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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 2011oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period
from                             to


Commission File Number: 001-32325

CALLISTO PHARMACEUTICALS, INC.(Exact name of Registrant as specified in its charter)

Delaware(State or Other Jurisdiction of
Incorporation or Organization)

13-3894575(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(Registrant's telephone number)

(Former
Name, Former Address and Former Fiscal Year, if changed since last report)

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 ý    No o

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the Registrant was required to submit and post such
files). Yes o    No o

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

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o (Do not check if a
smaller reporting company)

Smaller reporting company ý


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

The number of the registrant's shares of common stock outstanding was 158,516,071 as of May 12 2011.



---





Table of Contents



CALLISTO PHARMACEUTICALS, INC.        FORM 10-Q

CONTENTS



PART IFINANCIAL INFORMATION


4Item 1.

Financial Statements


4Condensed Consolidated Balance Sheets as of March 31, 2011 (unaudited) and December 31, 2010


4Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2011 and 2010 (unaudited) and the period June 5,
 1996 (Inception) to March 31, 2011 (unaudited)


5Condensed Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the period June 5, 1996 (Inception) to March 31,
2011 (unaudited)


6Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2011 and 2010 (unaudited) and for the period
June 5, 1996 (Inception) to March 31, 2011 (unaudited)


15Notes to Condensed Consolidated Financial Statements (unaudited)


17Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations


30Item 3.

Quantitative and Qualitative Disclosures About Market Risk


34Item 4.

Controls and Procedures


34PART IIOTHER INFORMATION


35Item 6.

Exhibits


35Signatures


36


2

---





Table of Contents

INTRODUCTORY NOTE

This Report on Form 10-Q for Callisto Pharmaceuticals, Inc. ("Callisto" or the
"Company") may contain forward-looking statements. You can identify these statements by forward-looking words such as "may," "will," "expect," "intend," "anticipate," believe," "estimate" and
"continue" or similar words. Forward-looking statements include information concerning possible or assumed future business success or financial results. You should read statements that contain these
words carefully because they discuss future expectations and plans, which contain projections of future results of operations or financial condition or state other forward-looking information. We
believe that it is important to communicate future expectations to investors. However, there may be events in the future that we are not able to accurately predict or control. Accordingly, we do not
undertake any obligation to update any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

The forward-looking statements included herein are based on current expectations that involve a number of risks and uncertainties set forth under "Risk Factors"
in our Annual Report on Form 10-K for the year ended December 31, 2010 and other periodic reports filed with the SEC. Accordingly, to the extent that this Report contains
forward-looking statements regarding the financial condition, operating results, business prospects or any other aspect of the Company, please be advised that Callisto's actual financial condition,
operating results and business performance may
differ materially from that projected or estimated by the Company in forward-looking statements. All drug candidates to treat GI disorders and diseases, currently plecanatide and SP-333,
are being developed exclusively by Synergy Pharmaceuticals, Inc., our controlled subsidiary ("Synergy"). Use of the terms "we", "our" or "us" in connection with GI drug candidates discussed
herein refer to research and development activities and plans of Synergy.

3

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Table of Contents

PART IFINANCIAL INFORMATION

Item 1.    Financial Statements



CALLISTO PHARMACEUTICALS, INC.  (A Development Stage Company)        CONDENSED CONSOLIDATED BALANCE SHEETS

March 31, 2011

December 31, 2010(Unaudited)ASSETSCurrent Assets:Cash and cash equivalents

$
938,775

$
1,708,982Prepaid expenses and other


1,034,505


769,403Tax credits receivable


575,400


781,127Total Current Assets


2,548,680


3,259,512Property and equipment, net


8,080


9,397Security deposits


87,740


87,740Total Assets

$
2,644,500

$
3,356,649LIABILITIES AND STOCKHOLDERS' DEFICITCurrent Liabilities:Accounts payable

$
4,426,817

$
4,755,361Accrued expenses


2,433,716


2,311,050Notes Payable


511,877


Total Current Liabilities


7,372,410


7,066,411Derivative financial instruments, at estimated fair valuewarrants


5,139,347


3,487,959Total Liabilities


12,511,757


10,554,370Commitments and contingenciesStockholders' Deficit:Series A convertible preferred stock, par value $0.0001, 700,000 shares authorized, 8,000 shares outstanding at March 31, 2011 and
December 31, 2010


1


1Series B convertible preferred stock, par value $0.0001, 2,500,000 shares authorized, no shares outstanding at Mach 31, 2011 and December 31,
2010





Common stock, par value of $.0001 per share: 225,000,000 shares authorized; 158,466,071 and 157,509,404 shares outstanding at March 31, 2011 and
December 31, 2010, respectively


15,847


15,751Additional paid-in capital


140,509,670


139,496,452Deficit accumulated during development stage


(137,334,635
)

(135,573,268
)Total Stockholders' Equity (Deficit)


3,190,883


3,938,936Non-controlling interest


(13,058,140
)

(11,136,657
)Total Stockholders' Deficit


(9,867,257
)

(7,197,721
)Total Liabilities and Stockholders' Equity (Deficit)

$
2,644,500

$
3,356,649


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

4

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Table of Contents



CALLISTO PHARMACEUTICALS, INC.  (A Development Stage Company)        CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS        (Unaudited)

Three Months
Ended
March 31, 2011

Three Months
Ended
March 31, 2010

For the period
June 5, 1996
(inception) to
March 31, 2011Revenues

$


$


$
Costs and Expenses:Research and development


1,371,928


1,195,410


47,204,410Government grants








(1,135,318
)Purchased in-process research and development








6,944,553General and administrative


1,959,844


1,433,787


54,665,945Loss from Operations


(3,331,772
)

(2,629,197
)

(107,679,590
)Interest and investment income


51


16,475


914,933State tax credit





628,806


1,025,606Interest and other expense


(12,414
)

(284,169
)

(943,661
)Loss on debt extinguishment








(2,099,892
)Change in fair value of derivative instruments


(338,715
)

(17,062,145
)

(22,506,031
)Net Loss


(3,682,850
)

(19,330,230
)

(131,288,635
)Net Loss of controlled subsidiary attributable to noncontrolling interest


1,921,483


1,165,057


13,058,140Net loss attributable to controlling interest


(1,761,367
)

(18,165,173
)

(118,230,495
)Series A Preferred stock conversion rate change and beneficial conversion feature accreted as a dividend








(5,025,849
)Series B Preferred stock conversion rate change and beneficial conversion feature accreted as a dividend








(12,174,391
)Cumulative effect of adopting ASC Topic 815 January 1, 2009








(1,903,900
)Net loss attributable to common stockholders

$
(1,761,367
)
$
(18,165,173
)
$
(137,334,635
)Weighted Average Common Shares OutstandingBasic and Diluted


157,645,404


53,869,123Net Loss per Common ShareBasic and Diluted

$
(0.01
)
$
(0.34
)


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

5

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Table of Contents



CALLISTO PHARMACEUTICALS, INC.  (A Development Stage Company)        CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN  STOCKHOLDERS' EQUITY (DEFICIT)    
 (Unaudited)

Preferred
Shares

Preferred
Stock,
Par Value

Common
Shares

Common
Stock,
Par Value

Additional
Paid in CapitalBalance at inception, June 5, 1996




$





$


$
Net loss for the yearIssuance 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 condensed consolidated financial statements.

6

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Table of Contents

CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)

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

Unamortized Deferred
Stock Based
Compensation

Deficit Accumulated
during the Development
Stage

Total Stockholders'
EquityBalance 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 condensed consolidated financial statements.

7

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Table of Contents

CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)

CONDENSED CONSOLIDATED STATEMENTS 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'
EquityBalance 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 preferred stock in connection with the Merger


(4,235,299
)

(423
)

4,235,299


423











Common stock issued to former Synergy stockholders








4,329,927


432


6,494,458








6,494,890Common stock issued in exchange for Webtronics common stock








1,503,173


150


(150
)







Deferred Compensationstock options














9,313,953


(9,313,953
)




Amortization of deferred Stock based Compensation

















3,833,946





3,833,946Private placement of common 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 condensed consolidated financial statements.

8

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Table of Contents

CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)

CONDENSED CONSOLIDATED STATEMENTS 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'
EquityBalance, December 31, 2003


25,928,760

$
2,590

$
34,149,975

$
(5,480,007
)
$
(25,817,730
)
$
2,854,828Net loss for the year














(7,543,467
)

(7,543,467
)Amortization of deferred Stock-based compensation expense











3,084,473





3,084,473Variable accounting for stock options








(816,865
)







(816,865
)Stock-based compensation net of forfeitures








240,572


93,000





333,572Common stock issued via private placements, net


3,311,342


331


6,098,681








6,099,012Warrant and stock-based compensation for services in connection with the Merger








269,826








269,826Common stock returned from former Synergy 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

$
39,910,186

$
(2,302,534
)
$
(33,361,197
)
$
4,249,377


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

9

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Table of Contents

CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)

CONDENSED CONSOLIDATED STATEMENTS 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

$
39,910,186

$
(2,302,534
)
$
(33,361,197
)
$
4,249,377Net loss for the year














(11,779,457
)

(11,779,457
)Deferred stock-based compensationnew grants








1,571,772


(1,571,772
)




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








176,249








176,249Exercise 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 condensed consolidated financial statements.

10

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Table of Contents

CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)

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

Series A
Convertible
Preferred
Shares

Series A
Convertible
Preferred
Stock

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, 2005




$



33,233,096

$
3,323

$
46,387,875

$
(1,583,463
)
$
(45,140,654
)
$
(332,919
)Net loss for the year




















(12,919,229
)

(12,919,229
)Reclassification of deferred unamortized stock-based compensation upon adoption of FAS 123R














(1,583,463
)

1,583,463





Stock based compensation expense














2,579,431








2,579,431Common stock issued via private placement:




















February 2006








4,283,668


428


5,139,782








5,140,210Finders fees and expenses














(561,808
)







(561,808
)April 2006








666,667


67


799,933








800,000Finders fees and expenses














(41,000
)







(41,000
)Waiver and Lock-up Agreement








740,065


74


579,622








579,696Common stock issued for services








87,000


9


121,101








121,110Exercise of common stock warrants








184,500


18


190,017








190,035Series A convertible preferred stock issued via private placement:


574,350


57








5,743,443








5,743,500Finders fees and expenses


11,775


1








(448,909
)







(448,908
)Detachable warrants














2,384,485








2,384,485Beneficial conversion feature accreted as a dividend




















(2,384,485
)

(2,384,485
)Balance, December 31, 2006


586,125

$
58


39,194,996

$
3,919

$
61,290,509

$


$
(60,444,368
)
$
850,118


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

11

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Table of Contents

CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)

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

Series A
Convertible
Preferred
Shares

Series A
Convertible
Preferred
Stock,
Par Value

Series B
Convertible
Preferred
Shares

Series B
Convertible
Preferred
Stock,
Par Value

Common
Shares

Common
Stock,
Par Value

Additional
Paid in
Capital

Deficit
Accumulated
during the
Development
Stage

Total
Stockholders'
EquityBalance, December 31, 2006


586,125

$
58




$



39,194,996

$
3,919

$
61,290,509

$
(60,444,368
)
$
850,118Net loss for the year























(7,887,265
)

(7,887,265
)Stock-based compensation expense




















591,561





591,561Common stock issued for services














80,000


8


36,792





36,800Series A convertible preferred stock, issued via private placement


28,000


4














279,997





280,001Finders fees and expenses, Series A private placement




















(36,400
)




(36,400
)Conversion of Series A preferred stock to common stock


(395,450
)

(40
)







7,668,165


767


(727
)




Beneficial conversion feature accreted as a dividend to Series A preferred stock




















2,504,475


(2,504,475
)

Series B convertible preferred stock, issued via private placement








1,147,050


115








11,470,385





11,470,500Finders fees and expenses, Series B private placement




















(920,960
)




(920,960
)Beneficial conversion feature accreted as a dividend to Series B preferred stock




















10,495,688


(10,495,688
)

Change in fair value of Series B warrants from date of issuance to expiration of put option




















(2,591,005
)




(2,591,005
)Balance, December 31, 2007


218,675


22


1,147,050


115


46,943,161


4,694


83,120,315


(81,331,796
)

1,793,350Net loss for the year























(9,655,471
)

(9,655,471
)Recapitalization of majority owned subsidiary via private placements of common stock




















2,951,913





2,951,913Minority interest in equity of subsidiary acquired




















(42,824
)




(42,824
)Stock-based compensation expense




















589,063





589,063Proceeds from issuance of 11% Notes attributable to detachable warrants




















181,732





181,732Conversion of Series A preferred stock to common stock


(120,675
)

(12
)







2,413,500


241


(229
)




Conversion of Series B preferred stock to common stock








(10,000
)

(1
)

200,000


20


(19
)




Balance, December 31, 2008


98,000

$
10


1,137,050

$
114


49,556,661

$
4,955

$
86,799,951

$
(90,987,267
)
$
(4,182,237
)


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

12

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Table of Contents

CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)

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

(Unaudited)

Series A
Convertible
Preferred
Shares

Series A
Convertible
Preferred
Stock

Series B
Convertible
Preferred
Shares

Series B
Convertible
Preferred
Stock

Common
Shares

Common
Stock
Par Value

Additional
Paid in
Capital

Deficit
Accumulated
during the
Development
Stage

Non-
Controlling
Interest

Total
Stockholders'
Equity
(Deficit)Balance, December 31, 2008


98,000

$
10


1,137,050

$
114


49,556,661


4,955

$
86,799,951

$
(90,987,267
)
$


$
(4,182,237
)Cumulative effect of adoption of ASC Topic 815




















(181,732
)

(1,903,900
)




(2,085,632
)Net Loss























(15,073,021
)

(3,282,393
)

(18,355,414
)Stock based compensation expense




















1,119,856








1,119,856Conversion of Series A preferred stock to common stock


(35,000
)

(4
)







894,445


89


(85
)







Conversion of Series B preferred stock to common stock








(122,884
)

(12
)

2,963,236


296


(284
)







Private placements of common stock of majority owned subsidiary




















15,970,100








15,970,100Fees and expenses associated with private placements of majority owned subsidiary




















(260,002
)







(260,002
)Preferred Stock dividend attributable to reset of conversion price in conjunction with waiver of liquidation preference




















1,815,592


(1,815,592
)




Cashless Conversion of Warrants to Common Stock














193,769


19


(19
)







Balance December 31, 2009


63,000

$
6


1,014,166

$
102


53,608,111

$
5,359

$
105,263,377

$
(109,779,780
)
$
(3,282,393
)
$
(7,793,329
)Net Loss























(25,793,488
)

(7,854,264
)

(33,647,752
)Stock based compensation expense




















854,651








854,651Conversion of Series A preferred stock to common stock


(55,000
)

(5
)







1,527,777


153


(148
)







Conversion of Series B preferred stock to common stock








(1,014,166
)

(102
)

28,171,278


2,817


(2,715
)







Common shares in exchange for modification of convertible notes














265,770


27


100,169








100,196Extinguishment on debt




















2,809,531








2,809,531Cashless conversion of Warrants to common stock upon extinguishment of convertible notes














72,355,769


7,236


(7,236
)







Warrants exchanged














1,505,699


151


(151
)







Direct offering of common stock of controlled subsidiary




















7,179,000








7,179,000Fair value of warrants issued in connection with controlled subsidiary registered direct offerings reclassified to derivative liability




















(3,784,743
)







(3,784,743
)Fees and expenses associated with direct offering of controlled subsidiary




















(468,130
)







(468,130
)Reclassification of derivative liability to equity upon termination of price protection




















27,511,730








27,511,730Common stock issued as settlement for director's fees














75,000


8


41,117








41,125Balance December 31, 2010


8,000

$
1




$



157,509,404

$
15,751

$
139,496,452

$
(135,573,268
)
$
(11,136,657
)
$
(7,197,721
)


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

13

---



Table of Contents

CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)

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

(Unaudited)

Series A
Convertible
Preferred
Shares

Series A
Convertible
Preferred
Stock

Series B
Convertible
Preferred
Shares

Series B
Convertible
Preferred
Stock

Common
Shares

Common
Stock
Par Value

Additional
Paid in
Capital

Deficit
Accumulated
during the
Development
Stage

Non-
Controlling
Interest

Total
Stockholders'
Equity
(Deficit)Net Loss























(1,761,367
)

(1,921,483
)

(3,682,850
)Stock based compensation expense




















124,653








124,653Common stock issued for services














850,000


85


532,915








533,000Direct offering of common stock of controlled subsidiary




















1,800,000








1,800,000Fees and expenses associated with direct offering of controlled subsidiary




















(185,000
)







(185,000
)Fair value of warrants issued in connection with controlled subsidiary registered direct offerings reclassified to derivative liability




















(1,312,673
)







(1,312,673
)Warrants exercise














106,667


11


53,323








53,334Balance March 31, 2011


8,000

$
1




$



158,466,071

$
15,847

$
140,509,670

$
(137,334,635
)
$
(13,058,140
)
$
(9,867,257
)


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

14

---





Table of Contents



CALLISTO PHARMACEUTICALS, INC.  (A Development Stage Company)        CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS        (Unaudited)

Three months
ended
March 31, 2011

Three months
ended
March 31, 2010

Period from
June 5, 1996
(inception) to
March 31, 2011Cash flows from operating activities:Net loss

$
(3,682,850
)
$
(19,330,230
)
$
(131,288,635
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation


1,317


1,317


109,152Purchase discount accreted as interest income on U.S.Treasury bills








(26,950
)Stock-based compensation expense


124,653


278,097


19,834,029Purchased in-process research and development (non-cash portion)








6,841,053Interest expense on notes


11,877


284,169


771,277Stock-based liquidated damages








579,696Change in fair value of derivative instrumentswarrants


338,715


17,062,145


22,506,031Loss on debt extinguishment








2,099,892Net liabilities assumed in excess of assets acquired in merger








(282,752
)Changes in operating assets and liabilities:Prepaid expenses


267,898


(254,763
)

(501,505
)State tax credit receivable


205,727


(628,806
)

(575,400
)Security deposit








(87,740
)Accounts payable and accrued expenses


(205,878
)

(666,085
)

6,849,157Net cash used in operating activities


(2,938,541
)

(3,254,156
)

(73,172,695
)Cash flows from investing activities:Short term investmentspurchased








(5,921,825
)Short term investmentsliquidated








5,948,775Acquisition of equipment








(117,233
)Net cash used in investing activities








(90,283
)Cash flows from financing activities:Issuance of common and preferred stock








48,719,673Issuance of common stock of controlled subsidiary


1,800,000





27,974,100Finders fees and expensescombined


(185,000
)




(3,967,302
)Issuance of debt instruments


500,000





1,103,163Exercise of common stock warrants


53,334





372,119Net cash provided by financing activities


2,168,334





74,201,753Net (decrease) increase in cash and cash equivalents


(770,207
)

(3,254,156
)

938,775Cash and cash equivalents at beginning of period


1,708,982


7,207,612


Cash and cash equivalents at end of period

$
938,775

$
3,953,456

$
938,775


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

15

---



Table of Contents

CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Unaudited)

Three months
ended
March 31, 2011

Three months
ended
March 31, 2010

Period from
June 5, 1996
(inception) to
March 31, 2011Supplementary disclosure of cash flow information:Cash paid for taxes

$
12,009

$


$
289,963Supplementary disclosure of non-cash investing and financing activities:Series A Preferred stock beneficial conversion feature accreted as a dividend








4,888,960Series B Preferred stock beneficial conversion feature accreted as a dividend








10,495,688Series A Preferred stock conversion rate change accreted as a dividend








(136,889
)Series B Preferred stock conversion rate change accreted as a dividend








(1,678,703
)Common stock issued to extend notes payable








100,196Value of warrants classified as derivative liability


1,312,673





5,139,347Shares issued for prepaid consulting services

$
533,000

$


$
533,000


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

16

---





Table of Contents



CALLISTO PHARMACEUTICALS, INC.  (A Development Stage Company)        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS        (Unaudited)

1. Business overview:

Callisto Pharmaceuticals, Inc. ("Callisto" or the "Company") is a development stage biopharmaceutical company, whose primary focus has been on the development of drugs to treat
gastrointestinal ("GI") disorders and diseases and rheumatoid arthritis (RA). Callisto was incorporated in the state of Delaware on June 5, 1996 (inception). Since inception, Callisto's efforts
have been principally devoted to research and development, securing and protecting patents and raising capital.

From
inception through March 31, 2011, Callisto has sustained cumulative net losses attributable to common stockholders of $137,334,635. 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, as well as deemed
dividends attributable to the beneficial conversion rights of convertible preferred stock at issuance. From inception through March 31, 2011, Callisto has not generated any revenue from
operations. The Company 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 they will take to complete. The risk of not completing
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.

This
Report on Form 10-Q for Callisto Pharmaceuticals, Inc. may contain forward-looking statements. Forward-looking statements are characterized by future or
conditional verbs such as "may," "will," "expect," "intend," "anticipate," believe," "estimate" and "continue" or similar words. You should read statements that contain these words carefully because
they discuss future expectations and plans, which contain projections of future results of operations or financial condition or state other forward-looking information. Such statements are only
predictions and our actual results may differ materially from those anticipated in these forward-looking statements. We believe that it is important to communicate future expectations to investors.
However, there may be events in the future that we are not able to accurately predict or control. Factors that may cause such differences include, but are not limited to, those discussed elsewhere in
this report, 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. All drug candidates to treat gastro-intestinal ("GI") disorders and diseases, currently plecanatide and SP-333, are
being developed exclusively by Synergy Pharmaceuticals, Inc., our controlled subsidiary ("Synergy"). Use of the terms "we", "our" or "us" in connection with GI drug candidates discussed herein
refer to research and development activities and plans of Synergy.

17

---



Table of Contents

CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

2. Basis of presentation and going concern:

These condensed consolidated financial statements include Callisto and subsidiaries: (1) Callisto Research Labs, LLC (including its wholly-owned subsidiary, Callisto
Pharma, GmbH (Germanyinactive)), and (2) Synergy Pharmaceuticals, Inc. (including Synergy's wholly-owned subsidiaries, Synergy-DE, Synergy Advanced
Pharmaceuticals, Inc. and IgX, Ltd (Irelandinactive)). All intercompany balances and transactions have been eliminated. These condensed consolidated financial statements do
not include all of the information and footnote disclosures required by GAAP for complete financial statements. These statements should be read in conjunction with Callisto's audited financial
statements and notes thereto for the year ended December 31, 2010, included in Form 10-K filed with the SEC on March 31, 2011. Certain items in the prior year's
financial statements have been reclassified to conform to the current year's presentation.

In
the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, primarily consisting of normal adjustments, necessary for
the fair presentation of the balance sheet and results of operations for the interim periods. The results of operations for the three months ended March 31, 2011 are not necessarily indicative
of the results of operations to be expected for the full year ending December 31, 2011. The condensed consolidated balance sheet as of December 31, 2010 presented above was derived from
the audited consolidated financial statements as of that date.

The
condensed consolidated financial statements as of March 31, 2011 and December 31, 2010 have been prepared under the assumption that Callisto will continue as a going
concern for the twelve months ending December 31, 2011. 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.

Net
cash used in operating activities was $2,938,541 during the three months ended March 31, 2011 as compared to $3,254,156 for the three months ended March 31, 2010 and
$73,172,695 during the period from June 5, 1996 (inception) to March 31, 2011. During the three months ended March 31, 2011 and
2010 Callisto incurred net losses attributable to common stockholders of $1,761,367 and $18,165,173, respectively and $137,334,635 during the period from June 5, 1996 (inception) to
March 31, 2011. To date, Callisto's sources of cash have been primarily limited to the sale of equity securities and issuance of debt instruments. Net cash provided by financing activities for
the three months ended March 31, 2011 and 2010 and for the period from June 5, 1996 (inception) to March 31, 2011, was $2,168,334, $0, and $74,201,753, respectively.

Callisto
will be required to raise additional capital within this year to complete the development and commercialization of current product candidates and to continue to fund operations
at the current cash expenditure levels. Callisto cannot be certain that additional funding will be available on acceptable terms, or at all. To the extent that Callisto raises 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
business. If Callisto is unable to raise additional capital when required or on acceptable terms, Callisto may have to (i) significantly delay, scale back or discontinue the development and/or
commercialization of one or more product candidates; (ii) seek collaborators for product candidates at an earlier stage than otherwise would be

18

---



Table of Contents

CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

2. Basis of presentation and going concern: (Continued)

desirable
and on terms that are less favorable than might otherwise be available; or (iii) relinquish or otherwise dispose of rights to technologies, product candidates or products that
Callisto would otherwise seek to develop or commercialize ourselves on unfavorable terms.

3. Recent Accounting Pronouncements

In April 2010, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2010-13, "CompensationStock Compensation (Topic
718)Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades." ASU 2010-13
provides amendments to Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity's
equity securities trades should not be considered to contain a condition that is not a market,
performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The amendments in ASU 2010-13 are
effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. Callisto adopted this standard on January 1, 2011 and such adoption
did not have a material effect on its results of operation or its financial position.

4. Accounting for share-based payments

ASC Topic 718"CompensationStock Compensation"requires companies to measure the cost of employee services received in
exchange for the award of equity instruments based on the estimated fair value of the award at the date of grant. The expense is to be recognized over the period during which an employee is required
to provide services in exchange for the award.

ASC
Topic 718 did not change the way Callisto accounts for non-employee stock-based compensation. Callisto continues to account for shares of common stock, stock options and
warrants issued to non-employees based on the fair value of the stock, stock option or warrant, if that value is more reliably measurable than the fair value of the consideration or
services received. The Company accounts for stock options issued and vesting to non-employees in accordance with ASC Topic 505-50 "Equity-Based Payment
to Non-Employees"whereas the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance
commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. Accordingly the fair value of these options is being "marked to market"
quarterly until the measurement date is determined.

ASC
Topic 718 requires that cash flows resulting from tax deductions in excess of the cumulative compensation cost recognized for options exercised (excess tax benefits) be classified as
cash inflows from financing activities and cash outflows from operating activities. Due to Callisto's accumulated deficit position, no tax benefits have been recognized in the cash flow statement.

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

19

---



Table of Contents

CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

4. Accounting for share-based payments (Continued)

Callisto options

Stock based compensation expense, related to Callisto employee and non-employee share based payments, has been recognized
in operating results as follow:

Three Months Ended
March 31,June 5, 1996
(Inception) to
March 31, 20112011

2010Employeesincluded in research and development

$


$
4,582

$
2,692,157Employeesincluded in general and administrative


5,886


9,858


4,834,849Non-employeeresearch and development








102,750Non-employeegeneral and administrative


(28,693
)

75,282


9,910,210Total stock based compensation expense

$
(22,807
)
$
89,722

$
17,539,966


The
unrecognized compensation cost related to employee non-vested Callisto stock options outstanding at March 31, 2011, net of expected forfeitures, was $40,540 to be
recognized over a weighted average vesting period of approximately 1.75 years.

The
estimated fair value of each Callisto stock option award was determined on the date of grant using the Black-Scholes option valuation model with the following weighted-average
assumptions during the three months ended March 31, 2011 and 2010.

Three months
ended
March 31,2011

2010Risk free interest rate


(*
)%

2.38
%Dividend yield


(*
)

n/aExpected volatility


(*
)%

100
%Expected term


(*
)

5 years


(*)No
options granted during the quarter ended March 31, 2011, see below


20

---



Table of Contents

CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

4. Accounting for share-based payments (Continued)




A
summary of stock option activity and of changes in Callisto stock options outstanding under Callisto's plans is presented below:

Number of
options

Exercise
Price
Per Share

Weighted
Average
Exercise
Price
Per Share

Intrinsic
Value

Weighted
Average
Remaining
Contractual
TermBalance outstanding, December 31, 2010


7,971,872

$
0.08 - 3.60

$
1.46

$
394,520


4.2 yearsGranted




$


$



Forfeitures


(557,000
)
$
0.66 - 1.25

$
1.11


Balance outstanding, March 31, 2011


7,414,872

$
0.08 - 3.60

$
1.49

$
277,280


4.1 yearsExercisable as of March 31, 2011


5,595,872

$
0.08 - 3.60

$
1.43

$
104,960


3.7 years


Synergy Options

Synergy adopted the 2008 Equity Compensation Incentive Plan (the "Plan") during the quarter ended September 30, 2008. Stock
options granted under the Plan typically vest after three years of continuous service from the grant date and have a contractual term of ten years. Synergy did not issue stock options prior to the
quarter ended September 30, 2008. Stock-based compensation expense related to Synergy options and restricted stock units have been recognized in operating results as follow:

Three Months Ended
March 31,November 15, 2005
(inception) to
March 31, 20112011

2010Employeesincluded in research and development

$
36,749

$
49,459

$
556,339Employeesincluded in general and administrative


44,618


58,955


726,099Non-employeesincluded in research and development


8,362


8,362


103,009Non-employeesincluded in general and administrative


57,731


71,599


908,616Total stock-based compensation expense

$
147,460

$
188,375

$
2,294,063


The
unrecognized compensation cost related to non-vested employee stock options outstanding at March 31, 2011, net of expected forfeitures, was $159,826 to be
recognized over a weighted-average remaining vesting period of approximately three months. This unrecognized cost does not include amounts related to stock options which vest upon change of control.

21

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Table of Contents

CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

4. Accounting for share-based payments (Continued)

The estimated fair value of stock option awards was determined on the date of grant using the Black-Scholes option valuation model with the following weighted-average assumptions during
the following periods indicated.

Three Months
Ended
March 31, 2011

Three Months
Ended
March 31, 2010Risk-free interest rate


(*
)

2.71
%Dividend yield


(*
)

Expected volatility


(*
)

90
%Expected term (in years)


(*
)

6.0 yrs


(*)No
stock options granted during this period.


On
March 1, 2010, a majority of Synergy's shareholders acting by written consent approved an amendment to the Plan increasing the number of shares reserved under the Plan to
15,000,000 shares. A summary of stock option activity and of changes in stock options outstanding under the Plan is presented below:

Number of
Options

Exercise Price
Per Share

Weighted Average
Exercise Price
Per Share

Intrinsic
Value

Weighted Average
Remaining
Contractual TermBalance outstanding, December 31, 2010


8,604,016

$
0.25 - 0.95

$
0.51

$
25,763,002

8.4 yearsGranted








Exercised








Forfeited


(214,939
)
$
0.25 - 0.70

$
0.46Balance outstanding, March 31, 2011


8,389,077

$
0.25 - 0.95

$
0.51

$
27,961,736

8.2 yearsExercisable at March 31, 2011


2,683,343

$
0.25 - 0.95

$
0.30

$
9,510,701

7.3 years


5. Notes Payable

On February 8, 2011, Synergy entered into a loan agreement (the "Agreement") with an investor (the "Lender"), pursuant to which the Lender agreed to lend an aggregate $950,000 to
Synergy. Simultaneously with the execution and delivery of the Agreement, Synergy issued a note to the Lender in the principal amount of $500,000 (the "First Note"). Synergy had the option to issue an
additional note to the Lender in the principal amount of $450,000 beginning February 21, 2011 (the "Second Note" and with the First Note, the "Notes"). The Notes bear interest at 17% per annum
and are payable on April 1, 2011. As of March 31, 2011 Synergy had not borrowed under the Second Note. The First Note principal and interest totaling $511,877 was paid when due on
April 1, 2011 and the loan agreement was terminated.

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Table of Contents

CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

6. Research and Development Expense

In accordance with FASB ASC Topic 730-10-55, "Research and Development", Synergy recorded research and development expense of $ 407,445 and $ 683,182 in prepaid
research and development as of March 31, 2011 and December 31, 2010, respectively, for nonrefundable deposits on production of drug substance of our drug candidate plecanatide and
analytical testing services of our drug candidate SP-333. In accordance with this guidance, Synergy expenses these advance payments when drug compound is delivered and services are
performed.

7. State Tax Credit Receivable

As of December 31, 2010 Callisto had recorded a New York State Qualified Employer Tax Credit receivable totaling $531,127 and Synergy had recorded a $250,000 New York City
biotechnology refundable tax credit. During the quarter ended March 31, 2011 the Company collected $205,727 of the New York State credit and the balance of this credit $325,400 was collected on
April 5, 2011. The New York City tax credits of $250,000 remains a receivable as of March 31, 2011.

8. Net Loss per Share

Basic and diluted net loss per share is presented in conformity with ASC Topic 260, "Earnings per Share," for all periods presented. In accordance with ASC Topic 260, basic and diluted
net loss per common share was determined by dividing net loss attributable 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, and the conversion of preferred stock would have been
antidilutive.

The
following table sets forth the potentially dilutive effect of all outstanding derivative instruments which were not included in weighted average common shares outstanding as of:

March 31, 2011

March 31, 2010Common Shares outstanding


158,466,071


54,290,548Potentially dilutive common shares issuable upon:Exercise of warrants


10,265,332


84,842,576Exercise of Callisto stock options


7,414,872


8,350,038Conversion of Series A Convertible Preferred Stock


222,222


1,333,333Conversion of Series B Convertible Preferred Stock


0


1,014,166Total fully diluted


176,368,497


149,830,661


9. Derivative Financial Instruments

Effective January 1, 2009, the Company adopted provisions of ASC Topic 815-40, "Derivatives and Hedging: Contracts in Entity's Own Equity" ("ASC Topic
815-40"). ASC Topic 815-40 clarifies the determination of whether an instrument issued by an entity (or an embedded feature in the instrument) is indexed to an entity's own
stock, which would qualify as a scope exception under ASC Topic 815-10.

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Table of Contents

CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

9. Derivative Financial Instruments (Continued)

Callisto Derivative Instruments

Based upon the Company's analysis of the criteria contained in ASC Topic 815-40 and ASC Topic 815-10,
certain warrants (the "New Warrants") issued in connection with the issuance of the 11% Notes are accounted for as derivative liabilities on the Company's Balance Sheet.

In
accordance with ASC Topic 815-40, the New Warrants were re-measured at each balance sheet date based on estimated fair value, and any resultant changes in fair
value will be recorded as non-cash valuation adjustments within other income (expense) in the Company's statement of operations. The Company estimates the fair value of the New Warrants
using the Black-Scholes option pricing model in order to determine the associated derivative instrument liability described above.

The
Company estimates the fair value of the warrants using the Black-Scholes option pricing model. The assumptions used for the three months ended March 31, 2010 are noted in the
following table:

Three Months Ended
March 31, 2011

Three Months Ended
March 31, 2010Expected warrant term


(*
)

7.55 - 8.01 yearsRisk-free interest rate


(*
)

3.39
%Expected volatility


(*
)

100
%Dividend yield


(*
)

0
%


(*)During
the quarter ended and as of March 31, 2011 Callisto had no warrants outstanding which required liability accounting treatment in accordance
with ASC Topic 815-40.


Expected
volatility is based on historical volatility of the Company's common stock. The New Warrants have a transferability provision and based on guidance provided in SAB 107
for options issued with such a provision, we used the full contractual term as the expected term of the New Warrants. The risk free rate is based on the U.S. Treasury security rates for maturities
consistent with the expected term of the New Warrants.

On
June 30, 2010, the price protection provision included in the New Warrants, which required derivative liability accounting, expired. As a result of the expiration of this
provision, Callisto measured the fair value of the outstanding warrants through June 30, 2010, recognizing any changes in fair value of the derivative in earnings and then reclassified the
derivative instrument liability as of June 30, 2010 into stockholders' equity. Subsequent to June 30, 2010 Callisto has accounted for the New Warrants as components of stockholders'
equity until they were exchanged for common stock during the quarter ended December 31, 2010.

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Table of Contents

CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

9. Derivative Financial Instruments (Continued)

The
following table sets forth the components of changes in the Company's long term derivative financial instruments liability balance for the periods indicated:

Date

Description

New Warrants

Derivative
Instrument
Liability12/31/2009

Balance of derivative financial instruments December 31, 2009


68,883,536

$
11,870,3693/31/2010

Change in fair value of New Warrants during the quarter ended March 31, 2010





17,062,1453/31/2010

Balance of derivative financial instruments March 31, 2010


68,883,536

$
28,932,5146/30/2010

Change in fair value of New Warrants during the quarter ended June 30, 2010





(1,420,784
)6/30/2010

Reclassification of derivative liability to stockholder's equity upon expiration of supplemental condition (price
protection)





(27,511,730
)12/30/2010

New Warrants exchanged for common stock upon conversion of Notes


(68,883,536
)

12/31/2010 and 3/31/11

Balance of derivative financial instruments December 31, 2010 and March 31, 2011




$



Callisto Fair Value Measurements

The unrealized losses on the derivative liabilities are recorded as a change in derivative liabilities in the Company's statement of
operations. A financial instrument's level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. At each reporting period, the
Company performs a detailed analysis of the assets and liabilities that are subject to ASC Topic 820. At each reporting period, all assets and liabilities for which the fair value measurement is based
on significant unobservable inputs or instruments which trade infrequently and therefore have little or no price transparency were classified as Level 3. As of March 31, 2011 and
December 31, 2010 Callisto had no financial instruments or related derivative liabilities requiring fair value measurements.

Synergy Derivative Financial Instruments

Based upon Synergy's analysis of the criteria contained in ASC Topic 815-40, Synergy has determined that the warrants
issued in connection with its registered direct offerings must be recorded as derivative liabilities. In accordance with ASC Topic 815-40, the warrants are also being
re-measured at each balance sheet date based on estimated fair value, and any resultant changes in fair value is being recorded in the Company's statement of operations.

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CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

9. Derivative Financial Instruments (Continued)

Synergy
estimates the fair value of the warrants using the Black-Scholes option pricing model in order to determine the associated derivative instrument liability and change in fair
value described above. Synergy did not have derivative instruments outstanding during the quarter ended March 31, 2010. The
range of assumptions used to determine the fair value of the warrants at the end of and during each period indicated were:

Three Months Ended
March 31, 2011

Three Months Ended
March 31, 2010Estimated fair value of Synergy common stock

$2.43 - $3.13


(*
)Expected warrant term

4,25 - 7.0 years


(*
)Risk-free interest rate

1.80% - 2.9%


(*
)Expected volatility

90%


(*
)Dividend yield




(*
)


(*)No
derivative instruments issued or outstanding during the quarter ended March 31, 2010. See table below


Estimated
fair value of the stock is based on an apportionment of the unit price paid for the shares and warrants issued in Synergy's registered direct offerings, which were deemed to be
arms-length negotiated prices. Expected volatility is based on historical volatility of the Synergy's common stock. The warrants have a transferability provision and based on guidance
provided in SAB 107 for instruments issued with such a provision, Synergy used the full contractual term as the expected term of the warrants. The risk free rate is based on the U.S. Treasury
security rates for maturities consistent with the expected remaining term of the warrants.

The
following table sets forth the components of changes in the Synergy's derivative financial instruments liability balance for the periods indicated:

Date

Description

Warrants

Derivative
Instrument
Liability12/31/2009

Balance of derivative financial instruments liability




$
6/30/2010

Fair value of new warrants issued during the quarter


648,000

$
1,045,2149/30/2010

Fair value of new warrants issued during the quarter


103,703

$
163,9059/30/2010

Change in fair value of warrants during the quarter




$
(110,937
)9/30/2010

Balance of derivative financial instruments liability


751,703

$
1,098,18212/31/2010

Fair value of new warrants issued during the quarter


705,235

$
2,575,62412/31/2010

Change in fair value of warrants during the quarter




$
(185,847
)12/31/2010

Balance of derivative financial instruments liability


1,456,938

$
3,487,9593/31/2011

Fair value of new warrants issued during the quarter


420,000

$
1,312,6733/31/2011

Change in fair value of warrants during the quarter




$
338,7153/31/2011

Balance of derivative financial instruments liability


1,876,938

$
5,139,347


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CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

9. Derivative Financial Instruments (Continued)

Synergy Fair Value Measurements

The following table presents the Company's liabilities that are measured and recognized at fair value on a recurring basis classified
under the appropriate level of the fair value hierarchy as of December 31, 2010 and March 31, 2011:

Description

Quoted
Prices
in Active
Markets
for
Identical
Assets and
Liabilities
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Balance
as of
December 31,
2010

Quoted
Prices
in Active
Markets
for
Identical
Assets and
Liabilities
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Balance
as of
March 31,
2011Derivative liabilities related to Warrants

$


$


$
3,487,959

$
3,487,959

$


$


$
5,139,347

$
5,139,347


The following table sets forth a summary of changes in the fair value of the Company's Level 3 liabilities for the three months ended
March 31, 2011:

Description

Balance at
December 31,
2010

Fair Value of
warrants upon
issuance

Unrealized
(gains) or
losses

Balance as of
March 31,
2011Derivative liabilities related to Warrants

$
3,487,959

$
1,312,673

$
338,715

$
5,139,347


The
unrealized gains or losses on the derivative liabilities are recorded as a change in fair value of derivative liabilities in the Company's statement of operations. A financial
instrument's level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. At each reporting period, the Company reviews the assets
and liabilities that are subject to ASC Topic 815-40. At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs
or instruments which trade infrequently and therefore have little or no price transparency are classified as Level 3.

10. Stockholders' deficit

On March 4, 2011, Synergy closed a financing with a non-U.S. investor which raised gross proceeds of $1,800,000 in a registered direct offering. Synergy issued to the
investor 600,000 shares of its common stock and warrants to purchase 420,000 shares of common stock. The purchase price paid by the investor was $3.00 for each unit. The warrants expire after seven
years and are exercisable at $3.10 per share. Synergy paid fees to a non-US selling agent and legal expenses totaling $185,000 on this offering.

On
February 28, 2011 and March 8, 2011 Callisto entered into consulting agreements with two financial advisors who agreed to receive an aggregate of 850,000 of Callisto
common stock, with a fair value of $533,000, as full compensation for their services, which has been recorded as prepaid expense to be amortized over the term of the agreements.

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Table of Contents

CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

10. Stockholders' deficit (Continued)

On
March 22, 2010, the Company reached an agreement with more than the requisite holders of 70% of the outstanding $603,163 principal amount of 11% Secured Promissory Notes due
April 15, 2010 (the "Notes") to extend the due date of the Notes to April 30, 2011. In exchange for the amendment, the Company agreed to issue to the note holders 15% of the amount of
principal and interest due on the Notes as of March 31, 2010 payable in shares of common stock, or 265,770 shares of common stock. This modification of debt was considered "substantially
different" and was accounted for as a modification of debt. The carrying value of the notes payable before modification in the amount of $647,606 was extinguished and the fair value of the new debt in
the amount $671,103 was recorded. The difference between the carrying value and the fair value in the amount of $23,497 was recorded as interest expense. The fair value of the shares totaled $100,196
which cost was recorded as a loss on extinguishment during the three months ended March 31, 2010 and included in interest and other expense in the statement of operations.

On
October 29, 2010, Callisto entered into a Note and Warrant Exchange Agreement with the holders of its Secured Promissory Notes due April 30, 2011 (the "Notes"), which
were issued in December 2008 along with the related common stock purchase warrants exercisable for 68,883,536 shares of common stock (the "Warrants"), pursuant to which such holders exchanged
the Notes plus accrued interest and the Warrants for an aggregate 72,355,770 shares of common stock.

The
carrying value of the Notes extinguished, including accrued but unpaid interest, was $709,639. In accordance with ASC Topic 405-20 Callisto calculated the difference
between (i) the fair value of the Warrants received plus the carrying value of Notes extinguished and (ii) the fair value of the common stock issued to the note and warrant holders. This
resulted in a loss of $2,099,892 on extinguishment of the debt, which was recorded in the statement of operations during the quarter ended December 31, 2010.

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CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

10. Stockholders' deficit (Continued)

The
following table summarizes the financial impact of the 11% Notes payable and the related interest expense for the period from January 1, 2010 through December 31, 2010:

11% Notes
Payable

Interest
expenseJanuary 1, 2010

$
487,130Accretion of 11% Note discount to interest expense


144,116


144,11611% nominal interest expense quarter ended March 31, 2010


16,360


16,360Loss on extinguishment


23,497


23,497Common shares issued in exchange for modification of notes payable





100,196March 31, 2010

$
671,103

$
284,16911% nominal interest expense quarter ended June 30, 2010


16,542


16,542June 30, 2010

$
687,645

$
300,71111% nominal interest expense quarter ended September 30, 2010


16,723


16,723September 30, 2010

$
704,368

$
317,43411% nominal interest expense through October 29, 2010


5,271


5,271Extinguishment on Notes payable on October 29, 2010


(709,639
)

December 31, 2010 and March 31, 2011

$


$
322,705


11. Subsequent Events

On April 1, 2011 Synergy repaid the First Note principal and interest totaling $511,877 and the Agreement discussed in Note 5 above was terminated.

On
May 2, 2011, Synergy entered into a securities purchase agreement with certain investors to raise gross proceeds of $1,300,002 in a registered direct offering. The Company
issued to the investors 433,334 shares of its common stock and warrants to purchase 433,334 shares of common stock. The purchase price paid by the investors was $3.00 for each unit. The warrants
expire after seven years and are exercisable at $3.25 per share. Based upon the Company's analysis of the criteria contained in ASC Topic 815-40, Synergy has determined that the
warrants issued in connection with this registered direct offering must be recorded as derivative liabilities with a charge to additional paid in capital.

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Table of Contents

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our condensed consolidated financial statements and other financial
information appearing elsewhere in this quarterly report. In addition to historical information, the following discussion and other parts of this quarterly report contain forward-looking statements.
You can identify these statements by forward-looking words such as "may," "will," "expect," "intend," "anticipate," believe," "estimate" and "continue" or similar words. Forward-looking statements
include information concerning possible or assumed future business success or financial results. You should read statements that contain these words carefully because they discuss future expectations
and plans, which contain projections of future results of operations or financial condition or state other forward-looking information. We believe that it is important to communicate future
expectations to investors. However, there may be events in the future that we are not able to accurately predict or control. Accordingly, we do not undertake any obligation to update any
forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

The
forward-looking statements included herein are based on current expectations that involve a number of risks and uncertainties set forth under "Risk Factors" in our Annual Report on
Form 10-K for the year ended December 31, 2010 and other periodic reports filed with the SEC. Accordingly, to the extent that this Report contains forward-looking statements
regarding the financial condition, operating results, business prospects or any other aspect of the Company, please be advised that Callisto's actual financial condition, operating results and
business performance may differ materially from that projected or estimated by the Company in forward-looking statements. All drug candidates to treat GI disorders and diseases, currently plecanatide
and SP-333, are being developed exclusively by Synergy Pharmaceuticals, Inc., our controlled subsidiary ("Synergy"). Use of the terms "we", "our" or "us" in connection with GI drug
candidates discussed herein refer to research and development activities and plans of Synergy.

BUSINESS OVERVIEW

Callisto Pharmaceuticals, Inc. (which may be referred to as "Callisto", "the Company", "we" or "us") was incorporated under the
laws of the State of Delaware in May 2003. We operate through two subsidiary companies: Synergy Pharmaceuticals Inc. and Callisto Research Labs, LLC, and we own two inactive
subsidiaries, IgX, Ltd (Ireland) and Callisto Pharma, GmbH (Germany). Our principle corporate headquarters totals approximately 5,500 square feet, in two suites 1609 and 1701, located at
420 Lexington Avenue, New York, NY.

We
are a development stage biopharmaceutical company focused primarily on the development of drugs to treat gastrointestinal ("GI") disorders and diseases and rheumatoid arthritis
("RA"). Our lead drug candidates are as follows:



Callisto's
product development efforts are thus in their early stages and Callisto cannot make estimates of the costs or the time they will take to complete. The risk of not completing
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

30

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Table of Contents

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.

RECENT DEVELOPMENTS

On May 2, 2011, we entered into a securities purchase agreement with certain investors to raise gross proceeds of $1,300,002 in
a registered direct offering. We issued to the investors 433,334 shares of our common stock and warrants to purchase 433,334 shares of common stock. The purchase price paid by the investors was $3.00
for each unit. The warrants expire after seven years and are exercisable at $3.25 per share.

On
March 4, 2011, we closed a financing with a non-U.S. investor which raised gross proceeds of $1,800,000 in a registered direct offering. Synergy issued to the
investor 600,000 shares of our common stock and warrants to purchase 420,000 shares of common stock. The purchase price paid by the investor was $3.00 for each unit. The warrants expire after seven
years and are exercisable at $3.10 per share. We paid fees to a non-US selling agent and legal expenses totaling $175,000 on this offering.

FINANCIAL OPERATIONS OVERVIEW

From inception through March 31, 2011, we have sustained cumulative net losses attributable to common stockholders of
$137,334,635. Our losses have resulted primarily from expenditures incurred in connection with research and development activities related to the 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, as well as deemed dividends attributable to the beneficial conversion rights of convertible preferred stock at issuance. From inception through
March 31, 2011, we have not generated any revenue from operations, expect to incur additional losses to perform further research and development activities and do not currently have any
commercial biopharmaceutical products, and do not expect to have such for several years, if at all.

Net
cash used in operating activities was $2,938,541 during the three months ended March 31, 2011 as compared to $3,254,156 for the three months ended March 31, 2010 and
$73,172,695 during the period from June 5, 1996 (inception) to March 31, 2011. During the three months ended March 31, 2011 and 2010 Callisto incurred net losses attributable to
common stockholders of $1,761,367 and $18,165,173, respectively and $137,334,635 during the period from June 5, 1996 (inception) to March 31, 2011. To date, Callisto's sources of cash
have been primarily limited to the sale of equity securities and issuance of debt instruments. Net cash provided by financing activities for the three months ended March 31, 2011 and 2010 and
for the period from June 5, 1996 (inception) to March 31, 2011, was $2,168,334, $0, and $74,201,753, respectively.

Callisto
will be required to raise additional capital within this year to complete the development and commercialization of current product candidates and to continue to fund operations
at the current cash expenditure levels. Callisto cannot be certain that additional funding will be available on acceptable terms, or at all. To the extent that Callisto raises 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
business. If Callisto is unable to raise additional capital when required or on acceptable terms, Callisto may have to (i) significantly delay, scale back or discontinue the development and/or
commercialization of one or more product candidates; (ii) 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; or (iii) relinquish or otherwise dispose of rights to technologies, product candidates or products that Callisto would otherwise seek to develop or
commercialize ourselves on unfavorable terms.

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OFF-BALANCE SHEET ARRANGEMENTS

We had no off-balance sheet arrangements as of March 31, 2011.

RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2011 AND MARCH 31, 2010

We had no revenues during the three months ended March 31, 2011 and 2010 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 $176,518 or 15% to $1,371,928 for the three months ended March 31, 2011 from $1,195,410 for the three months ended March 31,
2010. This increase in research and development expenses was entirely attributable to continuing the development of our plecanatide product candidate. These expenses included (i) program
expenses including animal studies, analytical testing, clinical data monitoring and patient costs of approximately $1,061,000, as compared to $896,000 during the three months ended March 31,
2010, (ii) in-house staff salaries and wages, stock based compensation and employee benefits of approximately $253,000, as compared to $215,000 during the three months ended
March 31, 2010 as we hired additional product development personnel, partially offset by (iii) lower scientific and regulatory advisory fees and expenses of approximately $56,000, as
compared to $79,000 during the three months ended March 31, 2010.

General
and administrative expenses for the three months ended March 31, 2011 increased $526,057 or 37%, to $1,959,844 for the three months ended March 31, 2011 from
$1,433,787 for the three months ended March 31, 2010. These expenses primarily include (i) higher facilities cost of approximately $226,000 as compared to $190,000 during the three
months ended March 31, 2010, (ii) higher consultants and financial advisors fees of approximately $1,269,000, as compared to $282,000 during the three months ended March 31, 2010,
partially offset by (iii) salaries and wages, stock based compensation and related employee benefits of approximately $172,000, as compared to $452,000 during the three months ended
March 31, 2010 (iv) accounting, corporate legal and tax services of approximately $247,000, as compared to $454,000.

Net
loss attributable to common stockholders for the three months ended March 31, 2011 decreased $16,403,806 to $1,761,367 compared to a net loss of $18,165,173 incurred for the
three months ended March 31, 2010. The increased net loss is the result of higher research and development, and general and administrative expenses discussed above, plus the following
non-operating expenses for the periods indicated.

Quarter Ended
03/31/2011

Quarter Ended
03/31/2010

Change ($)Loss from Operations

$
(3,331,772
)
$
(2,629,197
)
$
(702,575
)Interest and dividend income


51


16,475


(16,424
)State tax credit





628,806


(628,806
)Interest expense and other expenses


(12,414
)

(284,169
)

271,755Change in FV of financial instruments


(338,715
)

(17,062,145
)

16,723,430Net loss attributable to noncontrolling interest


1,921,483


1,165,057


756,426Net loss attributable to common stockholders

$
(1,761,367
)
$
(18,165,173
)
$
16,403,806


LIQUIDITY AND CAPITAL RESOURCES

As of March 31, 2011 we had $938,775 in cash and cash equivalents, compared to $1,708,982 as of December 31, 2010. Net
cash used in operating activities was $2,938,541 during the three months ended March 31, 2011 as compared to $3,254,156 for the three months ended March 31, 2010.To date our

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sources
of cash have been primarily limited to the sale of equity securities. Net cash provided by financing activities for the three months ended March 31, 2011 and 2010 and for the period
from June 5, 1996 (inception) to March 31, 2011, was $2,168,334, $0, and $74,201,753, respectively.

As
of March 31, 2011, we had a negative working capital of $4,823,730, as compared to a negative working capital of $3,806,899 on December 31, 2010.

On
February 8, 2011, Synergy entered into a loan agreement (the "Agreement") with an investor (the "Lender"), pursuant to which the Lender agreed to lend an aggregate $950,000 to
us. Simultaneously with the execution and delivery of the Agreement, we issued a note to the Lender in the principal amount of $500,000 (the "First Note") which was payable on April 1, 2011 and
accrued interest at 17% per annum. The First Note principal and interest totaling $511,877 was paid when due on April 1, 2011.

On
March 4, 2011, Synergy closed a financing with a non-U.S. investor which raised gross proceeds of $1,800,000 less a total of $185,000 for offering expenses in
connection with this registered direct offering. We issued to the investor 600,000 shares of Synergy common stock and warrants to purchase 420,000 shares of Synergy common stock. The purchase price
paid by the investor was $3.00 for each unit. The warrants expire after seven years and are exercisable at $3.10 per share.

On
May 2, 2011, Synergy entered into a securities purchase agreement with certain investors to raise gross proceeds of $1,300,002 in a registered direct offering. Synergy issued
to the investors 433,334 shares of Synergy common stock and warrants to purchase 433,334 shares of Synergy common stock.
The purchase price paid by the investors was $3.00 for each unit. The warrants expire after seven years and are exercisable at $3.25 per share.

Worldwide
economic conditions and the international equity and credit markets have significantly deteriorated and may remain depressed for the foreseeable future. These developments make
it more difficult for us to obtain additional equity or credit financing, when needed.

Our
working capital requirements will depend upon numerous factors including but not limited to the nature, cost and timing of pharmaceutical research and development programs. We will
be required to raise additional capital within the next twelve months to complete the development and commercialization of current product candidates, to fund the existing working capital deficit and
to continue to fund operations at our current cash expenditure levels. To date, our sources of cash have been primarily limited to the sale of 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 business. If we are unable to raise additional capital when required or on acceptable terms, we may have
to (i) significantly delay, scale back or discontinue the development and/or commercialization of one or more of product candidates; (ii) 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; or (iii) 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
consolidated financial statements as of March 31, 2011 and December 31, 2010 have been prepared under the assumption that we will continue as a going concern for the
twelve months ending December 31, 2011. Our independent registered public accounting firm has issued a report dated March 31, 2011 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

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efficiencies
and, ultimately, to generate revenue. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

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 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA of our Annual Report on Form 10-K as of and for year ended December 31, 2010,
filed with the SEC on March 31, 2011. There have been no changes to our critical accounting policies since December 31, 2010.

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk on the fair values of certain assets is related to credit risk associated with securities held in short
term investment accounts, commercial paper included in short term money market accounts and the FDIC insurance limit on our bank balances. At March 31, 2011 we had no balances in money market
balances that was exposed to market risk.

ITEM 4.    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 March 31,
2011, our Chief Executive Officer and Principal Financial Officer have concluded that as of March 31, 2011, 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.

In
connection with the preparation of our annual financial statements, our management performed an assessment of the effectiveness of internal control over financial reporting as of
December 31, 2010. Management's assessment included an evaluation of the design of our internal control over financial reporting and the operational effectiveness of those controls. Based on
this evaluation, management determined that, as of December 31, 2010, there were material weaknesses in our internal control over financial reporting. The material weaknesses identified during
management's assessment were (i) an effective whistle-blower program or other comparable mechanism and (ii) an ongoing program to manage identified fraud risks. As of December 31,
2010, we did not maintain effective internal control over financial reporting. As defined by Regulation S-X, Rule 1-02(a)(4), a material weakness is a deficiency
or a combination of deficiencies, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected.

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.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

As of March 31, 2011, we are in the process of remediating the material weakness which existed at December 31, 2010. If
these remedial measures are insufficient to address any of the identified material weaknesses or are not implemented effectively, or additional deficiencies arise in the future, material misstatements
in our interim or annual financial statements may occur in the future.

There
were no changes in our internal controls over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that could significantly affect internal
controls over financial reporting during the quarter ended March 31, 2011.

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PART IIOTHER INFORMATION

ITEM 6.    EXHIBITS

31.1

Certification of Chief Executive Officer required under Rule 13a-14(a)/15d-14(a) under the Exchange Act.31.2

Certification of Principal Financial Officer required under Rule 13a-14(a)/15d-14(a) under the Exchange Act.32.1

Certification of Chief Executive Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2

Certification of Principal Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


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SIGNATURES

Pursuant to the requirements 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.(Registrant)Date: May 16, 2011

By:

/s/ GARY S. JACOB Gary S. Jacob Chief Executive OfficerDate: May 16, 2011

By:

/s/ BERNARD F. DENOYER Bernard F. Denoyer Senior Vice President, Finance


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