dbrm_10qsb-71130.htm

10QSB 1 dbrm_10qsb-71130.htm FORM 10QSB FOR THE PERIOD ENDED NOVEMBER 30, 2007 dbrm_10qsb-71130.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 November 30, 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 January 11, 2008 the registrant had 43,698,299 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

ITEM 1.	Financial Statements	3

	Balance Sheets at November 30, 2007 (Unaudited) and February 28, 2007	3

	Statements of Operations for the Three Months and Nine Months Ended November 30, 2007 and 2006 and from March 1, 2005 (Date of Inception of Exploration Stage) to November 30, 2007 – (Unaudited)	4

	Statement of Changes in Stockholders' Equity – (Unaudited)	5

	Statements of Cash Flows for the Nine Months Ended November 30, 2007 and 2006 and from March 1, 2005 (Date of Inception of Exploration Stage) to November 30, 2007 – (Unaudited)	7

	Notes to Unaudited Financial Statements	9

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

ITEM 3.	Controls and Procedures	31

	PART II – OTHER INFORMATION

ITEM 1.	Legal Proceedings	33

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33

ITEM 3.	Defaults Upon Senior Securites	33

ITEM 4.	Submission Of Matters To aVote of Security Holders	33

ITEM 5.	Other Information	33

ITEM 6.	Exhibits	34

Signatures		35

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

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	November 30, 2007			February 28, 2007
CURRENT ASSETS:
Cash	$	11,214		$	377,957
Investment in marketable securities, at market, cost of $4,863 and $2,356,213 respectively		4,863			2,356,213
Accounts receivable
Oil and gas sales		101,067			56,906
Related party participants		26,717			41,357
Joint interest participants		934,560			799,970
Note receivable including accrued interest of $-0- and $28,336 respectively		-			828,336
Prepaid expenses and other current assets		2,145			76,895
Total current assets		1,080,566			4,537,634

OIL AND GAS PROPERTIES, net of accumulated depletion, depreciation, amortization and impairment, successful efforts method		5,502,635			4,552,850
VEHICLES AND EQUIPMENT, net of accumulated depreciation		21,887			18,556
OTHER ASSETS		320,753			102,426
Total assets	$	6,925,841		$	9,211,466

LIABILITITES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable and other accrued liabilities	$	1,549,861		$	2,110,458
Notes Payable – related party		-			200,000
Convertible debentures, net of discount of $17,058 and $90,002 respectively		107,943			134,999
Total current liabilities		1,657,804			2,445,457
OTHER LIABILITIES:
Asset retirement obligation		106,795			99,427
Total liabilities		1,764,599			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, authorized; 1,307,465 and 1,399,765 shares issued and outstanding, respectively		1,308			1,400
Common stock – 200,000,000 shares authorized, $0.001 par value; 43,658,299 and 40,877,230 shares issued and outstanding, respectively		43,658			40,877
Additional paid-in capital		20,928,967			20,224,411
Accumulated deficit		(736,035	)		(736,035	)
Deficit accumulated during the exploration stage		(15,076,656	)		(12,864,071	)
Total stockholders’ equity		5,161,242			6,666,582
Total liabilities and stockholders’ equity	$	6,925,841		$	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

													From Inception
													March 1, 2005
	Three Months Ended						Nine Months Ended						Through
	November 30,						November 30,						November 30,
	2007			2006			2007			2006			2007
REVENUE:
Oil and gas sales	$	130,860		$	218,590		$	650,599		$	488,689		$	1,279,945

OPERATING EXPENSES:
Production costs		162,277			59,736			368,872			91,669			742,638
Exploration expenses		71,276			722,239			604,672			762,644			2,128,781
Depreciation, depletion, amortization and impairment expense		83,069			19,884			456,596			20,920			2,854,644
General and administrative		390,883			356,069			1,283,718			3,306,528			9,123,458
Total operating expenses		707,505			1,157,928			2,713,858			4,181,761			14,849,521

LOSS FROM OPERATIONS		(576,645	)		(939,338	)		(2,063,259	)		(3,693,072	)		(13,569,576	)

OTHER INCOME (EXPENSE):
Interest income		-			36,517			34,494			42,107			136,553
Dividend income		291			5,208			3,109			5,208			8,656
Miscellaneous income		800			-			1,900			-			1,900
Interest expense		(76,049	)		(282,387	)		(188,829	)		(958,961	)		(1,654,189	)
Total other income (expense)		(74,958	)		(240,662	)		(149,326	)		(911,646	)		(1,507,080	)

NET LOSS	$	(651,603	)	$	(1,180,000	)	$	(2,212,585	)	$	(4,604,718	)	$	(15,076,656	)

Cumulative convertible preferred stock dividend requirement		(58,897	)		(93,142	)		(181,962	)		(93,142	)		(337,278	)
Deemed dividend – Beneficial conversion feature		-			-			-			(4,199,295	)		(4,199,295	)

NET LOSS AVAILABLE TO COMMON SHAREHOLDERS	$	(710,500	)	$	(1,273,142	)	$	(2,394,547	)	$	(8,897,155	)	$	(19,613,229	)

NET LOSS PER COMMON SHARE	$	(0.02	)	$	(0.03	)	$	(0.06	)	$	(0.25	)

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING -		41,804,013			39,035,759			41,705,303			36,297,926

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

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

BALANCE, March 1, 2005 (Date of inception of exploration stage)		-	$	-		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		-		-		-		-		-			-			(4,472,041	)		(4,472,041	)

BALANCE, FEBRUARY 28, 2006		-	$	-		29,458,221	$	29,458	$	7,267,514		$	(736,035	)	$	(4,472,041	)	$	2,088,896


Issuance of common stock for:
Cash		-		-		8,027,206		8,027		5,180,230			-			-			5,188,257
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		-		-		-		-		-			-			(8,392,030	)		(8,392,030	)

BALANCE, FEBRUARY 28, 2007		1,399,765	$	1,400		40,877,230	$	40,877	$	20,224,411		$	(736,035	)	$	(12,864,071	)	$	6,666,582

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

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

Issuance of common stock for:
Services	-			-		10,000		10		4,490			-			-			4,500
Conversion of preferred stock	(30,300	)		(30	)	90,900		91		(61	)		-			-			-
Deferred financing costs	-			-		-		-		35,386			-			-			35,386
	-			-		-		-		-			-			-			-
Net loss	-			-		-		-		-			-			(943,322	)		(943,322	)

BALANCE, AUGUST 31, 2007	1,317,465		$	1,318		41,171,299	$	41,171	$	20,291,963		$	(736,035	)	$	(14,425,053	)	$	5,173,364

Issuance of common stock for:
Cash	-			-		2,457,000		2,457		611,793			-			-			614,250
Conversion of preferred stock	(10,000	)		(10	)	30,000		30		(20	)		-			-			-
Deferred financing costs	-			-		-		-		25,587			-			-			25,587
Private placement costs	-			-		-		-		(356	)		-			-			(356	)
Net loss	-			-		-		-		-			-			(651,603	)		(651,603	)

BALANCE, NOVEMBER 30, 2007	1,307,465		$	1,308		43,658,299	$	43,658	$	20,928,967		$	(736,035	)	$	(15,076,656	)	$	5,161,242

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

	Nine Months Ended November 30,			Nine Months Ended November 30,			From Inception March 1, 2005 Through November 30,
	2007			2006			2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss	$	(2,212,585	)	$	(4,604,716	)	$	(15,076,656	)
Adjustments to reconcile net loss to net cash
used in operating activities:
Common stock issued for services		4,500			2,347,700			6,239,729
Depreciation, depletion, amortization and impairment expense expense		456,596			20,920			2,854,644
Exploration expense – dry well		38,458			-			854,978
Non cash interest expense and accretion		147,815			958,961			1,452,993
Non cash interest income		(19,052	)		(1,519	)		(47,637	)

Changes in assets and liabilities:
Marketable securities		2,351,350			(3,024,720	)		(4,863	)
Accounts receivable – oil and gas sales		(44,161	)		(123,285	)		(101,067	)
Accounts receivable – related party participants		14,640			-			(26,717	)
Accounts receivable – joint interest participants		(134,590	)		-			(934,560	)
Prepaid expenses and other current assets		74,750			(107,505	)		(1,704	)
Accounts payable, other accrued liabilities		(599,930	)		387,315			1,587,979
Other assets		-			18,333			(77,177	)
Net cash used in operating activities		77,791			(4,128,516	)		(3,280,058	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of surety bond		(250,000	)		(25,000	)		(275,000	)
Purchase of certificate of deposit		-			(500,000	)		-
Refund on equipment deposit		-			250,000			-
Additions to note receivable		-			(809,298	)		-
Purchase of oil and gas properties		(1,431,872	)		(2,818,447	)		(8,310,728	)
Purchase of fixed assets		(8,930	)		(22,911	)		(31,841	)
Proceeds from note receivable		800,000			-			-
Increase in other oil & gas prepaid assets		32,393			(1,417,114	)		32,393
Net provided by, (used in) investing activities		(858,409	)		(5,342,770	)		(8,585,176	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sales of common stock, net		613,895			5,175,762			6,889,652
Proceeds from sales of preferred stock, net		(20	)		3,638,700			3,626,184
Repayment of borrowings		(200,000	)		25,000			1,160,521
Proceeds from borrowings		-			-			200,000
Capital lease obligation		-			200,000			-
Net cash provided by financing activities		413,875			9,039,462			11,876,357

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

NET INCREASE (DECREASE)IN CASH AND EQUIVALENTS	$	(366,743	)	$	(431,824	)	$	11,123

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

CASH AT END OF PERIOD	$	11,214		$	374,203		$	11,214

CASH PAID FOR:
Interest	$	38,325		$	13,769		$	52,090
Income taxes		-			-			-

SUPPLEMENTAL CASH FLOW INFORMATION:
Common stock issued for services	$	4,500		$	-		$	6,239,729
Common stock issued for oil and gas properties		-			-			940,750
Common stock issued on conversion of convertible debentures and interest		27,878			-			1,253,933
Discount on convertible notes payable		60,973			958,961			1,326,186
Conversion of preferred stock to common stock		175			-			175
Extension warrants on convertible notes payable	$	-		$	-		$	119,283

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

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. On March 1, 2005, Daybreak commenced oil and gas operations as an exploration stage company. On October 25, 2005, the shareholders approved a name change to Daybreak Oil and Gas, Inc.

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 and nine months ended November 30, 2007 are not necessarily indicative of the results that may be expected for the year ending February 29, 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.

Recently Issued Accounting Pronouncements

In February 2007, the FASB issued Statement of Financial Accounting Standards (SFAS) 159, The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115 (SFAS 159), which permits entities to choose to measure many financial instruments and certain other items at fair value (the Fair Value Option). Election of the Fair Value Option is made on an instrument-by-instrument basis and is irrevocable. At the adoption date, unrealized gains and losses on financial assets and liabilities for which the Fair Value Option has been elected would be reported as a cumulative adjustment to beginning retained earnings. If Daybreak elects the Fair Value Option for certain financial assets and liabilities, it will report unrealized gains and losses due to changes in fair value in earnings at each subsequent reporting date. The provisions of SFAS 159 are effective March 1, 2008 for Daybreak. Daybreak is currently assessing the impact, if any, that the adoption of this pronouncement will have on its operating results, financial position or cash flows.

In September 2006, the FASB issued SFAS 157, Fair Value Measurements (SFAS 157), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This pronouncement applies to other standards that require or permit fair value measurements. Accordingly, this statement does not require any new fair value measurement. The provisions of SFAS 157 are effective for Daybreak on March 1, 2008. Daybreak is currently assessing the impact, if any, that the adoption of this pronouncement will have on the its operating results, financial position or cash flows.

During July 2006, the FASB issued FIN 48, which addresses the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. FIN 48 prescribes specific criteria for the financial statement recognition and measurement of the tax effects of a position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition of previously recognized tax benefits, classification of tax liabilities on the balance sheet, recording interest and penalties on tax underpayments, accounting in interim periods, and disclosure requirements. FIN 48 is effective for fiscal periods beginning after December 15, 2006. As a result, Daybreak adopted FIN 48 effective March 1, 2007. The adoption of this pronouncement did not materially impact the its operating results, financial position or cash flows.

Exploration Stage Company

On March 1, 2005 (the inception date of the exploration stage), Daybreak commenced oil and gas operating activities. As of November 30, 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 of exploration stage.

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

Use of Estimates

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

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Oil and Gas Properties

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

Capitalized proved property acquisition costs are amortized by field using the unit-of-production method based on proved reserves. Capitalized exploration well costs and development 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 November 30, 2007.

Reclamation Bonds

Included in other assets at November 30, 2007 is $249,000 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 and nine months ended November 30, 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 a net loss of $2,212,585 for the nine month period ended November 30, 2007, and as of November 30, 2007, Daybreak has accumulated a deficit of $15,076,656. Daybreak had a working capital deficit of $577,238 at November 30, 2007.

Management Plans to Continue as a Going Concern

Daybreak is implementing the following plans to enhance its ability to continue as a going concern. The Company has successfully marketed a Joint Development Program in the Tuscaloosa project which will ensure Daybreak’s continuation of that drilling program. An increase in production in the Gilbertown Field in Alabama has allowed more work to be done to increase production further in that field. An unregistered private placement offering of the Company’s common stock is underway to increase working capital and the availability of funds for other drilling projects. Daybreak has formed a partnership with Chevron U.S.A. Inc. and others to limit the financial risk and enhance Daybreak’s ability to pursue potentially profitable seismic and drilling programs on the California oil and gas properties. 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 November 30, 2007, do not include any adjustments that might result from the implementation and or execution of Daybreak’s plans to improve their ability to continue as a going concern.

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 November 30, 2007, these funds were 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 November 30, 2007 and February 28, 2007 was equal to their book value and no trading gains or losses occurred during the nine months ended November 30, 2007. During the nine months ended November 30, 2007, Daybreak sold $2,365,000 of the trading securities.

NOTE 5 – ACCOUNTS RECEIVABLE – JOINT INTEREST PARTICIPANTS

In June 2007, Daybreak as Operator for the drilling and completion of the KSU #59 (formerly 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 KSU #59 well. Between August and October 2007, the Company received an aggregate of $199,970 in payments on this delinquency. As of November 30, 2007, this working interest participant was delinquent $571,788. In January 2008, Daybreak instituted legal action against this working interest participant for their default. This partner has a 25% working interest in the KSU #59 well.

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.

NOTE 6 – 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 for the refurbishment of a drilling rig. 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 in June 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 7 — OIL AND GAS PROPERTIES

Oil and gas properties, at cost

	November 30, 2007			February 28, 2007
Proved leasehold costs	$	2,283,992		$	2,092,107
Unproved leasehold costs		942,358			902,420
Costs of wells and development		3,505,888			2,035,940
Unevaluated capitalized exploratory well costs		1,379,482			1,822,619
Capitalized asset retirement costs		91,235			93,457
Total cost of oil and gas properties		8,202,955			6,946,543
Accumulated depletion, depreciation, amortization and impairment		(2,700,320	)		(2,393,693	)
Oil and gas properties, net	$	5,502,635		$	4,552,850

NOTE 8 — CONVERTIBLE DEBENTURES

The following table summarizes the activity during the nine months ended November 30, 2007 and the fiscal year ended February 28, 2007 related to the Convertible Debentures:

Description	Interest Rate		Dates of Maturity	November 30, 2007			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 10/31/08		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					(100,000	)		(100,000	)
Principal balance, end of period					125,001			225,001
Unamortized discount, end of year					(17,058	)		(90,002	)
Total debt, net of discount				$	107,943		$	134,999

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.

On October 31, 2007, the one remaining debenture holder of the $0.75 convertible debentures agreed to extend the term of the debenture to January 31, 2008. In consideration of this extension he received 90,000 warrants. These warrants have an exercise price of $0.25 per share and expire on October 31, 2009. The warrants were valued at $25,587 using the Black-Scholes option pricing model. The assumptions used in the Black-Scholes valuation model were: a risk fee interest rate of 3.9%; the current stock price at date of issuance of $0.40 per share; the exercise price of the warrants of $0.25; the term of two years; volatility of 112%; and dividend yield of 0.0%.

NOTE 9 — RELATED PARTY TRANSACTIONS

Office Lease

Daybreak leases offices from Terrence Dunne & Associates, a company owned by Terrence Dunne (former Chief Financial Officer, director and current 8.98% stockholder). 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 on the gas production revenue of the F-1 well for the life of the project. 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 was obligated to repay the note between the sixth (6th) and the thirtieth (30th) month after the operation of the pipeline had commenced. Additionally, Daybreak was 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 through October 2007 Daybreak made principal payments totaling $200,000 plus accrued interest. The loan has now been paid in full. The accelerated repayment schedule was triggered by the temporary shut-in status of the F-1 well, due to technical issues with water production.

NOTE 10 – WARRANTS

Warrants outstanding and exercisable as of November 30, 2007 are:

							Exercisable
			Exercise		Remaining		Warrants
Description	Warrants		Price		Life (Years)		Remaining
Spring 2006 Common Stock Private Placement		4,013,602	$	2.00		4.25		4,013,602
Placement Agent Warrants Spring 2006 PP		802,721	$	0.75		6.25		802,721
Placement Agent Warrants Spring 2006 PP		401,361	$	2.00		6.25		401,361
July 2006 Preferred Stock Private Placement		2,799,530	$	2.00		4.50		2,799,530
Placement Agent Warrants Preferred Stock PP		419,930	$	1.00		4.50		419,930
Convertible Debenture Term Extension		150,001	$	2.00		4.75		150,001
Convertible Debenture 2nd Term Extension		112,000	$	0.53		2.00		112,000
Convertible Debenture 3rd Term Extension		90,000	$	0.25		2.00		90,000
		8,789,145						8,789,145

NOTE 11 - 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 rates to income from continuing operations before income taxes is as follows:

	November 30, 2007
Computed at U.S. and State statutory rates (40%)	$	(885,000	)
Permanent differences		58,500
Changes in valuation allowance		826,500
Total	$	-

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

	November 30, 2007			February 28, 2007
Deferred tax assets:
Net operating loss carryforwards	$	2,600,000		$	1,734,000
Oil and gas properties		908,300			947,800
Less valuation allowance		(3,508,300	)		(2,681,800	)
Total	$	-		$	-

At November 30, 2007, Daybreak had estimated net operating loss carryforwards for federal and state income tax purposes of approximately $6,500,000 which will begin to expire, if unused, beginning in 2024. 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 12 — STOCKHOLDERS’ EQUITY

Private Placements

In October 2007, Daybreak commenced an unregistered offering through a private placement of its common stock under the securities transaction exemption Regulation D Rule 506 of the Securities Act of 1933. Shares were offered at $0.25 per share to “accredited investors” only as defined in Regulation D under the Securities Act of 1933. The offering was closed on December 27, 2007. The shares were sold directly by Daybreak and no placement agent was involved in the offering. A total of 2,497,000 shares of unregistered common stock were sold to thirteen (13) investors resulting in $624,250 in gross proceeds. Offering expenses were approximately $6,500. Net proceeds were used to meet drilling commitments in the Tuscaloosa project and general and administrative expenses.

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. (the “Company”,“Daybreak”, “we”, “us”, “our”) during the period covered by the financial statements. All statements other than statements of historical facts contained in this MD&A report, including statements regarding our current expectations and projections about future results, intentions, plans and beliefs, business strategy, performance, prospects and opportunities, 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 “forward-looking” 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. 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 November 30, 2007 (referred to herein as “the third quarter 2008”) and November 30, 2006 (referred to herein as “the third quarter 2007”) and of our financial condition as of November 30, 2007 should be read in conjunction with our financial statements and related notes thereto included elsewhere in this report.

We are an early stage oil and gas exploration company with a limited operating history and minimal proven reserves, production and cash flow. To date, we have had limited revenues and have not been able to generate positive earnings. Our management cannot provide any assurances that Daybreak 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 the 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 Daybreak 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 we cannot continue as a going concern, any equity investment in the Company could become devalued or worthless.

Plan of Operation

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. In November 2006, we became the operator of the Tuscaloosa project in Tensas and Franklin Parishes in Louisiana. In January 2007, the Krotz Springs project in Louisiana was begun and we were the operator of record during the drilling and completion phases of this project. In Alabama, we have been operator of the East Gilbertown Field since June 2007. In the past we have relied on our working interest partners to negotiate all drilling, and sales contracts. During the past three 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 in nine (9) of these wellbores. We will be perforating and testing for commercial production another well in our Tuscaloosa Project (the “F-2”) in early January 2008.

Liquidity and Capital Resources

Our working capital and current ratio (current assets divided by current liabilities) are as follows.

	November 30,			February 28,
	2007			2007
Current Assets	$	1,080,566		$	4,537,634
Current Liabilities		1,657,804			2,445,457
Working Capital	$	(577,238	)	$	2,092,177

Current Ratio		0.65			1.86

While these two ratios are important, numerous other factors may also affect the liquidity and capital resources of Daybreak. Working capital declined from $2,092,177 as of February 28, 2007, to a deficit of $577,238 as of November 30, 2007, a decrease of $2.67 million. This decrease was due primarily to the sale of $2.37 million of marketable securities, which funded losses from operations incurred by the Company during the first three quarters of the current fiscal year ($2.21 million) coupled with a net increase in investments in oil and gas properties ($950,000), principally for the drilling and completion costs of the Haas-Hirsch No. 1 (now the KSU # 59) well in the Krotz Springs prospect and the A-1 and F-2 wells in the Tuscaloosa project.

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 asource of funds in the foreseeable futurealong with possible oil and gas asset sales as deemedappropriate. 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 profitable oil and gas producing properties, which will very likely require us to continue to raise equity or debt capital from sources outside of the Company.

Daybreak 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 the right to participate in future drilling on certain leases or the loss of the lease itself. These ongoing capital commitments may also cause us 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, we may not be able to survive as a going concern, and any equity investment could become worthless.

Since our inception, we have suffered recurring losses from operations with negative cash flow and have depended on external financing to sustain our operations. During the fiscal year (“FY”) ended February 28, 2007, we reported losses from operations of $8.39 million. Losses have continued into the 3rd Quarter FY 2008, with the Company reporting a loss of $2.21 million for the nine months ended November 30, 2007. Although these losses are an improvement from the restated loss of $4.6 million for the same period in the prior year, there is no assurance that we can ever achieve sustainable profitability. Failure to achieve sustainable profitability could prevent us from continuing as a going concern, and could cause any equity investment to become substantially impaired in value.

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 debts, cancellation 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 developmental 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 November 30, 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 November 30, 2007 compared to the Three Months Ended November 30, 2006

Revenues. Our revenues are derived entirely from the sale of our share of oil and gas production from our producing wells. We realized our first revenues from producing wells in the second quarter of the 2007 fiscal year. Prior to that date, we had no revenues. During the third quarter of the current fiscal year, we received revenue from both the Tuscaloosa and Krotz Springs projects in Louisiana; the Gilbertown Field in Alabama and the Saxet Field in Texas. During the 3rd Quarter 2008, we recorded revenues from our interests in 19 producing wells.

Our gas and oil wells in the Tuscaloosa project were operating on a reduced production schedule because of downstream market issues and accordingly, 3rd Quarter 2008 total revenues of $130,860 from all projects decreased as compared to $218,590 in revenues during the 3rd Quarter 2007.

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 downstream market issues. The F-1 well was returned to minimal production with a pumpjack unit at the end of December 2007. However, we are continuing to work on regulating the hydrocarbon flows in an effort to return this well to commercial production levels. The F-1 well contributed 0% of total revenues in the 3rd Quarter of 2008 as compared to 68.1% of revenues in the 3rd Quarter of the prior year.

During the 2nd and 3rd quarters of the current fiscal year the F-3 well was periodically shut in because of the same downstream market issues as the F-1 well faced. While attempting to return the F-3 well to production during the 3rd Quarter , we encountered technical production problems that should be resolved with the installation of a pumpjack unit. We are anticipating the F-3 will return to commercial production in January 2008 however, there is no assurance that these efforts will be successful. The F-3 well contributed 29.9% of total revenues in the 3rd Quarter of 2008 as compared to 0% of revenues in the 3rd Quarter of the prior year.

The Krotz Springs project in Louisiana was brought into commercial production in May 2007 and produces both gas and oil. Some of the raw gas production from the KZU SU; KU No. 59 (KSU #59 (formerly Haas-Hirsch #1)) well is converted to liquids for sale. The KSU # 59 contributed 17.2% of total revenues in the 3rd Quarter of 2008 as compared to 0% of revenues in the 3rd Quarter of the prior year.

The Gilbertown Field in Alabama strictly produces oil and has eleven (11) producing wells that contributed 28.2% of total revenues in the 3rd Quarter of 2008 as compared to 0% of revenues in the 3rd Quarter of the prior year.

The Saxet Field project in Texashas three (3) wells producing both gas and oil. This project contributed 24.7% of total revenues in the 3rd Quarter of 2008 as compared to 31.9% of revenues in the 3rd Quarter of the prior year.

Expenses: Our production, exploration and depreciation, depletion, amortization and impairment expenses decreased to $316,622 for the 3rd Quarter 2008 as compared to $801,895 for the 3rd Quarter 2007. While there were increases in production costs and depreciation, depletion, amortization and impairment expenses directly related to the increased number of wells and exploration projects with which we were involved in comparison to the prior year, exploration and drilling expenses decreased by a greater margin because of lower dry hole costs in comparison to the prior year. Our general and administrative costs increased to $390,883 for the 3rd Quarter 2008 as compared to $356,069 for the 3rd Quarter 2007. This increase of about $34,800 was primarily due to increased contract legal and accounting costs as we completed our restated financial statements.

Revenues:

The table below shows the revenues for the 3rd Quarter 2008 compared to the 3rd Quarter 2007:

	Quarter		Quarter
	Ended		Ended
	November 30, 2007		November 30, 2006
Tuscaloosa F-1 Well – LA	$	0	$	148,916
Tuscaloosa F-3 Well - LA		38,162		0
Krotz Springs Project – LA		22,453		0
Gilbertown Field – Alabama		37,740		0
Saxet Field – Texas		32,505		69,674
Total Revenue	$	130,860	$	218,590

Costs and Expenses:

The table below shows the costs and expenses for the 3rd Quarter 2008 compared to the 3rd Quarter 2007:

	Quarter		Quarter
	Ended		Ended
	November 30, 2007		November 30, 2006
Production Costs	$	162,277	$	59,736
Exploration Costs		71,276		722,239
Depreciation, Depletion,
Amortization & Impairment		83,069		19,884
General & Administrative		390,883		356,069
Total Operating Expenses	$	707,505	$	1,157,928

Nine Months Ended November 30, 2007 compared to the Nine Months Ended November 30, 2006

Revenues. We recorded our first revenue from four producing wells in the first nine months of the 2007 year. Prior to that time, we had no revenues. During the first nine months of 2008, the Company recorded revenues from its interest in 17 producing wells (2- Tuscaloosa, 1- Krotz, 3- Saxet and - 11 - Gilbertown).

Revenue from our gas and oil wells increased during the first nine months to $650,599 as compared to $488,689 from the prior year. The increase is due to the greater number of productive wells that we had in operation.

In the Tuscaloosa Project in Louisiana, the F-1 well contributed 4% of total revenues in the first nine months of 2008 as compared to 83.7% of revenues in the first nine months of the prior year. The F-3 well contributed 55.6% of total revenues in the first nine months of 2008 as compared to 0% of revenues in the first nine months of the prior year.

The Krotz Springs project in Louisiana contributed 8% of total revenues in the first nine months of 2008 as compared to 0% of revenues in the first nine months of the prior year.

The Gilbertown Field in Alabama contributed 12.4% of total revenues in the first nine months of 2008 as compared to 0% of revenues in the first nine months of the prior year.

The Saxet Field project in Texas contributed 20% of total revenues in the first nine months of 2008 as compared to 16.3% of revenues in the first nine months of the prior year.

Expenses. Our production, exploration and depreciation, depletion, amortization and impairment expenses increased to $1,430,140 for the first nine months of 2008 as compared to $875,233 for the first nine months of 2007. These increases were directly related to the increased number of wells and exploration projects with which we were involved in comparison to the prior year. There were major increases in both production costs and the depreciation, depletion and amortization and impairment expenses as a result of our increase in the number of productive wells. Our general and administrative costs decreased to $1,283,718 for the first nine months of 2008 as compared to $3,306,528 for the first nine months of 2007. This decrease was a result of stock issuances for compensation in the first nine months of 2008.

Revenues:

The table below shows the revenues for the first nine months of 2008 compared to the first nine months of 2007:

	Nine Months		Nine Months
	Ended		Ended
	November 30, 2007		November 30, 2006
Tuscaloosa F-1 Well – LA	$	22,765	$	408,849
Tuscaloosa F-3 Well - LA		363,729		0
Krotz Springs Project – LA		51,882		0
Gilbertown Field – Alabama		81,499		0
Saxet Field – Texas		130,724		79,840
Total Revenue	$	650,599	$	488,689

Costs and Expenses:

The table below shows the costs and expenses for the first nine months of 2008 compared to the first nine months of 2007:

	Nine Months		Nine Months
	Ended		Ended
	November 30, 2007		November 30, 2006
Production Costs	$	368,872	$	91,669
Exploration Costs		604,672		762,643
Depreciation, Depletion,
Amortization & Impairment		456,596		20,920
General & Administrative		1,283,718		3,306,528
Total Operating Expenses	$	2,713,858	$	4,181,761

Due to the nature of the business, as well as the relative immaturity of our wells, we expect 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 we invest in future exploration and 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.

Oil and Gas Projects Update

Alabama. We have continued to increase total production in the Gilbertown Field since taking over as operator in June 2007. This has been accomplished through a series of workovers on existing wellbores that were either not producing or that had minimal production. We are continuing this workover program with the intent of paying for the workover costs through increased field production revenue.

California. In June 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 Daybreak et al 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 four initial test wells to be drilled on the jointly held lands. The four initial test wells must be drilled within nine months of the seismic data interpretation being completed. The shooting of the seismic was completed at the end of November 2007. The data is now being interpreted with the intent of holding partner meetings to pick the drilling sites in mid February 2008. We anticipate that drilling will commence in March or April 2008 depending upon rig availability.

Texas. We have continued to face increased production costs in the Saxet field with a workover required on an existing salt water disposal well. The workover was completed in late September 2007. We now anticipate being able to continue commercial production of the field; however, there is no assurance that commercial production will continue.

Louisiana. In July 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 28.5% on each well. The JDPA does not effect any prior agreement for wells and production infrastructure that is already in place. We have a 28.5% interest in all future lease rentals.

The first well in the four-well drilling program is the Tensas Farms et al “A-1” well which was spud on August 27, 2007 and reached total depth of 8,200 feet in September 2007. The well logs indicated an oil pay interval in the target zone at a depth between 8,094 and 8,118 feet. The production infrastructure was installed and the well was perforated and began commercial production in December 2007. Daily flow rates for December have averaged 265 Mcf (Thousand Cubic Feet) of gas and 125 Bbl (Barrels) of oil at variable choke settings and flowing tubing pressures. Estimated total gross production for the partial month of December was 4,800 Mcf of gas and 2,250 Bbl of oil. We should receive the December production revenue in February 2008. Daybreak has a 29.6% working interest in the well BPO (before payout) which will increase to a 37.6% working interest APO (after payout). Our NRI (net revenue interest) in this well is 22.19% BPO (before payout) and 27.05% APO (after payout).

The second well in the four-well drilling program is the Tensas Farms et al “F-2” reached total depth of 8,310 feet in late December 2007. The primary objective of the F-2 well is to test the oil leg of the Basal Tuscaloosa Formation that has been encountered in each of our four previous wells drilled in this field. Perforation and production testing began in early January 2008. Daybreak has a 25.2% working interest in the well BPO (before payout) which will increase to a 35.8% working interest APO (after payout).

Drilling of the third and fourth wells in the program is planned during the current calendar year. These two wells are currently targeted to test a Paluxy exploration play and a Selma Chalk play within the Tensas Farms area of mutual interest (AMI).

At the Krotz Springs project, also in Louisiana, we are continuing to produce from the Second Cockfied Sandstone that was perforated in May 2007. We anticipate that this zone will be depleted during the 2008 calendar year. Daybreak and the working interest partners will then perforate a shallower hydrocarbon zone that was encountered during the drilling of the KSU #59 (formerly the Haas-Hirsch #1). Additionally, Daybreak, as operator, has taken legal action against one of our working interest partners for the default on their financial obligation during the drilling and completion of the KSU #59 well. This partner has a 25% working interest in the KSU #59 and their default as of November 30, 2007 was in excess of $571,000.

Due to the nature of our business, as well as the relative immaturity of the business, we expect 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 similar factors, as well as numerous other factors including general market conditions.

Other Liquidity Factors

At August 31, 2007, we had outstanding, two convertible debentures for an aggregate 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. On October 31, 2007, the $75,000 convertible debenture plus accrued interest was paid off. The maturity of the other convertible debenture with a principal balance of $125,001 was extended to January 31, 2008.

In addition, at May 31, 2007, we had a note payable to a related party in the amount of $200,000 for financing of the pipeline used on the F-1 and F-3 wells. In the 2nd Quarter, principal payments of $185,000 were made on this financing obligation. During the 3rd Quarter of the current fiscal year, we paid in full the financed amount plus accrued interest that was due on this note payable.

In October 2007, we commenced an unregistered offering through a private placement of our common stock under the securities transaction exemption Regulation D Rule 506 of the Securities Act of 1933. Shares were offered at $0.25 per share to “accredited investors” only as defined in Regulation D under the Securities Act of 1933. The offering was closed on December 27, 2007. The shares were sold directly by Daybreak and no placement agent was involved in the offering. A total of 2,497,000 shares of unregistered common stock were sold to thirteen (13) investors resulting in $624,250 in gross proceeds. Offering expenses were approximately $6,500. Net proceeds were used to meet our drilling commitments in the Tuscaloosa project and general and administrative expenses.

In January 2008, we commenced an unregistered offering through a private placement of our common stock under the securities transaction exemption Regulation D Rule 506 of the Securities Act of 1933. We propose to offer and sell 10,000,000 shares for gross proceeds of $2,500,000. Shares will be offered and sold at $0.25 per share to “accredited investors” only as defined in Regulation D under the Securities Act of 1933. An additional 1,000,000 common stock shares may be sold at our sole discretion. The shares will be sold directly by Daybreak or by commissioned placement agents. A 10% commission plus 3% non-accountable expense allowance will be paid to the placement agents. Additionally, the placement agents will earn warrants in the amount of 7% of their sales. The warrants will be exercisable for a period of three (3) years at an exercise price of $0.25.

Management and Board of Directors Restructuring

In December 2007, both the management and the Board of Directors of Daybreak were restructured to allow for future growth and increased efficiency within the Company. Timothy R. Lindsey, formerly an outside director and consultant to Daybreak became the interim President and Chief Executive Officer. Robert Martin, formerly the President, became Senior Vice President, Exploration with the goal of furthering the development of our existing projects. Eric Moe formerly Chief Executive Officer and Terrence Dunne formerly Chief Financial Officer both left the Company to pursue other interests. Mr. Moe will continue to consult on select fundraising projects for Daybreak. Mr. Dunne is replaced as Chief Financial Officer by James F. Westmoreland in an interim capacity. Mr. Westmoreland was most recently the Chief Accounting Officer for The Houston Exploration Company. Additionally, Thomas Kilbourne resigned as Controller, but remains with the Company in a non-executive role throughout this transition period.

The following directors all resigned from the Board of Directors in December as the Company moved forward in its restructuring: Robert Martin, Eric Moe, Terrence Dunne, Jeffrey Dworkin (Secretary), Thomas Kilbourne (Treasurer) and Michael Curtis.

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 and oil and gas asset sales or obtaining joint venture partners. No assurances 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 stockholder base.

Off-Balance Sheet Arrangements

As of November 30, 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.”

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. Our stock is quoted on the NASDAQ over the counter (OTC.BB) market under the symbol DBRM.OB. From July 2007 to December 13, 2007, our stock was quoted in the OTC pink sheet market, due to SEC filing delinquencies. We returned to being quoted on the OTC Bulletin Board market after the filing of our third quarter 2008 10-QSB report.

ITEM 3. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

As of the end of the reporting period, November 30, 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 November 30, 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.

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 moved from being quoted in the OTC (Over-the-Counter) Bulletin Board market to the OTC pink sheet market. We returned to being quoted on the OTC Bulletin Board market after the filing of our third quarter 2008 10-QSB report.

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 control methods are not available for our implementation. This is especially true when evaluating an effective separation of duties and responsibilities in the corporate office.

(b) Changes in Internal Control.

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

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

During the preparation of the Company’s financial statements, as of November 30, 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 our administrative staff and hired a new Chief Financial Officer 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

ITEM 3. DEFAULTS UPON SENIOR SECURITES

None.

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

During the third 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

In December 2007, both the management and the Board of Directors of Daybreak were restructured to allow for future growth and increased efficiency within the Company. Timothy R. Lindsey, formerly an outside director and consultant to Daybreak became the interim President and Chief Executive Officer. Robert Martin, formerly the President, became Senior Vice President, Exploration with the goal of furthering the development of our existing projects. Eric Moe formerly Chief Executive Officer and Terrence Dunne formerly Chief Financial Officer both left the Company to pursue other interests. Mr. Moe will continue to consult on select fundraising projects for Daybreak. Mr. Dunne is replaced as Chief Financial Officer by James F. Westmoreland in an interim capacity. Mr. Westmoreland was most recently Vice President and Chief Accounting Officer for The Houston Exploration Company. Additionally, Thomas Kilbourne resigned as Controller, but he remains with the Company in a non-executive role throughout this transition period.

ITEM 6. EXHIBITS

The following Exhibits are filed as part of the report:

Section 1350 Certifications

31.1

Certification of Timothy R. Lindsey

31.2

Certification of James F. Westmoreland

Section 1350 Certifications

32.1

Certification of Timothy R. Lindsey

32.2

Certification of James F. Westmoreland

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/ Timothy R. Lindsey
		Timothy R. Lindsey, its
		Chief Executive Officer
		Date: January 11, 2008


	By:	/s/ James F. Westmoreland
		James F. Westmoreland, its
		Chief Financial Officer
		Date: January 11, 2008