dbog_10qsb-70531.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-QSB

(Mark One)

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

For the quarter ended May 31, 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

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

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

Yes ¨ No þ

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

Transitional Small Business Disclosure Format (Check One): Yes ¨ No þ

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

		PAGE

ITEM 1.	Financial Statements

	Balance Sheets at May 31, 2007 and February 28, 2007 (Unaudited)	3

	Statements of Operations for the Three Month Periods Ended May 31, 2007 and 2006 and for the period from inception (March 1, 2005) through May 31, 2007 (Unaudited)	4

	Statements of Changes in Stockholders Equity (Unaudited)	5

	Statements of Cash Flows for the Three Month Periods Ended May 31, 2007 and 2006 and for the period from inception (March 1, 2005) through May 31, 2007 (Unaudited)	6

	Notes to Unaudited Financial Statements	8

ITEM 2.	Management’s Discussion and Analysis or Plan of Operation	17

ITEM 3.	Controls and Procedures	26

PART II – OTHER INFORMATION

ITEM 1.	Legal Proceedings	28

ITEM 2.	Unregistered sales of Equity Securities and Use of Proceeds	28

ITEM 3.	Defaults Upon Senior Securities	28

ITEM 4.	Submission of Matters to a Vote of Security Holders	28

ITEM 5.	Other Information	28

ITEM 6.	Exhibits	28

Signatures		29

PART I

FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

Daybreak Oil and Gas, Inc.

(An Exploration Stage Company, Date of Inception March 1, 2005)

Balance Sheets – Unaudited

ASSETS	As of May 31, 2007			As of February 28, 2007
CURRENT ASSETS:
Cash	$	19,724		$	377,957
Investment in marketable securities, at market, cost of $167,628 and $2,356,213, respectively		167,628			2,356,213
Accounts receivable
Oil and gas sales		389,189			56,906
Related party participants		25,944			41,357
Joint interest participants		1,334,763			799,970
Notes receivable (including accrued interest of $45,152 and $28,336 respectively)		845,152			828,336
Prepaid expenses and other current assets		47,575			76,895
Total current assets		2,829,975			4,537,634

OIL AND GAS PROPERTIES, net of accumulated depletion, depreciation, amortization and impairment, successful efforts method		5,300,303			4,552,850
VEHICLES AND EQUIPMENT, net of accumulated depreciation		24,286			18,556
OTHER ASSETS		275,697			102,426
	$	8,430,261		$	9,211,466

LIABILITITES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable and other accrued liabilities	$	1,891,665		$	2,110,458
Notes payable – related party		200,000			200,000
Convertible debentures, net of discount of $40,030 and 90,002 respectively		159,971			134,999
Total current liabilities		2,251,636			2,445,457
OTHER LIABILITIES:
Asset retirement obligation		101,825			99,427
Total liabilities		2,353,461			2,544,884
COMMITMENTS
STOCKHOLDERS’ EQUITY:
Preferred stock – 10,000,000 shares authorized, $0.001 par value;		-			-
Series A Convertible Preferred stock – 2,400,000 shares authorized;$0.001 par value; 6% cumulative dividends; 1,347,765 and 1,399,765 shares issued and outstanding, respectively		1,348			1,400
Common stock – 200,000,000 shares authorized, $0.001 par value; 41,070,399 and 40,877,230 shares issued and outstanding, respectively		41,070			40,877
Additional paid-in capital		20,252,148			20,224,411
Accumulated deficit		(736,035	)		(736,035	)
Deficit accumulated during the exploration stage		(13,481,731	)		(12,864,071	)
Total stockholders’ equity		6,076,800			6,666,582


Total liabilities and stockholders’ equity		$	8,430,261			$	9,211,466

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

DAYBREAK OIL AND GAS, INC.

(An Exploration Stage Company, Date of Inception March 1, 2005)

Statements of Operations – Unaudited

	For the Three Months Ended						From Inception
	May 31,						Through May 31,
	2007			2006			2007
REVENUE:
Oil and gas sales	$	225,043		$	-		$	854,389

OPERATING EXPENSES:
Production costs		109,847			-			483,613
Exploration expenses		155,211			-			1,679,320
Depreciation, depletion, amortization and impairment expense		157,845			-			2,555,893
General and administrative		390,103			2,147,619			8,229,843
Total operating expenses		813,006			2,147,619			12,948,669

LOSS FROM OPERATIONS		(587,963	)		(2,147,619	)		(12,094,280	)

OTHER INCOME (EXPENSE):
Interest income		32,568			-			134,627
Dividend income		874			-			6,421
Interest expense		(63,139	)		(313,228	)		(1,528,499	)
Total other income (expense)		(29,697	)		(313,228	)		(1,387,451	)
NET LOSS	$	(617,660	)	$	(2,460,847	)	$	(13,481,731	)

Cumulative convertible preferred stock
dividend requirement		(55,378	)		-			(210,694	)
Deemed dividend		-			-			(4,199,295	)
NET LOSS AVAILABLE TO COMMON
SHAREHOLDERS	$	(673,038	)	$	(2,460,847	)	$	(17,891,718	)

NET LOSS PER COMMON SHARE – Basic and diluted	$	(0.02	)		(0.08	)

WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING – BASIC AND DILUTED		40,996,178			31,415,761

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

Daybreak Oil and Gas, Inc.

(An Exploration Stage Company, Date of Inception March 1, 2005)

Statement of Changes in Stockholders' Equity - Unaudited

For the years ended February 28, 2007 and 2006

	Series A Convertible																Deficit Accumulated
	Preferred Stock						Common Stock				Additional						During
											Paid-In			Accumulated			Exploration
	Shares			Amount			Shares		Amount		Capital			Deficit			Stage			Total

BALANCE, March 1, 2005		-		$	-			18,199,419	$	18,199	$	709,997		$	(736,035	)	$	-		$	(7,839	)

Issuance of common stock for:																					-
Cash		-			-			4,400,000		4,400		1,083,100			-			-			1,087,500
Services		-			-			5,352,667		5,353		3,622,176			-			-			3,627,529
Oil and gas properties		-			-			700,000		700		411,300			-			-			412,000
Conversion of convertible debentures and interest payable		-			-			806,135		806		200,728			-			-			201,534
Discount on convertible notes payable		-			-			-		-		1,240,213			-			-			1,240,213
Net loss		-			-			-		-		-			-			(4,786,226	)		(4,786,226	)

BALANCE, FEBRUARY 28, 2006		-			-			29,458,221		29,458		7,267,514			(736,035	)		(4,786,226	)		1,774,711

Issuance of common stock for:
Cash		-			-			8,027,206		8,027		5,180,230			-			-			5,188,257
Services		-			-			1,270,000		1,270		2,606,430			-			-			2,607,700
Oil and gas properties		-			-			72,500		73		378,678			-			-			378,751
Conversion of convertible debentures		-			-			2,049,303		2,049		1,022,473			-			-			1,024,522

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
Deferred financing costs		-			-			-		-		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		-			-			-		-		-			-			(8,077,845	)		(8,077,845	)

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

Issuance of common stock for:
Conversion of preferred stock		(52,000	)		(52	)		156,000		156		(104	)								-

Conversion of convertible debentures				37,169		37		27,841								27,878

Net loss													(617,660	)		(617,660	)

BALANCE, MAY 31, 2007	1,347,765	$	1,348	41,070,399	$	41,070	$	20,252,148	$	(736,035	)	$	(13,481,731	)	$	6,076,800

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

DAYBREAK OIL AND GAS, INC.

(An Exploration Stage Company, Date of Inception March 1, 2005)

Statements of Cash Flows - Unaudited

	Three Months Ended						From Inception March 1, 2005
	May 31,						Through May 31,
	2007			2006			2007
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(617,660	)	$	(2,460,847	)	$	(13,481,731	)
Adjustments to reconcile net loss to net cash
used in operating activities:
Common stock issued for services		-			1,835,199			6,235,229
Depreciation, depletion, amortization and impairment expense		157,845			-			2,555,893
Exploration expense – dry well		33,233			-			849,753
Non cash interest expense and accretion		52,370			313,229			1,357,548
Non cash interest income		(17,263	)		-			(45,848	)
Changes in assets and liabilities:
Restricted cash		-			(4,491,667	)		-
Accounts receivable – oil and gas sales		(332,284	)		-			(389,190	)
Accounts receivable – related party participants		15,413			-			(25,944	)
Accounts receivable – joint interest participants		(534,793	)		-			(1,334,763	)
Prepaid expenses and other current assets		29,320			(360	)		(47,134	)
Deferred financing costs		-			(1,500	)		-
Other Assets		77,177			-			-
Accounts payable and other accrued liabilities		(215,918	)		44,536			1,971,991
Net cash used in operating activities		(1,352,560	)		(4,761,412	)		(2,354,196	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of (investment in) marketable securities		2,188,585			-			(167,678	)
Purchase of reclamation bond		(250,000	)		-			(275,000	)
Refund (deposit) on equipment		-			250,000			-
Additions to note receivable		-			-			(800,000	)
Purchase of oil and gas properties		(936,662	)		(1,454,390	)		(7,815,518	)
Purchase of fixed assets		(7,596	)		-			(30,507	)
Net cash used in investing activities		994,327			(1,204,390	)		(9,088,653	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sales of preferred stock, net		-			-			3,626,204
Proceeds from sales of common stock, net		-			5,188,258			6,275,757
Proceeds from related party notes payable		-			200,000			200,000
Proceeds from borrowings		-			25,000			1,360,521
Net cash provided by financing activities		-			5,413,258			11,462,482

NET INCREASE IN CASH AND EQUIVALENTS		(358,233	)		(552,544	)		19,633

CASH AT BEGINNING OF PERIOD		377,957			806,027			91

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


CASH AT END OF PERIOD	$	19,724	$	253,483	$	19,724

CASH PAID FOR:
Interest	$	5,000	$	13,769	$	18,769
Income Taxes	$	-	$	-	$	-

SUPPLEMENTAL CASH FLOW INFORMATION:
Common stock issued for services	$	-	$	-	$	6,235,229
Common stock issued for oil and gas properties		-		420,000		940,750
Common stock repurchased and cancelled		-		-		(150,000	)
Common stock issued on conversion of convertible debentures and interest		27,877		-		1,253,933
Discount on convertible notes payable		-		25,000		1,265,213
Extension warrants on convertible notes payable	$	-	$	-	$	119,283

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

Daybreak Oil and Gas, Inc. (An Exploration Stage Company, Date of Inception March 1, 2005)

Notes to Financial Statements

(Unaudited)

NOTE 1 — ORGANIZATION AND BASIS OF PRESENTATION:

Organization

Originally incorporated as Daybreak Uranium, Inc., (“Daybreak”), under the laws of the State of Washington on March 11, 1955, Daybreak 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., to better reflect the business of Daybreak.

Basis of Presentation

The accompanying unaudited financial statements for Daybreak have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-QSB for quarterly reports under Section 13 or 15(d) of the Securities Exchange Act of 1934. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and such adjustments are of a normal recurring nature. Operating results for the three months ended May 31, 2007 are not necessarily indicative of the results that may be expected for the year ending February 28, 2008. The audited financial statements at February 28, 2007, which are included in Daybreak’s Annual Report on Form 10-KSB for the year ended February 28, 2007, should be read in conjunction with these financial statements.

Exploration Stage Company

On March 1, 2005 (the inception date), Daybreak commenced oil and gas exploration, development and operating activities. As of May 31, 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.

Daybreak Oil and Gas, Inc. (An Exploration Stage Company, Date of Inception March 1, 2005)

Notes to Financial Statements

(Unaudited)

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

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 expenses 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 cost (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”, the Company 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. 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.

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.

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 the Company 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 May 31, 2007 and February 28, 2007.

Daybreak Oil and Gas, Inc. (An Exploration Stage Company, Date of Inception March 1, 2005)

Notes to Financial Statements

(Unaudited)

Reclamation Bonds

Included in other assets at May 31, 2007 is $250,000 paid to U.S. Specialty Insurance Company to act as surety in pledging a bond to the State of Alabama in connection with asset retirement obligations for future plugging, abandonment and site restoration.

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.

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.

NOTE 3 — GOING CONCERN:

Financial Condition

Daybreak's financial statements for the three months ended May 31, 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 incurred net losses of $617,660 and $2,460,847 for the three month periods ended May 31, 2007 and May 31, 2006, respectively. As of May 31, 2007 Daybreak has accumulated a deficit during the exploration stage of $13,481,731. Daybreak had a working capital surplus of $578,341 at May 31, 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 May 31, 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 May 31, 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.

Daybreak Oil and Gas, Inc. (An Exploration Stage Company, Date of Inception March 1, 2005)

Notes to Financial Statements

(Unaudited)

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 May 31, 2007 and February 28, 2007, Daybreak held $167,628 and $2,356,213, respectively, 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”. The market value of the securities as at May 31, 2007 and February 28, 2007 was equal to their book value and no trading gains or losses occurred during the three months ended May 31, 2007 or for the fiscal year ended February 28, 2007. During the three months ended May 31, 2007, Daybreak sold $2,188,585 of the trading securities.

NOTE 5 – NOTES RECEIVABLE - DRILLING RIG AGREEMENT:

Daybreak advanced a total of $800,000 to Green River Drilling, LLC through November 30, 2006 under promissory note agreements. In May 2007, Daybreak was informed by Green River that they intended to sell the drilling rig to a third party. The sale has been 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.

NOTE 6 — OIL AND GAS PROPERTIES:

Oil and gas properties, at cost:

	As of May 31, 2007			As of February 28, 2007

Proved leasehold costs	$	2,272,443		$	2,092,107
Unproved leasehold costs		710,084			902,420
Costs of wells and development		3,388,431			2,035,943
Unevaluated exploratory well costs		1,251,156			1,822,619
Capitalized asset retirement costs		90,860			93,457
Total cost of oil and gas properties		7,712,974			6,946,546
Accumulated depletion, depreciation, amortization and impairment		(2,412,671	)		(2,393,693	)
Oil and gas properties, net	$	5,300,303		$	4,552,852

During the three months ended May 31, 2007, Daybreak has reclassified February 28, 2007 balances of $137,000 of unproved leasehold costs and ($137,000) of related impairment in order to recognize the expiration of leasehold.

As at February 28, 2007, total suspended well costs were $1,822,619. During the three month period ended May 31, 2007, $559,442 of these costs were reclassified to costs of wells and development.

Daybreak Oil and Gas, Inc. (An Exploration Stage Company, Date of Inception March 1, 2005)

Notes to Financial Statements

(Unaudited)

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. No impairment was recorded for the three months ended May 31, 2007 or the three months ended May 31, 2006.

NOTE 7 — CONVERTIBLE DEBENTURES:

The following table summarizes the activity during the year ended February 28, 2007 and the quarter ended May 31, 2007 related to the Convertible Debentures:

Description	Interest Rate		Dates of Maturity	Quarter ended May 31, 2007			Year Ended February 28, 2007
Principal balances, beginning of period
$0.25 Convertible Debentures		6%	03/22/06 to 08/31/06	$	-		$	32,000
$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		225,001			300,001

Principal issuances
$0.75 Convertible Debentures		10%	10/31/07		-			25,000
					225,001			1,163,701
Principal converted during the period
$0.25 Convertible Debentures					-			(32,000	)
$0.50 Convertible Debentures					-			(806,700	)
$0.75 Convertible Debentures					(25,000	)		(100,000	)
Principal balance, end of period					200,001			225,001
Unamortized discount, end of year					(40,030	)		(90,002	)
Total debt, net of discount				$	159,971			134,999

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 option pricing 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 Oil and Gas, Inc. (An Exploration Stage Company, Date of Inception March 1, 2005)

Notes to Financial Statements

(Unaudited)

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

Daybreak leases offices from Terrence Dunne & Associates, a company owned by Terrence Dunne (CFO and a director). In May 2007, Daybreak increased their office size from 850 to approximately 1,000 square feet and monthly lease payments increased from $1,000 to $1,250 per month. 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 and F-3 wells 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.

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.

Daybreak Oil and Gas, Inc. (An Exploration Stage Company, Date of Inception March 1, 2005)

Notes to Financial Statements

(Unaudited)

NOTE 9 – WARRANTS:

Warrants outstanding and exercisable as of May 31, 2007 are:

			Exercise		Remaining		Exercisable Warrants
Description	Warrants		Price		Life (Years)		Remaining
Spring 2006 Common Stock Private Placement		4,013,602	$	2.00		4.0		4,013,602
Placement Agent Warrants Spring 2006 PP		802,721	$	0.75		6.0		802,721
Placement Agent Warrants Spring 2006 PP		401,361	$	2.00		6.0		401,361
July 2006 Preferred Stock Private Placement		2,799,530	$	2.00		4.2		2,799,530
Placement Agent Warrants Preferred Stock PP		419,930	$	1.00		4.2		419,930
Convertible Debenture Term Extension – December 2006		150,001	$	2.00		4.6		150,001
		8,587,145						8,587,145

During the three months ended May 31, 2007, no warrants were exercised. The warrants had no intrinsic value at May 31, 2007.

NOTE 10 - 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:

	May 31, 2007
Computed at U.S. and State statutory rates (40%)	$	(246,100	)
Permanent differences		21,900
Changes in valuation allowance		224,200
Total	$	-

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

	May 31, 2007			February 28, 2007
Deferred tax assets:
Net operating loss carryforwards	$	1,996,600		$	1,734,000
Oil and gas properties		909,400			947,800
Less valuation allowance		(2,906,000	)		(2,681,800	)
Total	$	-		$	-

Daybreak Oil and Gas, Inc. (An Exploration Stage Company, Date of Inception March 1, 2005)

Notes to Financial Statements

(Unaudited)

At May 31, 2007, Daybreak had estimated net operating loss carryforwards for federal and state income tax purposes of approximately $4,991,500 which will begin to expire, if unused, beginning in 2024. The estimated valuation allowance increased by approximately $224,200 for the three months ended May 31, 2007. 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.

NOTE 11 – 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.

Daybreak Oil and Gas, Inc. (An Exploration Stage Company, Date of Inception March 1, 2005)

Notes to Financial Statements

(Unaudited)

These warrants have an exercise price of $0.56 per share and expire on August 31, 2009. 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%.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Safe Harbor Provision

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. (referred to herein as “we”, “our”, the “Company” or “Daybreak”) during the period covered by the financial statements. Certain statements in the MD&A report that are not historical in nature, including statements of management’s expectations, intentions, plans and beliefs, are inherently uncertain and are “forward-looking statements” and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements include those relating to estimated financial results, or expected prices, production volumes, reserve levels and number of drilling locations, expected drilling plans, including the timing, category, number, depth, cost and/or success of wells to be drilled, expected geologic formations or the availability of specific services or technologies. It is important to note that actual results may differ materially from the results predicted in any such forward-looking statements. Investors are cautioned that all forward looking statements involve risk and uncertainty. These risks and uncertainties include: the costs and accidental risks inherent in exploring and developing new oil and natural gas reserves, the price for which such reserves and production can be sold, environmental concerns affecting the drilling of oil and natural gas wells, impairment of oil and gas properties due to depletion or other causes, the uncertainties inherent in estimating quantities of proved reserves and cash flows, as well as general market conditions, competition and pricing 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. The following discussion should be read in conjunction with the unaudited financial statements and notes thereto included in this Form 10-QSB and with the Company’s latest audited financial statements as reported in its Form 10-KSB for the year ended February 28, 2007.

Introduction

The following discussion of our results of operations for the three month period ended May 31, 2007 (referred to herein as “the first quarter 2008”) and 2006 (referred to herein as “the first quarter 2007”) and of our financial condition as of May 31, 2007 should be read in conjunction with our financial statements and related notes thereto included elsewhere in this report.

Plan of Operation

We are an early stage oil and gas exploration company with a limited operating history and minimal proven reserves, production or cash flow. To date, we have had limited revenues and have not been able to generate positive earnings. Daybreak cannot provide any assurances that it will ever operate profitably. As a result of our limited operating history, we are more susceptible to the numerous business risks, investment and industry risks that have been described in our most recent report on Form 10-KSB for our fiscal year ended February 28, 2007 (Item 1. Description of Business - “Risk Factors”).

Our financial statements for the years ended February 28, 2007 and 2006 have been audited by our Independent Registered Public Accounting Firm. The Reports of Independent Registered Public Accounting Firm for each of these years 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 Daybreak cannot continue as a going concern, any equity investment in the Company could become devalued or worthless.

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 longer term success depends on, among many other factors, 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.

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 two fiscal years, 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 results in eight (8) of these wellbores.

Liquidity and Capital Resources

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: Working Capital and Current Ratio.

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

	May 31, 2007		February 28, 2007
Current Assets	$	2,829,975	$	4,537,634
Current Liabilities	$	2,251,634	$	2,445,457
Working Capital	$	578,341	$	2,092,177

Current Ratio		1.26		1.86

While these two ratios are important, numerous other factors may also affect the liquidity and capital resources of the Company. Working capital declined from $2.1 million as of February 28, 2007, to $0.6 million as of May 31, 2007, a decrease of $1.5 million. This decline was due primarily to losses incurred by the Company during the first quarter of the current fiscal year ($618,000) coupled with a net increase in investments in oil and gas property ($747,000), principally for the drilling and completion costs of the Haas-Hirsch No. 1 (now the KSU # 59) well in the Krotz Springs prospect.

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 fund our investment activities. At this time, 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. And, 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.

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

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

Since our inception, we have suffered recurring losses from operations and negative cash flow and have depended on external financing to sustain our operations. During the fiscal year (“FY”) ended February 28, 2007, we reported losses of $8.4 million. Losses have continued into the 1^st Quarter FY 2008, with the Company reporting a loss of $617,660. Although this loss is less than the loss of $2,460,847 reported in the 1st Quarter FY 2007, 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.

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. The charge is included in depreciation, depletion and amortization.

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.

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 May 31, 2007 and February 28, 2007.

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 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 our 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.

In addition, the financial statements included elsewhere herein, as well as the financial statements included in our most recent report on Form 10K-SB for the year ended February 28, 2007 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

Three Months Ended May 31, 2007 Compared to the Three Months Ended May 31, 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, 1^st Quarter 2008 revenues of $225,043 compares favorably to no revenues in the 1^st Quarter 2007. During the 1^st Quarter 2008, the company recorded revenues from its interest in 19 producing wells. While these results are encouraging, the Company continued to experience mechanical and technical production problems with certain major wells, particularly the F-1 well of the Tuscaloosa Project in Tensas Parish, Louisiana. The F-1 well contributed no revenues in the 1^st Quarter of 2008.

The F-1 well was shut in pending the resolution of certain mechanical problems in November, 2006. Production on this property was re-established for a short period of time in February, 2007. Afterward the F-1 well was shut in again 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 3^rd fiscal quarter of 2008. However, there is no assurance that these efforts will be successful.

Cost and Expenses:

A table of the costs and expenses for the 1^st quarter 2008 compared to the 1^st quarter 2007 follows:

	Quarter		Quarter
	Ended		Ended
	May 31, 2007		May 31, 2006
Production Costs	$	109,847	$	-
Exploration Costs		155,211		-
Depreciation, Depletion,
Amortization		157,845		-
General & Administrative		390,103		2,147,619
Total Operating Expenses	$	813,006	$	2,147,619

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 its 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.

The increase in production costs to $109,847 in the 1^st quarter 2008, relates entirely to the existence of production from oil and gas operations.

Exploration and drilling expenses increased substantially from $27,392 in the 1^st quarter 2007 to $155,211 in the 1^st quarter 2008 due primarily to an increase in the number of wells in progress. The Company participated in the development of 6 wells during the 1^st quarter 2008, compared to 1 well in the comparable period of the prior year.

The increase in depreciation, depletion, amortization and impairment to $157, 845 in the 1^st quarter of 2008, relates entirely to the existence of production from oil and gas operations.

General and administrative expenses, including management and directors fees, investor relations fees and other general and administrative expenses were substantially lower in the 1^st quarter 2008 compared to the 1^st quarter 2007. Primarily, this is due to the substantial stock compensation that was recorded in the 1^st quarter 2007, for which there are no significant comparable amounts in the 1^st quarter 2008.

Interest income was $32,568 in the 1^st quarter 2008 compared to $0 in the 1^st quarter 2007 due primarily to higher average cash and investment balances.

Interest expense decreased from $313,228 in the 1^st quarter 2007 to $63,139 in the 1^st quarter 2008 due to lower average debt balances as a result of conversions of debt to common stock.

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 similar factors, as well as numerous other factors including general market conditions.

Other Liquidity Factors

The Company has convertible debentures in the amount of $200,001 that, along within accrued interest, were originally due on August 31, 2007. On August 31, 2007, the maturity on these convertible debentures was extended to October 31, 2007. In addition, at May 31, 2007, the Company had a note payable to a related party in the amount of $200,000 related to the pipeline used on the F-1 and F-3 wells. Since June 14, 2007, payments of $170,000 have been made on the to reduce the balance of the note to $30,000 plus accrued interest.

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 or debt 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.

Off-Balance Sheet Arrangements

As of May 31, 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.

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 in our latest 10-KSB report.”

Disclosure Regarding Forward Looking Statements

Statements in this Form 10-QSB which are not historical in nature, including statements of management’s expectations, intentions, plans and beliefs, are inherently uncertain and are “forward-looking statements” and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements include those relating to estimated financial results, or expected prices, production volumes, reserve levels and number of drilling locations, expected drilling plans, including the timing, category, number, depth, cost and/or success of wells to be drilled, expected geologic formations or the availability of specific services or technologies. It is important to note that actual results may differ materially from the results predicted in any such forward-looking statements. Investors are cautioned that all forward looking statements involve risk and uncertainty. These risks and uncertainties include: the costs and accidental risks inherent in exploring and developing new oil and natural gas reserves, the price for which such reserves and production can be sold, environmental concerns affecting the drilling of oil and natural gas wells, impairment of oil and gas properties due to depletion or other causes, the uncertainties inherent in estimating quantities of proved reserves and cash flows, as well as general market conditions, competition and pricing. Please refer to the “Risk Factors” section of our Form 10-KSB for the fiscal year ended February 28, 2007. This and all our previously filed documents are on file at the Securities and Exchange Commission and can be viewed on our Web site at www.daybreakoilandgas.com. Copies of the filings are available from our Corporate office without charge.

Additional information relating to Daybreak is available on EDGAR at www.edgar-online.com or our web site at www.daybreakoilandgas.com. In the past, our stock has been quoted on the NASDAQ over the counter (OTC.BB) market under the symbol DBRM.OB. However, since July 2007, our stock has been quoted in the OTC pink sheet market, due to SEC filing delinquencies.

ITEM 3. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

As of the end of the reporting period, May 31, 2007, an evaluation was conducted by the Company's 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 effective as of May 31, 2007, to ensure timely reporting with the Securities and Exchange Commission (“SEC”).

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 SEC.

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 the February 28, 2007 10-KSB 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 10-KSB report. The filing of the 12b-25 report itself was delinquent. This resulted in the second “E” in less than 12 months being placed behind our trading symbol. Since our 10-KSB report was not filed by the end of the extended due date, this resulted in our Company stock being dropped from being quoted in the OTC (Over-the-Counter) Bulletin Board market. Until Daybreak is current with its SEC filings and is accepted to be quoted again on the Bulletin Board our stock is quoted in the pink sheet market.

The Form 10-QSB report for the first quarter ended May 31, 2007, was delinquent and also not filed in a timely manner as mandated by the SEC.

Due to the amount of administrative staff of the Company, certain beneficial internal control methods are not available for our implementation. This is especially true when evaluating 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 May 31, 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.

As a result our evaluations, the Company 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.

Changes Implemented to Correct Material Weaknesses:

We have increased administrative staff to assist in the more timely preparation of all required reporting documents

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.

PART II – OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

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

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On March 6, 2006, Michael Schneider, a shareholder loaned the company $25,000 to finance ongoing operating expenses. On the day of the loan, the closing price of our stock was $2.65. 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 this price the value of the principal in the conversion was $18,667. 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.

ITEM 3.

DEFAULTS UPON SENIOR SECURITES

None.

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

During the first quarter of the fiscal year ended February 28, 2008, we did not have any matters submitted to a vote of our security holders of the Company.

ITEM 5.

OTHER INFORMATION

None

ITEM 6.

EXHIBITS

The following Exhibits are filed as part of the report:

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

SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	DAYBREAK OIL AND GAS, INC.

	By:	/s/ Eric L. Moe
		Eric L. Moe, its
		Chief Executive Officer
		Date: September 20, 2007


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