**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
 
 **FORM
        10-QSB**
 
 (Mark
        One)
 [X]
              QUARTERLY
                  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
                  OF
                  1934
 **For
        the quarterly period ended December 31, 2006**
  [  
                    ]
                TRANSITION
                    REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
                    ACT
 For
        the
        transition period from ________________ to _______________
 
 **000-49620**
 (Commission
        file number)
 
 **COBALIS
        CORP.**
 (Exact
        name of small business issuer as specified in its charter)
  **Nevada**
                (State
                  or other
                  jurisdiction
                of
                  incorporation or organization)
              **91-1868007**
                (IRS
                  Employer
                Identification
                  No.)
 
 **2445
        McCabe Way, Suite 150, Irvine, California 92614**
 (Address
        of principal executive offices)
 
 **(949)
        757-0001**
 (Issuer's
        telephone number)
 
 **N/A**
 (Former
        name, former address and former fiscal year, if changed since last
        report)
 
 Check
        whether the issuer (1) filed all reports required to be filed by Section
        13 or
        15(d) of the Exchange Act during the past 12 months (or for such shorter
        period
        that the registrant was required to file such reports), and (2) has been
        subject
        to such filing requirements for the past 90 days. Yes [ X ] No [  
]
 
 State
        the number of shares outstanding of each of the issuer's classes of common
        equity, as of the latest practicable date: As of February 16, 2007 - 35,824,672
        shares of common stock Indicate by check mark whether the registrant is a
        shell
        company (as defined in Rule 12b-2 of the Exchange Act). Yes [   ]
        No [X]
 
 Transitional
        Small Business Disclosure Format (check one): Yes [   ] No
        [X]
  
 **COBALIS
          CORP.**
 **Index**
  **Page****PART
                    I.**
                **FINANCIAL
                    INFORMATION**
                2Item
                    1.
                Financial
                    Statements
                2Consolidated
                    Balance Sheet as of December 31, 2006 (unaudited)
                2Consolidated
                    Statements of Operations for the three and nine months ended December
                    31, 2006 and 2005 (unaudited)
                3Consolidated
                    Statements of Stockholders’ Deficit for the ninemonths ended December 31, 2006 (unaudited)
                4Consolidated
                    Statements of Cash Flows for the ninemonths ended December 31, 2006 and 2005 (unaudited)
                8Notes
                    to Consolidated Financial Statements (unaudited)
                10Item
                    2.
                Management's
                    Discussion and Analysis or Plan of Operations
                24Item
                    3.
                Controls
                    and Procedures
                32**PART
                    II.**
                **OTHER
                    INFORMATION**
                33Item
                    1.
                Legal
                    Proceedings
                33Item
                    2.
                Unregistered
                    Sales of Equity Securities and Use of Proceeds
                34Item
                    3.
                Defaults
                    Upon Senior Securities
                35Item
                    4.
                Submission
                    of Matters to a Vote of Security Holders
                35Item
                    5.
                Other
                    Information
                35Item
                    6.
                Exhibits
                38**SIGNATURES**
                39
 1




**PART
      I.**  **FINANCIAL
      INFORMATION**





**Item
      1.**  **Financial
      Statements**


**Cobalis
        Corp. and Subsidiary** **(A
          Development Stage Company)** **Consolidated
            Balance Sheet**


**December
                  31,****2006**(unaudited)**ASSETS**CURRENT
                  ASSETSCash
                  and cash equivalents
              
              $
              1,684,580Prepaid
                  expenses and other current assets
              
              
              21,801TOTAL
                  CURRENT ASSETS
              
              
              1,706,381PROPERTY
                  AND EQUIPMENT, net of accumulated depreciation of $111,770
              
              
              3,553WEBSITE
                  DEVELOPMENT COSTS, net of accumulated amortization of
                  $33,545
              
              
              1,062PATENTS,
                  net of accumulated amortization of $321,177
              
              
              632,262DEBT
                  ISSUANCE COSTS
              
              
              275,787DEPOSIT
              
              
              12,546TOTAL
                  ASSETS
              
              $
              2,631,591**LIABILITIES
                  AND STOCKHOLDERS' DEFICIT**CURRENT
                  LIABILITIESAccounts
                  payable
              
              $
              545,629Accrued
                  expenses
              
              
              744,339Accrued
                  clinical trial costs
              
              
              2,611,356Accrued
                  legal settlements
              
              
              1,785,000Accrued
                  salaries
              
              
              376,125Warrant
                  liability
              
              
              7,186,980Accrued
                  derivative liabililty
              
              
              2,017,315Promissory
                  notes
              
              
              46,813Notes
                  payable, net of discount of $54,508
              
              
              300,000Convertible
                  notes payable
              
              
              850,000TOTAL
                  CURRENT LIABILITIES
              
              
              16,463,557SENIOR
                  DEBENTURE, net of discount of $53,806
              
              
              196,194CONVERTIBLE
                  DEBENTURE, net of discounts of $2,462,380
              
              
              37,620TOTAL
                  LIABILITIES
              
              
              16,697,371CONVERTIBLE
                  PREFERRED STOCK
              
              
              442,500COMMITMENTS
                  AND CONTINGENCIES
              
              
              -STOCKHOLDERS'
                  DEFICITCommon
                  stock; $0.001 par value; 50,000,000 sharesauthorized;
                  35,696,834 shares issued and outstanding
              
              
              35,697Additional
                  paid-in capital
              
              
              23,679,456Prepaid
                  expenses
              
              
              (94,826
              )Deficit
                  accumulated during the development stage
              
              
              (38,128,607
              )TOTAL
                  STOCKHOLDERS' DEFICIT
              
              
              (14,508,280
              )TOTAL
                  LIABILITIES AND STOCKHOLDERS' DEFICIT
              
              $
              2,631,591





**The
        accompanying notes are an integral part of these unaudited consolidated
        financial statements**
 2


**Cobalis
        Corp. and Subsidiary**
 **(A
        Development Stage Company)**


**Consolidated
        Statements of Operations**
  **Cumulative
                  from****Three
                  Months Ended**
              
              **Nine
                  Months Ended**
              
              **November
                  21,****December
                  31,**
              
              **December
                  31,**
              
              **December
                  31,**
              
              **December
                  31,**
              
              **2000
                  (inception) to****2006**
              
              **2005**
              
              **2006**
              
              **2005**
              
              **December
                  31,2006**(unaudited)
              
              (unaudited)
              
              (unaudited)
              
              (unaudited)
              
              (unaudited)NET
                  SALES
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              5,589COST
                  OF SALES
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              31,342GROSS
                  PROFIT (LOSS)
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (25,753
              )OPERATING
                  EXPENSES:Professional
                  fees
              
              
              656,601
              
              
              1,003,441
              
              
              2,224,275
              
              
              1,961,801
              
              
              11,399,802Salary
                  and wages
              
              
              651,607
              
              
              317,025
              
              
              1,755,239
              
              
              495,245
              
              
              4,792,537Rent
                  expense
              
              
              36,003
              
              
              34,486
              
              
              136,282
              
              
              103,409
              
              
              705,341Marketing
                  and research
              
              
              2,502,389
              
              
              (406,315
              )
              
              3,801,753
              
              
              (350,999
              )
              
              5,721,188Depreciation
                  and amortization
              
              
              16,580
              
              
              23,262
              
              
              47,857
              
              
              69,545
              
              
              575,121Impairment
                  expense
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              2,331,522Stock
                  option expense
              
              
              469,296
              
              
              -
              
              
              1,059,888
              
              
              -
              
              
              1,059,888Other
                  operating expenses
              
              
              194,443
              
              
              167,373
              
              
              618,344
              
              
              455,985
              
              
              2,245,274Legal
                  settlements
              
              
              60,000
              
              
              -
              
              
              60,000
              
              
              -
              
              
              872,718TOTAL
                  OPERATING EXPENSES
              
              
              4,586,919
              
              
              1,139,272
              
              
              9,703,638
              
              
              2,734,986
              
              
              29,703,391LOSS
                  FROM OPERATIONS
              
              
              (4,586,919
              )
              
              (1,139,272
              )
              
              (9,703,638
              )
              
              (2,734,986
              )
              
              (29,729,144
              )OTHER
                  INCOME (EXPENSE)Interest
                  expense and financing costs
              
              
              (225,639
              )
              
              (137,502
              )
              
              (457,774
              )
              
              (545,869
              )
              
              (4,659,748
              )Convertible
                  debenture financing cost
              
              
              (3,065,293
              )
              
              -
              
              
              (3,065,293
              )
              
              -
              
              
              (3,065,293
              )Change
                  in fair value of warrant and accrued derivative
                  liabilities
              
              
              (93,122
              )
              
              (51,270
              )
              
              (93,122
              )
              
              (24,928
              )
              
              210,578TOTAL
                  OTHER INCOME (EXPENSE)
              
              
              (3,384,054
              )
              
              (188,772
              )
              
              (3,616,189
              )
              
              (570,797
              )
              
              (7,514,463
              )LOSS
                  BEFORE PROVISION FOR INCOME TAXES
              
              
              (7,970,973
              )
              
              (1,328,044
              )
              
              (13,319,827
              )
              
              (3,305,783
              )
              
              (37,243,607
              )PROVISION
                  FOR INCOME TAXES
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -NET
                  LOSS
              
              
              (7,970,973
              )
              
              (1,328,044
              )
              
              (13,319,827
              )
              
              (3,305,783
              )
              
              (37,243,607
              )PREFERRED
                  STOCK DIVIDENDS
              
              
              9,375
              
              
              18,750
              
              
              37,500
              
              
              56,250
              
              
              1,110,000NET
                  LOSS ATTRIBUTED TO COMMON STOCKHOLDERS
              
              $
              (7,980,348
              )
              $
              (1,346,794
              )
              $
              (13,357,327
              )
              $
              (3,362,033
              )
              $
              (38,353,607
              )NET
                  LOSS PER SHARE:BASIC
                  AND DILUTED
              
              $
              (0.23
              )
              $
              (0.05
              )
              $
              (0.42
              )
              $
              (0.13
              )
              $
              (1.76
              )WEIGHTED
                  AVERAGE SHARES OUTSTANDING:BASIC
                  AND DILUTED
              
              
              34,945,875
              
              
              26,154,906
              
              
              31,430,962
              
              
              25,410,249
              
              
              21,754,624




**The
        accompanying notes are an integral part of these unaudited consolidated
        financial statements.**
 3


**Cobalis
        Corp. and Subsidiary**


**(A
          Development Stage Company)**
 **Consolidated
          Statements of Stockholders' Deficit**
 **For
          the Period From November 21, 2000 (inception) to September 30,
          2006**
  **Deficit****accumulated**
                
                **Total****Additional**
                
                
                
                **during
                    the**
                
                **stockholders'****Common
                    stock**
                
                **paid-in**
                
                **Prepaid**
                
                **development**
                
                **equity****Shares**
                
                **Amount**
                
                **capital**
                
                **Expenses**
                
                **stage**
                
                **(deficit)**Balance
                    at inception (November 21, 2000)
                
                
                -
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -Issuance
                    of founder’s shares in exchangefor
                    property and equipment
                
                
                16,300,000
                
                
                16,300
                
                
                -
                
                
                -
                
                
                -
                
                
                16,300Issuance
                    of common stock for cash - November 2000 @ $1.00
                
                
                30,000
                
                
                30
                
                
                29,970
                
                
                -
                
                
                -
                
                
                30,000Issuance
                    of common stock for cash - December 2000 @ $1.00
                
                
                15,000
                
                
                15
                
                
                14,985
                
                
                -
                
                
                -
                
                
                15,000Issuance
                    of common stock for cash - February 2001 @ $1.00
                
                
                12,000
                
                
                12
                
                
                11,988
                
                
                -
                
                
                -
                
                
                12,000Issuance
                    of common stock for cash - March 2001 @ $1.00
                
                
                125,000
                
                
                125
                
                
                124,875
                
                
                -
                
                
                -
                
                
                125,000Issuance
                    of common stock for services - March 2001 @ $1.00
                
                
                10,000
                
                
                10
                
                
                9,990
                
                
                -
                
                
                -
                
                
                10,000Contributed
                    capital
                
                
                -
                
                
                -
                
                
                62,681
                
                
                -
                
                
                -
                
                
                62,681Net
                    loss for the period from inception
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                -(November
                    21, 2000) to March 31, 2001
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (223,416
                )
                
                (223,416
                )Balance
                    at March 31, 2001, as restated
                
                
                16,492,000
                
                
                16,492
                
                
                254,489
                
                
                -
                
                
                (223,416
                )
                
                47,565Issuance
                    of common stock for cash - April 2001 @ $1.00
                
                
                10,000
                
                
                10
                
                
                9,990
                
                
                -
                
                
                -
                
                
                10,000Issuance
                    of common stock for telephone equipment -April
                    2001 @ $1.00
                
                
                6,750
                
                
                7
                
                
                6,743
                
                
                -
                
                
                -
                
                
                6,750Issuance
                    of common stock for cash - May 2001 @ $1.00
                
                
                11,000
                
                
                11
                
                
                10,989
                
                
                -
                
                
                -
                
                
                11,000Issuance
                    of common stock for website development -May
                    2001 @ $1.00
                
                
                17,000
                
                
                17
                
                
                16,983
                
                
                -
                
                
                -
                
                
                17,000Issuance
                    of common stock for legal services -May
                    2001 @ $1.00
                
                
                1,000
                
                
                1
                
                
                999
                
                
                -
                
                
                -
                
                
                1,000Issuance
                    of common stock for cash - June 2001 @ $1.00
                
                
                23,500
                
                
                24
                
                
                23,476
                
                
                -
                
                
                -
                
                
                23,500Issuance
                    of common stock for cash - July 2001 @ $1.00
                
                
                20,000
                
                
                20
                
                
                19,980
                
                
                -
                
                
                -
                
                
                20,000Issuance
                    of common stock for cash - August 2001 @ $1.00
                
                
                25,000
                
                
                25
                
                
                24,975
                
                
                -
                
                
                -
                
                
                25,000Issuance
                    of common stock for services, related party -September
                    2001 @ $1.00
                
                
                65,858
                
                
                66
                
                
                65,792
                
                
                -
                
                
                -
                
                
                65,858Issuance
                    of common stock for cash - September 2001 @ $1.00
                
                
                15,000
                
                
                15
                
                
                14,985
                
                
                -
                
                
                -
                
                
                15,000Issuance
                    of common stock for services - September 2001 @ $1.00
                
                
                11,000
                
                
                11
                
                
                10,989
                
                
                -
                
                
                -
                
                
                11,000Issuance
                    of stock options for services - September 2001
                
                
                -
                
                
                -
                
                
                32,000
                
                
                -
                
                
                -
                
                
                32,000Issuance
                    of common stock for cash - October 2001 @ $1.00
                
                
                5,000
                
                
                5
                
                
                4,995
                
                
                -
                
                
                -
                
                
                5,000Issuance
                    of common stock for cash - December 2001 @ $1.00
                
                
                30,000
                
                
                30
                
                
                29,970
                
                
                -
                
                
                -
                
                
                30,000Issuance
                    of common stock for services -December
                    31, 2001 @ $1.00
                
                
                33,000
                
                
                33
                
                
                32,967
                
                
                -
                
                
                -
                
                
                33,000Issuance
                    of common stock for services, related party -December
                    2001 @ $1.00
                
                
                117,500
                
                
                118
                
                
                117,382
                
                
                -
                
                
                -
                
                
                117,500Issuance
                    of common stock for prepaid advertising -December
                    2001 @ $1.00
                
                
                15,600
                
                
                15
                
                
                15,585
                
                
                -
                
                
                -
                
                
                15,600Issuance
                    of common stock for property and equipment -January
                    2002 @ $3.00
                
                
                1,000
                
                
                1
                
                
                2,999
                
                
                -
                
                
                -
                
                
                3,000Issuance
                    of common stock for services, related party -January
                    2002 @ $1.00
                
                
                33,000
                
                
                33
                
                
                32,967
                
                
                -
                
                
                -
                
                
                33,000Issuance
                    of common stock for cash - February 2002 @ $2.00
                
                
                20,000
                
                
                20
                
                
                39,980
                
                
                -
                
                
                -
                
                
                40,000Issuance
                    of common stock for cash - March 2002 @ $2.00
                
                
                12,500
                
                
                12
                
                
                24,988
                
                
                -
                
                
                -
                
                
                25,000Contributed
                    capital
                
                
                -
                
                
                -
                
                
                211,269
                
                
                -
                
                
                -
                
                
                211,269Deferred
                    compensation
                
                
                -
                
                
                -
                
                
                -
                
                
                (60,108
                )
                
                -
                
                
                (60,108
                )Net
                    loss
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (1,144,249
                )
                
                (1,144,249
                )Balance
                    at March 31, 2002, as restated
                
                
                16,965,708
                
                
                16,966
                
                
                1,005,492
                
                
                (60,108
                )
                
                (1,367,665
                )
                
                (405,315
                )
  4
  Issuance
                    of common stock for services - April 2002 @ $2.00
                
                
                3,000
                
                
                3
                
                
                5,997
                
                
                -
                
                
                -
                
                
                6,000Issuance
                    of common stock for cash - April 2002 @ $1.00
                
                
                10,000
                
                
                10
                
                
                9,990
                
                
                -
                
                
                -
                
                
                10,000Issuance
                    of common stock for cash - April 2002 @ $2.00
                
                
                17,500
                
                
                17
                
                
                34,983
                
                
                -
                
                
                -
                
                
                35,000Issuance
                    of common stock for cash - May 2002 @ $1.00
                
                
                10,000
                
                
                10
                
                
                9,990
                
                
                -
                
                
                -
                
                
                10,000Issuance
                    of common stock for cash - May 2002 @ $2.00
                
                
                16,000
                
                
                16
                
                
                31,984
                
                
                -
                
                
                -
                
                
                32,000Issuance
                    of stock options for services - May 2002
                
                
                -
                
                
                -
                
                
                350,000
                
                
                -
                
                
                -
                
                
                350,000Contributed
                    capital - bonus expense
                
                
                -
                
                
                -
                
                
                50,000
                
                
                -
                
                
                -
                
                
                50,000Issuance
                    of common stock for cash - June 2002 @ $1.00
                
                
                5,000
                
                
                5
                
                
                4,995
                
                
                -
                
                
                -
                
                
                5,000Issuance
                    of common stock for cash - June 2002 @ $2.00
                
                
                5,000
                
                
                5
                
                
                9,995
                
                
                -
                
                
                -
                
                
                10,000Issuance
                    of common stock for cash - July 2002 @ $1.00
                
                
                5,000
                
                
                5
                
                
                4,995
                
                
                -
                
                
                -
                
                
                5,000Issuance
                    of common stock for cash - August 2002 @ $2.00
                
                
                10,000
                
                
                10
                
                
                19,990
                
                
                -
                
                
                -
                
                
                20,000Issuance
                    of common stock for cash - September 2002 @ $2.00
                
                
                10,000
                
                
                10
                
                
                19,990
                
                
                -
                
                
                -
                
                
                20,000Issuance
                    of stock options below fair market value - November 2002
                
                
                -
                
                
                -
                
                
                250,000
                
                
                (250,000
                )
                
                -
                
                
                -Issuance
                    of common stock for conversion of note - December 2002 @
                    2.00
                
                
                50,000
                
                
                50
                
                
                99,950
                
                
                -
                
                
                -
                
                
                100,000Issuance
                    of common stock for cash - December 2002 @ $2.00
                
                
                20,000
                
                
                20
                
                
                39,980
                
                
                -
                
                
                -
                
                
                40,000Issuance
                    of common stock for services - December 2002 @ $2.00
                
                
                15,000
                
                
                15
                
                
                29,985
                
                
                -
                
                
                -
                
                
                30,000Issuance
                    of common stock for patents - December 2002 @ $2.00
                
                
                2,000,000
                
                
                2,000
                
                
                1,285,917
                
                
                -
                
                
                -
                
                
                1,287,917Contributed
                    capital
                
                
                
                
                
                
                
                
                292,718
                
                
                -
                
                
                -
                
                
                292,718Issuance
                    of common stock for exercise of options - December 2002
                
                
                574,000
                
                
                574
                
                
                574,028
                
                
                -
                
                
                -
                
                
                574,602Deferred
                    compensation
                
                
                
                
                
                
                
                
                
                
                
                60,108
                
                
                
                
                
                60,108Contributed
                    capital
                
                
                
                
                
                
                
                
                5,000
                
                
                -
                
                
                -
                
                
                5,000Issuance
                    of common stock for services - January 2003
                
                
                
                
                
                
                
                
                25,000
                
                
                -
                
                
                -
                
                
                25,000Issuance
                    of common stock for cash February 2003 @ $2.00
                
                
                11,500
                
                
                12
                
                
                22,988
                
                
                -
                
                
                -
                
                
                23,000Issuance
                    of common stock for cash March 2003 @ $2.00
                
                
                5,000
                
                
                5
                
                
                9,995
                
                
                -
                
                
                -
                
                
                10,000Deferred
                    compensation
                
                
                
                
                
                
                
                
                
                
                
                54,000
                
                
                -
                
                
                54,000Net
                    loss
                
                
                
                
                
                
                
                
                
                
                
                -
                
                
                (2,148,008
                )
                
                (2,148,008
                )Balance
                    at March 31, 2003, as restated
                
                
                19,732,708
                
                
                19,733
                
                
                4,193,962
                
                
                (196,000
                )
                
                (3,515,673
                )
                
                502,022Issuance
                    of common stock for cash April 2003 @ $2.00
                
                
                70,000
                
                
                70
                
                
                139,930
                
                
                -
                
                
                -
                
                
                140,000Issuance
                    of common stock for cash May 2003 @ $2.00
                
                
                30,000
                
                
                30
                
                
                59,970
                
                
                -
                
                
                -
                
                
                60,000Acquisition
                    by Biogentech Corp of ("Togs for Tykes")
                
                
                1,032,000
                
                
                1,032
                
                
                (101,032
                )
                
                -
                
                
                -
                
                
                (100,000
                )Issuance
                    of common stock for penalties January 2004 @ $2.80
                
                
                135,000
                
                
                135
                
                
                377,865
                
                
                -
                
                
                -
                
                
                378,000Issuance
                    of common stock for services February 2004 @ $2.20
                
                
                100,000
                
                
                100
                
                
                219,900
                
                
                -
                
                
                -
                
                
                220,000Issuance
                    of common stock for services February 2004 @ $1.85
                
                
                20,000
                
                
                20
                
                
                36,980
                
                
                -
                
                
                -
                
                
                37,000Value
                    of beneficial conversion feature of convertibledebenture
                    issued in September 2003
                
                
                
                
                
                
                
                
                346,870
                
                
                -
                
                
                -
                
                
                346,870Fair
                    value allocated to warrant liability for detachablewarrants
                    issued with preferred stock
                
                
                
                
                
                
                
                
                (181,849
                )
                
                -
                
                
                -
                
                
                (181,849
                )Dividend
                    on preferred stock
                
                
                
                
                
                
                
                
                885,000
                
                
                -
                
                
                (885,000
                )
                
                -Deferred
                    compensation
                
                
                
                
                
                
                
                
                
                
                
                196,000
                
                
                -
                
                
                196,000Net
                    loss
                
                
                
                
                
                
                
                
                
                
                
                -
                
                
                (5,703,639
                )
                
                (5,703,639
                )Balance
                    at March 31, 2004
                
                
                21,119,708
                
                
                21,120
                
                
                5,977,596
                
                
                -
                
                
                (10,104,312
                )
                
                (4,105,596
                )Issuance
                    of common stock for penalties May 2004 @ $1.85
                
                
                170,000
                
                
                170
                
                
                314,330
                
                
                -
                
                
                -
                
                
                314,500Issuance
                    of common stock for services June 2004 @ $1.75
                
                
                10,000
                
                
                10
                
                
                17,490
                
                
                -
                
                
                -
                
                
                17,500Issuance
                    of common stock for conversion of debt June 2004 @ $1.60
                
                
                371,317
                
                
                371
                
                
                593,736
                
                
                -
                
                
                -
                
                
                594,107Issuance
                    of common stock for services July 2004 @ $1.35
                
                
                7,489
                
                
                8
                
                
                10,101
                
                
                
                
                
                
                
                
                10,109
  5
  Issuance
                    of common stock for services July 2004 @ $1.10
                
                
                75,000
                
                
                75
                
                
                82,425
                
                
                
                
                
                
                
                
                82,500Issuance
                    of common stock for services August 2004 @ $0.75
                
                
                100,000
                
                
                100
                
                
                74,900
                
                
                
                
                
                
                
                
                75,000Conversion
                    of debt to common stock September 2004 @ 2.22
                
                
                857,143
                
                
                857
                
                
                1,902,000
                
                
                
                
                
                
                
                
                1,902,857Issuance
                    of common stock for services October 2004 @ $2.20
                
                
                4,758
                
                
                5
                
                
                10,463
                
                
                
                
                
                
                
                
                10,468Issuance
                    of common stock for services October 2004 @ $2.55
                
                
                375,000
                
                
                375
                
                
                955,875
                
                
                
                
                
                
                
                
                956,250Issuance
                    of common stock for services December 2004 @ $1.45
                
                
                5,000
                
                
                5
                
                
                7,245
                
                
                
                
                
                
                
                
                7,250Issuance
                    of common stock for services December 2004 @ $1.30
                
                
                63,676
                
                
                63
                
                
                82,715
                
                
                
                
                
                
                
                
                82,778Issuance
                    of common stock for services January 2005 @ $1.05
                
                
                1,250
                
                
                1
                
                
                1,312
                
                
                
                
                
                
                
                
                1,313Issuance
                    of common stock for services January 2005 @ $1.18
                
                
                75,000
                
                
                75
                
                
                88,425
                
                
                
                
                
                
                
                
                88,500Issuance
                    of common stock for services February 2005 @ $1.10
                
                
                155,000
                
                
                155
                
                
                170,345
                
                
                
                
                
                
                
                
                170,500Issuance
                    of common stock for services February 2005 @ $1.06
                
                
                100,000
                
                
                100
                
                
                105,900
                
                
                
                
                
                
                
                
                106,000Issuance
                    of common stock for services February 2005 @ $0.95
                
                
                30,000
                
                
                30
                
                
                28,470
                
                
                
                
                
                
                
                
                28,500Issuance
                    of common stock for services February 2005 @ $1.05
                
                
                80,628
                
                
                81
                
                
                84,578
                
                
                
                
                
                
                
                
                84,659Issuance
                    of common stock for services February 2005 @ $1.00
                
                
                467,159
                
                
                467
                
                
                466,692
                
                
                
                
                
                
                
                
                467,159Issuance
                    of common stock for services February 2005 @ $0.96
                
                
                350,000
                
                
                350
                
                
                335,650
                
                
                
                
                
                
                
                
                336,000Issuance
                    of common stock for financing costs March 2005 @ $0.81
                
                
                50,000
                
                
                50
                
                
                40,450
                
                
                
                
                
                
                
                
                40,500Issuance
                    of common stock for services March 2005 @ $0.80
                
                
                5,000
                
                
                5
                
                
                3,995
                
                
                
                
                
                
                
                
                4,000Issuance
                    of common stock for services March 2005 @ $0.75
                
                
                120,000
                
                
                120
                
                
                89,880
                
                
                
                
                
                
                
                
                90,000Issuance
                    of common stock for services March 2005 @ $0.68
                
                
                37,500
                
                
                38
                
                
                25,462
                
                
                
                
                
                
                
                
                25,500Fair
                    value of warrants issued to consultants
                
                
                
                
                
                
                
                
                553,715
                
                
                
                
                
                
                
                
                553,715-Net
                    loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (8,101,014
                )
                
                (8,101,014
                )Balance
                    at March 31, 2005
                
                
                24,630,628
                
                
                24,631
                
                
                12,023,750
                
                
                -
                
                
                (18,205,326
                )
                
                (6,156,945
                )Cancelation
                    of common stock previously issued
                
                
                (105,000
                )
                
                (105
                )
                
                (113,895
                )
                
                
                
                
                
                
                
                (114,000
                )Issuance
                    of common stock for services April 2005 @ $0.59
                
                
                100,000
                
                
                100
                
                
                58,900
                
                
                
                
                
                
                
                
                59,000Issuance
                    of common stock for services April 2005 @ $0.62
                
                
                162,500
                
                
                162
                
                
                100,587
                
                
                
                
                
                
                
                
                100,749Issuance
                    of common stock for services May 2005 @ $0.60
                
                
                39,836
                
                
                40
                
                
                23,862
                
                
                
                
                
                
                
                
                23,902Issuance
                    of common stock for services June 2005 @ $0.65
                
                
                110,000
                
                
                110
                
                
                71,390
                
                
                
                
                
                
                
                
                71,500Issuance
                    of common stock for services June 2005 @ $0.45
                
                
                200,000
                
                
                200
                
                
                89,800
                
                
                
                
                
                
                
                
                90,000Issuance
                    of common stock for services July 2005 @ $0.60
                
                
                10,000
                
                
                10
                
                
                5,990
                
                
                
                
                
                
                
                
                6,000Issuance
                    of common stock for services July 2005 @ $0.61
                
                
                125,000
                
                
                125
                
                
                76,125
                
                
                
                
                
                
                
                
                76,250Issuance
                    of common stock for interest July 2005 @ $0.61
                
                
                50,000
                
                
                50
                
                
                30,450
                
                
                
                
                
                
                
                
                30,500Cancelation
                    of common stock previously issued
                
                
                (150,000
                )
                
                (150
                )
                
                (143,850
                )
                
                
                
                
                
                
                
                (144,000
                )Issuance
                    of common stock for services August 2005 @ $0.48
                
                
                100,000
                
                
                100
                
                
                47,900
                
                
                
                
                
                
                
                
                48,000Issuance
                    of common stock for services September 2005 @ $0.50
                
                
                30,000
                
                
                30
                
                
                14,970
                
                
                
                
                
                
                
                
                15,000Issuance
                    of common stock for services September 2005 @ $0.42
                
                
                50,000
                
                
                50
                
                
                20,950
                
                
                
                
                
                
                
                
                21,000Issuance
                    of common stock for services September 2005 @ $0.50
                
                
                75,000
                
                
                75
                
                
                37,425
                
                
                
                
                
                
                
                
                37,500Issuance
                    of common stock for services October 2005 @ $0.53
                
                
                220,000
                
                
                220
                
                
                115,280
                
                
                (58,750
                )
                
                
                
                
                56,750Issuance
                    of common stock for prepaid interest October 2005 @ $0.58
                
                
                125,000
                
                
                125
                
                
                72,375
                
                
                (72,500
                )
                
                
                
                
                -Issuance
                    of common stock for conversion of debt October 2005 @
                    $1.75
                
                
                150,000
                
                
                150
                
                
                262,350
                
                
                
                
                
                
                
                
                262,500Issuance
                    of common stock for services November 2005 @ $0.78
                
                
                822,706
                
                
                823
                
                
                644,847
                
                
                (26,700
                )
                
                
                
                
                618,970Issuance
                    of common stock for services January 2006 @ $1.54
                
                
                335,000
                
                
                335
                
                
                515,165
                
                
                (119,500
                )
                
                
                
                
                396,000Issuance
                    of common stock for services February 2006 @ $1.42
                
                
                62,000
                
                
                62
                
                
                87,738
                
                
                
                
                
                
                
                
                87,800Issuance
                    of common stock for services March 2006 @ $1.58
                
                
                121,467
                
                
                121
                
                
                192,237
                
                
                
                
                
                
                
                
                192,358Issuance
                    of common stock for conversion of notes payable andaccrued
                    interest March 2006
                
                
                105,250
                
                
                105
                
                
                173,557
                
                
                
                
                
                
                
                
                173,662Cancelation
                    of common stock previously issued
                
                
                (3,000
                )
                
                (3
                )
                
                (4,797
                )
                
                
                
                
                
                
                
                (4,800
                )
  6
  Amortization
                    of prepaid expenses
                
                
                
                
                
                
                
                
                
                
                
                112,025
                
                
                
                
                
                112,025Value
                    of warrants issued with debt
                
                
                
                
                
                
                
                
                131,365
                
                
                
                
                
                
                
                
                131,365Repricing
                    of warrants
                
                
                
                
                
                
                
                
                301,155
                
                
                
                
                
                
                
                
                301,155Amortization
                    of fair value of warrants issued to consultants
                
                
                
                
                
                
                
                
                1,541,628
                
                
                
                
                
                
                
                
                1,541,628-Net
                    loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (6,603,454
                )
                
                (6,603,454
                )Balance
                    at March 31, 2006
                
                
                27,366,387
                
                
                27,366
                
                
                16,377,254
                
                
                (165,425
                )
                
                (24,808,780
                )
                
                (8,569,585
                )Issuance
                    of common stock for converstion of note payable andaccrued
                    interest April 2006
                
                
                27,200
                
                
                27
                
                
                51,109
                
                
                
                
                
                
                
                
                51,136Issuance
                    of common stock for services April 2006 @ $1.46
                
                
                115,000
                
                
                115
                
                
                167,835
                
                
                
                
                
                
                
                
                167,950Issuance
                    of common stock for cashless exercise of warrants
                
                
                192,997
                
                
                193
                
                
                (193
                )
                
                
                
                
                
                
                
                -Issuance
                    of common stock for services May 2006 @ $1.37
                
                
                150,000
                
                
                150
                
                
                204,450
                
                
                (165,600
                )
                
                
                
                
                39,000Issuance
                  of common
                  stock for conversion of accounts payable May 2006 @$1.28
                
                
                111,416
                
                
                112
                
                
                142,501
                
                
                
                
                
                
                
                
                142,613Issuance
                    of common stock for conversion of preferred stock July 2006 @
                    $2.12
                
                
                208,333
                
                
                208
                
                
                442,292
                
                
                
                
                
                
                
                
                442,500Issuance
                  of common
                  stock for conversion of related party debt July 2006 @$1.30
                
                
                3,995,806
                
                
                3,996
                
                
                5,190,558
                
                
                
                
                
                
                
                
                5,194,554Issuance
                    of common stock for services July 2006 @ $0.99
                
                
                30,000
                
                
                30
                
                
                29,820
                
                
                (14,850
                )
                
                
                
                
                15,000Issuance
                  of common
                  stock for conversion of convertible note debt July 2006 @$1.01
                
                
                200,000
                
                
                200
                
                
                201,800
                
                
                
                
                
                
                
                
                202,000Issuance
                    of common stock for services August 2006 @ $0.97
                
                
                20,000
                
                
                20
                
                
                19,380
                
                
                
                
                
                
                
                
                19,400Issuance
                    of common stock for services September 2006 @ $0.92
                
                
                156,000
                
                
                156
                
                
                143,684
                
                
                (94,000
                )
                
                
                
                
                49,840Issuance
                    of common stock for cash September 2006 @ $0.50
                
                
                400,000
                
                
                400
                
                
                199,600
                
                
                
                
                
                
                
                
                200,000Issuance
                    of common stock for services October 2006 @ $0.99
                
                
                360,000
                
                
                360
                
                
                356,440
                
                
                
                
                
                
                
                
                356,800Issuance
                    of common stock for cash October 2006 @ $0.50
                
                
                1,150,000
                
                
                1,150
                
                
                573,850
                
                
                
                
                
                
                
                
                575,000Issuance
                    of common stock for services November 2006 @ $093
                
                
                1,113,695
                
                
                1,114
                
                
                1,056,896
                
                
                
                
                
                
                
                
                1,058,010Issuance
                    of common stock for cash December 2006 @ $0.50
                
                
                100,000
                
                
                100
                
                
                49,900
                
                
                
                
                
                
                
                
                50,000Payment
                    of equity offering costs
                
                
                
                
                
                
                
                
                (57,500
                )
                
                
                
                
                
                
                
                (57,500
                )Amortization
                    of prepaid expenses
                
                
                
                
                
                
                
                
                
                
                
                345,049
                
                
                
                
                
                345,049Value
                    of warrants issued with debt
                
                
                
                
                
                
                
                
                112,533
                
                
                
                
                
                
                
                
                112,533Fair
                    value of vested stock options issued to employees
                
                
                
                
                
                
                
                
                1,059,888
                
                
                
                
                
                
                
                
                1,059,888Fair
                    value of warrants issued for extension of debt
                
                
                
                
                
                
                
                
                15,307
                
                
                
                
                
                
                
                
                15,307Amortization
                    of fair value of warrants issued to consultants
                
                
                
                
                
                
                
                
                887,932
                
                
                
                
                
                
                
                
                887,932Value
                    of warrants transferred to liability
                
                
                
                
                
                
                
                
                (3,545,880
                )
                
                
                
                
                
                
                
                (3,545,880
                )-Net
                    loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (13,319,827
                )
                
                (13,319,827
                )**Balance
                    at December 31,2006 (unaudited)**
                
                
                **35,696,834**
                
                **$**
                **35,697**
                
                **$**
                **23,679,456**
                
                **$**
                **(94,826**
                **)**
                **$**
                **(38,128,607**
                **)**
                **$**
                **(14,508,280**
                **)**


**The
      accompanying notes are an integral part of these unaudited consolidated
      financial statements.**  7


**Cobalis
        Corp. and Subsidiary**
 **(A
        Development Stage Company)**
 **Consolidated
        Statements of Cash Flows**


**Cumulative
                  from****Nine
                  Months Ended**
              
              
              
              **November
                  21,****December
                  31,**
              
              **December
                  31,**
              
              **2000
                  (inception) to****2006**
              
              **2005**
              
              **December
                  31, 2006**(unaudited)
              
              (unaudited)
              
              (unaudited)CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  loss
              
              $
              (13,319,827
              )
              $
              (3,305,783
              )
              $
              (37,243,607
              )Adjustment
                  to reconcile net loss to net cashprovided
                  by (used in) operating activities:Depreciation
                  and amortization expense
              
              
              47,857
              
              
              69,545
              
              
              575,121Common
                  stock issued for services
              
              
              1,706,000
              
              
              1,025,371
              
              
              6,552,323Common
                  stock issued for penalty
              
              
              -
              
              
              -
              
              
              692,500Common
                  stock issued for financing costs
              
              
              -
              
              
              30,500
              
              
              71,000Change
                  in value of warrant liability
              
              
              93,122
              
              
              24,928
              
              
              (210,578
              )Amortization
                  of debt issue costs
              
              
              203,853
              
              
              11,877
              
              
              315,425Exercise
                  of stock options for services
              
              
              -
              
              
              -
              
              
              26,960Amortization
                  of discounts on notes
              
              
              -
              
              
              -
              
              
              790,128Issuance
                  of stock options/warrants for services/debt
                  extension
              
              
              903,239
              
              
              913,199
              
              
              3,405,582Capital
                  contribution - bonus (related party)
              
              
              -
              
              
              -
              
              
              50,000Amortization
                  of prepaid expenses
              
              
              345,049
              
              
              11,005
              
              
              472,674Amortization
                  of deferred compensation
              
              
              -
              
              
              -
              
              
              250,000Discount
                  on common stock issued for settlement of debt
              
              
              -
              
              
              -
              
              
              50,000Impairment
                  expense
              
              
              -
              
              
              -
              
              
              2,331,522Re-pricing
                  of warrants
              
              
              -
              
              
              -
              
              
              301,155Value
                  of vested stock options issued to employees
              
              
              1,059,888
              
              
              -
              
              
              1,059,888Non-cash
                  financing costs
              
              
              3,065,293
              
              
              -
              
              
              3,065,293Changes
                  in assets and liabilities:
              
              
              
              
              
              
              
              
              -Prepaid
                  expenses and other assets
              
              
              (17,121
              )
              
              -
              
              
              (21,801
              )Inventory
              
              
              -
              
              
              -
              
              
              6,250Deposits
              
              
              -
              
              
              -
              
              
              27,454Accounts
                  payable
              
              
              248,493
              
              
              (171,734
              )
              
              1,096,632Accrued
                  expenses
              
              
              345,727
              
              
              (506,943
              )
              
              1,760,528Accrued
                  clinical trial costs
              
              
              2,611,356
              
              
              
              
              
              2,611,356Accrued
                  legal settlement
              
              
              60,000
              
              
              -
              
              
              1,785,000Accrued
                  salaries
              
              
              110,010
              
              
              
              
              
              110,010Amounts
                  due to related parties
              
              
              215,574
              
              
              228,561
              
              
              2,043,481Net
                  cash used in operating activities
              
              
              (2,321,487
              )
              
              (1,669,474
              )
              
              (8,025,704
              )
  8
  CASH
                  FLOWS FROM INVESTING ACTIVITIES:Purchase
                  of property and equipment
              
              
              -
              
              
              (1,542
              )
              
              (89,272
              )Increase
                  in patent costs
              
              
              (48,124
              )
              
              -
              
              
              (72,835
              )Change
                  in restricted cash
              
              
              -
              
              
              -
              
              
              -Merger
                  fees and costs
              
              
              -
              
              
              -
              
              
              -Increase
                  in acquisition deposits
              
              
              -
              
              
              -
              
              
              (2,220,000
              )Increase
                  in other deposits
              
              
              -
              
              
              -
              
              
              (40,000
              )Increase
                  in capitalized website
              
              
              -
              
              
              -
              
              
              (18,097
              )Net
                  cash used in investing activities
              
              
              (48,124
              )
              
              (1,542
              )
              
              (2,440,204
              )CASH
                  FLOWS FROM FINANCING ACTIVITIES:Change
                  in cash overdraft
              
              
              -
              
              
              (11,941
              )
              
              -Payment
                  on contract
              
              
              -
              
              
              -
              
              
              (161,000
              )Proceeds
                  from advances - related party
              
              
              -
              
              
              1,217,500
              
              
              4,581,449Proceeds
                  from advances from stockholders
              
              
              -
              
              
              310,000
              
              
              310,000Proceeds
                  from issuance of notes payable
              
              
              550,000
              
              
              250,000
              
              
              2,015,000Proceeds
                  from sale of common stock
              
              
              825,000
              
              
              -
              
              
              1,631,500Payment
                  of equity offering costs
              
              
              (57,500
              )
              
              
              
              
              (57,500
              )Proceeds
                  from sale of preferred stock
              
              
              -
              
              
              -
              
              
              885,000Proceeds
                  from convertible debenture
              
              
              -
              
              
              100,000
              
              
              700,000Capital
                  contribution
              
              
              2,500,000
              
              
              -
              
              
              3,071,668Payment
                  of debt issue costs
              
              
              (280,000
              )
              
              -
              
              
              (363,500
              )Payments
                  on advances from stockholders
              
              
              (10,000
              )
              
              (50,000
              )
              
              (60,000
              )Payments
                  on advances - related party
              
              
              -
              
              
              (131,329
              )
              
              (402,129
              )Net
                  cash provided by financing activities
              
              
              3,527,500
              
              
              1,684,230
              
              
              12,150,488NET
                  INCREASE IN CASH ANDCASH
                  EQUIVALENTS
              
              
              1,157,889
              
              
              13,214
              
              
              1,684,580CASH
                  AND CASH EQUIVALENTS, Beginning of period
              
              
              526,691
              
              
              1,169
              
              
              -CASH
                  AND CASH EQUIVALENTS, End of period
              
              $
              1,684,580
              
              $
              14,383
              
              $
              1,684,580SUPPLEMENTAL
                  DISCLOSURES OF CASH FLOW INFORMATION:Interest
                  paid
              
              $
              -
              
              $
              -
              
              $
              -Income
                  taxes paid
              
              $
              -
              
              $
              -
              
              $
              -SUPPLEMENTAL
                  DISCLOSURE OF NON-CASH INVESTING ANDFINANCING
                  ACTIVITIES:Common
                  shares issued for conversion of debt
              
              $
              5,396,554
              
              $
              -
              
              $
              5,396,554


**The
        accompanying notes are an integral part of these unaudited consolidated
        financial statements.**
 9
 
  **COBALIS
          CORP. AND SUBSIDIARY**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
          THE NINE MONTHS ENDED DECEMBER 31, 2006 AND 2005**
 **(UNAUDITED)**
   **NOTE
          1 - BASIS OF PRESENTATION**





The
      unaudited consolidated financial statements have been prepared by Cobalis Corp.
      (the “Company”), pursuant to the rules and regulations of the Securities and
      Exchange Commission. The information furnished herein reflects all adjustments
      (consisting of normal recurring accruals and adjustments) which are, in the
      opinion of management, necessary to fairly present the operating results for
      the
      respective periods. Certain information and footnote disclosures normally
      present in annual consolidated financial statements prepared in accordance
      with
      accounting principles generally accepted in the United States of America have
      been omitted pursuant to such rules and regulations. These consolidated
      financial statements should be read in conjunction with the audited consolidated
      financial statements and footnotes for the year ended March 31, 2006 included
      in
      the Company’s Annual Report on Form 10-KSB. The results of the nine months ended
      December 31, 2006 are not necessarily indicative of the results to be expected
      for the full year ending March 31, 2007.





Going
      Concern





The
      accompanying consolidated financial statements have been prepared in accordance
      with accounting principles generally accepted in the United States of America,
      which contemplate continuation of the Company as a going concern. The Company
      has incurred a net loss of $13,319,827 for the nine months ended December 31,
      2006 and as of December 31, 2006, the Company had a working capital deficit
      of
      $14,757,176 and a stockholder deficit of $14,508,280. In addition, as of
      December 31, 2006, the Company has not developed a substantial source of
      revenue.





These
      conditions raise substantial doubt as to the Company's ability to continue
      as a
      going concern. These consolidated financial statements do not include any
      adjustments that might result from the outcome of this uncertainty. These
      consolidated financial statements do not include any adjustments relating to
      the
      recoverability and classification of recorded asset amounts, or amounts and
      classification of liabilities that might be necessary should the Company be
      unable to continue as a going concern.





The
      Company has recently raised $2,500,000 by issuing a convertible debenture and
      has sold shares of its common stock for gross proceeds of $800,000 and is
      currently attempting to raise additional financing for operating purposes.
      The
      Company is also attempting to partner with a large pharmaceutical company for
      research and development, marketing and distribution of its
      product.





The
      Company requires substantial capital to pursue its operating strategy, including
      paying for its phase III clinical trials and currently has limited cash for
      operations. Until the Company can obtain revenues or obtain funding through
      debt
      and equity financing sufficient to fund working capital needs and additional
      research and development costs necessary to obtain the regulatory approvals
      for
      commercialization, the Company will be dependent upon external sources of
      financing.





There
      can
      be no assurances that sufficient financing will be available on terms acceptable
      to the Company, or at all. If the Company is unable to obtain such financing,
      the Company will be forced to scale back operations, which could have an adverse
      effect on the Company's financial condition and results of operations. These
      factors raise substantial doubt about the Company's ability to continue as
      a
      going concern.





Management
      believes that actions presently being taken to revise the Company's operating
      and financial requirements provide the opportunity for the Company to continue
      as a going concern.




10


**COBALIS
        CORP. AND SUBSIDIARY**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
        THE NINE MONTHS ENDED DECEMBER 31, 2006 AND 2005**
 **(UNAUDITED)**


Stock
      Options





The
      Company adopted SFAS No. 123 (Revised 2004), *Share
      Based Payment* (“SFAS
      No. 123R”), under the modified-prospective transition method on
      January 1, 2006. SFAS No. 123R requires companies to measure and
      recognize the cost of employee services received in exchange for an award of
      equity instruments based on the grant-date fair value. Share-based compensation
      recognized under the modified-prospective transition method of SFAS
      No. 123R includes share-based compensation based on the grant-date fair
      value determined in accordance with the original provisions of SFAS
      No. 123, *Accounting
      for Stock-Based Compensation,* for
      all
      share-based payments granted prior to and not yet vested as of January 1,
      2006 and share-based compensation based on the grant-date fair-value determined
      in accordance with SFAS No. 123R for all share-based payments granted after
      January 1, 2006. SFAS No. 123R eliminates the ability to account for
      the award of these instruments under the intrinsic value method prescribed
      by
      Accounting Principles Board (“APB”) Opinion No. 25, *Accounting
      for Stock Issued to Employees* ,
      and
      allowed under the original provisions of SFAS No. 123. Prior to the
      adoption of SFAS No. 123R, the Company accounted for our stock option plans
      using the intrinsic value method in accordance with the provisions of APB
      Opinion No. 25 and related interpretations.





As
      a
      result of adopting SFAS No. 123R, the Company recognized $1,059,888 in
      share-based compensation expense for the nine months ended December 31, 2006
      related to options granted to employees in May 2006. The impact of this
      share-based compensation expense on the Company’s basic and diluted earnings per
      share was $0.03 per share for the nine months ended December 31, 2006. The
      fair
      value of our stock options was estimated using the Black-Scholes option pricing
      model.





For
      periods presented prior to the adoption of SFAS No. 123R, pro forma
      information regarding net income and earnings per share as required by SFAS
      No. 123R has been determined as if the Company had accounted for its
      employee stock options under the original provisions of SFAS No. 123. The
      fair value of these options was estimated using the Black-Scholes option pricing
      model.





If
      the
      Company had elected to recognize compensation expense based upon the fair value
      at the grant date for awards under the Stock Option Plan consistent with the
      methodology prescribed by SFAS No. 123, the Company’s net loss and loss per
      share would be increased to the pro forma amounts indicated below for the nine
      months ended December 31, 2005:





**2005**Net
                loss attributed to common stockholders:As
                reported
            
            $
            (3,362,033
            )Compensation
                recognized under APB 25
            
            
            —Compensation
                recognized under SFAS 123
            
            
            (579,035
            )Pro
                forma
            
            $
            (3,941,068
            )Basic
                and diluted loss per common share:As
                reported
            
            $
            (0.13
            )Pro
                forma
            
            $
            (0.16
            )




11


**COBALIS
        CORP. AND SUBSIDIARY**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
        THE NINE MONTHS ENDED DECEMBER 31, 2006 AND 2005**
 **(UNAUDITED)**


The
      fair
      value for these options was estimated at the date of grant using a Black-Scholes
      option pricing model with the following weighted-average assumptions
      for 2005: risk-free interest rate of 4.25%; dividend yields of 0%;
      volatility factors of the expected market price of the Company’s common shares
      of 202%; and a weighted average expected life of the option of 5 years.





Patent
      Costs





Patent
      costs are carried at cost less accumulated amortization, which is calculated
      on
      a straight-line basis, over the estimated economic life of the patent. In
      accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," the
      Company evaluates intangible assets and other long-lived assets (including
      patent costs) for impairment, at least on an annual basis and whenever events
      or
      changes in circumstances indicate that the carrying value may not be recoverable
      from its estimated future cash flows. Recoverability of intangible assets and
      other long-lived assets is measured by comparing their net book value to the
      related projected undiscounted cash flows from these assets, considering a
      number of factors including past operating results, budgets, economic
      projections, market trends and product development cycles. If the net book
      value
      of the asset exceeds the related undiscounted cash flows, the asset is
      considered impaired, and a second test is performed to measure the amount of
      impairment loss. During the year ended March 31, 2004, the Company recognized
      an
      impairment expense of $111,522 related to one of its patents as it determined
      that this patent had no future value based on its assessment of expected future
      cash flows to be generated by this patent and the results of an independent
      appraisal done in April 2004. Amortization expense related to these patents
      for
      the nine months ended December 31, 2006 and 2005 was $42,461 and $40,399,
      respectively. Projected amortization expense approximates $54,000, $53,000,
      $53,000, $53,000 and $53,000, respectively, for each of the five years ended
      March 31, 2011. The weighted-average life of the remaining patents is
      approximately 14.9 years.





Recently
      Issued Accounting Pronouncements





In
      February 2006, FASB issued SFAS No. 155, “ *Accounting
      for Certain Hybrid Financial Instruments* ”.
      SFAS
      No. 155 amends SFAS No 133, “Accounting for Derivative Instruments and Hedging
      Activities”, and SFAS No. 140, “Accounting for Transfers and Servicing of
      Financial Assets and Extinguishments of Liabilities”. SFAS No. 155, permits fair
      value remeasurement for any hybrid financial instrument that contains an
      embedded derivative that otherwise would require bifurcation, clarifies which
      interest-only strips and principal-only strips are not subject to the
      requirements of SFAS No. 133, establishes a requirement to evaluate interest
      in
      securitized financial assets to identify interests that are freestanding
      derivatives or that are hybrid financial instruments that contain an embedded
      derivative requiring bifurcation, clarifies that concentrations of credit risk
      in the form of subordination are not embedded derivatives, and amends SFAS
      No.
      140 to eliminate the prohibition on the qualifying special-purpose entity from
      holding a derivative financial instrument that pertains to a beneficial interest
      other than another derivative financial instrument. SFAS 155 is effective for
      all financial instruments acquired or issued after the beginning of the
      Company’s first fiscal year that begins after September 15, 2006. Management
      believes that this statement will not have a significant impact on the
      consolidated financial statements.




12


**COBALIS
        CORP. AND SUBSIDIARY**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
        THE NINE MONTHS ENDED DECEMBER 31, 2006 AND 2005**
 **(UNAUDITED)**


In
      March
      2006 FASB issued SFAS 156 “ *Accounting
      for Servicing of Financial Assets”.* SFAS
      No.
      156 amends FASB Statement No. 140, *Accounting
      for Transfers and Servicing of Financial Assets and Extinguishments of
      Liabilities,* with
      respect to the accounting for separately recognized servicing assets and
      servicing liabilities. This Statement: (1) requires an entity to recognize
      a
      servicing asset or servicing liability each time it undertakes an obligation
      to
      service a financial asset by entering into a servicing contract, (2) requires
      all separately recognized servicing assets and servicing liabilities to be
      initially measured at fair value, if practicable; (3) permits an entity to
      choose the ‘amortization method’ or ‘fair value measurement method’ for each
      class of separately recognized servicing assets and servicing liabilities;
      (4)
      at its initial adoption, permits a one-time reclassification of
      available-for-sale securities to trading securities by entities with recognized
      servicing rights, without calling into question the treatment of other
      available-for-sale securities under Statement 115, provided that the
      available-for-sale securities are identified in some manner as offsetting the
      entity’s exposure to changes in fair value of servicing assets or servicing
      liabilities that a servicer elects to subsequently measure at fair value; and
      (5) requires separate presentation of servicing assets and servicing liabilities
      subsequently measured at fair value in the statement of financial position
      and
      additional disclosures for all separately recognized servicing assets and
      servicing liabilities. SFAS 156 is effective as of the beginning of the
      Company’s first fiscal year that begins after September 15, 2006. Management
      believes that this statement will not have a significant impact on the
      consolidated financial statements.




In
      September 2006, the FASB issued SFAS No. 157, “Fair Value
      Measurements.” This statement clarifies the definition of fair value,
      establishes a framework for measuring fair value and expands the disclosures
      on
      fair value measurements. SFAS No. 157 is effective for fiscal years
      beginning after November 15, 2007. Management has not determined the
      effect, if any, the adoption of this statement will have on the financial
      statements.




In
      September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for Defined
      Benefit Pension and Other Postretirement Plans−−an amendment of FASB Statements
      No. 87, 88, 106, and 132(R)". One objective of this standard is to make it
      easier for investors, employees, retirees and other parties to understand and
      assess an employer's financial position and its ability to fulfill the
      obligations under its benefit plans. SFAS No. 158 requires employers to fully
      recognize in their financial statements the obligations associated with
      single−employer defined benefit pension plans, retiree healthcare plans, and
      other postretirement plans. SFAS No. 158 requires an employer to fully recognize
      in its statement of financial position the overfunded or underfunded status
      of a
      defined benefit postretirement plan (other than a multiemployer plan) as an
      asset or liability and to recognize changes in that funded status in the year
      in
      which the changes occur through comprehensive income. This Statement also
      requires an employer to measure the funded status of a plan as of the date
      of
      its year−end statement of financial position, with limited exceptions. SFAS No.
      158 requires an entity to recognize as a component of other comprehensive
      income, net of tax, the gains or losses and prior service costs or credits
      that
      arise during the period but are not recognized as components of net periodic
      benefit cost pursuant to SFAS No. 87. This Statement requires an entity to
      disclose in the notes to financial statements additional information about
      certain effects on net periodic benefit cost for the next fiscal year that
      arise
      from delayed recognition of the gains or losses, prior service costs or credits,
      and transition asset or obligation. The Company is required to initially
      recognize the funded status of a defined benefit postretirement plan and to
      provide the required disclosures for fiscal years ending after December 15,
      2006. Management believes that this statement will not have a significant impact
      on the financial statements.




13


**COBALIS
        CORP. AND SUBSIDIARY**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
        THE NINE MONTHS ENDED DECEMBER 31, 2006 AND 2005**
 **(UNAUDITED)**




**NOTE
      2 - LOSS PER SHARE**





The
      Company reports loss per share in accordance with SFAS No. 128, "Earnings per
      Share." Basic loss per share is computed by dividing loss available to common
      shareholders by the weighted average number of common shares available. Diluted
      loss per share is computed similar to basic loss per share except that the
      denominator is increased to include the number of additional common shares
      that
      would have been outstanding if the potential common shares had been issued
      and
      if the additional common shares were dilutive. Diluted loss per share has not
      been presented since the effect of the assumed exercise of options and warrants
      to purchase common shares would have an anti-dilutive effect. There
      were 19,132,369 and 8,194,167 c ommon
      equivalent shares outstanding related to the options and warrants at December
      31, 2006 and 2005, respectively. In addition, as of December 31, 2006, 508,333
      shares of common stock are issuable upon the conversion of the convertible
      note
      payable and convertible preferred stock.




**NOTE
      3 - PROPERTY AND EQUIPMENT**





The
      cost
      of property and equipment at December 31, 2006 consisted of the
      following:




Furniture
                  and fixtures
              
              $
              73,203Office
                  equipment
              
              
              42,120115,323Less
                  accumulated depreciation and amortization
              
              
              (111,770
              )$
              3,553




Depreciation
      expense for the nine months ended December 31, 2006 and 2005 was $4,866 and
      $29,146, respectively.




**NOTE
      4 - ACCRUED LEGAL SETTLEMENTS**





Former
      Landlord





In
      March
      2003, the Company vacated its office space. The landlord then filed suit against
      the Company in the County of Orange, Superior Court of California, for unpaid
      rent. In January 2006, this matter was settled and the Company agreed to pay
      a
      total of $200,000 over the next year. The Company paid $75,000 in January 2006,
      leaving $125,000 owing. During the quarter ended December 31, 2006, the Company
      increased the settlement amount by $60,000 bring the balance due at December
      31,
      2006 to $185,000. The entire amount was paid in January 2007.




Gryphon
      Master Fund LP





On
      March
      31, 2006, the Company reached a settlement with Gryphon Master Lund LP related
      to two investments (See Notes 8 and 10) in the Company by Gryphon in September
      2003 totaling $1,600,000. The settlement agreement requires the Company to
      pay a
      maximum of $1,600,000 which will be reduced to $1,400,000 if the Company is
      able
      to pay the judgment on or before October 1, 2006. Full repayment is due under
      the settlement agreement on or before April 1, 2007. The settlement agreement
      also provides for Gryphon to convert its two investments (convertible debenture
      and convertible preferred stock) in the Company totaling $1,600,000 into 716,667
      shares of the Company common stock as per the terms of the original investment
      agreements. In addition the settlement agreement provides for a reduction of
      the
      exercise price to $0.01 for the 194,167 warrants currently held by Gryphon.
      In
      the event that the Company does not make the payment by April 1, 2007, then
      the
      stipulated judgment into which the Company entered with Gryphon provides that
      Gryphon has the right to enter a judgment of $1,600,000 against the Company
      with
      the court upon the Company’s default.




14


**COBALIS
        CORP. AND SUBSIDIARY**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
        THE NINE MONTHS ENDED DECEMBER 31, 2006 AND 2005**
 **(UNAUDITED)**


During
      the nine months ended December 31, 2006, Gryphon did a cashless exercise of
      these warrants and received a total of 192,997 shares of the Company’s common
      stock and converted a total of $442,500 worth of preferred stock into 208,333
      shares of the Company’s common stock.





As
      of
      December 31, 2006, the full $1,600,000 was still due under the settlement
      agreement.





**NOTE
      5 - RELATED PARTY TRANSACTIONS**





On
      July
      18, 2006, the Company entered into an Accord and Satisfaction Agreement
      (“Agreement”) with several related party creditors, arranging to settle debt of
      $5,194,553 including interest accrued through June 30, 2006, in exchange for
      the
      issuance of 3,995,809 shares of the Company’s $.001 par value common stock. This
      debt was incurred in the form of related party advances and services rendered
      to
      the Company over recent months. The conversion rate was $1.30 per share,
      representing a premium on the market price of the Company’s closing share price
      on Monday, July 17, 2006 of $1.00 per share.




The
      related parties that were owed funds included Radul Radovich, the Company’s
      Chairman of the Board of Directors, and several entities owned and controlled
      by
      Mr. Radovich. The amounts owed were as follows: Mr. Radovich was owed $952,611
      principal along with interest of $127,509, for a total of $1,084,120, which
      was
      to be converted to 833,938 restricted shares of the Company’s common stock; St.
      Petka Trust, a majority shareholder of the Company, and of which Mr. Radovich
      is
      the beneficiary and trustor, was owed $1,585,500 principal, along with interest
      of $211,335, for a total of $1,796,835, which was to be converted to 1,382,180
      restricted shares of the Company’s common stock; R and R Holdings, Inc. a Nevada
      corporation owned by Mr. Radovich, was owed $471,507 principal, along with
      interest of $62,848, for a total of $534,355, which was converted to 411,042
      restricted shares of the Company’s common stock; Silver Mountain Promotions,
      Inc., a Nevada corporation, owned by Mr. Radovich, was owed $922,103 principal,
      along with interest of $122,909, for a total of $1,045,012, which was converted
      to 803,855 restricted shares of the Company’s common stock; R R Development,
      Inc., a California corporation, owned by Mr. Radovich, was owed $170,000
      principal, along with interest of $51,838, for a total of $221,838, which was
      converted to restricted 170,644 shares of the Company’s common stock. In
      addition, Mr. Radovich was owed $512,392 for consulting fees, pursuant to a
      consulting contract with the Company. This amount was converted to 394,147
      restricted shares of the Company’s common stock.




**NOTE
      6 - PROMISSORY NOTES**





In
      June
      2005, the Company converted a total of $205,174 of amounts due for clinical
      trials into nine promissory notes that accrued interest at a rate of 10% per
      annum and were due on December 27, 2005. During the three months ended March
      31,
      2006 and June 30, 2006, respectively, the Company converted $131,042 and $27,319
      of these promissory notes plus accrued interest into 105,250 and 27,200 shares
      of the Company’s common stock. At December 31, 2006, $46,813 of these notes was
      still outstanding.




**NOTE
      7 - NOTES PAYABLE**




In
      August
      2006, the Company issued a note payable to MDC Enterprises Ltd. in the amount
      of
      $250,000 that accrues interest at 40% per annum and is due on December 29,
      2006.
      In addition, the Company also issued to MDC Enterprises Ltd. a warrant to
      purchase 150,000 shares of the Company’s common stock for $0.75 per shares.




15


**COBALIS
        CORP. AND SUBSIDIARY**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
        THE NINE MONTHS ENDED DECEMBER 31, 2006 AND 2005**
 **(UNAUDITED)**


The
      fair
      value of these warrants totaling $102,464 was computed using the Black-Scholes
      model under the following assumptions: (1) expected life of 5 years; (2)
      volatility of 199%, (3) risk free interest of 4.50% and (4) dividend rate of
      $0%. The face amount of the note payable of $250,000 was proportionately
      allocated to the note payable and the warrants in the amount of $177,323 and
      $72,677, respectively. The amount allocated to the warrants of $72,677 was
      recorded as a discount on the note payable and is being amortized over the
      term
      of the debenture. During the nine months ended December 31, 2006, the Company
      fully amortized the $72,677 of the discount to interest expense.





In
      September 2006, the Company issued a note payable in the amount of $50,000
      to an
      investor. The note bears interest at 10% per annum and is payable upon
      demand.




**NOTE
      8 - CONVERTIBLE NOTES PAYABLE**





Gryphon
      Master Fund, LP (See Note 4)





In
      September 2003, the Company sold a $600,000, six-year, 8% convertible note
      payable to Gryphon Master Fund, LP, which is convertible into shares of the
      Company's common stock at the initial conversion price of $2.00 per share.
      This
      price is subject to adjustment should the Company issue shares of its common
      stock at a price less than $1.75 per share. The convertible note payable was
      sold with detachable six-year warrants to purchase 90,000 shares of the
      Company's common stock at $2.88 per share. The warrant exercise price is also
      subject to adjustment based on sales of the Company's common stock below the
      current fair market value on the contract date.





The
      fair
      value of these warrants totaling $169,630 was computed using the Black-Scholes
      model under the following assumptions: (1) expected life of 3 years; (2)
      volatility of 104%, (3) risk free interest of 4.39% and (4) dividend rate of
      $0%. In addition, since this debt is convertible into equity at the option
      of
      the note holder at beneficial conversion rates, an embedded beneficial
      conversion feature was recorded as a debt discount and amortized using the
      effective interest method over the life of the debt in accordance with Emerging
      Issues Task Force No. 00-27, "Application of Issue No. 98-5 to Certain
      Convertible Instruments." Since the intrinsic value of the beneficial conversion
      feature and relative fair value of the warrants exceeds the proceeds of the
      convertible debt, the amount of the discount assigned to the beneficial
      conversion feature and warrants is limited to the amount of the net proceeds
      of
      the convertible debt. Therefore, the Company recorded a discount of $516,500
      (consisting of relative fair value of the warrants of $169,630 and beneficial
      conversion features of $346,870), the net proceeds received by the Company
      after
      the debt discount of $83,500. During the year ended March 31, 2005, the Company
      fully amortized the debt discount associated with the $600,000 convertible
      note
      payable due to the lawsuit filed by the holder of the convertible note
      payable.




On
      March
      31, 2006, the Company reached a settlement with Gryphon Master Lund LP related
      to two investments in the Company by Gryphon in September 2003 totaling
      $1,600,000 (See Notes 4 and 9). The settlement agreement requires the Company
      to
      pay a maximum of $1,600,000 which will be reduced to $1,400,000 if the Company
      is able to pay the judgment on or before October 1, 2006. Full repayment is
      due
      under the settlement agreement on or before April 1, 2007. The settlement
      agreement also provides for Gryphon to convert its two investments (convertible
      debenture and convertible preferred stock) in the Company totaling $1,600,000
      into 716,667 shares of the Company common stock as per the terms of the original
      investment agreements. In addition the settlement agreement provides for a
      reduction of the exercise price to $0.01 for the 194,167 warrants currently
      held
      by Gryphon. In the event that the Company does not make the payment by April
      1,
      2007, then the stipulated judgment into which the Company entered with Gryphon
      provides that Gryphon has the right to enter a judgment of $1,600,000 against
      the Company with the court upon the Company’s default.




16


**COBALIS
        CORP. AND SUBSIDIARY**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
        THE NINE MONTHS ENDED DECEMBER 31, 2006 AND 2005**
 **(UNAUDITED)**


During
      the nine months ended December 31, 2006, Gryphon did a cashless exercise of
      these warrants and received a total of 192,997 shares of the Company’s common
      stock and converted a total of $442,500 worth of preferred stock into 208,333
      shares of the Company’s common stock.




Tejeda
      and Tejeda, Inc.





On
      June
      13, 2005, the Company entered into a loan agreement with Tejeda and Tejeda,
      Inc.
      in the amount of $100,000. The loan was due on or before the 12-month
      anniversary and accrued interest at the rate of 10% per annum. The note is
      personally guaranteed by Mr. Radul Radovich, the Company’s Chairman, and Mr.
      Chaslav Radovich the Company’s CEO at the time. On the 12-month anniversary, the
      holder of the note was permitted to convert the loan into shares of the
      Company’s common stock at $1.75 per shares or at a price equal to a 25% discount
      to the closing bid price on the day of conversion at maturity. Upon conversion,
      the loan would be considered paid in full. In July 2006, Tejeda and Tejeda,
      Inc.
      elected to convert the note plus accrued interest into 200,000 shares of the
      Company’s common stock. The Company recognized an additional expense of $91,583
      related to the conversion of this note and accrued interest into shares of
      common stock.





Convertible
      Bridge Notes.





In
      July
      2006, the Company issued notes payable in the aggregate amount of $250,000
      to
      three investors. The notes bear interest at 5% per month, were due on September
      14, 2006, and carried a conversion feature provided the Company completed a
      larger financing by no later than October 14, 2006. The Company exercised its
      option to extend the due date to October 14, 2006 and issued to the investors
      a
      total of 25,000 warrants The warrants have an exercise price of $1.50 per shares
      and expire in September 2011. The value of these warrants of $15,307 has been
      expensed as financing costs. The fair value of these warrants of $15,307 was
      computed using the Black-Scholes model under the following assumptions: (1)
      expected life of 5 years; (2) volatility of 199%, (3) risk free interest of
      4.50% and (4) dividend rate of $0%. These notes were either converted to equity
      or repaid as follows: In
      January 2007, the Company paid $200,000 of the amount owed, plus the interest
      that had accrued on that portion of the principal. In
      February 2007, the Company repaid the remaining principal of $50,000 and
      interest owing at the time of conversion of $13,918.62 with the issuance of
      127,838 shares of the Company’s common stock and the grant of 44,744 warrants to
      purchase shares of the Company’s common stock at $1.00 per share. These warrants
      expire five years from the date of grant.




Cornell
      Capital Partners, L.P.





On
      December 20, 2006, the Company entered into a Securities Purchase Agreement
      with
      Cornell Capital Partners, L.P. ("Cornell Capital") pursuant to which the Company
      agreed to issue up to an aggregate principal amount of $3,850,000 of convertible
      debentures. Of that amount, $2,500,000 was funded on December 20, 2006. Two
      additional closings of $675,000 each are scheduled to occur as follows: the
      first upon the Company’s filing of a registration statement with the Securities
      and Exchange Commission (“SEC”), and the second upon that registration statement
      being declared effective by the SEC and Shareholder approval to increase the
      Company’s authorized shares from the current limit of 50,000,000. There is
      no guarantee that the Company will complete and file a registration statement,
      or that if filed, there is no guarantee that the SEC will declare the
      registration statement effective. Further, there is no guarantee that
      Shareholders will approve the increase in authorized shares.




17


**COBALIS
        CORP. AND SUBSIDIARY**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
        THE NINE MONTHS ENDED DECEMBER 31, 2006 AND 2005**
 **(UNAUDITED)**


The
        convertible debenture is convertible into shares of the Company common stock
        determined by dividing the dollar amount being converted by the lower of
        the
        fixed conversion price of $0.99 or the market conversion price, defined as
        90%
        of the average of the lowest three daily volume weighted average trading
        prices
        per share of the Company’s common stock for the fifteen trading days immediately
        preceding the conversion date. However, the maximum number of shares that
        will
        be issued upon conversion is 77,000,000. The convertible debenture is secured
        by
        the assets of the Company and shares of common stock pledged by certain founding
        shareholders of the Company. The Company, at its option, may redeem the
        convertible debenture beginning four months after the registration statement
        has
        been declared effective by the SEC.
  As
        part
        of the funding commitment, the Company issued four classes of warrants
        exercisable on a cash basis that enable Cornell Capital to purchase up to
        6,640,602 shares of common stock for an additional $5,500,000: an A Warrant
        to
        purchase 1,333,333 shares at $0.75 per share; B Warrant to purchase 1,205,400
        shares at $0.8296 per share; C Warrant to purchase 2,343,959 shares at $0.7466
        per share; and D Warrant to purchase 1,757,910 shares at $0.9955 per share.
        The
        A and B Warrants expire six months following the effective date of the
        registration and carry forced exercise provisions. The C & D Warrants are
        non-callable and have a five-year term. The warrants and convertible debenture
        are subject to certain anti-dilution rights.
  These
        convertible debentures do not meet the definition of a “conventional convertible
        debt instrument” since the Company does not have enough authorized shares to
        satisfy the conversion requests if the Company stock were to significantly
        decrease.  The debt can be converted into common stock at a conversions
        price that is a percentage of the market price (limited to 77,000,000 shares);
        therefore the number of shares that could be required to be delivered upon
        “net-share settlement” is in excess of the Company’s authorized and unissued
        shares.  As a result, the convertible debenture is considered
“non-conventional,” which means that the conversion feature must be bifurcated
        from the debt and shown as a separate derivative liability.  This
        beneficial conversion liability has been calculated to be $1,897,735 on December
        20, 2006.  In addition, since the convertible debenture is convertible into
        shares of common stock in excess of their authorized capital, the Company
        does
        not have enough authorized and unissued shares to settle the conversion of
        the
        warrants into common stock.  Therefore, the warrants issued in connection
        with this transaction are shown as a liability and have a fair value of
        $3,667,558 at December 20, 2006.  The value of the warrant was calculated
        using the Black-Scholes model using the following assumptions: Discount rate
        of
        4.5%, volatility of 137% and expected term of 1 to 5 years.  The fair value
        of the beneficial conversion feature and the warrant liability will be adjusted
        to fair value each balance sheet date with the change being shown as a component
        of net loss.
  The
        fair
        value of the beneficial conversion feature and the warrants at the inception
        of
        these convertible debentures were $1897,735 and $3,667,558, respectively.
         The first $2,500,000 of these discounts has been shown as a discount to
        the convertible debentures which will be amortized over the term of the
        convertible debenture and the excess of $3,065,293 has been shown as financing
        costs in the accompanying statement of operations.




18


**COBALIS
        CORP. AND SUBSIDIARY**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
        THE NINE MONTHS ENDED DECEMBER 31, 2006 AND 2005**
 **(UNAUDITED)**


**NOTE
      9 - SENIOR DEBENTURE**




On
        October 26, 2005, the Company issued a senior debenture to the Brad Chisick
        Trust in the amount of $250,000 that accrues interest at 10% per annum and
        is
        due on October 26, 2007. In addition, the Company also issued to the Brad
        Chisick Trust a warrant to purchase 500,000 shares of the Company’s common stock
        for $1.75 per shares.





The
      fair
      value of these warrants totaling $276,827 was computed using the Black-Scholes
      model under the following assumptions: (1) expected life of 5 years; (2)
      volatility of 194%, (3) risk free interest of 4.50% and (4) dividend rate of
      $0%. The face amount of the senior debenture of $250,000 was proportionately
      allocated to the senior debenture and the warrants in the amount of $118,635
      and
      $131,365, respectively. The amount allocated to the warrants of $131,365 was
      recorded as a discount on the senior debenture and is being amortized over
      the
      term of the debenture. During the nine months ended December 31, 2006, the
      Company amortized $49,487 of the discount to interest expense. At December
      31,
      2006, the balance of the debenture is shown net of unamortized discount of
      $53,806 in the consolidated balance sheet. In addition, on October 26, 2005,
      the
      Company issued to the Brad Chisick Trust 125,000 shares of its common stock
      valued at $72,500 as pre-payment of the accrued interest on this senior
      debenture. The prepaid interest will be amortized to interest expense over
      the
      two year term of the senior debenture.





**NOTE
      10 - CONVERTIBLE PREFERRED STOCK**





In
      September 2003, the Company sold 1,000 shares of its 7.5% convertible preferred
      stock (the "Convertible Preferred Stock") to Gryphon Master Fund, LP, for
      $1,000,000, less direct issuance costs of $115,000, which were netted against
      the proceeds of the offering. The Convertible Preferred Stock carries voting
      rights equivalent to the number of shares of common stock into which it can
      be
      converted, and has liquidation preference of $1,000 per share. The Convertible
      Preferred Stock is convertible into shares of the Company's common stock at
      the
      initial conversion price of $2.40 per share. This price is subject to change
      should the Company issue shares of its common stock at a price less than $1.75
      per share. Included with the Convertible Preferred Stock were detachable
      three-year warrants to purchase 104,167 shares of the Company's common stock
      at
      the price of $2.88 per share (the "Preferred Warrants"). The warrant exercise
      price is also subject to adjustment based on sales of the Company's common
      stock
      below the current fair market value on the contract date.





The
      fair
      value of these warrants totaling $181,849 was computed using the Black-Scholes
      model under the following assumptions: (1) expected life of 3 years; (2)
      volatility of 112%, (3) risk free interest of 4.1% and (4) dividend rate of
      $0%.
      In addition, since this convertible preferred stock is convertible into equity
      at the option of the stockholder at beneficial conversion rates, an embedded
      beneficial conversion feature was recorded as a discount to additional paid
      in
      capital in accordance with Emerging Issues Task Force No. 00-27, "Application
      of
      Issue No. 98-5 to Certain Convertible Instruments." Since the intrinsic value
      of
      the beneficial conversion feature and relative fair value of the warrants
      exceeds the proceeds of the convertible debt, the amount of the discount
      assigned to the beneficial conversion feature and warrants is limited to the
      amount of the proceeds of the convertible preferred stock. The discount was
      recorded as a preferred stock dividend at the date of issuance. The Company
      recognized $885,000 of preferred dividends related to the discount.




19


**COBALIS
        CORP. AND SUBSIDIARY**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
        THE NINE MONTHS ENDED DECEMBER 31, 2006 AND 2005**
 **(UNAUDITED)**


On
      March
      31, 2006, the Company reached a settlement with Gryphon Master Lund LP related
      to two investments in the Company by Gryphon in September 2003 totaling
      $1,600,000 (See Notes 4 and 8). The settlement agreement requires the Company
      to
      pay a maximum of $1,600,000 which will be reduced to $1,400,000 if the Company
      is able to pay the judgment on or before October 1, 2006. Full repayment is
      due
      under the settlement agreement on or before April 1, 2007. The settlement
      agreement also provides for Gryphon to convert its two investments (convertible
      debenture and convertible preferred stock) in the Company totaling $1,600,000
      into 716,667 shares of the Company common stock as per the terms of the original
      investment agreements. In addition the settlement agreement provides for a
      reduction of the exercise price to $0.01 for the 194,167 warrants currently
      held
      by Gryphon. In the event that the Company does not make the payment by April
      1,
      2007, then the stipulated judgment into which the Company entered with Gryphon
      provides that Gryphon has the right to enter a judgment of $1,600,000 against
      the Company with the court upon the Company’s default.





During
      the nine months ended December 31, 2006, Gryphon did a cashless exercise of
      these warrants and received a total of 192,997 shares of the Company’s common
      stock and converted a total of $500,000 worth of preferred stock into 208,333
      shares of the Company’s common stock.


.


**NOTE
      11 - STOCKHOLDERS’ DEFICIT**





Preferred
      Stock





The
      Company has authorized 5,000,000 shares of $0.001 par value preferred stock
      of
      which 1,000 have been designated at Convertible Preferred Stock (see Note
      10).





Common
      Stock





The
      Company has authorized 50,000,000 shares of $0.001 par value common
      stock.




Stock
      Options





The
      following table summarizes the options outstanding:




**Options**
              **outstanding**
            
            **Weighted
                Average Exercise Price**
            
            **Aggregate**
              **Intrinsic
                Value**Outstanding,
                March 31, 2006
            
            
            1,625,000
            
            $
            1.74
            
            $
            374,000Reclassified
                from warrants
            
            
            2,000,000
            
            $
            1.75Granted
            
            
            2,800,000
            
            $
            1.40Forfeited/Canceled
            
            
            (433,333
            )
            $
            1.58Exercised
            
            
            -
            
            
            -Outstanding,
                December 31, 2006
            
            
            5,991,667
            
            $
            1.60
            
            $
            0





The
      weighted average remaining contractual life of options outstanding is 7.49
      years
      at December 31, 2006. The exercise prices for the options outstanding at
      December 31, 2006 are as follows:




20


**COBALIS
        CORP. AND SUBSIDIARY**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
        THE NINE MONTHS ENDED DECEMBER 31, 2006 AND 2005**
 **(UNAUDITED)**


**Number
                of**
              **Options**
            
            **Exercise**
              **Price**325,000
            
            $1.002,800,000
            
            $1.401,666,667
            
            $1.751,200,000
            
            $2.005,991,667





The
      fair
      value for the options issued during the three months ended June 30, 2006 was
      estimated at the date of grant using a Black-Scholes option pricing model with
      the following weighted-average assumptions: risk-free interest rate of 4.50%;
      dividend yields of 0%; volatility factors of the expected market price of the
      Company’s common shares of 188%; and a weighted average expected life of the
      option of 5 years.





The
      Black-Scholes option valuation model was developed for use in estimating the
      fair value of traded options which have no vesting restrictions and are fully
      transferable. In addition, option valuation models require the input of highly
      subjective assumptions including the expected stock price volatility. Because
      the Company's employee stock options have characteristics significantly
      different from those of traded options, and because changes in the subjective
      input assumptions can materially affect the fair value estimate, in management's
      opinion, the existing models do not necessarily provide a reliable single
      measure of the fair value of employee stock options.





Warrants





As
      a
      result of the issuance of the convertible debenture to Cornell Capital (See
      Note
      8) the fair value of all warrant issued to non-employees have been removed
      from
      stockholders’ equity and shown as a liability. On December 20, 2006, the fair
      value of such warrants was $3,545,880. The fair value of these warrants and
      those issued to Cornell Capital will be adjusted to fair value at each balance
      sheet date.





The
      following table summarizes the warrants outstanding:




**Warrants**
              **outstanding**
            
            **Weighted
                Average Exercise Price**
            
            **Aggregate**
              **Intrinsic
                Value**Outstanding,
                March 31, 2006
            
            
            6,636,767
            
            $
            1.67
            
            $
            1,435,630Transferred
                to options
            
            
            (2,000,000
            )
            $
            1.75Granted
            
            
            8,698,102
            
            $
            0.86Forfeited/Canceled
            
            
            -
            
            
            -Exercised
            
            
            (194,167
            )
            $
            0.01Outstanding,
                December 31, 2006
            
            
            13,140,702
            
            $
            1.14
            
            $
            105,000





The
      weighted average remaining contractual life of warrants outstanding is 3.56
      years at December 31, 2006. The exercise prices for the warrants outstanding
      at
      December 31, 2006 are as follows:




21


**COBALIS
        CORP. AND SUBSIDIARY**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
        THE NINE MONTHS ENDED DECEMBER 31, 2006 AND 2005**
 **(UNAUDITED)**


**Number
                of**
              **Warrants**
            
            **Exercise**
              **Price**150,000
            
            $0.014,597,292
            
            $0.751,205,400
            
            $0.832,707,910
            
            $1.0087,500
            
            $1.504,192,600
            
            $1.75200,000
            
            $2.0013,140,702


**NOTE
      1** **2
      - LITIGATION**





*Former
      Leased Office Space:* The
      Company was a defendant in a suit brought by its former landlord for breach
      of
      lease agreement and alleged unpaid rent in the County of Orange, Superior Court
      of California, Case #03CC02904. In January 2006, this matter was settled and
      the
      Company is to pay a total of $200,000 over the next year, of which the Company
      paid the first $75,000 on January 31, 2006, leaving $125,000 as of that time.
      The Company has accrued an additional $60,000 related to this matter during
      the
      quarter ended December 31, 2006 being the total accrual on that date to
      $185,000. This amount was paid in full in January 2007.





*Marinko
      Vekovic:* **** On
      March
      9, 2006, Marinko Vekovic, a former consultant, filed a Complaint against the
      Company alleging a breach of a written consulting agreement, specific
      performance of common stock warrants and the “reasonable value of work and labor
      performed,” seeking damages in excess of $700,000, and specific performance of
      an alleged obligation to issue 600,000 free trading warrants at a $1.75 share
      price. The lawsuit, entitled Vekovic vs. Cobalis, is pending in Orange County
      Superior Court, Central Justice Center, Case No. 06CC03923.





On
      April
      18, 2006, the Company filed an Answer to the Complaint, denying the allegations
      by Mr. Vekovic. On the same date, the Company also filed a Cross-Complaint
      for
      rescission of the consulting agreement, on grounds that Mr. Vekovic made
      numerous material misrepresentations intended to fraudulently induce the Company
      to enter the consulting agreement and to issue to Vekovic 112,500 shares of
      the
      Company’s common stock registered in a registration statement on Form S-8.
      Through the Company’s Cross-Complaint, the Company seeks to rescind the
      consulting agreement and seeks restitution from Mr. Vekovic in an amount no
      less
      than the price for which Mr. Vekovic sold the 112,500 shares of the S-8 stock,
      plus all or some portion of the compensation paid to Mr. Vekovic, given that
      Mr.
      Vekovic substantially failed to perform the consulting services which were
      the
      subject of the consulting agreement. The Company also seeks to recover
      attorneys’ fees incurred in the defense of the Complaint and the prosecution of
      the Company’s Cross-Complaint, pursuant to the attorneys’ fee provision in the
      consulting agreement.




22


**COBALIS
        CORP. AND SUBSIDIARY**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
        THE NINE MONTHS ENDED DECEMBER 31, 2006 AND 2005**
 **(UNAUDITED)**


The
      Company believes that it will prevail in defending Mr. Vekovic’s Complaint and
      that its liability to Mr. Vekovic, if any, would not be material. Furthermore,
      the Company believes that it has a good chance of prevailing on its
      Cross-Complaint, such that the Company would recover a monetary award from
      Mr.
      Vekovic. However, as is the case with any litigation, the Company cannot
      guarantee the outcome of the case.





*Europacific
      Consulting, Inc.* **** This
      action was filed on May 23, 2006 in the Supreme Court of New York, County of
      New
      York, Case No. 601830/06. Europacific Consulting, Inc. (“Europacific”) is a New
      York corporation whose sole shareholder and director is Antonio Treminio.
      Europacific is suing for alleged breach of oral contract and damages of
      $250,000. Europacific alleges that Cobalis orally engaged Europacific to perform
      certain services for us, including introductions to potential board members,
      qualified investors and strategic alliances for our product line. We issued
      20,000 shares to Europacific in January 2005, and canceled those shares in
      May
      2005. In October 2006, we settled this case by rescinding our stop order on
      those 20,000 shares.





*Cappello
      Capital Corp.* In
      March
      2005, we entered into an agreement with Cappello Capital Corp. (“Cappello”) for
      investment banking and related financial services. Pursuant to a financing
      agreement, we issued 100,000 shares as an initial retainer. We believe that
      Cappello did not perform per the agreement, but we are currently in discussions
      with Cappello to attempt to arrive at a settlement, but no settlement can be
      guaranteed. ****





In
      the
      ordinary course of business, the Company is generally subject to claims,
      complaints, and legal actions. At December 31, 2006, management believes that
      the Company is not a party to any action which would have a material impact
      on
      its financial condition, operations, or cash flows.




**NOTE
      1** **3
      - SUBSEQUENT EVENTS**





The
      following events occurred subsequent to December 31, 2006:




·
            On
                January 11, 2007 the Company paid $169,950 to Advance Botanicals/MDC.
                This
                was a re-payment of $150,000 on their $250,000 bridge note plus accrued
                interest. MDC also agreed to extend the payment for the remaining
                $100,000
                owed to MDC for an additional 60 days in return for an additional
                25,000
                warrants to purchase the Company’s common stock at $1.00.





·
            On
                January 11, 2007 the Company paid $125,000 to Irwin Geduld. This
                was a
                repayment of a $100,000 bridge loan plus accrued interest of $25,000
                and
                represents a full payment of this obligation.





**·**
            On
                January 11, 2007 the Company paid $75,000 to Steve Geduld. This was
                a
                repayment of $50,000 on his $100,000 bridge note plus accrued interest,
                which represents full payment of this obligation. Also on January
                29, 2007
                the Company repaid the remaining $50,000 principal plus $1,666.66
                in
                accrued interest.





·
            On
                January 10, 2007 the Company paid $185,000 as final settlement with
                its
                former landlord.





·
            On
                February 6, 2007 the Company converted a $50,000 bridge note from
                Anthony
                Brent into shares of common stock plus $13,918.62 accrued interest.
                In
                satisfaction of that note, the Company issued 127,838 Shares at $0.50
                per
                share, and 44,744 warrants to purchase shares of the Company’s common
                stock at $1.00 per share. Those warrants expire five years from the
                date
                of grant.




23




**Item
      2.**  **Management's
      Discussion and Analysis or Plan of Operations**




**This
      following information specifies certain forward-looking statements of management
      of the company. Forward-looking statements are statements that estimate the
      happening of future events and are not based on historical fact. Forward-looking
      statements may be identified by the use of forward-looking terminology, such
      as
“may”, “shall”, “could”, “expect”, “estimate”, “anticipate”, “predict”,
“probable”, “possible”, “should”, “continue”, or similar terms, variations of
      those terms or the negative of those terms. The forward-looking statements
      specified in the following information have been compiled by our management
      on
      the basis of assumptions made by management and considered by management to
      be
      reasonable. Our future operating results, however, are impossible to predict
      and
      no representation, guaranty, or warranty is to be inferred from those
      forward-looking statements.**





**The
      assumptions used for purposes of the forward-looking statements specified in
      the
      following information represent estimates of future events and are subject
      to
      uncertainty as to possible changes in economic, legislative, industry, and
      other
      circumstances. 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 require the exercise of judgment. To the extent
      that the assumed events do not occur, the outcome may vary substantially from
      anticipated or projected results, and, accordingly, no opinion is expressed
      on
      the achievability of those forward-looking statements. No assurance can be
      given
      that any of the assumptions relating to the forward-looking statements specified
      in the following information are accurate, and we assume no obligation to update
      any such forward-looking statements.**




Our
      Management's Discussion and Analysis of Financial Condition and Results of
      Operations section discusses our financial statements, which have been prepared
      in accordance with accounting principles generally accepted in the United States
      of America. The preparation of these financial statements requires us to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities at the date of the financial statements and the reported amounts
      of
      revenues and expenses during the reporting period. On an on-going basis, we
      evaluate our estimates and judgments, including those related to revenue
      recognition, accrued expenses, financing operations, and contingencies and
      litigation. We base our estimates and judgments on historical experience and
      on
      various other factors that are believed to be reasonable under the
      circumstances, the results of which form the basis for making judgments about
      the carrying value of assets and liabilities that are not readily apparent
      from
      other sources. Actual results may differ from these estimates under different
      assumptions or conditions. The most significant accounting estimates inherent
      in
      the preparation of our financial statements include estimates as to the
      appropriate carrying value of certain assets and liabilities which are not
      readily apparent from other sources, primarily valuation of patent costs and
      stock-based compensation. The methods, estimates and judgments we use in
      applying these most critical accounting policies have a significant impact
      on
      the results we report in our consolidated financial statements.




**OVERVIEW**





As
      discussed above, we were incorporated in 1997 and on July 6, 2004 changed our
      name to Cobalis Corp., having previously used the BioGentech Corp. In 2003,
      we
      acquired our operational subsidiary, BioGentech Incorporated,(BioGentec). To
      distinguish between parent and subsidiary, a slight spelling difference was
      utilized. BioGentec, a private Nevada corporation, was incorporated on November
      21, 2000 according to the laws of Nevada, under the name St Petka, Inc. On
      May
      4, 2001, St. Petka, Inc. changed its name to BioGentec Incorporated. On July
      2,
      2003, BioGentec was merged into Togs for Tykes Acquisition Corp., a wholly
      owned
      subsidiary formed for the purpose of acquiring BioGentec. As allowed under
      SFAS
      141, “Business Combinations” (“SFAS 141”), we designated a date of convenience
      of the closing for accounting purposes as June 30, 2003. Under the terms of
      the
      merger




24




agreement,
      all of BioGentec's outstanding common stock (19,732,705 shares of $0.001 par
      value stock) was exchanged for 19,732,705 shares newly issued shares of $0.001
      par value stock of Cobalis Corp. common stock. This transaction was consummated
      with the filing of the Articles of Merger with the State of Nevada on July
      2,
      2003. BioGentec shareholders then effectively controlled approximately 95%
      of
      the issued and outstanding common stock of Cobalis. Since the shareholders
      of
      BioGentec obtained control of Cobalis, according to SFAS 141, this acquisition
      was treated as a recapitalization for accounting purposes, in a manner similar
      to reverse acquisition accounting.





**GOING
      CONCERN**





The
      accompanying consolidated financial statements have been prepared in conformity
      with accounting principles generally accepted in the United States of America,
      which contemplate continuation as a going concern. We incurred a net loss of
      $13,319,827 for the nine months ended December 31, 2006 and as of December
      31,
      2006; we had a working capital deficit of $14,757,176 and a stockholder deficit
      of $14,508,280. In addition, as of December 31, 2006, we have not developed
      a
      substantial source of revenue. These conditions raise substantial doubt as
      to
      our ability to continue as a going concern. The consolidated financial
      statements do not include any adjustments that might result from the outcome
      of
      this uncertainty. The consolidated financial statements do not include any
      adjustments relating to the recoverability and classification of recorded asset
      amounts, or amounts and classification of liabilities that might be necessary
      should we be unable to continue as a going concern.





We
      have
      recently raised $2,500,000 by issuing a convertible debenture and has sold
      shares of our common stock for gross proceeds of $800,000 and are currently
      attempting to raise additional debt and equity financing for operating purposes.
      We are also attempting to partner with a large pharmaceutical company for
      research and development, marketing and distribution of its product. We require
      substantial capital to pursue our operating strategy, which includes
      commercialization of our product and paying for our phase III clinical trials,
      and we currently have limited cash for operations. Until we can obtain revenues
      sufficient to fund working capital needs and additional research and development
      costs necessary to obtain the regulatory approvals for commercialization, we
      will be dependent upon external sources of financing.





We
      believe that actions presently being taken to revise our operating and financial
      requirements provide the opportunity for us to continue as a going concern.
      There can be no assurances that sufficient financing will be available on terms
      acceptable to us, or at all. If we are unable to obtain such financing, we
      will
      be forced to scale back operations, which could have an adverse effect on our
      financial condition and results of operations.





**CRITICAL
      ACCOUNTING POLICY AND ESTIMATES**





Our
      Management's Discussion and Analysis of Financial Condition and Results of
      Operations section discusses our consolidated financial statements, which have
      been prepared in accordance with accounting principles generally accepted in
      the
      United States of America. The preparation of the consolidated financial
      statements requires management to make estimates and assumptions that affect
      the
      reported amounts of assets and liabilities at the date of the consolidated
      financial statements and the reported amounts of revenues and expenses during
      the reporting period. On an on-going basis, management evaluates its estimates
      and judgments, including those related to revenue recognition, accrued expenses,
      financing operations, and contingencies and litigation. Management bases its
      estimates and judgments on historical experience and on various other factors
      that are believed to be reasonable under the circumstances, the results of
      which
      form the basis for making judgments about the carrying value of assets and
      liabilities that are not readily apparent from other sources. Actual results
      may
      differ from these estimates under different assumptions or conditions. The
      most
      significant accounting estimates inherent in the preparation of our consolidated
      financial statements include estimates as to the appropriate carrying value
      of
      certain assets and liabilities which are not readily apparent from other
      sources, primarily valuation of patent costs and stock-based compensation.
      The
      methods, estimates and judgments we use in applying these most critical
      accounting policies have a significant impact on the results we report in our
      consolidated financial statements.




25





**Patent
      Cost Valuation.** The
      determination of the fair value of certain acquired assets and liabilities
      is
      subjective in nature and often involves the use of significant estimates and
      assumptions. Determining the fair values and useful lives of intangible assets
      requires the exercise of judgment. While there are a number of different
      generally accepted valuation methods to estimate the value of intangible assets
      acquired, we primarily use the weighted-average probability method outlined
      in
      SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” This
      method requires significant management judgment to forecast the future operating
      results used in the analysis. In addition, other significant estimates are
      required such as residual growth rates and discount factors. The estimates
      we
      have used are consistent with the plans and estimates that we use to manage
      our
      business, based on available historical information and industry averages.
      The
      judgments made in determining the estimated useful lives assigned to each class
      of assets acquired can also significantly affect our net operating results.





**Stock-based
      Compensation.** We
      adopted SFAS No. 123 (Revised 2004), *Share
      Based Payment* (“SFAS
      No. 123R”), under the modified-prospective transition method on
      January 1, 2006. SFAS No. 123R requires companies to measure and
      recognize the cost of employee services received in exchange for an award of
      equity instruments based on the grant-date fair value. Share-based compensation
      recognized under the modified-prospective transition method of SFAS
      No. 123R includes share-based compensation based on the grant-date fair
      value determined in accordance with the original provisions of SFAS
      No. 123, *Accounting
      for Stock-Based Compensation,* for
      all
      share-based payments granted prior to and not yet vested as of January 1,
      2006 and share-based compensation based on the grant-date fair-value determined
      in accordance with SFAS No. 123R for all share-based payments granted after
      January 1, 2006. SFAS No. 123R eliminates the ability to account for
      the award of these instruments under the intrinsic value method prescribed
      by
      Accounting Principles Board (“APB”) Opinion No. 25, *Accounting
      for Stock Issued to Employees* ,
      and
      allowed under the original provisions of SFAS No. 123. Prior to the
      adoption of SFAS No. 123R, we accounted for our stock option plans using
      the intrinsic value method in accordance with the provisions of APB Opinion
      No. 25 and related interpretations.





**Estimate
      of Litigation-based Liability.** We
      are a
      defendant in certain claims and litigation in the ordinary course of business.
      We accrue liabilities relating to these lawsuits on a case-by-case basis. We
      generally accrue attorney fees and interest in addition to the liability being
      sought. Liabilities are adjusted on a regular basis as new information becomes
      available. We consult with our attorneys to determine the viability of an
      expected outcome. The actual amount paid to settle a case could differ
      materially from the amount accrued.





**LIQUIDITY
      AND CAPITAL RESOURCES**





We
      had
      cash and cash equivalents of $1,684,580 and prepaid expenses and other current
      assets of $21,801 December 31, 2006. Our total current assets at December 31,
      2006 were $1,706,381. We also had the following long term assets: $3,553 in
      property and equipment, net; $1,062 in net website development costs; $632,262
      represented by net value of our patents; debt issue cost of $275,787 and $12,546
      in deposits. Our total assets as of December 31, 2006 were $2,631,591.





Our
      total
      current liabilities were $16,463,557 at December 31, 2006, which was represented
      by accounts payable of $545,629; accrued expenses of $744,339; accrued clinical
      trials costs of $2,611,356; accrued legal settlements of $1,785,000; accrued
      salaries of $376,125; warrant liability of $7,186,980; accrued derivative
      liability of $2,017,315; promissory notes of $46,813; notes payable of $300,000
      and convertible notes payable of $850,000.




26





In
      June
      2005, we converted a total of $205,174 of amounts due for clinical trials into
      nine promissory notes that accrued interest at a rate of 10% per annum and
      were
      due on December 27, 2005. During the three months ended March 31, 2006 and
      June
      30, 2006, respectively, we converted $131,042 and $27,319 of these promissory
      notes plus accrued interest into 105,250 and 27,200 shares of our common stock.
      At December 31, 2006, $46,813 of these notes was still outstanding.





We
      also
      had $196,194 represented by a senior debenture and $37,620 represented by a
      convertible debenture, making our total liabilities $16,485,371, and a
      convertible preferred stock liability of $442,500. Our liabilities exceeded
      our
      assets by $14,508,280.





On
      July
      18, 2006, we entered into an Accord and Satisfaction Agreement (“Agreement”)
      with several related party creditors, arranging to settle debt of $5,194,553
      including interest accrued through June 30, 2006, in exchange for the issuance
      of 3,995,809 shares of our $.001 par value common stock. This debt was incurred
      in the form of related party advances and services rendered to the company
      over
      recent months. The conversion rate was $1.30 per share, representing a premium
      on the market price of our closing share price on Monday, July 17, 2006 of
      $1.00
      per share.




The
      related parties that were owed funds include Radul Radovich, our Chairman of
      the
      Board of Directors, and several entities owned and controlled by Mr. Radovich.
      The amounts owed were as follows: Mr. Radovich was owed $952,611 principal
      along
      with interest of $127,509, for a total of $1,084,120, which was converted to
      833,938 restricted shares of our common stock; St. Petka Trust, a majority
      shareholder of the company, and of which Mr. Radovich is the beneficiary and
      trustor, was owed $1,585,500 principal, along with interest of $211,335, for
      a
      total of $1,796,835, which was converted to 1,382,180 restricted shares of
      our
      common stock; R and R Holdings, Inc. a Nevada corporation owned by Mr. Radovich,
      was owed $471,507 principal, along with interest of $62,848, for a total of
      $534,355, which was converted to 411,042 restricted shares of our common stock;
      Silver Mountain Promotions, Inc., a Nevada corporation, owned by Mr. Radovich,
      was owed $922,103 principal, along with interest of $122,909, for a total of
      $1,045,012, which was converted to 803,855 restricted shares of our common
      stock; R R Development, Inc., a California corporation, owned by Mr. Radovich,
      was owed $170,000 principal, along with interest of $51,838, for a total of
      $221,838, which was converted to restricted 170,644 shares of our common stock.
      In addition, Mr. Radovich was owed $512,392 for consulting fees, pursuant to
      a
      consulting contract with the company. This amount was converted to 394,147
      restricted shares of our common stock.





We
      have
      financed our operations primarily through cash generated from related party
      debt
      financing as well as issuing a convertible debenture.





Our
      net
      cash used by investing activities was $48,124 for the nine months ended December
      31, 2006 compared to $1,542 for the nine months ended December 31, 2005. The
      increase of $46,582 is primarily due to a payment for our patent.





Our
      net
      cash provided by financing activities was $3,527,500 for the nine months ended
      December 31, 2006 compared to net cash provided by financing activities of
      $1,684,230 for the nine months ended December 31, 2005. The increase of
      $1,818,270 is primarily due to the issuance of the convertible debenture and
      the
      sale of our common stock offset by a reduction in related party
      advances.





In
      June
      2005, we entered into a loan agreement with Tejeda and Tejeda, Inc. in the
      amount of $100,000. The loan is due in one year. The note is personally
      guaranteed by Mr. Radul Radovich, the chairman of our board of directors, and
      Mr. Chas Radovich, our President, Secretary and one of our directors. When
      the
      loan is due, the holder of the note has the option to convert the loan into
      shares of our common stock at $0.50 per share or at a price equal to a 25%
      discount to the closing bid price on the day of conversion at maturity. In
      July
      2006, the holder of the note elected to convert the note to 200,000 shares
      of
      our common stock. We recognized an additional expense of $91,583 related to
      the
      conversion of this note and accrued interest into shares of common stock.




27




In
        October 2005, we issued a senior debenture to the Brad Chisick Trust for
        $250,000 that accrues interest at 10% per annum, and is due in two years.
        We
        also issued the holder of this debenture a warrant to purchase 500,000 shares
        of
        our common stock at $1.75 per share.


During
      the three months ended June 30, 2006, we issued 111,416 shares of our common
      stock that were registered on or about May 11, 2006 on Form S-8 as payment
      for
      certain accounts payable, past due salaries to certain related parties and
      amounts due to consultants.





In
      July
      2006, we issued notes payable in the aggregate amount of $250,000 to three
      investors. The notes bear interest at 5% per month and were due on September
      14,
      2006. We exercised our option to extend the due date to October 14, 2006 and
      issued to the investors a total of 25,000 warrants. These notes were repaid
      subsequent to the quarter ended December 31, 2006.





In
      August
      2006, we issued a note payable to MDC Enterprises Ltd. in the amount of $250,000
      that accrues interest at 40% per annum and is due on December 29, 2006. In
      addition, we also issued to MDC Enterprises Ltd. a warrant to purchase 150,000
      shares of our common stock for $0.75 per shares.





In
      September 2006, we issued a note payable in the amount of $50,000 to an
      investor. The note bears interest at 10% per annum and is payable upon
      demand.





On
      December 20, 2006, the we entered into a Securities Purchase Agreement with
      Cornell Capital Partners, L.P. ("Cornell Capital") pursuant to which we agreed
      to issue up to an aggregate principal amount of $3,850,000 of convertible
      debentures. Of that amount, $2,500,000 was funded on December 20, 2006. Two
      additional closings of $675,000 each are scheduled to occur as follows: the
      first upon the Company’s filing of a registration statement with the Securities
      and Exchange Commission (“SEC”), and the second upon that registration statement
      being declared effective by the SEC and Shareholder approval of additional
      authorized shares. There is no guarantee that we will complete and file a
      registration statement, or that if filed, there is no guarantee that the SEC
      will declare the registration statement effective. Further, there is no
      guarantee that Shareholders will approve the increase in authorized
      shares.




The
      convertible debenture is convertible into shares of our common stock determined
      by dividing the dollar amount being converted by the lower of the fixed
      conversion price of $0.99 or the market conversion price, defined as 90% of
      the
      average of the lowest three daily volume weighted average trading prices per
      share of our common stock for the fifteen trading days immediately preceding
      the
      conversion date. The convertible debenture is secured by our assets and shares
      of common stock pledged by certain founding shareholders. At our option, we
      may
      redeem the convertible debenture beginning four months after the registration
      statement has been declared effective by the SEC.




As
      part
      of the funding commitment, we issued four classes of warrants exercisable on
      a
      cash basis that enable Cornell Capital to purchase up to 6,640,602 shares of
      common stock for an additional $5,500,000: an A Warrant to purchase 1,333,333
      shares at $0.75 per share; B Warrant to purchase 1,205,400 shares at $0.8296
      per
      share; C Warrant to purchase 2,343,959 shares at $0.7466 per share; and D
      Warrant to purchase 1,757,910 shares at $0.9955 per share. The A and B Warrants
      expire six months following the effective date of the registration and carry
      forced exercise provisions. The C and D Warrants are non-callable and have
      a
      five-year term. The warrants and convertible debenture are subject to certain
      anti-dilution rights.




28






Per
      EITF
      00-19, paragraph 4, these convertible debentures do not meet the definition
      of a
“conventional convertible debt instrument” since the debt is not convertible
      into a fixed number of shares.  The debt can be converted into common stock
      at a conversions price that is a percentage of the market price; therefore
      the
      number of shares that could be required to be delivered upon “net-share
      settlement” is essentially indeterminate.  Therefore, the convertible
      debenture is considered “non-conventional,” which means that the conversion
      feature must be bifurcated from the debt and shown as a separate derivative
      liability.  This beneficial conversion liability has been calculated to be
      $1,897,735 on December 20, 2006.  In addition, since the convertible
      debenture is convertible into an indeterminate number of shares of common stock,
      it is assumed that the Company could never have enough authorized and unissued
      shares to settle the conversion of the warrants into common stock.
 Therefore, the warrants issued in connection with this transaction have a
      fair value of $3,667,558 at December 20, 2006.  The value of the warrant
      was calculated using the Black-Scholes model using the following assumptions:
      Discount rate of 4.5%, volatility of 137% and expected term of 1 to 5 years.
       The fair value of the beneficial conversion feature and the warrant
      liability will be adjusted to fair value each balance sheet date with the change
      being shown as a component of net loss.





The
      fair
      value of the beneficial conversion feature and the warrants at the inception
      of
      these convertible debentures were $1897,735 and $3,667,558, respectively.
 The first $2,500,000 of these discounts has been shown as a discount to
      the convertible debentures which will be amortized over the term of the
      convertible debenture and the excess of $3,065,293 has been shown as financing
      costs in the accompanying statement of operations.





As
      a
      result of the issuance of the convertible debenture to Cornell Capital the
      fair
      value of all warrant issued to non-employees have been removed from
      stockholders’ equity and shown as a liability. On December 20, 2006, the fair
      value of such warrants was $3,545,880. The fair value of these warrants and
      those issued to Cornell Capital will be adjusted to fair value at each balance
      sheet date.





**RESULTS
      OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2006 AS COMPARED TO THE
      THREE MONTHS ENDED DECEMBER 31, 2005**





**Revenues
      and Cost of Sales.** We
      had no
      significant revenues for the three months ended December 31, 2006 and December
      31, 2005 as we are undertaking twin Phase III clinical trials in order to obtain
      FDA approval of PreHistin TM as an
      over the counter drug. Our net sales were $0, as were our cost of sales and
      gross loss for the three months ended December 31, 2006, as compared net sales
      of $0 as were our cost of sales and gross loss for the three months ended
      December 31, 2005.





**Operating
      Expenses.** Our
      operating expenses for the three months ended December 31, 2006 were $4,586,919
      compared to $1,139,272 for the three months ended December 31, 2005. For both
      periods, we incurred expenses for two major purposes: i) ongoing development
      of
      our PreHistin TM product
      and related product management and ii) general management and fund raising
      efforts. For the three months ended December 31, 2006, this amount was
      represented by $16,580 in depreciation and amortization; $656,601 in
      professional fees; $651,607 in salary and wages; $36,003 in rent expense;
      $2,502,389 in marketing and research; $469,296 in stock option expense; $194,443
      in other operating expenses and $60,000 in a legal settlement. This is compared
      to the three months ended December 31, 2005, where we had $23,262 in
      depreciation and amortization; $1,003,441 in professional fees; $317,025 in
      salary and wages; $34,486 in rent expense; $(406,315) in marketing and research;
      and $167,373 in other operating expenses. Our operating expenses increased
      during the three months ended December 31, 2006 as compared to the three months
      ended December 31, 2005 principally as a result of an increase in salaries
      and
      wages due to the addition of two executives, an increase in marketing and
      research due to our Phase III clinical trials and an increase in stock
      option expense related
      to the adoption of SFAS No. 123R.




29





Interest
      expense and financing costs for the three months ended December 31, 2006 were
      $225,639 compared to $137,502 for the three months ended December 31, 2005.
      The
      increase is due the increase in debt in 2006 and the amortization of debt
      discounts in 2006 offset by no non-registration penalties being accrued during
      the three months ended December 31, 2006 as compared to penalties of $96,000
      during the three months ended December 31, 2005.





The
      convertible debenture financing costs relate to the excess of the fair value
      of
      the beneficial conversion feature and the warrants over the face amount of
      the
      convertible debt.





The
      change in the fair value in the warrant and accrued derivative liabilities
      relates to the change in the value of the detachable warrants and beneficial
      conversion feature issued in connection with the convertible debentures and
      convertible preferred stock.




**RESULTS
      OF OPERATIONS FOR THE NINE MONTHS ENDED DECEMBER 31, 2006 AS COMPARED TO THE
      NINE MONTHS ENDED DECEMBER 31, 2005**





**Revenues
      and Cost of Sales.** We
      had no
      significant revenues for the nine months ended December 31, 2006 and December
      31, 2005 as we are undertaking clinical development in order to obtain FDA
      approval of PreHistin TM as an
      over the counter drug. Our net sales were $0, as were our cost of sales and
      gross loss for the nine months ended December 31, 2006, as compared net sales
      of
      $0 as were our cost of sales and gross loss for the nine months ended December
      31, 2005.





**Operating
      Expenses.** Our
      operating expenses for the nine months ended December 31, 2006 were $9,703,638
      compared to $2,734,986 for the nine months ended December 31, 2005. For both
      periods, we incurred expenses for two major purposes: i) ongoing development
      of
      our PreHistin TM product
      and related product management and ii) general management and fund raising
      efforts. For the nine months ended December 31, 2006, this amount was
      represented by $47,857 in depreciation and amortization; $2,224,275 in
      professional fees; $1,755,239 in salary and wages; $136,282 in rent expense;
      $3,801,753 in marketing and research; $1,059,888 in stock option expense;
      $618,344 in other operating expenses and $60,000 in a legal settlement. This
      is
      compared to the nine months ended December 31, 2005, where we had $69,545 in
      depreciation and amortization; $1,961,801 in professional fees; $495,245 in
      salary and wages; $103,409 in rent expense; $(350,999) in marketing and
      research; and $455,985 in other operating expenses. Our operating expenses
      increased during the nine months ended December 31, 2006 as compared to the
      nine
      months ended December 31, 2005 principally as a result of an increase in
      salaries and wages due to the addition of two executives, an increase in
      marketing and research due to our Phase III clinical trials and an increase
      in
      stock option expense related to the adoption of SFAS No. 123R. A significant
      portion of the professional fees were paid by issuing shares of our stock.
      The
      value of these services was based on the market value of our stock at the
      measurement date.





Interest
      expense and financing costs for the nine months ended December 31, 2006 were
      $457,774 compared to $545,869 for the nine months ended December 31, 2005.
      The
      decrease is due to no non-registration penalties being accrued during the nine
      months ended December 31, 2006 as compared to penalties of $192,000 during
      the
      nine months ended December 31, 2005 offset by the increase in debt in 2006
      and
      the amortization of debt discounts in 2006.




The
      convertible debenture financing costs relate to the excess of the fair value
      of
      the beneficial conversion feature and the warrants over the face amount of
      the
      convertible debt.




30





The
      change in the fair value in the warrant and accrued derivative liabilities
      relates to the change in the value of the detachable warrants and beneficial
      conversion feature issued in connection with the convertible debentures and
      convertible preferred stock.




**OUR
      PLAN OF OPERATION FOR THE NEXT TWELVE MONTHS.**




Over
        the
        next twelve months, we plan to continue moving forward with the completion
        of
        the Phase III clinical trials of our planned allergy prevention product,
        PreHistin TM ,
        followed by submission by the end of the third quarter of 2007 of a new drug
        application (“NDA”) to the FDA for marketing approval of PreHistin TM as an
        over-the-counter allergy medication. Once the NDA is filed, we hope to receive
        approval from the FDA within twelve months enabling market launch in the
        United
        States of the product. We do not anticipate generating product sales within
        the
        next twelve months. However, if results from our twin Phase III trials are
        compelling, we may be successful in generating licensing revenue from a
        potential pharmaceutical partner.


In
      addition to seeking approval from the FDA for the primary indication of seasonal
      allergic rhinitis (hay fever) for PreHistin TM ,
      we may
      conduct additional studies to validate the viability of approval for
      supplemental indications and alternative delivery mechanisms. The tests will
      be
      a combination of clinical trials and laboratory analyses.





As
      of
      December 31, 2006, we had cash and equivalents of $1,684,580. To fully execute
      our business plan for the next 12 months, we will need to raise additional
      funds
      in order to complete the Phase III clinical trials, submit the
      PreHistin TM application to the United States FDA, and execute a licensing agreement or
      otherwise launch the PreHistin TM product.
      There is no assurance that these funds will be raised. Other than the funds
      already received from Cornell Capital, we have no ongoing source of working
      capital.




In
      October 2005, we reported results of an initial six-week 714 patient Phase
      III
      trial designed to study various PreHistin TM dose
      regimens for reducing seasonal allergy symptoms when compared to placebo. As
      reported, the statistical analysis utilized a modified intent to treat and
      an
      ANOVA (ANalysis Of VAriation) model to determine the treatment effects for
      the
      four arm study and certain assumptions used were not specified in the
      statistical analysis plan (SAP). Although the data resulting from the prior
      Phase III clinical trial demonstrated that patients who were administered
      PreHistin TM showed a
      statistically significant reduction of allergy symptoms when the modified
      analysis was applied, the data most likely will be viewed by the FDA as
      supportive data and not as pivotal Phase III results required to secure
      approval.




In
      January 2006, we were notified by the FDA that the marketing approval process
      for PreHistin TM would be
      conducted within the FDA by the Office of Nonprescription Products, the branch
      of the FDA which handles over-the-counter drug products. Previously the Division
      of Pulmonary and Allergy Drug Products had handled our approval process (IND
      number 68,994). We believe this is a positive development since, as an
      FDA-approved over-the-counter drug, PreHistin TM would
      not require a doctor's prescription, thus making consumer purchases easier,
      faster and more convenient.





In
      April
      2006, we submitted a protocol to the FDA (Protocol DF0107) for a Phase III
      study
      on ragweed sensitive seasonal allergy patients in the central and eastern United
      States. In June 2006 the FDA notified us by letter regarding that protocol
      stating that our two proposed study designs were “acceptable”. From the time we
      had submitted Protocol DF0107 for review by the FDA in early April 2006, until
      June 2006, the protocol had changed with the following notable exceptions:




31





·
            There
                are two study arms in two studies (Protocol RA3333 and Protocol RA55555),
                one with a placebo lozenge BID and one with a 3.3mg cyanocobalamin
                lozenge
                BID. Each arm in each study is between 312 and 500 patient-volunteers.





·
            Patients
                are to keep symptom diaries for 10 consecutive weeks. Patients are
                to
                receive a bottle of nasal saline, ocular saline and a supply of loratadine
                10 mg sufficient for them to take, if required, from Week 7 to Week
                10.
                (As with the prior protocol, the patients are to use the study medication
                from Week 1 to Week 6, with Weeks 4, 5 and 6 being the primary endpoint.)





In
      June
      2006, we announced that we intend to initiate two identical, Phase III clinical
      trials of our anti-allergy medication PreHistin TM in
      patients with seasonal allergic rhinitis. The randomized, double blind,
      placebo-controlled studies are intended to assess the efficacy, overall safety
      and tolerability of our flagship drug PreHistin TM to
      prevent the onset and reduce the severity of allergy symptoms.




We
      commenced these studies in July 2006 and, if they are successful, we anticipate
      using them in conjunction with our Mt. Cedar study as the primary basis for
      submitting an application to FDA for marketing approval. 
 The
        new
        study design calls for two simultaneously conducted Phase III clinical trials,
        each comprised of one placebo arm and one active arm receiving 3.3 mg of
        sublingual PreHistin TM administered twice daily for the six weeks of the study. In July 2006, we
        conducted the double-blind, placebo-controlled trials will be conducted at
        23
        sites throughout the United States during the Ragweed allergy season. The
        trials
        utilized electronic diary records to assess improvement in the severity of
        nasal
        allergy symptoms. A total of 1,551 patients were randomized into the twin
        studies to receive either placebo or PreHistin TM for
        three weeks prior to the onset of the allergy season, and for an additional
        three weeks into the season. The patients’ dosing regimens were completed in
        October 2006.
 
 Other
        than the research and development related to our PreHistin TM product,
        we do not plan to engage in any other research and development unless we
        are
        able to raise additional funds. We do not anticipate any significant hiring
        over
        the next 12 months.


**Off-balance
      sheet arrangements.** There
      are
      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, revenues or expenses, results of operations, liquidity, capital
      expenditures or capital resources that are material to investors.




**Item
      3.**  **Controls
      and Procedures**





As
      required by SEC rules, we have evaluated the effectiveness of the design and
      operation of our disclosure controls and procedures at the end of the period
      covered by this report. This evaluation was carried out under the supervision
      and with the participation of our management, including our principal executive
      officer and principal financial officer. Based on this evaluation, these
      officers have concluded that the design and operation of our disclosure controls
      and procedures are effective. There were no changes in our internal control
      over
      financial reporting or in other factors that have materially affected, or are
      reasonably likely to materially affect, our internal control over financial
      reporting.




32





Disclosure
      controls and procedures are our controls and other procedures that are designed
      to ensure that information required to be disclosed by us in the reports that
      we
      file or submit under the Exchange Act is recorded, processed, summarized and
      reported, within the time periods specified in the SEC’s rules and forms.
      Disclosure controls and procedures include, without limitation, controls and
      procedures designed to ensure that information required to be disclosed by
      us in
      the reports that we file under the Exchange Act is accumulated and communicated
      to our management, including principal executive officer and principal financial
      officer, as appropriate, to allow timely decisions regarding required
      disclosure.




**Part
      II.**  **OTHER
      INFORMATION**





**Item
      1.**  **Legal
      Proceedings**





*Former
      Leased Office Space:* The
      Company was a defendant in a suit brought by its former landlord for breach
      of
      lease agreement and alleged unpaid rent in the County of Orange, Superior Court
      of California, Case #03CC02904. In January 2006, this matter was settled and
      the
      Company is to pay a total of $200,000 over the next year, of which the Company
      paid the first $75,000 on January 31, 2006. The Company has accrued an
      additional $60,000 related to this matter during the quarter ended December
      31,
      2006 being the total accrual on that date to $185,000. This amount was paid
      in
      full in January 2007.





*Marinko
      Vekovic:* **** On
      March
      9, 2006, Marinko Vekovic, a former consultant, filed a Complaint against the
      Company alleging a breach of a written consulting agreement, specific
      performance of common stock warrants and the “reasonable value of work and labor
      performed,” seeking damages in excess of $700,000, and specific performance of
      an alleged obligation to issue 600,000 free trading warrants at a $1.75 share
      price. The lawsuit, entitled Vekovic vs. Cobalis, is pending in Orange County
      Superior Court, Central Justice Center, Case No. 06CC03923.




On
      April
      18, 2006, the Company filed an Answer to the Complaint, denying the allegations
      by Mr. Vekovic. On the same date, the Company also filed a Cross-Complaint
      for
      rescission of the consulting agreement, on grounds that Mr. Vekovic made
      numerous material misrepresentations intended to fraudulently induce the Company
      to enter the consulting agreement and to issue to Vekovic 112,500 shares of
      the
      Company’s common stock registered in a registration statement on Form S-8.
      Through the Company’s Cross-Complaint, the Company seeks to rescind the
      consulting agreement and seeks restitution from Mr. Vekovic in an amount no
      less
      than the price for which Mr. Vekovic sold the 112,500 shares of the S-8 stock,
      plus all or some portion of the compensation paid to Mr. Vekovic, given that
      Mr.
      Vekovic substantially failed to perform the consulting services which were
      the
      subject of the consulting agreement. The Company also seeks to recover
      attorneys’ fees incurred in the defense of the Complaint and the prosecution of
      the Company’s Cross-Complaint, pursuant to the attorneys’ fee provision in the
      consulting agreement.





The
      Company believes that it will prevail in defending Mr. Vekovic’s Complaint and
      that its liability to Mr. Vekovic, if any, would not be material. Furthermore,
      the Company believes that it has a good chance of prevailing on its
      Cross-Complaint, such that the Company would recover a monetary award from
      Mr.
      Vekovic. However, as is the case with any litigation, the Company cannot
      guarantee the outcome of the case.




33





*Europacific
      Consulting, Inc.* **** This
      action was filed on May 23, 2006 in the Supreme Court of New York, County of
      New
      York, Case No. 601830/06. Europacific Consulting, Inc. (“Europacific”) is a New
      York corporation whose sole shareholder and director is Antonio Treminio.
      Europacific is suing for alleged breach of oral contract and damages of
      $250,000. Europacific alleges that Cobalis orally engaged Europacific to perform
      certain services for us, including introductions to potential board members,
      qualified investors and strategic alliances for our product line. We issued
      20,000 shares to Europacific in January 2005, and canceled those shares in
      May
      2005. In October 2006, we settled this case by rescinding our stop order on
      those 20,000 shares.





*Cappello
      Capital Corp.* In
      March
      2005, we entered into an agreement with Cappello Capital Corp. (“Cappello”) for
      investment banking and related financial services. Pursuant to a financing
      agreement, we issued 100,000 shares as an initial retainer. We believe that
      Cappello did not perform per the agreement, but we are currently in discussions
      with Cappello to attempt to arrive at a settlement, but no settlement can be
      guaranteed. ****




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





During
      the three months ended December 31, 2006, we issued the following shares of
      our
      unregistered common stock:





·
            1,000,000
                shares with registration rights issued to Chaim Stern for cash of
                $500,000;





·
            150,000
                shares with registration rights issued to Irina Aronson and Yuly
                Aronson
                Irrevocable Trust for cash of
                $75,000;





·
            50,000
                shares issued to John Bridle for cash of $25,000; and





·
            50,000
                shares issued to Robert Stillwagon for cash of $25,000.





The
      proceeds were used for working capital and for funding our clinical
      trials.




We
      also
      issued these shares:




·
            20,000
                shares issued to Norman Rest for rent value at $19,600;





·
            100,000
                shares issued to Chaslav Radovich for compensation valued at $99,000;





·
            200,000
                shares issued to Gerald Yakatan for compensation value at $198,000;





·
            20,000
                shares issued to Jaffoni & Collins for services valued at $20,200;




We
      did
      not receive any proceeds from the issuance of these shares; these shares were
      all issued in lieu of repaying our employees, consultants, advisors, and as
      the
      case may be, creditors, in cash




These
      transactions were not registered under the Act in reliance on the exemption
      from
      registration in Section 4(2) of the Act, as transactions not involving any
      public offering. The securities were issued to our employees, officers,
      directors, creditors, consultants, advisors, and existing shareholders, who
      by
      virtue of those relationships, we believe were familiar with our business,
      and
      were able to assess the risks and merits of the investment.




34




**Item
      3.**  **Defaults
      Upon Senior Securities**





Not
      applicable




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





Not
      applicable




**Item
      5.**  **Other
      Information**




**APPOINTMENT
      AND RESIGNATION OF PRINCIPAL OFFICERS AND DIRECTORS.**




On
      February 14, 2007, Dr. Lawrence May and Messrs. Chaslav Radovich and Ernest
      Armstrong resigned as members of the board of directors of Cobalis Corp., a
      Nevada corporation ("Registrant"). Mr. Radovich will continue to serve as the
      Registrant’s President and Secretary, and Mr. Armstrong will continue to serve
      as the Registrant’s Chief Scientific Officer. Dr. May and Mr. Armstrong have
      served as members of the Registrant’s board of directors since December 2004,
      and Mr. Radovich has served as a director since 2003. Chaslav Radovich resigned
      his position as a director under the condition that in the event that Chaslav
      Radovich’s father, Mr. Radul Radovich, currently the chairman of the
      Registrant’s board of directors, leaves or is removed from office for any
      reason, Mr. Chaslav Radovich will be appointed as director and as chairman
      of
      the board. The resignations were not the result of any disagreement with the
      policies or practices of the Registrant.




On
      the
      same date, the Registrant appointed Mr. Thomas H. Silberg, Ms. Ellen McDonald
      and Mr. S. Wayne Kay as members of its board of directors. The Registrant has
      agreed to issue each newly appointed director 50,000 options to purchase shares
      of the Registrant’s common stock at $1.00 per share. These options will vest
      over three years and expire after five years.




The
      following are the biographies of the new directors:




**S.
      Wayne Kay, 56.** From
      2005
      to the present, Mr. Kay has served as an executive advisor to the management
      and
      boards of several early-stage companies as a self employed consultant, including
      a life sciences tool company, a company developing a non-invasive cardiac output
      measurement device, a clinical chemistry reagent medical device company and
      similar enterprises.  From 2001 to 2004, Mr. Kay was the president, chief
      executive officer and director of Quidel Corporation in San Diego, California,
      initially serving as chief operating officer in 2001. Prior to that, from 1999
      through 2000, Mr. Kay was the senior vice president and officer of Neoforma.com,
      with offices in Santa Clara, California and Washington D.C.  From 1994 to
      1999, he was the president, chief executive officer and director of Health
      Industry Distributors Association, (HIDA) in Alexandria, Virginia.  Prior
      to that, he was president, chief executive officer and director of Enzymatics,
      Inc. from 1989 to 1994, and president of SmithKline Diagnostics, Inc. in San
      Jose, California, a division of SmithKline Beecham Corporation, from 1982 to
      1989.  Mr. Kay earned his bachelor of science in business administration in
      1978 from the University of San Francisco, and his masters of business
      administration from Pepperdine University in 1982.  Mr. Kay also
      serves on the board of directors of HIDA, in Alexandria, Virginia, and of
      iMedical Devices, Inc., in Los Altos, California and Cyntellect, Inc., in San
      Diego, California. Mr. Kay is not an officer or director of any other reporting
      company.




**Ellen
      McDonald, 45.** From
      2005 to the present, Ms. McDonald has served as the senior vice president
      business operations for Chugai Pharma USA, LLC, which is a foreign issuer listed
      on the Over-the-Counter Pink Sheets as CHGCF.PK. From 2004 to 2005, she was
      self-employed as a strategic commercialization consultant for small to mid-sized
      biotechnology, pharmaceutical and medical device companies. From 2001 to 2004,
      Ms. McDonald was the senior vice president for cardiovascular marketing and
      medical with Bristol-Myers Squibb. From 1989 to 2001, she held positions of
      increasing responsibility with Johnson & Johnson, Inc. In 1999, she assumed
      the role of vice president, oncology franchise for Ortho Biotech Inc., which
      at
      the time was Johnson & Johnson’s largest pharmaceutical franchise. Ms.
      McDonald served on active duty with the U.S. Army Military Police Corps from
      1984 to 1989, achieving the rank of captain. Ms. McDonald earned her bachelor’s
      of science degree in general engineering from the U.S. Military Academy at
      West
      Point in 1984, and her masters of business administration from Columbia
      University in 1996. Ms. McDonald is not an officer or director of any other
      reporting company.




35




**Thomas
      H. Silberg, 60.** In May
      2006, Mr. Silberg became the executive vice president for operations for Abraxis
      Bioscience, Inc. a company listed on NASDAQ under the symbol ABBI, and in
      September 2006, was appointed as the president of Abraxis Pharmaceutical
      Products, with offices in Chicago and Los Angeles. From 2004 to 2005, Mr.
      Silberg has served as the chief operating officer of Tercica Inc., located
      in
      South San Francisco, which is a biopharmaceutical company listed on NASDAQ
      under
      the symbol TRCA. From 2001 to 2003, Mr. Silberg was the executive vice president
      and chief operating officer for Ligand Pharmaceuticals, Inc., and from 2000
      to
      2001, its senior vice president for commercial operations. From 1972 to 2000,
      he
      was with Hoffmann La-Roche Inc. in increasingly responsible positions, finally
      serving as its vice president for business operations from 1994 to 1999. Mr.
      Silberg earned his bachelor’s degree in marketing and advertising from the
      University of Minnesota in 1972. He also attended programs in Management at
      Harvard in 1992 and in Finance at Wharton in 1986. In the past, he also served
      as a member of the Licensing Executive Society, the Biotechnology Industry
      Organization, a member of the Medi-Promotions Board of directors, the American
      Society of Health-Systems Pharmacists Commission on Goals, the University of
      Southern California, Center of Excellence in Health Management Executive Board
      and several Hoffman-LaRoche organizations. Mr. Silberg is not an officer or
      director of any other reporting company.




**Security
      Ownership of Certain Beneficial Owners and Management**




The
      following table sets forth certain information regarding the beneficial
      ownership of our common stock as of February 16, 2007 by each person or entity
      known by us to be the beneficial owner of more than 5% of the outstanding shares
      of common stock, each of our directors and named executive officers, and all
      of
      our directors and executive officers as a group.




**Title
                of Class**
            **Name
                and Address of Beneficial Owner**
            **Amount
                and Nature of Beneficial Owner**
            **Percent
                of Class**Common
                Stock
            Gerald
                Yakatan
              2445
                McCabe Way, Suite 150
              Irvine,
                CA, 92614
            612,500
                shares (1)
              Chief
                Executive Officer
              and
                Director
            1.7%Common
                Stock
            Thomas
                Stankovich
              2445
                McCabe Way, Suite 150
              Irvine,
                CA, 92614
            428,070
                shares (2)
              Director
            1.2%Common
                Stock
            Chaslav
                Radovich
              2445
                McCabe Way, Suite 150
              Irvine,
                CA, 92614
            1,184,934
                shares (3)
              President,Secretary
            3.3%Common
                Stock
            Radul
                Radovich
              46
                Calle Fresno
              San
                Clemente, CA, 92672
            10,076,528
                shares (4)
              Chairman
                of the
              Board
                of Directors
            28.1%Common
                Stock
            Ernest
                Armstrong
              2445
                McCabe Way, Suite 150
              Irvine,
                CA, 92614
            251,967
                shares (5)****
              Chief
                Scientific Officer
            0.7%Common
                Stock
            Kevin
                Prendiville
              2445
                McCabe Way, Suite 150
              Irvine,
                CA, 92614
            506,480
                shares (6)
              Director
            1.4%Common
                Stock
            Kevin
                Pickard
              445
                McCabe Way, Suite 150
              Irvine,
                CA, 92614
            30,000
                shares (7)
              InterimChief
                Financial Officer
              and
                Treasurer
            0.1%




36




Common
                Stock
            St.
                Petka Trust
              46
                Calle Fresno
              San
                Clemente, CA 92672
            7,417,736
                shares (4)
            20.7%Common
                Stock
            Silver
                Mountain Promotions
              6446
                Silver Dawn Lane
              Las
                Vegas, NV, 89118
            848,688
                shares (4)
            2.4%Common
                Stock
            R
                and R Holdings
              46
                Calle Fresno
              San
                Clemente, CA, 92672
            411,375
                shares (4)
            1.2%Common
                Stock
            R
                & R Development
              46
                Calle Fresno
              San
                Clemente, CA, 92672
            170,644
                shares (4)
            0.5%Common
                Stock
            Gene
                Pharmaceuticals
              2445
                McCabe Way, Suite 150
              Irvine,
                CA, 2614
            1,449,087
                shares (8)
            4.0%Common
                Stock
            James
                Hammer
              2537
                Red Arrow Drive
              Las
                Vegas, NV 8913
            3,294,643
                shares (9)
            9.2%Common
                Stock
            Thomas
                H. Silberg
              2445
                McCabe Way, Suite 150
              Irvine,
                CA, 2614
            No
                shares (10)
            0%Common
                Stock
            Ellen
                McDonald
              2445
                McCabe Way, Suite 150
              Irvine,
                CA, 2614
            No
                shares (10)
            0%Common
                Stock
            S.
                Wayne Kay
              2445
                McCabe Way, Suite 150
              Irvine,
                CA, 2614
            No
                shares (10)
            0%Common
                Stock
            Officers
                and directors as a group
            14,539,566
                shares
            40.6%




(1)
            Dr.
                Yakatan also owns 1,000,000 options to purchase shares of our common
                stock
                at $1.40 per share which were granted on May 15, 2006, vest over
                three
                years, and expire on May 15, 2016.


(2)
            Thomas
                Stankovich was granted 1,000,000 options to purchase shares of our
                common
                stock at $1.75 per share, which were granted in November 2006 to
                replace
                warrants he was granted while serving as one of our officers. Of
                those
                options, 666,667 vested by the date of his resignation in December
                2006.
                He was to receive a total of 1,000,000 options pursuant to his employment
                agreement, though he is no not entitled to the unvested options after
                he
                left his employment with us. These options expire in November 2016.


(3)
            Chaslav
                Radovich owns 1,140,934 shares individually and is the custodian
                of the
                44,000 shares owned by Milena Radovich, his minor child. Mr. Radovich
                also
                owns 1,500,000 options to purchase shares of our common stock at
                $1.40 per
                share, which were granted on May 15, 2006 and vest over three years.
                These
                options expire on May 15, 2016.


(4)
            Radul
                Radovich and his spouse are the beneficiaries of the St. Petka Trust,
                which owns 7,417,736 shares. Radul Radovich is also the Trustor of
                St.
                Petka Trust. Radul Radovich also owns R and R Holdings, which holds
                411,375 shares of our common stock. Radul Radovich also owns R&R
                Development, which holds 170,644 shares. Radul Radovich also owns
                Silver
                Mountain Promotions, which holds 848,688 shares of our common
                stock.


(5)
            Ernest
                Armstrong owns 245,063 shares individually, 550 shares owned jointly
                with
                his parent, has beneficial ownership of 3,000 shares owned jointly
                by Mr.
                Armstrong’s spouse and Mr. Armstrong’s parent, and 3,354 shares owned
                jointly with his spouse. Mr. Armstrong is also anticipated to receive
                2,200,000 options to purchase shares of our common stock at $2.00
                per
                share expiring seven years from the dates of grants, including 1,200,000
                options from us and 1,000,000 options to purchase shares owned by
                St.
                Petka Trust.




37




(6)
            Kevin
                Prendiville owns 100,000 shares directly and is one of the trustees
                of the
                Prendiville Revocable Trust which owns 402,840 shares; he also owns
                3,640
                shares as custodian for his minor child. Dr. Prendiville also owns
                333,000
                warrants to purchase shares of our common stock at $1.75 per share,
                which
                were granted and vested on October 24, 2005 and expire on October
                24,
                2010.


(7)
            Kevin
                Pickard was appointed as our interim CFO and treasurer in December
                2006.
                He holds 100,000 warrants to purchase shares of our common stock
                for $1.75
                per share; of those, 50,000 warrants expire on September 7, 2009
                and
                50,000 warrants expire on July 29, 2010. Those warrants were issued
                while
                Mr. Pickard served as our consultant.


(8)
            Mr.
                Armstrong is a majority owner and managing member of Gene Pharmaceuticals,
                LLC, which owns 1,449,087 shares.


(9)
            James
                Hammer owns 1,177,143 shares individually, 360,000 owned by immediate
                family members who share his household, 107,500 shares owned jointly
                with
                his spouse and 1,650,000 shares owned by the Hammer Family Trust.


(10)
            Thomas
                H. Silberg, Ellen McDonald and S. Wayne Kay were appointed as directors
                in
                February 2007. Each is anticipated to receive 50,000 options to purchase
                shares of our common stock with an exercise price of $1.00 per share.
                Those options will vest over three years and expire after five
                years.






Beneficial
      ownership is determined in accordance with the rules of the Securities and
      Exchange Commission and generally includes voting or investment power with
      respect to securities. In accordance with Securities and Exchange Commission
      rules, shares of our common stock which may be acquired upon exercise of stock
      options or warrants which are currently exercisable or which become exercisable
      within 60 days of the date of the table are deemed beneficially owned by the
      optionees. Subject to community property laws, where applicable, the persons
      or
      entities named in the table above have sole voting and investment power with
      respect to all shares of our common stock indicated as beneficially owned by
      them.




**Item
      6.**  **Exhibits**


**Regulation**
                **S-B
                  Number**
              
              **Exhibit**17.1
              
              Letter
                  of Resignation for Dr. May17.2
              
              Letter
                  of Resignation for Mr. Radovich17.3
              
              Letter
                  of Resignation for Mr. Armstrong31.1
              
              Rule
                  13a-14(a)/15d-14(a) Certification of Chief Executive Officer of
                  the
                  Company (5)31.2
              
              Rule
                  13a-14(a)/15d-14(a) Certification of Chief Financial Officer of
                  the
                  Company (5)32.1
              
              Section
                  906 Certification by Chief Executive Officer (5)32.2
              
              Section
                  906 Certification by Chief Financial Officer
                  (5)
  38


**SIGNATURES**





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




**COBALIS
                CORP.**Date: February
              16, 2007
            By:
            /s/ Gerald
              YakatanGerald
              YakatanPrincipal
              Executive Officer, Director


Date: February
              16, 2007
            By:
            /s/ Chaslav
              RadovichChaslav
              RadovichPresident,
              Secretary




Date: February
              16, 2007
            By:
            /s/ Kevin
              PickardKevin
              PickardChief
              Financial Officer, Treasurer


39