**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**


**FORM
      10-KSB**


(Mark
      One)





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





For
      the
      fiscal year ended February 28, 2007





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




For
      the
      transition period ______ to _______





Commission
      file number 000-50107





**DAYBREAK
      OIL AND GAS, INC.**


(Name
      of
      small business issuer in its charter)





**Washington**
            
            **91-0626366**(State
                or other jurisdiction of incorporation or organization)
            
            (I.R.S.
                Employer Identification No.)





**601
                W. Main Ave., Suite 1012, Spokane, WA**
            **99201**(Address
                of principal executive offices)
            (Zip
                code)





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





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





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





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





Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the registrant was required to file such reports), and (2) has been subject
      to such filing requirements for the past 90
      days.                         Yes
þNo
 ̈





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





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


Large
      accelerated filer  ̈                                                      Accelerated
      filer  ̈                                           Non-accelerated
      filer þ





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


Yes
 ̈                                No
      þ





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





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





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





**1**


**TABLE
      OF CONTENTS**





PAGEPART  I
            
            4ITEM
              1.
            DESCRIPTION
              OF BUSINESS
            4ITEM
              2.
            DESCRIPTION
              OF PROPERTIES
            22ITEM
              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
            51ITEM
              7.
            FINANCIAL
              INFORMATION
            62ITEM
                8.
            CHANGES
              IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
              AND
                FINANCIAL DISCLOSURE
            109ITEM
              8A.
            CONTROLS
              AND PROCEDURES
            110ITEM
              8B.
            OTHER
              INFORMATION
            112PART  III
            113ITEM
              9.
            DIRECTORS,
                EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
              COMPLIANCE
                WITH SECTION 16(A) OF THE EXCHANGE ACT
            113ITEM
              10.
            EXECUTIVE
              COMPENSATION
            118ITEM
              11.
            SECURITY
                OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
              MANAGEMENT
                AND RELATED STOCKHOLDER MATTERS
            122ITEM
              12.
            CERTAIN
              RELATIONSHIPS AND RELATED TRANSACTIONS
            124ITEM
              13.
            EXHIBITS
            134ITEM
              14.
            PRINCIPAL
              ACCOUNTANT FEES AND SERVICES
            136SIGNATURES
            137




**2**


**CAUTIONARY
      STATEMENT ABOUT FORWARD-LOOKING STATEMENTS**




We
      believe that some statements contained in this Prospectus relate to results
      or
      developments that we anticipate will or may occur in the future and are not
      statements of historical fact.  Words such as “anticipate,” “believe,”
“could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,”
“will” and similar expressions identify forward-looking
      statements.  Examples of forward-looking statements include statements
      about the following:





- Our
          future operating results,
- Our
          future capital expenditures,
- Our
          expansion and growth of operations, and
- Our
          future investments in and acquisitions of oil and natural gas
          properties.




We
      have
      based these forward-looking statements on assumptions and analyses made in
      light
      of our experience and our perception of historical trends, current conditions,
      and expected future developments.  However, you should be aware that
      these forward-looking statements are only our predictions and we cannot
      guarantee any such outcomes.  Future events and actual results may
      differ materially from the results set forth in or implied in the
      forward-looking statements.  Factors that might cause such a
      difference include:





- 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.”

























**3**


**PART  I**





**ITEM
      1.  DESCRIPTION OF BUSINESS**





*Background*





Daybreak
      Oil and Gas, Inc. (referred to herein as “we,” “our,” “Daybreak,” or the
“Company”) was originally incorporated in the State of Washington on March 11,
      1955 as Daybreak Uranium, Inc. The Company was established for the purpose
      of
      mineral exploration and development on claims or leased lands throughout the
      western United States. In August 1955, we acquired the assets of Morning Sun
      Uranium, Inc. By the late 1950s, the Company had ceased to be a producing mining
      company and thereafter engaged in mineral exploration. In May 1964, to reflect
      the diversity of its mineral holdings, the Company changed its name to Daybreak
      Mines, Inc. The trading symbol for the Company became DBRM.





Our
      subsequent efforts in the acquisition, exploration and development of
      potentially viable commercial properties were unsuccessful. By February 1967,
      we
      had ceased active operations. After that time, our activities were confined
      to
      annual assessment and maintenance work on our Idaho mineral properties and
      other
      general and administrative functions. In November 2004, we sold our mineral
      rights in approximately 340 acres in Shoshone County, Idaho.





*Overview*





Effective
      March 1, 2005, we undertook a new business direction for the Company as an
      exploration and development company in the oil and gas industry. As of this
      date, we have become an early stage energy company. Currently, we are
      developing prospects in Alabama, California, Louisiana and Texas. In October
      of
      2005, to better reflect this new direction of the Company, our shareholders
      approved changing our name to Daybreak Oil and Gas, Inc. Our trading symbol
      continues to be DBRM.





We
      are
      actively pursuing oil and gas opportunities through joint ventures with industry
      partners as a means of limiting our drilling risk.  Our prospects are
      generally brought to us by other oil and gas companies or
      individuals.  We identify and evaluate prospective oil and gas
      properties to determine both the degree of risk and the commercial potential
      of
      the project.  We are currently developing projects that have a mix of
      low risk with a potential of steady reliable revenue as well as projects with
      a
      higher risk of success, but that may also have a large return.  We
      seek to maximize the value of our asset base by exploring and developing
      properties that have both production and reserve growth potential.





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





**4**


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





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





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





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





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





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





*Historical
      Business Development*





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





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





**5**


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





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





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





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





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





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





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





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





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





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





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





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





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





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





**6**


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





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





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





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





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





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





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





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





*Competition*





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





**7**


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





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





*Significant
      Customers*





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





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





*Title
      to Properties*





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





*Long
      Term Success*





Our
      success depends on (1) the successful acquisition, drilling and development
      of
      commercial grade oil and gas properties and (2) the prevailing prices for oil
      and natural gas to generate future revenues and operating cash
      flow.  Oil and natural gas prices have been extremely volatile in
      recent years and are affected by many factors outside our
      control.  This volatile nature of the energy markets makes it
      difficult to estimate future prices of oil and natural gas; however, any
      prolonged period of depressed prices would have a material adverse effect on
      our
      results of operations and financial condition.  Such pricing factors
      are largely beyond our control, and may result in fluctuations in our
      earnings.  We believe significant opportunities are available to us in
      the oil and gas exploration and development industry.





**8**


*Regulation*




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




Laws
      and
      regulations relating to our business frequently change, and future laws and
      regulations, including changes to existing laws and regulations, could adversely
      affect our business.




**RISK
      FACTORS**





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




**Risks
      related to investment in our Company**




***Our
      auditors have expressed an opinion that our significant operating losses raise
      substantial doubt about our ability to continue as a going
      concern***





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





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





***We
      are an early stage oil and gas exploration company with a limited operating
      history on which to base an investment decision***





We
      have a
      limited history of oil and gas production and have minimal proven
      reserves.  To date, we have had limited revenues and have not yet
      generated positive earnings.  The Company cannot provide any
      assurances that we will ever operate profitability.  As a result of
      our limited operating history, we are more susceptible to business
      risks.  These risks include unforeseen capital requirements, failure
      to establish business relationships, and competitive disadvantages against
      larger and more established companies.





**9**


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





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





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





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





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





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





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





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





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





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











**10**


***The
      oil and gas business is highly competitive placing us at an operating
      disadvantage***





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





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





- access
          capital markets;
- recruit
          more qualified personnel;
- absorb
          the burden of any changes in laws and regulation in applicable
          jurisdictions;
- handle
          longer periods of reduced prices of gas and oil.

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





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





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





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





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





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





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





**11**


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





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





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





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





The
      evaluation of these and other factors is based upon available seismic data,
      computer modeling, well tests and information obtained from production of oil
      and natural gas from adjacent or similar properties.  The probability
      of the existence and recoverability of reserves is less than 100% and actual
      recoveries of proved reserves can differ materially from
      estimates.  Accordingly, reserve estimates may be subject to downward
      adjustment.  Actual production, revenue and expenditures will likely
      vary from estimates, and such variances may be material.





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





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





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





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





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





**12**


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





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





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





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





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





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





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























**13**


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





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





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





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





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





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





Our
      Company President and one Director have substantial experience in the oil and
      gas business.  The rest of the management team has little or no
      experience in managing or conducting oil and gas operations.  The loss
      of any of these individuals, particularly our President or this Director could
      adversely affect our business.  If one or more members of our
      management team dies, becomes disabled or voluntarily terminates employment
      with
      us, there is no assurance that a suitable or comparable substitute will be
      found.





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





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





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





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





**14**


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





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





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





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





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





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





Our
      common stock is generally quoted on the OTC Bulletin Board, however since July
      2007, our stock has been quoted in the OTC pink sheet market because of SEC
      filing delinquencies. Both the pink sheet market and the bulletin board market
      are characterized by low trading volume.  Because of this limited
      liquidity, stockholders may be unable to sell their shares at or above the
      cost
      of their purchase prices.  The trading price of our shares has
      experienced wide fluctuations and these shares may be subject to similar
      fluctuations in the future.





The
      trading price of our common stock may be affected by a number of factors
      including events described in the risk factors set forth in this 10-KSB report,
      as well as our operating results, financial condition, announcements of drilling
      activities, general conditions in the oil and gas exploration and development
      industry, and other events or factors.





**15**


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





***Privately
      placed issuances of our common stock have and may continue to dilute ownership
      interests which could have an adverse effect on our stock
      prices***





Our
      authorized capital stock consists of 200,000,000 shares of common stock and
      10,000,000 shares of preferred stock.  As of September
      14, 2007, there were 41,171,299
      shares of common stock outstanding.  On May 19, 2006, the Company
      closed on a private placement sale of 4,013,602 units at $1.50 per unit
      resulting in gross proceeds of $6,020,404.  Each unit sold was
      comprised of two shares of common stock and one common stock purchase
      warrant.  The 118 investors in this private placement were issued
      8,027,206 shares of common stock and 4,013,602 common stock warrants. The
      placement agent for the offering earned an additional 1,204,082 common stock
      warrants. At the time of the offering, the common stock component prices of
      the
      private placement units were significantly lower than the trading price of
      our
      common stock. As of February 28, 2007, the Company’s authorized equity allows
      for 159,122,770 shares of authorized and unissued common stock.  In
      addition to the completed private placement, we may in the future, issue
      additional previously authorized and unissued common stock.  These
      events may result in the further dilution of the ownership interests of our
      present shareholders and purchasers of common stock offered in this
      prospectus.





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





***Preferred
      stock has been issued with greater rights than the common stock issued which
      may
      dilute and depress the investment value of the common stock
      investments***





Our
      articles of incorporation currently authorize the issuance of 10,000,000 shares
      of $0.001 par value preferred stock.  In June 2006, the Board of
      Directors authorized 2,400,000 shares of preferred stock to be designated as
      Series A Convertible Preferred stock. The Board of Directors has the power
      to
      issue shares without shareholder approval, and such shares can be issued with
      such rights, preferences, and limitations as may be determined by our Board
      of
      Directors.  On July 18, 2006, the Company closed on a private
      placement sale of 1,399,765 units at $3.00 per unit resulting in gross proceeds
      of $4,199,291.  Each unit sold was comprised of one Series A
      Convertible Preferred share and two common stock purchase
      warrants.  Each Series A Convertible Preferred share can be converted
      to three common stock shares at any time. The 100 investors in this private
      placement were issued a total of 1,399,765 Series A Convertible Preferred shares
      and 2,799,527 common stock warrants. The placement agent for the offering earned
      an additional 419,930 common stock warrants. As of February 28, 2007, 1,399,765
      shares of Series A Convertible preferred stock were issued and outstanding.




**16**


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





- conversion
          into common stock of the Company anytime the preferred shareholder may
          wish;
- automatic
          convertibility into common stock if after the effective date of  the
          registration statement the Company’s common stock closes at or above $3.00 per
          share for twenty (20) out of thirty trading days (30) days;
- cumulative
          dividends in the amount of 6% of the original purchase price per annum,
          payable upon declaration by the board of directors;
- the
          ability to vote together with the common stock with a number of votes equal
          to
          the number of shares of common stock to be issued upon conversion of the
          preferred stock.

The
      issuance of the Series A Convertible Preferred shares could delay, discourage,
      hinder or preclude an unsolicited acquisition of our Company.  In
      addition, the issuance of these preferred shares could make it less likely
      that
      shareholders receive a premium for their shares as a result of any such attempt
      to acquire the Company.  Further, this issuance could adversely affect
      the market price of, and the voting and other rights, of the holders of
      outstanding shares of common stock.





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





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





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





***Principal
      stockholders and directors control the Company through substantial voting
      power***





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





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














**17**


***We
      do not anticipate paying dividends on our common stock which could devalue
      the
      market value of these securities***





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





***Pursuant
      to SEC Rules our common stock is classified as a “penny stock’ increasing the
      risk of investment in these shares***





Our
      common stock is designated as “penny stock” and thus may be more illiquid than
      shares traded on an exchange or on NASDAQ.  The SEC has adopted rules
      (Rules 15g-2 through l5g-6 of the Exchange Act) which define “penny stocks” and
      regulate broker-dealer practices in connection with transactions with these
      stocks.  Penny stocks generally are any non-NASDAQ or non-exchange
      listed equity securities with a price of less than $5.00, subject to certain
      exceptions.  The “penny stock rules” require a broker-­dealer
      to:


- deliver
          a standardized risk disclosure document prepared by the SEC;
- provide
          the customer with current bid and offer quotations for the penny
          stock;
- include
          the compensation of the broker-dealer and its salesperson in the
          transaction;
- provide
          monthly account statements showing the market value of each penny stock
          held
          in the customers account;
- make
          a
          special written determination that the penny stock is a suitable investment
          for the purchaser and receive the purchaser’s written agreement to the
          transaction.

The
      “penny stock” reporting and disclosure requirements may have the effect of
      reducing the level of trading activity in the secondary market for a stock
      that
      is subject to these rules.  The market liquidity for the shares could
      be severely and adversely affected by limiting the ability of broker-dealers
      to
      sell these shares.  In addition, the ability of purchasers in this
      offering to sell their stock in any secondary market could be adversely
      restricted.





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





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




**18**


***An
      investment in the common stock of our Company will not provide any federal
      income tax benefits for the shareholders***





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





**Risks
      Related to Our Industry**





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





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





- acquire
          permits before the commencement of drilling;
- restrict
          the substances that can be released into the environment with drilling
          and
          production activities;
- limit
          or prohibit drilling activities on protected areas;
- require
          that reclamation measures be taken to prevent pollution from former
          operations;
- require
          remedial measures to be taken with respect to contaminated
          property.

The
      costs
      of complying with environmental laws and regulations could negatively impact
      our
      financial condition and results of operations.  Future changes in
      environmental laws and regulations could occur that may result in stricter
      standards and enforcement which could further negatively impact our
      business.





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





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





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





The
      business of exploring for and producing oil and gas involves a substantial
      risk
      of investment loss.  Drilling oil and gas wells involves the risk that
      the wells may be unproductive or that, although productive, that the wells
      may
      not produce oil and/or gas in economic quantities.




**19**


Other
      hazards, such as unusual or unexpected geological formations, pressures, fires,
      blowouts, loss of circulation of drilling fluids may substantially delay or
      prevent completion of any well.  Adverse weather conditions can also
      hinder drilling operations.  In addition, a “productive well” (a well
      that is producing oil or gas or that is capable of production) may become
      uneconomic due to pressure depletion, water encroachment, mechanical
      difficulties, etc, which impair or prevent the production of oil and/or gas
      from
      the well.





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





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





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





*Employees
      and Consultants*





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





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





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





The
      Daybreak Oil and Gas, Inc. corporate office is located at 601 W. Main Ave.,
      Suite 1012, Spokane, Washington 99201-0613.  Our telephone number
      is (509) 232-7674.





Our
      regional operations office is located at 16225 Park Ten Place, Suite 500,
      Houston, Texas 77084. The telephone number of our office in Houston is
      (281) 994-4021.




**20**


*Availability
      of SEC Filings*





You
      may
      read and copy any materials we file with the SEC at the SEC’s Public Reference
      Room at 100 F Street, NE, Room 1580, Washington, DC 20549. You can
      obtain information on the operation of the Public Reference Room by calling
      the
      SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports,
      proxy and information statements, and other information regarding issuers that
      file electronically with the SEC. The address of that site is
      (http://www.sec.gov).





*Website*





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





*Successful
      Efforts Accounting*





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



































**21**


**ITEM
      2.   DESCRIPTION OF PROPERTIES**





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





**Louisiana**





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





*Project
      Development*





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





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





*Field
      Development*





*“F-1”  Well*


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





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





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





**22**


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





*“F-3”
      Well*


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





*“B-1”Well*


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





*“A-1”
      and “F-2” Wells*


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





*Reserves*


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





*Outlook*


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





St.
      Landry Parish.  The Krotz Springs Prospect is primarily a deep gas
      play with reservoirs located at approximately 11,000 feet.  We and our
      partners have jointly leased 9,600 acres in this prospect area. We have limited
      access to a 3-D interpretation that shows potential gas reservoirs primarily
      in
      the Cockfield Sands. Daybreak was the operator on this project during the
      drilling and completion phases. Since production started in May of 2007, the
      unit operator of the Krotz Springs Field has now become the operator for this
      well. Total project drilling and completion costs were approximately $9.2
      Million.




**23**


Daybreak
      has a 12.5% working interest in this project. Our NRI is 9.125%. As of February
      28, 2007, we had spent $532,108 in leasehold, drilling and completion costs
      associated with this project. We have the option of participating in the
      drilling of an additional five wells in the Krotz Springs Field. Each succeeding
      well must be drilled within six months of the completion of the prior well.
      Current production is being evaluated prior to committing to further
      drilling.





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





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





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





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














**24**


**Texas**





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





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





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





*Reserves*


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





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





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





**California**





Kern
      and Tulare Counties.  In May 2005, we agreed to jointly explore an
      Area of Mutual Interest (“AMI”)  in the southeastern part of the San
      Joaquin Basin.  We initially paid a $12,500 fee to secure the project
      and the geological concepts.  Our agreement calls for us to also pay
      another $5,000 fee upon the completion of each sub-regional lead that is
      developed for 3-D seismic survey.  Additionally, we will pay another
      $5,000 fee upon the spud of the first well in each prospect area.





**25**


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





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





**Alabama
      (East Gilbertown Field)**





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





*Working
      Interest Participation*


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





*Reserves*


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





*Outlook*


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





**Canada**





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





**26**


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





**Summary
      Operating Data**





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





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








The
      following table shows the average sales price per unit of oil and natural gas
      as
      well as the average cost of production in barrels of oil equivalent (“BOE”), for
      the past three fiscal years.. One barrel of oil is roughly equivalent to 6,000
      cubic feet of natural gas. Oil is shown in barrels (“Bbl”), and of natural gas
      is shown in thousands of cubic feet (“Mcf”).




Years
                Ended February 28,2007
            
            
            2006
            
            
            2005Average
                Sales Price:Gas
                (per Mcf)
            
            $
            5.68
            
            
            $
            -
            
            
            $
            -Oil  (per
                Bbl)
            
            $
            63.01
            
            
            $
            -
            
            
            $
            -Average
                Cost of Production:Oil  (per
                Bbl)
            
            $
            24.81
            
            
            $
            -
            
            
            $
            -








The
      following table shows the developed and undeveloped oil and gas lease acreage
      held by us as of February 28, 2007. Undeveloped acres are acres on which wells
      have not been drilled or completed to a point that would permit the production
      of commercial quantities of oil and gas.  Gross acres are the total
      number of acres in which we have an interest. Net acres are the sum of our
      fractional interests owned in the gross acres.





**27**








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








The
      following table summarizes our productive oil and gas wells as of February
      28,
      2007. Productive wells are producing wells and wells capable of production.
      Gross wells are the total number of wells in which we have an interest. Net
      wells are the sum of our fractional interests owned in the gross
      wells.




**State**
            
            **Field**
            
            **Gross**
            
            
            **Net**Louisiana
            
            Tuscaloosa
            
            
            3
            
            
            
            2.23Texas
            
            Saxet
            
            
            3
            
            
            
            0.43Alabama
            
            Gilbertown
            
            
            14
            
            
            
            0.26Total
            
            
            
            
            20
            
            
            
            2.92








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





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








**28**


**ITEM
      3.  LEGAL PROCEEDINGS**





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












































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





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

















**29**


**PART  II**





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





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





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








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








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








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





**30**


**Dividend
      Policy**





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





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





**Recent
      Sales of Unregistered Securities**





*Convertible
      Debentures*




●
            From
                  March 19, 2005 through August 31, 2005, we borrowed $168,821 from
                  six
                  shareholders, officers or directors through a series of twenty-seven
                  convertible debentures to finance our operating
                  activities.  These convertible debentures had the following
                  features: one year term, six percent interest rate and the notes
                  were
                  convertible after six months to unregistered common
                  stock.




A
      conversion rate of $0.25 per share was selected because a private placement
      offering of our common stock was being planned at the same time for that price.
      Both the principal and the accrued interest were eligible for conversion to
      unregistered common stock.





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





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





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





**31**


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





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





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





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





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





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





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





7)
      On
      April 25, 2005, Terrence Dunne (appointed a director in January 2006 and CFO
      in
      April 2006), a shareholder and 10% control person (at the time), loaned the
      Company $8,000 to finance ongoing operating expenses. On the day of the loan,
      the closing price of our stock was $0.35.




**32**


On
      November 28, 2005, Mr. Dunne converted the note plus interest into unregistered
      common stock.  He was issued 33,105 shares of stock from this
      conversion.  On the day of the conversion, the closing price of our
      stock was $0.52.  Based on the closing price, the value of the
      principal in the conversion was $16,640.





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





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





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





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





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





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





**33**


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





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





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





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





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





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





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




**34**


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





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





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





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





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





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





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




**35**


On
      the
      day of the conversion, the closing price of our stock was $2.25. Based on the
      closing price, the value of the principal in the conversion was
      $36,000.





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





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





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





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





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





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





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





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




**36**


On
      the
      day of the conversion, the closing price of our stock was $.95.  Based
      on the closing price, the value of the principal in the conversion was
      $380,000.





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





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





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





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





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





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





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





**37**


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





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





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





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





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





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





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





2)
      On
      February 27, 2006, Daniel McKinney, a shareholder loaned the Company $125,001
      in
      a Convertible Debenture to finance ongoing operating expenses. On the day of
      the
      loan, the closing price of our stock was $2.21.




**38**


On
      December 28, 2006, Mr. McKinney agreed to extend the term of the debenture
      to
      August 31, 2007. In consideration of this extension, he was issued 83,333
      warrants. On August 31, 2007, Mr. KcKinney agreed to extend the term of the
      debenture to October 31, 2007. In consideration of this extension, he was issued
      70,000 warrants. The convertible note and warrants issued upon extension of
      the
      term of the note were issued pursuant to a Section 4(2) exemption from
      registration under the Securities Act of 1933, as amended.





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





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





*Warehousing
      Line of Credit and Convertible Promissory Note*





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





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





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




**39**


Upon
      conversion, the remaining discount was recognized as interest and the
      Convertible Promissory Note was cancelled. Financing costs for the Convertible
      Promissory Note were paid by issuing 66,000 shares of unregistered common stock
      to Genesis Financial and the director who guaranteed Convertible Promissory
      Note
      as explained below. The common stock fair value of $38,380 was recognized as
      interest expense on the date of grant and the fair value was determined using
      Daybreak’s trading price on the date of grant.





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





*Private
      Placements*





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





Mineral
      rights acquisition;


Drilling
      wells;


Seismic
      exploration;


General
      and administrative expenses;


Legal
      and
      accounting expenses.





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





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





A
      total
      of 118 investors participated in this private placement. From the offering,
      8,027,206 shares of unregistered common stock and 4,013,602 warrants were
      issued. The warrants were valued at $1,779,172 using the Black-Scholes option
      pricing model. The assumptions used in the Black-Scholes valuation model were:
      a
      risk fee interest rate of 4.99%; the current stock price at date of issuance
      of
      $2.70 per share; the exercise price of $2.00; an expected term of five (5)
      years; volatility of 112%; and dividend yield of 0.0%.




**40**


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





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





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





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





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




**41**


The
      relative fair value of the Common Stock and the Common Stock Purchase Warrants
      was as follows:




**Description**
            
            **Shares**
            
            
            **Relative
                Fair**
              **Value
                Amount**Common
                Stock
            
            
            8,027,206
            
            
            $
            4,241,232Common
                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:





Land
      acquisition;


Drilling
      additional wells;


Connecting
      well to pipeline;


Seismic
      exploration;


General
      and administrative expenses;


Legal
      and
      accounting expenses.





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





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





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





**42**


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





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





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





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











**43**


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





The
      relative fair values of the Series A Convertible Preferred Shares and the Common
      Stock Purchase Warrants were as follows:


**Description**
            
            **Shares**
            
            
            **Relative
                Fair**
              **Value
                Amount**Series
                A Convertible Preferred
            
            
            1,399,765
            
            
            $
            2,710,073Common
                Stock Purchase Warrants
            
            
            2,799,530
            
            
            
            1,489,222Total
                Proceeds
            
            
            
            
            
            
            4,199,295Offering
                Costs
            
            
            
            
            
            
            (573,091
            )Net
                Proceeds
            
            
            
            
            
            $
            3,626,204





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





Completions
      of wells;


Connecting
      wells to pipelines;


Drilling
      additional wells;


Working
      capital.





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





*Stock
      for Services*





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





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




**44**


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





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





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





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





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





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





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





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





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





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





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





**45**


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





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





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





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





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





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





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





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





*Stock
      for Directors Services*





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








**46**


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





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





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





*Stock
      for Oil and Gas Properties*





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





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





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





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





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




**47**


*Subsequent
      Issuances*





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





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





**Securities
      Authorized for Issuance under Equity Compensation Plan**





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





**Common
      Stock**





The
      Company is authorized 200,000,000 shares of Common Stock with a par value of
      $0.001 of which 29,458,221 were issued as of February 28, 2006. At February
      28,
      2007, a total of 40,877,230 shares were issued and outstanding. All shares
      of
      Common Stock are equal to each other with respect to voting, liquidation,
      dividend and other rights.  Owners of shares of Common Stock are
      entitled to one vote for each share of Common Stock owned at any shareholders'
      meeting.  Holders of shares of Common Stock are entitled to receive
      such dividends as may be declared by the Board of Directors out of funds legally
      available therefore; and upon liquidation, are entitled to participate pro
      rata
      in a distribution of assets available for such a distribution to
      shareholders.





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





**Preferred
      Stock**





The
      Company is authorized 10,000,000 shares of Preferred Stock with a par value
      of
      $0.001 of which none had been issued as of February 28, 2006. Our Preferred
      Stock may be entitled to preference over the Common Stock with respect to the
      distribution of assets of the Company in the event of liquidation, dissolution,
      or winding-up of the Company, whether voluntarily or involuntarily, or in the
      event of any other distribution of assets of the Company among its shareholders
      for the purpose of winding-up its affairs.




**48**


The
      authorized but unissued shares of Preferred Stock may be divided into and issued
      in designated series from time to time by one or more resolutions adopted by
      the
      Board of Directors.  The Directors in their sole discretion shall have
      the power to determine the relative powers, preferences, and rights of each
      series of Preferred Stock.





On
      June
      30, 2006, in action by the Board of Directors, 2,400,000 of theses preferred
      shares were designated as Series A Convertible Preferred. In July 2006, we
      completed a private placement of the Series A Convertible Preferred that
      resulted in the issuance of 1,399,765 shares.




**Series
      A Convertible Preferred Stock**




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





**Conversion:**


The
      preferred shareholder shall have the right to convert the Series A Convertible
      Preferred Stock into the Company’s Common Stock at any time.  Each
      share of Preferred Stock is convertible into three (3) shares of Common
      Stock.





**Automatic
      Conversion:**


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





**Dividend:**


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





**Voting
      Rights:**


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





**Debt
      Securities**





From
      March 23, 2005 through August 31, 2005, in a series of twenty-seven loans,
      we
      borrowed from six officers, directors or shareholders, a total of $168,821
      to
      finance ongoing operations. These convertible debentures were for a term of
      one
      year; had a 6% interest rate and both the principal and interest could be
      converted to unregistered common stock after a minimum period of six months.




**49**


The
      conversion rate was $0.25 per share. During the fiscal year ended February
      28,
      2006, twenty-four of the twenty-seven loans were converted to unregistered
      common stock resulting in 566,134 unregistered shares being issued. During
      the
      fiscal year ended February 28, 2007, the remaining three convertible debentures
      were converted to unregistered common stock resulting in 137,541 unregistered
      shares being issued.





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





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





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








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











**50**


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





The
      following management’s discussion and analysis (“MD&A”) is management’s
      assessment of the historical financial and operating results of Daybreak Oil
      and
      Gas, Inc. (the “Company” or “Daybreak”) during the period covered by the
      financial statements. This MD&A should be read in conjunction with the
      audited financial statements and the related notes and other information
      included elsewhere in this 10-KSB report.





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





**Safe Harbor
      Provision**





Certain
      statements contained in our Management’s Discussion and Analysis of Financial
      Condition or Plan of Operation are intended to be covered by the safe harbor
      provided for under Section 27A of the Securities Act of 1933, as amended, and
      Section 21E of the Securities Exchange Act of 1934, as amended. All statements
      other than statements of historical facts contained in this report, including
      statements regarding our current expectations and projections about future
      results, business strategy, performance, prospects and opportunities, are
      forward-looking statements. To understand about forward looking statements,
      please refer the section labeled forward looking statements at the beginning
      of
      this 10-KSB report.





**Overview**





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





Our
      operations are focused on identifying and evaluating prospective oil and gas
      properties and funding projects that we believe have the potential to produce
      oil or gas in commercial quantities. We are currently developing projects in
      Alabama, California, Louisiana and Texas. Since November of 2006, we have been
      involved as the operator of two project areas in Louisiana and in June of 2007,
      we became the operator of the Gilbertown project in Alabama. In the past we
      have
      relied on our working interest partners to negotiate all drilling, and sales
      contracts. Over the last fiscal year, we have been involved in the
      drilling/workover and/or completion of thirteen (13) wells in Alabama,
      Louisiana, Texas and in Alberta, Canada. We have achieved or increased
      commercial production in eight (8) of these wellbores.





*Long
      Term Success*





Our
      success depends on the acquisition and drilling of commercial grade oil and
      gas
      properties and the prevailing prices for oil and natural gas. Oil and natural
      gas prices have been extremely volatile in recent years and are affected by
      many
      factors outside our control. This volatile nature of the energy markets makes
      it
      difficult to estimate future prices of oil and natural gas; however, any
      prolonged period of depressed prices would have a material adverse effect on
      our
      results of operations and financial condition.





**51**


*Restated
      Financial Statements*





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





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

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





Again
      pursuant to SFAS No. 123(R), the guidelines for recording common stock issued
      for investor relations services and the acquisition of interests in oil and
      gas
      properties suggest that the more readily determinable fair value of these shares
      should be based on the publicly traded share price of our shares at the grant
      or
      acquisition date. SFAS No. 157 also suggests that when shares are issued for
      services or properties, they should be valued at the publicly traded share
      price. Accordingly, we have restated the impact of the share based payments
      for
      services and oil and gas properties to reflect the use of the publicly traded
      share price.




We
      also
      reviewed our prior determination of the fair value of shares resulting from
      the
      potential conversion of debt and concluded that we did not appropriately
      accounted for discounts in accordance with SFAS 123(R) and EITF 98-05. We have
      calculated the intrinsic value of the embedded beneficial conversion feature
      present in the convertible debt using quoted closing market prices on the date
      of each of the transactions.




**52**


This
      calculation has determined that $1,138,701 in discounts should have been
      assigned to the convertible debt issuances at their respective inception. These
      discounts will be amortized over the period commencing on the issuance date
      to
      the earliest conversion date of the debt.




The
      accompanying financial statements for the twelve month period ended February
      28,
      2006, have been restated to effect the changes described above.





*Selected
      Financial Information*




Since
      our
      inception, we have incurred recurring losses from operations with negative
      cash
      flow and have depended on external financing to sustain our operations. During
      the fiscal year ended February 28, 2007, we reported losses of $8,392,030.
      There
      is no assurance that we will be able to achieve profitability.




Our
      balance sheet on February 28, 2007, shows total assets of $9,211,466 comprised
      primarily of oil and gas properties (net of Depreciation, Depletion,
      Amortization and Impairment) of $4,552,850, cash and marketable securities
      for
      $2,356,213, note receivable (including interest) for $828,336 and accounts
      receivable (including trade, related parties and joint interest participants)
      of
      $799,970. This compares with the February 28, 2006 balances for oil and gas
      properties of $1,132,400; cash and marketable securities for $814,360 and
      deposits on equipment of $250,000.




At
      February 28, 2007, we had total liabilities of $2,544,884, comprised mainly
      of
      $2,110,458 in accounts payable, $134,999 in notes payable (net of discount),
      $200,000 in pipeline financing obligation as compared with the February 28,
      2006
      balances for accounts payable of $28,646 and notes payable (net of discount)
      of
      $89,468.





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





*Accumulated
      Deficit*





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





*Cash
      Flows*





1)
            Cash
                  flow from operating activities for the fiscal year ended February
                  28, 2007, was ($531,274) compared to ($393,185) for the same period
                  ending
                  February 28, 2006. This was primarily caused by our operating loss
                  of
                  $8,392,030 as compared to $4,472,041 from the prior year. Principal
                  operating activities in 2007 included a $1.6 million impairment
                  of oil and
                  gas properties related to the Tensas Farms F-1 and F-3 wells in
                  Louisiana
                  and $1.2 million of interest expense related primarily to accretion
                  of
                  debt discount.


2)
            Cash
                flow from investing activities for the fiscal year ended February
                28, 2007, was ($8,936,257) compared to ($1,223,900) for the same
                period
                ending February 28, 2006. This difference was due to an increase
                in our
                investments in oil and gas properties of ($5,904,956) compared with
                ($973,900) from the prior fiscal year. Additional increases came
                from the
                deposits in money market funds ($2,356,213) and additions to notes
                receivable ($800,000).




**53**




3)
            Cash
                flow from financing activities for the fiscal year ended February
                28, 2007, was $9,039,461 compared to $2,423,022 for the same period
                ending
                February 28, 2006. This difference was due to proceeds from the sale
                of
                our common stock of $5,188,257 as compared to the sale of common
                stock
                from the prior year of 1,087,500. Another $3,626,204 was received
                from
                proceeds of the convertible preferred stock in July 2006. Additionally,
                for the fiscal year ended February 28, 2007, the pipeline cost for
                the F-1
                well in Louisiana was financed for
                $200,000.





**Liquidity
      and Capital Resources**




*Liquidity
      and Working Capital*




Liquidity
      is defined as the ability to convert assets into cash or to obtain cash.
      Short-term liquidity refers to the ability to meet short-term obligations of
      12
      months or less. Liquidity is a matter of degree and is expressed in terms of
      a
      ratio. Two common liquidity ratios in financial statement analysis are: Current
      Ratio and Working Capital.




Current
      ratio is defined as current assets divided by current liabilities. Working
      capital is defined as current assets minus current liabilities.




**February
                28,**
            
            
            **February
                28,****2007**
            
            
            **2006**Current
                Assets
            
            $
            4,537,634
            
            
            $
            1,074,610Current
                Liabilities
            
            $
            2,445,457
            
            
            $
            118,114Working
                Capital
            
            $
            2,092,177
            
            
            $
            956,496Current
                Ratio
            
            
            1.86
            
            
            
            9.10








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





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





Our
      only
      source of funds in the past has been through the debt or equity markets. Since
      we have not yet established profitable operations, this is also expected to
      be
      our source of funds in the foreseeable future.  Our business model is
      focused on acquiring developmental properties and also existing production.
      Our
      ability to generate future revenues and operating cash flow will depend on
      successful exploration, and/or acquisition of oil and gas producing properties,
      which will very likely require the Company to continue to raise equity or debt
      capital from sources outside of the Company.




**54**


The
      Company has ongoing capital commitments to develop certain leases pursuant
      to
      their underlying terms.  Failure to meet such ongoing commitments may
      result in the loss of certain leases.  These ongoing capital
      commitments may also cause the Company to seek additional capital from sources
      outside of the Company.




Since
      our
      future operations will continue to be heavily dependent on our ability to seek
      and secure capital from exterior sources, should we be unable to continue to
      find new capital from such sources, the Company may not be able to survive
      as a
      going concern, and any equity investment in the Companycould become worthless or substantially impaired in value.




Since
      our
      inception, we have suffered recurring losses from operations with negative
      cash
      flow and have depended on external financing to sustain our operations. During
      the fiscal year ended February 28, 2007, we reported losses of $8.1 million.
      There is no assurance that the Company can ever achieve sustainable
      profitability.  Failure to achieve sustainable profitability could
      prevent the Company from continuing as a going concern, and could cause any
      equity investment in the Company to become worthless.




**Critical
      Accounting Policies**




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





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


*Oil
        and Gas Properties*
 
 We
        use
        the successful efforts method of accounting for oil and gas property
        acquisition, exploration, development, and production
        activities.  Costs to acquire mineral interests in oil and gas
        properties, to drill and equip exploratory wells that find proved reserves,
        and
        to drill and equip development wells are capitalized as
        incurred.  Costs to drill exploratory wells that are unsuccessful in
        finding proved reserves are expensed as incurred.  In addition, the
        geological and geophysical costs, and costs of carrying and retaining unproved
        properties are expensed as incurred.  Costs to operate and maintain
        wells and field equipment are expensed as incurred.
 
 **55**
 Capitalized
        proved property acquisition costs are amortized by field using the
        unit-of-production method based on proved reserves.  Capitalized
        exploration well costs and development costs (plus estimated future
        dismantlement, surface restoration, and property abandonment costs, net of
        equipment salvage values) are amortized in a similar fashion (by field) based
        on
        their proved developed reserves.  Support equipment and other property
        and equipment are depreciated over their estimated useful lives.
 
 Pursuant
        to SFAS No. 144, “Impairment or Disposal of Long-Lived Assets”, we review proved
        oil and natural gas properties and other long-lived assets for impairment.
        These
        reviews are predicated by events and circumstances, (such as downward revision
        of the reserve estimates or commodity prices), that indicate a decline in
        the
        recoverability of the carrying value of such properties. We estimate the
        future
        cash flows expected in connection with the properties and compare such future
        cash flows to the carrying amount of the properties to determine if the carrying
        amount is recoverable. When the carrying amounts of the properties exceed
        their
        estimated undiscounted future cash flows, the carrying amounts of the properties
        are reduced to their estimated fair value.  The factors used to
        determine fair value include, but are not limited to, estimates of proved
        reserves, future commodity prices, the timing of future production, future
        capital expenditures and a risk-adjusted discount rate. Asset impairments
        of
        $1,606,292 and $-0- were recorded for the years ended February 28, 2007 and
        February 28, 2006, respectively. The charge is included in depreciation,
        depletion and amortization.
 
 Unproved
        oil and gas properties that are individually significant are also periodically
        assessed for impairment of value. An impairment loss for unproved oil and
        gas
        properties is recognized at the time of impairment by providing an impairment
        allowance.
 
 On
        the
        retirement or sale of a partial unit of proved property, the cost is charged
        to
        accumulated depreciation, depletion, and amortization with a resulting gain
        or
        loss recognized in income.
 
 Deposits
        and advances for services expected to be provided for exploration and
        development or for the acquisition of oil and gas properties are classified
        as
        long term other assets.  As of February 28, 2007 $70,266 had been
        advanced for services.
 
 *Revenue
        Recognition*
 
 We
        use
        the sales method to account for sales of crude oil and natural
        gas.  Under this method, revenues are recognized based on actual
        volumes of oil and gas sold to purchasers.  The volumes sold may
        differ from the volumes to which we are entitled based on its interests in
        the
        properties.  These differences create imbalances which are recognized
        as a liability only when the imbalance exceeds the estimate of remaining
        reserves. We had no significant imbalances as of February 28, 2007 and February
        28, 2006.
  *Suspended
        Well Costs*
 
 On
        April
        4, 2005, the Financial Accounting Standards Board, (FASB) issued FASB Staff
        Position No. 19-1,"Accounting for Suspended Well Costs" (FSP No. 19-1). This
        staff position amends SFAS No. 19, "Financial Accounting and Reporting by
        Oil
        and Gas Producing Companies" and provides guidance concerning exploratory
        well
        costs for companies that use the successful efforts method of accounting.
        Daybreak adopted FSP No. 19-1 for the fiscal years ended February 28, 2007
        and
        2006.
 
 **56**
 The
        FSP
        states that exploratory well costs should continue to be capitalized if:
        (1) a
        sufficient quantity of reserves are discovered in the well to justify its
        completion as a producing well and (2) sufficient progress is made in assessing
        the reserves and the economic and operating feasibility of the well. If the
        exploratory well costs do not meet both of these criteria, these costs should
        be
        expensed, net of any salvage value. Additional annual disclosures are required
        to provide information about management's evaluation of capitalized exploratory
        well costs.
 
 In
        addition, the FSP requires annual disclosure of: (1) net changes from period
        to
        period of capitalized exploratory well costs for wells that are pending the
        determination of proved reserves, (2) the amount of exploratory well costs
        that
        have been capitalized for a period greater than one year after the completion
        of
        drilling and (3) an aging of exploratory well costs suspended for greater
        than
        one year, designating the number of wells the aging is related to. Further,
        the
        disclosures should describe the activities undertaken to evaluate the reserves
        and the projects, the information still required to classify the associated
        reserves as proved and the estimated timing for completing the
        evaluation.
 
 *Share
        Based Payments*
 
 Prior
        to
        February 28, 2005, we accounted for opur stock based compensation plans under
        the recognition and measurement provisions of APB Opinion No. 25, “Accounting
        for Stock Issued to Employees” and related Interpretations, (“APB 25”) as
        permitted by SFAS No. 123, “Accounting for Stock Based Compensation” (“SFAS
        123”).
 
 Effective
        March 1, 2005, we adopted the fair value recognition provisions of SFAS No.
        123,
“Accounting for Stock-Based Compensation” (“SFAS 123”) for our stock based
        compensation plans under the recognition and measurement provisions of SFAS
        123.  No awards granted prior to March 1, 2005 were modified or
        settled in cash during fiscal 2006.
 
 Effective
        March 1, 2006, we adopted the fair value recognition provisions of SFAS No.
        123R, “Share Based Payment” and related Interpretations (“SFAS
        123R”).
 
 Under
        both SFAS 123 and SFAS 123R, compensation cost for all share based payments
        granted on or subsequent to March 1, 2005 are based on the grant date fair
        value
        estimated in accordance with the provisions of SFAS 123 and SFAS 123R, for
        the
        respective fiscal years. Compensation cost is recognized on a straight line
        basis over the requisite service period for the entire award in accordance
        with
        the provisions of SFAS 123R.  If at any date the portion of the
        grant-date fair value of the award that is vested is greater than that amount
        recognized on a straight line basis, the amount of the vested grant date
        fair
        value is recognized.
 
 We
        account for transactions in which we issue equity instruments to acquire
        goods
        or services from non-employees in accordance with the provisions of SFAS
        No.
        123R (as amended).  These transactions are accounted for based on the
        fair value of the consideration received or the fair value of the equity
        instruments issued, whichever is more reliably measurable.
 
 *Restatements*
 
 We
        have
        restated our financial statements in accordance with SFAS No. 154, “Accounting
        Changes and Error Corrections”*.* The financial statements were restated
        for the first three (3) quarters for the fiscal year ended February 28, 2006,
        for the twelve months ended February 28, 2006 and for the first three (3)
        quarters for the fiscal year ended February 28, 2007 (the “restated periods”).
  **57**
 The
        financial statements were restated to reflect adjustments to non-cash
        transactions involving (1) the valuation of common stock issued for management
        and director compensation, (2) the valuation of common stock issued for investor
        relations services, (3) the valuation of common stock issued for the acquisition
        of oil and gas properties, and (4) the recognition of beneficial conversion
        features inherent in the convertible debentures issued during the restated
        periods.


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





**Fiscal
      Year 2007 compared to Fiscal Year 2006**





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





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





*Cost
      and Expenses:*





A
      table
      of our costs and expenses for the fiscal year 2007 compared to the fiscal year
      2006 follows:




Fiscal
                Year
            
            
            Fiscal
                Year2007
            
            
            2006Production
                Costs
            
            $
            373,766
            
            
            $
            -Exploration
                Costs
            
            
            1,196,640
            
            
            
            327,469Depreciation,
                Depletion,Amortization
                & Impairment
            
            
            2,398,048
            
            
            
            -General
                & Administrative
            
            
            3,936,868
            
            
            
            3,902,872Total
                Operating Expenses
            
            $
            7,905,322
            
            
            $
            4,230,341








Expenses
        incurred by the Company include production costs associated directly with
        the
        generation of oil and gas revenues, exploration and drilling costs related
        to
        the development of oil and gas properties and general and administrative
        expenses, including legal and accounting expenses, management and director
        fees,
        investor relations expenses, and other general and administrative
        costs.
 
 **58**
 The
        increase in production costs from $0 in the fiscal year 2006 to $373,766
        in the
        fiscal year 2007 relates entirely to the existence of revenues in fiscal
        year of
        2007.
 
 Exploration
        and drilling expenses increased substantially from $327,469 in fiscal year
        2006
        to $1,196,640 in fiscal year 2007 due primarily to an increase in the number
        of
        wells in progress.  The Company participated in the development of 11
        wells during the fiscal year 2007, compared to 2 wells in the comparable
        period
        of the prior year.
 
 The
        increase in depreciation, depletion, amortization and impairment to $2,398,048
        in the fiscal year 2007 from $0 for the fiscal year 2006, relates mainly
        to
        $787,401 for oil and gas properties as a result of production, and
        an impairment of proved oil and gas properties of
        $1,606,292.


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





Other
      administrative expenses, including management and directors fees, investor
      relations fees and other general and administrative expenses were basically
      unchanged in fiscal year 2007 compared to fiscal year 2006.




Interest
      income was $101,697 in fiscal year 2007 compared to $362 in fiscal year 2006
      due
      primarily to higher average cash and investment balances. 
 Interest
        expense increased substantially to $1,223,298 in fiscal year 2007 compared
        to
        $242,062 in fiscal year 2006. This was a result of an increase in debt to
        fund
        operations and related amortization of debt discounts using the effective
        interest method. The discounts were recorded on convertible promissory notes
        as
        a result of intrinsic beneficial conversion features.


Due
      to
      the nature of its business, as well as the relative immaturity of the business,
      the Company expects that revenues, as well as all categories of expenses, will
      continue to fluctuate substantially quarter to quarter and year to year. Production
      costs will fluctuate according to the number and percentage ownership of
      producing wells, as well as the amount of revenues being contributed by such
      wells. Exploration and drilling expenses will be dependant the amount of capital
      that the Company has to invest in future development projects, as well as the
      success or failure of such projects. Likewise, the amount of depreciation,
      depletion, amortization expense and impairment costs will depend upon the
      factors cited in the prior sentence, as well as numerous other factors including
      general market conditions.





**Other
      Liquidity Factors**





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


**59**
 **Summary**





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





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





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





**Off-Balance
      Sheet Arrangements**





As
      of
      February 28, 2007, we did not have any relationships with unconsolidated
      entities or financial partners, such as entities often referred to as structured
      finance or special purpose entities, which have been established for the purpose
      of facilitating off-balance sheet arrangements or other contractually narrow
      or
      limited purposes. As such, we are not materially exposed to any financing,
      liquidity, market or credit risk that could arise if we had engaged in such
      relationships.




**Exploration
      and Drilling**





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





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





In
      the
      Tuscaloosa project in Louisiana, we are currently proceeding with a
      multi-well (4) drilling program. This program commenced in August 2007. We
      are drilling two Tuscaloosa wells back to back. We then will be drilling a
      Chalk
      and a Paluxy play based upon results of the Tuscaloosa drilling. Our F-1 well
      has had the technical issues resolved and will return to production in the
      third
      quarter of the year. The F-3 well has been producing since March and has been
      performing as anticipated. In August 2007, the F-3 well was shut-in due to
      downstream gas distributor issues, but has returned to production in
      September.




**60**


In
      the
      Krotz Springs Field, in central Louisiana, we completed the Haas-Hirsch No.
      1
      well in May and commenced production. As part of the farm-out agreement,
      Daybreak was no longer the operator of this well once production began.
      Consequentially the well has been renamed the KSU #59. Production levels have
      been consistent since production began.





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





*Drilling
      Rig*





In
      August
      2006, we entered into an agreement with Green River Drilling for a drilling
      rig.
      Daybreak advanced funds to refurbish the rig and then would have first right
      on
      use of the rig for three years. We felt it was necessary to enter this
      arrangement because of the shortage of available rigs for drilling in Louisiana.
      We advanced a total of $800,000 to Green River for the refurbishing of the
      rig.




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




**Summary**





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





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




















**61**


**ITEM
      7.  FINANCIAL INFORMATION**








REPORT
      OF
      INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To
      the
      Board of Directors and


Stockholders
      of Daybreak Oil and Gas, Inc.


(An
      Exploration Stage Company)





We
      have
      audited the accompanying balance sheets of Daybreak Oil and Gas, Inc. (an
      exploration stage company) as of February 28, 2007 and 2006 and the related
      statements of operations, stockholders’ equity, and cash flows for each of the
      two years then ended and for the period from March 1, 2005 (inception) to
      February 28, 2007.  These financial statements are the responsibility
      of the Company's management. Our responsibility is to express an opinion on
      these financial statements based on our audits. The financial statements for
      the
      period from March 1, 2005 (inception) through February 28, 2007 include total
      revenues of $629,346 and a net loss of $12,864,071.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform an audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. An audit also includes examining,
      on a test basis, evidence supporting the amounts and disclosures in the
      financial statements, assessing the accounting principles used and significant
      estimates made by management, as well as evaluating the overall financial
      statement presentation.  We believe that our audits provide a
      reasonable basis for our opinion.





In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the financial position of Daybreak Oil and Gas, Inc. as
      of
      February 28, 2007 and 2006 and the results of operations and cash flows for
      the
      for the periods described above, in conformity with accounting principles
      generally accepted in the United States of America.





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





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







Malone
      & Bailey PC


www.malone-bailey.com


Houston,
      Texas


September
      20, 2007











**62**




**Daybreak
                Oil and Gas, Inc.**
              **(An
                Exploration Stage Company, Date of Inception March 1,
                2005)****Balance
                Sheets**
              **As
                of February 28, 2007 and 2006****ASSETS**
            
            2007
            
            
            2006
              (Restated)CURRENT
              ASSETS:Cash
            
            $
            377,957
            
            
            $
            806,027Restricted
                cash
            
            
            -
            
            
            
            8,333Investment
                in marketable securities, at market,  cost of
                $2,356,213
            
            
            2,356,213
            
            
            
            -Accounts
                receivable:Oil
                and gas sales
            
            
            56,906
            
            
            
            -Related
                party participants
            
            
            41,357
            
            
            
            -Joint
                interest participants
            
            
            799,970
            
            
            
            -Notes
                receivable (including accrued interest of $28,336)
            
            
            828,336
            
            
            
            -Prepaid
                expenses and other current assets
            
            
            76,895
            
            
            
            250Deposit
                on equipment
            
            
            -
            
            
            
            250,000Deferred
                financing costs, net of amortization
            
            
            -
            
            
            
            10,000Total
                current assets
            
            
            4,537,634
            
            
            
            1,074,610OIL
                AND GAS PROPERTIES, net of accumulated depletion, depreciation,amortization
                and impairment, successful efforts method
            
            
            4,552,850
            
            
            
            1,132,400VEHICLES
                AND EQUIPMENT, net of accumulated depreciation of
                $4,355
            
            
            18,556
            
            
            
            -OTHER
              ASSETS
            
            
            102,426
            
            
            
            -Total
                assets
            
            $
            9,211,466
            
            
            $
            2,207,010**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**CURRENT
              LIABILITIES:Account
                payable and other accrued liabilities
            
            $
            2,110,458
            
            
            $
            28,646Notes
                payable – related party
            
            
            200,000
            
            
            
            -Convertible
                debentures, net of discount of $ 90,002 and $1,049,233respectively
            
            
            134,999
            
            
            
            89,468Total
                current liabilities
            
            
            2,445,457
            
            
            
            118,114OTHER
              LIABILITIES:Asset
                retirement obligation
            
            
            99,427
            
            
            
            -Total
                liabilities
            
            
            2,544,884
            
            
            
            118,114COMMITMENTS
            
            
            -
            
            
            
            -STOCKHOLDERS’
              EQUITY:Preferred
                stock – 10,000,000 shares authorized, $0.001 par valueSeries
                A Convertible Preferred stock – 2,400,000 shares authorized; $0.001par
                value; 6% cumulative dividends, authorized; 1,399,765 and -0-shares
                issued and outstanding, respectively
            
            
            1,400
            
            
            
            -Common
                stock – 200,000,000 shares authorized, $0.001 par value;40,877,230
                and 29,458,221 shares issued and outstanding, respectively
            
            
            40,877
            
            
            
            29,458Additional
                paid-in capital
            
            
            20,224,411
            
            
            
            7,267,514Accumulated
                deficit
            
            
            (736,035
            )
            
            
            (736,035
            )Deficit
                accumulated during the exploration stage
            
            
            (12,864,071
            )
            
            
            (4,472,041
            )Total
                stockholders’ equity
            
            
            6,666,582
            
            
            
            2,088,896Total
                liabilities and stockholders’ equity
            
            $
            9,211,466
            
            
            $
            2,207,010




The
            accompanying notes are an integral part of these financial
            statements.
 **63**




**DAYBREAK
                OIL AND GAS, INC.**
              **(An
                Exploration Stage Company)**
              **Statements
                of Operations**
              **For
                the Years ended February 28, 2007 and 2006 and for the
                Period**
              **from
                Inception (March 1, 2005) to February 28, 2007**Year
                Ended
            
            
            From
                InceptionFebruary
                28,
            
            
            Through
                February 28,2007
            
            
            2006
              (Restated)
            
            
            2007REVENUE:Oil
                and gas sales
            
            $
            629,346
            
            
            $
            -
            
            
            $
            629,346OPERATING
                EXPENSES:Production
                costs
            
            
            373,766
            
            
            
            -
            
            
            
            373,766Exploration
                expenses
            
            
            1,196,640
            
            
            
            327,469
            
            
            
            1,524,109Depreciation,
                depletion, amortization and impairment
            
            
            2,398,048
            
            
            
            -
            
            
            
            2,398,048General
                and administrative
            
            
            3,936,868
            
            
            
            3,902,872
            
            
            
            7,839,740Total
                operating expenses
            
            
            7,905,322
            
            
            
            4,230,341
            
            
            
            12,135,663LOSS
                FROM OPERATIONS
            
            
            (7,275,976
            )
            
            
            (4,230,341
            )
            
            
            (11,506,317
            )OTHER
                INCOME (EXPENSE):Interest
                income
            
            
            101,697
            
            
            
            362
            
            
            
            102,059Dividend
                income
            
            
            5,547
            
            
            
            -
            
            
            
            5,547Interest
                expense
            
            
            (1,223,298
            )
            
            
            (242,062
            )
            
            
            (1,465,360
            )Total
                other income (expense)
            
            
            (1,116,054
            )
            
            
            (241,700
            )
            
            
            (1,357,754
            )NET
                LOSS
            
            $
            (8,392,030
            )
            
            $
            (4,472,041
            )
            
            $
            (12,864,071
            )Cumulative
                convertible preferred stockdividend
                requirement
            
            
            (155,316
            )
            
            
            -
            
            
            
            (155,316
            )Deemed
                  dividend
            
            
            (4,199,295
            )
            
            
            -
            
            
            
            (4,199,295
            )NET
                LOSS AVAILABLE TO COMMONSHAREHOLDERS
            
            $
            (12,746,641
            )
            
            $
            (4,472,041
            )
            
            $
            (17,218,682
            )NET
              LOSS PER COMMON SHARE – Basicand
                diluted
            
            $
            (0.34
            )
            
            
            (0.19
            )WEIGHTED
                AVERAGE NUMBER OFCOMMON
                SHARES OUTSTANDING –Basic
                and diluted
            
            
            37,045,509
            
            
            
            23,175,905




The
            accompanying notes are an integral part of these financial
            statements.
 **64**




**DAYBREAK
                OIL AND GAS, INC.**
              **(An
                Exploration Stage Company)**
              **Statement
                of Changes in Stockholders' Equity**
              **For
                the Period from Inception (March 1, 2005) through February 28,
                2007****Series
                A Convertible**
            
            
            
            
            
            
            
            
            
            
            
            **Deficit
                Accumulated****Preferred
                Stock**
            
            
            **Common
                Stock**
            
            
            **Additional**
            
            
            
            
            
            **During
                Exploration****Paid-In**
            
            
            **Accumulated**
            
            
            **Exploration****Shares**
            
            
            **Amount**
            
            
            **Shares**
            
            
            **Amount**
            
            
            **Capital**
            
            
            **Deficit**
            
            
            **Stage**
            
            
            **Total**BALANCE,
                March 1, 2005
            
            
            -
            
            
            $
            -
            
            
            
            18,199,419
            
            
            $
            18,199
            
            
            $
            709,997
            
            
            $
            (736,035
            )
            
            $
            -
            
            
            $
            (7,839
            )*Issuance
                of common stock for:*Cash
            
            
            -
            
            
            
            -
            
            
            
            4,400,000
            
            
            
            4,400
            
            
            
            1,083,100
            
            
            
            -
            
            
            
            -
            
            
            
            1,087,500Services
            
            
            
            
            
            
            
            
            
            
            5,352,667
            
            
            
            5,353
            
            
            
            3,622,176
            
            
            
            
            
            
            
            
            
            
            
            3,627,529Oil
                and gas properties
            
            
            -
            
            
            
            -
            
            
            
            700,000
            
            
            
            700
            
            
            
            411,300
            
            
            
            -
            
            
            
            -
            
            
            
            412,000Conversion
                of convertibledebentures
                and interestpayable
            
            
            -
            
            
            
            -
            
            
            
            806,135
            
            
            
            806
            
            
            
            200,728
            
            
            
            -
            
            
            
            -
            
            
            
            201,534*Discount
                on convertible**notes
                payable*
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,240,213
            
            
            
            -
            
            
            
            -
            
            
            
            1,240,213Net
                loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (4,472,041
            )
            
            
            (4,472,041
            )BALANCE,
                FEBRUARY 28, 2006
              (Restated)
            
            
            -
            
            
            
            -
            
            
            
            29,458,221
            
            
            
            29,458
            
            
            
            7,267,514
            
            
            
            (736,035
            )
            
            
            (4,472,041
            )
            
            
            2,088,896*Issuance
                of common stock for:*Cash
            
            
            -
            
            
            
            -
            
            
            
            8,027,206
            
            
            
            8,027
            
            
            
            5,180,230
            
            
            
            -
            
            
            
            -
            
            
            
            5,188,257Services
            
            
            -
            
            
            
            -
            
            
            
            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
            
            
            
            -
            
            
            
            -
            
            
            
            1,024,522*Purchase
                and cancellation of common stock:*
            
            
            
            
            
            
            
            
            
            
            (150,000
            )
            
            
            (150
            )
            
            
            (149,850
            )
            
            
            
            
            
            
            
            
            
            
            (150,000
            )*Issuance
                of preferred stock for:*Cash
            
            
            1,399,765
            
            
            
            1,400
            
            
            
            -
            
            
            
            -
            
            
            
            3,624,804
            
            
            
            -
            
            
            
            -
            
            
            
            3,626,204*Discount
                on convertible notes payable*
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            25,000
            
            
            
            -
            
            
            
            -
            
            
            
            25,000*Extension
                warrants on convertible notes**payable*
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            119,283
            
            
            
            -
            
            
            
            -
            
            
            
            119,283*Discount
                on preferred stock*
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            4,199,295
            
            
            
            -
            
            
            
            -
            
            
            
            4,199,295*Deemed
                dividend on preferred stock*
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (4,199,295
            )
            
            
            -
            
            
            
            -
            
            
            
            (4,199,295
            )Net
                loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (8,392,030
            )
            
            
            (8,392,030
            )BALANCE,
                FEBRUARY 28, 2007
            
            
            1,399,765
            
            
            $
            1,400
            
            
            
            40,877,230
            
            
            $
            40,877
            
            
            $
            20,224,411
            
            
            $
            (736,035
            )
            
            $
            (12,864,071
            )
            
            $
            6,666,582




The
            accompanying notes are an integral part of these financial
            statements.
 **65**




**DAYBREAK
                  OIL AND GAS, INC.**
                **(An
                  Exploration Stage Company)**
                **Statements
                  of Cash Flows**
                **For
                  the Years ended February 28, 2007 and 2006 and for the
                  Period**
                **from
                  Inception (March 1, 2005) through February 28,
                  2007**Year
                  Ended
              
              
              From
                  InceptionFebruary
                  28,
              
              
              Through
                  February 28,2007
              
              
              2006
                (Restated)
              
              
              2007*CASH
                  FLOWS FROM OPERATING ACTIVITIES*Net
                  Loss
              
              $
              (8,392,030
              )
              
              $
              (4,472,041
              )
              
              $
              (12,864,071
              )Adjustments
                  to reconcile net loss to net cashused
                  in operating activities:Common
                  stock issued for services
              
              
              2,607,700
              
              
              
              3,627,529
              
              
              
              6,235,229Depreciation,
                  Depletion, Amortization and Impairment
                expense
              
              
              2,398,048
              
              
              
              -
              
              
              
              2,398,048Exploration
                  expense – dry wells
              
              
              563,020
              
              
              
              253,500
              
              
              
              816,520Non
                  cash interest expense and accretion
              
              
              1,109,484
              
              
              
              195,694
              
              
              
              1,305,178Non
                  cash interest income
              
              
              (28,585
              )
              
              
              -
              
              
              
              (28,585
              )Changes
                  in assets and liabilities:Restricted
                  cash
              
              
              8,333
              
              
              
              (8,333
              )
              
              
              -Accounts
                  receivable - oil and gas sales
              
              
              (56,906
              )
              
              
              -
              
              
              
              (56,906
              )Accounts
                  receivable – related party participants
              
              
              (41,357
              )
              
              
              
              
              
              
              (41,357
              )Accounts
                  receivable – joint interest participants
              
              
              (799,970
              )
              
              
              
              
              
              
              (799,970
              )Prepaid
                  expenses and other current assets
              
              
              (76,645
              )
              
              
              191
              
              
              
              (76,454
              )Deferred
                  financing costs
              
              
              10,000
              
              
              
              (10,000
              )
              
              
              -Accounts
                  payable and other accrued liabilities
              
              
              2,167,634
              
              
              
              20,275
              
              
              
              2,187,909Other
                  assets
              
              
              (77,177
              )
              
              
              -
              
              
              
              (77,177
              )Net
                  cash used in operating activities
              
              
              (608,451
              )
              
              
              (393,185
              )
              
              
              (1,001,636
              )*CASH
                  FLOWS FROM INVESTING ACTIVITIES:*Investment
                  in marketable securities
              
              
              (2,356,213
              )
              
              
              -
              
              
              
              (2,356,213
              )Purchase
                  of reclamation bond
              
              
              (25,000
              )
              
              
              -
              
              
              
              (25,000
              )
  The
                  accompanying notes are an integral part of these financial
                  statements.
 **66**
 
 Refund
                  (deposit) on equipment
              
              
              250,000
              
              
              
              (250,000
              )
              
              
              -Additions
                  to note receivable
              
              
              (800,000
              )
              
              
              -
              
              
              
              (800,000
              )Purchase
                  of oil and gas properties
              
              
              (5,904,956
              )
              
              
              (973,900
              )
              
              
              (6,878,856
              )Purchase
                  of fixed assets
              
              
              (22,911
              )
              
              
              -
              
              
              
              (22,911
              )Net
                  cash used in investing activities
              
              
              (8,859,080
              )
              
              
              (1,223,900
              )
              
              
              (10,082,980
              )*CASH
                  FLOWS FROM FINANCING ACTIVITIES:*Proceeds
                  from sales of preferred stock, net
              
              
              3,626,204
              
              
              
              -
              
              
              
              3,626,204Proceeds
                  from sales of common  stock, net
              
              
              5,188,257
              
              
              
              1,087,500
              
              
              
              6,275,757Proceeds
                  from related party notes payable
              
              
              200,000
              
              
              
              -
              
              
              
              200,000Proceeds
                  from borrowings
              
              
              25,000
              
              
              
              1,335,521
              
              
              
              1,360,521Net
                  cash provided by financing activities
              
              
              9,039,461
              
              
              
              2,423,021
              
              
              
              11,462,482*NET
                  INCREASE IN CASH AND EQUIVALENTS*
              
              
              (428,070
              )
              
              
              805,936
              
              
              
              377,866*CASH
                  AT BEGINNING OF PERIOD*
              
              
              806,027
              
              
              
              91
              
              
              
              91*CASH
                  AT END OF PERIOD*
              
              $
              377,957
              
              
              $
              806,027
              
              
              $
              377,957*CASH
                  PAID FOR:*Interest
              
              $
              13,769
              
              
              
              -
              
              
              $
              13,769Income
                  Taxes
              
              
              -
              
              
              
              -
              
              
              
              -
  The
              accompanying notes are an integral part of these financial
              statements.
 **67**
  *SUPPLEMENTAL
                  CASH FLOW INFORMATION:*Common
                  stock issued for services
              
              $
              2,607,700
              
              
              $
              3,627,529
              
              
              $
              6,235,229Common
                  stock issued for oil and gas properties
              
              
              528,750
              
              
              
              412,000
              
              
              
              940,750Common
                  stock repurchased and cancelled
              
              
              (150,000
              )
              
              
              -
              
              
              
              (150,000
              )Common
                  stock issued on conversion of convertible debentures and
                  interest
              
              
              1,024,522
              
              
              
              201,534
              
              
              
              1,226,056Discount
                  on convertible notes payable
              
              
              25,000
              
              
              
              1,240,213
              
              
              
              1,265,213Extension
                  warrants on convertible notes payable
              
              $
              119,283
              
              
              $
              -
              
              
              $
              119,283


















































The
            accompanying notes are an integral part of these financial
            statements.
 **68**
 **Daybreak
            Oil and Gas, Inc.**
 **(An
            Exploration Stage Company, Date of Inception March 1,
            2005)**
 **Notes
            to Financial Statements**




***NOTE
      1 — ORGANIZATION AND BASIS OF PRESENTATION:***





*Organization*





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





*Basis
      of Presentation*





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





*Exploration
      Stage Company*





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





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





*Use
      of Estimates*





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





***NOTE
      2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:***





*Cash
      and Cash Equivalents*





Cash
      equivalents include demand deposits with banks and all highly liquid investments
      with original maturities of three months or less. For the fiscal years ending
      February 28, 2007 and February 28, 2006, Daybreak’s cash deposits exceeded the
      Federal Deposit Insurance Corporation insurance limits by $277,957 and $706,027
      respectively.





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




*Restricted
      Cash*





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





*Investment
      in Marketable Securities*





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





*Accounts
      and Notes Receivable*





Daybreak
      routinely assesses the recoverability of all material trade and other
      receivables. Daybreak accrues a reserve on a receivable when, based on the
      judgment of management, it is probable that a receivable will not be collected
      and the amount of any reserve may be reasonably estimated.  Actual
      write-offs may exceed the recorded allowance.  No allowance for
      doubtful accounts was considered necessary at February 28, 2007 and February
      28,
      2006.





*Oil
      and Gas Properties*





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





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





Pursuant
      to SFAS No. 144, “Impairment or Disposal of Long-Lived Assets”, Daybreak reviews
      proved oil and natural gas properties and other long-lived assets for
      impairment. These reviews are predicated by events and circumstances, (such
      as
      downward revision of the reserve estimates or commodity prices), that indicate
      a
      decline in the recoverability of the carrying value of such properties. Daybreak
      estimates the future cash flows expected in connection with the properties
      and
      compares such future cash flows to the carrying amount of the properties to
      determine if the carrying amount is recoverable.


**70**
 **Daybreak
            Oil and Gas, Inc.** **(An
              Exploration Stage Company, Date of Inception March 1,
              2005)**
 **Notes
              to Financial Statements**


When
      the
      carrying amounts of the properties exceed their estimated undiscounted future
      cash flows, the carrying amounts of the properties are reduced to their
      estimated fair value.  The factors used to determine fair value
      include, but are not limited to, estimates of proved reserves, future commodity
      prices, the timing of future production, future capital expenditures and a
      risk-adjusted discount rate. Asset impairments of $1,606,292 and $-0- were
      recorded for the years ended February 28, 2007 and February 28, 2006,
      respectively. The charge is included in depreciation, depletion and
      amortization.





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





On
      the
      retirement or sale of a partial unit of proved property, the cost is charged
      to
      accumulated depreciation, depletion, and amortization with a resulting gain
      or
      loss recognized in income.





Deposits
      and advances for services expected to be provided for exploration and
      development or for the acquisition of oil and gas properties are classified
      as
      long term other assets.  As of February 28, 2007 $70,266 had been
      advanced for services.





*Property
      and Equipment*





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





*Long
      Lived Assets*





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





*Debt*





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





*Fair
      Value of Financial Instruments*





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


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


*Share−Based
      Payments*





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





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





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





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





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





*Loss
      per Share of Common Stock*





Basic
      loss per share of common stock is calculated by dividing net loss available
      to
      common stockholders by the weighted average number of common shares issued
      and
      outstanding during the year. Common stock equivalents, including common stock
      issuable upon the conversion of loans and interest payable, are excluded from
      the calculations when their effect is anti-dilutive. At February 28, 2007 and
      February 28, 2006, the potential dilutive effect of converting notes payable
      and
      related interest to shares was determined to be anti-dilutive, and therefore
      their effect is excluded from the calculation of diluted weighted average
      shares.





*Concentration
      of Credit Risk*





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





**72**
 **Daybreak
            Oil and Gas, Inc.** **(An
              Exploration Stage Company, Date of Inception March 1,
              2005)**
 **Notes
              to Financial Statements**


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





*Revenue
      Recognition*





Daybreak
      uses the sales method to account for sales of crude oil and natural
      gas.  Under this method, revenues are recognized based on actual
      volumes of oil and gas sold to purchasers.  The volumes sold may
      differ from the volumes to which Daybreak is entitled based on its interests
      in
      the properties.  These differences create imbalances which are
      recognized as a liability only when the imbalance exceeds the estimate of
      remaining reserves. Daybreak had no significant imbalances as of February 28,
      2007 and February 28, 2006.




*Reclamation
      Bonds*





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





*Environmental
      Matters and Asset Retirement Obligation*





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





SFAS
      No.
      143, “Accounting for Asset Retirement Obligations,” addresses financial
      accounting and reporting for obligations associated with the retirement of
      tangible long-lived assets and the associated asset retirement
      costs.  This statement requires that Daybreak recognizes the fair
      value of a liability for an asset retirement obligation (ARO) in the period
      in
      which it is incurred.  The ARO is capitalized as part of the carrying
      value of the assets to which it is associated, and depreciated over the useful
      life of the asset.  An ARO and the related asset retirement cost are
      recorded when an asset is first drilled, constructed or
      purchased.  The asset retirement cost is determined and discounted to
      present value using a credit-adjusted risk-free rate.  After initial
      recording, the liability is increased for the passage of time, with the increase
      being reflected as interest accretion expense in the statements of
      operations.


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


Subsequent
      adjustments in the cost estimate are reflected in the ARO liability and the
      amounts continue to be amortized over the useful life of the related long-lived
      asset.





*Suspended
      Well Costs*





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





The
      position states that exploratory well costs should continue to be capitalized
      if: (1) a sufficient quantity of reserves are discovered in the well to justify
      its completion as a producing well and (2) sufficient progress is made in
      assessing the reserves and the economic and operating feasibility of the well.
      If the exploratory well costs do not meet both of these criteria, these costs
      should be expensed, net of any salvage value. Additional annual disclosures
      are
      required to provide information about management's evaluation of capitalized
      exploratory well costs.





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





*Provisions
      for Taxes*





Daybreak
      has adopted SFAS No. 109 “Accounting for Income Taxes”. Pursuant to this
      pronouncement, income taxes are accounted for using an asset and liability
      approach. SFAS No. 109 requires the recognition of deferred tax assets and
      liabilities for the expected future tax consequences of temporary differences
      between the financial statements and tax bases of assets and liabilities at
      the
      applicable tax rates. A valuation allowance is utilized when it is more likely
      than not, that some portion of, or all of the deferred tax assets will not
      be
      realized. Deferred tax assets and liabilities are adjusted for the effects
      of changes in tax laws and rates on the date of enactment.





*Recent
      Accounting Pronouncements*





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


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


*Reclassifications*





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





*Restatements*





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





***NOTE
      3 — GOING CONCERN:***





*Financial
      Condition*





Daybreak's
      financial statements for the year ended February 28, 2007, have been
      prepared on a going concern basis, which contemplates the realization of
      assets and the settlement of liabilities in the normal course of business.
      Daybreak has incurred net losses since inception and has accumulated a deficit
      during the exploration stage of $12,864,071. Daybreak had a working capital
      surplus of $2,292,177 at February 28, 2007.





*Management
      Plans to Continue as a Going Concern*





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





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











**75**
 **Daybreak
            Oil and Gas, Inc.** **(An
              Exploration Stage Company, Date of Inception March 1,
              2005)**
 **Notes
              to Financial Statements**


***NOTE
      4 – INVESTMENTS IN MARKETABLE SECURITIES:***





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





***NOTE
      5 - NOTES RECEIVABLE - DRILLING RIG AGREEMENT:***





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





***NOTE
      6 — OIL AND GAS PROPERTIES:***





Oil
      and
      gas properties, at cost:





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








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


Suspended
      Well Costs





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





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





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





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





*Impairment
      of oil and gas properties*





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


*Asset
      Retirement Obligation*





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


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


The
      asset
      retirement obligations are recorded as current or non-current liabilities based
      on the estimated timing of the anticipated cash flows.  For the year
      ended February 28, 2007 and 2006, Daybreak has recognized accretion expense
      of
      $5,970 and $0, respectively.




The
      following table describes the changes in the asset retirement obligations for
      the year ended February 28, 2007.




Asset
                retirement obligations, beginning of period
            
            $
            -Fair
                value of  liabilities assumed in acquisitions
            
            
            103,457Liabilities
                contributed at formation
            
            
            -Liabilities
                related to property sales
            
            
            -Adjustment
                due abandonment in year
            
            
            (10,000
            )Accretion
                expense
            
            
            5,970Asset
                retirement obligations, end of period
            
            $
            99,427





***NOTE
      7 — CONVERTIBLE DEBENTURES:***





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





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


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


**78**
 **Daybreak
              Oil and Gas, Inc.** **(An
                Exploration Stage Company, Date of Inception March 1,
                2005)**
 **Notes
                to Financial Statements**


Twenty-Six
      (26) of the 6% interest $0.25 convertible debentures for a total of $158,821
      were with related parties.





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





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





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





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





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





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


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


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





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


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


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





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





***NOTE
      8 — RELATED PARTY TRANSACTIONS:***





*Office
      Lease*





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





*Financing
      of Gas Pipeline*





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





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


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


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


*Common
      Stock and Cash for Services*





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





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


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





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





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





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





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


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





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





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





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





*Convertible
      Debentures*





Of
      the
      $168,821 $0.25 Convertible Debentures issued in the fiscal year ended February
      28, 2006, $158,821 were issued to five individuals who were considered to be
      related parties at the time. In the fiscal year ended February 28, 2006,
      twenty-three of the related party convertible debentures representing $126,821
      in principal were converted, resulting in 524,820 shares of unregistered common
      stock being issued to satisfy the principal and interest obligations. By
      February 28, 2007, all twenty-six of related party convertible debentures were
      converted resulting in a total of 662,360 shares of unregistered common stock
      being issued to satisfy principal and interest obligations.




Of
      the
      $806,700 in convertible debenture of the 10% interest $0.75 series, $200,000
      was
      from Hooper Group, LLC , an entity controlled by Keith Hooper a Daybreak
      shareholder (greater than 5%). In the fiscal year ended February 28, 2007,
      these
      notes were converted for 440,000 shares of unregistered common stock to satisfy
      the principal and interest obligations.





***NOTE
      9 — STOCKHOLDERS’ EQUITY:***





*Series
      A Convertible Preferred Stock*





Daybreak
      is authorized to issue up to 10,000,000 shares of $0.001 par value preferred
      stock.   Daybreak has designated 2,400,000 shares of the 10,000,000 total
      preferred shares as “Series A Convertible Preferred Stock” (“Series A
      Preferred”), with a $0.001 par value. During the year ended February 28, 2007,
      Daybreak conducted a private placement sale of Series A Preferred (the “July
      2006 Preferred Stock Private Placement”). Each sale unit consisted of one share
      of Series A Preferred and two common stock purchase warrants. The units were
      sold for $3.00 per unit, with a total of 1,399,765 units sold; resulting in
      gross proceeds of $4,199,295. Daybreak received net proceeds of $3,626,204
      after
      placement agent fees, commissions and other offering costs of
      $573,091.








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


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





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





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





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


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


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




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





The
      relative fair values of the Series A Convertible Preferred Shares and the Common
      Stock Purchase Warrants were as follows:




**Description**
            
            **Shares**
            
            
            **Relative
                Fair**
              **Value
                Amount**Series
                A Convertible Preferred
            
            
            1,399,765
            
            
            $
            2,710,073Common
                Stock Purchase Warrants
            
            
            2,799,530
            
            
            
            1,489,222Total
                Proceeds
            
            
            
            
            
            
            4,199,295Offering
                Costs
            
            
            
            
            
            
            (573,091
            )Net
                Proceeds
            
            
            
            
            
            $
            3,626,204








*Common
      Stock*





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





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





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


**85**
 **Daybreak
            Oil and Gas, Inc.** **(An
              Exploration Stage Company, Date of Inception March 1,
              2005)**
 **Notes
              to Financial Statements**


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





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





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





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





The
      relative fair value of the Common Stock and the Common Stock Purchase Warrants
      was as follows:




**Description**
            
            **Shares**
            
            
            **Relative
                Fair**
              **Value
                Amount**Common
                Stock
            
            
            8,027,206
            
            
            $
            4,241,232Common
                Stock Purchase Warrants
            
            
            4,013,602
            
            
            
            1,779,172Total
                Proceeds
            
            
            
            
            
            
            6,020,404Placement
                fees
            
            
            
            
            
            
            (832,147
            )Net
                Proceeds
            
            
            
            
            
            $
            5,188,257


**86**
 **Daybreak
            Oil and Gas, Inc.** **(An
              Exploration Stage Company, Date of Inception March 1,
              2005)**
 **Notes
              to Financial Statements**


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





*Common
      Stock for Services*





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





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





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





*Common
      Stock Issued for Convertible Debentures and Interest Payable*





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





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





*Common
      Stock Issued for Oil and Gas Property Interests*





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





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


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


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





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





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





***NOTE
      10 – WARRANTS:***





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





Warrants
      outstanding and exercisable as of February 28, 2007 are:




**Exercise**
            
            
            **Remaining**
            
            
            **Exercisable
                Warrants****Description**
            
            **Warrants**
            
            
            **Price**
            
            
            **Life
                (Years)**
            
            
            **Remaining**May  2006
                Common Stock Private Placement
            
            
            4,013,602
            
            
            $
            2.00
            
            
            
            4.25
            
            
            
            4,013,602Placement
                Agent Warrants May 2006 PP
            
            
            802,721
            
            
            $
            0.75
            
            
            
            6.25
            
            
            
            802,721Placement
                Agent Warrants May 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 PP
            
            
            419,930
            
            
            $
            1.00
            
            
            
            4.50
            
            
            
            419,930Convertible
                Debenture Term Extension
            
            
            150,001
            
            
            $
            2.00
            
            
            
            4.75
            
            
            
            150,0018,587,145
            
            
            
            
            
            
            
            
            
            
            
            8,587,145








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


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


***NOTE
      11 – RESTATEMENT:***





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





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




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





Again
      pursuant to SFAS No. 123(R), the guidelines for recording common stock issued
      for investor relations services and the acquisition of interests in oil and
      gas
      properties suggest that the more readily determinable fair value of these shares
      should be based on the publicly traded share price of Daybreak’s registered
      shares at the grant or acquisition date. SFAS No. 157 also suggests that when
      shares are issued for services or properties, they should be valued at the
      publicly traded share price. Accordingly, Daybreak has restated the impact
      of
      the share based payments for services and oil and gas properties to reflect
      the
      use of the publicly traded share price.




Daybreak
      has reviewed its prior determination of the fair value of shares resulting
      from
      the potential conversion of debt and concluded that it has not appropriately
      accounted for discounts in accordance with SFAS 123(R) and EITF
      98-05.  Daybreak has calculated the intrinsic value of the embedded
      beneficial conversion feature present in the convertible debt using quoted
      closing market prices on the date of each of the transactions.


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


This
      calculation has determined that $1,138,701 in discounts should have been
      assigned to the convertible debt issuances at their respective inception. These
      discounts will be amortized over the period commencing on the issuance date
      to
      the earliest conversion date of the debt.




The
        accompanying financial statements for the twelve month period February 28,
        2006,
        have been restated to effect the changes described above. The impact of those
        adjustments for the following periods is summarized as
        follows:


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

**90**
 **Daybreak
            Oil and Gas, Inc.** **(An
              Exploration Stage Company, Date of Inception March 1,
              2005)**
 **Notes
              to Financial Statements**




**As
                of May 31, 2005 (Unaudited):**
            
            **As**
              **Originally**
              **Reported**
            
            
            **Adjustments**
            
            
            
            **As**
              **Restated**Total
                current assets
            
            $
            401,521
            
            
            $
            (365,623
            )
            1)
            
            $
            35,898Oil
                and gas properties, net of accumulated
              depletion,
                successful efforts method
            
            
            -
            
            
            
            -
            
            
            
            
            -Total
                assets
            
            
            401,521
            
            
            
            (365,623
            )
            
            
            
            35,898Total
                current liabilities
            
            $
            101,244
            
            
            $
            (39,064
            )
            2)
            
            $
            62,180Preferred
                stock
            
            
            -
            
            
            
            -
            
            
            
            
            -Common
                stock
            
            
            20,149
            
            
            
            -
            
            
            
            
            20,149Additional
                paid-in capital
            
            
            1,195,547
            
            
            
            1,053,000
            
            1)46,611
            
            2)
            
            
            2,295,158Accumulated
                deficit
            
            
            (915,419
            )
            
            
            179,384
            
            3)
            
            
            (736,035
            )Deficit
                accumulated during the exploration stage
            
            
            -
            
            
            
            (1,426,170
            )
            
            
            
            -(179,384
            )
            3)
            
            
            (1,605,554
            )Total
                stockholders’ equity
            
            
            300,277
            
            
            
            (326,559
            )
            
            
            
            (26,282
            )Total
                liabilities and stockholders’ equity
            
            $
            401,521
            
            
            $
            (365,623
            )
            
            
            $
            35,898




**THREE
                MONTHS ENDED****For
                the three months ended May 31, 2005 (Unaudited):**
            
            **As**
              **Originally**
              **Reported**
            
            
            **Adjustments**
            
            
            
            **As**
              **Restated**Revenue
            
            $
            -
            
            
            $
            -
            
            
            
            $
            -ExpensesGeneral
                and administrative
            
            
            179,383
            
            
            
            1,418,623
            
            1)
            
            
            1,598,006Total
                expenses
            
            
            179,383
            
            
            
            1,418,623
            
            
            
            
            1,598,006Loss
                from operations
            
            
            (179,383
            )
            
            
            (1,418,623
            )
            
            
            
            (1,598,006
            )Other
                expenses:Interest
                expense
            
            
            -
            
            
            
            (7,547
            )
            2)
            
            
            (7,547
            )Net
                loss
            
            $
            (179,383
            )
            
            $
            (1,426,170
            )
            
            
            $
            (1,605,553
            )Net
                loss available to common shareholders
            
            $
            (179,383
            )
            
            $
            (1,426,170
            )
            
            
            $
            (1,605,553
            )Net
                loss per common share
            
            $
            (0.01
            )
            
            $
            (0.07
            )
            
            
            $
            (0.08
            )Weighted-average
                common shares outstanding
            
            $
            18,969,528
            
            
            $
            1,196,130
            
            4)
            
            $
            20,165,658





1)
            To
                recognize previously deferred expense for stock based compensation
                and
                adjust the valuation of stock based compensation and services provided
                by
                third parties utilizing the market price on the date of
                grant.


2)
            To
                record discount related to the beneficial conversion feature and
                record
                the amortization of discount on convertible debt using the effective
                interest rate method.


3)
            To
                reclassify deficit accumulated during exploration
                stage.


4)
            To
                adjust weighted average shares outstanding and earnings per share
                as a
                result of recognizing certain issuances as of the date of satisfaction
                of
                all necessary conditions to
                issuance.




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




**As
                of August 31, 2005 (Unaudited):**
            
            **As**
              **Originally**
              **Reported**
            
            
            **Adjustments**
            
            
            
            **As
                Restated**Total
                current assets
            
            $
            244,671
            
            
            $
            (243,747
            )
            1)
            
            $
            924Oil
                and gas properties, net of accumulated
              depletion,
                successful efforts method
            
            
            378,500
            
            
            
            12,000
            
            4)
            
            
            390,500Total
                assets
            
            $
            623,171
            
            
            $
            (231,747
            )
            
            
            $
            391,424Total
                current liabilities
            
            $
            224,787
            
            
            $
            (52,722
            )
            2)
            
            $
            172,065Preferred
                stock
            
            
            -
            
            
            
            -
            
            
            
            
            -Common
                stock
            
            
            21,295
            
            
            
            -
            
            
            
            
            21,295Additional
                paid-in capital
            
            
            1,480,901
            
            
            
            1,058,700
            
            1)
            
            
            -73,511
            
            2)12,000
            
            4)
            
            
            2,625,112Accumulated
                deficit
            
            
            (1,103,812
            )
            
            
            367,777
            
            3)
            
            
            (736,035
            )Deficit
                accumulated during the exploration
              stage
            
            
            -
            
            
            
            (1,323,236
            )(367,777
            )
            3)
            
            
            (1,691,013
            )Total
                stockholders’ equity
            
            
            398,384
            
            
            
            (179,025
            )
            
            
            
            219,359Total
                liabilities and stockholders’ equity
            
            $
            623,171
            
            
            $
            (231,747
            )
            
            
            $
            391,424
































**92**
 **Daybreak
              Oil and Gas, Inc.** **(An
                Exploration Stage Company, Date of Inception March 1,
                2005)**
 **Notes
                to Financial Statements**


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








1)
            To
                recognize previously deferred expense for stock based compensation
                and
                adjust the valuation of stock based compensation and services provided
                by
                third parties utilizing the market price on the date of
                grant.


2)
            To
                record discount related to the beneficial conversion feature and
                record
                the amortization of discount on convertible debt using the effective
                interest rate method.


3)
            To
                reclassify deficit accumulated during exploration
                stage.


4)
            To
                adjust the valuation of the stock based acquisition of oil and gas
                properties utilizing the market trading price on the date of
                grant.


5)
            To
                adjust weighted average shares outstanding and earnings per share
                as a
                result of recognizing certain issuances as of the date of satisfaction
                of
                all necessary conditions to
                issuance.





**93**
 **Daybreak
              Oil and Gas, Inc.** **(An
                Exploration Stage Company, Date of Inception March 1,
                2005)**
 **Notes
                to Financial Statements**


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






































**94**
 **Daybreak
              Oil and Gas, Inc.** **(An
                Exploration Stage Company, Date of Inception March 1,
                2005)**
 **Notes
                to Financial Statements**


**For
              the three and nine months ended November 30, 2005
              (Unaudited):****THREE
                MONTHS ENDED**
            
            
            **NINE
                MONTHS ENDED****As**
              **Originally
                Reported**
            
            
            **Adjustments**
            
            
            
            **As**
              **Restated**
            
            
            **As**
              **Originally
                Reported**
            
            
            **Adjustments**
            
            
            
            **As**
              **Restated**Revenue
            
            $
            -
            
            
            $
            -
            
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            
            $
            -ExpensesExploration
                and drilling
            
            
            58,400
            
            
            
            -
            
            
            
            
            58,400
            
            
            
            70,900
            
            
            
            -
            
            
            
            
            70,900General
                and administrative
            
            
            681,170
            
            
            
            719,108
            
            1)
            
            
            1,400,278
            
            
            
            1,036,446
            
            
            
            2,021,555
            
            1)
            
            
            3,058,001Total
                expenses
            
            
            739,570
            
            
            
            719,108
            
            
            
            
            1,458,678
            
            
            
            1,107,346
            
            
            
            2,021,555
            
            
            
            
            3,128,901Loss
                from operations
            
            
            (739,570
            )
            
            
            (719,108
            )
            
            
            
            (1,458,678
            )
            
            
            (1,107,346
            )
            
            
            (2,021,555
            )
            
            
            
            (3,128,901
            )Other
                income and expenses:Interest
                income
            
            
            321
            
            
            
            -
            
            
            
            
            321
            
            
            
            321
            
            
            
            -
            
            
            
            
            321Interest
                expense
            
            
            -
            
            
            
            (31,781
            )
            2)
            
            
            (31,781
            )
            
            
            -
            
            
            
            (52,570
            )
            2)
            
            
            (52,570
            )321
            
            
            
            (31,781
            )
            
            
            
            (31,781
            )
            
            
            321
            
            
            
            (52,570
            )
            
            
            
            (52,249
            )Net
                loss
            
            $
            (739,249
            )
            
            $
            (750,889
            )
            
            
            $
            (1,490,138
            )
            
            $
            (1,107,025
            )
            
            $
            (2,074,125
            )
            
            
            $
            (3,181,150
            )Net
                loss available to common
              shareholders
            
            $
            (739,249
            )
            
            $
            (750,889
            )
            
            
            $
            (1,490,138
            )
            
            $
            (1,107,025
            )
            
            $
            (2,074,125
            )
            
            
            $
            (3,181,150
            )Net
                loss per common share
            
            $
            (0.03
            )
            
            $
            (0.03
            )
            
            
            $
            (0.06
            )
            
            $
            (0.05
            )
            
            $
            (0.10
            )
            
            
            $
            (0.15
            )Weighted-average
                common
              shares
                outstanding
            
            
            23,471,326
            
            
            
            446,149
            
            5)
            
            
            23,917,475
            
            
            
            20,997,432
            
            
            
            418,718
            
            5)
            
            
            21,416,150






1)
            To
                recognize previously deferred expense for stock based compensation
                and
                adjust the valuation of stock based compensation and services provided
                by
                third parties utilizing the market trading price on the day of
                grant


2)
            To
                record discount related to the beneficial conversion feature and
                record
                the amortization of discount on convertible debt using the effective
                interest rate method.


3)
            To
                reclassify deficit accumulated during exploration
                stage.


4)
            To
                adjust the valuation of the stock based acquisition of oil and gas
                properties utilizing the market trading price on the date of
                grant.


5)
            To
                adjust weighted average shares outstanding and earnings per share
                as a
                result of recognizing certain issuances as of the date of satisfaction
                of
                all necessary conditions to
                issuance.

















**95**
 **Daybreak
                Oil and Gas, Inc.** **(An
                  Exploration Stage Company, Date of Inception March 1,
                  2005)**
 **Notes
                  to Financial Statements**


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























**96**
 **Daybreak
                Oil and Gas, Inc.** **(An
                  Exploration Stage Company, Date of Inception March 1,
                  2005)**
 **Notes
                  to Financial Statements**


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








1)
            To
                recognize previously deferred expense for stock based compensation
                and
                adjust the valuation of stock based compensation and services provided
                by
                third parties utilizing the market trading price on the day of
                grant.


2)
            To
                record discount related to the beneficial conversion feature and
                record
                the amortization of discount on convertible debt using the effective
                interest rate method.


3)
            To
                adjust the valuation of the stock based acquisition of oil and gas
                properties utilizing the market trading price on the date of
                grant.


4)
            To
                adjust weighted average shares outstanding and earnings per share
                as a
                result of recognizing certain issuances as of the date of satisfaction
                of
                all necessary conditions to
                issuance.














**97**
 **Daybreak
              Oil and Gas, Inc.** **(An
                Exploration Stage Company, Date of Inception March 1,
                2005)**
 **Notes
                to Financial Statements**




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





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





1)
            To
                recognize previously deferred expense for stock based compensation
                and
                adjust the valuation of stock based compensation and services provided
                by
                utilizing the market trading price on the day of
                grant.


2)
            To
                record discount related to the beneficial conversion feature and
                record
                the amortization of discount on convertible debt using the effective
                interest rate method.


3)
            To
                adjust the valuation of the stock based acquisition of oil and gas
                properties utilizing the market trading price on the date of
                grant.


4)
            To
                adjust weighted average shares outstanding and earnings per share
                as a
                result of recognizing certain issuances as of the date of satisfaction
                of
                all necessary conditions to
                issuance.


**98**
 **Daybreak
                Oil and Gas, Inc.** **(An
                  Exploration Stage Company, Date of Inception March 1,
                  2005)**
 **Notes
                  to Financial
                  Statements**




**As
                of August 31, 2006 (Unaudited):****As**
              **Originally**
              **Reported**
            
            
            **Adjustments**
            
            
            
            **As
                Restated**Total
                current assets
            
            $
            7,934,597
            
            
            $
            (495,535
            )
            1)
            
            $
            7,439,062Oil
                and gas properties, net of accumulated
              depletion,
                successful efforts method
            
            
            3,369,678
            
            
            
            550,500
            
            3)
            
            
            3,920,178Vehicles
                and equipment, net of accumulated
              depreciation
            
            
            21,670
            
            
            
            -
            
            
            
            
            21,670Total
                assets
            
            $
            11,325,945
            
            
            $
            54,965
            
            
            
            $
            11,380,910Total
                current liabilities
            
            $
            1,161,146
            
            
            $
            (452,245
            )
            
            
            $
            708,901Other
                liabilities
            
            
            207,519
            
            
            
            -
            
            
            
            
            207,519Total
                liabilities
            
            
            1,368,665
            
            
            
            (452,245
            )
            
            
            
            916,420Preferred
                stock
            
            
            1,400
            
            
            
            -
            
            
            
            
            1,400Common
                stock
            
            
            38,980
            
            
            
            -
            
            
            
            
            38,980Additional
                paid-in capital
            
            
            13,492,210
            
            
            
            3,727,381
            
            1)1,286,812
            
            2)550,500
            
            3)
            
            
            19,056,903Accumulated
                deficit
            
            
            (736,035
            )
            
            
            -
            
            
            
            
            (736,035
            )Deficit
                accumulated during the exploration
              stage
            
            
            (2,839,275
            )
            
            
            (2,234,180
            )
            1)(212,579
            )
            2)(2,610,724
            )
            
            
            
            (7,896,758
            )Total
                stockholders’ equity
            
            
            9,957,280
            
            
            
            507,210
            
            
            
            
            10,464,490Total
                liabilities and stockholders’ equity
            
            $
            11,325,945
            
            
            $
            54,965
            
            
            
            $
            11,380,910





**99**
 **Daybreak
                Oil and Gas, Inc.** **(An
                  Exploration Stage Company, Date of Inception March 1,
                  2005)**
 **Notes
                  to Financial
                  Statements**




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





1)
            To
                recognize previously deferred expense for stock based compensation
                and
                adjust the valuation of stock based compensation and services provided
                by
                third parties utilizing the market trading price on the day of
                grant.


2)
            To
                record discount related to the beneficial conversion feature and
                record
                the amortization of discount on convertible debt using the effective
                interest rate method.


3)
            To
                adjust the valuation of the stock based acquisition of oil and gas
                properties utilizing the market trading price on the date of
                grant.


4)
            To
                adjust weighted average shares outstanding and earnings per share
                as a
                result of recognizing certain issuances as of the date of satisfaction
                of
                all necessary conditions to
                issuance.








**100**
 **Daybreak
                Oil and Gas, Inc.** **(An
                  Exploration Stage Company, Date of Inception March 1,
                  2005)**
 **Notes
                  to Financial Statements**


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





































**101**
 **Daybreak
                  Oil and Gas, Inc.** **(An
                    Exploration Stage Company, Date of Inception March 1,
                    2005)**
 **Notes
                    to Financial Statements**


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





1)
            To
                recognize previously deferred expense for stock based compensation
                and
                adjust the valuation of stock based compensation and services provide
                by
                third parties utilizing the market trading price on the day of
                grant.


2)
            To
                record discount related to the beneficial conversion feature and
                record
                the amortization of discount on the convertible debt using the effective
                interest rate method.


3)
            To
                adjust the valuation of the stock based acquisition of oil and gas
                properties utilizing the market trading price on the date of
                grant.


4)
            To
                adjust weighted average shares outstanding and earnings per share
                as a
                result of recognizing certain issuances as of the date of satisfaction
                of
                all necessary conditions to
                issuance.





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


***NOTE
      12 - INCOME TAXES***





Reconciliation
      between actual tax expense (benefit) and income taxes computed by applying
      the
      U.S. federal income tax rate and state income tax rate to income from continuing
      operations before income taxes is as follows:




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







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




Deferred
                tax assets:
            
            **2007**
            
            
            **2006
                (Restated)**Net
                operating loss carryforwards
            
            $
            1,734,000
            
            
            $
            825,200Oil
                and gas properties
            
            
            947,
                800
            
            
            
            -Less
                valuation allowance
            
            
            (2,681,800
            )
            
            
            (825,200
            )Total
            
            $
            -
            
            
            $
            -







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





The
      above
      estimates are based upon management’s decisions concerning certain elections
      which could change the relationship between net income and taxable income.
      Management decisions are made annually and could cause the estimates to vary
      significantly.














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


**NOTE
      13 – SUBSEQUENT EVENTS**





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





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





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





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





On
      August
      31, 2007, the remaining two debenture holders of the $0.75 convertible
      debentures agreed to extend the term of the debentures to October 31, 2007.
      In
      consideration of this extension they received 112,000 warrants. The warrants
      were valued at $35,386 using the Black-Scholes option pricing
      model.  The assumptions used in the Black-Scholes valuation model
      were: a risk fee interest rate of 4.1 %; the current stock price at date of
      issuance of $0.53 per share; the exercise price of the warrants of $0.53; the
      term of two years; volatility of 114%; and dividend yield of 0.0%.


**104**
 **Daybreak
                      Oil and Gas, Inc.** **(An
                        Exploration Stage Company, Date of Inception March 1,
                        2005)**
 **Notes
                        to Financial
                        Statements**


***SUPPLEMENTARY
      INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES
      (UNAUDITED)***





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








**Capitalized
      Costs Relating to Oil and Gas Producing Activities**




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







**Costs
      Incurred in Oil and Gas Producing Activities**




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




















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


**Results
      of Operations from Oil and Gas Producing Activities**





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








**Proved
      Reserves**





The
      Company’s proved oil and natural gas reserves have been estimated by independent
      petroleum engineers.  Proved reserves are the estimated quantities
      that geologic and engineering data demonstrate with reasonable certainty to
      be
      recoverable in future years from known reservoirs under existing economic and
      operating conditions. Proved developed reserves are the quantities expected
      to
      be recovered through existing wells with existing equipment and operating
      methods.  Due to the inherent uncertainties and the limited nature of
      reservoir data, such estimates are subject to change as addition information
      becomes available.  The reserves actually recovered and the timing of
      production of these reserves may be substantially different from the original
      estimate. Revisions result primarily from new information obtained from
      development drilling and production history; acquisitions of oil and natural
      gas
      properties; and changes in economic factors.   The Company had no
      proved reserves in fiscal 2006.  The fiscal 2007 proved reserves are
      summarized in the table below:








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





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


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





The
      following information is based on the Company’s best estimate of the required
      data for the Standardized Measure of Discounted Future Net Cash Flows as of
      February 28, 2007 and 2006 in accordance with SFAS No. 69, “Disclosures
      About Oil and Gas Producing Activities” which requires the use of a 10% discount
      rate. This information is not the fair market value, nor does it represent
      the
      expected present value of future cash flows of the Company’s proved oil and gas
      reserves.




February
                28,2007
            
            
            2006Future
                cash inflows
            
            $
            3,270,219
            
            
            $
            -Future
                production costs (1)
            
            
            (889,817
            )
            
            
            -Future
                development costs
            
            
            (170,762
            )
            
            
            -Future
                income tax expenses (2)
            
            
            -
            
            
            
            -Future
                net cash flows
            
            
            2,209,640
            
            
            
            -10%
                annual discount for estimated timing of cash flows
            
            
            (269,273
            )
            
            
            -Standardized
                measure of discounted future net cash flows at the end of the
                year
            
            $
            1,940,367
            
            
            $
            -




(1)
            Production
                costs include oil and gas operations expense, production ad valorem
                taxes,
                transportation costs and general and administrative expense supporting
                the
                Company’s oil and gas operations.


(2)
            The
                Company has sufficient tax deductions and allowances related to proved
                oil
                and gas reserves to offset future net
                revenues.




Future
      cash inflows are computed by applying year-end prices, adjusted for location
      and
      quality differentials on a property-by-property basis, to year-end quantities
      of
      proved reserves, except in those instances where fixed and determinable price
      changes are provided by contractual arrangements at year-end. The discounted
      future cash flow estimates do not include the effects of the Company’s
      derivative instruments, if any. See the following table for average
      prices.




February
                28,2007
            
            
            2006Average
                crude oil price per Bbl
            
            $
            56.71
            
            
            
            n/aAverage
                natural gas price per Mcf
            
            $
            7.56
            
            
            
            n/a





**107**
 **Daybreak
                      Oil and Gas, Inc.** **(An
                        Exploration Stage Company, Date of Inception March 1,
                        2005)**
 **Notes
                        to Financial
                        Statements**




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




Future
      income tax expenses are computed by applying the appropriate year-end statutory
      tax rates to the estimated future pretax net cash flows relating to the
      Company’s proved crude oil and natural gas reserves, less the tax bases of the
      properties involved. The future income tax expenses give effect to tax credits
      and allowances, but do not reflect the impact of general and administrative
      costs and exploration expenses of ongoing operations relating to the Company’s
      proved crude oil and natural gas reserves.




**Sources
      of Changes in Discounted Future Net Cash Flows**





Principal
      changes in the aggregate standardized measure of discounted future net cash
      flows attributable to the Company’s proved crude oil and natural gas reserves,
      as required by SFAS No. 69, at year end are set forth in the table
      below.




Twelve
                months ended February 28,2007
            
            
            2006Standardized
                measure of discounted future net cash flows at the beginning of the
                year
            
            $
            -
            
            
            $
            -Extensions,
                discoveries and improved recovery, less related costs
            
            
            1,806,060
            
            
            
            -Revisions
                of previous quantity estimates
            
            
            -
            
            
            
            -Changes
                in estimated future development costs
            
            
            -
            
            
            
            -Purchases
                (sales) of minerals in place
            
            
            389,887
            
            
            
            -Net
                changes in prices and production costs
            
            
            -
            
            
            
            -Accretion
                of discount
            
            
            -
            
            
            
            -Sales
                of oil and gas produced, net of production costs
            
            
            (255,580
            )
            
            
            -Development
                costs incurred during the period
            
            
            -
            
            
            
            -Change
                in timing of estimated future production and other
            
            
            -
            
            
            
            -Net
                change in income taxes
            
            
            
            
            
            
            -Standardized
                measure of discounted future net cash flows at the end of the
                year
            
            $
            1,940,367
            
            
            $
            -

















**108**


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





During
      the fiscal years ended February 28, 2003 and February 29, 2004, the Board of
      Directors of the Company engaged the firm of DeCoria, Maichel & Teague PS
      (DMT) as our independent registered public accounting firm to perform annual
      audits. In those reports there were no adverse opinions or disclaimers of
      opinion nor were they modified as to uncertainty, audit scope or accounting
      principles, with the exception of a statement regarding the uncertainty of
      our
      Company’s ability to continue as a going concern.




Because
      of a pending merger with a company in California, the firm of DMT resigned
      on
      January 7, 2005 as our independent accountant. On January 12, 2005 we engaged
      the firm of Kabani & Company, as our independent auditors to provide the
      requisite audit services for the Company.




On
      April
      20, 2005, the Board of Directors dismissed the firm of Kabani & Company as
      our independent auditors. Since the pending merger in California did not occur,
      the Board of Directors felt that it was important to have a local independent
      auditor to perform our annual audits. The firm of Kabani & Company did not
      report on any financial statements for the Company. While they were engaged
      by
      us, they did review our Quarterly Report on Form 10-QSB for the period ending
      November 30, 2004.




On
      May
      24, 2005, Daybreak reported that we had again engaged the firm of DeCoria,
      Maichel & Teague PS (DMT) to act as our independent auditor and perform the
      requisite audit services for the fiscal years ended February 28, 2005. DMT
      performed the annual audit for the fiscal years ended February 28, 2005 and
      February 28, 2006. In those reports there were no adverse opinions or
      disclaimers of opinion nor were they modified as to uncertainty, audit scope
      or
      accounting principles, with the exception of a statement regarding the
      uncertainty of our Company’s ability to continue as a going
      concern.





On
      November 8, 2006, the Registrant’s independent auditor, DeCoria, Maichel &
Teague PS (DMT) was dismissed based on a recommendation from the Audit
      Committee. There were no disagreements with DMT on any matter of accounting
      principals, financial statement disclosure, or auditing scope or procedures,
      however the Audit Committee recognized a need to engage an independent
      registered public accounting firm with more specific expertise with the oil
      and
      gas industry.




On
      November 8, 2006, the Board of Directors, engaged the firm of Malone &
Bailey, PC of Houston, Texas, as the Company’s independent registered public
      accountants to perform annual audits for the Company. In the process of
      responding to comments from the Securities and Exchange Commission in regards
      to
      the SB-2 registration statement that we filed for the Spring 2006 private
      placement, Daybreak determined that it would be necessary to restate previously
      filed financial statements for the fiscal year ended February 28, 2006. The
      restatement of financial statements involved transactions of a non-cash nature
      for the determination of the fair value of common stock issuances and the
      recognition and accounting treatment of a beneficial conversion feature in
      regards to the convertible debentures that Daybreak had issued. As a consequence
      of the need for the restatement, Malone & Bailey was also engaged to conduct
      an audit of the fiscal year ended February 28, 2006 as well as February 28,
      2007.


**109**





**ITEM
      8A.  CONTROLS AND PROCEDURES**





(a)           Evaluation
      of Disclosure Controls and Procedures





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





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





Material
      weakness identified included:





The
      Company’s corporate governance and disclosure controls and procedures do not
      provide reasonable assurance that material transactions are timely and
      accurately reported in our Periodic Reports that we file with the Securities
      and
      Exchange Commission.




We
        have
        restated previously filed financial statements for the four (4) quarters
        for the
        fiscal year ended February 28, 2006, the 12 months ended February 28, 2006,
        and
        the first three (3) quarters for the fiscal year ended February 28, 2007. 
The nature of the restatements is disclosed in this 10-K filing as Note 11
        to
        the financial statements.  The material weaknesses giving rise to the
        restatements were due to errors in applying GAAP in regards to a) properly
        valuing and recording share based payments, and b) properly valuing and
        recognizing beneficial conversion features, relative fair value of warrants
        and
        related discounts on convertible debt and preferred stock issuances.  These
        deficiencies were identified as a result of comment letters received from
        the
        Securities and Exchange Commission (SEC) in response to our previously filed
        SB-2 Registration Statement.  Our Independent Registered Accountants also
        noted these deficiencies during the audit of our financials statements for
        the
        fiscal years ended February 28, 2007 and February 28, 2006,
        respectively.


In
      particular, the Company does not have adequate controls over the timely filing
      of our required quarterly 10-QSB and year end 10-KSB reports. For the fiscal
      year ended February 28, 2007, we were forced to file a 12b-25 “Notification of
      Late Filing” report for the quarters ended August 31, 2006 and November 30,
      2006.





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





Our
      10-KSB report for the fiscal year ended February 28, 2007, should have been
      filed on May 29, 2007. We were unable to complete the 10-KSB in the time
      allotted because the restatement of our previously filed financial statements
      was not completed. Consequently we filed a 12b-25 “Notification of Late Filing”
report, believing that we would complete the restatement and audit process
      within the filing extension period.


**110**


We
      were
      not successful in meeting that goal. On July 2, 2007, our stock was dropped
      from
      being quoted on the OTC Bulletin Board market to the OTC pink sheet market.
      We
      will be eligible to apply to return to the OTC bulletin Board market when we
      become current in our SEC filings.





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





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




(b)           Changes
      in Internal Control.





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





The
      Company’s control over financial reporting is a process designed to provide
      reasonable assurance regarding the reliability of financial reporting and the
      preparation of financial statements for external purposes in accordance with
      generally accepted accounting principals. Because of the inherent limitations
      due to, for example, the potential for human error or circumvention of controls,
      internal control over financial reporting may not prevent or detect
      misstatements. Also, projections of any evaluation of effectiveness to future
      periods are subject to the risk that controls may become inadequate because
      of
      changes in conditions, or that the degree of compliance with policies or
      procedures may deteriorate.





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





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





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


**111**
 Changes
                    Implemented to Correct Material
                    Weaknesses:





- We
          have
          revised our operation procedures relating to management’s issuance of common
          stock and the timely disclosure of unregistered equity
          transactions.
- We
          have
          increased administrative staff to assist in the more timely preparation
          of all
          required reporting documents

(c)           Limitations.




Our
      management does not expect that our disclosure controls or internal controls
      over financial reporting will prevent all errors or all instances of fraud.
      A
      control system, no matter how well designed and operated, can provide only
      reasonable, not absolute, assurance that the control system's objectives will
      be
      met.





Further,
      the design of a control system must reflect the fact that there are resource
      constraints, and the benefits of controls must be considered relative to their
      costs.





Because
      of the inherent limitations in all control systems, no evaluation of controls
      can provide absolute assurance that all control issues and instances of fraud,
      if any, within our company have been detected. These inherent limitations
      include the realities that judgments in decision-making can be faulty, and
      that
      breakdowns can occur because of simple error or mistake. Controls can also
      be
      circumvented by the individual acts of some persons, by collusion of two or
      more
      people, or by management override of the controls. The design of any system
      of
      controls is based in part upon certain assumptions about the likelihood of
      future events, and any design may not succeed in achieving its stated goals
      under all potential future conditions.





Over
      time, controls may become inadequate because of changes in conditions or
      deterioration in the degree of compliance with policies or procedures. Because
      of the inherent limitation of a cost-effective control system, misstatements
      due
      to error or fraud may occur and not be detected.





**ITEM
      8B.  OTHER INFORMATION**





None



















**112**


**PART  III**





**ITEM
      9.   DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
      PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT**




**DIRECTORS**Name
            Age
            Position(s)
              w/the Company
            Director
              SinceDale
              B. Lavigne
            75
            Director/Chairman
            March
              1965Robert
              N. Martin
            52
            Director/President
            December
              2004Eric
              L. Moe
            43
            Director
              / CEO
            August
              2006Jeffrey
              R. Dworkin
            49
            Director/Secretary
            December
              2004Terrence
              J. Dunne
            58
            Director/Chief
              Financial Officer
            January
              2006Thomas
              C. Kilbourne
            55
            Director/Treasurer/Controller
            January
              2001Michael
              Curtis
            52
            Director
            December
              2004Ronald
              D. Lavigne
            52
            Director
            July
              1999Tim
              R. Lindsey
            55
            Director
            January
              2007**EXECUTIVE  OFFICERS**Bennett
              W. Anderson
            46
            Chief
              Operating Officer
            March
              2006





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





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





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





**113**


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





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





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





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





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





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





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








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





Thomas
      C. Kilbourne is the Controller/Treasurer and a Director of the Company and
      is formerly its Chief Financial Officer.  Mr. Kilbourne has been an officer
      and director of the Company since January 2001. He graduated from the University
      of Montana with a BS Degree in Business Administration and
      Finance.


**114**


Mr.
      Kilbourne has been the Chief Financial Officer and a Director of the Osburn
      Drug
      Company since 1999. Prior to that time, he had been the General Manager of
      Tabor’s/Modern Drug in Wallace, Idaho since 1980. Mr. Kilbourne is also a
      director and officer of various other public non-reporting inactive mineral
      exploration companies. Mr. Kilbourne is the son-in-law of Dale Lavigne and
      the
      brother-in-law of Ronald Lavigne.





Ronald
      D. Lavigne is a Director of the Company.  Mr. Lavigne has served as a
      Director of the Company since July of 1999.  Mr. Lavigne graduated from the
      University of Montana with a BS Degree in Pharmacy.  Mr. Lavigne is the
      President and a Director of the Osburn Drug Company.  Mr. Lavigne is also a
      director and officer of various other public non-reporting inactive mineral
      exploration companies, and is the son of Dale Lavigne and the brother-in-law
      of
      Thomas Kilbourne.




Tim
      R.
      Lindsey is a Director of the Company.  Mr. Lindsey has over thirty
      years of technical and executive leadership in exploration, production,
      technology, and business development in the United States, Canada, Africa,
      Europe, Latin America and Asia – Pacific.




From
      March 2005 to the present, Mr. Lindsey has been a Principal of Lindsey Energy
      and Natural Resources an independent consulting firm specializing in energy
      and
      mining industry issues. From September 2003 to March 2005, Mr. Lindsey held
      the
      positions of Vice-President, Exploration and Senior Vice-President, Exploration
      with the Houston Exploration Company (NYSE:THX), a Houston-based independent
      natural gas and oil company engaged in the exploration, development,
      exploitation and acquisition of domestic natural gas and oil properties. From
      October 1975 to February 2003, Mr. Lindsey was employed with Marathon Oil
      Corporation (NYSE: MRO), a Houston-based company engaged in the worldwide
      exploration and production of crude oil and natural gas, as well as the domestic
      refining, marketing and transportation of petroleum products. During his 27
      year
      tenure with Marathon, Mr. Lindsey held a number of positions including senior
      management roles in both domestic and international exploration and business
      development. He also serves as a Director for Challenger Energy Corp., a
      Calgary-based oil and gas company focused on projects offshore Trinidad and
      Tobago; and, offshore Nova Scotia.




Mr.
      Lindsey obtained his Bachelor of Science Degree in Geology from Eastern
      Washington University in 1973, and completed his graduate studies in Economic
      Geology from the University of Montana in 1975.  In addition, he
      completed the Advanced Executive Program from the Kellogg School of Management
      at Northwestern University in 1990. Mr. Lindsey is a member of the American
      Association of Petroleum Geologists and the Rocky Mountain Association of
      Geologists.




**Directors’
      Term of Office**




Directors
      hold office until the next annual meeting of shareholders and the election
      and
      qualification of their successors. Officers are elected annually by our board
      of
      directors and serve at the discretion of the board of directors.




**Board
      Meetings**




During
      the fiscal year ended February 28, 2007, there were twelve regular meetings
      of
      the Board of Directors. All directors attended at least 75% of these meetings
      with the exception of Michael Curtis.




**115**


**Director
      Compensation**




For
      the
      fiscal year ended February 28, 2007, directors of the Company were compensated
      for their services at a rate of $750 per month. Director fees were paid in
      cash
      on a quarterly basis.




**Committees
      of the Board of Directors**




**Audit
      Committee**




The
      Audit
      Committee is responsible for monitoring the integrity of the Company’s financial
      reporting standards and practices and its financial statements, overseeing
      the
      Company’s compliance with ethics and compliance policies and legal and
      regulatory requirements, and selecting, compensating, overseeing, and evaluating
      the Company’s independent auditors.





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





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





**Nominating
      Committee**





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





**Compensation
      Committee**





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





None
      of
      the foregoing Directors or Executive Officers has, during the past five
      years:




(a)
      Had
      any bankruptcy petition filed by or against any business of which such person
      was a general partner or executive officer either at the time of the bankruptcy
      or within two years prior to that time. Mr. Jeffrey Dworkin declared personal
      bankruptcy under Canadian law on September 3, 2003 and was discharged on June
      3,
      2004




(b)
      Been
      convicted in a criminal proceeding or subject to a pending criminal
      proceeding;




**116**


(c)
      Been
      subject to any order, judgment, or decree, not subsequently reversed, suspended
      or vacated, of any court of competent jurisdiction, permanently or temporarily
      enjoining, barring, suspending or otherwise limiting his involvement in any
      type
      of business, securities or banking activities; and




(d)
      Been
      found by a court of competent jurisdiction (in a civil action), the Commission
      or the Commodity Futures Trading Commission to have violated a federal or state
      securities or commodities law, and the judgment has not been reversed,
      suspended, or vacated.




Compliance
      with Section 16(a) of the Exchange Act. Our officers, directors and persons
      owning more than 10% of our common stock are obligated to file reports of
      ownership and changes in ownership with the Securities and Exchange Commission
      under Section 16(a) of the Securities Exchange Act of 1934. To our knowledge,
      based solely upon review of the copies of such reports received or written
      representations from the reporting persons, we believe that during our fiscal
      year ended February 28, 2007 our directors, executive officers and persons
      who
      own more than 10% of our common stock complied with all Section 16(a) filing
      requirements with the exception of the following:





Ronald
      Lavigne (1 Report, 1 Transaction)





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











































**117**


**ITEM
      10.  EXECUTIVE COMPENSATION**





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





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





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





Executive
      Summary Compensation Table




**Name
                  and Principal Position**
              **Position**
              **Fiscal
                  Year Ended February 28**
              
              **Salary**
              
              
              **Stock
                  Awards**
              
              
              **Total**Robert
                  Martin (1) (2)
                  (3)
              President
              2007
              
              $
              161,500
              
              
              $
              597,500
              (3)
              
              $
              759,0002006
              
              $
              40,050
              
              
              $
              869,000
              (2)
              
              $
              909,0502005
              
              $
              -
              
              
              $
              -
              
              
              $
              -Eric
                  Moe (4) (5) (6)
                  (7)
              Chief
                  Executive Officer(4)
              2007
              
              $
              103,500
              
              
              $
              1,110,000
              (7)
              
              $
              1,213,5002006
              
              $
              32,000
              (5)
              
              $
              955,000
              (6)
              
              $
              987,0002005
              
              $
              -
              
              
              $
              -
              
              
              $
              -Dale
                  Lavigne (8)
              Chairman
              2007
              
              $
              -
              
              
              $
              -
              
              
              $
              -2006
              
              $
              -
              
              
              
              168,000
              (8)
              
              $
              168,0002005
              
              $
              -
              
              
              $
              -
              
              
              $
              -Terrence
                  Dunne (9)
              Chief
                  Financial Officer
              2007
              
              $
              -
              
              
              $
              -
              
              
              $
              -2006
              
              $
              -
              
              
              $
              224,000
              (9)
              
              $
              224,0002005
              
              $
              -
              
              
              $
              -
              
              
              $
              -Bennett
                  Anderson (10)
              Chief
                  Operating Officer
              2007
              
              $
              98,500
              
              
              $
              -
              
              
              $
              98,5002006
              
              $
              5,000
              
              
              
              223,000
              (10)
              
              $
              228,0002005
              
              $
              -
              
              
              $
              -
              
              
              $
              -Thomas
                  Kilbourne (9)
                  (11)
              Treasurer
                  and Controller
              2007
              
              $
              84,500
              
              
              $
              239,000
              (11)
              
              $
              323,5002006
              
              $
              -
              
              
              $
              224,000
              (9)
              
              $
              224,0002005
              
              $
              -
              
              
              $
              -
              
              
              $
              -Jeffrey
                  Dworkin
              Secretary
              2007
              
              $
              36,191
              
              
              $
              -
              
              
              $
              36,1912006
              
              $
              12,000
              
              
              $
              -
              
              
              $
              12,0002005
              
              $
              -
              
              
              $
              -
              
              
              $
              -
 **118**
 Ronald
                  Lavigne (8)
              Director
              2007
              
              $
              -
              
              
              $
              -
              
              
              $
              -2006
              
              $
              -
              
              
              $
              168,000
              (8)
              
              $
              168,0002005
              
              $
              -
              
              
              $
              -
              
              
              $
              -Tim
                  Lindsey (12)
              Director
              2007
              
              $
              -
              
              
              $
              260,000
              (12)
              
              $
              260,0002006
              
              $
              -
              
              
              $
              -
              
              
              $
              -2005
              
              $
              -
              
              
              $
              -
              
              
              $
              -**Totals**
              
              **2007**
              
              **$**
              **484,191**
              
              
              **$**
              **2,206,500**
              
              
              **$**
              **2,690,691****2006**
              
              **$**
              **89,050**
              **(5)**
              
              **$**
              **2,831,000**
              **(6)**
              
              **$**
              **2,920,050****2005**
              
              **$**
              **-**
              
              
              **$**
              **-**
              
              
              **$**
              **-**





(1)
            Payments
                for Mr. Martin’s services are paid directly to 413294 Alberta Ltd., a
                Canadian Company.


(2)
            Includes
                $869,000 that was paid with 1,100,000 shares of unregistered common
                stock.


(3)
            Includes
                $597,500 that was paid with 250,000 shares of unregistered common
                stock.


(4)
            For
                the fiscal year ended February 28, 2006, Mr. Moe was employed as
                an
                investor relations (IR) consultant to
                Daybreak


(5)
            Includes
                $29,000 that was paid for investor relations (IR) consulting to Mr.
                Moe in
                fiscal year 2006.


(6)
            Includes
                $955,000 that was paid with 1,500,000 shares of unregistered common
                stock
                for IR consulting to Mr. Moe in fiscal year
                2006.


(7)
            Includes
                $1,110,000 that was paid with 500,000 shares of unregistered common
                stock.


(8)
            Includes
                $168,000 that was paid with 300,000 shares of unregistered common
                stock.


(9)
            Includes
                $224,000 that was paid with 400,000 shares of unregistered common
                stock.


(10)
            Includes
                $223,000 that was paid with 100,000 shares of unregistered common
                stock.


(11)
            Includes
                $239,000 that was paid with 100,000 shares of unregistered common
                stock.


(12)
            Includes
                $260,000 that was paid with 200,000 shares of unregistered common
                stock.









































**119**


**Director
      Summary Compensation Table**




**Name
                  and Principal Position**
              **Position**
              **Fiscal
                  Year Ended February 28**
              
              **Fees**
              
              
              **Stock
                  Awards**
              
              
              **Total**Robert
                  Martin (1) (2)
                  (4)
              Director
              2007
              
              $
              9,000
              (4)
              
              $
              -
              
              
              $
              9,0002006
              
              $
              -
              
              
              $
              21,330
              (2)
              
              
              21,3302005
              
              $
              -
              
              
              $
              -
              
              
              $
              -Eric
                  Moe (4)
              Director
                  (9)
              2007
              
              $
              5,250
              (4)
              
              $
              -
              
              
              $
              5,2502006
              
              $
              -
              
              
              $
              -
              
              
              $
              -2005
              
              $
              -
              
              
              $
              -
              
              
              $
              -Dale
                  Lavigne (2)
                  (4)
              Chairman
                  and Director
              2007
              
              $
              9,000
              (4)
              
              $
              -
              
              
              $
              9,0002006
              
              $
              -
              
              
              $
              21,330
              (2)
              
              $
              21,3302005
              
              $
              -
              
              
              $
              -
              
              
              $
              -Terrence
                  Dunne (3)
                  (4)
              Director
              2007
              
              $
              9,000
              (4)
              
              $
              -
              
              
              $
              9,0002006
              
              $
              -
              
              
              $
              6,750
              (3)
              
              $
              6,7502005
              
              $
              -
              
              
              $
              -
              
              
              $
              -Thomas
                  Kilbourne (2)
                  (4)
              Director
              2007
              
              
              9,000
              (4)
              
              $
              -
              
              
              $
              9,0002006
              
              $
              -
              
              
              $
              21,330
              (2)
              
              $
              21,3302005
              
              $
              -
              
              
              $
              -
              
              
              $
              -Jeffrey
                  Dworkin (2)
                  (4)
              Director
              2007
              
              $
              9,000
              (4)
              
              $
              -
              
              
              $
              9.0002006
              
              $
              -
              
              
              $
              21,330
              (2)
              
              $
              21,3302005
              
              $
              -
              
              
              $
              -
              
              
              $
              -Ronald
                  Lavigne (2)
                  (4)
              Director
              2007
              
              $
              9,000
              (4)
              
              $
              -
              
              
              $
              9,0002006
              
              $
              -
              
              
              $
              21,330
              (2)
              
              $
              21,3302005
              
              $
              -
              
              
              $
              -
              
              
              $
              -Michael
                  Curtis (2)
                  (4)
              Director
              2007
              
              $
              9,000
              (4)
              
              $
              -
              
              
              $
              9,0002006
              
              $
              -
              
              
              $
              21,330
              (2)
              
              $
              21,3302005
              
              $
              -
              
              
              $
              -
              
              
              $
              -Tim
                  Lindsey (6)
              Director
              2007
              
              $
              1,500
              (6)
              
              $
              -
              
              
              $
              1,5002006
              
              $
              -
              
              
              $
              -
              
              
              $
              -2005
              
              $
              -
              
              
              $
              -
              
              
              $
              -**Totals**
              
              **2007**
              
              **$**
              **69,750**
              
              
              **$**
              **-**
              
              
              **$**
              **69,750****2006**
              
              **$**
              **-**
              
              
              **$**
              **134,730**
              
              
              **$**
              **134,730****2005**
              
              **$**
              **-**
              
              
              **$**
              **-**
              
              
              **$**
              **-**




(1)
            Payments
                for Mr. Martin’s services are paid directly to 413294 Alberta Ltd., a
                Canadian Company.


(2)
            Directors
                fees of $21,330 that were paid with 30,000 shares of unregistered
                common
                stock.


(3)
            Directors
                fees of $6,750 that were paid with 3,000 shares of unregistered common
                stock.


(4)
            Directors
                fees of $9,000 that were paid in
                cash.


(5)
            Directors
                fees of $5,250 that were paid in
                cash.


(6)
            Directors
                fees of $1,500 that were paid in
                cash.




**120**


**Employment
      Contracts**





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





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



















































**121**


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





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





***Security
      Ownership of Certain Beneficial Owners***





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








**Title
                of Class**
            **Name
                and Address of Beneficial Owner**
            **Amount
                and Nature of Beneficial Ownership**
            **Percent
                of Class (1)**Common
                Stock
            Terrence
                J. Dunne
            3,803,804
            9.24601
                W. Main AveSuite  1017Spokane,
                WA 99201Common
                Stock
            Keith
                A. Hooper(2)
            3,176,077
            7.711529
                W. Adams St.Chicago,
                IL  60607Common
                Stock
            Robert
                O' Brien
            2,878,953
            6.991511
                S. Riegel CT.Spokane,
                WA 99212


_________________________





(1)
            Percent
                  of class is based upon 41,171,299 shares of common stock outstanding
                  on
                  September 14, 2007.


(2)
            Includes
                2,936,077 shares held directly or as a trustee by Mr. Hooper; 240,000
                shares held indirectly by Hooper Group a Company controlled by Mr.
                Hooper.










**122**


The
        following table sets forth, as of September 14, 2007, information regarding
        the
        beneficial ownership of our common stock with respect to each of our executive
        officers, each of our directors, known by us to own beneficially more than
        5% of
        the common stock, and all of our directors and executive officers as a group.
        The term "executive officer" is defined as the President, Chief Executive
        Officer, Chief Financial Officer, Secretary, Treasurer and the Chief Operating
        Officer. Each individual or entity named has sole investment and voting power
        with respect to shares of common stock indicated as beneficially owned by
        them,
        subject to community property laws, where applicable, except where otherwise
        noted. The percentage of common stock beneficially owned is based on
        41,171,299shares of
        common stock outstanding as of September 14, 2007.


**Name
                of**
            **Title
                or**
            **Amount
                and Nature**
            **Percent****Title
                of Class**
            **Beneficial
                Owner**
            **Position**
            **of
                Beneficial Ownership**
            **of
                Class (1)**Common
                Stock
            Robert
                N. Martin
            President
                & Director
            1,380,000
            3.35%Common
                Stock
            Dale
                B. Lavigne
            Chairman
                & Director
            822,555
            2.00%Common
                Stock
            Eric
                L. Moe
            CEO
                & Director
            1,104,600
            2.68%Common
                Stock
            Bennett
                W. Anderson
            COO
            300,000
            0.73%Common
                Stock
            Terrence
                J. Dunne
            CFO
                & Director
            3,803,804
            9.24%Common
                Stock
            Jeffrey
                R. Dworkin
            Secretary
                & Director
            30,000
            0.07%Common
                Stock
            Thomas
                C. Kilbourne
            Treasurer
                & Director
            930,072
            2.26%.Common
                Stock
            Ronald
                D. Lavigne
            Director
            688,814
            1.67%Common
                Stock
            Michael
                Curtis
            Director
            30,000
            0.07%Common
                Stock
            Tim
                R. Lindsey
            Director
            200,000
            0.49%Total
            Ten
                (10) individuals
            
            9,289,845
            22.56%






























**123**


**ITEM
      12.  CERTAIN RELATIONSHIPS AND RELATED
      TRANSACTIONS**




For
      the
      fiscal years ended February 28, 2005 and February 28, 2004 there were no related
      party transactions.




During
      the fiscal year ended February 28, 2006, we had the following related party
      transactions:




*Convertible
      Debentures*




From
      March 19, 2005 until August 31, 2005, five shareholders of whom three were
      directors and the other two were 10% control persons (at the time) made
      twenty-six loans to the Company totaling $158,821 in convertible debentures
      to
      finance our operating activities. These convertible debentures had the following
      features: one year term, six percent interest rate and the notes were
      convertible after six months to unregistered common stock. The conversion rate
      of $0.25 per share was selected because a private placement offering of our
      common stock was being planned at the same time for that same price. Both the
      principal and the accrued interest were eligible for conversion to unregistered
      common stock.





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





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





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





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





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





2)
      On
      March 22, 2005, Terrence Dunne (appointed a director in January 2006 and CFO
      in
      April 2006), a shareholder and 10% control person (at the time), loaned the
      Company $10,216 to finance ongoing operating expenses. On the day of the loan,
      the closing price of our stock was $0.46. On November 28, 2005,
      Mr.
      Dunne converted the note plus interest into unregistered common
      stock.




**124**


He
      was
      issued 42,503 shares of stock from this conversion.  On the day of the
      conversion, the closing price of our stock was $0.52.  Based on this
      price the value of the principal in the conversion was $21,249.





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





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





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





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





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





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





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





**125**


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





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





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





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





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





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





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





**126**


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





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





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





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





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





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





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





24)
      On
      August 31, 2005, Ronald Lavigne, a director and shareholder, loaned the Company
      $2,500 to finance ongoing operating expenses. On the day of the loan, the
      closing price of our stock was $0.37.    On February 28,
      2006, Mr. Lavigne converted the note plus interest into unregistered common
      stock.




**127**


He
      was
      issued 10,298 shares of stock from this conversion.  On the day of the
      conversion, the closing price of our stock was $2.25.  Based on this
      price the value of the principal in the conversion was $22,500





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





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





*Stock
      for Services*





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





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





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





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





**128**


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





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





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





*Stock
      for Investor Relations Services*





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





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





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




**129**


The
      shares issued for services were issued pursuant to a Section 4(2) exemption
      from
      registration under the Securities Act of 1933, as amended.





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





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





*Stock
      for Directors Services*





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





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





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





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





**130**


*Stock
      for Services*





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





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





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





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





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





*Stock
      for Investor Relations Services*





On
      May
      10, 2006, we issued 150,000 shares of unregistered common stock to AnMac
      Enterprises (a company owned by Michael McIntyre) for Investor Relations (“IR”)
      consulting services from March 1, 2006 through February 28, 2007.




**131**


On
      the
      grant date of March 1, 2006, the closing price of our stock was $2.39. Based
      on
      the closing price the value of this stock issuance was $358,500. In conforming
      to the current interpretation of FAS 123(R) the value of this transaction has
      now been expensed as of the grant date as reflected in our restated financials.
      The shares issued for services were issued pursuant to a Section 4(2) exemption
      from registration under the Securities Act of 1933, as amended.





*Office
      Lease*





On
        August
        3, 2006, the Board of Directors approved the rental of office space from
        Terrence Dunne & Associates, a company owned by Terrence Dunne (CFO and a
        director). Originally, we occupied approximately 700 square feet and paid
        $600
        per month. In October 2006, the rent increased to $700 per month. In March
        2007, to accommodate an increase in the administrative staff size we
        expanded the amount of office space rented to approximately 850 square
        feet. This increase in space resulted in a monthly rent of $1,000. In May
        2007,
        we again increased our office size and is now paying $1,250 per month for
        approximately 1,000 square feet. This office lease is currently on a month
        to month basis.
 
 *Financing
        of Gas Pipeline*
 
 On
        May
        24, 2006, Daybreak financed its forty percent (40%) working interest in the
        Tuscaloosa project gas pipeline through a financing arrangement with Hooper
        Oil
& Gas Partners, LLC (“Hooper O&G”). This pipeline services the Tensas
        Farms et al F-1 well in Tensas Parish, Louisiana. Hooper O&G is a company
        controlled by Keith A. Hooper, a 5% shareholder of the Company (at the
        time).
 
 We
        have
        accounted for this agreement as a financing arrangement in the form of a
        note
        payable. The principal of the note is $200,000. We are obligated to pay $5,000
        per quarter in interest until the principal is paid in full. Daybreak is
        also
        required to pay an additional 1% interest fee based on our original net revenue
        interest (“NRI”) on the production revenue of the F-1 well for the life of the
        project.
 
 We
        are
        required to commence repayment of the loan if production from the F-1 well
        should cease for any cause for a period exceeding sixty days. From June 14,
        2007
        through September 7, 2007, we made principal payments totaling $170,000.
        The
        balance of the loan is now past due. The accelerated repayment schedule was
        triggered by the temporary shut-in status of the F-1 well, due to technical
        issues with water production.  Daybreak and Hooper O& G have
        agreed to make final payment on the note by November 30, 2007.
 
 *Oil
        and Gas Properties*
 
 On
        September 12, 2006, Daybreak approved the individual participation of Bennett
        Anderson (COO) in the North Colgrade project. This project was drilled in
        December 2006, in Winn Parish, Louisiana. We had a 19% working interest in
        this
        project and was not the operator of the project. Mr. Anderson had a 1% working
        interest in the project. Both Daybreak and Bennett Anderson have participated
        in
        the drilling of two wells on this prospect. Neither well has been commercially
        successful. The wells have been plugged and abandoned.




**132**


On
        October 30, 2006, Daybreak approved the individual participation of Robert
        Martin (President and Director) and Eric Moe (CEO and Director) in the
        Tuscaloosa Project in northeast Louisiana. Both Robert Martin and Eric Moe
        participated in the drilling of the Tensas Farms B-1 and Tensas Farms F-3
        wells.
        We have an approximate 88% and 48% working interest in the B-1 and F-3 wells
        respectively. Mr. Martin and Mr. Moe each have a 1% working interest in the
        project. The F-3 well began commercial production on March 23, 2007. In February
        of 2007, the B-1 well had production casing set and initial completion attempted
        resulting in no flow.
 
 On
        January 10, 2007, Daybreak approved the individual participation of Terrence
        Dunne (CFO and Director) in the Krotz Springs project for the Haas-Hirsch
        No. 1
        well in St. Landry Parish Louisiana. We were the operator of this project
        during
        the drilling phase which began in January 2007. We have a 12.5% working interest
        in this project. Terrence Dunne has a 2.5% working interest in the project.
        Upon
        the conclusion of drilling and the completion stage of this project we ceased
        to
        function as the operator of the project.


*Consulting
      Contracts*





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





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





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





































**133**


**ITEM
      13.  EXHIBITS**





The
      following Exhibits are filed as part of the report:





1.01
            Placement
                agent agreement for the sale of securities in March 2006 (19)


1.02
            Placement
                agent agreement for the sale of securities in July
                2006


3.01
            (i)
            Articles
                of Incorporation (1)


(ii)
            By-Laws
                (2)


3.02
            (i)
            Amend
                Articles of Incorporation for name change (18)


3.03
            (i)
            Amend
                Articles of Incorporation defining Series A Preferred Convertible
                Stock
                (19)


4.01
            Registration
                statement of securities (16)


7.01
            Non-Reliance
                on previously filed financial statements (27)


10.01
            Quitclaim
                mining deed with Silver Crown Mining of mineral rights in Idaho (26)


10.02
            Agreement
                with Crosspoint Holdings, Inc. for the purchase of Series A Preferred
                Stock (6)


10.03
            Consulting
                Agreement with 413294 Alberta Ltd. effective March 1,
                2005


10.04
            Consulting
                Agreement with AnMac Enterprises effective March 1,
                2005


10.05
            Consulting
                Agreement with Eric Moe effective March 1,
                2005


10.06
            Expiration
                of Series A Stock Purchase Agreement with Crosspoint Holdings, Inc.,
(10)


10.07
            Drilling
                agreement with MPG Petroleum for Ginny South project. (11)


10.08
            Agreement
                with MPG Petroleum to join land bank for Pearl Prospect (12)


10.09
            Consulting
                agreement with Summitt Ventures for management services (15)


10.10
            Development
                agreement with Chicago Mill Joint Venture for Louisiana project (26)


10.11
            Prospect
                review and non-competition agreement for California project (26)


10.12
            Joint
                Venture Agreement with Nomad Hydrocarbons, Ltd. for California project
                (26)


10.13
            Development
                agreement with Oracle Operating Co. for Texas project (26)


10.14
            Prospect
                review agreement for California project (26)


10.15
            Development
                agreement with Vision Exploration for Louisiana project (26)


10.16
            Farmin
                agreement with Big Sky Western Canada for well in Alberta,
                Canada (26)


10.17
            Development
                agreement with Vision Exploration for prospect in Louisiana(26)


10.18
            Subscription
                agreement and letter of investment intent, March 2006 private placement
                (19)


10.19
            Warrant
                for the purchase shares of common stock, March 2006 private placement
                (19)


10.20
            Registration
                rights agreement, March 2006 private placement (19)


10.21
            Pipeline
                license agreement for Tuscaloosa project in Louisiana (26)


10.22
            Subscription
                agreement and letter of investment intent, July 2006 private
                placement


10.23
            Warrant
                for the purchase shares of common stock, July 2006 private
                placement


10.24
            Registration
                rights agreement, July 2006 private
                placement


10.25
            Development
                agreement with Frank Davis Exploration for prospect in
                Louisiana (26)


10.26
            Agreement
                for refurbishing and operating of drilling rig (20)


10.27
            Consulting
                Agreement with Jeffrey Dworkin dated August 1,
                2006


10.28
            Office
                Rent Agreement with Terrence Dunne & Associates dated August 1,
                2006


10.29
            Consulting
                Agreement with Michael Hooper dated August 3,
                2006


10.30
            Purchase
                of additional mineral interest in Tuscaloosa project in
                Louisiana (21)


10.31
            Farmout
                agreement with Monarch Gulf Exploration, Inc. (22)


10.32
            Oil
                and gas lease with Anadarko E&P Company, L.P.(23)


10.33
            Drilling
                contract with Energy Drilling for two wells in Louisiana (25)


10.34
            Consulting
                Agreement with Tim Lindsey effective January 2,
                2007


10.35
            Consulting
                Agreement with 413294 Alberta Ltd. effective March 1,
                2007


10.36
            Consulting
                Agreement with Jeffrey Dworkin effective March 1,
                2007


10.37
            Consulting
                Agreement with Michael Hooper effective March 1,
                2007


10.38
            Employment
                Agreement with Eric Moe, CEO effective March 1,
                2007




**134**




10.39
            Employment
                Agreement with Bennett Anderson effective March 1,
                2007


10.40
            Employment
                Agreement Thomas Kilbourne effective March 1,
                2007


10.41
            Office
                Rent Agreement with Terrence Dunne & Associates effective May 1,
                2007


10.42
            Seismic
                farmout agreement with
                ChevronU.S.A.(28)


10.43
            Joint
                Development Participation Agreement for Tuscaloosa project in
                Louisiana (29)


14.01
            Code
                of Ethics (3)


14.02
            Code
                of Ethics for President, CEO and Senior Financial Officers (4)


14.03
            Code
                of Ethics, Revised (5)


16.01
            Change
                in Certifying Accountant (8)


16.02
            Change
                in Certifying Accountant (9)


16.03
            Change
                in Certifying Accountant (13)


16.04
            Change
                in Certifying Accountant(14)


16.05
            Change
                in Certifying Accountant (24)


17.01
            Resignation
                of Current Executive Officers and Directors (7)


19.01
            Definitive
                proxy statement in conjunction with annual meeting (17)





Section
      1350 Certifications


31.1
            Certification
                of Eric L. Moe


31.2
            Certification
                of Thomas C. Kilbourne





Section
      1350 Certifications


32.1
            Certification
                of Eric L. Moe


32.2
            Certification
                of Thomas C. Kilbourne





99.1
            Audit
                Committee Pre-Approval Policies (4)





(1)
            Previously
                filed as exhibit to Form 10-SB on November 22, 2002, and incorporated
                by
                reference herein.


(2)
            Previously
                filed as exhibit to Form 10-SB on November 22, 2002, and incorporated
                by
                reference herein.


(3)
            Previously
                filed as exhibit to Form 10-KSB on June 30, 2003, and incorporated
                by
                reference herein.


(4)
            Previously
                filed as exhibit to Form 10-KSB/A on March 19, 2004, and incorporated
                by
                reference herein.


(5)
            Previously
                filed as exhibit to Form 10-KSB on May 19, 2004, and incorporated
                by
                reference herein.


(6)
            Previously
                filed as exhibit to Form 8-K on November 5, 2004, and incorporated
                by
                reference herein.


(7)
            Previously
                filed as exhibit to Form 8-K on December 14, 2004, and incorporated
                by reference herein.


(8)
            Previously
                filed as exhibit to Form 8-K on January 19, 2005, and incorporated
                by
                reference herein.


(9)
            Previously
                filed as exhibit to Form 8-K/A on February 24, 2005, and incorporated
                by
                reference herein.


(10)
            Previously
                filed as exhibit to Form 8-K on April 7, 2005, and incorporated by
                reference herein.


(11)
            Previously
                filed as exhibit to Form 8-K on April 21, 2005, and incorporated
                by
                reference herein.


(12)
            Previously
                filed as exhibit to Form 8-K on April 28, 2005, and incorporated
                by
                reference herein.


(13)
            Previously
                filed as exhibit to Form 8-K on May 19, 2005, and incorporated by
                reference herein.


(14)
            Previously
                filed as exhibit to Form 8-K on May 31, 2005, and incorporated by
                reference herein.


(15)
            Previously
                filed as exhibit to Form 10-KSB on June 15, 2005, and incorporated
                by
                reference herein.


(16)
            Previously
                filed as exhibit to Form S-8 on August 19, 2005, and incorporated
                by
                reference herein.


(17)
            Previously
                filed as exhibit to Form DEF 14A on September 28, 2005, and incorporated
                by reference herein.


(18)
            Previously
                filed as exhibit to Form 8-K on November 1, 2005, and incorporated
                by
                reference herein.


(19)
            Previously
                filed as exhibit to Form SB-2 on July 18, 2006, and incorporated
                by
                reference herein.


(20)
            Previously
                filed as exhibit to Form 8-K on September 6, 2006, and incorporated
                by
                reference herein.


(21)
            Previously
                filed as exhibit to Form 8-K on September 28, 2006, and incorporated
                by
                reference herein.


(22)
            Previously
                filed as exhibit to Form 8-K on October 26, 2006, and incorporated
                by
                reference herein.


(23)
            Previously
                filed as exhibit to Form 8-K on November 7, 2006, and incorporated by
                reference herein.


(24)
            Previously
                filed as exhibit to Form 8-K on November 15, 2006, and incorporated
                by
                reference herein.


(25)
            Previously
                filed as exhibit to Form 8-K on November 17, 2006, and incorporated
                by
                reference herein.


(26)
            Previously
                filed as exhibit to Form SB-2/A on December 28, 2006, and incorporated
                by
                reference herein.


(27)
            Previously
                filed as exhibit to Form 8-K on June 25, 2007, and incorporated by
                reference herein.


(28)
            Previously
                filed as exhibit to Form 8-K on July 16, 2007, and incorporated by
                reference herein.


(29)
            Previously
                filed as exhibit to Form 8-K on July 20, 2007, and incorporated by
                reference herein.





**135**


**ITEM
      14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**




**Audit
      Fees**




The
      following table presents fees for professional audit services performed by
      Malone & Bailey, PC for the audit of our annual financial statements for the
      fiscal years ended February 28, 2007 and February 28, 2006 and DeCoria,
      Maichel & Teague ("DMT") for the fiscal year ended February 28, 2006 and
      fees billed for other services rendered by them during those
      periods.




**2007**
            
            
            **2006**Audit
                Fees
            
            $
            210,723
            
            
            $
            56,798Audit
                Related Fees
            
            
            26,784
            
            
            
            0Tax
                Fees
            
            
            
            
            
            
            3,250All
                Other Fees
            
            $
            2,643
            
            
            
            0Total
            
            $
            240,150
            
            
            $
            60,048




Audit
      Fees consist of fees billed for professional services rendered for the audit
      of
      our financial statements and review of the interim financial statements included
      in quarterly reports and services that are normally provided by our independent
      accountants in connection with statutory and regulatory filings or
      engagements.




**Audit
      Related Fees**




Audit-Related
      Fees consist of fees billed for assurance and related services that are
      reasonably related to the performance of the audit or review of our consolidated
      financial statements and are not reported under “Audit Fees.” Additionally, fees
      billed in connection with the filing of our SB-2 registration statement are
      included in this category.




**Tax
      Fees**




Tax
      Fees
      consists of fees billed for professional services for tax compliance, tax advice
      and tax planning. These services include assistance regarding federal and state
      tax compliance, tax audit defense, customs and duties, and mergers and
      acquisitions.




**Other
      Fees**




All
      Other
      Fees consist of fees billed for products and services provided by the prior
      principal accountant, DMT, other than those services described
      above.




**Audit
      Committee Pre-Approval Policies and Procedures**




Our
      Audit
      Committee Charter requires the prior approval of all audit and non-audit
      services provided by our independent auditors. All of the services for which
      fees are listed above were pre-approved by our Board of Directors.




**136**


**SIGNATURES**





Pursuant
      to the requirements of Section 13 or 15 (d) of the Securities Exchange Act
      of
      1934, the registrant has duly caused this report to be signed on its behalf
      by
      the undersigned, thereunto duly authorized.





DAYBREAK
                OIL AND GAS, INC.By:
            /s/ Eric
              L. MoeEric
              L. Moe, itsChief
              Executive OfficerDate:  September
              20,
              2007


By:
            /s/ Thomas
              C. KilbourneThomas
              C. Kilbourne,
              itsPrincipal
              Accounting
              OfficerDate:  September
              20,
              2007




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





By:
            /s/
                Robert N.
                Martin
            
            By:
            /s/
                Dale B.
                LavigneRobert
                N.
                Martin
            
            
            Dale
                B.
                LavigneDirector
                /
                President
            
            
            Director
                /
                ChairmanDate:  September
              20, 2007
            
            
            Date:  September
              20, 2007 
 By:
              /s/
                  Eric L.
                  Moe
              
              By:
              /s/
                  Jeffrey R.
                  DworkinEric
                  L.
                  Moe
              
              
              Jeffrey
                  R.
                  DworkinDirector
                  /
                  CEO
              
              
              Director
                  /
                  SecretaryDate:  September
                20, 2007
              
              
              Date:  September
                20, 2007 
 By:
                /s/
                    Ronald D.
                    Lavigne
                
                By:
                /s/
                    Michael
                    CurtisRonald
                    D.
                    Lavigne
                
                
                Michael
                    CurtisDirector
                
                
                DirectorDate:  September
                  20, 2007
                
                
                Date:  September
                  20, 2007 
 By:
                  /s/
                      Tim R.
                      Lindsey
                  
                  By:
                  /s/
                      Terrence J.
                      DunneTim
                      R.
                      Lindsey
                  
                  
                  Terrence
                      J.
                      DunneDirector
                  
                  
                  Director
                      /
                      CFODate:  September
                    20, 2007
                  
                  
                  Date:  September
                    20, 2007 
 By:
                    /s/
                        Thomas C.
                        KilbourneThomas
                        C.
                        KilbourneDirector
                        /
                        TreasurerDate:  September
                      20, 2007
   **137**