**UNITED STATES OF AMERICASECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,DC 20549**

**FORM 10-Q**

**(Mark One)**

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACTOF 1934

**FORTHE QUARTERLY PERIOD ENDED: June 30, 2007**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

**Forthe transition period from                 to                 **

**CommissionFile Number: 001-32325**

**CALLISTO PHARMACEUTICALS, INC.**

(Exact name of Registrantas specified in its charter)

| **Delaware**                                                     |   | **13-3894575**                        |
|------------------------------------------------------------------|--------|---------------------------------------|
| (State or Other  Jurisdiction of  Incorporation or Organization) |   | (I.R.S. Employer  Identification No.) |

 

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

(Address of principalexecutive offices) (Zip Code)

**(212) 297-0010**

(Registrant’s telephonenumber)

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

Indicate by check markwhether the registrant: (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.

Yes  x   No  o

Indicate by check markwhether the Registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated Filer  o |   | Accelerated filer  o |   | Non-accelerated filer  x |
|--------------------------------------|--------|--------------------------------|--------|------------------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).

Yes  o   No  x

Thenumber of the registrant’s shares of common stock outstanding was 40,930,161 asof August 9, 2007.

 

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**CALLISTOPHARMACEUTICALS, INC.FORM 10-QCONTENTS**
| **PART I—FINANCIAL  INFORMATION** |   |
|---------------------------------------------|--------|
| Item 1.                                     |   | Condensed  Consolidated Financial Statements | 1 |
|                                        |   | Condensed  Consolidated Balance Sheets as of June 30, 2007 (unaudited) and  December 31, 2006 | 1 |
|                                        |   | Condensed  Consolidated Statements of Operations for the Three and Six Months  Ended June 30, 2007 and 2006 (unaudited) and the period June 5,  1996 (Inception) to June 30, 2007 (unaudited) | 2 |
|                                        |   | Condensed  Consolidated Statements of Changes in Stockholders’ Equity  (Deficit) for the period June 5, 1996 (Inception) to June 30, 2007  (unaudited) | 3 |
|                                        |   | Condensed  Consolidated Statements of Cash Flows for the Six Months Ended  June 30, 2007 and 2006 (unaudited) and for the period June 5, 1996  (Inception) to  June 30, 2007 (unaudited) | 10 |
|                                        |   | Notes  to Condensed Consolidated Financial Statements (unaudited) | 11 |
| Item 2.                                     |   | Management’s  Discussion and Analysis of Financial Condition and Results  of Operations | 20 |
| Item 3.                                     |   | Quantitative  and Qualitative Disclosures About Market Risk | 33 |
| Item 4.                                     |   | Controls  and Procedures | 33 |
| **PART II—OTHER INFORMATION**     |   |
| Item 1A.                                    |   | Risk Factors | 35 |
| Item 2.                                     |   | Unregistered Sales of Equity Securities and Use of  Proceeds | 35 |
| Item 6.                                     |   | Exhibits | 35 |
| Signatures                                  | 36     |

 

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**INTRODUCTORY NOTE**

**This Report on Form 10-Qfor Callisto Pharmaceuticals, Inc. (“Callisto” or the “Company”)may contain forward-looking statements. You can identify these statementsby forward-looking words such as “may,” “will,” “expect,” “intend,” “anticipate,”believe,” “estimate” and “continue” or similar words. Forward-lookingstatements include information concerning possible or assumed future businesssuccess or financial results. You should read statements that contain thesewords carefully because they discuss future expectations and plans, whichcontain projections of future results of operations or financial condition orstate other forward-looking information. We believe that it is important tocommunicate future expectations to investors. However, there may be eventsin the future that we are not able to accurately predict or control.Accordingly, we do not undertake any obligation to update any forward-lookingstatements for any reason, even if new information becomes available or other eventsoccur in the future.**

**The forward-lookingstatements included herein are based on current expectations that involve anumber of risks and uncertainties set forth under “Risk Factors” in our AnnualReport on Form 10-K for the year ended December 31, 2006 and otherperiodic reports filed with the SEC. Accordingly, to the extent that thisReport 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 resultsand business performance may differ materially from that projected orestimated by the Company in forward-looking statements.**

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**PART I—FINANCIALINFORMATION**

**Item 1.**                        CondensedConsolidated Financial Statements

**CALLISTOPHARMACEUTICALS, INC.(A development stage company)**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

| ** **                                                                                                                                                                                                                                                                                      | ** ** | **June 30, 2007** | ** ** | **December 31, 2006** | ** **  |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------------|-------------|
| ** **                                                                                                                                                                                                                                                                                      | ** ** | **(unaudited)**             | ** ** | ** **                      | ** **  |
| **ASSETS**                                                                                                                                                                                                                                                                                      |       |                        |       |                            |        |   |   |
| Current assets:                                                                                                                                                                                                                                                                                 |       |                        |       |                            |        |   |   |
| Cash and cash  equivalents                                                                                                                                                                                                                                                                      |       | $                           | 689,415    |                            |        | $ | 3,904,232 |   |   |
| Prepaid expenses  and other                                                                                                                                                                                                                                                                     |       | 113,484                     |       |                            | 66,741      |   |   |
|                                                                                                                                                                                                                                                                                            |       | 802,899                     |       |                            | 3,970,973   |   |   |
| Property and equipment—net                                                                                                                                                                                                                                                                 |       | 5,017                       |       |                            | 6,451       |   |   |
| Security deposits                                                                                                                                                                                                                                                                               |       | 73,716                      |       |                            | 73,716      |   |   |
|                                                                                                                                                                                                                                                                                            |       | $                           | 881,632    |                            |        | $ | 4,051,140 |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)**                                                                                                                                                                                                                                         |       |                        |       |                            |        |   |   |
| Current liabilities:                                                                                                                                                                                                                                                                            |       |                        |       |                            |        |   |   |
| Accounts payable                                                                                                                                                                                                                                                                                |       | $                           | 1,864,633  |                            |        | $ | 1,843,422 |   |   |
| Accrued expenses                                                                                                                                                                                                                                                                                |       | 1,567,867                   |       |                            | 1,357,600   |   |   |
|                                                                                                                                                                                                                                                                                            |       | 3,432,500                   |       |                            | 3,201,022   |   |   |
| Stockholders’ equity  (deficit):                                                                                                                                                                                                                                                           |       |                        |       |                            |        |   |   |
| Series A  convertible preferred stock, par value $0.0001, 700,000  shares authorized, 579,125 shares outstanding at June 30, 2007  with a liquidation preference of $5,791,250 and 586,125 shares outstanding at  December 31, 2006 with a liquidation preference  of $5,861,250 |       | 58                          |       |                            | 58          |   |   |
| Common stock, par  value $.0001, 150,000,000 and 100,000,000  shares authorized and 39,741,661 and 39,194,996 shares  outstanding at June 30, 2007 and December 31, 2006, respectively                                                                                                |       | 3,974                       |       |                            | 3,919       |   |   |
| Additional  paid-in capital                                                                                                                                                                                                                                                                     |       | 61,885,367                  |       |                            | 61,290,509  |   |   |
| Deficit  accumulated during development stage                                                                                                                                                                                                                                                   |       | (64,440,267                 | )          |                            | (60,444,368 | ) |   |
|                                                                                                                                                                                                                                                                                            |       | (2,550,868                  | )          |                            | 850,118     |   |   |
|                                                                                                                                                                                                                                                                                            |       | $                           | 881,632    |                            |        | $ | 4,051,140 |   |   |

 

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

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**CALLISTOPHARMACEUTICALS, INC.**

**(A development stagecompany)**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

| ** **                                                                          | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** | **June 5, 1996  (Inception) to** | ** ** |
|-------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                          | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007**                                        | ** ** | **2006** | ** ** | **June 30, 2007** | ** ** |
| Revenues                                                                            |       | $                                                   | —     |                                              | $          | —                                          |       | $ | — |   | $ | — |   | $ | — |   |
| Costs and  expenses:                                                                |       |                                                |       |                                              |       |                                            |       |   |   |   |   |
| Research and development                                                            |       | 1,119,036                                           |       | 1,565,591                                         |       | 2,077,718                                       |       | 3,759,430 |   | 24,115,533 |   |
| Government grants                                                                   |       | (59,113                                             | )          | (201,155                                          | )          | (103,069                                        | )          | (255,422 | ) | (947,534 | ) |
| Purchased in process research and development                                       |       | —                                              |       | —                                            |       | —                                          |       | — |   | 6,944,553 |   |
| General and administrative                                                          |       | 973,496                                             |       | 1,457,120                                         |       | 1,933,156                                       |       | 3,211,210 |   | 22,686,896 |   |
| Stock based compensation—non employees                                         |       | 16,601                                              |       | 456,201                                           |       | (2,877                                          | )          | 960,248 |   | 9,695,684 |   |
| Loss from operations                                                                |       | (2,050,020                                          | )          | (3,277,757                                        | )          | (3,904,928                                      | )          | (7,675,466 | ) | (62,495,132 | ) |
| Interest and investment income                                                      |       | 3,743                                               |       | 19,021                                            |       | 28,714                                          |       | 42,101 |   | 732,330 |   |
| Other expense,  net                                                                 |       | —                                              |       | (157,435                                          | )          | —                                          |       | (157,435 | ) | (173,295 | ) |
| Net loss                                                                            |       | (2,046,277                                          | )          | (3,416,171                                        | )          | (3,876,214                                      | )          | (7,790,800 | ) | (61,936,097 | ) |
| Series A Preferred stock beneficial conversion  feature accreted as a dividend |       | —                                              |       | —                                            |       | (119,685                                        | )          | — |   | (2,504,170 | ) |
| Net loss available to common stockholders                                           |       | $                                                   | (2,046,277 | )                                                 | $          | (3,416,171                                      | )          | $ | (3,995,899 | ) | $ | (7,790,800 | ) | $ | (64,440,267 | ) |
| Weighted average shares outstanding:  basic and diluted                             |       | 39,633,090                                          |       | 38,216,561                                        |       | 39,412,846                                      |       | 37,103,474 |   |   |   |
| Net loss per  common share:  basic and diluted                                      |       | $                                                   | (0.05      | )                                                 | $          | (0.09                                           | )          | $ | ($0.10 | ) | $ | (0.21 | ) |   |   |

 

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

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**CALLISTO PHARMACEUTICALS, INC. (A Development Stage Company)**

**CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)**

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

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**CALLISTO PHARMACEUTICALS, INC. (A Development Stage Company)**

**CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)**

 

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

 

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

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**CALLISTO PHARMACEUTICALS,INC.(A Development Stage Company)**

**CONDENSED CONSOLIDATED STATEMENTS OF CHANGES INSTOCKHOLDERS’ EQUITY (DEFICIT)**

| ** **                                                    | ** ** | **Preferred  Stock** | ** ** | **Preferred  Stock  Par  Value** | ** ** | **Common  Stock** | ** ** | **Common  Stock  Par  Value** | ** ** | **Additional  Paid in  Capital** | ** ** | **Unamortized  Deferred  Stock Based  Compensation** | ** ** | **Deficit  Accumulated  during the  Development  Stage** | ** ** | **Total  Stockholders’  Equity** | ** ** |
|---------------------------------------------------------------|------------|----------------------|------------|----------------------------------|------------|-------------------|------------|-------------------------------|------------|---------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------|------------|
| Balance December 31, 2002                                |       | 4,235,299            |       |                             | 423        |              |       | 13,083,695                    |       |                                  | 1,307      |                                                      |       |                                                          | 14,538,618 |                                  |       |   | — |   |   |   | (12,711,483 | ) |   |   | 1,828,865 |   |   |
| Net 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  |                                  |       |   | — |   |   |   | — |   |   |   | 6,494,890 |   |   |
| Common 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 |   |   |   | — |   |   |   | 3,833,946 |   |   |
| Private placement of  common stock, net                       |       | —               |       |                             | —     |              |       | 2,776,666                     |       |                                  | 278        |                                                      |       |                                                          | 3,803,096  |                                  |       |   | — |   |   |   | — |   |   |   | 3,803,374 |   |   |
| Balance,  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

5

----

**CALLISTO PHARMACEUTICALS,INC.(A Development Stage Company)**

**CONDENSED CONSOLIDATED STATEMENTS OF CHANGES INSTOCKHOLDERS’ EQUITY (DEFICIT)**

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

 

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

6

----

**CALLISTO PHARMACEUTICALS, INC. (A Development Stage Company)**

**CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)**

| ** **                                         | ** ** | **Common  Stock** | ** ** | **Common  Stock  Par  Value** | ** ** | **Additional  Paid in  Capital** | ** ** | **Unamortized  Deferred  Stock Based  Compensation** | ** ** | **Deficit  Accumulated  during the  Development  Stage** | ** ** | **Total  Stockholders’  Equity (Deficit)** | ** ** |
|----------------------------------------------------|------------|-------------------|------------|-------------------------------|------------|---------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------------------------------------|------------|-------------------------------------------------|------------|
| Balance,  December 31, 2004                   |       | 29,219,102        |       |                          | $          | 2,922                                 |       |                                                      | $          | 39,910,187                                                    |       |                                            | $          | (2,302,534 | ) |   | $ | (33,361,197 | ) | $ | 4,249,378 |   |
| Net 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  |                                            |       | — |   | 2,290,843 |   |
| Variable accounting for stock options              |       | —            |       |                          | —     |                                  |       | 75,109                                                    |       |                                                          | —     |                                            |       | — |   | 75,109 |   |
| Common stock  issued  via private placement:       |       |              |       |                          |       |                                  |       |                                                      |       |                                                          |       |                                            |       |   |   |   |   |
| March 2005                                    |       | 1,985,791         |       |                          | 198        |                                  |       | 3,018,203                                                 |       |                                                          | —     |                                            |       | — |   | 3,018,401 |   |
| August 2005                                   |       | 1,869,203         |       |                          | 187        |                                  |       | 1,812,940                                                 |       |                                                          | —     |                                            |       | — |   | 1,813,127 |   |
| Finders fees and  expenses                         |       | —            |       |                          | —     |                                  |       | (176,250                                                  | )          |                                                          | —     |                                            |       | — |   | (176,250 | ) |
| Exercise of common stock warrant                   |       | 125,000           |       |                          | 13         |                                  |       | 128,737                                                   |       |                                                          | —     |                                            |       | — |   | 128,750 |   |
| Common stock issued  for services                  |       | 34,000            |       |                          | 3          |                                  |       | 47,177                                                    |       |                                                          | —     |                                            |       | — |   | 47,180 |   |
| Balance,  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

7

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**CALLISTO PHARMACEUTICALS, INC. (A Development Stage Company)**

**CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)**

                                                

| ** **                                                                                   | ** ** | **Series A  Convertible  Preferred  Shares** | ** ** | **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** | ** ** |
|----------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|-----------------------------------|------------|-------------------|------------|-------------------------------|------------|---------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------|------------|
| Balance, December 31, 2005                                                              |       |                                              | —     |                              |       |              | —     |                          |       | 33,233,096                            |       |                                                      | $          | 3,323                                                         |       |                                  | $          | 46,387,875 |   |   | $ | (1,583,463 | ) |   |   | $ | (45,140,654 | ) |   |   | $ | (332,919 | ) |   |
| Net loss for the period                                                                      |       |                                              | —     |                              |       |              | —     |                          |       | —                                |       |                                                      | —     |                                                          |       | —                                |       |   | — |   |   |   | (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                             |       |   |   |   |   |   |   |   |   |   | 2,579,431 |   |   |
| Common  stock issued via private placement:                                                  |       |                                              |       |                              |       |              |       |                          |       |                                  |       |                                                      |       |                                                          |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| February 2006                                                                           |       |                                              |       |                              |       |              |       |                          |       | 4,283,668                             |       |                                                      | 428        |                                                          |       | 5,139,782                             |       |   |   |   |   |   |   |   |   |   | 5,140,210 |   |   |
| Finders fees and  expenses                                                                   |       |                                              |       |                              |       |              |       |                          |       |                                  |       |                                                      |       |                                                          |       | (561,808                              | )          |   |   |   |   |   |   |   |   |   | (561,808 | ) |   |
| April 2006                                                                              |       |                                              |       |                              |       |              |       |                          |       | 666,667                               |       |                                                      | 67         |                                                          |       | 799,933                               |       |   |   |   |   |   |   |   |   |   | 800,000 |   |   |
| Finders fees and  expenses                                                                   |       |                                              |       |                              |       |              |       |                          |       |                                  |       |                                                      |       |                                                          |       | (41,000                               | )          |   |   |   |   |   |   |   |   |   | (41,000 | ) |   |
| Waiver and Lock-up Agreement                                                                 |       |                                              |       |                              |       |              |       |                          |       | 740,065                               |       |                                                      | 74         |                                                          |       | 579,622                               |       |   |   |   |   |   |   |   |   |   | 579,696 |   |   |
| Common stock issued for services                                                             |       |                                              |       |                              |       |              |       |                          |       | 87,000                                |       |                                                      | 9          |                                                          |       | 121,101                               |       |   |   |   |   |   |   |   |   |   | 121,110 |   |   |
| Exercise of common stock warrants                                                            |       |                                              |       |                              |       |              |       |                          |       | 184,500                               |       |                                                      | 18         |                                                          |       | 190,017                               |       |   |   |   |   |   |   |   |   |   | 190,035 |   |   |
| Series A convertible  preferred stock issued via private placement:                     |       |                                              | 574,350    |                              |       |              | 57         |                          |       |                                  |       |                                                      |       |                                                          |       | 5,743,443                             |       |   |   |   |   |   |   |   |   |   | 5,743,500 |   |   |
| Finders fees and expenses                                                                    |       |                                              | 11,775     |                              |       |              | 1          |                          |       |                                  |       |                                                      |       |                                                          |       | (448,909                              | )          |   |   |   |   |   |   |   |   |   | (448,908 | ) |   |
| Detachable warrants                                                                          |       |                                              |       |                              |       |              |       |                          |       |                                  |       |                                                      |       |                                                          |       | 2,384,485                             |       |   |   |   |   |   |   |   |   |   | — |   |   |
| Beneficial conversion feature accreted as a dividend                                         |       |                                              | —     |                              |       |              |       |                          |       | —                                |       |                                                      | —     |                                                          |       | —                                |       |   | — |   |   |   | (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

8

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**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** | ** ** | **Common  Stock** | ** ** | **Common  Stock  Par  Value** | ** ** | **Additional  Paid in  Capital** | ** ** | **Deficit  Accumulated  during the  Development  Stage** | ** ** | **Total  Stockholders’  Equity (Deficit)** | ** ** |
|-------------------------------------------------------------------------|------------|---------------------------------------------------|------------|--------------------------------------------------|------------|-------------------|------------|-------------------------------|------------|---------------------------------------|------------|---------------------------------------------------------------|------------|------------------------------------------------------|------------|
| Balance, December 31, 2006                                         |       |                                              | 586,125    |                                             |       |              | $          | 58                            |       |                                  | 39,194,996 |                                                          |       | $                                                    | 3,919      |   |   | $ | 61,290,509 |   | $ | (60,444,368 | ) |   | $ | 850,118 |   |   |
| Net loss for the period                                                 |       |                                              | —     |                                             |       |              | —     |                          |       | —                                |       |                                                          | —     |                                                 |       | — |   | (3,876,214 | ) |   | (3,876,214 | ) |   |
| Stock based  compensation  expense                                      |       |                                              |       |                                             |       |              |       |                          |       |                                  |       |                                                          |       |                                                 |       | 194,828 |   |   |   |   | 194,828 |   |   |
| Common stock issued  for services                                       |       |                                              |       |                                             |       |              |       |                          |       | 80,000                                |       |                                                          | 8          |                                                 |       | 36,792 |   |   |   |   | 36,800 |   |   |
| Series A convertible preferred stock  issued via private placement |       |                                              | 28,000     |                                             |       |              | 3          |                          |       |                                  |       |                                                          |       |                                                 |       | 279,997 |   |   |   |   | 280,000 |   |   |
| Finders fees and  expenses                                              |       |                                              |       |                                             |       |              |       |                          |       |                                  |       |                                                          |       |                                                 |       | (36,400 | ) |   |   |   | (36,400 | ) |   |
| Conversion of Series A preferred stock to common  stock                 |       |                                              | (35,000    | )                                                |       |              | (3         | )                             |       | 466,665                               |       |                                                          | 47         |                                                 |       | (44 | ) |   |   |   |   |   |   |
| Detachable warrants                                                     |       |                                              |       |                                             |       |              |       |                          |       |                                  |       |                                                          |       |                                                 |       | 119,685 |   |   |   |   | — |   |   |
| Beneficial conversion feature accreted as a dividend                    |       |                                              | —     |                                             |       |              |       |                          |       | —                                |       |                                                          | —     |                                                 |       | — |   | (119,685 | ) |   | — |   |   |
| Balance,  June 30, 2007                                            |       |                                              | 579,125    |                                             |       |              | $          | 58                            |       |                                  | 39,741,661 |                                                          |       | $                                                    | 3,974      |   |   | $ | 61,885,367 |   | $ | (64,440,267 | ) |   | $ | (2,550,868 | ) |   |

 

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

9

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**CALLISTOPHARMACEUTICALS, INC.(A Development Stage Company)**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Unaudited)**

| ** **                                                                                                  | ** ** | **Six months Ended June 30,** | ** ** | **Period from  June 5, 1996  (inception) to** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                                                                  | ** ** | **2007**                                          | ** ** | **2006**                                                          | ** ** | **June 30, 2007** | ** ** |
| Cash flows from operating activities:                                                                       |       |                                              |       |                                                              |       |   |   |
| Net loss                                                                                                    |       | $                                                 | (3,876,214 | )                                                                 | $          | (7,790,800 | ) | $ | (61,936,097 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities:                                |       |                                              |       |                                                              |       |   |   |
| Depreciation                                                                                                |       | 1,434                                             |       | 717                                                               |       | 88,222 |   |
| Stock based compensation  expense                                                                           |       | 231,628                                           |       | 1,911,021                                                         |       | 16,749,074 |   |
| Purchased in-process  research and development non-cash portion                                             |       | —                                            |       | —                                                            |       | 6,841,053 |   |
| Liquidated damages  non-cash                                                                                |       | —                                            |       | —                                                            |       | 579,696 |   |
| Changes in operating assets and liabilities:                                                                |       |                                              |       |                                                              |       |   |   |
| Prepaid expenses                                                                                            |       | (46,743                                           | )          | (8,261                                                            | )          | (113,484 | ) |
| Rent deposits                                                                                               |       | —                                            |       | 8,480                                                             |       | (73,716 | ) |
| Accounts payable and  accrued expenses                                                                      |       | 231,478                                           |       | (331,963                                                          | )          | 3,140,071 |   |
| Total adjustments                                                                                           |       | 417,797                                           |       | 1,579,994                                                         |       | 27,210,916 |   |
| Net cash used in  operating activities                                                                      |       | (3,458,417                                        | )          | (6,210,806                                                        | )          | (34,725,181 | ) |
| Cash flows from investing activities:                                                                       |       |                                              |       |                                                              |       |   |   |
| Acquisition of equipment                                                                                    |       | —                                            |       | (8,602                                                            | )          | (93,239 | ) |
| Net cash used in  investing activities                                                                      |       | —                                            |       | (8,602                                                            | )          | (93,239 | ) |
| Cash flows from financing activities:                                                                       |       |                                              |       |                                                              |       |   |   |
| Issuance of common and  preferred stock, net of repurchases                                                 |       | 280,000                                           |       | 5,940,210                                                         |       | 37,249,173 |   |
| Finders’ fees and  expenses                                                                            |       | (36,400                                           | )          | (602,808                                                          | )          | (2,060,123 | ) |
| Exercise of common stock  warrants                                                                          |       | —                                            |       | 190,035                                                           |       | 318,785 |   |
| Net cash provided by  financing activities                                                                  |       | 243,600                                           |       | 5,527,437                                                         |       | 35,507,835 |   |
| Net (decrease) increase  in cash and cash equivalents                                                       |       | (3,214,817                                        | )          | (691,971                                                          | )          | 689,415 |   |
| Cash and cash  equivalents at beginning of period                                                           |       | 3,904,232                                         |       | 1,420,510                                                         |       | — |   |
| Cash and cash  equivalents at end of period                                                                 |       | $                                                 | 689,415    |                                                              | $          | 728,539 |   | $ | 689,415 |   |
| Supplementary disclosure of cash flow information:                                                          |       |                                              |       |                                                              |       |   |   |
| Cash paid for taxes                                                                                         |       | $                                                 | 2,441      |                                                              | $          | 7,984 |   | $ | 125,928 |   |
| Cash paid for interest                                                                                      |       | $                                                 | —     |                                                              | $          | — |   | $ | — |   |
| Supplemental disclosure  of non-cash investing and financing activities:                                    |       |                                              |       |                                                              |       |   |   |
| Accretion of fair value  of beneficial conversion feature as a dividend to Series A Preferred  stockholders |       | $                                                 | 119,685    |                                                              | $          | — |   | $ | 2,504,170 |   |
| Stock options, warrants  and common stock issued for services                                               |       | $                                                 | 231,628    |                                                              | $          | 1,911,021 |   | $ | 16,749,074 |   |
| Stock-based liquidated damages                                                                              |       | $                                                 | —     |                                                              | $          | — |   | $ | 579,676 |   |

 

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

10

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**CALLISTO PHARMACEUTICALS, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)**

**1.**                 Businessoverview:

Callisto Pharmaceuticals, Inc. (“Callisto”) is adevelopment stage biopharmaceutical company, whose primary focus is onbiopharmaceutical product development. Since inception in June of 1996Callisto’s efforts have been principally devoted to research and development,securing and protecting patents and raising capital. From inception through June 30,2007, Callisto has sustained cumulative net losses available to common stockholders of $64,440,267. Callisto’s losses have resulted primarily fromexpenditures incurred in connection with research and development activities,application and filing for regulatory approval of proposed products, stockbased compensation expense, patent filing and maintenance expenses, purchase ofin-process research and development, outside accounting and legal services andregulatory, scientific and financial consulting fees. From inception through June 30,2007, Callisto has not generated any revenue from operations, expects to incuradditional losses to perform further research and development activities anddoes not currently have any commercial biopharmaceutical products, and does notexpect to have such for several years, if at all.

Callisto’s productdevelopment efforts are in their early stages and Callisto cannot makeestimates of the costs or the time they will take to complete. The risk ofcompletion of any program is high because of the many uncertainties involved inbringing new drugs to market including the long duration of clinical testing,the specific performance of proposed products under stringent clinical trialprotocols, the extended regulatory approval and review cycles, the nature andtiming of costs and competing technologies being developed by organizationswith significantly greater resources.

**2.**                 Basisof presentation and going concern:

The accompanying unaudited condensed consolidatedfinancial statements of Callisto, which include its wholly owned subsidiaries: (1) CallistoResearch Labs, LLC (including its wholly owned but inactive subsidiary,Callisto Pharma, GmbH (Germany)) and (2) Synergy Pharmaceuticals Inc. (“Synergy”, including its wholly owned but inactive subsidiary IgX, Ltd (Ireland)), havebeen prepared in accordance with (i) accounting principles generallyaccepted in the United States of America (“GAAP”) for interim financialinformation and (ii) the rules of the Securities and ExchangeCommission (the “SEC”) for quarterly reports on Form 10-Q. Theresults of operations of Synergy are included in the condensed consolidatedfinancial statements since May 1, 2003. All intercompany balances andtransactions have been eliminated and certain expense items in prior periodshave been reclassified to conform to current financial statementpresentation. These condensed consolidated financial statements do not includeall of the information and footnote disclosures required by GAAP for completefinancial statements. These statements should be read in conjunction withCallisto’s audited financial statements and notes thereto for the year ended December 31,2006, included in Form 10-K filed with the SEC on April 17,2007. In the opinion of management, the accompanying unaudited condensed consolidatedfinancial statements include all adjustments, primarily consisting of normaladjustments, necessary for the fair presentation of the balance sheet andresults of operations for the interim periods. The results of operations forthe three and six months ended June 30, 2007 are not necessarilyindicative of the results of operations to be expected for the full year endingDecember 31, 2007.

Callisto’s consolidated financial statements as of June 30,2007 and December 31, 2006 have been prepared under the assumption thatCallisto will continue as a going concern for the twelve months ending December 31,2007. Callisto’s independent registered public accounting firm has issued areport dated 

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April 13, 2007 thatincluded an explanatory paragraph referring to Callisto’s recurring losses fromoperations and net capital deficiency and expressing substantial doubt in ourability to continue as a going concern without additional capital becomingavailable. Callisto’s ability to continue as a going concern is dependentupon its ability to obtain additional equity or debt financing, attainfurther operating efficiencies and, ultimately, to generate revenue. Thefinancial statements do not include any adjustments that might result from theoutcome of this uncertainty. Callisto will be required to raise additionalcapital within the next twelve months to complete the development andcommercialization of current product candidates and to continue to fundoperations at the current cash expenditure levels.

To date, Callisto’s sources of cash have beenprimarily limited to the sale of equity securities. Net cash provided byfinancing activities for the six months ended June 30, 2007 and 2006and for the period from June 5, 1995 (inception) to June 30, 2007 wasapproximately $244,000, $5.5 million and $35.5 million, respectively. Callistocannot be certain that additional funding will be available on acceptableterms, or at all. To the extent that Callisto can raise additional funds byissuing equity securities, Callisto’s stockholders may experience significantdilution. Any debt financing, if available, may involve restrictive covenantsthat impact Callisto’s ability to conduct its business. If Callisto is unableto raise additional capital when required or on acceptable terms, it may haveto significantly delay, scale back or discontinue the development and/orcommercialization of one or more of Callisto’s product candidates. Callistoalso may be required to  seek collaborators for product candidates at anearlier stage than otherwise would be desirable and on terms that are lessfavorable than might otherwise be available; and relinquish licenses orotherwise dispose of rights to technologies, product candidates or products.

On August 2, 2007,Callisto closed a private placement of 1,124,550 shares of Series BConvertible Preferred Stock and 22,491,000 warrants to certain investors foraggregate gross proceeds of approximately $11.2 million. The Warrants areimmediately exercisable at $0.70 per share and are exercisable at any timewithin three years from the date of issuance. (see Note 7. SubsequentEvents). If the Put Option associated with the Series B Preferred Stock isexercised under the conditions discussed in Note 7 we will be required to raiseadditional capital within the next twelve months to complete the developmentand commercialization of current product candidates and to continue to fundoperations at our current cash expenditure levels.

**3.**                 Accountingfor share-based payments

In December 2004, the Financial AccountingStandards Board (FASB) issued Statement of Financial Accounting Standard (“SFAS”)No. 123 (Revised 2004), *Share-BasedPayments* (“SFAS 123R”). SFAS 123R requires a public entity tomeasure the cost of employee services received in exchange for the award ofequity instruments based on the fair value of the award at the date of grant.The expense is to be recognized over the period during which an employee isrequired to provide services in exchange for the award. SFAS 123R was effectiveas of the beginning of the first interim or annual reporting period that beganafter December 15, 2005 and accordingly Callisto adopted SFAS 123R on January 1,2006.

SFAS 123R provides for two transition methods. The “modified*prospective”* method requires thatshare-based compensation expense be recorded for any employee options grantedafter the adoption date and for the unvested portion of any employee optionsoutstanding as of the adoption date. The “*modifiedretrospective”*method requires that, beginning in the first quarterof 2006, all prior periods presented be restated to reflect the impact ofshare-based compensation expense consistent with the proforma disclosurespreviously required under SFAS 123. Callisto has elected to use the “modified *prospective”* method in adopting thisstandard.

Prior to January 1, 2006, Callisto had adoptedSFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). Asprovided for by SFAS 123, Callisto had elected to continue to account forstock-based compensation according to the provisions of Accounting PrinciplesBoard Opinion No. 25, 

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“Accounting for StockIssued to Employees” (“APB 25”). Accordingly, compensation expense had beenrecognized to the extent of employee or director services rendered based on theintrinsic value of stock options granted. Callisto accounts for common stock,stock options, and warrants granted to non-employees based on the fair value ofthe instrument, using the Black-Scholes option pricing model based onassumptions for expected stock price volatility, term of the option, risk-freeinterest rate and expected dividend yield at the grant date.

For all awards granted prior to January 1, 2006,stock based compensation expense is being recognized on a straight line basisover the remaining requisite service period, which ranged from nine months tothree years at the date of adoption. The adoption of SFAS 123R increased netloss for the three and six months ended June 30, 2007 and 2006 by $118,860and $460,770, and $234,505 and $950,773, respectively, for stock basedcompensation cost related to employee stock options.

The unrecognized compensation cost related tonon-vested share-based compensation arrangements for all employee stock optionsoutstanding at June 30, 2007 and 2006 was $547,148 and $1,089,829,respectively, to be recognized over a weighted average vesting period of 1.37and 1.83 years, respectively.

Effectivewith the adoption of SFAS 123R stock-based compensation expense related toCallisto’s share-based compensation arrangements attributable to employees isbeing recorded as a component of general and administrative expense andresearch and development expense in accordance with the guidance of StaffAccounting Bulletin 107**,** Topic 14,paragraph F *. Classification of CompensationExpense Associated with Share-Based Payment Arrangements* (“SAB 107”).Total stock based compensation expense related to employee and non-employeestock options recognized in operating results was as follow:

| ** **                                             | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,**                                                        | ** ** | **June 5, 1996  (Inception) to**                                                          | ** ** |
|--------------------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| **Stock based compensation expense**    | ** ** | ** **                                          | ** ** | **        2007        ** | ** ** | **        2006        ** | ** ** | **2007** | ** ** | **2006** | ** ** | **June 30, 2007** | ** ** |
| Employees—included  in research and development   |       |                                                | $          | 14,698                                                                                                   |       |                                                                                                     |       | $ | 141,008 |   |   | $ | 32,544 |   | $ | 289,604 |   | $ | 2,585,088 |   |
| Employees—included  in general and administrative |       |                                                | 104,162    |                                                                                                     |       |                                                                                                     | 319,762    |   |   | 201,961 |   | 661,169 |   | 4,468,301 |   |
| Subtotal employee stock option grants                  |       |                                                | 118,860    |                                                                                                     |       |                                                                                                     | 460,770    |   |   | 234,505 |   | 950,773 |   | 7,053,389 |   |
| Non-employee—research and development             |       |                                                | —     |                                                                                                     |       |                                                                                                     | 102,750    |   |   | — |   | 102,750 |   | 102,750 |   |
| Non-employee—general  and administrative          |       |                                                | 16,601     |                                                                                                     |       |                                                                                                     | 353,451    |   |   | (2,877 | ) | 857,498 |   | 9,592,935 |   |
| Subtotal non-employee stock option grants              |       |                                                | 16,601     |                                                                                                     |       |                                                                                                     | 456,201    |   |   | (2,877 | ) | 960,248 |   | 9,695,685 |   |
| Total stock based  compensation expense                |       |                                                | $          | 135,462                                                                                                  |       |                                                                                                     |       | $ | 916,971 |   |   | $ | 231,628 |   | $ | 1,911,021 |   | $ | 16,749,074 |   |
|                                                        |            |                                                     |            |                                                                                                          |            |                                                                                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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Theestimated fair value of each employee option award granted was determined inaccordance with SFAS 123R on the date of grant using the Black-Scholes optionvaluation model with the following weighted-average assumptions for employeeoptions granted during the three and six months ended June 30, 2007 and2006:

| ** **               | ** ** | **Three months ended June 30,**                                          | ** ** | **Six months ended June 30,**                                            | ** ** |
|--------------------------|------------|----------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| ** **               | ** ** | **       2007       ** | ** ** | **       2006       ** | ** ** | **    2007     ** | ** ** | **     2006     ** | ** ** |
| Risk free interest  rate |       |                                                                                         | 4.7        | %                                                                                            |       |   | No grants |   |   | 4.7 | % |   | 4.3 | % |   |
| Dividend yield           |       |                                                                                         | 0.0        | %                                                                                            |       |   | No grants |   |   | 0.0 | % |   | 0.0 | % |   |
| Expected  volatility     |       |                                                                                         | 60         | %                                                                                            |       |   | No grants |   |   | 60 | % |   | 79 | % |   |
| Expected term            |       |                                                                                         | 5 years    |                                                                                         |       |   | No grants |   |   | 5-6 years |   |   | 7 years |   |   |

 

*Risk-free interest rate:*   assumptionis based upon observed interest rates appropriate for the expected term ofCallisto’s employee stock options.

*Dividend yield:*   Callistohas not paid any dividends on common stock since its inception and does notanticipate paying dividends on its common stock in the foreseeable future.

*Expected volatility:*   Isbased on the historical volatility of Callisto’s stock.

*Expected term:*   basedon expectations regarding future exercises of options which generally vest over3 years and have a 10 year life. The expected term of the employee and non-employeedirector options is the estimated weighted-average period until exercise orcancellation of vested options (forfeited unvested options are not considered).SAB 107 guidance permits companies to use a “safe harbor” expected termassumption for grants up to December 31, 2007 based on the mid-point ofthe period between vesting date and contractual term, averaged on atranche-by-tranche basis. Callisto used the SAB 107 safe harbor for itsexpected term assumption starting on January 1, 2007. Previously Callistohad estimated expected term based on a sampling of industry comparables forpublicly traded companies. The expected term for consultant awards is theremaining period to contractual expiration.

SFAS 123R requires forfeituresto be estimated at the time of grant and revised, if necessary, in subsequentperiods if actual forfeitures differ from those estimates. Callisto estimatedfuture unvested option forfeitures based on historical Company experience andhas incorporated this rate in determining the fair value of employee optiongrants.

Asummary of stock option activity and of changes in options outstanding underCallisto’s plans is presented below:

| ** **                            | ** ** | **Number of  options** | ** ** | **Exercise  Price  Per Share** | ** **  | **Weighted  Average  Exercise  Price  Per Share** | ** ** |
|---------------------------------------|------------|-----------------------------|------------|-------------------------------------|-------------|--------------------------------------------------------|------------|
| Balance,  December 31, 2006      |       | 8,053,375                   |       | $                                   | 0.75 - 6.75 |                                                   |       | $ | 1.75 |   |   |
| Granted                               |       | 732,000                     |       | $                                   | 0.66 - 0.96 |                                                   |       | $ | 0.80 |   |   |
| Forfeitures                           |       | (225,000                    | )          | $                                   | 0.75 - 1.60 |                                                   |       | $ | 1.01 |   |   |
| Balance,  June 30, 2007          |       | 8,560,375                   |       | $                                   | 0.66 - 6.75 |                                                   |       | $ | 1.69 |   |   |
| Exercisable as of  June 30, 2007 |       | 5,344,046                   |       | $                                   | 0.75 - 6.75 |                                                   |       | $ | 1.67 |   |   |

 

The weighted averageremaining term of all options outstanding at June 30, 2007 was 6.4 yearsas compared to 7.3 years at December 31, 2006.

SFAS 123R requires thatcash flows resulting from tax deductions in excess of the cumulativecompensation cost recognized for options exercised (excess tax benefits) beclassified as cash inflows from financing activities and cash outflows fromoperating activities. Due to Callisto’s accumulated deficit position, no taxbenefits have been recognized in the cash flow statement.

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**RECENTACCOUNTING PRONOUNCEMENTS:**

In February 2007, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards No.159, “The Fair Value Option for Financial Assets andFinancial Liabilities, including an Amendment to SFAS 115” (“SFAS 159”). Thefair value option established by SFAS 159 permits all entities to measure alleligible items at fair value at specified election dates. A business entity shallreport all unrealized gains and losses on items for which the fair value optionhas been elected in earnings at each subsequent reporting date. The provisionsof SFAS 159 are effective for fiscal years beginning after November 15,2007. Callisto is currently evaluating the impact, if any, of the provisions ofSFAS 159.

In December 2006, theFASB issued a FASB Staff Position (“FSP”) Emerging Issues Task Force (“EITF”)Issue No. 00-19-2 “Accounting for Registration PaymentArrangements” (“FSP 00-19-2”) which addresses an issuer’saccounting for registration payment arrangements. FSP 00-19-2specifies that the contingent obligation to make future payments or otherwisetransfer consideration under a registration payment arrangement, whether issuedas a separate agreement or included as a provision of a financial instrument orother agreement, should be separately recognized and measured in accordancewith FASB Statement No.5 “Accounting for Contingencies”. The guidance in FSP 00-19-2amends FASB Statements No. 133, “Accounting for Derivative Instruments andHedging Activities”, and No.150, “Accounting for Certain Financial Instrumentswith Characteristics of both Liabilities and Equity”, and FASB InterpretationNo.45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees,Including Indirect Guarantees of Indebtedness of Others” to include scopeexceptions for registration payment arrangements. FSP 00-19-2 iseffective immediately for registration payment arrangements and the financialinstruments subject to those arrangements that are entered into or modifiedsubsequent to the date of issue of FSP 00-19-2. For registrationpayment arrangements and financial instruments subject to those arrangementsthat were entered into prior to the issuance of FSP 00-19-2, thisis effective for financial statements issued for fiscal years beginning after December 15,2006, and interim periods within those fiscal years. Callisto has analyzed theprovisions of FSP 00-19-2 and adoption of this standard did nothave a material effect on Callisto’s consolidated financial statements.

In September 2006,the FASB issued Statement of Financial Accounting Standards No.157, “Fair ValueMeasurements” (“SFAS 157”). SFAS 157 defines fair value, establishes aframework for measuring fair value in accordance with generally acceptedaccounting principles and expands disclosures about fair value measurements.The provisions of SFAS 157 are effective for fiscal years beginning after November 15,2007. Callisto is currently evaluating the impact, if any, of the provisions ofSFAS 157.

In July 2006, theFASB issued FASB Interpretation No. 48 (“FIN 48”) “Accounting forUncertainty in Income Taxes (an interpretation of FASB Statement No. 109”)which is effective for fiscal years beginning after December 15, 2006.This interpretation was issued to clarify the accounting for uncertainty in theamount of income taxes recognized in the financial statements by prescribing arecognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return. The provisions of FIN 48 are effective January 1, 2007, withthe cumulative effect of the change in accounting principle recorded as anadjustment to retained earnings. The adoption of FIN 48 did not have amaterial impact on the Company’s consolidated financial position, results ofoperations or cash flows.

**4.**                 Net Loss perShare

Basic and diluted net lossper share is presented in conformity with SFAS No. 128, “Earnings perShare,” for all periods presented. In accordance with SFAS No. 128, basicand diluted net loss per common share was determined by dividing net lossapplicable to common stockholders by the weighted-average common sharesoutstanding during the period. Diluted weighted-average shares are the same asbasic weighted-average shares since the inclusion of issuable shares pursuantto the exercise of stock options and warrants, would have been antidilutive. Asof June 30, 2007 and 2006 there were 16,296,620 and 4,077,352 

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warrantsoutstanding, respectively and 8,560,375 and 8,349,875 total optionsoutstanding, respectively. In addition Callisto had 7,721,666 common sharesissuable upon conversion of its Series A convertible preferred stock as ofJune 30, 2007 and no preferred stock was outstanding as of June 30,2006.

**5.**                 Stockholders’equity (deficit):

From October 23, 2006until January 10, 2007, Callisto placed 602,350 shares of Series AConvertible Preferred Stock and 8,031,333 warrants to certain investors foraggregate gross proceeds of $6,023,500. As of December 31, 2006Callisto had closed on 574,350 shares of such Series A ConvertiblePreferred Stock for aggregate gross proceeds of $5,743,500. The final trauncheof this financing closed January 10, 2007 when Callisto placed 28,000shares of such Series A Convertible Preferred Stock for aggregate grossproceeds of $280,000. The shares of Series A Convertible Preferred Stockare convertible into shares of common stock at a conversion price of $0.75 pershare. The investors also are parties to a Registration Rights Agreement, datedas of October 23, 2006 pursuant to which Callisto agreed to file,within 60 days of closing, a registration statement with the SEC covering theresale of the shares of common stock underlying the Series A ConvertiblePreferred Stock and the warrants issued to the investors. The warrants areimmediately exercisable at $0.75 per share, will expire five years from thedate of issuance, and have certain antidilution rights for the twelvemonth period beginning on the effective date of the registration statementregistering the shares of common stock underlying the warrants. (See note7 Subsequent Events) Callisto (i) paid aggregate fees and expenses of$485,308 ($448,908 prior to December 31, 2006) in cash and (ii) issuedan aggregate 11,775 shares of Series A Convertible Preferred Stock and1,228,761 warrants to purchase common stock, to certain selling agents. Thewarrants are immediately exercisable at $0.75 per share, will expire five yearsafter issuance and have the same anti-dilutive rights as the investor warrants.On January 12, 2007 Callisto filed a registration statement on Form S-3registering the common stock issuable upon (i) the conversion of the all Series AConvertible Preferred Stock, (ii) the exercise of all related investorwarrants and (iii) the exercise of all selling agent warrants. On February 15,2007 Amendment No.1 to this registration statement was declared effective bythe SEC.

The material terms of the Series APreferred Stock consist of:

*Dividends.*   Holdersof the Series A Convertible Preferred Stock shall not be entitled toreceive dividends except as and if declared at Callisto’s sole election.

*Voting Rights.*   Sharesof the Series A Convertible Preferred Stock shall have no voting rights.However, so long as any shares of Series A Convertible Preferred Stock areoutstanding, Callisto shall not, without the affirmative vote of a majority ininterest of the shares of Series A Convertible Preferred Stock then outstanding,(a) alter or change adversely the powers, preferences or rights given tothe Series A Convertible Preferred Stock, (b) authorize or create anyclass of stock senior or equal to the Series A Convertible PreferredStock, (c) amend its articles of incorporation or other charter documents,so as to affect adversely any rights of the holders of Series AConvertible Preferred Stock or (d) increase the authorized number ofshares of Series A Convertible Preferred Stock.

*Liquidation.*   Uponany liquidation, dissolution or winding-up of Callisto, the holders of the Series AConvertible Preferred Stock shall be entitled to receive an amount equal to theStated Value per share, which is $10 per share plus any accrued and unpaiddividends.

*Conversion Rights.*   Eachshare of Series A Convertible Preferred Stock shall be convertible intothat number of shares of common stock determined by dividing the Stated Value,currently $10 per share, by the conversion price, currently $0.75 per share.The conversion price is subject to adjustment for dilutive issuances.

*Automatic conversion.*   BeginningOctober 24, 2007, if the price of the common stock equals $1.50 per sharefor 20 consecutive trading days, and an average of 50,000 shares of commonstock per day shall have been traded during the 20 trading days, Callisto shallhave the right to deliver a notice to the holders of the Series AConvertible Preferred Stock, to convert any portion of the shares of Series AConvertible Preferred Stock into shares of Common Stock at the conversionprice.

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As per Emerging IssuesTask Force (“EITF”) Issue 00-19, *“Accountingfor Derivative Financial Instruments Indexed to, and Potentially Settled in,Company Stock”*, Callisto has determined that the warrants should betreated as “permanent equity”.

As per  FSP No. 00-19-2“*Accounting for Registration PaymentArrangements”* (“FSP 00-19-2”) , issued in December 2006,which specifies that contingent obligations under a registration paymentarrangement should be separately recognized and measured in accordance withFASB Statement No.5 “*Accounting forContingencies”*, Callisto has determined that no liability needed tobe recorded. On January 12, 2007 Callisto filed a registration statementon Form S-3 registering the common stock issuable upon (i) theconversion of the all Series A Convertible Preferred Stock, (ii) theexercise of all related investor warrants and (iii) the exercise of allselling agent warrants. On February 15, 2007 Amendment No.1 to thisregistration statement was declared effective by the SEC.

As per EITF 00-27, “Application*of Issue 98-5 to Certain ConvertibleInstruments*” Callisto evaluated the preferred stock transaction andaccordingly found that there was an embedded beneficial conversion feature. Thefair value of the detachable warrants on the date of grant was $3,557,872 usingBlack Scholes assumptions of 60% volatility, a risk free interest rate of 4.57%to 4.84%, no dividend, an expected life of 5 years and a stock price onthat dates of grant ranging from $0.88 to $ 0.75 per share. The conversionrights of the preferred stock contained a beneficial conversion featuretotaling $2,504,170, using the “effective conversion price” method based onrelative fair value of the preferred stock and the warrants. This beneficialconversion feature was immediately accreted to the preferred stock as a dividendbecause the preferred stock could be converted immediately upon issuance. Thebeneficial conversion feature associated with final traunche of 28,000 sharesof Series A Convertible Preferred Stock placed on January 10, 2007amounted to $119,685 and was recorded as a beneficial conversion featureaccreted as a dividend in the quarter ended March 31, 2007.

**6.**                 Commitments andcontingencies:

Employment and consultingagreements:

On January 25, 2007,Callisto entered into an Extension and Amendment Agreement with Mr. Cerrone.The agreement extends the term of the consulting agreement between us and Mr. Cerrone,dated as of December 27, 2004, to December 31, 2009. Among otherthings, the agreement increases Mr. Cerrone’s compensation from $205,000to $275,000 per year. Additionally, pursuant to the agreement, inrecognition of the services beyond that required by Mr. Cerrone during theperiod from July 1, 2006 to January 25, 2007, Callisto paidMr. Cerrone a bonus of $75,000 on April 5, 2007. Mr. Cerroneshall be eligible to earn a cash bonus of up to 22.5% of his base compensationfor each twelve month period during the term of the agreement based on meetingperformance objectives and bonus criteria to be mutually identified by Mr. Cerroneand Callisto’s Board.

On January 25, 2007,in conjunction with the Extension and Amendment Agreement, Mr. Cerrone wasgranted 225,000 ten year non-qualified stock options at an exercise price of$0.96 per share of which 75,000 vest on each of December 31, 2007, 2008and 2009. In accordance with EITF—Emerging Issues Task Force Issue 96-18:*Accounting for Equity Instruments That AreIssued to Other Than Employees for Acquiring, or in Conjunction with Selling,Goods or Service* s (“EITF 96-18”), the measurement date willbe the earliest of the third anniversary of the agreement (when “performancecommitment is completed”) or the accelerated vesting date if Mr. Cerroneis terminated without cause or good reason. Accordingly the fair value of theseoptions of $165,040 on the date of grant is being “marked to market” quarterlyuntil the measurement date is determined. The fair value of these options as ofJune 30, 2007 was $88,569. Stock-based compensation expense, associatedwith these options, recorded during the six months ended June 30, 2007 was$12,618.

On February 16, 2007,Dr. Jacob entered into an Extension and Amendment Agreement with Callistoas approved by the Compensation Committee which extended the term under hisemployment agreement to June 30, 2009. In addition, pursuant to theagreement, Dr. Jacob was granted 225,000 ten year incentive 

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stockoptions exercisable at $0.81 per share of which 75,000 vest on each of December 31,2007, 2008 and 2009. His salary and other compensation were unchanged.

On April 24, 2007,Callisto entered into a services agreement with Barretto Pacific Corporationpursuant to which Barretto will provide beginning May 1, 2007, investorrelations services. Callisto will pay Barretto a fee of $120,000 over a sevenmonth period and 80,000 shares of restricted common stock. During the three monthsended June 30, 2007 Callisto paid $20,000 of this fee and issued the80,000 shares of common stock. The fair value of the common shares issued toBarretto was $55,200, of which $36,800 was accounted for as stock-basedcompensation expense during the three months ended June 30, 2007.

On June 8, 2007Callisto filed a complaint against Donald Picker, its former Executive VicePresident, Research & Development in the Supreme Court of the State of NewYork alleging that (i) Dr. Picker breached his written employmentagreement with Callisto by accepting employment with Tapestry Pharmaceuticals,Inc. a manner not in accordance with his agreement, (ii) Dr. Picker actedfraudulently by failing to reveal to Callisto that he was negotiatingemployment with Tapestry while purportedly representing Callisto innegotiations with Tapestry pursuant to a confidential disclosure agreementbetween Tapestry and Callisto and (iii) Dr. Picker misappropriatedconfidential files and materials from Callisto's offices. Callisto is seeking$80 million in damages from Dr. Picker.

On June 18, 2007,Callisto received notice from the staff of the American Stock Exchange (“AMEX”)indicating that it is not in compliance with certain continued listingstandards, specifically, Section 1003(a) (ii) of the Company Guidewith shareholders’ equity of less than $4,000,000 and losses from continuingoperations and/or net losses in three of its four most recent fiscal years.

On July 18, 2007Callisto submitted a plan, advising AMEX of the actions it has taken, or willtake, that would bring it into compliance with Section 1003(a)(ii) of theCompany Guide by April 3, 2008. If AMEX accepts the Company’s plan, it maybe able to continue its listing during the plan period of up to 18 months,during which time the Company will be subject to periodic review to determineif it is making progress consistent with the plan. If it is not in compliancewith the continued listing standards at the end of the plan period, or it doesnot make progress consistent with the plan during the plan period, AMEX staffmay initiate delisting proceedings. While the plan is under review by AMEX,Callisto expects that its common stock will continue to trade withoutinterruption on AMEX.

**7.**                 Subsequentevents:

On August 2, 2007,Callisto closed a private placement of 1,124,550 shares of Series BConvertible Preferred Stock (the “Series B Preferred Stock”) and22,491,000 warrants (the “Warrants”) to certain investors (the “Investors”) foraggregate gross proceeds of approximately $11.2 million pursuant to aSecurities Purchase Agreement dated as of August 2, 2007 (the “SPA”). TheWarrants are immediately exercisable at $0.70 per share and are exercisable atany time within three years from the date of issuance. Other than pursuantto certain issuances, for the twelve month period beginning on the effectivedate of the Registration Statement registering the resale of the shares ofCommon Stock underlying the Warrants by the Holder, if the Company at any timewhile the Warrants are outstanding, shall sell or grant any option to acquireshares of Common Stock, at an effective price lower than the then exerciseprice then, the exercise price shall be reduced to such lower price.

Subsequentto closing, $8,480,000 of the net proceeds were placed into escrow at therequest of RAB Special Situations (Master) Fund Limited and Absolute OctaneMaster Fund Limited (collectively, the “Lead Investors”), each of whichinvested $5,000,000 in the private placement. Pursuant to a Put OptionAgreement, the Lead Investors shall have the right until October 30, 2007to require redemption by the Company of all of the Series B ConvertiblePreferred Stock and 85% of the Warrants purchased by them only upon theoccurrence of any of the following events:

(i)            TheCompany shall have not received the approval of its common stockholders of theissuance of shares of Common Stock issuable upon the conversion of the Series BConvertible Preferred 

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Stock or theexercise of the Warrants (the “Underlying Shares”) by 5:00 pm New York time on September 30,2007; or

(ii)        TheAmerican Stock Exchange shall not have approved the Listing of AdditionalSecurities application filed by the Company relating to the Underlying Sharesby 5:00 pm New York time on September 30, 2007 (for a reason other thanthe Lead Investors failing to timely provide American Stock Exchange withinformation reasonably requested by Amex Listing Qualification as part of theirreview of the application); or

(iii)    TheAmerican Stock Exchange or the Company delists the Common Stock on or before5:00 pm New York time on September 30, 2007. (See Note 6)

The net proceeds placed inescrow will be released to the Company on September 30, 2007 if the events(i), (ii) and (ii) above have not occurred. If the Put Optionassociated with the Series B Preferred Stock is exercised under theconditions discussed above we will be required to raise additional capitalwithin the next twelve months to complete the development and commercializationof current product candidates and to continue to fund operations at our currentcash expenditure levels.

In connection with thistransaction the Company paid an aggregate $843,375 and issued warrants topurchase 2,473,900 shares of common stock at $0.50 per share and 2,473,900shares of common stock at $0.70 per share to certain selling agents. Thewarrants will expire three years after issuance. If the Put Option associatedwith the Series B Preferred Stock is exercised under the conditionsdiscussed above we will be required to raise additional capital within the nexttwelve months to complete the development and commercialization of currentproduct candidates and to continue to fund operations at our current cashexpenditure levels.

The Investors also areparties to a Registration Rights Agreement, dated as of August 2, 2007pursuant to which the Company has agreed to file, within 45 days of closing, aregistration statement covering the resale of the shares of common stockunderlying the Series B Preferred Stock and Warrants issued to theInvestors. Failure to file a registration statement and maintain itseffectiveness as agreed will result in the Company being required to payliquidated damages equal to 1% per month of the aggregate purchase price paidby the Investors, not to exceed an aggregate of 18%.

TheCompany is evaluating the accounting treatment of this transaction underrelevant GAAP including but not limited to:

1.)           EITFIssue 00-19, *“Accounting forDerivative Financial Instruments Indexed to, and Potentially Settled in,Company Stock”* to determine whether the warrants should be treatedas “permanent equity” or a liability.

2.)           FSPNo. 00-19-2 “*Accounting forRegistration Payment Arrangements*” (“FSP 00-19-2”) todetermine if and how contingent obligations under a registration paymentarrangement should be separately recognized and measured.

3.)           EITF00-27  “Application *of Issue 98-5 to Certain Convertible Instruments”*,to determine whether the preferred stock had an embedded beneficial conversionfeature.

4.)           Statementsof Financial Accounting Standards No.150: *Accounting for CertainFinancial Instruments with Characteristics of Both Liabilities and Equity*,to determine the balance sheet classification the Preferred stock givenmandatory redemption option.

The 579,125 shares of Series APreferred Stock outstanding as of June 30, 2007 and 8,031,333 warrantsissued from October 23, 2006 until January 10, 2007 in connectionwith the Series A Preferred Stock financing have certain antidilutionrights (see Note 5 above). As a result of the August 2, 2007 Series BPreferred Stock financing the conversion price of Series A Preferred Stockand the exercise price of the Series A Warrants was reset from $0.75 pershare to $0.50 per share.

On July 31, 2007Callisto entered in a Mutual Release and Settlement Agreement with TrilogyCapital Partners, Inc.(“Trilogy”) wherein the parties settled their dispute andpending litigation. Callisto paid Trilogy $47,000 which amount was accrued forduring the year December 31, 2006.

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**ITEM2.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussionshould be read in conjunction with our condensed consolidated financialstatements and other financial information appearing elsewhere in thisQuarterly Report. In addition to historical information, the followingdiscussion and other parts of this quarterly report contain forward-lookinginformation that involves risks and uncertainties.

**OVERVIEW**

Since inception in June 1996our efforts have been principally devoted to research and development, securingpatent protection, obtaining corporate relationships and raising capital. Sinceinception through June 30, 2007, we have sustained cumulative net lossesavailable to common stockholders of $64,440,267. Our losses have resultedprimarily from expenditures incurred in connection with clinical development oflicensed products, the purchase of in-process research and development, stockbased compensation expense, patent filing and maintenance, outside accountingand legal services and regulatory consulting fees. From inception through June 30,2007 we have not generated any revenue from operations. We expect to incursubstantial and increasing losses for the next several years as we develop ourproduct candidates, expand our clinical development team and prepare for thecommercial launch of our product candidates. We do not currently have anycommercial biopharmaceutical products, and do not expect to have such forseveral years, if at all.

Our research anddevelopment expenses consist primarily of costs associated with clinicaldevelopment team salaries and staff costs, application and filing forregulatory approval of our proposed products, regulatory and scientificconsulting fees, clinical and patient costs for product candidates in on-goingtrials, sponsored pre-clinical research, royalty payments as well as legal andprofessional fees associated with filing and maintaining our patent and licenserights to our proposed products. We expense all research and development costsas they are incurred. We expect our research and development expenses toincrease significantly in the future as we develop our product candidates.

Our general andadministrative expenses primarily include personnel and related costs, rent andprofessional accounting and corporate legal fees. We expect our general andadministrative expenses to increase significantly over the next few years as wecontinue to build our operations to support our product candidates and as weincur costs associated with being a publicly traded company.

**HISTORY**

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

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

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**RECENT DEVELOPMENTS**

On August 2, 2007, weclosed a private placement of 1,124,550 shares of Series B ConvertiblePreferred Stock (the “Series B Preferred Stock”) and 22,491,000 warrants(the “Warrants”) to certain investors (the “Investors”) for aggregate grossproceeds of approximately $11.2 million pursuant to a Securities PurchaseAgreement dated as of August 2, 2007 (the “SPA”). The Warrants areimmediately exercisable at $0.70 per share and are exercisable at any timewithin three years from the date of issuance. Other than pursuant tocertain issuances, for the twelve month period beginning on the effective dateof the Registration Statement registering the resale of the shares of CommonStock underlying the Warrants by the Holder, if we at any time while theWarrants are outstanding, shall sell or grant any option to acquire shares ofCommon Stock, at an effective price lower than the then exercise price then,the exercise price shall be reduced to such lower price.

Subsequentto closing, $8,480,000 of the net proceeds were placed into escrow at therequest of RAB Special Situations (Master) Fund Limited and Absolute OctaneMaster Fund Limited (collectively, the “Lead Investors”), each of whichinvested $5,000,000 in the private placement. Pursuant to a Put OptionAgreement, the Lead Investors shall have the right until October 30, 2007to require redemption by us of all of the Series B Convertible PreferredStock and 85% of the Warrants purchased by them only upon the occurrence of anyof the following events:

(i)            Weshall have not received the approval of its common stockholders of the issuanceof shares of Common Stock issuable upon the conversion of the Series BConvertible Preferred Stock or the exercise of the Warrants (the “UnderlyingShares”) by 5:00 pm New York time on September 30, 2007; or

(ii)        TheAmerican Stock Exchange shall not have approved the Listing of AdditionalSecurities application filed by us relating to the Underlying Shares by 5:00 pmNew York time on September 30, 2007 (for a reason other than the LeadInvestors failing to timely provide American Stock Exchange with informationreasonably requested by Amex Listing Qualification as part of their review ofthe application); or

(iii)    TheAmerican Stock Exchange or we delist the Common Stock on or before 5:00 pm NewYork time on September 30, 2007.

The net proceeds placed inescrow will be released to the Company on September 30, 2007 if the events (i),(ii) and (ii) above have not occurred. If the Put Option associated with theSeries B Preferred Stock is exercised under the conditions discussed above wewill be required to raise additional capital within the next twelve months tocomplete the development and commercialization of current product candidatesand to continue to fund operations at our current cash expenditure levels.

In connection with thistransaction the Company paid an aggregate $843,375 and issued warrants topurchase 2,473,900 shares of common stock at $0.50 per share and 2,473,900shares of common stock at $0.70 per share to certain selling agents. Thewarrants will expire three years after issuance. If the Put Option associatedwith the Series B Preferred Stock is exercised under the conditions discussedabove we will be required to raise additional capital within the next twelvemonths to complete the development and commercialization of current productcandidates and to continue to fund operations at our current cash expenditurelevels.

The Investors also areparties to a Registration Rights Agreement, dated as of August 2, 2007pursuant to which the Company has agreed to file, within 45 days of closing, aregistration statement covering the resale of the shares of common stockunderlying the Series B Preferred Stock and Warrants issued to theInvestors. Failure to file a registration statement and maintain itseffectiveness as agreed will result in the Company being required to payliquidated damages equal to 1% per month of the aggregate purchase price paidby the Investors, not to exceed an aggregate of 18%.

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TheCompany is evaluating the accounting treatment of this transaction underrelevant GAAP including but not limited to:

1.)           EITFIssue 00-19, *“Accounting forDerivative Financial Instruments Indexed to, and Potentially Settled in,Company Stock”* to determine whether the warrants should be treatedas “permanent equity” or a liability.

2.)           FSPNo. 00-19-2 “*Accounting forRegistration Payment Arrangements*” (“FSP 00-19-2”) to determine if and how contingentobligations under a registration payment arrangement should be separatelyrecognized and measured.

3.)           EITF00-27 “Application *of Issue 98-5to Certain Convertible Instruments”*, to determine whether thepreferred stock had an embedded beneficial conversion feature.

4.)           Statementsof Financial Accounting Standards No.150: *Accounting for CertainFinancial Instruments with Characteristics of Both Liabilities and Equity*,to determine the balance sheet classification the Preferred stock givenmandatory redemption option.

The 579,125 shares of Series APreferred Stock outstanding as of June 30, 2007 and 8,031,333 warrantsissued from October 23, 2006 until January 10, 2007 in connectionwith the Series A Preferred Stock financing have certain antidilutionrights. As a result of the August 2, 2007 Series B Preferred Stockfinancing the conversion price of Series A Preferred Stock and theexercise price of the Series A Warrants was reset from $0.75 per share to$0.50 per share.

**PLAN OF OPERATIONS**

Our plan of operations forthe next twelve months is to focus primarily on the clinical development ofAtiprimod and L-Annamycin to treat advanced late-stage cancers, and on thepre-clinical and clinical development of Guanilib to treat gastrointestinaldisorders.

Our lead drug candidate inthe clinic, Atiprimod, is an orally administered drug with antiproliferativeand antiangiogenic activity. On November 7, 2006, we announced theinitiation of a multi-center open-label Phase II clinical trial ofAtiprimod in low- to intermediate-grade neuroendocrine cancers, primarilyadvanced carcinoid cancer patients. This trial is based on earlier encouragingclinical results from a Phase I trial of Atiprimod in advanced cancer patientsthat showed stable disease and disease-related symptom relief in patients withadvanced carcinoid cancer. We are presently enrolling patients in the Phase IIclinical trial at seven clinical sites in the U.S. We also have underway aPhase I clinical trial of Atiprimod in relapsed or refractory multiple myelomaat a small number of clinical sites in the U.S.

Our second drug candidate,L-Annamycin, earlier completed an initial Phase I/IIa clinical trial inrelapsed or refractory leukemia patients with a prior sponsor. L-Annamycin is anovel compound from the anthracycline family of proven anti-cancer drugs, whichhas a novel therapeutic profile, including activity against drug resistanttumors and significantly reduced cardiotoxicity, or damage to the heart. L-Annamycinwas in-licensed by Callisto in October 2004 and is presently in twoclinical trials: 1) a Phase I/IIa clinical trial in adult relapsed orrefractory acute lymphocytic leukemia (ALL) patients at three clinical sites inthe U.S.; and 2) a Phase I clinical trial in children and young adults withrelapsed or refractory ALL or AML.

We also have implemented aplan to develop Guanilib, Callisto’s guanylyl cyclase C receptor agonist, totreat gastrointestinal disorders such as chronic constipation and irritablebowel syndrome. We plan to file an Investigational New Drug application withFDA in early 2008, and evaluate its potential initially in the clinic ingastrointestinal disorders.

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***ATIPRIMOD TO TREATADVANCED CARCINOID CANCER PATIENTS AND MULTIPLE MYELOMA***

On August 28, 2002,our wholly-owned subsidiary, Synergy, entered into a worldwide licenseagreement with AnorMED Inc. (“AnorMED”), a Canadian corporation, to research,develop, sell and commercially exploit the Atiprimod (SKF 106615) patentrights.

Atiprimod is one of aclass of compounds known as azaspiranes and was originally developed as apotential treatment for rheumatoid arthritis based on encouraging data from anumber of animal models of arthritis and autoimmune indications. Thedevelopment of this drug originated with a partnership between AnorMED andSmithKline Beecham (“SKB”) that led to the successful filing of aninvestigational new drug application, or IND, and completion of three Phase Iclinical trials involving a total of 63 patients. The drug successfullycompleted both single and multiple dose Phase I clinical trials in patientswith rheumatoid arthritis. Both trials evaluated the safety andpharmacokinetics (how the body takes up and eliminates drugs) of Atiprimod andshowed that the drug is well tolerated. In the third Phase I clinical trial,the drug was found to be well tolerated in an open label extension studyperformed with 43 patients from the first two studies, with patients on thedrug for as long as one year.

**PRECLINICAL STUDIES**

Atiprimod’s specificability to lower the level of key growth factors, known to play an importantrole in the development of multiple myeloma, is the basis for its potential useas a drug to treat this disease. Atiprimod was previously shown to inhibit theproduction of the pro-inflammatory mediators IL-6 and TNF (alpha) in anumber of animal models of inflammation and autoimmune disease. Atiprimod wasalso demonstrated using in vitro models of tumor cell growth to inhibitproliferation of a number of human multiple myeloma cell lines.Characterization of the mechanism of Atiprimod antiproliferative activity in aseries of experiments showed that the drug works by inducing apoptosis(programmed cell death) in myeloma cells. In a second series of experiments performedwith Atiprimod on co-cultures composed of multiple myeloma cells plus bonemarrow stromal cells (used to simulate the human disease), the drug was foundto have a profound effect on secretion of the angiogenic (blood vessel related)growth factor VEGF. A separate set of experiments also suggest an additionalexplanation for the disease-modifying activity of Atiprimod originally observedin chemically-induced arthritic-rat animal studies, and provide a furtherrationale for the application of this drug to treat multiple myeloma. Using abone resorption assay (bone degradation experiment) to measure the effect ofdrug on osteoclast-mediated bone resorption, Atiprimod demonstrated a profoundeffect on osteoclast, or white blood cell, function. The drug appears to beselectively toxic for activated osteoclasts, displaying a negligible effect onbone marrow stromal cells.

**COMPLETED CLINICAL STUDIES**

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

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**DEVELOPMENT STRATEGY**

Atiprimod commenced aPhase I/IIa clinical trial in relapsed or refractory multiple myeloma patientson May 26, 2004. These are patients that have a re-occurrence of activedisease, and no longer respond to approved therapies. The Phase I/IIa clinicaltrial is an open label study, with the primary objective of assessing safety ofdrug and identifying the maximum tolerated dose. The secondary objectives areto measure the pharmacokinetics, evaluate the response in patients withrefractory disease and to identify possible surrogate responses to the drug tobetter determine the mechanism of drug action. In December 2005, weannounced interim results from this trial performed in relapsed or refractorymultiple myeloma patients which consisted of 15 patients treated withAtiprimod, including 3 patients at the highest dose level of 180 mg/day. Twopatients exhibited stable disease, with one patient having a 34% decrease in Mprotein (measure of tumor burden) over 3 months of treatment. It was also notedthat two patients reported a subjective decrease in bone pain. In 2006, weamended the protocol to continue the trial at higher dose levels and currentlyhave this trial open at 4 clinical sites in the U.S.

On March 15, 2005, weannounced a second Phase I/IIa clinical trial of Atiprimod in advanced cancerpatients. The trial is entitled: “An Open Label Study of the Safety andEfficacy of Atiprimod Treatment for Patients with Advanced Cancer”. The primaryobjective is to assess the safety and determine the maximum tolerated dose ofAtiprimod in advanced cancer patients. The secondary objectives are to measurethe pharmacokinetics of Atiprimod and evaluate the response in a variety ofrelapsed solid tumors and hematological malignancies. This study was conductedat the University of Texas M.D. Anderson Cancer Center, and was closed toenrollment in November 2006.

On November 7, 2006,we announced the initiation of a multi-center, open-label Phase II clinicaltrial of Atiprimod in low to intermediate grade neuroendocrine carcinomas,including advanced carcinoid cancer patients. This trial is based onencouraging clinical results from the Phase I clinical trial in advanced cancerpatients that showed stable disease and a reduction in disease-related symptomsin patients with advanced carcinoid cancer. The first study site to enter thetrial in November, 2006 was the Hematology Oncology Services of Arkansas inLittle Rock, Arkansas. We have added a number of additional sites, and as of August 9,2007, have seven clinical sites presently open and have enrolled 31 patients,to date.

The primary objective ofthe Phase II clinical trial is to evaluate efficacy of Atiprimod in patientswith low to intermediate grade neuroendocrine carcinoma who have metastatic orunresectable cancer and who have either symptoms, despite standard therapy(octreotide), or progression of neuroendocrine tumors. Patients, after signingan informed consent, are required to complete two weeks of a symptoms diary toestablish their symptoms baseline before commencing Atiprimod dosing. A maximumof 40 evaluable patients will be enrolled in this trial. Efficacy evaluationswill include the measure of target lesions (per RECIST), and the quantizationof symptom relief.

**MANUFACTURING OF ATIPRIMOD**

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

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***L-ANNAMYCIN TO TREATRELAPSED ACUTE LEUKEMIA***

On August 12, 2004 weentered into a worldwide exclusive license agreement with The University ofTexas M.D. Anderson Cancer Center to develop and commercially exploit theL-Annamycin patent rights. L-Annamycin, an anthracycline drug for leukemiatherapy, has a novel therapeutic profile, including activity against drugresistant tumors and significantly reduced toxicity.

**PRECLINICAL STUDIES**

Nonclinical studies haveshown that Annamycin delivered as a liposomal preparation (L-Annamycin) iseffective against several different in vivo tumor models (animal experiments),including human tumors which are resistant to other chemotherapy drugs, graftedinto animals. Additionally, results from in vitro studies (cell cultureexperiments) indicate that L-Annamycin and free Annamycin were able topartially overcome tumor resistance to chemotherapy drugs in several tumor celllines that were resistant to other drugs such as doxorubicin. In nonclinicaltoxicity studies, myelosuppression (suppression of the body’s immune response)was noted in mice at a single intravenous dose of 15.7 mg/kg L-Annamycin. Withweekly intravenous doses of 5.2 mg/kg L-Annamycin for 6 weeks, or 3.1 and 4.2mg/kg L-Annamycin for 10 weeks in mice, the cardiotoxicity (toxicity toheart tissue) of L-Annamycin was substantially less than an equivalent dose ofdoxorubicin. In dogs, a single 15-minute intravenous infusion of up to1.42 mg/kg L-Annamycin was well tolerated, with no clinically significantadverse effects, hematological or chemical changes, or pathological changes.

**COMPLETED CLINICAL STUDIES**

L-Annamycin was evaluatedpreviously by Aronex Pharmaceuticals, Inc. in 3 clinical trials: 1) aPhase I clinical trial in 36 patients with relapsed solid tumors, 2) aPhase II clinical trial in 13 patients with doxorubicin-resistant breastcancer, and 3) a Phase I/IIa trial in 20 patients with relapsed/refractory AMLand ALL. In the initial Phase I study, L-Annamycin was administered by a single1- to 2-h intravenous infusion at 3-week intervals.Thirty-six patients with relapsed solid tumors were treated and 109 treatmentcourses were administered at doses ranging from 3 to 240 mg/m2. Nocardiotoxicity was seen on biopsy of heart tissue of four patients studied. Themaximum tolerated dose (MTD) for L-Annamycin in solid tumor patients was foundto be 190 mg/m2. A second Phase II study of L-Annamycin was performed in 13women with doxorubicin-resistant breast cancer. The median number of priorchemotherapy regimes was two, and six patients had two or more organ sites ofinvolvement. L-Annamycin was administered at 190-250 mg/m2 as a singlei.v. infusion over 1-2 h every 3 weeks. Of the 13 patients, 12 had cleardeterioration and new tumor growth after one or two courses.

The potential of a lesscardiotoxic drug that was active against multi-drug resistant tumors led to athird trial in relapsed leukemia patients (both AML and ALL). The trialinvolved 20 patients with relapsed/refractory AML (n=17) or ALL (n=3). Theconclusions drawn from the trial were that L-Annamycin was safe, welltolerated and showed potential clinical activity in patients with acuteleukemias, and that further evaluation of this novel anthracycline in patientswith hematopoietic, or blood borne, malignancies was clearly warranted.

**DEVELOPMENT STRATEGY**

We began a Phase Iclinical trial at The University of Texas M.D. Anderson Cancer Center in adultrelapsed or refractory acute lymphocytic leukemia (ALL) patients on December 1,2005. Additional sites enrolled in this study include the Roswell Park CancerInstitute (Buffalo, NY) and the Montefiore Medical Center (New York, NY). Thesingle-arm, open-label L-Annamycin trial is designed to enroll patients in adose escalation Phase I portion followed by 10 patients at a final fixed dosein the Phase II portion once the maximum tolerated dose (MTD) is determined. Upto 34 adult patients can be treated in this single-arm trial. On February 22,2007, we announced the opening of a Phase I clinical trial of L-Annamycin in 

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pediatricrelapsed or refractory ALL or AML patients. The trial is presently open at fourclinical sites in the U.S.

**MANUFACTURING OF ANNAMYCIN**

An improved manufacturingmethod for Annamycin has been developed at Antibioticos S.p.A., our commercialsupplier of GMP (“Good Manufacturing Practice”) drug substance. GMP material iscurrently being produced in sufficient quantity for all three anticipatedtrials outlined in the development strategy section. The analytical methodsdeveloped previously have been successfully transferred, and are in the processof being validated by Quantitative Technologies, Inc., our analyticalcontract research organization, or CRO, for Annamycin development work. Thefinal lyophilized GMP formulated drug product is being manufactured byPharmaceutical Services, Inc., who previously produced final product forthe earlier clinical trials. Currently, Antibioticos S.p.A. is our solesupplier of Annamycin for our clinical trials. Our agreement with Antibioticosprovides that Antibioticos will provide 400 grams of GMP drug substance(Annamycin) for our L-Annamycin clinical trials. Upon the conclusion of ourPhase IIb clinical trials, the agreement provides that the parties willnegotiate in good faith towards a commercial supply agreement for Annamycin.

***ORPHAN DRUG STATUSOF ATIPRIMOD AND L-ANNAMYCIN***

On January 6, 2004,we announced that the Office of Orphan Products Development of the FDA grantedorphan drug designation to Atiprimod for the treatment of multiple myeloma. On September 26,2006, we announced that the Office of Orphan Products Development of the FDAgranted orphan drug designation to Atiprimod for the treatment of carcinoidtumors. On June 24, 2005, we announced that the Office of Orphan ProductsDevelopment of the FDA granted orphan drug designation to L-Annamycin for thetreatment of acute lymphoblastic leukemia. On June 28, 2005, we announcedthat the Office of Orphan Products Development of the FDA granted orphan drugdesignation to L-Annamycin for the treatment of acute myeloid leukemia. The FDAgrants orphan drug status for drug candidates that are intended to treat rarelife-threatening diseases that, at the time of application, affect no more than200,000 patients in the United States. The drug must have the ability to providesignificant patient benefit over currently available treatment or fill an unmetmedical need. Orphan drug designation entitles us to seven years of marketexclusivity in the United States of America, and ten years of marketexclusivity in Europe, upon FDA marketing approval, provided that we continueto meet certain conditions established by the FDA. Once the FDA grantsmarketing approval of a new drug, the FDA will not accept or approve otherapplications to market the same medicinal product for the same therapeuticindication. Other incentives provided by orphan status include certain taxbenefits, eligibility for research grants and protocol assistance. Protocolassistance includes regulatory assistance and possible exemptions or reductionsof certain regulatory fees.

***GUANILIB TO TREATGASTROINTESTINAL DISORDERS***

We have successfullydeveloped a potent analog of uroguanylin, an intestinal hormone produced in thehuman GI tract which is responsible for a number of key cellular processes,including regulated turnover of epithelial cells in the colon. The analog,called Guanilib, has been demonstrated to be superior to uroguanylin in itsbiological activity, protease stability and pH characteristics. Guanilib hasbeen undergoing pre-clinical animal studies as a treatment for gastrointestinalinflammation in a collaborative study involving clinical gastroenterologist Dr. ScottPlevy of the University of North Carolina, Chapel Hill, NC. Recent resultsfrom his laboratory showed that Guanilib was efficacious in treatment ofulcerative colitis in mice.

More recent in-vivo animalexperiments have indicated that Guanalib has the potential to treatgastrointestinal disorders, and consequently, on August 8, 2007 weannounced our intention to implement 

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a planto develop Guanilib to treat gastrointestinal disorders such as chronicconstipation and irritable bowel syndrome. We plan to file an InvestigationalNew Drug application with FDA in early 2008, and to evaluate Guanilib’spotential initially in the clinic in gastrointestinal disorders in 2008.

A patent coveringtherapeutic applications of Guanilib in GI inflammatory diseases andcarcinogenesis was granted by the U.S. Patent and Trademark Office on May 9,2006.

***DEGRASYNS***

On January 10, 2006,we entered into a license agreement with the University of Texas M.D. AndersonCancer Center whereby we were granted the exclusive right to manufacture, havemanufactured, use, import, offer to sell and/or sell anti-cancer compoundscalled tyrphostins (renamed Degrasyns). Degrasyns are a second-generation classof tyrphostins developed by scientists at the University of Texas M.D. AndersonCancer Center that have a novel anti-cancer mechanism-of-action that centers ontheir ability to selectively degrade key proteins that are involved in tumorcell proliferation and survival. The intention in 2007 was to work with keyscientists at the University of Texas M.D. Anderson Cancer Center to bringforward a pre-clinical candidate for development in the clinic. The keyCallisto employee responsible for coordinating this program with scientists atM.D. Anderson Cancer Center, Dr. Donald Picker, former Executive VicePresident of Research & Development, resigned from the Company inDecember, 2006. Consequently, work on this program has been scaled back untilthe Company is able to hire an expert or utilize the services of a consultantto take over Dr. Picker’s responsibilities.

***SUPERANTIGEN-BASEDBIOTERORRISM DEFENSE***

On August 20, 1996,we entered into a license agreement to research, develop, sell and commerciallyexploit certain Rockefeller University (“Rockefeller”) licensed patentscovering peptides and antibodies useful in treating toxic shock syndrome andseptic shock. In addition, on July 25, 2001, we entered into a licenseagreement for two additional patents related to the regulation of exoproteinsin staphylococcus aureus.

On April 1, 2005 wewere awarded a two-year $885,641 biodefense partnership grant from the NationalInstitute of Allergy and Infectious Diseases (“NIAID”) to develop a monoclonalantibody and vaccine against bacterial superantigen toxins. The goal was todesign a monoclonal antibody and vaccine that prevent the unregulatedactivation of T-cells (human white blood cells) by bacteria from the class ofstaphylococcus aureus and streptococcus pyogenes. Funding for this program hasbeen extended through April, 2008. Because the bioterrorism program is not acore activity of Callisto, we expect to terminate further development work uponthe expiration of the research grant.

**EMPLOYEES**

Our plan is to usecontract research organizations (“CRO”) for most of our development efforts,including monitoring of clinical trial results, thus minimizing the need tohire full time employees. As of August 3, 2007, we had 9 full-time and 3part-time employees.

**OFF-BALANCE SHEET ARRANGEMENTS**

We had no off-balancesheet arrangements as of June 30, 2007.

**RESULTS OF OPERATIONS**

**THREE MONTHS ENDED JUNE 30, 2007 AND JUNE 30, 2006**

We had no revenues duringthe three months ended June 30, 2007 and 2006 because we do not have anycommercial biopharmaceutical products and we do not expect to have suchproducts for several years, if at all.

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Research and development expenses decreased $446,555or 29%, to $1,119,036 for the three months ended June 30, 2007 from$1,565,591 for the three months ended June 30, 2006. This decrease wasprimarily due to our research and development overhead not allocated tospecific programs, principally in-house staff related expenses andsponsored out-sourced research projects, being reduced approximately $487,000or 59% to approximately $339,000 during the three months ended June 30,2007, from approximately $826,000 during the three months ended June 30,2006. Included in research and development overhead was stock basedcompensation expense, associated with options granted to employees, whichdecreased approximately $126,000 or 89% from approximately $141,000 in thequarter ended June 30, 2006 to approximately $15,000 in the quarter ended June 30,2007. This lower stock-based compensation during 2007 is primarily attributableto the full vesting during 2006 of certain options granted in 2003, that are nolonger being expensed in 2007.

Partially offsetting the above overhead reductions,our program specific research and development expenditures were increasedduring the quarter ended June 30, 2007 and refocused onto the developmentof Guanilib, our most promising pre-clinical drug candidate. Guanilibdevelopment spending during the quarter ended June 30, 2007 was increasedto approximately $275,000, whereas we did not have any expenditures on thisprogram during the three months ended June 30, 2006. We incurreddevelopment expenses of approximately $377,000 in the three months ended June 30,2007 on Atiprimod, our lead clinical candidate, which was slightly lower thanthe $398,000 level of spending during the three months ended June 30,2006. All other development programs were significantly curtailed during thethree months ended June 30, 2007, specifically: (i) costs related tothe development of L-Annamycin were reduced by approximately $203,000, or 63%,to approximately $121,000 and (ii) Degrasyns development spending wascurtailed approximately $114,000 or 94% to approximately $6,000.

General and administrative expenses for the threemonths ended June 30, 2007 were also curtailed to $973,496, a decrease of$483,624 or 33%, from $1,457,120 for the three months ended June 30, 2006.This decrease was accomplished primarily by reducing (i) spending oninvestor relations by approximately $270,000, (ii) accounting fees byapproximately $49,000 and (iii) stock based compensation expenseassociated with options granted to employees decreased approximately $216,000or 67%. This lower stock-based compensation during 2007 is primarilyattributable to the full vesting during 2006 of certain options granted in 2003,that are no longer being expensed in 2007.

Net loss for the threemonths ended June 30, 2007 was $2,046,277 compared to a net loss of$3,416,171 incurred for the three months ended June 30, 2006. Thedecreased net loss is the result of lower research and development, and generaland administrative expenses both of which are discussed above. In addition, (i) non-employeestock-based compensation expense during the three months ended June 30,2007 was $16,601, as compared to an expense of $456,201 during the three monthsended June 30, 2006 which included $367,000 associated with the TrilogyCapital stock options which completed on vesting June 30, 2006, and (ii) liquidateddamages of $157,435 were incurred during the three months ended June 30,2006 where we had none in the three months ended June 30, 2007 because therelated registration statement was filed with the SEC in January 2007.

**SIX MONTHS ENDEDJUNE 30, 2007 AND JUNE 30, 2006**

We had no revenues during the six months ended June 30,2007 and 2006 because we do not have any commercial biopharmaceuticalproducts and we do not expect to have such products for several years, if atall.

Research and development expenses decreased $1,681,712or 45%, to $2,077,718 for the six months ended June 30, 2007 from$3,759,430 for the six months ended June 30, 2006. This decrease wasprimarily due to our research and development overhead not allocated tospecific programs, principally in-house staff related expenses and sponsoredout-sourced research projects, being reduced approximately $975,000 

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or 63% to approximately$574,000 during the six months ended June 30, 2007, from approximately$1,549,000 during the six months ended June 30, 2006. Included in researchand development overhead was stock based compensation expense, associated withoptions granted to employees, which decreased approximately $258,000 or 89%from approximately $290,000 in the six months ended June 30, 2006 toapproximately $32,000 in the six months ended June 30, 2007. This lowerstock-based compensation during 2007 is primarily attributable to the fullvesting during 2006 of certain options granted in 2003, that are no longerbeing expensed in 2007.

Our program specific research and developmentexpenditures also were curtailed during the six months ended June 30, 2007and refocused onto development of Guanilib, our most promising pre-clinicaldrug candidate. Guanilib development spending during the six months ended June 30,2007 was increased to approximately $301,000, up $173,000 or 135% fromapproximately $128,000 during the six months ended June 30, 2006. Weincurred development expenses of approximately $877,000 in the six months endedJune 30, 2007 on Atiprimod, our lead clinical candidate, which wasslightly lower than the $881,000 level of spending during the six months ended June 30,2006. All other development programs were significantly curtailed during thesix months ended June 30, 2007, specifically: (i) costs related tothe development of L-Annamycin were reduced by approximately $563,000, or 64%,to approximately $318,000 and (ii) Degrasyns development spending wascurtailed approximately $416,000 or 98% to approximately $7,000.

General and administrative expenses for the six monthsended June 30, 2007 were also curtailed to $1,933,156, a decrease of$1,278,054 or 40%, from $3,211,210 for the six months ended June 30, 2006.This decrease was accomplished primarily by reducing (i) spending oninvestor relations by approximately $624,000, (ii) accounting fees byapproximately $105,000, (iii) staff bonuses $80,000 and (iv) stockbased compensation expense associated with options granted to employeesdecreased approximately $459,000 or 69%. This lower stock-based compensationduring 2007 is primarily attributable to the full vesting during 2006 ofcertain options granted in 2003, that are no longer being expensed in 2007.

Net loss for the six months ended June 30, 2007was $3,876,214 compared to a net loss of $7,790,800 incurred for the six monthsended June 30, 2006. The decreased net loss is the result of lowerresearch and development and general and administrative expenses both ofwhich are discussed above. In addition, (i) non-employee stock-basedcompensation expense during the six months ended June 30, 2007 decreasedby approximately $963,000 or 100% from the six months period ended June 30,2006 which included approximately $734,000 associated with the Trilogy Capitalstock options which completed vesting June 30, 2006, and (ii) otherexpense for the six months ended June 30, 2006 was $157,435 due toliquidated damage payments to investors for failure to register shares of theCompany’s common stock sold in a private placement in February and April 2006.We had no such payments during the six months ended June 30, 2007.

The beneficial conversiondividend accreted to the Series A preferred stockholders, upon issuance inthe six months ended June 30, 2007, was $119,685, resulting in a net lossavailable to common stockholders of $3,995,899 for the six months ended June 30,2007. This compared to a net loss available to common stockholders of$7,790,800 reported for the six months ended June 30, 2006, during whichperiod we had no preferred share transactions and no related beneficialconversion feature that needed to be accreted as a dividend.

**LIQUIDITY ANDCAPITAL RESOURCES**

As of June 30, 2007 we had $689,415 in cash andcash equivalents, compared to $3,904,232 as of December 31, 2006. Thisdecrease in cash of $3,214,817 during the six months ended June 30, 2007was principally the result of cash used in operating activities of $3,458,417;partially offset by the completion of a private placement of Series AConvertible preferred stock yielding net proceeds of $243,600.

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On August 2, 2007, we closed a private placementof 1,124,550 shares of Series B Convertible Preferred Stock (the “Series BPreferred Stock”) and 22,491,000 warrants (the “Warrants”) to certain investors(the “Investors”) for aggregate gross proceeds of approximately $11.2 millionpursuant to a Securities Purchase Agreement dated as of August 2, 2007(the “SPA”). The Warrants are immediately exercisable at $0.70 per share andare exercisable at any time within three years from the date ofissuance. Other than pursuant to certain issuances, for the twelve monthperiod beginning on the effective date of the Registration Statementregistering the resale of the shares of Common Stock underlying the Warrants bythe Holder, if we at any time while the Warrants are outstanding, shall sell orgrant any option to acquire shares of Common Stock, at an effective price lowerthan the then exercise price then, the exercise price shall be reduced to suchlower price.

Subsequent toclosing, $8,480,000 of the net proceeds were placed into escrow at the requestof RAB Special Situations (Master) Fund Limited and Absolute Octane Master FundLimited (collectively, the “Lead Investors”), each of which invested $5,000,000in the private placement. Pursuant to a Put Option Agreement, the Lead Investorsshall have the right until October 30, 2007 to require redemption by us ofall of the Series B Convertible Preferred Stock and 85% of the Warrantspurchased by them only upon the occurrence of any of the following events:

(i)            We shall have not receivedthe approval of its common stockholders of the issuance of shares of CommonStock issuable upon the conversion of the Series B Convertible PreferredStock or the exercise of the Warrants (the “Underlying Shares”) by 5:00 pm NewYork time on September 30, 2007; or

(ii)        The American StockExchange shall not have approved the Listing of Additional Securitiesapplication filed by us relating to the Underlying Shares by 5:00 pm New Yorktime on September 30, 2007 (for a reason other than the Lead Investorsfailing to timely provide American Stock Exchange with information reasonablyrequested by Amex Listing Qualification as part of their review of theapplication); or

(iii)    The American Stock Exchange orwe delist the Common Stock on or before 5:00 pm New York time on September 30,2007.

The net proceeds placed in escrow will be released tothe Company on September 30, 2007 if the events (i), (ii) and (ii) abovehave not occurred. In connection with this transaction the Company paid anaggregate $843,375 and issued warrants to purchase 2,473,900 shares of commonstock at $0.50 per share and 2,473,900 shares of common stock at $0.70 pershare to certain selling agents. The warrants will expire three years afterissuance.

The Investors also are parties to a RegistrationRights Agreement, dated as of August 2, 2007 pursuant to which the Companyhas agreed to file, within 45 days of closing, a registration statementcovering the resale of the shares of common stock underlying the Series BPreferred Stock and Warrants issued to the Investors. Failure to file aregistration statement and maintain its effectiveness as agreed will result inthe Company being required to pay liquidated damages equal to 1% per month ofthe aggregate purchase price paid by the Investors, not to exceed an aggregateof 18%.

The Company isevaluating the accounting treatment of this transaction under relevant GAAPincluding but not limited to:

(1)         EITF Issue 00-19, *“Accounting for Derivative Financial InstrumentsIndexed to, and Potentially Settled in, Company Stock”* to determinewhether the warrants should be treated as “permanent equity” or a liability.

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(2)         FSP No. 00-19-2“*Accounting for Registration PaymentArrangements*” (“FSP 00-19-2”) to determine if and howcontingent obligations under a registration payment arrangement should beseparately recognized and measured.

(3)         EITF 00-27 “Application*of Issue 98-5 to Certain ConvertibleInstruments”*, to determine whether the preferred stock had anembedded beneficial conversion feature.

(4)         Statements of FinancialAccounting Standards No.150: *Accounting for CertainFinancial Instruments with Characteristics of Both Liabilities and Equity*,to determine the balance sheet classification the Preferred stock givenmandatory redemption option.

From October 2006 until January 2007, weplaced 602,350 shares of Series A Convertible Preferred Stock and8,031,333 warrants to certain investors for aggregate gross proceeds of$6,023,500. As of December 31, 2006 we had closed on 574,350 sharesof such Series A Convertible Preferred Stock for aggregate gross proceedsof $5,743,500. The final traunche of this financing closed January 10,2007 when we placed 28,000 shares of such Series A Convertible PreferredStock for aggregate gross proceeds of $280,000. The shares of Series AConvertible Preferred Stock are convertible into shares of common stock at aconversion price of $0.75 per share. The investors also are parties to aRegistration Rights Agreement, dated as of October 23, 2006 pursuant towhich we agreed to file, within 60 days of closing, a registrationstatement with the Securities and Exchange Commission (the “SEC”) covering theresale of the shares of common stock underlying the Series A ConvertiblePreferred Stock and the warrants issued to the investors. The warrants areimmediately exercisable at $0.75 per share, will expire five years from thedate of issuance, and have certain antidilution rights for the twelvemonth period beginning on the effective date of the registration statementregistering the shares of common stock underlying the warrants. We paidaggregate fees and expenses of $485,308 ($448,908 prior to December 31,2006) in cash, issued an aggregate 11,775 shares of Series A ConvertiblePreferred Stock and 1,228,761warrants to purchase common stock to certainselling agents. The warrants are immediately exercisable at $0.75 per share,will expire five years after issuance and have the same anti-dilutive rights asthe investor warrants. On January 12, 2007 we filed a registrationstatement on Form S-3 registering the common stock issuable upon (i) theconversion of the all Series A Convertible Preferred Stock, (ii) theexercise of all related investor warrants and (iii) the exercise of allselling agent warrants. On February 15, 2007 Amendment No.1 to thisregistration statement was declared effective by the SEC.

As a result of the August 2, 2007 Series BPreferred Stock financing the conversion price of Series A Preferred Stockand the exercise price of the Series A Warrants was reset from $0.75 pershare to $0.50 per share as per the antidilution rights discussed above.

On April 24, 2007, we entered into a servicesagreement with Barretto Pacific Corporation pursuant to which Barretto willprovide beginning May 1, 2007, investor relations services to us. Ouragreement requires us to pay Barretto a fee of $120,000 over a seven monthperiod and 80,000 shares of restricted common stock. During the three monthsended June 30, 2007 Callisto paid $20,000 of this fee and issued the80,000 shares of common stock.

Our working capital requirements will depend uponnumerous factors including but not limited to the nature, cost and timing of:pharmaceutical research and development programs; pre-clinical and clinicaltesting; obtaining regulatory approvals; technological advances and our abilityto establish collaborative arrangements with research organizations andindividuals needed to commercialize our products. Our capital resources will befocused primarily on the clinical development and regulatory approval of ourcurrent product candidates, and the acquisition of licenses and rights tocertain other cancer related drug technologies. We will be required to raiseadditional capital to complete the development and commercialization of ourcurrent product candidates.

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Our consolidated financial statements as of December 31,2006 have been prepared under the assumption that we will continue as a goingconcern for the twelve months ending December 31, 2007. Our independentregistered public accounting firm has issued a report dated April 13, 2007that included an explanatory paragraph referring to our recurring losses fromoperations and net capital deficiency and expressing substantial doubt in ourability to continue as a going concern without additional capital becomingavailable. Our ability to continue as a going concern is dependentupon our ability to obtain additional equity or debt financing, attainfurther operating efficiencies and, ultimately, to generate revenue. The financialstatements do not include any adjustments that might result from the outcome ofthis uncertainty. If the Put Option associated with the Series B PreferredStock is exercised under the conditions discussed above we will be required toraise additional capital within the next twelve months to complete thedevelopment and commercialization of current product candidates and to continueto fund operations at our current cash expenditure levels.

To date, our sources ofcash have been primarily limited to the sale of our equity securities. Wecannot be certain that additional funding will be available on acceptableterms, or at all. Any debt financing, if available, may involverestrictive covenants that impact our ability to conduct our business. If weare unable to raise additional capital when required or on acceptable terms, wemay have to significantly delay, scale back or discontinue the developmentand/or commercialization of one or more of our product candidates.

**CRITICAL ACCOUNTINGPOLICIES AND ESTIMATES**

Our discussion and analysis of financial condition andresults of operations are based upon our condensed consolidated financialstatements, which have been prepared by us without audit in accordance with therules and regulations of the Securities and Exchange Commission. Thepreparation of our financial statements requires us to make estimates thataffect the reported amounts of assets, liabilities, revenue and expense, andrelated disclosure of contingent assets and liabilities. We base our accountingestimates on historical experience and other factors that are believed to bereasonable under the circumstances. However, actual results may vary fromthese estimates under different assumptions or conditions. The following is asummary of our critical significant accounting policies and estimates.

Financial Reporting Release No. 60 requires allcompanies to include a discussion of critical accounting policies or methodsused in the preparation of financial statements. Our accounting policies aredescribed in Note 3 of the notes to our consolidated financial statementsincluded in this Annual Report on Form 10-K for the fiscal yearended December 31, 2006. The financial statements are prepared inaccordance with accounting principles generally accepted in the United Statesof America, which requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.Actual results could differ from those estimates.

We rely heavily on incentive compensation in the formof stock options to recruit, retain and motivate directors, executive officers,employees and consultants. Incentive compensation in the form of stock optionsis designed to provide long-term incentives, develop and maintain an ownershipstake and conserve cash during our development stage. Since inception through June 30,2007 stock based compensation expense has totaled $16,749,072 or 26% of ourtotal accumulated net losses available to common stockholders of $64,440,267.

In December 2004, the Financial AccountingStandards Board (FASB) issued Statement of Financial Accounting Standard (“SFAS”)No. 123 (Revised 2004), *Share-BasedPayments* (“SFAS 123R”). SFAS 123R requires a public entity tomeasure the cost of employee services received in exchange for the award ofequity instruments based on the fair value of the award at the date of grant.The expense is to be 

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recognized over the periodduring which an employee is required to provide services in exchange for theaward. SFAS 123R was effective as of the beginning of the first interim orannual reporting period that began after December 15, 2005 and accordinglywe adopted SFAS 123R on January 1, 2006.

SFAS 123R provides for two transition methods. The “modified*prospective”* method requires thatshare-based compensation expense be recorded for any employee options grantedafter the adoption date and for the unvested portion of any employee optionsoutstanding as of the adoption date. The “modified *retrospective”* method requires that, beginning in the firstquarter of 2006, all prior periods presented be restated to reflect the impactof share-based compensation expense consistent with the proforma disclosurespreviously required under SFAS 123. We have elected to use the “modified *prospective*” method in adopting thisstandard.

Prior to January 1, 2006, we had adopted SFAS No. 123,“Accounting for Stock-Based Compensation” (“SFAS 123”). As provided for by SFAS123, we had elected to continue to account for stock-based compensationaccording to the provisions of Accounting Principles Board Opinion No. 25,“Accounting for Stock Issued to Employees” (“APB 25”). Accordingly,compensation expense had been recognized to the extent of employee servicesrendered based on the intrinsic value of stock options granted under the plan.

SFAS 123R did not change the way we account fornon-employee stock-based compensation. We continue to account for shares ofcommon stock, stock options and warrants issued to non-employees based on thefair value of the stock, stock option or warrant.

For all fair value computations required for employeeand non-employee stock-based compensation we use the Black-Scholesoption-pricing model which requires assumptions for expected stock pricevolatility, expected term of the option, risk-free interest rate and expecteddividend yield at the grant date. Our stock price has fluctuated from $3.95 pershare as of December 31, 2003 to $0.69 per share as of June 30, 2007.

Research and Development:We do not currently have any commercial biopharmaceutical products, and do notexpect to have such for several years, if at all and therefore our research anddevelopment costs are expensed as incurred. These include expenditures inconnection with an in-house research and development laboratory, salaries andstaff costs, application and filing for regulatory approval of our proposedproducts, purchase of in-process research and development, regulatory andscientific consulting fees, contract research and royalty payments to outsidesuppliers, facilities and universities as well as legal and professional feesassociated with filing and maintaining our patent and license rights to ourproposed products. While certain of our research and development costs may havefuture benefits, our policy of expensing all research and developmentexpenditures is predicated on the fact that we have no history of successful commercializationof biopharmaceutical products to base any estimate of the number of futureperiods that would be benefited.

**ITEM 3.**                QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to marketrisk on the fair values of certain assets is related to credit risk associatedwith short term investment grade commercial paper included in short term moneymarket accounts and the FDIC insurance limit on our balances. At June 30,2007 our money market balances totaled approximately $600,000.

**ITEM 4.**                CONTROLSAND PROCEDURES

Based on an evaluation of our disclosure controls andprocedures (as defined in Rules 13a-15(e) and 15d-15(e) ofthe Securities Exchange Act of 1934, as amended) required by paragraph (b) ofRule 13a-15 or Rule 15d-15, as of June 30, 2007, ourChief Executive Officer and Principal Financial Officer have 

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concluded that ourdisclosure controls and procedures were not effective due to the fact that welack sufficient internal accounting personnel and segregation of duties necessaryto ensure that an adequate review of the financial statements and notes theretois performed ensuring that information required to be disclosed by us in thereports 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 andforms. Our Chief Executive Officer and Principal Financial Officer alsoconcluded that, as of June 30, 2007, our disclosure controls andprocedures were not effective in ensuring that information required to bedisclosed by us in the reports that we file or submit under the Exchange Act isaccumulated and communicated to our management, including our Chief ExecutiveOfficer and Principal Financial Officer, to allow timely decisions regardingrequired disclosure.

In designing and evaluating our disclosure controlsand procedures, management recognizes that any controls and procedures, nomatter how well designed and operated, can provide only reasonable assurance ofachieving the desired control objectives, and management necessarily isrequired to apply its judgment in evaluating the relationship between thebenefit of desired controls and procedures and the cost of implementing newcontrols and procedures.

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

There were no changes in our internal controls overfinancial reporting that could significantly affect internal controls overfinancial reporting during the quarter ended June 30, 2007.

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**PART II. OTHERINFORMATION**

**ITEM 1A.**        RISKFACTORS

In addition to the otherinformation set forth in this report, you should carefully consider the factorsdiscussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-Kfor the year ended December 31, 2006, which could materially affect ourbusiness, financial condition or future results. There have been no materialchanges to the risk factors disclosed in the Annual Report.

**Item2.  Unregistered Sales of EquitySecurities and Use of Proceeds**

On May 14, 2007, we issued 80,000 shares of commonstock to Barretto Pacific Corporation pursuant to a Services Agreement datedApril 24, 2007 between us and Barretto Pacific. The issuance of the shares of common stock was exempt from registrationunder the Securities Act pursuant to Section 4(2) thereof. We made thisdetermination based on the representations of Barretto Pacific which included,in pertinent part, that such holder was an “accredited investor” within themeaning of Rule 501 of Regulation D promulgated under the Securities Act andthat such holder was acquiring our securities, for investment purposes for itsown account and not as nominees or agents, and not with a view to the resale ordistribution thereof, and that it understood that the shares of our commonstock may not be sold or otherwise disposed of without registration under theSecurities Act or an applicable exemption therefrom.

**ITEM 6.**                EXHIBITS

(a) Exhibits

| 31.1 |   | Certification of Chief  Executive Officer required under Rule 13a-14(a)/15d-14(a) under  the Exchange Act.                                              |
|------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.2 |   | Certification of  Principal Financial Officer required under Rule 13a-14(a)/15d-14(a) under  the Exchange Act.                                          |
| 32.1 |   | Certification of Chief  Executive Officer pursuant to 18 U.S.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**

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.
|                             | ** ** | **CALLISTO  PHARMACEUTICALS, INC.** |
|-----------------------------|------------|------------------------------------------|
|                        |       |    (Registrant)           |
| Date: August 14,  2007 | * *   | By:                                      | /s/ GARY S. JACOB |
| * *                    | * *   | * *                                 |   | Gary S. Jacob |
|                        |       | * *                                 |   | *Chief Executive Officer* |
| Date: August 14,  2007 | * *   | By:                                      | /s/ BERNARD F. DENOYER |
| * *                    | * *   |                                     | Bernard F. Denoyer |
| * *                    | * *   |                                     | *Vice President, Finance* |

 

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