**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 September 30, 2006**




[X]
              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 November 1, 2006 - 35,576,834 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
                  NumberPART
                  I.
              FINANCIAL
                  INFORMATION
              2Item
                  1.
              Financial
                  Statements
              2Consolidated
                  Balance Sheet as of September 30, 2006 (unaudited)
              2Consolidated
                  Statements of Operations for the three and six months ended September
                  30,
                  2006 and 2005 (unaudited)
              3Consolidated
                  Statements of Stockholders’ Deficit for the six
                  months ended September 30, 2006 (unaudited)
              4Consolidated
                  Statements of Cash Flows for the six
                  months ended September 30, 2006 and 2005
                  (unaudited)
              5Notes
                  to Consolidated Financial Statements (unaudited)
              6Item
                  2.
              Management's
                  Discussion and Analysis or Plan of Operations
              18Item
                  3.
              Controls
                  and Procedures
              25PART
                  II.
              OTHER
                  INFORMATION
              25Item
                  1.
              Legal
                  Proceedings
              25Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              26Item
                  3.
              Defaults
                  Upon Senior Securities
              27Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              27Item
                  5.
              Other
                  Information
              27Item
                  6.
              Exhibits
              28SIGNATURES
              29


i


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





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





**COBALIS
      CORP. AND SUBSIDIARY**


**(A
      Development Stage Company)**


Consolidated
      Balance
      Sheet




**September
                30,****2006**(unaudited)**ASSETS**CURRENT
                ASSETSCash
                and cash equivalents
            
            $
            66,120Prepaid
                expenses and other current assets
            
            
            32,991TOTAL
                CURRENT ASSETS
            
            
            99,111PROPERTY
                AND EQUIPMENT, net of accumulated depreciation of $110,896
            
            
            4,427WEBSITE
                DEVELOPMENT COSTS, net of accumulated amortization of
                $33,368
            
            
            1,239PATENTS,
                net of accumulated amortization of $305,648
            
            
            647,791DEPOSIT
            
            
            12,546TOTAL
                ASSETS
            
            $
            765,114**LIABILITIES
                AND STOCKHOLDERS' DEFICIT**CURRENT
                LIABILITIESAccounts
                payable
            
            $
            437,105Accrued
                expenses
            
            
            536,192Accrued
                clinical trial costs
            
            
            1,004,032Accrued
                legal settlements
            
            
            1,725,000Accrued
                salaries
            
            
            1,096,711Promissory
                notes
            
            
            46,813Notes
                payable, net of discount of $54,508
            
            
            245,492Convertible
                notes payable
            
            
            850,000TOTAL
                CURRENT LIABILITIES
            
            
            5,941,345SENIOR
                DEBENTURE, net of discount of $70,361
            
            
            179,639TOTAL
                LIABILITIES
            
            
            6,120,984CONVERTIBLE
                PREFERRED STOCK
            
            
            442,500COMMITMENTS
                AND CONTINGENCIES
            
            
            -STOCKHOLDERS'
                DEFICITCommon
                stock; $0.001 par value; 50,000,000 sharesauthorized;
                32,973,139 shares issued and outstanding
            
            
            32,973Additional
                paid-in capital
            
            
            24,552,826Prepaid
                expenses
            
            
            (226,535
            )Deficit
                accumulated during the development stage
            
            
            (30,157,634
            )TOTAL
                STOCKHOLDERS' DEFICIT
            
            
            (5,798,370
            )TOTAL
                LIABILITIES AND STOCKHOLDERS' DEFICIT
            
            $
            765,114




**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 Periods Ended**
              
              **Six
                  Months Periods Ended**
              
              **November
                  21,****September
                  30,**
              
              **September
                  30,**
              
              **September
                  30,**
              
              **September
                  30,**
              
              **2000
                  (inception) to****2006**
              
              **2005**
              
              **2006**
              
              **2005**
              
              **September
                  30, 2006**(unaudited)
              
              (unaudited)
              
              (unaudited)
              
              (unaudited)
              
              (unaudited)NET
                  SALES
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              5,589COST
                  OF SALES
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              31,342GROSS
                  PROFIT (LOSS)
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (25,753
              )OPERATING
                  EXPENSES:Professional
                  fees
              
              
              650,769
              
              
              447,182
              
              
              1,567,674
              
              
              958,360
              
              
              10,743,201Salary
                  and wages
              
              
              918,330
              
              
              95,653
              
              
              1,103,632
              
              
              178,220
              
              
              4,140,930Rent
                  expense
              
              
              37,203
              
              
              34,487
              
              
              100,279
              
              
              68,923
              
              
              669,338Marketing
                  and research
              
              
              1,273,555
              
              
              29,043
              
              
              1,299,364
              
              
              55,316
              
              
              3,218,799Depreciation
                  and amortization
              
              
              14,515
              
              
              21,401
              
              
              31,277
              
              
              46,283
              
              
              558,541Impairment
                  expense
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              2,331,522Salary,
                    wages, stock option expense
              
              
              461,684
              
              
              -
              
              
              590,592
              
              
              -
              
              
              590,592Other
                  operating expenses
              
              
              290,106
              
              
              182,735
              
              
              423,901
              
              
              288,612
              
              
              2,050,831Legal
                  settlements
              
              
              -
              
              
              -
              
              
              
              
              
              -
              
              
              812,718TOTAL
                  OPERATING EXPENSES
              
              
              3,646,162
              
              
              810,501
              
              
              5,116,719
              
              
              1,595,714
              
              
              25,116,472LOSS
                  FROM OPERATIONS
              
              
              (3,646,162
              )
              
              (810,501
              )
              
              (5,116,719
              )
              
              (1,595,714
              )
              
              (25,142,225
              )OTHER
                  INCOME (EXPENSE)Interest
                  expense and financing costs
              
              
              (100,340
              )
              
              (225,635
              )
              
              (232,135
              )
              
              (408,367
              )
              
              (4,434,109
              )Change
                  in fair value of warrant liability
              
              
              -
              
              
              777
              
              
              -
              
              
              26,342
              
              
              303,700TOTAL
                  OTHER INCOME (EXPENSE)
              
              
              (100,340
              )
              
              (224,858
              )
              
              (232,135
              )
              
              (382,025
              )
              
              (4,130,409
              )LOSS
                BEFORE
                PROVISION FORINCOME
                  TAXES
              
              
              (3,746,502
              )
              
              (1,035,359
              )
              
              (5,348,854
              )
              
              (1,977,739
              )
              
              (29,272,634
              )PROVISION
                  FOR INCOME TAXES
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -NET
                  LOSS
              
              
              (3,746,502
              )
              
              (1,035,359
              )
              
              (5,348,854
              )
              
              (1,977,739
              )
              
              (29,272,634
              )PREFERRED
                  STOCK DIVIDENDS
              
              
              9,375
              
              
              18,750
              
              
              28,125
              
              
              37,500
              
              
              1,100,625NET LOSS
                ATTRIBUTED
                TO COMMONSTOCKHOLDERS
              
              $
              (3,755,877
              )
              $
              (1,054,109
              )
              $
              (5,376,979
              )
              $
              (2,015,239
              )
              $
              (30,373,259
              )NET
                  LOSS PER SHARE:BASIC
                  AND DILUTED
              
              $
              (0.12
              )
              $
              (0.04
              )
              $
              (0.18
              )
              $
              (0.08
              )
              $
              (1.43
              )WEIGHTED
                  AVERAGE
                  SHARESOUTSTANDING:BASIC
                  AND DILUTED
              
              
              31,551,496
              
              
              25,232,801
              
              
              29,663,903
              
              
              25,035,886
              
              
              21,186,993
   **The
        accompanying notes are an integral part of these unaudited consolidated
        financial statements**
 3


**COBALIS
      CORP. AND SUBSIDIARY**


**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
                )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 converstion 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
                
                
                
                
                
                
                
                
                10,109Issuance
                    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
                )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
                
                
                
                
                
                
                
                
                200,000Amortization
                    of prepaid expenses
                
                
                
                
                
                
                
                
                
                
                
                213,340
                
                
                
                
                
                213,340Value
                    of warrants issued with debt
                
                
                
                
                
                
                
                
                72,677
                
                
                
                
                
                
                
                
                72,677Fair
                    value of vested stock options issued to employees
                
                
                
                
                
                
                
                
                590,592
                
                
                
                
                
                
                
                
                590,592Fair
                    value of warrants issued for extension of debt
                
                
                
                
                
                
                
                
                15,307
                
                
                
                
                
                
                
                
                15,307Amortization
                    of fair value of warrants issued to consultants
                
                
                
                
                
                
                
                
                704,160
                
                
                
                
                
                
                
                
                704,160-Net
                    loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (5,348,854
                )
                
                (5,348,854
                )Balance
                    at September 30,2006 (unaudited)
                
                
                32,973,139
                
                $
                32,973
                
                $
                24,552,826
                
                $
                (226,535
                )
                $
                (30,157,634
                )
                $
                (5,798,370
                )
 **The
          accompanying notes are an integral part of these unaudited consolidated
          financial statements**
 4





**COBALIS
      CORP. AND SUBSIDIARY**


**(A
        Development Stage Company)**
 **Consolidated
          Statements of Cash Flows**


**Cumulativefrom****Six
                  Months Periods Ended**
              
              **November
                  21,****September
                  30,**
              
              **September
                  30,**
              
              **2000
                  (inception) to****2006**
              
              **2005**
              
              **September
                  30, 2006**(unaudited)
              
              (unaudited)
              
              (unaudited)CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  loss
              
              $
              (5,348,854
              )
              $
              (1,977,739
              )
              $
              (29,272,634
              )Adjustment
                  to reconcile net loss to net cashprovided
                  by (used in) operating activities:Depreciation
                  and amortization expense
              
              
              31,277
              
              
              46,283
              
              
              558,541Common
                  stock issued for services
              
              
              291,190
              
              
              290,901
              
              
              5,137,513Common
                  stock issued for penalty
              
              
              -
              
              
              -
              
              
              692,500Common
                  stock issued for financing costs
              
              
              -
              
              
              30,500
              
              
              71,000Change
                  in value of warrant liability
              
              
              -
              
              
              (26,342
              )
              
              (303,700
              )Amortization
                  of debt issue costs
              
              
              51,101
              
              
              -
              
              
              162,673Exercise
                  of stock options for services
              
              
              -
              
              
              -
              
              
              26,960Amortization
                  of discounts on notes
              
              
              -
              
              
              -
              
              
              790,128Issuance
                  of stock options/warrants for services/debt
                  extension
              
              
              719,467
              
              
              428,639
              
              
              3,221,810Capital
                  contribution - bonus (related party)
              
              
              -
              
              
              -
              
              
              50,000Amortization
                  of prepaid expenses
              
              
              213,340
              
              
              -
              
              
              340,965Amortization
                  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
              
              
              590,592
              
              
              -
              
              
              590,592Changes
                  in assets and liabilities:
              
              
              
              
              
              
              
              
              -Prepaid
                  expenses and other assets
              
              
              (28,311
              )
              
              -
              
              
              (32,991
              )Inventory
              
              
              -
              
              
              -
              
              
              6,250Deposits
              
              
              -
              
              
              -
              
              
              27,454Accounts
                  payable
              
              
              139,969
              
              
              31,726
              
              
              988,108Accrued
                  expenses
              
              
              137,580
              
              
              (197,572
              )
              
              1,552,381Accrued
                  clinical trial costs
              
              
              1,004,032
              
              
              
              
              
              1,004,032Accrued
                  legal settlement
              
              
              -
              
              
              -
              
              
              1,725,000Accrued
                  salaries
              
              
              830,596
              
              
              
              
              
              830,596Amounts
                  due to related parties
              
              
              215,574
              
              
              278,802
              
              
              2,043,481Net
                  cash used in operating activities
              
              
              (1,152,447
              )
              
              (1,094,802
              )
              
              (6,856,664
              )CASH
                  FLOWS FROM INVESTING ACTIVITIES:Purchase
                  of property and equipment
              
              
              -
              
              
              -
              
              
              (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
              )
              
              -
              
              
              (2,440,204
              )CASH
                  FLOWS FROM FINANCING ACTIVITIES:Change
                  in cash overdraft
              
              
              -
              
              
              1,562
              
              
              -Payment
                  on contract
              
              
              -
              
              
              -
              
              
              (161,000
              )Proceeds
                  from advances - related party
              
              
              -
              
              
              817,500
              
              
              4,581,449Proceeds
                  from advances from stockholders
              
              
              -
              
              
              310,000
              
              
              310,000Proceeds
                  from issuance of notes payable
              
              
              550,000
              
              
              -
              
              
              2,015,000Proceeds
                  from sale of common stock
              
              
              200,000
              
              
              -
              
              
              1,006,500Proceeds
                  from sale of preferred stock
              
              
              -
              
              
              -
              
              
              885,000Proceeds
                  from convertible debenture
              
              
              -
              
              
              100,000
              
              
              700,000Capital
                  contribution
              
              
              -
              
              
              -
              
              
              571,668Payment
                  of debt issue costs
              
              
              -
              
              
              -
              
              
              (83,500
              )Payments
                  on advances from stockholders
              
              
              (10,000
              )
              
              (50,000
              )
              
              (60,000
              )Payments
                  on advances - related party
              
              
              -
              
              
              (85,129
              )
              
              (402,129
              )Net
                  cash provided by financing activities
              
              
              740,000
              
              
              1,093,933
              
              
              9,362,988NET
                  INCREASE (DECREASE) IN CASH ANDCASH
                  EQUIVALENTS
              
              
              (460,571
              )
              
              (869
              )
              
              66,120CASH
                  AND CASH EQUIVALENTS, Beginning of year
              
              
              526,691
              
              
              1,169
              
              
              -CASH
                  AND CASH EQUIVALENTS, End of year
              
              $
              66,120
              
              $
              300
              
              $
              66,120SUPPLEMENTAL
                  DISCLOSURES OF CASH FLOW INFORMATION:Interest
                  paid
              
              $
              -
              
              $
              -
              
              $
              -Income
                  taxes paid
              
              $
              -
              
              $
              -
              
              $
              -SUPPLEMENTAL
                DISCLOSURE OF NON-CASH INVESTING AND FINANCING 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**
 5
 
 **COBALIS
            CORP. AND SUBSIDIARY**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
            THE SIX MONTHS ENDED SEPTEMBER 30, 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 six months ended
      September 30, 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 $5,348,854 for the six months ended September 30,
      2006 and as of September 30, 2006, the Company had a working capital deficit
      of
      $5,842,234 and a stockholder deficit of $5,798,370. In addition, as of September
      30, 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 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 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.




6


**COBALIS
        CORP. AND SUBSIDIARY**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
        THE SIX MONTHS ENDED SEPTEMBER 30, 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 $590,592 in
      share-based compensation expense for the six months ended September 30, 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 $0.02 per share. 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. There was no pro forma expense to recognize during the six months ended
      September 30, 2005.




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 six months ended September 30, 2006 and 2005 was $26,932 and $26,932,
      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 15.2 years.




7


**COBALIS
        CORP. AND SUBSIDIARY**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
        THE SIX MONTHS ENDED SEPTEMBER 30, 2006 AND 2005**
 **(UNAUDITED)**




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.




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.




8


**COBALIS
        CORP. AND SUBSIDIARY**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
        THE SIX MONTHS ENDED SEPTEMBER 30, 2006 AND 2005**
 **(UNAUDITED)**




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.




**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 11,192,600 and 6,094,167 c ommon
      equivalent shares outstanding related to the options and warrants at September
      30, 2006 and 2005, respectively. In addition, as of September 30, 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 September 30, 2006 consisted of the
      following:


Furniture
                  and fixtures
              
              $
              73,203Office
                  equipment
              
              
              42,120115,323Less
                  accumulated depreciation and amortization
              
              
              (110,896
              )$
              4,427




Depreciation
      expense for the six months ended September 30, 2006 and 2005 was $3,992 and
      $18,998, respectively.




9


**COBALIS
        CORP. AND SUBSIDIARY**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
        THE SIX MONTHS ENDED SEPTEMBER 30, 2006 AND 2005**
 **(UNAUDITED)**




**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 is to pay
        a total
        of $200,000 over the next year. As of September 30, 2006, the balance due
        under
        this settlement was $125,000, with the July 31, 2006 payment being missed.
        This
        amount was collateralized by 513,851 shares owned by the Company’s President and
        one of its directors, Chaslav Radovich, which may be sold to satisfy the
        amount
        owed if not paid by December 31, 2006.


Gryphon
      Master Fund LP





On
        March
        31, 2006, the Company reached a settlement with Gryphon Master Fund 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.
        During the six months ended September 30, 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
        September 30, 2006, the full $1,600,000 was still due under the settlement
        agreement, which must be paid by April 1, 2007.


**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 are owed funds include 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
      is
      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 is 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 is to be 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
      is
      to be 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 is to be 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 is to be converted to
      394,147 restricted shares of the Company’s common stock.




10


**COBALIS
        CORP. AND SUBSIDIARY**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
        THE SIX MONTHS ENDED SEPTEMBER 30, 2006 AND 2005**
 **(UNAUDITED)**




**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 September 30,, 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.





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 three months ended September 30, 2006, the Company
      amortized $18,169 of the discount to interest expense. At September 30, 2006,
      the balance of the note payable is shown net of unamortized discount of $54,508
      in the consolidated balance sheet.





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.




11


**COBALIS
        CORP. AND SUBSIDIARY**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
        THE SIX MONTHS ENDED SEPTEMBER 30, 2006 AND 2005**
 **(UNAUDITED)**







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 Fund 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. No payment was
        made by
        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.


During
      the six months ended September 30, 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 is due on or before the 12-month anniversary
      and accrues 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. On the 12-month anniversary, the holder of the note
      may elect 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. If such conversion is elected, the loan shall
      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.




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 and were due on
        September 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 currently have not been repaid.




12


**COBALIS
        CORP. AND SUBSIDIARY**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
        THE SIX MONTHS ENDED SEPTEMBER 30, 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 six months ended September 30, 2006, the
      Company amortized $32,932 of the discount to interest expense. At September
      30,
      2006, the balance of the debenture is shown net of unamortized discount of
      $70,361 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.




13


**COBALIS
        CORP. AND SUBSIDIARY**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
        THE SIX MONTHS ENDED SEPTEMBER 30, 2006 AND 2005**
 **(UNAUDITED)**




On
        March
        31, 2006, the Company reached a settlement with Gryphon Master Fund 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.


During
      the six months ended September 30, 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**
              **IntrinsicValue**Outstanding,
                March 31, 2006
            
            
            1,625,000
            
            $
            1.74
            
            $
            374,000Reclassified
                from warrants
            
            
            2,000,000
            
            $
            1.75
            
            
            -Granted
            
            
            2,800,000
            
            $
            1.40
            
            
            -Forfeited/Canceled
            
            
            (100,000
            )
            $
            1.00
            
            
            -Exercised
            
            
            -
            
            
            -
            
            
            -Outstanding,
                September 30, 2006
            
            
            6,325,000
            
            $
            1.60
            
            $
            0





The
      weighted average remaining contractual life of options outstanding is 5.57
      years
      at September 30, 2006. The exercise prices for the options outstanding at
      September 30, 2006 are as follows:




14


**COBALIS
        CORP. AND SUBSIDIARY**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
        THE SIX MONTHS ENDED SEPTEMBER 30, 2006 AND 2005**
 **(UNAUDITED)**


**Number
                of**
              **Options**
            
            **Exercise**
              **Price**325,000
            
            $1.002,800,000
            
            $1.402,000,000
            
            $1.751,200,000
            
            $2.006,325,000





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





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
            )
            $
            1.75
            
            
            -Granted
            
            
            425,000
            
            $
            1.03
            
            
            -Forfeited/Canceled
            
            
            -
            
            
            -
            
            
            -Exercised
            
            
            (194,167
            )
            $
            0.01
            
            
            -Outstanding,
                September 30, 2006
            
            
            4,867,600
            
            $
            1.64
            
            $
            223,500





The
      weighted average remaining contractual life of warrants outstanding is 3.55
      years at September 30, 2006. The exercise prices for the warrants outstanding
      at
      September 30, 2006 are as follows:




15


**COBALIS
        CORP. AND SUBSIDIARY**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
        THE SIX MONTHS ENDED SEPTEMBER 30, 2006 AND 2005**
 **(UNAUDITED)**






**Number
                of**
              **Warrants**
            
            **Exercise**
              **Price**150,000
            
            $0.01300,000
            
            $0.7525,000
            
            $1.504,192,600
            
            $1.75200,000
            
            $2.004,867,600




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





*Former
        Leased Office Space:* The
        Company 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. This leaves a total of $125,000
        owing, of which $75,000 is due on July 31, 2006, and $50,000 is due on December
        31, 2006. The July 31, 2006 payment was not made. The amount owed was
        collateralized by 513,851 shares owned by the Company’s President and one of its
        directors, Chaslav Radovich, a portion of which may be sold to satisfy the
        amount owed if not paid by December 31, 2006.


*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. The next hearing
      date for this case is scheduled for March 2007.





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 S-8 common stock. 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 Company’s S-8 common 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.




16


**COBALIS
        CORP. AND SUBSIDIARY**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
        THE SIX MONTHS ENDED SEPTEMBER 30, 2006 AND 2005**
 **(UNAUDITED)**


*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, who
      are suing for alleged breach of oral contract and damages of $250,000.
      Europacific alleges that Cobalis orally engaged Europacific to perform certain
      services for the Company, including introductions to potential board members,
      qualified investors and strategic alliances for the Company’s product line. The
      Company issued 20,000 shares to Europacific in January 2005, and canceled those
      shares in May 2005, after what it contends is Europacific’s fraudulent
      inducement and failure to perform. The Company believes the claim for $250,000
      is without basis since the consideration for Europacific’s services was 20,000
      shares, which at a current market value of $1.10 per share, would equal
      approximately only $22,000. Subsequent to the period covered by this report,
      the
      Company agreed to settle this claim by reissuing the 20,000 disputed
      shares.




In
      the
      ordinary course of business, the Company is generally subject to claims,
      complaints, and legal actions. At September 30, 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**





Subsequent
      to September 30, 2006, the Company issued unregistered equity securities to
      the
      following:





·
            October
                11, 2006 - 1,000,000 shares issued to Chaim Stern for cash of $500,000
                and


·
            October
                  16, 2006 - 150,000 shares issued to Irina Aronson and Yuly Aronson
                  Irrevocable Trust for cash of
                  $75,000.





In
        addition, the Company filed an Form S-8 and issued 1,113,695 share of common
        stock for past due employee compensation of $1,056,586.


17




**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 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.




18





**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
      $5,348,854 for the six months ended September 30, 2006 and as of September
      30,
      2006; we had a working capital deficit of $5,842,234 and a stockholder deficit
      of $5,798,370. In addition, as of September 30, 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
      are
      currently attempting to raise additional debt and equity financing for operating
      purposes. We require substantial capital to pursue our operating strategy,
      which
      includes commercialization of our products, 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.




19





**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 $66,120 and prepaid expenses and other current
      assets of $32,991at September 30, 2006. Our total current assets at September
      30, 2006 were $99,111. We also had the following long term assets: $4,427 in
      property and equipment, net; $1,239 in net website development costs; $647,791
      represented by net value of our patents; and $12,546 in deposits. Our total
      assets as of September 30, 2006 were $765,114.





Our
      total
      current liabilities were $5,941,345 at September 30, 2006, which was represented
      by accounts payable of $437,105; accrued expenses of $536,192; accrued clinical
      trials costs of $1,004,032; accrued legal settlements of $1,725,000; accrued
      salaries of $1,096,711; promissory notes of $46,813; notes payable of $495,492
      and convertible notes payable of $600,000.





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 September 30, 2006, $46,813 of these notes was still
      outstanding.




20





We
      also
      had $179,639 represented by a senior debenture, making our total liabilities
      $6,120,984, and a convertible preferred stock liability of $442,500. Our
      liabilities exceeded our assets by $5,355,870.





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 are 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 is to be 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 is to be 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 is to be 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 is to be 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 is to be 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 is to be
      converted to 394,147 restricted shares of our common stock. Subsequent to the
      period covered by this report, we issued these shares on October 17,
      2006.





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 six months ended September
      30, 2006 compared to $0 for the six months ended September 30, 2005. The
      increase of $48,124 is primarily due to a reduction in related party advances
      offset by an increase in the sale of notes payable and common
      stock.




Our
      net
      cash provided by financing activities was $740,000 for the six months ended
      September 30, 2006 compared to net cash provided by financing activities of
      $1,093,933 for the six months ended September 30, 2005. The decrease of $353,933
      is primarily due to a reduction in related party advances offset by an increase
      in the sale of notes payable and common stock.





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.




21





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 its option to extend the due date to October 14, 2006 and
      issued to the investors a total of 25,000 warrants. These notes currently have
      not bee repaid.





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.





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.





**RESULTS
      OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006 AS COMPARED TO
      THE
      THREE MONTHS ENDED SEPTEMBER 30, 2005**





**Revenues
      and Cost of Sales.** We
      had no
      significant revenues for the three months ended September 30, 2006 and September
      30, 2005 as we are undertaking a Phase III clinical trial 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 September 30, 2006, as compared net sales
      of $0 as were our cost of sales and gross loss for the three months ended
      September 30, 2005.





**Operating
      Expenses.** Our
      operating expenses for the three months ended September 30, 2006 were $3,646,162
      compared to $810,501 for the three months ended September 30, 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 September 30, 2006, this amount was
      represented by $14,515 in depreciation and amortization; $650,769 in
      professional fees; $918,330 in salary and wages; $37,203 in rent expense;
      $1,273,555 in marketing and research; $461,684 in stock option expense; and
      $290,106 in other operating expenses. This is compared to the three months
      ended
      September 30, 2005, where we had $21,401 in depreciation and amortization;
      $447,182 in professional fees; $95,653 in salary and wages; $34,487 in rent
      expense; $29,043 in marketing and research; and $182,735 in other operating
      expenses. Our operating expenses increased during the three months ended
      September 30, 2006 as compared to the three months ended September 30, 2005
      principally as a result of an increase in salaries and wages due to the
      additions 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 three months ended September 30, 2006 were
      $100,340 compared to $225,635 for the three months ended September 30, 2005.
      The
      decrease is due to no non-registration penalties being accrued during the three
      months ended September 30, 2006 as compared to penalties of $96,000 during
      the
      three months ended September 30, 2005.





The
      change in the fair value in the warrant liability relates to the decrease in
      the
      value of the detachable warrants issued in connection with the convertible
      note
      payable and convertible preferred stock. Due to the decrease of our stock price,
      the fair value of these warrants has decreased resulting in the decrease of
      the
      warrant liability.




22







**RESULTS
      OF OPERATIONS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2006 AS COMPARED TO THE
      SIX
      MONTHS ENDED SEPTEMBER 30, 2005**





**Revenues
      and Cost of Sales.** We
      had no
      significant revenues for the six months ended September 30, 2006 and September
      30, 2005 as we are undertaking a Phase III clinical trial 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 six months ended September 30, 2006, as compared net sales
      of
      $0 as were our cost of sales and gross loss for the six months ended September
      30, 2005.





**Operating
      Expenses.** Our
      operating expenses for the six months ended September 30, 2006 were $5,116,719
      compared to $1,595,714 for the six months ended September 30, 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 six months ended September 30, 2006, this amount was
      represented by $31,277 in depreciation and amortization; $1,567,674 in
      professional fees; $1,103,632 in salary and wages; $100,279 in rent expense;
      $1,299,364 in marketing and research; $590,592 in stock option expense; and
      $423,901 in other operating expenses. This is compared to the six months ended
      September 30, 2005, where we had $46,283 in depreciation and amortization;
      $958,360 in professional fees; $178,220 in salary and wages; $68,923 in rent
      expense; $55,316 in marketing and research; and $288,612 in other operating
      expenses. Our operating expenses increased during the six months ended September
      30, 2006 as compared to the six months ended September 30, 2005 principally
      as a
      result of an increase in professional fees, which include payments for
      accounting, legal and shareholder relations and amortization of the value of
      warrants issued to consultants over the terms of the related consulting
      agreements, an increase in salaries and wages due to the additions 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 six months ended September 30, 2006 were
      $232,135 compared to $408,367 for the six months ended September 30, 2005.
      The
      decrease is due to no non-registration penalties being accrued during the six
      months ended September 30, 2006 as compared to penalties of $192,000 during
      the
      six months ended September 30, 2005.





The
      change in the fair value in the warrant liability relates to the decrease in
      the
      value of the detachable warrants issued in connection with the convertible
      note
      payable and convertible preferred stock. Due to the decrease of our stock price,
      the fair value of these warrants has decreased resulting in the decrease of
      the
      warrant liability.




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





Over
      the
      next 12 months, we plan to continue moving forward with the completion of the
      Phase III clinical trials of our allergy prevention product,
      PreHistin TM ,
      followed by submission of a new drug application (“NDA”) to the FDA for
      marketing approval of PreHistin TM as an
      over the counter ("OTC") allergy medication. Once the NDA is filed, we hope
      to
      receive approval from the FDA enabling our marketing launch in the United States
      of the product or licensing to a potential pharmaceutical partner. We estimate
      the cost to complete the Phase III clinical trials and the submission of the
      NDA
      to the FDA for marketing approval will be approximately $5,000,000.




23





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
      September 30, 2006, we had cash and equivalents of $66,120. 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.




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
      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.





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 1,550 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’ diaries and studies were completed on
        October 6, 2006.




We
      estimate these costs to be approximately $5,000,000 over the coming year. We
      will need to raise funds to execute studies for the further development of
      the
      PreHistin TM product
      line and to complete the acquisition of additional products. We plan to raise
      these funds through private or other equity offerings. We may attempt to secure
      loans from lending institutions or other sources. There is no guarantee that
      we
      will be able to raise additional funds through offerings or other sources.
      If we
      are unable to raise funds, our ability to continue with product development
      will
      be hindered.





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.




24




**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.





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 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. This leaves a total of $125,000
        owing, of which $75,000 is due on July 31, 2006 (which was not paid), and
        $50,000 which is due on December 31, 2006. The amount was collateralized
        by
        513,851 shares owned by the Company’s President and one of its directors,
        Chaslav Radovich, a portion of which may be sold to satisfy the amount owed,
        if
        not paid by December 31, 2006.


*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. The next hearing
      date for this case is set for March 2007.





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 S-8 common stock. 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 Company’s S-8 common 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.




25





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, who
      are suing for alleged breach of oral contract and damages of $250,000.
      Europacific alleges that Cobalis orally engaged Europacific to perform certain
      services for the Company, including introductions to potential board members,
      qualified investors and strategic alliances for the Company’s product line. The
      Company issued 20,000 shares to Europacific in January 2005, and canceled those
      shares in May 2005, after what it contends is Europacific’s fraudulent
      inducement and failure to perform. The Company intends to vigorously contest
      this case and consider this a frivolous claim. The Company believes the claim
      for $250,000 is without basis since the consideration for Europacific’s services
      was 20,000 shares, which at a current market value of $1.10 per share, would
      equal approximately only $22,000. The Company is in the process of settling
      this
      case by preparing to reissue those 20,000 shares.




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





During
      the three months ended September 30, 2006, we issued the following shares of
      our
      unregistered common stock:





·
            208,333
                shares to Gryphon Master Fund for the conversion of $500,000 worth
                of
                preferred stock;





·
            15,000
                shares to Steve Barnes for services valued at
                $14,850;





·
            15,000
                shares to Jaffone & Collins for services valued at
                $15,000;





·
            200,000
                shares to Tejeda and Tejeda, Inc. for the conversion of a note payable
                and
                accrued interest valued at
                $202,000;





·
            20,000
                shares to Richard Fishman for services valued at
                $19,400;





·
            56,000
                shares to Steve Barnes for services valued at $49,840;





·
            100,000
                shares to Adam Barnett for services valued at
                $94,000;





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.





We
      also
      sold the following shares for cash:





·
            300,000
                shares to MDC Enterprises, Ltd. for cash of $150,000 and





·
            100,000
                shares to Dane Bjelopetrovich for cash of
                $50,000.





The
      proceeds of these sales were used for working capital.




26





Subsequent
      to September 30, 2006, we issued the following shares of our unregistered common
      stock:





·
            833,938
                shares to Radul Radovich for conversion of related party debt and
                accrued
                interest valued at $1,084,120;





·
            1,382,180
                shares to St. Petka Trust for conversion of related party debt and
                accrued
                interest valued at $1,796,835;





·
            411,042
                shares to RR Holdings for conversion of related party debt and accrued
                interest valued at $534,355;





·
            803,855
                shares to Silver Mountain, Inc. for conversion of related party debt
                and
                accrued interest valued at
                $1,045,013;





·
            170,644
                shares to RR Development for conversion of related party debt and
                accrued
                interest valued at $221,839; and





·
            394,147
                shares to Radul Radovich for consulting services valued at
                $512,392.





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.





We
      also
      issued these shares for cash:





·
            1,000,000
                shares issued to Chaim Stern for cash of $500,000; and





·
            150,000
                shares issued to Irina Aronson and Yuly Aronson Irrevocable Trust
                for cash
                of $75,000.





The
      proceeds of these sales were used for working capital.




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, 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.




**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**





Subsequent
      to the period covered by this report, and on October 17, 2006, our board of
      directors adopted our 2006 Stock Option Plan, attached hereto as Exhibit 4.2.




27





On
      November 13, 2006, we amended the Executive Employment Agreement entered into
      with Thomas Stankovich, our Chief Financial Officer and Treasurer, to provide
      for the grant of 1,000,000 options pursuant to our Stock Option Plan, while
      simultaneously canceling the 1,000,000 warrants granted upon execution of the
      original employment agreement in December 2005. These options vest over three
      years and are exercisable at $1.75 per share. The amendment to Mr. Stankovich’s
      employment agreement is attached hereto as Exhibit _10.2.1.





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




**Regulation**
                **S-B
                  Number**
              **Exhibit**3.1
              
              Articles
                  of Incorporation (1)3.1.1
              
              Certificate
                  of Amendment to Articles of Incorporation (1)3.1.2
              
              Certificate
                  of Amendment to Articles of Incorporation (2)3.1.3
              
              Certificate
                  of Amendment to Articles of Incorporation (3)3.2
              
              Bylaws
                  (1)4.1
              
              Convertible
                  Note with Gryphon Master Fund LP (4)4.2
              
              2006
                  Stock Option Plan (7)10.1
              
              Asset
                  Purchase Agreement between BioGentec Inc., (fka St. Petka, Inc.)
                  and Gene
                  Pharmaceuticals, LLC, (fka Allergy Limited, LLC,) as amended
                  (4)10.2
              
              Employment
                  Agreement with Thomas Stankovich (5)10.2.1
              
              Amendment
                  No. 1 to Employment Agreement with Thomas Stankovich
                  (7)10.3
              
              Employment
                  Agreement with Gerald Yakatan (6)10.4
              
              Employment
                  Agreement with Chaslav Radovich (6)31.1
              
              Rule
                  13a-14(a)/15d-14(a) Certification of Chief Executive Officer of
                  the
                  Company (7)31.2
              
              Rule
                  13a-14(a)/15d-14(a) Certification of Chief Financial Officer of
                  the
                  Company (7)32.1
              
              Section
                  906 Certification by Chief Executive Officer (7)32.2
              
              Section
                  906 Certification by Chief Financial Officer (7)_______________(1)
                  Incorporated by reference to the exhibits to the registrant’s registration
                  statement on Form 10-SB filed on February 8, 2002.(2)
                  Incorporated by reference to the exhibits to the registrant’s information
                  statement on schedule 14C filed on June 10, 2003.(3)
                  Incorporated by reference to the exhibits to the registrant’s current
                  report on Form 8-K, filed July 8, 2004.(4)
                  Incorporated by reference to the exhibits to the registrant’s annual
                  report on Form 10-KSB for the fiscal year ended March 31, 2004.(5)
                  Incorporated by reference to the exhibits to the registrant’s quarterly
                  report on Form 10-QSB for the period ended December 31,
                  2005(6)
                  Incorporated by reference to the exhibits to the registrant’s annual
                  report on Form 10-KSB for the fiscal year ended March 31,
                  2006(7)
                  Included herein.




28




**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: November
              20, 2006
            By:
            /s/ Gerald
              YakatanGerald Yakatan
              Principal Executive Officer,
                Director




Date: November
              20, 2006
            By:
            /s/ Chaslav
              RadovichChaslav Radovich
              President, Secretary, Director  Date: November
              20, 2006
            By:
            /s/ Thomas
              StankovichThomas Stankovich
              Treasurer and Chief Financial
                Officer




29