**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**


**FORM
      10-K**





(Mark
      one)


**x
      ANNUAL REPORT UNDER
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT**


**OF
      1934**





**FOR
      THE FISCAL YEAR ENDED: DECEMBER 31, 2005**





**o
      TRANSITION REPORT
      PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES**


**EXCHANGE
      ACT OF 1934**





For
      the
      transition period from _________ to ___________





Commission
      file number 001-32325





**CALLISTO
      PHARMACEUTICALS, INC.**


(Exact
      Name of Registrant as Specified in its Charter)





Delaware
            13-3894575(State
                or Other Jurisdiction ofIncorporation
                or Organization)
            (I.R.S.
                Employer Identification No.)








420
      Lexington Avenue, Suite 1609, New York, New York 10170


(Address
      of Principal Executive Offices) (Zip Code)





(212)
      297-0010


(Issuer's
      telephone number, including area code)





Securities
      registered pursuant to Section 12(b) of the Act:





Title
                of each class
            Name
                of each exchange on which registeredCommon
                Stock, $.0001 par value
            American
                Stock Exchange





Securities
      registered pursuant to section 12(g) of the Act:








Title
      of class


None





Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act.  Yes o No þ





Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the
      Act.  Yes o No þ





Indicate
      by check mark whether the registrant: (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 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 þ No o





Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the best
      of registrant's knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-K or any amendment to
      this
      Form 10-K. þ





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one):





Large
                accelerated filero
            Accelerated
                filero
            Non-accelerated
                filerþ





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).  Yes o No þ





The
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates of the registrant as of March 30, 2006, based on the closing
      sale
      price on such date, was $50,615,700.





As
      of
      March 30, 2006 the registrant had a total of 37,713,264 shares of Common
      Stock outstanding.












**DOCUMENTS
      INCORPORATED BY REFERENCE**




The
      information required by Part III of this Report, to the extent not set forth
      herein, is incorporated herein by reference from the registrant’s definitive
      proxy statement relating to the Annual Meeting of Shareholders to be held in
      2006, which definitive proxy statement shall be filed with the Securities and
      Exchange Commission within 120 days after the end of the fiscal year to which
      this Report relates.





2




**CALLISTO
      PHARMACEUTICALS, INC.**





**FORM
      10-K**





**INDEX**





PART
                I
            
            PAGEItem
                1.
            Business
            4Item
                1A
            Risk
                Factors
            11Item
                1B
            Unresolved
                Staff Comments
            20Item
                2.
            Properties
            20Item
                3.
            Legal
                Proceedings
            20Item
                4.
            Submission
                of Matters to a Vote of Security
                Holders
            20PART
                IIItem
                5.
            Market
                for the Registrant’s Common Equity,
                RelatedStockholder Matters and Issuer Purchases of Equity
                Securities
            20Item
                6.
            Selected
                Consolidated Financial Data
            21Item
                7.
            Management's
                Discussion and Analysis of
                Financial Condition and Results of Operations
            22Item
                7A.
            Quantitative
                and Qualitative Disclosures About Market
                Risk
            30Item
                8.
            Financial
                Statements and Supplementary
                Data
            30Item
                9.
            Changes
                in and Disagreements with Accountants On
                Accounting and Financial Disclosure
            30Item
                9A.
            Controls
                and Procedures
            31Item
                9B.
            Other
                Information
            31PART
                IIIItem
                10.
            Directors
                and Executive Officers of the
                Registrant
            32Item
                11.
            Executive
                Compensation
            32Item
                12.
            Security
                Ownership of Certain Beneficial owners and
                Mangement and Related Stockholder Matters
            32Item
                13.
            Certain
                Relationships and Related
                Transactions
            32Item
                14.
            Principal
                Accountant Fees and
                Services
            32PART
                IVItem
                15.
            Exhibits
                and Financial Statement
                Schedules
            32Signatures
            36





3




**PART
      I**





This
      Form
      10-K contains forward-looking statements that involve risks and uncertainties.
      Such forward-looking statements are characterized by future or conditional
      verbs
      and include, but are not limited to, statements regarding the results of product
      development efforts, clinical trials and applications for marketing approval
      of
      pharmaceutical products, and the scope and success of future operations. Such
      statements are only predictions and our actual results may differ materially
      from those anticipated in these forward-looking statements. Factors that may
      cause such differences include, but are not limited to, those discussed under
      "Risk Factors" and elsewhere in this Form 10-K for the year ended December
      31,
      2005, as filed with the Securities and Exchange Commission, including the
      uncertainties associated with product development, the risk that products that
      appeared promising in early clinical trials do not demonstrate efficacy in
      larger-scale clinical trials, the risk that we will not obtain approval to
      market our products, the risks associated with dependence upon key personnel
      and
      the need for additional financing. We do not assume any obligation to update
      forward-looking statements as circumstances change.





**ITEM
      1. BUSINESS.**





Callisto
      Pharmaceuticals, Inc. is referred to throughout this report as "Callisto,"
      "we"
      or "us."





We
      are a
      biopharmaceutical company focused on the development of drugs to treat relapsed
      (re-occurrence of active disease) or refractory acute leukemia, multiple myeloma
      (an incurable blood cancer that invades and proliferates in bone marrow), and
      advanced carcinoid cancer patients. Our lead drug candidate, L-Annamycin, a
      drug
      from the anthracycline family (chemotherapy drugs which are derived from
      antibiotics), earlier completed an initial Phase I/IIa clinical trial in
      relapsed or refractory leukemia patients with a prior sponsor. L-Annamycin,
      originally developed by scientists at The University of Texas M.D. Anderson
      Cancer Center to address the clinical limitations associated with anthracycline
      drugs such as Adriamycin (doxorubicin) to treat cancer, began a clinical trial
      at The University of Texas M.D. Anderson Cancer Center in adult relapsed or
      refractory acute lymphocytic leukemia (ALL) patients on December 1, 2005. This
      single-arm, open label trial will enroll 12 patients in a dose escalation Phase
      I portion, followed by 10 patients in a final fixed dose in the Phase II
      portion. We plan to treat up to 34 patients. We also expect to commence two
      additional trials of L-Annamycin in 2006, a single agent trial in pediatric
      relapsed or refractory ALL patients and a combination therapy trial with Ara-C
      (cytosine arabinoside) in relapsed or refractory acute myeloid leukemia (AML)
      patients.





Our
      second drug candidate, Atiprimod, is an orally administered drug with
      antiproliferative and antiangiogenic activity. Atiprimod commenced a Phase
      I/IIa
      clinical trial in relapsed multiple myeloma patients on May 26, 2004. These
      are
      patients that have a re-occurrence of active disease, and no longer respond
      to
      approved therapies. The Phase I/IIa clinical trial is being performed at four
      sites, The University of Texas M.D. Anderson Cancer Center (Houston, TX), the
      Dana-Farber Cancer Institute (Boston, MA), the St. Vincent's Comprehensive
      Cancer Center (New York, NY) and the Roswell Park Cancer Institute (Buffalo,
      NY). In December 2005, we announced interim results from this trial performed
      in
      relapsed or refractory multiple myeloma patients which consisted of 15 patients
      treated with Atiprimod, including 3 patients at the highest dose level of 180
      mg/day. Two patients exhibited stable disease, with one patient having a 34%
      decrease in M protein (measure of tumor burden) over 3 months of treatment.
      It
      was also noted that two patients reported a subjective decrease in bone pain.
      We
      plan to continue this trial at higher dose levels until the maximum tolerated
      dose is reached and then treat 10 additional patients at that
      level.





On
      March
      15, 2005 we announced a second Phase I/IIa clinical trial of Atiprimod in
      advanced cancer patients. The new trial is entitled: "An Open Label Study of
      the
      Safety and Efficacy of Atiprimod Treatment for Patients with Advanced Cancer",
      and is currently being conducted at the University of Texas M.D. Anderson Cancer
      Center. On February 28, 2006, we announced plans to launch an additional
      indication for clinical development of Atiprimod based on encouraging clinical
      results from the advanced cancer clinical trial that showed a clear response
      in
      a patient with advanced carcinoid cancer plus additional encouraging clinical
      data on other carcinoid patients. Based on these new clinical data, we plan
      to
      initiate a new Phase I/II clinical trial of Atiprimod in carcinoid cancer
      patients with advanced metastatic tumors at several clinical sites in the next
      few months.





**RECENT
      DEVELOPMENTS**





On
      February 3, 2006, we closed a private placement of 4,283,668 shares of common
      stock and 1,070,917 common stock purchase warrants to certain accredited
      investors. The warrants are exercisable for 18 months from closing at an
      exercise price of $1.60 per share. The securities were sold at a price of $1.20
      per share for aggregate gross proceeds of approximately $5.14 million. Net
      proceeds, after fees and expenses, was $4.6 million. We agreed to file, within
      60 days after the closing, a registration statement covering the resale of
      the
      shares of common stock and the shares underlying the warrants. In addition,
      we
      agreed to use our commercially reasonable efforts to cause the registration
      statement to be declared effective within 120 days after closing.





On
      January 10, 2006, we entered into a Patent and Technology License Agreement
      with
      The University of Texas M.D. Anderson Cancer Center. Pursuant to the license
      agreement, we were granted the exclusive right to manufacture, have
      manufactured, use, import, offer to sell and/or sell anti-cancer compounds
      called tyrphostins (renamed Degrasyns). We paid a nonrefundable license fee
      upon
      execution of this agreement and we are obligated to pay annual license
      maintenance fees to The University of Texas M.D. Anderson Cancer Center. We
      are
      also obligated under this agreement to pay for the legal fees and expenses
      associated with establishing and protecting the patent rights
      worldwide.




We
      also
      agreed to pay The University of Texas M.D. Anderson Cancer Center royalties
      based on net sales from any licensed products, plus aggregate milestone payments
      of up to $1,750,000 based upon achieving certain regulatory submissions and
      approvals. The term of the agreement is from January 10, 2006 until the end
      of
      the term for which the patent rights associated with the licensed technology
      have expired. If the first pending patent is issued, the agreement is projected
      to expire in 2025. In addition, at any time after 2 years from January 10,
      2006,
      The University of Texas M.D. Anderson Cancer Center has the right to terminate
      the license if we fail to provide evidence within 90 days of written notice
      that
      we have commercialized or are actively and effectively attempting to
      commercialize the licensed technology.




4




**HISTORY**





In
      March
      2002, Callisto Pharmaceuticals, Inc. ("Old Callisto"), a non-public company,
      purchased 99.7% of the outstanding common shares of Webtronics, Inc.,
      ("Webtronics") a public company for $400,000. Webtronics was incorporated in
      Florida on February 2, 2001 and had limited operations at December 31, 2002.





On
      April
      30, 2003, pursuant to an Agreement and Plan of Merger dated March 10, 2003,
      as
      amended April 4, 2003, Synergy Acquisition Corp., a wholly-owned subsidiary
      of
      Webtronics merged into Synergy Pharmaceuticals Inc. ("Synergy") and Callisto
      Acquisition Corp., a wholly-owned subsidiary of Webtronics merged into Old
      Callisto (collectively, the "Merger"). As a result of the Merger, Old Callisto
      and Synergy became wholly-owned subsidiaries of Webtronics. In the Merger
      Webtronics issued 17,318,994 shares of its common stock in exchange for
      outstanding Old Callisto common stock and an additional 4,395,684 shares in
      exchange for outstanding Synergy common stock. Old Callisto changed its name
      to
      Callisto Research Labs, LLC ("Callisto Research") and Webtronics changed its
      name to Callisto Pharmaceuticals, Inc. and changed its state of incorporation
      from Florida to Delaware. Subsequently, 171,818 shares of common stock issued
      to
      former Synergy shareholders were returned to us under the terms of certain
      indemnification agreements.





**L-ANNAMYCIN
      TO TREAT RELAPSED ACUTE LEUKEMIA**





On
      August
      12, 2004 we entered into a worldwide exclusive license agreement with The
      University of Texas M.D. Anderson Cancer Center to develop and commercially
      exploit the L-Annamycin patent rights. L-Annamycin, an anthracycline drug for
      leukemia therapy, has a novel therapeutic profile, including activity against
      drug resistant tumors and significantly reduced toxicity.





**PRECLINICAL
      STUDIES**





Nonclinical
      studies have shown that Annamycin delivered as a liposomal preparation
      (L-Annamycin) is effective against several different in vivo tumor models
      (animal experiments), including human tumors which are resistant to other
      chemotherapy drugs, grafted into animals. Additionally, results from in vitro
      studies (cell culture experiments) indicate that L-Annamycin and free Annamycin
      were able to partially overcome tumor resistance to chemotherapy drugs in
      several tumor cell lines that were resistant to other drugs such as doxorubicin.
      In nonclinical toxicity studies, myelosuppression (suppression of the body’s
      immune response) was noted in mice at a single intravenous dose of 15.7 mg/kg
      L-Annamycin. With weekly intravenous doses of 5.2 mg/kg L-Annamycin for 6 weeks,
      or 3.1 and 4.2 mg/kg L-Annamycin for 10 weeks in mice, the cardiotoxicity
      (toxicity to heart tissue) of L-Annamycin was substantially less than an
      equivalent dose of doxorubicin. In dogs, a single 15-minute intravenous infusion
      of up to 1.42 mg/kg L-Annamycin was well tolerated, with no clinically
      significant adverse effects, hematological or chemical changes, or pathological
      changes.





**COMPLETED
      CLINICAL STUDIES**





L-Annamycin
      was evaluated previously by Aronex Pharmaceuticals, Inc. in 3 clinical trials:
      1) a Phase I clinical trial in 36 patients with relapsed solid tumors, 2) a
      Phase II clinical trial in 13 patients with doxorubicin-resistant breast cancer,
      and 3) a Phase I/IIa trial in 20 patients with relapsed/refractory AML and
      ALL.
      In the initial Phase I study, L-Annamycin was administered by a single 1- to
      2-h
      intravenous infusion at 3-week intervals. Thirty-six patients with relapsed
      solid tumors were treated and 109 treatment courses were administered at doses
      ranging from 3 to 240 mg/m2. No cardiotoxicity was seen on biopsy of heart
      tissue of four patients studied. The maximum tolerated dose (MTD) for
      L-Annamycin in solid tumor patients was found to be 190 mg/m2. A second Phase
      II
      study of L-Annamycin was performed in 13 women with doxorubicin-resistant breast
      cancer. The median number of prior chemotherapy regimes was two, and six
      patients had two or more organ sites of involvement. L-Annamycin was
      administered at 190-250 mg/m2 as a single i.v. infusion over 1-2 h every 3
      weeks. Of the 13 patients, 12 had clear deterioration and new tumor growth
      after
      one or two courses.





The
      potential of a less cardiotoxic drug that was active against multi-drug
      resistant tumors led to a third trial in relapsed leukemia patients (both AML
      and ALL). The trial involved 20 patients with relapsed/refractory AML (n=17)
      or
      ALL (n=3). L-Annamycin was infused at a starting dose of 190 mg/m2/day x 3
      days
      with escalation to 230, 280, and 350 mg/m2/day x 3 days. Notably, this dosing
      regime gave cumulative dosages that were 4 to 5-fold greater than was achieved
      in solid tumor patients. L-Annamycin was generally well tolerated with no
      observed cardiotoxicity. The MTD was determined at 280 mg/m2/day x 3 days with
      grade 3/4 hepatotoxicity, or liver toxicity, and mucositis, or inflammation
      and
      lesions of the oral mucosa, observed at the highest dose levels of 350 mg/m2/day
      x 3 days. Of the 20 treated patients, two achieved complete remission (1 AML
      at
      280 mg/m2/day x 3 days who had failed prior induction therapy, and 1 ALL at
      350
      mg/m2/day x 3 days). Importantly, fifty percent of all patients cleared their
      immature white blood cells, or blasts circulating in their blood stream and
      43%
      cleared the blasts in their bone marrow. The conclusions drawn from the trial
      were that L-Annamycin was safe, well tolerated and showed clinical activity
      in
      patients with acute leukemias, and that further evaluation of this novel
      anthracycline in patients with hematopoietic, or blood borne, malignancies
      was
      clearly warranted.





**DEVELOPMENT
      STRATEGY**





We
      began
      a clinical trial at The University of Texas M.D. Anderson Cancer Center in
      adult
      relapsed or refractory acute lymphocytic leukemia (ALL) patients on December
      1,
      2005. This single-arm, open label trial will enroll 12 patients in a dose
      escalation Phase I portion, followed by 10 patients in a final fixed dose in
      the
      Phase II portion. We plan to treat up to 34 patients. We also expect to commence
      two additional trials with L-Annamycin in 2006, a single agent trial of
      L-Annamycin in pediatric relapsed ALL patients, and a combination trial of
      L-Annamycin in combination with Ara-C in adult relapsed or refractory AML
      patients.




5




**MANUFACTURING**





An
      improved manufacturing method for Annamycin has been developed at Antibioticos
      S.p.A., our commercial supplier of GMP ("Good Manufacturing Practice") drug
      substance. GMP material is currently being produced in sufficient quantity
      for
      all three anticipated trials outlined in the development strategy section.
      The
      analytical methods developed previously have been successfully transferred,
      and
      are in the process of being validated by Quantitative Technologies, Inc., our
      analytical contract research organization, or CRO, for Annamycin development
      work. The final lyophilized GMP formulated drug product is being manufactured
      by
      Pharmaceutical Services, Inc., who previously produced final product for the
      earlier clinical trials. Currently, Antibioticos S.p.A. is our sole supplier
      of
      Annamycin for our clinical trials. Our agreement with Antibioticos provides
      that
      Antibioticos will provide 400 grams of GMP drug substance (Annamycin) for our
      L-Annamycin clinical trials. Upon the conclusion of our Phase IIb clinical
      trials, the agreement provides that the parties will negotiate in good faith
      towards a commercial supply agreement for Annamycin.





**ATIPRIMOD
      TO TREAT MULTIPLE MYELOMA AND ADVANCED CARCINOID CANCER PATIENTS**





On
      August
      28, 2002, our wholly-owned subsidiary, Synergy, entered into a worldwide license
      agreement with AnorMED Inc. ("AnorMED"), a Canadian corporation, to research,
      develop, sell and commercially exploit the Atiprimod (SKF 106615) patent rights.





Atiprimod
      is one of a class of compounds known as azaspiranes and was originally developed
      as a potential treatment for rheumatoid arthritis based on encouraging data
      from
      a number of animal models of arthritis and autoimmune indications. The
      development of this drug originated with a partnership between AnorMED and
      SmithKline Beecham ("SKB") that led to the successful filing of an
      investigational new drug application, or IND, and completion of three Phase
      I
      clinical trials involving a total of 63 patients. The drug successfully
      completed both single and multiple dose Phase I clinical trials in patients
      with
      rheumatoid arthritis. Both trials evaluated the safety and pharmacokinetics
      (how
      the body takes up and eliminates drugs) of Atiprimod and showed that the drug
      is
      well tolerated. In the third Phase I clinical trial, the drug was found to
      be
      well tolerated in an open label extension study performed with 43 patients
      from
      the first two studies, with patients on the drug for as long as one year.





**PRECLINICAL
      STUDIES**





Atiprimod's
      specific ability to lower the level of key growth factors, known to play an
      important role in the development of multiple myeloma, is the basis for its
      potential use as a drug to treat this disease. Atiprimod was previously shown
      to
      inhibit the production of the pro-inflammatory mediators IL-6 and TNF(alpha)
      in
      a number of animal models of inflammation and autoimmune disease. Atiprimod
      was
      also demonstrated using in vitro models of tumor cell growth to inhibit
      proliferation of a number of human multiple myeloma cell lines. Characterization
      of the mechanism of Atiprimod's antiproliferative activity in a series of
      experiments showed that the drug works by inducing apoptosis (programmed cell
      death) in myeloma cells. In a second series of experiments performed with
      Atiprimod on co-cultures composed of multiple myeloma cells plus bone marrow
      stromal cells (used to simulate the human disease), the drug was found to have
      a
      profound effect on secretion of the angiogenic (blood vessel related) growth
      factor VEGF. A separate set of experiments also suggest an additional
      explanation for the disease-modifying activity of Atiprimod originally observed
      in chemically-induced arthritic-rat animal studies, and provide a further
      rationale for the application of this drug to treat multiple myeloma. Using
      a
      bone resorption assay (bone degradation experiment) to measure the effect of
      drug on osteoclast-mediated bone resorption, Atiprimod demonstrated a profound
      effect on osteoclast, or white blood cell, function. The drug appears to be
      selectively toxic for activated osteoclasts, displaying a negligible effect
      on
      bone marrow stromal cells.





**COMPLETED
      CLINICAL STUDIES**





Atiprimod
      successfully completed single and multiple dose Phase I clinical trials in
      patients with rheumatoid arthritis (RA). In the initial Phase I study, 28
      patients were given single escalating doses of drug (0.002 - 1.0 mg/kg), with
      a
      4-month follow-up. Atiprimod was well tolerated, displaying no clinically
      relevant changes in any laboratory parameters. In particular, liver function
      tests remained in the normal range. The second Phase I study involved a 28-day
      multiple-dose-rising study in 35 RA patients. The study evaluated the effect
      of
      food on bioavailability, or the concentration of drug in the body, as well
      as
      the safety and pharmacokinetics of repeat dosing. Dosages included 0.1, 1.0,
      5.0, and 10 mg/day plus a 14-day cohort at 30 mg/day, with 4-month follow-up.
      All doses were well tolerated and clinical tests were unremarkable.
      Significantly, reductions in tender and swollen joint counts were noted in
      a
      number of subjects during the course of the dosing period. Individuals from
      the
      two Phase I safety studies were also involved in a Phase I open-label extension
      trial at 5 mg/day dosage. Forty-three patients entered the study and remained
      on
      the drug as long as 12 months. Clinical laboratory results for all patients
      were
      unremarkable, in particular liver enzyme levels remained within the normal
      range
      in all patients throughout the study period.





**DEVELOPMENT
      STRATEGY**





On
      May
      26, 2004 we commenced a Phase I/IIa clinical trial of Atiprimod in relapsed
      multiple myeloma patients at two sites, the Dana-Farber Cancer Institute
      (Boston) and The University of Texas M.D. Anderson Cancer Center (Houston).
      On
      January 31, 2005, we announced the opening of two additional sites for the
      Phase
      I/IIa clinical trial of Atiprimod, the Roswell Park Cancer Institute in Buffalo,
      New York, and the St. Vincent's Comprehensive Cancer Center in New York, New
      York. The clinical trial is an open label study, with the primary objective
      of
      assessing safety of drug and identifying the maximum tolerated dose. The
      secondary objectives are to measure the pharmacokinetics, evaluate the response
      in patients with refractory disease and to identify possible surrogate responses
      to the drug to better determine the mechanism of drug action. In December 2005,
      we announced interim results from this trial performed in relapsed or refractory
      multiple myeloma patients which consisted of 15 patients treated with Atiprimod,
      including 3 patients at the highest dose level of 180 mg/day. Two patients
      exhibited stable disease, with one patient having a 34% decrease in M protein
      (measure of tumor burden) over 3 months of treatment. It was also noted that
      two
      patients reported a subjective decrease in bone pain. We plan to continue this
      trial at higher dose levels until the maximum tolerated dose is reached and
      then
      treat 10 additional patients at that level.




6




On
      March
      15, 2005 we announced a second Phase I/IIa clinical trial of Atiprimod in
      advanced cancer patients. The new trial is entitled: "An Open Label Study of
      the
      Safety and Efficacy of Atiprimod Treatment for Patients with Advanced Cancer."
      The primary objective is to assess the safety and determine the maximum
      tolerated dose of Atiprimod in advanced cancer patients. The secondary
      objectives are to measure the pharmacokinetics of Atiprimod and evaluate the
      response in a variety of relapsed solid tumors and hematological malignancies.
      The trial is currently being conducted at the University of Texas M.D. Anderson
      Cancer Center.





On
      February 28, 2006, we announced plans to launch an additional indication for
      clinical development of Atiprimod based on encouraging clinical results from
      the
      advanced cancer patient clinical trial that showed a clear response in a patient
      with advanced carcinoid cancer plus additional encouraging clinical data on
      other carcinoid patients. Based on these new clinical data, we plan to initiate
      a new Phase I/II clinical trial of Atiprimod in carcinoid cancer patients with
      advanced metastatic tumors at several clinical sites in the next few
      months.





**MANUFACTURING**





A
      practical, efficient and cost effective method for producing Atiprimod on a
      commercial scale was originally developed by SKB. In the course of this work,
      a
      new dimaleate salt form was developed. A portion of the 7 kilos of Atiprimod
      drug substance, available from SKB, was used as the source for generating the
      Atiprimod dimaleate drug product presently being used in the Phase I/IIa
      clinical study. Several lots of drug substance were re-qualified to meet current
      FDA approved release specifications. The full package of fully validated
      analytical methods developed by SKB was transferred to a contract research
      organization used by us to perform all analytical tests. One large-scale GMP
      production run of Atiprimod dimaleate led to the successful release of 10 Kg
      of
      material available for future Phase II clinical studies. We plan to enter into
      a
      supply contract for Atiprimod with a commercial supplier by the end of 2007
      or
      after confirming activity of the drug candidate in our current human clinical
      trials.





**ORPHAN
      DRUG STATUS**





On
      January 6, 2004, we announced that the Office of Orphan Products Development
      of
      the FDA granted orphan drug designation to Atiprimod for the treatment of
      multiple myeloma. On
      June
      24, 2005, we announced that the Office of Orphan Products Development of the
      FDA
      granted orphan drug designation to L-Annamycin for the treatment of acute
      lymphoblastic leukemia. On
      June
      28, 2005, we announced that the Office of Orphan Products Development of the
      FDA
      granted orphan drug designation to L-Annamycin for the treatment of acute
      myeloid leukemia. The FDA grants orphan drug status for drug candidates that
      are
      intended to treat rare life-threatening diseases that, at the time of
      application, affect no more than 200,000 patients in the United States. The
      drug
      must have the ability to provide significant patient benefit over currently
      available treatment or fill an unmet medical need. Orphan drug designation
      entitles us to seven years of market exclusivity in the United States of
      America, and ten years of market exclusivity in Europe, upon FDA marketing
      approval, provided that we continue to meet certain conditions established
      by
      the FDA. Once the FDA grants marketing approval of a new drug, the FDA will
      not
      accept or approve other applications to market the same medicinal product for
      the same therapeutic indication. Other incentives provided by orphan status
      include certain tax benefits, eligibility for research grants and protocol
      assistance. Protocol assistance includes regulatory assistance and possible
      exemptions or reductions of certain regulatory fees.





**GUANYLATE
      CYCLASE RECEPTOR AGONIST TECHNOLOGY**







Our
      guanylate cyclase receptor agonist (GCRA) program is based on control of cyclic
      guanosine monophosphate (“cyclic GMP”), an important second messenger involved
      in key cellular processes, which are essential for maintenance of the balance
      between proliferation and cellular death (apoptosis). Uroguanylin, a hormone
      produced by and secreted by specialized cells in the human GI tract, helps
      to
      maintain this balance by activating synthesis of cyclic GMP through activation
      of guanylate cyclase receptor. Recent findings suggest a role of cyclic GMP
      in
      gastrointestinal (GI) inflammatory diseases.




We
      have
      successfully developed a potent analog (synthetic molecule) of uroguanylin
      called Guanilib (formerly called SP304). Guanilib has been demonstrated to
      be
      superior to uroguanylin in its biological activity, protease stability and
      pH
      characteristics. Guanilib is currently undergoing pre-clinical animal studies
      as
      a treatment for gastrointestinal or GI inflammation in a collaborative study
      involving clinical gastroenterologist Dr. Scott Plevy of the University of
      Pittsburgh. Recent results from his laboratory showed that Guanilib was
      efficacious in treatment of ulcerative colitis in mice. A patent allowance
      covering therapeutic applications of Guanilib in colon cancer and GI
      inflammatory diseases has recently been granted by the U.S. Patent and Trademark
      Office.





**DEGRASYNS**





On
      January 10, 2006, we entered into a license agreement with the University of
      Texas M.D. Anderson Cancer Center whereby we were granted the exclusive right
      to
      manufacture, have manufactured, use, import, offer to sell and/or sell
      anti-cancer compounds called tyrphostins (renamed Degrasyns). Degrasyns are
      a
      second-generation class of tyrphostins developed by scientists at the University
      of Texas M.D. Anderson Cancer Center that have a novel anti-cancer
      mechanism-of-action that centers on their ability to selectively degrade key
      proteins that are involved in tumor cell proliferation and survival. We plan
      to
      work closely with scientists at the University of Texas M.D. Anderson Cancer
      Center during 2006 to bring forward a pre-clinical candidate for development
      in
      the clinic.





7




**SUPERANTIGEN-BASED
      BIOTERORRISM DEFENSE**





On
      August
      20, 1996, we entered into a license agreement to research, develop, sell and
      commercially exploit certain Rockefeller University ("Rockefeller") licensed
      patents covering peptides and antibodies useful in treating toxic shock syndrome
      and septic shock. In addition, on July 25, 2001, we entered into a license
      agreement for two additional patents related to the regulation of exoproteins
      in
      staphylococcus aureus.





We
      have
      designed both a monoclonal antibody and a peptide that prevent the unregulated
      activation of T-cells (human white blood cells) by a wide range of bacterial
      toxins (superantigens). This form of T-cell activation leads to a lethal
      condition called toxic shock syndrome, and is typically generated by bacteria
      from the class of staphylococcus aureus and streptococcus pyogenes. These
      bacteria provide a potential opportunity for bioterrorists, and, in particular,
      the toxin from staphylococcus enterotoxin B is listed as a Category B
      bioterrorism agent by the Centers for Disease Control Emergency Preparedness
      and
      Response program. We are exploring the development of the monoclonal antibody
      as
      a therapeutic agent to prevent, treat and control superantigen-mediated
      bioweapons. Our goal is to demonstrate therapeutic utility of this agent in
      an
      animal model in which toxic shock is induced by an aerosolized superantigen
      toxin. The research work involves a collaboration with Dr. Sina Bavari, U.S.
      Army Medical Research Institute of Infectious Diseases, Fort Detrick, MD. We
      are
      also exploring strategic alternatives regarding further development of the
      Superantigen program, including spin-off or strategic partnership.





**GOVERNMENT
      REGULATION**





Regulation
      by governmental authorities in the United States of America and other countries
      will be a significant factor in the production and marketing of any products
      that may be developed by us. The nature and the extent to which such regulation
      may apply will vary depending on the nature of any such products. Virtually
      all
      of our potential products will require regulatory approval by governmental
      agencies prior to commercialization. In particular, human therapeutic products
      are subject to rigorous pre-clinical and clinical testing and other approval
      procedures by the FDA and similar health authorities in foreign countries.
      Various federal statutes and regulations also govern or influence the
      manufacturing, safety, labeling, storage, record keeping and marketing of such
      products. The process of obtaining these approvals and the subsequent compliance
      with appropriate federal and foreign statutes and regulations requires the
      expenditure of substantial resources. In order to test in clinical trials,
      produce and market products for diagnostic or therapeutic use, a company must
      comply with mandatory procedures and safety standards established by the FDA
      and
      comparable agencies in foreign countries. Before beginning human clinical
      testing of a potential new drug, a company must file an IND and receive
      clearance from the FDA. This application is a summary of the pre-clinical
      studies that were conducted to characterize the drug, including toxicity and
      safety studies, as well as an in-depth discussion of the human clinical studies
      that are being proposed.





The
      pre-marketing program required for approval of a new drug typically involves
      a
      time-consuming and costly three-phase process. In Phase I, trials are conducted
      with a small number of patients to determine the early safety profile, the
      pattern of drug distribution and metabolism. In Phase II, trials are conducted
      with small groups of patients afflicted with a target disease in order to
      determine preliminary efficacy, optimal dosages and expanded evidence of safety.
      In Phase III, large scale, multi-center comparative trials are conducted with
      patients afflicted with a target disease in order to provide enough data for
      statistical proof of efficacy and safety required by the FDA and others.





The
      FDA
      closely monitors the progress of each of the three phases of clinical testing
      and may, in its discretion, reevaluate, alter, suspend or terminate the testing
      based on the data that have been accumulated to that point and its assessment
      of
      the risk/benefit ratio to the patient. Estimates of the total time required
      for
      carrying out such clinical testing vary between two and ten years. Upon
      completion of such clinical testing, a company typically submits a New Drug
      Application (NDA) or Product License Application (PLA) to the FDA that
      summarizes the results and observations of the drug during the clinical testing.
      Based on its review of the NDA or PLA, the FDA will decide whether or not to
      approve the drug. This review process can be quite lengthy, and approval for
      the
      production and marketing of a new pharmaceutical or medical diagnostic product
      can require a number of years and substantial funding, and there can be no
      assurance that any approvals will be granted on a timely basis, if at all.





If
      the
      product is approved for sale, FDA regulations govern the production process
      and
      marketing activities, and a post-marketing testing and surveillance program
      may
      be required to monitor continuously a product's usage and effects. Product
      approvals may be withdrawn if compliance with regulatory standards are not
      maintained, and other countries, in which any products developed by us are
      marketed, may impose a similar regulatory process.





**COMPETITION**





The
      biopharmaceutical industry is characterized by rapidly evolving technology
      and
      intense competition. Our competitors include major pharmaceutical and
      biotechnology companies focusing on hematological oncology such as Bioenvision
      Inc., SGX Pharmaceuticals, Inc., Sunesis Pharmaceuticals, Inc. and Vion
      Pharmaceuticals, Inc. Most of our competitors have financial, technical and
      marketing resources significantly greater than our resources. Academic
      institutions, governmental agencies and other public and private research
      organizations are also conducting research activities and seeking patent
      protection and may commercialize products on their own or through joint venture.
      We are aware of certain development projects for products to prevent or treat
      certain diseases targeted by us. The existence of these potential products
      or
      other products or treatments of which we are not aware, or products or
      treatments that may be developed in the future, may adversely affect our ability
      to market the products we develop.





8




**RESEARCH
      AND DEVELOPMENT EXPENSES**





Research
      and development expenses consist primarily of salaries and other
      personnel-related expenses, facilities costs, laboratory supplies, license
      fees
      and patent legal costs. Research and development expenses were $6,154,254 for
      the year ended December 31, 2005, compared to $2,817,387 and $1,369,985 for
      the
      twelve months ended December 31, 2004 and 2003, respectively.





On
      October 7, 2003 we were awarded a $265,697 Small Business Technology Transfer
      Research grant from the National Institutes of Health for studies on Atiprimod.
      The Principal and Co-Principal Investigators of the grant entitled "Atiprimod
      to
      Treat Multiple Myeloma and Bone Resorption" are Dr. Gary S. Jacob, our Chief
      Executive Officer, and Dr. Kenneth C. Anderson, Director of the Jerome Lipper
      Multiple Myeloma Center of the Dana-Farber Cancer Institute, respectively.
      The
      studies, which began in early 2004 and were completed in November 2004, utilized
      unique in vitro and in vivo methods and animal models at the Dana-Farber Cancer
      Institute and at our in-house laboratory facilities to explore Atiprimod's
      pharmacological activity and mechanism of action. Funding for the total amount
      of this grant was received during 2004 as expenses were incurred and $265,697
      has been reported on our Consolidated Statements of Operations as a separate
      line item entitled "Government Grant".





On
      April
      1, 2005 we were awarded an $885,641 biodefense partnership grant from the
      National Institute of Allergy
      and Infectious Diseases (“NIAID”) to develop a monoclonal antibody and vaccine
      against bacterial superantigen toxins over a two year period. The Principal
      Investigator of the grant entitled: "Peptide and Antibodies as Antidotes for
      Superantigens" is Dr. Kunwar Shailubhai, Senior Vice President, Drug Discovery
      for Synergy Pharmaceuticals Inc., our wholly-owned subsidiary. The grant will
      also fund a key collaboration with Dr. Sina Bavari of the U.S. Army
      Medical Research Institute of Infectious Diseases ,
      Fort
      Detrick, MD, to evaluate our monoclonal antibody and antagonist peptide agents
      in animal models. During the twelve months ended December 31, 2005 we received
      $226,119 which has been reported on our Consolidated Statements of Operations
      as
      a separate line item entitled "Government Grant".




**PROPRIETARY
      RIGHTS**





We
      are
      able to protect our technology from unauthorized use by third parties only
      to
      the extent that it is covered by valid and enforceable patents or is effectively
      maintained as a trade secret. Accordingly, patents or other proprietary rights
      are an essential element of our business. As of March 20, 2006, we are the
      assignee or exclusive licensee of 7 pending patent applications and 15 issued
      patents in the United States, and currently we have approximately 150 issued
      or
      pending foreign patent applications. We seek patent protection of inventions
      originating from our ongoing research and development activities that are
      commercially important to our business. Our composition-of-matter patents for
      L-Annamycin and Atiprimod expire in 2017 and 2016, respectively. Our formulation
      patents for L-Annamycin and Atiprimod dimaleate salt both expire in 2016.





We
      have
      obtained licenses from various parties that give us rights to technologies
      that
      we deem to be necessary or desirable for our research and development. These
      licenses (both exclusive and non-exclusive) may require us to pay royalties
      to
      the parties in addition to upfront or milestone payments, and to expend certain
      minimum resources to develop these technologies.





Patents
      extend for varying periods according to the date of patent filing or grant
      and
      the legal term of patents in the various countries where patent protection
      is
      obtained. The actual protection afforded by a patent, which can vary from
      country to country, depends on the type of patent, the scope of its coverage
      and
      the availability of legal remedies in the country.





While
      trade secret protection is an essential element of our business and we have
      taken security measures to protect our proprietary information and trade
      secrets, we cannot give assurance that our unpatented proprietary technology
      will afford us significant commercial protection. We seek to protect our trade
      secrets by entering into confidentiality agreements with third parties,
      employees and consultants. Our employees and consultants also sign agreements
      requiring that they assign to us their interests in intellectual property
      arising from their work for us. All employees sign an agreement not to engage
      in
      any conflicting employment or activity during their employment with us and
      not
      to disclose or misuse our confidential information. However, it is possible
      that
      these agreements may be breached or invalidated, and if so, there may not be
      an
      adequate corrective remedy available. Accordingly, we cannot ensure that
      employees, consultants or third parties will not breach the confidentiality
      provisions in our contracts, infringe or misappropriate our trade secrets and
      other proprietary rights or that measures we are taking to protect our
      proprietary rights will be adequate.





In
      the
      future, third parties may file claims asserting that our technologies or
      products infringe on their intellectual property. We cannot predict whether
      third parties will assert such claims against us or against the licensors of
      technology licensed to us, or whether those claims will harm our business.
      If we
      are forced to defend ourselves against such claims, whether they are with or
      without merit and whether they are resolved in favor of, or against, our
      licensors or us, we may face costly litigation and the diversion of management's
      attention and resources. As a result of such disputes, we may have to develop
      costly non-infringing technology or enter into licensing agreements. These
      agreements, if necessary, may be unavailable on terms acceptable to us, or
      at
      all.





**LICENSE
      AGREEMENTS**





On
      January 10, 2006, we entered into a Patent and Technology License Agreement
      with
      The University of Texas M.D. Anderson Cancer Center. Pursuant to the license
      agreement, we were granted the exclusive right to manufacture, have
      manufactured, use, import, offer to sell and/or sell anti-cancer compounds
      called tyrphostins (renamed Degrasyns). We paid a nonrefundable license fee
      upon
      execution of this agreement and we are obligated to pay annual license
      maintenance fees to The University of Texas M.D. Anderson Cancer Center. We
      are
      also obligated under this agreement to pay for legal fees and expenses
      associated with establishing and protecting the patent rights
      worldwide.





9




We
      also
      agreed to pay The University of Texas M.D. Anderson Cancer Center royalties
      based on net sales from any licensed products, plus aggregate milestone payments
      of up to $1,750,000 based upon achieving certain regulatory submissions and
      approvals. The term of the agreement is from January 10, 2006 until the end
      of
      the term for which the patent rights associated with the licensed technology
      have expired. If the first pending patent is issued, the agreement is projected
      to expire in 2025. In addition, at any time after 2 years from January 10,
      2006,
      The University of Texas M.D. Anderson Cancer Center has the right to terminate
      the license if we fail to provide evidence within 90 days of written notice
      that
      we have commercialized or are actively and effectively attempting to
      commercialize the licensed technology.





On
      August
      12, 2004, we entered into a world-wide license agreement with The University
      of
      Texas M. D. Anderson Cancer Center to research, develop, sell and commercially
      exploit the patent rights for L-Annamycin. Consideration paid for this license
      amounted to $31,497 for reimbursement of out-of-pocket costs for filing,
      enforcing and maintaining the L-Annamycin patent rights and a $100,000 initial
      license fee. We also agreed to pay The University of Texas M. D. Anderson Cancer
      Center royalties based on net sales from any licensed products, plus aggregate
      milestone payments of up to $750,000 based upon achieving certain regulatory
      submissions and approvals. The term of the agreement is from August 12, 2004
      until November 2, 2019. Under the terms of the license agreement, we are
      required to make certain good faith expenditures towards the clinical
      development of at least one licensed product within the two year period after
      March 2005. In addition, at any time after 5 years from August 12, 2004, The
      University of Texas M.D. Anderson Cancer Center has the right to terminate
      the
      license if we fail to provide evidence within 90 days of written notice that
      we
      have commercialized or we are actively and effectively attempting to
      commercialize L-Annamycin.





On
      August
      28, 2002, and as amended on May 23, 2003, Synergy entered into a worldwide
      license agreement with AnorMED to research, develop, sell and commercially
      exploit the Atiprimod patent rights. The license agreement provides for
      aggregate milestone payments of up to $14 million based upon achieving certain
      regulatory submissions and approvals for an initial indication, and additional
      payments of up to $16 million for each additional indication based on achieving
      certain regulatory submissions and approvals. In addition the agreement requires
      Synergy to pay AnorMED royalties on net sales. Commencing on January 1, 2004
      and
      on January 1 of each subsequent year Synergy is obligated to pay AnorMED a
      maintenance fee of $200,000 until the first commercial sale of the product.
      The
      three annual maintenance fee payments under this agreement were made in January
      2004, 2005 and 2006 and were recorded as research and development expense.
      Pursuant to the license agreement, failure to pay the maintenance fee is a
      material breach of the license agreement. The license agreement will terminate
      in 2018.





On
      July
      25, 2001, we entered into a license agreement to research, develop, sell and
      commercially exploit certain Rockefeller University licensed patents covering
      the regulation of exoprotein in staphylococcus aureus. We agreed to pay
      Rockefeller a $7,500 annual maintenance fee until the first commercial sale
      of
      the product, plus royalties of 2% and 0.75% of net sales of product depending
      on
      whether the product is covered by a claim under the licensed patents or derived
      from a claim under the licensed patents and will pay Rockefeller 15% of any
      sublicense fee paid by sublicensees. The agreement will terminate in November
      2016. Rockefeller may terminate the license agreement if we are more than 30
      days late in paying Rockefeller any amounts due under the license agreement
      or
      if we breach the license agreement. We have paid the annual maintenance fee
      for
      the year ended July 25, 2002, and have accrued but not paid the annual
      maintenance fee for the twelve months ended July 25, 2003, 2004 and 2005 pending
      our evaluation as to the applicability of the patents licensed under this
      agreement to our ongoing toxic shock syndrome and septic shock development
      program under the August 20, 1996 agreement.





On
      August
      20, 1996, we entered into a license agreement to research, develop, sell and
      commercially exploit certain Rockefeller University licensed patents covering
      peptides and antibodies useful in treating toxic shock syndrome and septic
      shock. We agreed to work toward commercialization of products related to these
      patents as evidenced by a minimum expenditure of approximately $210,000 per
      year, plus milestone payments and royalties of between 2% and 3% of annual
      net
      sales and will pay Rockefeller 30% of any sublicense fee paid by sublicensees.
      The licensed patents under this agreement are the subject of research being
      funded by the NIAID grant awarded to us on April 1, 2005 for $885,641over two
      years. The license agreement will terminate upon the expiration of the related
      patents.





**EMPLOYEES**





As
      of
      March 20, 2006, we had 9 full-time and 3 part-time employees. We believe our
      employee relations are satisfactory.





**AVAILABLE
      INFORMATION**





We
      operate three wholly owned subsidiary companies Callisto Research Labs, LLC,
      Synergy Pharmaceuticals Inc. ("Synergy") and Callisto Pharma, GmbH (Germany);
      and we own one inactive subsidiary, IgX, Ltd (Ireland). We were incorporated
      in
      Delaware in May 2003 and our principal offices are at 420 Lexington Avenue,
      Suite 1609, New York, NY 10170.





We
      maintain a site on the world wide web at http://www.callistopharma.com; however,
      information found on our website is not incorporated by reference into this
      report. We make available free of charge through our website our Securities
      and
      Exchange Commission, or SEC, filings, including our annual report on Form 10-K,
      quarterly reports on Form 10-Q, current reports on Form 8-K and amendments
      to
      those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
      Exchange Act as soon as reasonably practicable after we electronically file
      such
      material with, or furnish it to, the SEC.





10




**ITEM
      1A.  RISK FACTORS**





You
      should carefully consider the following risk factors and the other information
      included herein as well as the information included in other reports and filings
      made with the SEC before investing in our common stock. If any of the following
      risks actually occurs, our business, financial condition or results of
      operations could be harmed. The trading price of our common stock could decline
      due to any of these risks, and you may lose part or all of your investment.





**RISKS
      RELATED TO OUR BUSINESS**





**WE
      ARE AT AN EARLY STAGE OF DEVELOPMENT AS A COMPANY, CURRENTLY HAVE NO SOURCE
      OF
      REVENUE AND MAY NEVER BECOME PROFITABLE.**





We
      are a
      development stage biopharmaceutical company. Currently, we have no products
      approved for commercial sale and, to date, we have not generated any revenue.
      Our ability to generate revenue depends heavily on:





·
            demonstration
                in Phase I/IIa and Phase IIb clinical trials that our two product
                candidates, Atiprimod for the treatment of relapsed multiple myeloma
                and
                advanced carcinoid cancer and L-Annamycin for the treatment of relapsed
                acute leukemia, respectively, are safe and
                effective;


·
            the
                successful development of our other product
                candidates;


·
            our
                ability to seek and obtain regulatory approvals, including with respect
                to
                the indications we are seeking;


·
            the
                successful commercialization of our product candidates;
                and


·
            market
                acceptance of our products.





All
      of
      our existing product candidates will require extensive additional clinical
      evaluation, regulatory review, significant marketing efforts and substantial
      investment before they could provide us with any revenue. For example, Atiprimod
      for the treatment of multiple myeloma entered Phase I/IIa clinical trials in
      May
      2004 and L-Annamycin for the treatment of acute leukemia entered clinical trials
      in December 2005. Our other product candidates are in preclinical development.
      As a result, if we do not successfully develop and commercialize Atiprimod
      or
      L-Annamycin, we will be unable to generate any revenue for many years, if at
      all. We do not anticipate that we will generate revenue for several years,
      at
      the earliest, or that we will achieve profitability for at least several years
      after generating material revenue, if at all. If we are unable to generate
      revenue, we will not become profitable, and we may be unable to continue our
      operations.





**WE
      HAVE INCURRED SIGNIFICANT LOSSES SINCE INCEPTION AND ANTICIPATE THAT WE WILL
      INCUR CONTINUED LOSSES FOR THE FORESEEABLE FUTURE.**




As
      of
      December 31, 2005 and 2004, we had an accumulated deficit of
      $45,140,654  and
      $33,361,197, respectively. We have incurred losses in each year since our
      inception in 1996. We incurred a net loss of $11,779,457, $7,543,467 and
      $13,106,247 for the twelve months ended December 31, 2005, 2004 and 2003,
      respectively. These losses, among other things, have had and will continue
      to
      have an adverse effect on our stockholders' equity and working capital. We
      expect to incur significant and increasing operating losses for the next several
      years as we expand our research and development, continue our clinical trials
      of
      Atiprimod for the treatment of multiple myeloma and advanced carcinoid cancer,
      continue and initiate our clinical trials of L-Annamycin for the treatment
      of
      acute leukemias, acquire or license technologies, advance our other product
      candidates into clinical development, seek regulatory approval and, if we
      receive FDA approval, commercialize our products. Because of the numerous risks
      and uncertainties associated with our product development efforts, we are unable
      to predict the extent of any future losses or when we will become profitable,
      if
      at all. If we are unable to achieve and then maintain profitability, the market
      value of our common stock will likely decline.





**OUR
      INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM HAS EXPRESSED DOUBT ABOUT OUR
      ABILITY TO CONTINUE AS A GOING CONCERN, WHICH MAY HINDER OUR ABILITY TO OBTAIN
      FUTURE FINANCING**




Our
        consolidated financial statements as of December 31,
        2005 have been prepared under the assumption that we will continue as a going
        concern for the year ending December 31, 2006. Our independent registered
        public
        accounting firm has issued a report dated March 29, 2006 that included an
        explanatory paragraph referring to our recurring losses from operations and
        net
        capital deficiency and expressing substantial doubt in our ability to continue
        as a going concern without additional capital becoming available. Our ability
        to
        continue as a going concern is dependent upon our ability to obtain
        additional equity or debt financing, attain further operating efficiencies,
        reduce expenditures, and, ultimately, to generate revenue. The financial
        statements do not include any adjustments that might result from the outcome
        of
        this uncertainty.




**WE
      WILL NEED TO RAISE SUBSTANTIAL ADDITIONAL CAPITAL TO FUND OUR OPERATIONS, AND
      OUR FAILURE TO OBTAIN FUNDING WHEN NEEDED MAY FORCE US TO DELAY, REDUCE OR
      ELIMINATE OUR PRODUCT DEVELOPMENT PROGRAMS OR COLLABORATION EFFORTS.**





Our
      operations have consumed substantial amounts of cash since inception. We expect
      to continue to spend substantial amounts to:





·
            complete
                the clinical development of our two lead product candidates, Atiprimod
                for
                the treatment of multiple myeloma and advanced carcinoid cancer and
                L-Annamycin for the treatment of acute
                leukemia;


·
            continue
                the development of our other product
                candidates;


·
            finance
                our general and administrative
                expenses;


·
            prepare
                regulatory approval applications and seek approvals for Atiprimod
                and
                L-Annamycin and our other product
                candidates;


·
            license
                or acquire additional technologies;


·
            launch
                and commercialize our product candidates, if any such product candidates
                receive regulatory approval; and


·
            develop
                and implement sales, marketing and distribution
                capabilities.





In
      2005,
      our cash used in operating activities increased significantly over 2004 and
      we
      expect that our cash used in operating activities will increase
      significantly for the next several years. For the year ended December 31, 2005,
      we used approximately $8,700,000, or approximately $725,000 per month in
      operating activities, as compared to approximately $4,700,000 and $2,000,000
      for
      the twelve months ended December 31, 2004 and 2003, respectively.





11




We
      will
      be required to raise additional capital within the next year to complete the
      development and commercialization of our current product candidates and to
      continue to fund operations at the current cash expenditure levels. Our future
      funding requirements will depend on many factors, including, but not limited
      to:





·
            the
                rate of progress and cost of our clinical trials and other development
                activities;


·
            any
                future decisions we may make about the scope and prioritization of
                the
                programs we pursue;


·
            the
                costs of filing, prosecuting, defending and enforcing any patent
                claims
                and other intellectual property
                rights;


·
            the
                costs and timing of regulatory
                approval;


·
            the
                costs of establishing sales, marketing and distribution
                capabilities;


·
            the
                effect of competing technological and market
                developments;


·
            the
                terms and timing of any collaborative, licensing and other arrangements
                that we may establish; and


·
            general
                market conditions for offerings from biopharmaceutical
                companies.





To
      date,
      our sources of cash have been primarily limited to the sale of our equity
      securities. Net cash provided by financing activities for the twelve months
      ended December 31, 2005, 2004 and 2003 was approximately $4,800,000, $6,100,000
      and $3,800,000 respectively. We cannot be certain that additional funding will
      be available on acceptable terms, or at all. To the extent that we raise
      additional funds by issuing equity securities, our stockholders may experience
      significant dilution. Any debt financing, if available, may involve restrictive
      covenants that impact our ability to conduct our business. If we are unable
      to
      raise additional capital when required or on acceptable terms, we may have
      to
      significantly delay, scale back or discontinue the development and/or
      commercialization of one or more of our product candidates. We also may be
      required to:





·
            seek
                collaborators for our product candidates at an earlier stage than
                otherwise would be desirable and on terms that are less favorable
                than
                might otherwise be available; and


·
            relinquish
                license or otherwise dispose of rights to technologies, product candidates
                or products that we would otherwise seek to develop or commercialize
                ourselves on unfavorable terms.




**IF
      OUR AGREEMENTS WITH ANORMED INC. OR THE UNIVERSITY OF TEXAS M.D. ANDERSON CANCER
      CENTER TERMINATE, OUR BUSINESS WOULD BE ADVERSELY AFFECTED.**





Our
      business is dependent on rights we have licensed from AnorMED Inc. and The
      University of Texas M.D. Anderson Cancer Center. Under the terms of the AnorMED
      license agreement, we are obligated to make a maintenance fee payment of
      $200,000 on January 1 of each year for the term of the license agreement.
      Pursuant to the license agreement, failure to pay the maintenance fee is a
      material breach of the agreement. We do not anticipate failing to pay the
      maintenance fee, however in the event we cannot pay the maintenance fee, AnorMED
      may terminate the license agreement and we would not be able to further develop
      and commercialize Atiprimod which would have an adverse effect on our business.
      Under the terms of The University of Texas M.D. Anderson Cancer Center license
      agreement for L-Annamycin, we are required to make certain good faith
      expenditures towards the clinical development of at least one licensed product
      within the two year period after March 2005. In addition, at any time after
      5
      years from August 12, 2004, The University of Texas M.D. Anderson Cancer Center
      has the right to terminate the license if we fail to provide evidence within
      90
      days of written notice that we have commercialized or we are actively and
      effectively attempting to commercialize L-Annamycin. If we fail to fulfill
      these
      obligations or other material obligations, The University of Texas M.D. Anderson
      Cancer Center license agreement may be terminated and our business would be
      adversely affected.





**CLINICAL
      TRIALS INVOLVE A LENGTHY AND EXPENSIVE PROCESS WITH AN UNCERTAIN OUTCOME, AND
      RESULTS OF EARLIER STUDIES AND TRIALS MAY NOT BE PREDICTIVE OF FUTURE TRIAL
      RESULTS.**





In
      order
      to receive regulatory approval for the commercialization of our product
      candidates, we must conduct, at our own expense, extensive clinical trials
      to
      demonstrate safety and efficacy of these product candidates. Clinical testing
      is
      expensive, can take many years to complete and its outcome is uncertain. Failure
      can occur at any time during the clinical trial process.





The
      results of preclinical studies and early clinical trials of our product
      candidates do not necessarily predict the results of later-stage clinical
      trials. Product candidates in later stages of clinical trials may fail to show
      the desired safety and efficacy traits despite having progressed through initial
      clinical testing. The data collected from clinical trials of our product
      candidates may not be sufficient to support the submission of a new drug
      application or to obtain regulatory approval in the United States or elsewhere.
      Because of the uncertainties associated with drug development and regulatory
      approval, we cannot determine if or when we will have an approved product for
      commercialization or achieve sales or profits.





12




**DELAYS
      IN CLINICAL TESTING COULD RESULT IN INCREASED COSTS TO US AND DELAY OUR ABILITY
      TO GENERATE REVENUE.**





While
      to
      date there has been no delays in our clinical trials, enrollment in our
      Atiprimod Phase I/IIa trial in multiple myeloma was slower than anticipated
      due
      to limited availability of relapsed multiple myeloma patients. In the future,
      we
      may experience delays in clinical testing of our product candidates. We do
      not
      know whether planned clinical trials will begin on time, will need to be
      redesigned or will be completed on schedule, if at all. Clinical trials can
      be
      delayed for a variety of reasons, including delays in obtaining regulatory
      approval to commence a trial, in reaching agreement on acceptable clinical
      trial
      terms with prospective sites, in obtaining institutional review board approval
      to conduct a trial at a prospective site, in recruiting patients to participate
      in a trial or in obtaining sufficient supplies of clinical trial materials.
      Many
      factors affect patient enrollment, including the size of the patient population,
      the proximity of patients to clinical sites, the eligibility criteria for the
      trial, competing clinical trials and new drugs approved for the conditions
      we
      are investigating. Prescribing physicians will also have to decide to use our
      product candidates over existing drugs that have established safety and efficacy
      profiles. Any delays in completing our clinical trials will increase our costs,
      slow down our product development and approval process and delay our ability
      to
      generate revenue.





**WE
      MAY BE REQUIRED TO SUSPEND OR DISCONTINUE CLINICAL TRIALS DUE TO UNEXPECTED
      SIDE
      EFFECTS OR OTHER SAFETY RISKS THAT COULD PRECLUDE APPROVAL OF OUR PRODUCT
      CANDIDATES.**





Our
      clinical trials may be suspended at any time for a number of reasons. For
      example, we may voluntarily suspend or terminate our clinical trials if at
      any
      time we believe that they present an unacceptable risk to the clinical trial
      patients. In addition, regulatory agencies may order the temporary or permanent
      discontinuation of our clinical trials at any time if they believe that the
      clinical trials are not being conducted in accordance with applicable regulatory
      requirements or that they present an unacceptable safety risk to the clinical
      trial patients.





Administering
      any product candidates to humans may produce undesirable side effects. These
      side effects could interrupt, delay or halt clinical trials of our product
      candidates and could result in the FDA or other regulatory authorities denying
      further development or approval of our product candidates for any or all
      targeted indications. Ultimately, some or all of our product candidates may
      prove to be unsafe for human use. Moreover, we could be subject to significant
      liability if any volunteer or patient suffers, or appears to suffer, adverse
      health effects as a result of participating in our clinical trials.





**IF
      WE ARE UNABLE TO SATISFY REGULATORY REQUIREMENTS, WE MAY NOT BE ABLE TO
      COMMERCIALIZE OUR PRODUCT CANDIDATES.**





We
      need
      FDA approval prior to marketing our product candidates in the United States
      of
      America. If we fail to obtain FDA approval to market our product candidates,
      we
      will be unable to sell our product candidates in the United States of America
      and we will not generate any revenue.





This
      regulatory review and approval process, which includes evaluation of preclinical
      studies and clinical trials of a product candidate as well as the evaluation
      of
      our manufacturing process and our contract manufacturers' facilities, is
      lengthy, expensive and uncertain. To receive approval, we must, among other
      things, demonstrate with substantial evidence from well-controlled clinical
      trials that the product candidate is both safe and effective for each indication
      where approval is sought. Satisfaction of these requirements typically takes
      several years and the time needed to satisfy them may vary substantially, based
      on the type, complexity and novelty of the pharmaceutical product. We cannot
      predict if or when we might submit for regulatory review any of our product
      candidates currently under development. Any approvals we may obtain may not
      cover all of the clinical indications for which we are seeking approval. Also,
      an approval might contain significant limitations in the form of narrow
      indications, warnings, precautions, or contra-indications with respect to
      conditions of use.





The
      FDA
      has substantial discretion in the approval process and may either refuse to
      file
      our application for substantive review or may form the opinion after review
      of
      our data that our application is insufficient to allow approval of our product
      candidates. If the FDA does not file or approve our application, it may require
      that we conduct additional clinical, preclinical or manufacturing validation
      studies and submit that data before it will reconsider our application.
      Depending on the extent of these or any other studies, approval of any
      applications that we submit may be delayed by several years, or may require
      us
      to expend more resources than we have available. It is also possible that
      additional studies, if performed and completed, may not be considered sufficient
      by the FDA to make our applications approvable. If any of these outcomes occur,
      we may be forced to abandon our applications for approval, which might cause
      us
      to cease operations.





We
      will
      also be subject to a wide variety of foreign regulations governing the
      development, manufacture and marketing of our products. Whether or not FDA
      approval has been obtained, approval of a product by the comparable regulatory
      authorities of foreign countries must still be obtained prior to manufacturing
      or marketing the product in those countries. The approval process varies from
      country to country and the time needed to secure approval may be longer or
      shorter than that required for FDA approval. We cannot assure you that clinical
      trials conducted in one country will be accepted by other countries or that
      approval in one country will result in approval in any other country.





13




**IF
      OUR PRODUCT CANDIDATES ARE UNABLE TO COMPETE EFFECTIVELY WITH MARKETED CANCER
      DRUGS TARGETING SIMILAR INDICATIONS AS OUR PRODUCT CANDIDATES, OUR COMMERCIAL
      OPPORTUNITY WILL BE REDUCED OR ELIMINATED.**





We
      face
      competition from established pharmaceutical and biotechnology companies, as
      well
      as from academic institutions, government agencies and private and public
      research institutions. Many of our competitors have significantly greater
      financial resources and expertise in research and development, manufacturing,
      preclinical testing, conducting clinical trials, obtaining regulatory approvals
      and marketing approved products than we do. Smaller or early-stage companies
      may
      also prove to be significant competitors, particularly through collaborative
      arrangements with large, established companies. Our commercial opportunity
      will
      be reduced or eliminated if our competitors develop and commercialize cancer
      drugs that are safer, more effective, have fewer side effects or are less
      expensive than our product candidates. These third parties compete with us
      in
      recruiting and retaining qualified scientific and management personnel,
      establishing clinical trial sites and patient registration for clinical trials,
      as well as in acquiring technologies and technology licenses complementary
      to
      our programs or advantageous to our business.





We
      expect
      that our ability to compete effectively will depend upon our ability to:





·
            successfully
                and rapidly complete clinical trials and submit for and obtain all
                requisite regulatory approvals in a cost-effective
                manner;


·
            maintain
                a proprietary position for our products and manufacturing processes
                and
                other related product technology;


·
            attract
                and retain key personnel;


·
            develop
                relationships with physicians prescribing these products;
                and


·
            build
                an adequate sales and marketing infrastructure for our product
                candidates.





Because
      we will be competing against significantly larger companies with established
      track records, we will have to demonstrate to physicians that, based on
      experience, clinical data, side-effect profiles and other factors, our products
      are preferable to existing cancer drugs. If we are unable to compete effectively
      in the cancer drug market and differentiate our products from currently marketed
      cancer drugs, we may never generate meaningful revenue.





Numerous
      pharmaceutical and biotechnology companies have developed anthracycline drugs
      used to treat acute leukemias similar to our compound, L-Annamycin. These
      compounds include Adriamycin® and Ellence® which are marketed by Pfizer and
      Cerubidine® which is marketed by Boehringer Ingelheim. These drugs have been
      approved by the FDA and are currently being marketed as opposed to L-Annamycin
      which is in clinical development. Atiprimod, our drug candidate for relapsed
      multiple myeloma, works through a different mechanism of action than Velcade
      which is currently marketed by Millenium Pharmaceuticals and other drugs in
      development, such as Celgene Corporation’s Revlimid.





**WE
      CURRENTLY HAVE NO SALES AND MARKETING ORGANIZATION. IF WE ARE UNABLE TO
      ESTABLISH A DIRECT SALES FORCE IN THE UNITED STATES TO PROMOTE OUR PRODUCTS,
      THE
      COMMERCIAL OPPORTUNITY FOR OUR PRODUCTS MAY BE DIMINISHED.**





We
      currently have no sales and marketing organization. If any of our product
      candidates are approved by the FDA, we intend to market that product directly
      to
      hospitals in the United States of America through our own sales force. We will
      incur significant additional expenses and commit significant additional
      management resources to establish this sales force. We may not be able to
      establish these capabilities despite these additional expenditures. We will
      also
      have to compete with other pharmaceutical and biotechnology companies to
      recruit, hire and train sales and marketing personnel. If we elect to rely
      on
      third parties to sell our product candidates in the United States, we may
      receive less revenue than if we sold our products directly. In addition, we
      may
      have little or no control over the sales efforts of those third parties. In
      the
      event we are unable to develop our own sales force or collaborate with a third
      party to sell our product candidates, we may not be able to commercialize our
      product candidates which would negatively impact our ability to generate
      revenue.





**WE
      MAY NEED OTHERS TO MARKET AND COMMERCIALIZE OUR PRODUCT CANDIDATES IN
      INTERNATIONAL MARKETS.**





In
      the
      future, if appropriate regulatory approvals are obtained, we intend to
      commercialize our product candidates in international markets. However, we
      have
      not decided how to commercialize our product candidates in those markets. We
      may
      decide to build our own sales force or sell our products through third parties.
      Currently, we do not have any plans to enter international markets. If we decide
      to sell our product candidates in international markets through a third party,
      we may not be able to enter into any marketing arrangements on favorable terms
      or at all. In addition, these arrangements could result in lower levels of
      income to us than if we marketed our product candidates entirely on our own.
      If
      we are unable to enter into a marketing arrangement for our product candidates
      in international markets, we may not be able to develop an effective
      international sales force to successfully commercialize those products in
      international markets. If we fail to enter into marketing arrangements for
      our
      products and are unable to develop an effective international sales force,
      our
      ability to generate revenue would be limited.





14




**IF
      OUR RELATIONSHIP WITH OUR CONTRACT MANUFACTURER FOR L-ANNAMYCIN TERMINATES,
      OR
      THEIR FACILITIES ARE DAMAGED OR DESTROYED, WE MAY BE UNABLE TO DEVELOP OR
      COMMERCIALIZE L-ANNAMYCIN.**





Currently,
      Antibioticos S.p.A. is our sole supplier of Annamycin (drug substance that
      is
      the active component of the final formulated L-Annamycin drug product). If
      our
      relationship with this contract manufacturer, or any other contract manufacturer
      we might use, terminates or if any of their facilities are damaged for any
      reason, including fire, flood, earthquake or other similar event, we may be
      unable to obtain supply of Annamycin. If any of these events were to occur,
      we
      may need to find alternative manufacturers or manufacturing facilities. The
      number of contract manufacturers with the expertise, required regulatory
      approvals and facilities to manufacture Annamycin on a commercial scale is
      extremely limited, and it would take a significant amount of time to arrange
      for
      alternative manufacturers. If we need to change to other commercial
      manufacturers, the FDA and comparable foreign regulators must approve these
      manufacturers’ facilities and processes prior to our use, which would require
      new testing and compliance inspections. In addition, we may not have the
      intellectual property rights, or may have to share intellectual property rights,
      to any improvements in the current manufacturing processes or any new
      manufacturing processes for Annamycin. Any of these factors could cause us
      to
      delay or suspend clinical trials, regulatory submissions, required approvals
      or
      commercialization of L-Annamycin, entail higher costs, and could result in
      our
      being unable to commercialize L-Annamycin successfully. Furthermore, if our
      contract manufacturers fail to deliver the required commercial quantities of
      bulk drug substance or finished product on a timely basis and at commercially
      reasonable prices, and we were unable to find one or more replacement
      manufacturers capable of production at a substantially equivalent cost, in
      substantially equivalent volumes and quality, and on a timely basis, we would
      likely be unable to meet demand for L-Annamycin and we would lose potential
      revenue.





**IF
      THE FDA DOES NOT APPROVE OUR CONTRACT MANUFACTURERS' FACILITIES, WE MAY BE
      UNABLE TO DEVELOP OR COMMERCIALIZE OUR PRODUCT CANDIDATES.**





We
      rely
      on third-party contract manufacturers to manufacture our product candidates,
      and
      currently have no plans to develop our own manufacturing facility. The
      facilities used by our contract manufacturers to manufacture our product
      candidates must be approved by the FDA. If the FDA does not approve these
      facilities for the manufacture of our product, we may need to fund additional
      modifications to our manufacturing process, conduct additional validation
      studies, or find alternative manufacturing facilities, any of which would result
      in significant cost to us as well as a delay of up to several years in obtaining
      approval for and manufacturing of our product candidates. In addition, our
      contract manufacturers will be subject to ongoing periodic unannounced
      inspection by the FDA and corresponding state agencies for compliance with
      good
      manufacturing practices regulations, or cGMPs, and similar foreign standards.
      These regulations cover all aspects of the manufacturing, testing, quality
      control and record keeping relating to our product candidates. We do not have
      control over our contract manufacturers' compliance with these regulations
      and
      standards. Failure by our contract manufacturers to comply with applicable
      regulations could result in sanctions being imposed on us, including fines,
      injunctions, civil penalties, failure of the government to grant market approval
      of drugs, delays, suspension or withdrawals of approvals, operating restrictions
      and criminal prosecutions, any of which could significantly and adversely affect
      our business. In addition, we have no control over our contract manufacturers'
      ability to maintain adequate quality control, quality assurance and qualified
      personnel. Failure by our contract manufacturers to comply with or maintain
      any
      of these standards could adversely affect the development of our product
      candidates and our business.





**IF
      PRODUCT LIABILITY LAWSUITS ARE SUCCESSFULLY BROUGHT AGAINST US, WE MAY INCUR
      SUBSTANTIAL LIABILITIES AND MAY BE REQUIRED TO LIMIT COMMERCIALIZATION OF OUR
      PRODUCT CANDIDATES.**





We
      face
      an inherent risk of product liability lawsuits related to the testing of our
      product candidates, and will face an even greater risk if we sell our product
      candidates commercially. Currently, we are not aware of any anticipated product
      liability claims with respect to our product candidates. In the future, an
      individual may bring a liability claim against us if one of our product
      candidates causes, or merely appears to have caused, an injury. If we cannot
      successfully defend ourselves against the product liability claim, we may incur
      substantial liabilities. Regardless of merit or eventual outcome, liability
      claims may result in:





·
            decreased
                demand for our product candidates;


·
            injury
                to our reputation;


·
            withdrawal
                of clinical trial participants;


·
            costs
                of related litigation;


·
            substantial
                monetary awards to patients;


·
            product
                recalls;


·
            loss
                of revenue; and


·
            the
                inability to commercialize our product
                candidates.





We
      have
      clinical trial liability insurance with a $3,000,000 annual aggregate limit
      for
      up to 40 patients participating at the same time in our Atiprimod and
      L-Annamycin clinical trials. We intend to expand our insurance coverage to
      include the sale of commercial products if marketing approval is obtained for
      our product candidates. Our current insurance coverage may prove insufficient
      to
      cover any liability claims brought against us. In addition, because of the
      increasing costs of insurance coverage, we may not be able to maintain insurance
      coverage at a reasonable cost or obtain insurance coverage that will be adequate
      to satisfy any liability that may arise.





15




**EVEN
      IF WE RECEIVE REGULATORY APPROVAL FOR OUR PRODUCT CANDIDATES, WE WILL BE SUBJECT
      TO ONGOING SIGNIFICANT REGULATORY OBLIGATIONS AND OVERSIGHT.**





If
      we
      receive regulatory approval to sell our product candidates, the FDA and foreign
      regulatory authorities may, nevertheless, impose significant restrictions on
      the
      indicated uses or marketing of such products, or impose ongoing requirements
      for
      post-approval studies. Following any regulatory approval of our product
      candidates, we will be subject to continuing regulatory obligations, such as
      safety reporting requirements, and additional post-marketing obligations,
      including regulatory oversight of the promotion and marketing of our products.
      If we become aware of previously unknown problems with any of our product
      candidates here or overseas or our contract manufacturers' facilities, a
      regulatory agency may impose restrictions on our products, our contract
      manufacturers or on us, including requiring us to reformulate our products,
      conduct additional clinical trials, make changes in the labeling of our
      products, implement changes to or obtain re-approvals of our contract
      manufacturers' facilities or withdraw the product from the market. In addition,
      we may experience a significant drop in the sales of the affected products,
      our
      reputation in the marketplace may suffer and we may become the target of
      lawsuits, including class action suits. Moreover, if we fail to comply with
      applicable regulatory requirements, we may be subject to fines, suspension
      or
      withdrawal of regulatory approvals, product recalls, seizure of products,
      operating restrictions and criminal prosecution. Any of these events could
      harm
      or prevent sales of the affected products or could substantially increase the
      costs and expenses of commercializing and marketing these products.





**WE
      RELY ON THIRD PARTIES TO CONDUCT OUR CLINICAL TRIALS. IF THESE THIRD PARTIES
      DO
      NOT SUCCESSFULLY CARRY OUT THEIR CONTRACTUAL DUTIES OR MEET EXPECTED DEADLINES,
      WE MAY NOT BE ABLE TO SEEK OR OBTAIN REGULATORY APPROVAL FOR OR COMMERCIALIZE
      OUR PRODUCT CANDIDATES.**





We
      have
      agreements with third-party contract research organizations, or CROs, to provide
      monitors and to manage data for our clinical programs. We and our CROs are
      required to comply with current Good Clinical Practices, or GCPs, regulations
      and guidelines enforced by the FDA for all of our products in clinical
      development. The FDA enforces GCPs through periodic inspections of trial
      sponsors, principal investigators and trial sites. In the future, if we or
      our
      CROs fail to comply with applicable GCPs, the clinical data generated in our
      clinical trials may be deemed unreliable and the FDA may require us to perform
      additional clinical trials before approving our marketing applications. We
      cannot assure you that, upon inspection, the FDA will determine that any of
      our
      clinical trials for products in clinical development comply with GCPs. In
      addition, our clinical trials must be conducted with product produced under
      cGMP
      regulations, and will require a large number of test subjects. Our failure
      to
      comply with these regulations may require us to repeat clinical trials, which
      would delay the regulatory approval process.





If
      any of
      our relationships with these third-party CROs terminate, we may not be able
      to
      enter into arrangements with alternative CROs. If CROs do not successfully
      carry
      out their contractual duties or obligations or meet expected deadlines, if
      they
      need to be replaced, or if the quality or accuracy of the clinical data they
      obtain is compromised due to the failure to adhere to our clinical protocols,
      regulatory requirements or for other reasons, our clinical trials may be
      extended, delayed or terminated, and we may not be able to obtain regulatory
      approval for or successfully commercialize our product candidates. As a result,
      our financial results and the commercial prospects for our product candidates
      would be harmed, our costs could increase, and our ability to generate revenue
      could be delayed.





**IF
      WE FAIL TO ATTRACT AND KEEP SENIOR MANAGEMENT AND KEY SCIENTIFIC PERSONNEL,
      WE
      MAY BE UNABLE TO SUCCESSFULLY DEVELOP OUR PRODUCT CANDIDATES, CONDUCT OUR
      CLINICAL TRIALS AND COMMERCIALIZE OUR PRODUCT CANDIDATES.**





Our
      success depends in part on our continued ability to attract, retain and motivate
      highly qualified management, clinical and scientific personnel and on our
      ability to develop and maintain important relationships with leading academic
      institutions, clinicians and scientists. We are highly dependent upon our senior
      management and scientific staff, particularly Gary S. Jacob, our Chief Executive
      Officer and Donald Picker, our Executive Vice President, R&D. The loss of
      services of Drs. Jacob, Picker or one or more of our other members of senior
      management could delay or prevent the successful completion of our planned
      clinical trials or the commercialization of our product candidates.





The
      competition for qualified personnel in the biotechnology and pharmaceuticals
      field is intense. We will need to hire additional personnel as we expand our
      clinical development and commercial activities. We may not be able to attract
      and retain quality personnel on acceptable terms given the competition for
      such
      personnel among biotechnology, pharmaceutical and other companies. We do not
      carry "key person" insurance covering any members of our senior management.





**IF
      WE FAIL TO ACQUIRE AND DEVELOP OTHER PRODUCTS OR PRODUCT CANDIDATES, WE MAY
      BE
      UNABLE TO GROW OUR BUSINESS.**





To
      date,
      we have in-licensed or acquired the rights to each of our product candidates.
      As
      part of our growth strategy, in addition to developing our current product
      candidates, we intend to license or acquire additional products and product
      candidates for development and commercialization. Because we have limited
      internal research capabilities, we are dependent upon pharmaceutical and
      biotechnology companies and other researchers to sell or license products to
      us.
      The success of this strategy depends upon our ability to identify, select and
      acquire the right pharmaceutical product candidates and products. We currently
      do not have any intentions to acquire another company.





Any
      product candidate we license or acquire may require additional development
      efforts prior to commercial sale, including extensive clinical testing and
      approval by the FDA and applicable foreign regulatory authorities. All product
      candidates are prone to the risks of failure inherent in pharmaceutical product
      development, including the possibility that the product candidate will not
      be
      shown to be sufficiently safe and effective for approval by regulatory
      authorities. In addition, we cannot assure you that any products that we license
      or acquire that are approved will be manufactured or produced economically,
      successfully commercialized or widely accepted in the marketplace.




16




Proposing,
      negotiating and implementing an economically viable product acquisition or
      license is a lengthy and complex process. Other companies, including those
      with
      substantially greater financial, marketing and sales resources, may compete
      with
      us for the acquisition or license of product candidates and approved products.
      We may not be able to acquire or license the rights to additional product
      candidates and approved products on terms that we find acceptable, or at all.





**WE
      MAY UNDERTAKE ACQUISITIONS IN THE FUTURE, AND ANY DIFFICULTIES FROM INTEGRATING
      THESE ACQUISITIONS COULD DAMAGE OUR ABILITY TO ATTAIN OR MAINTAIN PROFITABILITY.**





We
      may
      acquire additional businesses, products or product candidates that complement
      or
      augment our existing business. Integrating any newly acquired business or
      product could be expensive and time-consuming. We may not be able to integrate
      any acquired business or product successfully or operate any acquired business
      profitably. Moreover, we many need to raise additional funds through public
      or
      private debt or equity financing to make acquisitions, which may result in
      dilution to stockholders and the incurrence of indebtedness that may include
      restrictive covenants.





**WE
      WILL NEED TO INCREASE THE SIZE OF OUR ORGANIZATION, AND WE MAY EXPERIENCE
      DIFFICULTIES IN MANAGING GROWTH.**





We
      are a
      small company with 9 full-time and 3 part-time employees as of March 20, 2006.
      To continue our clinical trials and commercialize our product candidates, we
      will need to expand our employee base for managerial, operational, financial
      and
      other resources. Future growth will impose significant added responsibilities
      on
      members of management, including the need to identify, recruit, maintain and
      integrate additional employees. Over the next 12 months depending on the
      progress of our planned clinical trials, we plan to add additional employees
      to
      assist us with our clinical programs. Our future financial performance and
      our
      ability to commercialize our product candidates and to compete effectively
      will
      depend, in part, on our ability to manage any future growth effectively. To
      that
      end, we must be able to:





·
            manage
                our development efforts
                effectively;


·
            manage
                our clinical trials effectively;


·
            integrate
                additional management, administrative, manufacturing and sales and
                marketing personnel;


·
            maintain
                sufficient administrative, accounting and management information
                systems
                and controls; and


·
            hire
                and train additional qualified
                personnel.





We
      may
      not be able to accomplish these tasks, and our failure to accomplish any of
      them
      could harm our financial results.





**REIMBURSEMENT
      MAY NOT BE AVAILABLE FOR OUR PRODUCT CANDIDATES, WHICH COULD DIMINISH OUR SALES.**





Market
      acceptance and sales of our product candidates may depend on reimbursement
      policies and health care reform measures. The levels at which government
      authorities and third-party payors, such as private health insurers and health
      maintenance organizations, reimburse patients for the price they pay for our
      products could affect whether we are able to commercialize these products.
      We
      cannot be sure that reimbursement will be available for any of these products.
      Also, we cannot be sure that reimbursement amounts will not reduce the demand
      for, or the price of, our products. We have not commenced efforts to have our
      product candidates reimbursed by government or third party payors. If
      reimbursement is not available or is available only to limited levels, we may
      not be able to commercialize our products.





In
      recent
      years, officials have made numerous proposals to change the health care system
      in the United States. These proposals include measures that would limit or
      prohibit payments for certain medical treatments or subject the pricing of
      drugs
      to government control. In addition, in many foreign countries, particularly
      the
      countries of the European Union, the pricing of prescription drugs is subject
      to
      government control. If our products are or become subject to government
      regulation that limits or prohibits payment for our products, or that subject
      the price of our products to governmental control, we may not be able to
      generate revenue, attain profitability or commercialize our products.





As
      a
      result of legislative proposals and the trend towards managed health care in
      the
      United States, third-party payers are increasingly attempting to contain health
      care costs by limiting both coverage and the level of reimbursement of new
      drugs. They may also refuse to provide any coverage of uses of approved products
      for medical indications other than those for which the FDA has granted market
      approvals. As a result, significant uncertainty exists as to whether and how
      much third-party payers will reimburse patients for their use of newly-approved
      drugs, which in turn will put pressure on the pricing of drugs.




**LEGISLATIVE
      OR REGULATORY REFORM OF THE HEALTHCARE SYSTEM MAY AFFECT OUR ABILITY TO SELL
      OUR
      PRODUCTS PROFITABLY.**





In
      both
      the United States and certain foreign jurisdictions, there have been a number
      of
      legislative and regulatory proposals to change the healthcare system in ways
      that could impact upon our ability to sell our products profitably. In recent
      years, new legislation has been proposed in the United States at the federal
      and
      state levels that would effect major changes in the healthcare system, either
      nationally or at the state level.





These
      proposals have included prescription drug benefit proposals for Medicare
      beneficiaries introduced in Congress. Legislation creating a prescription drug
      benefit and making certain changes in Medicaid reimbursement has recently been
      enacted by Congress and signed by the President. Given this legislation's recent
      enactment, it is still too early to determine its impact on the pharmaceutical
      industry and our business. Further federal and state proposals are likely.
      The
      potential for adoption of these proposals affects or will affect our ability
      to
      raise capital, obtain additional collaborators and market our products. We
      expect to experience pricing pressures in connection with the sale of our
      products due to the trend toward managed health care, the increasing influence
      of health maintenance organizations and additional legislative proposals. Our
      results of operations could be adversely affected by future healthcare reforms.





17




**RISKS
      RELATED TO OUR INTELLECTUAL PROPERTY**





**IT
      IS DIFFICULT AND COSTLY TO PROTECT OUR PROPRIETARY RIGHTS, AND WE MAY NOT BE
      ABLE TO ENSURE THEIR PROTECTION.**





Our
      commercial success will depend in part on obtaining and maintaining patent
      protection and trade secret protection of our product candidates, and the
      methods used to manufacture them, as well as successfully defending these
      patents against third-party challenges. We will only be able to protect our
      product candidates from unauthorized making, using, selling, offering to sell
      or
      importation by third parties to the extent that we have rights under valid
      and
      enforceable patents or trade secrets that cover these activities.





As
      of
      March 20, 2006, we own and/or have licensed rights to 15 issued United States
      patents and 7 United States patent applications. We have approximately 150
      issued and/or pending foreign patent applications. We may file additional patent
      applications and extensions. Our issued United States patents we own and license
      primarily are composition of matter and formulation patents related to Atiprimod
      and L-Annamycin. Our composition of matter patents for L-Annamycin and Atiprimod
      expire in 2017 and 2016, respectively. Our formulation patents for L-Annamycin
      and Atiprimod dimaleate (preferred salt form) both expire in 2016.





The
      patent positions of pharmaceutical and biotechnology companies can be highly
      uncertain and involve complex legal and factual questions for which important
      legal principles remain unresolved. No consistent policy regarding the breadth
      of claims allowed in biotechnology patents has emerged to date in the United
      States. The biotechnology patent situation outside the United States is even
      more uncertain. Changes in either the patent laws or in interpretations of
      patent laws in the United States and other countries may diminish the value
      of
      our intellectual property. Accordingly, we cannot predict the breadth of claims
      that may be allowed or enforced in our licensed patents or in third-party
      patents.





The
      degree of future protection for our proprietary rights is uncertain because
      legal means afford only limited protection and may not adequately protect our
      rights or permit us to gain or keep our competitive advantage. For example:





·
            others
                may be able to make compounds that are competitive with our product
                candidates but that are not covered by the claims of our licensed
                patents,
                or for which we are not licensed under our license
                agreements;


·
            we
                or our licensors might not have been the first to make the inventions
                covered by our pending patent application or the pending patent
                applications and issued patents of our
                licensors;


·
            we
                or our licensors might not have been the first to file patent applications
                for these inventions;


·
            others
                may independently develop similar or alternative technologies or
                duplicate
                any of our technologies;


·
            it
                is possible that our pending patent application or one or more of
                the
                pending patent applications of our licensors will not result in issued
                patents;


·
            the
                issued patents of our licensors may not provide us with any competitive
                advantages, or may be held invalid or unenforceable as a result of
                legal
                challenges by third parties;


·
            we
                may not develop additional proprietary technologies that are patentable;
                or


·
            the
                patents of others may have an adverse effect on our
                business.





We
      also
      may rely on trade secrets to protect our technology, especially where we do
      not
      believe patent protection is appropriate or obtainable. However, trade secrets
      are difficult to protect. While we use reasonable efforts to protect our trade
      secrets, our employees, consultants, contractors, outside scientific
      collaborators and other advisors may unintentionally or willfully disclose
      our
      information to competitors. Enforcing a claim that a third party illegally
      obtained and is using our trade secrets is expensive and time consuming, and
      the
      outcome is unpredictable. In addition, courts outside the United States are
      sometimes less willing to protect trade secrets. Moreover, our competitors
      may
      independently develop equivalent knowledge, methods and know-how.





**WE
      MAY INCUR SUBSTANTIAL COSTS AS A RESULT OF LITIGATION OR OTHER PROCEEDINGS
      RELATING TO PATENT AND OTHER INTELLECTUAL PROPERTY RIGHTS AND WE MAY BE UNABLE
      TO PROTECT OUR RIGHTS TO, OR USE, OUR TECHNOLOGY.**





If
      we
      choose to go to court to stop someone else from using the inventions claimed
      in
      our licensed patents, that individual or company has the right to ask the court
      to rule that these patents are invalid and/or should not be enforced against
      that third party. These lawsuits are expensive and would consume time and other
      resources even if we were successful in stopping the infringement of these
      patents. In addition, there is a risk that the court will decide that these
      patents are not valid and that we do not have the right to stop the other party
      from using the inventions. There is also the risk that, even if the validity
      of
      these patents is upheld, the court will refuse to stop the other party on the
      ground that such other party's activities do not infringe our rights to these
      patents.





Furthermore,
      a third party may claim that we are using inventions covered by the third
      party's patent rights and may go to court to stop us from engaging in our normal
      operations and activities, including making or selling our product candidates.
      These lawsuits are costly and could affect our results of operations and divert
      the attention of managerial and technical personnel. There is a risk that a
      court would decide that we are infringing the third party's patents and would
      order us to stop the activities covered by the patents. In addition, there
      is a
      risk that a court will order us to pay the other party damages for having
      violated the other party's patents. The biotechnology industry has produced
      a
      proliferation of patents, and it is not always clear to industry participants,
      including us, which patents cover various types of products or methods of use.
      The coverage of patents is subject to interpretation by the courts, and the
      interpretation is not always uniform. If we are sued for patent infringement,
      we
      would need to demonstrate that our products or methods of use either do not
      infringe the patent claims of the relevant patent and/or that the patent claims
      are invalid, and we may not be able to do this. Proving invalidity, in
      particular, is difficult since it requires a showing of clear and convincing
      evidence to overcome the presumption of validity enjoyed by issued patents.





18




Because
      some patent applications in the United States of America may be maintained
      in
      secrecy until the patents are issued, because patent applications in the United
      States of America and many foreign jurisdictions are typically not published
      until eighteen months after filing, and because publications in the scientific
      literature often lag behind actual discoveries, we cannot be certain that others
      have not filed patent applications for technology covered by our licensors'
      issued patents or our pending applications or our licensors' pending
      applications or that we or our licensors were the first to invent the
      technology. Our competitors may have filed, and may in the future file, patent
      applications covering technology similar to ours. Any such patent application
      may have priority over our or our licensors' patent applications and could
      further require us to obtain rights to issued patents covering such
      technologies. If another party has filed a United States patent application
      on
      inventions similar to ours, we may have to participate in an interference
      proceeding declared by the United States Patent and Trademark Office to
      determine priority of invention in the United States. The costs of these
      proceedings could be substantial, and it is possible that such efforts would
      be
      unsuccessful, resulting in a loss of our United States patent position with
      respect to such inventions.





Some
      of
      our competitors may be able to sustain the costs of complex patent litigation
      more effectively than we can because they have substantially greater resources.
      In addition, any uncertainties resulting from the initiation and continuation
      of
      any litigation could have a material adverse effect on our ability to raise
      the
      funds necessary to continue our operations.





**RISKS
      RELATED TO OUR COMMON STOCK**





**MARKET
      VOLATILITY MAY AFFECT OUR STOCK PRICE AND THE VALUE OF YOUR INVESTMENT.**





The
      market prices for securities of biopharmaceutical companies in general have
      been
      highly volatile and may continue to be highly volatile in the future. The
      following factors, in addition to other risk factors described in this section,
      may have a significant impact on the market price of our common stock:





·
            announcements
                of technological innovations or new products by us or our
                competitors;


·
            announcement
                of FDA approval or non-approval of our product candidates or delays
                in the
                FDA review process;


·
            actions
                taken by regulatory agencies with respect to our product candidates,
                clinical trials, manufacturing process or sales and marketing activities;


·
            regulatory
                developments in the United States of America and foreign countries;


·
            the
                success of our development efforts and clinical trials;


·
            the
                success of our efforts to acquire or in-license additional products
                or
                product candidates;


·
            any
                intellectual property infringement action, or any other litigation,
                involving us;


·
            announcements
                concerning our competitors, or the biotechnology or biopharmaceutical
                industries in general;


·
            actual
                or anticipated fluctuations in our operating results;


·
            changes
                in financial estimates or recommendations by securities analysts;


·
            our
                ability to maintain listing requirements on the American Stock Exchange;


·
            sales
                of large blocks of our common stock;


·
            sales
                of our common stock by our executive officers, directors and significant
                stockholders; and


·
            the
                loss of any of our key scientific or management personnel.





The
      occurrence of one or more of these factors may cause our stock price to decline,
      and investors may not be able to resell their shares at or above the price
      that
      they paid for the shares. In addition, the stock markets in general, and the
      markets for biotechnology and biopharmaceutical stocks in particular, have
      experienced extreme volatility that has often been unrelated to the operating
      performance of particular companies. These broad market fluctuations may
      adversely affect the trading price of our common stock.





**WE
      ARE AT RISK OF SECURITIES CLASS ACTION LITIGATION.**





In
      the
      past, securities class action litigation has often been brought against a
      company following a decline in the market price of its securities. This risk
      is
      especially relevant for us because biotechnology and biopharmaceutical companies
      have experienced significant stock price volatility in recent years. If we
      faced
      such litigation, it could result in substantial costs and a diversion of
      management's attention and resources, which could harm our business.





**WE
      HAVE NOT PAID CASH DIVIDENDS IN THE PAST AND DO NOT EXPECT TO PAY CASH DIVIDENDS
      IN THE FUTURE. ANY RETURN ON INVESTMENT MAY BE LIMITED TO THE VALUE OF OUR
      STOCK.**





We
      have
      never paid cash dividends on our stock and do not anticipate paying cash
      dividends on our stock in the foreseeable future. The payment of cash dividends
      on our stock will depend on our earnings, financial condition and other business
      and economic factors affecting us at such time as the board of directors may
      consider relevant. If we do not pay cash dividends, our stock may be less
      valuable because a return on your investment will only occur if our stock price
      appreciates.




19




**ITEM
      1B. UNRESOLVED STAFF COMMENTS**





None.





**ITEM
      2. PROPERTIES.**





We
      currently lease 3,886 square feet of office space located at 420 Lexington
      Avenue, Suite 1609, New York, New York through June 30, 2011. This facility
      contains our executive and administrative headquarters. In December 2005 our
      lease for laboratory space in New Jersey terminated and research activities,
      directed by Dr. Kunwar Shailubhai, were relocated to Doylestown,
      PA,





We
      believe our existing facilities are well maintained, in good operating
      condition, and that our existing and planned facilities will be adequate to
      support our operations for the foreseeable future.





**ITEM
      3. LEGAL PROCEEDINGS.**





We
      are
      not a party to any pending legal proceedings.





**ITEM
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.**





Our
      Annual Meeting of Stockholders was held on October 20, 2005 and we disclosed
      the
      results of the matters voted on in our Quarterly Report on Form 10-Q filed
      on
      November 14, 2005.





**PART
      II**





**ITEM
      5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED
      STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.**





**MARKET
      INFORMATION**





Our
      common stock has been quoted on the American Stock Exchange under the symbol
      "KAL" since October 25, 2004. From May 21, 2003 to October 22, 2004, our common
      stock was quoted on the OTC Bulletin Board under the symbol "CLSP.OB." Prior
      to
      May 21, 2003, our common stock was quoted on the OTC Bulletin Board under the
      symbol "WEBR.OB" but never traded. The following table shows the reported high
      and low closing prices per share for our common stock as reported on the
      American Stock Exchange and the OTC Bulletin Board. With respect to the OTC
      Bulletin Board quotes, these quotations reflect inter-dealer prices, without
      markup, markdown or commissions and may not necessarily represent actual
      transactions or a liquid trading market.





2005
            
            HIGH
            
            LOWFourth
                Quarter
            
            
            $1.53
            
            
            $1.01Third
                Quarter
            
            
            1.42
            
            
            0.97Second
                Quarter
            
            
            1.50
            
            
            0.95First
                Quarter
            
            
            1.98
            
            
            1.302004
            
            
            HIGH
            
            
            LOWFourth
                Quarter
            
            
            $2.08
            
            
            $1.50Third
                Quarter
            
            
            2.01
            
            
            1.15Second
                Quarter
            
            
            3.70
            
            
            1.95First
                Quarter
            
            
            4.25
            
            
            3.25








**NUMBER
      OF STOCKHOLDERS**





As
      of
      March 29, 2006, there were 163 holders of record of our common
      stock.





**DIVIDEND
      POLICY**





Historically,
      we have not declared paid any cash dividends to the holders of our common stock
      and we do not expect to pay any such dividends in the foreseeable future as
      we
      expect to retain our future earnings for use in the operation and expansion
      of
      our business.





20




**ITEM
      6. SELECTED FINANCIAL DATA**





The
      following selected consolidated financial data should be read in conjunction
      with our consolidated financial statements and related notes and “Management’s
      Discussion and Analysis of Financial Condition and Results of Operations”
included elsewhere in this Annual Report on Form 10-K. The statements of
      operations data for the twelve months ended December 31, 2005, 2004 and 2003
      and
      the balance sheet data at December 31, 2005 and 2004 are derived from our
      audited financial statements which are included elsewhere in this Form 10-K.
      The
      statement of operations data for the year ended December 31, 2001 and the
      balance sheet data at December 31, 2002 and 2001 are derived from our audited
      financial statements which are not included in this Form 10-K. The historical
      results are not necessarily indicative of results to be expected for future
      periods. The following information is presented in thousands, except per share
      data.




**For
                the Years Ended December 31,****2005**
            
            **2004**
            
            **2003**
            
            **2002**
            
            **2001****Consolidated
                Statements of Operations Data:**Revenues
            
            $
            -0-
            
            $
            -0-
            
            $
            -0-
            
            $
            -0-
            
            $
            -0-Operating
                expenses:Research
                and development
            
            
            6,154
            
            
            2,817
            
            
            1,370
            
            
            491
            
            
            653Government
                grant
            
            
            (226
            )
            
            (266
            )
            
            —
            
            
            —
            
            
            —Purchased
                in process research and development
            
            
            —
            
            
            210
            
            
            6,735
            
            
            —
            
            
            —Stock-based
                compensation - research and development
            
            
            276
            
            
            1,508
            
            
            434
            
            
            —
            
            
            —General
                and administrative
            
            
            3,714
            
            
            2,363
            
            
            1,398
            
            
            1,228
            
            
            939Stock-based
                compensation - general and administrative
            
            
            2,143
            
            
            1,224
            
            
            3,400
            
            
            —
            
            
            22Loss from
                operations
            
            
            (12,062
            )
            
            (7,857
            )
            
            (13,337
            )
            
            (1,719
            )
            
            (1,614
            )Other
                income
            
            
            177
            
            
            229
            
            
            222
            
            
            —
            
            
            —Interest
                and investment income
            
            
            105
            
            
            84
            
            
            9
            
            
            34
            
            
            182Net
                loss
            
            $
            (11,780
            )
            $
            (7,544
            )
            $
            (13,106
            )
            $
            (1,685
            )
            $
            (1,432
            )Net
                loss per common share — basic and diluted
            
            $
            (0.37
            )
            $
            (0.26
            )
            $
            (0.61
            )
            $
            (0.10
            )
            $
            (0.08
            )Weighted
                average number of common shares outstanding — basic and diluted
            
            
            31,527
            
            
            28,485
            
            
            21,358
            
            
            17,319
            
            
            17,319






**As
                of December 31,****2005**
            
            **2004**
            
            **2003**
            
            **2002**
            
            **2001****Consolidated
                Balance Sheet Data:**Cash
                and cash equivalents
            
            $
            1,421
            
            $
            5,323
            
            $
            3,956
            
            $
            2,223
            
            $
            3,627Total
                assets
            
            
            1,684
            
            
            5,470
            
            
            4,119
            
            
            2,272
            
            
            3,651Total
                current liabilities
            
            
            2,017
            
            
            1,220
            
            
            1,264
            
            
            440
            
            
            138Accumulated
                deficit during development stage
            
            
            (45,141
            )
            
            (33,361
            )
            
            (25,818
            )
            
            (12,711
            )
            
            (11,027
            )Total
                stockholders’ equity (deficit)
            
            $
            (333
            )
            $
            4,249
            
            $
            2,855
            
            $
            1,829
            
            $
            3,513





21




**ITEM
      7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
      AND RESULTS OF OPERATIONS**





The
      following discussion should be read in conjunction with our financial statements
      and other financial information appearing elsewhere in this Annual Report.
      In
      addition to historical information, the following discussion and other parts
      of
      this Annual Report contain forward-looking information that involves risks
      and
      uncertainties.





**OVERVIEW**





We
      are a
      development stage biopharmaceutical company, whose primary focus is on
      biopharmaceutical product development. Since inception in June 1996 our efforts
      have been principally devoted to research and development, securing patent
      protection, obtaining corporate relationships and raising capital. Since
      inception through December 31, 2005, we have sustained cumulative net losses
      of
      $45,140,654. Our losses have resulted primarily from expenditures incurred
      in
      connection with clinical development of licensed products, the purchase of
      in-process research and development, stock based compensation expense, patent
      filing and maintenance, outside accounting and legal services and regulatory
      consulting fees.





From
      inception through December 31, 2005 we have not generated any revenue from
      operations. We expect to incur substantial and increasing losses for the next
      several years as we develop our product candidates, expand our clinical
      development team and prepare for the commercial launch of our product
      candidates. We do not currently have any commercial biopharmaceutical products,
      and do not expect to have such for several years, if at all.





To
      date,
      our sources of cash have been primarily limited to the sale of our equity
      securities. On February 3, 2006, we closed a private placement of 4,283,668
      shares of common stock and 1,070,917 common stock purchase warrants to certain
      accredited investors. The warrants are exercisable for 18 months from closing
      at
      an exercise price of $1.60 per share. The securities were sold at a price of
      $1.20 per share for aggregate gross proceeds of approximately $5.14 million,
      for
      which net proceeds were $4.6 million. On August 22, 2005, we closed a private
      placement of 1,869,203 shares of common stock to certain existing stockholders.
      The shares were sold at a price of $0.97 per share for aggregate gross proceeds
      of approximately $1.8 million, for which net proceeds were $1.6 million. On
      March 9, 2005, we completed a private placement of an aggregate 1,985,791 shares
      of our common stock at a per share price of $1.52, for aggregate gross proceeds
      of $3.02 million and for which net proceeds were $2.99 million. We have devoted
      substantially all of our capital resources to the in-licensing and development
      of our product candidates.





Our
      research and development expenses consist primarily of costs associated with
      an
      in-house research and development laboratory, salaries and staff, application
      and filing for regulatory approval of our proposed products, purchase of
      in-process research and development, regulatory and scientific consulting fees,
      contract research and royalty payments to outside suppliers, facilities and
      universities as well as legal and professional fees associated with filing
      and
      maintaining our patent and license rights to our proposed products. We expense
      all research and development costs as they are incurred. We expect our research
      and development expenses to increase significantly in the future as we develop
      our product candidates.





Our
      general and administrative expenses primarily include personnel and related
      costs, rent and professional service fees. We expect our general and administrative
      expenses to increase significantly over the next few years as we continue to
      build our operations to support our product candidates and as we incur costs
      associated with being a publicly traded company.





**HISTORY**





In
      March
      2002, Callisto Pharmaceuticals, Inc. ("Old Callisto"), a non-public company,
      purchased 99.7% of the outstanding common shares of Webtronics, Inc., a public
      company ("Webtronics"), for $400,000. Webtronics was incorporated in Florida
      on
      February 2, 2001 and had limited operations during the year ended December
      31,
      2002. On April 30, 2003, pursuant to an Agreement and Plan of Merger dated
      March
      10, 2003, as amended April 4, 2003, Synergy Acquisition Corp., a wholly-owned
      subsidiary of Webtronics merged into Synergy Pharmaceuticals Inc. ("Synergy")
      and Callisto Acquisition Corp., a wholly-owned subsidiary of Webtronics merged
      into Old Callisto (collectively, the "Merger"). As a result of the Merger,
      Old Callisto
      and Synergy became wholly-owned subsidiaries of Webtronics. Old Callisto changed
      its name to Callisto Research Labs, LLC and Webtronics changed its name to
      Callisto Pharmaceuticals, Inc. and changed its state of incorporation from
      Florida to Delaware





**PLAN
      OF OPERATIONS**





Our
      plan
      of operations for the next year is to focus primarily on the development of
      two
      drugs to treat leukemia, multiple myeloma (an incurable blood cancer that
      invades and proliferates in bone marrow) and advanced carcinoid tumors. Our
      lead
      drug in development for leukemia, L-Annamycin, earlier completed a Phase I/IIa
      trial in relapsed or refractory acute leukemia patients. On December 1, 2005
      we
      initiated a clinical trial in adult relapsed or refractory acute lymphocytic
      leukemia patients. Our second drug candidate, Atiprimod, is presently in a
      Phase
      I/IIa clinical trial in multiple myeloma patients, and in a Phase I/IIa clinical
      trial in advanced cancer patients. The drug is an orally available drug with
      antiproliferative and antiangiogenic activity.





Our
      plan
      of research studies include further pre-clinical work on Guanilib, in
      preclinical development for gastrointestinal inflammation, a drug exploratory
      program focused on a class of anticancer compounds called Degrasyns, and a
      monoclonal antibody and vaccine candidate that are being explored as biodefense
      agents against staphylococcal and streptococcal bioterrorism
      agents.




22




*L-Annamycin*





On
      August
      12, 2004, we entered into a world-wide license agreement with The University
      of
      Texas M.D. Anderson Cancer Center to research, develop, sell and commercially
      exploit the patent rights for L-Annamycin, an anthacycline cancer drug for
      leukemia therapy. Consideration paid for this license amounted to $31,497 for
      reimbursement of out-of-pocket costs for filing, enforcing and maintaining
      the
      Annamycin patent rights and a $100,000 initial license fee. We also agreed
      to
      pay The University of Texas M.D. Anderson Cancer Center royalties based on
      net
      sales from any licensed products, plus aggregate milestone payments of up to
      $750,000 based upon achieving certain regulatory submissions and approvals.
      The
      term of the agreement is from August 12, 2004 until November 2, 2019. Under
      the
      terms of the license agreement, we are required to make certain good faith
      expenditures towards the clinical development of at least one licensed product
      within the two year period after March 2005. In addition, at any time after
      5
      years from August 12, 2004, The University of Texas M.D. Anderson Cancer Center
      has the right to terminate the license if we fail to provide evidence within
      90
      days of written notice that we have commercialized or we are actively and
      effectively attempting to commercialize Annamycin.





L-Annamycin
      was discovered by scientists at The University of Texas M.D. Anderson Cancer
      Center and initially evaluated in a Phase I clinical trial in 36 patients with
      relapsed solid tumors, a Phase II clinical trial in 13 patients with
      doxorubicin-resistant breast cancer, and a Phase I/IIa trial in 20 patients
      with
      relapsed or refractory acute myeloid leukemia (AML) or relapsed or refractory
      acute lymphocytic leukemia (ALL). We began a clinical trial at The University
      of
      Texas M.D. Anderson Cancer Center in adult relapsed or refractory acute
      lymphocytic leukemia (ALL) patients on December 1, 2005. This single-arm, open
      label trial will enroll 12 patients in a dose escalation Phase I portion,
      followed by 10 patients in a final fixed dose in the Phase II portion. We plan
      to treat up to 34 patients. We also expect to commence two additional trials
      with L-Annamycin in 2006, a single agent trial of L-Annamycin in pediatric
      relapsed or refractory ALL patients, and a combination trial of L-Annamycin
      in
      combination with Ara-C in adult relapsed or refractory AML patients.





*Atiprimod*





On
      August
      28, 2002, and as amended on May 23, 2003, Synergy entered into a worldwide
      license agreement with AnorMED to research, develop, sell and commercially
      exploit the Atiprimod patent rights. The license agreement provides for
      aggregate milestone payments of up to $14 million based upon achieving certain
      regulatory submissions and approvals for an initial indication, and additional
      payments of up to $16 million for each additional indication based on achieving
      certain regulatory submissions and approvals. In addition the agreement requires
      Synergy to pay AnorMED royalties on net sales. Commencing on January 1, 2004
      and
      on January 1 of each subsequent year, Synergy is obligated to pay AnorMED a
      maintenance fee of $200,000 until the first commercial sale of the product.
      The
      first two annual maintenance fee payments under this agreement were made in
      January 2004 and 2005 and were recorded as research and development expense.
      The
      license agreement will terminate in 2018.





On
      May
      26, 2004 we commenced a Phase I/IIa clinical trial of Atiprimod in relapsed
      or
      refractory multiple myeloma patients at two sites, the Dana-Farber Cancer
      Institute (Boston) and The University of Texas M.D. Anderson Cancer Center
      (Houston). On January 31, 2005, we announced the opening of two additional
      sites
      for the Phase I/IIa clinical trial of Atiprimod, the Roswell Park Cancer
      Institute in Buffalo, New York, and the St. Vincent's Comprehensive Cancer
      Center in New York, New York. The clinical trial is an open label study, with
      the primary objective of assessing safety of drug and identifying the maximum
      tolerated dose. The secondary objectives are to measure the pharmacokinetics,
      evaluate the response in patients with refractory disease and to identify
      possible surrogate responses to the drug to better determine the mechanism
      of
      drug action. In December 2005, we announced an update on interim results from
      this trial performed in relapsed or refractory multiple myeloma patients which
      consisted of 15 patients treated with Atiprimod, including 3 patients at the
      highest dose level of 180 mg/day. Two patients exhibited stable disease, with
      one patient having a 34% decrease in M protein (measure of tumor burden) over
      3
      months of treatment. It was also noted that two patients reported a subjective
      decrease in bone pain. We plan to continue this trial at higher dose levels
      until the maximum tolerated dose is reached and then treat 10 additional
      patients at that level.





On
      March
      15, 2005 we announced a second Phase I/IIa clinical trial of Atiprimod in
      advanced cancer patients. The new trial is entitled: "An Open Label Study of
      the
      Safety and Efficacy of Atiprimod Treatment for Patients with Advanced Cancer."
      The primary objective is to assess the safety and determine the maximum
      tolerated dose of Atiprimod in advanced cancer patients. The secondary
      objectives are to measure the pharmacokinetics of Atiprimod and evaluate the
      response in a variety of relapsed solid tumors and hematological malignancies.
      The trial is currently being conducted at the University of Texas M.D. Anderson
      Cancer Center. On February 28, 2006, we announced plans to launch an additional
      indication for clinical development of Atiprimod based on encouraging clinical
      results from the advanced cancer clinical trial that showed a clear response
      in
      a patient with advanced carcinoid cancer plus additional encouraging clinical
      data on other carcinoid patients. Based on these new clinical data, we plan
      to
      initiate a new Phase I/II clinical trial of Atiprimod in carcinoid cancer
      patients with advanced metastatic tumors at several clinical sites in the next
      few months.





**GUANYLATE
      CYCLASE RECEPTOR AGONIST TECHNOLOGY (GUANILIB)**




Our
      guanylate cyclase receptor agonist (GCRA) program is based on control of cyclic
      GMP, an important second messenger involved in key cellular processes, which
      are
      essential for maintenance of the balance between proliferation and cellular
      death (apoptosis). Uroguanylin, a hormone produced by and secreted by
      specialized cells in the human GI tract, helps to maintain this balance by
      activating synthesis of cyclic GMP through activation of guanylate cyclase
      receptor. Recent findings suggest roles of cyclic GMP in GI inflammatory
      diseases.




We
      have
      successfully developed a potent analog (synthetic molecule) of uroguanylin
      called Guanilib (formerly called SP304). Guanilib has been demonstrated to
      be
      superior to uroguanylin in its biological activity, protease stability and
      pH
      characteristics. Guanilib is currently undergoing pre-clinical animal studies
      as
      a treatment for GI inflammation in a collaborative study involving clinical
      gastroenterologist Dr. Scott Plevy of the University of Pittsburgh. Recent
      results from his laboratory showed that Guanilib was efficacious in treatment
      of
      colitis in mice. A patent allowance covering therapeutic applications of
      Guanilib in colon cancer and GI inflammatory diseases has recently been granted
      by the U.S. Patent and Trademark Office.





23




**DEGRASYNS**





On
      January 10, 2006, we entered into a license agreement with the University of
      Texas M.D. Anderson Cancer Center whereby we were granted the exclusive right
      to
      manufacture, have manufactured, use, import, offer to sell and/or sell
      anti-cancer compounds called tyrphostins (renamed Degrasyns). Degrasyns are
      a
      second-generation class of tyrphostins developed by scientists at the University
      of Texas M.D. Anderson Cancer Center that have a novel anti-cancer
      mechanism-of-action that centers on their ability to selectively degrade key
      proteins that are involved in tumor cell proliferation and survival. We plan
      to
      work closely with scientists at the University of Texas M.D. Anderson Cancer
      Center during 2006 to bring forward a pre-clinical candidate for development
      in
      the clinic.




**SUPERANTIGEN-BASED
      BIOTERORRISM DEFENSE**





On
      August
      20, 1996, we entered into a license agreement to research, develop, sell and
      commercially exploit certain Rockefeller University licensed patents covering
      peptides and antibodies useful in treating toxic shock syndrome and septic
      shock. We agreed to work toward commercialization of products related to these
      patents as evidenced by a minimum expenditure of approximately $210,000 per
      year, plus milestone payments and royalties of between 2% and 3% of annual
      net
      sales and will pay Rockefeller 30% of any sublicense fee paid by sublicensees.




The
      licensed patents under this agreement are the subject of research being funded
      by the NIAID grant awarded to us on April 1, 2005 for $885,641 over two years.
      The license agreement will terminate upon the expiration of the related
      patents.





On
      July
      25, 2001, we entered into a license agreement to research, develop, sell and
      commercially exploit certain Rockefeller University licensed patents covering
      the regulation of exoprotein in staphylococcus aureus. We agreed to pay
      Rockefeller a $7,500 annual maintenance fee until the first commercial sale
      of
      the product, plus royalties of 2% and 0.75% of net sales of product depending
      on
      whether the product is covered by a claim under the licensed patents or derived
      from a claim under the licensed patents and will pay Rockefeller 15% of any
      sublicense fee paid by sublicensees. The agreement will terminate in November
      2016. Rockefeller may terminate the license agreement if we are more than 30
      days late in paying Rockefeller any amounts due under the license agreement
      or
      if we breach the license agreement. We have paid the annual maintenance fee
      for
      the year ended July 25, 2002, and have accrued but not paid the annual
      maintenance fee for the twelve months ended July 25, 2003, 2004 and 2005,
      pending our evaluation as to the applicability of the patents licensed under
      this agreement to our ongoing toxic shock syndrome and septic shock development
      program under the August 20, 1996 agreement.





We
      are
      exploring the development of a monoclonal antibody as a therapeutic agent to
      prevent, treat and control superantigen-mediated bioweapons. Our goal is to
      demonstrate therapeutic utility of this agent in an animal model in which toxic
      shock is induced by an aerosolized superantigen toxin. The research work
      involves collaboration with Dr. Sina Bavari, U.S. Army Medical Research
      Institute of Infectious Diseases, Fort Detrick, MD. We are also exploring
      strategic alternatives regarding further development of the superantigen
      program, including spin-off or strategic partnership.





**MANUFACTURING**





An
      improved manufacturing method for Annamycin has been developed at Antibioticos
      S.p.A., our commercial supplier of Good Manufacturing Practice, or GMP, drug
      substance. GMP material is currently being produced in sufficient quantity
      for
      all three anticipated Phase I/II trials. Currently, Antibioticos S.p.A. is
      our
      sole supplier of Annamycin for our clinical trials. Our agreement with
      Antibioticos provides that Antibioticos S.p.A. will provide 400 grams of GMP
      drug substance (Annamycin) for our L-Annamycin clinical trials. Upon the
      conclusion of our Phase IIb clinical trials, the agreement provides that the
      parties will negotiate in good faith towards a commercial supply agreement
      for
      Annamycin. If our relationship with this contract manufacturer, or any other
      contract manufacturer we might use, terminates or if any of their facilities
      are
      damaged for any reason, including fire, flood, earthquake or other similar
      event, we may be unable to obtain supply of Annamycin. If any of these events
      were to occur, we may need to find alternative manufacturers or manufacturing
      facilities. The number of contract manufacturers with the expertise, required
      regulatory approvals and facilities to manufacture Annamycin on a commercial
      scale is extremely limited, and it would take a significant amount of time
      to
      arrange for alternative manufacturers. If we need to change to other commercial
      manufacturers, the FDA and comparable foreign regulators must approve these
      manufacturers' facilities and processes prior to our use, which would require
      new testing and compliance inspections. In addition, we may not have the
      intellectual property rights, or may have to share intellectual property rights,
      to any improvements in the current manufacturing processes or any new
      manufacturing processes for Annamycin. Any of these factors could cause us
      to
      delay or suspend clinical trials, regulatory submissions, required approvals
      or
      commercialization of L-Annamycin, entail higher costs, and could result in
      our
      being unable to commercialize L-Annamycin successfully.





One
      large-scale GMP production run of Atiprimod dimaleate led to the successful
      release of 10 Kg of material available for future Phase II clinical studies.
      We
      plan to enter into a supply contract for Atiprimod with a commercial supplier
      by
      the end of 2007 or after confirming activity of the drug candidate in our
      current human clinical trials.





**EMPLOYEES**





Our
      plan
      is to use contract research organizations (“CRO”) for most of our development
      efforts, including monitoring of clinical trial results, thus


minimizing
      the need to hire full time employees. As of March 20, 2006, we had 9 full-time
      and 3 part-time employees.





24




**OFF-BALANCE
      SHEET ARRANGEMENTS**





We
      had no
      off-balance sheet arrangements as of December 31, 2005.





**CRITICAL
      ACCOUNTING POLICIES**





Financial
      Reporting Release No. 60 requires all companies to include a discussion of
      critical accounting policies or methods used in the preparation of financial
      statements. Our accounting policies are described in Note 3 of the notes to
      our
      consolidated financial statements included in this Annual Report on Form 10-K
      for the fiscal year ended December 31, 2005. The financial statements are
      prepared in accordance with accounting principles generally accepted in the
      United States of America, which requires management to make estimates and
      assumptions that affect the reported amounts of assets and liabilities and
      disclosure of contingent assets and liabilities at the date of the financial
      statements and the reported amounts of revenues and expenses during the
      reporting period. Actual results could differ from those estimates.





Accounting
      for stock based compensation: We have adopted Statement of Financial Accounting
      Standard No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). As
      provided for by SFAS 123, we have also elected to account for our stock-based
      compensation programs according to the provisions of Accounting Principles
      Board
      Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25")."
      Accordingly, compensation expense has been recognized based on the intrinsic
      value of stock issued or options granted to employees and directors for services
      rendered. Other stock based compensation associated with grants to
      non-employees, as well as Directors who perform services outside of their Board
      duties, is measured using the fair value method. We rely heavily on incentive
      compensation in the form of stock options to recruit, retain and motivate
      directors, executive officers, employees and consultants. Incentive compensation
      in the form of stock options is designed to provide long-term incentives,
      develop and maintain an ownership stake and conserve cash during our development
      stage. Since inception through December 31, 2005 stock based compensation
      expense totaled $13,770,967 or approximately 31% of our accumulated deficit.





We
      account for stock options and warrants granted to non-employees based on the
      fair value of the stock option or warrant using the Black-Scholes option-pricing
      model based on assumptions for expected stock price volatility, expected term
      of
      the option, risk-free interest rate and expected dividend yield at the grant
      date.





The
      single most significant factor impacting our operating results is the price
      of
      our stock which is used in the computation of stock-based compensation expense,
      particularly for variable options. Our stock price fluctuated from $3.95 per
      share as of December 31, 2003 to $1.38 per share as of December 31, 2005. 
As of December 31, 2005, 803,500 of our non-employee options required variable
      accounting treatment in accordance with **** FASB
      Interpretation No. 44 “Accounting for Certain Transactions Involving Stock
      Compensation, **** an
      Interpretation of APB Opinion No. 25” (“FIN 44”). Our stock-based compensation
      expense associated with these non-employee variable options during the twelve
      months ended December 31, 2005 was $75,110. During the twelve months ended
      December 31, 2003 we recorded $1,108,817 of stock-based compensation expense
      associated with these non-employee variable options and we reversed $816,865
      of
      this expense during the twelve month ended December 31, 2004.





Research
      and Development: We do not currently have any commercial biopharmaceutical
      products, and do not expect to have such for several years, if at all and
      therefore our research and development costs are expensed as incurred. These
      include expenditures in connection with an in-house research and development
      laboratory, salaries and staff costs, application and filing for regulatory
      approval of our proposed products, purchase of in-process research and
      development, regulatory and scientific consulting fees, contract research and
      royalty payments to outside suppliers, facilities and universities as well
      as
      legal and professional fees associated with filing and maintaining our patent
      and license rights to our proposed products. While certain of our research
      and
      development costs may have future benefits, our policy of expensing all research
      and development expenditures is predicated on the fact that we have no history
      of successful commercialization of biopharmaceutical products to base any
      estimate of the number of future periods that would be benefited.





25




**RESULTS
      OF OPERATIONS**





**YEARS
      ENDED DECEMBER 31, 2005 AND DECEMBER 31, 2004**





We
      had no
      revenues during the twelve months ended December 31, 2005 and 2004 because
      we do
      not have any commercial biopharmaceutical products and we do not expect to
      have
      such products for several years, if at all.





Research
      and development expenses increased approximately $3,336,867, or 118%, to
      $6,154,254 for the twelve months ended December 31, 2005 from $2,817,387 for
      the
      twelve months ended December 31, 2004. The single most significant factor
      contributing to this increase in research and development expense was our
      L-Annamycin project where our program expenses increased to approximately
      $2,500,000 during the twelve months ended December 31, 2005. We started our
      work
      on L-Annamycin in the latter part of 2004, and incurred approximately $300,000
      in expenses during the twelve months ended December 31, 2004, primarily limited
      to a $100,000 initial license fee, $31,000 in patent related legal fees paid
      to
      The University of Texas M. D. Anderson Cancer Center and approximately $85,000
      incurred with our clinical consultant to begin the process of developing
      protocols and obtaining investigational review board (“IRB”) approvals to start
      our trials.





Atiprimod
      clinical trial expenses which include patient costs, drug formulation and
      tableting, data collection, monitoring, insurance, and FDA consultants increased
      approximately $500,000, or 35% to approximately $1,900,000 during the twelve
      months ended December 31, 2005 as compared to approximately $1,400,000 for
      the
      twelve months ended December 31, 2004. Also contributing to this increase in
      research and development expense in the twelve months ended December 31, 2005
      were salaries and wages in the amount of $750,000 compared to $450,000 during
      the twelve months ended December 31, 2004, increasing approximately $300,000,
      or
      67%. The increase was a result of hiring a chief medical officer, an in-house
      patent agent and several clinical trial associates to manage our clinical
      activities.





Stock-based
      compensation - research and development recorded during the twelve months ended
      December 31, 2005, totaled $276,252 as compared to $1,508,588 recorded during
      the twelve months ended December 31, 2004. This decrease was primarily
      attributable to the restructuring of Dr. Kunwar M. Shailubhai’s employment
      agreement during 2004, which resulted in additional stock-based compensation
      expense of approximately $1,100,000 during the twelve months ended December
      31,
      2004 (see Footnote 8 to our Consolidated Financial Statements).





Government
      grant funding for the twelve months ended December 31, 2005 was $226,119 as
      compared to $265,697 for the twelve months ended December 31, 2004. Our 2005
      funding was for work on a biodefense partnership grant from the National
      Institute of Allergy and Infectious Diseases to develop a monoclonal antibody
      and vaccine against bacterial superantigen toxins under our August 20, 1996
      license with Rockefeller University. Our 2004 funding was from a grant from
      the
      National Institutes of Health for studies on Atiprimod. We request grant funding
      to reimburse research and development expenses as incurred and this
      reimbursement has been reported on our Consolidated Statements of Operations
      as
      a separate line item entitled "Government Grant".





General
      and administrative expenses for the twelve months ended December 31, 2005 were
      $3,714,082, an increase of $1,351,309 or 57%, from $2,362,773 for the twelve
      months ended December 31, 2004. The increase was due primarily to approximately
      (i) $500,000 of increased investor relations costs, (ii) $270,000 in higher
      consulting fees for strategic planning and capital markets advice,(iii) $250,000
      in higher personnel expenses primarily employee group insurance, payroll taxes
      and recruitment fees associated with staffing growth and (iv) $90,000 in higher
      costs related to our work on compliance with the Sarbanes-Oxley Act of 2002.





Stock-based
      compensation - general and administrative recorded during the twelve months
      ended December 31, 2005, totaled $2,143,442 as compared to $1,224,182 recorded
      during the twelve months ended December 31, 2004.  This increase was
      primarily attributable to the expense associated with warrants we issued to
      Trilogy Capital Partners  to
      purchase 1,793,322 shares of our Common Stock at an exercise price of $1.03
      per
      share. The fair value of the warrants using the Black-Scholes methodology is
      $1,469,431 which is being recorded as stock-based compensation expense over
      the
      twelve month term of the service agreement entered into on July 18, 2005. During
      the twelve months ended December 31, 2005 the amortization of the Trilogy
      warrant stock-based compensation totaled $734,995.





Purchased
      in-process research and development was $0 and $209,735 for the twelve months
      ended December 31, 2005 and 2004 respectively. The 2004 expense was primarily
      in
      connection with the acquisition of rights to two key patents from Houston
      Pharmaceuticals, Inc.





During
      December 2005 and 2004 Synergy sold certain New Jersey State tax loss carry
      forwards under a state economic development program for cash of approximately
      $177,000 and $233,000, respectively, the proceeds of which were used to support
      research and development activities in New Jersey. This state tax benefit was
      recorded as Other Income during the fourth quarters ended December 31, 2005
      and
      2004. As of December 31, 2005 we have no remaining New Jersey State tax loss
      carry forwards available for sale.





Net
      loss
      for the twelve months ended December 31, 2005 was $11,779,457 compared to a
      net
      loss of $7,543,467 reported for the twelve months ended December 31, 2004.
      The
      increased net loss is primarily the result of higher research, development,
      general and administrative expenses discussed above net of lower stock based
      compensation and purchased in-process R&D.





26




**YEARS
      ENDED DECEMBER 31, 2004 AND DECEMBER 31, 2003.**





The
      results of operations of Synergy are included in the consolidated statements
      of
      operations since the Merger on April 30, 2003.





We
      had no
      revenues during the twelve months ended December 31, 2004 and 2003 because
      we do
      not have any commercial biopharmaceutical products and we do not expect to
      have
      such products for several years, if at all.





Research
      and development expenses increased approximately $1,447,402, or 106%, to
      $2,817,387 for the twelve months ended December 31, 2004 from $1,369,985 for
      the
      twelve months ended December 31, 2003. The single most significant factor
      contributing to this increase in research and development expense was
      approximately $500,000 in higher costs associated with the commencement of
      our
      Phase I/IIa clinical trials of Atiprimod in May of 2004. These clinical trial
      expenses included patient costs, drug formulation and tableting, data
      collection, monitoring, insurance, and FDA consultants. During the twelve months
      ended December 31, 2003 our Atiprimod project expenses were pre-clinical in
      nature, associated with preparing our IND application. Also contributing to
      this
      increase in research and development expense in the twelve months ended December
      31, 2004 were our payments of the first annual $200,000 maintenance fee to
      AnorMED, Inc. for the Atiprimod license. In addition personnel costs increased
      approximately $300,000 as we retained two Synergy executive staff scientists,
      Drs. Picker and Shailubhai, subsequent to the Merger and we incurred $137,000
      of
      costs to develop a new GMP certified commercial production capacity for future
      trials of Atiprimod. The remainder of the increase was primarily attributable
      to
      $160,000 of higher expenses paid to outside collaborating institutions under
      our
      government research grant for Atiprimod.





Our
      L-Annamycin project, which started in the latter part of 2004, incurred expenses
      primarily limited to a $100,000 initial license fee and $31,000 in patent
      related legal fees paid to The University of Texas MD Anderson Cancer Center
      and
      approximately $85,000 incurred with our clinical consultant to begin the process
      of developing protocols and obtaining investigational review board (“IRB”)
      approvals to start our trials. Until the latter part of 2004 our lead drug
      candidate was Atiprimod and almost all of our resources were devoted to that
      project. Concurrently with the license of L-Annamycin we began implementing
      a
      project cost management system which became effective January 1, 2005. This
      system captures all of our outside variable project cost (e.g. patient costs,
      drug formulation and tableting, data collection, monitoring, insurance, and
      FDA
      consultants) associated with the clinical development of each of our drug
      candidates. With regard to our relatively fixed and smaller research and
      development overhead expenses, principally salaries and facilities, we are
      not
      able to accurately and meaningfully determine project allocations at this time.
      We do believe however that these internal fixed resources are expended on
      projects approximately in proportion to our outside variable costs.





Stock-based
      compensation - research and development recorded during the twelve months ended
      December 31, 2004, totaled $1,508,588 as compared to $434,187 recorded during
      the twelve months ended December 31, 2003. This increase was primarily
      attributable to restructuring of Dr. Kunwar M. Shailubhai’s employment
      agreement, which resulted in deferred compensation cost associated with 225,000
      cancelled options of $706,813 as of the date of cancellation being charged
      to
      stock-based compensation expense during the twelve months ended December 31,
      2004 (see Footnote 8 to our Consolidated Financial Statements).  In
      addition our stock-based compensation - research and development recorded during
      the twelve months ended December 31, 2004 reflects a full twelve months of
      expense attributable to options granted to our scientific staff at mid-year
      2003
      subsequent to the Merger with Synergy in April 2003.





Government
      grant funding for the twelve months ended December 31, 2004 was $265,697 as
      compared to $0 for the twelve months ended December 31, 2003. We request grant
      funding to reimburse research and development expenses as incurred.





General
      and administrative expenses for the twelve months ended December 31, 2004 were
      $2,362,773, an increase of $964,683 or 69%, from $1,398,090 for the twelve
      months ended December 31, 2003. The increase was due primarily to approximately
      (i) $300,000 of increased personnel costs principally as a result of the Merger
      and recruitment costs related to hiring personnel, (ii) $220,000 in higher
      facilities and office overhead related to the move into our new corporate
      headquarters in New York City during the quarter ended December 31, 2003, (iii)
      $340,000 in higher outside services associated with being a public company
      including outside directors, transfer agent fees and investor relations and
      (iv)
      $80,000 in higher business travel principally attending investor, professional
      and medical conferences in the United States, England, Italy and Germany.





Stock-based
      compensation - general and administrative recorded during the twelve months
      ended December 31, 2004, totaled $1,224,182 as compared to $3,399,759 recorded
      during the twelve months ended December 31, 2003.  This decrease was
      primarily attributable to a decrease in our stock price from $3.95 as of
      December 31, 2003 to $1.98 per share as of December 31, 2004.  This share
      price decrease resulted in the recapture during 2004 of stock based compensation
      recorded on certain variable options granted to non-employees during 2003. 
The stock-based compensation expense associated with these variable options
      during the twelve months ended December 31, 2003 was $1,108,817, whereas we
      reversed $816,865 of this expense during the twelve months ended December 31,
      2004.





Purchased
      in-process research and development was $209,735 for the twelve months ended
      December 31, 2004, primarily in connection with the acquisition of rights to
      two
      key patents covering a novel cancer platform technology from Houston
      Pharmaceuticals, Inc. During the twelve months ended December 31, 2003 we
      recorded $6,734,818 of purchased in-process research and development expense
      in
      connection with the Merger.





During
      December 2004 and 2003, Synergy sold certain New Jersey State tax loss carry
      forwards under a state economic development program for cash of approximately
      $233,000 and $222,000 respectively , the proceeds of which were used to support
      research and development activities in New Jersey. This state tax benefit was
      recorded as Other Income during the fourth quarters ended December 31, 2004
      and
      2003.





Net
      loss
      for the twelve months ended December 31, 2004 was $7,543,467 compared to a
      net
      loss of $13,106,247 incurred for the twelve months ended December 31, 2003.
      The
      decreased net loss is primarily the result of the lower purchased in-process
      research and development expenses, partially offset by higher research,
      development, general and administrative expenses discussed above. In addition
      we
      recorded lower stock based compensation expense of $2,732,770 during the twelve
      months ended December 31, 2004, as compared to $3,833,946 recorded during the
      same period ended December 31, 2003.




27




**LIQUIDITY
      AND CAPITAL RESOURCES**





As
      of
      December 31, 2005 we had $1,420,510 in cash and cash equivalents, compared
      to
      $5,323,384 as of December 31, 2004. This decrease in cash of $3,902,874 during
      the twelve months ended December 31, 2005 was principally the result of cash
      used in operating activities of $8,686,902 during the twelve months ended
      December 31, 2005. Cash used in operating activities was primarily for research
      and development and general and administrative expenses discussed above,
      partially offset by government grant funding, the sale of tax loss carry
      forwards and interest and investment income. We financed these net operating
      cash expenditures from existing cash balances, by completing two private
      placements of common stock yielding net proceeds of $4,655,278, and from the
      exercise of common stock warrants totaling $128,750.





On
      February 3, 2006, we closed a private placement of 4,283,668 shares of common
      stock and 1,070,917 common stock purchase warrants to certain accredited
      investors. The warrants are exercisable for 18 months from closing at an
      exercise price of $1.60 per share. The securities were sold at a price of $1.20
      per share for aggregate proceeds of $5,140,402. We paid an aggregate $468,340
      and issued an aggregate 390,284 warrants to certain selling agents.
      The selling agent warrants are exercisable at $1.25 per share and will expire
      three years after closing. We also
      incurred $30,000 in legal fees directly associated with the closing. The net
      proceed were from this private placement were $4,641,870.





On
      August
      22, 2005, we closed a private placement of 1,869,203 shares of common stock
      to
      certain of our existing stockholders. The shares were sold at a price of $0.97
      per share for aggregate proceeds of approximately $1.8 million. We paid an
      aggregate $151,250 to certain selling agents.





On
      March
      9, 2005 we sold and issued in a private placement an aggregate 1,985,791 shares
      of common stock at a per share price of $1.52, for aggregate gross proceeds
      of
      approximately $3.02 million. Because this transaction was completed with certain
      existing institutional shareholders and certain members of our management we
      paid no fees to selling agents, and legal fees were $25,000.





On
      April
      1, 2005 we were awarded a biodefense partnership grant from the National
      Institute of Allergy and Infectious Diseases (NIAID) to develop a monoclonal
      antibody and vaccine against bacterial superantigen toxins, in the amount of
      $885,641 over two years. Work on the NIAID superantigen grant started in July
      2005 and funding totaled $226,119 during the twelve months ended December 31,
      2005. ****





Our
      capital resources are focused primarily on the clinical development and
      regulatory approval of L-Annamycin for acute leukemia and Atiprimod for multiple
      myeloma, advanced carcinoid cancer, and bone resorption disease, a major
      complication associated with multiple myeloma. Our product development efforts
      are thus in their early stages and we cannot make estimates of the costs or
      the
      time it will take to complete. The risk of completion of any program is high
      because of the long duration of clinical testing, extended regulatory approval
      and review cycles and uncertainty of the costs. Net cash inflows from any
      products developed may take several years to achieve. We will need additional
      funding to complete these activities. We could however receive grants, contracts
      or technology licenses in the short-term. The amount and timing of these
      inflows, if any, is not known.





Our
      consolidated financial statements as of December 31, 2005 have been prepared
      under the assumption that we will continue as a going concern for the year
      ending December 31, 2006. Our independent registered public accounting firm
      has
      issued a report dated March 29, 2006 that included an explanatory paragraph
      referring to our recurring losses from operations and net capital deficiency
      and
      expressing substantial doubt in our ability to continue as a going concern
      without additional capital becoming available. Our ability to continue as a
      going concern is dependent upon our ability to obtain additional equity or
      debt financing, attain further operating efficiencies and, ultimately, to
      generate revenue. The financial statements do not include any adjustments that
      might result from the outcome of this uncertainty.  We will be required to
      raise additional capital within the next year to complete the development and
      commercialization of our current product candidates and to continue to fund
      operations at the current cash expenditure levels.





To
      date,
      our sources of cash have been primarily limited to the sale of our equity
      securities. We cannot be certain that additional funding will be available
      on
      acceptable terms, or at all. To the extent that we raise additional funds by
      issuing equity securities, our stockholders may experience significant dilution.
      Any debt financing, if available, may involve restrictive covenants that impact
      our ability to conduct our business. If we are unable to raise additional
      capital when required or on acceptable terms, we may have to significantly
      delay, scale back or discontinue the development and/or commercialization of
      one
      or more of our product candidates. We also may be required to:





·
            seek
                collaborators for our product candidates at an earlier stage than
                otherwise would be desirable and on terms that are less favorable
                than
                might otherwise be available; and


·
            relinquish
                license or otherwise dispose of rights to technologies, product candidates
                or products that we would otherwise seek to develop or commercialize
                ourselves on unfavorable terms.





Our
      current plan of operations envisions expenditures that will require additional
      funding, and we have developed a contingency plan reflecting scaled back
      operations which uses only existing resources to fund our operations for the
      next twelve months.





28




**CONTRACTUAL
      OBLIGATIONS AND COMMITMENTS**





The
      following is a summary of our significant contractual cash obligations for
      the
      periods indicated that existed as of December 31, 2005, and is based on
      information appearing in the Notes to Consolidated Financial Statements.





**Total**
            
            **Less
                than**
              **1
                Year**
            
            **1-2**
              **Years**
            
            **3-5**
              **Years**
            
            **More
                than**
              **5
                Years**Operating
                leases - facilities
            
            $
            854,541
            
            $
            148,553
            
            $
            306,079
            
            $
            318,444
            
            $
            81,464Purchase
                obligation- principally consulting services
            
            
            513,298
            
            
            393,298
            
            
            60,000
            
            
            60,000
            
            
            (3
            )Minimum
                spending obligations (1)
            
            
            2,212,714
            
            
            534,874
            
            
            1,069,747
            
            
            608,093
            
            
            (3
            )License
                royalty payments (2)
            
            
            1,342,500
            
            
            407,500
            
            
            440,000
            
            
            495,000
            
            
            (3
            )Total
                obligations
            
            $
            4,923,053
            
            $
            1,484,225
            
            $
            1,875,826
            
            $
            1,481,537
            
            $
            81,464





(1)
      We
      have licensed patents from other companies and institutions under certain
      license agreements. This line item represents our minimum obligations to spend
      monies for product development and commercialization as set forth in each
      license.





(2)
      This
      line item represents our minimum license fee payments to (i) AnorMED, Inc.
      for
      our Atiprimod license, (ii) the University of Texas M.D. Anderson Cancer Center
      for our Degrasyns license and (iii) Rockefeller University for the license
      of
      several patents related to our superantigen- based
      bioterrorism defense program .
      Our
      patent license agreements also include milestone royalty payments to be paid
      in
      cash upon the achievement of certain regulatory approval and product
      commercialization goals. These milestone payments have not been estimated
      because of the uncertainty surrounding the duration of on-going early stage
      clinical trials and the extent of regulatory approval and review cycles. Since
      inception we have never achieved regulatory approval of any of our proposed
      products and we do not currently have any commercial biopharmaceutical products,
      and do not expect to have such for several years. (See Footnote 8 to our
      consolidated financial statements for a more detailed description of the terms
      of our license agreements)





(3)
      For
      purposes of this schedule we have assumed that all patents not commercialized
      within 5 years will be abandoned, license agreements will be terminated and
      associated minimum license fee payments will cease.





**RECENT
      ACCOUNTING PRONOUNCEMENTS:**





In
      December 2004, the Financial Accounting Standards Board (FASB) issued Statement
      of Financial Accounting Standard ("SFAS") No. 123 (Revised 2004), *Share-Based
      Payments* (“SFAS
      123R”). SFAS 123R requires a public entity to measure the cost of employee
      services received in exchange for the award of equity instruments based on
      the
      fair value of the award at the date of grant. The expense will be recognized
      over the period during which an employee is required to provide services in
      exchange for the award. SFAS 123R also addresses transactions in which an entity
      incurs liabilities in exchange for goods or services that are based on the
      fair
      value of the award. SFAS 123R is effective as of the beginning of the first
      interim or annual reporting period that begins after December 15, 2005 and
      accordingly Callisto adopted this standard on January 1, 2006. This statement
      does not change the accounting guidance for share based payment transactions
      with parties other than employees as set forth in SFAS 123 and EITF 96-18
“ *Accounting
      for Equity Instruments Issued to Other than Employees, for Acquiring, or in
      connection with selling Goods or Services”.*





SFAS
      123R
      provides for two transition methods. The “ *modified
      prospective”* method
      requires that share-based compensation expense be recorded for any employee
      options granted after the adoption date and for the unvested portion of any
      employee options outstanding as of the adoption date. The “ *modified
      retrospective* ”
method
      requires that, beginning in the first quarter of 2006, all prior periods
      presented be restated to reflect the impact of share-based compensation expense
      consistent with the proforma disclosures previously required under SFAS 123.
      Callisto has elected to use the “ *modified
      prospective* ”
in
      adopting this standard.





In
      March
      2005 the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”) which
      discusses the SEC’s interpretation of SFAS 123R and the related valuation on
      share-based compensation for public entities. We are assessing the requirements
      of SFAS 123R and SAB 107 and the impact that they will have on our consolidated
      financial statements. While we cannot precisely determine the impact on net
      loss
      and loss per share we anticipate the adoption of these standards will affect
      our
      results of operations to an extent similar to that presented SFAS 123 proforma
      disclosure included in Note 3 to the accompanying audited consolidated financial
      statements.





In
      December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets
      An
      Amendment of APB Opinion No. 29”, which is effective for fiscal periods
      beginning after June 15, 2005. SFAS No.153 amends APB 29, "Accounting for
      Nonmonetary Transactions", which is based on the principle that exchanges of
      nonmonetary assets should be measured based on the fair value of the assets
      exchanged. The guidance in APB 29 included certain exceptions to that principle.
      SFAS No. 153 amends APB 29 to eliminate the exception for nonmonetary exchanges
      of similar productive assets and replaces it with a general exception for
      exchanges of nonmonetary assets that do not have commercial substance. A
      nonmonetary exchange has commercial substance if the future cash flows of the
      entity are expected to change significantly as a result of the exchange. Our
      adoption of this statement on July 1, 2005 did not have a material effect on
      our
      financial position or results of operations.





In
      May
      2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,”
which changes the requirements for accounting for and reporting of a change
      in
      accounting principle. SFAS No. 154 requires retrospective application to prior
      periods’ financial statements of a voluntary change in accounting principle
      unless it is impracticable. SFAS No. 154 also requires that a change in method
      of depreciation, amortization, or depletion for long-lived, nonfinancial assets
      be accounted for as a change in accounting estimate that is affected by a change
      in accounting principle. SFAS No. 154 is effective for accounting changes and
      a
      correction of errors made in fiscal years beginning after December 15, 2005,
      but
      does not change the transition provisions of any existing accounting
      pronouncements, including those that are in a transition phase as of the
      effective date of SFAS No. 154. The adoption of SFAS No. 154 will not have
      a
      material effect on our results of operations or our financial
      position .




29




**ITEM
      7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK.**





At
      December 31, 2005 and 2004, a substantial portion of our c ash
      and
      cash equivalents consists of short term, highly liquid investments in a money
      market fund managed by a large money center bank (JPMorganChase). Maturities
      of
      fund investments are all less than three months.





**ITEM
      8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.**





The
      full
      text of our audited consolidated financial statements as of December 31, 2005
      and 2004 and for the fiscal years ended December 31, 2005, 2004 and 2003 and
      for
      the period from June 5, 1996 (inception) to December 31, 2005, begins on page
      F-1 of this Annual Report on Form 10-K.





**ITEM
      9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
      AND FINANCIAL DISCLOSURE**





None





30




**ITEM
      9A. CONTROLS AND PROCEDURES.**




Based
      on
      an evaluation of our disclosure controls and procedures (as defined in Rules
      13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended)
      required by paragraph (b) of Rule 13a-15 or Rule 15d-15, as of December 31,
      2005, our Chief Executive Officer and Principal Financial Officer have concluded
      that our disclosure controls and procedures were not effective in ensuring
      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 Commission's rules and forms. Our Chief
      Executive Officer and Principal Financial Officer also concluded that, as of
      December 31, 2005, our disclosure controls and procedures were not effective
      in
      ensuring that information required to be disclosed by us in the reports that
      we
      file or submit under the Exchange Act is accumulated and communicated to our
      management, including our Chief Executive Officer and Principal Financial
      Officer, to allow timely decisions regarding required disclosure.




In
      designing and evaluating our disclosure controls and procedures, management
      recognizes that any controls and procedures, no matter how well designed and
      operated, can provide only reasonable assurance of achieving the desired control
      objectives, and management necessarily is required to apply its judgment in
      evaluating the relationship between the benefit of desired controls and
      procedures and the cost of implementing new controls and procedures.





In
      that
      context and in order to ensure the effectiveness of our disclosure controls
      in
      the future we are taking the following actions:





(i)
            form
                a Disclosure Committee, comprising members of our senior management
                and
                corporate counsel, charged with the task of discussing and reviewing
                all
                transactions occurring during each quarter prior to filing our periodic
                reports with the SEC;





(ii)
            tighten
                our policy regarding review and approval of all contractual
                obligations;





(iii)
            inclusion
                of our Chief Business Officer and our Principal Financial and Accounting
                Officer in all Board of Directors
                meetings;





(iv)
            segregate
                financial reporting and accounting duties more effectively between
                our
                Chief Business Officer and our Principal Financial and Accounting
                Officer
                in preparing all periodic reports filed with the SEC;
                and





(v)
            retain
                a third party GAAP advisor to assist the Principal Financial and
                Accounting Officer, as well as advise the Audit Committee from time
                to
                time.





The
      consolidated financial statements include all adjustments identified as a result
      of the evaluation performed.




Except
      for the above, there were no changes in our internal controls over financial
      reporting that could significantly affect internal controls over financial
      reporting during the quarter ended December 31, 2005.





**ITEM
      9B. OTHER INFORMATION**





None.





31




**PART
      III**





**ITEM
      10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.**





Information
      required by Item 10 of Part III is included in our Proxy Statement relating
      to our 2006 Annual Meeting of Stockholders, and is incorporated herein by
      reference. Information relating to our Code of Business Conduct and Ethics
      and
      to compliance with Section 16(a) of the 1934 Act is set forth in our Proxy
      Statement relating to our 2006 Annual Meeting of Stockholders and is
      incorporated herein by reference.





**ITEM
      11. EXECUTIVE COMPENSATION.**





Information
      required by Item 11 of Part III is included in our Proxy Statement relating
      to our 2006 Annual Meeting of Stockholders and is incorporated herein by
      reference.





**ITEM
      12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
      MANAGEMENT AND RELATED STOCKHOLDER MATTERS**





Information
      required by Item 12 of Part III is included in our Proxy Statement relating
      to our 2006 Annual Meeting of Stockholders and is incorporated herein by
      reference.





**ITEM
      13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.**





Information
      required by Item 13 of Part III is included in our Proxy Statement relating
      to our 2006 Annual Meeting of Stockholders and is incorporated herein by
      reference.





**ITEM
      14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**





Information
      required by Item 14 of Part III is included in our Proxy Statement relating
      our 2006 Annual Meeting of Stockholders and is incorporated herein by reference.








**ITEM
      15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.**





(a) *List
      of Documents Filed as a Part of This Report:*




(1) *Index
      to Consolidated Financial Statements:*




Report
      of
      BDO Seidman LLP, Independent Registered Public Accounting Firm


Consolidated
      Balance Sheets as of December 31, 2005 and 2004


Consolidated
      Statements of Operations for each of the three years in the period ended
      December 31, 2005 and for the period from June 5, 1996 (inception) to
      December 31, 2005


Consolidated
      Statements of Changes in Stockholders’ Equity (Deficit) for the period from June
      5, 1996 (inception) to December 31, 2005


Consolidated
      Statements of Cash Flows for each of the three years in the period ended
      December 31, 2005 and for the period from June 5, 1996 (inception) to
      December 31, 2005


Notes
      to
      Consolidated Financial Statements





(2) *Index
      to Financial Statement Schedules:*




All
      schedules have been omitted because the required information is included in
      the
      consolidated financial statements or the notes thereto, or is not applicable
      or
      required.




(3) *Index
      to Exhibits*




**ExhibitNumber**
              **Description**
 3.1
              Certificate
                  of Incorporation (Incorporated by reference to Exhibit 99.1 filed
                  with the
                  Company's Current Report on Form 8-K filed on May 28,
                  2003)
  32
  3.2
              Certificate
                  of Amendment to the Certificate of Incorporation of Callisto
                  Pharmaceuticals, Inc. (Incorporated by reference to Exhibit 3.1
                  to the
                  Company’s Quarterly Report on Form 10-Q filed on November 14,
                  2005)3.3
              Bylaws
                  (Incorporated by reference to Exhibit 99.2 filed with the Company's
                  Current Report on Form 8-K filed on May 28, 2003)4.1
              1996
                  Incentive and Non-Qualified Stock Option Plan (Incorporated by
                  reference
                  to Exhibit 4.1 filed with the Company's Current Report on Form
                  8-K filed
                  on May 15, 2003)4.2
              Form
                  of Warrant to purchase shares of common stock issued in connection
                  with
                  the sale of common stock (Incorporated by reference to Exhibit
                  4.1 filed
                  with the Company's Current Report on Form 8-K filed on January
                  28,
                  2004)4.3
              Form
                  of Warrant issued to Trilogy Partners, Inc. (Incorporated by reference
                  to
                  Exhibit 4.1 filed with the Company’s Current Report on Form 8-K filed on
                  July 22, 2005)4.4
              2005
                  Equity Compensation Incentive Plan (Incorporated by reference to
                  Appendix
                  B filed with the Company's Definitive Proxy Statement on Schedule
                  14A
                  filed on August 31, 2005)4.5
              2005
                  Directors’ Stock Option Plan (Incorporated by reference to Appendix C
                  filed with the Company's Definitive Proxy Statement on Schedule
                  14A filed
                  on August 31, 2005)4.6
              Form
                  of Warrant to purchase Common Stock issued in connection with the
                  sale of
                  Common Stock (Incorporated by reference to Exhibit 4.1 filed with
                  the
                  Company’s Current Report on Form 8-K filed on February 9,
                  2006)4.7
              Form
                  of Warrant to purchase Common Stock issued to certain selling agents
                  in
                  connection with the sale of Common Stock (Incorporated by reference
                  to
                  Exhibit 4.2 filed with the Company’s Current Report on Form 8-K filed on
                  February 9, 2006)10.1
              Employment
                  Agreement dated June 13, 2003 by and between Callisto Pharmaceuticals,
                  Inc. and Gary S. Jacob (Incorporated by reference to Exhibit 10.1
                  filed
                  with the Company's Quarterly Report on Form 10-QSB filed on August
                  20,
                  2003)*10.2
              Employment
                  Agreement dated April 6, 2004 by and between Synergy Pharmaceuticals
                  Inc.
                  and Kunwar Shailubhai (Incorporated by reference to Exhibit 10.2
                  filed
                  with the Company's Annual Report on Form 10-KSB on April 14,
                  2004)*10.3
              Employment
                  Agreement dated June 13, 2003 by and between Callisto Pharmaceuticals,
                  Inc. and Donald H. Picker (Incorporated by reference to Exhibit
                  10.3 filed
                  with the Company's Current Report on Form 10-QSB filed on November
                  14,
                  2003)*10.4
              Amendment
                  to Employment Agreement dated April 6, 2004 by and between Callisto
                  Pharmaceuticals, Inc. and Donald H. Picker (Incorporated by reference
                  to
                  Exhibit 10.6 filed with the Company's Annual Report on Form 10-KSB
                  filed
                  on April 14, 2004)*10.5
              License
                  Agreement dated as of August 28, 2002 by and between Synergy
                  Pharmaceuticals Inc. and AnorMED Inc.( Incorporated by reference
                  to
                  Exhibit 10.4 filed with the Company's Current Report on Form 10-QSB
                  filed
                  on November 14, 2003)**10.6
              Employment
                  Agreement dated January 15, 2004 by and between Callisto Pharmaceuticals,
                  Inc and Bernard Denoyer (Incorporated by reference to Exhibit 10.6
                  filed
                  with the Company's Annual Report on Form 10-KSB on April 14,
                  2004)*10.7
              Form
                  of Registration Rights Agreement dated as of January 21, 2004 by
                  and among
                  the Registrant and the Purchasers set forth on the signature page
                  thereto
                  (Incorporated by reference to Exhibit 4.1 filed with the Company's
                  Current
                  Report on Form 8-K filed on January 28, 2004)10.8
              Common
                  Stock Purchase Agreement dated as of April 19, 2004, by and between
                  Callisto Pharmaceuticals, Inc. and the Purchasers set forth on
                  Exhibit A
                  thereto (Incorporated by reference to Exhibit 10.1 filed with the
                  Company's Current Report on Form 8-K filed on April 19,
                  2004)10.9
              Patent
                  and Technology License Agreement dated August 12, 2004 by and between
                  The
                  Board of Regents of the University of Texas System, on behalf of
                  The
                  University of Texas M. D. Anderson Cancer Center and Callisto
                  Pharmaceuticals, Inc. (Incorporated by reference to Exhibit 10.1
                  filed
                  with the Company's Current Report on Form 8-K filed on September
                  7,
                  2004)**
 10.10
              Consulting
                  Agreement dated as of December 27, 2004 between the Registrant
                  and
                  Gabriele M. Cerrone (Incorporated by reference to Exhibit 10.10
                  filed with
                  the Company’s Annual Report on Form 10-KSB filed on March 30, 2005)
                  *
  33
  10.11
              Common
                  Stock Purchase Agreement dated as of March 8, 2005 by and between
                  Callisto
                  Pharmaceuticals, Inc. and the Purchasers
                  set forth on Exhibit A thereto (Incorporated by reference to Exhibit
                  10.1
                  filed with the Company's Current Report on Form 8-K filed on March
                  5,
                  2005)10.12
              License
                  Agreement between Callisto Pharmaceuticals, Inc. and The Rockefeller
                  University effective as of July 25, 2001 (Incorporated by reference
                  to
                  Exhibit 10.12 filed with the Company’s Annual Report on Form 10-K filed on
                  June 6, 2005)10.13
              Agreement
                  among Davos Chemical Corporation, Callisto Pharmaceuticals, Inc.
                  and
                  Antibioticos S.p.A. dated July 28, 2004 (Incorporated by reference
                  to
                  Exhibit 10.15 filed with the Company’s Annual Report on Form 10-K filed on
                  June 6, 2005)10.14
              Extension
                  and Severance Compensation Agreement dated June 9, 2005 between
                  Callisto
                  Pharmaceuticals, Inc. and Gary S. Jacob (Incorporated by reference
                  to
                  Exhibit 10.1 filed with the Company’s Current Report on Form 8-K filed on
                  June 15, 2005)*10.15
              Extension
                  and Severance Compensation Agreement dated June 9, 2005 between
                  Callisto
                  Pharmaceuticals, Inc. and Donald S. Picker (Incorporated by reference
                  to
                  Exhibit 10.2 filed with the Company’s Current Report on Form 8-K filed on
                  June 15, 2005)*10.16
              Letter
                  of Engagement between Trilogy Capital Partners, Inc. and Callisto
                  Pharmaceuticals, Inc. dated July 18, 2005 (Incorporated by reference
                  to
                  Exhibit 10.1 filed with the Company’s Current Report on Form 8-K filed on
                  July 22, 2005)10.17
              Common
                  Stock Purchase Agreement dated as of August 22, 2005 between Callisto
                  Pharmaceuticals, Inc. and the investors listed on Exhibit A thereto
                  (Incorporated by reference to Exhibit 10.1 filed with the Company’s
                  Current Report on Form 8-K filed on August 26, 2005)10.18
              Amendment
                  dated October 19, 2005 to the Employment Agreement dated as of
                  June 13,
                  2003 by and between Callisto Pharmaceuticals, Inc. and Gary S.
                  Jacob
                  (Incorporated by reference to Exhibit 10.1 filed with the Company’s
                  Current Report on Form 8-K filed on October 21, 2005)*10.19
              Amendment
                  dated October 19, 2005 to the Employment Agreement dated as of
                  September
                  23, 2003, as amended April 6, 2004 by and between Callisto
                  Pharmaceuticals, Inc. and Donald H. Picker (Incorporated by reference
                  to
                  Exhibit 10.2 filed with the Company’s Current Report on Form 8-K filed on
                  October 21, 2005)*10.20
              Amendment
                  dated October 19, 2005 to the Employment Agreement dated as of
                  January 15,
                  2004 by and between Callisto Pharmaceuticals, Inc. and Bernard
                  Denoyer
                  (Incorporated by reference to Exhibit 10.4 filed with the Company’s
                  Current Report on Form 8-K filed on October 21, 2005)*10.21
              Amendment
                  dated October 19, 2005 to the Employment Agreement dated as of
                  April 6,
                  2004 by and between Synergy Pharmaceuticals Inc. and Kunwar Shailubhai
                  (Incorporated by reference to Exhibit 10.5 filed with the Company’s
                  Current Report on Form 8-K filed on October 21, 2005)*10.22
              Patent
                  and Technology License Agreement dated January 10, 2006 between
                  The
                  University of Texas M.D. Anderson Cancer Center and Callisto
                  Pharmaceuticals, Inc. **10.23
              Securities
                  Purchase Agreement dated February 3, 2006 between Callisto
                  Pharmaceuticals, Inc. and the investors listed on Schedule A thereto
                  (Incorporated by reference to Exhibit 10.1 filed with the Company’s
                  Current Report on Form 8-K filed on February 9, 2006)14
              Code
                  of Business Conduct and Ethics (Incorporated by reference to Exhibit
                  14
                  filed with the Company's Annual Report on Form 10-KSB filed on
                  April 14,
                  2004)21
              List
                  of Subsidiaries23
              Consent
                  of BDO Seidman, LLP31.1
              Certification
                  of Chief Executive Officer required under Rule 13a-14(a)/15d-14(a)
                  under
                  the Exchange Act31.2
              Certification
                  of Principal Financial Officer required under Rule 13a-14(a)/15d-14(a)
                  under the Exchange Act32.1
              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
                  200232.2
              Certification
                  of Principal Financial Officer pursuant to 18 U.S.C Section 1350,
                  as
                  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                  200299.1
              Power
                  of Attorney (included on page 36)
  34
  *
        Management contract or compensatory plan or arrangement required to be filed
        as
        an Exhibit to this form pursuant to Item 601 of Regulation S-K.
 
 **
        Confidential treatment has been requested with respect to deleted portions
        of
        this agreement.




35




**SIGNATURES**





Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, the registrant has duly caused this report to be signed on its behalf
      by
      the undersigned, thereunto duly authorized.




Callisto
              Pharmaceuticals, Inc.Date: March
              31, 2006
            By:
            /s/ Gary
              S.
              JacobGary
                S. Jacob,
              Chief
                Executive Officer




**POWER
      OF ATTORNEY**




KNOW ALL
      MEN
      BY THESE PRESENTS, that the undersigned officers or directors of the Registrant,
      by virtue of their signatures to this report, appearing below, hereby constitute
      and appoint Gabriele M. Cerrone and Gary S. Jacob, or any one of them, with
      full
      power of substitution, as attorneys-in-fact in their names, places and stead
      to
      execute any and all amendments to this report in the capacities set forth
      opposite their names and hereby ratify all that said attorneys-in-fact do by
      virtue hereof.




Pursuant
      to the requirements of the Securities Exchange Act of 1934, this report has
      been
      signed below by the following persons on behalf of the registrant and in the
      capacities and on the dates indicated.


SIGNATURE
              
              TITLE
              DATE/s/
                  Gary S. Jacob
              
              Chief
                  Executive Officer and Director
              March
                  31, 2006Gary
                  S. Jacob
              
              (Principal
                  Executive Officer)/s/
                  Bernard F. Denoyer
              
              Vice
                  President, Finance
              March
                  31, 2006Bernard
                  F. Denoyer
              
              (Principal
                  Financial and Accounting Officer)/s/
                  Gabriele M. Cerrone
              
              Chairman
                  of the Board
              March
                  31, 2006Gabriele
                  M. Cerrone/s/
                  Riccardo Dalla-Favera
              
              Director
              March
                  31, 2006Riccardo
                  Dalla-Favera/s/
                  John P. Brancaccio
              
              Director
              March
                  31, 2006John
                  P. Brancaccio/s/
                  Stephen K. Carter
              
              Director
              March
                  31, 2006Stephen
                  K. Carter/s/
                  Christoph Bruening
              
              Director
              March
                  31, 2006Christoph
                  Bruening/s/
                  Randall K. Johnson
              
              Director
              March
                  31, 2006Randall
                  K. Johnson


36





**CALLISTO
      PHARMACEUTICALS, INC.**


(A
      Development Stage Company)





**Index
      to Consolidated Financial Statements**





**PAGE**Report
                of Independent Registered Public Accounting Firm
            F-2Consolidated
                Balance Sheets as of December 31, 2005 and 2004
            F-3Consolidated
                Statements of Operations for the three yearsin
                the period ended December 31, 2005 and for the periodfrom
                June 5, 1996 (inception) to December 31, 2005
            F-4Consolidated
                Statement of Changes in Stockholders' Equity (Deficit)for
                the period from June 5, 1996 (inception) to December 31,
                2005
            F-5Consolidated
                Statements of Cash Flows for the three years in the period endedDecember
                31, 2005 and for the period from June 5, 1996 (inception) to December
                31,
                2005
            F-10Notes
                to Consolidated Financial Statements
            F-11




F-1




Report
      of
      Independent Registered Public Accounting Firm





Board
      of
      Directors and Stockholders


Callisto
      Pharmaceuticals, Inc.


New
      York,
      New York





We
      have
      audited the accompanying consolidated balance sheets of Callisto
      Pharmaceuticals, Inc. and Subsidiaries (a development stage company) (the
      "Company") as of December 31, 2005 and 2004, the related consolidated statements
      of operations and cash flows for each of the three years in the period ended
      December 31, 2005 and for the period from June 5, 1996 (inception) to December
      31, 2005 and the related consolidated statement of stockholders' equity
      (deficit) for the period from June 5, 1996 (inception) to December 31, 2005.
      These financial statements are the responsibility of the Company's management.
      Our responsibility is to express an opinion on these financial statements based
      on our audits.





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





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of Callisto Pharmaceuticals,
      Inc. and Subsidiaries as of December 31, 2005 and 2004, and the results of
      their
      operations and their cash flows for each of the three years in the period ended
      December 31, 2005 and for the period from June 5, 1996 (inception) to December
      31, 2005, in conformity with accounting principles generally accepted in the
      United States of America.





The
      accompanying financial statements have been prepared assuming that the Company
      will continue as a going concern. As discussed in Note 2 to the financial
      statements, the Company has suffered recurring losses from operations and has
      a
      net capital deficiency that raise substantial doubt about its ability to
      continue as a going concern. Management’s plans in regard to these matters are
      also described in Note 2. The financial statements do not include any
      adjustments that might result from the outcome of this uncertainty.





/s/
      BDO
      Seidman, LLP





New
      York,
      New York


March
      29,
      2006




F-2




**CALLISTO
      PHARMACEUTICALS, INC.**


(A
      Development Stage Company)


**CONSOLIDATED
      BALANCE SHEETS**




**AS
                OF****DECEMBER
                31,****2005**
            
            **2004****ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            1,420,510
            
            $
            5,323,384Prepaid
                expenses and other
            
            
            181,284
            
            
            45,2311,601,794
            
            
            5,368,615Property
                and equipment - net
            
            
            —
            
            
            18,856Security
                deposits
            
            
            82,196
            
            
            82,196$
            1,683,990
            
            $
            5,469,667**LIABILITIES
                AND STOCKHOLDERS' EQUITY (DEFICIT)**Current
                liabilities:Accounts
                payable
            
            $
            1,424,612
            
            $
            984,486Accrued
                expenses
            
            
            592,297
            
            
            235,8032,016,909
            
            
            1,220,289Stockholders'
                equity (deficit):Common
                stock, par value $.0001, 100,000,000 shares authorized, 33,233,096and
                29,219,102 outstanding at December 31, 2005 and 2004,
                respectively.
            
            
            3,323
            
            
            2,922Additional
                paid-in capital
            
            
            46,387,875
            
            
            39,910,187Unamortized
                deferred stock based compensation
            
            
            (1,583,463
            )
            
            (2,302,534
            )Deficit
                accumulated during development stage
            
            
            (45,140,654
            )
            
            (33,361,197
            )(332,919
            )
            
            4,249,378$
            1,683,990
            
            $
            5,469,667





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




F-3




**CALLISTO
      PHARMACEUTICALS, INC.**


(A
      Development Stage Company)


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**




**For
                the****period
                From****June
                5, 1996****(Inception)
                to****For
                the years ended December 31,**
            
            **December
                31,****2005**
            
            **2004**
            
            **2003**
            
            **2005**Revenues
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            —Costs
                and expenses:Research
                and development
            
            
            6,154,254
            
            
            2,817,387
            
            
            1,369,985
            
            
            13,874,002Government
                grant
            
            
            (226,119
            )
            
            (265,697
            )
            
            —
            
            
            (491,816
            )Purchased
                in process research and development
            
            
            —
            
            
            209,735
            
            
            6,734,818
            
            
            6,944,553Stock-based
                compensation (research and development)
            
            
            276,252
            
            
            1,508,588
            
            
            434,187
            
            
            2,219,027General
                and administrative
            
            
            3,714,082
            
            
            2,362,773
            
            
            1,398,090
            
            
            12,326,327Stock-based
                compensation (general and administrative)
            
            
            2,143,442
            
            
            1,224,182
            
            
            3,399,759
            
            
            11,551,940Loss
                from operations
            
            
            (12,061,911
            )
            
            (7,856,968
            )
            
            (13,336,839
            )
            
            (46,424,033
            )Interest
                and investment income
            
            
            105,303
            
            
            84,081
            
            
            8,768
            
            
            654,984Other
                income
            
            
            177,151
            
            
            229,420
            
            
            221,824
            
            
            628,395Net
                loss
            
            $
            (11,779,457
            )
            $
            (7,543,467
            )
            $
            (13,106,247
            )
            $
            (45,140,654
            )Weighted
                average shares outstanding:basic
                and diluted
            
            
            31,527,060
            
            
            28,485,227
            
            
            21,357,659Net
                loss per common share:basic
                and diluted
            
            $
            (0.37
            )
            $
            (0.26
            )
            $
            (0.61
            )




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




F-4




**CALLISTO
      PHARMACEUTICALS, INC.**


(A
      Development Stage Company)


**CONSOLIDATED
      STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)**




**Preferred
                Shares**
            
            **Preferred
                Stock,**
              **Par
                Value**
            
            **Common
                Shares**
            
            **Common
                Stock,**
              **Par
                Value**
            
            **Additional**
              **Paid
                in Capital**Balance
                at inception, June 5, 1996
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Net
                loss for the periodIssuance
                of founder shares
            
            
            —
            
            
            —
            
            
            2,642,500
            
            
            264
            
            
            528Common
                stock issued
            
            
            —
            
            
            —
            
            
            1,356,194
            
            
            136
            
            
            272Common
                stock issued via private placement
            
            
            —
            
            
            —
            
            
            1,366,667
            
            
            137
            
            
            1,024,863Balance,
                December 31, 1996
            
            
            —
            
            
            —
            
            
            5,365,361
            
            
            537
            
            
            1,025,663Net
                loss for the year
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Common
                stock issued via private placement
            
            
            —
            
            
            —
            
            
            1,442,666
            
            
            144
            
            
            1,081,855Balance,
                December 31, 1997
            
            
            —
            
            
            —
            
            
            6,808,027
            
            
            681
            
            
            2,107,518Net
                loss for the year
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Amortization
                of Stock based Compensation
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            52,778Common
                stock issued via private placement
            
            
            —
            
            
            —
            
            
            1,416,667
            
            
            142
            
            
            1,062,358Common
                stock issued for services
            
            
            —
            
            
            —
            
            
            788,889
            
            
            79
            
            
            591,588Common
                stock repurchased and cancelled
            
            
            —
            
            
            —
            
            
            (836,792
            )
            
            (84
            )
            
            (96,916
            )Balance,
                December 31, 1998
            
            
            —
            
            
            —
            
            
            8,176,791
            
            
            818
            
            
            3,717,326Net
                loss for the year
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Deferred
                Compensation - stock options
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            9,946Amortization
                of Stock based Compensation
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Common
                stock issued for services
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            3,168,832Common
                stock issued via private placement
            
            
            —
            
            
            —
            
            
            346,667
            
            
            34
            
            
            259,966Balance,
                December 31, 1999
            
            
            —
            
            
            —
            
            
            8,523,458
            
            
            852
            
            
            7,156,070Net
                loss for the year
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Amortization
                of Stock based Compensation
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Common
                stock issued
            
            
            —
            
            
            —
            
            
            4,560,237
            
            
            455
            
            
            250,889Other
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            432Preferred
                shares issued
            
            
            3,485,299
            
            
            348
            
            
            —
            
            
            —
            
            
            5,986,302Preferred
                stock issued for services
            
            
            750,000
            
            
            75
            
            
            —
            
            
            —
            
            
            1,124,925Balance,
                December 31, 2000
            
            
            4,235,299
            
            
            423
            
            
            13,083,695
            
            
            1,307
            
            
            14,518,618Net
                loss for the year
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Deferred
                Compensation - stock Options
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            20,000Amortization
                of Stock based Compensation
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Balance,
                December 31, 2001
            
            
            4,235,299
            
            
            423
            
            
            13,083,695
            
            
            1,307
            
            
            14,538,618Net
                loss for the year
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Amortization
                of Stock based Compensation
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Balance,
                December 31, 2002
            
            
            4,235,299
            
            
            423
            
            
            13,083,695
            
            
            1,307
            
            
            14,538,618


The
        accompanying notes are an integral part of these consolidated financial
        statements
  F-5




**CALLISTO
      PHARMACEUTICALS, INC.**


(A
      Development Stage Company)


**CONSOLIDATED
      STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
      (Continued)**




**Unamortized**
              **Deferred**
              **Stock
                Based**
              **Compensation**
            
            **Deficit**
              **Accumulated**
              **during
                the**
              **Development**
              **Stage**
            
            **Total**
              **Stockholders'**
              **Equity**Balance
                at inception, June 5, 1996
            
            
            —
            
            
            —
            
            
            —Net
                loss for the year
            
            
            
            
            
            (404,005
            )
            
            (404,005
            )Issuance
                of founder shares
            
            
            —
            
            
            —
            
            
            792Common
                stock issued
            
            
            —
            
            
            —
            
            
            408Common
                stock issued via private placement
            
            
            —
            
            
            —
            
            
            1,025,000Balance,
                December 31, 1996
            
            
            —
            
            
            (404,005
            )
            
            622,195Net
                loss for the year
            
            
            —
            
            
            (894,505
            )
            
            (894,505
            )Common
                stock issued via private placement
            
            
            —
            
            
            —
            
            
            1,081,999Balance,
                December 31, 1997
            
            
            —
            
            
            (1,298,510
            )
            
            809,689Net
                loss for the year
            
            
            —
            
            
            (1,484,438
            )
            
            (1,484,438
            )Amortization
                of Stock based Compensation
            
            
            —
            
            
            —
            
            
            52,778Common
                stock issued
            
            
            
            
            
            
            
            
            1,062,500Common
                stock issued for services
            
            
            —
            
            
            —
            
            
            591,667Common
                Stock repurchased and cancelled
            
            
            —
            
            
            —
            
            
            (97,000
            )Balance,
                December 31, 1998
            
            
            —
            
            
            (2,782,948
            )
            
            935,196Net
                loss for the year
            
            
            —
            
            
            (4,195,263
            )
            
            (4,195,263
            )Deferred
                Compensation - stock options
            
            
            (9,946
            )
            
            —
            
            
            —Amortization
                of Stock based Compensation
            
            
            3,262
            
            
            —
            
            
            3,262Common
                stock issued for services
            
            
            —
            
            
            —
            
            
            3,168,832Common
                stock issued via private placement
            
            
            —
            
            
            —
            
            
            260,000Balance,
                December 31, 1999
            
            
            (6,684
            )
            
            (6,978,211
            )
            
            172,027Net
                loss for the year
            
            
            
            
            
            (2,616,261
            )
            
            (2,616,261
            )Amortization
                of Stock based Compensation
            
            
            4,197
            
            
            
            
            
            4,197Common
                stock issue
            
            
            —
            
            
            —
            
            
            251,344Other
            
            
            —
            
            
            —
            
            
            432Preferred
                shares issued
            
            
            —
            
            
            —
            
            
            5,986,650Preferred
                stock issued for services
            
            
            —
            
            
            —
            
            
            1,125,000Balance,
                December 31, 2000
            
            
            (2,487
            )
            
            (9,594,472
            )
            
            4,923,389Net
                loss for the year
            
            
            —
            
            
            (1,432,046
            )
            
            (1,432,046
            )Deferred
                Compensation - stock options
            
            
            (20,000
            )
            
            —
            
            
            —Amortization
                of Stock based Compensation
            
            
            22,155
            
            
            —
            
            
            22,155Balance,
                December 31, 2001
            
            
            (332
            )
            
            (11,026,518
            )
            
            3,513,498Net
                loss for the year
            
            
            —
            
            
            (1,684,965
            )
            
            (1,684,965
            )Amortization
                of Stock based Compensation
            
            
            332
            
            
            —
            
            
            332Balance,
                December 31, 2002
            
            
            —
            
            
            (12,711,483
            )
            
            1,828,865


The
        accompanying notes are an integral part of these consolidated financial
        statements
  F-6


**CALLISTO
      PHARMACEUTICALS, INC.**


(A
      Development Stage Company)


**CONSOLIDATED
      STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) (Continued)**




**Preferred**
              **Stock**
            
            **Preferred**
              **Stock**
              **Par**
              **Value**
            
            **Common**
              **Stock**
            
            **Common**
              **Stock**
              **Par**
              **Value**
            
            **Additional**
              **Paid
                in**
              **Capital**
            
            **Unamortized**
              **Deferred**
              **Stock
                Based**
              **Compensation**
            
            **Deficit**
              **Accumulated**
              **during
                the**
              **Development**
              **Stage**
            
            **Total**
              **Stockholders'**
              **Equity**Balance
                December 31, 2002
            
            
            4,235,299
            
            
            423
            
            
            13,083,695
            
            
            1,307
            
            
            14,538,618
            
            
            —
            
            
            ($12,711,483
            )
            
            1,828,865Net
                loss for the year
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (13,106,247
            )
            
            (13,106,247
            )Conversion
                of preferredstock
                in connectionwith
                the Merger
            
            
            (4,235,299
            )
            
            (423
            )
            
            4,235,299
            
            
            423
            
            
            —
            
            
            —
            
            
            —
            
            
            —Common
                stock issued toformer
                Synergystockholders
            
            
            —
            
            
            
            
            
            4,329,927
            
            
            432
            
            
            6,494,458
            
            
            —
            
            
            —
            
            
            6,494,890Common
                stock issued inexchange
                for Webtronicscommon
                stock
            
            
            —
            
            
            
            
            
            1,503,173
            
            
            150
            
            
            (150
            )
            
            —
            
            
            —
            
            
            —Deferred
                Compensation -stock
                options
            
            
            —
            
            
            
            
            
            —
            
            
            —
            
            
            9,313,953
            
            
            (9,313,953
            )
            
            —
            
            
            —Amortization
                of deferredStock
                based Compensation
            
            
            —
            
            
            
            
            
            —
            
            
            —
            
            
            —
            
            
            3,833,946
            
            
            —
            
            
            3,833,946Private
                placement ofcommon
                stock, net
            
            
            —
            
            
            —
            
            
            2,776,666
            
            
            278
            
            
            3,803,096
            
            
            —
            
            
            —
            
            
            3,803,374Balance,
                December 31, 2003
            
            
            —
            
            
            —
            
            
            25,928,760
            
            
            2,590
            
            
            34,149,975
            
            
            (5,480,007
            )
            
            (25,817,730
            )
            
            2,854,828




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




F-7




**CALLISTO
      PHARMACEUTICALS, INC.**


(A
      Development Stage Company)


**CONSOLIDATED
      STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) (Continued)**





**Preferred**
              **Stock**
            
            **Preferred**
              **Stock**
              **Par**
              **Value**
            
            **Common**
              **Stock**
            
            **Common**
              **Stock**
              **Par**
              **Value**
            
            **Additional**
              **Paid
                in**
              **Capital**
            
            **Unamortized**
              **Deferred**
              **Stock
                Based**
              **Compensation**
            
            **Deficit**
              **Accumulated**
              **during
                the**
              **Development**
              **Stage**
            
            **Total**
              **Stockholders'**
              **Equity**Balance,
                December 31, 2003
            
            
            —
            
            
            —
            
            
            25,928,760
            
            
            2,590
            
            
            34,149,975
            
            
            (5,480,007
            )
            
            (25,817,730
            )
            
            2,854,828Net
                loss for the period
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (7,543,467
            )
            
            (7,543,467
            )Amortization
                of deferredStock-based
                compensation expense
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            3,084,473
            
            
            —
            
            
            3,084,473Variable
                accounting forstock
                options
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (816,865
            )
            
            —
            
            
            —
            
            
            (816,865
            )Stock-based
                compensation netof
                forfeitures
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            240,572
            
            
            93,000
            
            
            —
            
            
            333,572Common
                stock issued viaprivate
                placements, net
            
            
            —
            
            
            —
            
            
            3,311,342
            
            
            331
            
            
            6,098,681
            
            
            —
            
            
            —
            
            
            6,099,012Warrant
                and stock-basedcompensation
                for services inconnection
                with the Merger
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            269,826
            
            
            —
            
            
            —
            
            
            269,826Common
                stock returned from formerSynergy
                stockholders
            
            
            —
            
            
            —
            
            
            (90,000
            )
            
            (9
            )
            
            (159,083
            )
            
            —
            
            
            —
            
            
            (159,092
            )Stock
                issued for patent rights
            
            
            —
            
            
            —
            
            
            25,000
            
            
            3
            
            
            56,247
            
            
            —
            
            
            —
            
            
            56,250Common
                stock issued for services
            
            
            —
            
            
            —
            
            
            44,000
            
            
            7
            
            
            70,833
            
            
            —
            
            
            —
            
            
            70,840Balance,
                December 31, 2004
            
            
            —
            
            
            —
            
            
            29,219,102
            
            
            2,922
            
            
            39,910,187
            
            
            (2,302,534
            )
            
            (33,361,197
            )
            
            4,249,378


The
        accompanying notes are an integral part of these consolidated financial
        statements
 
 F-8




**CALLISTO
      PHARMACEUTICALS, INC.**


(A
      Development Stage Company)


**CONSOLIDATED
      STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) (Continued)**




**Common**
              **Stock**
            
            
            **Common**
              **Stock**
              **Par**
              **Value**
            
            
            **Additional**
              **Paid
                in**
              **Capital**
            
            
            **Unamortized**
              **Deferred**
              **Stock
                Based**
              **Compensation**
            
            
            **Deficit**
              **Accumulated**
              **during
                the**
              **Development**
              **Stage**
            
            
            **Total**
              **Stockholders'**
              **Equity(Deficit)**Balance,
                December 31, 2004
            
            
            29,219,102
            
            $
            2,922
            
            $
            39,910,187
            
            
            ($2,302,534
            )
            
            ($33,361,197
            )
            $
            4,249,378Net
                loss for the year
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (11,779,457
            )
            
            (11,779,457
            )Deferred
                stock-based compensation - new grants
            
            
            —
            
            
            —
            
            
            1,571,772
            
            
            (1571,772
            )
            
            —
            
            
            —Amortization
                of deferred stock-based compensation
            
            
            —
            
            
            —
            
            
            —
            
            
            2,290,843
            
            
            —
            
            
            2,290,843Variable
                accounting for stock options
            
            
            —
            
            
            —
            
            
            75,109
            
            
            —
            
            
            —
            
            
            75,109Common
                stock issued via private placement:March
                2005
            
            
            1,985,791
            
            
            198
            
            
            3,018,203
            
            
            —
            
            
            —
            
            
            3,018,401August
                2005
            
            
            1,869,203
            
            
            187
            
            
            1,812,940
            
            
            —
            
            
            —
            
            
            1,813,127Finders
                fees and expenses
            
            
            —
            
            
            —
            
            
            (176,250
            )
            
            —
            
            
            —
            
            
            (176,250
            )Exercise
                of common stock warrant
            
            
            125,000
            
            
            13
            
            
            128,737
            
            
            —
            
            
            —
            
            
            128,750Common
                stock issued for services
            
            
            34,000
            
            
            3
            
            
            47,177
            
            
            —
            
            
            —
            
            
            47,180Balance,
                December 31, 2005
            
            
            33,233,096
            
            $
            3,323
            
            $
            46,387,875
            
            
            ($1,583,463
            )
            
            ($45,140,654
            )
            
            ($332,919
            )




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




F-9





**CALLISTO
      PHARMACEUTICALS, INC.**


(A
      Development Stage Company)


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**





**For
                the years ended December
                31,**
            
            **Period
                from**
              **June
                5, 1996**
              **(inception)
                to****2005**
            
            **2004**
            
            **2003**
            
            **December****31,
                2005**Cash
              flows from operating activities:Net
                loss
            
            $
            (11,779,457
            )
            $
            (7,543,467
            )
            $
            (13,106,247
            )
            $
            (45,140,654
            )Adjustments
                to reconcile net loss to net cash used in operating activities:Depreciation
            
            
            18,856
            
            
            27,632
            
            
            27,755
            
            
            84,637Stock
                based compensation expense
            
            
            2,419,694
            
            
            2,732,770
            
            
            3,833,946
            
            
            13,770,967Purchased
                in-process research and development(non-cash
                portion)
            
            
            —
            
            
            106,235
            
            
            6,734,818
            
            
            6,841,053Changes
                in operating assets and liabilities:Prepaid
                expenses
            
            
            (136,053
            )
            
            7,413
            
            
            (24,188
            )
            
            (181,284
            )Security
                deposit
            
            
            —
            
            
            (19,216
            )
            
            (62,980
            )
            
            (82,196
            )Accounts
                payable and accrued expenses
            
            
            790,058
            
            
            (43,481
            )
            
            581,008
            
            
            1,770,418Total
                adjustments
            
            
            3,092,555
            
            
            2,811,353
            
            
            11,090,359
            
            
            22,203,595Net
                cash used in operating activities
            
            
            (8,686,902
            )
            
            (4,732,114
            )
            
            (2,015,888
            )
            
            (22,937,059
            )Cash
                flows from investing activities:Acquisition
                of equipment
            
            
            —
            
            
            —
            
            
            (54,462
            )
            
            (84,637
            )Net
                cash used in investing activities
            
            
            —
            
            
            —
            
            
            (54,462
            )
            
            (84,637
            )Cash
                flows from financing activities:Issuance
                of common and preferred stock,net
                of repurchases
            
            
            4,831,528
            
            
            6,533,144
            
            
            4,164,999
            
            
            25,285,463Finders
                fees and expenses
            
            
            (176,250
            )
            
            (434,132
            )
            
            (361,625
            )
            
            (972,007
            )Exercise
                of common stock warrants
            
            
            128,750
            
            
            —
            
            
            —
            
            
            128,750Net
                cash provided by financing activities
            
            
            4,784,028
            
            
            6,099,012
            
            
            3,803,374
            
            
            24,442,206Net
                (decrease) increase in cash and cash equivalents
            
            
            (3,902,874
            )
            
            1,366,898
            
            
            1,733,024
            
            
            1,420,510Cash
                and cash equivalents at beginning of period
            
            
            5,323,384
            
            
            3,956,486
            
            
            2,223,462
            
            
            —Cash
                and cash equivalents at end of period
            
            $
            1,420,510
            
            $
            5,323,384
            
            $
            3,956,486
            
            $
            1,420,510Supplementary
                disclosure of cash flow information:Cash
                paid for taxes
            
            $
            46,643
            
            $
            2,921
            
            $
            23,834
            
            $
            109,606Cash
                paid for interest
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            —





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




F-10




**CALLISTO
      PHARMACEUTICALS, INC.**


(A
      Development Stage Company)





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**





1.
      Business overview:





Callisto
      Pharmaceuticals, Inc. ("Callisto") is a development stage biopharmaceutical
      company, whose primary focus is on biopharmaceutical product development. See
      footnote 4 for a complete description of Merger and consolidation. Since
      inception in June of 1996 Callisto’s efforts have been principally devoted to
      research and development, securing and protecting patents and raising capital.
      From inception through December 31, 2005, Callisto has sustained cumulative
      net
      losses of $45,140,654. Callisto's losses have resulted primarily from
      expenditures incurred in connection with research and development activities,
      application and filing for regulatory approval of proposed products, stock
      based
      compensation expense, patent filing and maintenance expenses, purchase of
      in-process research and development, outside accounting and legal services
      and
      regulatory, scientific and financial consulting fees. From inception through
      December 31, 2005, Callisto has not generated any revenue from operations,
      expects to incur additional losses to perform further research and development
      activities and does not currently have any commercial biopharmaceutical
      products, and does not expect to have such for several years, if at all.





Callisto's
      product development efforts are thus in their early stages and Callisto cannot
      make estimates of the costs or the time it will take to complete. The risk
      of
      completion of any program is high because of the many uncertainties involved
      in
      bringing new drugs to market including the long duration of clinical testing,
      the specific performance of proposed products under stringent clinical trial
      protocols, the extended regulatory approval and review cycles, the nature and
      timing of costs and competing technologies being developed by organizations
      with
      significantly greater resources.





2.
      Basis
      of presentation and going concern:





The
      accompanying consolidated financial statements of Callisto which include its
      wholly owned subsidiaries: (1) Callisto Research Labs, LLC (including its wholly
      owned but inactive subsidiary, Callisto Pharma, GmbH (Germany)) and (2) Synergy
      Pharmaceuticals Inc. ("Synergy", including its wholly owned but inactive
      subsidiary IgX, Ltd (Ireland)), have been prepared in accordance with accounting
      principles generally accepted in the United States of America ("GAAP"). The
      results of operations of Synergy are included in the consolidated financial
      statements from May 1, 2003 to December 31, 2005. All intercompany balances
      and
      transactions have been eliminated (see footnote 4).





The
      consolidated financial statements as of December 31, 2005 have been prepared
      under the assumption that Callisto will continue as a going concern for the
      twelve months ending December 31, 2006. Callisto’s ability to continue as a
      going concern is dependent upon its ability to obtain additional equity or
      debt financing, attain further operating efficiencies and, ultimately, to
      generate revenue. The financial statements do not include any adjustments that
      might result from the outcome of this uncertainty.  Callisto will be
      required to raise additional capital within the next twelve months to complete
      the development and commercialization of current product candidates and to
      continue to fund operations at its current cash expenditure levels.





In
      2005,
      Callisto’s cash used in operating activities increased significantly
      over 2004 and it is expected that Callisto’s cash used in operating
      activities will increase significantly for the next several years. For the
      twelve months ended December 31, 2005, Callisto used approximately $8,700,000,
      or approximately $725,000 per month in operating activities, as compared to
      approximately $4,700,000 and $2,000,000 for the twelve months ended December
      31,
      2004 and 2003 respectively.




During
      the year ended December 31, 2005 Callisto
      incurred a net loss of approximately $11.8 million and as of that date current
      liabilities exceeded current assets by approximately $415,000 and we have a
      deficit accumulated during the development stage of approximately $45
      million.





To
      date,
      Callisto’s sources of cash have been primarily limited to the sale of equity
      securities. Net cash provided by financing activities for the twelve months
      ended December 31, 2005, 2004 and 2003 was approximately $4,800,000, $6,100,000
      and $3,800,000 respectively. Callisto cannot be certain that additional funding
      will be available on acceptable terms, or at all. To the extent that Callisto
      can raise additional funds by issuing equity securities, Callisto’s stockholders
      may experience significant dilution. Any debt financing, if available, may
      involve restrictive covenants that impact Callisto’s ability to conduct its
      business. If Callisto is unable to raise additional capital when required or
      on
      acceptable terms, it may have to significantly delay, scale back or discontinue
      the development and/or commercialization of one or more of Callisto’s product
      candidates. Callisto also may be required to:





·
            seek
                collaborators for product candidates at an earlier stage than otherwise
                would be desirable and on terms that are less favorable than might
                otherwise be available; and


·
            relinquish
                license or otherwise dispose of rights to technologies, product candidates
                or products that Callisto would otherwise seek to develop or commercialize
                ourselves on unfavorable terms.





Our
      current plan of operations envisions expenditures that will require additional
      funding, and we have developed a contingency plan reflecting scaled back
      operations which uses only existing resources to fund our operations for the
      next twelve months.





3.
      Summary of significant accounting policies





Use
      of
      Estimates - The preparation of financial statements in conformity with GAAP
      requires management to make estimates and assumptions that affect the reported
      amounts of assets and liabilities and disclosure of contingent assets and
      liabilities at the date of the financial statements and the reported amounts
      of
      revenues and expenses during the reporting period. Actual results could differ
      from those estimates.





Cash
      and
      cash equivalents - Cash and cash equivalents consist of short term, highly
      liquid investments, with original maturities of less than three months when
      purchased and are stated at cost.





F-11




Fair
      value of financial instruments - Callisto's financial instruments consist of
      cash and accounts payable. These financial instruments are stated at their
      respective carrying values which are equivalent to fair value due to their
      short
      term nature.





Business
      concentrations and credit risks - All of Callisto's cash and cash equivalents
      as
      of December 31, 2005 and 2004 are on deposit with two major money center
      financial institutions. Deposits at any point in time may exceed federally
      insured limits.





Accounting
      for stock based compensation - Callisto has adopted Statement of Financial
      Accounting Standard ("SFAS") No. 123, "Accounting for Stock-Based Compensation."
      As provided for by SFAS 123, Callisto has also elected to continue to account
      for its stock-based compensation programs according to the provisions of
      Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
      Employees ("APB 25")." Accordingly, compensation expense has been recognized
      to
      the extent of employee or director services rendered based on the intrinsic
      value of stock options granted under the plans.





In
      December 2002, the Financial Accounting Standards Board issued SFAS No. 148,
      "Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment
      of FASB Statement No. 123," to provide alternative methods of transition for
      a
      voluntary change to the fair value based method of accounting for stock-based
      employee compensation. In addition, this statement amends the disclosure
      requirements of SFAS No. 123 to require prominent disclosures in both annual
      and
      interim financial statements about the method of accounting for stock-based
      employee compensation and the effect of the method used on reported
      results.




F-12




Had
      compensation cost for stock options granted to employee and directors been
      determined based upon the fair value at the grant date for awards, consistent
      with the methodology prescribed under SFAS 123 and SFAS 148, Callisto's net
      loss
      would have been as follows:




**Years
                Ended December
                31,****2005**
            
            
            **2004**
            
            
            **2003**Net
                loss, as reported
            
            $
            (11,779,457
            )
            $
            (7,543,467
            )
            $
            (13,106,247
            )Add:
                Stock-based employee compensation expenserecorded
                under APB No. 25 intrinsic method
            
            
            1,530,417
            
            
            1,317,108
            
            
            1,996,890Deduct:
                Stock-based employee compensationexpense
                  determined under Fair Value based method for
                  all awards
            
            
            (2,526,419
            )
            
            (2,916,720
            )
            
            (2,510,721
            )Pro
                forma net loss
            
            $
            (12,775,459
            )
            $
            (9,143,079
            )
            $
            (13.620,078
            )Net
                loss per share:Basic
                and diluted
                - as reported
            
            $
            (0.37
            )
            $
            (0.26
            )
            $
            (0.61
            )Basic
                and diluted -pro forma
            
            $
            (0.41
            )
            $
            (0.32
            )
            $
            (0.64
            )Range
                  of Fair Value per share for options granted
            
            
            $0.75
                  to $1.34
            
            
            $1.35
                  to $3.15
            
            
            $0.58
                  to $5.50Black-Scholes
                Methodology Assumptions:Dividend
                yield
            
            
            0
            %
            
            0
            %
            
            0
            %Risk
                free interest rate
            
            
            4.25
            %
            
            2.87%
                to 4.5
            %
            
            2.87%
                to 4.5
            %Expected
                lives of options
            
            
            3 to 7
                years
            
            
            7
                to 10 years
            
            
            7
                to 10 years




Volatility
      of 0% was used until Callisto's common stock began to trade publicly on June
      16,
      2003. From June 16, 2003 through December 31, 2004 Callisto used 100% volatility
      to determine fair value of options granted to employees. During the twelve
      months ended December 31, 2005 Callisto used a 79% volatility factor, based
      on
      more recent historical volatility.





Net
      Loss
      per Share - Basic and diluted net loss per share is presented in conformity
      with
      SFAS No. 128, "Earnings per Share," for all periods presented. In accordance
      with SFAS No. 128, basic and diluted net loss per common share was determined
      by
      dividing net loss applicable to common stockholders by the weighted-average
      common shares outstanding during the period. Diluted weighted-average shares
      are
      the same as basic weighted-average shares since the inclusion of issuable shares
      pursuant to the exercise of stock options and warrants, would have been
      antidilutive. As of December 31, 2005, 2004 and 2003, Callisto had 8,008,210,
      7,322,060 and 4,853,560 stock options outstanding, respectively. In addition
      Callisto had 2,567,317 and 758,995 common stock warrants outstanding as of
      December 31, 2005 and 2004, respectively, and none as of December 31, 2003.





Research
      and development - Callisto does not currently have any commercial
      biopharmaceutical products, and does not expect to have such for several years,
      if at all and therefore, research and development costs are expensed as
      incurred. These include expenditures in connection with an in-house research
      and
      development laboratory, salaries and staff costs, application and filing for
      regulatory approval of proposed products, patent filing and maintenance
      expenses, purchase of in-process research and development, regulatory and
      scientific consulting fees as well as contract research and royalty payments
      to
      licensors, patient
      costs, drug formulation and tableting, data collection, monitoring, insurance,
      and FDA consultants .





Government
      Grants - Callisto requests cash funding under approved grants as expenses are
      incurred (not in advance) and reports these receipts on the consolidated
      statements of operations as a separate line item entitled "Government Grant".
      The corresponding expenses are included in research and development.  On
      April
      1, 2005, Callisto was awarded a biodefense partnership grant from the National
      Institute of Allergy and Infectious Diseases (NIAID) to develop a monoclonal
      antibody and vaccine against bacterial superantigen toxins, in the amount of
      $885,641 over two years. Work on the NIAID superantigen grant started in July
      2005 and funding totaled $226,119 during the twelve months ended December 31,
      2005 . Callisto
      received a research grant from the National Institutes of Health (“NIH”) for
      studies on Atiprimod with funding totaling $265,697 during the year ended
      December 31, 2004 and received no government grants during 2003.





Income
      taxes - Income taxes are accounted for under the asset and liability method
      prescribed by SFAS No. 109, "Accounting for Income Taxes." Deferred income
      taxes
      are recorded for temporary differences between financial statement carrying
      amounts and the tax basis of assets and liabilities. Deferred tax assets and
      liabilities reflect the tax rates expected to be in effect for the years in
      which the differences are expected to reverse. A valuation allowance is provided
      if it is more likely than not that some or the entire deferred tax asset will
      not be realized.




F-13




RECENT
      ACCOUNTING PRONOUNCEMENTS:





In
      December 2004, the Financial Accounting Standards Board (FASB) issued Statement
      of Financial Accounting Standard ("SFAS") No. 123 (Revised 2004), *Share-Based
      Payments* (“SFAS
      123R”). SFAS 123R requires a public entity to measure the cost of employee
      services received in exchange for the award of equity instruments based on
      the
      fair value of the award at the date of grant. The expense will be recognized
      over the period during which an employee is required to provide services in
      exchange for the award. SFAS 123R also addresses transactions in which an entity
      incurs liabilities in exchange for goods or services that are based on the
      fair
      value of the award. SFAS 123R is effective as of the beginning of the first
      interim or annual reporting period that begins after December 15, 2005 and
      accordingly Callisto adopted this standard January 1, 2006 for the first quarter
      of 2006. This statement does not change the accounting guidance for share based
      payment transactions with parties other than employees as set forth in SFAS
      123
      and EITF 96-18 “ *Accounting
      for Equity Instruments Issued to Other than Employees, for Acquiring, or in
      connection with selling Goods or Services”,* which is
      effective for fiscal periods beginning after June 15, 2005





SFAS
      123R
      provides for two transition methods. The “ *modified
      prospective”* method
      requires that share-based compensation expense be recorded for any employee
      options granted after the adoption date and for the unvested portion of any
      employee options outstanding as of the adoption date. The “ *modified
      retrospective* ”
method
      requires that, beginning in the first quarter of 2006, all prior periods
      presented be restated to reflect the impact of share-based compensation expense
      consistent with the proforma disclosures previously required under SFAS 123.
      Callisto has elected to use the “ *modified
      prospective* ”
in
      adopting this standard.





In
      March
      2005 the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”) which
      discusses the SEC’s interpretation of SFAS 123R and the related valuation on
      share-based compensation for public entities. Callisto is assessing the
      requirements of SFAS 123R and SAB 107 and the impact that they will have on
      Callisto’s consolidated financial statements. While Callisto cannot precisely
      determine the impact on net loss and loss per share management anticipates
      the
      adoption of these standards share-based payment standards will affect Callisto’s
      results of operations to an extent similar to that presented the SFAS 123
      proforma disclosure above.





In
      December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets
      -
      An Amendment to APB Opinion No. 29", which is effective for fiscal periods
      beginning after June 15, 2005. SFAS No. 153 amends APB 29, "Accounting for
      Nonmonetary Transactions", which is based on the principle that exchanges of
      nonmonetary assets should be measured based on the fair value of the assets
      exchanged. The guidance in APB 29 included certain exceptions to that principle.
      SFAS No. 153 amends APB 29 to eliminate the exception for nonmonetary exchanges
      of similar productive assets and replaces it with a general exception for
      exchanges of nonmonetary assets that do not have commercial substance. A
      nonmonetary exchange has commercial substance if the future cash flows of the
      entity are expected to change significantly as a result of the exchange. The
      Company’s adoption of this statement on July 1, 2005 did not have a material
      effect on Callisto’s financial position or results of operations.





In
      May
      2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,”
which changes the requirements for accounting for and reporting of a change
      in
      accounting principle. SFAS No. 154 requires retrospective application to prior
      periods’ financial statements of a voluntary change in accounting principle
      unless it is impracticable. SFAS No. 154 also requires that a change in method
      of depreciation, amortization, or depletion for long-lived, nonfinancial assets
      be accounted for as a change in accounting estimate that is affected by a change
      in accounting principle. SFAS No. 154 is effective for accounting changes and
      a
      correction of errors made in fiscal years beginning after December 15, 2005,
      but
      does not change the transition provisions of any existing accounting
      pronouncements, including those that are in a transition phase as of the
      effective date of SFAS No. 154. The adoption of SFAS No. 154 will not have
      a
      material effect on Callisto’s results of operations or financial
      position.





4.
      Merger
      and consolidation:





In
      March
      2002, Callisto Pharmaceuticals, Inc. ("Old Callisto"), a non-public company,
      purchased 99.7% of the outstanding common shares of Webtronics, Inc.,
      ("Webtronics") a public company for $400,000. Webtronics was incorporated in
      Florida on February 2, 2001 and had limited operations during the twelve months
      ended December 31, 2002. The purchase price of Webtronics was treated as a
      cost
      of becoming a public company, however because there was no capital raised at
      the
      time, the amount was charged to general and administrative expense during the
      twelve months ended December 31, 2002.





On
      April
      30, 2003, pursuant to an Agreement and Plan of Merger dated March 10, 2003,
      as
      amended April 4, 2003, Synergy Acquisition Corp., a wholly-owned subsidiary
      of
      Webtronics merged into Synergy Pharmaceuticals Inc. ("Synergy") and Callisto
      Acquisition Corp., a wholly-owned subsidiary of Webtronics merged into Old
      Callisto (collectively, the "Merger"). As a result of the Merger, Old Callisto
      and Synergy became wholly-owned subsidiaries of Webtronics. In connection with
      the Merger Webtronics issued 17,318,994 shares of its common stock in exchange
      for outstanding Old Callisto common stock and an additional 4,395,684 shares
      in
      exchange for outstanding Synergy common stock. Subsequently, 171,818 shares
      of
      common stock issued to former Synergy shareholders were returned to Callisto
      under the terms of certain indemnification agreements. The Merger was accounted
      for as a recapitalization of Old Callisto by an exchange of Webtronics common
      stock for the net assets of Old Callisto consisting primarily of cash and fixed
      assets. Old Callisto then changed its name to Callisto Research Labs, LLC and
      Webtronics changed its name to Callisto Pharmaceuticals, Inc. and changed its
      state of incorporation from Florida to Delaware. Callisto remains the continuing
      legal entity and registrant for Securities and Exchange Commission reporting
      purposes.





The
      merged companies are considered to be in the development stage. No revenues
      have
      been realized since inception and all activities have been concentrated in
      research and development of biopharmaceutical products not yet approved by
      the
      Food and Drug Administration. The fair value of the net shares issued to former
      Synergy shareholders in the Merger totaled $6,335,799 through December 31,
      2005.
      The fair value per share of $1.50, used to determine this amount, was the value
      per share Callisto sold common stock in a private placement. The total
      consideration was allocated in full to the Synergy research and development
      projects which had not yet reached technological feasibility and having no
      alternative use was charged to purchased in-process research and development
      expense during the year ended December 31, 2003.




F-14




The
      results of operations of Synergy are included in the consolidated financial
      statements since May 1, 2003. The following combined pro forma results of
      operations for the twelve months ended December 31, 2003 have been prepared
      as
      if the Merger with Synergy had occurred at January 1, 2003.




Revenues
            
            $
            —Net
                loss
            
            
            ($13,513,820
            )Net
                loss per common share - basic and diluted
            
            
            (0.58
            )(23,296,920
                common shares in 2003)In
                addition, Callisto assumed liabilities in excess of Synergy assets
                acquired at April 30, 2003 as follows:Cash
            
            $
            9,501Accounts
                receivable
            
            
            258,928Rent
                deposit
            
            
            44,746Fixed
                assets
            
            
            38,343Total
                assets acquired
            
            
            351,518Accounts
                payable and other liabilities assumed
            
            
            (591,446
            )Net
                liabilities assumed in excess of assets acquired
            
            
            (239,928
            )Fair
                value of shares issued to Synergy shareholders
            
            
            (6,335,799
            )Total
                consideration paid by Callisto to acquire Synergy
            
            $
            (6,575,727
            )




5.
      Stockholders' equity (deficit):





On
      October 20, 2005, at the Annual Meeting of Stockholders, Callisto stockholders
      voted to amend Callisto's certificate of incorporation to increase the
      authorized number of shares of common stock from 75,000,000 shares to
      100,000,000 shares. In addition the stockholders voted to adopt the Callisto
      2005 Equity Compensation Incentive Plan and the Callisto 2005 Directors’ Stock
      Option Plan. (Note 6) The details of these stockholder resolutions are included
      in Callisto’s Proxy Statement (Schedule 14A Information) filed September 1, 2005
      with the Securities and Exchange Commission.





On
      October 5, 2005, Trilogy Capital Partners, Inc. exercised 125,000 common stock
      warrants at an exercise price of $1.03 per share for aggregate proceeds of
      $128,750. (Note 8)





On
      August
      22, 2005, Callisto sold and issued in a private placement an aggregate 1,869,203
      shares of common stock at a price of $0.97 per share for aggregate proceeds
      of
      $1,813,127 and paid an aggregate $151,250 to certain selling agents.





On
      March
      9, 2005, Callisto sold and issued in a private placement 1,985,791 shares of
      common stock at a per share price of $1.52, for aggregate gross proceeds of
      $3,018,401 and net proceeds of $2,993,401. Because this transaction was
      completed with certain existing institutional shareholders and certain members
      of management, Callisto paid no selling agent fees and legal fees were $25,000.





On
      April
      19, 2004, Callisto sold and issued in a private placement to accredited
      investors an aggregate 2,151,109 shares of common stock at an issue price of
      $2.25 per share for aggregate gross proceeds of $4,839,995. Callisto incurred
      fees and expenses aggregating $294,241 to various selling agents. In addition,
      Callisto issued an aggregate 124,711 warrants to purchase common stock to such
      selling agents. The warrants are immediately exercisable at $2.48 per share
      and
      will expire five years after issuance.





In
      January 2004 Callisto recorded $209,076 of purchased in process research and
      development as a result of the issuance of 263,741 warrants to two Callisto
      shareholders, which warrants are immediately exercisable at $1.50 per share
      and
      will expire ten years after issuance; and $60,750 of stock-based compensation
      expense associated with shares of common stock issued to a shareholder for
      services performed.





From
      November 2003 through January 2004, Callisto sold and issued 3,905,432 shares
      of
      common stock at an issue price of $1.50 for aggregate gross proceeds of
      $5,858,148. Callisto incurred an aggregate of $501,516 in fees to various
      selling agents. In addition Callisto issued 31,467 shares of common stock and
      370,543 warrants to purchase common stock to such selling agents. The warrants
      are immediately exercisable at $1.90 per share and will expire five years after
      issuance.





As
      of
      December 31, 2003 Callisto had closed on a portion of this transaction,
      specifically 2,776,666 shares of common stock at a price of $1.50 per share
      for
      aggregate gross proceeds of $4,164,999, less $361,625 incurred in fees to
      various selling agents. During January 2004, Callisto completed this private
      placement begun in late 2003 and issued 1,128,766 shares of common stock at
      an
      issue price of $1.50 for aggregate proceeds of $1,693,149, less $139,891 in
      fees
      to various selling agents.




F-15




During
      2000, the Board of Directors approved an increase in the authorized common
      shares from 35,000,000 shares to 60,000,000 shares and a one-for-three reverse
      split of the common stock. All share and per share information has been adjusted
      to reflect the stock split as if it had occurred at the beginning of the
      earliest period presented. In May 2003, as part of the Merger, the authorized
      common shares were increased to 75,000,000 shares.





During
      2000, Callisto sold 2,252,441 shares of Series A convertible preferred stock
      at
      $1.70 per share and 1,232,858 shares of Series B convertible preferred stock
      at
      $1.75 per share. In addition, the Board of Directors authorized the issuance
      of
      750,000 shares of Series C convertible preferred stock at $0.10 per share to
      an
      executive officer of Callisto. The net proceeds from the sale of these 4,235,299
      shares of convertible preferred stock totaled $6,061,650. The holders of the
      convertible preferred stock had equal voting rights with the common
      stockholders, had certain liquidation preferences and were convertible at any
      time into shares of common stock at a ratio of one share of common stock for
      each share of convertible preferred stock at the election of the holder.
      Callisto recorded compensation expenses of approximately $1,050,000 related
      to
      the shares sold to the executive officer. During the second quarter of 2003,
      all
      of the convertible preferred stockholders converted their shares of preferred
      stock to common stock in connection with the Merger.





During
      2000, Callisto also sold 4,526,903 shares of common stock at a purchase price
      of
      $0.05 per share to certain officers and directors of the company for services
      performed in the year 1999. Based on the most recent private placement of common
      stock during the fourth quarter of 1999, the value of these shares was
      determined to be $0.70 per share and Callisto recorded $3,168,832 as stock
      based
      compensation expense.





During
      1998, as part of a settlement agreement between the founding partners of CSO
      Ventures, Inc. and Callisto, one of the founders of CSO sold 836,792 shares
      of
      common stock back to Callisto at a price of approximately $0.12 per share,
      for
      $97,000. Concurrently, Callisto entered into a stock purchase agreement with
      a
      private investor to sell him 766,667 shares of common stock at a price of
      $92,000 or $0.12 per share. The fair value of the common stock issued was
      determined to be $0.75 per share and Callisto recorded $483,000 of stock based
      compensation expense.





During
      the period from December 1996 to December 1999, Callisto completed the following
      private placements of its common stock:




**Shares**
              ****
              **Price
                  Per Share**
              ****
              **Gross
                  Proceeds**December
                  1996
              
              
              1,366,667
              
              $
              0.75
              
              $
              1,025,000December
                  1997
              
              
              1,442,667
              
              $
              0.75
              
              
              1,081,999October
                  1998
              
              
              1,416,667
              
              $
              0.75
              
              
              1,062,500January
                  1999
              
              
              146,667
              
              $
              0.75
              
              
              110,000December
                  1999
              
              
              200,000
              
              $
              0.75
              
              
              150,000Total
              
              
              4,572,668
              
              
              
              
              $
              3,429,499


6.
      Stock
      option plan:





In
      1996,
      Callisto adopted an incentive and non-qualified stock option plan (the "Plan")
      for employees, consultants and outside directors to purchase up to 2,000,000
      shares of common stock. The Plan was amended in December 2002 to increase the
      number of shares authorized under the Plan to 10,000,000.  The
      option term for the 5,128,372 options granted to date under the Plan is ten
      years from date of grant. The Plan terminated January 1, 2006 under its original
      terms and no further options will be granted under the Plan .





On
      October 20, 2005, Callisto adopted 2005 Equity Compensation Incentive Plan
      (“2005 Equity Plan”). The maximum number of shares of common stock with respect
      to which awards may be granted under the 2005 Equity Plan is
      5,000,000.  The
      option term for options granted under the 2005 Equity Plan is ten years from
      date of grant and there were 5,000,000 option shares available for future grants
      as of December 31, 2005.





On
      October 20, 2005, Callisto also adopted the Callisto 2005 Directors’ Stock
      Option Plan (“2005 Director’s Plan”). The maximum number of shares of common
      stock with respect to which awards may be granted under the 2005 Director’s Plan
      is 1,000,000.  The
      option term for options granted under the 2005 Director’s Plan is ten years from
      date of grant and there are 970,000 option shares available for future grants
      as
      of December 31, 2005.





The
      Company recognizes deferred compensation expense for the intrinsic value of
      unvested stock options granted to employees. Deferred stock-based compensation
      is amortized to stock-based compensation expense over the vesting period of
      the
      stock option. During the twelve months ended December 31, 2005, 2004, and 2003
      and for the period from June 5, 1996 (inception) to December 31, 2005 Callisto
      recognized $2,419,694, $2,732,770, $3,833,946 and $13,770,967, respectively,
      as
      stock-based compensation expense related to issuance of stock and stock options.
      At December 31, 2005, there was $1,583,463 remaining in unamortized deferred
      compensation.




F-16




The
      following represent options outstanding for the years since June 5, 1996
      (inception) through December 31, 2005.




**Number**
            
            
            
            
            
            **Weighted
                Average**
            ******of
                options**
            
            
            **Exercise
                Price**
            
            
            **Exercise
                Price**
            ******outstanding**
            
            
            **Per
                Share**
            
            
            **Per
                Share**Balance,
                June 5, 1996 (inception)
            
            
            0
            
            $
            0.00
            
            $
            0.001996:
                Granted
            
            
            66,668
            
            $
            0.75
            
            $
            0.75Balance,
                December 31, 1996
            
            
            66,668
            
            $
            0.75
            
            $
            0.751997:
                Granted
            
            
            166,668
            
            $
            0.75
            
            $
            0.75Balance,
                December 31, 1997
            
            
            233,336
            
            $
            0.75
            
            $
            0.751998:
                Granted
            
            
            264,169
            
            $
            0.75
            
            $
            0.75Balance,
                December 31, 1998
            
            
            497,505
            
            $
            0.75
            
            $
            0.751999:
                Granted
            
            
            633,334
            
            $
            0.75
                - 4.90
            
            $
            1.92Balance,
                December 31, 1999
            
            
            1,130,839
            
            $
            0.75
                - 4.90
            
            $
            1.412000:
                Granted
            
            
            815,666
            
            $
            2.85
                - 6.75
            
            $
            3.83Forfeitures
            
            
            (15,000
            )
            $
            0.75
            
            $
            0.75Balance,
                December 31, 2000
            
            
            1,931,505
            
            $
            0.75
                - 6.75
            
            $
            2.442001:
                Granted
            
            
            730,000
            
            $
            1.25
                - 6.50
            
            $
            2.77Balance,
                December 31, 2001
            
            
            2,661,505
            
            $
            0.75
                - 6.75
            
            $
            2.532002:
                Granted
            
            
            330,000
            
            $
            4.50
                - 6.50
            
            $
            5.50Balance,
                December 31, 2002
            
            
            2,991,505
            
            $
            0.75
                - 6.75
            
            $
            2.862003:
                Granted
            
            
            3,013,555
            
            $
            1.10
                - 2.50
            
            $
            1.48Forfeitures
            
            
            (1,151,500
            )
            $
            2.85
                - 6.75
            
            $
            4.51Balance,
                December 31, 2003
            
            
            4,853,560
            
            $
            0.75
                - 6.75
            
            $
            1.612004:
                Granted
            
            
            2,853,500
            
            $
            1.50
                - 3.60
            
            $
            3.11Forfeitures
            
            
            (385,000
            )
            $
            1.50
                - 2.50
            
            $
            1.66Balance,
                December 31, 2004
            
            
            7,322,060
            
            $
            0.75
                - 6.75
            
            $
            2.192005:
                Granted
            
            
            2,174,484
            
            $
            0.97
                - 1.70
            
            $
            1.34Forfeitures
            
            
            (1,488,334
            )
            $
            1.50
                - 3.50
            
            $
            3.12Balance,
                December 31, 2005
            
            
            8,008,210
            
            $
            0.75
                - 6.75
            
            $
            1.79





Included
      in the balance at December 31, 2005 were 2,849,838 Non-Plan options, of which
      2,370,128 were exercisable.








Options
      are exercisable as follows at December 31, 2005:


**Options
                  Outstanding**
              
              
              **Options
                  Exercisable****Ranges
                  of**
                **Exercise
                  Prices**
              
              
              **Number**
                **Outstanding**
              
              
              **Weighted
                  Average**
                **Remaining**
                **Contractual
                  Life**
              
              
              **Weighted
                  Average**
                **Exercise
                  Price**
              
              
              **Number**
                **Exercisable**
              
              
              **Weighted
                  Average**
                **Exercise
                  Price**$0.75
                  - $1.10
              
              
              1,992,823
              
              
              6.6
                  years
              
              $
              0.95
              
              
              1,141,499
              
              $
              0.91$1.17
                  - $1.75
              
              
              3,716,055
              
              
              7.9
                  years
              
              $
              1.48
              
              
              2,172,721
              
              $
              1.44$1.95
                  - $3.60
              
              
              2,137,666
              
              
              7.3
                  years
              
              $
              2.84
              
              
              924,166
              
              $
              2.59$4.90
                  - $6.75
              
              
              161,666
              
              
              4.4
                  years
              
              $
              5.32
              
              
              61,666
              
              $
              6.00Total
              
              
              8,008,210
              
              
              7.4
                  years
              
              $
              1.79
              
              
              4,300,052
              
              $
              1.61


F-17




6.
      Stock
      option plan (continued):





On
      April
      26, 2004, Callisto's Board of Directors granted 100,000 stock options to
      Gabriele M. Cerrone, Chairman of the Board, in recognition of his efforts during
      the past year on behalf of the Company. The stock options are immediately
      exercisable at $3.20 per share and stock-based compensation expense of $286,918
      was recorded in connection with the grant, based on a Black-Scholes fair value
      of $2.87 per share.





On
      June
      29, 2004, Callisto's Compensation Committee recommended and the Board of
      Directors approved the grant of 275,000 stock options to Gary Jacob, Chief
      Executive Officer, as additional compensation. The stock options are exercisable
      at $3.00 per share. 25,000 options vest on each of June 1, 2005 and June 1,
      2006
      and 50,000 options vest on June 1, 2007. The remaining 175,000 options vest
      upon
      the achievement of performance milestones associated with the successful
      in-licensing, advancement and development of certain drug candidates. If the
      milestones are achieved Callisto will record stock-based compensation expense
      based on the intrinsic value of the options at that time. At this date, the
      milestones have not yet been achieved. On July 6, 2005, Callisto's
      Compensation Committee recommended and the Board of Directors approved the
      grant
      of 350,000 stock options to Mr. Jacob as additional compensation. The stock
      options are exercisable at $1.01 per share. 100,000 options vest on
      each of July 6, 2006 and 2007 and 150,000 options vest on July 6,
      2008.





On
      June
      29, 2004, Callisto's Compensation Committee recommended and the Board of
      Directors approved the grant of 400,000 stock options to Donald Picker,
      Executive Vice President, R&D as additional compensation. The stock options
      are exercisable at $3.00 per share. 50,000 options vest on each of June 1,
      2005
      and June 1, 2006 and 75,000 options vest on June 1, 2007. The remaining 225,000
      options vest upon the achievement of performance milestones associated with
      the
      successful advancement and development of Callisto’s drug candidates through
      various stages of clinical trials. If the milestones are achieved Callisto
      will
      record stock-based compensation expense based on the intrinsic value of the
      options at that time. At this date, the milestones have not yet been
      achieved. On July 6, 2005, Callisto's Compensation Committee recommended
      and the Board of Directors approved the grant of 200,000 stock options to Mr.
      Picker as additional compensation. The stock options are exercisable at $1.01
      per share. 75,000 options vest on each of July 6, 2006 and 2007 and 50,000
      options vest on July 6, 2008.





7.
      Income
      taxes:





At
      December 31, 2005 and 2004, Callisto had available Federal net operating tax
      loss carry forwards of approximately $22,000,000 and $13,000,000, respectively,
      expiring through 2025 to offset future taxable income. The net deferred tax
      asset has been fully offset by a valuation allowance due to uncertainties
      regarding realization of benefits from these future tax deductions. As a result
      of the change in control provisions of Internal Revenue Code Section 382, a
      significant portion of these net operating loss carry forwards may be subject
      to
      limitation on future utilization.





During
      the twelve months ended December 31, 2005, 2004, and 2003, Synergy sold certain
      New Jersey State tax loss carry forwards under a state economic development
      program for cash of approximately $177,000, $233,000 and $222,000, respectively.
      The proceeds of economic development funds have and will be used to support
      research and development activities in New Jersey. This state tax benefit was
      recorded as Other Income during the fourth quarter ended December 31, 2005,
      2004
      and 2003. As of December 31, 2005 Callisto had no remaining New Jersey State
      tax
      loss carry forwards available for sale.





8.
      Commitments and contingencies:





License
      agreements:





On
      August
      12, 2004, Callisto entered into a world-wide license agreement with The
      University of Texas M. D. Anderson Cancer Center to research, develop, sell
      and
      commercially exploit the patent rights for L-Annamycin, an anthracycline cancer
      drug for leukemia therapy. Consideration paid for this license amounted to
      $31,497 for reimbursement of out-of-pocket costs for filing, enforcing and
      maintaining the L-Annamycin patent rights and a $100,000 initial license fee.
      L-Annamycin has not reached commercialization and therefore these costs were
      recorded as research and development expense. Callisto also agreed to pay The
      University of Texas M. D. Anderson Cancer Center royalties based on net sales
      from any licensed products, plus aggregate milestone payments of up to $750,000
      based upon achieving certain regulatory submissions and approvals. The term
      of
      the agreement is from August 12, 2004 until November 2, 2019. Under the terms
      of
      the license agreement, Callisto is required to make certain good faith
      expenditures towards the clinical development of at least one licensed product
      within the two year period after March 2005. In addition, at any time after
      5
      years from August 12, 2004, The University of Texas M.D. Anderson Cancer Center
      has the right to terminate the license if Callisto fails to provide evidence
      within 90 days of written notice that it has commercialized or it is actively
      and effectively attempting to commercialize L-Annamycin.





On
      February 24, 2004, Callisto entered into an agreement with Houston
      Pharmaceuticals, Inc. (“HPI”) to sublicense the rights to a key patent covering
      a technology platform for site-directed DNA intercalation and Callisto acquired
      the rights to a patent covering new anthracycline analogs. Callisto issued
      to
      HPI 25,000 shares of common stock at a fair value of $56,250 and reimbursed
      HPI
      approximately $103,500 for various costs and expenses. The total consideration
      of $159,750 was allocated in full to the HPI patent rights, which have not
      yet
      reached technological feasibility, and having no alternative use, was accounted
      for as purchased in-process research and development expense during the quarter
      ended March 31, 2004. The fair value of the common stock issued to HPI was
      $2.25, based on the price per share paid in the April 2004 private placement,
      which closed on April 19, 2004. In addition, Callisto granted to HPI 1,170,000
      performance based stock options, exercisable at $3.50 per share, which vest
      upon
      the achievement of certain milestones. Callisto also agreed to pay HPI royalties
      of 2% on net sales from any products resulting from commercializing the
      site-directed DNA intercalation. Pursuant to the sublicense agreement, in the
      event Callisto’s Board of Directors determined to abandon its development and
      commercialization of the site-directed DNA intercalation, HPI had the right
      to
      terminate the sublicense agreement. On September 19, 2005 because data from
      in
      vivo pre-clinical studies did not meet Callisto’s standards for clinical
      development Callisto notified HPI of its decision to terminate the sublicense
      agreement. In addition on September 28, 2005 Callisto agreed with HPI that
      HPI
      would repurchase certain patent rights in exchange for forfeiting the 1,170,000
      performance based stock options. Accordingly the 1,170,000 options granted
      to
      HPI were cancelled.




F-18




On
      August
      28, 2002, and as amended on May 23, 2003, Synergy entered into a worldwide
      license agreement with AnorMED, Inc. (“AnorMED”) to research, develop, sell and
      commercially exploit the Atiprimod patent rights. The license agreement provides
      for aggregate milestone payments of up to $14 million based upon achieving
      certain regulatory submissions and approvals for an initial indication, and
      additional payments of up to $16 million for each additional indication based
      on
      achieving certain regulatory submissions and approvals. In addition the
      agreement requires Synergy to pay AnorMED royalties on net sales. Commencing
      on
      January 1, 2004 and on January 1 of each subsequent year Synergy is obligated
      to
      pay AnorMED a maintenance fee of $200,000 until the first commercial sale of
      the
      product. The first two annual maintenance fee payments under this agreement
      were
      made in January 2004 and 2005 and these were recorded as research and
      development expense. The license agreement will terminate in 2018.





On
      August
      20, 1996, Callisto entered into a license agreement to research, develop, sell
      and commercially exploit certain Rockefeller University licensed patents
      covering peptides and antibodies useful in treating toxic shock syndrome and
      septic shock. Callisto agreed to work toward commercialization of products
      related to these patents as evidenced by a minimum expenditure per year of
      approximately $210,000, plus milestone payments and royalties of between 2%
      and
      3% of annual net sales and will pay Rockefeller 30% of any sublicense fee paid
      by sublicensees. The licensed patents under this agreement are the subject
      of
      research being funded by the NIAID grant awarded to Callisto on April 1, 2005
      for $885,641over two years. The license agreement will terminate upon the
      expiration of the related patents.





On
      July
      25, 2001, Callisto entered into a license agreement to research, develop, sell
      and commercially exploit certain Rockefeller University licensed patents
      covering the regulation of exoprotein in staphylococcus aureus. Callisto agreed
      to pay Rockefeller a $7,500 annual maintenance fee until the first commercial
      sale of the product, plus royalties of 2% and 0.75% of net sales of product
      depending on whether the product is covered by a claim under the licensed
      patents or derived from a claim under the licensed patents and will pay
      Rockefeller 15% of any sublicense fee paid by sublicensees. The agreement will
      terminate in November 2016. Rockefeller may terminate the license agreement
      if
      Callisto is more than 30 days late in paying Rockefeller any amounts due under
      the license agreement or if Callisto breaches the license agreement. Callisto
      has paid the annual maintenance fee for the twelve months ended July 25, 2002,
      and have accrued but not paid the annual maintenance fee for the twelve months
      ended July 25, 2003, 2004 and 2005, pending Callisto’s evaluation as to the
      applicability of the patents licensed under this agreement to ongoing toxic
      shock syndrome and septic shock development program under the August 20, 1996
      agreement.





Employment
      and Consulting Agreements:





On
      October 10, 2005 Callisto entered
      into an employment agreement with Dan D’Agostino to serve as Callisto's Chief
      Business Officer. Pursuant to the employment agreement, Callisto will employ
      Mr.
      D’Agostino for a period of one year commencing October 10, 2005 which term will
      be automatically renewed for successive one year periods until written notice
      not to renew is delivered by either Callisto or Mr. D’Agostino. Mr. D’Agostino
      will be paid an annual base salary of $175,000 ("Base Salary"). In addition,
      Mr.
      D’Agostino will be eligible to earn an annual cash bonus up to 15% of his annual
      Base Salary annually, plus up to $25,000 based on meeting performance objectives
      and bonus criteria, specifically surrounding Callisto's
      corporate development plans to expand its technology and product portfolio.





Mr.
      D’Agostino was granted an aggregate 400,000 incentive stock options pursuant
      to
      Callisto's stock option plan with an exercise price of $1.53 per share. 300,000
      of such options will vest pursuant to the following schedule: 100,000 options
      will vest on October 10, 2006; 100,000 options will vest on October 10, 2007;
      and 100,000 options will vest on October 10, 2008. The remaining 100,000 options
      will vest upon the successful in-licensing of certain drug candidates.





On
      July
      18, 2005, Callisto entered into a letter of engagement (the “Agreement”) with
      Trilogy Capital Partners, Inc. (“Trilogy”). The term of the Agreement is for one
      year beginning on July 18, 2005 and terminable thereafter by either party upon
      30 days’ prior written notice. Pursuant to the Agreement, Trilogy will provide
      marketing and financial public relations services to Callisto and will assume
      the responsibilities of an investor relations officer for Callisto. Callisto
      will pay Trilogy $12,500 per month under the Agreement.





Pursuant
      to the Agreement, Callisto issued warrants to Trilogy to purchase 1,793,322
      shares of Common Stock of Callisto at an exercise price of $1.03 per share
      (the
“Warrants”). The Warrants issued to Trilogy are exercisable upon issuance and
      expire on July 18, 2008. The fair value of the Warrants using the Black-Scholes
      methodology was $1,469,931 on the date of grant and is being amortized to
      stock-based compensation expense over the term of the Agreement. Stock based
      compensation expense associated with these warrants was $734,695 during the
      year
      ended December 31, 2005. On October 5, 2005 Trilogy exercised 125,000 common
      stock warrants for cash totaling $128,750.





On
      December 27, 2004, Callisto entered into a consulting agreement (the
      "Agreement") with Gabriele M. Cerrone, Callisto's Chairman of the Board (the
      "Consultant"). The duties of the Consultant and the obligations of Callisto
      to
      pay compensation commenced on January 10, 2005 (the "Start Date"). The duties
      of
      the Consultant pursuant to the Agreement will consist of strategic planning
      and
      capital markets consulting advice. The term of the Agreement will commence
      upon
      the Start Date and continue until December 31, 2006 with automatic renewal
      for
      successive one year periods unless either party gives notice to the other not
      to
      renew the Agreement.





Callisto
      will pay Consultant the annual sum of $205,000 (the "Base Compensation") at
      the
      rate of $17,083.33 per month commencing on the Start Date. In addition, per
      the
      Agreement Consultant was granted 375,000 ten year non-qualified stock options
      at
      an exercise price of $1.70 per share, which was the stock price on December
      27,
      2004 (date of execution of the Agreement), one half of such options vest on
      each
      of the first two anniversaries of the date of the Agreement. The stock-based
      compensation expense associated with these option grants during the year ended
      December 31, 2005 was $212,619. This expense was based on an initial
      Black-Scholes fair value of $1.52 per share on the date of grant and
      subsequently marked to market quarterly as required by Financial Accounting
      Standards Board Interpretation No. 44 (“FIN 44”). Accordingly the measurement
      date will be the earlier of the second anniversary of the agreement (fully
      vested) or the accelerated vesting date if Mr. Cerrrone is terminated without
      cause or good reason.




F-19




In
      the
      event the Agreement is terminated without cause or for good reason, the
      Consultant will receive a cash payment equal to the aggregate amount of Base
      Compensation for the then remaining term of the Agreement and all unvested
      stock
      options will immediately vest and the exercise period of such options will
      be
      extended to the later of the longest period permitted by Callisto's stock option
      plans or ten years following termination. In the event a change of control
      of
      Callisto occurs, Consultant shall be entitled to such compensation upon the
      subsequent termination of the Agreement within two years of the change in
      control unless such termination is the result of the Consultant's death,
      disability or retirement or the Consultant's termination for cause.





On
      December 22, 2004, the Board of Directors of Callisto, acting upon advice of
      its
      Compensation Committee, awarded Mr. Cerrone a cash bonus of $200,000 in
      recognition of his contributions to the Company including negotiation and
      acquisition of certain intellectual property licenses during 2004. Accordingly
      this bonus was charged to research and development expense during 2004. Mr.
      Cerrone’s cash bonus for the year ended December 31, 2005 was $30,750 per his
      Agreement and based on his role in strategic planning and capital markets
      consulting for the Company during 2005 this bonus was charged to general and
      administrative expense.





On
      August
      12, 2004, in connection with the L-Annamycin license, Callisto entered into
      a
      consulting agreement with Roman Perez-Soler, M.D., for a term concurrent with
      the L-Annamycin license agreement. In connection therewith Dr. Perez-Soler
      agreed to be appointed to the Company's Scientific Advisory Board. As
      consideration for consulting and advisory services Dr. Perez-Soler shall receive
      a $30,000 per year consulting fee and 44,000 shares of restricted common stock.
      These shares were recorded as stock based compensation expense during the 12
      months ended December 31, 2004 for a total of $70,840 based on the closing
      stock
      price of $1.61 on August 23, 2004. In addition, Callisto granted to Dr.
      Perez-Soler an option to purchase 468,500 shares of common stock at an exercise
      price of $3.00 per share. The option shares vest upon achievement of specific
      milestones related to future development of L-Annamycin, at which time
      stock-based compensation expense will be recorded based upon the fair value
      of
      the options at that time.





On
      April
      6, 2004, Kunwar Shailubhai, Ph.D. entered into an employment agreement with
      Synergy in which he agreed to serve as Senior Vice President, Drug Discovery.
      Dr. Shailubhai's employment agreement is for a term of 12 months beginning
      April
      6, 2004 and is automatically renewable for successive one year periods at the
      end of the term. Dr. Shailubhai's salary is $150,000 per year and he is eligible
      to receive a cash bonus of up to 15% of his salary per year. Dr. Shailubhai
      received a grant of 100,000 stock options which are exercisable at $1.50 per
      share. 50,000 of such stock options vested in June 2004 and 50,000 options
      vested in December 2004.





Callisto
      previously had an employment agreement dated June 13, 2003 with Kunwar
      Shailubhai, Ph.D. to serve as Executive Vice President and Head of Research
      and
      Development for a term of 18 months beginning June 13, 2003. Dr. Shailubhai's
      salary was $170,000 per year and he was eligible to receive a cash bonus of
      up
      to 15% of his salary per year. In connection with his employment agreement,
      Dr.
      Shailubhai received a grant of 25,000 stock options which were fully vested
      and
      have an exercise price of $1.50 per share. Dr. Shailubhai also received a grant
      of 325,000 stock options which were to have vested over a three year period
      and
      were exercisable at $1.50 per share. This employment agreement was terminated
      on
      April 6, 2004 and unvested options were forfeited.





The
      new
      grant of 100,000 options will be subject to variable accounting because it
      was
      deemed that his agreement was a continuation of employment with a wholly owned
      subsidiary of Callisto. The unamortized deferred compensation cost associated
      with the 225,000 cancelled options of $706,813 as of the date of cancellation,
      was charged to stock-based compensation expense during the quarter ended June
      30, 2004. The remaining deferred balance, based on the original intrinsic value,
      associated with the remaining 100,000 options of $314,139, was expensed over
      the
      vesting period of the new grant (e.g. April 7, 2004 through December 31, 2004).





On
      January 15, 2004, Callisto entered into an employment agreement with Bernard
      Denoyer, its Vice President, Finance. Mr. Denoyer's employment agreement is
      for
      a term of 12 months beginning January 15, 2004 and is automatically renewable
      for successive one year periods at the end of the term. Mr. Denoyer's salary
      is
      $90,000 per year and he is eligible to receive a cash bonus of up to 10% of
      his
      salary per year. Mr. Denoyer received a grant of 100,000 stock options which
      vest over a three year period and are exercisable at $3.60 per share. On July
      29, 2005 Mr. Denoyer was granted an additional 75,000 stock options which vest
      over three years and are exercisable at $1.38 per share.





On
      September 23, 2003, Callisto entered into an employment agreement with Donald
      H.
      Picker, Ph.D., to serve as Vice President, Drug Development. The employment
      agreement is for a term of 18 months beginning September 23, 2003 and is
      automatically renewable for successive one year periods at the end of the term.
      Dr. Picker's salary is $175,000 per year and he is eligible to receive a cash
      bonus of up to $45,000 per year upon the achievement of certain performance
      milestones. In connection with his employment agreement, Dr. Picker received
      a
      grant of 325,000 stock options which vest over a three year period and are
      exercisable at $1.50 per share. On April 6, 2004 the employment agreement of
      Donald H. Picker, Callisto's Executive Vice President, R&D was amended. Dr,
      Picker's salary was increased from $175,000 to $200,000 per year and certain
      milestones were added upon which cash bonuses of up to $92,500 over a 12 month
      period may be paid. During the years ended December 31, 2005 and 2004, Dr.
      Picker earned a bonus of $20,000 and $37,500, respectively, based on achievement
      of certain milestones. The balance of the annual bonus Dr. Picker is eligible
      to
      receive will be paid only if and when certain other milestones are reached.





On
      June
      13, 2003, Callisto entered into an employment agreement with Gary S. Jacob,
      Ph.D., to serve as Chief Executive Officer and Chief Scientific Officer. Dr.
      Jacob's employment agreement is for a term of 18 months beginning June 13,
      2003
      and is automatically renewable for successive one year periods at the end of
      the
      term. As of March 17, 2006, pursuant to Compensation Committee approval, Dr.
      Jacob's salary was increased to $300,000 per year and he is eligible
      to receive a cash bonus of up to 15% of his salary per year. In connection
      with
      his employment agreement, Dr. Jacob received a grant of 500,000 stock options
      which vest over a three year period and are exercisable at $1.50 per share.
      During the years ended December 31, 2005 and 2004, Dr. Jacob was paid a bonus
      of
      $33,750 during each year as per his employment agreement.





Callisto
      has various consulting agreements with members of its scientific advisory board
      to provide services. Fees are based and paid on services provided.





F-20


Lease
      agreements:





On
      August
      20, 2003, Callisto entered into a five year lease for its corporate headquarters
      in New York City with an approximate rent of $100,000 annually through August
      2008. On June 7, 2004 Callisto extended its lease for its corporate headquarters
      in New York City three additional years through June 30, 2011, and increased
      its
      space to 3,886 rentable square feet . This increased average annual rent to
      approximately $150,000. On November 4, 2003, Synergy entered a two year lease
      for laboratory space in New Jersey, principally to support combined Callisto
      and
      Synergy research efforts, with an approximate rent of $50,000 annually through
      November 2005, at which time the Company did not renew its lease, because its
      research group moved to laboratory and office space in Doylestown PA, funded
      in
      full by the NIAID biodefense grant. During the twelve months ended December
      31,
      2005, 2004 and 2003 and for the period from June 5, 1996 (inception) to December
      31, 2005, total rent expense was $244,531, $217,297, $67,261 and $649,110,
      respectively. Total annual commitments under the remaining New York City lease
      for each of the years ended December 31, are as follows:





2006
            
            $
            148,5532007
            
            
            151,5242008
            
            
            154,5552009
            
            
            157,6462010
            
            
            160,7992011
            
            
            81,464Total
            
            $
            854,541





Other:





In
      April
      2003, Callisto settled legal fees totaling approximately $352,000, accrued
      as of
      December 31, 2002, for approximately $100,000. The balance was reversed into
      general and administrative expense in the second quarter of 2003.




9.
      Property and equipment:





Equipment
      consists of laboratory, testing and computer equipment and furniture and
      fixtures consists of office furniture, both stated at cost, with useful lives
      ranging from 2-4 years, depreciated on a straight line basis. Depreciation
      expense for the years ended December 31, 2005, 2004, 2003 and from June 5,
      1996
      (inception) to December 31, 2005 was $18,856, $27,632, $27,755, and $84,637,
      respectively.




**December
                  31,****2005**
            ****
            **2004**Equipment
            
            $
            46,294
            
            $
            46,294Furniture
                and fixtures
            
            
            38,343
            
            
            38,343Less
                - Accumulated depreciation
            
            
            (84,637
            )
            
            (65,781
            )Property
                and equipment, net
            
            $
            0
            
            $
            18,856




10.
      Selected Quarterly Financial Data (Unaudited):




**(Amounts
                in dollars)****First**
            
            **Second**
            
            **Third**
            
            **Fourth****Quarter**
            
            **Quarter**
            
            **Quarter**
            
            **Quarter**
            
            **Total**Year
                Ended December 31, 2004Net
                loss
            
            ($1,827,913)
            
            ($1,909,797)
            
            ($1,605,686)
            
            ($2,200,071)
            
            ($7,543,467)Net
                income per share:Basic
                and diluted
            
            ($0.07)
            
            ($0.07)
            
            ($0.06)
            
            ($0.08)
            
            ($0.26)Year
                Ended December 31, 2005Net
                loss
            
            ($2,594,131)
            
            ($2,610,677)
            
            ($3,320,569)
            
            ($3,254,081)
            
            ($11,779,457)Net
                loss per share:Basic
                and diluted
            
            ($0.09)
            
            ($0.08)
            
            ($0.10)
            
            ($0.10)
            
            ($0.37)




F-21




11.
      Subsequent events:





On
      February 3, 2006, Callisto closed a private placement of 4,283,668 shares of
      common stock and 1,070,917 common stock purchase warrants to certain accredited
      investors. The warrants are exercisable for 18 months from closing at an
      exercise price of $1.60 per share. The securities were sold at a price of $1.20
      per share for aggregate proceeds of $5,140,402. The Company paid an aggregate
      $468,340 and issued an aggregate 390,284 warrants to certain selling
      agents. The selling agent warrants are exercisable at $1.25 per share and will
      expire three years after closing.  Callisto
      also incurred $30,000 in legal fees directly associated with the closing. The
      net proceeds from this private placement were $4,641,870.





Callisto
      agreed to file, within 60 days after the closing, a registration statement
      covering the resale of the shares of common stock and the shares underlying
      the
      warrants. In addition, Callisto agreed to use commercially reasonable efforts
      to
      cause the registration statement to be declared effective within 120 days after
      closing.





Had
      this
      private placement been completed on December 31, 2005 pro forma selected balance
      sheet items would have been as follows:





**As
                reported**
              **2005**
            ****
            **Pro
                forma**
              **2005**Cash
                and cash equivalents
            
            $
            1,420,510
            
            $
            6,062,379Stockholders'
                equity (deficit)
            
            $
            (332,919
            )
            $
            4,308,951Common
                shares outstanding
            
            
            33,233,096
            
            
            37,516,764





As
      provided for by Emerging
      Issues Task Force Issue 00-19: *Accounting
      for Derivative Financial Instruments Indexed to, and Potentially Settled in,
      a
      Company's Own Stock* (“EITF
      00-19”) the warrants will be classified as permanent equity. The
      fair value of the investor warrants on February 3, 2006, the date of grant
      was
      $662,680 using Black Scholes assumptions of 79% volatility, a risk free interest
      rate of 4.25%, no dividend, an expected life of 18 months and a stock price
      on
      that date of $1.59 per share. This fair value allocated to the investor warrants
      will be recorded as additional paid in capital during the quarter ended March
      31, 2006.





On
      January 31, 2006, Callisto entered into a consulting agreement with Dr. Moshe
      Talpaz, whereby Dr. Talpaz will provide consulting services for Callisto’s
      Degrasyns program. Under the agreement Dr. Talpaz will be paid $10,000 per
      year
      and was granted 575,000 10-year options to purchase Callisto common stock at
      $1.60 per share. Such options vest based on milestones related to the Degrasyns
      compounds being developed towards FDA approval. The term of the agreement is
      for
      the length of time the Company is developing the Degrasyns platform of compounds
      in all indications.





On
      January 10, 2006, Callisto entered into a Patent and Technology License
      Agreement with The University of Texas M.D. Anderson Cancer Center. Pursuant
      to
      the license agreement, Callisto was granted the exclusive right to manufacture,
      have manufactured, use, import, offer to sell and/or sell anti-cancer compounds
      called tyrphostins (renamed Degrasyns). Callisto paid a nonrefundable fee upon
      execution of this agreement and is obligated to pay annual license maintenance
      fees to The University of Texas M.D. Anderson Cancer Center. Callisto is also
      obligated under this agreement to pay for the legal fees and expenses associated
      with establishing and protecting the patent rights worldwide.




Callisto
      also agreed to pay The University of Texas M.D. Anderson Cancer Center royalties
      based on net sales from any licensed products, plus aggregate milestone payments
      of up to $1,750,000 based upon achieving certain regulatory submissions and
      approvals. The term of the agreement is from January 10, 2006 until the end
      of
      the term for which the patent rights associated with the licensed technology
      have expired. If the first pending patent is issued, the agreement is projected
      to expire in 2025. In addition, at any time after two years from January 10,
      2006, The University of Texas M.D. Anderson Cancer Center has the right to
      terminate the license if Callisto fails to provide evidence within 90 days
      of
      written notice that it has commercialized or is actively and effectively
      attempting to commercialize the licensed technology.







F-22


Index
      to
      Exhibits




**ExhibitNumber**
            **Description**


3.1
            Certificate
                of Incorporation (Incorporated by reference to Exhibit 99.1 filed
                with the
                Company's Current Report on Form 8-K filed on May 28,
                2003)3.2
            Certificate
                of Amendment to the Certificate of Incorporation of Callisto
                Pharmaceuticals, Inc. (Incorporated by reference to Exhibit 3.1 to
                the
                Company’s Quarterly Report on Form 10-Q filed on November 14,
                2005)3.3
            Bylaws
                (Incorporated by reference to Exhibit 99.2 filed with the Company's
                Current Report on Form 8-K filed on May 28, 2003)4.1
            1996
                Incentive and Non-Qualified Stock Option Plan (Incorporated by reference
                to Exhibit 4.1 filed with the Company's Current Report on Form 8-K
                filed
                on May 15, 2003)4.2
            Form
                of Warrant to purchase shares of common stock issued in connection
                with
                the sale of common stock (Incorporated by reference to Exhibit 4.1
                filed
                with the Company's Current Report on Form 8-K filed on January 28,
                2004)4.3
            Form
                of Warrant issued to Trilogy Partners, Inc. (Incorporated by reference
                to
                Exhibit 4.1 filed with the Company’s Current Report on Form 8-K filed on
                July 22, 2005)4.4
            2005
                Equity Compensation Incentive Plan (Incorporated by reference to
                Appendix
                B filed with the Company's Definitive Proxy Statement on Schedule
                14A
                filed on August 31, 2005)4.5
            2005
                Directors’ Stock Option Plan (Incorporated by reference to Appendix C
                filed with the Company's Definitive Proxy Statement on Schedule 14A
                filed
                on August 31, 2005)4.6
            Form
                of Warrant to purchase Common Stock issued in connection with the
                sale of
                Common Stock (Incorporated by reference to Exhibit 4.1 filed with
                the
                Company’s Current Report on Form 8-K filed on February 9,
                2006)4.7
            Form
                of Warrant to purchase Common Stock issued to certain selling agents
                in
                connection with the sale of Common Stock (Incorporated by reference
                to
                Exhibit 4.2 filed with the Company’s Current Report on Form 8-K filed on
                February 9, 2006)10.1
            Employment
                Agreement dated June 13, 2003 by and between Callisto Pharmaceuticals,
                Inc. and Gary S. Jacob (Incorporated by reference to Exhibit 10.1
                filed
                with the Company's Quarterly Report on Form 10-QSB filed on August
                20,
                2003)*10.2
            Employment
                Agreement dated April 6, 2004 by and between Synergy Pharmaceuticals
                Inc.
                and Kunwar Shailubhai (Incorporated by reference to Exhibit 10.2
                filed
                with the Company's Annual Report on Form 10-KSB on April 14,
                2004)*10.3
            Employment
                Agreement dated June 13, 2003 by and between Callisto Pharmaceuticals,
                Inc. and Donald H. Picker (Incorporated by reference to Exhibit 10.3
                filed
                with the Company's Current Report on Form 10-QSB filed on November
                14,
                2003)*10.4
            Amendment
                to Employment Agreement dated April 6, 2004 by and between Callisto
                Pharmaceuticals, Inc. and Donald H. Picker (Incorporated by reference
                to
                Exhibit 10.6 filed with the Company's Annual Report on Form 10-KSB
                filed
                on April 14, 2004)*10.5
            License
                Agreement dated as of August 28, 2002 by and between Synergy
                Pharmaceuticals Inc. and AnorMED Inc.( Incorporated by reference
                to
                Exhibit 10.4 filed with the Company's Current Report on Form 10-QSB
                filed
                on November 14, 2003)**10.6
            Employment
                Agreement dated January 15, 2004 by and between Callisto Pharmaceuticals,
                Inc and Bernard Denoyer (Incorporated by reference to Exhibit 10.6
                filed
                with the Company's Annual Report on Form 10-KSB on April 14,
                2004)*10.7
            Form
                of Registration Rights Agreement dated as of January 21, 2004 by
                and among
                the Registrant and the Purchasers set forth on the signature page
                thereto
                (Incorporated by reference to Exhibit 4.1 filed with the Company's
                Current
                Report on Form 8-K filed on January 28, 2004)10.8
            Common
                Stock Purchase Agreement dated as of April 19, 2004, by and between
                Callisto Pharmaceuticals, Inc. and the Purchasers set forth on Exhibit
                A
                thereto (Incorporated by reference to Exhibit 10.1 filed with the
                Company's Current Report on Form 8-K filed on April 19,
                2004)




F-23




10.9
            Patent
                and Technology License Agreement dated August 12, 2004 by and between
                The
                Board of Regents of the University of Texas System, on behalf of
                The
                University of Texas M. D. Anderson Cancer Center and Callisto
                Pharmaceuticals, Inc. (Incorporated by reference to Exhibit 10.1
                filed
                with the Company's Current Report on Form 8-K filed on September
                7,
                2004)**


10.10
            Consulting
                Agreement dated as of December 27, 2004 between the Registrant and
                Gabriele M. Cerrone (Incorporated by reference to Exhibit 10.10 filed
                with
                the Company’s Annual Report on Form 10-KSB filed on March 30, 2005)
                *10.11
            Common
                Stock Purchase Agreement dated as of March 8, 2005 by and between
                Callisto
                Pharmaceuticals, Inc. and the Purchasers
                set forth on Exhibit A thereto (Incorporated by reference to Exhibit
                10.1
                filed with the Company's Current Report on Form 8-K filed on March
                5,
                2005)10.12
            License
                Agreement between Callisto Pharmaceuticals, Inc. and The Rockefeller
                University effective as of July 25, 2001 (Incorporated by reference
                to
                Exhibit 10.12 filed with the Company’s Annual Report on Form 10-K filed on
                June 6, 2005)10.13
            Agreement
                among Davos Chemical Corporation, Callisto Pharmaceuticals, Inc.
                and
                Antibioticos S.p.A. dated July 28, 2004 (Incorporated by reference
                to
                Exhibit 10.15 filed with the Company’s Annual Report on Form 10-K filed on
                June 6, 2005)10.14
            Extension
                and Severance Compensation Agreement dated June 9, 2005 between Callisto
                Pharmaceuticals, Inc. and Gary S. Jacob (Incorporated by reference
                to
                Exhibit 10.1 filed with the Company’s Current Report on Form 8-K filed on
                June 15, 2005)*10.15
            Extension
                and Severance Compensation Agreement dated June 9, 2005 between Callisto
                Pharmaceuticals, Inc. and Donald S. Picker (Incorporated by reference
                to
                Exhibit 10.2 filed with the Company’s Current Report on Form 8-K filed on
                June 15, 2005)*10.16
            Letter
                of Engagement between Trilogy Capital Partners, Inc. and Callisto
                Pharmaceuticals, Inc. dated July 18, 2005 (Incorporated by reference
                to
                Exhibit 10.1 filed with the Company’s Current Report on Form 8-K filed on
                July 22, 2005)10.17
            Common
                Stock Purchase Agreement dated as of August 22, 2005 between Callisto
                Pharmaceuticals, Inc. and the investors listed on Exhibit A thereto
                (Incorporated by reference to Exhibit 10.1 filed with the Company’s
                Current Report on Form 8-K filed on August 26, 2005)10.18
            Amendment
                dated October 19, 2005 to the Employment Agreement dated as of June
                13,
                2003 by and between Callisto Pharmaceuticals, Inc. and Gary S. Jacob
                (Incorporated by reference to Exhibit 10.1 filed with the Company’s
                Current Report on Form 8-K filed on October 21, 2005)*10.19
            Amendment
                dated October 19, 2005 to the Employment Agreement dated as of September
                23, 2003, as amended April 6, 2004 by and between Callisto
                Pharmaceuticals, Inc. and Donald H. Picker (Incorporated by reference
                to
                Exhibit 10.2 filed with the Company’s Current Report on Form 8-K filed on
                October 21, 2005)*10.20
            Amendment
                dated October 19, 2005 to the Employment Agreement dated as of January
                15,
                2004 by and between Callisto Pharmaceuticals, Inc. and Bernard Denoyer
                (Incorporated by reference to Exhibit 10.4 filed with the Company’s
                Current Report on Form 8-K filed on October 21, 2005)*10.21
            Amendment
                dated October 19, 2005 to the Employment Agreement dated as of April
                6,
                2004 by and between Synergy Pharmaceuticals Inc. and Kunwar Shailubhai
                (Incorporated by reference to Exhibit 10.5 filed with the Company’s
                Current Report on Form 8-K filed on October 21, 2005)*10.22
            Patent
                and Technology License Agreement dated January 10, 2006 between The
                University of Texas M.D. Anderson Cancer Center and Callisto
                Pharmaceuticals, Inc. **10.23
            Securities
                Purchase Agreement dated February 3, 2006 between Callisto
                Pharmaceuticals, Inc. and the investors listed on Schedule A thereto
                (Incorporated by reference to Exhibit 10.1 filed with the Company’s
                Current Report on Form 8-K filed on February 9, 2006)14
            Code
                of Business Conduct and Ethics (Incorporated by reference to Exhibit
                14
                filed with the Company's Annual Report on Form 10-KSB filed on April
                14,
                2004)21
            List
                of Subsidiaries23
            Consent
                of BDO Seidman, LLP31.1
            Certification
                of Chief Executive Officer required under Rule 13a-14(a)/15d-14(a)
                under
                the Exchange Act31.2
            Certification
                of Principal Financial Officer required under Rule 13a-14(a)/15d-14(a)
                under the Exchange Act




F-24




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
                200232.2
            Certification
                of Principal Financial Officer pursuant to 18 U.S.C Section 1350,
                as
                adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                200299.1
            Power
                of Attorney (included on page 36)




*
      Management contract or compensatory plan or arrangement required to be filed
      as
      an Exhibit to this form pursuant to Item 601 of Regulation S-K.





**
      Confidential treatment has been requested with respect to deleted portions
      of
      this agreement.




F-25