**UNITED STATES OF AMERICA**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,DC 20549**

**FORM 10-Q**

**(Mark One)**

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

**EXCHANGEACT OF 1934**

**FOR THEQUARTERLY PERIOD ENDED: MARCH 31, 2007**

o**TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(D) OF THE**

**SECURITIESEXCHANGE ACT OF 1934**

**For thetransition period from                 to                 **

**CommissionFile Number: 001-32325**

**CALLISTO PHARMACEUTICALS, INC.**

(Exact name of Registrantas specified in its charter)

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

 

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

(Address of principalexecutive offices) (Zip Code)

**(212) 297-0010**

(Registrant’s telephonenumber)

(Former Name, Former Address and Former Fiscal Year,

if changed since lastreport)

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

Yes                            x                                    No                                o

Indicate by check mark whether the Registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” inRule 12b-2 of the Exchange Act. (Check one):
| Large accelerated Filer | o |   | Accelerated filer | o |   | Non-accelerated filer | x |
|-------------------------|---|--------|-------------------|---|--------|-----------------------|---|

 

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

Yes                            o                                    No                                x

The number of the registrant’s shares of common stockoutstanding was 39,694,995 as of May 18, 2007.

 

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**CALLISTOPHARMACEUTICALS, INC.**

**FORM 10-Q**

**CONTENTS**
| **PART I — FINANCIAL INFORMATION** |       |                                                                                                                                                                                                      |
|----------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                         |       |                                                                                                                                                                                                      |   |   |
| Item 1.                                      |       | Condensed Consolidated  Financial Statements                                                                                                                                                              |   |   |
|                                         |       |                                                                                                                                                                                                      |   |   |
|                                         |       | Condensed Consolidated Balance Sheets as of  March 31, 2007 (unaudited) and December 31, 2006                                                                                                   |   |   |
|                                         |       |                                                                                                                                                                                                      |   |   |
|                                         |       | Condensed Consolidated Statements of Operations for  the Three Months Ended March 31, 2007 and 2006 (unaudited) and the  period June 5, 1996 (Inception) to March 31, 2007 (unaudited)     |   |   |
|                                         |       |                                                                                                                                                                                                      |   |   |
|                                         |       | Condensed Consolidated Statements of Changes in  Stockholders’ Equity (Deficit) for the period June 5, 1996 (Inception)  to March 31, 2007 (unaudited)                                     |   |   |
|                                         |       |                                                                                                                                                                                                      |   |   |
|                                         |       | Condensed Consolidated Statements of Cash Flows for  the Three Months Ended March 31, 2007 and 2006 (unaudited) and for the  period June 5, 1996 (Inception) to March 31, 2007 (unaudited) |   |   |
|                                         |       |                                                                                                                                                                                                      |   |   |
|                                         |       | Notes to Condensed Consolidated Financial Statements  (unaudited)                                                                                                                                         |   |   |
|                                         |       |                                                                                                                                                                                                      |   |   |
| Item 2.                                      |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                                                                               |   |   |
|                                         |       |                                                                                                                                                                                                      |   |   |
| Item 3.                                      |       | Quantitative  and Qualitative Disclosures About Market Risk                                                                                                                                               |   |   |
|                                         |       |                                                                                                                                                                                                      |   |   |
| Item 4.                                      |       | Controls and Procedures                                                                                                                                                                                   |   |   |
| ** **                                   | ** ** | ** **                                                                                                                                                                                                | ** ** | ** ** |
| **PART II  — OTHER INFORMATION**   |       |                                                                                                                                                                                                      |
|                                         |       |                                                                                                                                                                                                      |   |   |
| Item 1A.                                     |       | Risk Factors                                                                                                                                                                                              |   |   |
|                                         |       |                                                                                                                                                                                                      |   |   |
| Item 6.                                      |       | Exhibits                                                                                                                                                                                                  |   |   |
|                                         |       |                                                                                                                                                                                                      |   |   |
| Signatures                                   |       |                                                                                                                                                                                                      |

 

i

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**INTRODUCTORYNOTE**

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

**The forward-looking statementsincluded herein are based on current expectations that involve a number ofrisks and uncertainties set forth under “Risk Factors” in our Annual Report onForm 10-K for the year ended December 31, 2006 and other periodicreports filed with the SEC. Accordingly, to the extent that this Reportcontains forward-looking statements regarding the financial condition,operating results, business prospects or any other aspect of the Company,please be advised that Callisto’s actual financial condition, operating resultsand business performance may differ materially from that projected orestimated by the Company in forward-looking statements.**

ii

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**PART I- FINANCIAL INFORMATION**

**Item 1. Condensed ConsolidatedFinancial Statements**

**CALLISTO PHARMACEUTICALS, INC.**

**(Adevelopment stage company)**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**
| ** **                                                                                                                                                                                                                                                                        | ** ** | **(unaudited)**              | ** ** | ** **                      | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                                                                                                                                                                        | ** ** | **March 31, 2007** | ** ** | **December 31, 2006** | ** ** |
| **ASSETS**                                                                                                                                                                                                                                                                        |       |                         |       |                            |       |
| Current assets:                                                                                                                                                                                                                                                                   |       |                         |       |                            |       |
| Cash and cash  equivalents                                                                                                                                                                                                                                                        |       | $                            | 2,158,676  |                            | $          | 3,904,232 |   |
| Prepaid expenses and  other                                                                                                                                                                                                                                                       |       | 46,256                       |       | 66,741                          |       |
|                                                                                                                                                                                                                                                                              |       |                         |       |                            |       |
|                                                                                                                                                                                                                                                                              |       | 2,204,932                    |       | 3,970,973                       |       |
|                                                                                                                                                                                                                                                                              |       |                         |       |                            |       |
| Property and equipment  - net                                                                                                                                                                                                                                                     |       | 6,451                        |       | 6,451                           |       |
| Security deposits                                                                                                                                                                                                                                                                 |       | 73,716                       |       | 73,716                          |       |
|                                                                                                                                                                                                                                                                              |       |                         |       |                            |       |
|                                                                                                                                                                                                                                                                              |       | $                            | 2,285,099  |                            | $          | 4,051,140 |   |
|                                                                                                                                                                                                                                                                              |       |                         |       |                            |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY (DEFICIT)**                                                                                                                                                                                                                          |       |                         |       |                            |       |
| Current liabilities:                                                                                                                                                                                                                                                              |       |                         |       |                            |       |
| Accounts payable                                                                                                                                                                                                                                                                  |       | $                            | 1,741,705  |                            | $          | 1,843,422 |   |
| Accrued expenses                                                                                                                                                                                                                                                                  |       | 1,183,449                    |       | 1,357,600                       |       |
|                                                                                                                                                                                                                                                                              |       |                         |       |                            |       |
|                                                                                                                                                                                                                                                                              |       | 2,925,154                    |       | 3,201,022                       |       |
| Stockholders’ equity  (deficit):                                                                                                                                                                                                                                             |       |                         |       |                            |       |
| Series A convertible  preferred stock, par value $0.0001, 700,000 shares authorized, 614,125 shares  outstanding at March 31, 2007 with a liquidation preference of $6,141,250 and  586,125 shares outstanding at December 31, 2006 with a liquidation preference  of $5,861,250. |       | 61                           |       | 58                              |       |
| Common stock, par value  $.0001, 150,000,000 and 100,000,000 shares authorized, respectively,  39,194,996 shares outstanding at both March 31, 2007 and December 31, 2006,  respectively.                                                                                         |       | 3,919                        |       | 3,919                           |       |
| Additional paid-in  capital                                                                                                                                                                                                                                                       |       | 61,749,956                   |       | 61,290,509                      |       |
| Deficit accumulated  during development stage                                                                                                                                                                                                                                     |       | (62,393,991                  | )          | (60,444,368                     | )          |
|                                                                                                                                                                                                                                                                              |       | (640,055                     | )          | 850,118                         |       |
|                                                                                                                                                                                                                                                                              |       |                         |       |                            |       |
|                                                                                                                                                                                                                                                                              |       | $                            | 2,285,099  |                            | $          | 4,051,140 |   |

 

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

1

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**CALLISTO PHARMACEUTICALS, INC.**

**(Adevelopment stage company)**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**
| ** **                                                                     | ** ** | ** **                       | ** ** | ** **                   | ** ** | **For the**             | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                                                     | ** ** | ** **                       | ** ** | ** **                   | ** ** | **period from**         | ** ** |
| ** **                                                                     | ** ** | ** **                       | ** ** | ** **                   | ** ** | **June 5, 1996**   | ** ** |
| ** **                                                                     | ** ** | **Three months ended** | ** ** | **(Inception) to**      | ** ** |
| ** **                                                                     | ** ** | **March 31, 2007**     | ** ** | **March 31, 2006** | ** ** | **March 31, 2007** | ** ** |
| Revenues                                                                       |       | $                                | —     |                         | $          | —                       |       | $ | — |   |
|                                                                           |       |                             |       |                         |       |                         |       |
| Costs and  expenses:                                                           |       |                             |       |                         |       |                         |       |
|                                                                           |       |                             |       |                         |       |                         |       |
| Research and  development                                                      |       | 958,683                          |       | 2,193,840                    |       | 22,996,497                   |       |
|                                                                           |       |                             |       |                         |       |                         |       |
| Government grant                                                               |       | (43,956                          | )          | (54,267                      | )          | (888,421                     | )          |
|                                                                           |       |                             |       |                         |       |                         |       |
| Purchased in  process research and development                                 |       | —                           |       | —                       |       | 6,944,553                    |       |
|                                                                           |       |                             |       |                         |       |                         |       |
| General and  administrative                                                    |       | 959,660                          |       | 1,754,090                    |       | 21,713,401                   |       |
|                                                                           |       |                             |       |                         |       |                         |       |
| Stock-based  compensation – non-employees                                 |       | (19,478                          | )          | 504,047                      |       | 9,679,083                    |       |
|                                                                           |       |                             |       |                         |       |                         |       |
| Loss from  operations                                                          |       | (1,854,909                       | )          | (4,397,710                   | )          | (60,445,113                  | )          |
|                                                                           |       |                             |       |                         |       |                         |       |
| Interest and  investment income                                                |       | 24,971                           |       | 23,082                       |       | 728,587                      |       |
| Other expense                                                                  |       | —                           |       | —                       |       | (173,295                     | )          |
|                                                                           |       |                             |       |                         |       |                         |       |
| Net loss                                                                       |       | (1,829,938                       | )          | (4,374,628                   | )          | (59,889,821                  | )          |
|                                                                           |       |                             |       |                         |       |                         |       |
| Series A  Preferred stock beneficial conversion feature accreted as a dividend |       | (119,685                         | )          | —                       |       | (2,504,170                   | )          |
| Net loss  available to common stockholders                                     |       | $                                | (1,949,623 | )                            | $          | (4,374,628                   | )          | $ | (62,393,991 | ) |
|                                                                           |       |                             |       |                         |       |                         |       |
| Weighted average  shares outstanding:                                          |       |                             |       |                         |       |                         |       |
| basic and  diluted                                                             |       | 39,194,996                       |       | 35,798,019                   |       |                         |       |
|                                                                           |       |                             |       |                         |       |                         |       |
| Net loss per  common share:                                                    |       |                             |       |                         |       |                         |       |
| basic and diluted                                                              |       | $                                | (0.05      | )                            | $          | (0.12                        | )          |   |   |

 

See accompanying notes tocondensed consolidated financial statements.

2

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**CALLISTO PHARMACEUTICALS, INC.**

(A Development Stage Company)

**CONDENSEDCONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)**
| ** **                                                  | ** ** | **Preferred  Shares** | ** ** | **Preferred  Stock,  Par Value** | ** ** | **Common  Shares** | ** ** | **Common  Stock,  Par Value** | ** ** | **Additional  Paid in Capital** | ** ** |
|-------------------------------------------------------------|------------|-----------------------|------------|---------------------------------------|------------|--------------------|------------|------------------------------------|------------|-------------------------------------------|------------|
| Balance at inception, June 5, 1996 |       | —                |       | —                                |       | —             |       | —                             |       | —                                    |       |
| Net loss for the period                 |       |                  |       |                                  |       |               |       |                               |       |                                      |       |
| Issuance of  founder shares                                 |       | —                |       | —                                |       | 2,642,500          |       | 264                                |       | 528                                       |       |
| Common stock  issued                                        |       | —                |       | —                                |       | 1,356,194          |       | 136                                |       | 272                                       |       |
| Common stock  issued via private placement                  |       | —                |       | —                                |       | 1,366,667          |       | 137                                |       | 1,024,863                                 |       |
| Balance,  December 31, 1996                                 |       | —                |       | —                                |       | 5,365,361          |       | 537                                |       | 1,025,663                                 |       |
| Net loss for the  year                                      |       | —                |       | —                                |       | —             |       | —                             |       | —                                    |       |
| Common stock  issued via private placement                  |       | —                |       | —                                |       | 1,442,666          |       | 144                                |       | 1,081,855                                 |       |
|                                                        |       |                  |       |                                  |       |               |       |                               |       |                                      |       |
| Balance,  December 31, 1997                                 |       | —                |       | —                                |       | 6,808,027          |       | 681                                |       | 2,107,518                                 |       |
| Net loss for the  year                                      |       | —                |       | —                                |       | —             |       | —                             |       | —                                    |       |
| Amortization of  Stock based Compensation                   |       | —                |       | —                                |       | —             |       | —                             |       | 52,778                                    |       |
| Common stock  issued via private placement                  |       | —                |       | —                                |       | 1,416,667          |       | 142                                |       | 1,062,358                                 |       |
| Common stock  issued for services                           |       | —                |       | —                                |       | 788,889            |       | 79                                 |       | 591,588                                   |       |
| Common stock  repurchased and cancelled                     |       | —                |       | —                                |       | (836,792           | )          | (84                                | )          | (96,916                                   | )          |
|                                                        |       |                  |       |                                  |       |               |       |                               |       |                                      |       |
| Balance,  December 31, 1998                                 |       | —                |       | —                                |       | 8,176,791          |       | 818                                |       | 3,717,326                                 |       |
| Net loss for the  year                                      |       | —                |       | —                                |       | —             |       | —                             |       | —                                    |       |
| Deferred  Compensation - stock options                      |       | —                |       | —                                |       | —             |       | —                             |       | 9,946                                     |       |
| Amortization of  Stock based Compensation                   |       | —                |       | —                                |       | —             |       | —                             |       | —                                    |       |
| Common stock  issued for services                           |       | —                |       | —                                |       | —             |       | —                             |       | 3,168,832                                 |       |
| Common stock  issued via private placement                  |       | —                |       | —                                |       | 346,667            |       | 34                                 |       | 259,966                                   |       |
|                                                        |       |                  |       |                                  |       |               |       |                               |       |                                      |       |
| Balance,  December 31, 1999                                 |       | —                |       | —                                |       | 8,523,458          |       | 852                                |       | 7,156,070                                 |       |
| Net loss for the  year                                      |       | —                |       | —                                |       | —             |       | —                             |       | —                                    |       |
| Amortization of  Stock based Compensation                   |       | —                |       | —                                |       | —             |       | —                             |       | —                                    |       |
| Common stock  issued                                        |       | —                |       | —                                |       | 4,560,237          |       | 455                                |       | 250,889                                   |       |
| Other                                                       |       | —                |       | —                                |       | —             |       | —                             |       | 432                                       |       |
| Preferred shares  issued                                    |       | 3,485,299             |       | 348                                   |       | —             |       | —                             |       | 5,986,302                                 |       |
| Preferred stock  issued for services                        |       | 750,000               |       | 75                                    |       | —             |       | —                             |       | 1,124,925                                 |       |
| Balance,  December 31, 2000                                 |       | 4,235,299             |       | 423                                   |       | 13,083,695         |       | 1,307                              |       | 14,518,618                                |       |
| Net loss for the  year                                      |       | —                |       | —                                |       | —             |       | —                             |       | —                                    |       |
| Deferred  Compensation - stock Options                      |       | —                |       | —                                |       | —             |       | —                             |       | 20,000                                    |       |
| Amortization of  Stock based Compensation                   |       | —                |       | —                                |       | —             |       | —                             |       | —                                    |       |
| Balance,  December 31, 2001                                 |       | 4,235,299             |       | 423                                   |       | 13,083,695         |       | 1,307                              |       | 14,538,618                                |       |
| Net loss for the  year                                      |       | —                |       | —                                |       | —             |       | —                             |       | —                                    |       |
| Amortization of  Stock based Compensation                   |       | —                |       | —                                |       | —             |       | —                             |       | —                                    |       |
|                                                        |       |                  |       |                                  |       |               |       |                               |       |                                      |       |
| Balance, December 31,  2002                                 |       | 4,235,299             |       | 423                                   |       | 13,083,695         |       | 1,307                              |       | 14,538,618                                |       |

 

The accompanying notesare an integral part of these 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 notesare an integral part of these condensed consolidated financial statements

4

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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 notesare an integral part of these 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, December31,  2003                                                       |       | —               |       | —                           |       | 25,928,760        |       | 2,590                         |       | 34,149,975                            |       | (5,480,007                                                | )          | (25,817,730                                                   | )          | 2,854,828                             |       |
|                                                                             |       |                 |       |                             |       |              |       |                          |       |                                  |       |                                                      |       |                                                          |       |                                  |       |
| Net loss for the period                                                          |       | —               |       | —                           |       | —            |       | —                        |       | —                                |       | —                                                    |       | (7,543,467                                                    | )          | (7,543,467                            | )          |
|                                                                             |       |                 |       |                             |       |              |       |                          |       |                                  |       |                                                      |       |                                                          |       |                                  |       |
| Amortization of  deferred Stock-based compensation expense                       |       | —               |       | —                           |       | —            |       | —                        |       | —                                |       | 3,084,473                                                 |       | —                                                        |       | 3,084,473                             |       |
|                                                                             |       |                 |       |                             |       |              |       |                          |       |                                  |       |                                                      |       |                                                          |       |                                  |       |
| Variable accounting for  stock options                                           |       | —               |       | —                           |       | —            |       | —                        |       | (816,865                              | )          | —                                                    |       | —                                                        |       | (816,865                              | )          |
|                                                                             |       |                 |       |                             |       |              |       |                          |       |                                  |       |                                                      |       |                                                          |       |                                  |       |
| Stock-based  compensation net of forfeitures                                     |       | —               |       | —                           |       | —            |       | —                        |       | 240,572                               |       | 93,000                                                    |       | —                                                        |       | 333,572                               |       |
|                                                                             |       |                 |       |                             |       |              |       |                          |       |                                  |       |                                                      |       |                                                          |       |                                  |       |
| Common stock issued via  private placements, net                                 |       | —               |       | —                           |       | 3,311,342         |       | 331                           |       | 6,098,681                             |       | —                                                    |       | —                                                        |       | 6,099,012                             |       |
|                                                                             |       |                 |       |                             |       |              |       |                          |       |                                  |       |                                                      |       |                                                          |       |                                  |       |
| Warrant and stock-based  compensation for services in connection with the Merger |       | —               |       | —                           |       | —            |       | —                        |       | 269,826                               |       | —                                                    |       | —                                                        |       | 269,826                               |       |
|                                                                             |       |                 |       |                             |       |              |       |                          |       |                                  |       |                                                      |       |                                                          |       |                                  |       |
| Common stock returned  from former Synergy stockholders                          |       | —               |       | —                           |       | (90,000           | )          | (9                            | )          | (159,083                              | )          | —                                                    |       | —                                                        |       | (159,092                              | )          |
|                                                                             |       |                 |       |                             |       |              |       |                          |       |                                  |       |                                                      |       |                                                          |       |                                  |       |
| Stock issued for patent  rights                                                  |       | —               |       | —                           |       | 25,000            |       | 3                             |       | 56,247                                |       | —                                                    |       | —                                                        |       | 56,250                                |       |
|                                                                             |       |                 |       |                             |       |              |       |                          |       |                                  |       |                                                      |       |                                                          |       |                                  |       |
| Common stock issued for  services                                                |       | —               |       | —                           |       | 44,000            |       | 7                             |       | 70,833                                |       | —                                                    |       | —                                                        |       | 70,840                                |       |
|                                                                             |       |                 |       |                             |       |              |       |                          |       |                                  |       |                                                      |       |                                                          |       |                                  |       |
| Balance, December 31, 2004                                                       |       | —               |       | —                           |       | 29,219,102        |       | 2,922                         |       | 39,910,187                            |       | (2,302,534                                                | )          | (33,361,197                                                   | )          | 4,249,378                             |       |

 

The accompanying notes are an integral part of thesecondensed 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 of these condensedconsolidated financial statements

7

----

 
| ** **                                                                                   | ** ** | **Series A  Convertible  Preferred  Shares** | ** ** | **Convertible  Preferred  Stock** | ** ** | **Common  Stock** | ** ** | **Common  Stock  Par  Value** | ** ** | **Additional  Paid in  Capital** | ** ** | **Unamortized  Deferred  Stock Based  Compensation** | ** ** | **Deficit  Accumulated  during the  Development  Stage** | ** ** | **Total  Stockholders’  Equity** | ** ** |
|----------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|-----------------------------------|------------|-------------------|------------|-------------------------------|------------|---------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------|------------|
| Balance,  December 31, 2005                                                                  |       | —                                            |       | —                            |       | 33,233,096        |       | $                             | 3,323      |                                  | $          | 46,387,875                                                |       | $                                                             | (1,583,463 | )                                     | $          | (45,140,654 | ) | $ | (332,919 | ) |
|                                                                                         |       |                                              |       |                              |       |              |       |                          |       |                                  |       |                                                      |       |                                                          |       |                                  |       |
| Net loss for the  period                                                                     |       | —                                            |       | —                            |       | —            |       | —                        |       | —                                |       | —                                                    |       | (12,919,229                                                   | )          | (12,919,229                           | )          |
|                                                                                         |       |                                              |       |                              |       |              |       |                          |       |                                  |       |                                                      |       |                                                          |       |                                  |       |
| Reclassification  of deferred unamortized stock-based compensation upon adoption of FAS 123R |       |                                              |       |                              |       |              |       |                          |       | (1,583,463                            | )          | 1,583,463                                                 |       |                                                          |       | —                                |       |
|                                                                                         |       |                                              |       |                              |       |              |       |                          |       |                                  |       |                                                      |       |                                                          |       |                                  |       |
| Stock based  compensation expense                                                            |       |                                              |       |                              |       |              |       |                          |       | 2,579,431                             |       |                                                      |       |                                                          |       | 2,579,431                             |       |
|                                                                                         |       |                                              |       |                              |       |              |       |                          |       |                                  |       |                                                      |       |                                                          |       |                                  |       |
| Common stock  issued via private placement:                                                  |       |                                              |       |                              |       |              |       |                          |       |                                  |       |                                                      |       |                                                          |       |                                  |       |
| February 2006                                                                                |       |                                              |       |                              |       | 4,283,668         |       | 428                           |       | 5,139,782                             |       |                                                      |       |                                                          |       | 5,140,210                             |       |
| Finders fees and expenses                                                                    |       |                                              |       |                              |       |              |       |                          |       | (561,808                              | )          |                                                      |       |                                                          |       | (561,808                              | )          |
| April 2006                                                                                   |       |                                              |       |                              |       | 666,667           |       | 67                            |       | 799,933                               |       |                                                      |       |                                                          |       | 800,000                               |       |
| Finders fees and expenses                                                                    |       |                                              |       |                              |       |              |       |                          |       | (41,000                               | )          |                                                      |       |                                                          |       | (41,000                               | )          |
| Waiver and Lock-up Agreement                                                                 |       |                                              |       |                              |       | 740,065           |       | 74                            |       | 579,622                               |       |                                                      |       |                                                          |       | 579,696                               |       |
|                                                                                         |       |                                              |       |                              |       |              |       |                          |       |                                  |       |                                                      |       |                                                          |       |                                  |       |
| Common stock  issued for services                                                            |       |                                              |       |                              |       | 87,000            |       | 9                             |       | 121,101                               |       |                                                      |       |                                                          |       | 121,110                               |       |
|                                                                                         |       |                                              |       |                              |       |              |       |                          |       |                                  |       |                                                      |       |                                                          |       |                                  |       |
| Exercise of  common stock warrants                                                           |       |                                              |       |                              |       | 184,500           |       | 18                            |       | 190,017                               |       |                                                      |       |                                                          |       | 190,035                               |       |
|                                                                                         |       |                                              |       |                              |       |              |       |                          |       |                                  |       |                                                      |       |                                                          |       |                                  |       |
| Series A  convertible preferred stock issued via private placement:                          |       | 574,350                                           |       | 57                                |       |              |       |                          |       | 5,743,443                             |       |                                                      |       |                                                          |       | 5,743,500                             |       |
| Finders fees and expenses                                                                    |       | 11,775                                            |       | 1                                 |       |              |       |                          |       | (448,909                              | )          |                                                      |       |                                                          |       | (448,908                              | )          |
| Detachable warrants                                                                          |       |                                              |       |                              |       |              |       |                          |       | 2,384,485                             |       |                                                      |       |                                                          |       | —                                |       |
| Beneficial conversion feature accreted as a dividend                                         |       | —                                            |       |                              |       | —            |       | —                        |       | —                                |       | —                                                    |       | (2,384,485                                                    | )          | —                                |       |
| Balance,  December 31, 2006                                                                  |       | 586,125                                           |       | $                                 | 58         |              | 39,194,996 |                          | $          | 3,919                                 |       | $                                                         | 61,290,509 |                                                          | $          | —                                |       | $ | (60,444,368 | ) | $ | 850,118 |   |
|                                                                                              |            |                                                   |            |                                   |            |                   |            |                               |            |                                       |            |                                                           |            |                                                               |            |                                       |            |  |  |  |  |  |  |

 

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

8

----

**CALLISTO PHARMACEUTICALS, INC.**

(A Development Stage Company)

**CONDENSEDCONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)**
| ** **                                                          | ** ** | **Series A  Convertible  Preferred  Shares** | ** ** | **Convertible  Preferred  Stock** | ** ** | **Common  Stock** | ** ** | **Common  Stock  Par  Value** | ** ** | **Additional  Paid in  Capital** | ** ** | **Unamortized  Deferred  Stock Based  Compensation** | ** ** | **Deficit  Accumulated  during the  Development  Stage** | ** ** | **Total  Stockholders’  Equity (Deficit)** | ** ** |
|---------------------------------------------------------------------|------------|---------------------------------------------------|------------|-----------------------------------|------------|-------------------|------------|-------------------------------|------------|---------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------------------------------------|------------|------------------------------------------------------|------------|
| Balance, December  31, 2006                                         |       | 586,125                                           |       | $                                 | 58         |              | 39,194,996 |                          | $          | 3,919                                 |       | $                                                         | 61,290,509 |                                                          | $          | —                                               |       | $ | (60,444,368 | ) | $ | 850,118 |   |
|                                                                |       |                                              |       |                              |       |              |       |                          |       |                                  |       |                                                      |       |                                                          |       |                                                 |       |
| Net loss for the  period                                            |       | —                                            |       | —                            |       | —            |       | —                        |       | —                                |       | —                                                    |       | (1,829,938                                                    | )          | (1,829,938                                           | )          |
|                                                                |       |                                              |       |                              |       |              |       |                          |       |                                  |       |                                                      |       |                                                          |       |                                                 |       |
| Stock based  compensation expense                                   |       |                                              |       |                              |       |              |       |                          |       | 96,165                                |       |                                                      |       |                                                          |       | 96,165                                               |       |
|                                                                |       |                                              |       |                              |       |              |       |                          |       |                                  |       |                                                      |       |                                                          |       |                                                 |       |
| Series A  convertible preferred stock issued via private placement: |       | 28,000                                            |       | 3                                 |       |              |       |                          |       | 279,997                               |       |                                                      |       |                                                          |       | 280,000                                              |       |
| Finders fees and expenses                                           |       |                                              |       |                              |       |              |       |                          |       | (36,400                               | )          |                                                      |       |                                                          |       | (36,400                                              | )          |
| Detachable warrants                                                 |       |                                              |       |                              |       |              |       |                          |       | 119,685                               |       |                                                      |       |                                                          |       | —                                               |       |
| Beneficial conversion feature accreted as a dividend                |       | —                                            |       |                              |       | —            |       | —                        |       | —                                |       | —                                                    |       | (119,685                                                      | )          | —                                               |       |
|                                                                |       |                                              |       |                              |       |              |       |                          |       |                                  |       |                                                      |       |                                                          |       |                                                 |       |
| Balance, March  31, 2007                                            |       | 614,125                                           |       | $                                 | 61         |              | 39,194,996 |                          | $          | 3,919                                 |       | $                                                         | 61,749,956 |                                                          | $          | —                                               |       | $ | (62,393,991 | ) | $ | (640,055 | ) |

 

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

9

----

**CALLISTO PHARMACEUTICALS, INC.**

(A Development Stage Company)

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**
| ** **                                                                                                 | ** ** | **Three months Ended March 31,** | ** ** | **Period from  June 5, 1996  (inception) to** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                                                                 | ** ** | **2007**                                             | ** ** | **2006**                                                          | ** ** | **March 31, 2007** | ** ** |
| Cash flows from  operating activities:                                                                     |       |                                                 |       |                                                              |       |   |   |
| Net loss                                                                                                   |       | $                                                    | (1,829,938 | )                                                                 | $          | (4,374,628 | ) | $ | (59,889,821 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities:                               |       |                                                 |       |                                                              |       |   |   |
| Depreciation                                                                                               |       | —                                               |       | —                                                            |       | 86,788 |   |
| Stock-based  compensation expense                                                                          |       | 96,165                                               |       | 994,050                                                           |       | 16,613,610 |   |
| Stock-based  liquidated damages                                                                            |       | —                                               |       | —                                                            |       | 579,696 |   |
| Purchased  in-process research and development (non-cash portion)                                          |       | —                                               |       | —                                                            |       | 6,841,053 |   |
| Changes in  operating assets and liabilities:                                                              |       |                                                 |       |                                                              |       |   |   |
| Prepaid expenses                                                                                           |       | 20,486                                               |       | 81,415                                                            |       | (46,255 | ) |
| Rent deposits                                                                                              |       | —                                               |       | 17,480                                                            |       | (73,716 | ) |
| Accounts payable  and accrued expenses                                                                     |       | (275,869                                             | )          | (108,160                                                          | )          | 2,632,725 |   |
| Total  adjustments                                                                                         |       | (159,218                                             | )          | 984,785                                                           |       | 26,633,901 |   |
| Net cash used in  operating activities                                                                     |       | (1,989,156                                           | )          | (3,389,843                                                        | )          | (33,255,920 | ) |
|                                                                                                       |       |                                                 |       |                                                              |       |   |   |
| Cash flows from  investing activities:                                                                     |       |                                                 |       |                                                              |       |   |   |
| Acquisition of  equipment                                                                                  |       | —                                               |       | (8,602                                                            | )          | (93,239 | ) |
| Net cash used in  investing activities                                                                     |       | —                                               |       | (8,602                                                            | )          | (93,239 | ) |
|                                                                                                       |       |                                                 |       |                                                              |       |   |   |
| Cash flows from  financing activities:                                                                     |       |                                                 |       |                                                              |       |   |   |
| Issuance of  common and preferred stock, net of repurchases                                                |       | 280,000                                              |       | 5,140,210                                                         |       | 37,249,173 |   |
| Finders fees and  expenses                                                                                 |       | (36,400                                              | )          | (561,808                                                          | )          | (2,060,123 | ) |
| Exercise of  common stock warrants                                                                         |       | —                                               |       | 190,035                                                           |       | 318,785 |   |
| Net cash  provided by financing activities                                                                 |       | 243,600                                              |       | 4,768,437                                                         |       | 35,507,835 |   |
|                                                                                                       |       |                                                 |       |                                                              |       |   |   |
| Net (decrease)  increase in cash and cash equivalents                                                      |       | (1,745,556                                           | )          | 1,369,992                                                         |       | 2,158,676 |   |
|                                                                                                       |       |                                                 |       |                                                              |       |   |   |
| Cash and cash  equivalents at beginning of period                                                          |       | 3,904,232                                            |       | 1,420,510                                                         |       | — |   |
| Cash and cash  equivalents at end of period                                                                |       | $                                                    | 2,158,676  |                                                              | $          | 2,790,502 |   | $ | 2,158,676 |   |
| Supplementary  disclosure of cash flow information:                                                        |       |                                                 |       |                                                              |       |   |   |
| Cash paid for  taxes                                                                                       |       | $                                                    | 1,441      |                                                              | $          | 12,146 |   | $ | 124,928 |   |
| Cash paid for  interest                                                                                    |       | $                                                    | —     |                                                              | $          | — |   | $ | — |   |
| Supplemental  disclosure of non-cash investing and financing activities:                                   |       |                                                 |       |                                                              |       |   |   |
| Accretion of fair value of beneficial conversion  feature as a dividend to Series A Preferred stockholders |       | $                                                    | 119,685    |                                                              | —     |   | 2,504,170 |   |
| Stock options, warrants and common stock issued for  services                                              |       | $                                                    | 96,165     |                                                              | $          | 994,050 |   | $ | 16,613,610 |   |
| Stock-based  liquidated damages                                                                            |       | $                                                    | —     |                                                              | $          | — |   | $ | 579,676 |   |

 

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

10

----

**CALLISTOPHARMACEUTICALS, INC.**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

**1. Business overview:**

Callisto Pharmaceuticals, Inc. (“Callisto”) is adevelopment stage biopharmaceutical company, whose primary focus is onbiopharmaceutical product development. Since inception in June of 1996 Callisto’sefforts have been principally devoted to research and development, securing andprotecting patents and raising capital. From inception through March 31, 2007,Callisto has sustained cumulative net losses of $59,889,821. Callisto’s losseshave resulted primarily from expenditures incurred in connection with researchand development activities, application and filing for regulatory approval ofproposed products, stock based compensation expense, patent filing andmaintenance expenses, purchase of in-process research and development, outsideaccounting and legal services and regulatory, scientific and financialconsulting fees. From inception through March 31, 2007, Callisto has notgenerated any revenue from operations, expects to incur additional losses toperform further research and development activities and does not currently haveany commercial biopharmaceutical products, and does not expect to have such forseveral years, if at all.

Callisto’s product development efforts are thus intheir early stages and Callisto cannot make estimates of the costs or the timethey will take to complete. The risk of completion of any program is highbecause of the many uncertainties involved in bringing new drugs to marketincluding the long duration of clinical testing, the specific performance ofproposed products under stringent clinical trial protocols, the extendedregulatory approval and review cycles, the nature and timing of costs andcompeting technologies being developed by organizations with significantlygreater resources.

**2. Basis of presentation and goingconcern:**

The accompanying unaudited condensed consolidatedfinancial statements of Callisto Pharmaceuticals, Inc. (“Callisto”), whichinclude its wholly owned subsidiaries: (1) Callisto Research Labs, LLC(including its wholly owned but inactive subsidiary, Callisto Pharma, GmbH(Germany)) and (2) Synergy Pharmaceuticals Inc. (“Synergy” , including itswholly owned but inactive subsidiary IgX, Ltd (Ireland)), have been prepared inaccordance with (i) accounting principles generally accepted in the UnitedStates of America (“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 disclosuresrequired by GAAP for complete financial statements. These statements should beread in conjunction with Callisto’s audited financial statements and notesthereto for the year ended December 31, 2006, included in Form 10-Kfiled with the SEC on April 17, 2007. In the opinion of management, theaccompanying unaudited condensed consolidated financial statements include alladjustments, primarily consisting of normal adjustments, necessary for the fairpresentation of the balance sheet and results of operations for the interimperiods. The results of operations for the three months ended March 31,2007 are not necessarily indicative of the results of operations to be expectedfor the full year ending December 31, 2007.

Callisto’s consolidated financial statements as ofMarch 31, 2007 and December 31, 2006 have been prepared under theassumption that Callisto will continue as a going concern for the twelve monthsending December 31, 2007. Callisto’s independent registered publicaccounting firm has issued a report dated April 13, 2007 that included anexplanatory paragraph referring to Callisto’s recurring losses from operationsand net capital deficiency and expressing substantial doubt in our ability tocontinue as a going concern without additional capital becoming available.Callisto’s ability to continue as a going concern is dependent upon itsability to obtain additional equity or debt financing, attain further operatingefficiencies and, ultimately, to generate revenue. The financial statements donot include any adjustments that might result from the outcome of thisuncertainty. Callisto will be required to raise additional capital within thenext twelve months to complete the development and commercialization of currentproduct candidates and to continue to fund operations at the current cashexpenditure levels.

To date, Callisto’s sources of cash have beenprimarily limited to the sale of equity securities. Net cash provided byfinancing activities for the three months ended March 31, 2007and  2006 and for the period from June 5, 1995(inception) to March 31, 2007 was approximately $244,000, $4.8 million and$35.5 million respectively. Callisto cannot be certain that additional fundingwill be available on acceptable terms, or at all. To the extent that Callistocan raise additional funds by issuing equity securities, Callisto’sstockholders may experience significant dilution. Any debt financing, ifavailable, may involve restrictive covenants that impact Callisto’s ability toconduct its business. If Callisto is unable to raise additional capital whenrequired or on acceptable terms, it may have to significantly delay, scale backor discontinue the development and/or commercialization of one or more ofCallisto’s product candidates. Callisto also may be required to  seek collaborators forproduct candidates at an earlier stage than otherwise would be desirable and onterms that are less favorable than might otherwise be available; and relinquish licenses or otherwisedispose of rights to technologies, product candidates or products.

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**3. Accounting for share-based payments**

In December 2004, the Financial AccountingStandards Board (FASB) issued Statement of Financial Accounting Standard (“SFAS”)No. 123 (Revised 2004), *Share-BasedPayments* (“SFAS 123R”). SFAS 123R requires a public entity tomeasure the cost of employee services received in exchange for the award ofequity instruments based on the fair value of the award at the date of grant.The expense is to be recognized over the period during which an employee isrequired to provide services in exchange for the award. SFAS 123R was effectiveas of the beginning of the first interim or annual reporting period that beganafter December 15, 2005 and accordingly Callisto adopted SFAS 123R onJanuary 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 quarter of 2006, all prior periodspresented be restated to reflect the impact of share-based compensation expenseconsistent with the proforma disclosures previously required under SFAS 123.Callisto has elected to use the “modified *prospective*”method in adopting this standard.

Prior to January 1,2006, Callisto had adopted SFAS No. 123, “Accounting for Stock-BasedCompensation” (“SFAS 123”). As provided for by SFAS 123, Callisto had electedto continue to account for stock-based compensation 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. Callisto accounts for common stock,stock options, and warrants granted to non-employees based on the fair value ofthe instrument, using the Black-Scholes option pricing model based onassumptions for expected stock price volatility, term of the option, risk-freeinterest rate and expected dividend yield at the grant date.

For all awards grantedprior to January 1, 2006, stock based compensation expense is beingrecognized on a straight line basis over the remaining requisite service period,which ranged from nine months to three years at the date of adoption. Theadoption of SFAS 123R increased net loss for the three months ended March 31,2007 and 2006 by $115,643 and $490,003, or $0.003 and $0.01 per share,respectively for stock based compensation cost related to employee stockoptions.

The unrecognizedcompensation cost related to non-vested share-based compensation arrangementsfor all employee stock options outstanding at March 31, 2007 and 2006 was$593,578 and $621,853, respectively, to be recognized over a weighted averagevesting period of 1.24 and 1.37 years, respectively.

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”).  Total stock based compensation expenserelated to employee and non-employee stock options recognized in operatingresults was as follow:
|                                                          | ** ** | **Three Months Ended March 31 ,** | ** ** | **June 5, 1996  (Inception) to  March 31** | ** ** |
|----------------------------------------------------------|------------|------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| **Stock based compensation expense**      | ** ** | **2007**                                                   | ** ** | **2006**                                                       | ** ** | **2007** | ** ** |
| ** **                                               | ** ** | ** **                                                 | ** ** | ** **                                                     | ** ** | ** ** | ** ** |
| Employees —  included in research and development   |       | $                                                          | 17,846     |                                                           | $          | 148,596 |   | $ | 2,570,390 |   |
| Employees —  included in general and administrative |       | 97,797                                                     |       | 341,407                                                        |       | 4,364,137 |   |
| Subtotal  employee stock option grants                   |       | 115,643                                                    |       | 490,003                                                        |       | 6,934,527 |   |
|                                                     |       |                                                       |       |                                                           |       |   |   |
| Non-employee —  research and development            |       | —                                                     |       | —                                                         |       | 102,750 |   |
| Non-employee —  general and administrative          |       | (19,478                                                    | )          | 504,047                                                        |       | 9,576,333 |   |
| Subtotal  non-employee stock option grants               |       | (19,478                                                    | )          | 504,047                                                        |       | 9,679,083 |   |
| Total stock based  compensation expense                  |       | $                                                          | 96,165     |                                                           | $          | 994,050 |   | $ | 16,613,610 |   |

 

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The estimated fair value of each employee option awardgranted was determined in accordance with SFAS 123R on the date of grant usingthe Black-Scholes option valuation model with the following weighted-averageassumptions for employee options granted during the three months endedMarch 31, 2007 and 2006:
|                          | ** ** | **Three months ended March 31,** | ** ** |
|--------------------------|------------|------------------------------------------------------|------------|
| ** **               | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| Risk free  interest rate |       | 4.68                                                 | %          | 4.25 | % |
| Dividend yield           |       | 0.0                                                  | %          | 0.0 | % |
| Expected  volatility     |       | 60                                                   | %          | 79 | % |
| Expected term            |       | 7 years                                              |       | 7 years |   |

 

*Risk-free interest rate:*assumption is based upon observed interest rates appropriate for the expectedterm of Callisto’s employee stock options.

*Dividend yield:*Callisto has not paid any dividends on common stock since its inception anddoes not anticipate paying dividends on its common stock in the foreseeablefuture.

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

*Expected term*:based on expectations regarding future exercises of options which generallyvest over 3 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. Callisto estimated future unvested option forfeitures based on historicalCompany experience and has incorporated this rate in determining the fair valueof employee option grants.

A summary of stock option activity and of changes inoptions outstanding under Callisto’s plans is presented below:
| ** **                        | ** ** | **Number**          | ** ** | **Exercise  Price** | ** **       | **Weighted  Average  Exercise  Price** | ** ** |
|-----------------------------------|------------|---------------------|------------|---------------------|------------------|----------------------------------------|------------|
| ** **                        | ** ** | **of options** | ** ** | **Per Share**  | ** **       | **Per Share**                     | ** ** |
|                              |       |                |       |                |             |                                   |       |
| Balance,  December 31, 2006       |       | 8,053,375           |       | $                   | 0.75 - 6.75      |                                   | $          | 1.75 |   |
| Granted                           |       | 450,000             |       | $                   | 0.81 – 0.96 |                                   | $          | 0.89 |   |
| Forfeitures                       |       | (115,000            | )          | $                   | 0.75 - 1.60      |                                   | $          | 0.86 |   |
| Balance, March  31, 2007          |       | 8,388,375           |       | $                   | 0.75 – 6.75 |                                   | $          | 1.72 |   |
| Exercisable as of March  31, 2007 |       | 5,364,046           |       | $                   | 0.75 - 6.75      |                                   | $          | 1.64 |   |

 

The weighted averageremaining term of all options outstanding at March 31, 2007 was 6.6 years ascompared to 7.3 years at December 31, 2006.

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

RECENT ACCOUNTINGPRONOUNCEMENTS:

In February 2007, the FASB issued Statement ofFinancial Accounting Standards No.159, “The Fair Value Option for FinancialAssets and Financial Liabilities, including an Amendment to SFAS 115” (“SFAS159”). The fair value option established by SFAS 159 permits all entities tomeasure all eligible items at fair value at specified election dates. Abusiness entity shall report all unrealized gains and losses on items for whichthe fair value option has been elected in earnings at each subsequent reportingdate. The provisions of SFAS 159 are effective for fiscal years beginning afterNovember 15, 2007. Callisto is currently evaluating the impact, if any, of theprovisions of SFAS 159.

In December 2006, the Financial Accounting StandardsBoard (“FASB”) issued a FASB Staff Position (“FSP”) Emerging Issues Task Force(“EITF”) Issue No. 00-19-2”Accounting for Registration Payment Arrangements”(“FSP 00-19-2”) which addresses an issuer’s accounting for registration paymentarrangements. FSP 00-19-2 specifies that the contingent obligation to makefuture payments or otherwise transfer consideration under a registrationpayment arrangement, whether issued as a separate agreement or included as aprovision of a financial instrument or other agreement, should be separatelyrecognized and measured in accordance with FASB Statement No.5 “Accounting forContingencies”. The guidance in FSP 00-19-2 amends FASB Statements No. 133,“Accounting for Derivative Instruments and Hedging Activities”, and No.150,“Accounting for Certain Financial Instruments with Characteristics of bothLiabilities and Equity”, and FASB Interpretation No.45, “Guarantor’s Accountingand Disclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others” to include scope exceptions for registration paymentarrangements. FSP 00-19-2 is effective immediately for registration paymentarrangements and the financial instruments subject to those arrangements thatare entered into or modified subsequent to the date of issue of FSP 00-19-2.For registration payment arrangements and financial instruments subject tothose arrangements that were entered into prior to the issuance of FSP 00-19-2,this is effective for financial statements issued for fiscal years beginningafter December 15, 2006, and interim periods within those fiscal years.Callisto has analyzed the provisions of FSP 00-19-2 and adoption of thisstandard did not have a material effect on Callisto’s consolidated financialstatements.

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

In July 2006, the FASB issued FASB Interpretation No.48 (“FIN 48”) “Accounting for Uncertainty in Income Taxes (an interpretation ofFASB Statement No. 109”) which is effective for fiscal years beginning afterDecember 15, 2006. This interpretation was issued to clarify the accounting foruncertainty in the amount of income taxes recognized in the financialstatements by prescribing a recognition threshold and measurement attribute forthe financial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. The provisions of FIN 48 are effectiveJanuary 1, 2007, with the cumulative effect of the change in accountingprinciple recorded as an adjustment to retained earnings. The  adoption of FIN 48 did not have a materialimpact on the Company’s consolidated financial position, results of operationsor cash flows.

**4. Net Loss per Share**

Basic and diluted net loss per share is presented inconformity with SFAS No. 128, “Earnings per Share,” for all periodspresented. In accordance with SFAS No. 128, basic and diluted net loss percommon share was determined by dividing net loss applicable to commonstockholders by the weighted-average common shares outstanding during the period.Diluted weighted-average shares are the same as basic weighted-average sharessince the inclusion of issuable shares pursuant to the exercise of stockoptions and warrants, would have been antidilutive. As of March 31, 2007and 2006 there were 16,296,620 and 3,844,018 warrants outstanding, respectivelyand 8,388,375 and 8,508,210 total options outstanding, respectively. Inaddition Callisto had 8,031,033 common shares issuable upon conversion of itsSeries A convertible preferred stock as of March 31, 2007 (See Note 5 below)and no preferred stock was outstanding as of March 31, 2006.

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

From October 23, 2006 until January 10, 2007, Callistoplaced 602,350 shares of Series A Convertible Preferred Stock and 8,031,333warrants to certain investors for aggregate gross proceeds of$6,023,500. As of December 31, 2006 Callisto had closed on 574,350 sharesof such Series A Convertible Preferred Stock for aggregate gross proceeds of$5,743,500. The final traunche of this financing closed January 10, 2007 whenCallisto placed 28,000 shares of such Series A Convertible Preferred Stock foraggregate gross proceeds of $280,000. The shares of Series A ConvertiblePreferred Stock are convertible into shares of common stock at a conversionprice of $0.75 per share.  The investors also are parties to aRegistration Rights Agreement, dated as of October 23, 2006 pursuant towhich Callisto agreed to file, within 60 days of closing, a registrationstatement with the Securities and Exchange Commission (the “SEC”) covering theresale of the shares of common stock underlying the Series A ConvertiblePreferred Stock and the warrants issued to the investors. The warrants areimmediately exercisable at $0.75 per share,   will expire five years from thedate of issuance, and have certain antidilution rights for the twelvemonth period beginning on the effective date of the registration statementregistering the shares of common stock underlying the warrants.  Callisto(i) paid aggregate fees and expenses of $485,308 ($448,908 prior to December31, 2006) in cash and (ii) issued an aggregate 11,775 shares of Series AConvertible Preferred Stock and 1,228,761warrants to purchase common stock, tocertain selling agents. The warrants are immediately exercisable at $0.75 pershare, will expire five years after issuance and have the same anti-dilutiverights as the investor warrants. On January 12, 2007 Callisto filed aregistration statement on Form S-3 registering the common stock issuable upon(i) the conversion of the all Series A Convertible Preferred Stock, (ii) theexercise of all related investor warrants and (iii) the exercise of all sellingagent warrants. On February 15, 2007 Amendment No.1 to this registrationstatement was declared effective by the SEC.

The material terms of the Series A PreferredStock consist of:

*Dividends* .Holders of the Series A Convertible Preferred Stock shall not be entitledto receive dividends except as and if declared at Callisto’s sole election.

*Voting Rights*.. Shares of the Series A Convertible Preferred Stock shall have novoting rights. However, so long as any shares of Series A ConvertiblePreferred Stock are outstanding, Callisto shall not, without the affirmativevote of a majority in interest of the shares of Series A ConvertiblePreferred Stock then outstanding, (a) alter or change adversely thepowers, preferences or rights given to the Series A Convertible PreferredStock, (b) authorize or create any class of stock senior or equal to theSeries A Convertible Preferred Stock, (c) amend its articles ofincorporation or other charter documents, so as to affect adversely any rightsof the holders of Series A Convertible Preferred Stock or(d) increase the authorized number of shares of Series A ConvertiblePreferred Stock.

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

*Conversion Rights*.. Each share of Series A Convertible Preferred Stock shall be convertibleinto that number of shares of common stock determined by dividing the StatedValue, currently $10 per share, by the conversion price, currently $0.75 pershare. The conversion price is subject to adjustment for dilutive issuances.

*Automatic conversion*.. Beginning October 24, 2007, if the price of the common stock equals $1.50 pershare for 20 consecutive trading days, and an average of 50,000 shares ofcommon stock per day shall have been traded during the 20 trading days,Callisto shall have the right to deliver a notice to the holders of theSeries A Convertible Preferred Stock, to convert any portion of the sharesof Series A Convertible Preferred Stock into shares of Common Stock at theconversion price.

As per Emerging Issues Task Force (“EITF”) Issue00-19, *“Accounting for Derivative FinancialInstruments Indexed to, and Potentially Settled in, Company Stock”*,Callisto has determined that the warrants should be treated as “permanentequity”.

As per  FASBStaff Position (“FSP”) Emerging Issues Task Force (“EITF”) Issue No. 00-19-2”*Accounting for Registration Payment Arrangements*” (“FSP00-19-2”) , issued in December 2006, which specifies that contingentobligations under a registration payment arrangement should be separatelyrecognized and measured in accordance with FASB Statement No.5 “*Accounting for Contingencies*”, Callisto has determined thatit is not likely have a material effect on Callisto’s consolidated financialstatements.  On January 12, 2007 Callistofiled a registration statement on Form S-3 registering the common stockissuable upon (i) the conversion of the all Series A Convertible Preferred Stock,(ii) the exercise of all related investor warrants and (iii) the exercise ofall selling agent warrants. On February 15, 2007 Amendment No.1 to thisregistration statement was declared effective by the SEC.

As per EITF 00-27, “Application*of Issue 98-5 to Certain Convertible Instruments*”Callisto evaluated the preferred stock transaction and accordingly found thatthere was an embedded beneficial conversion feature.  The fair value ofthe detachable warrants on the date of grant was $3,557,872 using Black Scholesassumptions of 60% volatility, a risk free interest rate of 4.57% to 4.84%, nodividend, an expected life of 5 years and a stock price on that dates of grantranging from $0.88 to $ 0.75 per share.  The conversion rights of thepreferred stock contained a beneficial conversion feature totaling $2,504,170,using the “effective conversion price” method based on relative fair value ofthe preferred stock and the warrants. This beneficial conversion feature wasimmediately accreted to the preferred stock as a dividend because the preferredstock could be converted immediately upon issuance.  The beneficialconversion feature associated with final traunche of 28,000 shares of Series AConvertible Preferred Stock placed in January 2007 amounted to $119,685 and wasrecorded as a beneficial conversion feature accreted as a dividend in thequarter ended March 31, 2007.

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**6. Commitments and contingencies**:

Employment and consulting agreements:

 On January 25, 2007, Callisto entered into anExtension and Amendment Agreement with Mr. Cerrone.  The agreement extendsthe term of the consulting agreement between us and Mr. Cerrone, dated as ofDecember 27, 2004, to December 31, 2009.  Among other things, theagreement increases Mr. Cerrone’s compensation from $205,000 to $275,000 peryear.  Additionally, pursuant to the agreement, in recognition of theservices beyond that required of Mr. Cerrone during the period from July 1,2006 to January 25, 2007, Callisto had accrued a bonus to Mr. Cerrone of$75,000, as of  March 31, 2007, which waspaid on April 5, 2007.  Mr. Cerrone shall be eligible to earn a cash bonusof up to 22.5% of his base compensation for each twelve month period during theterm of the agreement based on meeting performance objectives and bonuscriteria to be mutually identified by Mr. Cerrone and Callisto’s Board.

On January 25, 2007, in conjunction with the Extensionand Amendment Agreement, Mr. Cerrone was granted 225,000 ten year non-qualifiedstock options at an exercise price of $0.96 per share of which 75,000 vest on eachof December 31, 2007, 2008 and 2009. The stock-based compensation expenseassociated with this option grant during the three months ended March 31, 2007was $14,695. This expense was based on an initial Black-Scholes fair value of$165,040 or $0.44 per share on the date of grant. In accordance with EITF - Emerging Issues Task Force Issue 96-18: *Accounting for Equity Instruments That Are Issued to Other ThanEmployees for Acquiring, or in Conjunction with Selling, Goods or Service*s(“EITF 96-18”), the measurement date will be the earliest of the thirdanniversary of the agreement (when “performance commitment is completed”) orthe accelerated vesting date if Mr. Cerrone is terminated without cause or goodreason. Accordingly the fair value of these options will be marked to marketquarterly.

On February 16, 2007, Dr. Jacob entered into anExtension and Amendment Agreement with Callisto as approved by the CompensationCommittee which extended the term under his employment agreement toJune 30, 2009. In addition, pursuant to the agreement, Dr. Jacob wasgranted 225,000 ten year incentive stock options exercisable at $0.81 per shareof which 75,000 vest on each of December 31, 2007, 2008 and 2009. His salaryand other compensation was unchanged.

**7. Subsequent events:**

On April 24, 2007, we entered into a servicesagreement with Barretto Pacific Corporation pursuant to which Barretto willprovide beginning May 1, 2007 investor relations services to us. We willpay Barretto a fee of $120,000 over a seven month period and 80,000 shares ofrestricted common stock.

 

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**ITEM2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS**

The following discussion should be read in conjunctionwith our condensed consolidated financial statements and other financialinformation appearing elsewhere in this Quarterly Report. In addition tohistorical information, the following discussion and other parts of thisquarterly report contain forward-looking information that involves risks anduncertainties.

**OVERVIEW**

Since inception in June 1996 our efforts havebeen principally devoted to research and development, securing patentprotection, obtaining corporate relationships and raising capital. Sinceinception through March 31, 2007, we have sustained cumulative net lossesof $59,889,821. Our losses have resulted primarily from expenditures incurredin connection with clinical development of licensed products, the purchase ofin-process research and development, stock based compensation expense, patentfiling and maintenance, outside accounting and legal services and regulatoryconsulting fees.  From inception throughMarch 31, 2007 we have not generated any revenue from operations. Weexpect to incur substantial and increasing losses for the next several years aswe develop our product candidates, expand our clinical development team andprepare for the commercial launch of our product candidates. We do notcurrently have any commercial biopharmaceutical products, and do not expect tohave such for several years, if at all.

Our research and development expenses consistprimarily of costs associated with clinical development team salaries and staffcosts, application and filing for regulatory approval of our proposed products,regulatory and scientific consulting fees, clinical and patient costs forproduct candidates in on-going trials, sponsored pre-clinical research, royaltypayments as well as legal and professional fees associated with filing andmaintaining our patent and license rights to our proposed products. We expenseall research and development costs as they are incurred. We expect our researchand development expenses to increase significantly in the future as we developour product candidates.

Our general and administrative expenses primarilyinclude personnel and related costs, rent and professional accounting andcorporate legal fees. We expect our general and administrative expenses toincrease significantly over the next few years as we continue to build ouroperations to support our product candidates and as we incur costs associatedwith being a publicly traded company.

**HISTORY**

In March 2002, CallistoPharmaceuticals, Inc. (“Old Callisto”), a non-public company, purchased99.7% 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 andPlan of Merger dated March 10, 2003, as amended April 4, 2003, SynergyAcquisition Corp., a wholly-owned subsidiary of Webtronics merged into SynergyPharmaceuticals Inc. (“Synergy”) and Callisto Acquisition Corp., a wholly-ownedsubsidiary of Webtronics merged into Old Callisto (collectively, the “Merger”).As a result of the Merger, Old Callisto and Synergy became wholly-ownedsubsidiaries of Webtronics. In the Merger Webtronics issued 17,318,994 sharesof its common stock in exchange for outstanding Old Callisto common stock andan additional 4,395,684 shares in exchange for outstanding Synergy commonstock. Old Callisto changed its name to Callisto Research Labs, LLC (“CallistoResearch”) and Webtronics changed its name to CallistoPharmaceuticals, Inc. and changed its state of incorporation from Floridato Delaware. Subsequently, 171,818 shares of common stock issued to formerSynergy shareholders were returned to us under the terms of certainindemnification agreements.

**PLAN OF OPERATIONS**

Our plan of operations for the next twelve months isto focus primarily on the clinical development of our two drugs, Atiprimod andL-Annamycin, to treat neuroendocrine carcinomas (including advanced carcinoidcancer), adult and pediatric acute leukemia (a disease of the white bloodcells) and multiple myeloma (an incurable blood cancer that invades andproliferates in bone marrow).

Our lead drug candidate, Atiprimod, is an orallyadministered drug with antiproliferative and antiangiogenic activity. Weare presently enrolling patients in two clinical trials in low to intermediategrade neuroendocrine cancer and relapsed or refractory multiple myeloma at anumber of clinical sites in the U.S.  On November 7, 2006, weannounced the initiation of a multi-center open-label Phase IIclinical trial of Atiprimod in low- to intermediate-grade neuroendocrinecancers, including advanced carcinoid cancer patients. This trial is based onearlier encouraging clinical results from an ongoing trial of Atiprimod inadvanced cancer patients that showed stable disease and disease-related symptomrelief in patients with advanced carcinoid cancer.  Atiprimod is also in amulti-center, dose-escalation Phase I/IIa clinical trial in relapsed orrefractory multiple myeloma patients.  In December 2005, we announcedinterim results from this trial on 15 patients treated with Atiprimod,including 3 patients at the highest dose level of 180 mg/day. Twopatients exhibited stable disease, with one patient having a 34% decrease inM protein (measure of tumor burden) over 3 months of treatment. In 2006, weamended the protocol to continue the trial at higher dose levels and currentlyhave this trial underway at clinical sites in the U.S.

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Our second lead drug candidate, L-Annamycin, earliercompleted an initial Phase I/IIa clinical trial in relapsed or refractoryleukemia patients with a prior sponsor. L-Annamycin is a novel compound fromthe anthracycline family of proven anti-cancer drugs, which has a noveltherapeutic profile, including activity against drug resistant tumors andsignificantly reduced cardiotoxicity, or damage to the heart. L-Annamycin wasin-licensed by Callisto in October 2004 and is presently in two clinicaltrials: 1) a Phase I/IIa clinical trial in adult relapsed or refractory acutelymphocytic leukemia (ALL) patients at three clinical sites in the U.S.; and 2)a Phase I clinical trial in children and young adults with relapsed orrefractory ALL or AML.

**ATIPRIMOD TO TREAT ADVANCED CARCINOIDCANCER PATIENTS AND MULTIPLE MYELOMA**

On August 28, 2002, our wholly-owned subsidiary,Synergy, entered into a worldwide license agreement with AnorMED Inc. (“AnorMED”),a Canadian corporation, to research, develop, sell and commercially exploit theAtiprimod (SKF 106615) patent rights.

Atiprimod is one of a class of compounds known asazaspiranes and was originally developed as a potential treatment forrheumatoid arthritis based on encouraging data from a number of animal modelsof arthritis and autoimmune indications. The development of this drugoriginated with a partnership between AnorMED and SmithKline Beecham (“SKB”)that led to the successful filing of an investigational new drug application,or IND, and completion of three Phase I clinical trials involving a total of 63patients. The drug successfully completed both single and multiple dose Phase Iclinical trials in patients with rheumatoid arthritis. Both trials evaluatedthe safety and pharmacokinetics (how the body takes up and eliminates drugs) ofAtiprimod and showed that the drug is well tolerated. In the third Phase Iclinical trial, the drug was found to be well tolerated in an open labelextension study performed with 43 patients from the first two studies, withpatients on the drug for as long as one year.

**PRECLINICAL STUDIES**

Atiprimod’s specific ability to lower the level of keygrowth factors, known to play an important role in the development of multiplemyeloma, is the basis for its potential use as a drug to treat this disease.Atiprimod was previously shown to inhibit the production of thepro-inflammatory mediators IL-6 and TNF (alpha) in a number of animal models ofinflammation and autoimmune disease. Atiprimod was also demonstrated using invitro models of tumor cell growth to inhibit proliferation of a number of humanmultiple myeloma cell lines. Characterization of the mechanism of Atiprimod’santiproliferative activity in a series of experiments showed that the drugworks by inducing apoptosis (programmed cell death) in myeloma cells. In asecond series of experiments performed with Atiprimod on co-cultures composedof multiple myeloma cells plus bone marrow stromal cells (used to simulate thehuman disease), the drug was found to have a profound effect on secretion ofthe angiogenic (blood vessel related) growth factor VEGF. A separate set ofexperiments also suggest an additional explanation for the disease-modifyingactivity of Atiprimod originally observed in chemically-induced arthritic-ratanimal studies, and provide a further rationale for the application of thisdrug to treat multiple myeloma. Using a bone resorption assay (bone degradationexperiment) to measure the effect of drug on osteoclast-mediated boneresorption, Atiprimod demonstrated a profound effect on osteoclast, or whiteblood cell, function. The drug appears to be selectively toxic for activatedosteoclasts, displaying a negligible effect on bone marrow stromal cells.

**COMPLETED CLINICAL STUDIES**

Atiprimod successfully completed single and multipledose Phase I clinical trials in patients with rheumatoid arthritis (RA). In theinitial Phase I study, 28 patients were given single escalating doses of drug(0.002 - 1.0 mg/kg), with a 4-month follow-up. Atiprimod was well tolerated,displaying no clinically relevant changes in any laboratory parameters. Inparticular, liver function tests remained in the normal range. The second PhaseI study involved a 28-day multiple-dose-rising study in 35 RA patients. Thestudy evaluated the effect of food on bioavailability, or the concentration ofdrug in the body, as well as the safety and pharmacokinetics of repeat dosing.Dosages included 0.1, 1.0, 5.0, and 10 mg/day plus a 14-day cohort at 30mg/day, with 4-month follow-up. All doses were well tolerated and clinicaltests were unremarkable. Significantly, reductions in tender and swollen jointcounts were noted in a number of subjects during the course of the dosingperiod. Individuals from the two Phase I safety studies were also involved in aPhase I open-label extension trial at 5 mg/day dosage. Forty-three patientsentered the study and remained on the drug as long as 12 months. Clinicallaboratory results for all patients were unremarkable, in particular liverenzyme levels remained within the normal range in all patients throughout thestudy period.

**DEVELOPMENT STRATEGY**

Atiprimod commenced a Phase I/IIa clinical trial inrelapsed or refractory multiple myeloma patients on May 26, 2004. These arepatients that have a re-occurrence of active disease, and no longer respond toapproved therapies. The Phase I/IIa clinical trial is an open label study, withthe primary objective of assessing safety of drug and identifying the maximumtolerated dose. The secondary objectives are to measure the pharmacokinetics,evaluate the response in patients with refractory disease and to identifypossible surrogate responses to the drug to better determine the mechanism ofdrug action.  In December 2005, we announced interim results from thistrial performed in relapsed or refractory multiple myeloma patients whichconsisted of 15 patients treated with Atiprimod, including 3 patients at thehighest dose level of 180 mg/day. Two patients exhibited stable disease, withone patient having a 34% decrease in M protein (measure of tumor burden) over 3months of treatment. It was also noted that two patients reported a subjectivedecrease in bone pain.  In 2006, we amended the protocol to continue thetrial at higher dose levels and currently have this trial open at 4 clinicalsites in the U.S.

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On March 15, 2005, we announced a second Phase I/IIaclinical trial of Atiprimod in advanced cancer patients. The trial is entitled:“An Open Label Study of the Safety and Efficacy of Atiprimod Treatment forPatients with Advanced Cancer”.  The primary objective is to assess thesafety and determine the maximum tolerated dose of Atiprimod in advanced cancerpatients. The secondary objectives are to measure the pharmacokinetics ofAtiprimod and evaluate the response in a variety of relapsed solid tumors andhematological malignancies. This study was conducted at the University of TexasM.D. Anderson Cancer Center, and was closed to enrollment in November 2006.

On November 7, 2006, we announced the initiation of amulti-center, open-label Phase II clinical trial of Atiprimod in low tointermediate grade neuroendocrine carcinomas, including advanced carcinoidcancer patients. This trial is based on encouraging clinical results from thePhase I clinical trial in advanced cancer patients that showed stable diseaseand a reduction in disease-related symptoms in patients with advanced carcinoidcancer.  The first study site to enter the trial was the HematologyOncology Services of Arkansas in Little Rock, Arkansas.  On January 31,2007 we announced the opening of a second site for this trial — the Dana-FarberCancer Institute in Boston, MA.  Subjects will also be seen at thefollowing facilities: Brigham and Women’s Hospital, Massachusetts GeneralHospital and Beth Israel Deaconess Medical Center. On March 12, 2007 weannounced the opening of the third site for this trial — The Physician Officesat Mount Sinai Medical Center, NY

The primary objective of the Phase II clinical trialis to evaluate efficacy of Atiprimod in patients with low to intermediate gradeneuroendocrine carcinoma who have metastatic or unresectable cancer and whohave either symptoms, despite standard therapy (octreotide), or progression ofneuroendocrine tumors. Patients, after signing an informed consent, arerequired to complete two weeks of a symptoms diary to establish their symptomsbaseline before commencing Atiprimod dosing. A maximum of 40 evaluable patientswill be enrolled in this trial. Efficacy evaluations will include the measureof target lesions (per RECIST), and the quantization of symptom relief.

**MANUFACTURING OF ATIPRIMOD**

A practical, efficient and cost effective method forproducing Atiprimod on a commercial scale was originally developed by SKB. Inthe course of this work, a new dimaleate salt form was developed. A portion ofthe 7 kilos of Atiprimod drug substance, available from SKB, was used as thesource for generating the Atiprimod dimaleate drug product presently being usedin the Phase I/IIa clinical study. Several lots of drug substance werere-qualified to meet current FDA approved release specifications. The fullpackage of fully validated analytical methods developed by SKB was transferredto a contract research organization used by us to perform all analytical tests.One large-scale GMP production run of Atiprimod dimaleate led to the successfulrelease of 10 Kg of material available for future Phase II clinical studies. Weplan to enter into a supply contract for Atiprimod with a commercial supplierby the end of 2007 or after confirming activity of the drug candidate in ourcurrent human clinical trials.

**L-ANNAMYCIN TO TREAT RELAPSED ACUTELEUKEMIA**

On August 12, 2004 we entered into a worldwideexclusive license agreement with The University of Texas M.D. Anderson CancerCenter to develop and commercially exploit the L-Annamycin patent rights.L-Annamycin, an anthracycline drug for leukemia therapy, has a noveltherapeutic profile, including activity against drug resistant tumors andsignificantly reduced toxicity.

**PRECLINICAL STUDIES**

Nonclinical studies have shown that Annamycindelivered as a liposomal preparation (L-Annamycin) is effective against severaldifferent in vivo tumor models (animal experiments), including human tumorswhich are resistant to other chemotherapy drugs, grafted into animals.Additionally, results from in vitro studies (cell culture experiments) indicatethat L-Annamycin and free Annamycin were able to partially overcome tumorresistance to chemotherapy drugs in several tumor cell lines that wereresistant to other drugs such as doxorubicin. In nonclinical toxicity studies,myelosuppression (suppression of the body’s immune response) was noted in miceat a single intravenous dose of 15.7 mg/kg L-Annamycin. With weekly intravenousdoses of 5.2 mg/kg L-Annamycin for 6 weeks, or 3.1 and 4.2 mg/kg L-Annamycinfor 10 weeks in mice, the cardiotoxicity (toxicity to heart tissue) ofL-Annamycin was substantially less than an equivalent dose of doxorubicin. Indogs, a single 15-minute intravenous infusion of up to 1.42 mg/kg L-Annamycinwas well tolerated, with no clinically significant adverse effects,hematological or chemical changes, or pathological changes.

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**COMPLETED CLINICAL STUDIES**

L-Annamycin was evaluated previously by AronexPharmaceuticals, Inc. in 3 clinical trials: 1) a Phase I clinical trial in 36patients with relapsed solid tumors, 2) a Phase II clinical trial in 13patients with doxorubicin-resistant breast cancer, and 3) a Phase I/IIa trialin 20 patients with relapsed/refractory AML and ALL. In the initial Phase Istudy, L-Annamycin was administered by a single 1- to 2-h intravenous infusionat 3-week intervals. Thirty-six patients with relapsed solid tumors weretreated and 109 treatment courses were administered at doses ranging from 3 to240 mg/m2. No cardiotoxicity was seen on biopsy of heart tissue of fourpatients studied. The maximum tolerated dose (MTD) for L-Annamycin in solidtumor patients was found to be 190 mg/m2. A second Phase II study ofL-Annamycin was performed in 13 women with doxorubicin-resistant breast cancer.The median number of prior chemotherapy regimes was two, and six patients hadtwo or more organ sites of involvement. L-Annamycin was administered at 190-250mg/m2 as a single i.v. infusion over 1-2 h every 3 weeks. Of the 13 patients,12 had clear deterioration and new tumor growth after one or two courses.

The potential of a less cardiotoxic drug that wasactive against multi-drug resistant tumors led to a third trial in relapsedleukemia patients (both AML and ALL). The trial involved 20 patients withrelapsed/refractory AML (n=17) or ALL (n=3). The conclusions drawn from thetrial were that L-Annamycin was safe, well tolerated and showed potentialclinical activity in patients with acute leukemias, and that further evaluationof this novel anthracycline in patients with hematopoietic, or blood borne,malignancies was clearly warranted.

**DEVELOPMENT STRATEGY**

We began a Phase I clinical trial at The University ofTexas M.D. Anderson Cancer Center in adult relapsed or refractory acutelymphocytic leukemia (ALL) patients on December 1, 2005. Additional sitesenrolled in this study include the Roswell Park Cancer Institute (Buffalo, NY) andthe Montefiore Medical Center (New York, NY). The single-arm, open-labelL-Annamycin trial is designed to enroll patients in a dose escalation Phase Iportion followed by 10 patients at a final fixed dose in the Phase II portiononce the maximum tolerated dose (MTD) is determined.  Up to 34 adultpatients can be treated in this single-arm trial. On February 22, 2007, weannounced the opening of a Phase I clinical trial of L-Annamycin in pediatricrelapsed or refractory ALL or AML patients. The trial is presently open at twosites in the U.S., Phoenix Children’s Hospital, Phoenix, AZ, and the Universityof Arizona, Tucson, AZ.

**MANUFACTURING OF ANNAMYCIN**

An improved manufacturing method for Annamycin hasbeen developed at Antibioticos S.p.A., our commercial supplier of GMP (“GoodManufacturing Practice”) drug substance. GMP material is currently beingproduced in sufficient quantity for all three anticipated trials outlined inthe development strategy section. The analytical methods developed previouslyhave been successfully transferred, and are in the process of being validatedby Quantitative Technologies, Inc., our analytical contract researchorganization, or CRO, for Annamycin development work. The final lyophilized GMPformulated drug product is being manufactured by Pharmaceutical Services, Inc.,who previously produced final product for the earlier clinical trials.Currently, Antibioticos S.p.A. is our sole supplier of Annamycin for ourclinical trials. Our agreement with Antibioticos provides that Antibioticoswill provide 400 grams of GMP drug substance (Annamycin) for our L-Annamycinclinical trials. Upon the conclusion of our Phase IIb clinical trials, theagreement provides that the parties will negotiate in good faith towards acommercial supply agreement for Annamycin.

**ORPHAN DRUG STATUS OF ATIPRIMOD ANDL-ANNAMYCIN**

On January 6, 2004, we announced that the Office ofOrphan Products Development of the FDA granted orphan drug designation toAtiprimod for the treatment of multiple myeloma.  On September 26, 2006,we announced that the Office of Orphan Products Development of the FDA grantedorphan drug designation to Atiprimod for the treatment of carcinoidtumors.   On June 24, 2005, we announced that the Office of OrphanProducts Development of the FDA granted orphan drug designation to L-Annamycinfor the treatment of acute lymphoblastic leukemia. On June 28, 2005, weannounced that the Office of Orphan Products Development of the FDA grantedorphan drug designation to L-Annamycin for the treatment of acute myeloidleukemia. The FDA grants orphan drug status for drug candidates that areintended to treat rare life-threatening diseases that, at the time ofapplication, affect no more than 200,000 patients in the United States. Thedrug must have the ability to provide significant patient benefit overcurrently available treatment or fill an unmet medical need. Orphan drugdesignation entitles us to seven years of market exclusivity in the UnitedStates of America, and ten years of market exclusivity in Europe, upon FDAmarketing approval, provided that we continue to meet certain conditionsestablished by the FDA. Once the FDA grants marketing approval of a new drug,the FDA will not accept or approve other applications to market the samemedicinal product for the same therapeutic indication. Other incentivesprovided by orphan status include certain tax benefits, eligibility forresearch grants and protocol assistance. Protocol assistance includesregulatory assistance and possible exemptions or reductions of certainregulatory fees.

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**GUANYLATE CYCLASE RECEPTOR AGONISTTECHNOLOGY (Guanilib)**

Our guanylate cyclase receptor agonist (GCRA) programis based on control of cyclic guanosine monophosphate (“cyclic GMP”), animportant second messenger involved in key cellular processes, which areessential for maintenance of the balance between proliferation and cellulardeath (apoptosis). Uroguanylin, a hormone produced by and secreted byspecialized cells in the human GI tract, helps to maintain this balance by activatingsynthesis of cyclic GMP through activation of guanylate cyclase receptor.Recent findings suggest a role of cyclic GMP in gastrointestinal (GI)inflammatory diseases.

We have successfully developed a potent analog(synthetic molecule) of uroguanylin called Guanilib (formerly called SP304).Guanilib has been demonstrated to be superior to uroguanylin in its biologicalactivity, protease stability and pH characteristics. Guanilib is currentlyundergoing pre-clinical animal studies as a treatment for gastrointestinal orGI inflammation in a collaborative study involving clinical gastroenterologistDr. Scott Plevy of the University of North Carolina, Chapel Hill, NC. Recentresults from his laboratory showed that Guanilib was efficacious in treatment ofulcerative colitis in mice. A patent allowance covering therapeuticapplications of Guanilib in colon cancer and GI inflammatory diseases hasrecently been granted by the U.S. Patent and Trademark Office.

**DEGRASYNS**

On January 10, 2006, we entered into a licenseagreement with the University of Texas M.D. Anderson Cancer Center whereby wewere granted the exclusive right to manufacture, have manufactured, use,import, offer to sell and/or sell anti-cancer compounds called tyrphostins(renamed Degrasyns). Degrasyns are a second-generation class of tyrphostinsdeveloped by scientists at the University of Texas M.D. Anderson Cancer Centerthat have a novel anti-cancer mechanism-of-action that centers on their abilityto selectively degrade key proteins that are involved in tumor cellproliferation and survival. We plan to work closely with scientists at theUniversity of Texas M.D. Anderson Cancer Center during 2007 to bring forward apre-clinical candidate for development in the clinic.

**SUPERANTIGEN-BASED BIOTERORRISMDEFENSE**

On August 20, 1996, we entered into a licenseagreement to research, develop, sell and commercially exploit certainRockefeller University (“Rockefeller”) licensed patents covering peptides andantibodies useful in treating toxic shock syndrome and septic shock. Inaddition, on July 25, 2001, we entered into a license agreement for twoadditional patents related to the regulation of exoproteins in staphylococcusaureus.

On April 1, 2005 we were awarded a two-year $885,641biodefense partnership grant from the National Institute of Allergy andInfectious Diseases (“NIAID”) to develop a monoclonal antibody and vaccineagainst bacterial superantigen toxins. The goal was to design a monoclonalantibody and vaccine that prevent the unregulated activation of T-cells (humanwhite blood cells) by bacteria from the class of staphylococcus aureus andstreptococcus pyogenes. Funding for this program will end in the spring of2007.  Because the bioterrorism program is not a core activity of Callisto,we expect to terminate further development work upon the expiration of theresearch grant.

**EMPLOYEES**

Our plan is to use contract research organizations (“CRO”)for most of our development efforts, including monitoring of clinical trialresults, thus minimizing the need to hire full time employees. As of May 14,2007, we had 9 full-time and 4 part-time employees.

**OFF-BALANCE SHEET ARRANGEMENTS**

We had no off-balance sheet arrangements as ofMarch 31, 2007.

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**RESULTSOF OPERATIONS**

**THREEMONTHS ENDED MARCH 31, 2007 AND MARCH 31, 2006**

We had no revenues duringthe three months ended March 31, 2007 and 2006 because we do not have anycommercial biopharmaceutical products and we do not expect to have suchproducts for several years, if at all.

Research and developmentexpenses decreased $1,235,157 or 56%, to $958,683 for the three months endedMarch 31, 2007 from $2,193,840 for the three months ended March 31,2006. While we have recently closed on a private placement (see Liquidity andCapital Resources below) we refocused our development activities onto theclinical development of our most promising drug candidate, Atiprimod, duringour first quarter of 2007. Atiprimod development expenses were approximately$500,000 in the three months ended March 31, 2007 which was unchanged from thelevel of spending during the three months ended March 31, 2006. All otherdevelopment programs were significantly curtailed during the three months endedMarch 31, 2007 resulting in the following: (i) costs related to the developmentof L-Annamycin were reduced by approximately $360,000, or 65%, (ii) Degrasynsdevelopment spending was curtailed 100% from approximately $300,000 in thequarter ended March 31, 2006 and (iii) Guanilib development expenditures werereduced by 80% or approximately $100,000, as compared to the three months endedMarch 31, 2006. In addition our research and development overhead not allocatedto specific programs, principally in-house staff related expenses, was reducedapproximately $500,000 or 67% during the three months ended March 31, 2007.Included in research and development overhead was stock based compensationexpense, associated with options granted to employees, which decreasedapproximately $130,000 from approximately $149,000 in the quarterMarch 31, 2006 to approximately $19,000 in the quarter endedMarch 31, 2007.

General andadministrative expenses for the three months ended March 31, 2007 werealso curtailed to $959,660, a decrease of $794,430 or 45%, from $1,754,090 forthe three months ended March 31, 2006. This decrease was accomplishedprimarily by reducing (i) spending on investor relations by approximately$347,000, (ii) bonuses by approximately $70,000, (iii) accounting,audit and legal expenses by approximately $60,000 and (iv) stock basedcompensation expense associated with options granted to employees byapproximately $243,000 or 72% from approximately $341,000 in the quarter endedMarch 31, 2006 to approximately $98,000 in the quarter endedMarch 31, 2007. This reduced stock-based compensation is primarilyattributable to the forfeiture of options held by Dr. Donald Picker whoresigned on December 19, 2006.

Net loss for the threemonths ended March 31, 2007 was $1,829,928 compared to a net loss of$4,374,628 incurred for the three months ended March 31, 2006. Thedecreased net loss is the result of lower research and development, and generaland administrative expenses both of which are discussed above. In addition werecorded a net gain of $19,478 in non-employee stock based compensation expenseduring the three months ended March 31, 2007 due to a lower stock pricewhich resulted in a reversal of expense previously recorded on certain optionswe account for as variable as required by FIN No. 44. This compared to anexpense of $504,047 recorded during the three months ended March 31, 2006.

The beneficialconversion dividend accreted to the Series A preferred stockholders, uponissuance in the quarter ended March 31, 2007, was $119,685, resulting in a netloss available to common stockholders of $1,949,623 for the three months endedMarch 31, 2007. This compared to a net loss available to common stockholders of$4,374,628 reported for the three months ended March 31, 2006, during which periodwe had no preferred share transactions and no related beneficial conversionfeature that needed to be accreted as a dividend.

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**LIQUIDITYAND CAPITAL RESOURCES**

As of March 31, 2007we had $2,158,676 in cash and cash equivalents, compared to $3,904,232 as ofDecember 31, 2006. This decrease in cash of $1,745,556 during the threemonths ended March 31, 2007 was principally the result of cash used inoperating activities of $1,989,156; partially offset by the completion of aprivate placement of Series A Convertible preferred stock yielding netproceeds of $243,600.

From October 2006until January 2007, we placed 602,350 shares of Series A Convertible PreferredStock and 8,031,333 warrants to certain investors for aggregate gross proceedsof $6,023,500. As of December 31, 2006 we had closed on 574,350 shares ofsuch Series A Convertible Preferred Stock for aggregate gross proceeds of$5,743,500. The final traunche of this financing closed January 10, 2007 whenwe placed 28,000 shares of such Series A Convertible Preferred Stock foraggregate gross proceeds of $280,000. The shares of Series A ConvertiblePreferred Stock are convertible into shares of common stock at a conversionprice of $0.75 per share.  The investors also are parties to a RegistrationRights Agreement, dated as of October 23, 2006 pursuant to which we agreedto file, within 60 days of closing, a registration statement with theSecurities and Exchange Commission (the “SEC”) covering the resale of theshares of common stock underlying the Series A Convertible Preferred Stock andthe warrants issued to the investors. The warrants are immediately exercisableat $0.75 per share,   will expire five years from the dateof issuance, and have certain antidilution rights for the twelve monthperiod beginning on the effective date of the registration statementregistering the shares of common stock underlying the warrants.  We paidaggregate fees and expenses of $485,308 ($448,908 prior to December 31, 2006)in cash, issued an aggregate 11,775 shares of Series A Convertible PreferredStock and 1,228,761warrants to purchase common stock to certain selling agents.The warrants are immediately exercisable at $0.75 per share, will expire fiveyears after issuance and have the same anti-dilutive rights as the investorwarrants.  On January 12, 2007 we filed a registration statement on FormS-3 registering the common stock issuable upon (i) the conversion of the allSeries A Convertible Preferred Stock, (ii) the exercise of all related investorwarrants and (iii) the exercise of all selling agent warrants. On February 15,2007 Amendment No.1 to this registration statement was declared effective bythe SEC.

On April 24, 2007,we entered into a services agreement with Barretto Pacific Corporation pursuantto which Barretto will provide beginning May 1, 2007, investor relationsservices to us. We will pay Barretto a fee of $120,000 over a seven monthperiod and 80,000 shares of restricted common stock.

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. We expect that our existing capital resources will not besufficient to fund our operations for at least the next 12 months. We will berequired to raise additional capital to complete the development andcommercialization of our current product candidates.

Our consolidatedfinancial statements as of December 31, 2006 have been prepared under theassumption that we will continue as a going concern for the twelve monthsending December 31, 2007. Our independent registered public accountingfirm has issued a report dated April 13, 2007 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.

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

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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.

FinancialReporting Release No. 60 requires all companies to include a discussion ofcritical accounting policies or methods used in the preparation of financialstatements. Our accounting policies are described in Note 3 of the notes to ourconsolidated financial statements included in this Annual Report on Form 10-Kfor the fiscal year ended December 31, 2006. The financial statements areprepared in accordance with accounting principles generally accepted in theUnited States of America, which requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.Actual results could differ from those estimates.

We rely heavily onincentive compensation in the form of stock options to recruit, retain andmotivate directors, 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 March 31, 2007 stock basedcompensation expense has totaled $16,613,610 or 27% of our total accumulated deficitof $62,393,991.

InDecember 2004, the Financial Accounting Standards Board (FASB) issuedStatement of Financial Accounting Standard (“SFAS”) No. 123 (Revised2004), *Share-Based Payments* (“SFAS123R”). SFAS 123R requires a public entity to measure the cost of employeeservices received in exchange for the award of equity instruments based on thefair value of the award at the date of grant. The expense is to be recognizedover the period during which an employee is required to provide services inexchange for the award. SFAS 123R was effective as of the beginning of thefirst interim or annual reporting period that began after December 15,2005 and accordingly we adopted SFAS 123R on January 1 , 2006.

SFAS 123R providesfor two transition methods. The “modified *prospective”*method requires that share-based compensation expense be recorded for anyemployee options granted after the adoption date and for the unvested portionof any employee options outstanding as of the adoption date. The “modified*retrospective”* method requires that,beginning in the first quarter of 2006, all prior periods presented be restatedto reflect the impact of share-based compensation expense consistent with theproforma disclosures previously required under SFAS 123. We have elected to usethe “modified *prospective*” methodin adopting this standard.

Prior toJanuary 1, 2006, we had adopted SFAS No. 123, “Accounting forStock-Based Compensation” (“SFAS 123”). As provided for by SFAS 123, we hadelected to continue to account for stock-based compensation according to theprovisions of Accounting Principles Board Opinion No. 25, “Accounting forStock Issued to Employees” (“APB 25”). Accordingly, compensation expense hadbeen recognized to the extent of employee services rendered based on theintrinsic value of stock options granted under the plan.

SFAS 123R did notchange the way we account for non-employee stock-based compensation. Wecontinue to account for shares of common stock, stock options and warrantsissued to non-employees based on the fair value of the stock, stock option orwarrant.

For all fair valuecomputations required for employee and non-employee stock-based compensation weuse the Black-Scholes option-pricing model which requires assumptions forexpected stock price volatility, expected term of the option, risk-freeinterest rate and expected dividend yield at the grant date. Our stock pricehas fluctuated from $3.95 per share as of December 31, 2003 to $0.75 per shareas of March 31, 2007.

Research andDevelopment: We do not currently have any commercial biopharmaceuticalproducts, and do not expect to have such for several years, if at all andtherefore our research and development costs are expensed as incurred. Theseinclude expenditures in connection with an in-house research and developmentlaboratory, salaries and staff costs, application and filing for regulatoryapproval of our proposed products, purchase of in-process research anddevelopment, regulatory and scientific consulting fees, contract research and royaltypayments to outside suppliers, facilities and universities as well as legal andprofessional fees associated with filing and maintaining our patent and licenserights to our proposed products. While certain of our research and developmentcosts may have future benefits, our policy of expensing all research anddevelopment expenditures is predicated on the fact that we have no history ofsuccessful commercialization of biopharmaceutical products to base any estimateof the number of future periods that would be benefited.

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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 March 31,2007 our money market balances totaled approximately $2.0 million.

**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 March 31, 2007, our Chief Executive Officer andPrincipal Financial Officer have concluded that our disclosure controls andprocedures were not effective due to the fact that we lack sufficient internalaccounting personnel and segregation of duties necessary to ensure that anadequate review of the financial statements and notes thereto is performedensuring that information required to be disclosed by us in the reports that wefile or submit under the  Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin the Commission’s rules and forms. Our Chief Executive Officer andPrincipal Financial Officer also concluded that, as of March 31, 2007, ourdisclosure controls and procedures were not effective in ensuring thatinformation required to be disclosed by us in the reports that we file orsubmit under the Exchange Act is accumulated and communicated to ourmanagement, including our Chief Executive Officer and Principal FinancialOfficer, to allow timely decisions regarding required disclosure.

In order to ensurethe effectiveness of our disclosure controls in the future we plan to addfinancial staff resources to our accounting and finance department. In designingand evaluating our disclosure controls and procedures, management recognizesthat any controls and procedures, no matter how well designed and operated, canprovide only reasonable assurance of achieving the desired control objectives,and management necessarily is required to apply its judgment in evaluating therelationship between the benefit of desired controls and procedures and thecost of implementing new controls and procedures.

The consolidatedfinancial statements include all adjustments identified as a result of theevaluation performed.

There were nochanges in our internal controls over financial reporting that couldsignificantly affect internal controls over financial reporting during thequarter ended March 31, 2007.

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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 for the year ended December 31, 2006, which couldmaterially affect our business, financial condition or future results. Therehave been no material changes to the risk factors disclosed in the AnnualReport.

**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: May 21, 2007* | * *   | *By:*                                   | */s/ Gary S. Jacob* | * * | * * |
| * *                  | * *   | * *                                | *Gary S. Jacob* |   |   |
| * *                  | * *   | * *                                | *Chief Executive Officer* |   |   |
|                      |       |                                    |   |   |
|                      |       |                                    |   |   |
| *Date: May 21, 2007* | * *   | *By:*                                   | */s/ Bernard F. Denoyer* | * * | * * |
| * *                  | * *   | * *                                | *Bernard F. Denoyer* |   |   |
| * *                  | * *   | * *                                | *Vice President, Finance* |   |   |
|                           |            |                                         |  |  |  |  |

 

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