**Exhibit
      10.40**


EMPLOYMENT
      AGREEMENT





THIS
      EMPLOYMENT AGREEMENT ("Agreement") is entered into effective the 1st day of
      March,
      2007, between Daybreak Oil and Gas Inc., a Washington corporation (“Daybreak”,
      "Employer", “Company”) and Thomas C. Kilbourne, ("Employee").





It
      is
      agreed as follows:





1.
      *Employment.* Employer employs Employee, and Employee accepts employment,
      upon the terms and conditions set forth in this Agreement.





2.
      *Term.* This Agreement begins on March 1, 2007, and continues until
      February 28, 2008, unless terminated earlier by either party in compliance
      with
      this Agreement's provisions governing termination.





3.
      *Compensation.*





a.
      *Salary.* Employer will pay Employee a monthly salary of Eight Thousand
      Five Hundred ($8,500) dollars during the term of this Agreement. The salary
      will
      be paid in accordance with Employer's existing payroll policies for comparable
      employees. Employee's compensation will be subject to prospective review by
      Employer in its sole discretion.





b.
      *Fringe Benefits.* Employee may receive bonuses during the term of
      employment as determined by Employer, in its sole discretion. Employee will
      be
      entitled to participate in all other fringe benefit programs applicable to
      comparable employees of Employer. Employer may amend, eliminate, or add to
      the
      existing fringe benefit programs in its sole discretion.





4.
      *Duties.* Employee will be employed initially as Controller and Treasurer
      of Daybreak, and in such additional or other capacities and offices as may
      be
      assigned by the Board of Directors from time to time. The Employee warrants
      and
      represents that he is duly qualified to perform the duties hereunder and further
      covenants that in performing his duties hereunder, he will not engage in any
      activity that is in violation of applicable security laws or subject the
      Corporation to liability thereunder.





It
      shall
      be expressly understood that the Employee shall have no power to bind the
      Company to any contract or obligation on behalf of Daybreak in any manner
      without approval of the Board of Directors.





5.
      *Other Employment.* Without the prior express written authorization of
      Daybreak, Employee is prohibited from directly or indirectly, during the term
      of
      this Agreement,




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rendering
      services of a business, professional, or commercial nature to any other person,
      firm or corporation, whether or not the services are rendered for
      compensation.





6.
      *Vacation Benefits.* Employee is entitled to vacation periods with full
      pay in accordance with established Daybreak policy. Vacation will be scheduled
      by mutual agreement; however, Employee will be allowed sufficient discretion
      in
      scheduling to assure the vacation benefit may be used.





7.
      *Expenses.* During the term of employment, Employee is entitled to
      reimbursement for reasonable business expenses incurred on behalf of Daybreak
      in
      accordance with the standard practice for the reimbursement policies and
      procedures established by Employer. All out-of-pocket expenses submitted for
      reimbursement, shall be done in a timely manner. Such timely manner shall be
      defined as the expense reimbursement request shall be received by Employer
      no
      later than sixty (60) days after the date of the expense receipt or the
      occurrence of such expense. Any expense receipt dated sixty (60) days earlier
      than the expense reimbursement request is received shall not be eligible for
      reimbursement by Daybreak. If any receipt for a charge incurred on a Company
      credit card is not submitted to Employer within sixty (60) days of the
      transaction date, the transaction amount can be charged back to the Employee
      or
      be deducted from the Employee’s next payroll check. Compensation provided
      Employee under this Agreement takes into account Employee's personal obligation
      to incur and pay certain additional expenses required of Employee as an employee
      of Employer for which Daybreak is under no obligation to reimburse
      Employee.





8.
      *Employment at Will.* This is an agreement for employment of indefinite
      duration. The employment relationship may be terminated at will by either party.
      Termination by either party must be made by written notice to the other party
      given at least 7 days in advance of the termination date. Upon termination,
      Employee will be paid accrued unpaid salary prorated in accordance with
      Employer's general policies and procedures.





9.
      *Employer Business.* All business revenues and fees produced or
      transacted through the efforts of Employee are the sole property of Daybreak.
      Employee will have no right to the business or to share in any revenues or
      fees
      resulting from the conduct of the business other than the compensation provided
      for in this Agreement.





10.
      *Confidential Information.*





a.
      *Disclosure Prohibited.* Employee acknowledges that, in the course of
      this employment, Employee will become acquainted with confidential information
      belonging to Daybreak. Employee may not, at any time during the period of
      Employee's employment or thereafter, except as authorized in writing by
      Daybreak, directly or indirectly, use, disclose, reproduce, or in any other
      way
      publicly or privately disseminate any "Confidential Information" as
      defined.


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              Agreement: 2 of 4


b.
      *Definition.* "Confidential Information" means all information not
      generally known to the public, which relates to the business of Daybreak or
      any
      third parties doing business with Daybreak. By way of example, confidential
      information includes, but is not limited to, information relating to oil and
      gas
      plays, development information on oil and gas prospects, fundraising plans,
      customers and customer lists, pricing, contracts, costs and other financial
      information, merchandising and marketing techniques, inventions, plans
      specifications, and products disclosed to or known by Employee in connection
      with his employment by Employer.





11.
      *Protection of Daybreak Property.* All records, files, manuals, lists of
      customers, blanks, forms, materials, supplies, computer programs, and other
      materials furnished to Employee by Daybreak, used on its behalf, or generated
      or
      obtained during the course of this employment remain the property of Daybreak.
      Employee is only a holder of this property for the sole use and benefit of
      Employer and will safely keep and preserve such property, except as consumed
      in
      the normal business operation of Employer. Upon termination of this employment,
      Employee will immediately deliver to Daybreak, or its authorized representative,
      all of Daybreak’s property, including all copies, remaining in Employee's
      possession or control.





12.
      *Remedies.* The parties recognize that irreparable injury will result to
      Daybreak and its business and property if Employee breaches the covenant of
      confidentiality contained in Section 10 of this Agreement. It is agreed that
      if
      Employee breaches the covenant of confidentiality, Daybreak will be entitled
      to
      an injunction to restrain further breach of that covenant by Employee or any
      of
      Employee's partners, agents, employers and employees, or any persons acting
      for
      or with Employee, in addition to any other remedies Daybreak may
      have.





13.
      *Assignability.* These contractual obligations of Employee are personal
      and neither the rights nor obligations under this Agreement may be assigned
      or
      transferred by Employee to any other person. This Agreement will bind and
      benefit any successor of Employer, whether by merger, sale of assets,
      reorganization or other form of business acquisition, disposition, or business
      reorganization.





14.
      *Amendment.* This Agreement contains the entire understanding of the
      parties. This Agreement may be changed only by a written document signed by
      Employee and Daybreak.





15.
      *Notices.* All notices and other communications required or permitted to
      be given by this Agreement must be in writing and must be given and will be
      deemed received if and when either hand-delivered and a signed receipt is given,
      or mailed by registered or certified U.S. mail, return receipt requested,
      postage prepaid, and if to Employer to:





Daybreak
      Oil and Gas, Inc.


601
      W.
      Main Ave.  Suite 1012


Spokane,
      WA 99201


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              Agreement: 3 of 4





And,
      if
      to Employee to:





Thomas
      C.
      Kilbourne


P.O.
      Box
      953


Osburn,
      ID 83849





Either
      party may change the address to which notice to it is to be addressed by
      notifying the other party of the change.





16.
      *Enforcement.* This Agreement is to be construed in accordance with the
      laws of the State of Washington. Any action arising in connection with this
      Agreement must be brought in Spokane County Superior Court, Spokane, Washington.
      By this Agreement, the parties confer jurisdiction over the subject matter
      of
      and parties to this Agreement. The party who prevails in any such action will
      be
      entitled to an award of the reasonable costs and attorneys' fees incurred in
      the
      action.





IN
      WITNESS WHEREOF, the parties have executed this Agreement.




"EMPLOYER"
            
            “EMPLOYEE”Daybreak
              Oil and Gas Inc.,a
              Washington corporationBy:
            /s/
                Terrence J.
                Dunne
            
            
            /s/
                Thomas C.
                KilbourneIts:
            Chief
                Financial
                Officer
            
            
            Thomas
                C.
                KilbourneTitle


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        Agreement: 4 of 4