UNITED STATES ~~SECURITIES AND EXCHANGE COMMISSION~~

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: September 30, 2011
or
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 2012

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

For the transition period from to

Commission File Number: 001-32325

CALLISTO PHARMACEUTICALS, INC.

(Exact name of Registrant as specified in its charter)

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

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

(Address of principal executive offices) (Zip Code)

(212) 297-0010

(Registrant’s telephone number)

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

Indicate by check 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 x 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 x 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 ~~Smaller reporting company x~~ (Do not check if a smaller reporting company) Smaller reporting company x

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

The number of the registrant’s shares of common stock outstanding was 158,516,~~071~~071as as of ~~November~~May 1114, ~~2011~~2012.

Table of Contents

CALLISTO PHARMACEUTICALS, INC.

FORM 10-Q

CONTENTS

		Page Number
PART I—FINANCIAL INFORMATION
PART I—FINANCIAL INFORMATION		4
	Item 1.	Financial Statements	4
Item 1.	Financial Statements	4
		Condensed Consolidated Balance Sheets as of March 31, 2012 (unaudited) and December 31, 2011	4
	Condensed Consolidated Balance Sheets as of September 30, 2011 (unaudited) and December 31, 2010	4
		Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2012 and 2011 (unaudited) and the period June 5, 1996 (Inception) to March 31, 2012 (unaudited)	5
	Condensed Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2011 and 2010 (unaudited) and the period June 5, 1996 (Inception) to September 30, 2011 (unaudited)	5
		Condensed Consolidated Statements of Changes in Stockholders’ Equity for the period June 5, 1996 (Inception) to March 31, 2012 (unaudited)	6
	Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the period June 5, 1996 (Inception) to September 30, 2011 (unaudited)	6
		Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2012 and 2011 (unaudited) and for the period June 5, 1996 (Inception) to March 31, 2012 (unaudited)	15
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2011 and 2010 (unaudited) and for the period June 5, 1996 (Inception) to September 30, 2011 (unaudited)	15
		Notes to Condensed Consolidated Financial Statements (unaudited)	17
	Notes to Condensed Consolidated Financial Statements (unaudited)	17
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32
	Item 4.	Controls and Procedures	29
Item 4.	Controls and Procedures	32
PART II—OTHER INFORMATION
PART II—OTHER INFORMATION		34
	Item 1	Legal Proceedings	31
Item 6.	Exhibits	34
	Item 1A.	Risk Factors	31
Signatures		35
	Item 2.	Properties	31
	Item 6.	Exhibits	31
Signatures			32

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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 “plan,” “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, ~~2010~~2011, as ~~and~~filed ~~other~~with ~~periodic~~the ~~reports~~Securities ~~filed~~Exchange ~~with~~Commission ~~the~~on ~~SEC.~~March 30, 2012. Accordingly, to the extent that this Report contains forward-looking statements regarding the financial condition, operating results, business prospects or any other aspect of the Company, please be advised that Callisto’s actual financial condition, operating results and business performance may differ materially from that projected or estimated by the Company in forward-looking statements. All drug candidates to treat GI disorders and diseases, currently plecanatide and SP-333, are being developed exclusively by Synergy Pharmaceuticals, Inc., our controlled subsidiary (“Synergy”). Use of the terms “we”, “our” or “us” in connection with GI drug candidates discussed herein refer to research and development activities and plans of Synergy.

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

CALLISTO PHARMACEUTICALS, INC.

(A Development Stage Company)

CONDENSED CONSOLIDATED BALANCE SHEETS

	September 30, 2011			December 31, 2010
	March 31, 2012			December 31, 2011
	(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	676,~~473~~123,418		$	113,~~708~~244,~~982~~961
Prepaid expenses and other	~~845~~1,~~089~~268,642			~~769~~796,~~403~~028
Tax credits receivable	—377,865			~~781~~377,~~127~~865
Total Current Assets	~~912~~7,~~562~~769,925			314,~~259~~418,~~512~~854
Property and equipment, net	65,~~269~~282			95,~~397~~774
Security deposits	87,740			87,740
Total Assets	$	17,~~006~~862,~~571~~947		$	314,~~356~~512,~~649~~368
LIABILITIES AND STOCKHOLDERS’ DEFICIT
LIABILITIES AND STOCKHOLDERS’ (DEFICIT)/EQUITY
Current Liabilities:
Accounts payable	$	63,~~216~~806,~~462~~085		$	43,~~755~~206,~~361~~827
Accrued expenses	21,~~456~~047,~~901~~883			21,~~311~~457,~~050~~427
Total Current Liabilities	84,~~673~~853,~~363~~968			74,~~066~~664,~~411~~254
Derivative financial instruments, at estimated fair value—warrants	3,~~860~~317,~~838~~168			3,~~487~~325,~~959~~114
Total Liabilities	128,~~534~~171,~~201~~136			107,~~554~~989,~~370~~368
Commitments and contingencies
Stockholders’ (Deficit)/Equity:
Stockholders’ Deficit:
Series A convertible preferred stock, par value $0.0001, 700,000 shares authorized, 8,000 shares outstanding at March 31, 2012 and December 31, 2011	1			1
Series A convertible preferred stock, par value $0.0001, 700,000 shares authorized, 8,000 shares issued and outstanding at September 30, 2011 and December 31, 2010	1			1
Common stock, par value of $.0001 per share: 225,000,000 shares authorized; 158,516,071shares outstanding at March 31, 2012 and December 31, 2011	15,852			15,852
Series B convertible preferred stock, par value $0.0001, 2,500,000 shares authorized, no shares outstanding at September 30, 2011 and December 31, 2010	—			—
Additional paid-in capital	168,982,120			168,531,201
Common stock, par value of $.0001 per share: 225,000,000 shares authorized; 158,516,071 and 157,509,404 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively	15,852			15,751
Deficit accumulated during development stage	(145,508,572		)	(142,366,313		)
Additional paid-in capital	144,565,901			139,496,452
Total Callisto Stockholders’ Equity	23,489,401			26,180,741
Deficit accumulated during development stage	(140,348,549		)	(135,573,268		)
Non-controlling interest	(23,797,590		)	(19,657,741		)
Total Stockholders’ Equity	4,233,205			3,938,936
Total Stockholders’ (Deficit)/Equity	(308,189		)	6,523,000
Non-controlling interest	(15,760,835		)	(11,136,657		)
Total Liabilities and Stockholders’ (Deficit)/Equity	$	7,862,947		$	14,512,368
Total Stockholders’ Deficit	(11,527,630		)	(7,197,721		)
Total Liabilities and Stockholders’ Deficit	$	1,006,571		$	3,356,649

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

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CALLISTO PHARMACEUTICALS, INC.

(A Development Stage Company)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,						June 5, 1996 (Inception) to
	Three Months Ended March 31, 2012			Three Months Ended March 31, 2011			For the period June 5, 1996 (inception) to March 31, 2012
	2011			2010			2011			2010			September 30, 2011
Revenues	$	—		$	—		$	—
Revenues	$	—		$	—		$	—		$	—		$	—
Costs and Expenses:
Costs and expenses:
Research and development	5,338,140			1,371,928			64,432,657
Research and development	3,882,802			2,301,486			7,610,829			7,899,051			53,443,310
Government grants	3,508			—			(1,131,810		)
Government grants	—			—			—			—			(1,135,318		)
Purchased in-process research and development	—			—			6,944,553
Purchased in process research and development	—			—			—			—			6,944,553
General and administrative	1,953,309			1,959,844			62,325,966
General and administrative	1,288,945			1,302,469			5,124,477			4,341,003			57,830,579
Loss from Operations	(7,294,957		)	(3,331,772		)	(132,571,366		)
	(5,171,747		)	(3,603,955		)	(12,735,306		)	(12,240,054		)	(117,083,124		)
Interest and investment income	4,903			51			921,480
Loss from operations
Tax credit	—			—			1,393,219
Interest and investment income	3			933			57			25,084			914,939
Other income	—			(12,414		)	(943,124		)
State tax credit	—			—			—			628,806			1,025,606
Loss on debt extinguishment	—			—			(2,099,892		)
Other income or expense	(4,425		)	(16,723		)	(10,631		)	(317,434		)	(941,878		)
Change in fair value of derivative instruments	7,946			(338,715		)	(16,902,339		)
Loss on debt extinguishment	—			—			—			—			(2,099,892		)
Net Loss	(7,282,108		)	(3,682,850		)	(150,202,022		)
Change in fair value of derivative instruments—warrants	4,382,796			110,937			3,346,421			(15,530,425		)	(18,820,895		)
Net Loss attributable to noncontrolling interest	4,139,849			1,921,483			23,797,590
Net loss	(793,373		)	(3,508,808		)	(9,399,459		)	(27,434,023		)	(137,005,244		)
Net loss attributable to Callisto	(3,142,259		)	(1,761,367		)	(126,404,432		)
Net Loss of subsidiary attributable to noncontrolling interest	280,055			1,792,485			4,624,178			5,827,676			15,760,835
Series A Preferred stock conversion rate change and beneficial conversion feature accreted as a dividend	—			—			(5,025,849		)
Net loss attributable to controlling interest	(513,318		)	(1,716,323		)	(4,775,281		)	(21,606,347		)	(121,244,409		)
Series B Preferred stock conversion rate change and beneficial conversion feature accreted as a dividend	—			—			(12,174,391		)
Series A Preferred stock beneficial conversion feature accreted as a dividend	—			—			—			—			(4,888,960		)
Cumulative effect of adopting ASC Topic 815 January 1, 2009	—			—			(1,903,900		)
Series B Preferred stock beneficial conversion feature accreted as a dividend	—			—			—			—			(10,495,688		)
Net loss attributable to Callisto common stockholders	$	(3,142,259	)	$	(1,761,367	)	$	(145,508,572	)
Series A Preferred stock conversion rate change accreted as a dividend	—			—			—			—			(136,889		)
Weighted Average Common Shares Outstanding
Series B Preferred stock conversion rate change accreted as a dividend	—			—			—			—			(1,678,703		)
Basic and Diluted	158,516,071			157,645,404
Cumulative effect of adopting ASC Topic 815 January 1, 2009	—			—			—			—			(1,903,900		)
Net Loss per Common Share
Net loss available to common stockholders	$	(513,318	)	$	(1,716,323	)	$	(4,775,281	)	$	(21,606,347	)	$	(140,348,549	)
Basic and Diluted	$	(0.02	)	$	(0.01	)
Weighted average shares outstanding:
basic and diluted	158,516,071			54,504,437			158,225,741			54,267,164
Net loss per common share :
basic and diluted	$	(0.00	)	$	(0.03	)	$	(0.03	)	$	(0.40	)

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

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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 Capital
Balance at inception, June 5, 1996	—	$	—	—		$	—		$	—
Net loss for the year
Issuance of founder shares	—	—		2,642,500		264			528
Common stock issued	—	—		1,356,194		136			272
Common stock issued via private placement	—	—		1,366,667		137			1,024,863

Balance, December 31, 1996	—	—		5,365,361		537			1,025,663
Net loss for the year	—	—		—		—			—
Common stock issued via private placement	—	—		1,442,666		144			1,081,855

Balance, December 31, 1997	—	—		6,808,027		681			2,107,518
Net loss for the year	—	—		—		—			—
Amortization of Stock based Compensation	—	—		—		—			52,778
Common stock issued via private placement	—	—		1,416,667		142			1,062,358
Common stock issued for services	—	—		788,889		79			591,588
Common stock repurchased and cancelled	—	—		(836,792	)	(84		)	(96,916		)

Balance, December 31, 1998	—	—		8,176,791		818			3,717,326
Net loss for the year	—	—		—		—			—
Deferred Compensation—stock options	—	—		—		—			9,946
Amortization of Stock based Compensation	—	—		—		—			—
Common stock issued for services	—	—		—		—			3,168,832
Common stock issued via private placement	—	—		346,667		34			259,966

Balance, December 31, 1999	—	—		8,523,458		852			7,156,070
Net loss for the year	—	—		—		—			—
Amortization of Stock based Compensation	—	—		—		—			—
Common stock issued	—	—		4,560,237		455			250,889
Other	—	—		—		—			432
Preferred shares issued	3,485,299	348		—		—			5,986,302
Preferred stock issued for services	750,000	75		—		—			1,124,925

Balance, December 31, 2000	4,235,299	423		13,083,695		1,307			14,518,618
Net loss for the year	—	—		—		—			—
Deferred Compensation—stock Options	—	—		—		—			20,000
Amortization of Stock based Compensation	—	—		—		—			—

Balance, December 31, 2001	4,235,299	423		13,083,695		1,307			14,538,618
Net loss for the year	—	—		—		—			—
Amortization of Stock based Compensation	—	—		—		—			—

Balance, December 31, 2002	4,235,299	$	423	13,083,695		$	1,307		$	14,538,618

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

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

~~CONDENSED~~(A ~~CONSOLIDATED~~Development ~~STATEMENTS~~Stage ~~OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT~~Company) ~~(Continued)~~

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN

STOCKHOLDERS’ EQUITY (DEFICIT) (Continued)

	Unamortized Deferred Stock Based Compensation			Deficit Accumulated during the Development Stage			Total Stockholders’ Equity
Balance at inception, June 5, 1996	$	—		$	—		$	—
Net loss for the year				(404,005		)	(404,005		)
Issuance of founder shares	—			—			792
Common stock issued	—			—			408
Common stock issued via private placement	—			—			1,025,000

Balance, December 31, 1996	—			(404,005		)	622,195
Net loss for the year	—			(894,505		)	(894,505		)
Common stock issued via private placement	—			—			1,081,999

Balance, December 31, 1997	—			(1,298,510		)	809,689
Net loss for the year	—			(1,484,438		)	(1,484,438		)
Amortization of Stock based Compensation	—			—			52,778
Common stock issued							1,062,500
Common stock issued for services	—			—			591,667
Common Stock repurchased and cancelled	—			—			(97,000		)

Balance, December 31, 1998	—			(2,782,948		)	935,196
Net loss for the year	—			(4,195,263		)	(4,195,263		)
Deferred Compensation—stock options	(9,946		)	—			—
Amortization of Stock based Compensation	3,262			—			3,262
Common stock issued for services	—			—			3,168,832
Common stock issued via private placement	—			—			260,000

Balance, December 31, 1999	(6,684		)	(6,978,211		)	172,027
Net loss for the year				(2,616,261		)	(2,616,261		)
Amortization of Stock based Compensation	4,197						4,197
Common stock issue	—			—			251,344
Other	—			—			432
Preferred shares issued	—			—			5,986,650
Preferred stock issued for services	—			—			1,125,000

Balance, December 31, 2000	(2,487		)	(9,594,472		)	4,923,389
Net loss for the year	—			(1,432,046		)	(1,432,046		)
Deferred Compensation—stock options	(20,000		)	—			—
Amortization of Stock based Compensation	22,155			—			22,155

Balance, December 31, 2001	(332		)	(11,026,518		)	3,513,498
Net loss for the year	—			(1,684,965		)	(1,684,965		)
Amortization of Stock based Compensation	332			—			332

Balance, December 31, 2002	$	—		$	(12,711,483	)	$	1,828,865

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

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CALLISTO PHARMACEUTICALS, INC. (A Development Stage Company)

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

	Preferred Stock		Preferred Stock Par Value			Common Stock	Common Stock Par Value		Additional Paid in Capital			Unamortized Deferred Stock Based Compensation			Deficit Accumulated during the Development Stage			Total Stockholders’ Equity
Balance December 31, 2002	4,235,299		$	423		13,083,695	$	1,307	$	14,538,618		$	—		$	(12,711,483	)	$	1,828,865
Net loss for the year	—		—			—	—		—			—			(13,106,247		)	(13,106,247		)
Conversion of preferred stock in connection with the Merger	(4,235,299	)	(423		)	4,235,299	423		—			—			—			—
Common stock issued to former Synergy stockholders	—					4,329,927	432		6,494,458			—			—			6,494,890
Common stock issued in exchange for Webtronics common stock	—					1,503,173	150		(150		)	—			—			—
Deferred Compensation—stock options	—					—	—		9,313,953			(9,313,953		)	—			—
Amortization of deferred Stock based Compensation	—					—	—		—			3,833,946			—			3,833,946
Private placement of common stock, net	—		—			2,776,666	278		3,803,096			—			—			3,803,374
Balance, December 31, 2003	—		$	—		25,928,760	$	2,590	$	34,149,975		$	(5,480,007	)	$	(25,817,730	)	$	2,854,828

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

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CALLISTO PHARMACEUTICALS, INC. (A Development Stage Company)

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

	Common Stock		Common Stock Par Value			Additional Paid in Capital			Unamortized Deferred Stock Based Compensation			Deficit Accumulated during the Development Stage			Total Stockholders’ Equity
Balance, December 31, 2003	25,928,760		$	2,590		$	34,149,975		$	(5,480,007	)	$	(25,817,730	)	$	2,854,828
Net loss for the year	—		—			—			—			(7,543,467		)	(7,543,467		)
Amortization of deferred Stock-based compensation expense	—		—			—			3,084,473			—			3,084,473
Variable accounting for stock options	—		—			(816,865		)	—			—			(816,865		)
Stock-based compensation net of forfeitures	—		—			240,572			93,000			—			333,572
Common stock issued via private placements, net	3,311,342		331			6,098,681			—			—			6,099,012
Warrant and stock-based compensation for services in connection with the Merger	—		—			269,826			—			—			269,826
Common stock returned from former Synergy stockholders	(90,000	)	(9		)	(159,083		)	—			—			(159,092		)
Stock issued for patent rights	25,000		3			56,247			—			—			56,250
Common stock issued for services	44,000		7			70,833			—			—			70,840
Balance, December 31, 2004	29,219,102		$	2,922		$	39,910,186		$	(2,302,534	)	$	(33,361,197	)	$	4,249,377

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

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CALLISTO PHARMACEUTICALS, INC.

(A Development Stage Company)

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

	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	)	$	4,249,377
Net loss for the year	—	—		—			—			(11,779,457		)	(11,779,457		)
Deferred stock-based compensation—new grants	—	—		1,571,772			(1,571,772		)	—			—
Amortization of deferred stock-based compensation	—	—		—			2,290,843			—			2,290,843
Variable accounting for stock options	—	—		75,109			—			—			75,109
Common stock issued via private placement:
March 2005	1,985,791	198		3,018,203			—			—			3,018,401
August 2005	1,869,203	187		1,812,940			—			—			1,813,127
Finders fees and expenses	—	—		(176,249		)	—			—			(176,249		)
Exercise of common stock warrant	125,000	13		128,737			—			—			128,750
Common stock issued for services	34,000	3		47,177			—			—			47,180
Balance, December 31, 2005	33,233,096	$	3,323	$	46,387,875		$	(1,583,463	)	$	(45,140,654	)	$	(332,919	)

STOCKHOLDERS’ EQUITY (DEFICIT) (Continued)

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

	Preferred Stock		Preferred Stock Par Value			Common Stock	Common Stock Par Value		Additional Paid in Capital			Unamortized Deferred Stock Based Compensation			Deficit Accumulated during the Development Stage			Total Stockholders’ Equity
Balance December 31, 2002	4,235,299		$	423		13,083,695	$	1,307	$	14,538,618		$	—		$	(12,711,483	)	$	1,828,865
Net loss for the year	—		—			—	—		—			—			(13,106,247		)	(13,106,247		)
Conversion of preferred stock in connection with the Merger	(4,235,299	)	(423		)	4,235,299	423		—			—			—			—
Common stock issued to former Synergy stockholders	—		—			4,329,927	432		6,494,458			—			—			6,494,890
Common stock issued in exchange for Webtronics common stock	—		—			1,503,173	150		(150		)	—			—			—
Deferred Compensation—stock options	—		—			—	—		9,313,953			(9,313,953		)	—			—
Amortization of deferred Stock based Compensation	—		—			—	—		—			3,833,946			—			3,833,946
Private placement of common stock, net	—		—			2,776,666	278		3,803,096			—			—			3,803,374

Balance, December 31, 2003	—		$	—		25,928,760	$	2,590	$	34,149,975		$	(5,480,007	)	$	(25,817,730	)	$	2,854,828

10The accompanying notes are an integral part of these condensed consolidated financial statements.

Table of Contents

CALLISTO PHARMACEUTICALS, INC.

(A Development Stage Company)

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN

STOCKHOLDERS’ EQUITY (DEFICIT) (Continued)

	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)
	Common Stock		Common Stock Par Value			Additional Paid in Capital			Unamortized Deferred Stock Based Compensation			Deficit Accumulated during the Development Stage			Total Stockholders’ Equity
Balance, December 31, 2005	—		$	—		33,233,096		$	3,323		$	46,387,875		$	(1,583,463	)	$	(45,140,654	)	$	(332,919	)
Balance, December 31, 2003	25,928,760		$	2,590		$	34,149,975		$	(5,480,007	)	$	(25,817,730	)	$	2,854,828
Net loss for the year	—		—			—		—	—		—	(7,543,467		—)	(7,543,467		~~(12,919,229~~)		)	~~(12,919,229~~		)
Reclassification of deferred unamortized stock-based compensation upon adoption of FAS 123R	—		—			—		—			(1,583,463		)	1,583,463			—			—
Amortization of deferred Stock-based compensation expense	—		—			—			3,084,473			—			3,084,473
Stock based compensation expense	—		—			—		—			2,579,431			—			—			2,579,431
Variable accounting for stock options	—		—			(816,865		)	—			—			(816,865		)
Common stock issued via private placement:														—			—
Stock-based compensation net of forfeitures	—		—			240,572			93,000			—			333,572
February 2006	—					4,283,668		428			5,139,782									5,140,210
Common stock issued via private placements, net	3,311,342		331			6,098,681			—			—			6,099,012
Finders fees and expenses	—		—			—					(561,808		)	—			—			(561,808		)
Warrant and stock-based compensation for services in connection with the Merger	—		—			269,826			—			—			269,826
April 2006	—		—			666,667		67			799,933									800,000
Common stock returned from former Synergy stockholders	(90,000	)	(9		)	(159,083		)	—			—			(159,092		)
Finders fees and expenses	—		—			—		—			(41,000		)	—			—			(41,000		)
Stock issued for patent rights	25,000		3			56,247			—			—			56,250
Waiver and Lock-up Agreement	—		—			740,065		74			579,622			—			—			579,696
Common stock issued for services	44,000		7			70,833			—			—			70,840
Common stock issued for services	—		—			87,000		9			121,101			—			—			121,110
Balance, December 31, 2004	29,219,102		$	2,922		$	39,910,186		$	(2,302,534	)	$	(33,361,197	)	$	4,249,377
Exercise of common stock warrants	—		—			184,500		18			190,017			—			—			190,035
Series A convertible preferred stock issued via private placement:	574,350		57			—		—			5,743,443			—			—			5,743,500
Finders fees and expenses	11,775		1			—		—			(448,909		)	—			—			(448,908		)
Detachable warrants	—		—			—		—			2,384,485			—			—			2,384,485
Beneficial conversion feature accreted as a dividend	—		—			—		—			—			—			(2,384,485		)	(2,384,485		)
Balance, December 31, 2006	586,125		$	58		39,194,996		$	3,919		$	61,290,509		$	—		$	(60,444,368	)	$	850,118

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

119

Table of Contents

CALLISTO PHARMACEUTICALS, INC.

(A Development Stage Company)

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN

STOCKHOLDERS’ EQUITY (DEFICIT) (Continued)

	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	)	$	4,249,377
Net loss for the year	—	—		—		—			(11,779,457		)	(11,779,457		)
Deferred stock-based compensation—new grants	—	—		1,571,772		(1,571,772		)	—			—
Amortization of deferred stock-based compensation	—	—		—		2,290,843			—			2,290,843
Variable accounting for stock options	—	—		75,109		—			—			75,109
Common stock issued via private placement:
March 2005	1,985,791	198		3,018,203		—			—			3,018,401
August 2005	1,869,203	187		1,812,940		—			—			1,813,127
Finders fees and expenses	—	—		176,249		—			—			176,249
Exercise of common stock warrant	125,000	13		128,737		—			—			128,750
Common stock issued for services	34,000	3		47,177		—			—			47,180

Balance, December 31, 2005	33,233,096	$	3,323	$	46,387,875	$	(1,583,463	)	$	(45,140,654	)	$	(332,919	)

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

Table of Contents

CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)

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

	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			—			—			2,579,431
Common stock issued via private placement:										—			—
February 2006	—			4,283,668	428		5,139,782									5,140,210
Finders fees and expenses	—	—		—			(561,808		)	—			—			(561,808		)
April 2006	—	—		666,667	67		799,933									800,000
Finders fees and expenses	—	—		—	—		(41,000		)	—			—			(41,000		)
Waiver and Lock-up Agreement	—	—		740,065	74		579,622			—			—			579,696
Common stock issued for services	—	—		87,000	9		121,101			—			—			121,110
Exercise of common stock warrants	—	—		184,500	18		190,017			—			—			190,035
Series A convertible preferred stock issued via private placement:	574,350	57		—	—		5,743,443			—			—			5,743,500
Finders fees and expenses	11,775	1		—	—		(448,909		)	—			—			(448,908		)
Detachable warrants	—	—		—	—		2,384,485			—			—			2,384,485
Beneficial conversion feature accreted as a dividend	—	—		—	—		—			—			(2,384,485		)	(2,384,485		)

Balance, December 31, 2006	586,125	$	58	39,194,996	$	3,919	$	61,290,509		$	—		$	(60,444,368	)	$	850,118

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

Table of Contents

CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)

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

	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’ Equity
Balance, December 31, 2006	586,125		$	58		—		$	—		39,194,996	$	3,919	$	61,290,509		$	(60,444,368	)	$	850,118
Net loss for the year	—		—			—		—			—	—		—			(7,887,265		)	(7,887,265		)
Stock-based compensation expense	—		—			—		—			—	—		591,561			—			591,561
Common stock issued for services	—		—			—		—			80,000	8		36,792			—			36,800
Series A convertible preferred stock, issued via private placement	28,000		4			—		—			—	—		279,997			—			280,001
Finders fees and expenses, Series A private placement	—		—			—		—			—	—		(36,400		)	—			(36,400		)
Conversion of Series A preferred stock to common stock	(395,450	)	(40		)	—		—			7,668,165	767		(727		)	—			—
Beneficial conversion feature accreted as a dividend to Series A preferred stock	—		—			—		—			—	—		2,504,475			(2,504,475		)	—
Series B convertible preferred stock, issued via private placement	—		—			1,147,050		115			—	—		11,470,385			—			11,470,500
Finders fees and expenses, Series B private placement	—		—			—		—			—	—		(920,960		)	—			(920,960		)
Beneficial conversion feature accreted as a dividend to Series B preferred stock	—		—			—		—			—	—		10,495,688			(10,495,688		)	—
Change in fair value of Series B warrants from date of issuance to expiration of put option	—		—			—		—			—	—		(2,591,005		)	—			(2,591,005		)

Balance, December 31, 2007	218,675		22			1,147,050		115			46,943,161	4,694		83,120,315			(81,331,796		)	1,793,350
Net loss for the year	—		—			—		—			—	—		—			(9,655,471		)	(9,655,471		)
Recapitalization of majority owned subsidiary via private placements of common stock	—		—			—		—			—	—		2,951,913			—			2,951,913
Minority interest in equity of subsidiary acquired	—		—			—		—			—	—		(42,824		)	—			(42,824		)
Stock-based compensation expense	—		—			—		—			—	—		589,063			—			589,063
Proceeds from issuance of 11% Notes attributable to detachable warrants	—		—			—		—			—	—		181,732			—			181,732
Conversion 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 ~~unaudited~~ condensed consolidated financial statements.

Table of Contents

CALLISTO PHARMACEUTICALS, INC. (A Development Stage Company)

(ACONDENSED ~~Development~~CONSOLIDATED ~~Stage~~STATEMENTS ~~Company~~OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) (Continued)

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN

STOCKHOLDERS’ EQUITY (DEFICIT) (Continued)

(Unaudited)

	Series A Convertible Preferred Shares		Series A Convertible Preferred Stock			Series B Convertible Preferred Shares		Series B Convertible Preferred Stock			Common Shares	Common Stock Par Value		Additional Paid in Capital			Deficit Accumulated during the Development Stage			Non- Controlling Interest			Total Stockholders’ Equity (Deficit)
Balance, December 31, 2008	98,000		$	10		1,137,050		$	114		49,556,661	4,955		$	86,799,951		$	(90,987,267	)	$	—		$	(4,182,237	)
Cumulative effect of adoption of ASC Topic 815	—		—			—		—			—	—		(181,732		)	(1,903,900		)	—			(2,085,632		)
Net Loss	—		—			—		—			—	—		—			(15,073,021		)	(3,282,393		)	(18,355,414		)
Stock based compensation expense	—		—			—		—			—	—		1,119,856			—			—			1,119,856
Conversion of Series A preferred stock to common stock	(35,000	)	(4		)	—		—			894,445	89		(85		)	—			—			—
Conversion of Series B preferred stock to common stock	—		—			(122,884	)	(12		)	2,963,236	296		(284		)	—			—			—
Private placements of common stock of majority owned subsidiary	—		—			—		—			—	—		15,970,100			—			—			15,970,100
Fees and expenses associated with private placements of majority owned subsidiary	—		—			—		—			—	—		(260,002		)	—			—			(260,002		)
Preferred Stock dividend attributable to reset of conversion price in conjunction with waiver of liquidation preference	—		—			—		—			—	—		1,815,592			(1,815,592		)	—			—
Cashless Conversion of Warrants to Common Stock	—		—			—		—			193,769	19		(19		)	—			—			—

Balance December 31, 2009	63,000		$	6		1,014,166		$	102		53,608,111	$	5,359	$	105,263,377		$	(109,779,780	)	$	(3,282,393	)	$	(7,793,329	)
Net Loss	—		—			—		—			—	—		—			(25,793,488		)	(7,854,264		)	(33,647,752		)
Stock based compensation expense	—		—			—		—			—	—		854,651			—			—			854,651
Conversion of Series A preferred stock to common stock	(55,000	)	(5		)	—		—			1,527,777	153		(148		)	—			—			—
Conversion of Series B preferred stock to common stock	—		—			(1,014,166	)	(102		)	28,171,278	2,817		(2,715		)	—			—			—
Common shares in exchange for modification of convertible notes	—		—			—		—			265,770	27		100,169			—			—			100,196
Extinguishment on debt	—		—			—		—			—	—		2,809,531			—			—			2,809,531
Cashless conversion of Warrants to common stock upon extinguishment of convertible notes	—		—			—		—			72,355,769	7,236		(7,236		)	—			—			—
Warrants exchanged	—		—			—		—			1,505,699	151		(151		)	—			—			—
Direct offering of common stock of controlled subsidiary	—		—			—		—			—	—		7,179,000			—			—			7,179,000
Fair value of warrants issued in connection with controlled subsidiary registered direct offerings reclassified to derivative liability	—		—			—		—			—	—		(3,784,743		)	—			—			(3,784,743		)
Fees and expenses associated with direct offering of controlled subsidiary	—		—			—		—			—	—		(468,130		)	—			—			(468,130		)
Reclassification of derivative liability to equity upon termination of price protection	—		—			—		—			—	—		27,511,730			—			—			27,511,730
Common stock issued as settlement for director’s fees	—		—			—		—			75,000	8		41,117			—			—			41,125

Balance December 31, 2010	8,000		$	1		—		$	—		157,509,404	$	15,751	$	139,496,452		$	(135,573,268	)	$	(11,136,657	)	$	(7,197,721	)

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

Table of Contents

CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)

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

(Unaudited)

	Series A Convertible Preferred Shares	Series A Convertible Preferred Stock		~~Common~~Series B Convertible Preferred Shares	~~Common~~Series ~~Stock~~B ~~Par~~Convertible ~~Value~~Preferred Stock		~~Additional~~Common ~~Paid in Capital~~Shares		Common Stock Par Value	~~Deficit Accumulated during the Development Stage~~		Additional Paid in Capital	~~Non- Controlling Interest~~		Deficit Accumulated during the Development Stage	~~Total Stockholders’ Equity (Deficit)~~		Non- Controlling Interest			Total Stockholders’ Equity (Deficit)
Balance December 31, 2010	8,000	$	1	157,509,404	$	15,751	$	139,496,452		$	(135,573,268	)	$	(11,136,657	)	$	(7,197,721	)
Net Loss	—	—		—	—		—		—			—			(6,793,045		)	(8,521,084		)	(15,314,129		)
Net Loss	—	—		—	—		—			(4,775,281		)	(4,624,178		)	(9,399,459		)
Stock based compensation expense	—	—		—	—		—		—			424,168			—			—			424,168
Stock based compensation expense	—	—		—	—		266,545			—			—			266,545
Common stock issued for services	—	—		—	—		850,000		85			532,915			—			—			533,000
Common stock issued for services	—	—		850,000	85		532,915			—			—			533,000
Value of common stock issued by controlled subsidiary for consulting services provided	—	—		—	—		—		—			341,295			—			—			341,295
Direct offering of common stock of controlled subsidiary	—	—		—	—		8,040,463			—			—			8,040,463
Placement of common stock of controlled subsidiary	—	—		—	—		—		—			34,369,064			—			—			34,369,064
Fees and expenses associated with direct offering of controlled subsidiary	—	—		—	—		~~(661,051~~—		)—	—		(2,148,384	—	)	—	~~(661,051~~		)—			(2,148,384		)
Warrants exercise	—	—		106,667	11		53,323			—			—			53,334
Warrant exercise							106,667		11			53,323									53,334
Warrants issued in connection with controlled subsidiary registered direct offering reclassified to derivative liability -net	—	—		—	—		(3,719,300		)	—			—			(3,719,300		)
Warrants issued in connection with controlled subsidiary registered direct offering reclassified to derivative liability-net	—	—		—	—		—		—			(5,094,186		)	—			—			(5,094,186		)
Exercise of warrants-controlled subsidiary	—	—		—	—		~~415,309~~—		—	—		415,309	—		—	~~415,309~~		—			415,309
Common stocks issued for settlement of directors’ fee	—	—		~~50,000~~—	5—		4150,~~245~~000		5	—		41,245	—		—	~~41,250~~		—			41,250
Sale of option to purchase shares of controlled subsidiary	—	—		—	—		~~100,000~~—		—	—		100,000	—		—	~~100,000~~		—			100,000
Balance September 30, 2011	8,000	$	1	158,516,071	$	15,852	$	144,565,901		$	(140,348,549	)	$	(15,760,835	)	$	(11,527,630	)
Balance December 31, 2011	8,000	1		—	—		158,516,071		15,852			168,531,201			(142,366,313		)	(19,657,741		)	6,523,000
Net loss for the period	—	—		—	—		—		—			—			(3,142,259		)	(4,139,849		)	(7,282,108		)
Stock based compensation expense	—	—		—	—		—		—			358,256			—			—			358,256
Common stock issued by controlled subsidiary for services rendered	—	—		—	—		—		—			92,663			—			—			92,663
Balance March 31, 2012	8,000	$	1	—	$	—	158,516,071		$	15,852		$	168,982,120		$	(145,508,572	)	$	(23,797,590	)	$	(308,189	)

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

Table of Contents

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

(A Development Stage Company)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine months ended September 30, 2011			Nine months ended September 30, 2010			Period from June 5, 1996 (inception) to September 30, 2011
	Three months ended March 31, 2012			Three months ended March 31, 2011			Period from June 5, 1996 (inception) to March 31, 2012
Cash flows from operating activities:
Net loss	$	(97,~~399~~282,~~459~~108	)	$	(273,~~434~~682,~~023~~850	)	$	(~~137~~150,~~005~~202,~~244~~022	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation	~~3,128~~492			31,~~951~~317			~~110~~111,~~963~~950
Purchase discount accreted as interest income on U.S.Treasury bills	—			—			(26,950		)
Stock-based compensation expense	~~574~~525,~~545~~919			~~611~~124,~~845~~653			2021,~~283~~458,~~921~~758
Purchased in-process research and development (non-cash portion)	—			—			6,841,053
Purchased in-process research and development	—			—			6,841,053
Interest expense on notes	—			~~317~~11,~~434~~877			759,400
Stock-based liquidated damages	—			—			579,696
Change in fair value of derivative instruments—warrants	(37,~~346,421~~946		)	15338,~~530,425~~715			1816,~~820~~902,~~895~~339
Loss on debt extinguishment	—			—			2,099,892
Net liabilities assumed in excess of assets acquired in merger	—			—			(282,752		)
Changes in operating assets and liabilities:
Prepaid expenses	~~149~~(547,~~314~~614		)	~~458~~267,~~282~~898			(~~620~~1,~~089~~268,642		)
State tax credit receivable	781,127			(628,806		)	—
Tax credit receivable	—			205,727			(377,865		)
Security deposit	—			—			(87,740		)
Accounts payable and accrued expenses	1189,~~648,202~~714			1(205,~~670,398~~878		)	84,~~703~~883,~~238~~842
	(190,105		)	17,963,529			57,181,527
Total Adjustments	160,565			744,309			51,592,981
Net cash used in operating activities	(97,~~589~~121,~~564~~543		)	(92,~~470~~938,~~494~~541		)	(7998,~~823~~609,~~717~~041		)
Cash flows from investing activities:
Short term investments—purchased	—			—			(5,921,825		)
Short term investments—liquidated	—			—			5,948,775
Acquisition of equipment	—			—			(117,233		)
Net cash used in investing activities	—			—			(90,283		)
Cash flows from financing activities:
Issuance of common and preferred stock	—			—			48,719,673
Issuance of common stock and exercise of warrants of controlled subsidiary	8,040,463			3,154,000			34,214,563
Issuance of common stock of controlled subsidiary	—			1,800,000			60,543,162
Proceeds from exercise of warrants of controlled subsidiary	415,309			—			415,309
Selling Agent fees and expenses-combined	—			(185,000		)	(5,930,684		)
Finders’ fees and expenses-combined	(661,051		)	(294,130		)	(4,443,354		)
Proceeds from sale of 11% Notes	—			500,000			603,163
Issuance of debt instruments converted to common stock	—			—			603,163
Proceed from exercise of warrants of controlled subsidiary	—			—			415,309
Exercise of common stock warrants	~~53,334~~—			—			372,119
Proceeds from sale of option	~~100,000~~—			53,334			100,000
Net cash provided by financing activities	~~7,948,055~~—			2,~~859~~168,~~870~~334			79104,~~981~~822,~~473~~742
Net (decrease) increase in cash and cash equivalents	(17,~~641~~121,~~509~~543		)	(6770,~~610,624~~207		)	676,~~473~~123,418
Cash and cash equivalents at beginning of period	113,~~708~~244,~~982~~961			71,~~207~~708,~~612~~982			—
Cash and cash equivalents at end of period	$	676,~~473~~123,418		$	~~596~~938,~~988~~775		$	676,~~473~~123,418

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

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CALLISTO PHARMACEUTICALS, INC.
(A Development Stage Company)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Unaudited)

	Nine months ended September 30, 2011		Nine months ended September 30, 2010		Period from June 5, 1996 (inception) to September 30, 2011
	Three months ended March 31, 2012		Three months ended March 31, 2011		Period from June 5, 1996 (inception) to March 31, 2012
Supplementary disclosure of cash flow information:
Cash paid for taxes	$	635,~~481~~776	$	5712,~~754~~009	$	18360,~~490~~660
Supplementary disclosure of non-cash investing and financing activities:
Series A Preferred stock beneficial conversion feature accreted as a dividend	—$	—	—$	—	~~(4,888,960~~$	(4,888,960	)
Series B Preferred stock beneficial conversion feature accreted as a dividend	—$	—	—$	—	~~(10,495,688~~$	(10,495,688	)
Series A Preferred stock conversion rate change accreted as a dividend	—$	—	—$	—	~~(136,889~~$	(136,889	)
Series B Preferred stock conversion rate change accreted as a dividend	—$	—	—$	—	~~(1,678,703~~$	(1,678,703	)
Director’s fees settled for shares of common stock	41,250		41,125		82,375
Common stock issued to extend notes payable	$	—	$	—	$	100,196
Common stock issued to extend notes payable	—		100,196		100,196
Value of warrants classified as derivative liability-net	$	—	$	1,312,673	$	20,331,912
Value of warrants classified as derivative liability - net	$	3,719,300	$	—	$	8,243,634
Value of shares issued for services	$	—	$	533,000	$	625,663
Shares issued for consulting services recorded as prepaid and amortized over the service period	$	533,000	$	—	$	533,000
Director’s fees settled for shares of common stock	$	—	$	—	$	82,375

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

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CALLISTO PHARMACEUTICALS, INC. (A Development Stage Company)

(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Business overview:

Callisto Pharmaceuticals, Inc. (which may be referred to as “Callisto”, or “the “Company”) is a development stage biopharmaceutical company, ~~whose~~focused ~~primary~~primarily ~~focus has been~~ on the development of drugs to treat gastrointestinal (“GI”) disorders and diseases and ~~rheumatoid~~was ~~arthritis~~incorporated ~~(RA).~~under ~~Callisto~~the ~~was~~laws ~~incorporated~~of in the ~~state~~State of Delaware on June 5, 1996 (inception). Since inception, Callisto’s efforts have been principally devoted to research and development, securing and protecting patents and raising capital.

~~From~~All ~~inception~~drug ~~through September 30~~candidates, ~~2011,~~currently ~~Callisto~~plecanatide ~~has~~and ~~sustained~~SP-333 ~~cumulative net losses available~~ to ~~common~~treat ~~stockholders~~GI ofdisorders ~~$140,348,549. Callisto’s losses have resulted primarily from expenditures incurred in connection with research~~ and ~~development activities~~diseases, ~~application~~are ~~and~~being ~~filing~~developed ~~for~~exclusively ~~regulatory~~by ~~approval~~Synergy. Use of ~~proposed~~the ~~products,~~terms ~~stock-based~~“the ~~compensation~~Company” ~~expense, patent filing and maintenance expenses, purchase of~~ in~~-process~~ ~~research~~connection ~~and~~with ~~development, outside accounting and legal services and regulatory, scientific and financial consulting fees, as well as deemed dividends attributable to~~ the ~~beneficial~~GI ~~conversion~~drug ~~rights~~candidates ofdiscussed ~~convertible~~herein ~~preferred~~refer ~~stock at issuance. From inception through September 30, 2011, Callisto has not generated any revenue from operations. The Company expects~~ to ~~incur additional losses to perform further~~ research and development activities and ~~does~~plans ~~not~~of ~~currently have any commercial biopharmaceutical products, and does not expect to have such for several years, if at all~~Synergy.

~~Callisto~~Synergy’s ~~product~~lead ~~development~~drug ~~efforts~~candidates are ~~thus~~as in their early stages and Callisto cannot make estimates of the costs or the time they will take to complete. The risk of not completing 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.follows:

~~This Report on Form 10-Q for Callisto Pharmaceuticals~~(1) Plecanatide, ~~Inc.~~ ~~may~~a ~~contain~~guanylyl ~~forward-looking~~cyclase ~~statements.~~C ~~Forward-looking statements are characterized by future or conditional verbs such as~~ (“~~may,~~GC-C”) ~~“will,”~~receptor ~~“expect~~agonist,” “intend,” “anticipate,” believe,” “estimate” and “continue” or similar words. You should read statements that contain these words carefully because they discuss future expectations and plans, which contain projections of future results of operations or financial condition or state other forward-looking information. Such statements are only predictions and our actual results may differ materially from those anticipated in these forward-looking statements. We believe that it is important to ~~communicate~~treat ~~future~~GI ~~expectations to investors. However~~disorders, ~~there~~primarily ~~may~~chronic beconstipation events in the future that we are not able to accurately predict or control. Factors that may cause such differences include, but are not limited to, those discussed elsewhere in this report, including the uncertainties associated with product development, the risk that products that appeared promising in early clinical trials do not demonstrate efficacy in larger-scale clinical trials, the risk that we will not obtain approval to market our products, the risks associated with dependence upon key personnel and the need for additional financing. We do not assume any obligation to update forward-looking statements as circumstances change. All drug candidates to treat gastro-intestinal (“GICC”) ~~disorders~~ and ~~diseases, currently plecanatide and SP~~constipation-~~333,~~predominant ~~are~~irritable ~~being~~bowel ~~developed~~syndrome ~~exclusively by Synergy Pharmaceuticals, Inc., our controlled subsidiary~~ (“~~Synergy~~IBS-C”). ~~Use of the terms “we”, “our” or “us” in connection with GI drug candidates discussed herein refer to research and development activities and plans of Synergy.~~

(2.) SP-333, ~~Basis~~a ofsecond ~~presentation~~generation ~~and~~GC-C ~~going~~receptor ~~concern:~~agonist, SP-333, now in pre-clinical development to treat gastrointestinal inflammatory diseases.

~~These~~From ~~condensed~~inception ~~consolidated~~through ~~financial~~March 31, ~~statements~~2012, ~~include~~ Callisto ~~and~~has ~~subsidiaries:~~sustained ~~(1) Callisto~~cumulative ~~Research~~net ~~Labs,~~losses ~~LLC~~attributable ~~(including~~to ~~its~~common ~~wholly-owned~~stockholders ~~subsidiary~~of $145,508,572. Callisto’s ~~Pharma,~~losses ~~GmbH~~have ~~(Germany—inactive)),~~resulted ~~and~~primarily ~~(2) Synergy~~from ~~Pharmaceuticals, Inc.~~expenditures ~~(including~~incurred ~~Synergy’s~~in ~~wholly-owned~~connection ~~subsidiaries,~~with ~~Synergy-DE,~~research ~~Synergy~~and ~~Advanced~~development ~~Pharmaceuticals~~activities, ~~Inc.~~ application and ~~IgX,~~filing ~~Ltd~~for ~~(Ireland—inactive)).~~regulatory ~~All~~approval ~~intercompany~~of ~~balances~~proposed ~~and~~products, ~~transactions~~stock-based ~~have~~compensation ~~been~~expense, ~~eliminated.~~patent ~~These~~filing ~~condensed~~and ~~consolidated~~maintenance ~~financial~~expenses, ~~statements~~purchase doof ~~not~~in-process ~~include~~research ~~all~~and ofdevelopment, ~~the~~outside ~~information~~accounting and ~~footnote~~legal ~~disclosures~~services ~~required~~and byregulatory, ~~GAAP~~scientific ~~for~~and ~~complete~~ financial ~~statements.~~consulting ~~These~~fees, ~~statements~~as ~~should~~well beas ~~read~~deemed individends ~~conjunction~~attributable ~~with~~to ~~Callisto’s~~the ~~audited~~beneficial ~~financial~~conversion ~~statements~~rights ~~and~~of ~~notes~~convertible ~~thereto~~preferred ~~for~~stock ~~the~~at ~~year~~issuance. ~~ended~~From ~~December~~inception through March 31, ~~2010~~2012, ~~included~~Callisto inhas ~~Form 10-K~~not ~~filed~~generated ~~with~~any ~~the~~revenue ~~SEC~~from onoperations. ~~March 31,~~The ~~2011.~~Company ~~Certain~~expects ~~items~~to inincur ~~the~~additional ~~prior~~losses ~~year’s~~to ~~financial~~perform ~~statements~~further research and development activities and does not currently have ~~been~~any ~~reclassified~~commercial tobiopharmaceutical ~~conform~~products, and does not expect to ~~the~~have ~~current~~such ~~year’s~~for ~~presentation~~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 not completing 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.

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In2. ~~the~~Basis ~~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~~going of operations for the interim periods. The results of operations for the three and nine months ended September 30, 2011 are not necessarily indicative of the results of operations to be expected for the full year ending December 31, 2011. The condensed consolidated balance sheet as of December 31, 2010 presented above was derived from the audited consolidated financial statements as of that date.concern:

~~The~~These condensed consolidated financial statements asinclude ofCallisto ~~September~~and subsidiaries: (1) 30Callisto Research Labs, LLC ~~2011~~(including its wholly-owned subsidiary, Callisto Pharma, GmbH (Germany—inactive)), and ~~December~~(2) 31Synergy Pharmaceuticals, Inc. ~~2010~~(including Synergy’s wholly-owned subsidiaries, Synergy Advanced Pharmaceuticals, Inc. and IgX, Ltd (Ireland—inactive)). All intercompany balances and transactions have been ~~prepared~~eliminated. ~~under~~These ~~the~~condensed ~~assumption~~consolidated ~~that~~financial ~~Callisto~~statements ~~will~~do ~~continue~~not asinclude aall ~~going~~of ~~concern~~the ~~for~~information ~~the~~and ~~twelve~~footnote ~~months~~disclosures ~~ending~~required ~~December 31,~~by ~~2011~~GAAP for complete financial statements. ~~Callisto’s~~These ~~ability~~statements toshould ~~continue~~be asread ain ~~going~~conjunction ~~concern~~with isCallisto’s ~~dependent~~audited ~~upon~~financial ~~its~~statements ~~ability~~and tonotes ~~obtain~~thereto ~~additional~~for ~~equity~~the oryear ~~debt~~ended ~~financing~~December 31, ~~attain~~2011, ~~further~~included ~~operating~~in ~~efficiencies~~Form 10-K ~~and,~~filed ~~ultimately,~~with tothe ~~generate~~SEC ~~revenue~~on March 30, 2012. ~~The~~Certain ~~financial~~items ~~statements~~in dothe ~~not~~prior ~~include~~year’s ~~any~~financial ~~adjustments~~statements ~~that~~have ~~might~~been ~~result~~reclassified ~~from~~to ~~the~~conform ~~outcome~~to ofthe ~~this~~current ~~uncertainty~~year’s presentation.

~~Net~~In ~~cash~~the ~~used~~opinion inof ~~operating activities was $9~~management,~~589,564~~ ~~during~~ the ~~nine~~accompanying ~~months~~unaudited ~~ended~~condensed ~~September 30,~~consolidated ~~2011~~financial asstatements ~~compared~~include toall $9adjustments,~~470,494~~ ~~for~~primarily ~~the~~consisting ~~nine~~of ~~months~~normal ~~ended September 30~~adjustments, ~~2010~~necessary ~~and~~for ~~$79,823,717 during~~ the ~~period~~fair ~~from~~presentation ~~June 5,~~of ~~1996 (inception) to September 30, 2011. During~~ the ~~three~~balance ~~months~~sheet and ~~nine~~results ~~months ended September 30, 2011 Callisto incurred net losses attributable to common stockholders~~ of ~~$513,318~~operations ~~and~~for ~~$4,775,281, respectively and $140,348,549 during~~ the ~~period~~interim ~~from June 5, 1996 (inception) to September 30, 2011~~periods. ~~Net~~The ~~losses~~results ~~attributable~~of tooperations ~~common shareholders~~ for the three months ~~and nine months~~ ended ~~September~~March 3031, ~~2010~~2012 ~~were~~are ~~$1,716,323~~not ~~and~~necessarily ~~$21,606,347,~~indicative ~~respectively.~~of Tothe ~~date,~~results ~~Callisto’s sources~~ of ~~cash~~operations ~~have~~to ~~been~~be ~~primarily~~expected ~~limited~~for to the ~~sale~~full ofyear ~~equity~~ending ~~securities~~December 31, ~~with warrants and issuance of debt instruments~~2012. ~~Net~~The ~~cash~~condensed ~~provided~~consolidated bybalance ~~financing~~sheet ~~activities~~as ~~for~~of ~~the~~December ~~nine months ended September 30~~31, 2011, ~~nine~~presented ~~months~~above ~~ended~~was ~~September 30,~~derived ~~2010,~~from ~~and for~~ the ~~period~~audited ~~from~~consolidated ~~June 5,~~financial ~~1996~~statements ~~(inception)~~as toof ~~September 30,~~that ~~2011, was $7,948,055, $2,859,870, and $79,981,473, respectively~~date.

~~Recent~~The ~~worldwide~~condensed ~~economic~~consolidated ~~conditions,~~financial statements as ~~well~~of asMarch 31, ~~domestic~~2012 and ~~international~~December 31, ~~equity~~2011 ~~and~~have ~~credit~~been ~~markets,~~prepared ~~have~~under ~~significantly~~the ~~deteriorated~~assumption ~~and~~that ~~may~~Callisto ~~remain~~will ~~depressed~~continue ~~and~~as ~~volatile~~a going concern for the ~~foreseeable~~twelve ~~future~~months ending December 31, 2012. ~~These~~Callisto’s ~~developments~~ability ~~will~~to ~~make~~continue itas ~~more~~a ~~difficult~~going concern is dependent upon its ability to obtain additional equity or ~~credit~~debt financing, ~~when~~attain ~~needed~~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.

~~Callisto~~Net ~~will~~cash beused ~~required~~in tooperating ~~raise~~activities ~~additional~~was ~~capital~~$7,121,543 ~~within~~during ~~this year to complete~~ the ~~development~~three ~~and~~months ~~commercialization~~ended ofMarch 31, ~~current~~2012 ~~product~~as ~~candidates~~compared ~~and~~ to ~~continue~~$2,938,541for ~~to fund operations at~~ the ~~current~~three ~~cash~~months ~~expenditure~~ended ~~levels.~~March 31, ~~Callisto~~2011 ~~cannot~~and be$98,609,041 ~~certain~~during ~~that~~the ~~additional~~period ~~funding~~from ~~will~~June 5, be1996 ~~available~~(inception) onto ~~acceptable terms~~March 31, ~~or at all~~2012. ToDuring the ~~extent~~three ~~that~~months ~~Callisto~~ended ~~raises~~March 31, ~~additional~~2012 ~~funds~~and ~~by issuing equity securities~~2011, Callisto’s ~~stockholders~~incurred ~~may~~net ~~experience~~losses ~~significant~~attributable ~~dilution.~~to ~~Any~~common ~~debt~~stockholders ~~financing~~of $3,142,259 ifand ~~available~~$1,761,367, ~~may~~respectively ~~involve~~and ~~restrictive~~$145,508,572 ~~covenants~~during ~~that~~the ~~impact~~period ~~Callisto’s~~from ~~ability~~June 5, to1996 ~~conduct~~(inception) ~~business. If Callisto is unable~~ to ~~raise~~March 31, ~~additional~~2012. ~~capital~~To ~~when~~date, ~~required~~Callisto’s orsources onof ~~acceptable~~cash ~~terms,~~have ~~Callisto~~been ~~may~~primarily ~~have~~limited to ~~(i) significantly~~the ~~delay,~~sale ~~scale~~of ~~back~~common orstocks, ~~discontinue~~warrants, ~~the development~~ and~~/or~~ ~~commercialization~~issuance of ~~one~~debt orinstruments. ~~more~~There ~~product~~were ~~candidates;~~no ~~(ii) seek~~financing ~~collaborators~~activities for ~~product~~the ~~candidates~~three atmonths anended ~~earlier stage than otherwise would be desirable and on terms that are less favorable than might otherwise be available; or (iii)~~March ~~relinquish~~31, or2012. ~~otherwise~~As ~~dispose~~ of ~~rights to technologies~~March 31, ~~product~~2012 ~~candidates~~Callisto orhad ~~products~~working ~~that~~capital ~~Callisto~~of ~~would~~$2,915,957 ~~otherwise~~as ~~seek~~compared to ~~develop~~working orcapital ~~commercialize~~of ~~ourselves~~$9,754,600 onas ~~unfavorable~~of ~~terms~~December 31, 2011.

On May 9, 2012, Synergy closed an underwritten public offering of 10,000,000 shares of common stock at an offering price of $4.50 per share. The gross proceeds from this offering are $45 million, before deducting underwriting discounts and commissions and other estimated offering expenses of approximately $3 million. Synergy also granted the underwriters a 45-day option to purchase up to an additional 1,500,000 shares of common stock at an offering price of $4.50 per share to cover over-allotments, if any.

Callisto may be required to raise additional capital within this year to complete the development and commercialization of current product candidates and to continue to fund operations at the current cash expenditure levels. Callisto cannot be certain that additional funding will be available on acceptable terms, or at all. Recently worldwide economic conditions and the international equity and credit markets have significantly deteriorated and may remain difficult for the foreseeable future. These developments may make it more difficult to obtain additional equity or credit financing, when needed. To the extent that Callisto raises additional funds by issuing equity securities, Callisto’s stockholders may experience significant dilution. Any debt financing, if available, may involve restrictive covenants that impact Callisto’s ability to conduct business. If Callisto is unable to raise additional capital when required or on acceptable terms, Callisto may have to (i) significantly delay, scale back or discontinue the development and/or commercialization of one or more product candidates; (ii) seek collaborators for product candidates at an earlier stage than otherwise would be desirable and on terms that are less favorable than might otherwise be available; or (iii) relinquish or otherwise dispose of rights to technologies, product candidates or products that Callisto would otherwise seek to develop or commercialize ourselves on unfavorable terms.

3. Recent Accounting Pronouncements

In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income (“ASU 2011-05”) which is intended to facilitate the convergence of U.S. GAAP and International Financial Reporting Standards (“IFRS”) as well as to increase the transparency of items reported in other comprehensive income. As a result of ASU 2011-05, all nonowner changes in stockholders’ equity are required to be presented in a single continuous statement of comprehensive income or in two separate but consecutive statements. The option to present other comprehensive income in the statement of changes in equity has been eliminated. ASU 2011-05 is effective for fiscal years beginning after December 15, 2011 and should be applied retrospectively. The Company ~~expects~~adopted ~~to adopt~~ this standard ~~beginning~~on inJanuary 1, 2012. Asand ~~ASU~~the ~~2011-05~~adoption ~~impacts~~did ~~presentation~~not ~~only, it will~~ have noa ~~effect~~material impact on the Company’s consolidated financial statements.

4In May 2011, FASB issued ASU No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” ASU 2011-04 amends Topic 820 to provide common fair value measurement and disclosure requirements in U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) and International Financial Reporting Standards. Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for ~~share~~measuring fair value and for disclosing information about fair value measurements, as well as providing guidance on how fair value should be applied where its use is already required or permitted by other standards within U.S. GAAP. ASU No. 2011-~~based~~04 ~~payments~~is to be applied prospectively, and early adoption is not permitted. For public entities, the amendments are effective during interim and annual periods beginning after

ASC Topic 718 “Compensation—Stock Compensation” requires companies to measure the cost of employee services received in exchange for the award of equity instruments based on the estimated fair value of the award at the date of grant. The expense is to be recognized over the period during which an employee is required to provide services in exchange for the award. ASC Topic 718 did not change the way The Company accounts for non-employee stock-based compensation. The Company continues to account for shares of common stock, stock options and warrants issued to non-employees based on the fair value of the stock, stock option or warrant, if that value is more reliably measurable than the fair value of the consideration or services received. The Company accounts for stock options issued and vesting to non-employees in accordance with ASC Topic 505-50 “Equity -Based Payment to Non-Employees” and accordingly the value of the stock compensation to non-employees is based upon the measurement date as determined at either a) the

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~~date at which a performance commitment is reached~~December 15, or2011. b)The atadoption ~~the~~of ~~date~~ASU ~~at which the necessary performance to earn the equity instruments is complete~~No. 2011-04 ~~Accordingly~~on ~~the~~January 1, ~~fair~~2012 ~~value~~did ofnot ~~these~~have ~~options~~a ismaterial ~~being~~impact ~~“marked~~on ~~to market” quarterly until~~ the ~~measurement~~Company’s ~~date~~consolidated isfinancial ~~determined~~statements.

~~ASC~~In December 2011, the FASB issued ASU 2011-11, “Balance Sheet (Topic ~~718~~210): ~~requires~~Disclosures ~~that~~about ~~cash~~Offsetting ~~flows~~Assets ~~resulting~~and ~~from~~Liabilities.” ~~tax~~ASU ~~deductions~~2011-11 inprovides ~~excess~~for additional disclosures of ~~the~~both ~~cumulative~~gross ~~compensation~~information ~~cost~~and ~~recognized~~net ~~for~~information ~~options~~about ~~exercised~~both ~~(excess~~instruments ~~tax~~and ~~benefits)~~transactions beeligible ~~classified~~for asoffset ~~cash~~in ~~inflows~~the ~~from~~statement ~~financing~~of ~~activities~~financial position and ~~cash~~instruments ~~outflows~~and ~~from~~transactions ~~operating~~subject ~~activities.~~to ~~Due~~an agreement similar to ~~the~~a ~~Company’s~~master ~~accumulated~~netting ~~deficit~~arrangement. ~~position,~~This noscope ~~excess~~would ~~tax~~include ~~benefits~~derivatives, ~~have~~sale ~~been~~and ~~recognized.~~repurchase ~~The~~agreements ~~Company~~and ~~accounts~~reverse ~~for~~sale ~~common~~and ~~stock~~repurchase agreements, ~~stock~~and ~~options,~~securities borrowing and ~~warrants~~securities ~~granted~~lending toarrangements. ~~employees~~The ~~and~~amendments ~~non-employees~~in ~~based~~this Update are effective for annual reporting periods beginning on ~~the~~or ~~fair~~after ~~market~~January 1, ~~value~~2013, ofand ~~the~~interim ~~instrument~~periods within those annual periods, ~~using~~and ~~the~~disclosures ~~Black-Scholes~~required ~~option~~by ~~pricing~~these ~~model~~amendments ~~based~~should onbe ~~assumptions~~provided retrospectively for ~~expected~~all ~~stock~~comparative ~~price~~periods ~~volatility,~~presented. ~~term~~The adoption of ~~the~~ASU ~~option,~~No. ~~risk~~2011-~~free~~11 ~~interest~~is ~~rate~~not ~~and~~ expected ~~dividend~~to ~~yield,~~have ata material impact on the ~~grant~~Company’s ~~date~~consolidated financial statements.

~~The~~In ~~Company~~December 2011, ~~accounts~~the ~~for~~FASB ~~common~~issued ~~stock~~ASU 2011-12, ~~stock~~“Comprehensive ~~options,~~Income ~~and~~(Topic ~~warrants~~220): ~~granted~~Deferral toof ~~employees~~the ~~and~~Effective ~~non-employees~~Date ~~based~~for onAmendments to the ~~fair~~Presentation ~~market~~of ~~value~~Reclassifications of ~~the~~Items ~~instrument,~~Out ~~using~~of ~~the~~Accumulated ~~Black~~Other Comprehensive Income in Accounting Standards Update No. 2011-~~Scholes~~05.” ~~option~~ASU ~~pricing~~2011-12 ~~model~~defers ~~based~~the onspecific ~~assumptions~~requirement ~~for~~to ~~expected~~present ~~stock~~items ~~price~~that ~~volatility,~~are ~~term~~reclassified from accumulated other comprehensive income to net income separately with their respective components of ~~the~~net ~~option,~~income ~~risk~~and other comprehensive income. ASU 2011-~~free~~12 ~~interest~~did ~~rate~~not ~~and~~defer ~~expected~~the ~~dividend~~requirement ~~yield,~~to report comprehensive income either in a single continuous statement or in two separate but consecutive financial statements. The amendments are effective at the ~~grant~~same ~~date~~time as the amendments in ASU 2011-05.

4. Accounting for share-based payments

ASC Topic 718 did not change the way Callisto accounts for non-employee stock-based compensation. Callisto continues to account for shares of common stock, stock options and warrants issued to non-employees based on the fair value of the stock, stock option or warrant, if that value is more reliably measurable than the fair value of the consideration or services received. The Company accounts for stock options issued and vesting to non-employees in accordance with ASC Topic 505-50 “ Equity-Based Payment to Non-Employees” whereas the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. Accordingly the fair value of these options is being “marked to market” quarterly until the measurement date is determined.

ASC Topic 718 requires that cash flows resulting from tax deductions in excess of the cumulative compensation cost recognized for options exercised (excess tax benefits) be classified as cash inflows from financing activities and cash outflows from operating activities. Due to Callisto’s accumulated deficit position, no tax benefits have been recognized in the cash flow statement.

Callisto accounts for common stock, stock options, and warrants granted to employees and non-employees based on the fair market value of the instrument, using the Black-Scholes option pricing model based on assumptions for expected stock price volatility, term of the option, risk-free interest rate and expected dividend yield, at the grant date.

Callisto options

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

	Three Months Ended September 30,					Nine Months Ended September 30,				June 5, 1996 (Inception) to September 30,
	Three Months Ended March 31,					June 5, 1996 (Inception) to
	2011		2010			2011		2010		2011
	2012		2011			March 31, 2012
Employees—included in research and development	$	—	$	—		$	—2,692,157	$	—	$	~~2,692,259~~
Employees—included in general and administrative	25,~~426~~835		65,~~405~~886			234,~~202~~863,996		~~26,148~~		~~4,852,166~~
Non-employee—research and development	—		—			—		—		102,750
Subtotal employee stock option grants	5,835		5,886			7,556,153
Non-employee—general and administrative	109,412		(23,346		)	244,059		24,111		10,182,859
Non-employee—research and development			—			102,750
Total stock based compensation expense	$	111,838	$	(16,941	)	$	267,261	$	55,604	$	17,830,034
Non-employee—general and administrative	82,013		(28,693		)	10,393,135
Subtotal non-employee stock option grants	82,013		(28,693		)	10,495,885
Total stock based compensation expense	$	87,848	$	(22,807	)	$	18,052,038

The unrecognized compensation cost related to employee non-vested Callisto stock options outstanding at September 30, 2011, net of expected forfeitures, was $32,851 to be recognized over a weighted average vesting period of approximately one year.

The estimated fair value of each Callisto stock option award was determined on the date of grant using the Black-Scholes option valuation model with the following weighted-average assumptions during the nine months ended September 30, 2011 and 2010.

	Nine months ended September 30,
	2011			2010
Risk free interest rate	1.85		%	2.38		%
Dividend yield	0		%	0		%
Expected volatility	90		%	100		%
Expected term	5 years			5 years
Weighted average grant date fair value	$	0.49		$	0.20

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

Table of Contents

	Number of options		Exercise Price Per Share		Weighted Average Exercise Price Per Share		Intrinsic Value		Weighted Average Remaining Contractual Term
Balance outstanding, December 31, 2010	7,971,872		$	0.08 - 3.60	$	1.46	$	394,520	4.2 years
Granted	26,500		$	0.66	$	0.66	—
Forfeitures	(563,000	)	$	0.08-1.25	$	1.10	—
Balance outstanding, September 30, 2011	7,435,372		$	0.08-3.60	$	1.49	$	208,615	3.64 years
Exercisable as of September 30, 2011	5,634,372		$	0.08-3.60	$	1.43	$	123,235	3.42 years

The unrecognized compensation cost related to employee non-vested Callisto stock options outstanding at March 31, 2012, net of expected forfeitures, was $21,020 to be recognized over a weighted average vesting period of approximately a year.

~~Synergy~~The ~~Options~~estimated fair value of each Callisto stock option award was determined on the date of grant using the Black-Scholes option valuation model . No options were granted during the quarter ended March 31, 2012 and March 31, 2011.

~~Synergy~~A ~~adopted~~summary ~~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~~stock ~~service~~option ~~from~~activity ~~the grant date~~ and ~~have a contractual term~~ of ~~ten~~changes ~~years.~~in ~~Synergy~~Callisto ~~did not issue~~ stock options ~~prior~~outstanding tounder ~~the~~Callisto’s ~~quarter~~plans ~~ended~~is ~~September 30,~~presented ~~2008. Stock-based compensation expense related to Synergy options and restricted stock units have been recognized in operating results as follow~~below:

	Three Months Ended September 30,						Nine Months Ended September 30,						November 15, 2005 (inception) to
	Number of options		Exercise Price Per Share			Weighted Average Exercise Price Per Share			Aggregate Intrinsic Value			Weighted Average Remaining Contractual Term
	2011			2010			2011			2010			September 30, 2011
Balance outstanding, December 31, 2011	7,435,372		$	0.08 - 3.60		$	1.49		$	7,200		3.39
Employees—included in research and development	$	1,225		$	45,991		$	75,131		$	145,254		$	594,721
Granted	—		$	—		$	—		—
Employees—included in general and administrative	1,487			46,553			91,220			164,501			772,706
Forfeitures	—		$	—		$	—		—
Non-employees—included in research and development	4,832			26,819			21,649			43,636			116,296
Balance outstanding, March 31, 2012	7,435,372		$	0.08 - 3.60		$	1.49		$	180,860		3.14
Non-employees—included in general and administrative	3,184			59,473			119,284			202,850			970,164
Exercisable as of March 31, 2012	5,903,372		$	0.08 - 3.60		$	1.37		$	125,710		2.92
Total stock-based compensation expense	$	10,728		$	178,836		$	307,284		$	556,241		$	2,453,887

~~There~~Stock was no unrecognized share-based compensation related to time vested employee stock options at September 30, 2011. The estimated fair value of stock option awards was determined on the date of grant using the Black-Scholes option valuation model with the following weighted-average assumptions during the following periods indicated.Options

	Nine Months Ended September 30, 2011	Nine Months Ended September 30, 2010
Risk-free interest rate	(*)	2.31- 2.71%
Dividend yield	(*)	—
Expected volatility	(*)	90%
Expected term (in years)	(*)	6.0 years

ASC Topic 718 “Compensation—Stock Compensation” requires companies to measure the cost of employee services received in exchange for the award of equity instruments based on the estimated fair value of the award at the date of grant. The expense is to be recognized over the period during which an employee is required to provide services in exchange for the award. ASC Topic 718 did not change the way Synergy accounts for non-employee stock-based compensation. Synergy continues to account for shares of common stock, stock options and warrants issued to non-employees based on the fair value of the stock, stock option or warrant, if that value is more reliably measurable than the fair value of the consideration or services received. The Company accounts for stock options issued and vesting to non-employees in accordance with ASC Topic 505-50 “Equity-Based Payment to Non-Employees” and accordingly the value of the stock compensation to non-employees is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. Accordingly the fair value of these options is being “marked to market” quarterly until the measurement date is determined.

ASC Topic 718 requires that cash flows resulting from tax deductions in excess of the cumulative compensation cost recognized for options exercised (*excess tax benefits) Nobe classified as cash inflows from financing activities and cash outflows from operating activities. Due to Synergy’s accumulated deficit position, no excess tax benefits have been recognized. Synergy accounts for common stock, stock options, and warrants granted ~~during~~to ~~this~~employees ~~period~~and non-employees based on the fair market value of the instrument, using the Black-Scholes option pricing model based on assumptions for expected stock price volatility, term of the option, risk-free interest rate and expected dividend yield, at the grant date.

On March 1, 2010, a majority of Synergy’s shareholders acting by written consent approved an amendment to the Plan increasing the number of shares reserved under the Plan to 15,000,000 shares. A summary of stock option activity and of changes in stock options outstanding under the Plan is presented below:

Table of Contents

	Number of Options		Exercise Price Per Share	Weighted Average Exercise Price Per Share		Intrinsic Value		Weighted Average Remaining Contractual Term
Balance outstanding, December 31, 2010	8,604,016		$0.25 - 0.95	$	0.51	$	25,763,002	8.4 years
Granted	—		—	—
Exercised	—		—	—
Forfeited	(289,939	)	$0.25-0.70	$	0.52
Balance outstanding, September 30, 2011	8,314,077		$0.25-0.95	$	0.51	$	14,174,290	7.66 years
Exercisable at September 30, 2011	2,783,386		$0.25-0.95	$	0.28	$	5,367,937	6.78 years

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.

5.Stock-based ~~Stockholder’s~~compensation ~~Equity~~has been recognized in operating results as follow:

On February 28, 2011 and March 8, 2011 Callisto entered into consulting agreements with two financial advisors who agreed to receive an aggregate of 850,000 shares of Callisto common stock, with a fair value of $533,000, as full compensation for their services, which has been recorded as prepaid expense and $308,000 has been amortized over the term of the agreements for the nine months ended September 30, 2011.

	Three Months Ended March 31,				November 15, 2005 (inception) to
	2012		2011		March 31, 2012
Employees—included in research and development	$	115,770	$	36,749	$	742,552
Employees—included in general and administrative	93,649		44,618		868,060
Subtotal employee stock based compensation	209,419		81,367		1,610,612
Non-employees—included in research and development	—		8,362		168,096
Non-employees—included in general and administrative	228,652		57,731		1,628,012
Subtotal non-employee stock based compensation	228,652		66,093		1,796,108

Total stock-based compensation expense	$	438,071	$	147,460	$	3,406,720

OnThe ~~February 19,~~unrecognized ~~2011~~compensation acost ~~Callisto~~related ~~warrant~~to ~~holder~~non-vested ~~exercised~~stock ~~his~~options ~~warrant~~outstanding toat ~~purchase~~March 31, ~~106~~2012,~~667~~ ~~shares~~net of ~~Callisto~~expected ~~common~~forfeitures, ~~stock~~was at$3,498,455 anto ~~exercise~~be ~~price~~recognized over a weighted-average remaining vesting period of $0approximately 2.505 ~~per~~years. ~~share~~This ~~yielding~~unrecognized ~~gross~~compensation ~~proceeds~~cost ofdoes ~~$53~~not include amounts related to 4,~~334~~364,000 stock options which vest upon a change of control.

OnThe ~~March 22,~~estimated ~~2010,~~fair ~~the~~value ~~Company reached an agreement with more than the requisite holders~~ of ~~70%~~stock ofoption ~~the~~awards ~~outstanding~~was ~~$603,163~~determined ~~principal~~on ~~amount of 11% Secured Promissory Notes due April 15, 2010 (~~the ~~“Notes”) to extend the due~~ date of ~~the~~grant ~~Notes~~using ~~to April 30, 2011. In exchange for~~ the ~~amendment,~~Black-Scholes ~~the~~option ~~Company~~valuation ~~agreed~~model towith ~~issue to~~ the ~~note~~following holders 15% of the amount of principal and interest due on the Notes as of March 31, 2010 payable in shares of common stock, or 265,770 shares of common stock. This modification of debt was considered “substantially different” and was accounted for as a modification of debt. In accordance with ASC Topic 405weighted-~~20,~~average ~~the~~assumptions carrying value of the notes payable before modification in the amount of $647,606 was extinguished and the fair value of the new debt in the amount $671,103 was recorded. The difference between the carrying value and the fair value in the amount of $23,497 was recorded as interest expense. The fair value of the shares totaled $100,196 and was recorded as a loss on extinguishment during the ~~nine~~periods ~~months ended September 30, 2010 and included in interest and other expense in the statement of operations~~indicated.

On October 29, 2010, Callisto entered into a Note and Warrant Exchange Agreement with the holders of its Secured Promissory Notes due April 30, 2011 (the “Notes”), which were issued in December 2008 along with the related common stock purchase warrants exercisable for 68,883,536 shares of common stock (the “Warrants”), pursuant to which such holders exchanged the Notes plus accrued interest and the Warrants for an aggregate 72,355,770 shares of common stock.

	Three Months Ended March 31, 2011	Three Months Ended March 31, 2010
Risk-free interest rate	1.05%-1.50%	(*)
Dividend yield	—	(*)
Expected volatility	60%	(*)
Expected term (in years)	6 years	(*)

~~The carrying value of the Notes extinguished, including accrued but unpaid interest, was $709,639. In accordance with ASC Topic 405-20 Callisto calculated the difference between~~ (i*) ~~the~~ ~~fair~~No ~~value of the Warrants received $37, 709,699, plus the carrying value of Notes extinguished $709,639, and (ii) the fair value of the common~~ stock ~~issued~~options togranted ~~the note $40,519,831, and warrant holders. This resulted in a loss of $2,099,892 on extinguishment of the debt, which was recorded in the statement of operations~~ during ~~the~~this ~~quarter ended December 31, 2010~~period.

~~The~~On ~~following~~March 1, ~~table~~2010, ~~summarizes~~a majority of Synergy’s shareholders acting by written consent approved an amendment to the ~~financial~~Plan ~~impact~~increasing the number of shares reserved under the ~~11%~~Plan ~~Notes~~to ~~payable~~7,500,000 ~~and~~shares, ~~the~~after ~~related~~a ~~interest~~retroactive ~~expense~~change ~~for~~of ~~the~~a ~~period~~one ~~from~~for ~~January~~ two (1,:2) ~~2010~~reverse ~~through~~stock ~~December~~split effective on November 3130, ~~2010~~2011. A summary of stock option activity and of changes in stock options outstanding under the Plan is presented below:

	Number of Options	Exercise Price Per Share		Weighted Average Exercise Price Per Share		Intrinsic Value		Weighted Average Remaining Contractual Term
Balance outstanding, December 31, 2011	5,964,039	$	0.50 – 4.30	$	1.77	$	10,631,388	8.18 years
Granted	772,000	$	3.40 – 4.38	$	3.54
Exercised	—	$	—	$	—
Forfeited	—	$	—	$	—

Balance outstanding, March 31, 2012	6,736,039	$	0.50 – 4.38	$	1.97	$	14,107,539	8.06 years

Exercisable at March 31, 2012	2,076,539	$	0.50 – 4.30	$	0.75	$	6,857,989	6.45 years

Table of Contents

	11% Notes Payable			Interest expense
January 1, 2010	$	487,130
Accretion of 11% Note discount to interest expense	144,116			144,116
11% nominal interest expense quarter ended March 31, 2010	16,360			16,360
Loss on extinguishment	23,497			23,497
Common shares issued in exchange for modification of notes payable	—			100,196
March 31, 2010	$	671,103		$	284,169
11% nominal interest expense quarter ended June 30, 2010	16,542			16,542
June 30, 2010	$	687,645		$	300,711
11% nominal interest expense quarter ended September 30, 2010	16,723			16,723
September 30, 2010	$	704,368		$	317,434
11% nominal interest expense through October 29, 2010	5,271			5,271
Extinguishment on Notes payable on October 29, 2010	(709,639		)	—
December 31, 2010	$	—		$	322,705

5. Research and Development Expense

OnResearch ~~October 20,~~and ~~2010~~development ~~Callisto~~costs ~~entered~~include ~~into~~expenditures anin ~~option~~connection ~~agreement (the “Agreement”)~~ with aan ~~third~~in-house ~~party~~research ~~(“Optionee”)~~and ~~granting~~development ~~the Optionee the right to purchase up to 2~~laboratory,~~000,000~~ ~~shares~~salaries ofand ~~the~~staff ~~common stock of Synergy Pharmaceuticals~~costs, ~~Inc.,~~ ~~currently~~application ~~owned~~and byfiling ~~Callisto~~for ~~(the~~regulatory ~~“Shares”)~~approval ~~at a purchase price~~ of ~~$2.45~~proposed ~~per share. On June 3~~products, ~~2011~~purchased ~~the~~in-process ~~Optionee~~research ~~paid~~and ~~Callisto $100~~development,~~000~~ inregulatory ~~cash~~and ~~for~~scientific ~~this~~consulting ~~option~~fees, ~~which~~as ~~may~~well beas ~~exercised~~contract atresearch, ~~any~~patient ~~time during the period from the date of the Agreement until (i) October 20~~costs, ~~2012~~drug ~~with~~formulation ~~respect~~and ~~to 1~~tableting,~~000,000~~ ~~Shares~~data ~~and (ii) October 20~~collection, ~~2015 with respect to 1~~monitoring,~~000,000~~ ~~Shares.~~insurance ~~The~~and ~~Company~~FDA ~~recorded this sale as an equity transaction through additional paid in capital~~consultants.

OnIn ~~March 4,~~accordance ~~2011,~~with ~~Synergy~~FASB ~~closed~~ASC aTopic ~~registered~~730-10-55, ~~direct~~Research ~~offering~~and ~~with~~Development, aCallisto ~~non-U.S.~~recorded ~~investor~~prepaid ~~which~~research ~~raised~~and ~~gross~~development ~~proceeds~~costs of $1,~~800~~064,~~000.~~136 ~~Synergy~~and ~~issued to the investor 600~~$577,~~000~~745 ~~shares~~as of ~~its~~March 31, ~~common~~2012 ~~stock~~ and ~~warrants~~December 31, to2011, ~~purchase 420~~respectively,~~000~~ ~~shares~~for ofnonrefundable ~~common~~pre-payments ~~stock.~~for ~~The~~production ~~purchase~~of ~~price~~drug ~~paid~~substance byand ~~the~~analytical ~~investor~~testing ~~was~~services ~~$3.00~~ for ~~each~~its ~~unit.~~drug ~~The warrants expire after seven years and are exercisable at $3~~candidates.10 ~~per~~In ~~share.~~accordance ~~Based~~with ~~upon~~this ~~the Company’s analysis of the criteria contained in ASC Topic 815-40~~guidance, ~~the~~Synergy ~~Company~~expenses ~~has~~deferred ~~determined~~research ~~that~~and ~~the~~development ~~warrants~~costs ~~issued~~when indrug ~~connection~~compound ~~with~~is ~~this~~delivered ~~registered direct offering must be recorded as derivative liabilities upon issuance~~ and ~~marked~~services toare ~~market on a quarterly basis~~performed.

~~On May 2, 2011, Synergy entered into a securities purchase agreement with certain investors to raise gross proceeds of $1,300,002 in a registered direct offering~~6. ~~The~~Income Company issued to the investors 433,334 shares of its common stock and warrants to purchase 433,334 shares of common stock. The purchase price paid by the investors was $3.00 for each unit. The warrants expire after seven years and are exercisable at $3.25 per share. Based upon the Company’s analysis of the criteria contained in ASC Topic 815-40, the Company has determined that the warrants issued in connection with this registered direct offering must be recorded as derivative liabilities upon issuance and marked to market on a quarterly basis.Taxes

~~From~~During ~~May 17~~the toyear ~~May~~ended December 2331, 2011, ~~Synergy~~our ~~entered~~controlled ~~into~~subsidiary ~~securities~~recorded ~~purchase~~refundable ~~agreements~~tax ~~with~~credit ~~certain investors to raise gross proceeds of $1,199,997~~ in aprepaid ~~registered~~and ~~direct~~other ~~offering.~~current ~~The~~assets ~~Company~~for ~~issued to the investors 399,999 shares of~~ its ~~common~~(i) 2010 ~~stock~~New ~~and~~York ~~warrants~~State toQETC ~~purchase 399~~credit,~~999~~ ~~shares~~totaling ~~of common stock. The purchase price paid by the investors was~~ $~~3.00~~248,486 ~~for each unit. The warrants expire after seven years~~ and ~~are~~(ii) its ~~exercisable~~New atYork ~~$3.25~~City ~~per~~Biotechnology ~~share.~~Tax ~~Based~~Credit ~~upon~~for the ~~Company’s~~tax ~~analysis~~year of ~~the~~2011 ~~criteria~~totaling ~~contained~~$118,437. On inApril 25, ~~ASC Topic 815-40~~2012, the Company ~~has~~received ~~determined~~$246,402 ~~that~~for ~~the~~2010 ~~warrants~~New ~~issued~~York inState ~~connection~~QETC ~~with this registered direct offering must be recorded as derivative liabilities upon issuance and marked to market on a quarterly basis~~credit.

~~On June 3, 2011, a Synergy warrant holder exercised his warrants and purchased a total of 160,000 shares of common stock~~7. ~~Synergy~~Net ~~raised~~Loss ~~gross~~per proceeds of $415,309 as a result of the warrant exercise. The purchase price paid by the warrant holder was $2.50 for 98,675 shares and $2.75 for 61,235 shares. Based upon the Company’s analysis of the criteria contained in ASC Topic 815-40, the Company had determined that the warrants exercised in connection with this transaction were derivative liabilities when issued and the Company had been marking this liability to market at the end of each reporting period. Upon the exercise of these warrants the fair value of the related derivative liability totaling $486,328 was reclassified to Additional Paid in Capital. (See Note 8 Derivative Financial Instruments)Share

~~From~~Basic ~~June 3~~and todiluted ~~June 15,~~net ~~2011,~~loss ~~Synergy~~per ~~entered~~share ~~into~~is ~~securities~~presented ~~purchase~~in ~~agreements~~conformity with ~~certain~~ASC ~~investors~~Topic to260, ~~raise~~“Earnings ~~gross~~per ~~proceeds of $1~~Share,~~161,243~~” infor aall ~~private~~periods ~~placement~~presented. ~~The~~ ~~Company~~In ~~issued~~accordance towith ~~the~~ASC ~~investors~~Topic ~~387~~260,~~081~~ ~~shares~~basic ~~of its common stock~~ and ~~warrants~~diluted tonet ~~purchase~~loss ~~387,081~~per ~~shares of~~ common ~~stock.~~share ~~The~~was ~~purchase~~determined ~~price paid~~ by ~~the~~dividing ~~investors~~net ~~was~~loss ~~$3.00~~attributable for each unit. The warrants expire after seven years and are exercisable at $3.25 per share. In connection with this transaction Synergy entered into a registration rights agreement with each of the investors pursuant to ~~which~~common ~~Synergy~~stockholders ~~agreed~~by ~~to register~~ the ~~shares~~weighted-average of common ~~stock and~~ shares ofoutstanding ~~common~~during ~~stock underlying~~ the ~~warrants~~period. inDiluted aweighted-average ~~resale~~shares ~~registration~~are ~~statement~~the tosame beas ~~filed~~basic ~~within~~weighted-average 45shares ~~days~~since ~~after~~ the ~~final~~inclusion ~~closing~~ of ~~the~~issuable ~~private~~shares ~~placement. Based~~pursuant ~~upon~~to the ~~Company’s~~exercise ~~analysis~~ of ~~the~~stock ~~criteria~~options ~~contained~~and ~~in ASC Topic 815-40~~warrants, ~~Synergy~~and ~~has determined that~~ the ~~warrants~~conversion ~~issued~~of inpreferred ~~connection~~stock ~~with~~would ~~this~~have ~~private~~been ~~placement must be recorded as derivative liabilities upon issuance and marked to market on a quarterly basis~~antidilutive.

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

	March 31, 2012	March 31, 2011
Common Shares outstanding	158,516,071	158,466,071
Potentially dilutive common shares issuable upon:
Exercise of warrants	988,741	10,265,332
Exercise of Callisto stock options	7,435,372	7,414,872
Conversion of Series A Convertible Preferred Stock	222,222	222,222
Conversion of Series B Convertible Preferred Stock	—	—

Total fully diluted	167,162,406	176,368,497

8. Derivative Financial Instruments

Effective January 1, 2009, the Company adopted provisions of ASC Topic 815-40, “Derivatives and Hedging: Contracts in Entity’s Own Equity” (“ASC Topic 815-40”). ASC Topic 815-40 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 ASC Topic 815-10.

Table of Contents

~~On July 11, 2011, Synergy entered into a securities purchase agreement with an investor to raise gross proceeds of $242,750 in a private placement~~8. ~~The~~ ~~Company~~Derivative ~~issued~~Financial toInstruments the investor 80,916 shares of its common stock and warrants to purchase 80,916 shares of common stock. The purchase price paid by the investors was $3.00 for each unit. The warrants expire after seven years and are exercisable at $3.25 per share. In connection with this transaction Synergy entered into a registration rights agreement with the investor pursuant to which Synergy agreed to register the shares of common stock and shares of common stock underlying the warrants in a resale registration statement to be filed within 45 days after the final closing of the private placement. Based upon the Company’s analysis of the criteria contained in ASC Topic 815-40, Synergy has determined that the warrants issued in connection with this private placement must be recorded as derivative liabilities upon issuance and marked to market on a quarterly basis.(Continued)

~~On July 28, 2011,~~ Synergy ~~entered~~Derivative ~~into~~Financial a securities purchase agreement with certain investors to raise gross proceeds of $2,336,472 in a registered direct offering. The Company issued to the investors 667,563 shares of its common stock. The purchase price paid by the investors was $3.50 for each share of common stock. Selling agent fees and expenses totaled approximately $231,291 and there were no warrants issued in connection with this transaction.Instruments

For the nine months ended September 30, 2011, Synergy paid $661,052 in selling agent fees and legal expenses related to the above financing transactions and issued 18,050 warrants to a selling agent which expire after seven years and are exercisable at $3.25 per share. Based upon the Company’s analysis of the criteria contained in ASC Topic 815-40, Synergy has determined that 16,050 warrants issued to selling agents were equity instruments upon issuance and 2,000 warrants were treated as derivative liabilities.

6. Derivative Financial Instruments

~~Callisto~~Based ~~Derivative~~upon ~~Instruments~~the Company’s analysis of the criteria contained in ASC Topic 815-40, Synergy has determined that certain warrants issued in connection with sale of its common stock must be classified as derivative instruments. In accordance with ASC Topic 815-40, these warrants are also being re-measured at each balance sheet date based on estimated fair value, and any resultant changes in fair value is being recorded in the Company’s statement of operations. The Company estimates the fair value of certain warrants using the Black-Scholes option pricing model in order to determine the associated derivative instrument liability and change in fair value described above. The range of assumptions used to determine the fair value of the warrants at each period end during the three months ended March 31, 2012 and March 31, 2011 were:

Based upon the Company’s analysis of the criteria contained in ASC Topic 815-40 and ASC Topic 815-10, certain warrants (the “New Warrants”) issued in connection with the issuance of the 11% Notes are accounted for as derivative liabilities on the Company’s Balance Sheet.

	Three Months Ended March 31, 2012	Three Months Ended March 31, 2011
Estimated fair value of Synergy common stock	$3.51 - $4.05	$4.86 - $6.26
Expected warrant term	5.0 - 7.0 years	4.0 - 7.0 years
Risk-free interest rate	0.51%-1.33%	1.80% - 2.9%
Expected volatility	60%	90%
Dividend yield	—	—

InEstimated ~~accordance~~fair ~~with~~value ~~ASC~~of ~~Topic~~stock ~~815-40,~~is the ~~New~~closing ~~Warrants~~market ~~were~~price ~~re-measured~~of the Company’s common stock on the date of warrant issuance and at the end of each ~~balance~~reporting ~~sheet~~period ~~date~~when the derivative instruments are marked to market. Expected volatility is a management estimate of future volatility, over the expected warrant term, based on ~~estimated~~historical ~~fair~~volatility ~~value,~~of Synergy’s common stock. The warrants have a transferability provision and ~~any~~based ~~resultant~~on ~~changes~~guidance provided in ~~fair~~SAB ~~value~~107 ~~will~~for beinstruments ~~recorded~~issued aswith ~~non-cash~~such ~~valuation~~a ~~adjustments~~provision, ~~within~~Synergy ~~other~~used ~~income~~the ~~(expense)~~full incontractual term as the ~~Company’s~~expected ~~statement~~term of ~~operations~~the warrants. The ~~Company~~risk ~~estimates~~free ~~the~~rate ~~fair~~is ~~value~~based ofon the ~~New~~U.S. ~~Warrants~~Treasury ~~using~~security ~~the~~rates ~~Black-Scholes~~for ~~option~~maturities ~~pricing~~consistent ~~model~~with inthe ~~order~~expected toremaining ~~determine~~term of the ~~associated~~warrants ~~derivative~~and ~~instrument~~the ~~liability~~date ~~described~~of ~~above~~grant or quarterly revaluation.

~~The~~As ~~Company~~of ~~estimates~~March ~~the~~31, ~~fair~~2012, ~~value~~certain of ~~the~~Synergy’s outstanding warrants ~~using~~contained a price protection clause which variable exercise price required the ~~Black-Scholes~~Company ~~option~~to ~~pricing~~use a binomial model to determine fair value. ~~The~~There ~~assumptions~~were ~~used~~no ~~for~~price protected warrants outstanding and therefore no binomial model calculation was required during the ~~nine~~three months ended ~~September 30~~March 31, 2011. ~~are~~The ~~noted~~range inof assumptions used to determine the ~~following~~fair ~~table~~value of the warrants at March 31, 2012 was as follows:

	Nine Months Ended September 30, 2011	Nine Months Ended September 30, 2010
	Three months ended, March 31, 2012
Estimated fair value of stock	(*)	$2.50-$3.70
Estimated fair value of Synergy common stock	$ 3.28
Expected warrant term	~~(*)~~4.63 years	~~5 years~~
Risk-free interest rate	~~(*)~~1.04%	~~1.20-1.79%~~
Expected volatility	~~(*)~~60%	~~90%~~
Dividend yield	~~(*)~~0%	0%

~~(*)~~In ~~During~~the Binomial model, the ~~nine~~assumption ~~months~~for ~~ended~~estimated fair value of the stock is based on a Black-Scholes based apportionment of the unit price paid for the shares and aswarrants issued in Synergy’s most recent registered direct offerings, which resulting stock prices were deemed to be arms-length negotiated prices. Expected volatility is a management estimate of ~~September 30~~future volatility over the expected warrant term, ~~2011~~based ~~Callisto~~on ~~had~~historical novolatility of Synergy’s common stock. The warrants ~~outstanding~~have ~~which~~a ~~required~~transferability ~~liability~~provision ~~accounting~~and ~~treatment~~based on guidance provided in ~~accordance~~SAB 107 for instruments issued with ~~ASC~~such ~~Topic~~a ~~815-40~~provision, Synergy used the full contractual term as the expected term of the warrants. The risk free rate is based on the U.S. Treasury security rates for maturities consistent with the expected remaining term of the warrants.

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 for maturities consistent with the expected term of the New Warrants.

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OnThe ~~June 30,~~following ~~2010,~~table ~~the~~sets ~~price~~forth ~~protection provision included in~~ the ~~New~~components ~~Warrants, which required derivative liability accounting, expired. As a result~~ of ~~the~~changes ~~expiration~~in ~~of this provision, Callisto measured~~ the ~~fair~~Synergy’s ~~value of the~~ outstanding warrants ~~through~~which ~~June 30,~~were ~~2010,~~deemed ~~recognizing any changes in fair value of the~~ derivative infinancial ~~earnings~~instruments and ~~then reclassified~~ the ~~derivative~~associated ~~instrument~~ liability asbalance ~~of June 30, 2010 into stockholders’ equity. Subsequent to June 30, 2010 Callisto has accounted~~ for the ~~New~~periods ~~Warrants as components of stockholders’ equity until they were exchanged for common stock during the quarter ended December 31, 2010.~~indicated:

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

Date	Description	Warrants		Derivative Instrument Liability
12/31/2010	Balance	728,469		$	3,487,959
3/31/2011	Fair value of new warrants issued during the quarter	210,000		$	1,312,673
3/31/2011	Change in fair value of warrants during the quarter recognized as other expense in the statement of operations	—		$	338,715
3/31/2011	Balance	938,469		$	5,139,347
6/30/2011	Fair value of new warrants issued during the quarter	611,207		$	2,607,827
6/30/2011	Exercise of warrants during the quarter	(80,000	)	$	(486,328	)
6/30/2011	Change in fair value of warrants during the quarter recognized as other expense in the statement of operations	—		$	697,660
6/30/2011	Balance	1,469,676		$	7,958,506
9/30/2011	Fair value of new warrants issued during the quarter	40,458		$	285,128
9/30/2011	Change in fair value of warrants during the quarter recognized as other income in the statement of operations	—		$	(4,382,796	)
9/30/2011	Balance	1,510,134		$	3,860,838
12/31/2011	Fair value of new warrants issued during the quarter	1,810,294		$	3,082,203
12/31/2011	Reclass of derivative liability to equity during the quarter	(1,055,268	)	$	(1,707,317	)
12/31/2011	Change in fair value of warrants during the quarter recognized as other income in the statement of operations	—		$	(1,910,610	)
12/31/2011	Balance	2,265,160		$	3,325,114

3/31/2012	Change in fair value of warrants during the quarter recognized as other income in the statement of operations	—		(7,946		)

3/31/2012	Balance	2,265,160		$	3,317,168

Date	Description	New Warrants		Derivative Instrument Liability
12/31/2009	Balance of derivative financial instruments December 31, 2009	68,883,536		$	11,870,369
3/31/2010	Change in fair value of New Warrants during the quarter ended March 31, 2010	—		17,062,145
3/31/2010	Balance of derivative financial instruments March 31, 2010	68,883,536		$	28,932,514
6/30/2010	Change in fair value of New Warrants during the quarter ended June 30, 2010	—		(1,420,784		)
6/30/2010	Reclassification of derivative liability to stockholder’s equity upon expiration of supplemental condition (price protection)	—		(27,511,730		)
12/30/2010	New Warrants exchanged for common stock upon conversion of Notes	(68,883,536	)	—
12/31/2010 and 9/30/11	Balance of derivative financial instruments December 31, 2010 and September 30, 2011	—		$	—

Synergy Fair Value Measurements

~~Callisto~~The ~~Fair~~following ~~Value~~table ~~Measurements~~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 December 31, 2011 and March 31, 2012:

The unrealized losses on the derivative liabilities are recorded 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 ASC Topic 820. 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 were classified as Level 3. As of September 30, 2011 and December 31, 2010 Callisto had no financial instruments or related derivative liabilities requiring fair value measurements.

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 December 31, 2011		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 March 31, 2012
Derivative liabilities related to Warrants	$	—	$	—	$	3,325,114	$	3,325,114	$	—	$	—	$	3,317,168	$	3,317,168

~~Synergy~~The ~~Derivative~~following ~~Financial~~table ~~Instruments~~sets forth a summary of changes in the fair value of the Company’s Level 3 liabilities for the three months ended March 31, 2012:

Effective January 1, 2009, Synergy adopted provisions of ASC Topic 815-40, “Derivatives and Hedging: Contracts in Entity’s Own Equity” (“ASC Topic 815-40”). ASC Topic 815-40 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 ASC Topic 815-10.

Description	Balance at December 31, 2011		Fair Value of warrants upon issuance		Unrealized (gains) or losses			Balance as of March 31, 2012
Derivative liabilities related to Warrants	$	3,325,114	$	—	$	(7,946	)	$	3,317,168

Based upon the Company’s analysis of the criteria contained in ASC Topic 815-40, Synergy has determined that the warrants issued in connection with its registered direct offerings and private placements must be recorded as derivative liabilities. Accordingly the warrants are also being re-measured at each balance sheet date based on estimated fair value, and any resultant changes in fair value is being recorded in the Company’s statement of operations.

The Company estimates the fair value of the warrants using the Black-Scholes model in order to determine the associated derivative instrument liability and change in fair value described above. The range of assumptions used to determine the fair value of the warrants during each period indicated were as follows:

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	Nine Months Ended September 30, 2011	Nine Months Ended September 30, 2010
Estimated fair value of Synergy common stock	$1.06-$2.07	$2.50-$3.70
Expected warrant term	5-7 years	5 years
Risk-free interest rate	0.69-1.43%	1.20-1.79%
Expected volatility	90%	90%
Dividend yield	0%	0%

Estimated fair value of the stock is based on a Black-Scholes based apportionment of the unit price paid for the shares and warrants issued in Synergy’s registered direct offerings, which resulting stock prices were deemed to be arms-length negotiated prices. Expected volatility is based on historical volatility of Synergy’s common stock. The warrants have a transferability provision and based on guidance provided in SAB 107 for instruments issued with such a provision, Synergy used the full contractual term as the expected term of the warrants. The risk free rate is based on the U.S. Treasury security rates for maturities consistent with the expected remaining term of the warrants.

Certain of Synergy’s warrants issued during the nine months ended September 30, 2011 contained a price protection clause which variable term required the Company to use a binomial model to determine fair value. The exercise price protection clause is effective on 833,333 warrants in the event of a subsequent equity sale at a price lower than $3.25 per share of common stock, for a period of two years from date of issuance.

The following table sets forth the components of changes in the Synergy’s derivative financial instruments liability balance for the periods indicated:

Date	Description	Warrants		Derivative Instrument Liability
12/31/2009	Balance of derivative financial instruments liability	—		$	—
6/30/2010	Fair value of new warrants issued during the quarter	648,000		$	1,045,214
9/30/2010	Fair value of new warrants issued during the quarter	103,703		$	163,905
9/30/2010	Change in fair value of warrants during the quarter	—		$	(110,937	)
9/30/2010	Balance of derivative financial instruments liability	751,703		$	1,098,182
12/31/2010	Fair value of new warrants issued during the quarter	705,235		$	2,575,624
12/31/2010	Change in fair value of warrants during the quarter	—		$	(185,847	)
12/31/2010	Balance of derivative financial instruments liability	1,456,938		$	3,487,959
3/31/2011	Fair value of new warrants issued during the quarter	420,000		$	1,312,673
3/31/2011	Change in fair value of warrants during the quarter	—		$	338,715
3/31/2011	Balance of derivative financial instruments liability	1,876,938		$	5,139,347
6/30/2011	Fair value of new warrants issued during the quarter	1,220,414		2,607,827
6/30/2011	Exercise of warrants during the quarter	(160,000	)	$	(486,328	)
6/30/2011	Change in fair value of warrants during the quarter	—		$	697,660
6/30/2011	Balance of derivative financial instruments liability	2,937,352		$	7,958,506
9/30/2011	Fair value of new warrants issued during the quarter	80,916		285,128
9/30/2011	Change in fair value of warrants during the quarter	—		$	(4,382,796	)
9/30/2011	Balance of derivative financial instruments liability	3,018,268		$	3,860,838

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 December 31, 2010 and September 30, 2011:

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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 December 31, 2010			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 September 30, 2011
Derivative liabilities related to Warrants		$	—		$	—		$	3,487,959		$	3,487,959		$	—		$	—		$	3,860,838		$	3,860,838

The following table sets forth a summary of changes in the fair value of the Company’s Level 3 liabilities for the nine months ended September 30, 2011:

Description		Balance at December 31, 2010			Fair Value of Warrants Exercised and Reclassified to Additional Paid in Capital			Fair value of New Warrants Issued During the Period			Unrealized (gains) or losses			Balance as of September 30, 2011
Derivative liabilities related to Warrants		$	3,487,959		$	(486,328	)	$	4,205,628		$	(3,346,421	)	$	3,860,838

The unrealized gains or losses on the derivative liabilities are recorded as a change in fair value of derivative liabilities in the Company’s statement of operations. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. At each reporting period, the Company reviews the assets and liabilities that are subject to ASC Topic 815-40. At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs or instruments which trade infrequently and therefore have little or no price transparency are classified as Level 3.

79. ~~Research~~Stockholders’ ~~and Development Expense~~Equity

~~Research~~On ~~and~~January ~~development~~30, ~~costs~~2012 ~~include~~Synergy ~~expenditures~~issued in26,250 ~~connection~~unregistered ~~with~~shares anof ~~in-house~~common ~~research~~stock ~~and~~to ~~development~~its ~~laboratory,~~corporate ~~salaries~~counsel ~~and~~for ~~staff~~professional ~~costs,~~services ~~application~~rendered. ~~and~~The ~~filing~~shares ~~for~~had ~~regulatory~~a ~~approval~~fair ofvalue ~~proposed~~on ~~products,~~the ~~purchased~~date ~~in-process~~of ~~research~~issuance ~~and~~of ~~development,~~$3.53 ~~regulatory~~per share and ~~scientific consulting fees~~$92,663 aswas ~~well~~recorded as ~~contract~~legal ~~research,~~expense ~~patient~~during ~~costs,~~the ~~drug~~quarter ~~formulation~~ended ~~and~~March ~~tableting~~31, ~~data collection, monitoring, insurance and FDA consultants~~2012.

InOn ~~accordance~~February ~~with~~14, ~~FASB~~2012, ~~ASC~~Synergy ~~Topic~~Pharmaceuticals, ~~730-10-55~~Inc., ~~Research~~(the “Company”) entered into an agreement and ~~Development~~plan of merger (the “Agreement”) with its wholly-owned subsidiary, Synergy ~~recorded~~Pharmaceuticals ~~prepaid~~Inc., ~~research~~a ~~and~~Delaware ~~development~~corporation ~~costs~~(“Synergy-DE”) for the purpose of ~~$485~~changing the state of incorporation of the Company to Delaware from Florida. Pursuant to the Agreement,~~600~~ the Company merged with and ~~$683,182~~into Synergy-DE with Synergy-DE continuing as ofthe ~~September 30,~~surviving ~~2011~~corporation. The directors and ~~December 31,~~officers ~~2010,~~in ~~respectively,~~office ~~for~~of ~~nonrefundable~~the ~~pre-payments~~Company ~~for~~upon ~~production~~the effective date of ~~plecanatide~~the ~~drug~~merger ~~substance~~shall be the directors and ~~analytical~~officers ~~testing~~of ~~services~~Synergy-DE, all of ~~our~~whom ~~drug~~shall ~~candidate~~hold ~~plecanatide~~their directorships and ~~SP-333.~~offices Inuntil the election and qualification of their respective successors or until their tenure is otherwise terminated in accordance with ~~this~~the ~~guidance,~~by-laws of Synergy-DE. The ~~expenses~~effective ~~prepaid~~date ~~research~~of ~~and~~the ~~development~~merger ~~costs~~shall ~~when~~be ~~drug~~the ~~compound~~date on which the Certificate of Merger is ~~delivered~~filed with the Secretary of State of Delaware and ~~services~~the ~~are~~Secretary ~~performed~~of State of Florida. The Certificate of Merger was filed with the Secretary of State of Florida on February 15, 2012 and with the Secretary of State of Delaware of February 16, 2012.

8. State Tax Credit Receivable

As of December 31, 2010 Callisto had recorded a New York State Qualified Employer Tax Credit receivable totaling $531,127 and Synergy had recorded a $250,000 New York City biotechnology refundable tax credit. During the nine months ended September 30, 2011 the Company collected $531,127 of the New York State creditand . the New York City tax credit of $250,000.

9. Net Loss per Share

Basic and diluted net loss per share is presented in conformity with ASC Topic 260, “Earnings per Share,” for all periods presented. In accordance with ASC Topic 260, basic and diluted net loss per common share was determined by dividing net loss attributable to common stockholders by the weighted-average common shares outstanding during the period. Diluted weighted-average shares are the same as basic weighted-average shares since the inclusion of issuable shares pursuant to the exercise of stock options and warrants, and the conversion of preferred stock would have been antidilutive.

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

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	September 30, 2011	September 30, 2010
Common Shares outstanding	158,516,071	54,504,437
Potentially dilutive common shares issuable upon:
Exercise of warrants	7,203,260	83,802,576
Exercise of stock options	7,435,372	8,019,872
Conversion of Series A Convertible Preferred Stock	222,222	1,333,333
Conversion of Series B Convertible Preferred Stock	—	28,032,389
Total fully diluted	173,376,925	175,692,607

10. Subsequent Events

On ~~October 4~~May 9, ~~2011~~2012, Synergy ~~entered~~closed ~~into~~an aunderwritten ~~securities~~public ~~purchase~~offering ~~agreement with certain investors for the sale~~ of 1 10,~~105~~000,~~293~~000 ~~units~~shares ~~in a registered direct offering, with each unit consisting~~ of ~~one share of~~ common stock ~~and~~at ~~one~~an ~~warrant~~offering toprice ~~purchase~~of 0$4.550 ~~shares~~per ~~of common stock~~share. The ~~net~~gross proceeds ~~to the Company~~ from ~~the~~this ~~sale~~offering ofare ~~the units was~~ $245 million,~~166,248,~~ ~~after~~before deducting ~~placement~~underwriting ~~agent~~discounts ~~fees~~and commissions and other estimated offering expenses ~~payable~~of byapproximately ~~the~~$3 ~~Company~~million. ~~The~~Synergy ~~purchase~~also ~~price~~granted ~~paid~~the byunderwriters ~~the~~a ~~investors~~45-day ~~was~~option ~~$2.125~~to ~~per~~purchase ~~unit. The~~up ~~warrants~~to ~~expire~~an ~~after~~additional ~~five~~1,500,000 ~~years~~shares ~~and~~of ~~are~~common ~~exercisable~~stock at an offering price of $24.7550 per share to cover over-allotments, if any.

~~The~~During ~~October 4~~the year ended December 31, 2011 ~~transaction~~the ~~pricing~~Company ~~resulted~~recorded inrefundable ~~the~~tax ~~exercise~~credit ~~price~~in ofprepaid ~~the~~and ~~833,333~~other ~~warrants~~current ~~issued~~assets ~~during~~for ~~May 2011~~its (~~the “May Warrants”~~i) to2010 beNew ~~reduced~~York toState ~~$2.125~~QETC ~~per~~credit, ~~share.~~totaling No$248,486 ~~other~~and ~~outstanding~~(ii) ~~warrants~~its orNew ~~common~~York ~~stock~~City ~~were~~Biotechnology ~~affected~~Tax byCredit ~~this~~for ~~subsequent~~the ~~equity~~tax ~~sale~~year atof a2011 ~~lower~~totaling ~~price~~$118,437. ~~The~~On ~~“price~~April ~~protection”~~25, ~~rights~~2012, ~~attributable~~Synergy toreceived ~~the~~$246,402 ~~May Warrants~~for ~~remain~~2010 inNew ~~effect~~York ~~until~~State ~~May 2013.~~QETC ~~This~~credit ~~exercise~~and ~~price~~Synergy ~~reduction~~will ~~from~~expense ~~$3.25~~the ~~per~~difference ~~share~~of to $2~~.125~~,084 ~~per~~in ~~share decreased~~ the ~~exercise~~quarter ~~proceeds~~ended ~~attributable~~June ~~to the May Warrants by $937~~30,~~500~~ 2012.

On October ~~14,~~ ~~2011~~20, ~~Synergy~~2010 Callisto entered into ~~securities~~an ~~purchase~~option ~~agreements~~agreement (the “Agreement”) with ~~various~~a ~~investors~~third ~~for~~party (“Optionee”) granting the ~~sale~~Optionee ~~of 273,824~~the ~~units~~right into apurchase ~~registered~~up ~~direct~~to ~~offering~~2,000,000 ~~with~~shares ~~each~~of ~~unit~~the ~~consisting~~common stock of ~~one~~Synergy ~~share~~Pharmaceuticals, ofInc., ~~common~~currently ~~stock~~owned ~~and~~by ~~one~~Callisto ~~warrant~~(the to“Shares”) ~~purchase~~at ~~0.5~~a ~~shares~~purchase price of ~~common~~$2.45 ~~stock~~per share. ~~The~~ ~~net~~On ~~proceeds~~June to3, 2011, the ~~Company~~Optionee paid Callisto $100,000 in cash for this option which may be exercised at any time during the period from the ~~sale~~date of the ~~Units~~Agreement ~~was~~until ~~$525~~(i) October 20,~~326,~~ ~~after~~2012 ~~deducting~~with ~~placement~~respect ~~agent~~to ~~fees~~1,000,000 Shares and ~~other~~(ii) ~~estimated~~October ~~offering~~20, ~~expenses~~2015 ~~payable~~with byrespect ~~the~~to ~~Company~~1,000,000 Shares. ~~The~~On ~~purchase~~April ~~price~~25, ~~paid~~2012, byCallisto amended the ~~investors~~Agreement ~~was~~(the $“Amended Agreement) to reflect Synergy’s (1:2~~.125~~) ~~per~~reverse ~~Unit~~stock split and also simplified the option term. ~~The~~This ~~Warrants~~Amended ~~expire~~Agreement ~~after~~granted ~~five~~the ~~years~~Optionee ~~and~~the ~~are~~right ~~exercisable~~to purchase up to 1,000,000 shares of the common stock of Synergy Pharmaceuticals, Inc. currently owned by Callisto, at a purchase price of $24.7590 per share, at any time during the period from April 25, 2012 until April 20, 2014.

On October 28, 2011, Synergy entered into securities purchase agreements with various investors for the sale of 235,294 units in a registered direct offering, with each unit consisting of one share of common stock and one warrant to purchase 0.5 shares of common stock. The gross proceeds to the Company from the sale of the Units was $500,000. The purchase price paid by the investors was $2.125 per Unit. The Warrants expire after five years and are exercisable at $2.75 per share.25

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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, ~~2010~~2011 and other periodic reports filed with the SEC. Accordingly, to the extent that this Report contains forward-looking statements regarding the financial condition, operating results, business prospects or any other aspect of the Company, please be advised that Callisto’s actual financial condition, operating results and business performance may differ materially from that projected or estimated by the Company in forward-looking statements. All drug candidates to treat GI disorders and diseases, currently plecanatide and SP-333, are being developed exclusively by Synergy Pharmaceuticals, Inc., our controlled subsidiary (“Synergy”). Use of the terms “we”, “our” or “us” in connection with GI drug candidates discussed herein refer to research and development activities and plans of Synergy.

BUSINESS OVERVIEW

Callisto Pharmaceuticals, Inc. (which may be referred to as “Callisto”, “the Company”, “we”, “our” or “us”) is a development stage biopharmaceutical company focused primarily on the development of drugs to treat gastrointestinal (“GI”) disorders and diseases and was incorporated under the laws of the State of Delaware inon ~~May 2003.~~June We5, ~~operate~~1996 ~~through~~(inception). ~~two~~Since ~~subsidiary~~inception, ~~companies:~~our ~~Synergy~~efforts ~~Pharmaceuticals~~have ~~Inc.~~been ~~and~~principally ~~Callisto~~devoted ~~Research~~to ~~Labs,~~research ~~LLC,~~ and wedevelopment, ~~own~~securing ~~two~~and ~~inactive~~protecting ~~subsidiaries, IgX,~~patents ~~Ltd (Ireland)~~ and ~~Callisto~~raising ~~Pharma,~~capital. ~~GmbH~~We ~~(Germany).~~operate ~~Our~~as ~~principle~~a ~~corporate~~holding ~~headquarters~~company ~~totals~~through ~~approximately~~two ~~5,500~~controlled ~~square~~subsidiaries: ~~feet~~Synergy Pharmaceuticals, inInc. ~~two~~(“Synergy”) ~~suites~~(41% ~~1609~~owned) and ~~1701~~Callisto Research Labs, ~~located~~LLC at(100% ~~420~~owned). ~~Lexington~~Synergy ~~Avenue,~~owns ~~New~~one ~~York~~inactive subsidiary, NYIgX, Ltd (Ireland).

WeAll ~~are~~of aour ~~development~~drug ~~stage~~candidates, ~~biopharmaceutical~~currently ~~company~~plecanatide ~~focused~~and ~~primarily~~SP-333 onto ~~the~~treat ~~development~~GI disorders and diseases, are being developed exclusively by Synergy. Use of ~~drugs~~the toterms ~~treat~~“we”, ~~gastrointestinal~~“our” (or “GIus”) ~~disorders~~in ~~and~~connection ~~diseases.~~with ~~Our~~the ~~lead~~GI drug candidates ~~are~~discussed asherein ~~follows:~~refer to research and development activities and plans of Synergy.

Synergy’s lead drug candidates are as follows:

(1) Plecanatide, a guanylyl cyclase C (“GC-C”) receptor agonist, to treat GI disorders, primarily chronic constipation (“CC”) and constipation-predominant irritable bowel syndrome (“IBS-C”).

(2) SP-333, a second generation GC-C receptor agonist, SP-333, now in pre-clinical development to treat gastrointestinal inflammatory diseases.

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 not completing 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.

RECENT DEVELOPMENTS

On ~~October 4,~~May ~~2011~~9, ~~we entered into a securities purchase agreement with certain investors for the sale of 1~~2012,~~105,293~~ ~~units~~Synergy inclosed aan ~~registered~~underwritten ~~direct~~public offering, ~~with each unit consisting~~ of ~~one~~10,000,000 ~~share~~shares of common stock ~~and~~at ~~one~~an ~~warrant~~offering toprice ~~purchase~~of 0$4.550 ~~shares~~per ~~of common stock~~share. The ~~net~~gross proceeds from ~~the~~this ~~sale~~offering ofare ~~the units was~~ $245 million,~~166,248,~~ ~~after~~before deducting ~~placement~~underwriting ~~agent~~discounts ~~fees~~and commissions and other estimated offering expenses ~~payable~~of ~~by us.~~approximately ~~The~~$3 ~~purchase~~million. ~~price~~Synergy ~~paid~~also bygranted the ~~investors~~underwriters ~~was~~a ~~$2.125~~45-day ~~per~~option ~~unit. The~~to ~~warrants~~purchase ~~expire~~up ~~after~~to ~~five~~an ~~years~~additional ~~and~~1,500,000 ~~are~~shares ~~exercisable~~of common stock at an offering price of $24.7550 per share to cover over-allotments, if any.

~~The~~As ~~October 4~~of April 9, ~~2011~~2012, ~~transaction~~our ~~pricing~~controlled ~~resulted~~subsidiary inSynergy has successfully achieved the ~~exercise~~halfway ~~price~~mark offor ~~the~~total ~~833,333~~enrollment ~~warrants~~in ~~issued~~our ~~during~~ongoing ~~May 2011~~plecanatide ~~(the~~Phase ~~“May Warrants”)~~II/III toclinical betrial ~~reduced~~in tochronic ~~$2.125~~idiopathic ~~per~~constipation ~~share~~(CIC) patients. NoOver ~~other~~800 ~~outstanding~~patients ~~warrants~~have orbeen ~~common~~screened ~~stock~~at ~~were~~present, ~~affected~~resulting byin ~~this~~a ~~subsequent~~total ~~equity~~of 440 randomized, enrolled patients as of April 9, 2012. The trial, designed to enroll 880 patients to achieve 800 evaluable

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~~sale~~patients, atwas ainitiated ~~lower~~on ~~price.~~October ~~The~~24, ~~“price~~2011. ~~protection”~~We ~~rights~~anticipate ~~attributable~~completing toenrollment of the ~~May Warrants~~trial ~~remain~~ in ~~effect~~the ~~until~~third ~~May 2013.~~quarter ~~This~~of ~~exercise~~this ~~price~~year ~~reduction~~and ~~from~~reporting ~~$3.25~~top ~~per~~line ~~share~~data toin ~~$2.125 per share decreased~~ the ~~exercise~~fourth ~~proceeds attributable to the May Warrants by $937,500~~quarter.

On October 14, 2011, Synergy entered into securities purchase agreements with various investors for the sale of 273,824 units in a registered direct offering, with each unit consisting of one share of common stock and one warrant to purchase 0.5 shares of common stock. The net proceeds to the Company from the sale of the Units was $525,326, after deducting placement agent fees and other estimated offering expenses payable by the Company. The purchase price paid by the investors was $2.125 per Unit. The Warrants expire after five years and are exercisable at $2.75 per share.

On October 28, 2011, Synergy entered into securities purchase agreements with various investors for the sale of 235,294 units in a registered direct offering, with each unit consisting of one share of common stock and one warrant to purchase 0.5 shares of common stock. The gross proceeds to the Company from the sale of the Units was $500,000 by the Company. The purchase price paid by the investors was $2.125 per Unit. The Warrants expire after five years and are exercisable at $2.75 per share.

Our corporate headquarters totals approximately 3,800 square feet in suite 1609, located at 420 Lexington Avenue, New York, NY, which lease expired on June 30, 2011. On July 21, 2011 we extended our lease on Suite 1609 from June 30, 2011, to March 31, 2012; at a monthly rent of $16,414.

FINANCIAL OPERATIONS OVERVIEW

From inception through ~~September 30~~March 31, ~~2011~~2012, we have sustained cumulative net losses attributable to common stockholders of $~~140~~145,~~348~~508,~~549~~572. Our losses have resulted primarily from expenditures incurred in connection with research and development activities related to the application and filing for regulatory approval of proposed products, stock-based compensation expense, patent filing and maintenance expenses, purchase of in-process research and development, outside accounting and legal services and regulatory, scientific and financial consulting fees, as well as deemed dividends attributable to the beneficial conversion rights of convertible preferred stock at issuance. From inception through ~~September 30~~March 31, ~~2011~~2012, we have not generated any revenue from operations, expect to incur additional losses to perform further research and development activities and do not currently have any commercial biopharmaceutical products, and do not expect to have such for several years, if at all.

Net cash used in operating activities was $97,~~589~~121,~~563~~543 during the ~~nine~~three months ended ~~September 30~~March 31, ~~2011~~2012 as compared to $92,~~470~~938,~~494~~541 for the ~~nine~~three months ended ~~September 30~~March 31, ~~2010~~2011 and $7998,~~823~~609,~~717~~041 during the period from June 5, 1996 (inception) to ~~September 30~~March 31, ~~2011~~2012. During the three months ~~and~~ended ~~nine~~March ~~months~~31, ~~ended~~2012 ~~September 30,~~and 2011 Callisto incurred net losses attributable to common stockholders of $~~513~~3,~~318~~142,259 and $41,~~775~~761,~~281~~367, respectively and $~~140~~145,~~348~~508,~~549~~572 during the period from June 5, 1996 (inception) to ~~September 30,~~March ~~2011. Net losses attributable to common shareholders for the three months and nine months ended September 30~~31, ~~2010 were $513,318and $4,775,281, respectively~~2012. To date, Callisto’s sources of cash have been primarily limited to the sale of equity securities, ~~and~~ issuance of debt instruments. ~~Net~~and ~~cash~~warrants. ~~provided~~There bywere no financing ~~activities~~transactions for the ~~nine~~three months ended ~~September 30~~March 31, ~~2011~~2012, and ~~2010~~$2,168,334 ~~and~~was provided by financing activities for the ~~period~~three ~~from~~months ~~June 5~~ended March 31, ~~1996~~2011. ~~(inception)~~As toof ~~September 30~~March 31, ~~2011~~2012, ~~was~~we ~~$7,948,055,~~had working capital of $2,~~859~~915,~~870~~957, ~~and~~as compared to working capital of $799,~~981~~754,~~473~~600 on December 31, ~~respectively~~2011.

Callisto ~~will~~may be required to raise additional capital within this year to complete the development and commercialization of current product candidates and to continue to fund operations at the current cash expenditure levels. Callisto cannot be certain that additional funding will be available on acceptable terms, or at all. Recently worldwide economic conditions and the international equity and credit markets have significantly deteriorated and may remain difficult for the foreseeable future. These developments will make it more difficult to obtain additional equity or credit financing, when needed. 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.

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 year ended December 31, 2010, filed with the SEC on March 31, 2011. There have been no changes to our critical accounting policies since December 31, 2010.

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CONTRACTUAL OBLIGATIONS AND COMMITMENTS

For a discussion of our contractual obligations see (i) our Financial Statements and Notes to Consolidated Financial Statements—Note 9. Commitments and Contingencies , and (ii) Item 7 Management Discussion and Analysis of Financial Condition and Results of Operations— Contractual Obligations and Commitments , included in our Annual Report on Form 10-K as of December 31, 2010.

Our corporate headquarters totals approximately 3,800 square feet in Suite 1609, located at 420 Lexington Avenue, New York, NY, expired on June 30, 2011. On July 21, 2011 we extended our lease on Suite 1609 until March 31, 2012, at a monthly rent of $16,414.

Other than the above lease extension there have been no changes in our contractual obligations and commitments during the three months ended September 30, 2011.

OFF-BALANCE SHEET ARRANGEMENTS

We had no off-balance sheet arrangements as of ~~September 30~~March 31, ~~2011~~2012.

RESULTS OF OPERATIONS

THREE MONTHS ENDED ~~September 30~~MARCH 31, ~~2011~~2012 AND ~~September 30~~MARCH 31, ~~2010~~2011

We had no revenues during the three months ended ~~September 30~~March 31, ~~2011~~2012 and ~~2010~~2011 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 ~~for~~increased ~~the three months ended September 30, 2011increased~~ $13,~~581~~966,~~316~~212 or 68289%, to $35,~~882~~338,~~802~~140 for the three months ended March 31, 2012 from $21,~~301~~371,~~486~~928 for the three months ended ~~September 30~~March 31, ~~2010~~2011. This increase in research and development expenses was ~~primarily~~entirely ~~due~~attributable to continuing the development of our plecanatide product candidate. These expenses included (i) higher program expenses ~~including~~for ~~animal~~ongoing ~~studies,~~plecanatide ~~analytical~~Phase ~~testing,~~II/III clinical ~~data~~trial ~~monitoring~~in ofCIC patients which totaled approximately $23,~~700~~249,000, as compared to approximately $258,000 during the three months ended March 31, 2011, (ii) higher chemistry, manufacturing, and controls (CMC) costs of drug substance and product, which totaled approximately $1,~~404~~327,000 , as compared to approximately $900,000 during the three months ended ~~September~~ March 31, ~~2010~~2011, (ii) ~~drug~~ ~~production~~higher compensation and employee benefits of approximately $~~837~~ 469,000, as compared to $ ~~404~~260,000 during the three months ended ~~September~~ March 31, ~~2010~~2011, inas ~~support~~a result of ~~ongoing~~increased ~~and~~staffing ~~planned~~levels ~~clinical~~required ~~trials,~~to ~~offset~~support our Phase II/III trial which was initiated in October 2011 and (iii) by ~~lower~~higher scientific and regulatory advisory fees and expenses of approximately $~~347~~129,000, as compared to $~~486~~56,000 during the three months ended ~~September 30~~March 31, ~~2010~~2011.

General and administrative expenses ~~decreased~~for ~~$13~~the three months ended March 31,~~524~~ or2011 1%decreased $6,535, to $1,~~288~~953,~~945~~309 for the three months ended ~~September 30~~March 31, ~~2011~~2012 from $1,~~302~~959,~~469~~844 for the three months ended ~~September 30~~March 31, ~~2010~~2011. ~~This~~These ~~decrease~~decreased ~~was~~expenses were primarily ~~due~~the toresult of (i) lower compensation and related employee benefits of approximately $~~194~~558,000, ofas ~~lower~~compared ~~facilities~~to $707,000 ~~and~~during ~~operational~~the ~~costs,~~three ~~offset~~months byended ~~higher~~March ~~travel~~31, ~~expenses~~2011, (ii) lower consultants and financial ~~advisory~~advisors fees ~~and~~of ~~expenses~~approximately ~~related~~$445,000, as compared to ~~our~~$736,000 ~~private~~during ~~placements~~the ~~and~~three ~~registered~~months ~~direct~~ended ~~offerings~~March ~~and~~31, ~~stock~~2011, ~~based~~partially ~~compensation~~offset ~~expenses,~~by (iii) higher facilities cost of approximately $~~181~~342,000 as compared to $224,000 during the ~~quarter~~three months ended ~~September 30~~March 31, 2011 asand ~~compared~~(iv) tohigher ~~the~~corporate ~~same~~legal ~~period~~services ~~last~~of ~~year.~~approximately $574,000 for the three months ended

Net loss attributable to common stockholders for the three months ended September 30, 2011 decreased $1,203,005to $513,318 compared to a net loss of $1,716,323 incurred for the three months ended September 30, 2011. The decreased net loss is the result of higher research and development, and lower general and administrative expenses discussed above, plus the following non-operating expenses for the periods indicated:27

	Quarter Ended 9/30/2011			Quarter Ended 9/30/2010			Change ($)
Loss from operations	$	(5,171,747	)	$	(3,603,955	)	$	(1,567,519	)
Interest and dividend income	3			933			(930		)
Other income or expense	(4,425		)	(16,723		)	12,298
Change in FV of financial instruments	4,382,796			110,937			4,271,859
Net loss attributable to noncontrolling interest	280,055			1,792,485			(1,512,430		)
Net loss attributable to common stockholders	$	(513,318	)	$	(1,716,323	)	$	1,203,005

NINE MONTHS ENDED SEPTEMBER 30, 2011 AND SEPTEMBER 30, 2010

We had no revenues during the nine months ended September 30, 2011 and 2010 because we do not have any commercial biopharmaceutical products and we do not expect to have such products for several years, if at all. Certain reclasses have been made in prior periods to conform to current year presentation (See note 2).

Research and development expenses for the nine months ended September 30, 2011 decreased $288,212 or 4%, to $7,610,829 from $7,899,051 for the nine months ended September 30, 2010. This decrease was primarily due to i) $1,930,000 of lower drug

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~~production,~~March ~~as a result of lower clinical trial activities, during the nine months ended September~~ 31, ~~2010~~2012, ~~offset~~as bycompared ~~ii)~~to $1248,~~640,~~000 offor ~~higher~~the ~~program~~three ~~expenses~~months ~~including~~ended ~~animal~~March ~~studies~~31, ~~analytical~~2011 ~~testing,~~as ~~and~~a ~~clinical~~result ~~data~~of ~~monitoring~~increased tointellectual ~~prepare~~property usrelated ~~for the upcoming 90 day clinical trial, during the nine months ended September 31, 2010~~costs.

~~General~~Net ~~and~~loss ~~administrative~~attributable ~~expenses~~to ~~increased~~common ~~$783~~stockholders for the three months ended March 31,~~474~~ or2012 ~~18%~~decreased $1,380,892 to $53,~~124~~142,~~477for~~259 ~~the~~compared ~~nine~~to ~~months~~a ~~ended~~net ~~September 30,~~loss ~~2011~~of ~~from~~ $41,~~341~~761,~~003for~~367incurred for the ~~nine~~three months ended ~~September 30~~March 31, ~~2010~~2011. This increase ~~was~~in ~~primarily~~our ~~due~~net toloss ~~approximately~~was ~~$650,000~~a result of the higher ~~financial~~in ~~advisory~~research ~~fees~~ and development expenses ~~related~~partially tooffset ~~our~~by ~~private~~lower ~~placements~~general and ~~registered~~administrative ~~direct~~expenses ~~offerings~~discussed ~~during~~above, plus the ~~nine~~following ~~months~~non-operating ~~ended~~expenses ~~September 30,~~for ~~2011~~the periods indicated.

Net loss attributable to common stockholders for the nine months ended September 30, 2011 decreased $16,831,066 to $4,775,281 compared to $21,606,347 incurred for the nine months ended September 30, 2010. The decreased net loss is the result of lower research and development, and higher general and administrative expenses discussed above, plus the following non-operating items for the periods indicated:

	Quarter Ended 03/31/2012			Quarter Ended 03/31/2011			Change ($)
Loss from Operations	$	(7,294,957	)	$	(3,331,772	)	$	(3,963,185	)
Interest and investment income	4,903			51			4,852
Interest income/(expense) and other income/(expenses)	—			(12,414		)	12,414
Change in FV of financial instruments	7,946			(338,715		)	346,661
Net loss attributable to noncontrolling interest	4,139,849			1,921,483			2,218,366
Net loss attributable to common stockholders	$	(3,142,259	)	$	(1,761,367	)	$	(1,380,892	)

	Nine Months Ended 09/30/2011			Nine Months Ended 09/30/2010			Change ($)
Loss from operations	$	(12,735,306	)	$	(12,240,054	)	$	(495,252	)
Interest and dividend income	57			25,084			(25,027		)
State tax credit	—			628,806			(628,806		)
Interest (expense) on 11% Secured Notes and other income/(expenses)	(10,631		)	(317,434		)	306,803
Change in Fair Value of derivative instruments—warrants	3,346,421			(15,530,425		)	18,876,846
Net loss of majority owned subsidiary attributable to non-controlling interest	4,624,178			5,827,676			(1,203,498		)
Net loss available to common stockholders	$	(4,775,281	)	$	(21,606,347	)	$	16,831,066

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LIQUIDITY AND CAPITAL RESOURCES

As of ~~September 30,~~March ~~2011~~31, 2012 we had $67 6,~~473in~~123,418 in cash and cash equivalents, compared to $113,~~708~~244,~~982~~961 as of December 31, ~~2010~~2011. Net cash used in operating activities was $97,~~589~~121,~~563for~~543 during the ~~nine~~three months ended ~~September 30~~March 31, ~~2011~~2012 as compared to $92,~~470~~938,~~494~~541 ~~during~~for the ~~nine~~three months ended ~~September 30~~March 31, ~~2010~~2012. ~~Net~~There ~~cash~~were ~~provided~~no by financing ~~activities~~transactions for the ~~nine~~three months ended ~~September 30~~March 31, ~~2011~~2012, ~~was~~and $72,~~948~~168,~~054,~~334 aswas ~~compared~~provided toby ~~$2,859,870~~financing ~~provided~~activities ~~during~~for the ~~nine~~three months ended ~~September 30~~March 31, 2011. As of ~~September 30~~March 31, ~~2011~~2012, we had ~~a negative~~ working capital of $72,~~760~~915,~~801~~957, as compared to ~~a negative~~ working capital of $39,~~806~~754,~~899~~600 on December 31, ~~2010~~2011.

WeOn ~~will~~May be9, ~~required~~2012, toSynergy ~~raise~~closed ~~additional~~an ~~capital~~underwritten ~~within~~public ~~the~~offering ~~next~~of ~~year~~10,000,000 toshares ~~complete~~of ~~the~~common ~~development~~stock ~~and~~at ~~commercialization~~an ofoffering ~~current~~price ~~product~~of ~~candidates~~$4.50 ~~and~~per toshare. ~~continue~~The togross ~~fund~~proceeds ~~operations~~from atthis ~~the~~offering ~~current~~are ~~cash~~$45 ~~expenditure~~million, ~~levels.~~before Wededucting ~~cannot~~underwriting bediscounts ~~certain~~and ~~that~~commissions ~~additional~~and ~~funding~~other ~~will~~estimated beoffering ~~available~~expenses onof ~~acceptable~~approximately ~~terms,~~$3 ormillion. atSynergy ~~all.~~also Togranted the ~~extent~~underwriters ~~that~~a we45-day ~~raise~~option ~~additional~~to ~~funds~~purchase byup ~~issuing~~to ~~equity~~an ~~securities~~additional 1,500,000 ~~our~~shares ~~stockholders~~of ~~may~~common ~~experience~~stock ~~significant~~at ~~dilution.~~an ~~Any~~offering ~~debt~~price ~~financing,~~of if$4.50 ~~available,~~per ~~may~~share ~~involve~~to ~~restrictive~~cover ~~covenants~~over-allotments, ~~that~~if ~~impact our ability to conduct business~~any.

IfOur wecondensed ~~are~~consolidated ~~unable~~financial tostatements ~~raise~~as ~~additional~~of ~~capital~~March ~~when~~31, ~~required~~2012 orand onDecember ~~acceptable terms~~31, we2011 ~~may~~ have tobeen ~~(i) significantly~~prepared ~~delay,~~under ~~scale back or discontinue~~ the ~~development~~assumption ~~and/or~~that ~~commercialization~~we ofwill ~~one~~continue oras ~~more~~a ~~product~~going ~~candidates;~~concern ~~(ii) seek collaborators~~ for ~~product~~the ~~candidates~~next attwelve anmonths. ~~earlier~~Our ~~stage~~ability ~~than~~to ~~otherwise~~continue ~~would~~as bea ~~desirable~~going ~~and~~concern onis ~~terms~~dependent ~~that~~upon ~~are~~our ~~less~~ability ~~favorable~~to ~~than~~obtain ~~might~~additional ~~otherwise~~equity beor ~~available;~~debt orfinancing, ~~(iii) relinquish~~attain orfurther ~~otherwise~~operating ~~dispose~~efficiencies ofand, ~~rights~~ultimately, to ~~technologies,~~generate ~~product~~revenue. ~~candidates~~The orfinancial ~~products~~statements ~~that~~do wenot ~~would~~include ~~otherwise~~any ~~seek~~adjustments tothat ~~develop~~might orresult ~~commercialize~~from ~~ourselves~~the onnegative ~~unfavorable~~outcome ~~terms~~of this uncertainty.

~~Recent~~CRITICAL ~~worldwide~~ACCOUNTING economic conditions, as well as domestic and 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.POLICIES

~~Our~~Financial ~~condensed~~Reporting ~~consolidated~~Release ~~financial~~No. ~~statements~~60 asrequires ofall ~~September 30,~~companies ~~2011~~to ~~and~~include ~~December 31,~~a ~~2010~~discussion ~~have~~of ~~been~~critical ~~prepared~~accounting ~~under~~policies ~~the~~or ~~assumption~~methods ~~that~~used wein ~~will~~the ~~continue~~preparation asof afinancial ~~going~~statements. ~~concern~~Our ~~for~~accounting ~~the~~policies ~~next~~are ~~twelve~~described ~~months.~~in ~~Our~~ITEM ~~ability~~8. toFINANCIAL ~~continue~~STATEMENTS asAND aSUPPLEMENTARY ~~going~~DATA ~~concern~~of ~~is dependent upon~~ our ~~ability~~Annual toReport ~~obtain~~on ~~additional~~Form ~~equity~~10-K oras ~~debt~~of ~~financing,~~and ~~attain~~for ~~further~~year ~~operating~~ended ~~efficiencies~~December ~~and~~31, ~~ultimately~~2011, tofiled ~~generate~~with ~~revenue.~~the ~~The~~SEC ~~financial~~on ~~statements~~March do30, ~~not~~2012. ~~include~~There ~~any~~have ~~adjustments~~been ~~that~~no ~~might~~changes ~~result~~to ~~from~~our ~~the~~critical ~~negative~~accounting ~~outcome~~policies ofsince ~~this~~December ~~uncertainty~~31, 2011.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

For a discussion of our contractual obligations see (i) our Financial Statements and Notes To Consolidated Financial Statements—Note 7. Commitments and Contingencies, and (ii) Item 7 Management Discussion and Analysis of Financial Condition and Results of Operations— Contractual Obligations and Commitment, included in our Annual Report on Form 10-K as of December 31, 2011. There have been changes in our contractual obligations and commitments during the three months ended March 31, 2012 as follows:

Our corporate headquarters totals approximately 4,300 rentable square feet located at 420 Lexington Avenue, New York, and was subject to a lease which has a monthly rate of $16,414 and expired on March 31, 2012. On March 30, 2012 we extended this lease through March 31, 2014, at a monthly rate of $18,833 on a straight line basis. We also occupy a small laboratory and several offices, totaling approximately 1, 300

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square feet, in the Bucks County Biotechnology Center in Doylestown, Pennsylvania under a lease which expired August 31, 2011. On February 1, 2012 we extended this lease through December 31, 2013, at a monthly rate of $2,254.

In addition during the quarter ended March 31, 2012 Synergy has entered into new drug substance purchase commitments to support our clinical and non-clinical development of plecanatide and SP-333.

The following table is a summary of contractual cash obligations for the periods indicated that existed as of March 31, 2012, and is based on information appearing in the notes to Consolidated Financial Statements included in our Annual Report on Form 10-K as of December 31, 2011, filed with the SEC on March 30, 2012; as well as the notes to Condensed Consolidated Financial Statements included in elsewhere in this Quarterly Report on Form 10-Q.

	Total		Less than 1 Year		1-2 Years		3-5 Years		More than 5 Years
Operating leases	$	472,294	$	242,950	$	229,344	$	—	$	—
Purchase obligations—principally employment and consulting services (1)	2,859,140		1,153,865		1,705,275		—		—
Purchase Obligations—Major Vendors (2)	3,506,589		3,506,589		—		—		—

Total obligations	$	6,838,023	$	4,903,404	$	1,934,619	$	—	$	—

(1) Represents salary and bonus for remaining term of employment agreements with Gary S. Jacob, CEO, Bernard F Denoyer, Senior Vice President, Finance and consulting fees and bonus for remaining term of consulting agreement with Gabriele M. Cerrone, Chairman.

(2) Represents amounts that will become due upon future delivery of supplies, drug substance and test results from various suppliers, under open purchase orders as of March 31, 2012.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk on the fair values of certain assets is related to credit risk associated with securities held in short term investment accounts, commercial paper included in short term money market accounts and the FDIC insurance limit on our bank balances. At ~~September 30,~~March ~~2011~~31, 2012 we had no$5,262,000 balances in money market balances.

ITEM 4. CONTROLS AND PROCEDURES

Based on an evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) required by paragraph (b) of Rule 13a-15 or Rule 15d-15, as of ~~September 30~~March 31, ~~2011~~2012, our Chief Executive Officer and Principal Financial Officer have concluded that as of ~~September 30~~March 31, ~~2011~~2012, 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, ~~2010~~2011. Management’s assessment included an evaluation of the design of our internal control over financial reporting and the operational effectiveness of those controls. Based on this evaluation, management determined that, as of December 31, ~~2010~~2011, there were material weaknesses in our internal control over financial reporting. The material weaknesses identified during management’s assessment were ~~a lack of~~ (i) an effective whistle-blower program or other comparable mechanism and (ii) an ongoing program to manage identified fraud risks. As of December 31, ~~2010~~2012, we did not maintain effective internal control over financial reporting. As defined by Regulation S-X, Rule 1-02(a)(4), a material weakness is a deficiency or a combination of deficiencies, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected.

In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the relationship between the benefit of desired controls and procedures and the cost of implementing new controls and procedures.

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management necessarily is required to apply its judgment in evaluating the relationship between the benefit of desired controls and procedures and the cost of implementing new controls and procedures.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

As of ~~September 30~~March 31, ~~2011~~2012, we are in the process of remediating the material weakness which existed at December 31, ~~2010~~2011. If these remedial measures are insufficient to address any of the identified material weaknesses or are not implemented effectively, or additional deficiencies arise in the future, material misstatements in our interim or annual financial statements may occur in the future.

There were no changes in our internal controls over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that could significantly affect internal controls over financial reporting during the quarter ended ~~September 30~~March 31, ~~2011~~2012.

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PART ~~II.~~ 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, ~~2010~~2011.

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, ~~2010~~2011.

ITEM 2. PROPERTIES.

Our corporate headquarters total approximately 4,300 rentable square feet located at 420 Lexington Avenue, New York, and is subject to a lease which has a monthly rate of $16,414 and expired on March 31, 2012. On March 30, 2012, we extended this lease through March 31, 2014, at a monthly rate of $ 18,833 on a straight line basis. We also occupy a small laboratory and several offices, totaling approximately 1, 300 square feet, in the Bucks County Biotechnology Center in Doylestown, Pennsylvania under a lease which expired August 31, 2011. On February 1, 2012 we extended this lease through December 31, 2013, at a monthly rate of $2,254.

ITEM 6. EXHIBITS

(a) ~~Exhibits~~

31.1		Certification of Chief Executive Officer required under Rule 13a-14(a)/15d-14(a) under the Exchange Act.
31.2		Certification of Principal Financial Officer required under Rule 13a-14(a)/15d-14(a) under the Exchange Act.
32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of Principal Financial Officer pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101		Financial statements from the quarterly report on Form 10-Q of the Company for the quarter ended September 30,2011, filed on November 14, 2011, formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Statements of Operations, (ii) the Condensed Consolidated Balance Sheets, (iii) the Condensed Consolidated Statements of Cash Flows (iv) the Condensed Consolidated Statement of Stockholders Equity (Deficit) and (v) the Notes to Consolidated Financial Statements tagged as blocks of text.

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.

		101		Financial statements from the quarterly report on Form 10-Q of the Company for the quarter ended March 31, 2012, filed on May 15, 2012, formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Statements of Operations, (ii) the Condensed Consolidated Balance Sheets, (iii) the Condensed Consolidated Statements of Cash Flows (iv) the Condensed Consolidated Statement of Stockholders Equity (Deficit) and (v) the Notes to Consolidated Financial Statements tagged as blocks of text.

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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: November 14, 2011	By:	/s/ GARY S. JACOB
Date: May 15, 2012	By:	/s/ GARY S. JACOB
	~~Gary S. Jacob~~	Gary S. Jacob
	~~Chief Executive Officer~~	Chief Executive Officer
Date: November 14, 2011	By:	/s/ BERNARD F. DENOYER
Date: May 15, 2012	By:	/s/ BERNARD F. DENOYER
	~~Bernard F. Denoyer~~	Bernard F. Denoyer
	~~Senior Vice President, Finance~~	Senior Vice President, Finance

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