Table of Contents



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: June 30, 2010oro

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 54,504,437 as of August 13, 2010.



---



Table of Contents

CALLISTO PHARMACEUTICALS, INC.

FORM 10-Q

CONTENTS



PagePART IFINANCIAL INFORMATION

2Item 1.

Financial Statements

2Condensed Consolidated Balance Sheets as of June 30, 2010 (unaudited) and December 31,
2009

2Condensed Consolidated Statements of Operations for the Three Months and Six Months Ended
June 30, 2010 and 2009 (unaudited) and the period June 5, 1996 (Inception) to June 30, 2010 (unaudited)

3Condensed Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the period June 5,
1996 (Inception) to June 30, 2010 (unaudited)

4Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30,
2010 and 2009 (unaudited) and for the period June 5, 1996 (Inception) to June 30, 2010 (unaudited)

12Notes to Condensed Consolidated Financial Statements (unaudited)

14Item 2.

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

28Item 3.

Quantitative and Qualitative Disclosures About Market Risk

33Item 4.

Controls and Procedures

33PART IIOTHER INFORMATION

35Item 1

Legal Proceedings

35Item 1A.

Risk Factors

35Item 6.

Exhibits

35Signatures

36


i

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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, 2009 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 (previously designated as
SP-304) and SP-333, are being developed exclusively by Synergy Pharmaceuticals, Inc., our 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.

ii

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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

June 30, 2010

December 31, 2009(Unaudited)ASSETSCurrent Assets:Cash and cash equivalents

$
1,331,073

$
7,207,612Cash in escrow


2,499,000


Prepaid Research and Development


176,260


1,000,000Prepaid expenses and other


36,545


61,630State tax credit receivable


628,806


Total Current Assets


4,671,684


8,269,242Property and equipment, net


12,031


14,665Security deposits


87,740


87,740$
4,771,455

$
8,371,647LIABILITIES AND STOCKHOLDERS' DEFICITCurrent Liabilities:Accounts payable

$
4,030,930

$
3,079,798Accrued expenses


1,201,052


727,679Total Current Liabilities


5,231,982


3,807,477Notes Payable


687,645


487,130Derivative financial instruments, at estimated fair valuewarrants


1,045,214


11,870,369Commitments and contingencies





Stockholders' Deficit:Series A convertible preferred stock, par value $0.0001, 700,000 shares authorized, 48,000 and 63,000 shares outstanding at June 30, 2010 and
December 31, 2009, respectively


5


6Series B convertible preferred stock, par value $0.0001, 2,500,000 shares authorized, 1,009,166 and 1,014,166 shares outstanding at June 30, 2010
and December 31, 2009


101


102Common stock, par value of $.0001 per share: 225,000,000 shares authorized; 54,504,437 and 53,608,111 shares outstanding at June 30, 2010 and
December 31, 2009, respectively


5,450


5,359Additional paid-in capital


134,788,446


105,263,377Deficit accumulated during development stage


(129,669,804
)

(109,779,780
)Total Callisto Stockholders' Equity /(Deficit)


5,124,198


(4,510,936
)Noncontrolling interest


(7,317,584
)

(3,282,393
)Total Deficit


(2,193,386
)

(7,793,329
)$
4,771,455

$
8,371,647


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

2

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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
June 30, 20102010

2009

2010

2009Revenues

$


$


$


$


$
Costs and expenses:Research and development (1)


4,402,155


1,103,727


5,597,565


1,442,961


41,841,504Government grants














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














6,944,553General and administrative (1)


1,604,747


1,143,931


3,038,534


2,159,295


48,401,450Loss from operations


(6,006,902
)

(2,247,658
)

(8,636,099
)

(3,602,256
)

(96,052,189
)Interest and investment income


7,675


14


24,150


225


913,486State tax credit








628,806





628,806Interest and other expense


(16,542
)

(73,532
)

(300,711
)

(115,018
)

(909,251
)Change in fair value of derivative instrumentswarrants


1,420,784


(16,519,465
)

(15,641,361
)

(16,736,568
)

(22,464,100
)Net loss


(4,594,985
)

(18,840,641
)

(23,925,215
)

(20,453,617
)

(117,883,248
)Net Loss of subsidiary attributable to noncontrolling interest


2,870,134


836,853


4,035,191


1,155,743


7,317,584Net loss attributable to controlling interest


(1,724,851
)

(18,003,788
)

(19,890,024
)

(19,297,874
)

(110,565,664
)Series A Preferred stock beneficial conversion feature accreted as a dividend














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














(10,495,688
)Series 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
)Cumulative effect of adopting ASC Topic 815 January 1, 2009














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

$
(1,724,851
)
$
(18,003,788
))
$
(19,890,024
)
$
(19,297,874
))
$
(129,669,804
)Weighted average shares outstanding:basic and diluted


54,420,023


50,846,570


54,146,561


50,737,615Net loss per common share:basic and diluted

$
(0.03
)
$
(0.35
)
$
(0.37
)
$
(0.38
)


---

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

3

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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.

4

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Table of Contents

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

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.

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
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.

6

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Table of Contents

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

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.

7

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Table of Contents

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

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.

8

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Table of Contents

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

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.

9

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Table of Contents

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

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.

10

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Table of Contents

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

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























(19,890,024
)

(4,035,191
)

(23,925,215
)Stock based compensation expense




















449,951








449,951Conversion of Series A preferred stock to common stock


(15,000
)

(1
)







416,667


42


(41
)







Conversion of Series B preferred stock to common stock








(5,000
)

(1
)

138,889


14


(13
)







Direct offering of common stock of majority owned subsidiary




















2,754,000








2,754,000Warrants issued in connection with registered direct offering classified as derivative liability




















(1,045,214
)







(1,045,214
)Fees and expenses associated with direct offering of majority owned subsidiary




















(286,630
)







(286,630
)Reclassification of derivative liability to equity




















27,511,730








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














75,000


8


41,117








41,125Common stock issued in exchange for modification of notes payable














265,770


27


100,169








100,196Balance June 30, 2010


48,000

$
5


1,009,166

$
101


54,504,437

$
5,450

$
134,788,446

$
(129,669,804
)
$
(7,317,584
)
$
(2,193,386
)


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 CASH FLOWS        (Unaudited)

Six months
ended June 30, 2010

Six months
ended June 30, 2009

Period from
June 5, 1996
(inception) to
June 30, 2010Cash flows from operating activities:Net loss

$
(23,925,215
)
$
(20,453,617
)
$
(117,883,248
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation


2,634


3,349


105,201Purchase discount accreted as interest income on U.S.Treasury bills








(26,950
)Stock-based compensation expense


449,951


480,648


19,304,676Purchased in-process research and development (non-cash portion)








6,841,053Interest expense accreted on notes


300,711


115,018


737,406Stock-based liquidated damages








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


15,641,361


16,736,568


22,464,099Net liabilities assumed in excess of assets acquired in merger








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


848,825


59,756


(212,805
)State tax credit receivable


(628,806
)




(628,806
)Security deposit








(87,740
)Accounts payable and accrued expenses


1,204,000


882,233


4,958,977Total adjustments


17,818,676


18,277,572


53,752,055Net cash used in operating activities


(6,106,539
)

(2,176,045
)

(64,131,193
)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








48,719,673Finders fees and expenses


(25,000
)

(157,927
)

(3,339,172
)Proceeds from sale of 11% Notes





603,163


603,163Proceeds of direct offering of majority owned subsidiary's common stock


255,000


5,138,500


19,250,100Exercise of common stock warrants








318,785Net cash provided by financing activities


230,000


5,583,736


65,552,549Net (decrease) increase in cash and cash equivalents


(5,876,539
)

3,407,691


1,331,073Cash and cash equivalents at beginning of period


7,207,612


301,323


Cash and cash equivalents at end of period

$
1,331,073

$
3,709,014

$
1,331,073


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 CASH FLOWS        (Unaudited)

Six months
ended
June 30, 2010

Six months
ended
June 30, 2009

Period from
June 5, 1996
(inception) to
June 30, 2010Supplementary disclosure of cash flow information:Cash paid for taxes

$
33,120

$
17,891

$
275,690Supplementary 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
)Director's fees settled for shares of common stock


41,125





41,125Cash received in escrow for June 30, 2010 direct registered offering


2,499,000





2,499,000Accrued finders fees related to direct registered offering

$
261,630

$


$
261,630


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

13

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Table of Contents



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

1. Business overview:

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 (previously designated as
SP-304) and SP-333, are being developed exclusively by Synergy Pharmaceuticals, Inc., our 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.

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, 2009, included in Form 10-K filed with the SEC on March 31, 2010. 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.

Certain
items in the comparable prior period's financial statements have been reclassified to conform to the current period's presentation. Specifically, legal costs associated with
patent applications and maintenance have been classified as general and administrative expense, where previously these costs were classified as research and development expense in our statement of
operations. The results of operations for the three and six months ended June 30, 2010 are not necessarily indicative of the results of operations to be expected for the full year ending
December 31, 2010. The condensed consolidated balance sheet as of December 31, 2009 presented above was derived from the audited consolidated financial statements as of that date.

The
condensed consolidated financial statements as of June 30, 2010 and December 31, 2009 have been prepared under the assumption that Callisto will continue as a going
concern for the next twelve months. Callisto's ability to continue as a going concern is dependent upon its ability to obtain

14

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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)

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 $6,106,539 during the six months ended June 30, 2010 as compared to $2,176,045 for the six months ended June 30, 2009. During the
six months ended June 30, 2010 and 2009 Callisto incurred net losses available to common stockholders of $19,890,024 and $19,297,874, respectively. To date, Callisto's sources of cash have been
primarily limited to the sale of equity securities and issuance of 11% Notes. Net cash provided by financing activities for the six months ended June 30, 2010 and 2009 and for the period from
June 5, 1996 (inception) to June 30, 2010, was $230,000, $5,583,736 and $65,552,549, respectively. As of June 30, 2010 Callisto had a working capital deficit of $560,298 compared
to a working capital of $4,461,765 as of December 31, 2009.

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

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.

3. Recent Accounting Pronouncements

In April 2010, the FASB issued 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 expects that the adoption of this standard will not have a material
effect on its results of operation or its financial position.

In
January 2010, the FASB issued Accounting Standards Update ("ASU") 2010-06, "Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value
Measurements" ("ASU 2010-06"). ASU 2010-06 includes new disclosure requirements related to fair value measurements, including transfers in and out of Levels 1 and 2 and
information about purchases, sales,

15

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Table of Contents

CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

3. Recent Accounting Pronouncements (Continued)

issuances
and settlements for Level 3 fair value measurements. This update also clarifies existing disclosure requirements relating to levels of disaggregation and disclosures of inputs and
valuation techniques. The provisions of ASU 2010-06 are effective for periods beginning after December 15, 2009. The disclosures relating to Level 3 activity are effective
for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The adoption of ASU 2010-06 did not have a material impact on the Company's
financial statements.

In
January 2010, the FASB issued ASU 2010-02,Accounting and Reporting for Decreases in Ownership of a Subsidiarya
ScopeClarification("ASU 2010-02"), in response to practice issues entities encountered in applying the decrease in
ownership provisions of
SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statements(codified in ASC 810-10, Consolidation). ASU 2010-02 clarifies that the
decrease in ownership provisions of ASC 810-10 and related guidance apply to
(a) a subsidiary or group of assets that is a business or nonprofit activity, (b) a subsidiary or group of assets that is a business or nonprofit activity for a noncontrolling interest
in an entity (including an equity method investee or joint venture) and (c) an exchange of a group of assets that constitutes a business or nonprofit activity for a noncontrolling interest in
an entity (including an equity method investee or joint venture). In addition, ASU 2010-02 clarifies that the decrease in ownership guidance does not apply to sales of
in-substance real estate or conveyances of oil and gas mineral rights, even if these transactions involve businesses. Finally, the ASU expands the disclosures required upon deconsolidation
of a subsidiary. The adoption of ASU 2010-02 on January 1, 2010 did not have a material impact on the Company's financial statements.

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

16

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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)

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.

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
June 30,

Six Months Ended
June 30,June 5, 1996
(Inception) to
June 30,
20102010

2009

2010

2009Employeesincluded in research and development

$
764

$
7,009

$
5,345

$
13,941

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


9,885


9,591


19,743


27,918


4,816,449Subtotal employee stock option grants


10,648


16,600


25,088


41,859


7,508,606Non-employeeresearch and development














102,750Non-employeegeneral and administrative


(27,825
)

91,842


47,458


84,503


9,881,469Subtotal non-employee stock option grants


(27,825
)

91,842


47,458


84,503


9,984,219Total stock based compensation expense

$
(17,176
)
$
108,442

$
72,546

$
126,362

$
17,492,825


The
unrecognized compensation cost related to employee non-vested Callisto stock options outstanding at June 30, 2010, net of expected forfeitures, was
$57,612, to be recognized over a weighted average vesting period of approximately 1.4 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 six months ended June 30, 2010 and 2009.

Six months ended
June 30,2010

2009Risk free interest rate


2.38
%
No awardsDividend yield


n/a

No awardsExpected volatility


100
%
No awardsExpected term


5 years

No awards


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
ValueBalance outstanding, December 31, 2009


7,495,038

$
0.08 - 6.75

$
1.70

$
Granted


855,000

$
0.26

$
0.26Forfeitures


(6,000
)
$
0.20

$
0.20Balance outstanding, June 30, 2010


8,344,038

$
0.08 - 6.75

$
1.56

$
Exercisable as of June 30, 2010


6,074,372

$
0.08 - 6.75

$
1.54

$



17

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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)

Synergy Options

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.

Synergy
adopted the 2008 Equity Compensation Incentive Plan (the "Plan") on July 3, 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 periodically issues stock options to employees and non-employees and has adopted ASC Topic 718 for employee
awards on July 3, 2008. 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.

Stock-based
compensation expense, including all options and restricted stock units, has been recognized in operating results as follow:

Three Months
Ended June 30,

Six Months
Ended June 30November 15, 2005
(inception) to
June 30, 20102010

2009

2010

2009Employeesincluded in research and development

$
49,804

$
43,055

$
99,263

$
86,296

$
431,334Employeesincluded in general and administrative


58,994


56,695


117,948


112,769


588,842Non-employeesincluded in research and development


8,455


8,455


16,817


16,817


59,279Non-employeesincluded in general and administrative


71,778


69,585


143,377


138,404


732,395Total stock-based compensation expense

$
189,031

$
177,790

$
377,405

$
354,286

$
1,811,850


The
estimated fair value of each Synergy stock option award was determined on the date of grant using the Black-Scholes option valuation model with the following
weighted-average assumptions:

Six months ended June 30,2010

2009Risk free interest rate


2.31 to 2.71
%
No awardsDividend yield


n/a

No awardsExpected volatility


90
%
No awardsExpected term


6 years

No awards


18

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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)

Risk-free interest rateBased upon observed US Treasury yield curve interest rates for Treasury instruments with maturities which
correspond to the expected term of Synergy's employee stock options at the date of grant.

Dividend yieldSynergy has not paid any dividends on common stock since its inception and does not anticipate paying dividends on its common stock in
the foreseeable future.

Expected volatilityBased on the historical volatility of similar publicly traded stocks in Synergy's industry segment with comparable market
capitalization and stage of development.

Expected termSynergy has had no stock options exercised since inception. The expected option term represents the period that stock-based awards are
expected to be outstanding based on the simplified method provided in Staff Accounting Bulletin ("SAB") No. 107,Share-Based Payment, ("SAB
No. 107"), which averages an award's weighted-average vesting period and expected term for "plain vanilla" share options. Under SAB No. 107, options are considered to be "plain vanilla"
if they have the following basic characteristics: (i) granted "at-the-money"; (ii) exercisability is conditioned upon service through the vesting date;
(iii) termination of service prior to vesting results in forfeiture; (iv) limited exercise period following termination of service; and (v) options are
non-transferable and non-hedgeable.

In
December 2007, the SEC issued SAB No. 110,Share-Based Payment, ("SAB No. 110"). SAB No. 110 was effective
January 1, 2008 and expresses the views of the Staff of the SEC with respect to extending the use of the simplified method, as discussed in SAB No. 107, in developing an estimate of the
expected term of "plain vanilla" share options in accordance with ASC Topic 718. The Company will continue to use the simplified method until it has the historical data necessary to provide a
reasonable estimate of expected life in accordance with SAB No. 107, as amended by SAB No. 110. For the expected term, the Company has "plain-vanilla" stock options, and therefore used a
simple average of the vesting period and the contractual term for options granted subsequent to January 1, 2006 as permitted by SAB No. 107.

ForfeituresASC Topic 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. Synergy's estimated future unvested option forfeitures is based on the historical experience of its majority shareholder, Callisto.

The
unrecognized compensation cost related to non-vested stock options outstanding at June 30, 2010, net of expected forfeitures, was $631,405, to be recognized over
the next three quarters.

On
March 1, 2010, a majority of our 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.

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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)

A
summary of stock option activity and of changes in stock options outstanding under the Plan is presented below:

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
ValueBalance outstanding, December 31, 2009


4,214,016

$
0.25 - 0.95

$
0.30

$
22,320,436Granted


4,465,000
(1)

0.70


0.70Exercised








Forfeited








Balance outstanding, June 30, 2010


8,679,016

$
0.25 - 0.95

$
0.51

$
63,987,092Exercisable at June 30, 2010


1,417,420

$
0.25 - 0.95

$
0.29

$
10,753,665


(1)These
stock options will vest and become exercisable only upon a change of control of the company. Because of this contingent vesting the Company did not
record any stock based compensation expense on these stock options during the six months ended June 30, 2010. The weighted average fair value of these stock options at the date of grant was
$6.77 per share as calculated by the Black-Scholes model, using the assumptions noted in the table above.


Synergy Restricted Stock Units

Restricted stock units, which entitle the holder to earn, at the end of a vesting term, a specified number of shares of Synergy common
stock are accounted for as stock based compensation in accordance with ASC Topic 718 in the same manner as stock options using fair value at the date of issuance. Restricted stock units are subject to
a repurchase agreement, assumed by Synergy pursuant to the Exchange Transaction, whereby 50% of the units vest after 1 year of continuous service and the remaining 50% vest after 2 years
of continuous service from the issuance date. The fair value at the date of issuance is being expensed ratably by month over the 2 year service period since July 2008. As of June 30,
2010 there were 874,760 restricted stock units outstanding. These units were originally issued on July 3, 2008 and are included in shares outstanding. The fair value of the 874,760 restricted
stock units on the date of issuance was $524,856 of which $31,275, $63,628 and $523,779 was recorded as stock-based compensation expense during the three and six months ended June 30, 2010 and
for the period from inception to June 31, 2010, leaving $1,077 unrecognized as of June 30, 2010, to be expensed in the quarter ended September 30, 2010.

5. Research and Development Expense

Research and development costs include expenditures in connection with an in-house research and development laboratory, salaries and staff costs, application and filing for
regulatory approval of proposed products, purchased in-process research and development, regulatory and scientific consulting

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Table of Contents

CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

5. Research and Development Expense (Continued)

fees,
as well as contract research, patient costs, drug formulation and tableting, data collection, monitoring, insurance and FDA consultants.

In
accordance with FASB ASC Topic 730-10-55, Research and Development, Synergy recorded prepaid research and development costs of $176,260 and $1.0 million
as of June 30, 2010 and December 31, 2009, respectively, for nonrefundable pre-payments for production of plecanatide drug substance and analytical testing services of our
drug candidate SP-333. In accordance with this guidance, Synergy expenses deferred research and development costs when drug compound is delivered and services are performed.

6. State Tax Credit Receivable

During the quarter ended March 31, 2010, Callisto determined that it was eligible for New York State's Qualified Emerging Technology Company Tax Credit for the tax years ended
December 31, 2006, 2007, and 2008 totaling $628,806. On April 23, 2010 Callisto filed amended tax returns for the above mentioned tax years, and reflected this receivable and credit in
our financial statements for the quarter ended March 31, 2010. As of June 30, 2010, this receivable was still outstanding.

7. 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:

June 30, 2010

June 30, 2009Common Shares outstanding


54,504,437


50,914,341Potentially dilutive common shares issuable upon:Exercise of warrants


84,842,576


85,050,964Exercise of stock options


6,074,372


7,903,358Conversion of Series A Convertible Preferred Stock


1,333,333


1,760,000Conversion of Series B Convertible Preferred Stock


28,032,389


21,583,320Total fully diluted


174,787,107


167,212,163


8. Derivative Financial Instruments

Effective January 1, 2009, the Company adopted provisions of ASC Topic 815-40, "Derivatives and Hedging: Contracts in Entity's Own Entity" ("ASC Topic
815-40"). ASC Topic 815-40 clarifies the

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Table of Contents

CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

8. Derivative Financial Instruments (Continued)

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.

Callisto Derivative Instruments

Based upon the Company's analysis of the criteria contained in ASC Topic 815-40 , certain warrants (the "New Warrants")
issued in connection with the issuance of the 11% Notes were to be treated as derivative liabilities on the Company's Balance Sheet. Prior to the adoption of ASC Topic 815-40, the Company
accounted for the warrants as components of stockholders' equity. 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 was 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.

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, we 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 into
stockholders' equity.

The
Company estimated the fair value of the New Warrants using the Black-Scholes option pricing model. The assumptions used for the three and six months ended June 30, 2010 are
noted in the following table:

Six Months Ended
June 30, 2010

Six Months Ended
June 30, 2009Expected option term


7.5 to 8.0 years

7.5 to 8.0 yearsRisk-free interest rate


2.7% to 3.4%

2.27% to 3.33%Expected volatility


100%

150% to 200%Dividend yield


0%

0%


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 yield curve interest rates
consistent with the expected term of the New Warrants.

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Table of Contents

CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

8. Derivative Financial Instruments (Continued)

The
following table sets forth the components of changes in the Callisto's 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


69,086,174

$
11,870,3693/31/2010

Change in fair value of New Warrants outstanding on December 31, 2009, during the quarter ended March 31, 2010




$
17,062,1453/31/2010

Balance of derivative financial instruments March 31, 2010


69,086,174

$
28,932,5146/30/2010

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




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

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




$
(27,511,730
)6/30/2010

Balance of derivative financial instruments June 30, 2010


69,086,174

$



Synergy Derivative Instruments

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 the issuance of the June 30, 2010 registered direct offering, must be recorded as derivative liabilities with a charge to additional paid in capital. In accordance
with ASC Topic 815-40, the warrants will be 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 warrants using the Black-Scholes option
pricing model in order to determine the associated derivative instrument liability described above. The assumptions used to determine the fair value of the warrants as of June 30, 2010 were:

June 30, 2010Estimated fair value of stock


$2.64Expected warrant term


5 yearsRisk-free interest rate


1.79%Expected volatility


90%Dividend yield


0%


Estimated
fair value of the stock is based on an apportionment of the $4.25 unit price paid for the shares and warrants issued June 30, 2010 in the Company's
registered direct offering, which was an arms-length negotiated price.

Expected
volatility is based on the historical volatility of similar publicly traded stocks in Synergy's industry segment with comparable market capitalization and stage of development.
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 consistent with the expected term of the warrants.

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CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

9. Fair Value Measurements

Callisto Fair Value Measurements

The following table sets forth a summary of changes in the fair value of the Callisto's Level 3 liabilities for the six months
ended June 30, 2010:

Description

Balance at
December 31,
2009

Unrealized
losses

Reclassified

Balance as of
June 30, 2010Derivative liabilities related to warrants

$
11,870,369

$
15,641,361

$
(27,511,730
)
$



The
unrealized losses on the derivative liabilities are classified in other expenses as a change in derivative liabilities in the Company's statement of operations. On June 30,
2010, the price protection clause expired. As a result, we measured the fair value of the outstanding warrants as of June 30, 2010, recognized any changes in value in earnings and then
reclassified the derivative instrument liability into stockholder's equity. (See Note 8 above)

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.

Synergy Fair Value Measurements

The following table presents the Company's liabilities, arising from Synergy's derivative liabilities discussed above (See
Note 7), that are measured and recognized at fair
value on a recurring basis classified under the appropriate level of the fair value hierarchy as of June 30, 2010:

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
June 30,
2010Derivative liabilities related to Warrants

$


$


$
1,045,214

$
1,045,214


The
following table sets forth a summary of changes in the fair value of the Company's Level 3 liabilities for the six months ended June 30, 2010:

Description

Balance at
December 31,
2009

Unrealized
losses

Balance as of
June 30, 2010Derivative liabilities related to Warrants

$


$


$
1,045,214


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CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

9. Fair Value Measurements (Continued)

The
unrealized losses on the derivative liabilities are classified in other expenses 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 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 December 30, 2008, Callisto entered into a securities purchase and exchange agreement ("Purchase Agreement") with several investors, each of whom were holders of record as of
November 4, 2008 of outstanding warrants to purchase shares of the Company's common stock, exercisable at $0.50 or $0.70 per share until August 2, 2010 ("Series B Warrants"). The
Series B Warrants were issued in connection with the private placement of the Company's Series B Preferred Shares on August 2, 2007. During the period from December 30,
2008 to June 17, 2009, pursuant to the Purchase Agreement, Callisto issued $603,163 principal amount of 11% Secured Notes due April 15, 2010 ("11% Notes"). Interest on the 11% Notes is
due at maturity and repayment of the 11% Notes is secured by a pledge of up to 2,292,265 shares of the common stock of Synergy owned by Callisto. Pursuant to the Purchase Agreement, Callisto issued
69,086,174 common stock purchase warrants ("New Warrants") in exchange for the surrender and cancellation of 26,938,800 outstanding Series B Warrants. The New Warrants have an exercise price,
subject to certain anti-dilution adjustments, of $0.02 per share and are exercisable at any time on or prior to December 31, 2016.

In
connection with the issuance of $349,880 of the $603,163 11% Notes in June 2009, Callisto entered into an additional security agreement granting all of the holders of the 11%
Notes a security interest in the Atiprimod technology acquired by the Company in December 2008.

The
proceeds from the issuance of these instruments were allocated to the 11% Notes and the New Warrants based upon the relative fair values of the 11% Notes and the New Warrants. The
New Warrants had a fair value of $6,781,471 upon issuance, measured utilizing the Black Scholes fair value methodology using assumptions ranging from 7.5 to 8 years for expected term,
volatility of 150% to 200%, no dividends and risk free interest rates ranging from 1.76% to 3.33%. This resulted in a debt discount of $552,728 apportioned to the New Warrants which was being accreted
to the 11% Notes as interest expense over the life of the 11% Notes.

On
June 30, 2010, the price protection provision included in the New Warrants expired. As a result, we measured the fair value of the outstanding warrants as of June 30,
2010, recognized any changes in value in earnings and then reclassified the derivative instrument liability into stockholder's equity. (See Note 8 above)

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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 December 30, 2009 through June 30, 2010:

11% Notes
Payable

Interest
expense11% Notes Balance December 31, 2009

$
487,130

$
436,693Accretion 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





100,19611% Notes balance March 31, 2010

$
671,103

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


16,542


16,54211% Notes balance June 30, 2010

$
687,645

$
300,711


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
June 30, 2010, Synergy entered into securities purchase agreements to sell securities to non-U.S. investors and raise gross proceeds of approximately $2,754,000 in
a registered direct offering. Synergy sold 648,000 units at $4.25 per share to investors. Each unit consists of one share of Synergy's common stock and one warrant to purchase one additional share of
Synergy common stock. The warrants expire after five years and are exercisable at $4.50 per share. In accordance with ASC 815-40, "Derivatives and HedgingContracts in Entity's
Own Equity" the warrants have been classified as a derivative liability.

The
offering was made pursuant to a shelf registration statement on Form S-3 (the base prospectus effective December 10, 2009), as supplemented by a prospectus
supplement filed with the Securities and Exchange Commission on June 23, 2010. As of June 30, 2010, Synergy had received proceeds of $255,000, less legal fees of $25,000 associated with
this offering, and the remaining $2,499,000 was held in escrow account and received by Synergy on July 2 and July 8, 2010. In July 2010, the Synergy paid an aggregate $261,630 to selling
agents in connection with this placement, of which the entire amount was accrued as of and for the period ended June 30, 2010.

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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)

During
the six months ended June 30, 2010, 15,000 shares of Callisto's Series A Convertible Preferred Stock were converted to 416,667 shares of common stock and 5,000
shares of Series B Convertible Preferred Stock were converted to 138,889 shares of common stock.

11. Subsequent Events

On July 13, 2010 Synergy issued 1,061,867 shares of its common stock as consideration for an agreement by certain holders of its common stock to extend their lock-up
of such shares from August 15, 2010 to January 15, 2011 or enter into a lock-up agreement until such date, as the case may be. This issuance was approved by Synergy's Board
of Directors on June 22, 2010 and represents 5% of the shares of previously issued common stock currently subject to a lock-up agreement or being requested to lock-up,
as the case maybe. The fair value of the common stock issued to accomplish this lock-up extension totaled $2,798,020, based on the estimated fair value of the shares issued in connection
with the June 30, 2010 registered direct offering (See Note 10). This amount will be charged to additional paid in capital as a cost of facilitating the registered direct offering
discussed above.

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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, 2009 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 majority-owned 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.

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.

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



RECENT DEVELOPMENTS

On June 30, 2010, Synergy entered into securities purchase agreements to sell securities to non-U.S. investors and
raised gross proceeds of approximately $2,754,000 in a registered direct offering. Synergy sold 648,000 units at $4.25 per share to investors. Each unit consists of one share of our Synergy common
stock and one warrant to purchase one additional share of Synergy common stock. The warrants expire after five years and are exercisable at $4.50 per share. The offering was made pursuant to a shelf
registration statement on Form S-3 (the base prospectus effective December 10,

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Table of Contents

2009),
as supplemented by a prospectus supplement filed with the Securities and Exchange Commission on June 23, 2010. As of June 30, 2010, we had received proceeds of $255,000, less
legal fees of $25,000 associated with this offering. The remaining $2,499,000 was held in escrow and received from escrow on July 2 and July 8, 2010. In July 2010, the Company paid an
aggregate $261,630 to selling agents in connection with this placement, of which the entire amount was accrued as of and for the period ended June 30, 2010.

On
March 19, 2010, we initiated a Phase 2a 14-day repeated-oral-dose, placebo-controlled, dose-escalation trial of
plecanatide (previously designated SP-304) in CC patients. We expect to obtain meaningful topline data from this by trial late summer of 2010, and use those data to establish doses for
follow-up Phase 2b clinical trials in CC and IBS-C. We plan to open a 24-day repeated-oral-dose trial of plecanatide in CC patients
in the autumn of 2010, and a 90-day trial of plecanatide in IBS-C patients in the second quarter of 2011.

An
Investigational New Drug application ("IND") for SP-333 is planned for the fourth quarter of 2010 and we plan to open the first human trial of SP-333 in
volunteers in early 2011.

FINANCIAL OPERATIONS OVERVIEW

From inception through June 30, 2010, we have sustained cumulative net losses available to common shareholders of $129,669,804.
Our losses have resulted primarily from expenditures 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 June 30, 2010, 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 $6,106,539 during the six months ended June 30, 2010 as compared to $2,176,045 for the six months ended June 30, 2009. During the
six months ended June 30, 2010 and 2009 Callisto incurred net losses attributable to common stockholders of $19,890,024 and $19,297,874, respectively. To date, Callisto's sources of cash have
been primarily limited to the sale of equity securities and issuance of 11% Notes. Net cash provided by financing activities for the six months ended June 30, 2010 and 2009 and for the period
from June 5, 1996 (inception) to June 30, 2010, was $230,000, $5,583,736 and $65,552,549, respectively.

OFF-BALANCE SHEET ARRANGEMENTS

We had no off-balance sheet arrangements as of June 30, 2010.

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2010 AND JUNE 30, 2009

We had no revenues during the three months ended June 30, 2010 and 2009 because we do not have any commercial biopharmaceutical
products and we do not expect to have such products for several years, if at all. Certain reclasses have been made in prior periods to conform to current year presentation (see note 2).

Research
and development expenses increased $3,298,428 or 299% to $4,402,155 for the three months ended June 30, 2010 from $1,103,727 for the three months ended June 30,
2009. This increase was primarily due to (i) higher program expenses, including animal studies, analytical testing, clinical data monitoring and patient costs, which increased by approximately
$1,821,000 during the three

29

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Table of Contents

months
ended June 30, 2010 to approximately $1,862,000 related to our continuing Phase 2a trial of plecanatide in CC patients which began March 19, 2010, (ii) drug
production increased approximately $1,300,000 to approximately $2,200,000 in support of ongoing and planned clinical trials, (iii) scientific advisors fees and expenses increased approximately
$55,000 to approximately $93,000 and (iv) staff compensation cost increased approximately $100,000 to $223,259 as we hired additional product development personnel.

General
and administrative expenses for the three months ended June 30, 2010 increased $460,816 or 40%, to $1,604,747 for the three months ended June 30, 2010 from
$1,143,931 for the three months ended June 30, 2009. This increase was primarily due to (i) approximately $265,000 of higher financial advisory and travel expenses related to our public
offerings and (ii) approximately $180,000 of increased facilities overhead, (iii) approximately $94,000 of higher patent legal expenses, offset by approximately $110,000 of lower stock
based compensation expense.

Loss
from operations for the three months ended June 30, 2010 increased $3,759,244 to $6,006,902 compared to a net loss from operations of $2,247,658 incurred for the three months
ended June 30, 2009. The increased loss is the result of higher research and development, and general and administrative expenses discussed above, plus the following non-operating
expenses for the quarters ended June 30, 2009 and 2010.

Quarter Ended
06/30/2010

Quarter Ended
06/30/2009

Change ($)
06/30/2010Loss from operations

$
(6,006,902
)
$
(2,247,658
)
$
(3,759,244
)Interest and dividend income


7,675


14


7,661Interest expense on 11% Secured Notes


(16,542
)

(73,532
)

56,990Change in Fair Value of derivative instrumentswarrants


1,420,784


(16,519,465
)

17,940,249Net loss of majority owned subsidiary attributable to non-controlling interest


2,870,134


836,853


2,033,281Net loss available to common stockholders

$
(1,724,851
)
$
(18,003,788
)
$
16,278,937


SIX MONTHS ENDED JUNE 30, 2010 AND JUNE 30, 2009

We had no revenues during the six months ended June 30, 2010 and 2009 because we do not have any commercial biopharmaceutical
products and we do not expect to have such products for several years, if at all. Certain reclasses have been made in prior periods to conform to current year presentation (See note 2).

Research
and development expenses increased $4,154,604 or 288% to $5,597,565 for the six months ended June 30, 2010 from $1,442,961 for the six months ended June 30, 2009.
This increase was primarily due to (i) higher program expenses, including animal studies, analytical testing, clinical data monitoring and patient costs, which increased by approximately
$2,660,000 during the six months ended June 30, 2010 to approximately $2,780,000 related to our Phase 2a clinical trial of plecanatide in CC patients which began March 19, 2010,
(ii) drug production increased approximately $1,300,000 to approximately $2,200,000 in support of ongoing and planned clinical trials, (iv) scientific advisors fees and expenses
increased approximately $75,000 to approximately $172,000 and (v) staff compensation cost increased approximately $164,000 to approximately $430,000 as we hired additional product development
personnel.

General
and administrative expenses for the six months ended June 30, 2010 increased $879,239 or 41%, to $3,038,534 for the six months ended June 30, 2010 from $2,159,295
for the six months ended June 30, 2009. This increase was primarily due to (i) approximately $316,000 of higher financial advisory and travel expenses related to Synergy's public
offerings, (ii) approximately $262,000 of increased facilities overhead and (iii) higher staff salaries, wages and benefits which increased by

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approximately
$60,000, (iv) approximately $286,000 of higher patent legal expense in the six months ended June 30, 2010 as compared to the same period last year, offset by approximately
$65,000 of lower stock based compensation expense.

Loss
from operations for the six months ended June 30, 2010 increased $5,033,843 to $8,636,099 compared to a net loss from operations of $3,602,256 incurred for the six months
ended June 30, 2009. 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 six months ended June 30, 2009 and 2010.

Six Months Ended
06/30/2010

Six Months Ended
06/30/2009

Change ($)
06/30/2010Loss from operations

$
(8,636,099
)
$
(3,602,256
)
$
(5,033,843
)Interest and dividend income


24,150


225


23,925State tax credit


628,806





628,806Interest expense on 11% Secured Notes


(177,018
)

(115,018
)

(62,000
)Interest expense attributable to extinguishment of debt


(123,693
)




(123,693
)Change in Fair Value of derivative instrumentswarrants


(15,641,361
)

(16,736,568
)

1,095,207Net loss of majority owned subsidiary attributable to non-controlling interest


4,035,191


1,155,743


2,879,448Net loss available to common stockholders

$
(19,890,024
)
$
(19,297,874
)
$
(592,150
)


LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2010 we had $1,331,073 in cash and cash equivalents, compared to $7,207,612 as of December 31, 2009. We
had working capital deficit of $560,298 as of June 30, 2010.

Net
cash used in operating activities was $6,106,539 during the six months ended June 30, 2010 as compared to $2,176,045 for the six months ended June 30, 2009. During the
six months ended June 30, 2010 and 2009 Callisto incurred net losses attributable to common stockholders of $19,890,024 and $19,297,874, respectively. To date, Callisto's sources of cash have
been primarily limited to the sale of equity securities and issuance of 11% Notes. Net cash provided by financing activities for the six months ended June 30, 2010 and 2009 and for the period
from June 5, 1996 (inception) to June 30, 2010, was $230,000, $5,583,736 and $65,552,549, respectively.

On
June 30, 2010, Synergy entered into securities purchase agreements to sell securities to non-U.S. investors and raise gross proceeds of approximately $2,754,000 in
a registered direct offering. Synergy sold 648,000 units at $4.25 per share to investors. Each unit consisted of one share of our common stock and one warrant to purchase one additional share of
common stock. The warrants expire after five years and are exercisable at $4.50 per share. The offering was made pursuant to a shelf registration statement on Form S-3 (the base
prospectus effective December 10, 2009), as supplemented by a prospectus supplement filed with the Securities and Exchange Commission on June 23, 2010. As of June 30, 2010,
Synergy had received proceeds of $255,000, less legal fees of $25,000 associated with this placement which was included in our cash and cash equivalents. The remaining $2,499,000 was held in escrow
and received on July 2, 2010 and July 8, 2010. In July 2010, Synergy also paid an aggregate $261,630 to selling agents in connection with this offering.

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.

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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 June 30, 2010 and December 31, 2009 have been prepared under the assumption that we will continue as a going concern for the
next twelve months. Our independent registered public accounting firm has issued a report dated March 31, 2010 that included an explanatory paragraph referring to our recurring losses from
operations and net capital deficiency and expressing substantial doubt in our ability to continue as a going concern without additional capital becoming available. Our ability to continue as a going
concern is dependent upon our ability to obtain additional equity or debt financing, attain further operating efficiencies and, ultimately, to generate revenue. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.

CRITICAL ACCOUNTING POLICIES

We prepare our financial statements in conformity with accounting principles generally accepted in the U.S. The preparation of
financial statements in conformity with U.S. generally accepted accounting principles ("GAAP") requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities,
including disclosure of contingent assets and contingent liabilities, at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Because of
the uncertainty of factors surrounding the estimates
or assumptions used in the preparation of the consolidated financial statements, actual results may vary from these estimates.

Share-Based Payments

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, 2010 stock-based compensation expense has totaled $19,304,676 or 17% of our net loss available to common shareholders of $129,669,804.

Upon
adoption of ASC Topic 718, we selected the Black-Scholes option pricing model as the most appropriate model for determining the estimated fair value for stock-based awards. Use of a
valuation model requires management to make certain assumptions with respect to selected model inputs. Expected volatility was calculated based on our historical volatility. Our stock price has
fluctuated from $3.95 per share as of December 31, 2003 to $0.41 per share as of June 30, 2010. The expected term was determined based on the simplified method provided in ASC Topic 718
"Share-Based Payment".

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The
risk-free interest rate is based on observed interest rate appropriate for the expected term of our stock options. Forfeitures are estimated, based on our historical experience, at the
time of grant.

Research and Development

Research and development costs include expenditures in connection with an in-house research and development laboratory,
salaries and staff costs, application and filing for regulatory approval of proposed products, purchased in-process research and development, regulatory and scientific consulting fees, as
well as contract research, patient costs, drug formulation and tableting, data collection, monitoring, insurance and FDA consultants, in accordance with ASC Topic
730-10-55-2. Also, as prescribed by this guidance the costs of patent applications and filings are legal in nature and classified as general and administrative
expense.

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. While certain of our research and development costs may ultimately have future benefits, our policy of expensing all research and development expenditures is predicated on
(i) 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 and
(ii) recoverability is highly uncertain at our stage of development.

In
June 2007, the EITF of the FASB reached a consensus on ASC Topic 730,Research and Development("ASC Topic 730"). In accordance with
ASC Topic 730-10-55 non-refundable advance payments for goods or services that will be used or rendered for future research and development activities are deferred
and capitalized. As the related goods are delivered or the services are performed, or when the goods or services are no longer expected to be provided, the deferred amounts are recognized as an
expense. We adopted ASC Topic 730-10-55 on January 1, 2008 and the adoption did not have a material effect on our consolidated financial position, results of operations
or cash flows.

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 June 30, 2010 we had $630,000 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 June 31,
2010, our Chief Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures were not effective in ensuring that information required to be disclosed by
us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms.

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, 2009. 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, 2009, there were material weaknesses in our internal control over financial reporting. The material weaknesses identified during
management's assessment were (i) a lack of sufficient internal accounting expertise to provide reasonable assurance that our financial statements and notes thereto, are prepared in accordance
with generally accepted accounting principles (GAAP)

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and
(ii) a lack of segregation of duties to ensure adequate review of financial statement preparation. In light of these material weaknesses, management concluded that, as of
December 31, 2009, 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.

Management,
in coordination with the input, oversight and support of our Audit Committee, has identified the following measures to strengthen our internal control over financial
reporting and to address the material weaknesses described above. During the quarter ended December 31, 2009 we hired a controller to: (i) prepare annual and quarterly consolidated
financial statements, (ii) prepare annual and quarterly account reconciliations and (iii) prepare annual and quarterly journal entries. This hire allows for better segregation of duties
within our financial department. During the quarter ended June 30, 2010 we also retained a GAAP advisor to assist management with accounting and reporting matters. While these remedial actions
have been implemented, they may not be in place for a sufficient period of time to help us certify that material weaknesses have been fully remediated as of the end of calendar year 2010. We will
continue to develop our remediation plans and implement additional measures during calendar year 2010 and possibly into calendar year 2011.

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 June 30, 2010, we are in the process of remediating certain material weakness which existed at December 31, 2009.
If the remedial measures described above 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. We are currently working to improve and simplify our internal processes and implement enhanced controls, as discussed above, to address the material weaknesses in
our internal control over financial reporting and to remedy the ineffectiveness of our disclosure controls and procedures. A key element of our remediation effort is the ability to recruit and retain
qualified individuals to support our remediation efforts. While our Audit Committee and Board of Directors have been supportive of our efforts by supporting the hiring of a controller in our finance
department as well as funding efforts to improve our financial reporting system, improvement in internal control will be hampered if we can not recruit and retain more qualified professionals.

Other
than described above, 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 June 30, 2010.

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PART IIOTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

There have been no material changes from the legal proceedings disclosed in our Form 10-K for the year ended December 31,
2009.

ITEM 1A.    RISK FACTORS

There have been no material changes from the risk factors disclosed in our Form 10-K for the year ended December 31,
2009.

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: August 16, 2010

By:

/s/ GARY S. JACOB Gary S. Jacob Chief Executive OfficerDate: August 16, 2010

By:

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


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