If an examination of the title history of a property that we have purchased reveals a natural gas or petroleum lease that has been purchased in error from a person who is not the owner of the mineral interest desired, our interest would be worthless.  In such an instance, we would lose the amount paid for the natural gas or petroleum lease, our estimated or proven reserves would decrease, and our business would be negatively impacted.

It is our practice, in acquiring natural gas and petroleum leases, or undivided interests in natural gas and petroleum leases, not to undertake the expense of retaining lawyers to examine the title to the mineral interest to be placed under lease or already placed under lease.  Rather, we rely upon the judgment of natural gas and petroleum lease brokers or landmen who perform the fieldwork in examining records in the appropriate governmental office before attempting to acquire a lease in a specific mineral interest.

The normal practice of operators in the natural gas and petroleum industry is to obtain, before they begin to drill a well, a preliminary title review of the spacing unit in which they propose to drill the well to ensure there are no obvious deficiencies in title to the well.  Frequently, as a result of such examinations, certain work must be done to correct deficiencies in the marketability of the title, and such curative work entails expense.  The work might include obtaining affidavits of heirship or causing an estate to be administered.

14.

We may not be able manage growth of our business operations effectively, which could result in a negative impact on our business operations and financial condition.

If we are unable to manage growth effectively, our business, financial condition, and results of operations will be negatively affected.  Because of our small size, growth in accordance with our plan of operations, if achieved, will place a significant strain on our financial, technical, operational and management resources.  The expansion of our activities and an increase in the number of projects we are evaluating or in which we participate will place additional demands on our financial, technical and management resources.  Our systems, procedures or controls may not be adequate to support our business operations and we may not be able to achieve the execution necessary to successfully implement our plan of operations.  Our failure to continue to upgrade our technical, administrative, operating and financial control systems or the occurrence of unexpected expansion difficulties, including the recruitment and retention of experienced managers, geoscientists and engineers, could have a negative impact on our business, financial condition, and results of operations and our ability to execute our plan of operations.

Risks associated with our industry:

15.

Due to the speculative nature of natural gas exploration, there is substantial risk that we will be unable to locate commercial quantities of natural gas, which in turn will negatively impact our business operations.

The search for commercial quantities of natural gas as a business is extremely risky.  The properties may not contain commercially exploitable quantities of natural gas.  Our exploration expenditures might not result in the discovery of commercial quantities of natural gas.  Problems such as unusual or unexpected formations and other conditions involved in natural gas exploration often result in unsuccessful exploration efforts.  We may not be able to discover and produce commercial quantities of natural gas from our properties.  If we do not discover and produce commercial quantities of natural gas, we will not have any products or services to offer and our business could fail.

16.

The natural gas and oil markets are volatile markets that have a direct impact on our revenues and profits, and market conditions will affect our ability to continue our operations.

Our revenues, operating results, cash flow and future rate of growth depend upon prevailing prices for natural gas and oil.  Historically, natural gas and oil prices and markets have been volatile and not predictable, and they are likely to continue to be volatile in the future.  Prices for natural gas and oil are subject to wide fluctuations in response to relatively minor changes in the supply of and demand for natural gas and oil, market uncertainty and a variety of additional factors that are beyond our control, including:

•  political conditions in both natural gas and oil producing and exporting countries

•  the supply and price of both domestic and foreign natural gas and oil

•  the worldwide and regional demand for energy

•  the effect of domestic and foreign government regulation of production and transportation

•  the price and availability of alternative energy sources

•  weather conditions

•  acts of war, terrorism and vandalism

•  market manipulation

Lower natural gas and oil prices could not only decrease our revenues on a per unit basis but could also reduce the amount of natural gas and oil that we can produce economically.  A substantial or extended decline in natural gas and oil prices could materially and adversely affect our business operations, financial condition, and ability to finance planned capital expenditures.

17.

Competition in the natural gas and oil industry is intense and we may not be able to compete effectively with our competitors.

Our ability to acquire additional natural gas and oil properties and develop new and existing properties in the future depends on our ability to conduct operations, to evaluate and select suitable properties, to attract qualified personnel, and to consummate transactions in this intensely competitive environment.  We compete with other natural gas and oil companies and other independent operators possessing greater financial resources and technical facilities than we have in seeking to acquire natural gas and oil properties and recruit and retain qualified personnel.  There is significant competition for the limited number of natural gas and oil opportunities and, as a result, we may be unable to acquire an interest in attractive natural gas and oil exploration properties on terms we consider acceptable on a continuing basis.  We also compete for the equipment and labor required to operate and develop natural gas and oil properties.  We do not believe that we have a competitive advantage in the natural gas and oil industry at this time.

Larger competitors may be able to absorb the burden of changes in federal, state and local laws and regulations more easily than we can, which could adversely affect our competitive position.  These competitors might be able to pay more for natural gas and oil properties and be more able to define, evaluate, bid for and acquire a greater number of properties than we can.   Some of our competitors have been operating in the natural gas and oil industry for longer than we have and have been able to operate through industry cycles.

18.

We are subject to complex laws and regulations, including environmental regulations, which could negatively impact our business operations and financial condition.

The development, production and sale of natural gas and oil in the United States are highly regulated.  We could be required to spend a lot to comply with environmental and other governmental regulations.  Matters subject to regulation include:

• the location and density of wells

•  the handling of drilling fluids and obtaining discharge permits for drilling operations

•  emissions into the environment

•  accounting for and paying royalties on production from state, federal and Indian lands

•  bonds for ownership, development and production of natural gas and oil properties

• the transportation of natural gas and oil

• the storage and disposition of hazardous waste

• the operation of wells and reports concerning operations

•  taxation

Under the various complex laws and regulations, we could be liable for personal injuries, property damage, oil spills, discharge of hazardous materials, remediation and clean-up costs and other environmental damages.  Failure to comply with these laws and regulations could result in the suspension or termination of our operations and subject us to administrative, civil and criminal penalties.  These laws and regulations could change in ways that substantially increase our costs.  Any of these liabilities, penalties, suspensions, terminations or regulatory changes could negatively impact our business operations and financial condition.

19.

The natural gas and oil industry involves numerous uncertainties and operating risks that could negatively impact our business operations and financial condition.

Our development, exploitation and exploration activities could be unsuccessful for many reasons, including weather, cost overruns, equipment shortages and mechanical difficulties.  The successful drilling of a natural gas well or an oil well does not ensure a profit on investment.  A variety of factors, both geological and market-related, can cause a well to become uneconomical or only marginally economical.  In addition to their cost, unsuccessful wells can impede our efforts to replace reserves.

The natural gas and oil business involves a variety of operating risks, including:

•  fires

•  explosions

•  blow-outs and surface cratering

•  uncontrollable flows of oil, natural gas, and formation water

•  natural disasters, such as adverse weather conditions

•  pipe, cement, or pipeline failures

•  casing collapses

•  embedded oil field drilling and service tools

•  abnormally pressured formations

•  environmental hazards, such as natural gas leaks, oil spills, pipeline ruptures, and discharge of toxic gases

Encountering any of these problems could affect well bores, gathering systems and processing facilities, which could adversely affect us or our operator’s ability to conduct operations.  We could also incur substantial losses as a result of:

•  injury or loss of life

•  severe damage to and destruction of property, natural resources, and equipment

•  pollution and other environmental damage

•  clean-up responsibilities

•  regulatory investigation and penalties

•  suspension of business operations

•  repairs to resume business operations

We do not carry business interruption insurance at levels that would provide enough funds for us to continue operating without access to other funds.  For some risks, we may not obtain insurance if we believe the cost exceeds the risks presented.  Pollution and environmental risks generally are not fully insurable.  A significant accident or the occurrence of another event not fully covered by insurance could negatively impact our business operations enough to force us to cease business operations.

Risks associated with Brek and its subsidiaries:

20.

Our stock price is volatile and may fluctuate, which will have a direct impact on your investment in Brek.

The stock markets in general, and the stock prices of natural gas and oil companies in particular, have experienced extreme volatility that often has been unrelated to the operating performance of any specific public company.  Factors unrelated or disproportionate to our operating performance could affect our stock price, and the trading price of our shares of common stock might not be an accurate reflection of their value.  The market price of our common stock could fluctuate significantly in response to a number of factors, some of which are beyond our control, such as interest rates, increased competition, general economic, political and market conditions, recessions, or changes in government regulations, including environmental regulations; and some of which are within our control, such as actual or anticipated variations in our operating results, announcements of new projects and properties, new customers, acquisition of potential natural gas and oil entities and prospects, our ability or inability to generate new revenues, and results of exploration and development.  These market fluctuations could adversely affect the market price of our shares of common stock.

21.

A small number of our stockholders own a substantial amount of our shares of common stock: if they were to sell their shares in the public market within a short period of time, the price of our shares of common stock could drop significantly.

Because a small number of our stockholders own a substantial number of our shares of common stock, those shareholders may be able to decide who will be directors, and other stockholders may not be able to elect any directors.   Sales of a large number of our shares of common stock or even the availability of a substantial number of shares of common stock for sale could have the effect of reducing the price per share of our common stock, especially if the shares of common stock continue to be thinly traded.

As of April 10, 2007, 79,973,062 shares of common stock were issued and outstanding, of which 45,134,292 shares were freely tradeable and 15,963,798 shares were, to the best of our knowledge, subject to Rule 144.  The remaining 18,874,972 shares of common stock were restricted from trading.  As of April 10, 2007, 370,000 stock options, exercisable into one share of common stock each, were outstanding.  An additional 4,580,000 stock options could be granted under our 2001 Stock Option Plan.  At April 10, 2007, if all the granted options were exercised, the number of issued and outstanding shares of common stock would increase by 370,000 to 80,343,062.

22.

A change in control of Brek can be delayed, impeded or effected by the directors and management, who collectively own 24.6% of the outstanding shares or by the implementation of Brek’s rights agreement by the board of directors.

Brek’s directors and management own an aggregate of 19,696,198 shares of common stock and as a result have the ability to influence the vote for a change of voting control of the Company or the vote to approve or reject any offer for the purchase and sale of the Company’s assets.

Upon the happening of certain events, the board of directors could vote to implement the Company’s rights agreement, which would delay, impede or effect a change in control of Brek or could impede a merger, consolidation, takeover or other business combination involving Brek or discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of Brek.  See Item 5 (c) “Dividends.”

23.

Brek is unable to implement its rights agreement at this time and as a result may be unable to delay, impede, or effect a change of control of Brek.

As of April 10, 2007, Brek has 79,973,062 shares of common stock issued and outstanding and is authorized to issue up to 300 million shares of common stock.  If the rights agreement were implemented today, we could be required to issue an additional 399,865,310 shares of common stock on a non-diluted basis, assuming all rights under the rights agreement were exercised.  As a result, we would not have enough shares in treasury to issue rights to all shareholders.  This does not include any shares that may be issued upon exercise of warrants or stock options.  Effectively, our board of directors will not be able to implement the rights agreement until the number of authorized shares of common stock is increased to satisfy share issuances for the exercise of all warrants and stock options and for the implementation of the rights agreement.  As a result, we will not be able to discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of Brek by implementing the rights agreement.  See Item 5 (c) “Dividends.”

24.

We may not be able to attract and retain qualified personnel necessary to implement our plan of operations and exploration programs.

Our management is inexperienced in operating a natural gas and oil business.  We may need to hire or retain qualified management, employees or consultants with expertise in natural gas and oil exploration and development.  Our success depends on our ability to attract, retain and motivate qualified personnel.  Our limited financial resources seriously inhibit our ability to attract qualified personnel.  Key personnel represent a significant asset, and the competition for these personnel is intense in the natural gas and oil industry.  We do not maintain key person life insurance on any of our personnel.  The loss of one or more of our key employees or our inability to attract, retain and motivate qualified personnel could negatively impact our ability to implement our plan of operations and to complete our natural gas and oil programs.

25.

Our officers and directors have conflicts of interest in that they are officers and directors of other companies which will prevent them from devoting full-time to our business operations and could negatively impact our business operations.

Our officers and directors have conflicts of interest in that they are officers and directors of other companies.  Management’s other activities prevent them from devoting full-time to the Company’s business operations.  This will impede our growth and business operations and may reduce our financial results because of the slow down in operations.

26.

We have not paid and do not expect to pay dividends in the foreseeable future.

We have never paid cash dividends on our shares of common stock and have no plans to do so in the foreseeable future.  We intend to retain earnings, if any, to develop and expand our business operations.

27.

“Penny Stock” rules could make buying or selling our shares of common stock difficult and could severely limit their market and liquidity.

Trading in Brek’s shares of common stock is subject to certain regulations adopted by the SEC commonly known as the “penny stock” rules.  Our shares of common stock qualify as penny stocks and are covered by Section 15(g) of the Securities Exchange Act of 1934, which imposes additional sales practice requirements on broker-dealers who sell the shares of common stock in the aftermarket.  The “penny stock” rules govern how broker-dealers can deal with their clients and “penny stocks”.  If you want to buy shares of Brek’s common stock, your broker-dealer must make a special suitability determination and you must deliver a written agreement before he will execute your buy order.  

These additional burdens imposed upon broker-dealers by the “penny stock” rules may discourage broker-dealers from effecting transactions in Brek’s shares of common stock, which could severely limit their market price and liquidity.  

This could prevent you from reselling your shares and cause the price of the shares to decline.  See “Penny Stock rules” on page 25 for more details.  

Item 2.

Description of Property.

Corporate Headquarters

We operate from an office located at 3388 Via Lido 4^th floor, Newport Beach, California 92663.  Our telephone number is 1-866-472-7987.   We provide the president with a budget of $20,000 per month to cover his services and administrative costs.

Property

A.

Petroleum and Natural Gas Properties

Riverbend Project, Utah

The Riverbend Project comprises approximately 112,190 gross acres in the Uinta Basin of northeastern Utah, of which we hold a 15% leasehold interest in approximately 16,750 net acres as of December 31, 2006.  Our interest is concentrated on three tight-sand formations in the Uinta basin: the Wasatch, Mesaverde and Blackhawk formations.

During the year ended December 31, 2006, we did not participate in the drilling and completion of any wells in the Riverbend project.  We farmed out the drilling of another fifteen wells in November, 2006, and did not participate in the drilling of thirteen proposed wells.  So far in 2007, we have declined to participate in the drilling of ten proposed wells.  See “Item 6 Management’s Discussion and Analysis.”

On April 8, 2004, we exercised our rights under the July 16, 2002 purchase agreement with Gasco Energy, Inc. to acquire 3,266 net acres located in the Uinta Basin in Utah for approximately $800,000.  This purchase included six wells producing nominal amounts of natural gas that the former owner had drilled to earn the acreage.  

In January 2005, we exercised our rights under the July 16, 2002 purchase agreement with Gasco Energy, Inc. to acquire 344 net acres located in the Uinita Basin in Utah for approximately $60,000 and 3,545 net acres in Riverbend area for a purchase price of approximately $830,000

We completed these three purchases by exercising our right to acquire 25% of any oil and gas interest that Gaso acquired in the area of mutual interest by paying 25% of Gasco’s acquisition costs, including brokerage, legal and title costs, as provided in the July 16, 2006 purchase agreement.

In July 2004, Gasco Energy, Inc. expanded its gas gathering system in the Riverbend area to carry the gas produced in this area to a major pipeline.  Gasco gathers the majority of the natural gas that we produce in the Riverbend area, markets it and sells it.

Greater Green River Basin Project, Wyoming

As of December 31, 2006, we had a 13% leasehold interest in approximately 52,573 gross acres (6,807 net acres) in this area, and non-operated interests in one shut in well and one producing well .  We may consider other proposals for this area such as the farm-out or unitization of some of our acreage if necessary to extend leases.  We did not consent to participate in the drilling of one well in 2006 and the completion of one well so far in 2007.

Crocker Canyon Prospect, California

We have a 7% leasehold interest in approximately 3,250 gross acres (203 net acres) in San Luis Obispo County and 65 gross (16 net) acres in Kern County of Southern California.  In 2004 we farmed out the drilling of one well to preserve acreage but did not participate in any drilling or development on this acreage during 2005. We agreed to a farmout by an agreement effective May 1, 2005, between Brek and Gasco as Farmor, and Venoco, Inc. as Farmee whereby Venoco earned an undivided 75% working interest in the San Luis Obispo farmout lands by drilling a test well on the property. The test well did not produce and is shut in. We plan to continue paying our portion of the leasehold rentals and other minimum geological expenses to preserve acreage on these prospects.

Rocksprings Prospect, Edwards County, Texas

Through Rock City Energy Corp., we own a controlling interest in Vallenar Energy Corp., which holds leases covering approximately 8,401 gross and 7,421 net acres in the Rocksprings Prospect in the Val Verde Basin of Edwards County, Texas.  Vallenar acquired the properties for their heavy oil play potential, however, during 2005, three nearby Ellenburger natural gas discovery wells have caused us to consider the natural gas potential underlying Vallenar’s leases.

We first acquired an interest in Vallenar in March 2002, when we bought 2,512,500 shares of Vallenar’s outstanding common stock from third parties and 733,333 preferred shares, convertible into 733,333 common shares at our option, directly from Vallenar.  These shares together represented approximately 30% of Vallenar Energy Corp.’s equity.  On June 28, 2002, we bought another 2 million shares of outstanding common stock from third parties for $10,000 and 800,000 shares at $0.50 per share ($400,000) directly from Vallenar.   At December 31, 2002, we held a 51.53% equity interest in Vallenar Energy Corp.  On August 24, 2006, we acquired a 100% interest in Rock City by exchanging our 51.53% interest in Vallenar Energy for a 100% interest in Rock City.  For as long as at least one-half of the preferred stock is outstanding, we are entitled to at least 26% of the total voting power of Vallenar Energy.  We are entitled to designate one director who must sit on the executive committee of the board or additional voting rights accrue to the preferred stock.  All decisions of this executive committee must be unanimous.  We have been playing an active role in the management of Vallenar Energy Corp. since 2002.

On May 8, 2006, we entered into a letter agreement dated April 3, 2006 with Chesapeake Exploration Limited Partnership (the “operator”) for the development of oil and gas properties in Texas.  Under the Chesapeake agreement, the operator can earn a 100% leasehold interest in the leases to depths below 1,500 feet in exchange for drilling until it has completed a well capable of producing hydrocarbons in commercial quantities.  When the operator has completed the first 10 wells and recovered 100% of the costs to drill the wells (“payout”), we can back in for a 25% working interest in the wells.  On future wells, we can either participate from the outset to earn a 25% working interest, or back in after payout to earn a 6.25% working interest.

Pursuant to an assignment of oil and gas leases, dated June 9, 2006 (“Chesapaeke assignment”), we assigned all of our Texas oil and gas leases, so far as they cover depths below 1,500 feet, to the operator in exchange for the operator’s initiating drilling operations on the land covered by the leases before the primary terms of the leases expire.   If the operator successfully completes a well capable of producing hydrocarbons in commercial quantities, this assignment of oil and gas leases will become permanent.  

The operator has performed sufficient work on the properties to extend and maintain all of the leases in good standing except for one lease, comprising 790 gross and net acres, which expired in February of 2007. Under the letter agreement, the operator must use reasonable efforts to extend leases at expiry or obtain new ones if they do not perform the work required by the leases.

B.

Oil and Gas Reserve Information (unaudited)

The reserve quantity and future net cash flow information in Tables 1, 2 and 3 represents proved reserves located in the State of Utah in the United States. The reserves as of December 31, 2006 and 2005 have been estimated by Netherland, Sewell and Associates, Inc., independent petroleum engineers.  We did not have any proved reserves in the State of Utah at December 31, 2003.  The determination of oil and gas reserves is based on estimates, which are highly complex and interpretive. The estimates are subject to continuing change as additional information becomes available.

The standardized measure of discounted future net cash flows is prepared under the guidelines set forth by the Securities and Exchange Commission (SEC) that require the calculation to be performed using year-end oil and gas prices. The oil and gas prices used as of December 31, 2006 and 2005 were $61.05 per Bbl of oil and $4.41 per Mcf of gas and $59.84 per Bbl of oil and $7.45 per Mcf of gas, respectively. Future production costs are based on year-end costs and include severance taxes. Each property that is leased by us is also charged with field-level overhead in the reserve calculation. The present value of future cash inflows is based on a 10% discount rate.

Reserve Quantities

(a) The majority of the revisions of previous estimates during 2005 comprise the following:

-  Four proved undeveloped locations were omitted from the 2005 reserve report because these locations required a higher capital investment than originally estimated due to drilling and completion problems and due to the lack of historical data related to recent completions and recompletions in this area.

-  Six proved undeveloped locations were omitted from the 2005 reserve report because recent drilling activity indicates that these locations may be outside of or on the edge of a previously identified zone.

-  Four proved developed non-producing completions significantly underperformed previous forecasts.

-  Reduced interest in some proved undeveloped locations due to lower interest from farmout versus higher proved undeveloped interest in prior year.

(b) The majority of the revisions of previous estimates during 2006 comprise the following:

-  Revisions to the reserve quantities were primarily due to lower prices for oil and gas at the end of 2006 as compared to 2005.

-  Some acreage is no longer economically viable at the lower prices

-  Reserves from farmout wells were reduced because, with the lower prices, there will be less gas remaining in the reservoir when payout for the farmee has been reached and we are able to back in.  

-  Increased operating costs have reduced the economic viability of some acreage.

Standardized Measure of Discounted Future Net Cash Flows

Changes in the Standardized Measure of Discounted Future Net Cash Flows

C.

Volumes, Prices and Operating Expenses

Table 4 presents information regarding the production volumes, average sales prices received and average production costs associated with our sales of natural gas and oil for the periods indicated.

D.

Development, Exploration and Acquisition Capital Expenditures

During the year ended December 31, 2006, we spent $38,151 in development and exploration activities.  During the year ended December 31, 2005, we spent $310,361 on development and exploration activities and $885,804 on the acquisition of acreage in the Riverbend area. As of December 31, 2006, we held a working interest of approximately 14% in 168,076 gross acres (23,776 net acres) located in Utah, Wyoming and California.  As of December 31, 2006, we held an interest in ten gross (1.51 net) producing gas wells and one gross (0.14 net) shut-in gas well located on these properties.

Table 5 presents information regarding our net costs incurred in the purchase of proved and unproved properties and in exploration and development activities:

E.

Productive Wells and Acreage

Table 6 summarizes our productive and shut-in gas wells as of December 31, 2006.  Productive wells are producing wells and wells capable of production.  Shut-in wells are wells that are capable of production but are not producing.  Gross wells are the total number of wells in which we have an interest.  Net wells are the sum of our fractional interests owned in the gross wells.

F.

Undeveloped Acreage

Table 7 summarizes the undeveloped and developed leasehold acreage, by area, that we hold as of December 31, 2006.  Undeveloped acres are acres on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and gas, regardless of whether or not the acreage contains proved reserves.  Developed acres are acres that are spaced or assignable to productive wells.  Gross acres are the total number of acres in which we have a working interest.  Net acres are the sum of our fractional interests owned in the gross acres.  The table does not include acreage that we have a contractual right to acquire or to earn through drilling projects, or any other acreage for which we have not yet received leasehold assignments.  In certain leases, our ownership is not the same for all depths.  The net acres in these leases are calculated using the greatest ownership interest at any depth.  Generally, this greater interest represents our ownership in the primary objective formation.

(1)

A lease covering 790 gross and net acres expired in February 2007.

G.

Drilling Activity

Table 8 summarizes our drilling activity during the years ended December 31, 2006 and 2005.   In the table, “gross” refers to the total wells in which we have a working interest, and “net” refers to gross wells multiplied by our working interest.  A productive well is an exploratory or a development well that is not a dry well.

H.

Current Activity

We are not participating in any drilling as of the date of this filing, as we do not have sufficient oil and gas revenues to satisfy our ongoing working capital needs.  We plan to continue to review drilling proposals that we receive from the operators and participate if our financial resources permit.  

I.

Delivery Commitments

We are not obligated to provide a fixed and determinable quantity of oil or gas in the near future under existing contracts or agreements

Item 3.

Legal Proceedings.

We are not a party to any pending legal proceedings and, to the best of our knowledge, none of our property or assets are the subject of any pending legal proceedings; except for the following:

Bermuda lawsuit – Transworld Payment Solutions N.V. et al. vs. Brek Energy Corporation et al.

On February 25, 2003, Transworld Payment Solutions N.V. and First Curacao International Bank N.V., the debtor and the guarantor respectively of a note receivable, commenced legal action against Brek and others in the Supreme Court of Bermuda claiming that Brek and its former subsidiary, First Ecom Systems Limited, had promised to develop and supply them with certain software pursuant to three license agreements dated October 19, 2001.  The plaintiffs were seeking rescission of all agreements between the parties or, alternatively, damages for misrepresentation and breach of agreements.  The plaintiffs commenced the lawsuit approximately one week before they had to make their first instalment payment pursuant to a share purchase agreement dated October 19, 2001.  At that time, the plaintiffs were obligated to make an instalment payment in the amount of $1,901,107.  The plaintiffs have not made any instalment payments as required by the terms and conditions of the share purchase agreement.  

Brek and the other defendants filed a defence and counterclaim on May 8, 2003 with the Supreme Court of Bermuda.  In their counterclaim, the defendants were seeking specific performance of the share purchase agreement or, alternatively, damages for breach of contract.  Although the directors believed that the plaintiffs’ claims were without merit as there was no condition to develop software for the plaintiffs, due to lack of financial resources Brek did not pursue its counterclaim.  No party has taken any action since Brek filed its defence and counterclaim.

On March 28, 2007, Brek and its subsidiary, Feds Acquisition Corporation, reached a settlement with the plaintiffs whereby the agreements giving rise to the litigation were rescinded, and the parties mutually released each other from any claims under the agreements and consented to the dismissal of the action filed in the Bermuda court.  We have instructed our counsel to file the consent order dismissing the action but do not have confirmation that it is filed as of the date of this filing.  This leaves only our inactive Hong Kong subsidiary, First Ecommerce Asia Limited, subject to the Transworld agreements and litigation.  The High Court of the Hong Kong Special Administrative Region in November 2003 ordered that First Ecommerce Asia be wound up and in April 2005 appointed liquidators for this purpose.  We do not know the status of the winding up, as the liquidators have not responded to our requests for a report.

Item 4.

Submission of Matters to a Vote of Security Holders.

We did not submit any matter to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter of the fiscal year covered by this report.

PART II

Item 5.

Market for Common Equity and Related Stockholder Matters.

(a)

Market Information

Our common stock traded on the Nasdaq National Market System under the symbol “FECC” from June 6, 2000 until February 19, 2002 when the symbol was changed to “BREK”.  

Before then, our common stock traded on the NASD OTC Bulletin Board under the symbol “FECC” since March 8, 1999.  On December 3, 2002, Brek was removed from the Nasdaq National Market System for failing to maintain minimum listing requirements.

Our common stock has also traded on the Berlin over-the-counter stock exchange since January 27, 2000 and has been listed on the Bermuda Stock Exchange since December 23, 1999.

Our shares of common stock were quoted on the NASD OTC Bulletin Board under the symbol “BREK” from December 3, 2002 until May 23, 2003, when our shares ceased to be quoted on the NASD OTC Bulletin Board. Since May 23, 2003 our common stock has been quoted on the gray market under the same symbol, “BREK”.

Table 9 gives the high and low bid information for each fiscal quarter for the last two fiscal years and for the interim period ended March 29, 2007.  The bid information was obtained from Pink Sheets LLC and reflects inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.

(b)

Holders of Record

We have 472 registered holders of our common stock.

(c)

Dividends

We have never declared or paid dividends on our shares of common stock, except for the Right declared as a dividend under the Rights Plan disclosed below.  We intend to follow a policy of retaining earnings, if any, to finance the growth of the business and do not anticipate paying any cash dividends in the foreseeable future.  The declaration and payment of future dividends on the shares of common stock will be the sole discretion of the board of directors and will depend on our profitability and financial condition, capital requirements, statutory and contractual restrictions, future prospects and other factors deemed relevant by the board of directors.

On December 5, 2001, our board of directors adopted a shareholder rights plan (the “Rights Plan”).  The purpose of the Rights Plan is to deter, and protect our shareholders from, certain coercive and otherwise unfair takeover tactics and enable the directors to represent effectively the interests of shareholders in the event of a takeover attempt.  The Rights Plan does not deter negotiated mergers or business combinations that the directors determine to be in the best interests of Brek and its shareholders.  In connection with the adoption of the Rights Plan, Brek entered into a rights agreement with U.S. Bank, N.A. dated as of March 1, 2002.  At the date of this filing, we would not be able to implement the Rights Plan unless the number of authorized shares of common stock is increased to satisfy share issuances for all issued and outstanding shares and the exercise of all warrants and stock options.

On March 20, 2002, the board of directors declared a dividend of one common share purchase right (a “Right”) for each outstanding share of common stock, par value $0.001 per share, of Brek.  The dividend was payable on March 20, 2002 to the stockholders of record on that date.  Upon the happening of certain events, the directors could vote to implement the rights plan, which would delay, impede or effect a change in control of Brek, or could impede a merger, consolidation, takeover or other business combination involving Brek, or discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of Brek.  Once the Rights become exercisable, each Right entitles the registered holder to purchase from Brek five shares of common stock at a price of $0.01 per share, subject to adjustment.  

(d)

Recent Sales of Unregistered Securities

We have sold no unregistered securities within the last three years that would require disclosure pursuant to Item 701 of Regulation S-B, except for the following:

January 15, 2004 - $0.05 Offering

On January 15, 2004, the board of directors authorized the issuance of up to 11,000,000 units at an offering price of $0.05 per unit.  Each unit consisted of one restricted share of common stock and one restricted warrant.  Each restricted warrant was convertible into one restricted share of common stock.  The restricted warrant was exercisable for 12 months at an exercise price of $0.35 per warrant.  We set the value of the units arbitrarily without reference to our assets, book value, revenues or other established criteria of value.  All the restricted units issued in this offering were issued for investment purposes in a “private transaction”.

In March 2004, we raised $437,500 in cash from this offering and issued an aggregate 8,750,000 restricted units to six non-US subscribers outside the United States and an additional 875,000 restricted units as a finder’s fee to Richard N. Jeffs, Brek’s CEO and president.  

In March 2004 and in May 2004, as part of this same offering, we issued an aggregate 1,375,000 restricted units as settlement of $68,750 of debt owed to five of our creditors who had provided services to us.  Of the five creditors, two were non-US persons outside the United States and three were accredited investors in the United States.  One of these creditors was Richard N. Jeffs, an executive officer and one was Michael Nazmack, a director of Brek.

For the non-US subscribers outside the United States, we relied upon Section 4(2) of the Securities Act of 1933 and Rule 903 of Regulation S promulgated pursuant to that Act by the Securities and Exchange Commission for the private placement in March 2004 and two of the debt settlements.  We are satisfied that we complied with the requirements of the exemption from the registration and prospectus delivery of the Securities Act of 1933.  The offering was not a public offering and was not accompanied by any general advertisement or any general solicitation.  We received from each subscriber a completed and signed subscription agreement containing certain representations and warranties, including, among others, that (a) the subscriber was not a U.S. person, (b) the subscriber subscribed for the shares for their own investment account and not on behalf of a U.S. person, and (c) there was no prearrangement for the sale of the shares with any buyer.  No offer was made or accepted in the United States, and the share certificates representing the shares were issued bearing a legend with the applicable trading restrictions.

Finally, for the accredited subscribers in the United States, Brek relied upon Section 4(2) of the Securities Act of 1933 and Rule 506 Regulation D promulgated pursuant to that Act by the Securities and Exchange Commission for the other three debt settlements.  We are satisfied that we complied with the requirements of the exemption from the registration and prospectus delivery of the Securities Act of 1933.  Specifically, we made the offer only to accredited investors as that term is defined under applicable federal and state securities laws.  The share certificates representing the shares were issued bearing a legend with the applicable trading restrictions.

January 29, 2004 - $0.20 Offering

On January 29, 2004, the board of directors authorized the issuance of up to 7,500,000 units at an offering price of $0.20 per unit.  Each unit consisted of one restricted share of common stock and one restricted warrant.  Each restricted warrant is convertible into one restricted share of common stock.  The restricted warrant is exercisable for three years at an exercise price of $0.30 per warrant.  We set the value of the units arbitrarily without reference to our assets, book value, revenues or other established criteria of value.  All the restricted units issued in this offering were issued for investment purposes in a “private transaction”.  

On May 24, 2004, we raised $700,000 in cash from this offering and issued an aggregate 3,500,000 restricted units to 10 accredited subscribers in the United States and an additional 350,000 restricted units as a finder’s fee to Richard N. Jeffs, Brek’s CEO and president.  

On May 28, 2004, we raised an additional $50,000 in cash from this offering and issued an additional 250,000 restricted units to one non-US subscriber outside the United States and an additional 25,000 restricted units as a finder’s fee to Richard N. Jeffs, Brek’s CEO and president.  

On November 30, 2004, we raised an additional $110,000 in cash from this offering and issued an additional 550,000 restricted units to two non-US subscribers outside the United States and one accredited subscriber in the United States, and an additional 55,000 restricted units as a finder’s fee to Richard N. Jeffs, Brek’s CEO and president.

For the accredited subscribers in the United States, we are satisfied that we complied with the requirements of the exemption from the registration and prospectus delivery of the Securities Act of 1933 as specified by the provisions of Section 4(2) of that Act and Rule 506 Regulation D promulgated pursuant to that Act by the Securities and Exchange Commission.  Specifically, we made the offer only to accredited investors, as that term is defined under applicable federal and state securities laws.  The share certificates representing the shares were issued bearing a legend with the applicable trading restrictions.

For the non-US subscribers outside the United States, Brek relied upon Section 4(2) of the Securities Act of 1933 and Rule 903 of Regulation S promulgated pursuant to that Act by the Securities and Exchange Commission.  We are satisfied that we complied with the requirements of the exemption from the registration and prospectus delivery of the Securities Act of 1933.  The offering was not a public offering and was not accompanied by any general advertisement or any general solicitation.  We received from each subscriber a completed and signed subscription agreement containing certain representations and warranties, including, among others, that (a) the subscriber was not a U.S. person, (b) the subscriber subscribed for the shares for their own investment account and not on behalf of a U.S. person, and (c) there was no prearrangement for the sale of the shares with any buyer.  No offer was made or accepted in the United States and the share certificates representing the shares were issued bearing a legend with the applicable trading restrictions.

May 2004 - $0.15 Offering

On May 3, 2004, the board of directors authorized the issuance of up to 5,000,000 units at an offering price of $0.15 per unit.  Each unit consisted of one restricted share of common stock and one restricted warrant.  Each restricted warrant is convertible into one restricted share of common stock.  The restricted warrant is exercisable for three years at an exercise price of $0.25 per warrant.  We set the value of the units arbitrarily without reference to our assets, book value, revenues or other established criteria of value.  All the restricted units issued in this offering were issued for investment purposes in a “private transaction”.  

On May 6, 2004, we raised $700,000 in cash from this offering and issued an aggregate 4,666,667 restricted units to two non-US subscribers outside the United States, one of which was an executive officer of Brek, and an additional 66,667 restricted units as a finder’s fee to Richard N. Jeffs, Brek’s CEO and president.

We relied upon Section 4(2) of the Securities Act of 1933 and Rule 903 of Regulation S promulgated pursuant to that Act by the Securities and Exchange Commission.  We are satisfied that we complied with the requirements of the exemption from the registration and prospectus delivery of the Securities Act of 1933.  The offering was not a public offering and was not accompanied by any general advertisement or any general solicitation.  We received from each subscriber a completed and signed subscription agreement containing certain representations and warranties, including, among others, that (a) the subscriber was not a U.S. person, (b) the subscriber subscribed for the shares for their own investment account and not on behalf of a U.S. person, and (c) there was no prearrangement for the sale of the shares with any buyer.  No offer was made or accepted in the United States and the share certificates representing the shares were issued bearing a legend with the applicable trading restrictions.

October 1, 2004 – $0.20 Offering

On October 14, 2004, we raised $279,392 in cash from this offering and issued 1,396,956 restricted units to First Griffin Group LLC at an offering price of $0.20 per unit.  Each unit consisted of one restricted share of common stock and one restricted warrant.  Each restricted warrant is convertible into one restricted share of common stock.  The restricted warrant is exercisable for two years at an exercise price of $0.35 per warrant.  We set the value of the units for the offering arbitrarily without reference to our assets, book value, revenues or other established criteria of value.  All the restricted units issued in this offering were issued for investment purposes in a “private transaction”.  For this offering, Brek relied upon Section 4(2) of the Securities Act of 1933.  We are satisfied that we complied with the requirements of the exemption from the registration and prospectus delivery of the Securities Act of 1933.  The offering was not a public offering and was not accompanied by any general advertisement or any general solicitation.  The share certificates representing the shares were issued bearing a legend with the applicable trading restrictions.

October 27, 2004 - $0.20 Offering

On October 27, 2004, the board of directors authorized the issuance of up to 6,000,000 units at an offering price of $0.20 per unit.  Each unit consisted of one restricted share of common stock and one restricted warrant.  Each restricted warrant is convertible into one restricted share of common stock.  The restricted warrant is exercisable for two years at an exercise price of $0.35 per warrant.  We set the value of the units arbitrarily without reference to our assets, book value, revenues or other established criteria of value.  All the restricted units issued in this offering were issued for investment purposes in a “private transaction”.  

On November 30, 2004, we raised $765,000 in cash from this offering and issued an aggregate 3,825,000 restricted units to three accredited subscribers in the United States, one of which was a director of Brek, and an additional 382,500 restricted units as a finder’s fee to one non-US finder outside the United States, who was an executive officer of Brek.

On December 21, 2004, we raised an additional $100,000 in cash from this offering and issued an additional 500,000 restricted units to one accredited subscriber in the United States and an additional 50,000 restricted units as a finder’s fee to Richard N. Jeffs, Brek’s CEO and president.

For the accredited subscribers in the United States, we are satisfied that we complied with the requirements of the exemption from the registration and prospectus delivery of the Securities Act of 1933 as specified by the provisions of Section 4(2) of that Act and Rule 506 Regulation D promulgated pursuant to that Act by the Securities and Exchange Commission.  Specifically, the offer was made to only accredited investors, as that term is defined under applicable federal and state securities laws.  The share certificates representing the shares were issued bearing a legend with the applicable trading restrictions.

December 2004 - $0.30 Offering

On December 22, 2004, the board of directors authorized the issuance of up to 3,666,667 units at an offering price of $0.30 per unit.  Each unit consisted of one restricted share of common stock and one restricted warrant.  Each restricted warrant is convertible into one restricted share of common stock.  The restricted warrant is exercisable for two years at an exercise price of $0.50 per warrant.  We set the value of the units arbitrarily without reference to our assets, book value, revenues or other established criteria of value.  All the restricted units issued in this offering were issued for investment purposes in a “private transaction”.  

We raised $1,000,000 in cash from this offering, which had five closings between January 2005 and July 2005, and issued an aggregate 3,333,336 restricted units to six accredited subscribers in the United States, and four non-US subscribers outside the United States and an additional 333,334 restricted units as a finder’s fee to Richard N. Jeffs, Brek’s CEO and president.

For the accredited subscribers in the United States, we are satisfied that we complied with the requirements of the exemption from the registration and prospectus delivery of the Securities Act of 1933 as specified by the provisions of Section 4(2) of that Act and Rule 506 Regulation D promulgated pursuant to that Act by the Securities and Exchange Commission.  Specifically, the offer was made to only accredited investors, as that term is defined under applicable federal and state securities laws.  The share certificates representing the shares were issued bearing a legend with the applicable trading restrictions.

For the non-US subscribers outside the United States, we relied upon Section 4(2) of the Securities Act of 1933 and Rule 903 of Regulation S promulgated pursuant to that Act by the Securities and Exchange Commission.  We are satisfied that we complied with the requirements of the exemption from the registration and prospectus delivery of the Securities Act of 1933.

The offering was not a public offering and was not accompanied by any general advertisement or any general solicitation.  Brek received from each subscriber a completed and signed subscription agreement containing certain representations and warranties, including, among others, that (a) the subscriber was not a U.S. person, (b) the subscriber subscribed for the shares for their own investment account and not on behalf of a U.S. person, and (c) there was no prearrangement for the sale of the shares with any buyer.  No offer was made or accepted in the United States and the share certificates representing the shares were issued bearing a legend with the applicable trading restrictions.

July 2005 – Exercise of Warrants

On July 29, 2005, we issued 400,000 shares of common stock to Richard N. Jeffs, the CEO and president of Brek, for the exercise of warrants at an exercise price of $0.25 per warrant.  We received $100,000 for the exercise of these warrants.  These warrants were issued as part of the May 3, 2004 offering at $0.15 per unit.

September 2005 – Exercise of Warrants

On September 28, 2005, we issued 100,000 shares of common stock to Richard N. Jeffs, the CEO and president of Brek for the exercise of warrants at an exercise price of $0.25 per warrant.  Brek received $25,000 for the exercise of these warrants.  These warrants were issued as part of the May 3, 2004 offering at $0.15 per unit.

January 2006 – Exercise of Warrants

On January 30, 2006, we issued 800,000 shares of common stock to Richard N. Jeffs, the CEO and president of Brek for the exercise of warrants at an exercise price of $0.25 per warrant.  We converted $200,000 of advances payable to Mr. Jeffs as consideration for the exercise of these warrants.  These warrants were issued as part of the May 3, 2004 offering at $0.15 per unit.

January 6, 2006 - $0.50 Offering

On January 6, 2006, the board of directors authorized the issuance of up to 2,000,000 units at an offering price of $0.50 per unit.  Each unit consisted of one restricted share of common stock and one restricted warrant.  Each restricted warrant is convertible into one restricted share of common stock.  The restricted warrant is exercisable for 12 months at an exercise price of $0.90 per warrant.  We set the value of the units arbitrarily without reference to our assets, book value, revenues or other established criteria of value.  All the restricted units issued in this offering were issued for investment purposes in a “private transaction”.  

On February 7, 2006, we raised $150,000 in cash from this offering and issued an aggregate 300,000 restricted units to two accredited subscribers in the United States.  

On February 8, 2006, we raised an additional $100,000 in cash from this offering and issued an aggregate 200,000 restricted units to one accredited subscriber in the United States.  

On February 9, 2006, we raised an additional $50,000 in cash from this offering and issued an aggregate 100,000 restricted units to one accredited subscriber in the United States.  

On February 17, 2006, we raised an additional $50,000 in cash from this offering and issued an aggregate 100,000 restricted units to one accredited subscriber in the United States.  

On March 2, 2006, we raised an additional $50,000 in cash from this offering and issued an aggregate 100,000 restricted units to one accredited subscriber in the United States.  

For the accredited subscribers in the United States, we are satisfied that we complied with the requirements of the exemption from the registration and prospectus delivery of the Securities Act of 1933 as specified by the provisions of Section 4(2) of that Act and Rule 506 Regulation D promulgated pursuant to that Act by the Securities and Exchange Commission.  Specifically, the offer was made to only accredited investors, as that term is defined under applicable federal and state securities laws.  The share certificates representing the shares were issued bearing a legend with the applicable trading restrictions.

May 2006 – Exercise of Warrants

On May 19, 2006, we issued 250,000 shares of common stock to one non-US subscriber outside the United States for the exercise of warrants at an exercise price of $0.30 per warrant.  We received $75,000 for the exercise of these warrants.  These warrants were issued as part of the January 29, 2004 offering at $0.20 per unit.

September 2006 – Settlement of Debt with Directors

On September 11, 2006, we approved the issuance of 300,922 shares of common stock at $0.50 per share to three directors to settle $150,461 of debt due to the directors.  On September 27, 2006, we issued 257,336 shares of common stock to Greg Pek, 24,000 shares of common stock to Ian Robinson, 14,586 shares of common stock to Robinson Management Ltd., a company controlled by Ian Robinson, and 5,000 shares of common stock to Mike Nazmack. The shares issued to Mr. Pek included 10, 410 shares to repay debt of $5,205 that Mr. Pek had received in cash. We cancelled the certificate representing the shares issued to Mr. Pek, returned the shares to treasury and reissued a certificate representing 246,926 common shares on November 21, 2006,

November 2006 – Exercise of Discounted Warrants

On September 28, 2006, the board of directors approved an offering to its warrant-holders who were accredited investors to allow the warrant-holders to exercise their warrants, in whole or in part, at a discounted exercise price equal to 33.33% of the initial exercise price stated in their warrant provided they exercised their warrants by October 31, 2006.  At that time, there were 18,534,460 warrants outstanding with various exercise prices.

On November 7, 2006, we issued a total of 18,334,460 shares of common stock for the exercise of the discounted warrants to a total of 35 subscribers, of which six were non-US subscriber outside the United States and 29 were accredited subscribers in the United States.  

●

3,433,334 of the warrants were exercised at an exercise price of $0.083325 per warrant.  These warrants were issued as part of the May 3, 2004 offering at $0.15 per unit with the initial exercise price of $0.25 per warrant.  1,493,087 of these shares were issued to settle $124,412 of debt.

●

4,480,000 of the warrants were exercised at an exercise price of $0.09999 per warrant.  These warrants were issued as part of the January 29, 2004 offering at $0.20 per unit with the initial exercise price of $0.30 per warrant.

●

6,154,456 of the warrants were exercised at an exercise price of $0.116655 per warrant.  These warrants were issued as part of the October 2004 offerings at $0.20 per unit with the initial exercise price of $0.35 per warrant.  287,137 of these shares were issued to settle $33,496 of debt.

●

3,666,670 of the warrants were exercised at an exercise price of $0.16665 per warrant.  These warrants were issued as part of the December 22, 2004 offering at $0.30 per unit with the initial exercise price of $0.50 per warrant.

●

600,000 of the warrants were exercised at an exercise price of $0.29997 per warrant.  These warrants were issued as part of the January 6, 2006 offering at $0.50 per unit with the initial exercise price of $0.90 per warrant.

For the exercise of these warrants, we received a total of $2,085,255 in cash and settled a total of $157,908 in debt.  Of the cash we received, $1,221,084 came from unrelated parties, $600,299 came from relatives of directors, companies controlled by directors or companies controlled by relatives of directors and $263,873 came from directors.  For the exercise of warrants, we settled $82,251 in debt with Richard N. Jeffs, our CEO and president, and $75,657 in debt with Susan Jeffs, the spouse of Rick Jeffs.

Item 6.

Management’s Discussion and Analysis or Plan of Operation.

The following discussion and analysis of our financial condition and the results of our operations (“MD&A”) is intended to help the reader understand Brek Energy Corporation, our operations and our present business environment.  

Our MD&A is provided as a supplement to – and should be read in conjunction with – our consolidated financial statements and the accompanying notes contained within this report.

Uncertainties relating to forward-looking statements

This MD&A contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  You can identify these statements where we have used 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.

We have made all of our forward-looking statements as of the date of the filing of this MD&A and we disclaim any duty to update these statements.

Certain parts of this MD&A may contain “forward-looking statements” within the meaning of the Securities Exchange Act of 1934 based on current management’s 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.

Our Business

We are in the oil and gas exploration business in the United States.  We have properties in Utah, Wyoming, California and Texas.  Our primary focus is on our operations in Utah.

We have participated in the drilling or re-completion of twelve wells and have ten producing wells in which we have net revenue interests of between 8% and 20%.  We have thirty-one farmouts, all in Utah except for one in California, and we have not consented to participate in the drilling of twenty-six wells: six in 2005, thirteen in 2006, and eleven to date in 2007.

On June 16, 2006, we signed farmout agreements with Gasco for ten non-consent wells as we had agreed in December 2005.  Under the farmout agreements, we agreed to forfeit 100% of our interest in all of the wells and wellbores, and to relinquish our leasehold interest in 188 net acres surrounding the wells (800 gross acres) in exchange for the right to back in to a 10% working interest in nine wells and wellbores and a 4.09% working interest in one well and wellbore when Gasco has recovered 100% of its drilling and operating costs.  In November 2006, we signed another fifteen farmout agreements with Gasco.  Under the agreements, we agreed to forfeit 100% of our interest in all of the wells and wellbores, and to relinquish our leasehold interest in 292 net acres surrounding the wells (1,600 gross acres) in exchange for the right to back in to a 30% working interest in the wells and wellbores after 100% payout.  All of these farmouts are in Utah.

Gasco has drilled (or will drill) the non-consent 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 almost $4 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, other than those associated with the farmouts discussed above, and can participate in future drilling that is proposed for other locations on the same leases.

Our oil and gas production decreased by approximately 20% during the year ended December 31, 2006, as compared with the year ended December 31, 2005.  During 2006, on a combined basis, our proved oil and gas reserve quantities decreased by approximately 78%, primarily because we agreed to farm out fifteen wells to Gasco and did not consent to participate in the drilling of thirteen wells, and because some proved properties were removed from the total proved reserves as they were not deemed to be economically viable at current oil and natural gas prices.  

Our reserve and production information as of December 31, 2006 and 2005 is set out in Table 10.

Table 10

Vallenar Energy Corp. (“Vallenar Energy”), through its subsidiary, Nathan Oil Partners LP, in May 2006 reached an agreement with Chesapeake Exploration Limited Partnership, an American oil and gas company with operations in Texas for the development and operation of the Texas properties.  Under the agreement, the operator can earn a 100% leasehold interest in the depths below 1,500 feet in exchange for drilling until it has completed a well capable of producing hydrocarbons in commercial quantities.  When the operator has completed the first ten wells and recovered 100% of the costs to drill and operate the wells, Nathan Oil can back in for a 25% working interest in the wells.  On future wells, Nathan Oil can either participate from the outset to earn a 25% working interest or back in after payout to earn a 6.5% working interest.

On August 24, 2006, we transferred our 51.53% interest in Vallenar Energy to Rock City Energy Corp. (formerly Vallenar Holdings, Inc.) in exchange for 4,000,000 common shares of Rock City.  We own all of the issued and outstanding shares of Rock City.  As a result of the business combination, we have consolidated the accounts of Rock City into our financial statements at December 31, 2006.  We accounted for our investment in Rock City as a purchase and valued our 4,000,000 shares of Rock City at $755,552.  This transaction did not result in any gain or loss on our or Vallenar Energy’s books at December 31, 2006.  In March, 2007, we subscribed for another 4,000,000 shares of Rock City for $600,000 cash.  We intend to distribute all of these shares to our shareholders as part of the merger agreement with Gasco Energy, discussed below.

As a result of this exchange of shares, Vallenar Energy Corp. ceased to be our subsidiary and we included Vallenar Energy’s operating losses ($26,335) in our consolidated statements of operations to August 24, 2006, as a loss from discontinued operations.  After August 24, 2006, any income or loss from Vallenar Energy, and the resulting minority interest, will be included in Rock City’s financial statements which have been consolidated in our financial statements.  We will continue to consolidate the Rock City financial statements in our financial statements until we have distributed the shares of Rock City to our shareholders.

On September 18, 2006, with the operator’s consent, we rescinded our consent to participate in the drilling of one well.  The operator credited our account for $560,294 for our portion of the costs billed to us.

Between January 1, 2006, and the end of this year, we received $75,000 in cash from the exercise of 250,000 warrants at $0.30 per unit, and $400,000 in cash from the private placement of 800,000 units at $0.50 per unit.  We used this cash to cover operating expenses.

In January of 2006 a director exercised 800,000 share purchase warrants in payment of advances payable of $200,000.

On September 28, 2006, our board resolved to offer all warrant holders a 66.67% discount if they exercised their outstanding warrants before October 31, 2006.  This offer was made to encourage the warrant holders to exercise their warrants prior to the Gasco merger.  We are using the proceeds to pay our accounts payable and any other liabilities that we must satisfy to close the merger discussed below, to provide working capital to cover our operating and administrative costs over the next year and for the purchase an additional 4,000,000 shares of Rock City for $600,000.  

By October 31, 2006, all except two warrant-holders accepted the offer and exercised their warrants to buy 16,554,236 common shares in exchange for $2,085,255 in cash, and 1,780,224 common shares to retire $157,908 of debt.  At December 31, 2006, 200,000 common stock purchase warrants remained outstanding.  These warrants expired in February 2007.  

Merger

On September 20, 2006, we agreed, subject to our stockholders’ approval, to merge with Gasco Energy, Inc. (“Gasco”) for equity consideration of 11 million shares of Gasco's common stock valued at approximately $30 million based on the closing price of Gasco's common stock on September 20, 2006.  

The directors of Brek and Gasco have approved the terms of the transaction, which we expect to close in early in 2007.  The completion of the merger is subject to the approval of our stockholders and the completion of the distribution and disposition of certain of our subsidiaries to our stockholders and others, leaving only the California, Utah and Wyoming assets in Brek.  Under the terms of the agreement, we will merge with and become a wholly owned subsidiary of Gasco.  Our stockholders will receive the number of shares of Gasco's common stock that is equal to 11 million divided by the total number of shares of Brek's common stock outstanding, fully diluted, on the date of the merger.

As part of the merger, our directors have agreed to vote their shares in favor of the transaction; our president and CEO has agreed to deposit 550,000 of the shares of Gasco's common stock that he will acquire in the transaction in escrow for one year to satisfy any claims resulting from breaches of our representations and warranties; and in consideration for pledging the 550,000 Gasco shares, our board of directors approved a fee payable to our president equal to 20% of the value of the Gasco shares on the date his 550,000 Gasco shares are deposited in escrow.  

If we breach the terms of the merger agreement we may be liable to pay a cancellation fee to Gasco of $1 million plus costs.

Critical Accounting Policies and Estimates

An appreciation of our critical accounting policies is necessary to understand our financial results.  These policies may require that we make difficult and subjective judgments regarding uncertainties, and as a result, such estimates may significantly impact our consolidated financial results.  The precision of these estimates and the likelihood of future changes depend on a number of underlying variables and a range of possible outcomes.  Other than our accounting for our revenue, inventory, prepaid expenses and deposits, financial instruments and intangible asset, our critical accounting policies do not involve the choice between alternative methods of accounting.  We have applied our critical accounting policies and estimation methods consistently.  

Oil and gas Properties

We follow the full cost method of accounting whereby all costs related to the acquisition and development of oil and gas properties are capitalized into a single cost center (“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. We did not capitalize any internal costs during the years ended December 31, 2006 and 2005.  Costs associated with production and general corporate activities are expenses in the period incurred.  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 development costs 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 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 (full cost pool) may not exceed an amount equal to the present value, discounted at 10%, of estimated future net revenues from proved oil and gas reserves less the future cash outflows associated with the asset retirement obligations that have been accrued in the balance sheet plus the cost, or estimated fair value , if lower of unproved properties and the costs of any properties not being amortized, if any. Should the full cost pool exceed this ceiling, an impairment is recognized.  

The present value of estimated future net revenues is computed by applying current oil and gas prices 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.  However, subsequent commodity price increases may be utilized to calculate the ceiling value.

As of December 31, 2006, based on oil and gas prices of $45.53 per barrel and $4.47 per mcf, the full cost pool was the same as the ceiling because of an impairment charge of $4,452,754 that was taken against our oil and gas properties.

Long-Lived Assets

At December 31, 2006 and 2005 our only long lived asset was our oil and gas properties. As a result of a reserves study, it was determined that the carrying amount of the oil and gas properties exceeded their fair value by $4,452,754 at December 31, 2006.  At December 31, 2006 and 2005 we recorded $4,452,754 and $0, respectively in charges for impairment of oil and gas properties, to reflect a decline in value of these properties, due primarily the lower prices for natural gas and a reduction of leased acreage.  The cost of our unproved properties is withheld from the depletion base as described above until the properties are either developed or abandoned.  We review these properties periodically for possible impairment.

Revenue recognition

We derive our revenue by selling the oil and gas produced from our wells.  We recognize this revenue as income when we sell the oil and gas.  We generally receive payment for the oil and gas sold one to three months after the month in which we sell it.  For this reason, we must estimate the revenue that we have earned but not yet received as of our reporting date.  We use actual production reports to estimate the quantities sold and the estimated average wellhead prices from the Natural Gas Weekly Update bulletin to estimate the price of the production.  We record variances between our estimates and the amounts we actually receive in the month that we receive the payment.

Stock-Based Compensation

On July 1, 2005, we adopted the “modified prospective method” of Statement of Financial Accounting Standards 123R “SFAS 123(R)” which requires that we recognize the compensation costs of all share-based payments granted, modified or settled in financial statements issued after July 1, 2005, as well as for any awards that we granted before the adoption date for which the required service has not yet been performed.  Our adoption of SFAS 123(R) did not have a material effect on our financial condition or results of operations because all required services had been performed before July 1, 2005.  We did not enter into any share-based transactions during this period.

Before July 1, 2005, we accounted for our stock-based compensation using APB 25 and related interpretations.  Under APB 25, we recognized compensation expense for stock options with an exercise price that was less than the market price on the date that we granted 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 our employees and directors.  Accordingly, we have recognized no compensation cost for these options before June 30, 2005.

We use the Black-Scholes option valuation model to calculate the fair value of compensation expense under SFAS 123(R).  This model requires that we estimate a risk-free interest rate and the volatility of the price of our common stock.  The use of a different estimate for any one of these components could have a material impact on the amount of calculated compensation expense.

Discontinued Operations

SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities” requires that costs associated with exit or disposal activities be recognized when the costs are incurred, rather than at the date of commitment of an exit or disposal plan.  Under SFAS No. 146, a liability related to an exit or disposal activity is not recognized, or measured initially at fair value, until such liability has actually been incurred.  

On August 24, 2006, we exchanged all of our shares in Vallenar Energy (a 51.53% interest) for all of the issued and outstanding shares of Rock City (4,000,000 common shares).  As a result of this exchange we reclassified Vallenar Energy’s net operating losses, up to August 24, 2006, in losses from discontinued operations in our consolidated financial statements.  For the years ended December 31, 2006 and 2005, we recorded losses from discontinued operations of $26,335 and $1,859, respectively.  No gain or loss on our investment in Vallenar Energy (of $755,552) was recorded on this exchange of shares.  

Recent Accounting Pronouncements

Refer to Note 2, of our Notes to Consolidated Financial Statements for a discussion of recent accounting standards and pronouncements.

Operations Review

We had a net loss of $5,486,113 during the year ended December 31, 2006.  As of December 31, 2006, we had a cash balance of $1,415,996 and trade accounts receivable of $82,014.  When these current assets are offset against our current obligations of $256,940 in accounts payable, $124,309 in accrued liabilities, $80,105 in accrued wages and $12,258 in amounts due to related parties, we are left with working capital of $1,024,398 at December 31, 2006.  

We believe that our cash and cash equivalents as of the date of this filing, which include the proceeds from the recent exercise of warrants, are adequate to satisfy our working capital needs.  As our oil and gas revenues are not yet sufficient to satisfy our ongoing operational and working capital requirements, for the foreseeable future we must continue to raise funds through private loans, private placements of our common shares, or the issuance of shares for debt.

Our independent registered public accounting firm have added an explanatory paragraph to their audit opinion issued in connection with our consolidated financial statements for the fiscal years 2006 and 2005, which related to our ability to continue as a going concern depends upon our ability to resolve our liquidity problems, principally by obtaining capital and generating sufficient revenues to become profitable.  Our ability to achieve and maintain profitability and positive cash flow depends upon our ability to develop our oil and gas properties, generate revenues from our oil and gas production, and control drilling, completion and production costs.  As we have a minority interest in our oil and gas properties and are not the operator, we can do little to affect the generation of revenue or control drilling, completion and production costs, and we do not have the expertise to initiate development independently of the owner of the majority interest, who is also the operator.  With our current plans, we expect to incur operating losses in future periods, and cannot assure that we will continue to generate revenues.  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

We owed $12,258 to related parties at December 31, 2006.  This sum includes $10,406 in professional and administrative fees that were unpaid at December 31, 2006.  None of the amounts due to related parties bear interest or have any fixed terms of repayment.

On January 31, 2006, one of our directors exercised 800,000 warrants at full exercise price to extinguish $200,000 in debt that we owed to him.

On September 27, 2006, we issued 300,922 common shares at $0.50 per share in payment of $150,461 in debt to three directors and a company controlled by a director.  In November 2006, one of the directors returned 10,410 shares of this commons stock to us in exchange for $5,205 in cash.  Prior to December 31, 2006, we cancelled the 10,410 shares.    

During October 2006, directors, relatives of directors, companies controlled by directors and companies controlled by relatives of directors exercised 8,044,233 common stock purchase warrants at a 66.67% discount for cash of $864,172.

During October 2006, directors and a company controlled by directors and relatives of directors exercised 1,780,224 common stock purchase warrants at a 66.67% discount in exchange for debt of $157,908.

During the year ended December 31, 2006, related parties charged $597,904 in fees for administrative fees, professional services and rent.

In 2004, we transferred to First Griffin Group 50% of our working interest in two wells and wellbores and 100% of our working interest in one well and wellbore.  In January 2007, we agreed to transfer to First Griffin a pro rata leasehold interest in 40 acres surrounding each well in exchange for $20,000 and the costs of the transfer.  Two of our directors and two relatives of directors have an interest in First Griffin.

In May 2004, we granted to Griffin Asset Management, LLC, a drilling fund in which two directors have an interest, an option which gave the drilling fund the right to contribute 50% of the drilling and completion costs of any well in which we participate in Utah and Wyoming in exchange for 50% of our production and working interest in the well.  The drilling fund has not exercised any rights under this agreement and irrevocably terminated it on March 12, 2007.

Comparison of the Years Ended December 31, 2006 and 2005

Overall Results of Operations

For the year ended December 31, 2006, we had a net loss of $5,486,113, or $0.09 per share, which was an increase of $5,228,908 from our net loss of $257,205 or $0.01 per share for the year ended December 31, 2005.  The increase in net loss for the year ended December 31, 2006 as compared to the year ended December 31, 2005, was primarily due to an impairment of oil and gas properties, increases in administrative expenses, lease operating expenses, gathering operations, professional fees, and a decrease in revenues.  These amounts were offset primarily by decreases in advertising, rent and minority interest in losses.

Revenue

Total revenue for the year ended December 31, 2006 was $440,537 compared to $764,802 for the year ended December 31, 2005.  The $324,265 decrease in revenue for 2006 was due to reduced production and lower prices for gas and oil.  

Operating expenses

For the year ended December 31, 2006, our total operating expenses were $5,929,443, which was an increase of $4,914,210 from our total expenses of $1,015,233 for the year ended December 31, 2005.  The increase in expenses for the year ended December 31, 2006 as compared to the year ended December 31, 2005 was primarily due to an impairment charge of $4,452,754 against our oil and gas properties.  The major reason for the impairment was a reduction in our proved reserves, due to some reservoirs being excluded from the total, because at current prices they were no longer considered economically viable.  During the year our administrative fees increased by approximately $265,000 and professional fees by approximately $92,000, lease operating expenses by approximately $127,000 and gathering expenses by approximately $79,000.   Increases on our operating expenses were offset primarily by a decreases in advertising and promotion of approximately $25,000 and rent of $59,000.

Our administrative, professional fees and regulatory expenses increased during the year ended December 31, 2006 due to the increasing amount of work required to meet our SEC, Sarbanes-Oxley and tax filing obligations, and to the increase in legal and other advisers’ fees incurred in negotiating the Gasco merger agreement.  During the next year we expect our operating costs to stabilize.

Other expenses

We have filed all of our corporate income tax returns, which resulted in our paying franchise taxes of approximately $5,834 as of December 31, 2006.  

Loss from discontinued operations

On August 24, 2006, we exchanged all of our shares in Vallenar Energy (a 51.53% interest) for all of the issued and outstanding shares of Rock City (4,000,000 common shares).  This transaction resulted in the reclassification and separate disclosure of Vallenar Energy’s net operating losses of $26,335 and $1,859, for the years ended December 31, 2006 and 2005, respectively.

Liquidity, Capital Resources and Financial Position

As of December 31, 2006, we had a cash balance of $1,415,996 and a negative cash flow from operations of $1,184,221 for the year then ended.  During the year ended December 31, 2006, we funded our operations through revenue from our oil and gas properties of $440,537, the exercise of 250,000 warrants, at full warrant exercise price, from which we received cash of $75,000 and the private placement of 800,000 units for which we received cash of $400,000.  Each unit consists of one common share and one common share purchase warrant.  In October 2006 we raised $2,085,255 in cash upon the exercise of 16,554,236 warrants under an offer made on September 28, 2006 which allowed warrant holders to exercise their warrants at 33.33% of the exercise price.

In the notes to our consolidated financial statements as of December 31, 2006, we caution that our ability to continue as a going concern is uncertain.  We have not generated sufficient revenues to cover our expenses, and we have an accumulated deficit of $67,079,026.  As of December 31, 2006, we had $473,612 in current liabilities.  When this is offset against our current assets of $1,498,010, we are left with working capital $1,024,398.  Although we have sufficient cash from the exercise of the warrants to satisfy our liabilities, we cannot assure that we will succeed in developing our business and achieving a profitable level of operations sufficient to meet our ongoing cash needs.  We have, however, successfully generated sufficient working capital and liquidity through oil and gas revenues and the private placement of our shares until the date of this filing, and believe that we can continue to do so for the next twelve months or as necessary until the merger completes.  

Table 11 summarizes our sources and uses of cash for the years ended December 31, 2006 and 2005.

Table 11

Net cash used in operating activities

The cash used in operations of $1,184,221 was primarily due to our expenses exceeding our revenue by $5,486,113.  The net loss was primarily due to a $4,452,754 impairment of our oil and gas properties, depletion of our oil and gas properties and accretion of our asset retirement liability totaling $77,939 and a minority interest adjustment of $34,962. We also paid down our trade accounts payable by $318,450 and our accrued wages payable by $20,490 as required under our merger agreement with Gasco.    Our expenditures were funded by the collection of trade accounts receivable of $38,096, increases in accrued liabilities of $43,919 and an increase of $59,671 in amounts due to related parties.

Net cash used in investing activities

During the year ended December 30, 2006, we spent $38,151 on exploration and development of our oil and gas properties and we received net proceeds of $20,000 on the sale of our Prickly Pear acreage in Utah.   

Net cash provided by financing activities

During the year we entered into the private placement of 800,000 units at $0.50 per unit in exchange for $400,000 cash.  Each unit consists of one share and one share purchase warrant, exercisable at $0.90 per share for one year.

During the year we issued 250,000 shares of our commons stock on the exercise of 250,000 share purchase warrants for $75,000 cash.  

On September 28, 2006, we resolved to offer our warrant-holders the opportunity to exercise their warrants at a discounted price equal to 33.33% of the original exercise price of their warrants if they exercised them by October 31, 2006.  As of October 31, 2006, 16,554,236 warrants were exercised for cash under this offer and 16,554,236 of our common shares were issued in exchange for $2,085,255 in cash.

We used this cash to pay operating expenses and to cover exploration and development expenses.

Contingencies and commitments

We had no contingencies or long-term commitments at December 31, 2006, except for:

(a)

the Transworld litigation which is disclosed in Note 12 “Commitments and Contingencies” of the notes to our consolidated financial statements appearing elsewhere in this report and

 (b)

our agreement and plan of merger with Gasco that is disclosed in Note 13 “Business Acquisitions and Sale of Subsidiary,” of the notes to our consolidated financial statements, appearing elsewhere in this report, in the merger section of this report and under contractual obligations below.

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 the agreements, we may lose the acreage or wells.

Contingent liability

In February 2003, the debtor and guarantor of a note receivable took legal action against us in Bermuda, claiming that our former subsidiary, First Ecom Systems Limited, had promised to develop and supply them with certain software.  The debtor then failed to pay the note installment that was due on March 1, 2003.  The directors believe that this lawsuit is without merit, as there was no promise to develop software for the debtor, and filed a defense and counterclaim on May 8, 2003.  The debtor-plaintiff filed a reply and defense on May 21, 2003.  In March 2007, Brek and our subsidiary, Feds Acquisition Corporation, settled with the debtor and guarantor, agreed to rescind the agreements giving rise to the litigation, and consented to the dismissal of the litigation from the Bermuda court.  This leaves only our inactive Hong Kong subsidiary, First Ecommerce Asia Limited, subject to the Transworld agreements and litigation. The High Court of the Hong Kong Special Administrative Region in November 2003 ordered that First Ecommerce Asia be wound up and in April 2005 appointed liquidators for this purpose. We do not know the status of the winding up, as the liquidators have not responded to our requests for a report.

Contractual obligations

On September 20, 2006 we entered into an agreement and plan of merger with Gasco Energy, Inc. whereby we agreed to merge with a subsidiary of Gasco in exchange for 11 million shares of Gasco's common stock.  The merger agreement is subject to our shareholders’ approval.

If we breach the terms of the merger agreement we may be liable to pay a cancellation fee to Gasco of $1million plus costs.

Income taxes

Table 12 sets out our deferred tax assets as of December 31, 2006 and 2005.  These relate primarily to net operating losses.  We have established a 100% valuation allowance, as we believe it is more likely than not that the deferred tax assets will not be realized.

Table 12

Deferred Tax Assets

We based the establishment of a 100% valuation allowance against our deferred tax assets on our current operating results.  If our operating results increase significantly, we might have to record our deferred taxes in our financial statements, which could have a material impact on our financial results.    

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.  We do not have any non-consolidated, special-purpose entities.

Internal and external sources of liquidity

We have funded our operations principally through the private placement of common shares, the exercise of share purchase warrants, the issuance of shares for debt and the sale of natural gas and oil.

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-KSB annual report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  You can identify these statements where we have used 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.

We have made all of our forward-looking statements as of the date of the filing of this Form 10-KSB and we disclaim any duty to update these statements.

Certain parts of this Form 10-KSB 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.

Item 7.

Financial Statements

BREK ENERGY CORPORATION

CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2006 and 2005

TABLE OF CONTENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

Brek Energy Corporation

We have audited the accompanying consolidated balance sheets of Brek Energy Corporation, as of December 31, 2006 and 2005, and the related consolidated statements of operations, stockholders’ deficit and comprehensive loss, and cash flows for the years then ended.  These consolidated financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Brek Energy Corporation as of December 31, 2006 and 2005, and the results of its consolidated operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  As more fully described in Note 3, the Company has incurred recurring operating losses and has an accumulated deficit.  These conditions raise substantial doubt about the Company’s ability to continue as a going concern.  Management’s plans in regard to these matters are also described in Note 3.  The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

Mendoza Berger & Company, LLP

/s/Mendoza Berger & Company, LLP

Irvine, California

March 23, 2007

BREK ENERGY CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2005

NOTE 1 – ORGANIZATION AND PRINCIPAL ACTIVITIES

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 was treated as a re-incorporation of JRL Resources as BREK.

Principal Activities

The Company is an independent energy company engaged in the exploration, development and acquisition of crude oil and natural gas in the United States.   “Our”, “we”, “us” as used herein also refer to Brek Energy Corporation.

During 2001, the Company changed its primary business from electronic payment processing to that of oil and gas exploration.  On July 19, 2001, the Company 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.  (Note 11)

In March 2002, the Company acquired a 26% non-dilutable voting interest in Vallenar Energy Corp. (“Vallenar Energy”) another company engaged in oil and gas exploration. On June 28, 2002, the Company increased its ownership of Vallenar Energy to 51.53%.  On August 24, 2006 the Company exchanged its 51.53% interest in Vallenar Energy for a 100% interest in Rock City Energy Corp. (“Rock City”), a company incorporated in the state of Nevada on August 10, 2006.  Rock City is involved in the oil and gas exploration business.  (Notes 4, 13, 14 and 16)

BREK ENERGY CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2005

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States.

These consolidated financial statements include the financial statements of Brek Energy Corp. and its wholly owned subsidiaries.  All significant intercompany balances and transactions have been eliminated from the financial results.

Certain amounts in the prior years’ consolidated financial statements and notes have been reclassified to conform to the current years’ presentation.

Cash and Cash Equivalents

Brek considers all highly liquid instruments with an original maturity or remaining maturity at the date of purchase of three months or less to be cash equivalents.  At December 31, 2006 and 2005, the Company did not have any cash equivalents.

Accounting Estimates

The preparation of consolidated 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 consolidated 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, the fair value of the oil and gas properties which value is based on the results of an independent reserves study, and the estimates and assumptions used for the fair value of equity instruments.

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 December 31, 2006 and 2005, all of the accounts receivable were considered collectable.

Segmented Reporting

The Company has only one business, an oil and gas business in the United States of America.  There is no activity within any of Brek’s foreign subsidiaries and as such, no summarization of financial data is necessary or has been used by management for decision making.

Revenue Recognition

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

BREK ENERGY CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2005

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

Foreign Currency Translation

The functional currency for Brek’s foreign subsidiaries is the respective local currency.  These subsidiaries consist of entities in Canada and Hong Kong.  Brek translates assets and liabilities to US dollars using period-end exchange rates and translates revenues and expenses using average exchange rates during the period.  Exchange gains and losses arising from translation of foreign entity financial statements are included as a component of other comprehensive income (loss).  

Transactions denominated in currencies other than the functional currency of the legal entity are re-measured to the functional currency of the legal entity at the period-end exchange rates.  Any associated currency re-measurement gains and losses are recognized in current operations.

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 for the years ended December 31, 2006 and 2005.

Financial Instruments

Foreign Exchange Risk

The Company is subject to foreign exchange risk for sales and purchases denominated in foreign currencies.  Foreign currency risk arises from the fluctuation of foreign exchange rates and the degree of volatility of these rates relative to the United States dollar.  The Company does not believe that it has any material risk due to foreign currency exchange.

Fair Value of Financial Instruments

The Company’s financial instruments include cash, accounts receivable, accounts payable and accrued liabilities and equity instruments.  The fair value of these financial instruments approximates their carrying values due to their short maturities.  

Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and trade accounts receivable.

The Company places its cash with various high quality financial institutions and, by policy, limits the amount of credit exposure with any one financial institution.  As part of its cash management process, the Company performs periodic evaluations of the relative credit standing of these financial institutions.

Receivables arising from sales to customers are not collateralized.  Management continually monitors the financial condition of its customers to reduce the risk of loss.  All of the Company’s sales were to the Company’s oil and gas operator. Substantially all of the Company’s accounts receivable is due from the Company’s oil and gas operator. Accounts receivable from oil and gas operators are generally paid within 60 days.  At December 31, 2006 and 2005, the Company had $82,014 and $120,110, respectively in trade accounts receivable due from their oil and gas operators.  

BREK ENERGY CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2005

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

Long-Lived Assets

At December 31, 2006 and 2005 the Company’s only long lived asset was its oil and gas properties. As a result of a reserves study, it was determined that the carrying amount of the oil and gas properties exceeded their fair value by $4,452,754 at December 31, 2006.  At December 31, 2006 and 2005 the Company recorded $4,452,754 and $0, respectively in charges for impairment of oil and gas properties, to reflect a decline in value of these properties, due primarily to the lower prices for natural gas and a reduction of leased acreage.  The cost of the unproved properties is withheld from the depletion base as described above until the properties are either developed or abandoned.  The Company reviews these properties periodically for possible impairment.

Advertising

Advertising costs amounted to $0 and $11,916, respectively for the years ended December 31, 2006 and 2005. 

Income Taxes

Income tax expense is based on pre-tax financial accounting income.  Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets, including tax loss and credit carryforwards, and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.  Deferred income tax expense represents the change during the period in the deferred tax assets and deferred tax liabilities. The components of the deferred tax assets and liabilities are individually classified as current and non-current based on their characteristics. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Oil and Gas Properties

The Company follows the full cost method of accounting whereby all costs related to the 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. The Company did not capitalize any internal costs during the years ended December 31, 2006 or 2005. Costs associated with production and general corporate activities were expensed in the period incurred.

Depletion of exploration and development costs 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 either they are developed or abandoned. The properties are reviewed periodically for impairment.

BREK ENERGY CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2005

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

Oil and Gas Properties, continued

Total well costs are transferred to the depletable pool even when multiple targeted zones have not been fully evaluated.  For depletion 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 (full cost pool) may not exceed an amount equal to the present value, discounted at 10%, of estimated future net revenues from proved oil and gas reserves less the future cash outflows associated with the asset retirement obligations that have been accrued in the balance sheet plus the cost, or estimated fair value, if lower of unproved properties and the costs of any properties not being amortized, if any. Should the full cost pool exceed this ceiling, an impairment is recognized. The present value of estimated future net revenues is computed by applying current oil and gas prices 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. However, subsequent commodity price increases may be utilized to calculate the ceiling value.   

As of December 31, 2006, based on oil and gas prices of $45.53 per barrel and $4.47 per mcf, the full cost pool was the same as the ceiling because of an impairment charge that was taken against our oil and gas properties of $4,452,754.

Asset Retirement Obligation

The Company follows Statement of Financial Accounting Standards (“SFAS”) No. 143, “Accounting for Asset Retirement Obligations”, which requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made.  The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset.  The increase in carrying value of a property associated with the capitalization of an asset retirement cost is included in proved oil and gas properties in the consolidated balance sheets.  The Company depletes the amount added to proved oil and gas property costs.  The future cash outflows for oil and gas properties associated with settling the asset retirement obligations that have been accrued in the accompanying balance sheets are excluded from the ceiling test calculations.  The Company’s asset retirement obligation consists of costs related to the plugging of wells and removal of facilities and equipment on its oil and gas properties.  The asset retirement liability is allocated to operating expenses using a systematic and rational method. At December 31, 2005, the asset retirement obligation of $21,380 and accretion expense of $3,505 were not booked because these amounts were not considered to be material. The information below reconciles the value of the asset retirement obligation at December 31, 2006.

BREK ENERGY CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2005

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

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

Basic net loss per share is computed by dividing net loss attributable to the common stockholders by the weighted average number of common shares outstanding during the reporting period. The shares of restricted common stock granted to certain officers, directors and employees of the Company are included in the computation only after the shares become fully vested. Diluted net income per common share includes the potential dilution that could occur upon exercise of the options and warrants to acquire common stock computed using the treasury stock method which assumes that the increase in the number of shares is reduced by the number of shares which could have been repurchased by the Company with the proceeds from the exercise of the options and warrants (which were assumed to have been made at the average market price of the common shares during the reporting period).

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

As of December 31, 2006, the Company had 79,973,062 shares of common stock issued and outstanding.  At December 31, 2006, the Company also had 370,000 shares of common stock issuable upon exercise of outstanding options and 200,000 shares of common stock issuable upon exercise of outstanding warrants. Additional options or warrants may be granted to purchase up to 4,580,000 shares of common stock under the Company’s 2001 stock option plan.

Stock-based Compensation

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 Accounting Principles Board Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees”, and amends SFAS 95, “Statement of Cash Flows”.  SFAS 123(R) eliminates the option to use APB 25’s intrinsic value method of accounting and requires recording expense for stock compensation based on a fair value based method.      

On July 1, 2005, the Company adopted the “modified prospective method” which requires the Company to recognize compensation costs, for all share-based payments granted, modified or settled, in financial statements issued subsequent to July 1, 2005, as well as for any awards that were granted prior to the adoption date for which the required service has not yet been performed.  The adoption of SFAS 123(R) did not have a material effect on the Company’s financial condition or results of operations because subsequent to July 1, 2005, the Company did not enter into any share-based transactions.

Prior to July 1, 2005, the Company accounted for its stock-based compensation using APB 25 and related interpretations. Under APB 25, compensation expense was recognized for stock options with an exercise price that was 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 SFAS 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 was recognized for these options prior to June 30, 2005.

BREK ENERGY CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2005

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

Stock-based Compensation, continued

The Company accounts for equity instruments issued to non-employees in accordance with the provisions of SFAS 123R, and Emerging Issues Task Force No. 96-18 (“EITF 96-18”). All transactions in which goods or services are consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument, whichever is more reliably measurable.

The Company did not grant any options during 2006 or 2005.

Discontinued Operations

SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities” requires that costs associated with exit or disposal activities be recognized when the costs are incurred, rather than at the date of commitment of an exit or disposal plan.  Under SFAS No. 146, a liability related to an exit or disposal activity is not recognized, or measured initially at fair value, until such liability has actually been incurred.  

On August 24, 2006, the Company exchanged all of their shares in Vallenar Energy (a 51.53% interest) for all of the issued and outstanding shares of Rock City (4,000,000 common shares).  This transaction resulted in the Company reclassifying and disclosing Vallenar Energy’s net operating losses, separately on the Statements of Operations for the years ended December 31, 2006 and 2005 (Notes 1, 13 and 14).

Recent Accounting Pronouncements

As previously discussed, the Company adopted SFAS No. 123(R) related to share based payments.       

In December 2004, the FASB issued SFAS No. 153 (“SFAS 153”), “Exchanges of Nonmonetary Assets”, which changes the guidance in APB 29, “Accounting for Nonmonetary Transactions”.  This statement amends APB 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance.  A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange.  The provisions of this SFAS 153 are to be applied prospectively and are effective for fiscal years beginning after June 15, 2005.  Adoption of SFAS 153 did not have a material impact on the Company’s consolidated financial statements.

In May 2005, the FASB issued SFAS No. 154 (“SFAS 154”), “Accounting Changes and Error Corrections”.  This statement, which replaces APB Opinion No. 20, “Accounting Changes”, and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements”, requires that a voluntary change in accounting principle be applied retrospectively to all prior period financial statements presented, unless it is impracticable to do so.  SFAS 154 also provides that a change in method of depreciating or amortizing a long-lived non-financial asset be accounted for as a change in estimate effected by a change in accounting principle, and also provides that correction of errors in previously issued financial statements should be termed a “restatement”.  SFAS 154 is effective for fiscal years beginning after December 15, 2005.  The adoption of SFAS 154 did not have a material impact on the Company’s consolidated financial statements.

BREK ENERGY CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2005

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

Recent Accounting Pronouncements, continued

In July 2006, the FASB issued FASB Interpretation No. 48 ("Interpretation No. 48"), "Accounting for Uncertainty in Income Taxes". Interpretation No. 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with SFAS No. 109, "Accounting for Income Taxes”. Interpretation No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Interpretation No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Interpretation No. 48 is effective beginning January 1, 2007. The adoption of Interpretation No. 48 is not expected to have a material impact on the Company’s consolidated financial statements.

In February 2006, the FASB issued SFAS No. 155 (“SFAS 155”), “Accounting for Certain Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140”.  This Statement amends FASB Statements No. 133, “Accounting for Derivative Instruments and Hedging Activities”, and No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”.  This Statement resolves issues addressed in Statement 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets.”  This statement is effective for all financial instruments acquired or issued after the beginning of an entities first fiscal year that begins after September 15, 2006.  Adoption of SFAS 155 is not expected to have a material impact on the Company’s consolidated financial statements.

In March 2006, the FASB issued SFAS No. 156 (“SFAS 156”), “Accounting for Servicing of Financial Assets – an amendment of FASB Statement No. 140”.  SFAS 156 amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,” with respect to accounting for separately recognized servicing assets and servicing liabilities.  SFAS 156 is effective for fiscal years that begin after September 15, 2006, with early adoption permitted as of the beginning of an entity’s fiscal year.  The Company does not have any servicing assets or servicing liabilities and, accordingly, the adoption of SFAS 156 is not expected to have a material impact on the Company’s consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157 (“SFAS 157”), "Fair Value Measurements”.   SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosure requirements about fair value measurements. SFAS 157 will be effective for the Company January 1, 2008. Adoption of SFAS 157 is not expected to have a material impact on the Company’s consolidated financial statements.

BREK ENERGY CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2005

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

Recent Accounting Pronouncements, continued

In September 2006, the Securities and Exchange Commission staff published Staff Accounting Bulletin SAB No. 108 (“SAB 108”), "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements." SAB 108 addresses quantifying the financial statement effects of misstatements, specifically, how the effects of prior year uncorrected errors must be considered in quantifying misstatements in the current year financial statements. SAB 108 is effective for fiscal years ending after November 15, 2006. The Company adopted SAB 108 in the fourth quarter of 2006, adoption did not have a material impact on Company’s consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159 (“SFAS 159”), "The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115”.   SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. SFAS 159 will be effective for the Company January 1, 2008. Adoption of SFAS 159 is not expected to have a material impact on the Company’s consolidated financial statements.

NOTE 3 – GOING CONCERN

During the year ended December 31, 2006, the Company has been focusing on developing its oil and gas business.  As such, the Company has accumulated a deficit of approximately $67 million to date and additional debt or equity financing will be required by the Company, to support development of its oil and gas properties, until such time as the Company increases its cash flow from operations or completes its merger with Gasco.  (Note 13)  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 increased 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.

NOTE 4 - OIL AND GAS PROPERTIES

The Company has an approximate 15% interest in 112,188 gross acres (16,750 net acres) in the Uinta Basin region in Utah, an approximate 13% interest in 52,573 gross acres (6,807 net acres) in the Greater Green River Basin of Wyoming, an approximate 7% interest in 3,315 gross acres (219 net acres) in Kern County and San Luis Obispo County in California and an approximate 89% interest in 9,191 gross acres (8,211 net acres) in Edwards County in Texas.  (Note 1, 2,13 and 16)  

BREK ENERGY CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2005

NOTE 4 - OIL AND GAS PROPERTIES, continued

The following table presents information regarding the Company’s net costs incurred in the purchase of proved and unproved properties and in exploration and development activities:

The above table excludes the following transactions:

On September 18, 2006, the Company rescinded their consent to participate in the drilling of a well, resulting in the reversal of $560,294 in development expenditures that were accrued during the year. In July 2006, the Company sold one of its proven oil and gas properties for $20,000.

Depletion and impairment expense related to the proved properties per equivalent Mcf of production for the years ended December 31, 2006 and 2005 were $57.59 and $0.84 respectively.

At December 31, 2006 and 2005, the Company’s unproved properties consist of leasehold acquisition and exploration costs in the following areas:

The following table sets forth a summary of oil and gas property costs not being amortized as of December 31, 2006, by the year in which such costs were incurred:

The costs associated with the Company’s drilling projects will be transferred to proved properties as the wells are drilled during the next five to ten years.

BREK ENERGY CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2006 AND 2005