**UNITED
STATES**
 **SECURITIES
AND EXCHANGE COMMISSION**
 Washington,
DC 20549
 
 **DRAFT**
 **FORM
10-QSB/ A**
 Amendment
Number 1
 
 
 x
    QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the quarterly period ended**October
      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: **30,920,034
Shares of $0.001 par value Common Stock outstanding as of December 9,
2004.**
 
 
 Transitional
Small Business Disclosure Format (check one): Yes o  **No** x
 
 1
  **HOUSE
OF BRUSSELS CHOCOLATES INC.**
 
 **FORM
10-QSB**
 **For
The Quarter Ended October 31, 2004**
 
 **INDEX**
 
 
 PART
      I - FINANCIAL INFORMATION
 ITEM 1.
    FINANCIAL
  STATEMENTSITEM
      2.
    MANAGEMENT'S DISCUSSION AND
      ANALYSIS OR PLAN OF OPERATIONSITEM 3.
    CONTROLS AND
  PROCEDURES
 PART
      II--OTHER INFORMATION
 ITEM
      1.
    LEGAL PROCEEDINGSITEM 2.
    UNREGISTERED SALES OF EQUITY
      SECURITIES AND USE OF PROCEEDSITEM 6.
    EXHIBITS
 SIGNATURES
 
  **HOUSE
      OF BRUSSELS CHOCOLATES INC.
      **FORM
      10-QSB
      **For the Quarter Ended October 31, 2004******
  House of
Brussels Chocolates Inc. is filing this Amendment No. 1 on Form 10-QSB/A to its
Form 10-QSB for the quarter ended October 31, 2004 that was originally filed
with the Securities and Exchange Commission (“SEC”) on December 15, 2004 (the
“Original 10-QSB”) to (i) modify our presentation of our Consolidated Statement
of Cash Flows to classify an amount issued in settlement of trade payable as an
adjustment to reconcile net loss for the period to cash used in operating
activities and (ii) expand our financial statement footnote disclosure related
to inventories. For the convenience of the reader, this Amendment No. 1 amends
in its entirety the Original 10-QSB.
 
 This
Amendment No. 1 continues to speak as of the date of the Original 10-QSB, and we
have not updated the disclosure contained herein to reflect any events that
occurred at a later date other than those set forth above . All information
contained in this Amendment No. 1 is subject to updating and supplementing as
provided in our periodic reports filed with the SEC subsequent to the date of
the filing of the Original 10-QSB.
 **PART
I - FINANCIAL INFORMATION**
 
   **ITEM
      1.**
    **FINANCIAL
      STATEMENTS**Consolidated
      Balance Sheets as of October 31, 2004 (unaudited) and April 30,
      2004Consolidated
      Statements of Operations for the Three and Six Month PeriodsEnding
      October 31, 2004 and October 31, 2003 (unaudited)Consolidated
      Statement of Changes in Shareholders' Equity for the Six Month PeriodFrom
      April, 30, 2004 to October 31, 2004 (unaudited)Consolidated
      Statements of Cash Flows for the Six Month PeriodsEnding
      October 31, 2004 and October 31, 2003 (unaudited)Notes
      to the Consolidated Financial Statements
   2
  **HOUSE
OF BRUSSELS CHOCOLATES INC.**
 
 
 
 
 **CONSOLIDATED
FINANCIAL STATEMENTS**
 **AS
OF OCTOBER 31, 2004**
 
  3
 **HOUSE
      OF BRUSSELS CHOCOLATES INC.
      ****Consolidated
      Balance Sheets as of October 31, 2004 and April 30,
      2004******
 
 **OCTOBER
      31, 2004**
    
    **APRIL
      30, 2004**(unaudited)
    
    (audited)**ASSETS**Current
      assetsCash
    
    $
    122,924
    
    $
    153,438Accounts
      receivable, net
    
    
    3,172,968
    
    
    414,835Inventory
    
    
    2,330,421
    
    
    1,286,838Prepaid
      expenses
    
    
    560,326
    
    
    479,386Total
      current assets
    
    
    6,186,639
    
    
    2,334,497Software,
      net
    
    
    57,455
    
    
    55,124Land
      and building, net
    
    
    1,168,342
    
    
    -Property,
      plant and equipment, net
    
    
    1,735,204
    
    
    951,866Goodwill
    
    
    1,043,790
    
    
    -Other
      assets
    
    
    323,350
    
    
    75,046$
    10,514,780
    
    $
    3,416,533**LIABILITIES
      AND SHAREHOLDERS' EQUITY**Current
      liabilitiesAccounts
      payable
    
    $
    2,513,607
    
    $
    757,137Accrued
      liabilities
    
    
    912,995
    
    
    145,149Current
      portion of capital lease and long term debt
    
    
    74,840
    
    
    -Due
      to related parties, net
    
    
    304,327
    
    
    313,983Total
      current liabilities
    
    
    3,805,769
    
    
    1,216,269Capital
      lease liability
    
    
    82,602
    
    
    -Long-term
      debt
    
    
    1,031,551
    
    
    -4,919,922
    
    
    1,216,269Capital
      stockAuthorized60,000,000
      common shares, $0.001 par value4,000,000
      preferred sharesIssued30,837,873
      (April 30, 2004 - 25,560,575 ) common shares
    
    
    30,838
    
    
    25,561Additional
      paid-in capital
    
    
    11,805,096
    
    
    7,659,725Warrants
      and stock options issued
    
    
    3,308,264
    
    
    3,467,928Accumulated
      other comprehensive income
    
    
    676,199
    
    
    341,660Accumulated
      deficit
    
    
    (10,225,539
    )
    
    (9,294,610
    )5,594,858
    
    
    2,200,264$
    10,514,780
    
    $
    3,416,533
  The
accompanying notes are an integral part of these financial
statements
 4
 **HOUSE
      OF BRUSSELS CHOCOLATES INC.
      ******Consolidated
      Statements of Operations for the Three Month and Six Month Periods****Ending
      October 31, 2004 and October 31,
      2003********
 
 **3
      MONTHS ENDED**
      **OCTOBER
      31,**
    
    **6
      MONTHS ENDED**
      **OCTOBER
      31,****2004**
    
    **2003**
    
    **2004**
    
    **2003**(unaudited)
    
    (unaudited)
    
    (unaudited)
    
    (unaudited)Sales
    
    $
    4,171,563
    
    $
    1,070,425
    
    $
    4,917,210
    
    $
    1,342,551Cost
      of sales, excluding amortizationand
      depreciation
    
    
    3,172,172
    
    
    452,482
    
    
    3,775,275
    
    
    700,016Gross
      profit
    
    
    999,391
    
    
    617,943
    
    
    1,141,935
    
    
    642,535Selling,
      general and administrativeexpenses
    
    
    1,215,966
    
    
    423,146
    
    
    1,947,512
    
    
    868,455Amortization
      and depreciation
    
    
    80,512
    
    
    2,107
    
    
    125,352
    
    
    64,3481,296,478
    
    
    425,253
    
    
    2,072,864
    
    
    932,803Net
      loss
    
    $
    (297,087
    )
    $
    192,690
    
    $
    (930,929
    )
    $
    (290,268
    )Weighted-average
      number of commonshares
      outstanding
    
    
    30,454,728
    
    
    19,652,943
    
    
    29,048,853
    
    
    19,928,556Basic
      and diluted loss per share
    
    $
    (0.01
    )
    $
    0.01
    
    $
    (0.03
    )
    $
    (0.01
    )
 
  The
accompanying notes are an integral part of these financial
statements
 
  5
 **HOUSE
      OF BRUSSELS CHOCOLATES INC.
      ********Consolidated
      Statement of Changes in Shareholders' Equity for the******Period
      from April 30, 2004 to October 31,
      2004************
 **ACCUMULATED****COMMON****STOCK**
    
    **ADDITIONAL**
    
    **WARRANTS**
    
    
    
    
    
    **OTHER****PAID
      IN**
    
    **AND**
    
    
    
    
    
    **COMPREHENSIVE**
    
    **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**
    
    **$**
    **2,200,264**Warrants
      and options exercised for common stock
    
    
    4,048,781
    
    
    4,049
    
    
    2,956,623
    
    
    (4,048,781
    )
    
    (547,932
    )
    
    
    
    
    
    
    
    2,412,740Stock-based
      compensation for services
    
    
    15,000
    
    
    15
    
    
    25,485
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,500Warrants
      expired
    
    
    
    
    
    
    
    
    35,439
    
    
    (354,391
    )
    
    (35,439
    )
    
    
    
    
    
    
    
    -Options
      under the 2004 stock option plan
    
    
    
    
    
    
    
    
    
    
    
    87,150
    
    
    78,355
    
    
    
    
    
    
    
    
    78,355Private
      placements
    
    
    142,000
    
    
    142
    
    
    152,121
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    152,263Warrants
      issued
    
    
    
    
    
    
    
    
    (312,294
    )
    
    518,454
    
    
    444,032
    
    
    
    
    
    
    
    
    131,737Stock
      issued for acquisition of Debas Chocolates
    
    
    324,042
    
    
    324
    
    
    929,676
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    930,000Loss
      for the periodForeign
      currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    59,614Shares
      held in contingency
    
    
    
    
    
    
    
    
    (650,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    (650,000
    )**Balance
      July 31, 2004**
    
    
    **30,090,398**
    
    **$**
    **30,091**
    
    **$**
    **10,796,775**
    
    
    **4,825,958**
    
    **$**
    **3,406,944**
    
    
    ****
    
    **$**
    **401,274**
    
    **$**
    **5,280,859**Warrants
      and options exercised for common stock
    
    
    423,786
    
    
    424
    
    
    453,662
    
    
    (482,082
    )
    
    (213,603
    )
    
    
    
    
    
    
    
    240,483Stock-based
      compensation for services
    
    
    67,005
    
    
    67
    
    
    144,934
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    145,001Options
      under the 2004 stock option plan
    
    
    
    
    
    
    
    
    
    
    
    55,577
    
    
    49,969
    
    
    
    
    
    
    
    
    49,969Stock
      issued in settlement of debt
    
    
    96,968
    
    
    97
    
    
    235,535
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    235,632Private
      placements
    
    
    159,716
    
    
    159
    
    
    174,190
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    174,349Warrants
      issued
    
    
    
    
    
    
    
    
    
    
    
    151,716
    
    
    64,954
    
    
    
    
    
    
    
    
    64,954Loss
      for the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (930,929
    )
    
    
    
    
    (930,929
    )Foreign
      currency translation adjustment
    
    
    ****
    
    
    ****
    
    
    ****
    
    
    
    
    
    
    
    
    ****
    
    
    274,925
    
    
    334,539**Balance
      October 31, 2004**
    
    
    **30,837,873**
    
    **$**
    **30,838**
    
    **$**
    **11,805,096**
    
    
    **4,551,169**
    
    **$**
    **3,308,264**
    
    **$**
    **(10,225,539**
    **)**
    **$**
    **676,199**
    
    **$**
    **5,594,858**
    The
accompanying notes are an integral part of these financial
statements
  6
 **HOUSE
      OF BRUSSELS CHOCOLATES INC.
      **********Consolidated
      Statement of Cash Flows for the Six Month Periods **Ended
      October 31, 2004 and October 31,
      2003******************
  **6
      MONTHS ENDED**
    
    **6
      MONTHS ENDED****OCTOBER
      31, 2004**
    
    **OCTOBER
      31, 2003**(unaudited)
    
    (unaudited)**CASH
      FLOWS FROM OPERATING ACTIVITIES**Net
      loss for the period
    
    $
    (930,929
    )
    $
    (290,268
    )Adjustments
      to reconcile net loss for the period to net cashused
      in operating activitiesAmortization
      and depreciation
    
    
    125,352
    
    
    64,348Employee
      and officer compensation through stock options
    
    
    128,324
    
    
    -Stock
      issued in settlement of trade payable
    
    
    235,632
    
    
    -Common
      stock and warrants issued for compensation
    
    
    170,501
    
    
    74,687Changes
      in non-cash working capital itemsAccounts
      receivable
    
    
    (2,640,737
    )
    
    (772,762
    )Inventory
    
    
    (873,360
    )
    
    (159,703
    )Prepaid
      expenses
    
    
    (63,192
    )
    
    21,955Other
      assets
    
    
    (1,314,492
    )
    
    (1,328
    )Accounts
      payable and accrued liabilities
    
    
    2,383,728
    
    
    662,862(2,779,173
    )
    
    (400,209
    )**CASH
      FLOWS FROM FINANCING ACTIVITIES**Proceeds
      from loans and other long term debt
    
    
    1,106,391
    
    
    48,150Proceeds
      from (repayments to) related parties
    
    
    (11,319
    )
    
    79,836Additions
      to (repayments of) obligations under capital lease
    
    
    82,602
    
    
    (13,330
    )Proceeds
      from exercise of previously issued warrants
    
    
    2,653,223
    
    
    -Proceeds
      from issuance of securities
    
    
    523,303
    
    
    526,5454,354,200
    
    
    641,201**CASH
      FLOWS FROM INVESTING ACTIVITIES**Acquisition
      of property, land, building and equipment
    
    
    (1,938,169
    )
    
    (20,179
    )Shares
      held in contingent escrow
    
    
    (650,000
    )
    
    -Issuance
      of common shares for purchase of subsidiary
    
    
    930,000
    
    
    -(1,658,169
    )
    
    (20,179
    )Foreign
      exchange effect on cash
    
    
    52,628
    
    
    (216,407
    )Increase
      (decrease) in cash and cash equivalents
    
    $
    (30,514
    )
    $
    4,406Cash
      and cash equivalents, beginning of the period
    
    
    153,438
    
    
    56,364Cash
      and cash equivalents, end of the period
    
    $
    122,924
    
    $
    60,770**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
 
  7
 **HOUSE
      OF BRUSSELS CHOCOLATES INC.
      ************Notes
      to the Consolidated Financial Statements for the Quarter **Ended
      October 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, and Fresno, 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. At
the date of purchase, $150,000 cash and 226,481 shares of our common stock were
held in escrow awaiting distribution to either Mr. Debbas or future cancellation
by the Company. The market value of the amounts escrowed at the date of purchase
was $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 October 31, 2004, we have identified and recorded nearly $550,000 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 $50,000 is held against the settlement of future proceedings
the results of which are currently non-estimable. As a result of an audit of the
DeBas balance sheet completed October 7, 2004, we increased the amount
recognized as goodwill associated with this acquisition from $920,000 to
$1,031,551. Our goodwill allocation however, remains 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.
 
 On
December 1, 2004 we completed the closure of our manufacturing facilities at
2065 Oakdale Avenue, San Francisco, California. The planned shutdown of this
operating location was undertaken to reduce manufacturing costs and consolidate
domestic west coast operations at our newly acquired production facilities in
Fresno, California. The inventories and manufacturing assets previously located
at the San Francisco plant have been reallocated to support operations at both
our Fresno and Delta, British Columbia locations. In connection with this
closure, the Company incurred certain costs associated with equipment relocation
and employee severance. In total, these costs were not material to our overall
financial position or results of operations.
 
  8
 **HOUSE
      OF BRUSSELS CHOCOLATES INC.
      ************Notes
      to the Consolidated Financial Statements for the Quarter **Ended
      October 31,
      2004********************
 
 **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 October 31, 2004 and the
results of our operations for the periods 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.
 
 **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.
 
  9
 **HOUSE
      OF BRUSSELS CHOCOLATES INC.
      ************Notes
      to the Consolidated Financial Statements for the Quarter **Ended
      October 31,
      2004********************
  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%
      and 6.66%
    Diminishing
      balance and 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.
  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, facilities 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.**
    **Accounts
      Receivable Financing Agreement**
 
 On
September 28, 2004, we entered into an accounts receivable financing agreement
with an asset based lender. Under the terms of this agreement, the lender will
finance 80% of the value of certain receivables assigned for their collection.
The lender charges a fee of one-half percent (.5%) of the face amount of any
invoice financed. In addition, we agreed to pay interest in the amount of one
and one-half percent (1.5%) on the face value of invoices financed for each 15
day period the amount due on that invoice is outstanding. At October 31, 2004,
invoices related to only three customers have been assigned under this agreement
and the principal balance due and outstanding is $97,326. Collateral under this
agreement includes all present or future contracts for sales, accounts
receivable, deposit accounts, chattel paper, letters of credit and inventories
whether now or hereafter owned or existing, consigned by or to, or acquired by
House of Brussels Inc. or its subsidiary Brussels Chocolates Ltd.
 
  10
 **HOUSE
      OF BRUSSELS CHOCOLATES INC.
      ************Notes
      to the Consolidated Financial Statements for the Quarter **Ended
      October 31,
      2004********************
  **5.**
    **Inventories**
 
 Inventories
consisted of the following:
 
 **October
      2004**
    
    **April
      2004**Finished
      goods
    
    $
    1,061,669
    
    $
    394,792Unpackaged
      finished goods
    
    
    181,564
    
    
    32,800Packaging
      materials
    
    
    633,691
    
    
    418,628Raw
      materials
    
    
    310,809
    
    
    349,522Inventory
      Development Costs
    
    
    142,688
    
    
    91,096$
    2,330,421
    
    $
    1,286,838
  Inventory
Development Costs include molds, tools, dies, film and film plates related to
our inventory of packaging materials. These costs are charged to expense over
the lesser of their expected useful lives, or the life of the product line to
which they relate.
 **6.**
    **Prepaid
      Expenses**
 Prepaid
expenses consisted of the following:
 
 **October
      2004**
    
    **April
      2004**Travel
      advances and miscellaneous
    
    $
    10,423
    
    $
    132,607Prepaid
      consulting fees
    
    
    176,389
    
    
    264,584Deposits,
      promotions and royalties
    
    
    320,441
    
    
    18,064Insurance
    
    
    53,073
    
    
    64,131$
    560,326
    
    $
    479,386
 
 **7.**
    **Software,
      Land and Building, Property, Plant and Equipment,
Net**
 Software,
land and building, property, plant and equipment consisted of the
following:
 
 **October
      2004**
    
    **April
      2004****Accumulated**
    
    **Net
      Book**
    
    **Net
      Book****Cost**
    
    **Amortization**
    
    **Value**
    
    **Value**Software
    
    $
    158,031
    
    $
    100,576
    
    $
    57,455
    
    $
    55,124Land
      and building
    
    
    1,198,000
    
    
    29,658
    
    
    1,168,342
    
    
    -Automotive
    
    
    74,911
    
    
    58,826
    
    
    16,085
    
    
    11,273Computer
      equipment
    
    
    201,982
    
    
    160,127
    
    
    41,855
    
    
    25,242Furniture
      and fixtures
    
    
    185,406
    
    
    104,782
    
    
    80,624
    
    
    10,434Production
      equipment and molds
    
    
    2,648,901
    
    
    1,159,345
    
    
    1,489,557
    
    
    874,299Leasehold
      improvements
    
    
    56,258
    
    
    25,579
    
    
    30,679
    
    
    -Leased
      equipment
    
    
    101,326
    
    
    55,938
    
    
    45,388
    
    
    -Other
      equipment
    
    
    96,631
    
    
    65,614
    
    
    31,017
    
    
    30,618$
    3,365,416
    
    $
    1,630,212
    
    $
    1,735,204
    
    $
    951,866
 
  11
 ****
 **HOUSE
      OF BRUSSELS CHOCOLATES INC.
      ************Notes
      to the Consolidated Financial Statements for the Quarter **Ended
      October 31,
      2004********************
 
 **8.**
    **Due
      to Related Parties**
 
 Amounts
due to related parties is comprised primarily of $279,000 due Guy Debbas, our
Vice President of Product Development, in connection with liabilities absorbed
during our purchase of DeBas. Under the terms of an amendment to the original
stock purchase agreement, payments on this indebtedness have been extended and
are now due in 12 equal instalments through October 2005. Principal on this debt
bears interest at 5% per annum.
 
 **9.**
    **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.
 
 **10.**
    **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 $729,558 and
security pledged includes all real estate, plant machinery and equipment,
furniture, inventory and accounts receivable belonging to our DeBas Subsidiary.
Monthly payments on the loan from County Bank are $2,940 and the principle
balance is $123,417 (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 by DeBas. 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 $131,764 (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 belonging to
DeBas. The loan from Bank of America has a principal balance of $3,482 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 $9,169 respectively.
 
 Principle
payments for the next five years are estimated to be:
 2004
    
    $
    69,4002005
    
    
    71,5002006
    
    
    75,0002007
    
    
    78,7502008
    
    
    118,000
   **11.**
    **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. To date, we issued options for
860,000 shares in grant sizes ranging from 10,000 to 200,000 shares to our
Directors and employees at exercise prices ranging from $1.63 to $2.38 per share
and an expiration timeframe of 3 years. Vestings related to these options vary.
Options to purchase 390,000 of our shares remain available under the plan. The
fair value of each option granted was estimated on the date of grant using the
Black-Scholes option-pricing model and the resulting amortized compensation
expense has been included in the accompanying financial statements.
 
  12
 **HOUSE
      OF BRUSSELS CHOCOLATES INC.
      ************Notes
      to the Consolidated Financial Statements for the Quarter **Ended
      October 31,
      2004********************
  **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 November 1, 2004, for the next five years
are:
 
 $
    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. 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.
 
 **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 entitled the holder to purchase
one share of common stock at a price of $0.30 per share during the period from
issuance 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
greater than 10% shareholder. The loan was 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.
 
  13
 **HOUSE
      OF BRUSSELS CHOCOLATES INC.
      ************Notes
      to the Consolidated Financial Statements for the Quarter **Ended
      October 31,
      2004********************
  **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. As a result of timing related issues, however, those warrants
subsequently expired without 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.
 
 **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.
 
 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.
 
 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.
 
 **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.
 
  14
 **HOUSE
      OF BRUSSELS CHOCOLATES INC.
      ************Notes
      to the Consolidated Financial Statements for the Quarter **Ended
      October 31,
      2004********************
  **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.
 
 **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.
 15
 **HOUSE
      OF BRUSSELS CHOCOLATES INC.
      **************Supplemental
      Statement of Expenses for the Three Month and Six Month Periods **Ended
      October 31,
      2004**********************
 
 **3
      MONTHS ENDED**
      **OCTOBER
      31,**
    
    **6
      MONTHS ENDED**
      **OCTOBER
      31,****2004**
    
    **2003**
    
    **2004**
    
    **2003**(unaudited)
    
    (unaudited)
    
    (unaudited)
    
    (unaudited)**Selling
      expenses**Bad
      debts
    
    $
    21,537
    
    $
    17,547
    
    $
    43,514
    
    $
    17,547Promotion
      and advertising
    
    
    39,782
    
    
    55,250
    
    
    88,194
    
    
    128,075Rent
      and utilities
    
    
    24,374
    
    
    21,895
    
    
    28,345
    
    
    74,759Salaries,
      benefits and consulting fees
    
    
    386,786
    
    
    110,387
    
    
    531,217
    
    
    188,986Travel
      and entertainment
    
    
    51,822
    
    
    19,686
    
    
    127,416
    
    
    32,837524,301
    
    
    224,765
    
    
    818,686
    
    
    442,204**General
      and administrative expenses**Board
      of Directors Fees
    
    
    44,097
    
    
    -
    
    
    88,195
    
    
    -Interest,
      bank fees and foreign exchange
    
    
    134,538
    
    
    29,836
    
    
    148,627
    
    
    39,758Office
      and miscellaneous
    
    
    77,079
    
    
    11,489
    
    
    164,078
    
    
    28,372Professional
      fees
    
    
    70,176
    
    
    30,693
    
    
    111,788
    
    
    147,240Rent
      and utilities
    
    
    52,061
    
    
    6,061
    
    
    64,747
    
    
    9,879Salaries,
      benefits and consulting fees
    
    
    279,667
    
    
    118,600
    
    
    501,425
    
    
    197,651Travel
      and entertainment
    
    
    34,047
    
    
    1,702
    
    
    49,966
    
    
    3,351691,665
    
    
    198,381
    
    
    1,128,826
    
    
    426,251**Total
      selling, general and administrative expenses**
    
    $
    1,215,966
    
    $
    423,146
    
    $
    1,947,512
    
    $
    868,455
 
 The
accompanying notes are an integral part of these financial
statements
 
  16
  ****HOUSE
      OF BRUSSELS CHOCOLATES INC.
      **FORM
      10-QSB
      **For the Quarter Ended October 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 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 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, 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,
Safeway, Nordstrom and Costco now represent a significant portion of our
revenue. We continue to focus our marketing efforts 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. In addition, during the first half of this fiscal year, we have
received significant purchase orders and commitments to purchase our products
from a variety of large retailers including Safeway, Costco, Marshall's, TJ Max,
Nordstroms, Laura Secord, Eckerds and KFM Foods International.
  17
 **HOUSE
      OF BRUSSELS CHOCOLATES INC.
      **FORM
      10-QSB
      **For the Quarter Ended October 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 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, $50,000 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
at the date of purchase was $800,000. For accounting purposes, approximately
$700,000 of these escrowed amounts have been excluded from the purchase price as
we believe they are currently non-estimable or will not be paid. As a result of
an audit of the DeBas balance sheet completed October 7, 2004, we increased the
amount recognized as goodwill associated with this acquisition from $920,000 to
$1,031,551. Our goodwill allocation however, remains 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 October 31, 2004, we generated $4,172,000 in revenues
representing a 290% increase in sales volume over the same period during the
previous fiscal year. Our increased sales volume can be attributed to a
substantial growth in orders from our expanding private label and wholesale
distribution customer base. More specifically, sales under our newly executed
contract with Walgreens rose to $875,000 during the fiscal quarter ended October
31, 2004 and our orders from supermarket giant Safeway generated nearly
$1,350,000 in revenues during this same period. In connection with these sales
our, cost of goods sold increased by $2,720,000 generating a gross margin of
nearly $1,000,000 or 24%. Despite enhanced sales, we recognized a loss of
$297,087 for the current quarter. In largest part, we believe that loss can be
attributed to larger than normal costs of production labor and our ongoing
investment in selling and administrative personnel required to support our
expansion.
 
 In an
effort to control and reduce our costs of production and administration, we have
undertaken a rigorous cost reduction and production efficiency review. In part,
that review has resulted in the December 1, 2004 closure of 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 newly acquired production
facilities in Fresno, California. The inventories and manufacturing assets
previously located at the San Francisco plant have been reallocated to support
operations at both our Fresno and Delta, British Columbia locations. In
connection with this closure, the Company incurred certain costs associated with
equipment relocation and employee severance. In total, these costs were not
material to our overall financial position or results of operations.
  18
 **HOUSE
      OF BRUSSELS CHOCOLATES INC.
      **FORM
      10-QSB
      **For the Quarter Ended October 31, 2004******
  **Revenues**
 
 Our sales
revenues for the three and six month periods ending October 31, 2004 increased
290% and 266% respectively when compared to the same periods during the previous
fiscal year. Sales for the fiscal quarter ending October 31, 2004 were
$4,172,000 and represent an increase of $3,101,000 over the revenues of
$1,070,000 reported for the fiscal quarter ended October 31, 2003. Sales for the
six month period ending October 31, 2004 were $4,917,000 and represent an
increase of $3,575,000 over the revenues of $1,343,000 reported for the same
period ended October 31, 2003. Our second fiscal quarter is traditionally the
busiest time of our fiscal year. Sales increases over prior years can be
attributed to a significant growth in our revenues from private label and
wholesale distribution customers. More specifically, sales under our newly
executed contract with Walgreens rose to $875,000 during the fiscal quarter
ended October 31, 2004 and our orders from supermarket giant Safeway generated
nearly $1,350,000 in revenues during this same period.
 
 **Cost
of Sales**
 
 Cost of
sales for the three and six month periods ending October 31, 2004 were
$3,172,000 and $3,775,000 respectively. Cost of sales for the current fiscal
quarter increased $2,720,000 or 601% over the cost of sales of $452,482 reported
for the three month period ending October 31, 2003. Cost of sales for the first
six months of our current fiscal year increased $3,075,000 or 439% over the cost
of sales of $700,016 reported for the comparable six month period in the
previous fiscal year. Substantially all of our increases in cost of sales for
the current three and six month periods were associated with increases in sales
revenue on which we earned a gross margin of 23%-24%. In part, the decline in
our gross margins between years reflects the effect of abnormally high margins
generated a result of $124,000 in one-time licensing fee income (12% of total
revenues) recognized during the fiscal quarter ending October 31, 2003. More
significantly however, our costs of sales for the current period include larger
than normal amounts of production labor. Those labor costs are associated with
idle time incurred at our San Francisco plant prior to shut down, and higher
than normal labor rates associated with unavoidable overtime incurred in
successfully achieving required delivery deadlines.
 
 **Selling,
general and administrative expenses**
 
 Selling
expenses for the three and six month periods ending October 31, 2004 were
$524,301 and $818,686 respectively. Selling expenses for the current fiscal
quarter increased $299,536 or 133% over the selling expenses of $224,765
reported for the three month period ending October 31, 2003. Selling expenses
for the first six months of our current fiscal year increased $376,482 or 85%
over the selling expenses of $442,204 reported for the comparable six month
period in the previous fiscal year. In largest part, the increases in selling
expenses for both the three and six month periods can be attributed to nearly
$387,000 and $532,000, respectively, paid in sales salaries, commissions and
brokerage costs associated with our increased revenues. In addition, the costs
of travel and entertainment related to our selling efforts have increased by
$95,000 or 288% for the six month period ended October 31, 2004.
 
 General
and administrative expenses for the three and six month periods ending October
31, 2004 were $691,665 and $1,129,000 respectively. General and administrative
expenses for the current fiscal quarter increased $493,284 or 249% over the
general and administrative expenses of $198,381 reported for the three month
period ending October 31, 2003. General and administrative expenses for the
first six months of our current fiscal year increased $702,575 or 165% over the
general and administrative expenses of $426,251 reported for the comparable six
month period in the previous fiscal year. The amounts we've incurred for general
and administrative expenses have risen in nearly all categories as a result of
our growth and expansion. Most significantly, during the three and six month
periods ending October 31, 2004 we have incurred $323,764 and $589,620 in
salaries, benefits, and director's fees. These respective amounts represent an
increase of $205,164 or 173% over the salaries, benefits, directors' fees of
$118,600 reported for the three month period ending October 31, 2003 and
$391,969 or 198% over the salaries, benefits, and directors' fees of $197,651
reported for the comparable six month period in the previous fiscal year.
  19
 **HOUSE
      OF BRUSSELS CHOCOLATES INC.
      **FORM
      10-QSB
      **For the Quarter Ended October 31, 2004******
  **FINANCIAL
CONDITION**
 
 At
October 31, 2004, our total assets equal $10,515,000 which represents an
increase of nearly $7,098,000 or 208% 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
$3,802,000 of the increase in assets overall. Substantially all of the residual
increase is attributable to assets purchased in connection with the expansion of
our new Delta, British Columbia manufacturing facility and our acquisition of
DeBas. The assets associated with DeBas include $1,044,000 in goodwill
associated with that transaction. Our acquisition of DeBas also resulted in the
absorption of approximately $2,493,000 in additional liabilities. Our current
ratio (the ratio of current assets to current liabilities), is 1.63 at October
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 six months ended October 31, 2004, our operations were primarily financed
using cash generated from revenues, sales of our common stock, the exercise of
share purchase warrants, vendor credit and short term receivables financing.
Asset purchases, together with the buildup of our inventories and accounts
receivable contributed heavily to the cash required by our operations during
this period. In total for the six month period ending October 31, 2004, our
investing activities consumed $1,658,000 and our operations consumed $2,779,000
in excess of amounts generated by product sales. This shortfall has been
substantially offset by $4,354,000 obtained as a result of our financing
activities including $3,177,000 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 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. Among those liabilities is approximately $260,000 in
employee related taxes which are delinquent. A lien for $157,000 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 during August 2004, we reached an agreement with a
significant vendor to accept the equivalent of $235,000 in shares of our
restricted common stock in lieu of cash payable under the terms of a previous
liability.
 
 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 by January 31, 2004. 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.
  20
 **HOUSE
      OF BRUSSELS CHOCOLATES INC.
      **FORM
      10-QSB
      **For the Quarter Ended October 31, 2004******
  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. On September 28, 2004, we
entered into an accounts receivable financing agreement with an asset based
lender. At October 31, 2004, invoices related to only three customers have been
assigned under this agreement and the principal balance due and outstanding is
$97,326. We are also involved in ongoing discussions with an investment bank
concerning arrangements whereby we could borrow funds against our accounts
receivable, 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 October 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 October 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 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 October
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:
 
 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
  21
 **HOUSE
      OF BRUSSELS CHOCOLATES INC.
      **FORM
      10-QSB
      **For the Quarter Ended October 31, 2004******
  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
1.**  **LEGAL
PROCEEDINGS** ****
 
 We are
involved in a matter pending in District Court, Clark County, Nevada, entitled
Whittington v. House of Brussels Chocolates, Inc., Case No. A482600 ("the
Matter").
 
 Mr.
Whittington is a former officer and director of the Company, who claims that he
had an agreement with the Company, entitling him to purchase 1.2 million shares
of stock (post 1 for 5 reverse split) for $0.05 per share and warrant rights to
purchase another 1.2 million shares (post 1 for 5 reverse split) at $0.30 per
share. Mr. Whittington filed suit in District Court, Clark County, Nevada, on
March 22, 2004, seeking to enforce this alleged agreement. On April 6, 2004, Mr.
Whittington took the further step of filing an application for temporary
restraining order and preliminary injunction, asking the court to compel the
Company to immediately issue him 1.2 million shares of stock and to give him
adequate time to exercise his alleged warrant rights to purchase an additional
1.2 million shares of stock. The Company answered Mr. Whittington's complaint,
denying the existence of the alleged agreement and denying that he is entitled
to any shares or warrants. In addition, the Company opposed Mr. Whittington's
application for a temporary restraining order and preliminary injunction. A
hearing on Mr. Whittington's application for temporary restraining order and
preliminary injunction was held on April 27, 2004. At the conclusion of the
hearing, the court denied all of the relief requested by Mr. Whittington. On May
6, 2004, Mr. Whittington filed a motion to amend his complaint. The motion was
granted and the First Amended Complaint was filed on September 9, 2004. The
First Amended Complaint asserts the following causes of action against the
Company: (1) alter ego/piercing the corporate veil; (2) accounting; (3)
injunctive relief; (4) breach of contract; (5) application for receivership; (6)
unjust enrichment; (7) conversion; (8) tortious and contractual breach of the
covenant of good faith and fair dealing; (9) breach of fiduciary duties; (10)
fraud/negligent misrepresentation; and (11) punitive damages. The Company has
filed an Answer to the First Amended Complaint denying and contesting all
claims, causes of action, and relief sought. The Answer includes a counterclaim
against Mr. Whittington for abuse of process. The discovery phase of the case is
about to begin.
 
 The
Company believes that Mr. Whittington's claims and causes of action are without
merit and will aggressively defend against all of the claims and causes of
actions asserted by him.
  ****
 **ITEM
2.**  **UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS** ****
 
 During
our quarter ended October 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 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.
    During
      the period from August 19 to August 31, 2002 we issued 210,082 shares of
      common stock to three (3) investors pursuant to the exercise of previously
      issued share purchase warrants. The warrants were exercisable at a price
      of $0.65 per share. Upon the exercise of these warrants, we received
      proceeds in the amount of $136,553.
  22
 **HOUSE
      OF BRUSSELS CHOCOLATES INC.
      **FORM
      10-QSB
      **For the Quarter Ended October 31, 2004******
  2.
    On
      August 31, 2004 we issued 96,968 shares of common stock pursuant to a
      Settlement Agreement dated August 20, 2004. This debt settlement related
      to liabilities acquired in connection with our recent purchase of DeBas.
      The shares issued were valued at $2.43 each and cancelled indebtedness in
      the amount of $235,632. Accordingly, no gain or loss resulted from this
      settlement.
 
 3.
    On
      September 15, 2004, we issued 59,716 investment units at a price of $1.75
      each to a member of our Board of Directors who is also a greater than 10%
      shareholder. Total proceeds of the sale were $104,503. Each investment
      unit was comprised of one share of our common stock and one share purchase
      warrant. Each share purchase warrant entitled the holder to purchase a
      share of our common stock at $1.85 until September 7,
2005.
 
 4.
    On
      October 8, 2004, we issued a total of 192,000 shares of common stock to
      two (2) investors, 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 $124,800. In connection with these
      transactions, we also issued share purchase warrants for 92,000 as a
      financing incentive to the same two (2) investors at an exercise price of
      $3.00 per share until September 28, 2006.
 
 5.
    On
      October 8, 2004, we issued 80,000 shares of common stock to one (1)
      investor pursuant to the exercise of previously issued share purchase
      warrants. The warrants were exercisable at a price of $0.65 per share.
      Upon the exercise of these warrants, we received proceeds in the amount of
      $52,000.
 
 6.
    In
      October, 2004, we sold a total of 100,000 shares of our common shares to
      nine (9) investors. The purchase price for each share was $1.02 and we
      received total proceeds of $102,000.
  ****
 **ITEM
6.**  **EXHIBITS**
 
 **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 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 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)
    Previously
      filed with the Securities and Exchange Commission as an exhibit to the
      Registrant's Form 10-QSB filed on September 14,
2004.
  23
 **HOUSE
      OF BRUSSELS CHOCOLATES INC.
      **FORM
      10-QSB
      **For the Quarter Ended October 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:
    **December 15,
      2004**By:
    s/s
      Grant Petersen**Grant
      Petersen****Chief
      Executive Officer, President and Director**
 
 24