BREK Energy (BREK) 10QSB 2004 Q3 Quarterly report (small business)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-QSB

[ X ] QUARTERLY REPORT UNDER SECTION 13 0R 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2004

[   ] TRANSITION REPORT UNDER SECTION 13 0R 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from____________to____________

Commission file number 000-27753

BREK ENERGY CORPORATION

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

Incorporated in the State of Nevada (State or other jurisdiction of incorporation or organization)	98-0206979 (I.R.S. Employer Identification No.)
Third Floor, 346 Kensington High Street, London, W14 8NS, United Kingdom (Address of principal executive offices)
011-44-20-7371-6668 (Issuer’s telephone number)
19/F, 80 Gloucester Road, Wanchai, Hong Kong, SAR (Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

[  ] Yes [ X ] No

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

[  ] Yes [ X ] No

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date.

Class	Outstanding at September 30, 2004
shares of common stock - $0.0001 par value	48,571,964

Page - 1

PART I - FINANCIAL INFORMATION

Item 1.Financial Statements.

BREK ENERGY CORPORATION

CONSOLIDATED FINANCIAL STATEMENTS

As at September 30, 2004 and December 31, 2003 and

for the three and nine month periods ended September 30, 2004 and 2003

UNAUDITED

Page - 2

BREK ENERGY CORPORATION

CONSOLIDATED BALANCE SHEETS

UNAUDITED

		September 30,			December 31,
		2004			2003
ASSETS
Current Assets
Cash	$	67,161		$	2,318
Trade accounts receivable		-			6,028
Prepaids		522,180			-
		589,341			8,346
Oil and gas properties (Note 3)		3,804,737			2,339,345
TOTAL ASSETS	$	4,394,078		$	2,347,691
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued liabilities	$	1,091,676		$	1,347,517
Due to related parties (Note 4)		169,007			210,957
TOTAL LIABILITIES		1,260,683			1,558,474
Commitments and contingencies (Note 8)
Minority interest		68,535			65,342
STOCKHOLDERS' EQUITY
Share capital (Note 5)
Authorized
300,000,000 common shares, $0.001 par value
Issued, outstanding and subscribed
50,468,920 and 28,713,630 common shares		50,470			28,714
Additional paid in capital		56,173,874			54,021,239
Common stock purchase warrants		8,177,375			8,016,124
Deficit		(61,336,859	)		(61,342,202	)
TOTAL STOCKHOLDERS' EQUITY		3,064,860			723,875
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	4,394,078		$	2,347,691

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

Page - 3

BREK ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

UNAUDITED

		Three Months						Nine Months
		Ended September 30,						Ended September 30,
		2004			2003			2004			2003
Revenue	$	135,892		$	5,657		$	207,445		$	20,746
Expenses
Operating expenses
General and administrative		79,915			14,778			198,909			291,107
Total operating expenses		79,915			14,778			198,909			291,107
Income (loss) from operations		55,977			(9,121	)		8,536			(270,361	)
Interest income		-			-			-			8,371
Net income (loss) before minority interest		55,977			(9,121	)		8,536			(261,990	)
Minority interest		(1,466	)		(1,466	)		(3,193	)		(5,848	)
Net income (loss) for the period	$	54,511		$	(10,587	)	$	5,343		$	(267,838	)
Basic and diluted income (loss) per share	$	0.01		$	(0.01	)	$	0.01		$	(0.01	)
Weighted average shares outstanding		48,571,965			28,713,630			41,554,834			28,626,855

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

Page - 4

BREK ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME

FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2004 and 2003

UNAUDITED

	Common Shares Issued					Additional			Common Stock		Common Shares Subscribed				Accumulated Other
	Number of					Paid in			Purchase		Number of				Comprehensive
		Shares		Amount		Capital			Warrants		Shares		Amount		Income (Loss	)		Total
Balance, January 1, 2003		26,560,037	$	26,561	$	53,635,745		$	8,016,124		-	$	-	$	(61,080,323	)	$	598,107
Common shares issued for cash		277,776		277		49,723			-		-		-		-			50,000
Common shares issued for debt		1,875,817		1,876		335,771			-		-		-		-			337,647
Net loss for the nine month period ended,
September 30, 2003		-		-		-			-		-		-		(267,838	)		(267,838	)
Balance, September 30, 2003		28,713,630		28,714		54,021,239			8,016,124		-		-		(61,348,161	)		717,916
Net income for the three month period ended,
December 31, 2003		-		-		-			-		-		-		5,959			5,959
Balance, December 31, 2003		28,713,630		28,714		54,021,239			8,016,124		-		-		(61,342,202	)		723,875
Units issued for cash		17,166,667		17,167		1,398,458			471,875		-		-		-			1,887,500
Units issued for debt		2,691,667		2,692		145,432			49,376		-		-		-			197,500
Finders fees		-		-		(128,750	)		-		-		-		-			(128,750	)
Shares subscribed		-		-		-			-		1,896,956		379,392		-			379,392
Common stock purchase warrants, expired						360,000			(360,000	)
Net income for the nine month period ended,
September 30, 2004		-		-		-			-		-		-		5,343			5,343
Balance September 30, 2004		48,571,964	$	48,573	$	55,796,379		$	8,177,375		1,896,956	$	379,392	$	(61,336,859	)	$	3,064,860

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

Page - 5

BREK ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

UNAUDITED

		Nine Month Periods Ended September 30,
		2004			2003
CASH FLOWS (USED IN) PROVIDED BY OPERATING ACTIVITIES
Net income (loss) for the period	$	5,343		$	(267,838	)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Minority interest		3,193			5,848
		8,536			(261,990	)
Changes in operating assets and liabilities:
Decrease (Increase) in trade accounts receivable		6,028			(8,299	)
(Increase) Decrease in other prepaids		(522,180	)		32,447
(Decrease) Increase in accounts payable and accrued liabilities		(223,436	)		368,962
(Decrease) Increase in amounts due to related parties		(5,605	)		112,099
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES		(736,657	)		243,219
CASH FLOWS USED IN INVESTING ACTIVITIES
Cash spent on oil and gas properties		(1,465,392	)		(293,481	)
NET CASH USED IN INVESTING ACTIVITIES		(1,465,392	)		(293,481	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock for cash		1,887,500			50,000
Proceeds from shares subscribed for cash		379,392			-
NET CASH PROVIDED BY FINANCING ACTIVITIES		2,266,892			50,000
Net increase (decrease) in cash and cash equivalents		64,843			(262	)
Cash at the beginning of the period		2,318			3,801
Cash at the end of the period	$	67,161		$	3,539
Supplemental cash information:
Cash paid during the period for:
Interest	$	-		$	-
Non-cash Transactions:
Issuance of common stock purchase warrants	$	521,251		$	-
Expiry of common stock purchase warrants	$	360,000		$	-
Issuance of common shares to an officer in payment of finders fees	$	128,750		$	-
Issuance of common shares in settlement of debt	$	32,405		$	65,675
Issuance of common shares in settlement of amounts due to related parties	$	36,346		$	271,972

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

Page - 6

BREK ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

September 30, 2004

NOTE 1 - ORGANIZATION, PRINCIPAL ACTIVITIES AND BASIS OF PRESENTATION

Organization

First Ecommerce Asia Limited (“FEAL”) was incorporated in Hong Kong on September 16, 1998. On January 28, 1999, FEAL, entered into an agreement and plan of merger with JRL Resources Corp., (“JRL Resources”) a company incorporated in the State of Florida on November 13, 1996. Pursuant to the terms of the agreement, plan of merger and related agreements, 3,015,000 newly issued shares of JRL Resources and 985,000 shares held by existing shareholders of JRL Resources were exchanged for two shares of FEAL. As a result of this business combination FEAL became a wholly-owned subsidiary of JRL Resources.

The merger between JRL Resources and FEAL was a merger of a private operating company, (FEAL) into a public shell corporation, with nominal net assets, that resulted in the owners and management of the private company (FEAL) obtaining operating control of the combined company after the transaction. For accounting purposes, the transaction has been treated as a reverse merger, of JRL Resources by FEAL with FEAL deemed to be the accounting acquirer.

Pursuant to an agreement and plan of merger dated February 12, 1999, JRL Resources was merged with and into Brek Energy Corporation (formerly First Ecom.com, Inc.) (“BREK” or the Company”), a company incorporated in the State of Nevada on February 12, 1999, with no shares issued and outstanding. Pursuant to the agreement and plan of merger, all of the 12,040,000 outstanding common shares of JRL Resources were exchanged on a one-for-one basis for newly issued shares of BREK, with BREK being the surviving corporation. For accounting purposes, this merger is treated as a re-incorporation of JRL Resources as BREK.

Principal Activities

During 2001, the Company changed its primary business to that of oil and gas exploration and on July 19, 2001, acquired a 26% non-dilutable voting interest in Gasco Energy, Inc., (“Gasco”). On July 16, 2002, the Company exchanged all of its shareholdings in Gasco for an undivided interest in all of Gasco’s undeveloped mineral leases in Utah, Wyoming, and California. At the same time, the Company acquired an additional undivided interest in Gasco’s undeveloped mineral leases from certain third parties in exchange for the issuance of 4,125,000 shares of the Company. The main focus of the Company’s oil and gas exploration business has been centered in the United States.

In March 2002, the Company acquired a 26% non-dilutable voting interest in Vallenar Energy Corp. (“Vallenar”) another company engaged in oil and gas exploration. On June 28, 2002, the Company increased its ownership of Vallenar to 51.53%.

Basis of Presentation

The unaudited consolidated financial statements included herein have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Item 310(b) of Regulation S-B. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended September 30, 2004 and 2003 are not necessarily indicative of the results that may be expected for any interim period or the entire year. For further information, these consolidated financial statements and the related notes should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2003 included in the Company’s annual report on Form 10-KSB.

Page - 7

BREK ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

September 30, 2004

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the financial statements of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated. Affiliated companies (20% to 50% owned companies) in which the Company does not have significant influence are accounted for, using the equity method. The Company’s share of earnings (losses) from these companies are included in the accompanying consolidated statements of operations.

Accounting 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 and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The Company’s financial statements are based on a number of significant estimates, including oil and gas reserve quantities which is the basis for the calculation of depletion and impairment of oil and gas properties.

Accounts Receivable

Receivables represent valid claims against debtors for sales arising on or before the balance sheet date and are reduced to their estimated net realizable value. An allowance for doubtful accounts is based on an assessment of the collectibility of all past due accounts. At September 30, 2004 and December 31, 2003, all of the trade accounts receivable were considered collectable.

Revenue Recognition

Oil and gas revenue is recognized as income when the oil and gas is produced and sold.

Segment Reporting

The Company is currently centrally managed and operates in one business segment: the oil and gas industry in the United States.

Comprehensive Income

Comprehensive income reflects changes in equity that results from transactions and economic events from non-owner sources. The Company had no comprehensive income during the three and nine month periods ended September 30, 2004 and 2003.

Basic and Diluted Net Income (Loss) Per Common Share (“EPS”)

Basic loss per share excludes dilution and is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted loss per share reflects the potential dilution of securities that could occur if securities or other contracts to issue common stock (such as, convertible preferred stock, warrants to purchase common stock and common stock options) were exercised or converted into common stock.

Potential common shares are excluded from the diluted loss per share computation in net loss periods as their effect would be anti-dilutive.

Page - 8

BREK ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

September 30, 2004

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

Oil and Gas Properties

The Company follows the full cost method of accounting whereby all costs related to the acquisition of oil and gas leases and acquisition and development of oil and gas properties are capitalized into a single cost centre (“full cost pool”). Such costs include lease acquisition costs, geological and geophysical expenses, overhead directly related to exploration and development activities and costs of drilling both productive and non-productive wells. Proceeds from property sales are generally credited to the full cost pool without gain or loss recognition unless such a sale would significantly alter the relationship between capitalized costs and the proved reserves attributable to these costs. A significant alteration would typically involve a sale of 25% or more of the proved reserves related to a single full cost pool.

Depletion of exploration and development costs and depreciation of production equipment is computed using the units of production method based upon estimated proven oil and gas reserves. The costs of unproved properties are withheld from the depletion base until such time as they are either developed or abandoned. The properties are reviewed periodically for impairment. Total well costs are transferred to the depletable pool even when multiple targeted zones have not been fully evaluated. For depletion and depreciation purposes, relative volumes of oil and gas production and reserves are converted at the energy equivalent rate of six thousand cubic feet of natural gas to one barrel of crude oil.

Under the full cost method of accounting, capitalized oil and gas property costs less accumulated depletion and net of deferred income taxes may not exceed an amount equal to the present value, discounted at 10%, of estimated future net revenues from proved oil and gas reserves plus the cost or estimated fair value, if lower, of unproven properties. Should capitalized costs exceed this ceiling, impairment is recognized. The present value of estimated future net revenues is computed by applying current prices of oil and gas to estimated future production of proved oil and gas reserves as of period-end, less estimated future expenditures to be incurred in developing and producing the proved reserves assuming the continuation of existing economic conditions. The Company’s oil and gas wells began producing during the first quarter of 2003, no depletion was recorded during the three and nine month periods ended September 30, 2004 because at December 31, 2002, the Company’s oil and gas properties were either written down to a nominal value or written down to their net present value, based on a December 31, 2004 reserves study. (Note 9)

Page - 9

BREK ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

September 30, 2004

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

Stock-based Compensation

The Company accounts for its stock-based compensation using Accounting Principles Board Opinion No. 25 (“APB 25”) and related interpretations. Under APB 25, compensation expense is recognized for stock options with an exercise price that is less than the market price on the grant date of the option. For stock options with exercise prices at or above the market value of the stock on the grant date, the Company adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123 “Accounting for Stock-Based Compensation” (“SFAS 123”) for the stock options granted to the employees and directors of the Company. Accordingly, no compensation cost has been recognized for these options. Compensation expense has been recognized in the accompanying financial statements for stock options that were issued to our outside consultants. Had compensation expense for the options granted to our employees and directors been determined based on the fair value at the grant date for options, consistent with the provisions of SFAS 123, the Company’s net loss and net loss per share for the three and nine months ended September 30, 2004 and 2003 would have been increased to the pro forma amounts indicated below:

	For the Three Months Ended		For the Three Months Ended			For the Nine Months Ended		For the Nine Months Ended
	September 30, 2004			September 30, 2003			September 30, 2004		September 30, 2003
Net income (loss) attributable to common shareholders:
As reported	$	54,511	$	(10,587	)	$	5,343	$	(267,838	)
Stock based employee compensation determined under the fair value based method		-		-			-		(490	)
Pro forma	$	54,511	$	(10,587	)	$	5,343	$	(268,328	)
Net income(loss) per common share:
As reported	$	0.01	$	(0.01	)	$	0.01	$	(0.01	)
Pro forma	$	0.01	$	(0.01	)	$	0.01	$	(0.01	)

The fair value of the common stock options granted during 2004 and 2003, for disclosure purposes was estimated on the grant dates using the Black Scholes Pricing Model and the following assumptions.

	2004	2003
Expected dividend yield	-	-
Expected price volatility	131% to 151%	131% to 151%
Risk-free interest rate	3% to 5.5%	3% to 5.5%
Expected life of options	5 years	5 years

Page - 10

BREK ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

September 30, 2004

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123(R), “Share-Based Payment” (“SFAS 123(R)”), which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS 123 (R) is effective for public companies for the first fiscal year beginning after June 15, 2005, supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS 95, Statement of Cash Flows.

SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro-forma disclosure is no longer an alternative. The new standard will be effective for the Company, for the quarter commencing July 1, 2005. SFAS 123(R) permits companies to adopt its requirements using either a “modified prospective” method or a “modified retrospective” method. Under the “modified prospective” method, compensation cost is recognized in the financial statements beginning with the effective date, based on the requirements of SFAS 123(R) for all share-based payments granted after that date, and based on the requirements of SFAS 123 for all unvested awards granted prior to the effective date of SFAS 123(R). Under the “modified retrospective” method, the requirements are the same as under the “modified prospective” method, but it also permits entities to restate financial statements of previous periods, either for all periods presented or to the beginning of the fiscal year in which the statement is adopted, based on previous pro forma disclosures made in accordance with SFAS 123. The Company has not yet determined which of the methods it will use upon adoption. The Company has not yet completed its evaluation but expects the adoption of SFAS 123(R) to have an effect on the financial statements similar to the pro forma effects reported in the Stock Based Compensation disclosure above.

The Securities and Exchange Commission issued Staff Accounting Bulletin SAB No. 106 (“SAB 106”) in September 2004 regarding the application of SFAS 143 for oil and gas producing entities that follow the full cost accounting method. SAB 106 states that after adoption of SFAS 143, the future cash outflows associated with settling asset retirement obligations that have been accrued on the balance sheet should be excluded from the present value of estimated future net cash flows used for the full cost ceiling test calculation. The Company has calculated its ceiling test computation in this manner since the adoption of SFAS 143 and therefore the adoption of SAB 106 did not have any effect on the Company’s financial statements.

During March 2004, the Emerging Issues Task Force (“EITF”) determined that mineral rights as defined in EITF Issue 04-2, “Whether Mineral Rights are Tangible or Intangible Assets”, are tangible assets and should not be considered intangible assets in SFAS 141, “Business Combinations” (“SFAS 141”) and SFAS 142, “Goodwill and Intangible Assets” (”SFAS 142”). The FASB, in agreement with this determination, amended SFAS 141 and 142 through the issuance of FASB Staff Position (“FSP”) FSP 141-1 and 142-1. In addition, the proposed FSP 142-b confirms that SFAS 142 did not change the balance sheet classification or disclosures of mineral rights of oil and gas producing entities. The Company classifies its oil and gas leaseholds as tangible oil and gas properties which is consistent with EITF 04-02, FSP 141-1 and 142-1 and therefore such pronouncements have not impacted the Company’s financial condition or results of operations.

Reclassifications

Certain prior period amounts in the accompanying consolidated financial statements have been reclassified to conform to the current period’s presentation. These reclassifications had no effect on the results of operations of financial position for any period presented.

Page - 11

BREK ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

September 30, 2004

NOTE 3 - OIL AND GAS PROPERTIES

The Company has a 25% interest on some 113,681 gross acres (13,611 net acres) in the Uinta Basin region in Utah, 110,743 gross acres (21,759 net acres) in the Greater Green River Basin of Wyoming and 3,868 gross acres (802 net acres) in Kern County and San Luis Obispo County in California and a 50% interest in 51,194 gross acres (8,865 net acres) in Edwards County in Texas.

The following table presents the Company’s oil and gas property acquisitions, exploration and development expenditures and an adjustment for impairment charges:

	September 30, 2004			December 31, 2003
Property acquisition costs
Acquired in share exchange with Gasco	$	14,402,000		$	14,402,000
Acquired in exchange for common shares of the
Company		2,862,750			2,862,750
Acquired upon acquisition of Vallenar		872,391			872,391
Additional property acquisitions		800,000
Exploration and development expenditures		1,501,783			836,391
		20,438,924			18,973,532
Less: Impairment charges		(16,634,187	)		(16,634,187	)
	$	3,804,737		$	2,339,345

At September 30, 2004 and December 31, 2003, the Company’s proved and unproved oil and gas properties consisted of leasehold interests and exploration and development costs related to their interests in Texas, Utah, Wyoming and California. The Company’s proven and unproven properties are evaluated periodically for the possibility of potential impairment. At September 30, 2004 and December 31, 2003, the Company’s oil and gas properties were valued as follows:

	September 30, 2004		December 31, 2003
Proved & Unproved Properties
Property acquisition costs
Utah	$	2,832,560	$	2,032,560
Wyoming		100		100
California		100		100
Texas		100		100
Exploration & development costs:
Wyoming		-		-
Utah		971,877		306,485
California		-		-
Texas		-		-
	$	3,804,737	$	2,339,345

Page - 12

BREK ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

September 30, 2004

NOTE 3 - OIL AND GAS PROPERTIES, continued

During the period ended September 30, 2004 and the year ended December 31, 2003, no impairment charges were recorded against the Texas, California and Wyoming properties.

During the period ended September 30, 2004 and the year ended December 31, 2003, no impairment charges were recorded against the Utah properties. At December 31, 2002, the Company recorded impairment charges against their Utah property based on a reserves study completed December 31, 2004. (Note 10)

NOTE 4 - RELATED PARTY TRANSACTIONS

During the nine month periods ended September 30, 2004 and 2003, the Company paid $nil and $30,000 in consulting fees to a director. At September 30, 2004 and December 31, 2003, the Company was indebted to this director in the amount of $123,463.

During the nine month periods ended September 30, 2004 and 2003, the Company paid $nil and $12,000 in consulting fees to a director. At September 30, 2004 and December 31, 2003, $12,000 of all of these fees were unpaid.

At September 30, 2004 and December 31, 2003, the Company had $33,544 and $31,346 in accounts payable to directors or companies controlled by directors.

During the period ended September 30, 2004, an officer of the Company received shares in payment of finder’s fees of $128,750 and in payment of debt of $25,951. (Note 5)

During the year ended December 31, 2003, the Company settled $271,972 in related party debt by issuing 1,510,958 common shares at $0.18 per share. (Note 5)

NOTE 5 - COMMON STOCK

On April 14, 2003, the Company issued 277,776 common shares at $0.18 per share by way of a private placement for total proceeds of $50,000.

On April 14, 2003, the Company converted $308,947 in accounts payable and $28,700 in loans payable into 1,875,817 common shares at $0.18 per share. (Note 4)

On March 3, 2004, the Company issued a total of 8,750,000 units at $0.05 for each unit, by way of a private placement for cash of $437,500. Each unit is comprised of one common share and one common share purchase warrant entitling the holder to purchase one common share for $0.35. The warrants have a term of one year and will expire on March 3, 2005. The fair value of the warrants was estimated to be $109,375 and has been recorded as a separate component of stockholders’ equity. (Note 7)

On March 3, 2004, the Company issued a total of 875,000 units, to an officer of the Company, at $0.05 for each unit, for finders’ fees of $43,750. Each unit is comprised of one common share and one common share purchase warrant entitling the holder to purchase one common share for $0.35. The warrants have a term of one year and will expire on March 3, 2005. The fair value of the warrants was estimated to be $10,938 and has been recorded as a separate component of stockholders’ equity. (Notes 4 and 7)

On March 3, 2004, the Company issued a total of 519,020 units, to an officer of the Company, at $0.05 for each unit, in exchange for debt totalling $25,951. Each unit is comprised of one common share and one common share purchase warrant entitling the holder to purchase one common share for $0.35. The warrants have a term of one year and will expire on March 3, 2005. The fair value of the warrants was estimated to be $6,488 and has been recorded as a separate component of stockholders’ equity. (Note 7)

Page - 13

BREK ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

September 30, 2004

NOTE 5 - COMMON STOCK, continued

On May 6, 2004, the Company issued a total of 4,666,667 units at $0.15 for each unit, by way of a private placement for cash of $700,000. Each unit is comprised of one common share and one common share purchase warrant entitling the holder to purchase one common share for $0.25. The warrants have a term of three years and will expire on May 6, 2007. The fair value of the warrants was estimated to be $175,000 and has been recorded as a separate component of stockholders’ equity. (Note 7)

On May 6, 2004, the Company issued a total of 66,667 units, to an officer of the Company, at $0.15 for each unit, for finders’ fees of $10,000. Each unit is comprised of one common share and one common share purchase warrant entitling the holder to purchase one common share for $0.25. The warrants have a term of three years and will expire on May 6, 2007. The fair value of the warrants was estimated to be $2,500 and has been recorded as a separate component of stockholders’ equity. (Notes 4 and 7)

On May 6, 2004, the Company issued a total of 855,980 units at $0.05 for each unit, in exchange for debt totalling $42,799. Each unit is comprised of one common share and one common share purchase warrant entitling the holder to purchase one common share for $0.35. The warrants have a term of one year and will expire on May 6, 2005. The fair value of the warrants was estimated to be $10,700 and has been recorded as a separate component of stockholders’ equity. (Note 7)

On May 24, 2004, the Company issued a total of 2,000,000 units at $0.20 for each unit, by way of a private placement for cash of $375,000 and an accounts receivable for $25,000. Each unit is comprised of one common share and one common share purchase warrant entitling the holder to purchase one common share for $0.30. The warrants have a term of three years and will expire on May 24, 2007. The fair value of the warrants was estimated to be $100,000 and has been recorded as a separate component of stockholders’ equity. The $25,000 account receivable was collected in July, 2004. (Note 7)

On May 24, 2004, the Company issued a total of 1,500,000 units at $0.20 for each unit, by way of a private placement for cash of $300,000. Each unit is comprised of one common share and one common share purchase warrant entitling the holder to purchase one common share for $0.35. The warrants have a term of two years and will expire on May 24, 2006. The fair value of the warrants was estimated to be $75,000 and has been recorded as a separate component of stockholders’ equity. (Note 7)

On May 24, 2004, the Company issued a total of 350,000 units to an officer of the Company, at $0.20 for each unit, for finders’ fees of $70,000. Each unit is comprised of one common share and one common share purchase warrant entitling the holder to purchase one common share for $0.30. The warrants have a term of three years and will expire on May 24, 2007. The fair value of the warrants was estimated to be $17,500 and has been recorded as a separate component of stockholders’ equity. (Notes 4 and 7)

On May 28, 2004, the Company issued a total of 250,000 units at $0.20 for each unit, by way of a private placement for cash of $50,000. Each unit is comprised of one common share and one common share purchase warrant entitling the holder to purchase one common share for $0.30. The warrants have a term of three years and will expire on May 28, 2007. The fair value of the warrants was estimated to be $12,500 and has been recorded as a separate component of stockholders’ equity. (Note 7)

On May 28, 2004, the Company issued a total of 25,000 units to an officer of the Company, at $0.20 for each unit, for finders’ fees of $5,000. Each unit is comprised of one common share and one common share purchase warrant entitling the holder to purchase one common share for $0.30. The warrants have a term of three years and will expire on May 28, 2007. The fair value of the warrants was estimated to be $1,250 and has been recorded as a separate component of stockholders’ equity. (Notes 4 and 7)

At September 30, 2004, 1,896,956 shares had been subscribed for at $0.20 per share. (Note 9)

Page - 14

BREK ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

September 30, 2004

NOTE 6 - STOCKHOLDER RIGHTS PLAN

On March 1, 2002, the Company approved a Rights Agreement whereby a dividend was declared of one right for each share of the Company’s common stock issued and outstanding on March 20, 2002 including any shares issued subsequent to March 20, 2002. Each right entitles the holder to purchase 5 shares of the Companies common stock at an exercise price of $0.01 per right, if certain events occurred relating to a person or group acquiring or attempting to acquire 10% or more of the outstanding of common shares of the Company without the approval of the Company’s board of Directors. The rights are exercisable until December 31, 2020.

At September 30, 2004 and December 31, 2003, the Company had reserved 252,344,600 and 143,568,150 shares for the exercise of these rights for the issued, outstanding and subscribed shares and 115,910,080 and 17,118,410 for the potential exercise of outstanding options and warrants.

NOTE 7 - STOCK OPTIONS AND WARRANTS

During the nine month period ended September 30, 2004 no share purchase options were issued or cancelled. During the nine month period ended September 30, 2004, 19,858,334 share purchase warrants were issued and 100,000 share purchase warrants expired. (Note 5)

NOTE 8 - COMMITMENTS AND CONTINGENCIES

On June 9, 2003, a petition was filed against the Company by Burlington Resources Oil & Gas Company , LP (“Burlington”) claiming that Brek failed to pay for costs incurred by Burlington in drilling oil and gas wells in Texas. Burlington claimed damages of $658,831. On July 16, 2003, Brek Petroleum Inc. filed its original answer to the petition. On March 1, 2004, the Company and Burlington entered into a settlement agreement whereby the Company agreed to pay Burlington a total of $691,874, in twelve equal monthly payments, commencing August 14, 2004, plus legal and court imposed interest.

During the nine month period ended September 30, 2004, the Company has been focusing on developing its oil and gas business. As such, the Company has accumulated a deficit of approximately $61 million to date and additional financing will be required by the Company to support development of its oil and gas properties until such time as the Company achieves positive cash flow from operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s ability to achieve and maintain profitability and positive cash flow is dependent upon its ability to locate profitable oil and gas properties, generate revenues from its oil and gas production and control production costs. Based upon current plans, the Company expects to incur operating losses in future periods. There is no assurance that the Company will be able to generate revenues in the future. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

In February 2003 the debtor and guarantor of the note receivable commenced legal action against the Company, in Bermuda, claiming that the Company and its former subsidiary, First Ecom Systems Limited, had promised to develop and supply them with certain software. As a result of this litigation the debtor ceased making the required instalment payments on March 1, 2003. Although the directors believed that this lawsuit was without merit as there was no condition to develop software for the debtor, due to lack of financial resources the Company did not defend its position and no further actions by either party have transpired since February 2003.

As is customary in the oil and gas industry, the Company may at times have commitments in place to reserve or earn certain acreage positions or wells. If the Company does not pay such commitments, the acreage positions or wells may be lost.

NOTE 9 - PROVISION FOR INCOME TAXES

The Company has not recorded a tax provision due to previous loss carry forwards.

Page - 15

BREK ENERGY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

September 30, 2004

NOTE 10 - SUBSEQUENT EVENTS

Oil and Gas Properties

Based on a December 31, 2004 reserves study, the Company recorded an impairment charge on their Utah oil and gas properties. Based on this study the Company valued the Utah oil and gas properties at an amount equal to the present value, discounted at 10%, of the estimated future net revenues from proved oil and gas reserves of approximately $5.7 million (calculated, based on estimated net revenues of $18.5 million) plus the cost, or estimated fair value, if lower of unproved properties, less estimated future expenditures to be incurred in developing and producing the proved reserves of approximately $1.9 million. The present value of estimated future net revenues was computed by applying current prices of oil and gas to estimated future production of proved oil and gas reserves as of December 31, 2004, assuming the continuation of existing economic conditions. (Note 3)

Common Shares and Warrants

Between October 1, 2004 and December 31, 2004, the Company issued 6,271,956 units for cash of $1,254,393 and 487,500 units, to an officer, as a finder’s fee of $97,500 for arranging placement of 4,875,000 of the 6,271,956 units. These units were issued at $0.20 per unit. Each unit is comprised of one common share and one share purchase warrant, each warrant entitles the holder to purchase one share of the Company’s common stock, is exercisable at prices between $0.30 to $0.35 per share and expires within two to three years. The fair value of the warrants was estimated to be $313,598 (25% of the $1,254,393 in debt or proceeds received from the sale of the units).

During 2005, the Company issued 3,333,335 units for cash of $1,000,000 and 333,334 units, to an officer, as a finder’s fee of $100,000, for arranging placement of these units. The units were issued at $0.30 per unit. Each unit is comprised of one common share and one share purchase warrant, each warrant entitles the holder to purchase one share of the Company’s common stock, is exercisable at $0.50 per share and expires within two years of the date of issuance. The fair value of the warrants was estimated to be $275,000 (25% of the $1,100,000 in debt or proceeds received from the sale of the units).

On July 25, 2005, an officer of the Company exchanged 400,000 warrants for 400,000 shares of the Company’s stock at $0.25 per share.

On September 29, 2005, an officer of the Company exchanged 100,000 warrants for 100,000 shares of the Company's stock, at $0.25 per share.

Page - 16

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

THE FOLLOWING IS A DISCUSSION AND ANALYSIS THAT MANAGEMENT BELIEVES IS RELEVANT TO AN ASSESSMENT AND UNDERSTANDING OF THE CONSOLIDATED RESULTS OF OPERATIONS AND FINANCIAL CONDITION OF BREK ENERGY CORPORATION AND ITS SUBSIDIARIES FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2004 AND 2003. THE FOLLOWING SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES APPEARING ELSEWHERE HEREIN AND MANAGEMENT’S DISCUSSION AND ANALYSIS INCLUDED IN BREK’S ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 2003.

OVERVIEW

Until 2002, we focused our operations on the electronic payment processing business. During 2001 and 2002, we disposed of our electronic payment processing businesses. In July 2002, we acquired a 25% working interest in the undeveloped oil and gas leases owned by Gasco Energy, Inc. in Utah, Wyoming, and California, and we acquired a 51.53% non-dilutable voting interest in Vallenar Energy Corp. a company engaged in oil and gas exploration.

Since we acquired our oil and gas interests, we have focused our attention on our oil and gas operations, primarily in Utah and Wyoming. We are not the operator on any of the properties. The main focus of our oil and gas exploration business is in the United States.

As of the date of this filing, we have participated in the drilling or re-completion of eleven wells and have ten producing wells in which we have net revenue interests of between 8% and 20%. One well, an earning well drilled by Burlington in 2002, generated some revenue for two years but is now shut in. We are still paying for work on one well that was completed during the summer of 2005. We believe that this work will increase the production in the well, with a corresponding increase in revenue.

We have farmed out the drilling of six wells. Under the farmout agreements, we agreed to forfeit 100% of our interest in five wells and wellbores and 75% of our interest in one well and wellbore, and to relinquish 70% of our leasehold interest in the acreage surrounding four wells and 75% in the acreage surrounding two wells in exchange for the right to back in to a 7.5% working interest in four wells and wellbores when the farmee has recovered 100% of its drilling and operating costs, an over-riding royalty interest in the revenue from one well convertible to a wellbore interest when the farmee has recovered 100% of its drilling and operating costs, and 7.5% of the revenue that we would have earned from one well had we not relinquished our well and wellbore interests in the well.

We transferred one-half of our interest in two wells and wellbores and all of our interest in one well and wellbore, all in Utah, to a small drilling fund for which the fund paid us its share of the drilling and completion costs. We used the recovered funds to invest in drilling other wells. The well in which we transferred all of our interest was an earning well.

We did not consent to the drilling of twenty wells proposed by Gasco. As a result of our non-consent, Gasco has drilled or will drill the wells bearing 100% of the costs and is entitled to all of the revenue generated from the sale of oil and gas until they have recovered 300% of their drilling costs, 150% of the costs of newly acquired equipment in the well, and 100% of the operating costs and the costs of any newly acquired surface equipment beyond the wellhead connections, at which time we are entitled to our percentage of the revenue. The average cost of these non-consent wells is approximately $3.5 million, so we do not expect to see any revenue from them for some time, if ever. We have not, however, forfeited any leasehold interests and can participate in future drilling that is proposed for other locations on the same leases.

FINANCIAL CONDITION

We had net income of $54,511 during the nine months ended September 30, 2004. As of September 30, 2004, we had a cash balance of $67,161 and prepaid expenses of $522,180. When these current assets are offset against our current obligations of $1,091,676 in accounts payable and accrued liabilities and $169,007 in amounts due to related parties, we are left with a working capital deficit of $671,342 at September 30, 2004. Our cash and cash equivalents at September 30, 2004, were not sufficient to satisfy our working capital needs and they are not as of the date of this filing. In order to satisfy our operational and working capital requirements for the foreseeable future we must raise funds through private loans, private placement of our shares of common stock or issuance of shares for debt.

Page - 17

Our independent auditors have added an explanatory paragraph to their audit opinions issued in connection with our consolidated financial statements for the fiscal years 2003 and 2002, which states that our ability to continue as a going concern depends upon our ability to resolve liquidity problems, principally by obtaining capital and generating sufficient revenues to become profitable. Our ability to achieve and maintain profitability and positive cash flow is dependent upon our ability to locate profitable oil and gas properties, generate revenues from our oil and gas production and control production costs. Based upon current plans, we expect our net income to be marginal or to incur operating losses in future periods. There is no assurance that we will be able to generate revenues in the future. The accompanying financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

RELATED-PARTY TRANSACTIONS

Included in the $169,007 that is due to related parties at September 30, 2004, is $144,406 in directors’ fees that were accrued during 2002 and 2003 and $24,601 in payments made to our creditors by directors, officers or companies controlled by directors or officers. None of the amounts due to related parties bear interest or have any fixed terms of repayment. During the nine months ended September 30, 2004, we repaid $36,346 in related-party debt by issuing 726,900 shares of common stock.

COMPARISON OF THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003.

Overall Results Of Operations

For the three months ended September 30, 2004, we had a net income of $54,511, or $0.01 per share, which was an increase of $65,098 from our net loss of $10,587 or $(0.01) per share for the three months ended September 30, 2003. The decrease in net loss for the three months ended September 30, 2004 as compared to the three months ended September 30, 2003 was primarily due to an increase in revenue, which was the result of increased production on our Utah oil and gas wells.

For the nine months ended September 30, 2004, we had net income of $5,343, or $0.01 per share, which was an increase of $273,181 from our net loss of $267,838 or $(0.01) per share for the nine months ended September 30, 2003. The decrease in net loss for the nine months ended September 30, 2004 as compared to the nine months ended September 30, 2003 was primarily due to a decrease in general and administrative expenses which was the result of discontinuing our operations in Hong Kong the first quarter of 2003 and an increase in revenue as a result of the increase in production from our Utah oil and gas wells in 2004.

Revenue

Total revenue for the three months ended September 30, 2004 was $135,892 compared to $5,657 for the three months ended September 30, 2003. Revenues from the Wyoming oil and gas properties for the three month periods ended September 30, 2004 and 2003 were $1,159 and $5,657. Revenue from the Utah oil and gas properties was $134,733 and $nil for the three month periods ended September 30, 2004 and 2003. During the third quarter of 2004, oil and gas production from our Utah properties increased, but decreased from our Wyoming properties. We expect that the Utah production will be variable until the new wells are better established, and that our Wyoming production will continue to decline.

Total revenue for the nine months ended September 30, 2004 was $207,445 compared to $20,746 for the nine months ended September 30, 2003. Revenues from the Wyoming oil and gas properties for the nine month periods ended September 30, 2004 and 2003 were $7,497 and $20,746. Revenue from the Utah oil and gas properties was $199,948 and $nil for the nine month periods ended September 30, 2004 and 2003. During the first nine months of 2004, we acquired more production in Utah when we increased our interest in some of our leases, and generated new production from wells that we drilled in Utah. We expect our Utah revenues to increase from new production and our Wyoming revenues to decline.

Operating Expenses

Total operating expenses increased to $79,915 for the three months ended September 30, 2004, from $14,778 for the three months ended September 30, 2003, due primarily to increases in professional fees of $48,204, administration, office and rent of $5,268 and travel and promotion of $11,665. These increases were due to the increase in our investing and financing activities.

Page - 18

Total operating expenses decreased to $198,909 for the nine months ended September 30, 2004, from $291,107 for the nine months ended September 30, 2003, due primarily to a decrease in professional fees of $164,738 offset by an increase in travel and promotion of $68,796 and in administration, office and rent of $3,744. Our professional fees declined because we no longer consult with Hong Kong professionals, who are considerably costlier than North American professionals. Our travel expenses increased because we increased our investing and financing activities. We expect our operating expenses to increase as we increase our investing and financing activities.

Interest Income

We had no interest income for the three months ended September 30, 2004 and 2003.

Interest income decreased to $nil from $8,371 for the nine month periods ended September 30, 2004 and 2003 primarily due to the decrease in cash float in our bank accounts.

Off Balance Sheet Arrangements

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors, and we do not have any non-consolidated, special-purpose entities.

Liquidity And Capital Resources

As of September 30, 2004, we had a cash balance of $67,161 and negative cash flows from operations of $736,657 for the period then ended. During the nine months ended September 30, 2004, we funded our operations through revenues from our oil and gas properties of $207,445 and the private placement of 19,063,623 units for which we received cash of $2,266,892. In return for arranging the private placement, we issued 1,316,667 units to an officer to pay finder’s fees in the amount of $128,750. We issued 648,100 units to pay $32,405 in debt and 726,900 units to an officer to repay $36,346. Each unit consists of one share of common stock and one share purchase warrant.

The notes to our consolidated financial statements as of September 30, 2004 contain footnote disclosure regarding our uncertain ability to continue as a going concern. We have not generated sufficient revenues to cover our expenses, and we have an accumulated deficit of $61,336,859. We have successfully generated sufficient working capital and liquidity through oil and gas revenues and the private placement of our shares of common stock until the date of this filing, and believe that we can continue to do so for the next twelve months. As of September 30, 2004 we had $1,260,683 in current liabilities and cannot assure that we will succeed in developing our business and achieving a profitable level of operations sufficient to meet our ongoing cash needs.

Below is a discussion of our sources and uses of funds for the nine months ended September 30, 2004.

Net Cash Used In Operating Activities

Net cash used in operating activities during the nine months ended September 30, 2004 was $736,657 from an increase in prepaid expenses and deposits of $522,180, a decrease of $223,436 in accounts payable and accrued liabilities, and a decrease in amounts due to related parties of $5,605, offset by net income of $5,343, an adjustment to minority interest of $3,193, and a decrease in accounts receivable and other receivables of $6,028.

Net Cash Provided By Financing Activities

During the nine months ended September 30, 2004, we generated $2,266,892 in cash by issuing 17,041,667 units and accepting subscriptions for 1,896,956 units.

Page - 19

Net Cash Used In Investing Activities

During the nine months ended September 30, 2004, we used invested $1,465,392 in our oil and gas properties.

Contingencies And Commitments

We had no contingencies or long-term commitments at September 30, 2003, except for the Transworld litigation and the Burlington settlement payable which are disclosed in the commitments and contingencies section of the footnotes to our consolidated financial statements, appearing elsewhere herein.

As is customary in the oil and gas industry, we may at times have agreements to reserve or earn acreage or wells. If we do not pay as required by these agreements, we may lose the acreage or wells.

CRITICAL ACCOUNTING POLICIES

Principles of Consolidation

Our consolidated financial statements include the financial statements of our subsidiaries. All significant inter-company balances and transactions have been eliminated. Affiliated companies (20% to 50% owned companies) in which we do not have significant influence are accounted for, using the equity method. Our share of earnings (losses) from these companies are included in the accompanying consolidated statements of operations.

Accounting 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 and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Our financial statements are based on a number of significant estimates, including the estimates of the oil and gas reserve quantities that are the basis for the calculation of depletion and impairment of oil and gas properties.

Accounts Receivable

Our receivables represent valid claims against debtors for sales arising on or before the balance sheet date and are reduced to their estimated net realizable value. An allowance for doubtful accounts is based on an assessment of the collectibility of all past due accounts. At September 30, 2004 and December 31, 2003, we considered all of the trade accounts receivable collectable.

Revenue Recognition

We recognize oil and gas revenue as income when the oil and gas is produced and sold.

Oil and Gas Properties

We follow the full-cost method of accounting whereby all costs related to the acquisition of oil and gas leases and acquisition and development of oil and gas properties are capitalized into a single cost centre (“full-cost pool”). These costs include lease acquisition costs, geological and geophysical expenses, overhead directly related to exploration and development activities and costs of drilling both productive and non-productive wells. Proceeds from property sales are generally credited to the full-cost pool without gain or loss recognition unless such a sale would significantly alter the relationship between capitalized costs and the proved reserves attributable to these costs. A significant alteration would typically involve a sale of 25% or more of the proved reserves related to a single full-cost pool.

We compute the depletion of exploration and development costs and depreciation of production equipment using the units-of-production method based upon estimated proven oil and gas reserves. We withhold the costs of unproved properties from the depletion base until they are either developed or abandoned. We review the properties periodically for impairment. We transfer total well costs to the depletable pool even when multiple targeted zones have not been fully evaluated. For depletion and depreciation purposes, we convert relative volumes of oil and gas production and reserves at the energy equivalent rate of six thousand cubic feet of natural gas to one barrel of crude oil.

Under the full-cost method of accounting, capitalized oil and gas property costs less accumulated depletion and net of deferred income taxes may not exceed an amount equal to the present value, discounted at 10%, of estimated future net revenues from proved oil and gas reserves plus the cost or estimated fair value, if lower, of unproven properties. Should capitalized costs exceed this ceiling, impairment is recognized. The present value of estimated future net revenues is computed by applying current prices of oil and gas to estimated future production of proved oil and gas reserves as of period-end, less estimated future expenditures to be incurred in developing and producing the proved reserves assuming the continuation of existing economic conditions. Our oil and gas wells began producing during the first quarter of 2003 we recorded no depletion during the three and nine months ended September 30, 2004 because at December 31, 2002, our oil and gas properties were either written down to a nominal value or written down to their net present value, based on a December 31, 2004 reserves study. (Note 9)

Page - 20

Stock-based Compensation

We account for our stock-based compensation using Accounting Principles Board Opinion No. 25 (“APB 25”) and related interpretations. Under APB 25, compensation expense is recognized for stock options with an exercise price that is less than the market price on the grant date of the option. For stock options with exercise prices at or above the market value of the stock on the grant date, we adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123 “Accounting for Stock-Based Compensation” (“SFAS 123”) for the stock options granted to the employees and directors of the Company. Accordingly, we have recognized no compensation cost for these options. Compensation expense has been recognized in the accompanying financial statements for stock options that were issued to our outside consultants. Had compensation expense for the options granted to our employees and directors been determined based on the fair value at the grant date for options, consistent with the provisions of SFAS 123, our net loss and net loss per share for the three and nine months ended September 30, 2004 and 2003 would have been increased to the pro forma amounts indicated below:

	For the Three Months Ended		For the Three Months Ended			For the Nine Months Ended		For the Nine Months Ended
	September 30, 2004		September 30, 2003			September 30, 2004		September 30, 2003
Net income (loss) attributable to common shareholders:
As reported	$	54,511	$	(10,587	)	$	5,343	$	(267,838	)
Stock based employee compensation determined under the fair value based method		-		-			-		(490	)
Pro forma	$	54,511	$	(10,587	)	$	5,343	$	(268,328	)
Net income(loss) per common share:
As reported	$	0.01	$	(0.01	)	$	0.01	$	(0.01	)
Pro forma	$	0.01	$	(0.01	)	$	0.01	$	(0.01	)

The fair value of the common stock options granted during 2004 and 2003, for disclosure purposes was estimated on the grant dates using the Black Scholes Pricing Model and the following assumptions.

	2004	2003
Expected dividend yield	-	-
Expected price volatility	131% to 151%	131% to 151%
Risk-free interest rate	3% to 5.5%	3% to 5.5%
Expected life of options	5 years	5 years

Page - 21

Recent Accounting Pronouncements

The Securities and Exchange Commission issued Staff Accounting Bulletin SAB No. 106 (“SAB 106”) in September 2004 regarding the application of SFAS 143 for oil and gas producing entities that follow the full-cost accounting method. SAB 106 states that after adoption of SFAS 143, the future cash outflows associated with settling asset retirement obligations that have been accrued on the balance sheet should be excluded from the present value of estimated future net cash flows used for the full-cost ceiling test calculation. We have calculated our ceiling test computation this way since the adoption of SFAS 143 and therefore the adoption of SAB 106 did not have any effect on our financial statements.

Contractual Obligations

The only contractual obligation we had at September 30, 2004 was the following Burlington settlement:

On March 1, 2004, the Company and Burlington Resources Oil & Gas Company LP (“Burlington”) entered into a settlement agreement whereby the Company agreed to pay Burlington a total of $691,874, in twelve equal monthly payments, commencing August 14, 2004, plus legal and court imposed interest.

Internal and External Sources of Liquidity

We have funded our operations principally through the subscription of shares of common stock and through shares for debt.

Inflation

We do not believe that inflation will have a material impact on our future operations.

Uncertainties Relating to Forward Looking Statements

This Form 10-QSB Quarterly Report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. You can identify these statements by our use of words such as “plan”, “expect”, “aim”, “believe”, “project”, “anticipate”, “intend”, “estimate”, “will”, “should”, “could” and other expressions that indicate future events and trends. All statements that address expectations or projections about the future, including statements about our strategy for participating in drilling programs, increasing revenues, and raising capital from external sources are forward-looking statements.

All forward-looking statements are made as of the date of filing of this Form 10-QSB and we disclaim any duty to update these statements.

Certain parts of this Form 10-QSB may contain “forward-looking statements” within the meaning of the Securities Exchange Act of 1934 based on current managements expectations. Our actual results could differ materially from those in our forward looking statements due to a number of uncertainties including, but not limited to, those discussed in this section. Factors that could cause our future results to differ from these expectations include general economic conditions, particularly as they affect our ability to raise sufficient working capital, the costs of bringing our oil and gas properties into production, and the market for our production. As a result, the identification and interpretation of data and other information and their use in developing and selecting assumptions from and among reasonable alternatives requires the exercise of judgment. To the extent that the assumed events do not occur, our outcome may vary substantially from our anticipated or projected results, and accordingly, we express no opinion on the achievability of those forward-looking statements and give no assurance that any of the assumptions relating to the forward-looking statements are accurate.

We may, from time to time, make oral forward-looking statements. We strongly advise you to read the foregoing paragraphs and the risk factors described in our annual report and in our other documents filed with the United States Securities and Exchange Commission for a description of certain factors that could cause our actual results to differ materially from those in the oral forward-looking statements. We disclaim any intention or obligation to update or revise any oral or written forward-looking statements whether as a result of new information, future events or otherwise.

Item 3. Controls and Procedures.

Disclosure Controls and Procedures

Richard N. Jeffs, Brek’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of Brek’s disclosure controls and procedures (as such term is defined in Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934 (the “Exchange Act” )) as of the end of the period covered by this quarterly report (the “Evaluation Date”). Based on such evaluation, Mr. Jeffs has concluded that, as of the Evaluation Date, Brek’s disclosure controls and procedures are effective in alerting Brek on a timely basis to material information required to be included in its reports filed or submitted under the Exchange Act.

Page - 22

Changes in Internal Controls

During the quarter of the fiscal year covered by this report, there were no changes in Brek’s internal controls or, to Brek’s knowledge, in other factors that have materially affected, or are reasonably likely to materially affect, these controls and procedures subsequent to the date Brek carried out this evaluation.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

During the quarter of the fiscal year covered by this report, no legal proceeding involving Brek or its assets, to the best of Brek’s knowledge, became a reportable event and there have been no material developments in any legal proceedings previously reported by Brek with the exception of the following:

Texas lawsuit - Burlington Resources Oil & Gas Company, LP vs. Brek Petroleum Inc.

On June 9, 2003, Burlington Resources Oil & Gas Company, LP (“Burlington”) filed a Petition in the District Court in Midland County, Texas of the 142^nd Judicial District claiming that Brek Petroleum Inc. failed to pay for costs incurred by Burlington in drilling oil and gas wells located in Midland County, Texas. Burlington claimed damages in the amount of $658,831. On July 16, 2003, Brek Petroleum Inc. filed its Original Answer to the Petition.

On March 1, 2004, the parties reached a settlement and entered into a Settlement Agreement and Release whereby Brek Petroleum Inc. agreed to pay Burlington a total of $691,874 in 12 equal monthly payments. The total of the settlement was comprised of the original amount claimed for damages, Burlington’s legal fees of $3,278, and court imposed interest. As of September 30, 2004, Brek Petroleum Inc. had delivered five of the monthly payments to Burlington. On July 14, 2005, Brek Petroleum Inc. delivered the twelfth and final monthly payment to Burlington.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

During the quarter of the fiscal year covered by this report, (i) Brek did not modify the instruments defining the rights of its shareholders, (ii) no rights of any shareholders were limited or qualified by any other class of securities, and (iii) Brek did not sell any unregistered equity securities.

Item 3. Defaults Upon Senior Securities.

During the quarter of the fiscal year covered by this report, no material default has occurred with respect to any indebtedness of Brek. Also, during this quarter, no material arrearage in the payment of dividends has occurred.

Item 4. Submission of Matters to a Vote of Security Holders.

No matter was submitted to a vote of security holders through the solicitation of proxies or otherwise, during the quarter of the fiscal year covered by this report.

Item 5.Other Information.

During the quarter of the fiscal year covered by this report, Brek reported all information that was required to be disclosed in a report in the form of a Form 8-K, except for the following

Item 2.06 - Material Impairments

Based on a reserve study completed during the first quarter of 2005, it was determined that a $16,634,187 impairment charge needed to be taken against the oil and gas properties at December 31, 2002.

Page - 23

Item 6. Exhibits.

(a)   Index to and Description of Exhibits

All Exhibits required to be filed with the Form 10-Q are incorporated by reference to Brek’s previously filed registration statements, annual reports, and Form 8-K’s (current reports).

Exhibit	Description	Status
3.1	Articles of Incorporation filed as an Exhibit to Brek’s registration statement on Form 10 filed on October 21, 1999, and incorporated herein by reference.	Filed
3.2	Bylaws filed as an Exhibit to Brek’s registration statement on Form 10 filed on October 21, 1999, and incorporated herein by reference.	Filed
4.1	1999 Stock Option Plan, filed as an Exhibit to Brek’s Form S-8 (Registration Statement) filed on September 11, 2000, and incorporated herein by reference.	Filed
4.2	Rights Agreement dated March 1, 2002 between Brek Energy Corporation and U.S. Bank N.A., filed as an Exhibit to Brek’s Form 8-K (Current Report) filed on March 6, 2002, and incorporated herein by reference.	Filed
4.3	2001 Employee Stock Option / Warrant Plan, filed as an Exhibit to Brek’s Form S-8 (Registration Statement) filed on July 10, 2002, and incorporated herein by reference.	Filed
10.1	Stock Purchase Agreement dated March 16, 2000 among Brek Energy Corporation, Balaji Exports Ltd., Rajan Chellarm Mahboobani, Ravi Kishinchand Daswani, and Asia Internet Limited, filed as an attached exhibit to Brek’s Form 10-KSB (Annual Report) filed on March 29, 2000, and incorporated herein by reference.	Filed
10.2	Stock Purchase Agreement dated March 12, 2002 between Vallenar Energy Corp. and Brek Energy Corporation, filed as an attached exhibit to Brek’s Form 10-K/A (Annual Report) filed on September 18, 2002, and incorporated herein by reference	Filed
10.3	Purchase Agreement dated July 16, 2002 among Gasco Energy, Inc., Pannonian Energy Inc., San Joaquin Oil & Gas Ltd., Brek Energy Corporation, Brek Petroleum Inc., Brek Petroleum (California), Inc. and certain stockholders, filed as an attached exhibit to Brek’s Form 8-K (Current Report) filed on July 31, 2002, and incorporated herein by reference	Filed
10.4	Share purchase agreement dated October 19, 2001 among First Ecom.com, Inc., First Commerce Asia Limited, FEDS Acquisition Corporation, First Ecom Systems Limited, Transworld Payment Solutions NV, and First Curacao International Bank NV, filed as an attached exhibit to Brek’s Form 10-KSB (2002 - Annual Report) filed on November 21, 2005, and incorporated herein by reference.	Filed
10.5	License agreements dated October 19, 2001 among First Ecom.com, Inc., First Ecom Systems Limited, and Transworld Payment Solutions NV, filed as an attached exhibit to Brek’s Form 10-KSB (2002 - Annual Report) filed on November 21, 2005, and incorporated herein by reference.	Filed
21	List of Subsidiaries, filed as an attached exhibit to Brek’s Form 10-KSB (2002 - Annual Report) filed on November 21, 2005, and incorporated herein by reference.	Filed
31	Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	Included
32	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	Included

Page - 24

SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, Brek Energy Corporation has caused this report to be signed on its behalf by the undersigned duly authorized person.

BREK ENERGY CORPORATION

By: /s/ Richard N. Jeffs

Name: Richard N. Jeffs

Title:Director and CEO and CFO

Dated:October 31, 2005

Page - 25

Exhibit 31

Page - 26

BREK ENERGY CORPORATION

CERTIFICATIONS PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

CERTIFICATION

I, Richard N. Jeffs, certify that:

1.   I have reviewed this quarterly report on Form 10-QSB of Brek Energy Corporation;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;

4. The small business issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the small business issuer and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

(c) Evaluated the effectiveness of the small business issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the small business issuer’s internal control over financial reporting that occurred during the small business issuer’s most recent fiscal quarter (the small business issuer’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer’s internal control over financial reporting; and

5. The small business issuer’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer’s auditors and the audit committee of the small business issuer’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer’s internal control over financial reporting.

Date: October 31, 2005

/s/ Richard N. Jeffs

Richard N. Jeffs

Chief Executive Officer

Page - 27

BREK ENERGY CORPORATION

CERTIFICATIONS PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

CERTIFICATION

I, Richard N. Jeffs, certify that:

1.   I have reviewed this quarterly report on Form 10-QSB of Brek Energy Corporation;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;

4. The small business issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the small business issuer and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

(c) Evaluated the effectiveness of the small business issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the small business issuer’s internal control over financial reporting that occurred during the small business issuer’s most recent fiscal quarter (the small business issuer’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer’s internal control over financial reporting; and

5. The small business issuer’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer’s auditors and the audit committee of the small business issuer’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer’s internal control over financial reporting.

Date: October 31, 2005

/s/ Richard N. Jeffs

Richard N. Jeffs

Chief Financial Officer

Page - 28

Exhibit 32

Page - 29

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Brek Energy Corporation (“Brek Energy”) on Form 10-QSB for the period ending September 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Richard N. Jeffs, President and Chief Executive Officer of Brek Energy and a member of the Board of Directors, certify, pursuant to s.906 of the Sarbanes-Oxley Act of 2002, that:

(1)   The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)   The information contained in the Report fairly represents, the financial condition and result of operations of Brek Energy.

/s/ Richard N. Jeffs

Richard N. Jeffs

Chief Executive Officer

October 31, 2005

Page - 30

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Brek Energy Corporation (“Brek Energy”) on Form 10-QSB for the period ending September 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Richard N. Jeffs, Chief Financial Officer of Brek Energy and a member of the Board of Directors, certify, pursuant to s.906 of the Sarbanes-Oxley Act of 2002, that:

(1)   The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)   The information contained in the Report fairly represents, the financial condition and result of operations of Brek Energy.

/s/ Richard N. Jeffs

Richard N. Jeffs

Chief Financial Officer

October 31, 2005

Page - 31