**UNITEDSTATES OF AMERICA**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, DC 20549**

**FORM 10-Q**

**(MarkOne)**

**x****                                ****QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF1934**

**FOR THE QUARTERLY PERIOD ENDED: JUNE30, 2006**

**o**                                   **TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIESEXCHANGE ACT OF 1934**

**For the transition period from                 to**

**Commission File Number: 001-32325**

**CALLISTOPHARMACEUTICALS, INC.**

(Exact name of Registrant as 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  principal executive offices)                                           | (Zip Code)                            |
|                                                                                |                                  |
| **(212)  297-0010**                                                                 |
| (Registrant’s  telephone number)                                               |
|                                                                                |
| (Former Name,  Former Address and Former Fiscal Year, if changed since last report) |

 

Indicate by check markwhether the registrant: (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the 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         Acceleratedfiler        o           Non-acceleratedfiler          x

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

Yes     o                     No      x

The number of the registrant’s shares of common stockoutstanding was 38,454,931 as of August 11, 2006.

 

 

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**CALLISTO PHARMACEUTICALS, INC.**

**FORM 10-Q**

**CONTENTS**
| **PART I — FINANCIAL  INFORMATION** |                                                                                                                                                                                              |
|-----------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                          |                                                                                                                                                                                              |   |
| Item 1.                                       | Condensed Consolidated Financial Statements                                                                                                                                                       |   |
|                                          |                                                                                                                                                                                              |   |
|                                          | Condensed Consolidated Balance Sheets as of June 30,  2006 (unaudited) and December 31, 2005                                                                                                 | 1 |
|                                          |                                                                                                                                                                                              |   |
|                                          | Condensed Consolidated Statements of Operations for  the Three and Six Months Ended June 30, 2006 and 2005 (unaudited) and the  period June 5, 1996 (Inception) to June 30, 2006 (unaudited) | 2 |
|                                          |                                                                                                                                                                                              |   |
|                                          | Condensed Consolidated Statements of Changes in  Stockholders’ Equity for the period June 5, 1996 (Inception) to June 30,  2006 (unaudited)                                             | 3 |
|                                          |                                                                                                                                                                                              |   |
|                                          | Condensed Consolidated Statements of Cash Flows for  the Six Months Ended June 30, 2006 and 2005 (unaudited) and for the period  June 5, 1996 (Inception) to June 30, 2006 (unaudited)       | 9 |
|                                          |                                                                                                                                                                                              |   |
|                                          | Notes to Condensed Consolidated Financial Statements  (unaudited)                                                                                                                                 | 10 |
|                                          |                                                                                                                                                                                              |   |
| Item 2.                                       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                                                                                                       | 15 |
|                                          |                                                                                                                                                                                              |   |
| Item 3.                                       | Quantitative and Qualitative Disclosures About Market  Risk                                                                                                                                       | 23 |
|                                          |                                                                                                                                                                                              |   |
| Item 4.                                       | Controls and Procedures                                                                                                                                                                           | 23 |
| ** **                                    | ** **                                                                                                                                                                                        | ** ** |
| **PART II  — OTHER INFORMATION**    |                                                                                                                                                                                              |
|                                          |                                                                                                                                                                                              |   |
| Item 1A.                                      | Risk Factors                                                                                                                                                                                      | 24 |
|                                          |                                                                                                                                                                                              |   |
| Item 4.                                       | Submission of Matters to a Vote of Security Holders                                                                                                                                               | 24 |
|                                          |                                                                                                                                                                                              |   |
| Item 6.                                       | Exhibits                                                                                                                                                                                          | 24 |
|                                          |                                                                                                                                                                                              |   |
|                                          | Signatures                                                                                                                                                                                        |   |
|                                               |                                                                                                                                                                                                   |  |  |

 

i

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**INTRODUCTORY NOTE**

**ThisReport on Form 10-Q for Callisto Pharmaceuticals, Inc. (“Callisto” orthe “Company”) may contain forward-looking statements. You can identifythese statements by forward-looking words such as “may,” “will,” “expect,” “intend,”“anticipate,” believe,” “estimate” and “continue” or similar words.Forward-looking statements include information concerning possible or assumedfuture business success or financial results. You should read statements thatcontain these words carefully because they discuss future expectations andplans, which contain projections of future results of operations or financialcondition or state other forward-looking information.  We believe that itis important to communicate future expectations to investors. However, theremay be events in the future that we are not able to accurately predict orcontrol. Accordingly, we do not undertake any obligation to update anyforward-looking statements for any reason, even if new information becomesavailable or other events occur in the future.**

**Theforward-looking statements included herein are based on current expectationsthat involve a number of risks and uncertainties set forth under “Risk Factors”in our Annual Report on Form 10-K/A for the year ended December 31,2005 and other periodic reports filed with the SEC. Accordingly, to the extentthat this Report contains forward-looking statements regarding the financialcondition, operating results, business prospects or any other aspect of theCompany, please be advised that Callisto’s actual financial condition,operating results and business performance may differ materially from thatprojected or estimated by the Company in forward-looking statements.**

ii

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**PART I- FINANCIAL INFORMATION**

**Item 1. Condensed Consolidated Financial Statements**

**CALLISTOPHARMACEUTICALS, INC.**

**(A development stage company)**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**
| ** **                                                                                                                                                       | ** ** | **June 30,  2006** | ** **                            | **December 31,  2005** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|---------------------------------------|-----------------------------|------------|
| ** **                                                                                                                                                       | ** ** | **(Unaudited)**         | ** **                            | ** **                  | ** ** |
| **Assets**                                                                                                                                                       |       |                    |                                  |                        |       |
| Current assets:                                                                                                                                                  |       |                    |                                  |                        |       |
| Cash and cash  equivalents                                                                                                                                       |       | $                       | 728,539                               |                        | $          | 1,420,510 |   |
| Prepaid expenses                                                                                                                                                 |       | 189,545                 |                                  | 181,284                     |       |
|                                                                                                                                                             |       | 918,084                 |                                  | 1,601,794                   |       |
|                                                                                                                                                             |       |                    |                                  |                        |       |
| Property and equipment  — net                                                                                                                               |       | 7,885                   |                                  | —                      |       |
| Rent deposits                                                                                                                                                    |       | 73,716                  |                                  | 82,196                      |       |
|                                                                                                                                                             |       | $                       | 999,685                               |                        | $          | 1,683,990 |   |
| **Liabilities  and Stockholders’ Deficit**                                                                                                                  |       |                    |                                  |                        |       |
| Current liabilities:                                                                                                                                             |       |                    |                                  |                        |       |
| Accounts payable                                                                                                                                                 |       | $                       | 978,090                               |                        | 1,424,612  |   |
| Accrued expenses                                                                                                                                                 |       | 733,106                 |                                  | 592,297                     |       |
|                                                                                                                                                             |       | 1,711,196               |                                  | 2,016,909                   |       |
| Stockholders’ deficit:                                                                                                                                      |       |                    |                                  |                        |       |
| Common stock,  par value $.0001, 100,000,000 shares authorized, 38,454,931 and 33,233,096  outstanding at June 30, 2006 and December 31, 2005, respectively |       | 3,845                   |                                  | 3,323                       |       |
| Additional  paid-in capital                                                                                                                                      |       | 52,216,098              |                                  | 46,387,875                  |       |
| Unamortized  deferred stock-based compensation                                                                                                                   |       | —                  |                                  | (1,583,463                  | )          |
| Deficit  accumulated during development stage                                                                                                                    |       | (52,931,454             | )                                     | (45,140,654                 | )          |
|                                                                                                                                                             |       | (711,511                | )                                     | (332,919                    | )          |
|                                                                                                                                                             |       | $                       |      999,685 |                        | $          |    1,683,990 |   |

 

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

1

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**CALLISTOPHARMACEUTICALS, INC.**

**(A development stage company)**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 
| ** **                                          | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** | **June 5, 1996  (Inception) to** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                          | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006**                                        | ** ** | **2005** | ** ** | **June 30, 2006** | ** ** |
|                                                |       |                                                |       |                                              |       |                                            |       |   |   |   |   |
| Revenues                                            |       | $                                                   | —     |                                              | $          | —                                          |       | $ | — |   | $ | — |   | $ | — |   |
|                                                |       |                                                |       |                                              |       |                                            |       |   |   |   |   |
| Costs and  expenses:                                |       |                                                |       |                                              |       |                                            |       |   |   |   |   |
|                                                |       |                                                |       |                                              |       |                                            |       |   |   |   |   |
| Research and  development                           |       | 1,565,591                                           |       | 1,582,800                                         |       | 3,759,430                                       |       | 3,158,568 |   | 19,765,292 |   |
|                                                |       |                                                |       |                                              |       |                                            |       |   |   |   |   |
| Government grants                                   |       | (201,155                                            | )          | —                                            |       | (255,422                                        | )          | — |   | (747,238 | ) |
|                                                |       |                                                |       |                                              |       |                                            |       |   |   |   |   |
| Purchased in  process research and development      |       |                                                |       | —                                            |       |                                            |       | — |   | 6,944,553 |   |
|                                                |       |                                                |       |                                              |       |                                            |       |   |   |   |   |
| General and  administrative                         |       | 1,457,120                                           |       | 1,092,562                                         |       | 3,211,210                                       |       | 2,100,378 |   | 18,852,075 |   |
|                                                |       |                                                |       |                                              |       |                                            |       |   |   |   |   |
|  Stock based compensation – non employees |       | 456,201                                             |       | (26,405                                           | )          | 960,248                                         |       | 3,733 |   | 9,284,818 |   |
|                                                |       |                                                |       |                                              |       |                                            |       |   |   |   |   |
| Loss from operations                                |       | (3,277,757                                          | )          | (2,648,957                                        | )          | (7,675,466                                      | )          | (5,262,679 | ) | (54,099,500 | ) |
|                                                |       |                                                |       |                                              |       |                                            |       |   |   |   |   |
| Interest and  investment income                     |       | 19,021                                              |       | 38,280                                            |       | 42,101                                          |       | 57,871 |   | 697,086 |   |
| Other income  (expense)                             |       | (157,435                                            | )          | —                                            |       | (157,435                                        | )          | — |   | 470,960 |   |
|                                                |       |                                                |       |                                              |       |                                            |       |   |   |   |   |
| Net loss                                            |       | $                                                   | (3,416,171 | )                                                 | $          | (2,610,677                                      | )          | $ | (7,790,800 | ) | $ | (5,204,808 | ) | $ | (52,931,454 | ) |
|                                                |       |                                                |       |                                              |       |                                            |       |   |   |   |   |
| Weighted average  shares outstanding:               |       |                                                |       |                                              |       |                                            |       |   |   |   |   |
| basic and  diluted                                  |       | 38,216,561                                          |       | 31,228,893                                        |       | 37,103,474                                      |       | 30,490,517 |   |   |   |
|                                                |       |                                                |       |                                              |       |                                            |       |   |   |   |   |
| Net loss per  common share:                         |       |                                                |       |                                              |       |                                            |       |   |   |   |   |
| basic and diluted                                   |       | $                                                   | ($0.09     | )                                                 | $          | (0.08                                           | )          | $ | ($0.21 | ) | $ | (0.17 | ) |   |   |

 

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

2

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**CALLISTOPHARMACEUTICALS, INC.**

**(A Development Stage Company)**

**CONDENSEDCONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)**

**(Unaudited)**

 
| ** **                                                  | ** ** | **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 ofthese condensed consolidated financial statements

3

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| ** **                                 | ** ** | **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 ofthese condensed consolidated financial statements

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| ** **                                                   | ** ** | **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 ofthese condensed consolidated financial statements

5

----

 
| ** **                                                                       | ** ** | **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 ofthese condensed consolidated financial statements

6

----

 

 
| ** **                                         | ** ** | **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 ofthese condensed consolidated financial statements

7

----

 
| ** **                                                                                   | ** ** | **Common  Stock** | ** ** | **Common  Stock  Par  Value** | ** ** | **Additional  Paid in  Capital** | ** ** | **Unamortized  Deferred  Stock Based  Compensation** | ** ** | **Deficit  Accumulated  during the  Development  Stage** | ** ** | **Total  Stockholders’  Deficit** | ** **  |
|----------------------------------------------------------------------------------------------|------------|-------------------|------------|-------------------------------|------------|---------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------------------------------------|------------|----------------------------------------|-------------|
| Balance,  December 31, 2005                                                             |       | 33,233,096        |       | $                             | 3,323      |                                  | $          | 46,387,875                                                |       | $                                                             | (1,583,463 | )                                      | $           | (45,140,654 | ) | $ | (332,919 | ) |
|                                                                                         |       |              |       |                          |       |                                  |       |                                                      |       |                                                          |       |                                   |        |
| Net loss for the  six months ended June 30, 2006                                             |       | —            |       | —                        |       | —                                |       | —                                                    |       | (7,790,800                                                    | )          | (7,790,800                             | )           |
|                                                                                         |       |              |       |                          |       |                                  |       |                                                      |       |                                                          |       |                                   |        |
| Reclassification  of deferred unamortized stock-based compensation upon adoption of FAS 123R |       | —            |       | —                        |       | (1,583,463                            | )          | 1,583,463                                                 |       | —                                                        |       | —                                 |        |
|                                                                                         |       |              |       |                          |       |                                  |       |                                                      |       |                                                          |       |                                   |        |
| Stock based  compensation expense                                                            |       | —            |       | —                        |       | 1,763,661                             |       | —                                                    |       | —                                                        |       | 1,763,661                              |        |
|                                                                                         |       |              |       |                          |       |                                  |       |                                                      |       |                                                          |       |                                   |        |
| Common stock issued  via private placement:                                                  |       |              |       |                          |       |                                  |       |                                                      |       |                                                          |       |                                   |        |
| February 2006                                                                           |       | 4,283,668         |       | 428                           |       | 5,139,782                             |       | —                                                    |       | —                                                        |       | 5,140,210                              |        |
| Finders’ fees and  expenses - February 2006                                             |       | —            |       | —                        |       | (561,808                              | )          | —                                                    |       | —                                                        |       | (561,808                               | )           |
| April 2006                                                                                   |       | 666,667           |       | 67                            |       | 799,933                               |       | —                                                    |       | —                                                        |       | 800,000                                |        |
| Finders’ fees and  legal exp - April 2006                                               |       | —            |       | —                        |       | (41,000                               | )          | —                                                    |       | —                                                        |       | (41,000                                | )           |
|                                                                                         |       |              |       |                          |       |                                  |       |                                                      |       |                                                          |       |                                   |        |
| Exercise of  common stock warrants                                                           |       | 184,500           |       | 18                            |       | 190,017                               |       | —                                                    |       | —                                                        |       | 190,035                                |        |
|                                                                                         |       | —            |       | —                        |       | —                                |       | —                                                    |       |                                                          |       |                                   |        |
| Common stock  issued for services                                                            |       | 87,000            |       | 9                             |       | 121,109                               |       |                                                      |       |                                                          |       | 121,110                                |        |
| Balance, June 30, 2006                                                                       |       | 38,454,931        |       | $                             | 3,845      |                                  | $          | 52,216,098                                                |       | —                                                        |       | $                                      | (52,931,454 | ) | $ | (711,511 | ) |
|                                                                                              |            |                   |            |                               |            |                                       |            |                                                           |            |                                                               |            |                                        |             |  |  |  |  |  |

 

The accompanying notes are an integral part ofthese condensed consolidated financial statements

8

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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** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2006**                                          | ** ** | **2005**                                                          | ** ** | **June 30, 2006** | ** ** |
| Cash flows from  operating activities:                                       |       |                                              |       |                                                              |       |   |   |
| Net loss                                                                     |       | (7,790,800                                        | )          | $                                                                 | (5,204,808 | ) | $ | (52,931,454 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                                              |       |                                                              |       |   |   |
| Depreciation                                                                 |       | 717                                               |       | 10,144                                                            |       | 85,354 |   |
| Stock based  compensation expense                                            |       | 1,911,021                                         |       | 768,940                                                           |       | 15,681,988 |   |
| Purchased in-process  research and development (non-cash portion)            |       | —                                            |       | —                                                            |       | 6,841,053 |   |
| Amortization of  purchase discount on marketable securities                  |       | —                                            |       | (1,373                                                            | )          | — |   |
| Changes in operating  assets and liabilities:                                |       |                                              |       |                                                              |       |   |   |
| Prepaid expenses                                                             |       | (8,261                                            | )          | (91,086                                                           | )          | (189,545 | ) |
| Rent deposits                                                                |       | 8,480                                             |       | —                                                            |       | (73,716 | ) |
| Accounts payable and  accrued expenses                                       |       | (331,963                                          | )          | 470,579                                                           |       | 1,438,455 |   |
| Total adjustments                                                            |       | 1,579,994                                         |       | 1,157,202                                                         |       | 23,783,589 |   |
| Net cash used in  operating activities                                       |       | (6,210,806                                        | )          | (4,047,604                                                        | )          | (29,147,865 | ) |
|                                                                         |       |                                              |       |                                                              |       |   |   |
| Cash flows from  investing activities:                                       |       |                                              |       |                                                              |       |   |   |
| Acquisition of  equipment                                                    |       | (8,602                                            | )          | —                                                            |       | (93,239 | ) |
| Purchase of marketable  investments                                          |       | —                                            |       | (990,417                                                          | )          | — |   |
| Net cash used in  investing activities                                       |       | (8,602                                            | )          | (990,417                                                          | )          | (93,239 | ) |
|                                                                         |       |                                              |       |                                                              |       |   |   |
| Cash flows from  financing activities:                                       |       |                                              |       |                                                              |       |   |   |
| Issuance of common and  preferred stock, net of repurchases                  |       | 5,940,210                                         |       | 3,018,402                                                         |       | 31,225,673 |   |
| Finders’ fees and  expenses                                             |       | (602,808                                          | )          | (25,000                                                           | )          | (1,574,815 | ) |
| Exercise of common  stock warrants                                           |       | 190,035                                           |       | 0                                                                 |       | 318,785 |   |
| Net cash provided by  financing activities                                   |       | 5,527,437                                         |       | 2,993,402                                                         |       | 29,969,643 |   |
|                                                                         |       |                                              |       |                                                              |       |   |   |
| Net (decrease)increase  in cash and cash equivalents                         |       | (691,971                                          | )          | (2,044,619                                                        | )          | 728,539 |   |
|                                                                         |       |                                              |       |                                                              |       |   |   |
| Cash and cash  equivalents at beginning of period                            |       | 1,420,510                                         |       | 5,323,384                                                         |       | — |   |
| Cash and cash equivalents  at end of period                                  |       | $                                                 | 728,539    |                                                              | $          | 3,278,765 |   | $ | 728,539 |   |
| Supplementary  disclosure of cash flow information:                          |       |                                              |       |                                                              |       |   |   |
| Cash paid for taxes                                                          |       | $                                                 | 7,984      |                                                              | $          | 36,443 |   | $ | 117,590 |   |
| Cash paid for interest                                                       |       | $                                                 | —     |                                                              | $          | — |   | $ | — |   |

 

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

9

----

**CALLISTO PHARMACEUTICALS, INC.**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

1. Basis of presentation:

The accompanyingunaudited condensed consolidated financial statements of CallistoPharmaceuticals, Inc. (“Callisto”), which include its wholly ownedsubsidiaries: (1) Callisto Research Labs, LLC (including its wholly ownedbut inactive subsidiary, Callisto Pharma, GmbH (Germany)) and (2) SynergyPharmaceuticals Inc. (“Synergy” , including its wholly owned but inactivesubsidiary IgX, Ltd (Ireland)), have been prepared in accordance with(i) accounting principles generally accepted in the United States ofAmerica (“GAAP”) for interim financial information and (ii) therules of the Securities and Exchange Commission (the “SEC”) for quarterlyreports on Form 10-Q. The results of operations of Synergy are included inthe condensed consolidated financial statements since May 1, 2003. Allintercompany balances and transactions have been eliminated and certain expenseitems in prior periods have been reclassified to conform to currentfinancial statement presentation. These condensed consolidated financialstatements do not include all of the information and footnote disclosures requiredby GAAP for complete financial statements. These statements should be read inconjunction with Callisto’s audited financial statements and notes thereto forthe year ended December 31, 2005, included in Form 10-K/A filed withthe SEC on April 18, 2006. In the opinion of management, the accompanyingunaudited condensed consolidated financial statements include all adjustments,primarily consisting of normal adjustments, necessary for the fair presentationof the balance sheet and results of operations for the interim periods. Theresults of operations for the three and six months ended June 30, 2006 are notnecessarily indicative of the results of operations to be expected for the fullyear ending December 31, 2006.

The audited financialstatements and notes thereto for the year ended December 31, 2005,included in Form 10-K/A filed with the SEC on April 18, 2006, havebeen prepared under the assumption that Callisto will continue as a goingconcern for the twelve months ending December 31, 2006. Callisto’s independentregistered public accounting firm has issued a report dated March 29, 2006that included an explanatory paragraph referring to recurring losses fromoperations and expressing substantial doubt in Callisto’s ability to continueas a going concern without additional capital becoming available. The financialstatements do not include any adjustments that might result from theunfavorable outcome of this ongoing uncertainty. Callisto will be required toraise additional capital to complete the development and commercialization ofcurrent product candidates and to continue to fund operations at our currentcash 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. To the extent that we raise additional funds by issuingequity securities, our stockholders may experience significant dilution. Anydebt financing, if available, may involve restrictive covenants that impact ourability to conduct our business. As of August 14, 2006 Callisto’s cashbalance was approximately $487,000. If we are unable to raise additionalcapital when required or on acceptable terms, we may have to significantlydelay, scale back or discontinue the development and/or commercialization ofone or more of our product candidates.

2. Accounting for stockbased compensation

In December 2004,the Financial Accounting Standards Board (FASB) issued Statement of FinancialAccounting Standard (“SFAS”) No. 123 (Revised 2004), *Share-Based Payments* (“SFAS 123R”). SFAS123R requires a public entity to measure the cost of employee services receivedin exchange for the award of equity instruments based on the fair value of theaward at the date of grant. The expense is to be recognized over the periodduring which an employee is required to provide services in exchange for theaward. SFAS 123R is effective as of the beginning of the first interim orannual reporting period that begins after December 15, 2005 andaccordingly Callisto adopted this standard 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*” in adopting this standard.

Prior to January 1,2006, Callisto had adopted SFAS No. 123, “Accounting for Stock-BasedCompensation.” As provided for by SFAS 123, Callisto had elected to continue toaccount for its stock-based compensation programs according to the provisionsof Accounting Principles Board Opinion No. 25, “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 under the plan. Callisto accounts forcommon stock, stock options, and warrants granted to non-employees based on thefair market value of the instrument, using the Black-Scholes option pricingmodel based on assumptions for expected stock price volatility, term of theoption, risk-free interest rate and expected dividend yield at the grant date.

10

----

For all awards grantedprior to January 1, 2006, the unearned deferred fair value of stock basedcompensation was recognized as an expense on a straight line basis over theremaining requisite service period, ranging from six months to three years. Ourfinancial results for prior periods have not been restated. The adoption ofSFAS 123R increased net loss for the three and six months ended June 30, 2006by approximately $78,000 and $186,000, respectively for stock basedcompensation cost related to employee stock options. The unrecognizedcompensation cost related to non-vested share-based compensation arrangementsfor all employee stock options outstanding at June 30, 2006, as measured at thedate of grant, was approximately $1,100,000.

Effective with theadoption of SFAS 123R stock-based compensation expense related to Callisto’sshare-based compensation arrangements attributable to employees is beingrecorded as a component of general and administrative expense and research anddevelopment expense in accordance with the guidance of Staff AccountingBulletin 107 **,** Topic 14, paragraphF *. Classification of Compensation ExpenseAssociated with Share-Based Payment Arrangements* (“SAB 107”). Priorperiod financial statement accounts have been reclassified to conform tothis presentation.

Stock based compensationexpense related to employee and non-employee stock options recognized in theoperating results for the three and six months ended June 30, 2006, June 30,2005 and for the period from June 6, 1996 (inception), through June 30, 2006were as follow:

 
| ** **                                               | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** | **June 5, 1996  (Inception) to** | ** ** |
|----------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|-------------------------------------------------|------------|
| **Stock based compensation expense**      | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006**                                        | ** ** | **2005** | ** ** | **June 30, 2006** | ** ** |
| ** **                                               | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Employees —  included in research and development   |       | $                                                   | 141,008    |                                              | $          | 69,063                                          |       | $ | 289,604 |   | $ | 138,126 |   | $ | 2,421,464 |   |
| Employees —  included in general and administrative |       | 319,762                                             |       | 313,541                                           |       | 661,169                                         |       | 627,081 |   | 3,975,706 |   |
| Subtotal employee stock option grants                    |       | 460,770                                             |       | 382,604                                           |       | 950,773                                         |       | 765,207 |   | 6,397,170 |   |
|                                                     |       |                                                |       |                                              |       |                                            |       |   |   |   |   |
| Non-employee —  research and development            |       | 102,750                                             |       | —                                            |       | 102,750                                         |       | — |   | 102,750 |   |
| Non-employee —  general and administrative          |       | 353,451                                             |       | (26,405                                           | )          | 857,498                                         |       | 3,733 |   | 9,182,068 |   |
| Subtotal non-employee stock option grants                |       | 456,201                                             |       | (26,405                                           | )          | 960,248                                         |       | 3,733 |   | 9,284,818 |   |
| Total stock based  compensation expense                  |       | $                                                   | 916,971    |                                              | $          | 356,199                                         |       | $ | 1,911,021 |   | $ | 768,940 |   | $ | 15,681,988 |   |

 

The estimated fair valueof employee options granted was determined in accordance with SFAS 123R on thedate of grant using the Black-Scholes option valuation model with the followingweighted-average assumptions for options granted during the six months andthree months ended June 30, 2006: As no options were granted during the threemonths ended June 30, 2006 the following assumptions remain the same: Risk freeinterest rate 4.25%; Dividend yield 0%; Volatility 79% and expected life of 3to 7 years. The risk-free interest rate assumption is based upon observedinterest rates appropriate for the expected term of Callisto’s employee stockoptions. The expected volatility is based on the historical volatility ofCallisto’s stock. The Company has not paid any dividends on common stock sinceits inception and does not anticipate paying dividends on its common stock inthe foreseeable future. The computation of the expected option term is based onexpectations regarding future exercises of options which generally vest over3 years and have a 10 year life.

SFAS 123R requiresforfeitures to be estimated at the time of grant and revised, if necessary, insubsequent periods if actual forfeitures differ from those estimates. Based onhistorical Company experience Callisto estimated future unvested optionforfeitures at 20% as of January 1, 2006 and incorporated this rate inestimated fair value of employee option grants.

Callisto’s determinationof fair value is affected by Callisto’s stock price as well as the assumptionsdiscussed above that require judgment. The weighted-average fair value of alloptions granted during the six months ended June 30, 2006, estimated as of thegrant date using the Black-Scholes option valuation model, was $1.19 per share.A summary of the status of Callisto’s stock option plans as of June 30, 2006and of changes in options outstanding under Callisto’s plans during the sixmonths ended June 30, 2006 is as follows:
| ** **                            | ** ** | **Number of** | ** ** | **Weighted Average**     | ** ** |
|---------------------------------------|------------|--------------------|------------|-------------------------------|------------|
| ** **                            | ** ** | **Shares**         | ** ** | **Price Per Share** | ** ** |
| Outstanding at  January 1, 2006  |       | 8,008,210          |       | $                             | 1.79       |   |
| Granted                               |       | 850,000            |       | 1.57                          |       |
| Exercised                             |       | —             |       |                          |       |
| Terminated                            |       | (508,335           | )          | 1.04                          |       |
| Outstanding at  June 30, 2006         |       | 8,349,875          |       | $                             | 1.81       |   |
| Options exercisable at  June 30, 2006 |       | 4,845,712          |       | $                             | 1.63       |   |

 

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The weighted averageremaining term of all options outstanding decreased from 7.4 years atDecember 31, 2005 to 7.2 years at June 30, 2006. At June 30, 2006 Callistohad 775,000 stock options outstanding under the 2005 Equity Plan, 52,500 stockoptions outstanding under the 2005 Director’s Plan and 7,522,375 stock optionsoutstanding under the 1996 Plan.

SFAS 123R requires that cashflows resulting from tax deductions in excess of the cumulative compensationcost recognized for options exercised (excess tax benefits) be classified ascash inflows from financing activities and cash outflows from operatingactivities. Due to Callisto’s accumulated deficit position, no tax benefitshave been recognized in the cash flow statement.

Had compensation cost forstock options granted to employees and directors prior to January 1, 2006been determined based upon the fair value at the grant date for awards,consistent with the methodology prescribed under SFAS 123, Callisto’s net lossfor the three and six months ended June 30, 2005 would have been as follows:
| ** **                                                                                        | ** ** | **Three Months**              | ** ** | **Six Months**                | ** ** |
|---------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                        | ** ** | **Ended June 30,  2005** | ** ** | **Ended June 30,  2005** | ** ** |
| Net loss, as  reported                                                                            |       | $                                  | (2,610,676 | )                                  | $          | (5,204,808 | ) |
| Add: Stock-based  employee compensation expense  recorded under APB No. 25 intrinsic value method |       | 330,404                            |       | 652,268                            |       |
|                                                                                              |       |                               |       |                               |       |
| Deduct:  Stock-based employee compensation  expense determined under fair value method            |       | (600,125                           | )          | (1,185,403                         | )          |
|                                                                                              |       |                               |       |                               |       |
| Pro forma net  loss                                                                               |       | $                                  | (2,880,397 | )                                  | $          | (5,737,943 | ) |
|                                                                                              |       |                               |       |                               |       |
| Net loss per  share:                                                                              |       |                               |       |                               |       |
| Basic and  diluted -as reported                                                                   |       | $                                  | (0.08      | )                                  | $          | (0.17 | ) |
|                                                                                              |       |                               |       |                               |       |
| Basic and  diluted -pro forma                                                                     |       | $                                  | (0.09      | )                                  | $          | (0.19 | ) |
| Black-Scholes  Methodology Assumptions:                                                           |       |                               |       |                               |       |
| Dividend yield                                                                                    |       | 0                                  | %          | 0                                  | %          |
| Risk free  interest rate                                                                          |       | 4.25                               | %          | 4.25                               | %          |
| Expected lives of  options                                                                        |       | 7 to 10 years                      |       | 7 to 10 years                      |       |

 

Volatility of 0% was useduntil Callisto’s common stock began to trade publicly on June 16, 2003. FromJune 13, 2003 through June 30, 2005 Callisto used 100% volatility to determinethe fair value of options granted to employees. Since July 1, 2005Callisto has used a volatility factor of 79%.

3. Net Loss per Share

Basic and diluted netloss per 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, 2006 there were 4,077,352 warrants and 8,349,875 stock optionsoutstanding, and at June 30, 2005 there were 758,995 warrants and 7,875,710stock options outstanding.

4. Government Grants

Callisto requests cashfunding under approved grants as expenses are incurred (not in advance) andrecords the receipt as an offset to research and development expense. OnApril 1, 2005 Callisto received a research grant for work on a biodefenseprogram from the National Institute of Allergy and Infectious Diseases to developa monoclonal antibody and vaccine against bacterial superantigen toxins underour August 20, 1996 license with Rockefeller University. This amounttotaled $201,155 and $255,422, during the three and six months ended June 30,2006, respectively and has been reported on our Condensed ConsolidatedStatements of Operations as a separate line item entitled “Government Grant”.

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5. Stockholders’ equity:

On February 3, 2006,Callisto closed on a private placement of 4,283,668 shares of common stock and1,070,917 common stock purchase warrants to certain accredited investors. Thewarrants are exercisable for 18 months from closing at an exercise price of$1.60 per share. The securities were sold at a price of $1.20 per share foraggregate gross proceeds of approximately $5.14 million. Net proceeds, afterfees and expenses, were $4.58 million. As provided for by Emerging Issues TaskForce Issue 00-19: *Accounting for DerivativeFinancial Instruments Indexed to, and Potentially Settled in, a Company’s OwnStock* (“EITF 00-19”) the warrants will be classifiedas permanent equity. The fair value of the investor warrants onFebruary 3, 2006, the date of grant was $662,680 using Black Scholesassumptions of 79% volatility, a risk free interest rate of 4.25%, no dividend,an expected life of 18 months and a stock price on that date of $1.59 pershare. This fair value allocated to the investor warrants was recorded asadditional paid in capital during the quarter ended March 31, 2006.

On April 7, 2006Callisto had a second closing of the financing described above, in which wesold an additional 666,667 shares of common stock and issued 166,667 commonstock purchase warrants at the same terms, for gross proceeds of $800,000,bringing the total gross proceeds of the financing to $5.94 million and netproceeds to $5.34 million. Placement agent fees of  $41,000 were paid on this second closing andthree year warrants to purchase a total of 66,667 common shares at a per shareprice of $1.25 were issued to several selling agents.

Callisto agreed to file,within 60 days after the first closing, a registration statement covering theresale of the shares of common stock and the shares underlying the warrants,and to use its commercially reasonable efforts to cause such registrationstatement to be declared effective within 120 days after closing or payfinancial penalties to the investors in the event a registration statement isnot filed or declared effective within such time period. Callisto has not yetfiled a registration statement within the 60-day time period and is incurringfinancial penalties of approximately $51,400 for every 30-day period that aregistration statement has not been filed for the shares sold on February 3,2006 and $8,000 for every 30-day period that a registration statement has notbeen filed for the shares sold on April 7, 2006.  As of June 30, 2006 Callisto has incurred$157,435 in liquidated damages related to the registration rights agreement,which has been classified as other expense in the condensed consolidated statementsof operations.

On May 18, 2006Callisto held a special shareholder meeting and approved (i) the potentialissuance and sale of up to 20,000,000 shares of Callisto common stock (orsecurities convertible into or exercisable for common stock) at a price belowfair market value for aggregate gross proceeds of up to $30,000,000 and(ii) the issuance of 75,000 shares of Callisto’s restricted common stockto Dr. Moshe Talpaz pursuant to a consulting agreement between Callistoand Dr. Talpaz (See Note 6).

6. Commitments andcontingencies:

Licensing agreements:

On January 10, 2006,Callisto entered into a Patent and Technology License Agreement with TheUniversity of Texas M.D. Anderson Cancer Center. Pursuant to the licenseagreement, Callisto was granted the exclusive right to manufacture, havemanufactured, use, import, offer to sell and/or sell anti-cancer compoundscalled tyrphostins (renamed Degrasyns). Callisto paid a nonrefundable fee uponexecution of this agreement and is obligated to pay annual license maintenancefees to The University of Texas M.D. Anderson Cancer Center. Callisto is alsoobligated under this agreement to pay for the legal fees and expensesassociated with establishing and protecting the patent rights worldwide.

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

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Employment and consultingagreements:

On January 31, 2006,Callisto entered into a consulting agreement with Dr. Moshe Talpaz,whereby Dr. Talpaz will provide consulting services for Callisto’s Degrasynsprogram. Under the agreement Dr. Talpaz will be paid $10,000 per year andwas granted 575,000 10-year options to purchase Callisto common stock at $1.60per share. Such options vest based on milestones related to the Degrasynscompounds being developed towards FDA approval. Callisto also agreed to issueto Dr. Talpaz 75,000 shares of restricted common stock, subject toshareholder approval which occurred on May 18, 2006. The term of theagreement is for the length of time Callisto is developing the Degrasynsplatform of compounds in all indications.

On February 17,2006, Pamela Harris, the Chief Medical Officer of Callisto, resigned from theCompany. As a result the employment agreement between Dr. Harris andCallisto dated as of March 28, 2005, as amended, was terminated.

On March 23, 2006,Callisto entered into a 2-year sponsored laboratory study agreement with theUniversity of Texas M. D. Anderson Cancer Center whereby Dr. NicholasDonato, as principal investigator, will analyze the anti-tumor activity andmechanism of action of Callisto’s WP1130 Degrasyn compound and analogs. Theagreement calls for payment of $145,900 to M.D. Anderson in two installments of$72,950 with the first payment due within 30 days, and the second payment duewithin six months of execution.

On March 27, 2006,Callisto entered into a 2-year sponsored laboratory study agreement with theUniversity of Texas M. D. Anderson Cancer Center whereby Dr. WilliamBornmann, as principal investigator, will perform molecular modeling andsynthesize a library of compounds based on Callisto’s Degrasynplatform technology. The agreement calls for payment of $127,145 to M.D.Anderson in two installments of $63,572 with the first payment due within 30days, and the second payment due within six months of execution.

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**ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS 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 inJune 1996 our efforts have been principally devoted to research anddevelopment, securing patent protection, obtaining corporate relationships andraising capital. Since inception through June 30, 2006, we have sustainedcumulative net losses of $52,931,454. Our losses have resulted primarily fromexpenditures incurred in connection with clinical development of licensedproducts, the purchase of in-process research and development, stock basedcompensation expense, patent filing and maintenance, outside accounting andlegal services and regulatory consulting fees. From inception through June 30, 2006 we have not generated any revenuefrom operations. We expect to incur substantial and increasing losses for thenext several years as we develop our product candidates, expand our clinicaldevelopment team and prepare for the commercial launch of our productcandidates. We do not currently have any commercial biopharmaceutical products,and do not expect to have such for several years, if at all.

On February 3, 2006,we closed on a private placement of 4,283,668 shares of common stock and1,070,917 common stock purchase warrants to certain accredited investors. Thewarrants are exercisable for 18 months from closing at an exercise price of$1.60 per share. The securities were sold at a price of $1.20 per share foraggregate gross proceeds of approximately $5.14 million. The net proceeds,after fees and expenses, were $4.58 million.

On April 7, 2006 wehad a second closing of the financing described above, in which we sold anadditional 666,667 shares of common stock and issued 166,667 common stockpurchase warrants at the same terms, for gross proceeds of $800,000, bringingthe total gross proceeds of the financing to $5.94 million and net proceeds to$5.34 million. Placement agent fees of $41,000 were paid on this second closing and three year warrants topurchase a total of 66,667 common shares at a per share price of $1.25 wereissued to several selling agents.

**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 onFebruary 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.

**PLANOF OPERATIONS**

Our plan of operationsfor the next twelve months is to focus primarily on the development of drugs totreat relapsed (re-occurrence of active disease) or refractory acute leukemia(a disease of the white blood cells), multiple myeloma (an incurable bloodcancer that invades and proliferates in bone marrow), and advanced carcinoidcancer patients. Our lead drug candidate, L-Annamycin, a drug from theanthracycline family (chemotherapy drugs which are derived from antibiotics),earlier completed an initial Phase I/IIa clinical trial in relapsed orrefractory leukemia patients with a prior sponsor. L-Annamycin, originallydeveloped by scientists at The University of Texas M.D. Anderson Cancer Centerto address the clinical limitations associated with anthracycline drugs such asAdriamycin (doxorubicin), began a clinical trial at The University of TexasM.D. Anderson Cancer Center in adult relapsed or refractory acute lymphocyticleukemia (ALL) patients on December 1, 2005. This single-arm, open labeltrial will enroll 12 patients in a dose escalation Phase I portion, followed by10 patients in a final fixed dose in the Phase II portion. We plan to treat upto 34 patients. We also expect to commence two additional trials of L-Annamycinin 2006, a single agent trial in pediatric relapsed or refractory ALL and AMLpatients and a combination therapy trial with Ara-C (cytosine arabinoside) inrelapsed or refractory acute myeloid leukemia (AML) patients.

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Our second drugcandidate, Atiprimod, is an orally administered drug with antiproliferative andantiangiogenic activity. Atiprimod commenced a Phase I/IIa clinical trial inrelapsed multiple myeloma patients on May 26, 2004. These are patientsthat have a re-occurrence of active disease, and no longer respond to approvedtherapies. The Phase I/IIa clinical trial is being performed at four sites, TheUniversity of Texas M.D. Anderson Cancer Center (Houston, TX), the Universityof Michigan Medical Center (Ann Arbor, MI), Fred Hutchinson Cancer ResearchCenter (Seattle, WA), and the Roswell Park Cancer Institute (Buffalo, NY). InDecember 2005, we announced interim results from this trial performed inrelapsed or refractory multiple myeloma patients which consisted of 15 patientstreated with Atiprimod, including 3 patients at the highest dose level of 180mg/day. Two patients exhibited stable disease, with one patient having a 34%decrease in M protein (measure of tumor burden) over 3 months of treatment. Itwas also noted that two patients reported a subjective decrease in bone pain.We have amended the protocol to enable us to continue this trial at higher doselevels until the maximum tolerated dose is reached and we then plan to treat 10additional patients at that level.

On June 2, 2006 at the AmericanSociety of Clinical Oncology (ASCO) annual meeting abstract number 13050,titled “Phase I study of the safety and efficacy of atiprimod, a novelazaspirane, for patients with advanced cancer” described data from our clinicaltrial in advanced cancer patients.  Theabstract stated that 14 patients had been treated at that date with 60 mgtablets (n=3), 60 mg capsules (n=3), 90 mg capsules (n=3) and 120 mg capsules(n=5).  Of the 14 patients, 4 hadcarcinoid tumors and 3 of these patients had shown responses with one patientbeing on drug for 7 cycles of therapy (7 months).  Due to the encouraging results in thecarcinoid patients from the Phase I trial in advanced cancer, on June 27, 2006we announced plans to begin a Phase II trial in advanced carcinoid patientsthat will include approximately 30 patients.

**L-ANNAMYCINTO TREAT RELAPSED ACUTE LEUKEMIA**

On August 12, 2004,we entered into a world-wide license agreement with The University of TexasM.D. Anderson Cancer Center to research, develop, sell and commercially exploitthe patent rights for L-Annamycin, an anthracycline cancer drug for leukemiatherapy. Consideration paid for this license amounted to $31,497 forreimbursement of out-of-pocket costs for filing, enforcing and maintaining theL-Annamycin patent rights and a $100,000 initial license fee. We also agreed topay The University of Texas M.D. Anderson Cancer Center royalties based on netsales from any licensed products, plus aggregate milestone payments of up to$750,000 based upon achieving certain regulatory submissions and approvals. Theterm of the agreement is from August 12, 2004 until November 2, 2019.Under the terms of the license agreement, we are required to make certain goodfaith expenditures towards the clinical development of at least one licensedproduct within the one year period after March 2006. In addition, at anytime after five years from August 12, 2004, The University of Texas M.D.Anderson Cancer Center has the right to terminate the license if we fail toprovide evidence within 90 days of written notice that we have commercializedor we are actively and effectively attempting to commercialize L-Annamycin.

L-Annamycin wasdiscovered by scientists at The University of Texas M.D. Anderson Cancer Centerand initially evaluated in a Phase I clinical trial in 36 patients withrelapsed solid tumors, a Phase II clinical trial in 13 patients withdoxorubicin-resistant breast cancer, and a Phase I/IIa trial in 20 patientswith relapsed/refractory acute myeloid leukemia, or AML and acute lymphocyticleukemia, or ALL.

**DEVELOPMENTSTRATEGY FOR L-ANNAMYCIN**

We began a clinical trialat The University of Texas M.D. Anderson Cancer Center in adult relapsed orrefractory acute lymphocytic leukemia (ALL) patients on December 1, 2005.This single-arm, open label trial will enroll 12 patients in a dose escalationPhase I portion, followed by 10 patients in a final fixed dose in the Phase IIportion. We plan to treat up to 34 patients. We also expect to commence twoadditional trials of L-Annamycin in 2006, a single agent trial in pediatricrelapsed or refractory ALL and AML patients and a combination therapy trialwith Ara-C (cytosine arabinoside) in relapsed or refractory acute myeloidleukemia (AML) patients.

**ATIPRIMODTO TREAT MULTIPLE MYELOMA AND ADVANCED CARCINOID CANCER PATIENTS**

On August 28, 2002,Synergy entered into a worldwide license agreement with AnorMED to research,develop, sell and commercially exploit the Atiprimod patent rights. The licenseagreement provides for aggregate milestone payments of up to $14 million basedupon achieving certain regulatory submissions and approvals for an initialindication, and additional payments of up to $16 million for each additionalindication based on achieving certain regulatory submissions and approvals. Inaddition the agreement requires Synergy to pay AnorMED royalties on net sales.Commencing on January 1, 2004 and on January 1 of each subsequentyear, Synergy is obligated to pay AnorMED a maintenance fee of $200,000 until thefirst commercial sale of the product. The first of these annual maintenance feepayments under this agreement was made on January 22, 2004. Pursuant tothe license agreement, failure to pay the maintenance fee is a material breachof the license agreement. The license agreement will terminate in 2018.

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**DEVELOPMENTSTRATEGY****FOR ATIPRIMOD**

Multiple Myeloma:

On May 26, 2004, wecommenced a Phase I/IIa clinical trial of Atiprimod in relapsed multiplemyeloma patients at two sites, the Dana-Farber Cancer Institute (Boston) andThe University of Texas M. D. Anderson Cancer Center (Houston). OnJanuary 31, 2005, we announced the opening of two additional sites for thePhase I/IIa clinical trial of Atiprimod, the Roswell Park Cancer Institute inBuffalo, New York, and the St. Vincent’s Comprehensive Cancer Center in NewYork, NY. The clinical trial is an open label study, with the primary objectiveof assessing the safety of the drug and identifying the maximum tolerated dose.The secondary objectives are to measure the pharmacokinetics, evaluate theresponse in patients with refractory disease and to identify possible surrogateresponses to drug to better determine the mechanism of drug action. Theduration of this clinical study depends on the enrollment rate, how well thedrug is tolerated, and on drug response.  On April 12, 2006 we announced that wereceived Institutional Review Board approval from 3 clinical trial sites tocontinue our Phase I/IIa trial in multiple myeloma at higher doses ofAtiprimod. We plan to announce more specifics on this trial shortly.

Advanced Cancer andCarcinoid:

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(MTD) of Atiprimod in advanced cancer patients. The secondary objectives are tomeasure the pharmacokinetics of Atiprimod and evaluate the response in a varietyof relapsed solid tumors and hematologic malignancies. The trial protocolreceived IRB approval on February 22, 2005 at The University of Texas M.D. Anderson Cancer Center with Dr. Razelle Kurzrock acting as thePrincipal Investigator. Site initiation was completed on March 3, 2005,and patient screening and dosing began in April, 2005. The duration of thisstudy will depend on the enrollment rate, how well the drug is tolerated and ondrug response.

On June 2, 2006 at theAmerican Society of Clinical Oncology (ASCO) annual meeting abstract number13050, titled “Phase I study of the safety and efficacy of atiprimod, a novelazaspirane, for patients with advanced cancer” described data from our clinicaltrial in advanced cancer patients.  Theabstract stated that 14 patients had been treated at that date with 60 mgtablets (n=3), 60 mg capsules (n=3), 90 mg capsules (n=3) and 120 mg capsules(n=5).  Of the 14 patients, 4 hadcarcinoid tumors and 3 of these patients had shown responses with one patientbeing on drug for 7 cycles of therapy (7 months).  Due to encouraging results in the carcinoidpatients from the Phase I trial in advanced cancer, on June 27, 2006 weannounced plans to begin a Phase II trial in advanced carcinoid patients toinclude approximately 30 patients.

**GUANYLATECYCLASE RECEPTOR AGONIST TECHNOLOGY**

Our guanylate cyclasereceptor agonist (GCRA) program is based on control of cyclic guanosinemonophosphate (“cyclic GMP”), an important second messenger involved in keycellular processes, which are essential for maintenance of the balance betweenproliferation and cellular death (apoptosis). Uroguanylin, a hormone producedby and secreted by specialized cells in the human GI tract, helps to maintainthis balance by activating synthesis of cyclic GMP through activation ofguanylate cyclase receptor. Recent findings suggest a role of cyclic GMP ingastrointestinal (GI) inflammatory diseases.

We have successfullydeveloped a potent analog (synthetic molecule) of uroguanylin called Guanilib(formerly called SP304). Guanilib has been demonstrated to be superior touroguanylin in its biological activity, protease stability and pHcharacteristics. Guanilib is currently undergoing pre-clinical animal studiesas a treatment for gastrointestinal or GI inflammation in a collaborative studyinvolving clinical gastroenterologist Dr. Scott Plevy of the University ofPittsburgh. Recent results from his laboratory showed that Guanilib wasefficacious in treatment of ulcerative colitis in mice. A patent coveringcompositions of matter and formulations of Guanilib, alone or in combinationwith a phosphodiesterase inhibitor, an anti-inflammatory agent, an antiviralagent, or an anticancer agent, has recently been issued to us by the U.S.Patent and Trademark Office. On May 9, 2006 the U.S. Patent and TrademarkOffice (USPTO) notified Callisto that its patent issued covering a novel drugcandidate, Guanilib, developed by Callisto scientists to treat and prevent avariety of inflammatory diseases of the bowel. The drug candidate isfirst-in-class of a new category of compounds with the potential to treatgastro-intestinal diseases such as ulcerative colitis.

**DEGRASYNS**

On January 10, 2006,we entered into a license agreement with the University of Texas M.D. Anderson CancerCenter 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-generationclass of tyrphostins developed by scientists at the University of TexasM.D. Anderson Cancer Center that have a novel anti-cancer mechanism-of-actionthat centers on their ability to selectively degrade key proteins that areinvolved in tumor cell proliferation and survival. We plan to work closely withscientists at the University of Texas M.D. Anderson Cancer Center during 2006to bring forward a pre-clinical candidate for development in the clinic.

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On March 23, 2006,we entered into a 2-year sponsored laboratory study agreement with theUniversity of Texas M. D. Anderson Cancer Center whereby Dr. NicholasDonato, as principal investigator, will analyze the anti-tumor activity andmechanism of action of our WP1130 Degrasyn compound and analogs. The agreementcalls for payment of $145,900 to M.D. Anderson in two installments of $72,950,with the first payment due within 30 days and the second payment due within sixmonths.

On March 27, 2006,we entered into a 2-year sponsored laboratory study agreement with theUniversity of Texas M. D. Anderson Cancer Center whereby Dr. WilliamBornmann, as principal investigator, will perform molecular modeling andsynthesize a library of compounds based on our Degrasynplatform technology. The agreement calls for payment of $127,145 to M.D.Anderson in two installments of $63,572, with the first payment due within 30days and the second payment due within six months.

**MANUFACTURING**

An improved manufacturingmethod for Annamycin has been developed at Antibioticos S.p.A., our commercialsupplier of Good Manufacturing Practice, or GMP, drug substance. GMP materialis currently being produced in sufficient quantity for all three anticipatedPhase I/II trials. Currently, Antibioticos S.p.A. is our sole supplier ofAnnamycin for our clinical trials. Our agreement with Antibioticos providesthat Antibioticos S.p.A. 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 will negotiatein good faith towards a commercial supply agreement for Annamycin. If ourrelationship with this contract manufacturer, or any other contractmanufacturer we might use, terminates or if any of their facilities are damagedfor any reason, including fire, flood, earthquake or other similar event, wemay be unable to obtain supply of Annamycin. If any of these events wereto occur, we may need to find alternative manufacturers or manufacturingfacilities. The number of contract manufacturers with the expertise, requiredregulatory approvals and facilities to manufacture Annamycin on a commercialscale is extremely limited, and it would take a significant amount of time toarrange for alternative manufacturers. If we need to change to other commercialmanufacturers, the FDA and comparable foreign regulators must approve thesemanufacturers’ facilities and processes prior to our use, which would requirenew testing and compliance inspections. In addition, we may not have theintellectual property rights, or may have to share intellectual propertyrights, to any improvements in the current manufacturing processes or any newmanufacturing processes for Annamycin. Any of these factors could cause us todelay or suspend clinical trials, regulatory submissions, required approvals orcommercialization of L-Annamycin, entail higher costs, and could result in ourbeing unable to commercialize L-Annamycin successfully.

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

**EMPLOYEES**

Our plan is to usecontract research organizations for most of our development efforts, includingmonitoring of clinical trial results, thus minimizing the need to hire fulltime employees. As of August, 3, 2006, we had 8 full-time and 3 part-timeemployees. We believe our employee relations are satisfactory.

**OFF-BALANCESHEET ARRANGEMENTS**

We had no off-balancesheet arrangements as of June 30, 2006.

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**RESULTSOF OPERATIONS**

**THREEMONTHS ENDED JUNE 30, 2006 AND JUNE 30, 2005**

We had no revenues duringthe three months ended June 30, 2006 and 2005 because we do not have anycommercial biopharmaceutical products and we do not expect to have suchproducts for several years, if at all.

Research and developmentexpenses decreased by $17,209, or 1%, to $1,565,591 for the three months endedJune 30, 2006 from $1,582,800 for the three months ended June 30, 2005.  During the three months ended June 30, 2006,cash research and development expenses were $1,424,583 as compared to$1,513,737 for the three months ended June 30, 2005, a decrease of $89,154 or 6%.  Stock based compensation expense increased by$71,945 from $69,063 to $141,008 due to an increase in research and developmentstaff and the adoption of SFAS 123R on January 1, 2006. See Note 2 to ourcondensed consolidated financial statements for more detailed discussion ofstock based compensation. The factors contributing to the decreased cashresearch and development expense during the quarter ended June 30, 2006 were adecrease in spending for L-Annamycin drug manufacturing costs and testing of$685,280 or 68% from the quarter ended June 30, 2005 offset by an increase inspending for non-allocated R&D expense. Non-allocated R&D expense increased during the period to $726,032for the three months ended June 30, 2006 from $250,966 in the three monthsended June 30, 2005, an increase of 189% due to the increase in our ongoingclinical trials. During the quarter there was $120,939 in new spending on theDegrasyns program.

On April 1, 2005 wereceived an $885,641 biodefense partnership grant from the National Instituteof Allergy and Infectious Diseases (“NIAID”) to develop a monoclonal antibodyand vaccine against bacterial superantigen toxins over the next two years.Government grant funding for the three months ended June 30, 2006 was $201,155as compared to $0 for the three months ended June 30, 2005. We request grantfunding to reimburse research and development expenses as incurred.

General andadministrative expenses for the three months ended June 30, 2006 were$1,457,120, an increase of $364,558 or 33%, from $1,092,562 for the threemonths ended June 30, 2005. The increase was due primarily to approximately(i) $306,690 of increased spending on investor relations to increasepublic investors’ awareness of our stock to $342,944 in the three months endedJune 30, 2006 versus $36,254 for the three months ended June 30, 2005, anincrease of 846%. This expense increase was in addition to a$77,000 increase in salaries and wages and a $37,668 increase in accountingaudit and tax service, and was offset by (i) a $39,385 decrease in recruitingand relocation costs due to the expense of hiring our former CMO in the prioryear period and a decrease in rent expense of $20,103 due to the relocation ofour lab and office space in New Jersey to Doylestown PA.

Stock-based compensationfor non employees increased $482,606 from ($26,405) for the three months endedJune 30, 2005 to $456,201 for the three months ended June 30, 2006 primarilyattributable to the warrants granted to Trilogy Capital Partners in July 2005.

Interest income of$19,021 for the three months ended June 30, 2006 decreased $19,259 or 50%from $38,280 in the three months ended June 30, 2005 due to decreasedaverage cash balances.

Other Expense for the threemonths ended June 30, 2006 was $157,435 due to liquidated damage payments toinvestors for failure to register shares of the Company’s common stock sold ina private placement in February and April 2006. We had no such payments during the three months ended June 30, 2005.

Net loss for the threemonths ended June 30, 2006 was $3,416,171 compared to a net loss of $2,610,677incurred for the three months ended June 30, 2005. The biggest components ofthe increased net loss were increased stock-based compensation expense andincreased public relations expense related to Trilogy Capital Partners.

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****SIX MONTHS ENDED JUNE 30, 2006 AND JUNE 30, 2005****

We had no revenues duringthe six months ended June 30, 2006 and 2005 because we do not have anycommercial biopharmaceutical products and we do not expect to have suchproducts for several years, if at all.

Research and developmentexpenses increased by $600,862 or 19%, to $3,759,430 for the six months endedJune 30, 2006 from the $3,158,568 we incurred for the six months ended June 30,2005. During the six months ended June 30, 2006 cash research and developmentexpenses were $3,469,826, versus $3,020,442 for the six months ended June 30,2005, an increase of $449,384 or 15%. Non-cash stock based compensation expense was $289,604 for the sixmonths ended June 30, 2006 versus $138,126 for the six months ended June 30,2005, an increase of $151,478 or 110% due to an increase in research anddevelopment staff and the adoption of SFAS 123R on January 1, 2006. See Note 2to our condensed consolidated financial statements for more detailed discussionof stock based compensation.  The factorscontributing to the increase in cash research and development expenses were (i)an increase in pre-clinical programs of $550,980, (ii) general research anddevelopment of $210,937, (iii) an increase in product license and related legalfees of $200,000, and (iv) an increase in legal patents and regulatory expensesof $130,607, offset by the absence of large purchases of L-Annamycin drugsubstance and testing which decreased by $625,146.

On April 1, 2005 wereceived an $885,641 biodefense partnership grant from the National Instituteof Allergy and Infectious Diseases (“NIAID”) to develop a monoclonal antibodyand vaccine against bacterial superantigen toxins over the next two years.Government grant funding for the six months ended June 30, 2006 was $255,422from our NIAID grant versus $0 for the six months ended June 30, 2005.

General and administrativeexpenses increased by $1,110,832 or 53%, to $3,211,210 for the six months endedJune 30, 2006 from $2,100,378 for the six months ended June 30, 2005. Duringthe six months ended June 30, 2006 cash general and administrative expenseswere $2,550,041 versus $1,473,297 for the six months ended June 30, 2005, anincrease of $1,076,743 or 73%.  Non-cashstock based compensation expense was $661,169 for the six months ended June 30,2006 versus $627,081 for the six months ended June 30, 2005, an increase of $34,088or 5%. See Note 2 to our condensed consolidated financial statements for moredetailed discussion of stock based compensation.  The increase in cash general andadministrative expenses was due primarily to approximately (i) $730,000 ofincreased investor relations costs including the fees paid to Trilogy CapitalPartners and affiliates, (ii) $140,000 of increased expenses related tosalaries due an increase in headcount, and (iii) $134,000 in increasedmanagement bonuses.

Stock-basedcompensation — related to non-employee options recorded during the sixmonths ended June 30, 2006 totaled $960,248 as compared to $3,733 recordedduring the six months ended June 30, 2005 attributable to the warrants grantedto Trilogy Capital Partners in July 2005.

Interest income of$42,101 for the six months ended June 30, 2006 decreased $15,770 or 27%, from$57,871 for the six months ended June 30, 2005 due to lower cash balances.

Other expense for the sixmonths ended June 30, 2006 was $157,435 due to liquidated damage payments toinvestors for failure to register shares of the Company’s common stock sold ina private placement in February and April 2006. We had no such payments during the six months ended June 30, 2005.

Net loss for the sixmonths ended June 30, 2006 was $7,790,800 compared to a net loss of $5,204,808incurred for the six months ended June 30, 2005. The increased net loss isprimarily the result of higher research and development, general andadministrative expenses, and higher stock based compensation expense, asdiscussed above.

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**LIQUIDITYAND CAPITAL RESOURCES**

As of June 30, 2006 wehad $728,539 in cash and cash equivalents, compared to $1,420,510 as ofDecember 31, 2005. This decrease in cash of $691,971 for the six monthsended June 30, 2006 was principally the result of cash used in operatingactivities of $6,210,806, partially offset by a private placement of commonstock yielding net proceeds of $5,337,402 and warrant exercise proceeds of$190,035.

On May 3, 2006 wewere awarded the second installment of $366,211 from an April 1, 2005grant totaling $885,641 for biodefense partnerships from the National Instituteof Allergy and Infectious Diseases (NIAID) to develop a monoclonal antibody andvaccine against bacterial superantigen toxins. Bacterial Superantigens areamong the most lethal of toxins that can potentially be used as bioweapons. Ourlead monoclonal antibody (Mab) and antagonist peptide are being developed toprovide broad-spectrum protection against a variety of superantigen toxins fromstaphylococcal and streptococcal bacterial strains

On April 7, 2006 wehad a second closing of the financing described below, in which we sold anadditional 666,667 shares of common stock and issued 166,667 common stockpurchase warrants at the same terms, for gross proceeds of $800,000, bringingthe total gross proceeds of the financing to $5.94 million and net proceeds to$5.34 million.  Placement agent fees of$41,000 were incurred on this second closing and three year warrants topurchase a total of 66,667 common shares at a per share price of $1.25 wereissued to several selling agents. We agreed to file, within 60 days after thefirst closing, a registration statement covering the resale of the shares ofcommon stock and the shares underlying the warrants, and to use ourcommercially reasonable efforts to cause such registration statement to bedeclared effective within 120 days after closing or pay financial liquidateddamages to the investors in the event a registration statement is not filed or declaredeffective within such time period. We have not yet filed a registrationstatement and we are incurring liquidated damages at the rate of approximately$51,400 for every 30-day period that a registration statement has not beenfiled for the shares sold on February 3, 2006 and $8,000 for every 30-dayperiod that a registration statement has not filed for the shares sold onApril 7, 2006. As of June 30, 2006 we have incurred $157,435 in liquidateddamages related to the registration rights agreement, which have beenclassified as other expense on our condensed consolidated statement ofoperations.

On March 23, 2006, weentered into a 2-year sponsored laboratory study agreement with the Universityof Texas M.D. Anderson Cancer Center whereby Dr. Nicholas Donato, as principalinvestigator,  will analyze the anti-tumor activity and mechanism ofaction of our WP 1130 Degrasyn compound and analogs. The agreement calls forpayment of $145,900 to M.D. Anderson in two installments of $72,950.The firstpayment was made in April 2006 and the second payment due within six months ofexecution.

On March 27, 2006, weentered into a 2-year sponsored laboratory study agreement with the Universityof Texas M.D. Anderson Cancer Center whereby Dr. William Bornmann, as principalinvestigator, will perform molecular modeling and synthesize a library ofcompounds based on our Degrasyn platform technology.  The agreement callsfor payment of $127,145 to M.D. Anderson in two installments of $63,572. Thefirst payment was made in April 2006 and the second payment is due within sixmonths of execution.

On February 3, 2006,we closed on a private placement of 4,283,668 shares of common stock and1,070,917 common stock purchase warrants to certain accredited investors. Thewarrants are exercisable for 18 months from closing at an exercise price of$1.60 per share. The securities were sold at a price of $1.20 per share foraggregate gross proceeds of approximately $5.14 million. The net proceeds,after fees and expenses, were $4.58 million.

Our working capitalrequirements will depend upon numerous factors including but not limited to thenature, cost and timing of: pharmaceutical research and development programs;pre-clinical and clinical testing; obtaining regulatory approvals;technological advances and our ability to establish collaborative arrangementswith research organizations and individuals needed to commercialize ourproducts. Our capital resources will be focused primarily on the clinicaldevelopment and regulatory approval of our current product candidates, and theacquisition of licenses and rights to certain other cancer related drugtechnologies. Our existing capital resources will not be sufficient to fund ouroperations and we will be required to raise additional capital to complete thedevelopment and commercialization of our current product candidates.

Our consolidatedfinancial statements as of December 31, 2005 have been prepared under theassumption that we will continue as a going concern for the twelve monthsending December 31, 2006, Our independent registered public accountingfirm has issued a report dated March 29, 2006 that included an explanatoryparagraph referring to our recurring losses from operations and net capitaldeficiency and expressing substantial doubt in our ability to continue as agoing concern without additional capital becoming available. Our ability tocontinue as a going concern is dependent upon our ability to obtainadditional equity or debt financing, attain further operating efficiencies and,ultimately, to generate revenue. The financial statements do not include anyadjustments that might result from the outcome of this uncertainty. We will berequired to raise additional capital within the next twelve months to completethe development and commercialization of current product candidates and tocontinue to fund operations at our current cash expenditure levels.

On May 18, 2006 weheld a special shareholder meeting and approved (i) the potential issuanceand sale of up to 20,000,000 shares of our common stock (or securitiesconvertible into or exercisable for common stock) at a price below fair marketvalue for aggregate gross proceeds of up to $30,000,000 and (ii) theissuance of 75,000 shares of our restricted common stock to Dr. MosheTalpaz pursuant to a consulting agreement between us and Dr. Talpaz.

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. As ofAugust 14, 2006 our cash balance was approximately $487,000. If we areunable 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.

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**CRITICALACCOUNTING POLICIES****ANDESTIMATES**

Our discussion andanalysis of financial condition and results of operations are based upon ourcondensed consolidated financial statements, which have been prepared by uswithout audit in accordance with the rules and regulations of theSecurities and Exchange Commission. The preparation of our financial statementsrequires us to make estimates that affect the reported amounts of assets,liabilities, revenue and expense, and related disclosure of contingent assetsand liabilities. We base our accounting estimates on historical experience andother factors that are believed to be reasonable under the circumstances.However, actual results may vary from these estimates under differentassumptions or conditions. The following is a summary of our criticalsignificant accounting policies and estimates.

Financial ReportingRelease No. 60 requires all companies to include a discussion of criticalaccounting policies or methods used in the preparation of financial statements.Our accounting policies are described in Note 3 of the notes to ourconsolidated financial statements included in our Annual Report onForm 10-K/A for the fiscal year ended December 31, 2005. Thefinancial statements are prepared in accordance with accounting principlesgenerally accepted in the United States of America, which requires managementto make estimates and assumptions that affect the reported amounts of assetsand liabilities and disclosure of contingent assets and liabilities at the dateof the financial statements and the reported amounts of revenues and expensesduring the reporting period. Actual results could differ from those estimates.

In December 2004,the Financial Accounting Standards Board (FASB) issued Statement of FinancialAccounting Standard (“SFAS”) No. 123 (Revised 2004), *Share-Based Payments* (“SFAS 123R”). SFAS123R requires a public entity to measure the cost of employee services receivedin exchange for the award of equity instruments based on the fair value of theaward at the date of grant. The expense is to be recognized over the periodduring which an employee is required to provide services in exchange for theaward. SFAS 123R is effective as of the beginning of the first interim orannual reporting period that begins after December 15, 2005 andaccordingly Callisto adopted this standard on January 1, 2006. For allawards granted prior to January 1, 2006, the unearned deferred fair valueof stock based compensation, on the date of adoption, will be recognized as anexpense on a straight line basis over the remaining requisite service period.Our financial results for prior periods have not been restated.  See Note 2 to our condensed consolidatedfinancial statements for more detailed discussion of stock based compensation.

Prior to January 1,2006 we accounted for stock-based compensation expense in accordance withStatement of Financial Accounting Standard No. 123, “Accounting forStock-Based Compensation” (“SFAS 123”). As provided for by SFAS 123, we hadelected to account for our stock-based compensation programs according to theprovisions of Accounting Principles Board Opinion No. 25, “Accounting forStock Issued to Employees” (“APB 25”).” Accordingly, compensation expense hadbeen recognized based on the intrinsic value of stock issued or options grantedto employees and directors for services rendered. We rely heavily on incentivecompensation in the form of stock options to recruit, retain and motivatedirectors, executive officers, employees and consultants. Incentivecompensation in the form of stock options is designed to provide long-termincentives, develop and maintain an ownership stake and conserve cash duringour development stage. Since inception through June 30, 2006 stock basedcompensation expense totaled $15,681,988 or approximately 30% of ouraccumulated deficit. We account for stock options and warrants granted tonon-employees based on the fair value of the stock option or warrant using theBlack-Scholes option pricing model based on assumptions for expected stockprice volatility, expected term of the option, risk-free interest rate andexpected dividend yield at the grant date.

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**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKETRISK**

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, 2006our money market balances totaled approximately $848,000.

**ITEM 4. CONTROLS AND PROCEDURES**

Based on an evaluation ofour disclosure controls and procedures (as defined inRules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of1934, as amended) required by paragraph (b) of Rule 13a-15 orRule 15d-15, as of June 30, 2006, our Chief Executive Officer andPrincipal Financial Officer have concluded that our disclosure controls andprocedures were effective in ensuring that information required to be disclosedby us in the reports that we file or submit under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in theCommission’s rules and forms. Our Chief Executive Officer and PrincipalFinancial Officer also concluded that, as of June 30, 2006, our disclosure controlsand procedures were 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.

During the three monthsended June 30, 2006, there were no changes in our internal control overfinancial reporting identified in connection with the evaluation required by paragraph(d) of Rule 13a-15 or Rule 15d-15 that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

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**PART II. OTHER INFORMATION**

**ITEM 1A. RISK FACTORS**

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 onForm 10-K/A for the year ended December 31, 2005, which couldmaterially affect our business, financial condition or future results.

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

At a SpecialMeeting of Stockholders held on May 18, 2006, two matters were voted upon. Adescription of each matter and a tabulation of the votes for each of thematters follow:

 
| 1.     | Proposal to approve the potential issuance of up to  20,000,000 shares of our common stock (or securities convertible |
|--------|-----------------------------------------------------------------------------------------------------------------------|
|   | into or exercisable for common stock) at a price  below fair market value                                             |

 

| Votes      |       |
|------------|------------|
| **For**    | ** ** | **Against** | ** ** | Abstain |
| 19,670,050 |       | 350,388 |   | 40,112 |
|            |            |  |  |  |  |

 
| 2. | Proposal to approve the issuance of 75,000 shares of  our restricted common stock to Dr. Moshe Talpaz pursuant to a consulting  agreement between us and Dr. Talpaz: |
|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| Votes      |       |
|------------|------------|
| **For**    | ** ** | **Against** | ** ** | Abstain |
| 19,850,710 |       | 189,112 |   | 20,727 |
|            |            |  |  |  |  |

 

**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**

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.
|                        | **CALLISTO  PHARMACEUTICALS, INC.** |
|-----------------------------|------------------------------------------|
|                        | (Registrant)                             |
|                        |                                     |
|                        |                                     |
| Date: August 14, 2006       | By:                                      | /s/ Gary S. Jacob |   |
|                        |                                     |   |   |
|                        |                                     | Gary S. Jacob |   |
|                        |                                     | Chief Executive Officer |   |
|                        |                                     |
|                        |                                     |
| Date: August 14,  2006 | By:                                      | /s/ Bernard F. Denoyer |   |
|                        |                                     |   |   |
|                        |                                     | Bernard F. Denoyer |   |
|                        |                                     | Vice President, Finance |   |

 

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