Document:

dbrm_ex401-90228.htm

    Exhibit
4.01

    Specimen Stock
Certificate

    (Front)

     

    

    
      
        
        

      

      
        
        

        
          

        

      

      
        
          (Back)

        

      

    

     

    DAYBREAK
OIL AND GAS, INC. 

    
      THE
COMPANY WILL FURNISH WITHOUT CHARGE TO EACH SHAREHOLDER WHO SO REQUESTS, A
SUMMARY OF THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING,
OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OF THE COMPANY AND THE
QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND RIGHTS, AND
THE VARIATIONS IN RIGHTS, PREFERENCES AND LIMITATIONS DETERMINED FOR EACH
SERIES, WHICH ARE FIXED BY THE ARTICLES OF INCORPORATION OF THE COMPANY, AS
AMENDED, AND THE RESOLUTIONS OF THE BOARD OF DIRECTORS OF THE COMPANY, AND THE
AUTHORITY OF THE BOARD OF DIRECTORS TO DETERMINE VARIATIONS FOR FUTURE SERIES.
SUCH REQUEST MAY BE MADE TO THE OFFICE OF THE SECRETARY OF THE COMPANY OR TO THE
TRANSFER AGENT. THE BOARD OF DIRECTORS MAY REQUIRE THE OWNER OF A LOST OR
DESTROYED STOCK CERTIFICATE, OR HIS LEGAL REPRESENTATIVES, TO GIVE THE COMPANY A
BOND TO INDEMNIFY IT AND ITS TRANSFER AGENTS AND REGISTRARS AGAINST ANY CLAIM
THAT MAY BE MADE AGAINST THEM ON ACCOUNT OF THE ALLEGED LOSS OR DESTRUCTION OF
ANY SUCH CERTIFICATE.

       

      
        
          
            
              
                
                  
                    
                      
                        
                          
                            
                              
                                
                                  
                                    
                                      
                                        
                                          
                                            
                                              
                                                
                                                  
                                                    
                                                      
                                                        
                                                          
                                                            
                                                              
                                                                
                                                                  
                                                                    
                                                                      
                                                                        
                                                                          
                                                                            
                                                                              
                                                                                
                                                                                  
                                                                                    
                                                                                      
                                                                                        
                                                                                          
                                                                                            
                                                                                              
                                                                                                
                                                                                                  
                                                                                                    
                                                                                                      	
                                                                                                               The following abbreviations, when used
      in the inscription on the face of this certificate, shall be construed as
      though they were written out in full according
      to applicable laws or
      regulations:

                                                                                                            
	 
	
                                                                                                              TEN
      COM

                                                                                                            	
                                                                                                              -
      as tenants in common

                                                                                                            	
                                                                                                              UNIF
      GIFT MIN ACT

                                                                                                            	
                                                                                                              Custodian

                                                                                                            
	 	 	 	
                                                                                                              (Cust)

                                                                                                            	      
                                                                                                              (Minor)

                                                                                                            
	      
                                                                                                              TEN
      ENT

                                                                                                            	      
                                                                                                              -
      as tenants by the entireties

                                                                                                            	 	      
                                                                                                              under
      Uniform Gifts to Minors Act

                                                                                                            	 
	 	 	 	 	      
                                                                                                              (State)

                                                                                                            
	      
                                                                                                              JT
      TEN

                                                                                                            	      
                                                                                                              -
      as joint tenants with right of survivorship and
      not as tenants in common

                                                                                                            	      
                                                                                                              UNIF
      TRF MIN ACT

                                                                                                            	      
                                                                                                              Custodian
      (until age      )

                                                                                                            
	 	 	 	
                                                                                                              (Cust)

                                                                                                            	      
                                                                                                                    
                                                                                                                (Minor)

                                                                                                              

                                                                                                            
	 	 	 	      
                                                                                                              under
      Uniform Transfers to Minors Act

                                                                                                            	 
	 	 	 	 	
                                                                                                              (State)

                                                                                                            
	 	 	 	 	 
	 	      
                                                                                                              Additional
      abbreviations may also be used though not in the above
      list.

                                                                                                            

                                                                                                    

                                                                                                  

                                                                                                

                                                                                              

                                                                                            

                                                                                          

                                                                                        

                                                                                      

                                                                                    

                                                                                  

                                                                                

                                                                              

                                                                            

                                                                          

                                                                        

                                                                      

                                                                    

                                                                  

                                                                

                                                              

                                                            

                                                          

                                                        

                                                      

                                                    

                                                  

                                                

                                              

                                            

                                          

                                        

                                      

                                    

                                  

                                

                              

                            

                          

                        

                      

                    

                  

                

              

            

          

        

      

       

       

      
        
          
            	 	      
                    PLEASE
      INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF
      ASSIGNEE

                  
	      
                    For
      value received, ____________________________hereby sell, assign and
      transfer unto

                  	 

          

        

      

       

        
          
 

      

      (PLEASE
PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING POSTAL ZIP CODE, OF
ASSIGNEE)

       

      
        
 

       

      
        
 

                                                                    
Shares of the common stock represented by the within Certificate, and do
hereby
irrevocably constitute and appoint
______________________________________________________Attorney to transfer the
said stock on the books
of the within-named Corporation with full power of substitution in the
premises.

       

      
      

       

      
        
          
            
              
                
                  
                    
                      
                        
                          
                            
                              
                                
                                  
                                    
                                      
                                        
                                          
                                            
                                              	      
                                                      Dated:
      

                                                    	 	
                                                      20 
      

                                                    	 	 	      
                                                      Signature(s)
      Guaranteed: Medallion Guarantee Stamp

                                                    
	 	 	 	
                                                      THE SIGNATURE(S)
      SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (Banks,
      Stockbrokers, Savings and Loan Associations and Credit Unions) WITH
      MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM, PURSUANT
      TO S.E.C. RULE 17Ad-15.

                                                    
	      
                                                      Signature:
      

                                                    	 	 	 
	 	 	 	 
	 	 	 	 
	      
                                                      Signature:
      

                                                    	 	 	 
	 	      
                                                      Notice:
      The signature to this assignment must correspond with the name
      as
      written upon the face of the certificate, in every particular,
      without
      alteration or enlargement, or any change whatever.dbrm_ex407-90228.htm

    Exhibit 4.07

     

    
      This
Warrant and the underlying shares of Common Stock represented by this
Certificate have not been registered under the Securities Act of 1933 (the
"Act"), and are "restricted securities" as that term is defined in Rule 144
under the Act.  The securities may not be offered for sale, sold or
otherwise transferred except pursuant to an effective registration statement
under the Act, or pursuant to an exemption from registration under the Act, the
availability of which is to be established to the satisfaction of the
Company.

      

      Warrant
No.2007-P-[NO]

      

      WARRANT
TO PURCHASE SHARES OF COMMON STOCK

      

      Warrant
to Purchase __________ Shares

      (subject
to adjustment as set forth herein)

      

      Exercise
Price $0.65 Per Share

      (subject
to adjustment as set forth herein)

      

      VOID
AFTER 3:00 P.M., PACIFIC TIME, ON FEBRUARY 14, 2010 

      

      THIS CERTIFIES THAT [INVESTOR’S NAME],
[INVESTOR’S ADDRESS]  is entitled to purchase from Daybreak Oil and
Gas, Inc., a Washington corporation (hereinafter called the "Company") with its
principal office located at 601 West Main Street, Suite 1012, Spokane,
Washington 99201, at any time after the issuance of this warrant, but before
3:00 P.M., Pacific Time, on February 14, 2010 (the "Termination Date"), at the
purchase price of $0.65 per share (the "Exercise Price"), the number of shares
(the "Shares") of the Company's Common Stock (the "Common Stock") set forth
above.  The number of Shares purchasable upon exercise of this Warrant
and the Exercise Price per Share shall be subject to adjustment from time to
time as set forth in Section 4 below.

      

      

      Section 1.    Definitions.

      

      The following terms used in this
agreement shall have the following meanings (unless otherwise expressly provided
herein):

      

      The
“Act.”     The Securities Act of 1933, as
amended.

      

      The
“Commission.”  The Securities and Exchange
Commission.

      

      The
“Company.”  Daybreak Oil and Gas, Inc.

       

      “Common Stock.”  The
Company’s Common Stock.

       

      “Current Market
Price.”  The Current Market Price shall be determined as
follows:

      

      
        (a)  if
the security at issue is listed on a national securities exchange or admitted to
unlisted trading privileges on such an exchange or quoted on either the National
Market System or the Small Cap Market of the automated quotation service
operated by The Nasdaq Stock Market, Inc. ("Nasdaq”), the current value shall be
the last reported sale price of that security on such exchange or system on the
day for which the Current Market Price is to be determined or, if no such sale
is made on such day, the average of the highest closing bid and lowest asked
price for such day on such exchange or system; or

      

      

      
        (b)  if
the security at issue is not so listed or quoted or admitted to unlisted trading
privileges, the Current Market Value shall be the average of the last reported
highest bid and lowest asked prices quoted on  the Nasdaq Electronic
Bulletin Board, or, if not so quoted, then by the National Quotation Bureau,
Inc. on the last business day prior to the day for which the Current Market
Price is to be determined; or

      

      

      
        (c)  if
the security at issue is not so listed or quoted or admitted to unlisted trading
privileges and bid and asked prices are not reported, the current market value
shall be determined in such reasonable manner as may be prescribed from time to
time by the Board of Directors of the Company, subject to the objection and
arbitration procedure as described in Section 7 below.

      

      

      
        
          
          

        

        
          1

          
            

          

        

        
          
          

        

      

      “Exercise
Price.”   $0.65 per Share, as modified in accordance with
Section 4, below.

       

      “Expiration
Date.”  February 14,
2010.

       

      “Holder “ or
“Warrantholder.”    The person to whom this Warrant
is issued, and any valid transferee thereof pursuant to Section 3.1
below.

       

      "NASD.”    The
National Association of Securities Dealers,
Inc.

       

      “Nasdaq.”    The
automated quotation system operated by the Nasdaq Stock Market,
Inc.

       

      "Termination of
Business.”    Any sale, lease or exchange of all, or
substantially all, of the Company's assets or business or any dissolution,
liquidation or winding up of the
Company.

       

      “Warrants.”    The
warrants issued in accordance with the terms of this Agreement and any Warrants
issued in substitution for or replacement of such warrants, including those
evidenced by a certificate or certificates originally issued or issued upon
division, exchange, substitution or transfer pursuant to this
Agreement.

       

      “Warrant
Securities.”    The Common Stock purchasable upon exercise
of a Warrant including the Common Stock underlying unexercised portions of a
Warrant.

       

      Section 2.    Term
of Warrants; Exercise of Warrant.

       

      2.1.           Exercise of
Warrant.  Subject to the terms of this Agreement, the Holder
shall have the right, at any time prior to 5:00 p.m., Spokane Time, on the
Expiration Date, to purchase from the Company up to the number of fully paid and
nonassessable Shares to which the Holder may at the time be entitled to purchase
pursuant to this Agreement, upon surrender to the Company, at its principal
office, of the Warrant to be exercised, together with the purchase form on the
reverse thereof, or the Warrant Conversion Exercise Form in the case of a
warrant conversion pursuant to Section 2.3 herein, duly filled in and signed,
and upon payment to the Company of the Exercise Price for the number of Shares
in respect of which such Warrants are then exercised, but in no event for less
than 100 Shares (unless fewer than an aggregate of 100 shares are then
purchasable under all outstanding Warrants held by a
Holder).

       

      2.2           Payment of Exercise
Price.  The payment of the Exercise Price shall be made in cash
or by check or any combination thereof. Warrant holders may also make payment of
the Exercise Price by Warrant conversion. Warrant holders wishing to pay all or
any part of the Exercise Price by Warrant conversion should contact the Company
for further information and the appropriate forms.

       

      2.3.           Conversion
Right.  In addition to and without limiting the rights of the
Warrantholder under the terms of the Warrant, the Holder shall have the right
(the “Conversion Right”) to convert this Warrant or any portion thereof into
Shares as provided in this Section 2.3 at any time or from time to time prior to
its expiration.

       

      (a)           Upon
exercise of the Conversion Right with respect to a particular number of Warrants
(the "Converted Warrants"), the Company shall deliver to the Holder, without
payment by the Holder of any Exercise Price or any cash or other consideration,
that number of Shares computed using the following formula:

       

      X = Y(A-B)

                 
A

      
        
          
             

            
              	
                      Where:

                    	
                      X
      = the
      number of Shares and/or Warrants to be issued to the
      Holder;

                    

            

          

        

      

      Y
= the
number of Shares and/or Warrants to be converted under this
Warrant;
A
= the
Current Market Price of one share of Common Stock;
and
B
= the Share
Exercise Price.

      

      
        
          
          

        

        
          2

          
            

          

        

        
          
          

        

      

      No
fractional Shares shall be issuable upon exercise of the Conversion Right, and
if the number of Shares to be issued in accordance with the foregoing formula is
other than a whole number, the Company shall pay to the Holder an amount in cash
equal to such fraction multiplied by the Current Market Price.

       

      b.           The
Conversion Right may be exercised by the Holder by the surrender of the Warrant
at the principal office of the Company or at the office of the Company’s stock
transfer agent, if any, together with a written statement specifying that the
Holder thereby intends to exercise the Conversion Right and indicating the
number of Shares subject to the Warrant which are being surrendered on the
reverse side of the Warrant, in exercise of the Conversion
Right.  Such conversion shall be effective upon receipt by the Company
of the Warrant, or on such later date as is specified therein (the “Conversion
Date”), but not later than the Expiration Date.  Certificates for the
Converted Shares issuable upon exercise of the Conversion Right, together with a
check in payment of any fractional Warrant Share and, in the case of a partial
exercise a new Warrant evidencing the Warrant Shares remaining subject to the
Warrant, shall be issued as of the Conversion Date and shall be delivered to the
Holder within seven (7) days following the Conversion
Date.

       

      2.4.           Issuance of
Shares.  Upon such surrender of the Warrants and payment of
such Exercise Price as aforesaid, the Company shall issue and cause to be
delivered with all reasonable dispatch to or upon the written order of the
Holder and in such name or names as the Holder may designate, a certificate or
certificates for the number of full Shares so purchased upon the exercise of the
Warrant, together with cash, as provided in Section 13 hereof, in respect of any
fractional Shares otherwise issuable upon such
surrender.

       

      2.5.           Holder of
Shares.  Upon receipt of the Warrant by the company as
described in Sections 2.1.or 2.3. above, the Holder shall be deemed to be the
holder of record of the Shares issuable upon such exercise, notwithstanding that
the transfer books of the Company may then be closed or that certificates
representing such Shares may not have been prepared or actually delivered to the
Holder.

       

      Section 3.    Transferability
and Form of Warrant.

       

      3.1.           Limitation on
Transfer.  Any assignment or transfer of a Warrant shall be
made by the presentation and surrender of the Warrant to the Company at its
principal office or the office of its transfer agent, if any, accompanied by a
duly executed Assignment Form.  Upon the presentation and surrender of
these items to the Company, the Company, at its sole expense, shall execute and
deliver to the new Holder or Holders a new Warrant or Warrants, in the name of
the new Holder or Holders as named in the Assignment Form, and the Warrant
presented or surrendered shall at that time be
canceled.

       

      3.2.           Exchange of
Certificate.  Any Warrant may be exchanged for another
certificate or certificates entitling the Warrantholder to purchase a like
aggregate number of Shares as the certificate or certificates surrendered then
entitled such Warrantholder to purchase.  Any Warrantholder desiring
to exchange a Warrant shall make such request in writing delivered to the
Company, and shall surrender, properly endorsed, with signatures guaranteed, the
certificate evidencing the Warrant to be so exchanged.  Thereupon, the
Company shall execute and deliver to the person entitled thereto a new Warrant
as so requested.

       

      3.3.           Mutilated, Lost,
Stolen, or Destroyed
Certificate.  In case the
certificate or certificates evidencing the Warrants shall be mutilated, lost,
stolen or destroyed, the Company shall, at the request of the Warrantholder,
issue and deliver in exchange and substitution for and upon cancellation of the
mutilated certificate or certificates, or in lieu of and substitution for the
certificate or certificates lost, stolen or destroyed, a new Warrant or
certificates of like tenor and representing an equivalent right or interest, but
only upon receipt of evidence satisfactory to the Company of such loss, theft or
destruction of such Warrant and a bond of indemnity, if requested, also
satisfactory in form and amount, at the applicant’s cost.  Applicants
for such substitute Warrant shall also comply with such other reasonable
regulations and pay such other reasonable charges as the Company may
prescribe.

       

      
        
          
          

        

        
          3

          
            

          

        

        
          
          

        

      

      Section
4.    Adjustment of Number
of Shares.

       

      The number and kind of securities purchasable
upon the exercise of the Warrants and the Warrant Price shall be subject to
adjustment from time to time upon the happening of certain events, as
follows:

       

      4.1.           Adjustments.  The
number of Shares purchasable upon the exercise of the Warrants shall be subject
to adjustments as follows:

       

      (a)    In case the Company
shall (i) pay a dividend in Common Stock or make a distribution to its
stockholders in Common Stock, (ii) subdivide its outstanding Common Stock, (iii)
combine its outstanding Common Stock into a smaller number of shares of Common
Stock, or (iv) issue by classification of its Common Stock other securities of
the Company, the number of Shares purchasable upon exercise of the Warrants
immediately prior thereto shall be adjusted so that the Warrantholder shall be
entitled to receive the kind and number of Shares or other securities of the
Company which it would have owned or would have been entitled to receive
immediately after the happening of any of the events described above, had the
Warrants been exercised immediately prior to the happening of such event or any
record date with respect thereto.  Any adjustment made pursuant to
this subsection 4.1.(a) shall become effective immediately after the effective
date of such event retroactive to the record date, if any, for such
event.

       

      (b)    In case the Company
shall issue rights, options, warrants, or convertible securities to all or
substantially all holders of its Common Stock, without any charge to such
holders, entitling them to subscribe for or purchase Common Stock at a price per
share which is lower at the record date mentioned below than the then Current
Market Price, the number of Shares thereafter purchasable upon the exercise of
each Warrant shall be determined by multiplying the number of Shares theretofore
purchasable upon exercise of the Warrants by a fraction, of which the numerator
shall be the number of shares of Common Stock outstanding immediately prior to
the issuance of such rights, options, warrants or convertible securities plus
the number of additional shares of Common Stock offered for subscription or
purchase, and of which the denominator shall be the number of shares of Common
Stock outstanding immediately prior to the issuance of such rights, options,
warrants, or convertible securities plus the number of shares which the
aggregate offering price of the total number of shares offered would purchase at
such Current Market Price.  Such adjustment shall be made whenever
such rights, options, warrants, or convertible securities are issued, and shall
become effective immediately and retroactively to the record date for the
determination of stockholders entitled to receive such rights, options,
warrants, or convertible securities.

       

      (c)    In case the Company
shall distribute to all or substantially all holders of its Common Stock
evidences of its indebtedness or assets (excluding cash dividends or
distributions out of earnings) or rights, options, warrants, or convertible
securities containing the right to subscribe for or purchase Common Stock
(excluding those referred to in subsection 4.1(b) above), then in each case the
number of Shares thereafter purchasable upon the exercise of the Warrants shall
be determined by multiplying the number of Shares theretofore purchasable upon
exercise of the Warrants by a fraction, of which the numerator shall be the then
Current Market Price on the date of such distribution, and of which the
denominator shall be such Current Market Price on such date minus the then fair
value (determined as
provided in subparagraph (e) below) of the portion of the assets or
evidences of indebtedness so distributed or of such subscription rights,
options, warrants, or convertible securities applicable to one
share.  Such adjustment shall be made whenever any such distribution
is made and shall become effective on the date of distribution retroactive to
the record date for the determination of stockholders entitled to receive such
distribution.

       

      (d)    No adjustment in the
number of Shares purchasable pursuant to the Warrants shall be required unless
such adjustment would require an increase or decrease of at least one percent in
the number of Shares then purchasable upon the exercise of the Warrants or, if
the Warrants are not then exercisable, the number of Shares purchasable upon the
exercise of the Warrants on the first date thereafter that the Warrants become
exercisable; provided, however, that any adjustments which by reason of this
subsection (4.1(d)) are not required to be made immediately shall be carried
forward and taken into account in any subsequent
adjustment.

       

      (e)    Whenever the number
of Shares purchasable upon the exercise of the Warrant is adjusted, as herein
provided, the Exercise Price payable upon exercise of the Warrant shall be
adjusted by multiplying such Exercise Price immediately prior to such adjustment
by a fraction, of which the numerator shall be the number of Warrant Shares
purchasable upon the exercise of the Warrant immediately prior to such
adjustment, and of which the denominator shall be the number of Warrant Shares
so purchasable immediately thereafter.
 

      
        
          
          

        

        
          4

          
            

          

        

        
          
          

        

      

      (f)    Whenever the number
of Shares purchasable upon exercise of the Warrants is adjusted as herein
provided, the Company shall cause to be promptly mailed to the Warrantholder by
first class mail, postage prepaid, notice of such adjustment and a certificate
of the chief financial officer of the Company setting forth the number of Shares
purchasable upon the exercise of the Warrants after such adjustment, a brief
statement of the facts requiring such adjustment and the computation by which
such adjustment was made.

       

      (g)    For the purpose of
this Section 4.1, the term “Common Stock” shall mean (i) the class of stock
designated as the Common Stock of the Company at the date of this Agreement, or
(ii) any other class of stock resulting from successive changes or
reclassifications of such Common Stock consisting solely of changes in par
value, or from par value to no par value, or from no par value to par
value.  In the event that at any time, as a result of an adjustment
made pursuant to this Section 4, the Warrantholder shall become entitled to
purchase any securities of the Company other than Common Stock, (y) if the
Warrantholder’s right to purchase is on any other basis than that available to
all holders of the Company’s Common Stock, the Company shall obtain an opinion
of an independent investment banking firm valuing such other securities and (z)
thereafter the number of such other securities so purchasable upon exercise of
the Warrants shall be subject to adjustment from time to time in a manner and on
terms as nearly equivalent as practicable to the provisions with respect to the
Shares contained in this Section 4.

       

      (h)    Upon the expiration
of any rights, options, warrants, or conversion privileges, if such shall have
not been exercised, the number of Shares purchasable upon exercise of the
Warrants, to the extent the Warrants have not then been exercised, shall, upon
such expiration, be readjusted and shall thereafter be such as they would have
been had they been originally adjusted (or had the original adjustment not been
required, as the case may be) on the basis of (i) the fact that the only shares
of Common Stock so issued were the shares of Common Stock, if any, actually
issued or sold upon the exercise of such rights, options, warrants, or
conversion privileges, and (ii) the fact that such shares of Common Stock, if
any, were issued or sold for the consideration actually received by the Company
upon such exercise plus the consideration, if any, actually received by the
Company for the issuance, sale or grant of all such rights, options, warrants,
or conversion privileges whether or not exercised; provided, however, that no
such readjustment shall have the effect of decreasing the number of Shares
purchasable upon exercise of the Warrants by an amount in excess of the amount
of the adjustment initially made in respect of the issuance, sale, or grant of
such rights, options, warrants, or conversion rights.

       

      4.2.           No Adjustment for
Dividends.  Except as provided in Section 4.1, no adjustment in
respect of any dividends or distributions out of earnings shall be made during
the term of the Warrants or upon the exercise of the
Warrants.

       

      4.3.           No Adjustment in
Certain Cases.  No adjustments shall be made pursuant to
Section 4 hereof in connection with the issuance of the Common Stock upon
exercise of the Warrants.  No adjustments shall be made pursuant to
Section 4 hereof in connection with grant or exercise of presently authorized or
outstanding options to purchase, or the issuance of shares of Common Stock under
the Company’s director or employee benefit plan.

       

      4.4.           Preservation of
Purchase Rights upon Reclassification, Consolidation, etc.  In
case of any consolidation of the Company with or merger of the Company into
another corporation, or in case of any sale or conveyance to another corporation
of the property, assets, or business of the Company as an entirety or
substantially as an entirety, the Company or such successor or purchasing
corporation, as the case may be, shall execute with the Warrantholder an
agreement that the Warrantholder shall have the right thereafter upon payment of
the Exercise Price in effect immediately prior to such action to purchase, upon
exercise of the Warrants, the kind and amount of shares and other securities and
property which it would have owned or have been entitled to receive after the
happening of such consolidation, merger, sale, or conveyance had the Warrants
been exercised immediately prior to such action.  In the event of a
merger described in Section 368(a)(2)(E) of the Internal Revenue Code of 1986,
in which the Company is the surviving corporation, the right to purchase Shares
under the Warrants shall terminate on the date of such merger and thereupon the
Warrants shall become null and void, but only if the controlling corporation
shall agree to substitute for the Warrants, its warrants which entitle the
holder thereof to purchase upon their exercise the kind and amount of shares and
other securities and property which it would have owned or been entitled to
receive had the Warrants been exercised immediately prior to such
merger.  Any such agreements referred to in this Section 4.4 shall
provide for adjustments, which shall be as nearly equivalent as may be
practicable to the adjustments provided for in Section 4 hereof.  The
provisions of this Section (4.4) shall similarly apply to successive
consolidations, mergers, sales, or conveyances.

      
 

      
        
          
          

        

        
          5

          
            

          

        

        
          
          

        

      

      4.5.           Par Value of Shares
of Common Stock.  Before taking any action which would cause an
adjustment effectively reducing the portion of the Exercise Price allocable to
each Share below the par value per share of the Common Stock issuable upon
exercise of the Warrants, the Company will take any corporate action which may,
in the opinion of its counsel, be necessary in order that the Company may
validly and legally issue fully paid and nonassessable Common Stock upon
exercise of the Warrants.

       

      4.6.           Independent Public
Accountants.  The Company may retain a firm of independent
public accountants of recognized national standing (which may be any such firm
regularly employed by the Company) to make any computation required under this
Section 4, and a certificate signed by such firm shall be conclusive evidence of
the correctness of any computation made under this Section
4.

       

      4.7.           Statement on
Warrants.  Irrespective of any adjustments in the number of
securities issuable upon exercise of the Warrants, Warrants theretofore or
thereafter issued may continue to express the same number of securities as are
stated in the similar Warrants initially issuable pursuant to this
Agreement.  However, the Company may, at any time in its sole
discretion (which shall be conclusive), make any change in the form of Warrant
that it may deem appropriate and that does not affect the substance thereof; and
any Warrant thereafter issued, whether upon registration of transfer of, or in
exchange or substitution for, an outstanding Warrant, may be in the form so
changed.

       

      4.8.            Treasury
Stock.  For purposes of this Section 4, shares of Common Stock
owned or held at any relevant time by, or for the account of, the Company, in
its treasury or otherwise, shall not be deemed to be outstanding for purposes of
the calculations and adjustments described.

       

      Section
5.    Reserved.

       

      Section
6.    Notice to
Holders. 

       

      If, prior to the expiration of this Warrant
either by its terms or by its exercise in full, any of the following shall
occur:

       

      
        	
                 

              	
                (a)

              	
                the
      Company shall declare a dividend or authorize any other distribution on
      its Common Stock; or

              

      

       

      
        	 	
                (b)

              	
                the
      Company shall authorize the granting to the shareholders of its Common
      Stock of rights to subscribe for or purchase any securities or any other
      similar rights; or

              

      

       

      
        	 	
                (c)

              	
                any
      reclassification, reorganization or similar change of the Common Stock, or
      any consolidation or merger to which the Company is a party, or the sale,
      lease, or exchange of any significant portion of the assets of the
      Company; or

              

      

       

      
        	 	
                (d)

              	
                the
      voluntary or involuntary dissolution, liquidation or winding up of the
      Company; or

              

      

       

      
        	 	
                (e)

              	
                any
      purchase, retirement or redemption by the Company of its Common
      Stock;

              

      

       

      then, and
in any such case, the Company shall deliver to the Holder or Holders written
notice thereof at least 30 days prior to the earliest applicable date specified
below with respect to which notice is to be given, which notice shall state the
following:

       

      
        
          
          

        

        
          6

          
            

          

        

        
          
          

        

      

       

      
        	 	
                (x)

              	
                the
      date on which a record is to be taken for the purpose of such dividend,
      distribution or rights, or, if a record is not to be taken, the date as of
      which the shareholders of Common Stock of record to be entitled to such
      dividend, distribution or rights are to be
  determined;

              

      

       

      
        	 	
                (y)

              	
                the
      date on which such reclassification, reorganization, consolidation,
      merger, sale, transfer, dissolution, liquidation, winding up or purchase,
      retirement or redemption is expected to become effective, and the date, if
      any, as of which the Company's shareholders of Common Stock of record
      shall be entitled to exchange their Common Stock for securities or other
      property deliverable upon such reclassification, reorganization,
      consolidation, merger, sale, transfer, dissolution, liquidation, winding
      up, purchase, retirement or redemption;
and

              

      

       

      
        	 	
                (z)

              	
                if
      any matters referred to in the foregoing clauses (x) and (y) are to be
      voted upon by shareholders of Common Stock, the date as of which those
      shareholders to be entitled to vote are to be
  determined.

              

      

       

      Section
7.    Officers'
Certificate. 

       

      Whenever the Exercise Price or the aggregate
number of Warrant Securities purchasable pursuant to this Warrant shall be
adjusted as required by the provisions of Section 4 above, the Company shall
promptly file with its Secretary or an Assistant Secretary at its principal
office, and with its transfer agent, if any, an officers' certificate executed
by the Company's President and Secretary or Assistant Secretary, describing the
adjustment and setting forth, in reasonable detail, the facts requiring such
adjustment and the basis for and calculation of such adjustment in accordance
with the provisions of this Warrant.  Each such officers' certificate shall
be made available to the Holder or Holders of this Warrant for inspection at all
reasonable times, and the Company, after each such adjustment, shall promptly
deliver a copy of the officers' certificate relating to that adjustment to the
Holder or Holders of this Warrant.  The officers' certificate described in
this Section 7 shall be deemed to be conclusive as to the correctness of the
adjustment reflected therein if, and only if, no Holder of this Warrant delivers
written notice to the Company of an objection to the adjustment within 30 days
after the officers' certificate is delivered to the Holder or Holders of this
Warrant.  The Company will make its books and records available for
inspection and copying during normal business hours by the Holder so as to
permit a determination as to the correctness of the adjustment.  If written
notice of an objection is delivered by a Holder to the Company and the parties
cannot reconcile the dispute, the Holder and the Company shall submit the
dispute to arbitration pursuant to the provisions of Section 20 below. 
Failure to prepare or provide the officers' certificate shall not modify the
parties' rights hereunder.

       

      Section
8.    Reservation of
Warrant Securities. 

       

      There has been reserved, and the Company shall
at all times keep reserved so long as the Warrants remain outstanding, out of
its authorized and unissued Common Stock, such number of shares of Common Stock
as shall be subject to purchase under the Warrants.  Every transfer
agent for the Common Stock and other securities of the Company issuable upon the
exercise of the Warrants will be irrevocably authorized and directed at all
times to reserve such number of authorized shares and other securities as shall
be requisite for such purpose.  The Company will keep a copy of this
Agreement on file with every transfer agent for the Common Stock and other
securities of the Company issuable upon the exercise of the
Warrants.  The Company will supply every such transfer agent with duly
executed stock and other certificates, as appropriate, for such purpose and will
provide or otherwise make available any cash which may be payable as provided in
Section 13 hereof.

       

      Section 9.    Restrictions
on Transfer.

       

      The Warrantholder agrees that prior to making
any disposition of the Warrants or the Shares,  the Warrantholder
shall give written notice to the Company describing briefly the manner in which
any such proposed disposition is to be made; and no such disposition shall be
made if the Company has notified the Warrantholder that in the opinion of
counsel reasonably satisfactory to the Warrantholder, there is no applicable
exemption from the registration requirements under the Act available for the
disposition, and a registration statement or other notification or
post-effective amendment thereto (hereinafter collectively a “Registration
Statement”) under the Act is required with respect to such disposition and no
such Registration Statement has been filed by the Company with, and declared
effective, if necessary, by, the Commission.

      
 

      
 

      
        
          
          

        

        
          7

          
            

          

        

        
          
          

        

      

      Section
10.    Payment
of Taxes.

       

      The Company will pay all
documentary  stamp taxes, if any, attributable to the initial issuance
of the Warrants or the securities comprising the Shares; provided, however, the
Company shall not be required to pay any tax which may be payable in respect of
any transfer of the Warrants or the securities comprising the
Shares.

       

      Section 11.    Transfer
to Comply With the Securities Act of 1933.

       

      This Warrant, the Warrant Securities, and all
other securities issued or issuable upon exercise of this Warrant, may not be
offered, sold or transferred, in whole or in part, except in compliance with the
Act, and except in compliance with all applicable state securities
laws.  The Company may cause substantially the following legends, or
their equivalents, to be set forth on each certificate representing the Warrant
Securities, or any other security issued or issuable upon exercise of this
Warrant, not theretofore distributed to the public or sold to underwriters, as
defined by the Act, for distribution to the public pursuant to Section 8
above

       

      
        
          
            	 	
                    (a)

                  	
                    "THE
      SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
      REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS
      AND MAY NOT BE SOLD, EXCHANGED, HYPOTHECATED OR TRANSFERRED IN ANY MANNER
      EXCEPT IN COMPLIANCE WITH THE AGREEMENT PURSUANT TO WHICH THEY WERE
      ISSUED.”

                  

          

        

      

       

      
        	 	
                (b) 

              	
                Any
      legend required by applicable state securities
  laws.

              

      

       

      Any certificate issued at any time in exchange
or substitution for any certificate bearing such legends (except a new
certificate issued upon completion of a public distribution pursuant to a
registration statement under the Securities Act of 1933, as amended (the “Act”),
or the securities represented thereby) shall also bear the above legends unless,
in the opinion of the Company’s counsel, the securities represented thereby need
no longer be subject to such restrictions.

       

      Section 12.    Fractional
Shares.

       

      
        No
fractional shares or scrip representing fractional shares shall be issued upon
the exercise of all or any part of this Warrant.  With respect to any
fraction of a share of any security called for upon any exercise of this
Warrant, the Company shall pay to the Holder an amount in money equal to that
fraction multiplied by the Current Market Price of that share. 

      

       

      Section
13.    No Rights as
Stockholder; Notices to
Warrantholder. 

       

      Nothing contained in this Agreement or in the
Warrants shall be construed as conferring upon the Warrantholder or its
transferees any rights as a stockholder of the Company, including the right to
vote, receive dividends, consent or receive notices as a stockholder in respect
to any meeting of stockholders for the election of directors of the Company or
any other matter.  The Company covenants, however, that for so long as
this Warrant is at least partially unexercised, it will furnish any Holder of
this Warrant with copies of all reports and communications furnished to the
shareholders of the Company.  In addition, if at any time prior to the
expiration of the Warrants and prior to their exercise, any one or more of the
following events shall occur:

       

      (a)  any action which would require an
adjustment pursuant to Section 4.1 (except subsections 4.1(e) and 4.1(h) or 4.4;
or

       

      (b)  a dissolution, liquidation, or
winding up of the Company (other than in connection with a consolidation,
merger, or sale of its property, assets, and business as an entirety or
substantially as an entirety) shall be proposed:

       

      then the
Company shall give notice in writing of such event to the Warrantholder, as
provided in Section 16 hereof, at least 20 days prior to the date fixed as a
record date or the date of closing the transfer books for the determination of
the stockholders entitled to any relevant dividend, distribution, subscription
rights or other rights or for the determination of stockholders entitled to vote
on such proposed dissolution, liquidation, or winding up.  Such notice
shall specify such record date or the date of closing the  transfer
books, as the case may be.  Failure to mail or receive notice or any
defect therein shall not affect the validity of any action taken with respect
thereto.

      
 

      
        
          
          

        

        
          8

          
            

          

        

        
          
          

        

      

      Section 14.    Charges
Due Upon Exercise. 

       

      The Company shall pay any and all issue or
transfer taxes, including, but not limited to, all federal or state taxes, that
may be payable with respect to the transfer of this Warrant or the issue or
delivery of Warrant Securities upon the exercise of this Warrant.  If
the Warrant is converted pursuant to Section 2, and the resale of the Warrant
Securities received upon such conversion are sold in accordance with Rule 144
under the Act, the Company shall also pay the costs of obtaining any opinion of
counsel required by it or its transfer agent to effectuate the
transfer,

       

      Section 15.    Warrant
Securities to be Fully Paid. 

       

      The Company covenants that all Warrant
Securities that may be issued and delivered to a Holder of this Warrant upon the
exercise of this Warrant and payment of the Exercise Price will be, upon such
delivery, validly and duly issued, fully paid and
nonassessable.

       

      Section
16.    Notices. 

       

      Any
notice pursuant to this Agreement by the Company or by a Warrantholder or a
holder of Shares shall be in writing and shall be deemed to have been duly given
if delivered or mailed by certified mail, return receipt requested:

       

      
        (i)    If to a
Warrantholder or a holder of Shares, addressed to the address set forth
above.

      

      
         

        (ii)    If to the
Company addressed to it at 601 W. Main Ave., Suite 1012, Spokane, Washington
99201, Attention:  Secretary.

         

      

      Each party may from time to time change the
address to which notices to it are to be delivered or mailed hereunder by notice
in accordance herewith to the other party.

       

      Section 17.    Merger
or Consolidation of the Company.

       

      The Company will not merge or consolidate with
or into any other corporation or sell all or substantially all of its property
to another corporation, unless the provisions of Section 4.4 are complied
with.

       

      Section 18.    Applicable
Law.

       

      This Warrant shall be governed by and construed
in accordance with the laws of the State of Washington, and courts located in
Spokane County, Washington shall have exclusive jurisdiction over all disputes
arising hereunder.

       

      Section
19.    Arbitration. 

       

      The Company and the Holder, and by receipt of
this Warrant or any Warrant Securities, all subsequent Holders or holders of
Warrant Securities, agree to submit all controversies, claims, disputes and
matters of difference with respect to this Warrant, including, without
limitation, the application of this Section 20 to arbitration in Spokane,
Washington, according to the rules and practices of the American Arbitration
Association from time to time in force; provided, however, that if such rules
and practices conflict with the applicable procedures of Washington courts of
general jurisdiction or any other provisions of Washington law then in force,
those Washington rules and provisions shall govern.  This agreement to
arbitrate shall be specifically enforceable.  Arbitration may proceed in
the absence of any party if notice of the proceeding has been given to that
party.  The parties agree to abide by all awards rendered in any such
proceeding.  These awards shall be final and binding on all parties to the
extent and in the manner provided by the rules of civil procedure enacted in
Washington.  All awards may be filed, as a basis of judgment and of the
issuance of execution for its collection, with the clerk of one or more courts,
state or federal, having jurisdiction over either the party against whom that
award is rendered or its property.  No party shall be considered in default
hereunder during the pendency of arbitration proceedings relating to that
default.

       

      
        
          
          

        

        
          9

          
            

          

        

        
          
          

        

      

      Section 20.    Acceptance
of Terms; Successors.

       

      By its acceptance of this Warrant Certificate,
the Holder accepts and agrees to comply with all of the terms and provisions
hereof.  All the covenants and provisions of this Warrant Certificate
by or for the benefit of the Company or the Holder shall bind and inure to the
benefit of their respective successors and assigns
hereunder.

       

      Section 21.    Miscellaneous
Provisions.

       

      (a)           Subject
to the terms and conditions contained herein, this Warrant shall be binding on
the Company and its successors and shall inure to the benefit of the original
Holder, its successors and assigns and all holders of Warrant Securities and the
exercise of this Warrant in full shall not terminate the provisions of this
Warrant as it relates to holders of Warrant
Securities.

       

      (b)           If
the Company fails to perform any of its obligations hereunder, it shall be
liable to the Holder for all damages, costs and expenses resulting from the
failure, including, but not limited to, all reasonable attorney's fees and
disbursements.

       

      (c)           This
Warrant cannot be changed or terminated or any performance or condition waived
in whole or in part except by an agreement in writing signed by the party
against whom enforcement of the change, termination or waiver is sought;
provided, however, that any provisions hereof may be amended, waived, discharged
or terminated upon the written consent of the Company and the
Company.

       

      (d)           If
any provision of this Warrant shall be held to be invalid, illegal or
unenforceable, such provision shall be severed, enforced to the extent possible,
or modified in such a way as to make it enforceable, and the invalidity,
illegality or unenforceability shall not affect the remainder of this
Warrant.

       

      (e)           The
Company agrees to execute such further agreements, conveyances, certificates and
other documents as may be reasonably requested by the Holder to effectuate the
intent and provisions of this Warrant.

       

      (f)           Paragraph
headings used in this Warrant are for convenience only and shall not be taken or
construed to define or limit any of the terms or provisions of this
Warrant.  Unless otherwise provided, or unless the context shall otherwise
require, the use of the singular shall include the plural and the use of any
gender shall include all genders.

       

      
        
          	 	DAYBREAK
      OIL AND GAS, INC.	 
	 	 	 	 
	
                  
                    Dated
      _____________

                  

                	
                  By:
      

                	/s/ 	 
	 	 	James
      F. Westmoreland	 
	 	 	 	 
	 	 	 	 

      

      
         

        
          
          

        

        
          10

          
            

          

        

        
          
          

        

      

      PURCHASE
FORM

      Dated ______________

      
 

      The undersigned hereby irrevocably elects to
exercise the Warrant represented by this Warrant Certificate to the extent of
purchasing  Shares of Daybreak Oil and Gas, Inc., and hereby tenders
payment of the exercise price thereof.

      INSTRUCTIONS
FOR REGISTRATION OF STOCK

      
 

      
        
          
            	 	
                    Name 

                  	
                     

                  
	 	 	
                    (please
      type or print in block letters)

                  
	 	
                    Address

                  	 
	 	 	 
	 	
                     

                  	 

          

        

      

    

     

    
      
        
          
            
              
                
                  
                    
                      
                        
                          
                            
                              
                                
                                  
                                    
                                      
                                        
                                          
                                            
                                              
                                                
                                                  
                                                    
                                                      
                                                        
                                                          ASSIGNMENT
FORM

                                                           

                                                        

                                                      

                                                    

                                                  

                                                

                                              

                                            

                                          

                                        

                                      

                                    

                                  

                                

                              

                            

                          

                        

                      

                    

                  

                

              

            

          

        

      

      FOR VALUE
RECEIVED, _____________________________________ , hereby sells,
assigns and transfers unto

       

      
        
          
            
              
                	 	
                        Name 

                      	
                         

                      
	 	 	
                        (please
      type or print in block letters)

                      
	 	
                        Address

                      	 

              

            

          

           

        

        the right
to purchase Shares of Daybreak Oil and Gas, Inc represented by this Warrant
Certificate to the extent of _______ Shares as
to which such right is exercisable and does hereby irrevocably constitute and
appoint ____________________
attorney, to transfer the same on the books of the Company with full power of
substitution in the premises.

      

      
        
           

          
            	
                    Signature 

                  	 	
                    Dated 

                  	 

          

        

      

       

      Notice:  the
signature on this assignment must correspond with the name as it appears upon
the face of this Warrant Certificate in every particular, without alteration or
enlargement or any change whatever.

      
        	
                 

              

      

       

      WARRANT
CONVERSION EXERCISE FORM

      
        	
                TO: 

              	
                Daybreak
      Oil and Gas, Inc.

              

      

       

      Pursuant to Section 2.3 of the Warrant, the
Holder hereby irrevocably elects to convert Warrants with respect to Shares of
the Company into  
Shares of the Company.  A conversion calculation is attached hereto as
Exhibit B-1.

      The undersigned requests that certificates for
such Shares be issued as follows:

       

      
        
          
            
              
                
                  
                    
                      
                        
                          
                            
                              	 	
                                      Name 

                                    	
                                       

                                    
	 	 	
                                      (please
      type or print in block letters)

                                    
	 	
                                      Address

                                    	 
	 	 	 
	 	
                                      Deliver
      to:

                                    	 

                            

                          

                        

                      

                    

                  

                

              

            

          

        

      

       

      and that
a new warrant for the balance remaining of the warrants, if any, subject to the
warrant be registered in the name of, and delivered to, the undersigned at the
address stated above.

       

      
        
          	
                  Signature 

                	 	
                  Dated 

                	 

        

      

       

       

      
        
          
          

        

        
          11

          
            

          

        

        
          
          

        

      

      Exhibit
B-1

      

      CALCULATION OF WARRANT
CONVERSION

      

      X = Y(A-B)

        
A

      

      
        	
                 
      

              	
                Where:

              	
                X
      =

              	
                the
      number of Shares and/or Warrants to be issued to the
    Holder;

              

      

      

      
        	
                 
      

              	
                Y
      =

              	
                the
      number of Shares and/or Warrants to be converted under this
      Warrant;

              

      

      

      
        	
                 
      

              	
                A
      =

              	
                the
      Current Market Price of one share of Common Stock;
  and

              

      

      

      
        	
                 
      

              	
                B
      =

              	
                the
      Share Exercise Price.

              

      

      

      Fractional
Converted Shares =
________________________________ (1)

      

       

      (1)  Daybreak
Oil and Gas, Inc. to pay for fractional Shares in cash @ $
_______________ per Share.

      

      
 

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

      12

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