Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE QUARTERLY PERIOD ENDED: JUNE 30, 2009oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period
from                             to


Commission File Number: 001-32325

CALLISTO PHARMACEUTICALS, INC.(Exact name of Registrant as specified in its charter)

Delaware(State or Other Jurisdiction of
Incorporation or Organization)

13-3894575(I.R.S. Employer
Identification No.)420 Lexington Avenue, Suite 1609, New York, New York 10170(Address of principal executive offices) (Zip Code)


(212) 297-0010(Registrant's telephone number)

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

Indicate
by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes ý    No o

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the Registrant was required to submit and post such
files). Yes o    No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o (Do not check if a smaller
reporting company)

Smaller reporting company ý


Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes o    No ý

The number of the registrant's shares of common stock outstanding was 50,914,341 as of August 13, 2009.



---





Table of Contents



CALLISTO PHARMACEUTICALS, INC.

FORM 10-Q

CONTENTS



PART IFINANCIAL INFORMATION

2Item 1.

Financial Statements

2Condensed Consolidated Balance Sheets as of June 30, 2009 (unaudited) and December 31,
2008

2Condensed Consolidated Statements of Operations for the Three and Six Months Ended
June 30, 2009 and 2008 (unaudited) and the period June 5, 1996 (Inception) to June 30, 2009 (unaudited)

3Condensed Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the period
June 5, 1996 (Inception) to June 30, 2009 (unaudited)

4Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2009 and 2008
(unaudited) and for the period June 5, 1996 (Inception) to June 30, 2009 (unaudited)

12Notes to Condensed Consolidated Financial Statements
(unaudited)

14Item 2.

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

27Item 3.

Quantitative and Qualitative Disclosures About Market
Risk

33Item 4T.

Controls and Procedures

33PART IIOTHER INFORMATION

35Item 1

Legal proceedings

35Item 1A.

Risk Factors

35Item 6.

Exhibits

35Signatures

36


i

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Table of Contents

INTRODUCTORY NOTE

This Report on Form 10-Q for Callisto Pharmaceuticals, Inc. ("Callisto" or the
"Company") may contain forward-looking statements. You can identify these statements by forward-looking words such as "may," "will," "expect," "intend," "anticipate," believe," "estimate" and
"continue" or similar words. Forward-looking statements include information concerning possible or assumed future business success or financial results. You should read statements that contain these
words carefully because they discuss future expectations and plans, which contain projections of future results of operations or financial condition or state other forward-looking information. We
believe that it is important to communicate future expectations to investors. However, there may be events in the future that we are not able to accurately predict or control. Accordingly, we do not
undertake any obligation to update any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

The forward-looking statements included herein are based on current expectations that involve a number of risks and uncertainties set forth under "Risk Factors"
in our Annual Report on Form 10-K for the year ended December 31, 2008 and other periodic reports filed with the SEC. Accordingly, to the extent that this Report contains
forward-looking statements regarding the financial condition, operating results, business prospects or any other aspect of the Company, please
be advised that Callisto's actual financial condition, operating results and business performance may differ materially from that projected or estimated by the Company in forward-looking
statements.

ii

---





Table of Contents

PART IFINANCIAL INFORMATION

Item 1.    Financial Statements



CALLISTO PHARMACEUTICALS, INC.  (A development stage company)        CONDENSED CONSOLIDATED BALANCE SHEETS

June 30, 2009

December 31, 2008(Unaudited)ASSETSCurrent Assets:Cash and cash equivalents

$
3,709,014

$
301,323Cash in escrow





201,908Prepaid expenses and other





59,756Total Current Assets


3,709,014


562,987Property and equipment, net


17,300


20,649Security deposits


78,116


78,116Total Assets

$
3,804,430

$
661,752LIABILITIES AND STOCKHOLDERS' DEFICITCurrent Liabilities:Notes Payable securedshort term

$
165,452

$
Accounts payable


4,413,050


3,687,549Accrued expenses


1,293,000


1,136,264Total Current Liabilities


5,871,502


4,823,813Notes payable securedlong term





20,176Derivative financial instruments, at estimated fair valuewarrants


19,193,193


Total Liabilities


25,064,695


4,843,989Commitments and contingencies





Stockholders' Deficit:Series A convertible preferred stock, par value $0.0001, 700,000 shares authorized, 88,000 and 98,000 shares outstanding with a liquidation preference
of $880,000 and $980,000 at June 30, 2009 and December 31, 2008, respectively


9


10Series B convertible preferred stock, par value $0.0001, 2,500,000 shares authorized, 1,079,166 and 1,137,050 shares outstanding with a liquidation
preference of $10,791,660 and $11,370,500 at June 30, 2009 and December 31, 2008, respectively


108


114Common stock, par value of $.0001 per share: Authorized 225,000,000 shares at December 31, 2008; 50,914,341 and 49,556,661 shares outstanding at
June 30, 2009 and December 31, 2008, respectively


5,091


4,955Additional paid-in capital


92,079,311


86,799,951Deficit accumulated during development stage


(112,189,041
)

(90,987,267
)Total Stockholders' Deficit


(20,104,522
)

(4,182,237
)Non-controlling interest


(1,155,743
)

Total Deficit


(21,260,265
)

(4,182,237
)Total Liabilities and Stockholders' Deficit

$
3,804,430

$
661,752


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

2

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CALLISTO PHARMACEUTICALS, INC.  (A development stage company)        CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS        (Unaudited)

Three Months Ended June 30

Six Months Ended June 30,June 5, 1996
(Inception) to
June 30, 20092009

2008

2009

2008Revenues

$


$


$


$


$
Costs and expenses:Research and development


1,145,063


1,064,545


1,543,085


3,081,528


35,641,349Government grants





(30,000
)




(30,000
)

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














6,944,553General and administrative


1,102,595


1,017,615


2,059,171


2,037,927


41,037,777Loss from operations


(2,247,658
)

(2,052,160
)

(3,602,256
)

(5,089,455
)

(82,488,361
)Interest and investment income


14


8,077


225


53,614


864,552Other income (expense), net


(73,532
)




(115,018
)




(286,864
)Change in fair value of derivative instrumentswarrants


(16,519,465
)




(16,736,568
)




(14,145,563
)Net loss


(18,840,641
)

(2,044,083
)

(20,453,617
)

(5,035,841
)

(96,056,236
)Net Loss attributable to non-controlling interest


836,853





1,155,743





1,155,743Net loss attributable to controlling interest


(18,003,788
)

(2,044,083
)

(19,297,874
)

(5,035,841
)

(94,900,493
)Series A Preferred stock beneficial conversion feature accreted as a dividend














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














(10,495,688
)Net loss available to common stockholders

$
(18,003,788
)
$
(2,044,083
)
$
(19,297,874
)
$
(5,035,841
)
$
(110,285,141
)Weighted average shares outstanding:basic and diluted


50,846,570


47,218,161


50,737,615


47,171,183Net loss per common share:basic and diluted

$
(0.35
)
$
(0.04
)
$
(0.38
)
$
(0.11
)


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

3

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Table of Contents



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

Preferred
Shares

Preferred
Stock,
Par Value

Common
Shares

Common
Stock,
Par Value

Additional
Paid in CapitalBalance at inception, June 5, 1996




$





$


$
Net loss for the yearIssuance of founder shares








2,642,500


264


528Common stock issued








1,356,194


136


272Common stock issued via private placement








1,366,667


137


1,024,863Balance, December 31, 1996








5,365,361


537


1,025,663Net loss for the year














Common stock issued via private placement








1,442,666


144


1,081,855Balance, December 31, 1997








6,808,027


681


2,107,518Net loss for the year














Amortization of Stock based Compensation














52,778Common stock issued via private placement








1,416,667


142


1,062,358Common stock issued for services








788,889


79


591,588Common stock repurchased and cancelled








(836,792
)

(84
)

(96,916
)Balance, December 31, 1998








8,176,791


818


3,717,326Net loss for the year














Deferred Compensationstock options














9,946Amortization of Stock based Compensation














Common stock issued for services














3,168,832Common stock issued via private placement








346,667


34


259,966Balance, December 31, 1999








8,523,458


852


7,156,070Net loss for the year














Amortization of Stock based Compensation














Common stock issued








4,560,237


455


250,889Other














432Preferred shares issued


3,485,299


348








5,986,302Preferred stock issued for services


750,000


75








1,124,925Balance, December 31, 2000


4,235,299


423


13,083,695


1,307


14,518,618Net loss for the year














Deferred Compensationstock Options














20,000Amortization of Stock based Compensation














Balance, December 31, 2001


4,235,299


423


13,083,695


1,307


14,538,618Net loss for the year














Amortization of Stock based Compensation














Balance, December 31, 2002


4,235,299

$
423


13,083,695

$
1,307

$
14,538,618


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

4

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

Unamortized Deferred
Stock Based
Compensation

Deficit Accumulated
during the Development
Stage

Total Stockholders'
EquityBalance at inception, June 5, 1996

$


$


$
Net loss for the year





(404,005
)

(404,005
)Issuance of founder shares








792Common stock issued








408Common stock issued via private placement








1,025,000Balance, December 31, 1996





(404,005
)

622,195Net loss for the year





(894,505
)

(894,505
)Common stock issued via private placement








1,081,999Balance, December 31, 1997





(1,298,510
)

809,689Net loss for the year





(1,484,438
)

(1,484,438
)Amortization of Stock based Compensation








52,778Common stock issued








1,062,500Common stock issued for services








591,667Common Stock repurchased and cancelled








(97,000
)Balance, December 31, 1998





(2,782,948
)

935,196Net loss for the year





(4,195,263
)

(4,195,263
)Deferred Compensationstock options


(9,946
)




Amortization of Stock based Compensation


3,262





3,262Common stock issued for services








3,168,832Common stock issued via private placement








260,000Balance, December 31, 1999


(6,684
)

(6,978,211
)

172,027Net loss for the year





(2,616,261
)

(2,616,261
)Amortization of Stock based Compensation


4,197





4,197Common stock issue








251,344Other








432Preferred shares issued








5,986,650Preferred stock issued for services








1,125,000Balance, December 31, 2000


(2,487
)

(9,594,472
)

4,923,389Net loss for the year





(1,432,046
)

(1,432,046
)Deferred Compensationstock options


(20,000
)




Amortization of Stock based Compensation


22,155





22,155Balance, December 31, 2001


(332
)

(11,026,518
)

3,513,498Net loss for the year





(1,684,965
)

(1,684,965
)Amortization of Stock based Compensation


332





332Balance, December 31, 2002

$


$
(12,711,483
)
$
1,828,865


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

5

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Table of Contents

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

Preferred
Stock

Preferred
Stock Par
Value

Common
Stock

Common
Stock Par
Value

Additional
Paid
in Capital

Unamortized
Deferred Stock
Based
Compensation

Deficit
Accumulated
during the
Development
Stage

Total
Stockholders'
EquityBalance December 31, 2002


4,235,299

$
423


13,083,695

$
1,307

$
14,538,618

$


$
(12,711,483
)
$
1,828,865Net loss for the year




















(13,106,247
)

(13,106,247
)Conversion of preferred stock in connection with the Merger


(4,235,299
)

(423
)

4,235,299


423











Common stock issued to former Synergy stockholders








4,329,927


432


6,494,458








6,494,890Common stock issued in exchange for Webtronics common stock








1,503,173


150


(150
)







Deferred Compensationstock options














9,313,953


(9,313,953
)




Amortization of deferred Stock based Compensation

















3,833,946





3,833,946Private placement of common stock, net








2,776,666


278


3,803,096








3,803,374Balance, December 31, 2003




$



25,928,760

$
2,590

$
34,149,975

$
(5,480,007
)
$
(25,817,730
)
$
2,854,828


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

6

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Table of Contents

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

Common
Stock

Common
Stock Par
Value

Additional
Paid in
Capital

Unamortized
Deferred Stock
Based
Compensation

Deficit Accumulated
during the
Development Stage

Total
Stockholders'
EquityBalance, December 31, 2003


25,928,760

$
2,590

$
34,149,975

$
(5,480,007
)
$
(25,817,730
)
$
2,854,828Net loss for the year














(7,543,467
)

(7,543,467
)Amortization of deferred Stock-based compensation expense











3,084,473





3,084,473Variable accounting for stock options








(816,865
)







(816,865
)Stock-based compensation net of forfeitures








240,572


93,000





333,572Common stock issued via private placements, net


3,311,342


331


6,098,681








6,099,012Warrant and stock-based compensation for services in connection with the Merger








269,826








269,826Common stock returned from former Synergy stockholders


(90,000
)

(9
)

(159,083
)







(159,092
)Stock issued for patent rights


25,000


3


56,247








56,250Common stock issued for services


44,000


7


70,833








70,840Balance, December 31, 2004


29,219,102

$
2,922

$
39,910,186

$
(2,302,534
)
$
(33,361,197
)
$
4,249,377


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

7

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Table of Contents

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

Common
Stock

Common
Stock
Par Value

Additional
Paid in
Capital

Unamortized
Deferred
Stock Based
Compensation

Deficit
Accumulated
during the
Development
Stage

Total
Stockholders'
Equity
(Deficit)Balance, December 31, 2004


29,219,102

$
2,922

$
39,910,186

$
(2,302,534
)
$
(33,361,197
)
$
4,249,377Net loss for the year














(11,779,457
)

(11,779,457
)Deferred stock-based compensationnew grants








1,571,772


(1,571,772
)




Amortization of deferred stock-based compensation











2,290,843





2,290,843Variable accounting for stock options








75,109








75,109Common stock issued via private placement:March 2005


1,985,791


198


3,018,203








3,018,401August 2005


1,869,203


187


1,812,940








1,813,127Fees and expenses








(176,250
)







(176,250
)Exercise of common stock warrant


125,000


13


128,737








128,750Common stock issued for services


34,000


3


47,177








47,180Balance, December 31, 2005


33,233,096

$
3,323

$
46,387,875

$
(1,583,463
)
$
(45,140,654
)
$
(332,919
)


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

8

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Table of Contents

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

Series A
Convertible
Preferred
Shares

Series A
Convertible
Preferred
Stock

Common
Stock

Common
Stock Par
Value

Additional
Paid in
Capital

Unamortized
Deferred
Stock Based
Compensation

Deficit
Accumulated
during the
Development
Stage

Total
Stockholders'
Equity
(Deficit)Balance, December 31, 2005




$



33,233,096

$
3,323

$
46,387,875

$
(1,583,463
)
$
(45,140,654
)
$
(332,919
)Net loss for the year




















(12,919,229
)

(12,919,229
)Reclassification of deferred unamortized stock-based compensation upon adoption of FAS 123R














(1,583,463
)

1,583,463





Stock based compensation expense














2,579,431








2,579,431Common stock issued via private placement:




















February 2006








4,283,668


428


5,139,782








5,140,210Fees and expenses














(561,808
)







(561,808
)April 2006








666,667


67


799,933








800,000Fees and expenses














(41,000
)







(41,000
)Waiver and Lock-up Agreement








740,065


74


579,622








579,696Common stock issued for services








87,000


9


121,101








121,110Exercise of common stock warrants








184,500


18


190,017








190,035Series A convertible preferred stock issued via private placement:


574,350


57








5,743,443








5,743,500Fees and expenses


11,775


1








(448,909
)







(448,908
)Detachable warrants














2,384,485








Beneficial conversion feature accreted as a dividend




















(2,384,485
)

Balance, December 31, 2006


586,125

$
58


39,194,996

$
3,919

$
61,290,509

$


$
(60,444,368
)
$
850,118


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

9

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Table of Contents

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

Series A
Convertible
Preferred
Shares

Series A
Convertible
Preferred
Stock,
Par Value

Series B
Convertible
Preferred
Shares

Series B
Convertible
Preferred
Stock,
Par Value

Common
Shares

Common
Stock,
Par
Value

Additional
Paid in
Capital

Deficit
Accumulated
during the
Development
Stage

Total
Stockholders'
EquityBalance, December 31, 2006


586,125

$
58




$



39,194,996

$
3,919

$
61,290,509

$
(60,444,368
)
$
850,118Net loss for the year























(7,887,265
)

(7,887,265
)Stock-based compensation expense




















591,561





591,561Common stock issued for services














80,000


8


36,792





36,800Series A convertible preferred stock, issued via private placement


28,000


4














279,997





280,001Fees and expenses, Series A private placement




















(36,400
)




(36,400
)Conversion of Series A preferred stock to common stock


(395,450
)

(40
)







7,668,165


767


(727
)




Beneficial conversion feature accreted as a dividend to Series A preferred stock




















2,504,475


(2,504,475
)

Series B convertible preferred stock, issued via private placement








1,147,050


115








11,470,385





11,470,500Fees and expenses, Series B private placement




















(920,960
)




(920,960
)Beneficial conversion feature accreted as a dividend to Series B preferred stock




















10,495,688


(10,495,688
)

Change in fair value of Series B warrants from date of issuance to expiration of put option




















(2,591,005
)




(2,591,005
)Balance, December 31, 2007


218,675


22


1,147,050


115


46,943,161


4,694


83,120,315


(81,331,796
)

1,793,350Net loss for the year























(9,655,471
)

(9,655,471
)Recapitalization of majority owned subsidiary via private placements of common stock




















2,951,913





2,951,913Minority interest in equity of subsidiary acquired




















(42,824
)




(42,824
)Stock-based compensation expense




















589,063





589,063Proceeds from issuance of 11% Notes attributable to detachable warrants




















181,732





181,732Conversion of Series A preferred stock to common stock


(120,675
)

(12
)







2,413,500


241


(229
)




Conversion of Series B preferred stock to common stock








(10,000
)

(1
)

200,000


20


(19
)




Balance, December 31, 2008


98,000

$
10


1,137,050

$
114


49,556,661

$
4,955

$
86,799,951

$
(90,987,267
)
$
(4,182,237
)


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

10

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Table of Contents

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

Series A
Convertible
Preferred
Shares

Series A
Convertible
Preferred
Stock

Series B
Convertible
Preferred
Shares

Series B
Convertible
Preferred
Stock

Common
Shares

Common
Stock
Par
Value

Additional
Paid in
Capital

Deficit
Accumulated
during the
Development
Stage

Non-
Controlling
Interest

Total
Stockholders'
Equity
(Deficit)Balance, December 31, 2008


98,000

$
10


1,137,050

$
114


49,556,661

$
4,955

$
86,799,951

$
(90,987,267
)
$


$
(4,182,237
)Cumulative effect of adoption of EITF Issue 07-05




















(181,732
)

(1,903,900
)




(2,085,632
)Net loss for the period























(19,297,874
)

(1,155,743
)

(20,453,617
)Stock based compensation expense




















480,648








480,648Conversion of Series A preferred stock to common stock


(10,000
)

(1
)







200,000


20


(19
)







Conversion of Series B preferred stock to common stock








(57,884
)

(6
)

1,157,680


116


(110
)







Private placements of common stock of majority owned subsidiary




















5,138,500








5,138,500Fees and expenses associated with private placements




















(157,927
)







(157,927
)Balance June 30, 2009


88,000

$
9


1,079,166

$
108


50,914,341

$
5,091

$
92,079,311

$
(112,189,041
)
$
(1,155,743
)

(21,260,265
)


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

11

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Table of Contents



CALLISTO PHARMACEUTICALS, INC.  (A Development Stage Company)        CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS        (Unaudited)

Six months
ended
June 30, 2009

Six months
ended
June 30, 2008

Period from
June 5, 1996
(inception) to
June 30, 2009Cash flows from operating activities:Net loss

$
(20,453,617
)
$
(5,035,841
)
$
(96,056,236
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation


3,349


3,080


99,933Purchase discount accreted as interest income on U.S. Treasury bills





(26,950
)

(26,950
)Stock-based compensation expense


480,648


131,554


18,215,517Purchased in-process research and development (non-cash portion)








6,841,053Interest expense on notes payable


115,018





115,018Stock-based liquidated damages








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


16,736,568





14,145,563Minority interest in net losses of majority owned subsidiary








(335,252
)Changes in operating assets and liabilities:Prepaid expenses


59,756


(33,303
)

Security deposit








(78,116
)Accounts payable and accrued expenses


882,233


(357,265
)

5,706,047Total adjustments


18,277,572


(282,884
)

45,262,510Net cash used in operating activities


(2,176,045
)

(5,318,725
)

(50,793,727
)Cash flows from investing activities:Short term investmentspurchased








(5,921,825
)Short term investmentsliquidated





2,994,640


5,948,775Acquisition of equipment








(117,233
)Net cash used in investing activities





2,994,640


(90,283
)Cash flows from financing activities:Issuance of common and preferred stock








48,719,673Finders fees and expenses








(2,981,083
)Proceeds from sale of 11% Notes


603,163





603,163Proceeds of private placement of majority owned subsidiary's common stock


5,138,500





8,090,413Fees and expenses on private placement of majority owned subsidiary common stock


(157,927
)




(157,927
)Exercise of common stock warrants








318,785Net cash provided by financing activities


5,583,736





54,593,023Net increase (decrease) in cash and cash equivalents


3,407,691


(2,324,085
)

3,709,014Cash and cash equivalents at beginning of period


301,323


3,269,341


Cash and cash equivalents at end of period

$
3,709,014

$
945,256

$
3,709,014


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

12

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Table of Contents

CALLISTO PHARMACEUTICALS, INC.  (A Development Stage Company)        CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS        (Unaudited)

Six months
ended
June 30, 2009

Six months
ended
June 30, 2008

Period from
June 5, 1996
(inception) to
June 30, 2009Supplementary disclosure of cash flow information:Cash paid for taxes

$
17,891

$
11,481

$
179,615Supplementary disclosure of non-cash investing and financing activities:Series A Preferred stock beneficial conversion feature accreted as a dividend

$


$


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

$


$


$
10,495,688


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

13

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Table of Contents

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

1. Business overview:

Callisto Pharmaceuticals, Inc. ("Callisto" or the "Company") is a development stage biopharmaceutical company, whose primary focus is on biopharmaceutical product development.
Since inception in June of 1996, Callisto's efforts have been principally devoted to research and development, securing and protecting patents and raising capital. From inception through
June 30, 2009, Callisto has sustained cumulative net losses available to common stockholders of $110,285,141. Callisto's losses have resulted primarily from expenditures incurred in connection
with research and development activities, application and filing for regulatory approval of proposed products, stock based compensation expense, patent filing and maintenance expenses, purchase of
in-process research and development, outside accounting and legal services, regulatory, scientific and financial consulting fees, change in fair value of derivative financial instruments
(warrants), as well as deemed dividends attributable to the beneficial conversion rights of convertible preferred stock at issuance. From inception on June 5, 1996 through June 30, 2009,
Callisto has not generated any revenue from operations, expects to incur additional losses to perform further research and development activities and does not currently have any commercial
biopharmaceutical products, and does not expect to have such for several years, if at all.

Callisto's
product development efforts are thus in their early stages and Callisto cannot make estimates of the costs or the time they will take to complete. The risk of completion of
any program is high because of the many uncertainties involved in bringing new drugs to market including the long duration of clinical testing, the specific performance of proposed products under
stringent clinical trial protocols, the extended regulatory approval and review cycles, the nature and timing of costs and competing technologies being developed by organizations with significantly
greater resources.

2. Basis of presentation and going concern:

These unaudited condensed consolidated financial statements include Callisto and subsidiaries, (1) Synergy Pharmaceuticals, Inc. consolidated ("Synergy") (a majority owned
subsidiary) and (2) Callisto Research Labs, LLC (a wholly-owned but inactive subsidiary). All intercompany balances and transactions have been eliminated. These unaudited condensed
consolidated financial statements do not include all of the information and footnote disclosures required by GAAP for complete financial statements. These statements should be read in conjunction with
Callisto's audited financial statements and notes thereto for the year ended December 31, 2008, included in Form 10-K filed with the SEC on April 15, 2009. In the
opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, primarily consisting of normal adjustments, necessary for the fair presentation
of the balance sheet and results of operations for the interim periods. The results of operations for the three and six months ended June 30, 2009 are not necessarily indicative of the results
of operations to be expected for the full year ending December 31, 2009. The condensed consolidated balance sheet as of December 31, 2008 was derived from the audited consolidated
financial statements as of that date.

The
condensed consolidated financial statements as of June 30, 2009 and December 31, 2008 have been prepared under the assumption that Callisto will continue as a going
concern for the twelve months ending December 31, 2009. Callisto's ability to continue as a going concern is dependent upon its ability to obtain additional equity or debt financing, attain
further operating efficiencies and, ultimately, to generate revenue. The financial statements do not include any adjustments that might

14

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Table of Contents

CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

2. Basis of presentation and going concern: (Continued)

result
from the outcome of this uncertainty. Callisto will be required to raise additional capital within the next twelve months to complete the development and commercialization of current product
candidates and to continue to fund operations at its current cash expenditure levels.

Net
cash used in operating activities was $2,176,045 during the six months ended June 30, 2009 as compared to $5,318,725 for the six months ended June 30, 2008 and
$50,793,727 for the period from June 5, 1996 (inception) to June 30, 2009. To date, Callisto's sources of cash have been primarily limited to the sale of equity securities. Net cash
provided by financing activities for the six months ended June 30, 2009 was $5,583,736 as compared to $0 for the six months ended June 30, 2008 and $54,593,023 for the period from
June 5, 1996 (inception) to June 30, 2009. Included in net cash provided by financing activities for the six months ended June 30, 2009 was primarily the Synergy private placement
of 7,340,715 shares of unregistered common stock at $0.70 per share to private investors for aggregate proceeds of $5,138,500. Fees to selling agents and other costs of capital associated with the
sale of certain common stock were $157,927.

As
of June 30, 2009 Callisto had a working capital deficit of $1,997,036 as compared to $4,260,826 as of December 31, 2008, accordingly Callisto will be required to raise
additional capital within the next year to complete the development and commercialization of current product candidates and to continue to fund operations at the current cash expenditure levels.
Callisto cannot be certain that additional funding will be available on acceptable terms, or at all. To the extent that Callisto raises additional funds by issuing equity securities, Callisto's
stockholders may experience significant dilution. Any debt financing, if available, may involve restrictive covenants that impact Callisto's ability to conduct business. If Callisto is unable to raise
additional capital when required or on acceptable terms, Callisto may have to (i) significantly delay, scale back or discontinue the development and/or commercialization of one or more product
candidates; (ii) seek collaborators for product candidates at an earlier stage than otherwise would be desirable and on terms that are less favorable than might otherwise be available; or
(iii) relinquish or otherwise dispose of rights to technologies, product candidates or products that Callisto would otherwise seek to develop or commercialize ourselves on unfavorable terms.

On
July 2, 2009, Synergy sold 1,870,000 shares of unregistered common stock, to certain investors at a price of $0.70 per share for aggregate gross proceeds of $1,309,000. On
July 6, 2009, Synergy sold 921,429 shares of unregistered common stock, to certain investors at a per share price of $0.70 for aggregate gross proceeds of $645,000. In July 2009 Synergy
incurred fees to selling agents of $87,073 in connection with its July 2009 private placements.

Recent
worldwide economic conditions and the international equity and credit markets have significantly deteriorated and may remain depressed for the foreseeable future. These
developments will make it more difficult to obtain additional equity or credit financing, when needed. Callisto has accordingly taken steps to conserve cash which include extending payment terms to
our suppliers as well as substantial management and staff salary cuts and deferrals. These actions may not be sufficient to allow the Company time to raise additional capital.

15

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Table of Contents

CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

3. Recent Accounting Pronouncements

In June 2009, the FASB issued SFAS No. 168,"The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting
Principlesa replacement of FASB Statement No. 162("SFAS 168"), to formally establish the FASB Accounting Standards Codification ("Codification") to
become the source of authoritative U.S. generally accepted accounting principles recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and
Exchange Commission ("SEC") under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. The subsequent issuances of new standards will be in the
form of Accounting Standards Updates that will be included in the Codification. Generally, the Codification is not expected to change U.S. GAAP. All other accounting literature excluded from
the Codification will be considered non-authoritative. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009.
The Company will adopt SFAS 168 for our quarter ending September 30, 2009. All future references to authoritative accounting literature will be references in accordance with the
Codification.

In
May 2009, the FASB issued SFAS No. 165, Subsequent Events ("SFAS 165"). SFAS 165 establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before the financial statements are issued. SFAS 165 is effective for interim or annual financial periods
ending after June 15, 2009, and is being applied prospectively. The Company adopted SFAS 165 on June 30, 2009 and has evaluated subsequent events through the date of the issuance
of this report.

In
April 2009, the FASB issued FSP 107-1 and Accounting Principles Board ("APB") 28-1,Interim Disclosures about Fair Value of Financial
Instruments("FSP 107-1"). FSP 107-1 amends SFAS No. 107,Disclosures About Fair Value of Financial
Instruments, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial
statements. FSP 107-1 also amends APB Opinion No. 28,Interim Financial Reporting, to require those disclosures in summarized
financial information at interim reporting periods. FSP 107-1 was effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods
ending after March 15, 2009. FSP 107-1 does not require disclosures for earlier periods presented for comparative purposes at initial adoption. In periods after initial adoption,
FSP 107-1 requires comparative disclosures only for periods ending after initial adoption. The Company adopted the provisions of FSP FAS 107-1 on June 30, 2009,
and its requirements are reflected herein.

In
April 2009, the FASB issued FSP 115-2 and 124-2,Recognition and Presentation of Other-Than-Temporary
Impairments("FSP 115-2 and 124-2"). FSP 115-2 and 124-2 amends the other-than-temporary impairment
guidance for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity
securities in the financial statements. FSP 115-2 and 124-2 does not amend existing recognition and measurement guidance related to other-than-temporary
impairments of equity securities. FSP 115-2 and 124-2 is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for
periods ending after March 15, 2009. FSP 115-2 and 124-2 does not require disclosures for earlier periods presented for comparative purposes at initial adoption. In
periods after initial adoption, FSP 115-2 and 124-2 requires comparative disclosures only for periods ending after

16

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Table of Contents

CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

3. Recent Accounting Pronouncements (Continued)

initial
adoption. Callisto adopted FSP FAS 115-2 and FAS 124-2 on June 30, 2009 and the adoption did not have a material effect on its consolidated
financial position, results of operations or cash flows.

In
April 2009, the FASB issued FSP 157-4,Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly(FSP 157-4"). FSP 157-4 provides additional guidance for estimating fair value in accordance
with SFAS 157 when the volume and level of activity for the asset or liability have significantly decreased. FSP 157-4 also includes guidance on identifying circumstances that
indicate a transaction is not orderly. FSP 157-4 is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending
after March 15, 2009. FSP 157-4 does not require disclosures for earlier
periods presented for comparative purposes at initial adoption. In periods after initial adoption, FSP 157-4 requires comparative disclosures only for periods ending after initial
adoption. Callisto adopted FSP FAS 157-4 on June 15, 2009 and the adoption did not have a material effect on its consolidated financial position, results of operations or
cash flows.

Effective
January 1, 2009, the Company adopted SFAS No. 160,"Non-controlling Interests in Consolidated Financial
Statements." This statement amends Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to establish accounting and reporting standards for a
non-controlling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. This statement clarifies that a non-controlling interest in a subsidiary is an
ownership in the consolidated entity that should be reported as equity in the consolidated financial statements. The adoption of SFAS 160 impacted the presentation and disclosure of
noncontrolling (minority) interests in the Company's condensed consolidated financial statements. SFAS 160 was applied prospectively. The noncontrolling (minority) interest relates to the third
party shareholders of Synergy who own 38.9% of Synergy as of June 30, 2009. The net loss attributable to the Synergy non-controlling interest totaled $1,155,743 during the six
months ended June 30, 2009. This amount was recorded as a reduction in net loss and stockholder's deficit in the condensed consolidated financial statements prospectively after adoption of SFAS
No. 160 on January 1, 2009. The net loss attributable to the non-controlling interest of $1,139,746 for the period from July 14, 2008 (inception of
non-controlling interest) to December 31, 2008 was not retrospectively adjusted in Callisto's Consolidated Financial Statements for the period ended and as of December 31,
2008 because the non-controlling interest had been reduced to zero. If this amount had been recorded, Callisto's net loss available to common stockholders would have been reduced by
$1,139,746 to $89,847,521 from inception through December 31, 2008.

In
June 2008, the FASB ratified the consensus reached on Emerging Issues Task Force ("EITF") Issue No. 07-05,Determining Whether an Instrument
(or Embedded Feature) Is Indexed to an Entity's Own Stock("EITF No. 07-05"). EITF No. 07-05 clarifies the determination of whether an
instrument (or an embedded feature) is indexed to an entity's own stock, which would qualify as a scope exception under SFAS No. 133,Accounting for Derivative
Instruments and Hedging Activities. The Company adopted EITF No. 07-05 on January 1, 2009. See Note 6 below.

In
February 2008, the FASB issued FSP No. 157-2,Partial Deferral of the Effective Date of Statement 157,("FSP
No. 157-2"). FSP No. 157-2 delays the effective date of SFAS No. 157,Fair Value Measurements("SFAS
No. 157") for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least

17

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Table of Contents

CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

3. Recent Accounting Pronouncements (Continued)

annually)
to fiscal years beginning after November 15, 2008. The Company adopted SFAS No. 157 for nonfinancial assets and nonfinancial liabilities on January 1, 2009 and the
adoption did not have a material impact on its consolidated financial position, results of operations or cash flows.

In
December 2007, the FASB ratified EITF Issue No. 07-1,Accounting for Collaborative Arrangements Related to the Development and
Commercialization of Intellectual Property, ("EITF No. 07-1"), which provides guidance on how the parties to a collaborative agreement should account for
costs incurred and revenue generated on sales to third parties, how sharing payments pursuant to a collaboration agreement should be presented in the income statement and certain related disclosure
requirements. EITF No. 07-1 is effective for fiscal years beginning after December 15, 2008, and is to be applied retrospectively to all periods presented for all
collaborative arrangements existing as of the effective date. The Company adopted the provisions of EITF No. 07-1 on January 1, 2009 and the adoption did not have a material
impact on its consolidated financial position, results of operations or cash flows.

4. Accounting for share-based payments

The Company periodically issues stock options and warrants to employees and non-employees in capital raising transactions, for services and for financing costs. The Company
adopted SFAS No. 123R for employee awards effective January 1, 2006, and is using the modified prospective method in which compensation cost is recognized beginning with the effective
date (a) based on the requirements of SFAS No. 123R for all share-based payments granted after the effective date and (b) based on the requirements of APB No. 25 for all
awards granted to employees prior to the effective date of SFAS No. 123R that remained unvested on the effective date.

The
Company accounts for stock option and warrant grants issued and vesting to non-employees in accordance with EITF No. 96-18: "Accounting for Equity
Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services" and EITF No. 00-18 "Accounting Recognition for Certain
Transactions involving Equity Instruments Granted to Other Than Employees" whereas the value of the stock compensation is based upon the measurement date as determined at either a) the date at
which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. Accordingly the fair value of these options is being
"marked to market" quarterly until the measurement date is determined.

18

---



Table of Contents

CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

4. Accounting for share-based payments (Continued)

Callisto options

Stock based compensation expense, related to Callisto employee and non-employee share based payments, has been recognized
in operating results as follow:

Three Months Ended
June 30,

Six Months Ended
June 30,June 5, 1996
(Inception) to
June 30,
20092009

2008

2009

2008Employeesincluded in research and development

$
7,009

$
10,295

$
13,941

$
22,946

$
2,675,826Employeesincluded in general and administrative


9,591


51,200


27,918


104,943


4,777,871Subtotal employee stock option grants


16,600


61,495


41,859


127,889


7,453,697Non-employeeresearch and development





(4,242
)




3,577


102,750Non-employeegeneral and administrative


91,842


(25,770
)

84,503


88


9,924,901Subtotal non-employee stock option grants


91,842


(30,012
)

84,503


3,665


10,027,651Total stock based compensation expense

$
108,442

$
31,483

$
126,362

$
131,554

$
17,481,348


The
unrecognized compensation cost related to employee non-vested Callisto stock options outstanding at June 30, 2009, net of expected forfeitures, was $42,602, to be
recognized over a weighted average vesting period of approximately six months. The weighted-average remaining term of all options outstanding at June 30, 2009 was 4.7 years as compared
to 5.1 years at December 31, 2008.

The
estimated fair value of each employee stock option award was determined on the date of grant using the Black-Scholes option valuation model. Callisto granted no stock options to
employees, and no stock options were exercised, during the three and six months ended June 30, 2009 and 2008.

A
summary of stock option activity and of changes in Callisto stock options outstanding under Callisto's plans is presented below:

Number of
options

Exercise
Price
Per Share

Weighted
Average
Exercise
Price
Per Share

Intrinsic
Value as of
June 30,
2009Balance outstanding, December 31, 2008


7,938,538

$
0.08 - 6.75

$
1.72

$
Granted




$


$
Forfeitures


(35,000
)
$
0.75

$
0.75Balance outstanding, June 30, 2009


7,903,538

$
0.08 - 6.75

$
1.72

$
Exercisable as of June 30, 2009


5,995,205

$
0.47 - 6.75

$
1.64

$



19

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Table of Contents

CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

4. Accounting for share-based payments (Continued)

Synergy Options

Synergy adopted The 2008 Equity Compensation Incentive Plan (the "Plan") during the quarter ended September 30, 2008. Stock
options granted under the Plan typically vest after three years of continuous service from the grant date and have a contractual term of ten years. Synergy did not issue stock options prior to the
quarter ended September 30, 2008. Synergy granted no stock options during the quarter ended June 30, 2009.

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

Three Months
Ended
June 30,

Six Months
Ended
June 30November 15, 2005
(inception) to
June 30, 20092009

2008

2009

2008Employeesincluded in research and development

$
43,055

n/a

$
86,296

n/a

$
165,825Employeesincluded in general and administrative


56,695

n/a


112,769

n/a


225,496Non-employeesincluded in research and development


8,455

n/a


16,817

n/a


25,366Non-employeesincluded in general and administrative


69,585

n/a


138,404

n/a


317,482Total stock-based compensation expense

$
177,790

n/a

$
354,286

n/a

$
734,169


The
unrecognized compensation cost related to non-vested employee stock options outstanding at June 30, 2009, net of expected forfeitures, was $1,029,223, to be
recognized over a weighted-average remaining vesting period of approximately 2.0 years.

A
summary of stock option activity and of changes in stock options outstanding under Synergy's plans is presented below:

Number of
Options

Exercise
Price
Per Share

Weighted
Average
Exercise
Price
Per Share

Intrinsic
Value as of
June 30,
2009Balance outstanding, December 31, 2008


4,080,016

$
0.25 - 0.95

$
0.29

$
8,933,935Granted








Exercised








Forfeited








Balance outstanding, June 30, 2009


4,080,016

$
0.25 - 0.95

$
0.29

$
10,851,543Exercisable at June 30, 2009


74,871

$
0.25

$
0.25

$
202,152


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Table of Contents

CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

4. Accounting for share-based payments (Continued)

Synergy Restricted Stock Units

Restricted Stock Units, which issue to the holder a specified number of shares of Synergy common stock are accounted for as stock based
compensation in accordance with SFAS No. 123R in the same manner as stock options using fair value at the date of grant. Subject to a repurchase agreement, according to which 50% of the units
are released after 1 year of continuous service and the remaining 50% are released after 2 years of continuous service from the grant date. The total fair value is being expensed ratably
by month over the 2 year service period.

On
July 3, 2008, 874,760 restricted stock units were granted by Synergy-DE and assumed by Synergy as part of the Exchange Transaction and are subject to a repurchase
agreement, as defined. These restricted stock units were issued to certain officers and a consultant of Synergy. The fair value of each Synergy restricted stock unit is estimated on the grant date
based on the price paid by shareholders participating in Synergy's July 14, 2008 private placement. As of June 30, 2009 there were 874,760 Synergy restricted stock units outstanding. The
fair value of the 874,760 Synergy restricted stock units on the date of grant was $524,856 of which $49,069 and $97,599 was recorded as stock-based compensation expense during the three and six months
ended June 30, 2009. As of June 30, 2009 the unrecognized fair value of the 437,380 unvested stock units, net of expected forfeitures, was $198,439 to be amortized over 12 months.
The intrinsic value of the 874,760 outstanding restricted stock units was $2,580,542 as of June 30, 2009, measured using the closing stock price of $2.95 per share as of that date.

SFAS
No. 123R requires that cash flows resulting from tax deductions in excess of the cumulative compensation cost recognized for options exercised (excess tax benefits) be
classified as cash inflows from financing activities and cash outflows from operating activities. Due to Synergy's accumulated deficit position, no tax benefits have been recognized in the cash flow
statement.

5. Net Loss per Share

Basic and diluted net loss per share is presented in conformity with SFAS No. 128, "Earnings per Share," for all periods presented. In accordance with SFAS No. 128, basic
and diluted net loss per common share was determined by dividing net loss applicable to common stockholders by the weighted-average common shares outstanding during the period. Diluted
weighted-average shares are the same as basic weighted-average shares since the inclusion of issuable shares pursuant to the exercise of stock options and warrants, and the conversion of preferred
stock would have been antidilutive. The

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CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

5. Net Loss per Share (Continued)

following
table sets forth the potentially dilutive effect of all outstanding derivative instruments which were not included in weighted average common shares outstanding as of:

June 30, 2009

June 30, 2008Common Shares outstanding


50,914,341


47,218,161Potentially dilutive common shares issuable upon:Exercise of warrants


85,050,964


45,162,920Exercise of stock options


7,903,538


7,927,038Conversion of Series A Convertible Preferred Stock


1,760,000


4,298,500Conversion of Series B Convertible Preferred Stock


21,583,320


22,741,000Total fully diluted


167,212,163


127,347,619


6. Derivative Financial Instruments

Effective January 1, 2009, the Company adopted EITF Issue No. 07-05, "Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity's Own
Stock" ("EITF 07-05"). EITF 07-05 clarifies the determination of whether an instrument issued by an entity (or an embedded feature in the instrument) is indexed
to an entity's own stock, which would qualify as a scope exception under SFAS 133.

Based
upon the Company's analysis of the EITF 07-05 criteria, certain warrants (the "New Warrants") issued in connection with the issuance of the 11% Notes (see
Note 8 below) must now be treated as derivative liabilities in the Company's statement of financial position. Prior to the adoption of EITF 07-05, the Company accounted for
the Warrants as components of stockholders' equity under SFAS 133.

Consistent
with EITF 07-05's requirements, the Company recognized the cumulative effect of the change in accounting principle to reduce the opening balance of the
deficit accumulated during the development stage for fiscal year 2009. The cumulative effect adjustment of $1,903,900 represents the difference between the amounts recognized in the statement
financial position before initial application of EITF 07-05 on January 1, 2009 and the initial fair value of the warrants. Additionally, the initial relative fair value of
the Warrants, aggregating $181,732, which were initially recorded as additional paid-in capital upon issuance, was reclassified to long-term liabilities upon adoption of
EITF 07-05. (See Note 8.) The total amount recognized at initial issuance of $2,085,632 was determined based on the estimated fair value of the New Warrants using a
Black-Scholes option pricing model.

Prospectively,
the New Warrants will be re-measured at each balance sheet date based on estimated fair value, and any resultant changes in fair value will be recorded as
non-cash valuation adjustments within other income (expense) in the Company's statement of operations. The following

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Table of Contents

CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

6. Derivative Financial Instruments (Continued)

table
sets forth the components of changes in the Company's long term derivative financial instruments liability balance for the periods indicated:

Date

Description

New Warrants

Derivative
Instrument
Liability12/31/2008

Initial relative fair value of New Warrants, upon issuance


23,219,105

$
181,73201/01/2009

Cumulative effect adjustment upon adoption of EITF 07-05




$
1,903,90001/01/2009

Fair value of New Warrants upon adoption of EITF 07-05


23,219,105

$
2,085,63203/31/2009

Change in fair value of warrants outstanding on December 31, 2008 during the quarter ended March 31,
2009.




$
(232,505
)01/31/2009

Fair value of New Warrants issued during the quarter ended March 31, 2009, on date of issuance.


5,633,726

$
562,27003/31/2009

Change in fair value of New Warrants issued during the quarter ended March 31, 2009.




$
(112,662
)03/31/2009

Balance of derivative financial instruments March 31, 2009


28,852,831

$
2,302,73506/30/2009

Change in fair value of warrants outstanding on March 31, 2009, during the quarter ended June 30, 2009




$
5,712,51306/17/2009

Fair value of New Warrants issued during the quarter ended June 30, 2009, on date of issuance.


40,236,218

$
4,365,62006/30/2009

Change in fair value of New Warrants issued during the quarter ended June 30, 2009.




$
6,812,32506/30/2009

Balance of derivative financial instruments June 30, 2009


69,089,049

$
19,193,193


7. Fair Value Measurements

The Company estimates the fair value of the New Warrants using the Black-Scholes option pricing model. The assumptions used for the three and six months ended June 30, 2009 are
noted in the following table:

Three Months Ended
June 30, 2009

Six Months Ended
June 30, 2009Expected option term


7.5 years

7.5 to 8 yearsRisk-free interest rate


3.33
%
2.27% to 3.33%Expected volatility


150
%
150% to 200%Dividend yield


0
%
0%


Expected
volatility is based on historical volatility of the Company's common stock. The New Warrants have a transferability provision and based on guidance provided in
SAB 107 for options issued with such a provision, we used the full contractual term as the expected term of the New Warrants. The risk free rate is based on the U.S. Treasury security rates
consistent with the expected term of the New Warrants.

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Table of Contents

CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

7. Fair Value Measurements (Continued)

The
unrealized losses on the derivative liabilities are classified in other expenses as a change in derivative liabilities in the Company's statement of operations. A financial
instrument's level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. At each reporting period, the Company performs a
detailed analysis of the assets and liabilities that are subject to SFAS 157. At each reporting period, all assets and liabilities for which the fair value measurement is based on significant
unobservable inputs or instruments which trade infrequently and therefore have little or no price transparency are classified as Level 3.

The
following table presents the Company's liabilities that are measured and recognized at fair value on a recurring basis classified under the appropriate level of the fair value
hierarchy as of June 30, 2009:

Description

Quoted
Prices in
Active
Markets for
Identical
Assets and
Liabilities
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Balance as of
June 30,
2009Derivative liabilities related to Warrants

$


$


$
19,193,193

$
19,193,193


The
following table sets forth a summary of changes in the fair value of the Company's Level 3 liabilities for the six months ended June 30, 2009:

Description

Balance at
December 31,
2008

Cumulative
Effect of the
Adoption of
EITF 07-05
(See Note 4)

Unrealized
Losses

Balance as of
June 30,
2009Derivative liabilities related to Warrants

$


$
2,085,632

$
17,107,561

$
19,193,193


8. Stockholders' deficit

During the six months ended June 30, 2009, 10,000 shares of Series A Convertible Preferred Stock were converted to 200,000 shares of common stock and 57,884 shares of
Series B Convertible Preferred Stock were converted to 1,157,680 shares of common stock, at conversion price of $0.50 per share.

On
December 30, 2008, Callisto entered into a securities purchase and exchange agreement ("Purchase Agreement") with several investors, each of whom were holders of record as of
November 4, 2008 of outstanding warrants to purchase shares of the Company's common stock, exercisable at $0.50 or $0.70 per share until August 2, 2010 ("Series B Warrants"). The
Series B Warrants were issued in connection with the private placement of the Company's Series B Preferred Shares on August 2, 2007. During the period from December 30,
2008 to June 30, 2009, pursuant to the Purchase Agreement, Callisto issued $603,163 principal amount of 11% Secured Notes due April 15, 2010 ("11% Notes"). Interest on the 11% Notes is
due at maturity and repayment of the 11% Notes is secured by a pledge of up to 2,292,265 shares of the common stock of Synergy owned by Callisto. Pursuant to the Purchase Agreement, Callisto issued
69,089,049 common stock purchase

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Table of Contents

CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

8. Stockholders' deficit (Continued)

warrants
(see Note 6) ("New Warrants") in exchange for the surrender and cancellation of 26,938,800 outstanding Series B Warrants. The New Warrants have an exercise price, subject to
certain anti-dilution adjustments, of $0.02 per share and are exercisable at any time on or prior to December 31, 2016. In connection with the issuance of $349,880 of the $603,163
11% Notes in June 2009, Callisto entered into an additional security agreement granting all of the holders of the 11% Notes a security interest in the Atiprimod technology acquired by the
Company in December 2008.

The
proceeds from the issuance of these instruments were allocated to the 11% Notes and the New Warrants based upon the relative fair values of the 11% Notes and the New Warrants. The
New Warrants had a fair value of $6,781,471 upon issuance, measured utilizing the Black Scholes fair value methodology using assumptions ranging from 7.5 to 8 years for expected term,
volatility of 150% to 200%, no dividends and risk free interest rates ranging from 1.76% to 3.33%. This resulted in a debt discount of $552,728 apportioned to the New Warrants recorded as additional
paid in capital and the balance of $20,176 was reflected on the Company's balance sheet as long term notes as of December 31, 2008. The debt discount of $552,728 will be accreted to the 11%
Notes as interest expense over the life of the 11% Notes and such accretion totaled $65,215 and $100,015 for the three and six months ended June 30, 2009, respectively. The following table
summarizes the financial impact the 11% Notes payable and the related interest expense for the period from December 30, 2008 through June 30, 2009:

11% Notes
Payable

Interest
expense11% Notes issued during the year ended December 31, 2008

$
201,908

$
Apportionment of net proceeds to 2008 New Warrants recorded as additional paid in capital (11% Note discount)


(181,732
)11% Notes balance at December 31, 2008


20,176


11% Notes issued during the three months ended March 31, 2009


51,374Accretion of 11% Note discount to interest expense


34,800


34,80011% nominal interest expense


6,686


6,68611% Notes balance March 31, 2009

$
113,036

$
41,48611% Notes issued during the three months ended June 30, 2009


349,880Apportionment of net proceeds to 2008 New Warrants recorded as additional paid in capital (11% Note discount)


(370,996
)Accretion of 11% Note discount to interest expense


65,215


65,21511% nominal interest expense


8,317


8,31711% Notes Balance June 30, 2009

$
165,452

$
115,018


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Table of Contents

CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

8. Stockholders' deficit (Continued)

During
the six months ended June 30, 2009 Synergy sold 7,340,715 shares of unregistered common stock at $0.70 per share to private investors, pursuant to a
Securities Purchase Agreement, for aggregate proceeds of $5,138,500. There were no warrants issued in connection with these transactions, although Synergy incurred $147,927 in fees to selling agents
and $10,000 in legal fees in connection with certain of these transactions. Pursuant to the Securities Purchase Agreement the investors agreed to be subject to a lock-up until
August 15, 2010 and Synergy agreed to price protection for the investors in the event of subsequent sales of equity securities as defined, until February 15, 2011.

9. Subsequent events

On July 2, 2009, Synergy sold 1,870,000 shares of common stock, to certain investors at a per share price of $0.70 for aggregate gross proceeds of $1,309,000. On July 6,
2009, Synergy sold an additional 921,429 shares of common stock, to certain investors at a per share price of $0.70 for aggregate gross proceeds of $645,000. In July 2009 Synergy incurred fees to
selling agents of $87,073 in connection with its July 2009 private placements.

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Table of Contents

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our condensed consolidated financial statements and other financial
information appearing elsewhere in this quarterly report. In addition to historical information, the following discussion and other parts of this quarterly report contain forward-looking statements.
You can identify these statements by forward-looking words such as "may," "will," "expect," "intend," "anticipate," believe," "estimate" and "continue" or similar words. Forward-looking statements
include information concerning possible or assumed future business success or financial results. You should read statements that contain these words carefully because they discuss future expectations
and plans, which contain projections of future results of operations or financial condition or state other forward-looking information. We believe that it is important to communicate future
expectations to investors. However, there may be events in the future that we are not able to accurately predict or control. Accordingly, we do not undertake any obligation to update any
forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

The
forward-looking statements included herein are based on current expectations that involve a number of risks and uncertainties set forth under "Risk Factors" in our Annual Report on
Form 10-K for the year ended December 31, 2008 and other periodic reports filed with the SEC. Accordingly, to the extent that this Report contains forward-looking statements
regarding the financial condition, operating results, business prospects or any other aspect of the Company, please be advised that Callisto's actual financial condition, operating results and
business performance may differ materially from that projected or estimated by the Company in forward-looking statements.

Callisto
Pharmaceuticals, Inc. (which may be referred to as "Callisto", "the Company", "we" or "us") was incorporated under the laws of the State of Delaware in May 2003. Our
principal offices are located at 420 Lexington Avenue, Suite 1609, New York, NY 10170. We are a development stage biopharmaceutical company focused primarily on the development of drugs to
treat neuroendocrine cancer (including advanced carcinoid cancer), rheumatoid arthritis ("RA"), acute leukemia and gastrointestinal ("GI") disorders and diseases. Our current drug candidates are as
follows:



From
inception through June 30, 2009, we have sustained cumulative net losses available to common stockholders of $110,285,141. Our losses have resulted primarily from
expenditures incurred in connection with research and development activities, application and filing for regulatory approval of proposed products, stock-based compensation expense, patent filing and
maintenance expenses, purchase of in-process research and development, outside accounting and legal services and regulatory, scientific and financial consulting fees, as well as deemed
dividends attributable to the beneficial conversion rights of convertible preferred stock at issuance and the change in fair value of derivative financial instruments. From inception through
June 30, 2009, we have not generated any revenue from operations, expect to incur additional losses to perform further research and development activities and do not currently have any
commercial biopharmaceutical products, and do not expect to have such for several years, if at all.

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Our
product development efforts are thus in their early stages and we cannot make estimates of the costs or the time they will take to complete. The risk of completion of any program is
high because of the many uncertainties involved in bringing new drugs to market including the long duration of clinical testing, the specific performance of proposed products under stringent clinical
trial protocols, the extended regulatory approval and review cycles, our ability to raise additional capital, the nature and timing of research and development expenses and competing technologies
being developed by organizations with significantly greater resources.

We
will be required to raise additional capital within the next year to complete the development and commercialization of current product candidates and to continue to fund operations at
the current cash expenditure levels. We cannot be certain that additional funding will be available on acceptable terms, or at all. To the extent that we raise additional funds by issuing equity
securities, our stockholders may experience significant dilution. Any debt financing, if available, may involve restrictive covenants that impact our ability to conduct business. If we is unable to
raise additional capital when required or on acceptable terms, we may have to (i) significantly delay, scale back or discontinue the development and/or commercialization of one or more product
candidates; (ii) seek collaborators for product candidates at an earlier stage than otherwise would be desirable and on terms that are less favorable than might otherwise be available; or
(iii) relinquish or otherwise dispose of rights to technologies, product candidates or products that we would otherwise seek to develop or commercialize ourselves on unfavorable terms.

Recent
worldwide economic conditions and the international equity and credit markets have significantly deteriorated and may remain depressed for the foreseeable future. These
developments will make it more difficult to obtain additional equity or credit financing, when needed. We have accordingly taken steps to conserve cash which include extending payment terms to our
suppliers as well as substantial management and staff salary cuts and deferrals.

Recent Developments

During the six months ended June 30, 2009 Synergy sold 7,340,715 shares of unregistered common stock at $0.70 per share to
private investors for aggregate proceeds of $5,138,500. On July 2, 2009, Synergy sold 1,870,000 shares of common stock, to certain investors at a per share price of $0.70 for aggregate gross
proceeds of $1,309,000. On July 6, 2009, Synergy sold an additional 921,429 shares of common stock, to certain investors at a per share price of $0.70 for aggregate gross proceeds of $645,000.
During July 2009 Synergy paid an aggregate $235,000 to selling agents in connection with certain of these 2009 private placements.

On
January 27, 2009, we announced that we were focusing all further development of Atiprimod towards the treatment of RA. We recognized that although the ongoing Phase II
clinical trial of Atiprimod in advanced carcinoid cancer gave encouraging results, the data were not sufficiently demonstrative to warrant further development of Atiprimod in this indication. We
announced, instead, our intention that based on Atiprimod's demonstrated favorable clinical safety profile, robustly supported by earlier studies of Atiprimod in RA patients, as well as by the recent
oncology trials in advanced carcinoid cancer patients, where the drug was dosed at levels and frequencies considerably higher than anticipated for use in RA, we believe that Atiprimod holds
significant promise as a new class of orally-administered, disease-modifying agent in RA.

On
December 30, 2008, we entered into a securities purchase and exchange agreement ("Purchase Agreement") with several investors, each of whom were holders of record as of
November 4, 2008 of outstanding warrants to purchase shares of the Company's common stock, exercisable at $0.50 or $0.70 per share until August 2, 2010 ("Series B Warrants"). The
Series B Warrants were issued in connection with the private placement of the Company's Series B Preferred Shares on August 2, 2007. During the period from December 30,
2008 to June 30, 2009, pursuant to the Purchase Agreement, we issued

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$603,163
principal amount of 11% Secured Notes due April 15, 2010 ("11% Notes"). Interest on the 11% Notes is due at maturity and repayment of the 11% Notes is secured by a pledge of up to
2,292,265 shares of the common stock of Synergy which we own. Pursuant to the Purchase Agreement, we also issued 69,089,049 common stock purchase New Warrants in exchange for the surrender and
cancellation of 26,938,800 outstanding Series B Warrants. The New Warrants have an exercise price, subject to certain anti-dilution adjustments, of $0.02 per share and are
exercisable at any time on or prior to December 31, 2016. In connection with the issuance of $349,880 of the $603,163 11% Notes in June 2009, we entered into an additional security agreement
granting all of the holders of the 11% Notes a security interest in the Atiprimod technology acquired by the Company in December 2008.

OFF-BALANCE SHEET ARRANGEMENTS

We had no off-balance sheet arrangements as of June 30, 2009.

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2009 AND JUNE 30, 2008

We had no revenues during the three months ended June 30, 2009 and 2008 because we do not have any commercial biopharmaceutical
products and we do not expect to have such products for several years, if at all.

Research
and development expenses increased $80,518 or 8% to $1,145,063 for the three months ended June 30, 2009 from $1,064,545 for the three months ended June 30, 2008.
This increase in research and development expense was attributable to a re-energized development program for Synergy's SP-304 candidate as Synergy was able to raise capital
during the quarter. This was partially offset by a significant curtailment of all Callisto's cancer drug development due to lack of funding. Program expenses include those incurred with outside
contract research organizations ("CROs") for pre-clinical animal testing, drug formulation, tableting as well as hospital patient costs, blood testing and FDA consultants. Our
SP-304 program expenses increased by approximately $326,000 or 48% to approximately $1,007,000 for the three months ended June 30, 2009 from approximately $681,000 during the three
months ended June 30, 2008, principally due to the purchase of drug substance. Offsetting this were lower Atiprimod program expenses which decreased by approximately $170,000 or 100% to $0 for
the three months ended June 30, 2009 from approximately $170,000 during the three months ended June 30, 2008, and lower Annamycin program expenses which decreased by approximately
$75,000 or 77% to approximately $22,000 for the three months ended June 30, 2009 from approximately $97,000 during the three months ended June 30, 2008. Research and development
in-house overhead, not allocated to specific programs, totaled approximately $123,000 and $130,000 during the three months ended June 30, 2009 and 2008, respectively. This decrease
was attributable to lower compensation costs as a result of terminating in-house clinical monitors.

General
and administrative expenses for the three months ended June 30, 2009 increased $84,980 or 8%, to $1,102,595 for the three months ended June 30, 2009 from $1,017,615
for the three months ended June 30, 2008. This increase was primarily due to higher stock based compensation expense which increased by approximately $200,000 or 795% to approximately $227,000
during the three months ended June 30, 2009, attributable to new Synergy stock options. This non-cash increase during the three months ended June 30, 2009 was partially
offset by a significant reduction of cash-based expenditures for (i) facilities and related overhead, lower by approximately $91,000 or 52%, as well as (ii) legal and
accounting fees which decreased by approximately $32,000 or 20%, as compared to the three months ended June 30, 2008.

Net
loss available to common stockholders for the three months ended June 30, 2009 increased $15,959,705 or 781% to $18,003,788 compared to a net loss of $2,044,083 incurred for
the three months ended June 30, 2008. The increased net loss is the result of higher research and development, and

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general
and administrative expenses discussed above, plus (i) lower interest income ($8,063) attributable to lower cash balances, (ii) higher interest expense ($73,532) attributable to
the newly issued 11% Notes and (iii) a $16,519,465 non-cash charge incurred to increase the estimated fair value of the derivative liabilities during the three months ended
June 30, 2009, partially offset by (iv) a credit of $836,853 for the net losses attributable to the non-controlling (minority) interest in Synergy, our majority owned
subsidiary.

SIX MONTHS ENDED JUNE 30, 2009 AND JUNE 30, 2008

We had no revenues during the six months ended June 30, 2009 and 2008 because we do not have any commercial biopharmaceutical
products and we do not expect to have such products for several years, if at all.

Research
and development expenses decreased $1,538,443 or 50% to $1,543,085 for the six months ended June 30, 2009 from $3,081,528 for the six months ended June 30, 2009.
This decrease in research and development expense was attributable to significant curtailment in all program expenses incurred with outside contract research organizations ("CROs"), including animal
testing, drug formulation, hospital patient costs, monitoring, blood testing and FDA consultants. Our SP-304 program expenses decreased by approximately $975,000 or 45% to approximately
$1,182,000 for the six months ended June 30, 2009 from approximately $2,157,000 during the six months ended June 30, 2008. Also contributing to this reduction were lower Atiprimod
program expenses which decreased by approximately $179,000 or 90% to approximately $20,000 for the six months ended June 30, 2009 from approximately $199,000 during the six months ended
June 30, 2008, and lower Annamycin program expenses which decreased by approximately $144,000 or 68% to approximately $68,000 for the six months ended June 30, 2009 from approximately
$212,000 during the six months ended June 30, 2008. Research and development in-house overhead, not allocated to specific programs, totaled approximately $271,000 and $512,000
during the six months ended June 30, 2009 and 2008, respectively, a decrease of approximately $241,000, or 47%. This decrease was attributable to lower compensation costs as a result of
terminating in-house clinical monitors.

General
and administrative expenses for the six months ended June 30, 2009 increased $21,000 or 1%, to $2,059,171 for the six months ended June 30, 2009 from $2,037,927 for
the six months ended June 30, 2008. This increase was primarily due to higher stock based compensation expense which increased by approximately $258,000 or 246% to approximately $363,000 during
the six months ended June 30, 2009, attributable to new Synergy stock options. This non-cash increase during the six months
ended June 30, 2009 was partially offset by a significant reduction of cash-based expenditures for (i) facilities and related overhead, lower by approximately $150,000 or
44%, (ii) legal and accounting fees, lower by approximately $44,000 or 15%, as well as (iii) lower travel and entertainment expenses, which decreased by approximately $43,000 or 35% as
compared to the six months ended June 30, 2008.

Net
loss available to common stockholders for the six months ended June 30, 2009 increased $14.3 million or 283% to $19.3 million compared to a net loss of
$5.0 million incurred for the six months ended June 30, 2008. The increased net loss is the result of lower research and development, and higher general and administrative expenses
discussed above, plus (i) $53,389 of lower interest and investment income attributable to lower cash balances, (ii) $115,018 of higher interest expense attributable to the newly issued
11% Notes and (iii) a $16,736,568 non-cash charge incurred to increase the estimated fair value of the derivative liabilities during the six months ended June 30, 2009,
partially offset by (iv) a credit of $1,155,743 for the net losses attributable to the non-controlling (minority) interest in Synergy, our majority owned subsidiary.

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LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2009 we had $3,709,014 in cash and cash equivalents, compared to $301,323 as of December 31, 2008. We had
a working capital deficit of $1,997,036 as of June 30, 2009 as compared to a working capital deficit of $4,260,826 as of December 31, 2008.

Net
cash used in operating activities was $2,176,045 during the six months ended June 30, 2009 as compared to $5,318,725 for the six months ended June 30, 2008 and
$50,793,727 for the period from June 5, 1996 (inception) to June 30, 2009. To date, our sources of cash have been primarily limited to the sale of equity securities. Net cash provided by
financing activities for the six months ended June 30, 2009 was $5,583,736 as compared to $0 for the six months ended June 30, 2008 and $54,593,023 for the period from June 5,
1996 (inception) to June 30, 2009. Included in net cash provided by financing activities for the six months ended June 30, 2009 was primarily the Synergy private placement of 7,340,715
shares of unregistered common stock at $0.70 per share to a private investors for aggregate proceeds of $5,138,500. Fees to selling agents and other costs associated with this sale of common stock
were $157,927.

On
December 30, 2008, we entered into a securities purchase and exchange agreement ("Purchase Agreement") with several investors, each of whom were holders of record as of
November 4, 2008 of
outstanding warrants to purchase shares of the Company's common stock, exercisable at $0.50 or $0.70 per share until August 2, 2010 ("Series B Warrants"). The Series B Warrants
were issued in connection with the private placement of our Series B Preferred Shares on August 2, 2007. During the period from December 30, 2008 to June 30, 2009, pursuant
to the Purchase Agreement, we issued $603,163 principal amount of 11% Secured Notes due April 15, 2010 ("11% Notes"). Interest on the 11% Notes is due at maturity and repayment of the 11% Notes
is secured by a pledge of up to 2,292,265 shares of the common stock of Synergy we own and the intellectual property associated with Atiprimod. In connection with the issuance of $349,880 of the
$603,163 11% Notes in June 2009, we entered into an additional security agreement granting all of the holders of the 11% Notes a security interest in the Atiprimod technology acquired by the
Company in December 2008.

On
July 2, 2009, Synergy sold 1,870,000 shares of common stock, to certain investors at a per share price of $0.70 for aggregate gross proceeds of $1,309,000. On July 6,
2009, Synergy sold an additional 921,429 shares of common stock, to certain investors at a per share price of $0.70 for aggregate gross proceeds of $645,000. In July 2009 Synergy incurred fees to
selling agents of $87,073 in connection with its July 2009 private placements.

Worldwide
economic conditions and the international equity and credit markets have significantly deteriorated and may remain depressed for the foreseeable future. These developments will
make it more difficult for us to obtain additional equity or credit financing, when needed. We have accordingly taken steps to conserve our cash which include extending payment terms to our vendors
and suppliers as well as management and staff cuts and salary deferrals. These actions may not be sufficient to allow us time to raise additional capital.

Our
working capital requirements will depend upon numerous factors including but not limited to the nature, cost and timing of pharmaceutical research and development programs. We will
be required to raise additional capital within the next twelve months to complete the development and commercialization of current product candidates, to fund the existing working capital deficit and
to continue to fund operations at our current cash expenditure levels. To date, our sources of cash have been primarily limited to the sale of equity securities. We cannot be certain that additional
funding will be available on acceptable terms, or at all. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience significant dilution. Any debt
financing, if available, may involve restrictive covenants that impact our ability to conduct business. If we are unable to raise additional capital when required or on acceptable terms, we may have
to (i) significantly delay, scale back or discontinue the development and/or commercialization of one or more of product candidates;

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(ii) seek
collaborators for product candidates at an earlier stage than otherwise would be desirable and on terms that are less favorable than might otherwise be available; or
(iii) relinquish license or otherwise dispose of rights to technologies, product candidates or products that we would otherwise seek to develop or commercialize ourselves on unfavorable terms.

Our
consolidated financial statements as of June 30, 2009 and December 31, 2008 have been prepared under the assumption that we will continue as a going concern for the
twelve months ending December 31, 2009. Our independent registered public accounting firm has issued a report dated April 15, 2009 that included an explanatory paragraph referring to our
recurring losses from operations and net capital deficiency and expressing substantial doubt in our ability to continue as a going concern without additional capital becoming available. Our ability to
continue as a going concern is dependent upon our ability to obtain additional equity or debt financing, attain further operating efficiencies and, ultimately, to generate revenue. The financial
statements do not include any adjustments that might result from the outcome of this uncertainty.

CRITICAL ACCOUNTING POLICIES

Financial Reporting Release No. 60 requires all companies to include a discussion of critical accounting policies or methods
used in the preparation of financial statements. Our accounting policies are described in ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA of our Annual Report on Form 10-K as of
and for years ended December 31, 2008 and 2007, filed with the SEC on April 15, 2009.

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

Derivative Instruments Liability

Effective January 1, 2009, we adopted EITF Issue No. 07-05, "Determining Whether an Instrument (or Embedded
Feature) Is Indexed to an Entity's Own Stock" ("EITF 07-05"). EITF 07-05 clarifies the determination of whether an instrument issued by an entity (or an embedded
feature in the instrument) is indexed to an entity's own stock, which would qualify as a scope exception under SFAS 133.

Based
upon our analysis of the EITF 07-05 criteria, certain warrants (the "New Warrants") issued in connection with the issuance of the 11% Notes must now be treated
as derivative liabilities in our balance sheet. Prior to the adoption of EITF 07-05, we accounted for
the Warrants as components of stockholders' equity under SFAS 133. Prospectively, the New Warrants will be re-measured at each balance sheet date based on estimated fair value, and
any resultant changes in fair value will be recorded as non-cash valuation adjustments within other income (expense) in the our statement of operations. (See Note 6, 7 and 8 to our
condensed consolidated financial statements for a more detailed discussion of the financial impact of these accounting policies).

During
the six months ended June 30, 2009 the change in estimated fair value of derivative financial instruments has resulted in an expense of $16,736,568 or approximately 15% of
our net loss available to common stockholders of $110,285,141.

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Research and Development

We do not currently have any commercial biopharmaceutical products, and do not expect to have such for several years, if at all and
therefore our research and development costs are expensed as incurred. These include expenditures in connection with an in-house research and development laboratory, salaries and staff
costs, application and filing for regulatory approval of our proposed products, purchase of in-process research and development, regulatory and scientific consulting fees, contract
research and royalty payments to outside suppliers, facilities and universities as well as legal and professional fees associated with filing and maintaining our patent and license rights to our
proposed products. While certain of our research and development costs may have future benefits, our policy of expensing all research and development expenditures is predicated on the fact that we
have no history of successful commercialization of biopharmaceutical products to base any estimate of the number of future periods that would be benefited.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

There have been no changes in our contractual obligations and commitments during the three months ended June 30, 2009.

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk on the fair values of certain assets is related to credit risk associated with securities held in short
term investment accounts, commercial paper included in short term money market accounts. At June 30, 2009 we had no money market balances and no exposure to market risk.

ITEM 4T.    CONTROLS AND PROCEDURES

Based on an evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) of the Securities Exchange Act of 1934, as amended) required by paragraph (b) of Rule 13a-15 or Rule 15d-15, as of June 30,
2009, our Chief Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures were not effective in ensuring that information required to be disclosed by
us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms.

In
connection with the preparation of our annual financial statements, our management performed an assessment of the effectiveness of internal control over financial reporting as of
December 31, 2008. Management's assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of those controls.
Based on this evaluation, management determined that, as of December 31, 2008, there were material weaknesses in our internal control over financial reporting. The material weaknesses
identified during management's assessment were (i) a lack of sufficient internal accounting expertise to provide reasonable assurance that our financial statements and notes thereto, are
prepared in accordance with generally accepted accounting principles (GAAP) and (ii) a lack of segregation of duties to ensure adequate review of financial statement preparation. In light of
these material weaknesses, management concluded that, as of December 31, 2008, we did not maintain effective internal control over financial reporting. As defined by the Public Company
Accounting Oversight Board Auditing Standard No. 5, a material weakness is a deficiency or a combination of deficiencies, such that there is a reasonable possibility that a material
misstatement of the annual or interim financial statements will not be prevented or detected.

In
designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply

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its
judgment in evaluating the relationship between the benefit of desired controls and procedures and the cost of implementing new controls and procedures.

The
condensed consolidated financial statements as of and for the period ended June 30, 2009 include all adjustments identified as a result of the evaluation performed.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

As of June 30, 2009 we are planning to remediate the material weaknesses which existed at December 31, 2008 by adding
financial staff resources to our accounting and finance department when funding becomes available. Management believes this will substantially reduce the risk of a material misstatement resulting from
the material weaknesses described above. However, it will require a period of time to determine the operating effectiveness of these newly implemented internal controls over financial reporting.

Other
than described above there were no changes in our internal controls over financial reporting that could significantly affect internal controls over financial reporting during the
three months ended June 30, 2009.

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PART IIOTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

There have been no material changes from the legal proceedings disclosed in our Form 10-K for the year ended
December 31, 2008.

ITEM 1A.    RISK FACTORS

There have been no material changes from the risk factors disclosed in our Form 10-K for the year ended
December 31, 2008.

ITEM 6.    EXHIBITS

| |      |  |                                                                                                                                                      
| | ---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------
| | 31.1 |  | Certification of Chief Executive Officer required under Rule 13a-14(a)/15d-14(a) under the Exchange Act.                                             
| | 31.2 |  | Certification of Principal Financial Officer required under Rule 13a-14(a)/15d-14(a) under the Exchange Act.                                         
| | 32.1 |  | Certification of Chief Executive Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.    
| | 32.2 |  | Certification of Principal Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

CALLISTO PHARMACEUTICALS, INC.(Registrant)Date: August 14, 2009

By:

/s/ GARY S. JACOB Gary S. Jacob Chief Executive OfficerDate: August 14, 2009

By:

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


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