
    
    
    
    
    
    
    (32,000
    )$0.50 Convertible Debentures
    
    
    10
    %
    
    
    
    
    
    
    
    
    
    
    (806,700
    )$0.75 Convertible Debentures
    
    
    10
    %
    
    
    
    
    
    
    
    
    
    
    (100,000
    )$0.25 Convertible Promissory Note
    
    
    0
    %
    
    
    
    
    
    
    Total conversions during the year endedPrincipal paid in cash
    
    
    
    
    
    
    
    
    
    
    (134,999
    )Principal balance, end of year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    225,001Unamortized discount, end of year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (90,002
    )Total debt, net of discount
    
    
    
    
    
    
    
    
    
    $
    0
    
    
    $
    134,999
    83




---



##### Table of Contents



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




---



##### Table of Contents



Daybreak Oil and Gas, Inc. (An Exploration Stage Company, Date of Inception March 1, 2005)
Notes to Financial Statements
      NOTE 9  RELATED PARTY TRANSACTIONS:
 Office Lease
  85




---



##### Table of Contents



Daybreak Oil and Gas, Inc. (An Exploration Stage Company, Date of Inception March 1, 2005)
Notes to Financial Statements
 Financing of Gas Pipeline
    Common Stock and Cash for Services
    86




---



##### Table of Contents



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




---



##### Table of Contents



Daybreak Oil and Gas, Inc. (An Exploration Stage Company, Date of Inception March 1, 2005)
Notes to Financial Statements
 Purchase of Additional Working Interest in Tuscaloosa Project
  NOTE 10  STOCKHOLDERS EQUITY:
 Series A Convertible Preferred Stock
    88




---



##### Table of Contents



Daybreak Oil and Gas, Inc. (An Exploration Stage Company, Date of Inception March 1, 2005)
Notes to Financial Statements
      89




---



##### Table of Contents



Daybreak Oil and Gas, Inc. (An Exploration Stage Company, Date of Inception March 1, 2005)
Notes to Financial Statements
   Relative FairDescription
    
    Shares
    
    
    Value AmountSeries A Convertible Preferred
    
    
    1,399,765
    
    
    $
    2,710,073Common Stock Purchase Warrants
    
    
    2,799,530
    
    
    
    1,489,222Total Proceeds
    
    
    
    
    
    
    4,199,295Offering Costs
    
    
    
    
    
    
    (573,091
    )Net Proceeds
    
    
    
    
    
    $
    3,626,204
 Common Stock
    90




---



##### Table of Contents



Daybreak Oil and Gas, Inc. (An Exploration Stage Company, Date of Inception March 1, 2005)
Notes to Financial Statements
      91




---



##### Table of Contents



Daybreak Oil and Gas, Inc. (An Exploration Stage Company, Date of Inception March 1, 2005)
Notes to Financial Statements
    Relative FairDescription
    
    Shares
    
    
    Value AmountCommon Stock
    
    
    8,027,206
    
    
    $
    4,241,232Common Stock Purchase Warrants
    
    
    4,013,602
    
    
    
    1,779,172Total Proceeds
    
    
    
    
    
    
    6,020,404Placement fees
    
    
    
    
    
    
    (832,147
    )Net Proceeds
    
    
    
    
    
    $
    5,188,257
  Common Stock for Services
   92




---



##### Table of Contents



Daybreak Oil and Gas, Inc. (An Exploration Stage Company, Date of Inception March 1, 2005)
Notes to Financial Statements
  Common Stock Issued for Convertible Debentures and Interest Payable
   Common Stock Issued for Oil and Gas Property Interests
    NOTE 11  WARRANTS:
  ExercisableExercise
    
    Remaining
    
    WarrantsDescription
    
    Warrants
    
    Price
    
    Life (Years)
    
    RemainingSpring 2006 Common Stock Private Placement
    
    
    4,013,602
    
    
    $
    2.00
    
    
    
    4.25
    
    
    
    4,013,602Placement Agent Warrants Spring 2006 PP
    
    
    802,721
    
    
    $
    0.75
    
    
    
    6.25
    
    
    
    802,721Placement Agent Warrants Spring 2006 PP
    
    
    401,361
    
    
    $
    2.00
    
    
    
    6.25
    
    
    
    401,361July 2006 Preferred Stock Private Placement
    
    
    2,799,530
    
    
    $
    2.00
    
    
    
    4.50
    
    
    
    2,799,530Placement Agent Warrants July 2006
Preferred Stock Private Placement
    
    
    419,930
    
    
    $
    1.00
    
    
    
    4.50
    
    
    
    419,930Convertible Debenture Term Extension
    
    
    150,001
    
    
    $
    2.00
    
    
    
    4.75
    
    
    
    150,0018,587,145
    
    
    
    
    
    
    
    
    
    
    
    8,587,145
 93




---



##### Table of Contents



Daybreak Oil and Gas, Inc. (An Exploration Stage Company, Date of Inception March 1, 2005)
Notes to Financial Statements
  Exercise
    
    Remaining
    
    Exercisable WarrantsDescription
    
    Warrants
    
    Price
    
    Life (Years)
    
    RemainingSpring 2006 Common Stock Private Placement
    
    
    4,013,602
    
    
    $
    2.00
    
    
    
    3.25
    
    
    
    4,013,602Placement Agent Warrants Spring 2006 PP
    
    
    802,721
    
    
    $
    0.75
    
    
    
    5.25
    
    
    
    802,721Placement Agent Warrants Spring 2006 PP
    
    
    401,361
    
    
    $
    2.00
    
    
    
    5.25
    
    
    
    401,361July 2006 Preferred Stock Private Placement
    
    
    2,799,530
    
    
    $
    2.00
    
    
    
    3.50
    
    
    
    2,799,530Placement Agent Warrants July 2006 Preferred Stock
Private Placement
    
    
    419,930
    
    
    $
    1.00
    
    
    
    3.50
    
    
    
    419,930Convertible Debenture Term Extension
    
    
    150,001
    
    
    $
    2.00
    
    
    
    3.75
    
    
    
    150,001Convertible Debenture 2nd Term Extension
    
    
    112,000
    
    
    $
    0.53
    
    
    
    1.50
    
    
    
    112,000Convertible Debenture 3rd Term Extension
    
    
    90,000
    
    
    $
    0.25
    
    
    
    1.75
    
    
    
    90,000Spring 2006 PP Goodwill Warrants
    
    
    4,013,602
    
    
    $
    0.65
    
    
    
    2.00
    
    
    
    2,952,934July 2006 PP Goodwill Warrants
    
    
    1,409,764
    
    
    $
    0.65
    
    
    
    2.00
    
    
    
    1,131,76714,212,511
    
    
    
    
    
    
    
    
    
    
    
    14.212,511
   NOTE 12  INCOME TAXES:
  2008Computed at U.S. and State statutory rates (40%)
    
    $
    (1,706,435
    )Permanent differences
    
    
    68,415Changes in valuation allowance
    
    
    1,638,020Total
    
    $
    
  2008
    
    
    2007Deferred tax assets:Net operating loss carryforwards
    
    $
    2,574,000
    
    
    $
    1,734,000Oil and gas properties
    
    
    1,745,820
    
    
    
    947,800Less valuation allowance
    
    
    (4,319,820
    )
    
    
    (2,681,800
    )Total
    
    $
    
    
    
    $
    
 94




---



##### Table of Contents



Daybreak Oil and Gas, Inc. (An Exploration Stage Company, Date of Inception March 1, 2005)
Notes to Financial Statements
   NOTE
13  FINAL CLOSING OF SALE OF TUSCALOOSA PROPERTIES SUBSEQUENT TO INITIAL FILING OF FORM
10-KSB:
   95




---



##### Table of Contents



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)
  Capitalized Costs Relating to Oil and Gas Producing Activities
 As of February 29 / 28,2008
    
    
    2007Proved propertiesMineral interests
    
    $
    1,855,994
    
    
    $
    2,092,107Wells, equipment and facilities
    
    
    3,207,055
    
    
    
    2,129,400Total proved properties
    
    
    5,063,049
    
    
    
    4,221,507Unproved propertiesMineral interests
    
    
    415,357
    
    
    
    902,420Uncompleted wells, equipment and facilities
    
    
    896,067
    
    
    
    1,822,619Total unproved properties
    
    
    1,311,424
    
    
    
    2,725,038Less accumulated depreciation, depletion,
amortization and impairment
    
    
    (4,570,481
    )
    
    
    (2,393,693
    )Net Capitalized Costs
    
    $
    1,803,992
    
    
    $
    4,552,852
 Costs Incurred in Oil and Gas Producing Activities
 Twelve Months EndedFebruary 29 / 28,2008
    
    
    2007Acquisition of proved properties
    
    $
    119,235
    
    
    $
    428,669Acquisition of unproved properties
    
    
    7,043
    
    
    
    1,486,901Development costs
    
    
    921,334
    
    
    
    859,688Exploration costs
    
    
    1,264,784
    
    
    
    4,241,917Total Costs Incurred
    
    $
    2,312,396
    
    
    $
    7,017,175
 96




---



##### Table of Contents



Results of Operations from Oil and Gas Producing Activities
 Twelve Months EndedFebruary 29 / 28,2008
    
    
    2007Oil and gas revenues
    
    $
    1,017,604
    
    
    $
    629,346Production costs
    
    
    (606,240
    )
    
    
    (373,766
    )Exploration expenses
    
    
    (717,265
    )
    
    
    (1,196,640
    )Depletion, depreciation, and impairment
    
    
    (2,314,160
    )
    
    
    (2,393,693
    )Result of oil and gas producing operations
before income taxes
    
    
    (2,620,061
    )
    
    
    (3,334,753
    )Provision for income taxes
    
    
    
    
    
    
    Results of Oil and Gas Producing Operations
    
    $
    (2,620,061
    )
    
    $
    (3,334,753
    )
 Proved Reserves
  Crude Oil andNatural GasLiquid
    
    
    Natural GasBbls
    
    
    McfProved Reserves as of February 29, 2008:Beginning of the period
    
    
    29,425
    
    
    
    211,800Revisions of previous estimates
    
    
    (15,775
    )
    
    
    (104,264
    )Extensions and discoveries
    
    
    9,776
    
    
    
    18,148Production
    
    
    (6,792
    )
    
    
    (49,584
    )Sale of minerals in place
    
    
    (3,522
    )
    
    
    (10,600
    )End of the period
    
    
    13,112
    
    
    
    65,500
 97




---



##### Table of Contents



Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves
  February 29 / 28,2008
    
    
    2007Future cash inflows
    
    $
    1,876,287
    
    
    $
    3,270,219Future production costs (1)
    
    
    (632,786
    )
    
    
    (889,817
    )Future development costs
    
    
    
    
    
    
    (170,762
    )Future income tax expenses (2)
    
    
    
    
    
    
    Future net cash flows
    
    
    1,243,501
    
    
    
    2,209,64010% annual discount for estimated timing of cash flows
    
    
    (113,236
    )
    
    
    (269,273
    )Standardized measure of discounted future net cash
flows at the end of the year
    
    $
    1,130,265
    
    
    $
    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.  February 29 / 28,2008
    
    2007Average crude oil price per Bbl
    
    
    74.89
    
    
    $
    65.10Average natural gas price per Mcf
    
    
    7.63
    
    
    $
    6.62
   98




---



##### Table of Contents



Sources of Changes in Discounted Future Net Cash Flows
  Twelve Months EndedFebruary 29 / 28,2008
    
    
    2007Standardized measure of discounted
future net cash flows at the beginning
of the year
    
    $
    1,940,367
    
    
    $
    Extensions, discoveries and improved
recovery, less related costs
    
    
    644,889
    
    
    
    1,806,060Revisions of previous quantity estimates
    
    
    (1,559,345
    )
    
    
    Changes in estimated future development
costs
    
    
    (185,701
    )
    
    
    Purchases (sales) of minerals in place
    
    
    (330,401
    )
    
    
    389,887Net changes in prices and production
costs
    
    
    283,362
    
    
    
    Accretion of discount
    
    
    194,037
    
    
    
    Sales of oil and gas produced, net of
production costs
    
    
    (411,365
    )
    
    
    (255,580
    )Development costs incurred during the
period
    
    
    356,463
    
    
    
    Change in timing of estimated future
production and other
    
    
    197,959
    
    
    
    Net change in income taxes
    
    
    
    
    
    
    Standardized measure of discounted
future net cash flows at the end of the
year
    
    $
    1,130,265
    
    
    $
    1,940,367
 99




---



##### Table of Contents



ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 ITEM 8A. CONTROLS AND PROCEDURES
         100




---



##### Table of Contents




    
    We have changed our Corporate Governance structure via the introduction of several new
corporate charters and company wide procedures along with a change in the composition of
the Board of Directors to be more independent.
    
    We have revised our operating procedures relating to preparation and issuance of
financial reports and the timely disclosure of all required SEC filings. The changes
include a defined quarter end closing schedule and more timely and detailed review by
management and the Board of Directors.
    
    We have added changes to our management team to increase our industry expertise and
increased the administrative staff available to assist in the more timely preparation of
all required reporting documents.
    
    We have made operating and financial changes to our day to day activities to improve the
segregation of duties at the Company with the intent to add more control around the
authorization of expenditures and payments on behalf of the company.
   101




---



##### Table of Contents



ITEM 8B. OTHER INFORMATION
  102




---



##### Table of Contents



PART III
 
 ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION
16(A) OF THE EXCHANGE ACT
  
 ITEM 10. EXECUTIVE COMPENSATION
  
 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
  
 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
  103




---



##### Table of Contents



ITEM 13. EXHIBITS
  3.01
    
    Articles of Incorporation, as amended (18)3.02
    
    Amended and Restated Bylaws (16)4.01
    
    Registration statement of securities (4)4.02
    
    Designations of Series A Convertible Preferred Stock (filed as Articles of Amendment to the
Articles of Incorporation of Daybreak Oil & Gas, Inc. dated June 30, 2006 and filed as part of
Exhibit 3.01 herewith.)10.01
    
    Quitclaim mining deed with Silver Crown Mining of mineral rights in Idaho (12)10.02
    
    Agreement with Crosspoint Holdings, Inc. for the purchase of Series A Preferred Stock (1)10.03
    
    Consulting Agreement with 413294 Alberta Ltd. effective March 1, 2005 (15)10.04
    
    Consulting Agreement with AnMac Enterprises effective March 1, 2005 (15)10.05
    
    Consulting Agreement with Eric Moe effective March 1, 2005 (15)10.06
    
    Expiration of Series A Stock Purchase Agreement with Crosspoint Holdings, Inc., (2)10.07
    
    Drilling agreement with MPG Petroleum for Ginny South project. (3)10.08
    
    Agreement with MPG Petroleum to join land bank for Pearl Prospect (3)10.09
    
    Consulting agreement with Summitt Ventures for management services (3)10.10
    
    Development agreement with Chicago Mill Joint Venture for Louisiana project (12)10.11
    
    Prospect review and non-competition agreement for California project (12)10.12
    
    Joint Venture Agreement with Nomad Hydrocarbons, Ltd. for California project (12)10.13
    
    Development agreement with Oracle Operating Co. for Texas project (12)10.14
    
    Prospect review agreement for California project (12)10.15
    
    Development agreement with Vision Exploration for Krotz Springs 3D Prospect (12)10.16
    
    Farmout agreement with Big Sky Western Canada for well in Alberta, Canada (12)10.17
    
    Development agreement with Vision Exploration for prospect in Louisiana (12)10.18
    
    Subscription agreement and letter of investment intent, March 2006 private placement (5)10.19
    
    Warrant for the purchase shares of common stock, March 2006 private placement (5)10.20
    
    Registration rights agreement, March 2006 private placement (5)10.21
    
    Pipeline license agreement for Tuscaloosa project in Louisiana (12)10.22
    
    Subscription agreement and letter of investment intent, July 2006 private placement (15)10.23
    
    Warrant for the purchase shares of common stock, July 2006 private placement (15)10.24
    
    Registration rights agreement, July 2006 private placement (15)10.25
    
    Development agreement with Frank Davis Exploration for prospect in Louisiana (12)10.26
    
    Agreement for refurbishing and operating of drilling rig (6)10.27
    
    Consulting Agreement with Jeffrey Dworkin dated August 1, 2006 (15)10.28
    
    Office Rent Agreement with Terrence Dunne & Associates dated August 1, 2006 (15)10.29
    
    Consulting Agreement with Michael Hooper dated August 3, 2006 (15)10.30
    
    Purchase of additional mineral interest in Tuscaloosa project in Louisiana (7)10.31
    
    Farmout agreement with Monarch Gulf Exploration, Inc. (8)10.32
    
    Oil and gas lease with Anadarko E&P Company, L.P. (9)10.33
    
    Drilling contract with Energy Drilling for two wells in Louisiana (11)10.34
    
    Consulting Agreement with Tim Lindsey effective January 2, 2007 (15)10.35
    
    Consulting Agreement with 413294 Alberta Ltd. effective March 1, 2007 (15)10.36
    
    Consulting Agreement with Jeffrey Dworkin effective March 1, 2007 (15)10.37
    
    Consulting Agreement with Michael Hooper effective March 1, 2007 (15)10.38
    
    Employment Agreement with Eric Moe, CEO effective March 1, 2007 (15)10.39
    
    Employment Agreement with Bennett Anderson effective March 1, 2007 (15)10.40
    
    Employment Agreement Thomas Kilbourne effective March 1, 2007 (15)
 104




---



##### Table of Contents



10.41
    
    Office Rent Agreement with Terrence Dunne & Associates effective May 1, 2007 (15)10.42
    
    Seismic Option Farmin Agreement with Chevron U.S.A. (13)10.43
    
    Joint Development Participation Agreement for Tuscaloosa project in Louisiana (14)10.44
    
    Definitive Purchase and Sale Agreement with Lasso Partners, LLC (18)10.45
    
    Letter of Agreement to Amendment of Purchase and Sale Agreement with Lasso Partners, LLC (17)10.46
    
    Warehousing Line of Credit Promissory Note and Personal Guaranty (18)10.47
    
    Purchase of Tuscaloosa interest from Kirby Cochran (18)10.48
    
    Purchase of Tuscaloosa interest from 413294 Alberta Ltd. (Robert N. Martin) (18)10.49
    
    Purchase of Tuscaloosa interest from Tempest Energy, Inc (Eric L. Moe) (18)10.50
    
    Letter of Agreement on North Shuteston Assignment of Interest (18)14.01
    
    Ethical Business Conduct Policy Statement (16)14.02
    
    Code of Ethics for Senior Financial Officers (16)16.01
    
    Change in Certifying Accountant (10)Section 1350 Certifications31.1
    
    Certification of Timothy R. Lindsey (19)31.2
    
    Certification of James F. Westmoreland (19)Section 1350 Certifications32.1
    
    Certification of Timothy R. Lindsey (19)32.2
    
    Certification of James F. Westmoreland (19)99.1
    
    Audit Fee Pre-Approval Policy (April 2008) (18)
 
 (1)
    
    Previously filed as exhibit to Form 8-K on November 5, 2004, and incorporated by reference
herein.(2)
    
    Previously filed as exhibit to Form 8-K on April 7, 2005, and incorporated by reference herein.(3)
    
    Previously filed as exhibit to Form 10-KSB on June 15, 2005, and incorporated by reference
herein.(4)
    
    Previously filed as exhibit to Form S-8 on August 19, 2005, and incorporated by reference
herein.(5)
    
    Previously filed as exhibit to Form SB-2 on July 18, 2006, and incorporated by reference
herein.(6)
    
    Previously filed as exhibit to Form 8-K on September 6, 2006, and incorporated by reference
herein.(7)
    
    Previously filed as exhibit to Form 8-K on September 28, 2006, and incorporated by reference
herein.(8)
    
    Previously filed as exhibit to Form 8-K on October 26, 2006, and incorporated by reference
herein.(9)
    
    Previously filed as exhibit to Form 8-K on November 7, 2006, and incorporated by reference
herein.(10)
    
    Previously filed as exhibit to Form 8-K on November 15, 2006, and incorporated by reference
herein.(11)
    
    Previously filed as exhibit to Form 8-K on November 17, 2006, and incorporated by reference
herein.(12)
    
    Previously filed as exhibit to Form SB-2/A on December 28, 2006, and incorporated by reference
herein.(13)
    
    Previously filed as exhibit to Form 8-K on July 16, 2007, and incorporated by reference
herein.(14)
    
    Previously filed as exhibit to Form 8-K on July 20, 2007, and incorporated by reference
herein.(15)
    
    Previously filed as exhibit to Form 10-KSB on September 21, 2007, and incorporated by
reference herein.(16)
    
    Previously filed as exhibit to Form 8-K on April 9, 2008, and incorporated by reference
herein.(17)
    
    Previously filed as exhibit to Form 8-K on May 2, 2008, and incorporated by reference herein.(18)
    
    Filed with Original Form 10-KSB filed on May 27, 2008.(19)
    
    Filed herewith. 105




---



##### Table of Contents



ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  106




---



##### Table of Contents



SIGNATURES
  DAYBREAK OIL AND GAS, INC.By:
    
    /s/ TIMOTHY R. LINDSEY

Timothy R. Lindsey, itsInterim President andChief Executive OfficerDate: July 14, 2008By:
    
    /s/ JAMES F. WESTMORELAND

James F. Westmoreland, itsExecutive Vice President and 
Chief Financial OfficerDate: July 14, 2008
  By:
    
    /s/ TIMOTHY R. LINDSEY
    
    By:
    
    /s/ DALE B. LAVIGNETimothy R. Lindsey
    
    
    
    Dale B. LavigneDirector/Interim President and Chief Executive Officer
    
    Director / ChairmanDate: May 27, 2008
    
    
    
    Date: May 27, 2008By:
    
    /s/ RONALD D. LAVIGNE
    
    By:
    
    /s/ JAMES F. MEARARonald D. Lavigne
    
    
    
    James F. MearaDirector
    
    
    
    DirectorDate: May 27, 2008
    
    
    
    Date: May 27, 2008
 107