**UNITED
STATES**


**SECURITIES
AND EXCHANGE COMMISSION**


WASHINGTON,
DC 20549





**FORM
10-Q**





(Mark
One)


**x QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES**


**EXCHANGE
ACT OF 1934**


**FOR
THE QUARTERLY PERIOD ENDED: JUNE 30, 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 of****
    
    (I.R.S.
      Employer Identification No.)Incorporation
      or Organization)










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 twelve 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.





x
    oYes
    No





Indicate
by check mark whether the registrant is an accelerated filer (as  defined
in Rule 12b-2 of the Exchange Act).






o
    xYes
    No




As of
August 8, 2005 the issuer had 31,238,893 shares of common stock outstanding.









**CALLISTO
PHARMACEUTICALS, INC.**


(A
DEVELOPMENT STAGE COMPANY)





**FORM
10-Q**





**CONTENTS**





**PART
I – FINANCIAL INFORMATION**






PageItem
      1.
    Condensed
      Consolidated Financial StatementsCondensed Consolidated Balance Sheets
    1as of June 30, 2005 (unaudited) and December 31,
      2004Condensed Consolidated Statements of
      Operations
    2for the Three and Six Months Ended June 30,
      2005 and 2004 (unaudited)and the period June 5, 1996 (Inception) to
      June 30, 2005 (unaudited)Condensed Consolidated Statements of Changes in
      Stockholders' Equity
    3for the period June 5, 1996 (Inception) to June 30, 2005
      (unaudited)Condensed Consolidated Statements of Cash Flows
    6for the Six Months Ended June 30, 2005 and 2004
      (unaudited)and for the period June 5, 1996 (Inception) to June 30,
      2005 (unaudited)Notes to Condensed Consolidated Financial Statements
      (unaudited)
    7Item
      2.
    Management's Discussion and Analysis of Financial
      Condition
    10and Results of OperationsItem
      4.
    Controls and Procedures
    17PART
      II – OTHER INFORMATIONItem
      5.
    Exhibits
    18Signatures





i




**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/A for the year ended December 31, 2004 and
other periodic reports filed with the SEC. Accordingly, to the extent that this
Report contains forward-looking statements regarding the acquisitions, financial
condition, operating results, business prospects or any other aspect of the
Company, please be advised that the Company's actual financial condition,
operating results and business performance may differ materially from that
projected or estimated by the Company in forward-looking statements.




ii





**PART
I – FINANCIAL INFORMATION**





**ITEM
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**





**CALLISTO PHARMACEUTICALS, INC.**


(A
DEVELOPMENT STAGE COMPANY)





**CONDENSED
CONSOLIDATED BALANCE SHEETS**






June
      30,
      2005
    
    December
      31,
      2004ASSETS
    
    (UNAUDITED)Current
      assets:Cash
      and cash equivalents
    
    $
    3,278,765
    
    $
    5,323,384Marketable
      investments
    
    
    991,790
    
    
    —Prepaid
      expenses
    
    
    136,317
    
    
    45,2314,406,872
    
    
    5,368,615Property
      and equipment - net
    
    
    8,712
    
    
    18,856Rent
      deposits
    
    
    82,196
    
    
    82,196$
    4,497,780
    
    $
    5,469,667LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable
    
    $
    1,475,069
    
    $
    984,486Accrued
      expenses
    
    
    215,799
    
    
    235,8031,690,868
    
    
    1,220,289Stockholders'
      equity:Common
      stock, par value $.0001, 75,000,000 shares authorized,
      31,228,893and
      29,219,102 outstanding at June 30, 2005 and December 31,
    2004,respectively
    
    
    3,123
    
    
    2,922Additional
      paid-in capital
    
    
    42,907,120
    
    
    39,910,187Unamortized
      deferred stock based compensation
    
    
    (1,537,326
    )
    
    (2,302,534
    )Deficit
      accumulated during development stage
    
    
    (38,566,005
    )
    
    (33,361,197
    )2,806,912
    
    
    4,249,378$
    4,497,780
    
    $
    5,469,667






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





1





**CALLISTO
PHARMACEUTICALS, INC.**
 (A
DEVELOPMENT STAGE COMPANY)





**CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS**


(UNAUDITED)






**Three
      Months Ended June 30,**
    ****
    **Six
      Months Ended June 30,**
    ****
    **June
      5, 1996**
      **(Inception)
      to**
    ********
    **2005**
    ****
    **2004**
    ****
    **2005**
    ****
    **2004**
    ****
    **June
      30, 2005**Revenues
    
    $
    —
    
    $
    —
    
    $
    —
    
    $
    —
    
    $
    —Costs
      and expenses:Research
      and development
    
    
    1,513,737
    
    
    324,363
    
    
    3,020,442
    
    
    925,652
    
    
    10,740,190Government
      grant
    
    
    —
    
    
    (47,962
    )
    
    —
    
    
    (100,220
    )
    
    (265,697
    )Purchased
      in processresearch
      and development
    
    
    —
    
    
    —
    
    
    —
    
    
    209,735
    
    
    6,944,553Stock
      based compensation -research
      and development
    
    
    69,063
    
    
    881,371
    
    
    138,126
    
    
    1,066,892
    
    
    2,080,901General
      and administrative
    
    
    779,021
    
    
    555,893
    
    
    1,473,297
    
    
    1,074,233
    
    
    10,085,543Stock
      based compensation -general
      and administrative
    
    
    287,136
    
    
    220,847
    
    
    630,814
    
    
    598,702
    
    
    10,039,311Loss
      from operations
    
    
    (2,648,957
    )
    
    (1,934,512
    )
    
    (5,262,679
    )
    
    (3,774,994
    )
    
    (39,624,801
    )Interest
      and investment income
    
    
    38,280
    
    
    24,715
    
    
    57,871
    
    
    37,284
    
    
    607,552Other
      income
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    451,244Net
      loss
    
    $
    (2,610,677
    )
    $
    (1,909,797
    )
    $
    (5,204,808
    )
    $
    (3,737,710
    )
    $
    (38,566,005
    )Weighted
      average shares outstanding:basic
      and diluted
    
    
    31,228,893
    
    
    28,749,608
    
    
    30,490,517
    
    
    27,767,221
    
    
    —Net
      loss per common share:basic
      and diluted
    
    $
    (0.08
    )
    $
    (0.07
    )
    $
    (0.17
    )
    $
    (0.13
    )
    
    —






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





2





**CALLISTO
PHARMACEUTICALS, INC.**


(A
DEVELOPMENT STAGE COMPANY)





**CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY**






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 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 condensed consolidated
financial statements





3





**CALLISTO
PHARMACEUTICALS, INC.**


(A DEVELOPMENT STAGE COMPANY)





**CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(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 basedCompensation
    
    
    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.




4




**CALLISTO
PHARMACEUTICALS, INC.**


(A
DEVELOPMENT STAGE COMPANY)




**CONDENSED
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (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 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
    )
    
    2,854,828Net
      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
    )
    
    4,249,378Net
      loss for the period
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (5,204,808
    )
    
    (5,204,808
    )Amortization
      of deferredStock-based
      compensation expense
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    765,208
    
    
    —
    
    
    765,208Variable
      accounting forstock
      options
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (112,941
    )
    
    —
    
    
    —
    
    
    (112,941
    )Stock-based
      compensation netof
      forfeitures
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    80,193
    
    
    —
    
    
    —
    
    
    80,193Common
      stock issued viaprivate
      placement, net
    
    
    —
    
    
    —
    
    
    1,985,791
    
    
    199
    
    
    2,993,203
    
    
    —
    
    
    —
    
    
    2,993,402Common
      stock issued for services
    
    
    —
    
    
    —
    
    
    24,000
    
    
    2
    
    
    36,478
    
    
    —
    
    
    —
    
    
    36,480Balance,
      June 30, 2005
    
    
    —
    
    $
    —
    
    
    31,228,893
    
    $
    3,123
    
    $
    42,907,120
    
    
    ($1,537,326
    )
    
    ($38,566,005
    )
    $
    2,806,812







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




5




**CALLISTO
PHARMACEUTICALS, INC.**


(A
DEVELOPMENT STAGE COMPANY)





**CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**


(UNAUDITED)






Six
      months ended June 30,
    
    Period
      from
      June
      5, 1996
      (inception)
      to2005
    
    2004
    
    June
      30, 2005Cash
      flows from operating activities:Net
      loss
    
    $
    (5,204,808
    )
    $
    (3,737,710
    )
    $
    (38,566,005
    )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
    
    
    10,144
    
    
    13,816
    
    
    75,925Stock
      based compensation expense
    
    
    768,940
    
    
    1,665,594
    
    
    12,120,212Purchased
      in-process research and development (non-cash
    portion)
    
    
    —
    
    
    106,235
    
    
    6,841,053Amortization
      of purchase discount on marketable investments
    
    
    (1,373
    )
    
    —
    
    
    (1,373
    )Changes
      in operating assets and liabilities:Prepaid
      expenses
    
    
    (91,086
    )
    
    (49,122
    )
    
    (136,317
    )Security
      deposit
    
    
    —
    
    
    —
    
    
    (82,196
    )Accounts
      payable and accrued expenses
    
    
    470,579
    
    
    (784,890
    )
    
    1,450,940Total
      adjustments
    
    
    1,157,202
    
    
    951,633
    
    
    20,268,244Net
      cash used in operating activities
    
    
    (4,047,604
    )
    
    (2,786,077
    )
    
    (18,297,761
    )Cash
      flows from investing activities:Acquisition
      of equipment
    
    
    —
    
    
    —
    
    
    (84,637
    )Purchase of marketable investments
    
    
    (990,417
    )
    
    —
    
    
    (990,417
    )Net
      cash used in investing activities
    
    
    (990,417
    )
    
    —
    
    
    (1,075,054
    )Cash
      flows from financing activities:Net
      proceeds from issuance of common andpreferred stock, net of
      repurchases
    
    
    2,993,402
    
    
    6,099,012
    
    
    22,651,580Net
      cash provided by financing activities
    
    
    2,993,402
    
    
    6,099,012
    
    
    22,651,580Net
      (decrease)increase in cash and cash equivalents
    
    
    (2,044,619
    )
    
    3,312,935
    
    
    3,278,765Cash
      and cash equivalents at beginning of period
    
    
    5,323,384
    
    
    3,956,486
    
    
    —Cash
      and cash equivalents at end of period
    
    $
    3,278,765
    
    $
    7,269,421
    
    $
    3,278,765Supplementary
      disclosure of cash flow information:Cash
      paid for taxes
    
    $
    36,443
    
    $
    2921
    
    $
    99,405






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




6




**CALLISTO
PHARMACEUTICALS, INC.**
 (A
DEVELOPMENT STAGE COMPANY)





**NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


(UNAUDITED)





1.
Summary of significant accounting policies





**BASIS
OF PRESENTATION:**





The
accompanying unaudited condensed consolidated financial statements of Callisto
Pharmaceuticals, Inc. ("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 (i) accounting principles
generally accepted in the United States of America ("GAAP") for interim
financial information and (ii) the rules of the Securities and Exchange
Commission (the "SEC") for quarterly reports on Form 10-Q. The results of
operations of Synergy are included in the consolidated statement of operations
since May 1, 2003 in the period from June 5, 1996 (inception) to June 30, 2005.
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, 2004, included in
Form 10-K/A filed with the SEC on June 6, 2005. 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 six months ended June 30, 2005 are
not necessarily indicative of the results of operations to be expected for the
full year ending December 31, 2005.








**CASH,
CASH EQUIVALENTS AND MARKETABLE INVESTMENTS**





Callisto
considers all highly liquid debt instruments, including treasury bills,
purchased with original maturities of three months or less to be cash
equivalents





Marketable
investments consisted of available-for-sale debt investments that are reported
at fair market value. As of June 30, 2005 approximately $991,790 was held in a
US Treasury bill that had a maturity date of October 9, 2005. All
treasury bills are purchased at a discount to face value, which discount is
amortized until maturity, in accordance with Statement of Financial Accounting
Standard (“SFAS”) No. 115 “Accounting for Debt and Equity Securities”. The
amortization of purchase discount of $1,373 on this investment was recorded
as interest income in Callisto's results of operations for the six
months ended June 30, 2005.





2.
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 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 plan.





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 (see below) about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results.




7





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






Three
      Months Ended June 30,
    
    Six
      Months Ended June 30,2005
    
    2004
    
    2005
    
    2004Net
      loss, as reported
    
    $
    (2,610,676
    )
    $
    (1,909,797
    )
    $
    (5,204,808
    )
    $
    (3,737,710
    )Add:
      Stock-based employee compensation expenserecorded under APB No. 25 intrinsic value method
    
    
    330,404
    
    
    1,020,679
    
    
    652,268
    
    
    1,334,442Deduct:
      Stock-based employee compensationexpense
      determined under fair value method
    
    
    (600,125
    )
    
    (1,557,530
    )
    
    (1,185,403
    )
    
    (2,041,916
    )Pro
      forma net loss
    
    $
    (2,880,397
    )
    $
    (2,446,648
    )
    $
    (5,737,943
    )
    $
    (4,445,184
    )Net
      loss per share:Basic
      and diluted -as reported
    
    $
    (0.08
    )
    $
    (0.07
    )
    $
    (0.17
    )
    
    ($0.13
    )Basic
      and diluted -pro forma
    
    $
    (0.09
    )
    $
    (0.09
    )
    $
    (0.19
    )
    
    ($0.16
    )Black-Scholes
      Methodology Assumptions:Dividend
      yield
    
    
    0
    %
    
    0
    %
    
    0
    %
    
    0
    %Risk
      free interest rate
    
    
    4.25
    %
    
    4.0
    %
    
    4.25
    %
    
    2.87%
      to 4.0
    %Expected
      lives of options
    
    
    7
      to 10 years
    
    
    7
      to 10 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. Since June 13, 2003 through June 30, 2005 Callisto has used 100%
volatility to determine Fair Value of options granted to employees.





3. 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
June 30, 2005 and December 31, 2004 there were 7,875,710 and 7,322,060 total
options outstanding, respectively. As of June 30, 2005 and December 31, 2004
there were 758,995 warrants outstanding.





4.
Government Grants





On April
1, 2005 Callisto received 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 the
next two years. Work on the NIAID superantigen grant started in early July
2005.





During
2004 Callisto had a research grant from the National Institutes of Health (NIH)
for studies on Atiprimod. This amount totaled $100,220 during the six months
ended June 30, 2004 and has been reported on our Condensed Consolidated
Statements of Operations as a separate line item entitled "Government Grant".
The work under the NIH grant was completed in the fourth quarter of 2004 and
Callisto received no further funding during the six months ended June 30, 2005.
Callisto requests cash funding under approved grants only as expenses are
incurred.





5.
Stockholders' equity:





On March
9, 2005 Callisto 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 $3,018,402 and net proceeds of $2,993,402. 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
25, 2005 Callisto filed a Preliminary Proxy Statement with the SEC and announced
a proposal 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 at Callisto's 2005 Annual Meeting of Shareholders which is
scheduled for October 20, 2005.




8





6.
Commitments and Contingencies.





Employment
and consulting agreements:





On
January 10, 2005 Gabriele M. Cerrone, Callisto's Chairman of the Board (the
"Consultant") began his duties under a consulting agreement (the "Agreement")
with Callisto, which had been entered into on December 27, 2004. The duties of
the Consultant and the obligations of Callisto to pay compensation commenced on
January 10, 2005 (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,
Consultant was granted 375,000 ten year non-qualified stock options at an
exercise price of $1.70 per share. One half of such options vest on each of the
first two anniversaries of the date of the Agreement. Stock-based compensation
expense associated with these option grants was recorded based on an initial
Black-Scholes Fair Value of $1.52 per share for the portion earned for services
rendered to date and will be marked to market quarterly with an adjustment to
compensation expense from January 10, 2005 until the measurement date is known.
The measurement date in this case will be the earlier of the second anniversary
of the agreement or the accelerated vesting date if Mr. Cerrone is terminated
without cause or good reason.





On March
28, 2005 Callisto entered into an employment agreement with Dr. Pamela Harris to
serve as Callisto's Chief Medical Officer. Pursuant to the Employment Agreement,
Callisto will employ Dr. Harris for a period of one year commencing March 28,
2005 which will be automatically renewed for successive one year periods until
written notice not to renew is delivered by either Callisto or Dr. Harris. Dr.
Harris will be paid an annual base salary of $220,000 ("Base Salary"). In
addition, Dr. Harris will be eligible to earn an annual cash bonus of up to
$20,000 based on meeting performance objectives and bonus criteria.





Dr.
Harris was granted an aggregate 200,000 incentive stock options pursuant to
Callisto's stock option plan with an exercise price of $1.54 per share. 100,000
of such options will vest pursuant to the following schedule: 30,000 options
will vest on March 28, 2006; 30,000 options will vest on March 28, 2007; and
40,000 options will vest on March 28, 2008. The remaining 100,000 options will
vest pursuant to the following schedule: 30,000 options will vest upon the
successful completion of a Phase IIb clinical trial for Atiprimod or a
comparable clinical trial involving another Callisto drug candidate, other than
Atiprimod or Annamycin; 30,000 options will vest upon the successful completion
of a Phase IIb clinical trial for Annamycin; and 40,000 options will vest upon
the successful completion of a Phase III clinical trial for Annamycin





On June
9, 2005, Callisto entered into Extension and Severance Compensation Agreements
(the “Agreements”) with each of Gary S. Jacob, Callisto’s Chief Executive
Officer and Donald H. Picker, Callisto’s Executive Vice President, R&D
(collectively, the “Executives”). The Agreements extend the term of the
employment agreement for each of the Executives to June 13, 2007.





Each of
the Agreements provide that in the event there is a change of control of
Callisto and the Executive’s employment by Callisto shall have been terminated
within two years after a change in control by him for good reason or by Callisto
and such termination did not occur as a result of (i) the Executive’s death,
(ii) the Executive’s disability, (iii) the Executive’s retirement or (iv) the
Executive’s termination for cause, the Executive shall be entitled to an amount
equal to the compensation due to the Executive for the Employment Term under the
Executive’s Employment Agreement for the time remaining of such Employment Term.
In addition, all of the Executive’s unvested stock options shall immediately and
irrevocably 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.








7.
Subsequent events:





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
twelve months 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 the Company
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 exercise price of $1.03 was determined by calculating the
average of the closing sales price of Callisto’s Common Stock on the American
Stock Exchange over the 15 trading days preceding the date of the Agreement. The
Warrants issued to Trilogy are exercisable upon issuance and expire on July 18,
2008. Callisto has agreed to file by August 30, 2005 a registration statement
with the Securities and Exchange Commission registering for resale the shares of
Common Stock underlying the Warrants. The Fair Value of the Warrants using the
Black-Scholes methodology is approximately $1,679,000 which will be recorded as
stock-based compensation expense over the term of the Agreement starting in the
quarter ended September 30, 2005.




9





**ITEM 2. MANAGEMENT'SDISCUSSION AND ANALYSIS AND RESULTS OF
OPERATIONS**





The
following discussion should be read in conjunction with our 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 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 June 30, 2005, we have sustained cumulative net losses of
$38,566,005. 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 June 30, 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 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 net
proceeds of $2,993,402. The financing was led by certain current institutional
shareholders and included certain members of our management. 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") 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 twelve months is to focus primarily on the
development of two drugs to treat leukemia and multiple myeloma (an incurable
blood cancer that invades and proliferates in bone marrow). Our lead drug in
development for leukemia, Annamycin, earlier completed a Phase I/IIa trial in
refractory leukemia patients. We plan to initiate clinical trials in relapsed
(failure of prior therapy) leukemia patients in the third quarter of 2005. Our
second drug candidate, Atiprimod, is presently in a Phase I/IIa clinical trial
in multiple myeloma patients, and is an orally available drug with
antiproliferative and antiangiogenic activity. We also have three drugs in
preclinical development, WP760, for melanoma, SP304 for gastrointestinal
inflammation, and a monoclonal antibody that is being explored as a biodefensive
agent against staphylococcal and streptococcal bioweapons.




10





**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 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
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 five
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.





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/refractory acute myeloid leukemia, or AML and acute lymphocytic
leukemia, or ALL. The Phase I trial of Annamycin performed in
relapsed/refractory acute leukemia patients by a prior sponsor has recently been
subjected to a careful audit by us of efficacy and safety data. Based on this
review, we have decided that the next trial with Annamycin in adult ALL patients
planned to begin in the third quarter of 2005 will include an initial evaluation
of a small number of patients in a Phase I/IIa trial that will be rolled into a
larger Phase IIb trial. We also expect to commence two additional trials with
Annamycin in the second half of 2005, a single agent trial of liposomal
Annamycin in pediatric relapsed ALL patients, and a combination trial of
Annamycin in combination with Ara-C in adult relapsed AML patients.





**ATIPRIMOD**





On August
28, 2002, 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 of these annual maintenance
fee payments under this agreement was made on January 22, 2004. 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 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, NY. The
clinical trial is an open label study, with the primary objective of assessing
the safety of the 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
drug to better determine the mechanism of drug action. The duration of this
clinical study depends on the enrollment rate, how well the drug is tolerated,
and on drug response, with final results not anticipated until the end of 2005.
If Atiprimod produces positive responses, we intend to initiate a Phase IIb
trial in relapsed multiple myeloma patients in 2006.





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 (MTD) 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 hematologic malignancies. The
trial protocol received institutional review board (IRB) approval on February
22, 2005 at The University of Texas M.D. Anderson Cancer Center with Dr. Razelle
Kurzrock as the Principal Investigator. Site initiation was completed on March
3, 2005, and patient screening and dosing began in April, 2005. The duration of
this study will depend on the enrollment rate, how well the drug is tolerated
and on drug response.





**SITE
DIRECTED INTERCALATION TECHNOLOGY**





On
February 24, 2004, we entered into an agreement with Houston Pharmaceuticals,
Inc., or HPI, to sublicense the rights to a key patent covering a technology
platform for site-directed DNA intercalation, or a compound's ability to insert
between the base pairs in DNA, and we acquired the rights to a patent covering
new anthracycline analogs. We 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 six months ended June 30, 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.




11




In
addition, we granted to HPI 1,170,000 performance based stock options,
exercisable at $3.50 per share, which vest upon the achievement of certain
milestones. If the milestones are achieved, we will record additional purchased
in-process research and development expense based upon the fair value of the
options at that time. We 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 our Board of
Directors determines to abandon its development and commercialization of the
site-directed DNA intercalation, HPI shall have the right to terminate the
sublicense agreement. The technology platform for site-directed DNA
intercalation is exemplified by the identification of a lead drug candidate,
WP760, for melanoma that shows remarkable selectivity for human melanoma cancer
cell lines. We are presently evaluating this drug pre-clinically in animal
models of human melanoma, and based on these results plan to make a decision on
further development of WP760.





**GUANYLYL
CYCLASE RECEPTOR AGONIST TECHNOLOGY**





Our GCRA
program has resulted in the development of SP304, a biologically functional
analog that has demonstrated superior biological activity, enhanced temperature
and protease stability and superior pH characteristics relative to human
uroguanylin. SP304 is currently undergoing pre-clinical evaluation as a
treatment for GI inflammation in a collaborative study involving clinical
gastroenterologist Dr. Scott Plevy of the University of Pittsburgh. Based on
these animal studies, we plan to make a decision on moving this drug forward
into the clinic.





**SUPERANTIGEN-BASED
BIOTERORRISM DEFENSE**





On July
25, 2001, 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 will 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 sub licensees. The agreement will
terminate on July 25, 2021. 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 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 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.





**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 II trials. Currently, Antibioticos S.p.A. is our
sole supplier of liposomal Annamycin for our clinical trials. Our agreement with
Antibioticos provides that they will provide 400 grams of GMP drug substance for
our 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
Annamycin, entail higher costs, and could result in our being unable to
commercialize Annamycin successfully.





We have
entered into a contract with Delmar Chemicals, Inc. to be the commercial
supplier of future Atiprimod GMP drug substance. 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.





**EMPLOYEES**





Our plan
is to use contract research organizations (CROs) for most of our development
efforts, including monitoring of clinical trial results, thus minimizing the
need to hire full time employees. As of July 22, 2005, we had 7 full-time and 2
part-time employees.




12




**OFF-BALANCE
SHEET ARRANGEMENTS**





We had no
off-balance sheet arrangements as of June 30, 2005.





**RESULTS
OF OPERATIONS**





**THREE
MONTHS ENDED JUNE 30, 2005 AND JUNE 30, 2004**





We had no
revenues during the three months ended June 30, 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 $1,189,374, or 367%, to
$1,513,737 for the three months ended June 30, 2005 from $324,363 for the three
months ended June 30, 2004. The most significant factor contributing to this
increase in research and development expense were direct out of pocket
expenditures of approximately $1,014,000 related to the preparation of our
Annamycin drug candidate to re-enter human clinical trials during the third
quarter of 2005. We acquired the rights to Annamycin in August of 2004 and
therefore had no expenditures during the three months ended June 30, 2004
related to this drug candidate. During the three months ended June 30, 2005 our
out of pocket expenditures related to Atiprimod totaled approximately $369,000
as compared to the period ended June 30, 2004 when we incurred approximately
$132,000 for the start-up of the clinical trials of our Atiprimod drug
candidate.





Government
grant funding for the three months ended June 30, 2005 was $0 as compared to
$47,962 from the National Institute of Health (“NIH”) grant during the three
months ended June 30, 2004. On April 1, 2005 we received 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 the next two years. Work on the NIAID grant was started
in July 2005. We request grant funding to reimburse research and development
expenses only as incurred.





Stock-based
compensation – research and development recorded during the three months
ended June 30, 2005 totaled $69,063 as compared to $881,371 recorded during the
three months ended June 30, 2004. The higher stock-based compensation in 2004 is
attributable to the restructuring of Dr. Kunwar M. Shailubhai’s employment with
us. On April 6, 2004, Dr. Shailubhai's previous employment agreement was
terminated and he entered into a new employment agreement with Synergy in which
he agreed to serve as Senior Vice President, Drug Discovery. Dr. Shailubhai's
unvested options totaling 325,000 shares, granted June 13, 2003 in connection
with his previous employment agreement, were cancelled and Dr. Shailubhai
received a new grant of 100,000 stock options. 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.





General
and administrative expenses for the three months ended June 30, 2005 were
$779,021, an increase of $223,128 or 40%, from $555,893 for the three months
ended June 30, 2004. The increase was due primarily to approximately (i) $75,000
of increased consulting fees related to our Chairman becoming a consultant and
the addition of a financial advisory consultant, (ii) $50,000 in higher outside
services of which $43,000 was for our American Stock Exchange Listing fee, (iii)
$30,000 of increased recruiting and relocation expenses related to the hiring of
clinical and regulatory personnel and management, and (iv) $22,000 in higher SEC
legal fees associated with filing our registration statements and responding to
SEC comments.





Stock-based
compensation – general and administrative recorded during the three months
ended June 30, 2005 totaled $287,136 as compared to $220,847 recorded during the
three months ended June 30, 2004. This increase was primarily attributable to a
decline in our stock price during the three months ended June 30, 2004 from
$3.40 as of April 1, 2004 to $2.00 per share as of June 30, 2004. This share
price decrease resulted in the recapture during 2004 of stock based compensation
expense recorded on certain variable options granted to non-employees during
2003. This recapture of variable stock based compensation expense occurred to a
much lesser extent during the three months ended June 30, 2005 as our stock
price declined less severely from $1.50 per share as of April 1, 2005 to $1.03
per share as of June 30, 2005.





Net loss
for the three months ended June 30, 2005 was $2,610,677 compared to a net loss
of $1,909,797 incurred for the three months ended June 30, 2004. The increased
net loss is primarily the result of higher research and development, and general
and administrative expenses, offset by lower stock based compensation expense -
research and development as discussed above.




13





**SIX
MONTHS ENDED JUNE 30, 2005 AND JUNE 30, 2004**





We had no
revenues during the six months ended June 30, 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 of $3,020,442 for the six months ended June 30, 2005
were $2,094,790, or 226%, higher than the $925,652 we incurred for the six
months ended June 30, 2004. During the six months ended June 30, 2005 we
accelerated out of pocket expenditures to contract research organizations
(“CROs”) for clinical protocol development consultants, drug substance
formulation and tabletizing, data monitoring, blood testing, and drug dosing at
our clinical trial sites, for our two major drug candidates, Annamycin and
Atiprimod. The most significant portion contributing to this increase in
research and development expense were CRO expenditures of approximately
$1,493,000 related to the preparation of our Annamycin drug candidate to
re-enter human clinical trials during the third quarter of 2005. We acquired the
rights to Annamycin in August of 2004 and therefore had no expenditures during
the six months ended June 30, 2004 related to this drug candidate. During the
six month period ended June 30, 2004 we incurred approximately $204,000 in out
of pocket CRO costs associated with our Atiprimod clinical trials, which began
in May of 2004. During the six months ended June 30, 2005 we incurred
approximately $617,000 in CRO costs for our Atiprimod Phase I/IIa clinical
trials.





Government
grant funding for the six months ended June 30, 2005 was $0 as compared to
$100,220 for the six months ended June 30, 2004.





Stock
based compensation expense - research and development was $138,126 during the
six months ended June 30, 2005, as compared to $1,066,892 recorded during the
six months ended June 30, 2004. The higher stock-based compensation in 2004 is
attributable to the restructuring of Dr. Kunwar Shailubhai’s compensation
arrangement with us. On April 6, 2004, Dr. Shailubhai's previous employment
agreement with us was terminated and he entered into a new 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. His
unvested options for 325,000 shares, granted June 13, 2003 in connection with
his previous employment agreement, were cancelled and Dr. Shailubhai received a
new grant of 100,000 stock options. 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.





General
and administrative expenses for the six months ended June 30, 2005 were
$1,473,297, an increase of $399,064 or 37%, from $1,074,233 for the six months
ended June 30, 2004. The increase was due primarily to approximately (i)
$153,000 of increased consulting fees related to our Chairman becoming a
consultant and the addition of a financial advisory consultant, (ii) $67,000 in
higher outside services of which $43,000 was for our American Stock Exchange
Listing fee and the balance associated with higher financial printing cost,
(iii) $85,000 of increased recruiting and relocation expenses related to the
hiring of clinical and regulatory personnel and management, and (iv) $27,000 in
higher SEC legal fees associated with filing our registration statements and
responding to SEC comments.





Stock-based
compensation – general and administrative recorded during the six months
ended June 30, 2005 totaled $630,814 as compared to $598,702 recorded during the
six months ended June 30, 2004. This increase was primarily attributable to a
decline in our stock price during the six months ended June 30, 2004 from $3.95
as of January 1, 2004 to $2.00 per share as of June 30, 2004. This share price
decrease resulted in the recapture during 2004 of stock based compensation
expense recorded on certain variable options granted to non-employees during
2003. This recapture of variable stock based compensation expense occurred to a
lesser extent during the six month ended June 30, 2005 as our stock price
decline from $1.98 per share as of January 1, 2005 to $1.03 per share as of June
30, 2005.





Purchased
in-process research and development was $0 for the six months ended June 30,
2005, as compared to $209,735 for the six months ended June 30, 2004 which was
primarily related to the acquisition of rights to two key patents covering a
novel cancer platform technology and anthracycline analogs from Houston
Pharmaceuticals, Inc.





Net loss
for the six months ended June 30, 2005 was $5,204,808 compared to a net loss of
$3,737,710 incurred for the six months ended June 30, 2004. The increased net
loss is primarily the result of higher research and development, and general and
administrative expenses, partially offset by lower stock based compensation
expense - research and development as discussed above.




14





**LIQUIDITY
AND CAPITAL RESOURCES**





As of
June 30, 2005 we had $4,270,555 in cash, cash equivalents and marketable
investments, compared to cash and cash equivalents of $5,323,384 as of December
31, 2004. This decrease of $1,052,829 during the six months ended June 30, 2005
was principally the result of cash used in operating activities of $4,047,604
during the six months ended June 30, 2005. This was partially offset by
completing a private placement of common stock yielding net proceeds of
$2,993,402.





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
$3,018,402 and net proceeds of $2,993,402. Because this transaction was
completed with certain existing institutional shareholders and certain members
of our management we paid no selling agent fees and legal fees were $25,000. We
filed a registration statement covering resale of the shares during the quarter
ended June 30, 2005.





On April
1, 2005 we received an $885,641 biodefense partnerships grant from the National
Institute of Allergy and Infectious Diseases (NIAID) to develop a monoclonal
antibody and vaccine against bacterial superantigen toxins over the next two
years. Funding of this new grant will begin in July 2005 when work was
started.





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 twelve months 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 the Company and will assume the responsibilities of an
investor relations officer for Callisto. Callisto will pay Trilogy $12,500 per
month under the Agreement.





Our product development efforts are 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 make take
several years to achieve. 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
working capital requirements will depend upon numerous factors including but not
limited to the nature, cost and timing of: pharmaceutical research and
development programs; pre-clinical and clinical testing; obtaining regulatory
approvals; technological advances and our ability to establish collaborative
arrangements with research organizations and individuals needed to commercialize
our products. Our capital resources will be focused primarily on the clinical
development and regulatory approval of our current product candidates, and the
acquisition of licenses and rights to certain other cancer related drug
technologies. We will be required to raise additional capital within the next
twelve months in order 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. 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.




15





**CRITICAL
ACCOUNTING POLICIES AND ESTIMATES**





Our
discussion and analysis of financial condition and results of operations are
based upon our condensed consolidated financial statements, which have been
prepared by us without audit in accordance with the rules and regulations of the
Securities and Exchange Commission. The preparation of our financial statements
requires us to make estimates that affect the reported amounts of assets,
liabilities, expenses, and related disclosure of contingent assets and
liabilities. We base our accounting estimates on historical experience and other
factors that are believed to be reasonable under the circumstances. However,
actual results may vary from these estimates under different assumptions or
conditions. The following is a summary of our critical significant accounting
policies and 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 June 30, 2005 stock based compensation expense
totaled $12,120,212 or approximately one third 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.





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.





**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
Payment." SFAS No 123R is a revision of SFAS No. 123, "Accounting for
Stock-Based Compensation" and supersedes Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees" and its related
implementation guidance. SFAS No. 123R focuses primarily on accounting for
transactions in which an entity obtains employee services through share-based
payment transactions. SFAS No 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 cost will be
recognized over the period during which an employee is required to provide
services in exchange for the award. SFAS No. 123R is effective as of the
beginning of the first interim or annual reporting period that begins after
December 15, 2005. While we cannot precisely determine the impact on net loss as
a result of the adoption of SFAS No 123R, estimated compensation expense related
to prior periods can be found in footnote 2 to our condensed consolidated
financial statements included herein.


In
December 2004, the Financial Accounting Standards Board (FASB) issued FASB
Statement No. 153 ("SFAS No. 153"), "Exchanges of Non-monetary Assets an
amendment of APB Opinion No. 29". SFAS No. 153 amends Opinion 29 to eliminate
the exception for non-monetary exchanges of similar productive assets and
replaces it with a general exception for exchanges of non-monetary assets that
do not have commercial substance. A non- monetary exchange has commercial
substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. SFAS No. 153 is effective for fiscal
periods after June 15, 2005. We do not expect the adoption of SFAS No. 153 to
have a material impact on our consolidated financial statements .




In June
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 effected 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.




16




**ITEM 4. CONTROLS AND PROCEDURES**





Our Chief
Executive Officer and Principal Financial Officer, based on the 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 the end of the period covered
by this report, have concluded that our disclosure controls and procedures were
effective to ensure the timely collection, evaluation and disclosure of
information relating to our company that would potentially be subject to
disclosure under the Securities Exchange Act of 1934, as amended, and the rules
and regulations promulgated there under.





During
the three months ended June 30, 2005, there were no changes in our internal
control over financial reporting identified in connection with the evaluation
required by paragraph (d) of Rule 13a-15 or Rule 15d-15 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.




17




****PART
II. OTHER INFORMATION****




**ITEM 5. EXHIBITS**





(a)
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.CSection 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.CSection 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.





18




**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: August
      8, 2005
    By:
    /s/
      Gary S. JacobGary
      S. Jacob
      Chief
      Executive Officer




Date: August
      8, 2005
    By:
    /s/ Bernard
      F. DenoyerBernard
      F. Denoyer
      Vice
      President, Finance