**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      DC 20549




**FORM
      10-QSB**




x
            QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
                ACT OF
                1934





For
      the
      quarterly period ended **July**  **31,
      2005**





o
            TRANSITION
                REPORT PURSUANT TO 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
                1934





For
      the
      transition period from ________ to ________




Commission
      file number:  **0-29213**




**HOUSE
      OF BRUSSELS CHOCOLATES INC.**


(Exact
      name of small business issuer as specified in its charter)




**NEVADA**
            
            **52-2202416**(State
                or other jurisdiction of
            
            (IRS
                Employer Identification No.)incorporation
                or organization)




**One
      Riverway, Suite 1700, Houston, Texas, 77056**


(Address
      of principal executive offices)





**(713)
      599-0800**


(Issuer’s
      telephone number)








State
      the
      number of shares outstanding of each of the issuer’s classes of common stock, as
      of the latest practicable date: **31,221,714
      Shares of $0.001 par value Common Stock outstanding as of September 5,
      2005.**





Transitional
      Small Business Disclosure Format (check one): Yes o  **No** x
















**HOUSE
      OF BRUSSELS CHOCOLATES INC.**





**FORM
      10-QSB**


**For
      The Quarter Ended July 31, 2005**





**INDEX**





PART
                I - FINANCIAL INFORMATIONITEM
                1.
            FINANCIAL
                STATEMENTSITEM
                2.
            MANAGEMENT'S
                DISCUSSION AND ANALYSIS OR PLAN OF
                OPERATIONSITEM
                3.
            CONTROLS
                AND PROCEDURESPART
                II--OTHER INFORMATIONITEM
                2.
            UNREGISTERED
                SALES OF EQUITY SECURITIES AND USE OF
                PROCEEDSITEM
                6.
            EXHIBITSSIGNATURES





Corporate Logo
              **HOUSE
                  OF BRUSSELS CHOCOLATES INC.**
                **FORM
                  10-QSB**
                **For
                  the Quarter Ended July 31, 2005**


**PART
      I - FINANCIAL INFORMATION**






**ITEM
                1.**
            **FINANCIAL
                STATEMENTS**






Consolidated
      Balance Sheets as of July 31, 2005 (unaudited) and April 30, 2005





Unaudited
      Consolidated Statements of Operations for the Three Months Ended July 31, 2005
      a nd
      2004





Unaudited
      Consolidated Statement of Changes in Shareholders’ Equity for the Three Months Ended
      July 31, 2005





Unaudited
      Consolidated Statements of Cash Flows for the Three Months Ended July 31, 2005 and
      2004





Notes
      to
      the Unaudited Consolidated Financial Statements


**HOUSE
          OF BRUSSELS CHOCOLATES INC.**
 
 
   **UNAUDITED
          CONSOLIDATED FINANCIAL STATEMENTS**
  **AS
          OF JULY 31, 2005 AND 2004**
  **AND
          FOR THE THREE MONTHS THEN ENDED**
  F-1
 Corporate Logo
                **HOUSE
                    OF BRUSSELS CHOCOLATES INC.**
                  **Table
                    of Contents**
  Consolidated
                  Balance Sheets as of July 31, 2005 (unaudited) and April 30,
                  2005
              F-3Unaudited
                  Consolidated Statements of Operations for the Three Months Ended
                  July 31,
                  2005 and July 31, 2004
              F-4Unaudited
                  Consolidated Statement of Changes in Shareholders’ Equity for the Three
                  Months Ended July 31, 2005
              F-5Unaudited
                  Consolidated Statements of Cash Flows for the Three MonthsEnded
                  July 31,
                  2005 and 2004
              F-6Notes
                  to the Unaudited Consolidated Financial Statements
              F-7
 
 F-2
 Corporate Logo
                **HOUSE
                    OF BRUSSELS CHOCOLATES INC.**
                  **Consolidated
                    Balance Sheets as of July 31, 2005 (unaudited) and April 30,
                    2005**
 **JULY
                  31, 2005**
              
              **APRIL
                  30, 2005**(unaudited)**ASSETS**Current
                  assetsCash
              
              $
              150,297
              
              $
              972,938Accounts
                  receivable, net
              
              
              868,942
              
              
              653,555Inventory
              
              
              2,486,207
              
              
              2,092,325Prepaid
                  expenses and other
              
              
              433,211
              
              
              366,762Total
                  current assets
              
              
              3,938,657
              
              
              4,085,580Property,
                  plant and equipment, net
              
              
              3,527,857
              
              
              3,391,294Goodwill
              
              
              1,141,790
              
              
              1,043,790Other
                  assets
              
              
              307,956
              
              
              360,823Total
                  assets
              
              $
              8,916,260
              
              $
              8,881,487**LIABILITIES
                  AND SHAREHOLDERS' EQUITY**Current
                  liabilitiesAccounts
                  payable
              
              $
              1,973,750
              
              $
              1,499,635Accrued
                  liabilities
              
              
              653,030
              
              
              743,545Current
                  maturities of long term debt
              
              
              984,375
              
              
              984,375Current
                  portion of capital lease obligations
              
              
              35,169
              
              
              35,169Due
                  to related parties
              
              
              455,804
              
              
              185,447Total
                  current liabilities
              
              
              4,102,128
              
              
              3,448,171Deferred
                  lease payments
              
              
              142,568
              
              
              144,944Capital
                  lease obligations
              
              
              65,392
              
              
              67,422Long-term
                  debt
              
              
              639,843
              
              
              193,731Total
                  liabilities
              
              
              4,949,931
              
              
              3,854,268Commitments
                  and contingenciesShareholders’
                  equity:Preferred
                  stock - $0.001 par value, 4,000,000 shares authorized, none
                  outstandingCommon
                  stock - $0.001 par value, 60,000,000 shares authorized, 31,201,828
                  and
                  31,182,597 shares issued and outstanding at July 31, 2005 and April
                  30,2005, respectively
              
              
              31,202
              
              
              31,183Additional
                  paid-in capital
              
              
              19,152,083
              
              
              18,709,155Accumulated
                  other comprehensive income - cumulative translation
                  adjustment
              
              
              509,298
              
              
              436,571Accumulated
                  deficit
              
              
              (15,726,254
              )
              
              (14,149,690
              )Total
                  shareholders’ equity
              
              
              3,966,329
              
              
              5,027,219Total
                  liabilities and shareholders’ equity
              
              $
              8,916,260
              
              $
              8,881,487
  The
        accompanying notes are an integral part of these consolidated financial
        statements.
 
 F-3
  Corporate Logo
              **HOUSE
                  OF BRUSSELS CHOCOLATES INC.**
                **Unaudited
                  Consolidated Statements of Operations for the**
                **Three
                  Months Ended July 31, 2005 and
                  2004**
  **FOR
                  THE THREE MONTHS ENDED JULY 31,****2005**
              
              **2004**Sales
              
              $
              964,754
              
              $
              797,284Cost
                  of goods sold
              
              
              1,308,939
              
              
              674,916Gross
                  margin
              
              
              (344,185
              )
              
              122,368Selling,
                  general and administrative expenses
              
              
              760,408
              
              
              733,091Loss
                  from operations
              
              
              (1,104,593
              )
              
              (610,723
              )Other
                  expenses:Interest
                  expense and costs of financing
              
              
              (463,515
              )
              
              (1,896
              )Loss
                  on disposal of assets
              
              
              (2,042
              )Foreign
                  transaction losses
              
              
              (6,414
              )
              
              (7,948
              )Total
                  other expenses
              
              
              (471,971
              )
              
              (9,844
              )Net
                  loss
              
              $
              (1,576,564
              )
              $
              (620,567
              )Basic
                  and diluted weighted-average number of common shares
                  outstanding
              
              
              31,183,433
              
              
              27,290,143Basic
                  and diluted net loss per common share
              
              $
              (0.05
              )
              $
              (0.02
              )
  The
        accompanying notes are an integral part of these consolidated financial
        statements.
 
 F-4
  Corporate Logo
              **HOUSE
                  OF BRUSSELS CHOCOLATES INC.**
                **Unaudited
                  Consolidated Statement of Changes in Shareholder's Equity for
                  the**
                **Three
                  Months Ended July 31,
                  2005**
  **COMMON
                  STOCK**
              
              **ADDITIONAL**
                **PAID
                  IN**
              
              **ACCUMULATED**
              
              **ACCUMULATED**
                **OTHER**
                **COMPREHENSIVE**
              
              **SHAREHOLDERS'****SHARES**
              
              **AMOUNT**
              
              **CAPITAL**
              
              **DEFICIT**
              
              **INCOME**
              
              **EQUITY**Balance
                  April 30, 2005
              
              
              31,182,597
              
              $
              31,183
              
              $
              18,709,155
              
              $
              (14,149,690
              )
              $
              436,571
              
              $
              5,027,219Net
                  loss
              
              
              
              
              
              
              
              
              
              
              
              (1,576,564
              )
              
              
              
              
              (1,576,564
              )Foreign
                  currency translation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              72,727
              
              
              72,727Comprehensive
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,503,837
              )Stock-based
                  compensation for services
              
              
              19,231
              
              
              19
              
              
              17,480
              
              
              
              
              
              
              
              
              17,499Options
                  issued under the 2004 stock option plan
              
              
              
              
              
              
              
              
              22,400
              
              
              
              
              
              
              
              
              22,400Beneficial
                  conversion feature granted in association with convertible
                  debt
              
              
              
              
              
              
              
              
              272,551
              
              
              
              
              
              
              
              
              272,551Warrants
                  issued in connection with convertible debt
              
              
              
              
              
              
              
              
              32,497
              
              
              
              
              
              
              
              
              32,497Escrow
                  released from reserve in connection with acquisition of DeBas Chocolates,
                  Inc.
              
              
              
              
              
              
              
              
              98,000
              
              
              
              
              
              
              
              
              98,000Balance
                  July 31, 2005
              
              
              31,201,828
              
              $
              31,202
              
              $
              19,152,083
              
              $
              (15,726,254
              )
              $
              509,298
              
              $
              3,966,329
  The
        accompanying notes are an integral part of these consolidated financial
        statements.
 
 F-5
 
 Corporate Logo
              **HOUSE
                  OF BRUSSELS CHOCOLATES INC.**
                **Unaudited
                  Consolidated Statements of Cash Flows for the**
                **Three
                  Months Ended July 31, 2005 and
                  2004**
  **FOR
                  THE THREE MONTHS ENDED JULY 31,****2005**
              
              **2004****CASH
                  FLOWS FROM OPERATING ACTIVITIES**Net
                  loss
              
              $
              (1,576,564
              )
              $
              (620,567
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activitiesDepreciation
                  and amortization
              
              
              87,941
              
              
              37,650Provision
                  for bad debts
              
              
              (14,719
              )
              
              -Compensatory
                  common stock, stock options and warrants
              
              
              39,899
              
              
              103,856Loss
                  on disposal of assets
              
              
              2,042
              
              
              -Amortization
                  of loan costs and beneficial conversion costs
              
              
              353,945
              
              
              -Deferred
                  rent
              
              
              2,376
              
              
              -Changes
                  in operating assets and liabilitiesAccounts
                  receivable
              
              
              (173,003
              )
              
              (659,037
              )Inventory
              
              
              (393,882
              )
              
              (678,733
              )Prepaid
                  expenses and other assets
              
              
              (74,525
              )
              
              74,207Accounts
                  payable and accrued liabilities
              
              
              434,795
              
              
              118,583Cash
                  flows from operations
              
              
              (1,311,695
              )
              
              (1,624,041
              )**CASH
                  FLOWS FROM INVESTING ACTIVITIES**Capital
                  expenditures
              
              
              (199,211
              )
              
              (558,676
              )Purchase
                  of Debas Chocolates, Inc.
              
              
              -
              
              
              (200,000
              )Cash
                  flows from investing activities
              
              
              (199,211
              )
              
              (758,676
              )**CASH
                  FLOWS FROM FINANCING ACTIVITIES**Proceeds
                  from notes payable and long-term debt
              
              
              458,158
              
              
              81,654Proceeds
                  from related party loans
              
              
              300,000
              
              
              58,707Repayments
                  of related party loans
              
              
              (29,643
              )
              
              (45,037
              )Payments
                  of obligations under capital leases
              
              
              (2,030
              )
              
              (77,654
              )Proceeds
                  from issuance of common stock and warrants
              
              
              -
              
              
              2,696,739Cash
                  flows from financing activities
              
              
              726,485
              
              
              2,714,409Effect
                  of foreign exchange rate changes on cash
              
              
              (38,220
              )
              
              (2,551
              )Increase
                  (decrease) in cash and cash equivalents
              
              
              (822,641
              )
              
              329,141Cash
                  and cash equivalents, beginning of the period
              
              
              972,938
              
              
              153,438Cash
                  and cash equivalents, end of the period
              
              $
              150,297
              
              $
              482,579
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
 
 F-6
 Corporate Logo
                **HOUSE
                    OF BRUSSELS CHOCOLATES INC.**
                  **Notes
                    to the Unaudited Consolidated Financial
                    Statements**
  **1.**
              **Nature
                  of Operations and Summary of Significant Accounting
                  Policies**
 
 House
        of
        Brussels Chocolates Inc. is a manufacturer of gourmet chocolates products
        that
        are offered through its four wholly owned subsidiaries Brussels Chocolates,
        Ltd.
        (“Brussels Chocolates”), House of Brussels Chocolates (USA), Ltd. (“HOBC USA”),
        DeBas Chocolate Inc. (DeBas), and ChocoMed Inc. (“ChocoMed’). House of Brussels
        Chocolates Inc. and its wholly owned subsidiaries are hereinafter collectively
        referred to as “We” or the “Company”). The Company, with manufacturing plants in
        Delta, B.C., Canada, and Fresno, California, has for more than 20 years offered
        a full line of quality chocolates manufactured to very strict standards.
        We
        specialize in manufacturing chocolate products for “private label” resale by
        major retailers. We are currently targeting customers that management believes
        have the capacity to make annual purchases of $1 million to $20 million.
        We
        formed ChocoMed in February 2004 to investigate the use of chocolate as a
        carrier for dietary supplements, functional foods and pharmaceutical compounds
        to treat various medical conditions. We acquired Debas in July 2004 to increase
        the Company’s ability to produce and market specialty chocolate products and to
        improve its manufacturing operations.
 
 Following
        is a summary of our significant accounting policies:
 
 **Basis
        of presentation**
 
 The
        accompanying consolidated financial statements have been prepared by the
        Company
        in accordance with generally accepted accounting principles in the United
        States
        for interim financial information. Certain information and disclosures normally
        included in financial statements prepared in accordance with generally accepted
        accounting principles have been condensed or omitted. In the opinion of the
        Company’s management, the unaudited consolidated financial statements contain
        all adjustments necessary (consisting of normal recurring adjustments) for
        a
        fair presentation of our financial position as of July 31, 2005 and the results
        of our operations for the period then ended. These financial statements should
        be read in conjunction with the audited financial statements and related
        notes
        of the Company included in our Form 10-KSB for the year ended April 30, 2005
        filed with Securities Exchange Commission on August 2, 2005.
 
 **Principles
        of consolidation**
 
 These
        consolidated financial statements include the accounts of House of Brussels
        Chocolates Inc. and all its wholly-owned subsidiaries after the elimination
        of
        all inter-company accounts and transactions.
 
 **Use
        of estimates**
 
 The
        preparation of financial statements in conformity with accounting principles
        generally accepted in the United States of America requires us to make estimates
        and assumptions that affect the reported amounts of 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.
 
 **Accounts
        Receivable**
 
 In
        the
        normal course of business, the Company extends credit to customers that satisfy
        its credit criteria. Because we sell the majority of our products to less
        than
        10 customers, our receivable risk is highly concentrated. We believe the
        customers to whom we sell are credit worthy. An allowance for doubtful accounts
        is determined through analysis of the aging of accounts receivable, assessments
        of collectibility based on historical trends, and an evaluation of the impact
        of
        current and projected economic conditions. The process by which the Company
        performs its analysis is conducted on a customer by customer basis, and takes
        into account, among other relevant factors, sales history, outstanding
        receivables, customer financial strength,. The Company monitors the
        collectibility of its accounts receivable on an ongoing basis by assessing
        the
        credit worthiness of its customers and evaluating the impact of reasonably
        likely changes in economic conditions that may impact credit risks. Estimates
        with regard to the collectibility of accounts receivable are reasonably likely
        to change in the future.
 
 F-7
 Corporate Logo
                **HOUSE
                    OF BRUSSELS CHOCOLATES INC.**
                  **Notes
                    to the Unaudited Consolidated Financial
                    Statements**
 
 **1.**
              **Nature
                  of Operations and Summary of Significant Accounting Policies,
                  continued**
 
 **Revenue
        Recognition**
 
 The
        Company records sales when all of the following criteria have been met: a
        valid
        customer order with a fixed price has been received; the product has been
        shipped within the required lead time; there is no further significant
        obligation to assist in the resale of the product; and collectibility is
        reasonably assured. Net sales include revenue from the sale of finished goods,
        net of allowances for trade promotions, consumer coupon programs and other
        sales
        incentives, and allowances and discounts associated with aged or potentially
        unsaleable products. Trade promotions and sales incentives primarily include
        reduced price features, merchandising displays, sales growth incentives,
        new
        item allowances and cooperative advertising
 
 **Inventories**
 
 The
        Company’s inventories are stated at the lower of cost or market value and are
        reduced by an allowance for slow-moving, excess, discontinued and shelf-life
        expired inventories. Our estimate for such allowance is based on our review
        of
        inventories on hand compared to estimated future usage and demand for our
        products. Such review encompasses not only potentially perishable inventories
        but also specialty packaging, much of it specific to certain private labels
        and
        holiday seasons. If actual future usage and demand for our products are less
        favourable than those projected by our review, inventory write-downs may
        be
        required. We closely monitor our inventory, both perishable and non-perishable,
        and related shelf and product lives. At July 31, 2005 and April 30, 2005
        our
        inventories were adjusted to recognize the impact of all write-downs and
        obsolescence. As such, we have no reserves against inventories at those
        dates.
 
 **Goodwill**
 
 Goodwill
        consists of the excess of purchase price over the fair market value of acquired
        assets and liabilities. Effective March 1, 2002, under SFAS 142 all
        goodwill with indefinite lives is no longer subject to amortization. SFAS
        142
        requires that an impairment test be conducted annually or in the event of
        an
        impairment indicator. Our test conducted in fiscal 2005 showed no impairment
        of
        our goodwill.
 
 **Foreign
        Currency Translation**
 
 Foreign
        exchange gains and losses, which result from the process of remeasuring foreign
        currency transactions into the appropriate functional currency, are included
        in
        other income and expenses, net in the Company’s Consolidated Statements of
        Operations. The translation of foreign currency financial statements into
        U.S.
        Dollars is included in other comprehensive income, which is a separate component
        of stockholders’ equity. Net foreign exchange losses, included in other income
        and expenses, were $31,370 and $11,606 for the years ended April 30, 2005
        and
        2004, respectively.
 
 Results
        of operations for foreign entities are translated using the average exchange
        rates during the period. For foreign entities, assets and liabilities are
        translated to U.S. dollars using a combination of the exchange rate in effect
        at
        the balance sheet date and historical rates, depending on the nature of the
        underlying assets and liabilities. Resulting translation adjustments are
        recorded as a component of other comprehensive loss.
 
 **Stock
        Based Compensation**
 
 During
        the fiscal year ended April 30, 2004, we elected a timely transition to “fair
        market value” based accounting for stock options in accordance with “Statement
        of Accounting Standard 148.” As a result, we currently recognize the fair market
        value of all options awarded to officers, elected directors and employees
        as
        compensation expense in the accompanying financial statements.
 
 **Segment
        Reporting**
  We
        monitor our operations on a consolidated basis and we have only one operating
        segment, manufacturing of chocolate products
 
 
 
 Corporate Logo
                **HOUSE
                    OF BRUSSELS CHOCOLATES INC.**
                  **Notes
                    to the Unaudited Consolidated Financial
                    Statements**
 **1.**
              **Nature
                  of Operations and Summary of Significant Accounting Policies, continued**
 
 **Reclassifications**
 
 Depreciation
        and amortization of manufacturing assets, previously presented as a separate
        line item in selling, general and administrative expenses during the three
        month
        period ended July 31, 2004, has been reclassified into cost of sales. Similarly,
        interest income, interest expense and foreign currency transaction adjustments,
        previously presented in selling, general and administrative expenses have
        been
        reclassified to other income and expenses. The impact of these reclassifications
        is as follows:
  **THREE
                  MONTHS**
                **ENDED**
                **JULY
                  31, 2004**Increase
                  in cost of sales
              
              $
              29,116(Decrease)
                  increase in selling, general and administrative expenses
              
              
              (38,960
              )Increase
                  (decrease) in other income and expenses
              
              $
              (9,844
              )
  **2.**
              **Significant
                  Events**
 
 In
        May
        2004, we executed an agreement with Walgreens for the sale of private label
        chocolates using our “Truffelinos” and “Truffelinos Lite” trademarks. As part of
        the agreement, Walgreens guaranteed that it would purchase not less than
        $3,000,000 in product annually for a two (2) year period. As of July 31,
        2005
        we’ve completed $1,399,000 in sales to Walgreens. Management believes sales
        during its second annual period will exceed $3,000,000 and will result in
        compliance with the minimum purchase requirement for the contract term as
        a
        whole. During December 2004, we entered into an exclusive three (3) year
        agreement with Schokinag Chocolate North America Inc. to provide manufacturing,
        co-packing, marketing and distribution services with respect to its line
        of
        gourmet drinking chocolates. We began shipping product under this agreement
        during August 2005. Large customers such as Walgreens, Laura Secord, Nordstrom,
        Whole Foods and Costco now represent a significant portion of our sales.
        We
        continue to focus our marketing efforts at large companies with the objective
        of
        reducing our selling expenses as a percentage of our revenues. This strategy,
        however, makes us more dependent on a few, large customers.
 
 In
        July
        2004, we acquired the operations of DeBas Chocolate Inc. located in Fresno,
        California. We undertook the acquisition of DeBas to expand our manufacturing
        capacity, increase revenues, enhance product lines and add a variety of highly
        recognizable gourmet trademarks to our family of offerings. As part of the
        transaction, we acquired a manufacturing and production facility. In the
        DeBas
        transaction, we acquired all of the outstanding shares of DeBas from Guy
        Debbas,
        its sole shareholder. We agreed to a purchase price of $1,130,000 payable
        $200,000 in cash and 324,042 shares of our restricted common stock valued
        at
        $930,000. Of the purchase price tendered, 226,481 shares of our common stock
        were held in escrow awaiting distribution to either Mr. Debbas or cancellation
        by the Company. During July 2005, Mr. Debbas achieved a $3,000,000 minimum
        revenue guarantee undertaken as part of the purchase agreement. As a result,
        $98,000, payable in 34,146 of the shares previously held in escrow, becomes
        distributable to Mr. Debbas. Accordingly, we have increased the goodwill
        recognized on our purchase of DeBas by this amount. Our goodwill allocation
        however, remains subject to revision based upon final payment of liabilities
        absorbed in the purchase.
 
 During
        the period from November 2004 through February 2005, we vacated a 32,000
        square
        foot plant near downtown Vancouver and moved to approximately 80,000 square
        feet
        of modern office, manufacturing and inventory warehouse space located in
        an
        industrial community in Delta, British Columbia. Though previous capacity
        was
        adequate to meet historic needs, our prior facilities did not provide the
        opportunity to reengineer work flows or allow the most effective layout of
        our
        manufacturing equipment. Our new facilities substantially increase our capacity.
        We believe the layout of these facilities more exactly meets our needs and
        will
        result in cost savings arising from efficiencies in workflow, maintenance
        and
        inventory management. In addition, in the December 1, 2004 we closed our
        manufacturing facilities at 2065 Oakdale Avenue, San Francisco, California.
        The
        shutdown of this operating location was undertaken to reduce manufacturing
        costs
        and consolidate domestic west coast operations at our production facilities
        in
        Fresno, California. The inventories and manufacturing assets previously located
        at the San Francisco plant were reallocated to support operations at both
        our
        Fresno and Delta, British Columbia locations.
 
 
  Corporate Logo
                **HOUSE
                    OF BRUSSELS CHOCOLATES INC.**
                  **Notes
                    to the Unaudited Consolidated Financial
                    Statements**
 **3.**
              **Liquidity**
 
 During
        the years ended April 30, 2005 and 2004, we have experienced negative operating
        results that we are taking actions to address. During 2005 and 2004, our
        net
        losses were $4,040,598 and $2,174,257, respectively and cash used in operations
        was $4,461,562 and $2,174,257, respectively. We have financed our operations
        using cash generated from operations, sales of our common stock, the exercise
        of
        share purchase warrants, vendor credit and debt financing.
 
 Cash
        required for on-going operations has increased significantly. Our need for
        raw
        materials and our investment in inventories and equipment has become sharply
        higher and we expect those needs to expand even further over the next six
        months. Though we seek customers with non-seasonal demand, our products sales
        still reflect a strong element of holiday purchasing. As a result, we face
        significant cash needs during the periods in which we generate the least
        revenue. Further, our acquisition of DeBas resulted in the use of cash and
        the
        absorption of additional liabilities.
 
 To
        address our cash needs on March 29, 2005, we executed a convertible debt
        facility with Laurus Master Fund, Ltd. granting us access to borrow up to
        $6,000,000. This financing consists of a $3,500,000 secured term loan (the
“Term
        Note”) and a $2,500,000 secured revolving note (the “Revolving Note”). The
        Revolving Note is effectuated through a $1,000,000 convertible minimum borrowing
        note and provides for advances up to 90% of eligible accounts receivable.
        To the
        extent we repay the amount outstanding under the Revolving Note and/or Laurus
        converts amounts due under the Revolving Note into Common Stock, we may
        re-borrow or make additional borrowings, provided that the aggregate amount
        outstanding may not exceed our eligible accounts receivable. At closing,
        we
        borrowed a total of $4,500,000 consisting of $3,500,000 million under the
        Term
        Note and $1,000,000 million under the Revolving Note. At July 31, 2005,
        $1,042,000 remained available for borrowing under the Revolving Note. Borrowings
        under the Laurus debt facility are secured by all of our assets.
 
 On
        June
        28, 2005, we also entered into two convertible promissory notes totaling
        $300,000 with our chief executive officer and a greater than 10% shareholder.
        The proceeds of the notes provided extra working capital for use during the
        onset of our busy season. The amount of this indebtedness was matched by
        an
        additional $300,000 in over advances under our Revolving Note with Laurus.
 
 
 **4**
              **Income
                  Taxes**
 
 The
        difference between the income tax benefit in the accompanying statement of
        operations and the amount that would result if the U.S. Federal statutory
        rate
        of 34% were applied to pre-tax loss for the three months ended July 30, 2005
        and
        2004 is due primarily to an increase in the valuation allowance offset against
        deferred tax assets. The valuation allowance increased with increased net
        operating losses because the Company is unable to demonstrate the benefit
        from
        utilization of net operating loss carryforwards is more likely than
        not.
  At
        July
        31, 2005, for United States federal income tax and alternative minimum tax
        reporting purposes, the Company has approximately $12,200,000 of unused net
        operating losses available for carryforward to future years. The benefit
        from
        carryforward of such net operating losses will expire in various years through
        2025. The benefit from utilization of net operating loss carryforwards could
        be
        subject to limitations if significant future ownership changes occur in the
        Company. The Company believes that a significant portion of its unused net
        operating loss carryforwards will never be utilized due to expiration or
        limitations on use due to ownership changes.
 
 
 **5.**
              **Stockholders’
                  Equity**
 
 The
        Company issued a total of 19,231 shares of common stock during the three
        month
        period ended July 31, 2005. During the same period, 60,000 share purchase
        warrants were issued, no warrants expired and no warrants were exercised.
        Shares
        and warrants were granted in connection with the issuance of convertible
        debt
        and to consultants for stock-based compensation. The fair value of each warrant
        was estimated on the date of grant using the Black-Scholes option-pricing
        model
        and the resulting equity value or expense has been included in the accompanying
        financial statements.
 
 
 Corporate Logo
                **HOUSE
                    OF BRUSSELS CHOCOLATES INC.**
                  **Notes
                    to the Unaudited Consolidated Financial
                    Statements**
 **6**
              **Related
                  Party Transactions**
 
 **Grant
        Petersen Loan**
 
 On
        June
        28, 2005, Grant Petersen, our Chief Executive Officer, President and Director,
        entered into a convertible promissory note with us in the principal amount
        of
        $50,000. The note bears interest at the Wall Street Journal prime rate plus
        2%.
        At the noteholder’s option, amounts due under this note may be converted to
        shares of our common stock at a price of $.90 per share. The principal amount
        of
        the note is due and payable in two equal monthly installments of principal
        and
        interest, with the first monthly installment due within thirty days after
        the
        date on which (a) the amount of outstanding loans (as defined in the Security
        Agreement between the Company and Laurus first becomes equal to or less than
        the
“Formula Amount” as set forth in the Security Agreement and (b) no event of
        default has occurred and is continuing under any obligations owed to
        Laurus.
 
 **Richard
        Siemens**
 
 In
        January 2004, Mr. Siemens, one of our directors and a greater than 10%
        shareholder, forwarded $99,844 to fund the issuance of certain share purchase
        warrants. Subsequent to forwarding the funds however, Mr. Siemens elected
        not to
        exercise. On September 15, 2004, Mr. Siemens used the amounts then payable
        to
        him, including interest, to offset the purchase price of 59,716 investment
        units. Each investment unit consisted of one share of our common stock at
        a
        purchase price of $1.75 and one share purchase warrant entitling the Mr.
        Siemens
        to purchase one share of our common stock at a price of $1.85 per share during
        the period from issuance until September 7, 2005.
 
 On
        June
        28, 2005, Mr. Siemens entered into a convertible promissory note with us
        in the
        principal amount of $250,000. The note bears interest at the Wall Street
        Journal
        prime rate plus 2%. At the noteholder’s option, amounts due under this note may
        be converted to shares of our common stock at a price of $.90 per share.
        The
        principal amount of the note is due and payable in two equal monthly
        installments of principal and interest, with the first monthly installment
        due
        within thirty days after the date on which (a) the amount of outstanding
        loans
        (as defined in the Security Agreement between the Company and Laurus first
        becomes equal to or less than the “Formula Amount” as set forth in the Security
        Agreement and (b) no event of default has occurred and is continuing under
        any
        obligations owed to Laurus.
 
 
 **Theodore
        Labella**
 
 On
        July
        30, 2004, Mr. Labella purchased 67,000 shares of our common stock at a price
        of
        $2.00 each under the terms of a private placement made to "accredited
        investors", as that term is defined in Rule 501 of Regulation D of the
        Securities Act. The Company received $134,000 in proceeds from this
        sale.
 
 On
        August
        18, 2004 and October 8, 2004 Mr. Labella purchased 85,000 and 110,000 shares
        of
        our common stock, respectively, pursuant to the exercise of previously issued
        share purchase warrants. The warrants were exercisable at a price of $0.65
        per
        share, for total proceeds of $126,750. In connection with his second warrant
        exercise, we also issued Mr. Labella share purchase warrants for 10,000 shares
        of our common stock at an exercise price of $3.00 per share until September
        28,
        2006.
 
 During
        February 2005, Mr. Labella advanced a total of $125,375 to the Company to
        assist
        with cash flow. The funds were advanced as a short-term loan. During April
        2005
        this indebtedness, together with accrued interest was converted into 147,664
        shares of our restricted common stock at a conversion price of $0.90 per
        share.
 
 **Evan
        Baergen**
 
 In
        December 2003, Evan Baergen (a former director and officer of the Company)
        advanced $88,055 to us to assist with cash flow needs. No formal agreement
        existed regarding the advance. This loan was unsecured with no fixed date
        of
        repayment. During May 2004, the total amount due Mr. Baergen was offset by
        his
        exercise of stock purchase warrants for shares of our common at a price of
        $0.30
        each. The shares issued in connection with this exercise were endorsed with
        a
        restrictive legend confirming that the securities could not be resold without
        registration under the Securities Act or an applicable exemption from the
        registration requirements of the Securities Act.
 
 
 
 Corporate Logo
                **HOUSE
                    OF BRUSSELS CHOCOLATES INC.**
                  **Notes
                    to the Unaudited Consolidated Financial
                    Statements**
 **6.**
              **Related
                  Party Transactions,
                  continued**
 
 **William
        Donovan, M.D.**
 
 We
        presently have a Consulting Agreement with Dr. William Donovan, our Chairman
        of
        the Board and Director, to provide consulting services regarding the Company's
        product development. This Agreement is for a period of 24 months and terminates
        on November 6, 2005. Under the terms of the Agreement, Dr. Donovan received
        a
        Share Purchase Warrant for 260,000 shares of our common stock at a warrant
        exercise price of $1.02 per share. Dr. Donovan received 160,000 shares of
        common
        stock upon partial exercise on July 30, 2004 and the remaining balance expired
        on November 6, 2004. The fair value of each warrant was estimated on the
        date of
        grant using the Black-Scholes option-pricing model and the resulting equity
        value or expense has been included in the accompanying financial
        statements.
 
 **Directors**
 
 During
        February and March 2004, a total of 1,520,000 share purchase warrants were
        issued to four (4) members of our Board of Directors, two of which are also
        officers of the Company. All warrants were issued in exchange for services.
        Our
        Chief Financial Officer, Robert Wesolek, received warrants for the purchase
        of
        500,000 shares at an exercise price of $1.65 which expire February 23, 2009.
        Our
        Former Chief Operating Officer, John Veltheer, received warrants for the
        purchase of 500,000 shares of our common stock at an exercise price of $1.85
        which expire March 12, 2009. Our Director, Harold Kahn, received warrants
        for
        the purchase of 260,000 shares of our common stock at an exercise price of
        $1.58
        which expire March 31, 2009. The residual warrants relate to a Consulting
        Agreement with Dr. William Donovan, our Chairman of the Board, to provide
        consulting services regarding the Company's product development. This Agreement
        is for a period of 24 months and terminates on November 6, 2005. Under the
        terms
        of the Agreement, Dr. Donovan received a share purchase warrant for 260,000
        shares of our common stock at a warrant exercise price of $1.02 per share.
        The
        fair value of each warrant was estimated on the date of grant using the
        Black-Scholes option-pricing model and the resulting equity value or expense
        has
        been included in the accompanying financial statements.
 
 On
        July
        30, 2004, we issued 260,000 shares of our common stock to two members of
        our
        Board of Directors pursuant to the exercise of previously issued share purchase
        warrants. Dr. William Donovan, our Director and Chairman, received 160,000
        of
        these shares, and Harold Kahn, our Director, received 100,000 of these shares.
        The warrants had exercise prices ranging from $1.02 to $1.58. We received
        $321,200 in total proceeds from these exercises. In connection with these
        transactions, we also issued share purchase warrants for 260,000 shares of
        common stock to these Directors at an exercise price of $3.00 per share.
        Dr.
        William Donovan, our Director and Chairman, received one of these warrants
        for
        160,000 shares which will expire on August 3, 2006. Mr. Harold Kahn, our
        Director, received one of these warrants for 100,000 shares which will expire
        on
        March 31, 2009.
 
 On
        November 22, 2004, Mr. Dale Frey received warrants for the purchase of 100,000
        shares of our common stock at an exercise price of $1.30 per share until
        November 22, 2005, and warrants for the purchase of 60,000 shares of our
        common
        stock at an exercise price of $1.45 per share until November 22, 2007. Mr.
        Frey
        was also granted 100,000 stock options under our 2004 Stock Option Plan.
        These
        options are exercisable at $1.40 per share until November 22, 2005.
 
 On
        March
        3, 2005, Dr. Donovan, Mr. Kahn and Mr. Frey were each granted 50,000 stock
        options under our 2004 Stock Option Plan. These options are exercisable at
        $0.91
        per share until March 3, 2007.
 
 On
        May
        17, 2005, Mr. Corbin Miller was granted an option to purchase 50,000 shares
        of
        our common stock under the terms of our 2004 Stock option Plan. These options
        are exercisable at $.91 per share until May 17, 2007.
 
 **7.**
              **Cash
                  Flow Information**
 
 **Non-Cash
        Investing and Financing Activities**
 
 During
        the three months ended July 31, 2004, we acquired DeBas Chocolate Inc. in
        a
        transaction that involved cash payments of $200,000, the issuance of shares
        of
        our restricted common stock and the absorption of debt and
        liabilities.
 
 
 Corporate Logo
                **HOUSE
                    OF BRUSSELS CHOCOLATES INC.**
                  **FORM
                    10-QSB**
                  **For
                    the Quarter Ended July 31, 2005**


ITEM
                2.
            MANAGEMENT'S
                DISCUSSION AND ANALYSISOR
                PLAN OF OPERATIONS




The
      following discussion and analysis of the financial condition and results of
      operations of the Company should be read in conjunction with the Company’s
      unaudited consolidated financial statements and related notes included elsewhere
      in this report and our Form 10-KSB for the year ended April 30, 2005 filed
      with
      Securities Exchange Commission on August 2, 2005.




**FORWARD
      LOOKING STATEMENTS**





The
      information contained in this Form 10-QSB contains certain forward-looking
      statements within the meaning of Section 27A of the Securities Act of 1933,
      as
      amended, Section 21E of the Securities Exchange Act of 1934, as amended, and
      the
      Private Securities Litigation Reform Act of 1995. These forward-looking
      statements involve risks and uncertainties, including among other things,
      statements regarding the Company's capital needs, business strategy and
      expectations. Any statement which does not contain an historical fact may be
      deemed to be a forward-looking statement. In some cases, you can identify
      forward-looking statements by terminology such as "may", "will", "should",
      "expect", "plan", "intend", "anticipate", "believe", "estimate", "predict",
      "potential" or "continue", the negative of such terms or other comparable
      terminology. In evaluating forward looking statements, you should consider
      various factors, including the risk factors outlined in our latest Form 10-KSB,
      and, from time to time, in other reports the Company files with the U.S.
      Securities and Exchange Commission (“SEC). These factors may cause the Company's
      actual results to differ materially from any forward-looking statement. The
      Company disclaims any obligation to publicly update these statements, or
      disclose any difference between its actual results and those reflected in these
      statements.





**OVERVIEW**





House
      of
      Brussels Chocolates Inc. (“We”, the “Company” or “House of Brussels”) owns and
      operates Brussels Chocolates Ltd., House of Brussels Chocolates (USA), Ltd.
      (“HOBC USA”) and DeBas Chocolate Inc. (DeBas) (collectively referred to as
“Brussels Chocolates”). We are an established manufacturer of gourmet chocolate
      products with plants in Delta, B.C., Canada, and Fresno, California. For more
      than 20 years we’ve offered a full line of quality chocolates, made from
      high-grade ingredients. Our chocolate products have a long history of customer
      acceptance and are manufactured to strict standards.





We
      specialize in manufacturing chocolate products for “private label” resale and we
      target customers with the capacity to make annual purchases of $1 million to
      $20
      million. We believe our expertise in formulating custom chocolate offerings
      and
      providing turnkey packaging solutions sets us apart. In early 2002, we primarily
      marketed our products directly to consumers through 13 high-end retail outlets.
      Based on our assessment of market potential and costs, we redirected our efforts
      to pursue private label and wholesale distribution customers exclusively. Our
      clients represent a diverse group of retailers and wholesalers.





Effective
      March 29, 2005, we entered into a $6,000,000 convertible financing facility
      with
      Laurus Master Fund, Ltd. (“Laurus" and the “Credit Facility”). The Credit
      Facility consists of (i) a $3,500,000 Secured Convertible Note (the “Secured
      Note”), (ii) a Secured Convertible Minimum Borrowing Note (the “Minimum
      Borrowing Note”) and (iii) and a $2,500,000 Secured Revolving Note (the “Secured
      Revolving Note”) (the Secured Note, Minimum Borrowing Note and Secured Revolving
      Note are collectively referred to herein as the “Notes”). The Notes are secured
      by a security interest in substantially all of the assets and intellectual
      property of the Company and its subsidiaries. The Secured Note matures three
      (3)
      years from the date of issuance, and is convertible into common stock of the
      Company, under certain conditions, at a price of $0.88 (the “Fixed Conversion
      Price”). The Secured Note has an interest rate equal to the Wall Street Journal
      prime rate plus 2%, reducible to as low as zero if the Company’s share price
      rises in accordance with certain benchmarks. Under the terms of the Secured
      Note, the Company began making monthly payments of $109,375.00, plus accrued
      and
      unpaid interest beginning August 1, 2005. Under certain conditions set forth
      in
      the Secured Note, Laurus will be required to convert into shares of common
      stock
      all or a portion of their monthly payment. In the event that all or a portion
      of
      the monthly payment is paid in cash, then the Company must pay Laurus 102%
      of
      such amount.


Corporate Logo
                **HOUSE
                    OF BRUSSELS CHOCOLATES INC.**
                  **FORM
                    10-QSB**
                  **For
                    the Quarter Ended July 31, 2005**


In
      connection with this financing, the Company has issued Laurus a common stock
      purchase warrants to purchase up to 1,560,000 shares of its common stock at
      a
      price of $1.20 per share (the "Warrants"). The Warrants are exercisable until
      seven (7) years from the date of issuance. Pursuant to the terms of the Credit
      Facility, the Company paid a closing payment of 3.6% of the total amount
      available under the facility to Laurus which represents a fee of 1.2% per year.





In
      May
      2004, we executed an agreement with Walgreens for the sale of private label
      chocolates using our “Truffelinos” and “Truffelinos Lite” trademarks. As part of
      the agreement, Walgreens guaranteed that it would purchase not less than
      $3,000,000 in product annually for a two (2) year period. As of September 1,
      2005, we’ve completed $1,428,000 in sales to Walgreens and have purchase orders
      in hand for an additional $959,000 in revenues under the terms of the agreement.
      Management believes sales during its second annual period will exceed $3,000,000
      and will result in compliance with the minimum purchase requirement for the
      contract as a whole. During December 2004, we entered into an exclusive three
      (3) year agreement with Schokinag Chocolate North America Inc. to provide
      manufacturing, co-packing, marketing and distribution services with respect
      to
      its line of gourmet drinking chocolates. We began shipping product under this
      agreement during August 2005. Large customers such as Walgreens, Laura Secord,
      Nordstrom, Whole Foods and Costco now represent a significant portion of our
      sales. We continue to focus our marketing efforts at large companies with the
      objective of reducing our selling expenses as a percentage of our revenues.
      This
      strategy, however, makes us more dependent on a few, large
      customers.





In
      July
      2004, we acquired the operations of DeBas Chocolate Inc. located in Fresno,
      California. We undertook the acquisition of DeBas to expand our manufacturing
      capacity, increase revenues, enhance product lines and add a variety of highly
      recognizable gourmet trademarks to our family of offerings. As part of the
      transaction, we acquired a manufacturing and production facility. In the DeBas
      transaction, we acquired all of the outstanding shares of DeBas from Guy Debbas,
      its sole shareholder. We agreed to a purchase price of $1,130,000 payable
      $200,000 in cash and 324,042 shares of our restricted common stock valued at
      $930,000. Of the purchase price tendered, 226,481 shares of our common stock
      were held in escrow awaiting distribution to either Mr. Debbas or cancellation
      by the Company. During July 2005, Mr. Debbas achieved a $3,000,000 minimum
      revenue guarantee undertaken as part of the purchase agreement. As a result,
      $98,000, payable in 34,146 of the shares previously held in escrow, becomes
      distributable to Mr. Debbas. Our goodwill allocation remains subject to revision
      based upon final payment of liabilities absorbed in the purchase.





During
      the period from November 2004 through February 2005, we vacated a 32,000 square
      foot plant near downtown Vancouver and moved to approximately 80,000 square
      feet
      of modern office, manufacturing and inventory warehouse space located in an
      industrial community in Delta, British Columbia. Though previous capacity was
      adequate to meet historic needs, our prior facilities did not provide the
      opportunity to reengineer work flows or allow the most effective layout of
      our
      manufacturing equipment. Our new facilities substantially increase our capacity.
      We believe the layout of these facilities more exactly meets our needs and
      will
      result in cost savings arising from efficiencies in workflow, maintenance and
      inventory management. In addition, on December 1, 2004 we closed our
      manufacturing facilities at 2065 Oakdale Avenue, San Francisco, California.
      The
      shutdown of this operating location was undertaken to reduce manufacturing
      costs
      and consolidate domestic west coast operations at our production facilities
      in
      Fresno, California. The inventories and manufacturing assets previously located
      at the San Francisco plant were reallocated to support operations at both our
      Fresno and Delta, British Columbia locations.




**CRITICAL
      ACCOUNTING POLICIES AND ESTIMATES**




The
      Company’s discussion and analysis of its financial condition and results of
      operations are based upon the Company’s financial statements, which have been
      prepared in accordance with accounting principles generally accepted in the
      United States of America. The preparation of these financial statements requires
      the Company to make estimates and judgments that affect the reported amounts
      of
      assets, liabilities, revenues and expenses and the related disclosures.
      Estimates and assumptions include, but are not limited to, the carrying value
      of
      accounts receivable from customers, inventories, the useful lives of fixed
      assets, goodwill, and other intangible assets, contingencies and litigation.
      The
      Company bases its estimates on analyses which form the basis for making
      judgments about the carrying values of assets and liabilities that are not
      readily apparent from other sources. Actual results may differ from these
      estimates.








Corporate Logo
                **HOUSE
                    OF BRUSSELS CHOCOLATES INC.**
                  **FORM
                    10-QSB**
                  **For
                    the Quarter Ended July 31, 2005**


Although
      not all inclusive, we believe that the following represent the more critical
      estimates and assumptions used in the preparation of our financial
      statements:




Accounts
      Receivable — In the normal course of business, the Company extends credit to
      customers that satisfy its credit criteria. Because we sell the majority of
      our
      products to less than 10 customers, our receivable risk is highly concentrated.
      We believe the customers to whom we sell are credit worthy. An allowance for
      doubtful accounts is determined through analysis of the aging of accounts
      receivable, assessments of collectibility based on historical trends, and an
      evaluation of the impact of current and projected economic conditions. The
      process by which the Company performs its analysis is conducted on a customer
      by
      customer basis, and takes into account, among other relevant factors, sales
      history, outstanding receivables, customer financial strength,. The Company
      monitors the collectibility of its accounts receivable on an ongoing basis
      by
      assessing the credit worthiness of its customers and evaluating the impact
      of
      reasonably likely changes in economic conditions that may impact credit risks.
      Estimates with regard to the collectibility of accounts receivable are
      reasonably likely to change in the future.




Revenue
      Recognition — The Company records sales when all of the following criteria have
      been met: a valid customer order with a fixed price has been received; the
      product has been shipped within the required lead time; there is no further
      significant obligation to assist in the resale of the product; and
      collectibility is reasonably assured. Net sales include revenue from the sale
      of
      finished goods, net of allowances for trade promotions, consumer coupon programs
      and other sales incentives, and allowances and discounts associated with aged
      or
      potentially unsaleable products. Trade promotions and sales incentives primarily
      include reduced price features, merchandising displays, sales growth incentives,
      new item allowances and cooperative advertising




Inventories
      — The Company’s inventories are stated at the lower of cost or market value and
      are reduced by an allowance for slow-moving, excess, discontinued and shelf-life
      expired inventories. Our estimate for such allowance is based on our review
      of
      inventories on hand compared to estimated future usage and demand for our
      products. Such review encompasses not only potentially perishable inventories
      but also specialty packaging, much of it specific to certain private labels
      and
      holiday seasons. If actual future usage and demand for our products are less
      favourable than those projected by our review, inventory write-downs may be
      required. We closely monitor our inventory, both perishable and non-perishable,
      and related shelf and product lives. At July 31, 2005 and April 30, 2005 our
      inventories were adjusted to recognize the impact of all write-downs and
      obsolescence. As such, we have no reserves against inventories at those
      dates.




Goodwill
      — Goodwill consists of the excess of purchase price over the fair market value
      of acquired assets and liabilities. Effective March 1, 2002, under SFAS 142
      all goodwill with indefinite lives is no longer subject to amortization. SFAS
      142 requires that an impairment test be conducted annually or in the event
      of an
      impairment indicator. Our test conducted in fiscal 2005 showed no impairment
      of
      our goodwill.




Other
      accounting estimates inherent in the preparation of the Company’s financial
      statements include estimates associated with its evaluation of the
      recoverability of deferred tax assets, as well as those used in the
      determination of liabilities related to litigation and taxation. Various
      assumptions and other factors underlie the determination of these significant
      estimates. The process of determining significant estimates is fact specific
      and
      takes into account factors such as historical experience, current and expected
      economic conditions, and product mix. The Company constantly re-evaluates these
      significant factors and makes adjustments where facts and circumstances dictate.
      Historically, actual results have not significantly deviated from those
      determined using the estimates described above.




The
      Company is involved in litigation with Stephen Whittington and other matters
      incidental to its business, the disposition of which is expected to have no
      material effect on the Company’s financial position or results of operations. It
      is possible, however, that future results of operations for any particular
      quarterly or annual period could be materially affected by changes in the
      Company’s assumptions related to these proceedings.








Corporate Logo
              **HOUSE
                  OF BRUSSELS CHOCOLATES INC.**
                **FORM
                  10-QSB**
                **For
                  the Quarter Ended July 31, 2005**


**RESULTS
      OF OPERATIONS**





**Revenues**





Our
      sales
      revenues for the three months ended July 31, 2005 increased $167,000 or 22%
      when
      compared to revenues generated during the same period last year. Sales for
      the
      three month periods ended July 31, 2005 and 2004 were $965,000 and $797,000,
      respectively. During the prior fiscal year, we began to generate revenues
      related to newly targeted private label customers. As such, revenues for the
      three month period ended July 31, 2004 included approximately $437,000 in sales
      generated by two such customers. The expansion in our sales revenues during
      the
      three month period ended July 31, 2005, can be attributed to the maintenance
      and
      a moderate growth in “pre-busy season” sales from our newly established customer
      focus.





**Cost
      of Goods Sold**





Cost
      of
      goods sold for the three month periods ended July 31, 2005 and 2004 were
      $1,309,000 and $675,000, respectively. When compared to the same period during
      the prior fiscal year, costs of goods sold for the three month period ended
      July
      31, 2005 increased $634,000 or 94%. For the fiscal quarter ended July 31, 2005,
      our costs of goods sold exceeded the revenues we generated by $344,000. As
      a
      result, our gross margin percentage when compared to the three month period
      ended July 31, 2004 fell 50% from a positive gross margin of 14% to a negative
      margin of 36%.





In
      addition to lower margins resulting from seasonally slow sales, our gross margin
      was negatively impacted by costs we incurred in non-productive labor associated
      with the expansion of crews required to support busy season demand. Included
      within those costs were time and expense incurred in the training of personnel
      associated with the development and roll-out of our new nutritional and energy
      bar product lines. In addition, during this period we’ve successfully installed
      and established production facilities related to our drinking chocolate line.
      We
      also incurred waste, non-productive labor and excess idle-time associated with
      equipment set-up and downtime, initial runs of new product formulations and
      packaging.





**Selling,
      General and Administrative expenses**





Selling
      expenses for the three month periods ended July 31, 2005 and 2004 were $281,000
      and $297,000 respectively. When compared to the same period in the prior year,
      current fiscal quarter selling expense declined by 5% or $16,000. For the three
      month period ended July 31, 2005, we continued to invest sales resources in
      approximately the same categories as in the same period during the prior year.
      Approximately 50% of our expenditures supported sales compensation and brokerage
      fees, while the majority of our residual expense supported promotion,
      advertising, travel and attendance at meetings and trade shows.





General
      and administrative expenses for the three month periods ended July 31, 2005
      and
      2004 were $479,000 and $437,000, respectively. General and administrative
      expenses for the current fiscal quarter increased by $42,000 or 10% over the
      general and administrative expense reported for the three month period ending
      July 31, 2004. During our prior fiscal year however, the amounts we incurred
      for
      general and administrative expenses rose sharply in nearly all categories as
      a
      result of our growth and expansion. Most significantly, during the three month
      periods ended July 31, 2005 and 2004, we spent $272,000 or 57% and $295,000
      or
      67% respectively, of our general and administrative expense on salaries,
      benefits, consulting, and directors’ fees.





The
      Company is currently focused on ways in which it can significantly reduce the
      amounts it incurs in selling, general and administrative expenses.








Corporate Logo
              **HOUSE
                  OF BRUSSELS CHOCOLATES INC.**
                **FORM
                  10-QSB**
                **For
                  the Quarter Ended July 31, 2005**


**Interest
      Expense and Costs of Financing**





During
      the three months ended July 31, 2005 we incurred $464,000 in interest expense
      and costs of financing. None of the indebtedness giving rise to these expenses
      existed during the three month period ended July 31, 2004. Accordingly, nearly
      the entire amount represents an increase over the same period last year. Of
      the
      amount incurred, $76,000 relates to the recognition of beneficial conversion
      features granted in connection with convertible debt undertaken with related
      parties. Significantly all of the remaining expense relates to amounts incurred
      in connection with our indebtedness with Laurus. Of that amount, approximately,
      $94,000 represents interest paid in cash and $294,000 relates to the non-cash
      amortization of loan costs and discounts.





**Net
      Loss**





Our
      net
      loss for the three month period was $1,577,000. This loss reflects the impact
      of
      our negative gross margin and of increased selling, general & administrative
      expense resulting from our ongoing investment to support our expansion. Also
      included in this loss is approximately $370,000 in non-cash cost related to
      the
      recognition of the value of beneficial conversion features and the amortization
      of discounts associated with our indebtedness.








**FINANCIAL
      CONDITION**





At
      July
      31, 2005, our total assets were $8,916,000. During the three month period ended
      July 31, 2005 our receivables increased by $215,000 or 33%, our inventories
      increased by $394,000 or 19%, and our accounts payable increased by $474,000
      or
      32%. Increases in receivables and inventories relate to the onset of demand
      for
      our upcoming busy season. Increases in accounts payable relate to purchasing
      to
      support busy season production, and an increased aging in certain of our
      accounts. Our current ratio (the ratio of current assets to current
      liabilities), is .96 at July 31, 2005 which represents a decline from 1.18
      at
      April 30, 2005. In the event we are unable to increase our gross margins, reduce
      our costs and/or generate sufficient additional revenues to offset our increased
      costs, which include significantly increased non-cash finance related expense,
      we may continue to sustain losses which would have a negative impact on our
      financial condition.





**LIQUIDITY
      AND CAPITAL RESOURCES**





During
      the three month period ended July 31, 2005 we incurred net losses of $1,577,000.
      During that period, our operations were financed using cash generated from
      operations, vendor credit and debt financing. Costs associated with our expanded
      production facilities, asset purchases, enhancement of personnel, and the
      buildup of our inventories and accounts receivable contributed heavily to the
      cash required by our operations during this period. In total, for the three
      months ended July 31, 2005, our investing activities consumed $199,000, and
      our
      operations consumed $1,312,000 in excess of amounts generated by product sales.
      This shortfall has been offset by $726,000 obtained by our financing activities
      and a net use of cash resources of $822,000. The net amount of our financing
      activity includes draws on the Laurus Credit Facility of $458,000. We also
      obtained a total of $300,000 in short-term loans from our Chief Executive
      Officer and a greater than ten percent shareholder.





Sales
      of
      chocolate products have a strong seasonal element. The majority of our customer
      sales occur in our second and third fiscal quarters. We have taken steps to
      reduce the seasonality of our sales by focusing on larger customers who can
      purchase our products for resale year round. During the three month period
      ended
      July 31, 2005, we have successfully completed the first stage of our roll-out
      of
      our nutritional and energy bar lines. These lines include the “365” brand of
      nutritional bars for resale under private label agreement with Whole Foods,
      and
      our in-house “24/7” brand of nutritional bars to be distributed through a
      variety of resellers including Costco. Regardless, we believe the seasonal
      element inherent in our industry will continue to make revenues substantially
      higher preceding certain holiday periods. These seasonal patterns cause our
      quarterly operating results and working capital requirements to fluctuate.
      They
      also make it much more difficult for us to operate profitably during the first
      and last quarters of the fiscal year. As a result of such seasonality, financial
      results for a particular quarter may not be indicative of results for the entire
      year.








Corporate Logo
              **HOUSE
                  OF BRUSSELS CHOCOLATES INC.**
                **FORM
                  10-QSB**
                **For
                  the Quarter Ended July 31, 2005**


On
      March
      29, 2005, we executed a convertible debt facility with Laurus Master Fund,
      Ltd.
      granting us access to borrow up to $6,000,000. This financing consists of a
      $3,500,000 secured term loan (the “Term Note”) and a $2,500,000 secured
      revolving note (the “Revolving Note”). The Revolving Note is effectuated through
      a $1,000,000 convertible minimum borrowing note and provides for advances up
      to
      90% of eligible accounts receivable. To the extent we repay the amount
      outstanding under the Revolving Note and/or Laurus converts amounts due under
      the Revolving Note into Common Stock, we may reborrow or make additional
      borrowings, provided that the aggregate amount outstanding may not exceed our
      eligible accounts receivable criteria. As of September 14, 2005, we had a
      balance outstanding of $2,304,000 on the $2,500,000 Laurus Revolving Note.
      Under
      the terms of a current overadvance waiver with Laurus, we have been permitted
      to
      borrow $933,000 in excess of eligible receivables through September 30, 2005.
      Upon expiration of that waiver, our borrowing capacity under the Revolving
      Note
      must be fully supported by an eligible receivables base. In the event our
      eligible receivables base is insufficient, and the waiver date cannot be
      extended, we may be subject to substantial additional interest on the remaining
      overadvance. Further, additional draws under the Revolving Note will be
      unavailable until eligible receivable collections and invoicing create an
      eligible receivables base that supports the entire balance outstanding.





Both
      the
      $3,500,000 Term Note and the $2,500,000 Revolving Note (together the “Notes”)
      provide for conversion, at the option of Laurus, of the amounts outstanding
      into
      the Company's common stock at a fixed conversion price of $0.88 per share (the
      “Fixed Conversion Price”). In the event that we issue common stock or
      derivatives convertible into our common stock for a price less than $0.88 per
      share, then the price at which Laurus may convert its shares is reset to that
      lower price. The conversion prices under the Notes are subject to equitable
      adjustment for stock splits, stock dividends and similar events. Laurus is
      obligated to convert scheduled principal and interest payments under the Term
      Note when (i) a registration statement has become effective with respect to
      the
      shares of common stock underlying the indebtedness, (ii) the five (5) day
      average market price of our common stock is 110% of the Fixed Conversion Price,
      and (iii) certain trading volume criteria have been met. Using the Black-Scholes
      option pricing model, we determined the fair value of the conversion feature
      related to the Notes to be $2,996,000. The assumptions used in the fair value
      calculation for the warrants were as follows: stock price of $0.93, exercise
      price of $0.88, weighted average term of three (3) years, volatility (annual)
      of
      65%, annual rate of quarterly dividends of 0%, a risk free rate of 3.5%.
      Accordingly, the fair value per share of the warrants was calculated to be
      $0.44
      per share. As a result of the beneficial conversion feature, a discount on
      debt
      issued of $4,023,000 was recorded and is being amortized to interest expense
      over the three year life of the debt agreement.





The
      Notes
      bear annual interest at the prime rate (as reported in the Wall Street Journal)
      plus 2% subject to a floor of six percent, and mature in three years. The
      interest rate on the Notes will be decreased by 2.0% for every 25% increase
      in
      the market value of our common stock above the Fixed Conversion Price up to
      a
      minimum of 0.0%. Monthly interest payments on the Notes began April 1, 2005.
      Monthly amortizing payments of principal on the Term Note, equal to $109,375,
      are payable on the first day of each month commencing August 1, 2005. The final
      principal amortization payment on the Term Note is due March 1, 2008. Under
      the
      Term Note if monthly payments of interest and principal are made in cash rather
      than converted to shares of our common stock, we will pay Laurus 102% of the
      then monthly amount due. Prepayments under the Term Note are subject to a
      premium in the amount of 20% of the principal being prepaid. The Revolving
      Note
      terminates, and borrowings there under become due March 29, 2008. During August
      2006, we filed an effective registration statement covering the common stock
      underlying the conversion feature of the Notes and the Warrants issued in
      connection with the Notes.





On
      June
      28, 2005, we also entered into two convertible promissory notes totaling
      $300,000 with our chief executive officer and a greater than 10% shareholder.
      The proceeds of the notes provided extra working capital for use during the
      onset of our busy season. The amount of this indebtedness was matched by an
      additional $300,000 in over advances under our Revolving Note with Laurus.
      In
      connection with the overadvance, we issued Laurus a warrant to purchase 60,000
      shares of our common stock exercisable at $1.20 per share.








Corporate Logo
              **HOUSE
                  OF BRUSSELS CHOCOLATES INC.**
                **FORM
                  10-QSB**
                **For
                  the Quarter Ended July 31, 2005**


With
      the
      onset of our busy season, cash required for on-going operations has increased
      significantly. Our need for raw materials and our investment in inventories,
      manpower and equipment has become sharply higher. We expect those needs to
      expand even further over the next three to four months. In addition during
      the
      three month period ended July 31, 2005, our gross margins declined. As such,
      without an increase in revenues, positive growth in our gross margins and
      reductions in costs, we will require additional equity investment or financing.





As
      a
      result of historic busy season expectations, expansion in sales of our current
      products and the launch of our nutritional bar and drinking chocolate lines,
      the
      Company believes that it will increase its revenues and margins during the
      upcoming quarters. In addition, the Company expects its efforts at cost
      reduction will successfully reduce its overhead. If, however, we are unable
      to
      generate operating profits we will require additional financing to pay costs
      associated with our core business. In that instance, the Company will seek
      equity investment or financing from its existing relationships.





**Off-Balance
      Sheet Arrangements**





We
      had no
      off-balance sheet arrangements during the fiscal quarter ended July 31,
      2005.







**ITEM
                3.**
            **CONTROLS
                AND PROCEDURES**




As
      required by Rule 13a-15 under the Securities Exchange Act of 1934 (the “Exchange
      Act”), we carried out an evaluation of the effectiveness of the design and
      operation of our disclosure controls and procedures as of July 31, 2005, that
      being the date of our most recently completed fiscal quarter. This evaluation
      was carried out under the supervision and with the participation of our Chief
      Executive Officer, Grant Petersen and Chief Financial Officer, Robert Wesolek.
      Based upon that evaluation, these management executives concluded that our
      disclosure controls and procedures are effective in timely alerting management
      to material information relating to us required to be included in our periodic
      SEC filings. There have been no significant changes in our internal controls
      or
      in other factors that could significantly affect internal controls subsequent
      to
      the date we carried out our evaluation.





Disclosure
      controls and procedures are controls and other procedures that are designed
      to
      ensure that information required to be disclosed our reports filed or submitted
      under the Exchange Act is recorded, processed, summarized and reported, within
      the time periods specified in the SEC’s rules and forms. Disclosure controls and
      procedures include, without limitation, controls and procedures designed to
      ensure that information required to be disclosed in our reports filed under
      the
      Exchange Act is accumulated and communicated to management, including our Chief
      Executive Officer and Chief Financial Officer, to allow timely decisions
      regarding required disclosure.





During
      our most recently completed fiscal quarter ended July
      31,
      2005 ,
      there
      were no changes in our internal control over financial reporting that have
      materially affected, or are reasonably likely to affect, our internal control
      over financial reporting.





The
      term
“internal control over financial reporting” is defined as a process designed by,
      or under the supervision of, the registrant's principal executive and principal
      financial officers, or persons performing similar functions, and effected by
      the
      registrant's board of directors, management and other personnel, 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 principles and includes those policies and
      procedures that:




1.
            Pertain
                to the maintenance of records that in reasonable detail accurately
                and
                fairly reflect the transactions and dispositions of the assets of
                the
                registrant;





2.
            Provide
                reasonable assurance that transactions are recorded as necessary
                to permit
                preparation of financial statements in accordance with generally
                accepted
                accounting principles, and that receipts and expenditures of the
                registrant are being made only in accordance with authorizations
                of
                management and directors of the registrant;and





3.
            Provide
                reasonable assurance regarding prevention or timely detection of
                unauthorized acquisition, use or disposition of the registrant's
                assets
                that could have a material effect on the financial
                statements.








Corporate Logo
                **HOUSE
                    OF BRUSSELS CHOCOLATES INC.**
                  **FORM
                    10-QSB**
                  **For
                    the Quarter Ended July 31, 2005**




**PART
      II--OTHER INFORMATION**




**ITEM
                2.**
            **UNREGISTERED
                SALES OF EQUITY SECURITIES AND USE OF PROCEEDS******




During
      our quarter ended July 31, 2005, we completed the following transactions in
      reliance upon exemptions from registration under the Securities Act of 1933,
      as
      amended (the "Act") as provided in Section 4(2) thereof. All certificates issued
      in connection with these transactions were endorsed with a restrictive legend
      confirming that the securities could not be resold without registration under
      the Act or an applicable exemption from the registration requirements of the
      Act. None of the transactions involved a public offering, underwriting discounts
      or sales commissions. We believe that each person was a “qualified” investor
      within the meaning of the Act and had knowledge and experience in financial
      and
      business matters which allowed them to evaluate the merits and risks of our
      securities. Each person was knowledgeable about our operations and financial
      condition.




1.
            On
                June 28, 2005, Grant Petersen, our current Chief Executive Officer,
                President and Director, entered into a convertible promissory note
                with
                the Company in the principal amount of $50,000. The note bears interest
                at
                the Wall Street Journal prime rate plus 2%. At the noteholder’s option,
                amounts due under this note may be converted to shares of our common
                stock
                at a price of $.90 per share. The principal amount of the note is
                due and
                payable in two equal monthly installments of principal and interest,
                with
                the first monthly installment due within thirty days after the date
                on
                which (a) the amount of outstanding loans (as defined in the Security
                Agreement between the Company and Laurus first becomes equal to or
                less
                than the “Formula Amount” as set forth in the Security Agreement and (b)
                no event of default has occurred and is continuing under any obligations
                owed to Laurus





2.
            On
                June 28, 2005, Richard Siemens, a greater than 10% shareholder,
                entered into a convertible promissory note with the Company in the
                principal amount of $250,000. The note bears interest at the Wall
                Street
                Journal prime rate plus 2%. At the noteholder’s option, amounts due under
                this note may be converted to shares of our common stock at a price
                of
                $.90 per share. The principal amount of the note is due and payable
                in two
                equal monthly installments of principal and interest, with the first
                monthly installment due within thirty days after the date on which
                (a) the
                amount of outstanding loans (as defined in the Security Agreement
                between
                the Company and Laurus first becomes equal to or less than the “Formula
                Amount” as set forth in the Security Agreement and (b) no event of default
                has occurred and is continuing under any obligations owed to
                Laurus.




3.
              On
                  July 11, 2005 we issued 60,000 warrants to Laurus in connection
                  with their
                  extension of an additional $300,000 overadvance on the Laurus Credit
                  Facility. The warrants give Laurus the right to purchase 60,000
                  shares of
                  our common stock at a price of $1.20 per share and expire seven
                  years from
                  the date of issuance.





Corporate Logo
              **HOUSE
                  OF BRUSSELS CHOCOLATES INC.**
                **FORM
                  10-QSB**
                **For
                  the Quarter Ended July 31, 2005**


**ITEM
                6.**
            **EXHIBITS**




**Exhibit
                  Number**
              **Description
                  of Exhibit**10.1
              Convertible
                  Note with Richard Siemens(1)10.2
              Convertible
                  Note with Grant Petersen(1)31.1
              Certification
                  of Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
                  as adopted
                  pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
              Certification
                  of Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
                  as adopted
                  pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
              Certification
                  of Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
                  as adopted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
              Certification
                  of Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
                  as adopted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002









(1)
              Previously
                  filed with the Securities and Exchange Commission as an exhibit
                  to the
                  Registrant’s Form SB-2/A registration statement filed on July 29,
                  2005.





Corporate Logo
              **HOUSE
                  OF BRUSSELS CHOCOLATES INC.**
                **FORM
                  10-QSB**
                **For
                  the Quarter Ended July 31, 2005**


**SIGNATURES**







In
      accordance with the requirements of the Securities and Exchange Act of 1934,
      the
      Registrant has duly caused this report to be signed on its behalf by the
      undersigned, thereunto duly authorized.





**HOUSE
      OF BRUSSELS CHOCOLATES INC.**





Date:
            **September
                19, 2005**By:
            s/s
                Grant Petersen**Grant
                Petersen****Chief
                Executive Officer, President and Director**