UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-QSB





(Mark
One)





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





For
the quarterly period ended December 31, 2007





[  ]           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
            91-1868007(State or other jurisdiction
              of
      incorporation or organization)
            (IRS Employer
              Identification No.)






733
Pelican Drive, Laguna Beach, California 92651-4111


(Address
of principal executive offices)





(949)
715-4744


(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 March 21, 2008: 50,865,128
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]




1




COBALIS
CORP.
 Index





PART
I.                                                                                        FINANCIAL
INFORMATION2





Item
1.     Financial Statements              2





Consolidated Balance Sheet as of
December 31, 2007 (unaudited)       2





Consolidated Statements of Operations
for the


three and nine months ended December
31, 2007 and 2006 (unaudited)       3





Consolidated Statements of
Stockholders’ Deficit for the


nine months ended December 31, 2007
(unaudited)                                                                                                      4





Consolidated Statements of Cash Flows
for the


three and nine months ended December
31, 2007 and 2006 (unaudited)5


Notes to Consolidated Financial
Statements
(unaudited)                                                                                                6





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





Item
3.    Controls and Procedures





PART
II.OTHER INFORMATION





Item
1. Legal Proceedings





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





Item
3. Defaults Upon Senior Securities





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





Item
5. Other Information





Item
6.Exhibits





SIGNATURES




2





PART
I.                                                                                       FINANCIAL
INFORMATION





Item
1.                                                                                                 Financial
Statements





Cobalis
      Corp. and Subsidiary(A
      Development Stage Company)Consolidated
      Balance SheetDecember
      31,2007ASSETS
            
            (unaudited)CURRENT
      ASSETSCash
      and cash equivalents
            $
            61Prepaid
      expenses and other current assets
            
            12,546TOTAL
      CURRENT ASSETS
            
            12,607PROPERTY
      AND EQUIPMENT, net of accumulated depreciation of $113,766
            1,557WEBSITE
      DEVELOPMENT COSTS, net of accumulated amortization of $34,252
            355PATENTS,
      net of accumulated amortization of $374,109
            
            579,330TOTAL
      ASSETS
            $
            581,242LIABILITIES
      AND STOCKHOLDERS' DEFICITCURRENT
      LIABILITIESAccounts
      payable
            $
            424,084Accrued
      expenses
            
            878,497Accrued
      clinical trial costs
            
            591,229Accrued
      legal settlements
            
            1,825,557Accrued
      salaries
            
            489,412Warrant
      liability
            
            541,351Accrued
      derivative liability
            
            3,229,865Promissory
      notes
            
            654,424Notes
      payable
            
            150,000Senior
      Debenture, net of discount of $0
            
            250,000Convertible
      debenture
            
            2,721,988TOTAL
      CURRENT LIABILITIES
            
            11,756,407COMMITMENTS
      AND CONTINGENCIESSTOCKHOLDERS'
      DEFICITCommon
      stock; $0.001 par value; 100,000,000 sharesauthorized;
      47,991,445 shares issued and outstanding
            
            47,991Additional
      paid-in capital
            
            30,218,924Prepaid
      expenses
            
            (2,582)Deficit
      accumulated during the development stage
            
            (41,439,498)TOTAL
      STOCKHOLDERS' DEFICIT
            
            (11,175,165)TOTAL
      LIABILITIES AND STOCKHOLDERS' DEFICIT
            $
            581,242The
      accompanying notes are an integral part of these unaudited consolidated
      financial statements





3




Cobalis
      Corp. and Subsidiary(A
      Development Stage Company)Consolidated
      Statements of OperationsCumulative
      fromThree
      Months Ended
            
            Nine
      Months Ended
            
            November
      21,December
      31,
            
            December
      31,
            
            December
      31,
            
            December
      31,
            
            2000
      (inception) to2007
            
            2006
            
            2007
            
            2006
            
            December
      31, 2007(unaudited)
            
            (unaudited)
            
            (unaudited)
            
            (unaudited)
            
            (unaudited)NET
      SALES
            $
            -
            $
            -
            $
            -
            $
            -
            $
            5,589COST
      OF SALES
            
            -
            
            -
            
            -
            
            -
            
            31,342GROSS
      LOSS
            
            -
            
            -
            
            -
            
            -
            
            (25,753)OPERATING
      EXPENSES:Professional
      fees
            
            25,000
            
            656,601
            
            1,199,979
            
            2,224,275
            
            13,160,838Salary
      and wages
            
            4,124
            
            651,607
            
            489,231
            
            1,755,239
            
            5,463,329Rent
      expense
            
            36,204
            
            36,003
            
            116,582
            
            136,282
            
            858,826Marketing
      and research
            
            -
            
            2,502,389
            
            -
            
            3,801,753
            
            5,553,516Depreciation
      and amortization
            
            13,784
            
            16,580
            
            41,351
            
            47,857
            
            630,756Impairment
      expense
            
            -
            
            -
            
            -
            
            -
            
            2,331,522Stock
      option expense
            
            480,230
            
            469,296
            
            1,438,020
            
            1,059,888
            
            3,005,599Other
      operating expenses
            
            34,182
            
            194,443
            
            298,223
            
            618,344
            
            2,616,409Legal
      settlements
            
            -
            
            60,000
            
            -
            
            60,000
            
            919,718TOTAL
      OPERATING EXPENSES
            
            593,524
            
            4,586,919
            
            3,583,386
            
            9,703,638
            
            34,540,513LOSS
      FROM OPERATIONS
            
            (593,524)
            
            (4,586,919)
            
            (3,583,386)
            
            (9,703,638)
            
            (34,566,266)OTHER
      EXPENSEInterest
      expense and financing costs
            
            (233,788)
            
            (225,639)
            
            (4,267,898)
            
            (457,774)
            
            (9,536,826)Convertible
      debenture financing cost
            
            -
            
            (3,065,293)
            
            -
            
            (3,065,293)
            
            (3,136,214)Loss
      on conversion of debt
            
            -
            
            -
            
            -
            
            -
            
            (88,839)Change
      in fair value of warrant and accrued derivative
liabilities
            898,980
            
            (93,122)
            
            7,156,168
            
            (93,122)
            
            6,998,647TOTAL
      OTHER EXPENSE
            
            665,192
            
            (3,384,054)
            
            2,888,270
            
            (3,616,189)
            
            (5,763,232)NET
      INCOME (LOSS)
            
            71,668
            
            (7,970,973)
            
            (695,116)
            
            (13,319,827)
            
            (40,329,498)PREFERRED
      STOCK DIVIDENDS
            
            -
            
            9,375
            
            -
            
            37,500
            
            1,110,000NET
      INCOME (LOSS) ATTRIBUTED TO COMMON STOCKHOLDERS
            $
            71,668
            $
            (7,980,348)
            $
            (695,116)
            $
            (13,357,327)
            $
            (41,439,498)NET
      LOSS PER SHARE:BASIC
      AND DILUTED
            $
            (0.00)
            $
            (0.23)
            $
            (0.02)
            $
            (0.42)
            $
            (1.70)WEIGHTED
      AVERAGE SHARES OUTSTANDING:BASIC
      AND DILUTED
            
            47,361,420
            
            34,945,875
            
            45,114,792
            
            31,430,962
            
            24,420,736




4





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, 2007 included in
the Company’s Annual Report on Form 10-KSB. The results of the nine months ended
December 31, 2007 are not necessarily indicative of the results to be expected
for the full year ending March 31, 2008.





Going Concern and
Bankruptcy





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 an operating loss of $593,524 for the nine months ended December
31, 2007, and as of December 31, 2007, the Company had a working capital deficit
and a stockholder deficit of $11,175,165. In addition, as of December 31, 2007,
the Company has not developed a substantial source of revenue.





On
March 31, 2006, the Company reached a settlement with Gryphon Master Lund LP
(“Gryphon”) related to two investments in the Company by Gryphon in September
2003 totaling $1,600,000. Full repayment was due under the settlement agreement
on or before April 1, 2007. The Company did not make the payment by April 1,
2007; therefore, the stipulated judgment into which the Company entered with
Gryphon provides that Gryphon has the right to enter a judgment of $1.6 million
against the Company with the court upon the Company’s default.





On
April 2, 2007, the Company filed a motion to vacate an agreed judgment based on
several grounds including that allegation that Gryphon breached the “no
shorting” provision contained in the settlement agreement. The Company believes,
and so allege in the Motion to Vacate, that despite Gryphon’s agreement, Gryphon
engaged in shorting of the Company’s stock.





On
April 23, 2007, Gryphon sued the Company for breach of contract. This new
lawsuit alleges that the Company breached a settlement agreement with Gryphon.
Gryphon is also seeking a declaratory judgment that it did not breach the same
settlement agreement. Gryphon’s alleged breach of the settlement agreement is
the subject of the Company’s Motion to Vacate. In addition to the declaratory
relief, Gryphon’s complaint seeks unspecified damages and attorneys’
fees.  On April 23, 2007, Gryphon also filed an opposition to the
Company’s Motion to Vacate repeating the same allegations.





Since
June 2007, Gryphon has aggressively been moving forward with judgment collection
activities, including, but not limited to, conducting a debtor’s exam, levying
the Company’s bank accounts and attaching the Company’s assets to the extent
such assets are not already encumbered.




5





There
is no guarantee that the Company will be successful in vacating the judgment or
in defending the new lawsuit. If the Company is unsuccessful in vacating the
judgment or in defending the subsequent lawsuit, and, if the Company is unable
to subsequently timely resolve the Gryphon matter or raise capital to satisfy
the judgment, the Company’s ability to move its business forward could be
adversely affected.





On
July 23, 2007, the Company received a notice of default from Cornell Capital
Partners, LP (“Cornell Capital”) with regard to the convertible debentures
entered into between the Company and Cornell Capital on December 20, 2006 and
February 20, 2007. Cornell Capital is taking the position that the recent
collection efforts against the Company by Gryphon with regard to the litigation
described above constitute a default under the relevant Cornell Capital funding
documents.  In the first notice of default, Cornell Capital, in
referencing the contractual 15 day cure period, gave the Company until August 7,
2007 to cure the perceived default (i.e., resolve the dispute with Gryphon). If
not cured, Cornell Capital has indicated that it will exercise all of its
contractual rights, including, but not limited to, accelerated full repayment of
the convertible debentures between the parties and exercising its rights under
the pledge and escrow agreement and security agreement entered into between the
parties.





On
July 25, 2007, the Company received a second notice of default from Cornell
Capital which also asserted that the Company was in default of certain
provisions of the security agreement between the Company and Cornell Capital,
entered into on December 20, 2006.  Per the terms of that security
agreement, Cornell Capital could demand payment in full for all amounts due
under the debenture agreements between the parties.  It is also
possible that Cornell Capital may enforce the terms of the security agreement
and the pledge and escrow agreement.





On
August 1, 2007, the Company received an informal notice from YA Global
Investments, L.P., formerly known as Cornell Capital that Cornell Capital had
filed a petition for involuntary bankruptcy proceedings pursuant to Chapter 7 on
that same date with the U.S. Bankruptcy Court for the Central District of
California, which seeks liquidation of the Company’s assets. Also on August 1,
2007, the Company received a copy of a file-stamped Chapter 7 petition
confirming the notice provided by Cornell Capital. The petition alleges past due
debts not less than $3,000,000 plus other amounts with regard to the convertible
debentures entered into between the Company and Cornell Capital on December 20,
2006 and February 20, 2007.





On
October 12, 2007, the Company filed its petition with the Bankruptcy Court for
the matter to proceed as a Chapter 11 proceeding, which means that instead of
liquidation the Company would be seeking approval from the Bankruptcy Court to
effectuate a reorganization of the Company. If accepted, this would allow the
Company to continue operating under supervision of the Bankruptcy Court. There
is no guarantee that the Bankruptcy Court will allow the Company to proceed
under Chapter 11 and not order liquidation. Moreover, since the right to proceed
under Chapter 11 is subject to many contingencies and required approvals, there
is no guarantee that even if the Bankruptcy Court allows the Company to proceed
under Chapter 11 that the Company’s plan of reorganization will be approved. In
the event the Company’s plan of reorganization is not approved, the Company may
still face liquidation and dissolution.





The
Company’s Board of Directors approved the Chapter 11 request as it hopes that
proceeding under Chapter 11 will allow the Company to attempt to raise operating
capital through either equity or debt financing. Such financing will be crucial
in allowing the Company to reorganize its affairs. There is no guarantee that
the Company will be permitted to proceed under Chapter 11 and, further, there is
no guarantee that the Company will be successful in raising equity and/or debt
financing sufficient to reorganize its affairs.  If the Company is not
able to successfully contest the petition or successfully file and finance a
Chapter 11, the Company will likely be forced to liquidate and cease
operations.




6





The
Bankruptcy Court has jurisdiction over the Company’s business and affairs as a
result of this Chapter 11 election.  On November 19, 2007, the Court
ordered the conversion from a Chapter 7 case to a Chapter 11 case.





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.




Debt Issuance
Costs





The
Company had capitalized fees and expenses associated with the issuance of its
convertible debentures as debt issuance costs, which were being amortized over
the term of the convertible debentures.  Cornell Capital Partners
declared an event of default regarding the convertible debentures; therefore,
effective as of September 30, 2007 the Company accelerated the amortization of
the debt issuance costs, and recorded an expense of $368,878.




Patent
Costs





Patent
costs are carried at cost less accumulated amortization, which is calculated on
a straight-line basis, over the estimated economic life of the patent.  In
accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," the
Company evaluates intangible assets and other long-lived assets (including
patent costs) for impairment, at least on an annual basis and whenever events or
changes in circumstances indicate that the carrying value may not be recoverable
from its estimated future cash flows.  Recoverability of intangible assets
and other long-lived assets is measured by comparing their net book value to the
related projected undiscounted cash flows from these assets, considering a
number of factors including past operating results, budgets, economic
projections, market trends and product development cycles.  If the net book
value of the asset exceeds the related undiscounted cash flows, the asset is
considered impaired, and a second test is performed to measure the amount of
impairment loss.  During the year ended March 31, 2004, the Company
recognized an impairment expense of $111,522 related to one of its patents as it
determined that this patent had no future value based on its assessment of
expected future cash flows to be generated by this patent and the results of an
independent appraisal done in April 2004.  Amortization expense related to
these patents for the nine months ended December 31, 2007 and 2006 was $40,226
and $34,536, respectively. Projected amortization expense approximates $53,000,
$53,000, $53,000, $53,000 and $53,000, respectively, for each of the five years
ended March 31, 2012. The weighted-average life of the remaining patents is
approximately 11.3 years.




7




Stock Based
Compensation





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





As
a result of adopting SFAS No. 123R, the Company recognized $1,438,020 and
$1,059,888 in share-based compensation expense for the nine months ended
December 31, 2007 and 2006.  The impact of this share-based
compensation expense on the Company’s basic and diluted earnings per share was
$0.03 and $0.03 per share for the nine months ended December 31, 2007 and 2006,
respectively.




The
fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 2007: risk-free interest rate of 4.5%; dividend yields of
0%; volatility factors of the expected market price of the Company’s common
shares of 198%; and a weighted average expected life of the option of 5
years.





Loss Per
Share





The
Company reports earnings (loss) per share in accordance with SFAS No. 128,
"Earnings per Share.  "Basic earnings (loss) per share is computed by
dividing income (loss) available to common shareholders by the weighted average
number of common shares available.  Diluted earnings (loss) per share
is computed similar to basic earnings (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 earnings
(loss) per share has not been presented since the effect of the assumed
conversion of options and warrants to purchase common shares would have an
anti-dilutive effect.  The Company has excluded all outstanding
options, warrants, and convertible note payable and preferred stock from the
calculation of diluted net loss per share because these securities are
anti-dilutive.  As of December 31, 2007 and 2006, the Company has
approximately 16,263,780 and 11,192,600 common stock equivalents,
respectively.  In addition, as of December 31, 2007, 60,488,622 shares
of common stock are issuable upon the conversion of the convertible note payable
and convertible debentures.





Recently Issued Accounting
Pronouncements





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





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 over-funded or under-funded 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.





In
February of 2007 the FASB issued SFAS 159, “The Fair Value Option for Financial
Assets and Financial Liabilities--Including an amendment of FASB Statement No.
115.”  The statement permits entities to choose to measure many
financial instruments and certain other items at fair value. The objective is to
improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions.  The statement is effective as of the beginning of an
entity's first fiscal year that begins after November 15, 2007.  The
company is analyzing the potential accounting treatment.




In
December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements”. This Statement amends ARB 51 to establish
accounting and reporting standards for the non-controlling (minority) interest
in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a
non-controlling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. SFAS No. 160 is effective for the Company’s fiscal year
beginning October 1, 2009. Management is currently evaluating the effect of this
pronouncement on financial statements.





In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations”. This
Statement replaces SFAS No. 141, Business Combinations. This Statement retains
the fundamental requirements in Statement 141 that the acquisition method of
accounting (which Statement 141 called the purchase method) be used for all
business combinations and for an acquirer to be identified for each business
combination. This Statement also establishes principles and requirements for how
the acquirer: a) recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any non-controlling
interest in the acquiree; b) recognizes and measures the goodwill acquired in
the business combination or a gain from a bargain purchase and c) determines
what information to disclose to enable users of the financial statements to
evaluate the nature and financial effects of the business combination. SFAS No.
141(R) will apply prospectively to business combinations for which the
acquisition date is on or after Company’s fiscal year beginning October 1, 2009.
While the Company has not yet evaluated this statement for the impact, if any,
that SFAS No. 141(R) will have on its consolidated financial statements, the
Company will be required to expense costs related to any acquisitions after
September 30, 2009.





FASB
Staff Position on FAS No. 115-1 and FAS No. 124-1 (“the FSP”), “The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments,” was
issued in November 2005 and addresses the determination of when an investment is
considered impaired, whether the impairment on an investment is
other-than-temporary and how to measure an impairment loss. The FSP also
addresses accounting considerations subsequent to the recognition of
other-than-temporary impairments on a debt security, and requires certain
disclosures about unrealized losses that have not been recognized as
other-than-temporary impairments. The FSP replaces the impairment guidance on
Emerging Issues Task Force (EITF) Issue No. 03-1 with references to
existing authoritative literature concerning other-than-temporary
determinations. Under the FSP, losses arising from impairment deemed to be
other-than-temporary, must be recognized in earnings at an amount equal to the
entire difference between the securities cost and its fair value at the
financial statement date, without considering partial recoveries subsequent to
that date. The FSP also required that an investor recognize other-than-temporary
impairment losses when a decision to sell a security has been made and the
investor does not expect the fair value of the security to fully recover prior
to the expected time of sale. The FSP is effective for reporting periods
beginning after December 15, 2005. The adoption of this statement will not have
a material impact on our consolidated financial statements.




9





FASB
Interpretation 48 prescribes a recognition threshold and a measurement attribute
for the financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return. Benefits from tax positions should be
recognized in the financial statements only when it is more likely than not that
the tax position will be sustained upon examination by the appropriate taxing
authority that would have full knowledge of all relevant information. The amount
of tax benefits to be recognized for a tax position that meets the
more-likely-than-not recognition threshold is measured as the largest amount of
benefit that is greater than fifty percent likely of being realized upon
ultimate settlement. Tax benefits relating to tax positions that previously
failed to meet the more-likely-than-not recognition threshold should be
recognized in the first subsequent financial reporting period in which that
threshold is met or certain other events have occurred. Previously recognized
tax benefits relating to tax positions that no longer meet the
more-likely-than-not recognition threshold should be derecognized in the first
subsequent financial reporting period in which that threshold is no longer met.
Interpretation 48 also provides guidance on the accounting for and disclosure of
tax reserves for unrecognized tax benefits, interest and penalties and
accounting in interim periods. Interpretation 48 is effective for fiscal years
beginning after December 15, 2006. The change in net assets as a result of
applying this pronouncement will be a change in accounting principle with the
cumulative effect of the change required to be treated as an adjustment to the
opening balance of retained earnings on January 1, 2007, except in certain cases
involving uncertainties relating to income taxes in purchase business
combinations. In such instances, the impact of the adoption of Interpretation 48
will result in an adjustment to goodwill. The adoption of this standard had no
material impact on the Company's consolidated financial statements.




In
September 2006, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements,” (“SAB
108”),which provides interpretive guidance on the consideration of the effects
of prior year misstatements in quantifying current year misstatements for the
purpose of a materiality assessment. The Company adopted SAB 108 in the fourth
quarter of 2006 with no impact on its consolidated financial
statements.








NOTE
2 - PROPERTY AND EQUIPMENT





The
cost of property and equipment at December 31, 2007 consisted of the
following:







Furniture
      and fixtures
            $
            73,203Office
      equipment
            
            42,120115,323Less
      accumulated depreciation and amortization
            
            (113,766)$
            1,557





Depreciation
expense for the nine months ended December 31, 2007 and 2006 was $1,125 and
$3,992, respectively.





NOTE
3 - ACCRUED LEGAL SETTLEMENTS





Gryphon Master Fund
LP





On
March 31, 2006, the Company reached a settlement with Gryphon Master Lund LP
related to two investments in the Company by Gryphon in September 2003 totaling
$1,600,000. The settlement agreement required the Company to pay a maximum of
$1,600,000 which was to be reduced to $1,400,000 if the Company was able to pay
the judgment on or before October 1, 2006. Full repayment was due under the
settlement agreement on or before April 1, 2007. The settlement agreement also
provided 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 provided for a reduction of the
exercise price to $0.01 for the 194,167 warrants currently held by
Gryphon.  During the year ended March 31, 2007, 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 $885,000 worth of preferred
stock into 416,667 shares of the Company's common stock.  During the
nine months ended December 31, 2007 the Company issued 300,000 shares of its
common stock for the conversion of this $600,000 convertible note
payable.





As
of December 31, 2007, the full $1,600,000 was still due under the settlement
agreement. (Refer to Note 1).  Also as a result of non-payment on this
settlement amount, the Company has accrued interest of $150,155 on the unpaid
balance per the terms of the settlement agreement.




10




NOTE
4 - PROMISSORY NOTES





In
June 2005, the Company converted a total of $205,174 of amounts due for clinical
trials into nine promissory notes that accrued interest at a rate of 10% per
annum and were due on December 27, 2005.  During the three months ended
March 31, 2006 and June 30, 2006, respectively, the Company converted $131,042
and $27,319 of these promissory notes plus accrued interest into 105,250 and
27,200 shares of the Company's common stock.  At December 31, 2007, $46,813
of these notes was still outstanding.





NOTE
5 - 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 4% 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
share.  In January 2007, the Company repaid $150,000 of this note
leaving a balance due at December 31, 2007 of $100,000.





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.  This note is outstanding at December 31,
2007.





During
the quarter ended December 31, 2007 the company issued notes payable in the
amount of $52,500 to an investor.  The note bears interest at 10% per
annum and is payable upon demand.  This note is outstanding at
December 31, 2007.





NOTE
6 - CONVERTIBLE NOTE PAYABLE





Gryphon Master Fund, LP (See
Note 3)





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.  During the nine months ended December 31, 2007 the Company
issued 300,000 shares of its common stock for the conversion of this $600,000
convertible note payable.





Cornell Capital Partners,
L.P.





On
December 20, 2006, the Company entered into a Securities Purchase Agreement with
Cornell Capital Partners, L.P. ("Cornell Capital") pursuant to which the Company
agreed to issue up to an aggregate principal amount of $3,850,000 of convertible
debentures.  Of that amount, $2,500,000 was funded on December 20, 2006.
 Two additional closings of $675,000 each were scheduled to occur as
follows: the first upon the Company's filing of a registration statement with
the Securities and Exchange Commission (“SEC”), and the second upon that
registration statement being declared effective by the SEC.  The two
additional closing took place on February 22, 2007 and March 16,
2007.




11




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




As
part of the funding commitment, the Company issued four classes of warrants
exercisable on a cash basis that enable Cornell Capital to purchase up to
6,640,602 shares of common stock for an additional $5,500,000: an A Warrant to
purchase 1,333,333 shares at $0.75 per share; B Warrant to purchase 1,205,400
shares at $0.8296 per share; C Warrant to purchase 2,343,959 shares at $0.7466
per share; and D Warrant to purchase 1,757,910 shares at $0.9955 per share. The
A and B Warrants expire six months following the effective date of the
registration and carry forced exercise provisions. The C & D Warrants are
non-callable and have a five-year term.  The warrants and convertible
debenture are subject to certain anti-dilution rights.  On April 24,
2007, Cornell Capital exercised Class A Warrants for 1,333,333 shares at an
exercise price of $0.75 per share.




Per
EITF 00-19, paragraph 4, these convertible debentures do not meet the definition
of a “conventional convertible debt instrument” since the debt is not
convertible into a fixed number of shares.  The debt can be converted into
common stock at a conversions price that is a percentage of the market price;
therefore the number of shares that could be required to be delivered upon
“net-share settlement” is essentially indeterminate.  Therefore, the
convertible debenture is considered “non-conventional,” which means that the
conversion feature must be bifurcated from the debt and shown as a separate
derivative liability.  This derivative liability conversion liability is as
follows:





Funding
      Date
            
            AmountDecember
      20, 2006
            $
            1,897,735February
      22, 2007
            
            745,921March
      16, 2007
            
            561,774$
            3,205,430





In
addition, since the convertible debenture is convertible into an indeterminate
number of shares of common stock, it is assumed that the Company could never
have enough authorized and unissued shares to settle the conversion of the
warrants into common stock.  Therefore, the warrants issued in connection
with this transaction had a fair value of $3,667,558 at December 20, 2006 and
are shown as a liability.  The value of the warrant was calculated using
the Black-Scholes model using the following assumptions: Discount rate of 4.5%,
volatility of 137% and expected term of 1 to 5 years.   The fair
value of the derivative liability and the warrant liability will be adjusted to
fair value each balance sheet date with the change being shown as a component of
net loss.




12





The
fair value of the derivative liability and the warrants at the inception of
these convertible debentures were shown as a debt discount with any discount
greater than the face amount of the debt being as financing costs in the
accompanying statement of operations as follows.




Funding
      Date
            
            Amount
      of Debt
            
            Fair
      Value of Warrants
            
            Fair
      Value of Derivative Liability
            
            Amount
      Applied to Debt Discount
            
            Recorded
      as Financing CostDecember
      20, 2006
            $
            2,500,000
            $
            3,667,558
            $
            1,897,735
            $
            2,500,000
            $
            3,065,293February
      22, 2007
            
            675,000
            
            -
            
            745,921
            
            675,000
            
            70,921March
      16, 2007
            
            675,000
            
            -
            
            561,774
            
            561,774
            
            -$
            3,850,000
            $
            3,667,558
            $
            6,872,988
            $
            3,736,774
            $
            3,136,214





At
December 31, 2007, the fair value of the warrant and derivative liabilities were
$541,351 and $3,229,865, respectively.  During the nine months ended
December 31, 2007, the Company recorded income of $7,156,168 as a result of
adjusting the warrant and derivative liabilities to fair value.





In
April, 2007, Cornell Capital converted $525,000 into 767,319 shares at an
exercise price of $0.68.  On July 23, 2007, the Company received a
notice of default from Cornell Capital with regard to the convertible
debentures. Therefore, the Company accelerated the amortized the remaining debt
issuance costs and debt discount during the six months ended September, 30, 2007
which resulted in a charge to earnings of $3,692,316.





On
July 12, 2007, the Company issued 1,524,664 shares to Cornell pursuant to the
conversion of convertible debentures in the amount of $170,000.  On
July 19, 2007, the Company issued 1,748,879 shares to Cornell Capital pursuant
to the conversion of convertible debentures in the amount of $195,000. On
September 27, 2007, the Company issued 2,113,208 shares to Cornell Capital
pursuant to the conversion of convertible debentures in the amount of
$112,000.  On October 16, 2007 the Company issued 1,607,143 shares to
Cornell pursuant to the conversion of convertible debentures in the amount of
$106,174.





Mark
Gostine





On
July 27, 2007, the Company issued a convertible debenture to Mark Gostine in the
amount of $100,000 that accrues interest at 12% per annum and is due on July 27,
2008. In addition, the Company will issue to Mark Gostine 350,000 shares of
the Company's common stock as interest and fees.




13





The
fair value of these shares is $49,000 and has been recorded as a discount on the
convertible debenture and is being amortized over the term of the debenture.
During the nine months ended December 31, 2007, the Company amortized $12,252 of
the discount to interest expense. At December 31, 2007, the balance of the
debenture is shown as $55,522, net of unamortized discount of $36,118 in the
consolidated balance sheet.








NOTE
7 - 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 was
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.  As of December 31, 2007 this senior debenture
was still outstanding.





The
fair value of these warrants totaling $276,827 was computed using the
Black-Scholes model under the following assumptions: (1) expected life of 5
years; (2) volatility of 194%, (3) risk free interest of 4.50% and (4) dividend
rate of 0%. The face amount of the senior debenture of $250,000 was
proportionately allocated to the senior debenture and the warrants in the amount
of $118,635 and $131,365, respectively. The amount allocated to the warrants of
$131,365 was recorded as a discount on the senior debenture and is being
amortized over the term of the debenture. During the nine months ended December
31, 2007, the Company fully amortized the discount to interest expense. At
December 31, 2007, the balance of the debenture is shown as $250,000 net of
amortization of 0 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.





During
the year ended March 31, 2007, the Company issued an additional 20,000 warrants
to the Brad Chisick Trust as additional consideration for this senior
convertible debenture.  The fair value of these warrants totaling
$17,840 was computed using the Black-Scholes model under the following
assumptions: (1) expected life of 5 years; (2) volatility of 139%, (3) risk free
interest of 4.50% and (4) dividend rate of 0%.








NOTE
8 - 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.





Common
Stock





The
Company has authorized 100,000,000 shares of $0.001 par value common
stock.





On
July 12, 2007, the Company issued 1,524,664 shares to Cornell Capital pursuant
to the conversion of convertible debentures in the amount of
$170,000.  On July 19, 2007 the Company issued 1,748,879 shares to
Cornell Capital pursuant to the conversion of convertible debentures in the
amount of $195,000.  The Company issued 250,000 shares to investor
relations on July 27, 2007. On September 27, 2007, the Company issued 2,113,208
shares to Cornell Capital pursuant to the conversion of convertible debentures
in the amount of $112,000.  On October 15, 2007 the Company issued
1,607,143 shares to Cornell Capital pursuant to the conversion of convertible
debentures in the amount of $106,174.




14





On
November 9, 2007 the Company issued 75,000 shares to Brian J. Strickel in
compensation of consulting services.





On
November 13, 2007 the Company issued 200,000 shares to Leapfrog Capital of New
York in compensation for consulting services.





On
November 29, 2007 the Company issued 100,000 shares to Kevin Pickard, CPA in
compensation for services rendered to the company as interim CFO.





Stock
Options





In
2002, the Company adopted a Stock Option Plan (the "Plan") initially reserving
an aggregate of 1,250,000 shares of the Company's common stock (the "Available
Shares") for issuance pursuant to the exercise of stock options, which may be
granted to employees and consultants to the Company. The Plan options were
subsequently increased to 2,000,000 shares.





The
Plan provides for the granting at the discretion of the Board of Directors of
both qualified incentive stock options and non-qualified stock options.
Consultants may receive only non-qualified stock options. The maximum term of
the stock options are three to five years and generally vest proportionately
throughout the term of the option.





Transactions
under the Plans during the period ended December 31, 2007 are summarized as
follows:





Options
      Outstanding
            
            Weighted
      Average Exercise
            
            Aggregate
      Intrinsic ValueOutstanding,
      March 31, 2007
            6,141,667
            $
            1.58
            $
            -GrantedForfeited/Canceled
      / Expired
            (1,500,000)
            $
            1.80Outstanding,
      Dec 3`, 2007
            4,641,667
            $
            1.51
            $
            -





The
weighted average remaining contractual life of options outstanding is 8.52 years
at September, 30, 2007.  The number of vested options at September,
30, 2007 is 3,453,922.  The exercise prices for the options
outstanding at September, 30, 2007 are as follows:




15





Number
      of Options
            
            Exercise
      Price175,000
            
            $1.002,800,000
            
            $1.401,666,667
            
            $1.754,641,667





The
total expense for the options vested during the nine months ended December 31,
2007 was $1,438,020.  The value of the unvested options was $2,019,004
as of December 31, 2007.








Warrants





As
a result of the issuance of the convertible debenture to Cornell Capital (See
Note 7) the fair value of all warrant issued to non-employees have been removed
from stockholders' equity and shown as a liability.  On December 20,
2006, the fair value of such warrants was $3,545,880.  The fair value
of these warrants and those issued to Cornell Capital will be adjusted to fair
value at each balance sheet date.





The
following table summarizes the warrants outstanding:





Warrants
      Outstanding
            Weighted
      Average Exercise Price
            Aggregate
      Intrinsic ValueOutstanding,
      March 31, 2007
            12,955,446
            $1.67
            $1,435,630Granted
            -
            -
            -Forfeited/Canceled
            -
            -
            -Exercised
            (1,333,333)
            $0.75Outstanding,
      December 31, 2007
            11,622,113
            $1.17
            $10,500








The
weighted average remaining contractual life of warrants outstanding is 3.00
years at December 31, 2007.  The number of vested warrants at December
31, 2007 is 11,622,113.  The exercise prices for the warrants
outstanding at September, 30, 2007 are as follows:





Number
      of Warrants
            
            Exercise
      Price150,000
            
            $0.014,597,292
            
            $0.751,205,400
            
            $0.832,860,154
            
            $1,003,942,600
            
            $1.75200,000
            
            $2.0011,622,113






16
 
  NOTE
9 – LITIGATION





InnoFood/Modofood: On July
28, 2003, the Company entered into a Stock Exchange Agreement ("InnoFood
Agreement") with InnoFood Inc. ("InnoFood") wherein the Company agreed, among
other things, to provide InnoFood with funding totaling $5,000,000 in exchange
for, among other things, 100% interest in InnoFood. The completed purchase of
InnoFood was not to occur until the $5,000,000 funding was delivered. Under the
InnoFood Agreement, the Company was obligated to provide InnoFood with the
funding on or before December 31, 2003. The Company did provide InnoFood with
$2,220,000. The Company has confirmation that $1,850,000 of the funds provided
to InnoFood was sent to Modofood S.P.A., an Italian company ("Modofood").
InnoFood originally entered into a licensing agreement with Modofood to market
and distribute Modofood's food processing technology. On October 17, 2003, the
Company entered into a Letter of Understanding ("LOU") with InnoFood to
restructure the relationship between ourselves and InnoFood. The Company
believes that InnoFood and certain related individuals may have intentionally
misled our management regarding certain material matters.




On
January 8, 2004, InnoFood sent us a letter attempting to terminate the original
InnoFood Agreement and the October 17, 2003 LOU. InnoFood claimed that the
Company breached both the InnoFood Agreement and the LOU by failing to provide
the funding called for under those agreements. With the letter of termination,
InnoFood delivered a signed promissory note agreeing to pay back $2,160,000 (net
of $60,000 interest InnoFood charged to the Company for non-payments). The
promissory note accrues interest at 10% and is due and payable on or before
January 15, 2009. Though the Company did not accept that note, the Company
believes that this promissory note represents an acknowledgment of InnoFood's
debt to the Company.




In
September 2006, the Company filed a complaint entitled Cobalis Corp. v.
InnoFood, Reynato Giordano, James Luce, Robert Dietrich, Randal Lanham, in
Orange County Superior Court, California, Case No. 06CC10355, to attempt to
recapture the funds transferred to InnoFood and acquire any intellectual
property related to the food preservation process at issue. Cobalis has entered
defaults against Innofood, Renato Giordano and Robert Dietrich. The only
remaining defendants are James Luce and Randall Lanham.




In
February 2007, James Luce filed a Cross-Complaint against Cobalis and Chaslov
Radovich, who filed an Answer to the Cross-Complaint. On March 3, 2007 Randal
Lanham filed a cross complaint against Cobalis and Chaslov Radovich which was
amended on May 28, 2007. Cobalis filed a Demurrer to the Lanham First Amended
Cross Complaint for which a hearing date was set for August 17, 2007. Prior to
the August 17 hearing on Cobalis' demurrer, the Innofood case has been stayed
with respect to the crossc-complaints filed by Randall Lanham and James Luce.
Accordingly, the hearing on Cobalis' demurrer was taken off calendar, subject to
the stay.




Subject
to the stay, the Company intends to vigorously prosecute this matter and to
defend the Lanham and Luce Cross-Complaints, although, as with any litigation,
there is no guarantee of a favorable outcome. The Case Management Conference on
August 20, 2007 was continued to October 22, 2007.




Gryphon Master Fund, LP. On
November 8, 2004, Gryphon Master Fund, LP, (“Gryphon”) filed a lawsuit against
the Company in United States District Court, Northern District of Texas, Dallas
Division, Case No. 3:04-CV-2405-L. The lawsuit sought repayment of a $600,000
convertible note payable, accrued interest on the convertible note payable
within the prescribed period, penalties for failing to register shares
underlying the conversion of the convertible note payable, attorneys fees and
court costs. In March 2006, the Company entered into settlement agreement with
Gryphon where both parties agreed to dismiss any and all current and future
claims, legal proceedings and litigation upon full satisfaction of the
settlement agreement.




17




The
settlement, which relates to two investments in the Company totaling $1.6
million made by Gryphon in September 2003, includes an agreed judgment totaling
$1.6 million. Of the remaining unconverted instruments, Gryphon is also eligible
to convert its convertible note and convertible preferred stock it holds to
508,334 shares of the Company's common stock. Under the settlement agreement,
full repayment of the $1.6 million was due on or before April 1, 2007. The
Company did not make the payment by April 1, 2007; therefore, the stipulated
judgment into which the Company entered with Gryphon provides that Gryphon has
the right to enter a judgment of $1.6 million against the Company with the court
upon the Company's default.





On April
2, 2007, the Company filed a motion to vacate an agreed judgment (the “Motion to
Vacate”) in the U.S. District Court for the Northern District of Texas, Dallas
Division with regard to case #3:04-CV- 2405 between Gryphon Master Fund, L.P.
(“Gryphon”) and the Company. The Company based the Motion to Vacate on several
grounds including that allegation that Gryphon breached the “no shorting”
provision contained in the settlement agreement. The Company believes, and so
allege in the Motion to Vacate, that despite Gryphon's agreement, Gryphon
engaged in shorting of the Company's stock. Since June 2007, Gryphon has
aggressively been moving forward with judgment collection activities, including,
but not limited to, conducting a debtor's exam, levying the Company's bank
accounts and attaching the Company's assets to the extent such assets are not
already encumbered.





On April
23, 2007, Gryphon sued the Company for breach of contract in the same U.S.
District Court as above, Case #3:07-cv-00701B. This new lawsuit alleges that the
Company breached a settlement agreement with Gryphon. Gryphon is also seeking a
declaratory judgment that it did not breach the same settlement agreement.
Gryphon's alleged breach of the settlement agreement is the subject of the
Company's Motion to Vacate. In addition to the declaratory relief, Gryphon's
complaint seeks unspecified damages and attorneys' fees.  On April 23,
2007, Gryphon also filed an opposition to the Company's Motion to Vacate
repeating the same allegations.  A trial date is scheduled for the
September 2007 docket.





There is
no guarantee that the Company will be successful in vacating the judgment or in
defending the new lawsuit. If the Company is unsuccessful in vacating the
judgment or in defending the subsequent lawsuit, and, if the Company is unable
to subsequently timely resolve the Gryphon matter or raise capital to satisfy
the judgment, the Company's ability to move its business forward could be
adversely affected. On August 6, 2007, the Company filed the Suggestion of
Bankruptcy requesting for an automatic stay in the proceedings.




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




On April 18, 2006, the Company filed an
answer to the complaint, denying the allegations by Mr. Vekovic. On the same
date, the Company also filed a cross-complaint for rescission of the consulting
agreement, on grounds that Mr. Vekovic made numerous material misrepresentations
intended to fraudulently induce the Company to enter the consulting agreement
and to issue to Vekovic 112,500 shares of its S-8 common stock. Through the
Company's cross-complaint, it sought to rescind the consulting agreement and
seek restitution from Mr. Vekovic in an amount no less than the price for which
Mr. Vekovic sold the 112,500 shares of its S-8 common stock, plus all or some
portion of the compensation paid to Mr. Vekovic, given that the Company believes
Mr. Vekovic substantially failed to perform the consulting services which were
the subject of the consulting agreement. The Company also sought to recover
attorneys' fees incurred in the defense of the complaint and the prosecution of
its cross-complaint, pursuant to the attorneys' fee provision in the consulting
agreement. On March 5, 2007, the Company entered into a settlement agreement
with Mr. Vekovic with regard to this case, whereby the Company agreed to
register on a future Form S-8 and issue 50,000 shares to Mr. Vekovic in addition
to a grant of 25,000 warrants to purchase shares of our common stock at $1.75
per share, expiring December 31, 2009.  The settlement agreements were
issued on March 12, 2007 and the shares were registered on April 11, 2007 and
issued subsequently.




18





Cappello Capital Corp. In
March 2005, the Company entered into an agreement with Cappello Capital Corp.
(“Cappello”) for investment banking and related financial services. Pursuant to
a financing agreement, the Company issued 100,000 shares as an initial retainer.
The Company believes that Cappello did not perform per the agreement,
but no settlement can be guaranteed.




Noel Marshall. On March 1,
2007, the Company became aware for the first
time of the complaint for damages, Case # 07CC03208 filed in
Superior Court Orange County California, entitled Noel Marshall v. Cobalis
Corp. Chas Radovich, Radul Radovich, Dragica Radovich, R.R. Holdings, Biogentec,
Silver Mountain Productions and St. Petka Trust, alleging breach of contract,
fraud, constructive trust, money had and received, and account stated (the
"Marshall Action"). In the Marshall Action, plaintiff
is alleging, among other things, that certain misrepresentations were
made with the intent of inducing plaintiff to purchase shares of
the Company's common stock.  The Company believes this lawsuit is frivolous
and without merit. The Company intends to vigorously defend this
matter. As with any litigation, there is no guarantee of a favorable outcome. In
August, 2007 a notice of stay was filed, and subsequently the court notified all
parties that the action was stayed as to Cobalis only.




As of the
date of this filing, all pending cases are now stayed because of Cornell
Capital's involuntary bankruptcy petition against the Company.




In the
ordinary course of business, the Company is generally subject to claims,
complaints, and legal actions. At March 31, 2007, 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
10 – SUBSEQUENT EVENTS





On
October 12, 2007, the Company filed its petition with the Bankruptcy Court for
the matter to proceed as a Chapter 11 proceeding, which means that instead of
liquidation the Company would be seeking approval from the Bankruptcy Court to
effectuate a reorganization of the Company. If accepted, this would allow the
Company to continue operating under supervision of the Bankruptcy
Court.





The
Company’s Board of Directors approved the Chapter 11 request as it hopes that
proceeding under Chapter 11 will allow the Company to attempt to raise operating
capital through either equity or debt financing. Such financing will be crucial
in allowing the Company to reorganize its affairs. There is no guarantee that
the Company will be permitted to proceed under Chapter 11 and, further, there is
no guarantee that the Company will be successful in raising equity and/or debt
financing sufficient to reorganize its affairs.  If the Company is not
able to successfully contest the petition or successfully file and finance a
Chapter 11, the Company will likely be forced to liquidate and cease
operations.





The
Bankruptcy Court has jurisdiction over the Company’s business and affairs as a
result of this Chapter 11 election.  On November 19, 2007, the Court
ordered the conversion from a Chapter 7 case to a Chapter 11 case.





During
the period ending March 24, 2008, the Company issued a total of 2,873,679 shares
in conversion of convertible debentures and as compensation for
services.




19




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.




20





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 an
operating loss of $593,524 for the nine months ended December 31, 2007 and as of
December 31, 2007 we had a working capital deficit of _  and a
stockholder deficit of $11,175,165. In addition, as of December 31, 2007, 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.





On
March 31, 2006, we reached a settlement with Gryphon Master Lund LP (Gryphon)
related to two investments in the company by Gryphon in September 2003 totaling
$1,600,000. Full repayment is due under the settlement agreement on or before
April 1, 2007. We did not make the payment by April 1, 2007; therefore, the
stipulated judgment into which we entered with Gryphon provides that Gryphon has
the right to enter a judgment of $1.6 million against us with the court upon our
default.





On
April 2, 2007, we filed a motion to vacate an agreed judgment based on several
grounds including that allegation that Gryphon breached the “no shorting”
provision contained in the settlement agreement. We believe, and so allege in
the Motion to Vacate, that despite Gryphon’s agreement, Gryphon engaged in
shorting of our stock.





On
April 23, 2007, Gryphon sued us for breach of contract. This new lawsuit alleges
that we breached a settlement agreement with Gryphon. Gryphon is also seeking a
declaratory judgment that it did not breach the same settlement agreement.
Gryphon’s alleged breach of the settlement agreement is the subject of our
Motion to Vacate. In addition to the declaratory relief, Gryphon’s complaint
seeks unspecified damages and attorneys’ fees.  On April 23, 2007,
Gryphon also filed an opposition to our Motion to Vacate repeating the same
allegations.





Since
June 2007, Gryphon has aggressively been moving forward with judgment collection
activities, including, but not limited to, conducting a debtor’s exam, levying
our bank accounts and attaching our assets to the extent such assets are not
already encumbered.





There
is no guarantee that we will be successful in vacating the judgment or in
defending the new lawsuit. If we are unsuccessful in vacating the judgment or in
defending the subsequent lawsuit, and, if we are unable to subsequently timely
resolve the Gryphon matter or raise capital to satisfy the judgment, our ability
to move its business forward could be adversely affected.





On
July 23, 2007, we received a notice of default from Cornell Capital Partners, LP
(Cornell Capital) with regard to the convertible debentures entered into between
the company and Cornell Capital on December 20, 2006 and February 20, 2007.
Cornell Capital is taking the position that the recent collection efforts
against us by Gryphon with regard to the litigation described above constitute a
default under the relevant Cornell Capital funding documents.  In the
first notice of default, Cornell Capital, in referencing the contractual 15 day
cure period, gave us until August 7, 2007 to cure the perceived default (i.e.,
resolve the dispute with Gryphon). If not cured, Cornell Capital has indicated
that it will exercise all of its contractual rights, including, but not limited
to, accelerated full repayment of the convertible debentures between the parties
and exercising its rights under the pledge and escrow agreement and security
agreement entered into between the parties.





On
July 25, 2007, we received a second notice of default from Cornell Capital which
also asserted that we were in default of certain provisions of the security
agreement between the company and Cornell Capital, entered into on December 20,
2006.  Per the terms of that security agreement, Cornell Capital could
demand payment in full for all amounts due under the debenture agreements
between the parties.  It is also possible that Cornell Capital may
enforce the terms of the security agreement and the pledge and escrow
agreement.




21





On
August 1, 2007, we received an informal notice from YA Global Investments, L.P.,
formerly known as Cornell Capital that Cornell Capital had filed a petition for
involuntary bankruptcy proceedings pursuant to Chapter 7 on that same date with
the U.S. Bankruptcy Court for the Central District of California, which seeks
liquidation of our assets. Also on August 1, 2007, we received a copy of a
file-stamped Chapter 7 petition confirming the notice provided by Cornell
Capital. The petition alleges past due debts not less than $3,000,000 plus other
amounts with regard to the convertible debentures entered into between the
company and Cornell Capital on December 20, 2006 and February 20,
2007.





On
October 12, 2007, we filed our petition with the Bankruptcy Court for the matter
to proceed as a Chapter 11 proceeding, which means that instead of our
liquidation would be seeking approval from the Bankruptcy Court to effectuate
our reorganization. If accepted, this would allow us to continue operating under
supervision of the Bankruptcy Court. There is no guarantee that the Bankruptcy
Court will allow us to proceed under Chapter 11 and not order liquidation.
Moreover, since the right to proceed under Chapter 11 is subject to many
contingencies and required approvals, there is no guarantee that even if the
Bankruptcy Court allows us to proceed under Chapter 11 that our plan of
reorganization will be approved. In the event our plan of reorganization is not
approved, we may still face liquidation and dissolution.





Our
Board of Directors approved the Chapter 11 request as we hope that proceeding
under Chapter 11 will allow us to attempt to raise operating capital through
either equity or debt financing. Such financing will be crucial in allowing us
to reorganize our affairs. There is no guarantee that we will be permitted to
proceed under Chapter 11 and, further, there is no guarantee that we will be
successful in raising equity and/or debt financing sufficient to reorganize its
affairs.  If we are not able to successfully finance a Chapter 11, we
will likely be forced to liquidate and cease operations.





The
Bankruptcy Court has jurisdiction over our business and affairs as a result of
this Chapter 11 election.  Currently, no orders have been entered by
the Bankruptcy Court and no receivers or other similar officers have been
appointed.





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.




22




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 $61 and prepaid expenses and other current
assets of $12,546 at December 31, 2007.  Our total current assets at
December 31, 2007 were $12,607. We also had the following long term assets:
$1,557 in property and equipment, net; $355 in net website development costs,
and $579,330 in patents net of amortization of $374,109.  Our total
assets as of December 31, 2007 were $581,242.





Our
total liabilities were $11,756,407 at December 31, 2007, which was represented
by accounts payable of $424,084; accrued expenses of $878,497; accrued clinical
trials costs of $591,229; accrued legal settlements of $1,825,557; accrued
salaries of $591,229; warrant liability of $541,351; accrued derivative
liability of $3,229,865; promissory notes of $654,424; notes payable of
$150,000, notes payable to related party of $64,787, senior debenture of
$250,000 and convertible notes payable of $2,721,988. Our liabilities exceeded
our assets by $11,175,165.





In
June 2005, we converted a total of $205,174 of amounts due for clinical trials
into nine promissory notes that accrued interest at a rate of 10% per annum and
were due on December 27, 2005.  During the three months ended March
31, 2006 and June 30, 2006, respectively, we converted $131,042 and $27,319 of
these promissory notes plus accrued interest into 105,250 and 27,200 shares of
our common stock.  At December 31, 2007, $46,813 of these notes was
still outstanding.




23





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




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





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





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.





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




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





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





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





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




24





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




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




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




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





The
fair value of the beneficial conversion feature and the warrants at the
inception of these convertible debentures were $1,897,735 and $3,667,558,
respectively.  The first $2,500,000 of these discounts has been shown as a
discount to the convertible debentures which will be amortized over the term of
the convertible debenture and the excess of $3,065,293 has been shown as
financing costs in the accompanying statement of operations.





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





During
the nine months ended December 31, 2007, Cornell Capital converted $890,000 of
their convertible debt into 4,040,862 shares.  In addition Cornell
Capital exercised 1,333,333 Class A Warrants at a stock price of $0.75 for gross
proceeds of $1,000,000.




25





RESULTS
OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2007 AS COMPARED TO THE
THREE MONTHS ENDED DECEMBER 31, 2006





Revenues and Cost of
Sales.We had no significant revenues for the three months
ended December 31, 2007 and December 31, 2006 as we are undertaking twin Phase
III clinical trials in order to obtain FDA approval of PreHistinTM as an
over the counter drug. Our net sales were $0, as were our cost of sales and
gross loss for the three months ended December 31, 2007, as compared net sales
of $0 as were our cost of sales and gross loss for the three months ended
December 31, 2006.





Operating
Expenses.Our operating expenses for the three months ended
December 31, 2007 were $593,524 compared to $4,586,919 for the three months
ended December 31, 2006.  For both periods, we incurred expenses for
two major purposes: i) ongoing development of our PreHistinTM product
and related product management and ii) general management and fund raising
efforts.  For the three months ended December 31, 2007, this amount
was represented by $13,784 in depreciation and amortization; $25,000 in
professional fees; $4,124 in salary and wages; $36,204 in rent expense; $0 in
marketing and research, $480,230 in stock option expense; and $34,182 in other
operating expenses.  This is compared to the three months ended
December 31, 2006, where we had $16,580 in depreciation and amortization;
$656,601 in professional fees; $651,607 in salary and wages; $36,003 in rent
expense; $2,502,389 in marketing and research; $469,296, in stock option
expense, $194,443 in other operating expenses and $60,000 in legal
settlements.  Our operating expenses decreased during the three months
ended December 31, 2007 as compared to the three months ended December 31, 2006
principally as a result of an decrease in marketing and research
expenses.




Interest
expense and financing costs for the three months ended December 31, 2007 were
$233,788 compared to $225,639 for the three months ended December 31,
2006.  The increase is because Cornell Capital called their
convertible debenture which resulted in accelerating the amortization of the
outstanding debt issuance costs and debt discounts during the period ended
December 31, 2007.





The
Company recorded other income of $898,980 and $(93,122) related to the change in
fair value of the warrant and derivative liabilities for the three months ended
December 31, 2007 and 2006, respectively.  The change in the fair
value in the warrant and accrued derivative liabilities relates to the change in
the value of the detachable warrants and beneficial conversion feature issued in
connection with the convertible debentures and convertible preferred
stock.




RESULTS
OF OPERATIONS FOR THE NINE MONTHS ENDED DECEMBER 31, 2007 AS COMPARED TO THE
NINE MONTHS ENDED DECEMBER 31, 2006





Revenues and Cost of Sales.We
had no significant revenues for the six months ended December 31, 2007 and
December 31, 2006 as we are undertaking twin Phase III clinical trials in order
to obtain FDA approval of PreHistinTM as an
over the counter drug.  Our net sales were $0, as were our cost of
sales and gross loss for the nine months ended December 31, 2007, as compared
net sales of $0 as were our cost of sales and gross loss for the nine months
ended December 31, 2006.





Operating Expenses.Our
operating expenses for the nine months ended December 31, 2007 were $3,583,386
compared to $9,703,638 for the nine months ended December 31,
2006.  For both periods, we incurred expenses for two major purposes:
i) ongoing development of our PreHistinTM product
and related product management and ii) general management and fund raising
efforts.  For the nine months ended September, 30, 2007, this amount
was represented by $41,351 in depreciation and amortization; $1,199,979 in
professional fees; $489,231 in salary and wages; $116,582, in rent expense; $0
in marketing and research, $1,438,020 in stock option expense; and $298,223 in
other operating expenses.  This is compared to the nine months ended
December 31, 2006, where we had $47,857 in depreciation and amortization;
$2,224,275 in professional fees; $1,755,239 in salary and wages; $136,282 in
rent expense; $3,801,753 in marketing and research; $1,059,888 in stock option
expense, and $678,344 in other operating expenses.  Our operating
expenses decreased during the nine months ended December 31, 2007 as compared to
the nine months ended December 31, 2006 principally as a result of an decrease
due to marketing and research expenses,




The
Company recorded other income of $7,156,168, and $(93,122) related to the change
in fair value of the warrant and derivative liabilities for the nine months
ended December 31, 2007 and 2006, respectively.  The change in the
fair value in the warrant and accrued derivative liabilities relates to the
change in the value of the detachable warrants and beneficial conversion feature
issued in connection with the convertible debentures and convertible preferred
stock.





OUR
PLAN OF OPERATION FOR THE NEXT TWELVE MONTHS.




In a
content of our reorganization strategy we will be evaluating our business
strategy for the next twelve months which could include moving forward with the
completion of Phase III clinical trials of our planned allergy prevention
product, PreHistin TM; or pursuing development of PreHistin TM for other atopic
and allergic conditions; or pursuing a national and global marketing and
licensing strategy for PreHistin TM. We anticipate generating revenues from
product sales in the next twelve months. We estimate the cost to complete the
Phase III clinical trials and the submission of an NDA to the FDA for marketing
approval will be significant. We are determining the costs for alternative
strategies as of the date of this filing. However, we will need to raise funds
to execute studies for the further development of our proposed PreHistinTM
product line, to complete the development of additional products, or to pursue
alternative strategies. We are in the process of raising additional funds to
execute further studies. We could be able to raise through the exercise of
Cornell Capital’s warrants, entering into a partnership agreement or private or
other equity offerings, or we may attempt to secure loans from lending
institutions or other sources. There is no guarantee 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.




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.




26




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





InnoFood/Modofood: On July
28, 2003, the Company entered into a Stock Exchange Agreement ("InnoFood
Agreement") with InnoFood Inc. ("InnoFood") wherein the Company agreed, among
other things, to provide InnoFood with funding totaling $5,000,000 in exchange
for, among other things, 100% interest in InnoFood. The completed purchase of
InnoFood was not to occur until the $5,000,000 funding was delivered. Under the
InnoFood Agreement, the Company was obligated to provide InnoFood with the
funding on or before December 31, 2003. The Company did provide InnoFood with
$2,220,000. The Company has confirmation that $1,850,000 of the funds provided
to InnoFood was sent to Modofood S.P.A., an Italian company ("Modofood").
InnoFood originally entered into a licensing agreement with Modofood to market
and distribute Modofood's food processing technology. On October 17, 2003, the
Company entered into a Letter of Understanding ("LOU") with InnoFood to
restructure the relationship between ourselves and InnoFood. The Company
believes that InnoFood and certain related individuals may have intentionally
misled our management regarding certain material matters.




On
January 8, 2004, InnoFood sent us a letter attempting to terminate the original
InnoFood Agreement and the October 17, 2003 LOU. InnoFood claimed that the
Company breached both the InnoFood Agreement and the LOU by failing to provide
the funding called for under those agreements. With the letter of termination,
InnoFood delivered a signed promissory note agreeing to pay back $2,160,000 (net
of $60,000 interest InnoFood charged to the Company for non-payments). The
promissory note accrues interest at 10% and is due and payable on or before
January 15, 2009. Though the Company did not accept that note, the Company
believes that this promissory note represents an acknowledgment of InnoFood's
debt to the Company.




In
September 2006, the Company filed a complaint entitled Cobalis Corp. v.
InnoFood, Reynato Giordano, James Luce, Robert Dietrich, Randal Lanham, in
Orange County Superior Court, California, Case No. 06CC10355, to attempt to
recapture the funds transferred to InnoFood and acquire any intellectual
property related to the food preservation process at issue. Cobalis has entered
defaults against Innofood, Renato Giordano and Robert Dietrich. The only
remaining defendants are James Luce and Randall Lanham.






27




In
February 2007, James Luce filed a Cross-Complaint against Cobalis and Chaslov
Radovich, who filed an Answer to the Cross-Complaint. On March 3, 2007 Randal
Lanham filed a cross complaint against Cobalis and Chaslov Radovich which was
amended on May 28, 2007. Cobalis filed a Demurrer to the Lanham First Amended
Cross Complaint for which a hearing date was set for August 17, 2007. Prior to
the August 17 hearing on Cobalis' demurrer, the Innofood case has been stayed
with respect to the crossc-complaints filed by Randall Lanham and James Luce.
Accordingly, the hearing on Cobalis' demurrer was taken off calendar, subject to
the stay.




Subject
to the stay, the Company intends to vigorously prosecute this matter and to
defend the Lanham and Luce Cross-Complaints, although, as with any litigation,
there is no guarantee of a favorable outcome. The Case Management Conference on
August 20, 2007 was continued to October 22, 2007.




Gryphon Master Fund, LP. On
November 8, 2004, Gryphon Master Fund, LP, (“Gryphon”) filed a lawsuit against
the Company in United States District Court, Northern District of Texas, Dallas
Division, Case No. 3:04-CV-2405-L. The lawsuit sought repayment of a $600,000
convertible note payable, accrued interest on the convertible note payable
within the prescribed period, penalties for failing to register shares
underlying the conversion of the convertible note payable, attorneys fees and
court costs. In March 2006, the Company entered into settlement agreement with
Gryphon where both parties agreed to dismiss any and all current and future
claims, legal proceedings and litigation upon full satisfaction of the
settlement agreement.




The
settlement, which relates to two investments in the Company totaling $1.6
million made by Gryphon in September 2003, includes an agreed judgment totaling
$1.6 million. Of the remaining unconverted instruments, Gryphon is also eligible
to convert its convertible note and convertible preferred stock it holds to
508,334 shares of the Company's common stock. Under the settlement agreement,
full repayment of the $1.6 million was due on or before April 1, 2007. The
Company did not make the payment by April 1, 2007; therefore, the stipulated
judgment into which the Company entered with Gryphon provides that Gryphon has
the right to enter a judgment of $1.6 million against the Company with the court
upon the Company's default.




On April
2, 2007, the Company filed a motion to vacate an agreed judgment (the “Motion to
Vacate”) in the U.S. District Court for the Northern District of Texas, Dallas
Division with regard to case #3:04-CV- 2405 between Gryphon Master Fund, L.P.
(“Gryphon”) and the Company. The Company based the Motion to Vacate on several
grounds including that allegation that Gryphon breached the “no shorting”
provision contained in the settlement agreement. The Company believes, and so
allege in the Motion to Vacate, that despite Gryphon's agreement, Gryphon
engaged in shorting of the Company's stock. Since June 2007, Gryphon has
aggressively been moving forward with judgment collection activities, including,
but not limited to, conducting a debtor's exam, levying the Company's bank
accounts and attaching the Company's assets to the extent such assets are not
already encumbered.





On April
23, 2007, Gryphon sued the Company for breach of contract in the same U.S.
District Court as above, Case #3:07-cv-00701B. This new lawsuit alleges that the
Company breached a settlement agreement with Gryphon. Gryphon is also seeking a
declaratory judgment that it did not breach the same settlement agreement.
Gryphon's alleged breach of the settlement agreement is the subject of the
Company's Motion to Vacate. In addition to the declaratory relief, Gryphon's
complaint seeks unspecified damages and attorneys' fees.  On April 23,
2007, Gryphon also filed an opposition to the Company's Motion to Vacate
repeating the same allegations.  A trial date is scheduled for the
September 2007 docket.





There is
no guarantee that the Company will be successful in vacating the judgment or in
defending the new lawsuit. If the Company is unsuccessful in vacating the
judgment or in defending the subsequent lawsuit, and, if the Company is unable
to subsequently timely resolve the Gryphon matter or raise capital to satisfy
the judgment, the Company's ability to move its business forward could be
adversely affected. On August 6, 2007, the Company filed the Suggestion of
Bankruptcy requesting for an automatic stay in the proceedings.




28





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




On April 18, 2006, the Company filed an
answer to the complaint, denying the allegations by Mr. Vekovic. On the same
date, the Company also filed a cross-complaint for rescission of the consulting
agreement, on grounds that Mr. Vekovic made numerous material misrepresentations
intended to fraudulently induce the Company to enter the consulting agreement
and to issue to Vekovic 112,500 shares of its S-8 common stock. Through the
Company's cross-complaint, it sought to rescind the consulting agreement and
seek restitution from Mr. Vekovic in an amount no less than the price for which
Mr. Vekovic sold the 112,500 shares of its S-8 common stock, plus all or some
portion of the compensation paid to Mr. Vekovic, given that the Company believes
Mr. Vekovic substantially failed to perform the consulting services which were
the subject of the consulting agreement. The Company also sought to recover
attorneys' fees incurred in the defense of the complaint and the prosecution of
its cross-complaint, pursuant to the attorneys' fee provision in the consulting
agreement. On March 5, 2007, the Company entered into a settlement agreement
with Mr. Vekovic with regard to this case, whereby the Company agreed to
register on a future Form S-8 and issue 50,000 shares to Mr. Vekovic in addition
to a grant of 25,000 warrants to purchase shares of our common stock at $1.75
per share, expiring December 31, 2009.  The settlement agreements were
issued on March 12, 2007 and the shares were registered on April 11, 2007 and
issued subsequently.




Cappello Capital Corp. In
March 2005, the Company entered into an agreement with Cappello Capital Corp.
(“Cappello”) for investment banking and related financial services. Pursuant to
a financing agreement, the Company issued 100,000 shares as an initial retainer.
The Company believes that Cappello did not perform per the agreement,
but  no settlement can be guaranteed.




Noel Marshall. On March 1,
2007, the Company became aware for the first
time of the complaint for damages, Case # 07CC03208 filed in
Superior Court Orange County California, entitled Noel Marshall v. Cobalis
Corp. Chas Radovich, Radul Radovich, Drsgica Radovich, R.R. Holdings, Biogentec,
Silver Mountain Productions and St. Petka Trust, alleging breach of contract,
fraud, constructive trust, money had and received, and account stated (the
"Marshall Action"). In the Marshall Action, plaintiff
is alleging, among other things, that certain misrepresentations were
made with the intent of inducing plaintiff to purchase shares of
the Company's common stock.  The Company believes this lawsuit is frivolous
and without merit. The Company intends to vigorously defend this
matter. As with any litigation, there is no guarantee of a favorable outcome. In
August, 2007 a notice of stay was filed, and subsequently the court notified all
parties that the action was stayed as to Cobalis only.




As of the
date of this filing, all pending cases are now stayed because of Cornell
Capital's involuntary bankruptcy petition against the Company.




In the
ordinary course of business, the Company is generally subject to claims,
complaints, and legal actions.  At September 30, 2007, 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.





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





During
the three months ended September, 30, 2007, we issued 250,000 shares of our
unregistered common stock for services rendered.  These transactions
were not registered under the Act in reliance on the exemption from registration
in Section 4(2) of the Act, as transactions not involving any public offering.
The securities were issued to our employees, officers, directors, creditors,
consultants, advisors, and existing shareholders, who by virtue of those
relationships, we believe were familiar with our business, and were able to
assess the risks and merits of the investment.




29




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




Not
applicable













Item 6. Exhibits





Regulation
              S-B
      Number
            
            Exhibit31.1
            
            Rule
      13a-14(a)/15d-14(a) Certification of Chief Executive Officer of the
      Company31.2
            
            Rule
      13a-14(a)/15d-14(a) Certification of Chief Financial Officer of the
      Company32.1
            
            Section
      906 Certification by Chief Executive Officer32.2
            
            Section
      906 Certification by Chief Financial
Officer




30




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: March
      24, 2008
            By:
            /s/ Chaslav
      RadovichChaslav
      RadovichPrincipal
      Executive Officer, Director





Date: March
      24, 2008
            By:
            /s/ Chaslav
      RadovichChaslav
      RadovichPresident,
      Secretary




Date: March
      24, 2008
            
            Chaslav
      RadovichChief
      Financial Officer, Treasurer