**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 1934For the quarterly period ended**July 31, 2004****o**
TRANSITION REPORT PURSUANT TO 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934For 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: **30,513,326 Shares of $0.001 par value Common Stock outstanding as of September 9, 2004.**




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





Page 1 of 25





**HOUSE OF BRUSSELS CHOCOLATES INC.**





**FORM 10-QSB**


**For The Quarter Ended July 31, 2004**





**INDEX**





|PART I -FINANCIAL INFORMATION | 3                                                          
|----------------------------- | -----------------------------------------------------------
|                              |                                                            
|ITEM 1.                       | FINANCIAL STATEMENTS                                       
|                              |                                                            
|ITEM 2.                       | MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS 
|                              |                                                            
|ITEM 3.                       | CONTROLS AND PROCEDURES                                    
|                              |                                                            
|PART II -OTHER INFORMATION    | 22                                                         
|                              |                                                            
|ITEM 2.                       | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|                              |                                                            
|ITEM 6.                       | EXHIBITS AND REPORTS ON FORM 8-K                           
|                              |                                                            
|SIGNATURES                    | 25                                                         






|
|
|
|

|
|





**PART I - FINANCIAL INFORMATION**




|**ITEM 1.** | **FINANCIAL STATEMENTS**                                                                                      
|----------- | --------------------------------------------------------------------------------------------------------------
|            |                                                                                                               
|            |                                                                                                               
|            | Consolidated Balance Sheets as of July 31, 2004 and April 30, 2004                                            
|            |                                                                                                               
|            | Consolidated Statements of Operations for the Three Month Periods Ending July 31, 2004 and July 31, 2003      
|            |                                                                                                               
|            | Consolidated Statement of Changes in Shareholders Equity for the Period From April, 30, 2004 to July 31, 2004
|            |                                                                                                               
|            | Consolidated Statements of Cash Flows for the Three Month Periods Ending July 31, 2004 and July 31, 2003      
|            |                                                                                                               
|            | Notes to the Consolidated Financial Statements for the Quarter Ended July 31, 2004                            









|
|
|
|

|
|



**HOUSE OF BRUSSELS CHOCOLATES INC.**









**CONSOLIDATED FINANCIAL STATEMENTS AS OF JULY 31, 2004**


**AND FOR THE THREE MONTH PERIOD THEN ENDED**


|
|
|
|

|
|

|                                                                   | **HOUSE OF BRUSSELS CHOCOLATES INC.**
|------------------------------------------------------------------ | -------------------------------------
|Consolidated Balance Sheets as of July 31, 2004 and April 30, 2004
|                                                                  





|                                                        |  | **JULY 31, 2004** |            | **APRIL 30, 2004** |  
|------------------------------------------------------- |  | ----------------- | ---------- | ------------------ | -
|                                                        |  | (unaudited)       |            | (audited)          |  
|                                                        |  |                   |            |                    |  
|**ASSETS**                                              |  |                   |            |                    |  
|Current assets                                          |  |                   |            |                    |  
|Cash                                                    |  | $                 | 482,579    |                    | $
|Accounts receivable, net                                |  |                   | 1,159,622  |                    |  
|Inventory                                               |  |                   | 2,280,106  |                    |  
|Prepaid expenses                                        |  |                   | 413,839    |                    |  
|Total current assets                                    |  |                   | 4,336,146  |                    |  
|                                                        |  |                   |            |                    |  
|Software, net                                           |  |                   | 52,623     |                    |  
|Land and building, net                                  |  |                   | 1,179,297  |                    |  
|Property, plant and equipment, net                      |  |                   | 1,475,005  |                    |  
|Goodwill                                                |  |                   | 920,040    |                    |  
|Other assets                                            |  |                   | 334,296    |                    |  
|                                                        |  | $                 | 8,297,407  |                    | $
|                                                        |  |                   |            |                    |  
|**LIABILITIES AND SHAREHOLDERS' EQUITY**                |  |                   |            |                    |  
|Current liabilities                                     |  |                   |            |                    |  
|Accounts payable                                        |  | $                 | 1,232,475  |                    | $
|Accrued liabilities                                     |  |                   | 797,795    |                    |  
|Current portion of capital lease and long-term debt     |  |                   | 77,654     |                    |  
|Due to related parties, net                             |  |                   | 327,653    |                    |  
|Total current liabilities                               |  |                   | 2,435,577  |                    |  
|                                                        |  |                   |            |                    |  
|Capital lease liability                                 |  |                   | 88,260     |                    |  
|Long-term debt                                          |  |                   | 1,053,664  |                    |  
|                                                        |  |                   | 3,577,501  |                    |  
|                                                        |  |                   |            |                    |  
|Capital stock                                           |  |                   |            |                    |  
|Authorized                                              |  |                   |            |                    |  
|60,000,000 common shares, $0.001 par value              |  |                   |            |                    |  
|4,000,000 preferred shares                              |  |                   |            |                    |  
|Issued                                                  |  |                   |            |                    |  
|30,090,398 (April 30, 2004 - 25,560,575 ) common shares |  |                   | 30,090     |                    |  
|Additional paid-in capital                              |  |                   | 10,796,775 |                    |  
|Warrants and stock options issued                       |  |                   | 3,406,944  |                    |  
|Accumulated other comprehensive income                  |  |                   | 401,274    |                    |  
|Accumulated deficit                                     |  |                   | (9,915,177 | )                  |  
|                                                        |  |                   | 4,719,906  |                    |  
|                                                        |  | $                 | 8,297,407  |                    | $




The accompanying notes are an integral part of these financial statements


Page 5 of 25


**HOUSE OF BRUSSELS CHOCOLATES INC.**Consolidated Statements of Operations for the Three Month PeriodsEnding July 31, 2004 and July 31, 2003 **3 MONTHS ENDED**

**3 MONTHS ENDED****JULY 31, 2004**

**JULY 31, 2003**(unaudited)

(unaudited)Sales

$
797,284

$
272,126Cost of sales, excluding depreciation


645,801


247,534Gross profit


151,483


24,592Selling, general and administrative expenses


734,400


445,309Amortization and depreciation


37,650


62,241772,050


507,550Net loss

$
(620,567
)
$
(482,958
)Weighted-average number of common shares


27,290,143


19,652,943outstandingBasic and diluted loss per share

$
(0.02
)
$
(0.02
)






The accompanying notes are an integral part of these financial statements


Page 6 of 25  **HOUSE OF BRUSSELS CHOCOLATES INC.**Consolidated Statement of Changes in Shareholders' Equity for thePeriod from April 30, 2004 to July 31, 2004 **ACCUM-****ULATED****OTHER****ADDITIONAL**

**WARRANTS**





**COMPRE-****COMMON****STOCK**

**PAID IN**

**AND**





**HENSIVE**

**SHAREHOLDERS'****SHARES**

**AMOUNT**

**CAPITAL**

**OPTIONS**

**AMOUNT**

**DEFICIT**

**INCOME**

**EQUITY****Balance April 30, 2004**


**25,560,575**

**$**
**25,561**


**7,659,725**


**8,623,526**

**$**
**3,467,928**

**$**
**(9,294,610**
**)**
**$**
**341,660**

**$**
**2,200,263**Warrants and options exercised for common stock


4,048,781


4,048


2,956,623


(4,048,781
)

(547,932
)







2,412,740Stock-based compensation for legal services


15,000


15


25,485














25,500Warrants expired








35,439


(354,391
)

(35,439
)







-Options under the 2004 stock option plan











87,150


78,356








78,356Private placements


142,000


142


152,121














152,263Warrants issued








(312,294
)

518,454


444,031








131,737Stock issued for acquisition of Debas Chocolates


324,042


324


929,676














930,000Shares held in escrow








(650,000
)













(650,000
)Foreign currency translation adjustment




















59,614


59,614Loss for the period

















(620,567
)




(620,567
)Comprehensive loss























(560,952
)**Balance July 31, 2004**


**30,090,398**

**$**
**30,090**

**$**
**10,796,775**


**4,825,958**

**$**
**3,406,944**

**$**
**(9,915,177**
**)**
**$**
**401,274**

**$**
**4,719,906**


The accompanying notes are an integral part of these financial statements


Page 7 of 25  **HOUSE OF BRUSSELS CHOCOLATES INC.**Consolidated Statement of Cash Flows for the Three Month Periods Ending July 31, 2004 and July 31, 2003


|                                                             |  | **3 MONTHS ENDED** |            | **3 MONTHS ENDED** |  
|------------------------------------------------------------ |  | ------------------ | ---------- | ------------------ | -
|                                                             |  | **JULY 31, 2004**  |            | **JULY 31, 2003**  |  
|                                                             |  | (unaudited)        |            | (unaudited)        |  
|                                                             |  |                    |            |                    |  
|**CASH FLOWS FROM OPERATING ACTIVITIES**                     |  |                    |            |                    |  
|Net loss for the period                                      |  | $                  | (620,567   | )                  | $
|Adjustments to reconcile net loss for the period to net cash |  |                    |            |                    |  
|used in operating activities                                 |  |                    |            |                    |  
|Amortization                                                 |  |                    | 37,650     |                    |  
|Employee and officer compensation through stock options      |  |                    | 78,355     |                    |  
|Common stock and warrants issued for compensation            |  |                    | 25,500     |                    |  
|Changes in non-cash working capital items                    |  |                    |            |                    |  
|Accounts receivable                                          |  |                    | (733,560   | )                  |  
|Inventory                                                    |  |                    | (943,247   | )                  |  
|Prepaid expenses                                             |  |                    | 68,100     |                    |  
|Other assets                                                 |  |                    | (1,179,009 | )                  |  
|Accounts payable and accrued liabilities                     |  |                    | 999,415    |                    |  
|                                                             |  |                    | (2,267,363 | )                  |  
|**CASH FLOWS FROM FINANCING ACTIVITIES**                     |  |                    |            |                    |  
|Proceeds from (repayments of) loans and other long term debt |  |                    | 1,236,318  |                    |  
|Proceeds from (repayments to) related parties                |  |                    | 13,146     |                    |  
|Repayments of obligations under capital lease                |  |                    | 88,260     |                    |  
|Proceeds from exercise of previously issued warrants         |  |                    | 2,412,739  |                    |  
|Proceeds from issuance of securities                         |  |                    | 284,000    |                    |  
|                                                             |  |                    | 4,034,463  |                    |  
|**CASH FLOWS FROM INVESTING ACTIVITIES**                     |  |                    |            |                    |  
|Purchase of property, land,                                  |  |                    |            |                    |  
|building and equipment, net of disposals                     |  |                    | (1,715,408 | )                  |  
|Shares held in escrow                                        |  |                    | (650,000   | )                  |  
|Issuance of common shares for purchase of subsidiary         |  |                    | 930,000    |                    |  
|                                                             |  |                    | (1,435,408 | )                  |  
|Foreign exchange effect on cash                              |  |                    | (2,551     | )                  |  
|Increase (decrease) in cash and cash equivalents             |  | $                  | 329,141    |                    | $
|Cash and cash equivalents, beginning of the period           |  |                    | 153,438    |                    |  
|Cash and cash equivalents, end of the period                 |  | $                  | 482,579    |                    | $
|                                                             |  |                    |            |                    |  
|                                                             |  |                    |            |                    |  
|                                                             |  |                    |            |                    |  
|**SUPPLEMENTAL CASH FLOW INFORMATION**                       |  | $                  | -          |                    | $
|Cash paid for income taxes                                   |  |                    | -          |                    |  
|Cash paid for interest                                       |  |                    |            |                    |  
|**SUPPLEMENTAL NON-CASH INVESTING & FINANCING ACTIVITIES**   |  |                    | -          |                    |  




The accompanying notes are an integral part of these financial statements


Page 8 of 25  **HOUSE OF BRUSSELS CHOCOLATES INC.**Notes to the Consolidated Financial Statements for the Quarter
Ended July 31, 2004  **1.**
**Nature of Operations**





House of Brussels Chocolates Inc., a Nevada corporation ("We" or the "Company"), trades under the symbol of HBSL on the OTC Bulletin Board. We were originally incorporated under the name of House of Brussels Chocolates Inc. on March 5, 1998. We manufacture gourmet quality chocolate products in our plants located in Vancouver, B.C., Canada, Fresno, California and San Francisco, California. We have over 20 years experience in manufacturing and distributing high-end chocolates. Our award-winning products have a long history of customer acceptance and are manufactured to the strictest standards. In February 2004, we also created a wholly-owned subsidiary, "ChocoMed Inc.", to investigate the use of chocolate as a carrier for dietary supplements, functional foods and pharmaceutical compounds to treat various medical conditions.





|**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, we transferred those trademarks to Walgreens and received a guarantee that Walgreens would purchase not less than $3,000,000 in product annually for a two (2) year period. Founded in 1901, Walgreens is a national retail pharmacy chain that is largely considered to be the leader in innovative drugstore retailing. Walgreens operates over 4,200 drugstores in 44 states and Puerto Rico.





On July 29, 2004, we entered onto a stock purchase agreement with DeBas Chocolates, Inc., a California corporation ("DeBas") whereby we purchased all of the outstanding shares of common stock of DeBas. We undertook this acquisition 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 also acquired a strategically located manufacturing and production facility which we believe will assist in lowering the cost of our product distribution. Additionally, Guy Debbas, Founder and President of DeBas, will remain with us as Vice President of Product Development under a five-year employment agreement.





We acquired all of the outstanding shares of DeBas from Guy Debbas, its sole shareholder. We agreed upon a purchase price of $1,130,000 payable in $200,000 cash and 324,042 shares of our restricted common stock valued at $930,000. In addition, we absorbed approximately $1,124,000 in net liabilities from DeBas. Of the purchase price tendered, $150,000 cash and 226,481 shares of our common stock have been held in escrow awaiting distribution to either Mr. Debbas or future cancellation by the Company. The market value of the amounts escrowed is $800,000. For accounting purposes, approximately $700,000 of these escrowed amounts have been excluded from purchase price as we believe they are currently non-estimable or will not be paid. The accompanying financial statements include $50,000 in restricted cash and $650,000 as an offset to additional paid in capital for shares held in escrow to account for this purchase price adjustment. As of July 31, 2004, we have identified and recorded nearly $450,000 in liabilities which offset future purchase payments to Mr. Debbas. Of the remaining amounts due, $98,000 is withheld contingent upon the achievement of revenue goals, and $152,000 is held against the settlement of future proceedings the results of which are currently non-estimable. We have tentatively recognized $920,000 in goodwill associated with this acquisition. Our goodwill allocation however, is subject to substantial revision based upon final valuation of the assets and liabilities absorbed in the purchase. The funds utilized for the purchase were derived from the cash and equity of the Company.





The terms and conditions of the stock purchase agreement were the result of arm's length negotiations between the parties. We believe the transaction was favorable to us in view of the payment terms, synergies associated with the personnel absorbed and the market value of the underlying assets of DeBas. No formal appraisal or fairness opinion was done in connection with this transaction.





|**3.** | **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 the financial position as of July 31, 2004 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, 2004 filed with Securities Exchange Commission on July 29, 2004.


Page 9 of 25  **HOUSE OF BRUSSELS CHOCOLATES INC.**Notes to the Consolidated Financial Statements for the Quarter
Ended July 31, 2004


**Principles of consolidation**


These consolidated financial statements include the accounts of House of Brussels Chocolates Inc. and all its subsidiaries after the elimination of intercompany 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 management 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.





**Business combinations and goodwill**


Business combinations and goodwill are accounted for in accordance with FASB 141 and 142 respectively. As such, the purchase method of accounting is applied to all acquisitions and goodwill is not amortized unless its value is impaired.





**Accounts receivable**


Accounts receivable result from sales to wholesale customers and are net of an allowance for doubtful accounts and returns. The Company reviews the allowances on a quarterly basis, and at that time, the allowances are adjusted to maintain them at an amount estimated to be adequate to cover any future losses.





**Inventories**


Inventories include finished goods, packaging supplies, and raw materials. Finished goods are valued at the lower of cost or net realizable value, on a weighted average basis. Packaging and raw materials are valued at the lower of cost or net realizable value, on a first in first out basis.





**Software, land, building, plant and equipment**


Purchases of software, land, buildings, plant and equipment are recorded at cost. Depreciation and amortization rates are determined based upon the estimated useful life of the asset. Land is not depreciated. Maintenance and repairs are charged to expenses as they are incurred. In the event facts and circumstances indicate the carrying value of capital assets may be impaired, an evaluation of recoverability is performed. If an evaluation is required, the estimated future undiscounted cash flow associated with the asset is compared to the asset's carrying amount to determine if a write-down to market or discounted cash flow is required.





Amortization and depreciation on Software, Building and Property, Plant and Equipment is calculated using the following annual rates:





**Category**
**Rates**
**Method**Software and computer equipment
30%
Diminishing balance and straight lineBuilding
5%
Diminishing balanceAutomotive
30%
Diminishing balanceFurniture and fixtures
20%
Diminishing balance and straight lineProduction equipment and molds
10%
Diminishing balance and straight lineLeasehold improvements
20%
Straight lineOther equipment
20%
Diminishing balance





**Accumulated other comprehensive income**


Accumulated other comprehensive income (loss) is reported on the Consolidated Balance Sheet and comprehensive loss is reported on the Consolidated Statement of Changes in Shareholders Equity.


Page 10 of 25  **HOUSE OF BRUSSELS CHOCOLATES INC.**Notes to the Consolidated Financial Statements for the Quarter
Ended July 31, 2004




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 the exchange rates in effect at the balance sheet date. Resulting translation adjustments are recorded as a component of other comprehensive loss.


****


**Revenue Recognition**


Sales revenue is recognized when the products have been shipped.





**Cost of Sales**


Cost of sales represents costs directly related to the manufacture and distribution of the Companys products. Primary costs include raw materials, packaging, direct labor, including employee benefits, overhead, and shipping and handling.





**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.





**Income taxes**


The Company recognizes income tax expense as it is incurred, but does not recognize the potential value of tax benefits associated with its retained losses until such benefits are probable and likely to materialize.





**Other recently issued accounting pronouncements**


Other recently issued accounting pronouncements will have no significant impact on the Company and its reporting methods.





|**4.** | **Inventories**
|------ | ---------------




Inventories consisted of the following:





**July 2004**

**April 2004**Finished goods

$
986,433

$
394,792Unpackaged finished goods


233,246


32,800Packaging materials


528,753


418,628Raw materials


395,323


349,522Inventory Development Costs


136,351


91,096$
2,280,106

$
1,286,838


****


|**5.** | **Prepaid Expenses**
|------ | --------------------




Prepaid expenses consisted of the following:





| |                                    |  | **July 2004** |         | **April 2004** |  
| | ---------------------------------- |  | ------------- | ------- | -------------- | -
| |                                    |  |               |         |                |  
| | Travel advances and miscellaneous  |  | $             | -       |                | $
| | Prepaid consulting fees            |  |               | 220,487 |                |  
| | Deposits, promotions and royalties |  |               | 115,108 |                |  
| | Insurance                          |  |               | 78,244  |                |  
| |                                    |  | $             | 413,839 |                | $




|
|
|
|

|
|

|                                                                                   | **HOUSE OF BRUSSELS CHOCOLATES INC.**
|---------------------------------------------------------------------------------- | -------------------------------------
|Notes to the Consolidated Financial Statements for the Quarter
Ended July 31, 2004
|                                                                                  

|**6.** | **Software, Land and Building, Property, Plant and Equipment, Net**
|------ | -------------------------------------------------------------------




Software, land and building, property, plant and equipment consisted of the following:





| |                                |  | **July 2004** |           | **April 2004**   |  
| | ------------------------------ |  | ------------- | --------- | ---------------- | -
| |                                |  |               |           | **Accumulated**  |  
| |                                |  | **Cost**      |           | **Amortization** |  
| |                                |  |               |           |                  |  
| | Software                       |  | $             | 96,779    |                  | $
| |                                |  |               |           |                  |  
| | Land and building              |  |               | 1,198,000 |                  |  
| |                                |  |               |           |                  |  
| | Automotive                     |  |               | 70,139    |                  |  
| | Computer equipment             |  |               | 251,282   |                  |  
| | Furniture and fixtures         |  |               | 112,010   |                  |  
| | Production equipment and molds |  |               | 2,422,702 |                  |  
| | Leasehold improvements         |  |               | 387,354   |                  |  
| | Other equipment                |  |               | 96,244    |                  |  
| |                                |  | $             | 3,339,731 |                  | $




|**7.** | **Due to Related Parties**
|------ | --------------------------




Amounts due to related parties are advances made to us by the directors, or past directors, of the Company and have no stated terms of repayment.





|**8.** | **Capital Lease Liability**
|------ | ---------------------------




In connection with its acquisition of Debas, the Company has acquired certain leased manufacturing equipment through Santa Barbara Leasing. Lease payments of $1,555.68 are due monthly through May 2009 at which time the leased equipment may be purchased at a bargain price of $1.00.





|**9.** | **Long-Term Debt**
|------ | ------------------




In connection with its acquisition of Debas, the Company assumed long-term debt consisting of bank loans and lines of credit. This indebtedness includes amounts due to Business Loan Center (New York), County Bank (California), California Bank and Trust (California) and Bank of America (California). The loan from Business Loan Center carries an annual interest rate of 5.58% over LIBOR and requires monthly payments of $5,340. The principle balance is $732,561 and security pledged includes all real estate, plant machinery and equipment, furniture, inventory and accounts receivable. Monthly payments on the loan from County Bank are $2,940 and the principle balance is $130,070 (bearing interest at Prime plus 1.5%). The County Bank debt is guaranteed by the U.S. Small Business Administration and collateralized by all inventory, chattel paper, accounts, equipment and general intangibles owned or later acquired. The loan from California Bank is also guaranteed by the U.S. Small Business Administration. It requires monthly payments of $2,719 and has a principle balance of $142,390 (bearing interest at Prime plus 1.5%). The security given on this debt consists of inventory, accounts, equipment, general intangibles and fixtures along with machinery and furniture. The loan from Bank of America has a principal balance of $4,459 and is collateralized by an automobile. The lines of credit issued by Bank of America and County Bank and are currently at their maximum amounts $100,000 (bearing interest at LIBOR plus 3.77%) and $9,587 respectively.


Page 12 of 25  **HOUSE OF BRUSSELS CHOCOLATES INC.**Notes to the Consolidated Financial Statements for the Quarter
Ended July 31, 2004




Principle payments for the next five years are estimated to be:




| | 2004 |  | $ | 69,400  | 
| | ---- |  | - | ------- | 
| | 2005 |  |   | 71,500  | 
| | 2006 |  |   | 75,000  | 
| | 2007 |  |   | 78,750  | 
| | 2008 |  |   | 118,000 | 



|**10.** | **Stock Option Plan**
|------- | ---------------------




On April 29, 2004, our Shareholders approved, and we implemented, a stock option plan for both employees and directors of the Company and its subsidiaries. Under terms of the plan we may grant options to purchase up to 1,250,000 shares of our common stock at discounts up to 15% off market price. During the prior fiscal year, we issued options for 810,000 shares in grant sizes ranging from 10,000 to 200,000 shares to our Directors and employees at an exercise price $1.63 per share and an expiration timeframe of 3 years. Vesting related to these options vary. Options to purchase 440,000 of our shares remain available under the plan at fiscal year end. The fair value of each option granted was estimated on the date of grant using the Black-Scholes option-pricing model and the resulting compensation expense has been included in the accompanying financial statements.





|**11.** | **Share Capital**
|------- | -----------------




The Company issued a total of 4,529,823 shares during the current period ended July 31, 2004. During the same period, 518,454 share purchase warrants were issued, 354,391 warrants expired and 4,048,781 warrants were exercised for a net decrease in warrants of 3,884,718. Shares and warrants were issued to investors for private placements 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.





|**12.** | **Contingent Liabilities**
|------- | --------------------------




**Non-Cancelable Lease Obligation**


The Companys new administrative offices and manufacturing facility, located in Delta, BC are leased under a fifteen (15) year operating lease which expires July 31, 2019. Base rent does not include operating expenses, taxes or a management fee for which the company is also liable. Annual base rent on the premises is currently $228,890, payable in monthly installments of $19,074.





Minimum annual payments under the lease as of August 1, 2004, for the next five years are:


2004


$
228,890228,890228,890242,354242,354Total

$
1,171,378




**Obligation Under Employment Agreement**


In connection with our purchase of DeBas, we entered into a five year employment agreement with its former shareholder, Guy Debbas. A copy of this agreement is attached hereto as Exhibit 10.4. Under the terms of this agreement, Mr. Debbas became the Companys Vice President of Product Development at an annual salary of $100,000. In addition, Mr. Debbas received an option to purchase 50,000 shares of our common stock at an exercise price of $2.38 per share until July 29, 2007. This option was granted in accordance with the terms of our 2004 Stock Option Plan and vests with respect to 100% of its shares in one year from the date of grant. The agreement also included terms requiring certain duties of confidentiality and non-competition from Mr. Debbas. This agreement provides for termination of employment with or without cause and in the event of disability or death. If the agreement is terminated without cause, Mr. Debbas will be entitled to a severance payment of $25,000.


Page 13 of 25  **HOUSE OF BRUSSELS CHOCOLATES INC.**Notes to the Consolidated Financial Statements for the Quarter
Ended July 31, 2004  **13.**
**Related Party Transactions**


****


**Debt Conversion**


On November 30, 2002, we issued 1,500,000 investment units to Evan Baergen, our then Chief Financial Officer, and 1,500,000 investment units to Grant Petersen, our current Chief Executive Officer, President and Director. The units were issued upon the conversion of two (2) notes payable by the Company to Mr. Baergen and Mr. Petersen in the amount of $75,000 each in compensation for services rendered. The notes were converted at a price of $0.05 per investment unit. Each unit was comprised of one share of common stock and one share purchase warrant. Each share purchase warrant entitles the holder to purchase one share of common stock at a price of $0.30 per share during the period from closing until May 2004. A total of 1,500,000 shares and 1,500,000 share purchase warrants were issued to each of Mr. Baergen and Mr. Petersen. During May 2004, Mr. Petersen exercised his option to purchase all of the shares of our common stock available under his warrants. During May, 2004, Mr. Baergen also exercised his option to purchase 293,920 shares of common stock available under his warrants. All securities 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.





**Distacom Ventures Loan**


During fiscal years 2003 and 2004, our Canadian subsidiary borrowed an aggregate of $343,000 CDN (equal to approximately $250,000) from Distacom Ventures Inc., a private company controlled by Mr. Richard Siemens, one of our directors and a 10% shareholder. The loan is secured by a general security agreement granted by Brussels Chocolates Ltd. against all of its present and after acquired personal property. Under the terms of the loan, Brussels Chocolates Ltd. pays interest at the rate of 7% per annum. An initial $180,000 CDN was advanced effective February 12, 2003 and subsequent advances of $20,000 CDN and $143,000 CDN were made on April 30, 2003 and May 2, 2003 respectively. The maturity date of all amounts advanced was May 31, 2004. During April 2004, the amounts due Distacom were offset by the exercise of previously issued stock purchase warrants for 171,689 of our shares at a price of $1.25 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 Act or an applicable exemption from the registration requirements of the Act.





**Richard Siemens**


In January 2004, Mr. Siemens, one of our directors and a 10% shareholder, forwarded $99,844 to fund the issuance of certain share purchase warrants. As a result of timing related issues, however, those warrants subsequently expired without exercise. As a result, an accrued liability to Mr. Siemens in the amount of $99,844 is included in the accompanying financial statements.





**Theodore Labella**


In December 2002, we issued 100,000 investment units to Mr. Theodore Labella (a greater than 5% shareholder) pursuant to the conversion of a convertible note issued by us in the amount of $20,000. Each unit was comprised of one share of common stock and one share purchase warrant. Each share purchase warrant entitled the holder to purchase one share of common stock at a price of $0.30 per share during the period from closing until February 24, 2004. Subsequently, these share purchase warrants have been exercised in full for proceeds to the Company in the amount of $30,000.





Also in December 2002, we issued 250,000 investment units to Mr. Labella, pursuant to a subscription agreement for proceeds of $50,000. Each unit was comprised of one share of common stock and one share purchase warrant. Each share purchase warrant entitles the holder to purchase one share of common stock at a price of $0.50 per share during the period from closing until March 25, 2004. Subsequently, these share purchase warrants have been exercised in full for proceeds to the Company in the amount of $125,000.


Page 14 of 25  **HOUSE OF BRUSSELS CHOCOLATES INC.**Notes to the Consolidated Financial Statements for the Quarter
Ended July 31, 2004




In January 2003, pursuant to a loan agreement between the Company and Mr. Labella in the amount of $50,000, we issued a total of 930,006 common shares to Mr. Labella as repayment of the loan plus interest.





On May 15, 2003, we issued 74,256 units to Hideko Ak Labella, spouse of Mr. Labella, pursuant to a consulting agreement. Each unit was comprised of one share of common stock and one share purchase warrant. Each share purchase warrant entitles the holder to purchase one share of common stock at a price of $0.50 (post-split) per share during the period ending May 13, 2004. On April 30, 2004, these share purchase warrants were exercised in full for proceeds to the Company in the amount of $37,128. The fair value of each investment unit 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, 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 Act. The Company received $134,000 in proceeds from this sale.





**GPAV Investments Ltd.**


In December 2002, we issued 500,000 common shares to GPAV Investments Ltd. (a greater than 5% shareholder) pursuant to a consulting agreement dated November 30, 2002 at a deemed value of $25,000.





On April 30, 2003, we issued 1,000,000 investment units to GPAV Investments Ltd., pursuant to a subscription agreement for proceeds of $50,000. Each unit was comprised of one share of common stock and one share purchase warrant. Each share purchase warrant entitles the holder to purchase one share of common stock at a price of $0.30 per share during the period from closing until May 31, 2004. On April 8, 2004, these share purchase warrants were exercised in full for proceeds to the Company in the amount of $300,000.





**Stephen Whittington**


In September 2002, Mr. Stephen Whittington (a former director and officer of the Company) advanced $60,000 to us to assist with cash flow needs. No formal agreement exists regarding the advance. This loan is unsecured with no fixed date of repayment.





**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 Act or an applicable exemption from the registration requirements of the Act.





**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 stock at a warrant exercise price of $1.02 per share. This warrant expires twelve months from the date of issuance. 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.


Page 15 of 25


**HOUSE OF BRUSSELS CHOCOLATES INC.**Notes to the Consolidated Financial Statements for the Quarter
Ended July 31, 2004




**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 Chief Operating Officer, John Veltheer, received warrants for the purchase of 500,000 shares 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 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 stock at a warrant exercise price of $1.02 per share. These issuances were completed pursuant to Section 4(2) of the Act. 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 as a financing incentive 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, and Harold Kahn, our Director, received one of these warrants for 100,000 shares. The term of the warrants ranged from July 27, 2006 to March 31, 2009.


Page 16 of 25  **HOUSE OF BRUSSELS CHOCOLATES INC.**Supplemental Statement of Expenses for the Three Month Periods
Ending July 31, 2004 and July 31, 2003  **SUPPLEMENTAL SCHEDULE OF EXPENSES**





|                                                       |  | **3 MONTHS ENDED** |         | **3 MONTHS ENDED** |  
|------------------------------------------------------ |  | ------------------ | ------- | ------------------ | -
|                                                       |  | **JULY 31, 2004**  |         | **JULY 31, 2003**  |  
|                                                       |  | (unaudited)        |         | (unaudited)        |  
|                                                       |  |                    |         |                    |  
|**Selling expenses**                                   |  |                    |         |                    |  
|Bad debts                                              |  | $                  | 21,583  |                    | $
|Promotion and advertising                              |  |                    | 39,959  |                    |  
|Rent and utilities                                     |  |                    | 4,421   |                    |  
|Salaries, benefits and consulting fees                 |  |                    | 147,745 |                    |  
|Travel and entertainment                               |  |                    | 83,605  |                    |  
|                                                       |  |                    | 297,313 |                    |  
|                                                       |  |                    |         |                    |  
|**General and administrative expenses**                |  |                    |         |                    |  
|Board of Directors Fees                                |  |                    | 44,097  |                    |  
|Interest, bank fees and foreign exchange               |  |                    | 15,014  |                    |  
|Office and miscellaneous                               |  |                    | 56,383  |                    |  
|Professional fees                                      |  |                    | 41,191  |                    |  
|Rent and utilities                                     |  |                    | 14,169  |                    |  
|Salaries, benefits and consulting fees                 |  |                    | 250,779 |                    |  
|Travel and entertainment                               |  |                    | 15,454  |                    |  
|                                                       |  |                    | 437,087 |                    |  
|                                                       |  |                    |         |                    |  
|**Total selling, general and administrative expenses** |  | $                  | 734,400 |                    | $

Page 17 of 25  **HOUSE OF BRUSSELS CHOCOLATES INC.**FORM 10-QSB
For the Quarter Ended July 31, 2004  **ITEM 2.**  **MANAGEMENT'S DISCUSSION AND ANALYSIS** **OR 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, 2004 filed with Securities Exchange Commission on July 29, 2004.




****


**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 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. and House of Brussels Chocolates (USA), Ltd. ("HOBC (USA)") (collectively referred to as "Brussels Chocolates").  We are established manufacturers of gourmet quality chocolate products with plants in Vancouver, B.C., Canada, Fresno, California and San Francisco, California. We have over 20 years experience in manufacturing and distributing high-end chocolates. Our Company offers a full line of gourmet quality, Belgian chocolates, made from high-grade ingredients. Our award-winning products have a long history of customer acceptance and are manufactured to the strictest standards.





During the past two years, we have completed a substantial transition in our business strategy. In early 2002, we primarily marketed our products directly to consumers through 13 high-end retail outlets. Based on our assessment of marketing costs and manufacturing capacity, we determined to redirect our efforts. Currently, we pursue "private labeling" and wholesale distribution customers exclusively. Our clients represent a diversified group of wholesalers. Large customers such as Walgreens, Nordstrom and Costco now represent a significant portion of our revenue. We continue to focus our marketing at large companies with the objective of reducing our selling and administrative expenses as a percentage of our revenues. This strategy, however, makes us more dependent on a few, large customers.





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, we transferred those trademarks to Walgreens and received a guarantee that Walgreens would purchase not less than $3,000,000 in product annually for a two (2) year period. Founded in 1901, Walgreens is a national retail pharmacy chain that is largely considered to be the leader in innovative drugstore retailing. Walgreens operates over 4,200 drugstores in 44 states and Puerto Rico. We project sales to Walgreens will substantially exceed the minimum guarantee. In addition, during this fiscal quarter, we have received significant purchase orders and commitments to purchase our products from a variety of large retailers including Costco Western Canada, Nordstroms, Laura Secord, Eckerds and KFM Foods International.





We anticipate revenues for the fiscal quarter ending October 31, 2004 will be substantially in excess of total revenues reported for the entire fiscal year ended April 30, 2004.


Page 18 of 25


**HOUSE OF BRUSSELS CHOCOLATES INC.**FORM 10-QSB
For the Quarter Ended July 31, 2004




As a chocolate wholesaler, we are subject to significant seasonality in demand. We undertake expansion in new markets with the objective of evening out large seasonal variations in revenue. One of our managements goals is to reduce or eliminate the severity of historical revenue and plant utilization swings. We believe the diversification of our products and markets will significantly reduce those seasonal effects. Further, we believe the acquisition of targeted business units can be accretive to our earnings, enhance revenues and assist in normalizing demand fluctuations. Consequently, from time-to-time, we investigate and pursue acquisitions we believe will help consolidate and/or accelerate our growth.





On July 29, 2004, we entered into a stock purchase agreement with DeBas Chocolates, Inc., a California corporation ("DeBas") whereby we purchased all of the outstanding shares of common stock of DeBas. We undertook this acquisition 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 also acquired a strategically located manufacturing and production facility which we believe will assist in lowering the cost of our product distribution. Additionally, Guy Debbas, Founder and President of DeBas, will remain with us as Vice President of Product Development under a five-year employment agreement. We believe Mr. Debbas is uniquely skilled in manufacturing efficiencies and product research & development.





In this 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. In addition, we absorbed approximately $1,124,000 in net liabilities from DeBas. Of the purchase price tendered, $150,000 cash and 226,481 shares of our common stock have been held in escrow awaiting distribution to either Mr. Debbas or cancellation by the Company. The market value of the amounts escrowed is $800,000. For accounting purposes, approximately $700,000 of these escrowed amounts have been excluded from purchase price as we believe they are currently non-estimable or will not be paid. We have tentatively recognized $920,000 in goodwill associated with this acquisition. Our goodwill allocation however, is subject to substantial revision based upon final valuation of the assets and liabilities absorbed in the purchase. The funds utilized for the purchase were derived from the cash and equity of the Company.





The terms and conditions of the stock purchase agreement were the result of arm's length negotiations between the parties. We believe the transaction was favorable to us in view of the payment terms, synergies associated with the personnel absorbed and the market value of the underlying assets of DeBas. No formal appraisal or fairness opinion was done in connection with this transaction.





**RESULTS OF OPERATIONS**





During the fiscal quarter ended July 31, 2004, we recorded $797,000 in revenues which represents a 193% increase in our sales volume over the same period during the previous year. In connection with these increased sales, our cost of goods sold increased by 161% generating a gross margin of $151,000 or 19%. When compared to the quarter ended July 31, 2003, our gross margin and gross margin percentage increased by $127,000 and 10% respectively. Despite enhanced sales and margins, we recognized a loss of $621,000 for the current quarter. In largest part, our loss relates to the residual impact of normal seasonal downturns and our ongoing investment in selling and administrative personnel required to support our expansion. Included in this loss is $104,000 in stock based compensation related to stock options granted during the prior year and expensed in this quarter as a result of our timely transition to "fair market value" based accounting for options in accordance with "Statement of Financial Accounting Standard 148."





**Revenues**





Our sales revenues increased $525,000 or 193%, from $272,000 to $797,000 for the fiscal quarters ending July 31, 2003 and 2004, respectively. In largest part, this increase is attributable to approximately $267,000 in sales generated under our newly executed contract with Walgreens and nearly $170,000 in revenues reported by our recently acquired subsidiary, DeBas. This increase in revenue is especially significant since it occurred in a fiscal quarter which traditionally is a seasonal low-point.


Page 19 of 25  **HOUSE OF BRUSSELS CHOCOLATES INC.**FORM 10-QSB
For the Quarter Ended July 31, 2004  **Cost of Sales**





Our cost of sales increased by $398,000 to $646,000, or 161%, for the quarter ended July 31, 2004, when compared to cost of sales of $248,000 for the same quarter in the prior year. Substantially all of this increase was matched by associated increases in sales revenue on which we earned a gross margin of 19%. Our gross margin for the same period during fiscal 2004 was only 9%. In largest part, the 10% increase in margin between periods reflects better utilization of labor and a stronger absorption of overheads costs.





**Selling, general and administrative expenses**





Our selling, general and administrative expenses increased to $734,000 for the quarter ended July 31, 2004 from $445,000 for the quarter ended July 31, 2003, an increase of $289,000 or 65%. In largest part, this increase can be attributed to a growth of $276,000 in the amounts we paid in salaries, benefits and directors fees during the current quarter. Of this amount, we recognized $49,000 in stock based compensation related to stock options granted during the prior year and expensed in this quarter as a result of our timely transition to "fair market value" based accounting for options in accordance with "Statement of Financial Accounting Standard 148." Overall, the increase in salaries and fees represents our ongoing investment in selling and administrative personnel required to support our expansion.





**FINANCIAL CONDITION**





At July 31, 2004, our total assets equal $8,297,000 which represents an increase of nearly $4,881,000 or 143% over assets reported at April 30, 2004. The build-up in current assets, including inventories and receivables resulted from an increase in actual and projected sales volumes and accounted for $2,002,000 of the increase in assets overall. Substantially all of the residual increase is attributable to assets purchased in connection with our acquisition of DeBas. These assets include $920,040 in goodwill associated with that transaction. Our acquisition of DeBas also resulted in the absorption of approximately $2,493,000 in additional liabilities. Of that amount, $1,351,000 will be payable within the next twelve months. Our current ratio (the ratio of current assets to current liabilities), is 1.78 at July 31, 2004 which represents a decline from 1.92 at April 30, 2004. In the event internally generated profits or our financing efforts do not provide adequate resources to sustain our growth, the lack of cash required to extinguish liabilities and invest in expansion, could result in a substantial decline in our expectations of earnings.





**LIQUIDITY AND CAPITAL RESOURCES**





During the current fiscal quarter, our operations were primarily financed using cash generated from revenues, sales of our common stock and the exercise of share purchase warrants. Asset purchases and the buildup of inventories contributed heavily to the cash required by our operations during this quarter. In total, we consumed $2,267,000 in excess of amounts generated by product sales. This shortfall was offset in its entirety by $2,697,000 in capital raised from our shareholders.





Cash required for on-going operations has increased significantly. Our need for raw materials and our investment in inventories has become sharply higher. Though we seek customers with non-seasonal demand, our products sales always 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. Among those liabilities is approximately $260,000 in employee related taxes which are delinquent. A lien for $156,806 has been placed against DeBas in connection with these past due amounts. Since our acquisition of Debas, we have paid all new tax obligations in full when due. We have also granted a limited power of attorney to an expert to negotiate favorable payment terms and possible reductions in penalties from the IRS. In addition, we intend to pursue settlement negotiations with respect to a variety of outstanding DeBas liabilities. In one instance subsequent to July 31, 2004, we have reached an agreement with a significant vendor to accept the equivalent of $235,398 in shares of our restricted common stock in lieu of cash payable under the terms of a previous liability.


Page 20 of 25  **HOUSE OF BRUSSELS CHOCOLATES INC.**FORM 10-QSB
For the Quarter Ended July 31, 2004





On July 27, 2004, we executed a 15-year lease for new manufacturing and office space for our Canadian operations outside of Vancouver, BC. This facility provides 74,000 square feet of useable space at an initial monthly rate of $30,000 including certain taxes, operating expenses and management fees. We anticipate the move to the new facility will be completed over the next two quarters. Though we will endeavor to minimize the cash required to support this change in location, necessary expenditures could strain cash flows.





We are actively seeking working capital to meet future needs. The support of our shareholders has been invaluable and we plan to continue our efforts to raise additional capital from the equity marketplace. In that connection, we have made application and are actively pursuing listing on a senior domestic stock exchange.





If we are unable to generate operating profits, we will require additional financing to pay costs including product development, marketing, rent, payrolls and facilities expense associated with our core business. Because of low interest rates, we believe debt financing may be an attractive option. We are involved in discussions with several financial institutions concerning financing arrangements whereby we could borrow funds against large purchase orders or accounts receivable. We may attempt to secure debt based on our inventories and fixed assets as well. If short-term and/or long-term financing cannot be obtained as described, we will have to revise our planned expansion so that cash flow generated by operations is sufficient to meet our cash requirements. There is no assurance that additional financing will be obtained. In the event our financing efforts do not provide adequate resources to sustain our growth, losses from operations or cash used to invest in our expansion, could result in substantial decline in our future expectations.





**Off-Balance Sheet Arrangements**





We had no off-balance sheet arrangements during the fiscal quarter ended July 31, 2004.







**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, 2004, 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 Securities and Exchange Commission'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, 2004 , 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:


Page 21 of 25  **HOUSE OF BRUSSELS CHOCOLATES INC.**FORM 10-QSB
For the Quarter Ended July 31, 2004  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.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------






**PART II--OTHER INFORMATION**










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





During our quarter ended July 31, 2004, 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 had knowledge and experience in financial and business matters which allowed them to evaluate the merits and risks of our securities and that each person was knowledgeable about our operations and financial condition.








|1. | On June 4, 2004 we issued 773,688 shares of common stock to seven (7) investors pursuant to the exercise of previously issued share purchase warrants. 728,233 of the warrants were exercisable at a price of $1.25 per share and 45,455 of the warrants had an exercise price of $0.65 per share. We received proceeds in the amount of $939,837 from these exercises.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




On June 4, 2004, we also issued 1,100,000 shares of common stock to our Chief Executive Officer, Grant Petersen and 293,920 shares of common stock to our former officer/director, Evan Baergen. These share issuances were also pursuant to the exercise of previously issued share purchase warrants. Each warrant had an exercise price of $0.30 per share. We received proceeds in the amount of $418,056 from these exercises.





|2. | On June 9, 2004 we issued 1,206,480 shares of common stock to an investor pursuant to the exercise of a previously issued share purchase warrant. The warrant had an exercise price of $0.30 per share. We received proceeds in the amount of $361,944 from this warrant exercise.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|3. | During the period from July 1stthrough July 9th, 2004 we issued 248,184 shares of common stock to four (4) investors pursuant to the exercise of previously issued share purchase warrants. The warrants had an exercise price of $0.65 per share. We received proceeds in the amount of $161,320 from these exercises.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|4. | On July 29, 2004, we issued 324,042 shares of our common stock as partial compensation for our purchase of 100% of the outstanding capital stock of DeBas Chocolate Inc. The market value of our common stock at the date of purchase was $2.87 per share or $930,000. Pursuant to the stock purchase agreement, 226,481 of the shares issued, were placed in escrow awaiting the final measurement of assets and liabilities assumed in the transaction.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Page 22 of 25 **** **HOUSE OF BRUSSELS CHOCOLATES INC.**FORM 10-QSB
For the Quarter Ended July 31, 2004




|5. | On July 30, 2004, we sold 142,000 shares of our common stock to three investors at a price of $2.00 per share. We received total proceeds on the sales of $284,000. These sales were made to "accredited investors", as that term is defined in Rule 501 of Regulation D of the Act.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




On July 30, 2004, we also issued 421,909 shares of our common stock to four (4) investors, including 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 $0.85 to $1.76. We received $523,432 in total proceeds from these exercises. In connection with these transactions, we also issued share purchase warrants for 376,454 as a financing incentive to the same four (4) investors 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, and Harold Kahn, our Director, received one of these warrants for 100,000 shares. The term of the warrants ranged from July 27, 2006 to March 31, 2009.







**ITEM 6.**  **EXHIBITS AND REPORTS ON FORM 8-K** ****





|**Exhibit Number** | **Description of Exhibit**                                                                                                                          
|------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------
|10.1               | Product and trademark sales Agreement between House of Brussels Chocolates Inc. and Walgreens(1)                                                    
|10.2               | Facilities Lease Agreement between House of Brussels Chocolates Inc. and 5290 Investments Ltd.(2)                                                   
|10.3               | Stock Purchase Agreement between House of Brussels Chocolates Inc. and DeBas Chocolate Inc.(2)                                                      
|10.4               | Employment Agreement between House of Brussels Chocolates Inc. and Guy Debbas(3)                                                                    
|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 2002(3)
|31.2               | 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 2002(3)
|32.1               | 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 2002(3)
|32.2               | 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(3)




| | (1) | Previously filed with the Securities and Exchange Commission as an exhibit to the Registrants Annual Report on Form 10-KSB filed on July 29, 2004.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Previously filed with the Securities and Exchange Commission as an exhibit to the Registrants Form 8-K filed on August 3, 2004.
| | --- | --------------------------------------------------------------------------------------------------------------------------------

| | (3) | Filed as an Exhibit to this Quarterly Report on Form 10-QSB.
| | --- | ------------------------------------------------------------




Page 23 of 25  **HOUSE OF BRUSSELS CHOCOLATES INC.**FORM 10-QSB
For the Quarter Ended July 31, 2004  REPORTS ON FORM 8-K




We filed a Form 8-K on May 18, 2004, to report that we entered into a guaranteed 2-year, multi-million dollar agreement to manufacture gourmet chocolates for Walgreens Co. of Deerfield, Illinois ("Walgreens") under a private label contract.





Subsequent to the quarter end, we filed a Form 8-K dated August 3, 2004 reporting that effective July 29, 2004, House of Brussels Chocolates Inc. entered a Stock Purchase Agreement with DeBas Chocolates, Inc., a California corporation ("DeBas") whereby we purchased all of the outstanding shares of Common Stock of DeBas to increase our business of manufacturing and retailing gourmet chocolate products.





Further, on that same Form 8-K we reported that on July 27, 2004, we executed a 15-year lease for new manufacturing facilities and office space supporting our Canadian operations outside of Vancouver, BC.


Page 24 of 25  **HOUSE OF BRUSSELS CHOCOLATES INC.**FORM 10-QSB
For the Quarter Ended July 31, 2004




**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 14, 2004**By:
s/s Grant Petersen**Grant Petersen****Chief Executive Officer, President and Director**






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