Unassociated Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
FORM 10-QSB
 
(Mark One)
 
ý
Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934.
 
 
 
For the quarterly period ended September 30, 2006
 
 
o
Transition report under Section 13 or 15(d) of the Exchange Act
 
 
 
For the transition period from _________ to ___________
 
 
 
Commission File Number: 000-50133
 
GRANT LIFE SCIENCES, INC.
(Exact Name of Small Business Issuer as Specified in Charter)
 
Nevada
82-0490737
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer Identification
Number)
 
3550 Wilshire Blvd., Suite 1700, Los Angeles, CA 90010
(Address of Principal Executive Offices)
 
(213) 637-5692
(Issuer’s Telephone Number, Including Area Code)
 
(Former Address, 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 ý   No o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o   No ý

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the last practicable date:  As of November 14, 2006, there were 136,338,605 shares of Common Stock, par value $0.001 per share, issued and outstanding.
 
Transitional Small Business Disclosure Format (check one):      Yes o   No ý


GRANT LIFE SCIENCES, INC.
FORM 10-QSB
INDEX
 
PART I FINANCIAL INFORMATION
 
 
 
 
Item 1
Condensed Consolidated Financial Statements (unaudited)
 
 
 
 
 
Condensed Consolidated Balance Sheets -September 30, 2006 (Unaudited) and December 31, 2005 (audited)
3
 
 
 
 
Condensed Consolidated Statement of Operations - three months and nine months ended September 30, 2006 (Unaudited) and 2005, and July 9, 1998 (date of inception) through September 30, 2006
4
 
 
 
 
Condensed Consolidated Statement of Deficiency in Stockholder’s Equity- July 9, 1998 (date of inception) through September 30, 2006
5
 
 
 
 
Condensed Consolidated Statement of Cash Flows - nine months ended September 30, 2006 and 2005 and July 9, 1998 (date of inception) through September 30, 2006
6
 
 
 
 
Notes to Condensed Consolidated Financial Statements
7
 
 
 
Item 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
17 
 
 
 
Item 3
Controls and Procedures
22
 
 
 
PART II OTHER INFORMATION
 
 
 
 
Item 1
Legal Proceedings
23
 
 
 
Item 2
Unregistered Sales of Equity Securities and Use of Proceeds
23
 
 
 
Item 3
Defaults upon Senior Securities
23
 
 
 
Item 4
Submission of Matters to a Vote of Security Holders
23
 
 
 
Item 5
Other Information
23
 
 
 
Item 6
Exhibits
23
 
 
 
Signatures
24
 
 
2

GRANT LIFE SCIENCES, INC.
(A development stage company)
CONSOLIDATED BALANCE SHEETS
 
 
  
September 30,
  
December 31,
  
   
2006
  
2005
  
ASSETS
  
 (unaudited)
  
(audited)
  
Current assets:
  
 
  
 
  
Cash and cash equivalents
  
$
41,456
  
$
800,472
  
Accounts receivable
    
21,338
    
72,675
  
Prepaid expenses
    
33,125
    
69,125
 
Deposits & other assets
    
34,283
    
45,209
 
Total current assets
    
130,202
    
987,481
 
 
          
Property and equipment, net of accumulated depreciation of
          
$18,071 and $12,519 at September 30, 2006 and December 31, 2005, respectively
    
12,622
    
14,321
 
Deferred financing fees, net of accumulated amortization of $32,292 and $13,542, at September 30, 2006 and December 31, 2005, respectively
    
42,708
    
61,458
  
 
          
Total assets
  
$
185,532
  
$
1,063,260
  
 
          
LIABILITIES AND DEFICIENCY IN STOCKHOLDERS' EQUITY
          
Current liabilities:
          
Accounts payable
  
$
154,968
  
$
124,847
  
Accrued liabilities
    
189,888
    
130,555
 
Accrued interest payable
    
111,148
    
106,637
 
Accrued payroll liabilities
    
81,305
    
94,680
 
Notes payable, current portion (Note C)
    
15,680
    
21,875
  
Total current liabilities
    
552,989
    
478,594
 
 
          
Long-term liabilities:
          
Notes payable - long term (Note C)
    
350,000
    
350,000
 
Convertible notes payable (Note C)
    
565,104
    
240,491
  
Derivative liability related to convertible notes
    
8,137,682
    
2,606,377
  
Warrant liability related to convertible notes
    
561,423
    
161,472
  
Total Liabilities
    
10,167,198
    
3,836,934
  
Commitments and contingencies
    
-
   
-
 
Deficiency in stockholders' equity:
          
Preferred stock, par value: $.001, authorized 20,000,000 shares; no shares issued and outstanding at September 30, 2006 and at December 31, 2005. (Note F)
    
-
   
-
 
Common stock, par value; $.001, authorized 750,000,000 shares at September 30, 2006 and 150,000,000 shares at December 31, 2005,132,977,917 and 126,486,518 shares issued and outstanding at September 30, 2006 and at December 31, 2005 respectively. (Note F)
    
132,979
    
126,487
 
Additional paid in capital
    
5,381,597
    
5,400,819
 
Deferred compensation
    
-
    
(285,308
)
               
Deficit accumulated during development stage
    
(15,496,242
)
  
(8,015,672
)
               
Total deficiency in stockholders' equity:
    
(9,981,666
)
  
(2,773,674
)
Total liabilities and deficiency in stockholders' equity:
  
$
185,532
  
$
1,063,260
  
 
The accompanying notes to consolidated financial statements

3

GRANT LIFE SCIENCES, INC.
(A development stage company)
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)

   
For the three months ended September 30,
  
For the nine months ended September 30,
  
For the period July 9, 1998 (date of inception) through
  
 
  
2006
  
2005
  
2006
  
2005
  
September 30, 2006
  
       
(Restated - Note E)
      
(Restated - Note E)
      
Sales
                          
$
72,675
  
Cost of Sales
                            
62,805
  
Gross Margin
                            
9,870
  
                                 
Operating Expenses:
                                
General and administrative
 
$
196,861
  
$
466,906
  
$
851,244
  
$
1,901,830
    
5,575,976
  
Depreciation
   
1,851
    
1,713
    
5,552
    
4,949
    
24,955
  
Acquisition cost
   
-
    
-
    
-
    
-
    
65,812
  
Research and development
   
99,966
    
90,091
    
227,576
    
480,220
    
1,696,081
  
     Total Operating Expenses
    
298,678
    
558,710
    
1,084,372
    
2,386,999
    
7,362,824
  
 
    
-
                          
Loss from Operations
    
(298,678
)
  
(558,710
)
  
(1,084,372
)
  
(2,386,999
)
  
(7,362,954
)
                                 
Other income (expenses):
                                
Gain on extinguishment of debt
   
-
    
-
    
-
    
-
    
510,104
  
Change in fair value related to adjustment of derivative and warrant liability to fair value of underlying securities
    
(6,948,491
)
  
(10,293,048
)
  
,(5,931,257
)
  
(10,452,987
)
  
(6,818,374
)
Interest expense
   
(168,671
)
  
(181,844
)
  
(464,939
)
  
(398,097
)
  
(1,834,918
)
                                 
Loss before income taxes
    
(7,415,840
)
  
(11,033,602
)
  
(7,480,568
)
  
(13,238,083
)
  
(15,496,142
)
Income tax expense
    
-
    
-
    
-
    
-
    
(100
)
Net loss
  
$
(7,415,840
)
$
(11,033,602
)
$
(7,480,568
)
$
(13,238,083
)
$
(15,496,242
)
                                 
Net loss per common share -
Basic and Fully diluted (Note A)
  
$
(0.058
)
$
(0.19
)
$
(0.059
)
$
(0.23
)
  
n/a
  
 
          
-
    
-
    
-
    
n/a
  
Weighted average shares -
Basic and Fully diluted (Note A)
    
127,685,236
    
59,219,548
    
126,890,482
    
57,837,341
    
n/a
  

See accompanying notes to the unaudited condensed consolidated financial statements

4

GRANT LIFE SCIENCES, INC.
(A development stage company)
CONSOLIDATED STATEMENT OF DEFICIENCY IN STOCKHOLDERS’ EQUITY
FOR THE PERIOD JULY 9, 1998 (Date of Inception) THROUGH
DECEMBER 31, 2005

   
Common
Shares
  
Common
Shares
Amount
  
Subscription
Receivable
  
Deferred
Compensation
  
Additional Paid
In Capital
  
Accumulated
Deficit
  
Total (Deficiency)
In
Stockholders
Equity
  
Balance, July 9, 1998 (date of inception)
    
9,272,200
  
$
9,272
  
$
-
  
$
-
  
$
(9,272
)
$
-
  
$
-
  
Issued stock for subscription receivable at $0.005 per share
    
18,795,000
    
18,795
    
(100,000
)
  
-
    
81,205
    
-
    
-
  
Balance, December 31, 1998
    
28,067,200
    
28,067
    
(100,000
)
  
-
    
71,933
    
-
    
-
  
Issued stock for cash at $0.004 per share
    
1,253,000
    
1,253
    
-
    
-
    
3,747
    
-
    
5,000
  
Net loss
    
-
    
-
    
-
    
-
    
-
    
(5,053
)
  
(5,053
)
Balance, December 31, 1999
    
29,320,200
    
29,320
    
(100,000
)
  
-
    
75,680
    
(5,053
)
  
(53
)
Payment of subscriptions receivable
    
-
    
-
    
100,000
    
-
    
-
    
-
    
100,000
  
Net loss
    
-
    
-
    
-
    
-
    
-
    
(43,641
)
  
(43,641
)
Balance, December 31, 2000
    
29,320,200
    
29,320
    
-
    
-
    
75,680
    
(48,694
)
  
56,306
  
Issued stock for cash at $0.004 per share
    
250,600
    
251
    
-
    
-
    
749
    
-
    
1,000
  
Net loss
    
-
    
-
    
-
    
-
    
-
    
(522,213
)
  
(522,213
)
Balance, December 31, 2001
    
29,570,800
    
29,571
    
-
    
-
    
76,429
    
(570,907
)
  
(464,907
)
Beneficial conversion feature on issuance of debt
    
-
    
-
    
-
    
-
    
98,507
    
-
    
98,507
  
Gain on extinguishment of debt
   
-
    
-
    
-
    
-
    
(98,507
)
  
-
    
(98,507
)
Issued stock for cash at $0.13 per share
   
689,150
    
689
    
-
    
-
    
91,811
    
-
    
92,500
  
Issued stock for services at $0.06 per share
   
1,591,310
    
1,591
    
-
    
-
    
101,659
    
-
    
103,250
  
Issued stock in satisfaction of debt at $0.14 per share
   
1,790,000
    
1,790
    
-
    
-
    
248,210
    
-
    
250,000
  
Net loss
    
-
    
-
    
-
    
-
    
-
    
(646,201
)
  
(646,201
)
Balance, December 31, 2002
   
33,641,260
    
33,641
    
-
    
-
    
518,109
    
(1,217,108
)
  
(665,358
)
Issued stock for cash at $0.13 per share
   
930,800
    
931
    
-
    
-
    
119,069
    
-
    
120,000
  
Net loss
    
-
    
-
    
-
    
-
    
-
    
(253,881
)
  
(253,881
)
Balance, December 31, 2003
    
34,572,060
    
34,572
    
-
    
-
    
637,178
    
(1,470,989
)
  
(799,239
)
Issued stock for cash at $0.0838 per share
   
238,660
    
239
    
-
    
-
    
19,761
    
-
    
20,000
  
Issued stock for services at $0.08 per share
   
500,000
    
500
    
-
    
-
    
39,500
    
-
    
40,000
  
Issued stock for cash at $0.1835 per share
   
9,560,596
    
9,561
    
-
    
-
    
1,485,376
    
-
    
1,494,937
  
Reverse merger with Grant Ventures, Inc.
   
6,000,000
    
6,000
    
-
    
-
    
-
    
-
    
6,000
  
Warrants issued as part of restructuring of debt (89,500 valued at $0.03779)
   
-
    
-
    
-
    
-
    
3,382
    
-
    
3,382
  
Recognition of beneficial conversion feature on issuance of note payable
   
-
    
-
    
-
    
-
    
200,000
    
-
    
200,000
  
Conversion of note payable and accrued interest at $0.07569 per share
   
2,720,000
    
2,720
    
-
    
-
    
203,165
    
-
    
205,885
  
Issued stock in satisfaction of debt at $0.1835 per share
   
249,475
    
249
    
-
    
-
    
45,530
    
-
    
45,779
  
Exercise of $0.01 warrants
    
2,403,000
    
2,403
    
-
    
-
    
21,627
    
-
    
24,030
  
Issued 250,000 warrants for services
    
-
    
-
    
-
    
-
    
11,000
    
-
    
11,000
  
Stock options issued to employees, directors, consultants
    
-
    
-
    
-
    
(1,523,966
)
  
1,523,966
    
-
    
-
  
Vesting of deferred compensation
    
-
    
-
    
-
    
426,081
    
-
    
-
    
426,081
  
Net loss
   
-
    
-
    
-
    
-
    
-
    
(1,910,350
)
  
(1,910,350
)
Balance, December 31, 2004
    
56,243,791
    
56,244
    
-
    
(1,097,886
)
  
4,190,485
    
(3,381,340
)
  
(232,496
)
Conversion of notes payable and accrued interest at $0.092178 per share on 3/31/05
    
1,395,322
    
1,395
    
-
    
-
    
127,225
    
-
    
128,620
  
Stock options issued to new director on 2/21/05
    
-
    
-
    
-
    
(26,725
)
  
26,725
    
-
    
-
  
Value of 250,000warrants issued as part of bridge loan on 3/15/05
    
-
    
-
    
-
    
-
    
65,540
    
-
    
65,540
  
Shares issued 4/28/05 for services at $0.40
    
500,000
    
500
    
-
    
-
    
199,500
          
200,000
  
Stock options granted to employee 4/1/05
    
-
    
-
    
-
    
(327,197
)
  
327,197
    
-
    
-
  
Stock options exercised 6/2/05
    
50,000
    
50
    
-
    
-
    
8,950
    
-
    
9,000
  
Shares issued 9/28 for legal services at $0.22
    
200,000
    
200
    
-
    
-
    
43,800
          
44,000
  
Partial conversion of Senior note payable at $0.0105 per share on 9/8
   
2,800,000
    
2,800
    
-
    
-
    
26,600
    
-
    
29,400
  
Partial conversion of Senior note payable at $0.0068 per share on 9/23
    
2,980,000
    
2,980
    
-
    
-
    
17,284
    
-
    
20,264
  
Partial conversion of Senior note payable at $0.00423 per share on 9/28
   
2,980,000
    
2,980
    
-
    
-
    
9,625
    
-
    
12,605
  
Stock options issued to interim CEO 9/28
    
-
    
-
    
-
    
(3,762
)
  
3,762
    
-
    
-
  
Partial conversion of Senior note payable at $0.00423 per share on 10/3/05
    
2,980,000
    
2,980
    
-
    
-
    
9,625
    
-
    
12,605
  
shares issued on exercise of warrant CAMFO II
    
250,000
    
250
    
-
    
-
    
2,500
    
-
    
2,750
  
Partial conversion of Senior note payable at $0.00423/share per share on 10/6/05
    
2,400,000
    
2,400
    
-
    
-
    
7,752
    
-
    
10,152
  
Partial conversion of Senior note payable at $0.00423 per share on 10/7/05
    
500,000
    
500
    
-
    
-
    
1,615
    
-
    
2,115
  
Partial conversion of Senior note payable at $0.00423 per share on 10/12/05
    
2,980,000
    
2,980
    
-
    
-
    
9,625
    
-
    
12,605
  
Partial conversion of Senior note payable at $0.00423 per share on 10/17/05
    
2,980,000
    
2,980
    
-
    
-
    
9,625
    
-
    
12,605
  
Partial conversion of Senior note payable at $0.00776 per share on 10/21/05
    
3,570,000
    
3,570
    
-
    
-
    
24,205
    
-
    
27,775
  
Partial conversion of Senior note payable at $0.00776 per share on 10/26/05
    
3,570,000
    
3,570
    
-
    
-
    
23,562
    
-
    
27,132
  
Partial conversion of Senior note payable at $0.00776 per share on 11/3/05
    
3,570,000
    
3,570
    
-
    
-
    
23,562
    
-
    
27,132
  
Partial conversion of Senior note payable at $0.0057 per share on 11/8/05
    
4,230,000
    
4,230
    
-
    
-
    
19,881
    
-
    
24,111
  
Partial conversion of Senior note payable at $0.0057 per share on 11/11/05
    
4,230,000
    
4,230
    
-
    
-
    
19,881
    
-
    
24,111
  
Partial conversion of Senior note payable at $0.0059 per share on 11/15/05
    
4,230,000
    
4,230
    
-
    
-
    
20,727
    
-
    
24,957
  
Partial conversion of Senior note payable at $0.0063 per share on 11/18/05
    
4,230,000
    
4,230
    
-
    
-
    
22,419
    
-
    
26,649
  
Partial conversion of Senior note payable at $0.0080 per share on 11/23/05
    
4,230,000
    
4,230
    
-
    
-
    
29,610
    
-
    
33,840
  
Partial conversion of Senior note payable at $0.01016 per share on 11/30/05
    
4,230,000
    
4,230
    
-
    
-
    
38,747
    
-
    
42,977
  
Partial conversion of Senior note payable at $0.0093 per share on 12/6/05
    
4,230,000
    
4,230
    
-
    
-
    
35,096
    
-
    
39,326
  
Partial conversion of Senior note payable at $0.00908 per share on 12/9/05
    
5,650,000
    
5,650
    
-
    
-
    
45,652
    
-
    
51,302
  
Partial conversion of Senior note payable at $0.00856 per share on 12/16/05
    
1,010,405
    
1,010
    
-
    
-
    
7,639
    
-
    
8,649
  
Shares issued at $0.09 on exercise of warrant
    
267,000
    
267
    
-
    
-
    
2,403
    
-
    
2,670
  
Vesting of deferred compensation
    
-
    
-
    
-
    
976,987
    
-
    
-
    
976,987
  
Cancellation of stock options
    
-
    
-
    
-
    
193,275
    
-
    
-
    
193,275
  
Net loss for the year
    
-
    
-
    
-
    
-
    
-
    
(4,634,331
)
  
(4,634,331
)
Balance, December 31, 2005
    
126,486,518
    
126,487
    
-
    
(285,308
)
  
5,400,818
    
(8,015,670
)
  
(2,773,672
)
Vesting of deferred compensation
    
-
    
-
    
-
    
84,972
    
-
    
-
    
84,972
  
Adjustment of presentation of Deferred Compensation
   
-
    
-
    
-
    
200,336
    
(200,336
)
  
-
    
-
  
Net loss for the quarter ended March 31, 2006
    
-
    
-
    
-
    
-
    
-
    
(207,044
)
  
(207,044
)
Balance, March 31, 2006
    
126,486,518
    
126,487
    
-
    
-
    
5,200,482
    
(8,222,714
)
  
(2,895,745
)
Vesting of stock options
    
-
    
-
    
-
    
-
    
91,413
    
-
    
91,413
  
Net income for the quarter ended June 30, 2006
    
-
    
-
    
-
    
-
    
-
    
142,312
    
142,312
  
Balance, June 30, 2006
    
126,486,518
  
$
126,487
    
-
    
-
  
$
5,291,895
    
($8,080,402
)
  
($2,662,020
)
Vesting of stock options
    
-
    
-
    
-
    
-
    
35,921
    
-
    
35,921
  
Partial conversion of Senior note payable at $0.00633 per share
    
1,264,865
    
1,264
    
-
    
-
    
6,742
    
-
    
8007
  
Issued stock in satisfaction
of debt
    
5,226,534
    
5,227
    
-
    
-
    
47,039
    
-
    
52,266
  
Net loss for the quarter ended September 30, 2006
    
-
    
-
    
-
    
-
    
-
    
(7,415,840
)
  
(7,415,840
)
Balance, September 30, 2006
    
132,977,917
  
$
132,979
    
-
    
-
  
$
5,381,597
    
($15,496,242
)
  
($9,981,666
)

See accompanying notes to consolidated financial statements

5

GRANT LIFE SCIENCES, INC.
(A development stage company)
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)

   
For the Nine Months
Ended September 30,
  
For the Period July 9, 1998 (date of inception) through
  
   
2006
  
2005
  
September 30, 2006
  
       
(Restated -
Note E) 
      
Cash flows from operating activities:
              
Net (loss)
  
$
(7,480,568
)
$
(13,238,083
)
$
(15,496,242
)
Adjustments to reconcile net (loss) to cash (used in) operations:
                    
Depreciation
    
5,552
    
4,949
    
24,955
  
Amortization
    
25,852
    
137,671
    
52,519
  
Change in fair value related to adjustment of derivative and warrant liability to fair value of underlying securities
    
5,931,257
    
10,452,987
    
6,818,374
  
Loss on abandonment of assets
    
-
    
-
    
3,790
  
Vesting of stock options (Note F)
    
212,305
    
871,475
    
1,615,372
  
Common stock issued in exchange for services rendered
    
-
    
194,000
    
388,250
  
Cancellation of stock options
    
-
    
-
    
193,275
  
Interest on convertible notes payable
    
332,619
    
112,732
    
989,693
  
Warrants issued in exchange for services rendered
    
-
    
-
    
11,000
  
Beneficial conversion feature discount
    
-
    
-
    
298,507
  
Gain on extinguishment of debt
    
-
    
-
    
(510,104
)
Write off of accounts payable due to stockholders
    
-
    
(1,230
)
  
(2,108
)
Acquisition cost
    
-
    
-
    
65,812
  
Decrease (increase) in:
                    
Accounts receivable
    
51,337
    
-
    
(21,338
)
Employee receivables
    
-
    
334
    
-
  
Prepaid expense
    
36,000
    
(129,418
)
  
(33,125
)
Deposits & other
    
3,822
    
3,000
    
(52,513
)
(Decrease) increase in:
                    
Accounts payable
    
30,122
    
114,577
    
152,442
  
Notes payable & long-term debt
    
(6,195
)
  
35,000-
    
15,680
  
Accounts payable - assumed liabilities
    
-
    
-
    
(17,506
)
Accounts payable - stockholders
    
-
    
-
    
(38,900
)
Accrued expenses
    
59,333
    
63,889
    
187,889
  
Accrued payroll liabilities
    
(13,375
)
  
80,916
    
81,305
  
Accrued interest payable
    
56,777
    
106,582
    
353,876
  
Net cash (used in) operating activities
    
(755,162
)
  
(1,190,620
)
  
(4,919,097
)
                     
Cash flows from investing activities:
                    
Payments for property and equipment
    
(3,854
)
  
(5,743
)
  
(41,368
)
Net cash used in investing activities
    
(3,854
)
  
(5,743
)
  
(41,368
)
                     
Cash flows from financing activities:
                    
Proceeds from sale of common stock, net of costs and fees
    
-
    
9,000
    
1,770,887
  
Net proceeds from notes payable
    
-
    
1,925,000
    
3,105,255
  
Proceeds from related party notes payable
    
-
    
-
    
60,000
  
Payments for related party notes payable
    
-
    
(34,221
)
      
Proceeds from stock subscriptions receivable
    
-
    
-
    
100,000
  
Net cash provided by financing activities
    
-
    
1,934,000
    
5,001,921
  
                     
Net increase (decrease) in cash and cash equivalents
    
(759,016
)
  
737,639
    
41,456
  
Cash and cash equivalents at beginning of the period
    
800,472
    
365,958
    
-
  
Cash and cash equivalents at end of the period
  
$
41,456
  
$
1,103,597
  
$
41,456
  

Supplementary disclosure for non-cash investing and financing activities:

During the three months ended September 30,2006 the Company issued 1,264,865 shares of its Common Stock upon conversion of $8,007 of secured convertible notes payable, and 5,226,534 shares of its common stock in satisfaction of $52,268 of indebtedness. 

See accompanying notes to consolidated financial statements

6

GRANT LIFE SCIENCES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(Unaudited)

NOTE A - SUMMARY OF ACCOUNTING POLICIES

Interim Financial Information

The interim financial information as of September 30, 2006 and for the three and nine months ended September 30, 2006 is unaudited. The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying condensed consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes included in the Company's Form 10-KSB for the year ended December 31, 2005.

In the opinion of management, all adjustments that are necessary for a fair presentation of the financial information for the interim periods reported have been made. The results of operations for the three and nine month period ended September 30, 2006 is not necessarily indicative of the results that can be expected for the entire year ending December 31, 2006.

Business and Basis or Presentation

Grant Life Sciences, Inc. (formerly Impact Diagnostics, Inc.) (the “Company”) was organized under the laws of the State of Utah on July 9, 1998. The Company’s purpose is to research, develop, market and sell diagnostic kits for detecting disease with emphasis on the detection of low-grade cervical disease.

On July 30, 2004, the Company became a wholly owned subsidiary of Grant Ventures, Inc., a Nevada Corporation, by merging with Impact Acquisition Corporation, a Utah corporation and wholly owned subsidiary of Grant Ventures, Inc. Grant Ventures, Inc. was an inactive publicly registered shell corporation with no significant assets or operations. For accounting purposes the merger was treated as a recapitalization of the Company. Grant Ventures, Inc. changed its name to Grant Life Sciences, Inc. in November 2004.

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Impact Diagnostics. All intercompany transactions and balances have been eliminated in consolidation.

Development Stage Company

Effective July 9, 1998 (date of inception), the Company is considered a development stage Company as defined in Statement of Financial Accounting Standards No. 7 “Accounting and Reporting by Development Stage Companies”, SFAS No. 7. The Company’s development stage activities consist of the development of medical diagnostic kits. Sources of financing for these development stage activities have been primarily debt and equity financing. The Company has not yet established a significant source of revenue.

Going Concern

The accompanying financial statements have been prepared assuming the Company will continue as a going concern. Continuing as a going concern is dependent upon successfully obtaining additional working capital through debt and equity financing.

Income Taxes

The Company follows Statement of Financial Accounting Standard No. 109 “Accounting for Income Taxes”, which requires the recognition of deferred tax assets and liabilities for expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are based on the differences between the financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.


7

Net Income (Loss) per Common Share
 
The computation of net loss per common share is based on the weighted average number of shares outstanding during each period. The computation of diluted earnings per common share is based on the weighted average number of shares outstanding during the period plus the common stock equivalents which would arise from the exercise of stock options and warrants, and the conversion of notes payable outstanding using the treasury stock method and the average market price per share during the period. The following table sets forth potential shares of common stock that are not included in the diluted net loss per share because to do so would be antidilutive:
 
     
As of September 30,
  
     
2006
  
2005
  
 
Options to purchase common stock - vested
    
4,025,118
    
4,695,953
  
 
Options to purchase common stock - unvested
    
745,834
    
1,314,166
  
 
Warrants
    
10,405,010
    
10,922,010
  
 
Shares from potential note conversions
    
141,969,294
    
79,508,727
  
 
Total
    
157,145,256
    
96,440,856
  

Stock-Based Compensation
 
In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (SFAS123R). This Statement requires public entities to measure the cost of equity awards to employees based on the grant-date value of the award. The Company elected early adoption of this Statement, effective for 2004, in advance of the Company's required adoption date of December 15, 2005.

New Accounting Pronouncements

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS No. 154”), an amendment to Accounting Principles Bulletin Opinion No. 20, “Accounting Changes” (“APB No. 20”), and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements”. Though SFAS No. 154 carries forward the guidance in APB No.20 and SFAS No.3 with respect to accounting for changes in estimates, changes in reporting entity, and the correction of errors, SFAS No. 154 establishes new standards on accounting for changes in accounting principles, whereby all such changes must be accounted for by retrospective application to the financial statements of prior periods unless it is impracticable to do so. SFAS No. 154 is effective for accounting changes and error corrections made in fiscal years beginning after December 15, 2005, with early adoption permitted for changes and corrections made in years beginning after May 2005. The Company will implement SFAS No. 154 in its fiscal year beginning January 1, 2006. We are currently evaluating the impact of this new standard but believe that it will not have a material impact on the Company’s financial position, results of operations, or cash flows.

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments”, which amends SFAS No. 133, “Accounting for Derivatives Instruments and Hedging Activities” and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities”. SFAS No. 155 amends SFAS No. 133 to narrow the scope exception for interest-only and principal-only strips on debt instruments to include only such strips representing rights to receive a specified portion of the contractual interest or principle cash flows. SFAS No. 155 also amends SFAS No. 140 to allow qualifying special-purpose entities to hold a passive derivative financial instrument pertaining to beneficial interests that itself is a derivative instrument. The Company is currently evaluating the impact this new Standard but believes that it will not have a material impact on the Company’s financial position, results of operations, or cash flows.

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets” (“SFAS NO. 156”), which provides an approach to simplify efforts to obtain hedge-like (offset) accounting. This Statement amends FASB Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, with respect to the accounting for separately recognized servicing assets and servicing liabilities. The Statement (1) requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in certain situations; (2) requires that a separately recognized servicing asset or servicing liability be initially measured at fair value, if practicable; (3) permits an entity to choose either the amortization method or the fair value method for subsequent measurement for each class of separately recognized servicing assets or servicing liabilities; (4) permits at initial adoption a one-time reclassification of available-for-sale securities to trading securities by an entity with recognized servicing rights, provided the securities reclassified offset the entity’s exposure to changes in the fair value of the servicing assets or liabilities; and (5) requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the balance sheet and additional disclosures for all separately recognized servicing assets and servicing liabilities. SFAS No. 156 is effective for all separately recognized servicing assets and liabilities as of the beginning of an entity’s fiscal year that begins after September 15, 2006, with earlier adoption permitted in certain circumstances. The Statement also describes the manner in which it should be initially applied. The Company does not believe that SFAS No. 156 will have a material impact on its financial position, results of operations or cash flows.

8
 
In July 2006, the FASB released FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting and reporting for uncertainties in income tax law. This interpretation prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. This statement is effective for fiscal years beginning after December 15, 2006.  The Company is currently evaluating the impact FIN 48 may have on its financial condition or results of operations.
 
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Issues No. 157, “Fair Value Measurements” (“SFAS 157”), which defines the fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Early adoption is encouraged, provided that the Company has not yet issued financial statements for that fiscal year, including any financial statements for an interim period within that fiscal year. The Company is currently evaluating the impact SFAS 157 may have on its financial condition or results of operations.
 
In September 2006, the FASB issued SFAS No. 158, “Employer’s accounting for Defined Benefit Pension and Other Post Retirement Plans”.  SFAS No. 158 requires employers to recognize in its statement of financial position an asset or liability based on the retirement plan’s over or under funded status.  SFAS No. 158 is effective for fiscal years ending after December 15, 2006. The Company is currently evaluating the effect that the application of SFAS No. 158 will have on its results of operations and financial condition.
 
In September 2006, the United States Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). This SAB provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB 108 establishes an approach that requires quantification of financial statement errors based on the effects on each of the company’s balance sheets, statements of operations and related financial statement disclosures. The SAB permits existing public companies to record the cumulative effect of initially applying this approach in the first year ending after November 15, 2006 by recording the necessary correcting adjustments to the carrying values of assets and liabilities as of the beginning of that year with the offsetting adjustment recorded to the opening balance of retained earnings. Additionally, the use of the cumulative effect transition method requires detailed disclosure of the nature and amount of each individual error being corrected through the cumulative adjustment and how and when it arose. The Company is currently evaluating the impact SAB 108 may have on its results of operations and financial condition.
 
In October 2006, the Emerging Issues Task Force (“EITF”) issued EITF 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That is, Gross versus Net Presentation)” to clarify diversity in practice on the presentation of different types of taxes in the financial statements. The Task Force concluded that, for taxes within the scope of the issue, a company may adopt a policy of presenting taxes either gross within revenue or net. That is, it may include charges to customers for taxes within revenues and the charge for the taxes from the taxing authority within cost of sales, or, alternatively, it may net the charge to the customer and the charge from the taxing authority. If taxes subject to EITF 06-3 are significant, a company is required to disclose its accounting policy for presenting taxes and the amounts of such taxes that are recognized on a gross basis. The guidance in this consensus is effective for the first interim reporting period beginning after December 15, 2006 (the first quarter of our fiscal year 2007). We do not expect the adoption of EITF 06-3 will have a material impact on our results of operations, financial position or cash flow.

NOTE B - BUSINESS COMBINATION AND CORPORATE RESTRUCTURE

On July 30, 2004, the Company entered into a merger transaction with Impact Diagnostics, Inc. ("Impact”). In accordance with SFAS No. 141, Impact was the acquiring entity. While the transaction is accounted for using the purchase method of accounting, in substance the Agreement is a recapitalization of the Impact’s capital structure.


9

For accounting purposes, the Company accounted for the transaction as a reverse acquisition and Impact is the surviving entity. The total purchase price and carrying value of net assets acquired was $65,812. The Company did not recognize goodwill or any intangible assets in connection with the transaction. From 1999 until the date of the Agreement, Grant was an inactive corporation with no significant assets and liabilities.

Effective with the Agreement, all 35,060,720 previously outstanding shares owned by the Impact’s members were exchanged on a share for share basis with shares of the Company’s common stock.

The total consideration was $65,812 and the significant components of the transaction are as follows:

 
Common stock retained
  
$
6,000
  
 
Assets acquired
    
-
  
 
Liabilities assumed - accounts payable
    
20,034
  
 
Liabilities assumed - accounts payable - stockholder
    
39,778
  
 
Cash paid
    
-
  
 
Total consideration paid/organization cost
  
$
65,812
  

On September 20, 2004, the Company’s Board of Directors approved a change in the Company’s name to Grant Life Sciences, Inc. The accompanying financial statements have been changed to reflect the change as if it had happened at the beginning of the periods presented. Stockholders approved this change effective November 12, 2004.

In accordance with SOP 98-5, the Company expensed $65,812 as organization costs in 2004.

NOTE C - NOTES PAYABLE

Notes payable at September 30, 2006 and December 31, 2005 are as follows:

 
September 30, 2006
December 31, 2005
10% note payable, unsecured, originally due on 11/30/2002. The note payable was in default as of December 31, 2002. The venture capital firm that issued the loan has since been placed in receivership. As of December 31, 2003 the note balance was $587,753 with accrued interest payable of $141,501. In August 2004, this note for $587,753 and accrued interest of $175,787 was restructured into a 3-year convertible note of $350,000 plus 89,500 5-year warrants to purchase additional shares at $0.01 per share. The note is convertible into shares of common stock at a conversion price of $0.83798 per share. Interest is payable quarterly at 6% per year. The 89,500 warrants have a value of $0.0378 per share. The conversion resulted in a $411,597 gain on extinguishment of debt in 2004.
350,000
350,000
10% convertible notes with interest due quarterly subject to certain conditions, due three years from the date of the notes, June 14, 2008, August 18, 2008, and August 29, 2008. The holder has the option to convert unpaid principal to the Company's common stock at the lower of (i) $0.40 or (ii) 43% of the average of the three lowest intraday trading prices for the common stock on a principal market for the twenty trading days before, but not including, conversion date. The Company granted the note holder a security interest in substantially all of the Company's assets and intellectual property and registration rights. (see below) In 2005 $470,313 of note principal was converted into 67,580,405 shares at an average conversion rate of $0.007 per share. In 2006, $8,007 of note principal was converted into 1,264,865 shares at an average conversion rate of $0.0063 per share.
565,104
240,491
6% note payable, unsecured, interest and principal to be paid in eight equal quarterly payments beginning 6/07/05. Final payment is due 3/7/2007.
15,680
21,875
Total notes payable
930,784
612,366
 
Less: current portion
(15,680)
(21,875)
Balance notes payable (long term portion)
$ 915,104
$ 590,491


10

NOTE D - CONVERTIBLE NOTES PAYABLE

During 2005, the Company issued to qualified investors Convertible Notes in a total amount of $2,000,000 in exchange for net proceeds of $1,761,670. The proceeds that the Company received were net of prepaid interest of $133,330 representing the first eight month's interest calculated at 10% per annum for the aggregate of $2,000,000 of convertible notes, $30,000 that was placed into an escrow fund to purchase key man life insurance, and related costs of $75,000. Prepaid interest is amortized over the first eight months of the note and capitalized financing costs are amortized over the maturity period (three years) of the convertible notes.

The transactions, to the extent that it is to be satisfied with common stock of the Company, would normally be included as equity obligations. However, in the instant case, due to the indeterminate number of shares which might be issued under the embedded convertible host debt conversion feature, the Company is required to record a liability for the fair value of the detachable warrants and the embedded convertible feature of the note payable (included in the liabilities as a "derivative liability").

The accompanying financial statements comply with current requirements relating to warrants and embedded conversion features as described in FAS 133, EITF 98-5, EITF 00-19, EITF 00-27, and APB 14 as follows:

·  
The Company allocated the proceeds received between convertible debt and the detachable warrants based upon the relative fair values on the dates the proceeds were received.
·  
Subsequent to the initial recording, the change in the fair value of the detachable warrants, determined under the Black-Scholes option pricing formula, and the change in the fair value of the embedded derivative in the conversion feature of the convertible debentures are recorded as adjustments to the liabilities at September 30, 2006.
·  
The expense relating to the change in the fair value of the Company's stock reflected in the change in the fair value of the warrants and derivatives (noted above) is included as other income (expense).
·  
Accreted interest of $322,619 during the nine months ended September 30, 2006 and $10,228 during the same peiod in 2005.

During 2005, $470,311 of the June 14th convertible note was converted into 67,580,405 shares at an average conversion rate of $0.007 according to the terms of the note. As at September 30, 2006, $8,007 of the June 14th convertible note was converted into 1,264,865 shares at an average conversion rate of $0.006 according to the terms of the note.

The following table summarizes the various components of the convertible notes as of September 30, 2006:


 
Convertible notes:
  
$
565,104
  
 
Warrant liability .
    
561,423
  
 
Derivative liability .
    
8,137,682
  
       
9,264,209
  
           
 
Adjustment of note and warrant liability to fair value
    
(6,691,100
)
 
Accretion of interest related to convertible debenture .
    
(573,109
)
 
Converted to common shares .
    
(478,320
)
 
Total convertible notes:
  
$
1,521,680
  

 NOTE E - RESTATEMENT

During the year ended December 31, 2005, it was determined the correct application of accounting principles had not been applied in the 2005 accounting for convertible debentures and detachable warrants (see Note C).

In its original accounting for the debentures and detachable warrants, the Company recognized an embedded beneficial conversion feature present in the convertible note and allocated a portion of the proceeds equal to the intrinsic value of that feature to additional paid in capital. The Company has determined that the embedded conversion feature should have been accounted for in accordance with FAS 133, EITF 98-5, EITF 00-19, EITF 00-27, and APB 14. Accordingly, the proceeds attributed to the common stock, convertible debt and warrants have been restated to reflect the relative fair value method.


11

In accordance with SFAS 154 the necessary corrections to apply the accounting principles on the aforementioned transactions are currently reflected in the reported Consolidated Statements of Losses for the three and nine months ended September 30, 2005 and the Consolidated Statement of Cash Flows for the nine months ended September 30, 2005. The impact on the previously issued September 30, 2005 financial statements is as follows:

 
Balance Sheets as at September 30, 2005
 
September 30, 2005 balance sheets prior to restatement
September 30, 2005 balance sheets post restatement
Amount increase (decrease) in September 30, 2005 balance sheets
Total Assets
$1,375,233
$1,375,233
$       -
       
Derivative liability related to convertible notes
-
$11,957,218
$11,957,218
Warrant liability related to convertible notes
-
$376,500
$376,500
Long term debt
$464,480
$561,376
$96,896
Total Liabilities
$1,002,348
$13,432,962
$12,430,614
       
Additional paid in capital
$7,078,639
$5,078,639
$(2,000,000)
Accumulated deficit
$(6,188,808)
$(16,619,422)
$(10,430,614)
Deficiency in Stockholders’ Equity
$(372,885)
$(12,057,729)
$(11,684,844)


Condensed Consolidated Statement of Losses for Three Months Ended September 30, 2005
 
Three Months ended September 30, 2005 financial statement balance prior to restatement
Three Months ended September 30, 2005 financial statement post restatement
Amount increase (decrease) in September 30, 2005 financial statements
Change in fair value related to adjustment of derivative and warrant liability to fair value of underlying securities
-
$(10,293,048)
$(10,293,048)
Interest expense
$(204,723)
$(181,844)
$ 22,876
Net loss
$(763,432)
$(11,033,602)
$(10,270,170)
       
Loss per share-basic and fully diluted
$(0.01)
$(0.19)
$(0.18)
       


Condensed Consolidated Statement of Losses for Nine Months Ended September 30, 2005
 
Nine Months ended September 30, 2005 financial statement balance prior to restatement
Nine Months ended September 30, 2005 financial statement post restatement
Amount increase (decrease) in September 30, 2005 financial statements
Change in fair value related to adjustment of derivative and warrant liability to fair value of underlying securities
-
$(10,452,987)
$(10,452,987)
Interest expense
$(420,470)
$(398,097)
$22,373
Net loss
$(2,807,469)
$(13,238,083)
$(10,430,614)
       
Loss per share basic and fully diluted
$(0.05)
$(0.24)
$ (0.19)
       

12

Consolidated Statement of Cash Flows
 
September 30, 2005 financial statement balance prior to restatement
September 30, 2005 financial statement post restatement
Change in September 30, 2005 financial statements
Net loss
$(2,807,468)
$(13,238,083)
$(10,430,615)
Change in fair value related to adjustment of derivative and warrant liability to fair value of underlying securities
-
$10,452,987
$10,452,987
Beneficial conversion feature discount
$135,106
$      -
$(135,106)
Interest on convertible notes payable
$      -
$(112,732)
$112,732
Net cash used in operating activities
$(1,190,619)
$(1,190,619)
$      -
       
Net cash used in by investing activities
$(5,743)
$(5,743)
$      -
       
Net cash provided by financing activities
$1,934,000
$1,934,000
$      -

NOTE F - COMMON STOCK

At the 2006 Annual Meeting of Stockholders of Grant Life Sciences, Inc. the stockholders of the Company, by an affirmative vote of 64% of its outstanding shares of common stock, agreed to the filing of a Certificate of Amendment to the Articles of Incorporation of the Company pursuant to which the Company’s authorized shares of common stock would be increased from 150,000,000 shares to 750,000,000 shares of common stock with $0.001 par value per share. As of September 30, 2006 the Company had 132,977,917 shares of common stock issued and outstanding. As of December 31, 2005, the Company had 126,486,518 shares of common stock issued and outstanding. The Company is authorized to issue 20,000,000 shares of preferred stock with $0.001 par value per share. No shares of preferred stock have been issued to date.

In 1998, the Company issued 18,795,000 shares of its common stock at $0.005 per share for $100,000 which is shown as subscription receivable until it was settled in the year 2000.

In 1999 the Company issued 1,253,000 shares of its common stock at $0.004 per share for $5,000 in cash.

In 2001 the Company issued 250,600 shares of its common stock at $0.004 per share for $1,000 in cash.

In 2002 the Company issued 689,150 shares of its common stock at $0.13 per share for $92,500 in cash.

In 2002 the Company issued 1,591,310 shares of its common stock at $0.06 per share in return for services valued at $103,250.

In 2002 the Company issued 1,790,000 shares of its common stock at $0.14 per share in satisfaction of $250,000 of debt.

In 2003 the Company issued 930,800 shares of its common stock at $0.13 per share for $120,000 in cash.

In July 2004, per the Agreement and Plan of Merger with Impact Diagnostics, Inc. all previously outstanding 35,060,720 shares of common stock owned by the Impact’s stockholders were exchanged for the same number of shares of the Company’s common stock. The value of the stock that was issued was the historical cost of the Company’s net tangible assets, which did not differ materially from their fair value.

In connection with the Merger, on July 5, 2004, the board of directors of Impact Diagnostics, Inc. approved a stock split of 3.58 shares to 1. As a result of the split, the outstanding common stock of Impact Diagnostics, Inc. increased from 9,793,497 to 35,060,720 shares. Pursuant to the Merger Agreement, each share of Impact Diagnostics common stock was exchanged for one share of Grant Life Sciences common stock. All numbers, in the financial statements and notes to the financial statements have been adjusted to reflect the stock split for all periods presented.


13

On September 20, 2004, the Company’s Board of Directors approved a change in the Company’s name to Grant Life Sciences, Inc. The accompanying financial statements have been changed to reflect the change as if it had happened at the beginning of the periods presented. Stockholders approved this change effective November 12, 2004.

In March and April of 2004, the Company issued 238,660 shares of common stock for cash at $0.0838 per share for $20,000.

In June 2004, the Company issued 500,000 shares of common stock in exchange for services valued at $40,000 to consultants. The stock issued was valued at $.08 per share, which represents the fair value of the stock issued, which did not differ materially from the value of the services rendered. Expense of $20,000, related to financial consulting, is included in general administrative expense and expense of $20,000 related to R&D consulting is included in R&D expense.

On August 19, 2004, the Company completed a private placement of 9,560,596 shares to accredited investors at a price of $0.1835 per share. As an additional enticement to purchase the shares, one 5-year warrant to purchase stock at $0.1835 was issued for each 5 shares of stock purchased. The private placement resulted in net proceeds to the company of approximately $1,494,937. The Company also issued warrants to purchase 2,670,000 shares at an exercise price of $0.01 per warrant and warrants to purchase 411,104 shares at an exercise price of $0.185 per warrant to its placement agent in connection with the Merger and private placement.

A bridge loan of $50,000, made to the Company on July 6, 2004, was converted to equity on July 31, 2004 as part of the private placement. In addition to the warrants received as part of the offering, 50,000 warrants with an exercise price of $0.1835 were issued to the lender.

In July, 2004, the Company issued 2,720,000 shares of common stock for a convertible note payable and accrued interest of $205,885.

In August 2004, the Company issued 249,475 shares of common stock at $0.1835 per share in satisfaction of two related party notes payable of $45,779. Accrued interest was forgiven by the lenders.

In November 2004, the Company issued 2,403,000 shares of common stock for exercise of warrants at $0.01 strike price, for total cash proceeds of $24,030. These warrants were originally issued in connection with the Merger and private placement of common stock.

In March 2005, convertible notes, maturing in January and February 2005, were converted into 1,395,322 shares of stock. The conversion price per share was $0.092178, as stated in the notes, which originated in January and February of 2004.

In April 2005, the Company issued 500,000 shares of common stock to its financial advisory group in exchange for services rendered over the 2005 calendar year. The stock issued was valued at $0.40 per share, which represents the fair value of the stock issued, which did not differ materially from the value of the services rendered.

In June 2005, the Company issued 50,000 shares of common stock for exercise of stock options for cash $9,000.

In September 2005, 200,000 shares were issued in exchange for legal services at $.22 per share. The commitment to issue the shares was made on June 14, 2005.

From September 2005 to December 2005, $470,311 of principal of the Senior 10% convertible notes converted into 67,580,405 shares. The average conversion price per share was $0.0070.

During the fourth quarter of 2005 warrants for 517,000 shares were exercised for $5,420 in cash.

In August 2006 $8,007 of principal of the senior 10% convertible notes converted into 1,264,865 shares. The average conversion price per share was $0.0063

In September 2006, 5,226,534 shares were issued in satisfaction of indebtedness for liquidated damages at $0.01 per share for a total of $52,265. The liquidated damages arose from a 2004 Agreement from a sale of unregistered shares and warrants of the Company in July and August 2004.
 

14

NOTE G - STOCK OPTIONS AND WARRANTS

The Company has a Stock Incentive Plan. The options granted under the Plan may be either qualified or non-qualified options. Up to 25,000,000 options may be granted to employees, directors and consultants under the plan. Options may be granted with different vesting terms and expire no later than 10 years from the date of grant. During the nine months ended September, 2006, 600,000 options were granted, 500,000 with an exercise price of $0.05, and 100,000 with an exercise price of $0.018. No options were exercised, or terminated. In 2005, 950,000 options were granted, 850,000 with an exercise price of $0.18 and 100,000 with an exercise price of $0.40. In 2004, 5,243,254 options were granted under the plan. All of the options granted in 2004 have an exercise price of $0.18, but differing vesting terms. 50,000 of these options were exercised in June 2005. Stockholders approved the plan effective November 12, 2004.

Stock Options

Transactions involving stock options issued to employees, directors and consultants under the Company’s 2004 Stock Incentive Plan are summarized below. The following table summarizes the options outstanding and the related exercise prices for the shares of the Company’s common stock issued under the 2004 Stock Incenctive Plan and as of September 30, 2006 :

Options Outstanding
  
Options Exercisable
  
Exercise Prices
  
Number Outstanding
  
Weighted Average Remaining Contractual Life (Years)
  
Weighed Average Exercise Price
  
Number Exercisable
  
Weighted Average Exercise Price
  
$ 0.18
    
4,170,952
    
6.8
  
$
0.18
    
3,700,118
  
$
0.18
  
$ 0.05
    
500,000
    
9.6
  
$
0.05
    
291,667
  
$
0.05
  
$ 0.018
    
100,000
    
9.6
  
$
0.018
    
33,333
  
$
0.018
  
Total
    
4,770,952
    
7.2
  
$
0.16
    
4,025,118
  
$
0.17
  


   
Number of Shares
  
Weighted Average Price Per Share
  
Aggregate Intrinsic Value
  
Outstanding at December 31, 2003
    
-
    
-
    
-
  
   Granted
   
5,243,254
  
$
0.18
  
$
-
  
   Exercised
    
-
    
-
    
-
  
   Canceled or expired
    
-
    
-
    
-
  
Outstanding at December 31, 2004
    
5,243,254
    
0.18
    
-
  
   Granted
   
950,000
    
0.19
    
-
  
   Exercised
    
(50,000
)
  
0.18
    
-
  
   Canceled or expired
    
(1,972,302
)
  
0.18
    
-
  
Outstanding at December 31, 2005
    
4,170,952
    
0.18
    
-
  
   Granted
   
-
    
-
    
-
  
   Exercised
    
-
    
-
    
-
  
   Canceled or expired
    
-
    
-
    
-
  
Outstanding at March 31, 2006
    
4,170,952
    
0.18
    
-
  
   Granted
   
600,000
    
0.045
    
17,000
  
   Exercised
    
-
    
-
    
-
  
   Canceled or expired
    
-
    
-
    
-
  
Outstanding at June 30, 2006
    
4,770,952
    
0.16
    
17,000
  
   Granted
   
-
    
-
    
-
  
   Exercised
    
-
    
-
    
-
  
   Canceled or expired
    
-
    
-
    
-
  
Outstanding at September 30, 2006
    
4,770,952
  
$
0.16
  
$
17,000
  


15

A summary of the status of the Company’s nonvested options as of December 31, 2005 and changes during the nine months ended September 30, 2006 is as follows:

Nonvested Shares
  
Number
of
options
  
Weighted
average
grant date
fair value
  
Nonvested at December 31, 2005
    
983,334
 
$
0.66
  
Granted
    
600,000
  
$
0.018
  
Vested
    
(837,500
)
$
0.18
  
Forfeited
    
-
    
-
  
Nonvested at September 30, 2006
    
745,834
 
$
0.33
  

As at September 30, 2006, the total compensation cost not yet recognized related to nonvested option awards is $83,739 which is expected to be realized over a weighted average period of 0.45 years.

The weighted-average fair value of stock options granted during the current year and the years ended December 31, 2005 and 2004 and the weighted-average significant assumptions used to determine those fair values, using a Black-Scholes option pricing model are as follows:
 
   
2006
 
2005
 
2004
  
Significant assumptions (weighted-average):
              
    Risk-free interest rate at  grant date
   
4.9
%
  
3.6
%
  
3.7
%
    Expected stock price volatility      
    
373
%
  
107
%
  
114
%
    Expected dividend payout  
   
0
%
  
0
%
  
0
%
    Expected option life-years based on management’s estimate
    
3 yrs
    
3 yrs
    
3 yrs
  
 
In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (SFAS123R). This Statement requires public entities to measure the cost of equity awards to employees based on the grant-date value of the award. The Company elected early adoption of this Statement, effective for 2004, in advance of the Company's required adoption date of December 15, 2005. During the three and nine months ended September 30, 2006, the Company recognized $35,921 ($48,521 in general and administrative and $(12,800) in research and development expenses) and $212,305 ($115,702 in general and administrative and $ 96,603 in research and development expenses) respectively as expense relating to vested stock options. During the nine months ended September 30, 2005, the Company recognized $871,475 ($539,667 in general and administrative and $331,808 in research and development expenses) as expenses relating to vested stock options.

Warrants

The following tables summarize changes in warrants outstanding and the related exercise prices for the shares of the Company’s common stock issued by the Company as of September 30, 2006:

Warrants Outstanding & Exercisable
  
Exercise Prices
  
Number Outstanding
  
Weighted Average Remaining Contractual Life (Years)
  
Weighed Average Exercise Price
  
$ 0.01
    
89,500
   
2.8
  
$
0.01
  
$ 0.1835
    
411,104
   
2.8
  
$
0.1835
  
$ 0.1835
    
1,912,100
   
2.8
  
$
0.1835
  
$ 0.1835
    
50,000
   
2.8
  
$
0.1835
  
$ 0.18
    
250,000
   
3.0
  
$
0.18
  
$ 0.45
    
2,692,307
    
3.7
  
$
0.45
  
$0.45
    
2,307,692
    
3.8
  
$
0.45
  
$0.45
    
2,692,307
    
3.9
  
$
0.45
  
     
10,405,010
        
$
0.38
  


16


   
Number of Shares
  
Weighted Average Exercise Price
 
Outstanding at January 1, 2003
    
-
  
$
-
  
   Granted
   
-
    
-
  
   Exercised
    
-
    
-
  
   Canceled or expired
    
-
    
-
  
Outstanding at December 31, 2003
    
-
    
-
  
   Granted
   
5,382,704
    
0.09
  
   Exercised
    
(2,403,000
)
  
0.01
  
   Canceled or expired
    
-
    
-
  
Outstanding at December 31, 2004
    
2,979,704
    
0.16
  
   Granted
   
7,942,306
    
0.45
  
   Exercised
    
(517,000
)
  
0.01
  
   Canceled or expired
    
-
    
-
  
Outstanding at December 31, 2005
    
10,405,010
    
0.38
  
   Granted
   
-
    
-
  
   Exercised
    
-
    
-
  
   Canceled or expired
    
-
    
-
  
Outstanding at March 31, 2006
    
10,405,010
    
0.38
  
   Granted
   
-
    
-
  
   Exercised
    
-
    
-
  
   Canceled or expired
    
-
    
-
  
Outstanding at June 30, 2006
    
10,405,010
    
0.38
  
   Granted
   
-
    
-
  
   Exercised
    
-
    
-
  
   Canceled or expired
    
-
    
-
  
Outstanding at September 30, 2006
    
10,405,010
  
$
0.38
  
 
All warrants outstanding were exercisable at the date of grant. All of the warrants, except 250,000 warrants issued in 2004 for R&D services, were issued in connection with financings. The exercise price of the warrants issued in 2005 can be adjusted downward if stock is issued below the market price.

NOTE H - SUBSEQUENT EVENT

On November 3, 2006 the Company issued 387,500 shares of common stock of the Corporation at $0.03 per share to the Chairman of the Audit Committee in consideration for board fees owing at September 2, 2005, 453,127 shares of common stock of the Corporation to a vendor at $0.015 per share in consideration for services provided during 2005, and 310,000 shares of common stock of the Corporation valued at $40,000 to a consultant in accordance with a March 5, 2005 Consulting Agreement.


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

Forward-Looking and Cautionary Statements
 
This report contains certain forward-looking statements.  These statements relate to future events or our future performance and involve known and unknown risks and uncertainties.  Actual results may differ substantially from such forward-looking statements, including, but not limited to, the following:
 
•      our ability to meet our cash and working capital needs;
 
•      our ability to maintain our corporate existence as a viable entity; and
 
•      other risks detailed in our periodic report filings with the SEC.
 

17

In some cases, you can identify forward-looking statements by terminology such as “may”, “will”, “should”, “expects”, “intends”, “plans,” “anticipates”, “believes,” “estimates,” “predicts”, “potential”, “continue”, or the negative of these terms or other comparable terminology.  These statements are only predictions.  Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.

Overview

We are considered a development stage company engaged primarily in the development of protein-based screening tests that are used to screen women for cervical cancer and pre-cancerous conditions that typically result in cervical cancer.  We believe our tests detect the presence of certain antibodies that appear only when cervical cancer or certain pre-cancerous conditions are present in the body.  Our tests are performed by analyzing a small amount of blood taken from the patient.  In one version of our test, the blood sample is analyzed in a clinical testing laboratory using standard laboratory equipment and analytic software, which generally can produce test results in about two hours.  Our rapid test is designed to be administered at the point of care by a health professional in a doctor’s office, hospital, and clinic or even at home, and provides easy-to-read results in approximately 15 minutes. Our planned cervical cancer test uses proprietary technology to detect the presence of antibodies.  We believe that in the future we may be able to use that technology to develop rapid tests for other diseases and cancers.

In conjunction with the primary diagnostic cervical cancer blood tests that we are developing, we have also acquired the exclusive worldwide rights to diagnostic devices for HIV-1, HIV-2 and dengue fever and a proprietary diagnostic reagent a key ingredient commonly used by leading manufacturers of rapid tests as a detectable label. We acquired these rights from AccuDx Corporation in March 2005 for a period of ten years. Pursuant to the license agreement AccuDx will assist us in arranging to use an FDA/GMP-compliant contract manufacturing facility in Tijuana, Mexico to manufacture our diagnostic test devices.

We had no revenues and a net loss of $7,415,840 in the three months ended September 30, 2006 compared with a net loss of $11,033,602 during the same three months in 2005. During the nine months ended September 30 we incurred a net loss of $7,480,568 in 2006 compared to a net loss of $13,238,083 in the same period in 2005. These losses are materially affected by non-cash changes in fair value related to adjustment of derivative and warrant liability to fair value of underlying securities, as follows:

   
For the three months ended September 30,
  
For the nine months ended September 30,
  
   
2006
  
2005
  
2006
  
2005
  
       
Restated
      
Restated
  
Change in fair value related to adjustment of derivative and warrant liability to fair value of underlying securities
  
$
(6,948,491
)
$
(10,293,048
)
$
(5,931,257
)
$
(10,452,987
)
                           
Net loss
 
$
(7,415,840
)
$
(11,033,602
)
$
(7,480,568
)
$
(13,238,083
)

For the three months ended September 30, 2006 compared to the three months ended September 30, 2005 the $260,000 reduction in operating expense results from: $67,000 lower consulting expenses, $115,000 lower stock option expense and $40,000 in lower salaries, $36,000 lower interest and $58,000 lower legal fees partially offset by an increase of $35,000 in audit fees

For the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005 the $1.3 million reduction in operating expense results from: $659,000 lower stock option expense and $157,000 in lower salaries, $281,000 lower consulting, $47,000 lower royalties and licenses and $122,000 lower legal fees partially offset by an increase of $69,000 in audit fees, and interest cost which increased by $68,000. Since inception in July 1998, we have incurred cumulative losses of $15,496,242.

In June and August, 2005 we sold $2,000,000 of convertible debt in a private placement as part of an agreement to sell $2,000,000 of convertible debt. In order to meet the number of shares that may be required on conversion of the $2 million of convertible notes, based on latest conversion rates, we requested and received shareholder approval at our annual meeting held May 23, 2006 to increase our authorized shares of common stock from 150 million shares to 750 million shares.

Application of Critical Accounting Policies

Our consolidated financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles in the United States. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management's application of accounting policies. We believe that understanding the basis and nature of the estimates and assumptions involved with the following aspects of our consolidated financial statements is critical to an understanding of our financials.
 

18

Stock-Based Compensation

  On December 16, 2004, the FASB published Statement No. 123 (Revised 2004), “Share-Based Payment” (“SFAS No. 123R”). SFAS No. 123R requires that compensation cost related to share-based payment transactions be recognized in the financial statements. Share-based payment transactions within the scope of SFAS No. 123R include stock options, restricted stock plans, performance-based equity awards, stock appreciation rights, and employee share purchase plans. The provisions of SFAS No. 123R are effective as of the first interim period that begins after December 15, 2005. The Company adopted this Statement early, for the year 2004. The company incurred expense of $976,986 in 2005 and $426,081 in 2004 for the stock options granted under its 2004 Stock Incentive Plan. The Company anticipates continuing to incur such costs in order to conserve its limited financial resources. The determination of the volatility, expected term and other assumptions used to determine the fair value of equity based compensation issued to non-employees under SFAS No. 123 involves subjective judgment and the consideration of a variety of factors, including our historical stock price, option exercise activity to date and the review of assumptions used by comparable enterprises.

Accounting for Derivatives

In June 1998, FASB issued SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” The Statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value.

In June 2005, the Company obtained a commitment from accredited investors to purchase convertible debt with warrants. The Company evaluated the transaction as a derivative transaction in accordance with SFAS No. 133. The transactions, to the extent that it is to be satisfied with common stock of the Company, would normally be included as equity obligations. However, in the instant case, due to the indeterminate number of shares which might be issued under the embedded convertible host debt conversion feature, the Company is required to record a liability for the fair value of the detachable warrants and the embedded convertible feature of the note payable (included in the liabilities as a "derivative liability").

The Company accounts for warrants and embedded conversion features as described in SFAS 133, EITF 98-5, 00-19, and 00-27, and APB 14 as follows:

·    
The Company allocated the proceeds received between the convertible debt and the detachable warrants based upon the relative fair market values on the dates the proceeds were received.
·    
Subsequent to the initial recording, the change in the fair value of the detachable warrants, determined under the Black-Scholes option pricing formula, and the change in the fair value of the embedded derivative in the conversion feature of the convertible debentures at each reporting date are recorded as adjustments to the liabilities.
·    
The expense relating to the change in the fair value of the Company's stock reflected in the change in the fair value of the warrants and derivatives is included as other income (expense).
 
Plan of Operations

Grant Life Sciences, Inc. (GLIF.OB), a development stage company, engages in the research, development, marketing, and sale of diagnostic kits for the screening, monitoring, and diagnosis of diseases with emphasis on women’s health, infectious diseases, and cancers.
 
During the next year, we expect we may acquire laboratory assets to augment our clinical research and development efforts, which are presently outsourced, and may continue to be outsourced. We have relocated our offices to California where our chairman, president and chief financial officer reside.
 
During the next 12 months, we plan to expand on our broadened business strategy of in- and out-licensing technologies and products. To this end, we have recently established OEM agreements to manufacture and distribute more than two-dozen immunoassay tests for the India and other South East Asia markets. These newly added tests are additions to the AccuDx rapid test line (HIV1/2, Dengue fever IgG and IgM), and include trimarkers (Toxoplasma, Rubella, and CMV IgG and IgM antibodies), HSV (IgG and IgM), HBVsAg, HCV, Troponin-I, TB rapid test, hemoglobin A1c, cancer markers, thyroid hormone panel (T3, T4, TSH), and others. In addition, we have signed a Letter of Intent (LOI) to exclusively represent Response Biomedical Corp. of Burnaby, B.C. to distribute its RAMP cardiac products in India.
 

19

We plan to take advantage of our established sales channel to provide important diagnostic tests to the vast India market and we intend to continue adding new products in the area of infectious diseases, hormones, and cancer biomarkers, for sales in the future. We are also actively expanding our sales channel to other South East Asia countries. Starting in the third quarter of 2006 we plan to increase revenue from the sales of immunoassay kits and RAMP cardiac products significantly.
 
As part of our in- and out-licensing strategy, we signed a Memorandum of Understanding (MOU) with Diagnostic Technology Ltd. (Haifa, Israel) in April 2006 related to Grant’s cervical cancer-diagnostic technology (U.S. Patent No. 6,743,593). The MOU, initially for a 90 day due diligence period was extended an additional 60 days in order to complete the evaluation of human papillomavirus antibody test.  The Company and DTL are exploring an expanded partnership related to the Company's cervical cancer-diagnostic technology.
 
As a development stage company, we plan to acquiring new products through our in-licensing activities, optimizing the technologies and products, and out-licensing to our partners for further development or sales through our own marketing channels. In addition to the human papillomavirus antibody test, we are actively evaluating a human papillomavirus antigen test and other new technologies.
 
During the next 12 months, we anticipate that we may add employees, including scientists and other professionals in the research and development, product development, business development, regulatory, manufacturing, marketing and clinical studies areas.
 
We do not anticipate investing in real estate or interests in real estate, real estate mortgages, or securities of or interests in persons primarily engaged in real estate activities during the next 12 months.  We do not intend to undertake investments in real estate as a part of our normal operations.

Liquidity and Capital Resources

As of September 30, 2006, we had total current assets of $130,202 and total current liabilities of $544,989.

Our continuation as a going concern is dependent on our ability to generate sufficient cash flows to meet our obligations on a timely basis and to obtain additional financing as may be required.

Auditor’s Opinion Expressed Doubt About The Company’s Ability to Continue as a “Going Concern”

The independent auditors report on our December 31, 2005 financial statements included in the Company's Annual Report states that the Company is in the development stage and has not established a significant source of revenues. This raises substantial doubt about the Company's ability to continue as a going concern. If we are unable to develop our business, we have to discontinue operations or cease to exist, which would be detrimental to the value of the Company's common stock. We can make no assurances that our business operations will develop and provide us with significant cash to continue operations.

Recent Accounting Pronouncements

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS No. 154”), an amendment to Accounting Principles Bulletin Opinion No. 20, “Accounting Changes” (“APB No. 20”), and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements”. Though SFAS No. 154 carries forward the guidance in APB No.20 and SFAS No.3 with respect to accounting for changes in estimates, changes in reporting entity, and the correction of errors, SFAS No. 154 establishes new standards on accounting for changes in accounting principles, whereby all such changes must be accounted for by retrospective application to the financial statements of prior periods unless it is impracticable to do so. SFAS No. 154 is effective for accounting changes and error corrections made in fiscal years beginning after December 15, 2005, with early adoption permitted for changes and corrections made in years beginning after May 2005. The Company will implement SFAS No. 154 in its fiscal year beginning January 1, 2006. We are currently evaluating the impact of this new standard but believe that it will not have a material impact on the Company’s financial position, results of operations, or cash flows.


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In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments”, which amends SFAS No. 133, “Accounting for Derivatives Instruments and Hedging Activities” and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities”. SFAS No. 155 amends SFAS No. 133 to narrow the scope exception for interest-only and principal-only strips on debt instruments to include only such strips representing rights to receive a specified portion of the contractual interest or principle cash flows. SFAS No. 155 also amends SFAS No. 140 to allow qualifying special-purpose entities to hold a passive derivative financial instrument pertaining to beneficial interests that itself is a derivative instrument. The Company is currently evaluating the impact this new Standard but believes that it will not have a material impact on the Company’s financial position, results of operations, or cash flows.
 
In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets” (“SFAS NO. 156”), which provides an approach to simplify efforts to obtain hedge-like (offset) accounting. This Statement amends FASB Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, with respect to the accounting for separately recognized servicing assets and servicing liabilities. The Statement (1) requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in certain situations; (2) requires that a separately recognized servicing asset or servicing liability be initially measured at fair value, if practicable; (3) permits an entity to choose either the amortization method or the fair value method for subsequent measurement for each class of separately recognized servicing assets or servicing liabilities; (4) permits at initial adoption a one-time reclassification of available-for-sale securities to trading securities by an entity with recognized servicing rights, provided the securities reclassified offset the entity’s exposure to changes in the fair value of the servicing assets or liabilities; and (5) requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the balance sheet and additional disclosures for all separately recognized servicing assets and servicing liabilities. SFAS No. 156 is effective for all separately recognized servicing assets and liabilities as of the beginning of an entity’s fiscal year that begins after September 15, 2006, with earlier adoption permitted in certain circumstances. The Statement also describes the manner in which it should be initially applied. The Company does not believe that SFAS No. 156 will have a material impact on its financial position, results of operations or cash flows.
 
In July 2006, the FASB released FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting and reporting for uncertainties in income tax law. This interpretation prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. This statement is effective for fiscal years beginning after December 15, 2006.  The Company is currently evaluating the impact FIN 48 may have on its financial condition or results of operations.
 
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Issues No. 157, “Fair Value Measurements” (“SFAS 157”), which defines the fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Early adoption is encouraged, provided that the Company has not yet issued financial statements for that fiscal year, including any financial statements for an interim period within that fiscal year. The Company is currently evaluating the impact SFAS 157 may have on its financial condition or results of operations.
 
In September 2006, the FASB issued SFAS No. 158, “Employer’s accounting for Defined Benefit Pension and Other Post Retirement Plans”.  SFAS No. 158 requires employers to recognize in its statement of financial position an asset or liability based on the retirement plan’s over or under funded status.  SFAS No. 158 is effective for fiscal years ending after December 15, 2006. The Company is currently evaluating the effect that the application of SFAS No. 158 will have on its results of operations and financial condition.
 
In September 2006, the United States Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). This SAB provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB 108 establishes an approach that requires quantification of financial statement errors based on the effects on each of the company’s balance sheets, statements of operations and related financial statement disclosures. The SAB permits existing public companies to record the cumulative effect of initially applying this approach in the first year ending after November 15, 2006 by recording the necessary correcting adjustments to the carrying values of assets and liabilities as of the beginning of that year with the offsetting adjustment recorded to the opening balance of retained earnings. Additionally, the use of the cumulative effect transition method requires detailed disclosure of the nature and amount of each individual error being corrected through the cumulative adjustment and how and when it arose. The Company is currently evaluating the impact SAB 108 may have on its results of operations and financial condition.

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In October 2006, the Emerging Issues Task Force (“EITF”) issued EITF 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That is, Gross versus Net Presentation)” to clarify diversity in practice on the presentation of different types of taxes in the financial statements. The Task Force concluded that, for taxes within the scope of the issue, a company may adopt a policy of presenting taxes either gross within revenue or net. That is, it may include charges to customers for taxes within revenues and the charge for the taxes from the taxing authority within cost of sales, or, alternatively, it may net the charge to the customer and the charge from the taxing authority. If taxes subject to EITF 06-3 are significant, a company is required to disclose its accounting policy for presenting taxes and the amounts of such taxes that are recognized on a gross basis. The guidance in this consensus is effective for the first interim reporting period beginning after December 15, 2006 (the first quarter of our fiscal year 2007). We do not expect the adoption of EITF 06-3 will have a material impact on our results of operations, financial position or cash flow.
 
Off-Balance Sheet Arrangements
 
We do not have any off-balance sheet arrangements as of September 30, 2006 or as of the date of this report.

Inflation

In the opinion of management, inflation has not had a material effect on the operations of the Company.

Item 3. Controls and Procedures
 
Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2006. Based on such evaluation, our principal executive officer and principal financial officer have concluded, as of the end of such period, that our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in our reports that we file or submit under the Securities Exchange Act of 1934.
 
During the third quarter of fiscal 2006, there were no changes to our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
 

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PART II
OTHER INFORMATION

Item 1. Legal Proceedings

None
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3. Defaults upon Senior Securities

In January 2006, the Company was served with a default notice by the holders of the $2,000,000 convertible notes. The default was the result of the Company’s not having maintained an effective registration statement for sufficient shares to permit the note holders to continue conversion of the notes to common shares. In February 2006, the notice of default was withdrawn in exchange for an agreement with the Company whereby the rate at which the notes could be converted was reduced from 50% to 43% of the average of the three lowest intraday trading prices for the common stock on a principal market for the 20 trading days before but not including conversion date.

Item 4. Submission of Matters to a Vote of Security Holders
 
None.

Item 5. Other Information

None.

Item 6.    Exhibits
 
Exhibit
Number
 
Description
 
     
31.1
 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
31.2
 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
32.1
 
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
32.2
 
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 

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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.
 
 
GRANT LIFE SCIENCES, INC.
   
Date: November 20, 2006
/s/ Hun-Chi Lin
 
Hun-Chi Lin
 
President and Chief Scientist
 
 
Date: November 20, 2006
/s/ Don Rutherford
 
Don Rutherford
 
Chief Financial Officer
 

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