<PAGE>

                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

[X]      Annual report under Section 13 or 15(d) of the Securities Exchange Act
         of 1934.
         For the fiscal year ended: DECEMBER 31, 2002.
                                    ------------------

[ ]      Transition report under Section 13 or 15(d) of the Securities Exchange
         Act of 1934.
         For the transition period from ____________ to ____________

COMMISSION FILE NUMBER:    33-23693
                       ---------------

                                 ENTROPIN, INC.
                                 --------------
                 (Name of Small Business Issuer in Its Charter)

           DELAWARE                                              68-0150827
-------------------------------                              -------------------
(State or Other Jurisdiction of                              (I.R.S. Employer
Incorporation or Organization)                               Identification No.)
                               45926 OASIS STREET
                             INDIO, CALIFORNIA 92201
                                  760-775-8333
      (Address of Principal Executive Offices; Zip Code; Telephone Number,
                              Including Area Code)

Securities registered under Section 12(b) of the Act: None Securities registered
under Section 12(g) of the Act:

    TITLE OF EACH CLASS                     NAME OF EXCHANGE ON WHICH REGISTERED

    Common Stock                            NASDAQ SmallCap Market
    Warrants to Purchase Common Stock       NASDAQ SmallCap Market

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 at least the past 90 days.
(1) Yes [X] No [ ] (2) Yes [X] No [ ]

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained herein, and will not be contained, to the best of
Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.  [ ]

Issuer's revenues for its most recent fiscal year:   $ -0-
                                                   ----------

The aggregate market value of voting stock held by non-affiliates as of March
21, 2003: $4,305,355 For purposes of this calculation, shares of common stock
held by directors, officers and 10% stockholders known to the Registrant have
been deemed to be owned by affiliates which should not be construed to indicate
that any such person possesses the power, direct or indirect, to direct or cause
the direction of the management or policies of Registrant or that such person is
controlled by or under common control with the Registrant.

The number of shares of common stock, $.001 par value, outstanding as of March
21, 2003: 10,047,587

Transitional Small Business Disclosure Format (Check one):  Yes [ ]   No [X]

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement to be delivered to stockholders in
connection with the Annual Meeting of Stockholders to be held June 20, 2003 are
incorporated by reference into Part III of this Report. Certain exhibits filed
with the registrant's prior registration statements and period and other reports
filed under the Securities Exchange Act of 1934 are incorporated herein by
reference into Part III of this report.



<PAGE>

                                TABLE OF CONTENTS

PART I

Item 1.   Description of Business                                             1

Item 2.   Description of Property                                            12

Item 3.   Legal Proceedings                                                  12

Item 4.   Submission of Matters to a Vote of Security Holders                12


PART II

Item 5.   Market For Common Equity and Related Stockholder Matters.          13

Item 6.   Management's Discussion and Analysis of Financial Condition
          and Results of Operations.                                         26

Item 7.   Financial Statements.                                              30

Item 8.   Changes in and Disagreements with Accountants on
          Accounting and Financial Disclosure.                               30


PART III

Item 9.   Directors and Executive Officers of the Registrant.                31

Item 10.  Executive Compensation.                                            31

Item 11.  Security Ownership of Certain Beneficial Owners and
            Management and Related Stockholder Matters.                      31

Item 12.  Certain Relationships and Related Transactions.                    31

Item 13.  Exhibits, List and Reports on Form 8-K.                            31

Item 14.  Controls and Procedures.                                           32

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                                 ENTROPIN, INC.

                                   FORM 10-KSB

                                     PART I

                SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements under "Description of Business" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
elsewhere in this Form 10-KSB and in the Company's periodic filings with the SEC
may constitute forward-looking statements. Any such statements involve known and
unknown risks, significant uncertainties and other factors which may cause our
actual results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by such forward-looking statements.

In some cases, you can identify the forward-looking statements by terminology
such as "may," "will," "should," "could," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential" or "continue" or the negative
of such terms or other comparable terminology.

Although we believe that the expectations reflected in any such forward-looking
statements are reasonable, we cannot guarantee our future results, levels of
activity, performance or achievements. Moreover, we assume no obligation to
update any forward-looking statements to reflect events or circumstances arising
after the date of this report.

You should carefully review and consider the various disclosures in this report
regarding factors that could cause actual results to differ materially from
anticipated results, including those factors under the caption "Factors That May
Affect Our Future Results and the Trading Price of Our Common Stock" under Item
1 below and elsewhere in this report.


ITEM 1.  DESCRIPTION OF BUSINESS.

BACKGROUND

We were incorporated in California in 1984 as Entropin, Inc., or old Entropin,
and in 1998, completed an agreement and plan of merger with Vanden Capital
Group, Inc., or Vanden, to exchange all of the issued and outstanding common
shares of old Entropin for 5,220,000 shares of Vanden's common stock. As a
result, old Entropin was merged into Vanden, and Vanden then changed its name to
Entropin, Inc. For accounting purposes, the acquisition was treated as a
recapitalization of old Entropin based upon historical cost, with old Entropin
as the acquirer. In conjunction with the merger, Entropin, Inc. became a
Colorado corporation. In June 2002, we changed our state of incorporation from
Colorado to Delaware. The reincorporation received approval of the holders of a
majority of our outstanding shares. The reincorporation was accomplished by
merging with and into Entropin, Inc., a Delaware corporation and our formerly
wholly-owned subsidiary. Each share of common stock of the Colorado corporation
was converted into one share of common stock of the Delaware corporation. Each
share of Series A preferred stock of the Colorado corporation was converted into
one share of Series A preferred stock of the Delaware corporation. Each share of
Series B preferred stock of the Colorado corporation was converted into one
share of Series B preferred stock of the Delaware corporation.

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BUSINESS

We are a pharmaceutical research and development company focused on the
development of our proprietary compounds as therapy for pain. We are considered
to be a development stage enterprise as defined in Statement No. 7 of the
Financial Accounting Standards Board. Our primary activities from inception
include research and development, preclinical studies and tests, seeking the
U.S. Food and Drug Administration, or FDA, approval for our proprietary
compounds, as well as fund raising.

Prior to 2000, we completed four preclinical animal studies and Phase I and
Phase II human clinical trials for our first compound, known as Esterom(R)
solution. These trials indicated that Esterom(R) solution was well tolerated and
did not appear to have any potential for addiction or abuse. The Phase II
clinical trial with Esterom(R) solution demonstrated effectiveness in improving
range of motion associated with impaired shoulder function and acute lower back
sprain. We then completed a multi-center clinical study of Esterom(R) solution
in late 2000, which confirmed the safety of Esterom(R) solution and demonstrated
a dose response in treated patients, but did not achieve the level of
statistical significance required by the FDA to demonstrate efficacy. In 2002,
we conducted a Phase II/III clinical study with Esterom(R) solution. The results
of the trial indicated that patients receiving Esterom(R) solution showed
improvement, but did not sufficiently outperform the patients receiving the
placebo to achieve the level of statistical significance required by the FDA to
demonstrate efficacy.

In January 2002, we reported that Dr. Gary Strichartz, Ph.D., Professor of
Anesthesia and Director of the Pain Research Center at Harvard Medical School,
and his team of researchers identified ENT-102, the active ingredient in
Esterom(R) solution, as a potent analgesic, or pain suppressant. Results of our
initial preclinical studies revealed that ENT-102 effectively blocks nerve
impulse conduction and when injected into animals may have long-lasting
properties to reduce and manage pain.

Based on these findings and the results of our Phase II/III clinical study with
Esterom(R) solution, we decided to forego further development of Esterom(R)
solution and pursue development of the proprietary chemical entity we named
ENT-102. In January 2003, we announced the discovery of a new chemical entity,
ENT-103, the simplified next generation of ENT-102. ENT-103 is a single chemical
compound that exists as a single molecular species. In contrast, ENT-102 is a
single chemical compound comprised of a mixture of four chemical species. Due to
the demonstrated pain reduction equivalency of ENT-103 and ENT-102 in
preclinical studies, and the advantages of pursuing regulatory approval with a
single molecule versus a mixture of four molecules, we decided to focus on the
development of ENT-103 as a therapy for treatment of acute pain.

We anticipate that we will complete ENT-103 preclinical research and toxicology
studies by the end of 2003. We cannot assure you, however, that our further
preclinical and toxicity tests of ENT-103 will be successful. Negative or
inconclusive results generated during these preclinical studies, or any future
clinical studies, will have an immediate material adverse effect on our
operations and future prospects.

RESEARCH AND DEVELOPMENT

In February 2003, we met with our key scientific advisors to review the progress
of the preclinical studies being performed at Harvard Medical School and the
University of Arizona. Based on our review of these preclinical studies, ENT-103
continues to perform as an active pain reliever in preclinical models for
post-incisional pain and neuropathic pain. Demonstrating preclinical
pharmacology is the essential first step in the development of a drug and the
data reviewed at this recent meeting continues to support the activity of
ENT-103 as a potential new pain therapeutic. The key scientific observations
from our review of these preclinical studies include:

         o        ENT-103 is effective in acute pain states

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         o        ENT-103 is effective against the consequences of acute
                  inflammatory pain
         o        ENT-103 is effective against experimental neuropathic pain
         o        ENT-103 suppresses the abnormal pain to tactile stimulation
                  that occurs after an incision

The laboratory of Dr. Frank Porreca at the University of Arizona evaluated the
effects of ENT-103 in three pain models: (1) acute pain representative of
post-operative pain; (2) pain associated with acute and chronic inflammatory
pain; and (3) neuropathic pain. Our review of the results from this preclinical
research indicates that ENT-103 is an active compound that is effective in acute
pain states, acute inflammatory pain, and neuropathic pain, but did not alter
chronic inflammatory pain at the dose tested. Assuming the use of a delivery
system that will effectively get the drug to the site of action, ENT-103 appears
to be effective in the treatment of pain.

The laboratory of Dr. Gary Strichartz, Harvard Medical School, reported expanded
studies of ENT-103 to treat the elevated pain, or hyperalgesia, that follows a
surgical incision. Our review of these preclinical studies indicates that
ENT-103 demonstrates complete anesthesia of the skin for two hours after
injection. Post-incisional pain in animals, particularly pain that occurs from
tactile stimulation of the skin that is normally not painful, is usually
elevated for one to two weeks following an incision. Pre-incisional injections
of ENT-103 produce a decline in this pain with almost complete suppression of
the pain by 48 hours.

Our research and development expenses were $3.1 million, $2.3 million and $3.1
million in fiscal 2002, 2001 and 2000, respectively.

OUTSOURCING STRUCTURE

We maintain a limited management team and support structure for our company,
involving three full-time employees and three part-time employees. We contract
with various organizations and third parties to provide services and expertise
to us in areas such as research and development, preclinical research and
toxicology studies, clinical trials and regulatory approval applications,
clinical supply and manufacturing of our products, product packaging, and
enhanced drug formulation.

PLAN OF OPERATION

Based on our current operating budget, we believe our existing resources will
fund our operation for the next twelve months. We intend to use our remaining
funds to continue to finance the development and preclinical studies of our
proprietary compound, ENT-103. We anticipate we will complete the necessary
preclinical research and toxicology studies for ENT-103 by the end of 2003. We
recognize our need to obtain additional funds to support our operations. We are
currently exploring our funding options as well as pursuing potential funding
support through a corporate partnership, licensing arrangement or merger. We
cannot guarantee that we will be able to accomplish these tasks. Moreover, our
actual expenses, obligations and liabilities may exceed those estimated in our
operating budget, which would significantly shorten the time in which we could
maintain our operations without obtaining additional funds.

PATENTS

We believe that patents and other proprietary rights are important to our
business. Our policy is to file patent applications to protect technology,
inventions and improvements to our inventions that are considered important to
the development of our business. We currently hold fifty six issued and pending
patent applications worldwide, including seven issued U.S. patents and 37
foreign patents; we have three patents pending. The issued patents include two
material composition patents covering the molecules contained in Esterom(R)

                                       3


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solution (including ENT-102) which expire in 2012 and 2013. We have also filed a
patent application with the United States Patent Office along with international
counterparts that describes a method for the enrichment of the compounds covered
in our composition of matter patents. This patent application describes a method
for the production of Esterom(R) solution and its components, including ENT-102

In August 2002, we filed a patent describing the manufacturing process for
ENT-102. Our patent application describes the preparation of commercial
quantities of ENT-102 and other related compounds.

In December 2002, we filed a composition of matter patent application for
ENT-103. Our patent application describes a new chemical entity, or NCE, that is
prepared by combining benzoylecgonine and 1,3 propanediol. ENT-102 is prepared
synthetically by combining benzoylecgonine and 1,2 propanediol. This is an
example of Structure Activity Relationship, or SAR, technology, which is the
basis for systematically developing NCEs with potentially different safety and
efficacy profiles, as well as NCEs for new indications. Our new patent
application claims composition of matter containing ENT-103 and also provides
the potential for the development of a number of additional new chemical
entities. We believe our other patents also provide the framework for the
discovery of additional NCEs using SAR.

GOVERNMENT REGULATION

The research, development, testing, manufacturing, promotion, marketing and
distribution of drug products are extensively regulated by government
authorities in the United States and other countries. Drugs are subject to
rigorous regulation by the FDA in the United States and similar regulatory
bodies in other countries. The steps ordinarily required before a new drug may
be marketed in the United States, which are similar to steps required in most
other countries, include:

         o        preclinical safety studies in animals and formulation studies;
         o        and the submission to the FDA of an Investigational New Drug,
                  or IND, application, approval of which must be received prior
                  to commencing human clinical studies with a new drug;
         o        adequate and well-controlled clinical trials to establish the
                  safety and efficacy of the drug for each medical indication;
         o        the submission of a New Drug Application, or NDA, to the FDA;
                  and
         o        FDA review and approval of the NDA.

Preclinical animal tests include laboratory evaluation of product chemistry,
stability, pharmaceutical properties and formulation, as well as studies to
prove the product is safe in animals. The results of preclinical testing are
submitted to the FDA for review prior to submission of an IND; the FDA can
prevent us from commencing human clinical studies should it find these studies
inadequate. The FDA may halt proposed or ongoing clinical trials at any time
until it allows the trials to continue under specified terms.

Clinical trials to support new drug applications are typically conducted in
three sequential phases. During Phase I safety studies, the initial introduction
of the drug on healthy human subjects, the drug is tested to assess how the drug
is handled in the body and the level of drugs in the body over time, as well as
side effects associated with increasing doses.

Phase II usually involves studies in a limited patient population to: (1) assess
the efficacy of the drug in specific, targeted indications; (2) assess dosage
tolerance and optimal dosage; and/or (3) identify possible adverse effects and
safety risks.

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If a compound is found to be potentially effective and to have an acceptable
safety profile in Phase II evaluations, Phase III trials (also called pivotal
studies, major studies or advanced clinical trials) are undertaken to further
demonstrate clinical efficacy and to further test for safety of the product
within an expanded patient population at geographically dispersed clinical study
sites.

After successful completion of the required clinical testing, the NDA is
generally submitted. The FDA may request additional information before accepting
the NDA for filing, in which case the application must be resubmitted with the
additional information. Once the submission has been accepted for filing, the
FDA has 180 days to review the application and respond to the applicant. The
review process is often significantly extended by FDA requests for additional
information or clarification. The FDA may refer the new drug application to an
appropriate advisory committee for review, evaluation and recommendation as to
whether the application should be approved, but the FDA is not bound by the
recommendation of an advisory committee.

If FDA evaluations of the new drug application and the manufacturing facilities
are favorable, the FDA may issue either an approval letter or an approvable
letter. An approvable letter will usually contain a number of conditions that
must be met in order to secure final approval of the new drug application and
authorization of commercial marketing of the drug for certain indications. The
FDA may refuse to approve the new drug application or issue a not approvable
letter, outlining the deficiencies in the submission and often requiring
additional testing or information.

The manufacturers of approved products and their manufacturing facilities are
subject to continual review and periodic inspections. Because we intend to
contract with third parties for manufacturing our product, our control of
compliance with FDA requirements will be more complicated. In addition,
identification of certain side effects or the occurrence of manufacturing
problems after any of our drugs are on the market could cause subsequent
withdrawal of approval, reformulation of the drug, additional clinical trials,
and changes in labeling of the product.

Outside the United States, our ability to market our products will also be
contingent upon receiving marketing authorizations from the appropriate
regulatory authorities. The foreign regulatory approval process includes all of
the risks associated with the FDA approval set forth above. The requirements
governing the conduct of clinical trials and marketing authorization vary widely
from country to country. At present, foreign marketing authorizations are
applied for at a national level, although within Europe procedures are available
to companies wishing to market a product in more than one European Union, or EU,
member state.

Under a new regulatory system in the EU, marketing authorizations may be
submitted at a centralized, a decentralized or a national level. The centralized
procedure is mandatory for the approval of biotechnology products and high
technology products and available at the applicant's option for other products.
The centralized procedure provides for the grant of a single marketing
authorization that is valid in all EU member states. The decentralized procedure
is available for all medicinal products that are not subject to the centralized
procedure. The decentralized procedure provides for mutual recognition of
national approval decisions, changes existing procedures for national approval
decisions and establishes procedures for coordinated EU actions on products,
suspensions and withdrawals. Under this procedure, the holder of a national
marketing authorization for which mutual recognition is sought may submit an
application to one or more EU member states, certify that the dossier is
identical to that on which the first approval was based or explain any
differences and certify that identical dossiers are being submitted to all
member states for which recognition is sought.

Within 90 days of receiving the application and assessment report, each EU
member state must decide whether to recognize approval. The procedure encourages
member states to work with applicants and other regulatory authorities to
resolve disputes concerning mutual recognition. Lack of objection of a given
country within 90 days automatically results in approval of the EU country.

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We will choose the appropriate route of European regulatory filing to accomplish
the most rapid regulatory approvals. However, the regulatory strategy may not
secure regulatory approvals or approvals of the chosen product indications. We
intend to contract with an experienced third party to assist with our European
clinical development and regulatory approvals.

UNITED STATES DRUG ENFORCEMENT AGENCY REGULATION

The DEA has designated Esterom(R) solution as a Schedule II controlled
substance. Because ENT-102 and ENT-103 are derivative components of Esterom(R)
solution, and also contain benzoylecgonine; these compounds are considered
Schedule II controlled substances. The manufacture, storage, shipment and use of
a Schedule II controlled substance are subject to stringent government
regulations.

PRODUCT LIABILITY INSURANCE

The clinical testing and sales of drugs such as Esterom(R) solution, ENT-102 and
ENT-103 entail risk of product liability claims. Medical testing has
historically been litigious, and we face financial exposure to product liability
claims in the event that use of any of our drugs results in personal injury. We
also face the possibility that defects in the manufacture of our drugs might
necessitate a product recall. There can be no assurance that we will not
experience losses due to product liability claims or recalls in the future. We
anticipate purchasing product liability insurance in reasonable and customary
amounts when we begin to sell any of our drugs. Such insurance can be expensive,
difficult to obtain and may not be available in the future at a reasonable cost
or in sufficient amounts to protect us against losses due to liability. An
inability to maintain insurance at an acceptable cost or to otherwise protect
against potential product liability could prevent or inhibit our
commercialization of our products. Moreover, a product liability claim in excess
of relevant insurance coverage or product recall could have a material adverse
effect on our business, financial condition and results of operations.

ROYALTY COMMITMENTS

In connection with our acquisition of the rights to the three original patents
for Esterom(R) solution from non-affiliated parties, we agreed to pay a royalty
of approximately 1% of amounts paid to us from the sale of products developed
based on these patents. We have agreed to pay a minimum royalty from actual
sales consisting of a front end payment of $40,000 plus payments of $3,572 per
quarter, beginning December 1, 1989, less a credit to us for 50% of patent
expenses we incur.

COMPETITION

The pharmaceutical industry is characterized by intense competition and is
subject to rapid and significant technological change. Rapid technological
development may cause any products we develop to become obsolete before we can
recoup all or any portion of our development expenses. Our competitors include
major pharmaceutical companies, biotechnology firms, universities and other
research institutions, both in the United States and abroad, which are actively
engaged in research and development of products in the therapeutic areas being
pursued by us. Most of our competitors have substantially greater financial,
technical, manufacturing, marketing and human resource capabilities than us. In
addition, many of our competitors have significantly greater experience in
testing new or improved therapeutic products and obtaining regulatory approvals
of products. Accordingly, our competitors may succeed in obtaining regulatory
approval for their products more rapidly than we are able to obtain approval for
our product(s). If we commence significant commercial sales of our product(s),
we will also be competing with respect to manufacturing efficiencies and
marketing capabilities, areas in which we have no experience.

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EMPLOYEES

We have two full-time executive officers, Thomas G. Tachovsky, President and
Chief Executive Officer and Patricia G. Kriss, Chief Financial Officer, Vice
President of Finance and Administration, and Secretary/Treasurer. We have two
administrative employees (one full-time and one part-time) and two part-time
executive officers, Higgins D. Bailey, Chairman of the Board, and Joseph R.
Ianelli, Vice Chairman of the Board.

FACTORS THAT MAY AFFECT OUR FUTURE RESULTS AND THE TRADING PRICE OF OUR COMMON
STOCK

ANY INVESTMENT IN SHARES OF OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU
SHOULD CONSIDER CAREFULLY THE FOLLOWING INFORMATION ABOUT THESE RISKS, TOGETHER
WITH OTHER INFORMATION CONTAINED IN THIS REPORT AND OUR OTHER FILINGS WITH THE
SECURITIES AND EXCHANGE COMMISSION BEFORE YOU DECIDE TO BUY OUR STOCK. IF ANY OF
THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION AND
PROSPECTS WOULD LIKELY SUFFER. ADDITIONAL RISK AND UNCERTAINTIES NOT PRESENTLY
KNOWN TO US OR THAT WE CURRENTLY DEEM IMMATERIAL MAY ALSO IMPAIR OUR OPERATIONS.

WE NEED ADDITIONAL FUNDS TO SUPPORT OUR OPERATIONS. IF WE ARE UNABLE TO OBTAIN
THEM, WE WILL BE UNABLE TO COMPLETE OUR PRODUCT DEVELOPMENT AND WILL NEED TO
REDUCE OR CEASE OUR OPERATIONS.

Our independent accountants' opinion on our 2002 financial statements includes
an explanatory paragraph indicating substantial doubt, on the basis described in
that paragraph, about our ability to continue as a going concern. We currently
are able generally to pay our debts and meet our obligations as they become due,
and we believe that our existing capital resources will be sufficient to satisfy
our current and projected funding requirements for at least the next twelve
months. Nevertheless, to continue long-term as a going concern, we need to raise
additional funds to support our operations. Our future capital requirements will
depend on many factors, including:

         o        progress with preclinical studies and toxicology studies;
         o        the funds required to redeem our outstanding Series B
                  Preferred Stock;
         o        the costs and expenses associated with defending against the
                  securities lawsuit recently filed against the Company and
                  certain of its executive officers;
         o        the time and costs involved in obtaining regulatory approvals
                  for our products;
         o        the magnitude of our research and development programs;
         o        the costs involved in obtaining, enforcing and defending
                  patent and other intellectual property rights; and
         o        the cost of manufacturing and of commercialization activities
                  and arrangements.

We intend to seek additional funding to support our future operations through
public or private sales of our equity or debt securities. Any additional equity
or debt financings would be dilutive to our stockholders. We also intend to seek
additional funding through potential corporate partnerships, licensing
arrangements and/or merger/acquisition transactions. Any such collaborative
arrangements, if necessary to raise additional funds, may require us to
relinquish rights to some of our technologies or products. We cannot guarantee
that we will be able to secure additional funds on reasonable terms, or at all.
If we are unable to obtain additional funds to support our operations, we will
be unable to complete our product development and will need to reduce or cease
our operations.

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WE MAY NOT BE ABLE TO MAINTAIN OUR LISTING ON THE NASDAQ SMALLCAP MARKET.

To maintain the listing of our common stock and warrants on the Nasdaq SmallCap
Market we are required to meet certain listing requirements, including
maintaining at least $2,500,000 in stockholders' equity and a minimum bid price
of $1.00 per share. On September 3, 2002, we received a reminder from the Nasdaq
Stock Market that the listing requirement to maintain stockholders' equity at,
or above, $2,500,000 would become effective on November 1, 2002. At September
30, 2002, our stockholders' equity was $995,126. As a result, we received formal
notice from Nasdaq on November 20, 2002, indicating our deficiency in
stockholders' equity.

In February 2003, we entered into separate agreements with each of the holders
of our Series A preferred stock, in which these stockholders agreed to exchange
each outstanding share of Series A preferred stock for one share of our Series
A' preferred stock. The terms of the Series A' preferred stock are the same as
the terms of the Series A preferred stock except the redemption provision of the
Series A' preferred stock allows us to redeem the Series A' preferred stock in
cash, common stock or any combination thereof and extends the redemption period
to January 15, 2015. Because we can redeem the Series A' preferred stock with
common stock at our discretion, we can include the outstanding Series A'
preferred stock balance in our stockholders' equity balance. Adding the option
to redeem these shares in common stock allows us to classify the Series A'
preferred stock as stockholders' equity, which allowed us to comply with
Nasdaq's stockholders' equity requirement as of February 14, 2003. However, as
we continue to use our available resources to support our operations, the
stockholders' equity we report on our balance sheet will continue to decrease.
As a result, unless we can raise additional funds to support our operations in
the near term, we will fall back out of compliance with the stockholders' equity
requirement of the Nasdaq SmallCap Market, and be subject to a delisting action
by Nasdaq. We cannot assure you that we will be able secure additional funds
within the timeframe required to maintain our listing on the Nasdaq SmallCap
Market, or at all.

We also received a letter from Nasdaq, dated October 22, 2002, stating that due
to the minimum bid price levels for our common stock remaining under the $1.00
level for thirty consecutive trading days, we could be subject to delisting
unless our common stock attains a bid price of $1.00 or more for a period of ten
consecutive days before April 21, 2003. We cannot assure you that we will be
able to satisfy the minimum bid listing requirement of the Nasdaq SmallCap
Market, or that any actions that we take to comply with this listing requirement
will be successful. Should our common stock and warrants be delisted from the
Nasdaq SmallCap Market, they would likely be traded on the "Electronic Bulletin
Board" of the National Association of Securities Dealers, Inc. However, this
alternative could result in a less liquid market available for existing and
potential investors to trade shares of our common stock and warrants and could
ultimately further depress the trading price of our common stock and warrants.
In addition, we may have more difficulty in raising necessary additional funds
as a result of not trading on the Nasdaq SmallCap Market.

WE HAVE A HISTORY OF LOSSES AND WE MAY NEVER ACHIEVE OR MAINTAIN PROFITABILITY.

To date we have experienced significant operating losses in funding the
research, development and testing of our previous drug candidate, Esterom(R)
solution, and our subsequent and current drug candidates, ENT-102 and ENT-103.
We expect to continue to incur substantial operating losses during our research,
development and preclinical testing of ENT-103 and during the regulatory
approval process for ENT-103, including the New Drug Application and clinical
trials. From our inception through December 31, 2002, we have incurred
cumulative net operating losses of $29.4 million. We will not even be able to
pursue generating revenues from sales of ENT-103 unless it is approved by the
FDA for marketing. FDA approval may take several years, if ENT-103 is approved
at all. In addition, we will need to raise substantial additional capital to
pursue the regulatory approval of ENT-103. As a result, we may never achieve a
profitable level of operations, or even if we achieve profitability, we may not
be able to sustain it on an ongoing basis.

                                       8


<PAGE>

NEGATIVE OR INCONCLUSIVE RESULTS GENERATED BY OUR ONGOING PRECLINICAL STUDIES OF
ENT-103 WILL HAVE A MATERIAL ADVERSE EFFECT ON OUR OPERATIONS AND PROSPECTS.

To date, we have completed limited preclinical studies on our sole drug
candidate, ENT-103. We are currently in the process of conducting additional
preclinical and toxicology studies that will be important in determining whether
ENT-103 remains a viable drug candidate. No assurances can be given as to the
results of or the time to complete these preclinical studies. ENT-103 may be
found to be ineffective or cause harmful side effects during pre-clinical
testing. In addition, interim results do not necessary predict final results.
Negative or inconclusive results generated during these preclinical or
toxicology studies, or any future clinical studies, will have an immediate
material adverse effect on our operations and future prospects. In addition, any
delay in the timing of the preclinical studies will adversely affect our ability
to meet certain milestones with our limited remaining funds. Further, any
negative results or delay in the preclinical studies will adversely affect our
ability to raise additional funds through the issuance of securities or
consummation of corporate partnering relationships.

IF WE FAIL TO OBTAIN REGULATORY APPROVAL TO COMMERCIALLY MANUFACTURE OR SELL
ENT-103, OR IF APPROVAL IS DELAYED, IT WILL INCREASE THE COST OF DEVELOPMENT,
AND WILL LIKELY PREVENT OR DELAY OUR ABILITY TO SELL ENT-103 AND GENERATE
REVENUE.

Our only current drug candidate, ENT-103, is in the preclinical development
stage and we do not anticipate beginning human clinical trials with ENT-103
until 2004. We have not yet filed an IND with FDA or
requested or received regulatory approval from the FDA for marketing products
containing ENT-103. Neither ENT-103 nor any other products that may result from
our research and development programs are expected to be commercially available
for several years, if at all.

The development of new pharmaceutical products is highly uncertain and subject
to a number of risks. The FDA approval process generally takes years and
consumes substantial capital resources with no assurance of ultimate success. We
cannot apply for FDA approval to market ENT-103 until the product successfully
completes all of the required clinical trials. Several factors may prevent our
successful completion of the clinical trials, including negative or inconclusive
preclinical results, failure or delays in the FDA approval process, insufficient
capital resources, inability to properly design and complete clinical trials or
insufficient proof that ENT-103 is safe and effective.

There can be no assurance that development of ENT-103 will be completed
successfully, that we will not encounter problems in preclinical studies or
clinical trials that will cause the delay or suspension of such trials, that
current or future testing will show ENT-103 to be efficacious or that ENT-103
will receive regulatory approval. Moreover, even if ENT-103 does receive
regulatory approval, there can be no assurance that ENT-103 will be commercially
successful, or have all of the patent and other regulatory protections necessary
to prevent competitors from producing similar products. The failure of ENT-103
to receive timely regulatory approval and achieve commercial success will have a
material adverse effect on our business and results of operations.

WE RELY ON THIRD PARTIES TO TEST, RESEARCH, DEVELOP AND MANUFACTURE ENT-103 AND
THOSE THIRD PARTIES MAY NOT PERFORM SUCCESSFULLY, WHICH COULD HARM OUR BUSINESS,
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

We depend on contractual arrangements with third parties for the provision of
services and expertise in selected areas. Under these contractual arrangements,
third parties are responsible for:

         o        conducting preclinical research and toxicology studies,
         o        conducting clinical trials and obtaining regulatory approvals,
         o        process and analytical methods development,


                                       9


<PAGE>

         o        clinical supply and commercial manufacturing,
         o        product packaging,
         o        research, and
         o        enhanced drug formulation(s).

Our existing contractual relationships place substantial responsibility on these
third parties, which could result in delays or termination if such parties fail
to perform as predicted. We may not be able to maintain these existing
relationships, or establish new ones on favorable terms, if at all. If these
third parties fail to perform their contractual obligations, it could have a
material adverse effect on our business and results of operations.

WE ARE EXPOSED TO VARIOUS LEGAL PROCEEDINGS, WHICH IF DETERMINED ADVERSELY,
COULD NEGATIVELY AFFECT OUR BUSINESS AND RESULTS OF OPERATIONS.

In February 2003, a complaint was filed in the Superior Court of the State of
California against the Company and certain of its executive officers seeking
unspecified damages and alleging that the defendants violated federal and state
securities laws. The Company believes the claims are without merit and intends
to defend the action vigorously. However, there can be no assurance that the
Company will succeed in defending or settling this action. In addition, the
Company will incur legal and other fees to defend against this action and its
management team may be distracted or need to devote significant time to this
matter. As a result, there can be no assurance that the action will not have a
material adverse effect on the Company's business.

WE ARE DEPENDENT ON CONTRACT MANUFACTURERS FOR THE PRODUCTION OF ENT-103 AND OUR
FAILURE TO OBTAIN OR RETAIN THESE CONTRACT MANUFACTURERS WOULD HAVE A MATERIAL
ADVERSE AFFECT ON OUR BUSINESS AND RESULTS OF OPERATIONS.

We have, and currently plan to continue to utilize, third party manufacturing
for the production of material for use in our research and clinical trials and
for the potential commercialization of ENT-103 and any future products we may
develop. We have no experience in manufacturing and do not have any
manufacturing facilities. Consequently, we are solely dependent on contract
manufacturers for all production of ENT-103 for development and
commercialization purposes. In the event that we are unable to obtain or retain
third-party manufacturing, we will not be able to manufacture ENT-103 as
planned.

ENT-103'S CLASSIFICATION AS A CONTROLLED SUBSTANCE MAY LIMIT SALES AND INCREASE
COSTS WHICH WOULD HARM OUR BUSINESS AND RESULTS OF OPERATIONS.

As a controlled substance, ENT-103 will be subject to expensive and burdensome
administrative requirements which will increase our costs. Moreover, these
administrative requirements may discourage ENT-103 use and acceptance by the
medical community, which would harm our business and results of operations.

IF WE ARE UNABLE TO DEFEND OUR PATENTS AND PROPRIETARY RIGHTS, OR IF OTHERS
DEVELOP SUBSTANTIALLY EQUIVALENT PRODUCTS, OUR BUSINESS WOULD BE IMPACTED.

Our patent, trademarks and other intellectual property rights are important to
our success. Others may challenge, seek to invalidate, infringe or circumvent
any patents we own, and rights we receive under those patents may not provide
competitive advantages to us. In addition, the manufacture, use or sale of our
products may infringe on the patent rights of others. Patent litigation can be
extremely expensive and time consuming. If we are unable to defend our existing
patents or if others develop similar products beyond the protection of our
existing patents, our business could be impaired.

                                       10


<PAGE>

We may also need to initiate litigation, which could be time-consuming and
expensive, to enforce our proprietary rights or to determine the scope and
validity of others' rights. Litigation, even if wholly without merit, could
result in substantial costs and diversion of resources, regardless of the
outcome. In addition, a court may find our patents invalid or may find that we
have infringed on a competitor's rights. If any claims or actions are asserted
against us, we may be required to participate in expensive interference
proceedings to determine who has the right to a patent for the technology.

WE MAY BE EXPOSED TO PRODUCT LIABILITY CLAIMS WHICH COULD ADVERSELY AFFECT OUR
BUSINESS AND FINANCIAL CONDITION.

The clinical testing of products containing ENT-103 entails risk of product
liability claims. Medical testing has historically been litigious and we face
financial exposure to product liability claims in the event that use of our
products results in personal injury. We also face the possibility that defects
in the manufacture of ENT-103 based products might necessitate a product recall.
There can be no assurance that we will not experience losses due to product
liability claims or recalls in the future. We anticipate purchasing product
liability insurance in reasonable and customary amounts prior to our sale of
ENT-103 based products. Such insurance can be expensive, difficult to obtain and
may not be available in the future at reasonable cost or in sufficient amounts
to protect us against losses due to liability. An inability to maintain
insurance or to otherwise protect against potential product liability could
prevent or inhibit our commercialization of ENT-103 products. Moreover, a
product liability claim in excess of relevant insurance coverage or product
recall could have a material adverse effect on our business, financial condition
and results of operations.

WE MAY FACE INTENSE COMPETITION AND MAY NOT BE ABLE TO COMPETE EFFECTIVELY.

The pharmaceutical industry is characterized by intense competition and is
subject to rapid and significant technological change. Rapid technological
development may cause ENT-103 and any other products we develop to become
obsolete before we can recoup all or any portion of our development expenses.
Our competitors include major pharmaceutical companies, biotechnology firms,
universities and other research institutions, both in the United States and
abroad, which are actively engaged in research and development of products in
the therapeutic areas being pursued by us. Most of our competitors have
substantially greater financial, technical, manufacturing, marketing and human
resource capabilities than us. In addition, many of our competitors have
significantly greater experience in testing new or improved therapeutic products
and obtaining regulatory approval of products. Accordingly, our competitors may
succeed in obtaining regulatory approval for their products more rapidly than we
are able to obtain approval for ENT-103. If we commence significant commercial
sales of our products, we will also be competing with respect to manufacturing
efficiencies and marketing capabilities, areas in which we have no prior
experience.

WE DEPEND ON KEY PERSONNEL WHO WOULD BE DIFFICULT TO REPLACE AND OUR BUSINESS
WILL LIKELY BE HARMED IF WE LOSE THEIR SERVICES.

Our future operating results depend in significant part on the continued
contributions of our management personnel, who would be difficult to replace. In
addition, we rely on the current members of our Scientific and Advisory Board
and a significant number of consultants to assist in formulating our research
and development strategy. The loss of any these people could impede the
achievement of our objectives and our business would likely be harmed.

OUR STOCK PRICE HAS BEEN VOLATILE AND MAY CONTINUE TO EXPERIENCE SIGNIFICANT
PRICE FLUCTUATIONS.

The market prices and trading volumes for our securities, and the securities of
development stage companies in general, have historically been highly volatile
and have experienced significant price and volume fluctuations that are

                                       11


<PAGE>

unrelated to operating performance. The following factors may have an adverse
effect on the price of our securities:

         o        announcements of the results of research or development by us
                  or by our competitors,
         o        preclinical and/or clinical trial results,
         o        our failure to receive regulatory approval,
         o        government regulation of our industry,
         o        developments concerning patents or other proprietary rights,
         o        sales of substantial amounts of our common stock by existing
                  stockholders,
         o        comments by securities analysts, and
         o        general conditions in our market, the stock market, or in the
                  economy; and
         o        comments by securities analysts and market conditions in
                  general.

The market price of our common stock may continue to experience significant
fluctuations in the future, including fluctuations that are unrelated to our
performance.

FUTURE SALES OF OUR SECURITIES IN THE PUBLIC OR PRIVATE MARKET COULD LOWER OUR
STOCK PRICE AND IMPAIR OUR ABILITY IN NEW STOCK OFFERINGS TO RAISE FUNDS TO
CONTINUE OPERATIONS.

Future sales of our common stock, including shares issued upon the exercise of
outstanding options and warrants or other derivative transactions with respect
to our stock, could have a significant negative effect on the market price of
our common stock. These sales may also make it more difficult for us to sell
equity securities or equity-related securities in the future at a time and price
that we would deem appropriate.


ITEM 2.  DESCRIPTION OF PROPERTY.

We sublease 800 square feet of office space in Indio, California from one of our
principal stockholders, Thomas T. Anderson, for a monthly rent of $800 on a
month-to-month basis. We also lease approximately 1,150 square feet of office
space in Chester, New York, for a monthly rent of $1,623. Unless extended for
another year, this lease will expire in July 2003. We believe these leases are
at or below market prices for comparable office space. We believe that our
current space is adequate for our current and identified future needs.


ITEM 3.  LEGAL PROCEEDINGS.

In February 2003, a complaint was filed in the Superior Court of the State of
California against the Company and certain of its executive officers seeking
unspecified damages and alleging that the defendants violated federal and state
securities laws. The Company believes the claims are without merit and intends
to defend the action vigorously. However, there can be no assurance that the
Company will succeed in defending or settling this action. Additionally, there
can be no assurance that the action will not have a material adverse effect on
the Company's business. As of the date of this report, we are not a party to any
other material legal proceedings.


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

We did not submit any matters to a vote of our security holders during the
quarter ended December 31, 2002.

                                       12


<PAGE>

                                     PART II

ITEM 5.  MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS.

PRICE RANGE OF COMMON STOCK

From February 25, 1998 until March 13, 2000, our common stock traded on the NASD
OTC Bulletin Board under the trading symbol "ETOP". Since March 14, 2000 our
common stock has been traded on the NASDAQ SmallCap Market under the trading
symbol "ETOP". The following table sets forth the high and low closing prices
per share for our common stock for the quarters indicated.

        Year ended December 31, 2001                  High                 Low
        ----------------------------                  ----                 ---
        First Quarter                                $ 3.59               $ 1.63
        Second Quarter                               $ 2.60               $ 1.56
        Third Quarter                                $ 2.13               $ 1.63
        Fourth Quarter                               $ 2.30               $ 1.87

        Year ended December 31, 2002                  High                 Low
        ----------------------------                  ----                 ---
        First Quarter                                $ 3.80               $ 2.05
        Second Quarter                               $ 3.85               $ 2.36
        Third Quarter                                $ 3.73               $ 0.38
        Fourth Quarter                               $ 0.44               $ 0.27

On March 21, 2003, the closing bid price of the common stock on the NASDAQ
SmallCap Market was $0.60 per share.

PRICE RANGE OF WARRANTS

Since March 14, 2000, the warrants issued in our secondary public offering have
been traded on the NASDAQ Small Cap Market under the trading symbol "ETOPW". The
following table sets forth the high and low closing prices per warrant for the
quarters indicated.

        Year ended December 31, 2001                  High                 Low
        ----------------------------                  ----                 ---
        First Quarter                                $ 1.00               $ 0.59
        Second Quarter                               $ 1.04               $ 0.61
        Third Quarter                                $ 0.62               $ 0.35
        Fourth Quarter                               $ 0.60               $ 0.30

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<PAGE>

        Year ended December 31, 2002                  High                 Low
        ----------------------------                  ----                 ---
        First Quarter                                $ 1.04               $ 0.44
        Second Quarter                               $ 1.00               $ 0.65
        Third Quarter                                $ 1.10               $ 0.09
        Fourth Quarter                               $ 0.10               $ 0.03

On March 21, 2003, the closing bid price of the warrants on the NASDAQ SmallCap
Market was $0.09 per share.

HOLDERS

As of March 21, 2003, approximately 410 holders of record owned approximately
3,695,726 shares of our common stock with the remaining shares held in street
name through registered brokers. As of March 21, 2003, approximately 24 holders
of record owned 983,500 warrants with the remaining warrants held in street name
through registered brokers.

DIVIDENDS

The payment of dividends by the Company is within the discretion of its Board of
Directors and depends in part upon the Company's earnings, capital requirements,
debt covenants and financial condition. We have never declared or paid dividends
on our common stock and do not intend to pay dividends on our common stock in
the foreseeable future. Instead, we will retain any earnings to finance the
expansion of our business and for general corporate purposes. We are obligated
to pay dividends on our Series B preferred stock, although we may elect to pay
the dividends on the Series B preferred stock in shares of our common stock. As
of December 31, 2002, we have issued 82,000 shares of common stock as dividends
on our Series B preferred stock. Our Series A preferred stock is redeemable,
non-voting preferred stock which is only redeemable from annual "Earnings", but
not to exceed "Net Cash Flow from Operating Activities" as those terms are
defined under Generally Accepted Accounting Principles, or GAAP.

NASDAQ LISTING REQUIREMENTS

Our common stock is currently listed on the Nasdaq SmallCap Market. We must
satisfy certain listing requirements to maintain our SmallCap Market listing.
Two important listing requirements are the requirement to maintain at least
$2,500,000 in stockholders' equity and the requirement to maintain a minimum bid
price of $1.00 per share.

The requirement to maintain at least $2,500,000 in stockholders' equity is a new
listing requirement that became effective on November 1, 2002. Stockholders'
equity is a line item that companies are required to report on their quarterly
and annual balance sheets filed with the SEC. Stockholders' equity is a measure
of the resources available to a company for its operations. By definition,
stockholders' equity is the residual of whatever is left after enough assets are
set aside to cover liabilities.

On September 3, 2002, we received a reminder from Nasdaq regarding the new
stockholders' equity requirement, and its intent to start the delisting process
for all companies that do not meet this requirement as of November 15, 2002, the
deadline for filing third quarter financial results. In our Form 10-QSB for the
third quarter, we reported that our stockholders' equity was $995,126. As a
result, we received formal notice from Nasdaq on November 20, 2002, regarding

                                       14


<PAGE>

our deficiency in stockholders' equity. During subsequent conversations, Nasdaq
extended the date for our compliance with the stock holders' equity requirement
until February 10, 2003.

In February 2003, we entered into separate agreements with each of the holders
of our Series A preferred stock, in which these stockholders agreed to exchange
each outstanding share of Series A preferred stock for one share of our Series
A' preferred stock. The terms of the Series A' preferred stock are the same as
the terms of the Series A preferred stock except the redemption provision of the
Series A' preferred stock allows us to redeem the Series A' preferred stock in
cash, common stock or any combination thereof and extends the redemption period
to January 15, 2015. Because we can redeem the Series A' preferred stock with
common stock at our discretion, we can include the outstanding Series A'
preferred stock balance in our stockholders' equity balance. Adding the option
to redeem these shares in common stock allows us to classify the Series A'
preferred stock as stockholders' equity and allowed us to comply with Nasdaq's
stockholders' equity requirement as of February 14, 2003. However, as we
continue to use our available resources to support our operations, the
stockholders' equity we report on our balance sheet will continue to decrease.
As a result, unless we can raise additional funds to support our operations in
the near term, we will fall back out of compliance with the stockholders' equity
requirement of the Nasdaq SmallCap Market, and be subject to a delisting action
by Nasdaq. We cannot assure you that we will be able secure additional funds
within the timeframe required to maintain our listing on the Nasdaq SmallCap
Market, or at all.

We also received a letter from Nasdaq on October 22, 2002 regarding the failure
of our stock to maintain a minimum bid price level of at least $1.00 per share.
This letter indicated that our common stock would be subject to delisting from
the SmallCap Market unless we achieve a bid price of $1.00 or more for a period
of ten consecutive days before April 21, 2003. We are exploring two options to
satisfy this requirement. First, we intend to continue to develop ENT-103 as
quickly as possible. If ENT-103 continues to show progress, our stock price may
increase over the $1.00 threshold. Second, if our stock price does not increase
over $1.00, we may approach our stockholders regarding a reverse stock split. If
approved, a reverse stock split would effectively decrease the number of
outstanding shares of our common stock, which would have the effect of
increasing the per share price of the common stock. We cannot assure you that we
will be able to satisfy the minimum bid listing requirement of the Nasdaq
SmallCap Market, or that any actions that we take to comply with this listing
requirement, will be successful.

SALES OF UNREGISTERED SECURITIES

We have issued securities to the following persons for the cash or other
consideration indicated in transactions that were not registered under the 1933
Act.

In September 1998, the Registrant granted options to purchase an aggregate of
295,000 shares of the Registrant's common stock at an exercise price of $4.00
per share for five years to its Executive Management as follows: Donald Hunter
120,000 shares; Higgins D. Bailey 55,000 shares, and Dewey H. Crim 120,000
shares. The shares are fully vested as to Messrs. Hunter and Bailey. Mr. Crim
resigned from Executive Management and 100,000 of his shares are vested. The
Registrant subsequently granted additional options on the same terms to Messrs.
Hunter and Bailey, its Executive Management, as follows: 2,500 shares each in
February 1999; 5,000 shares per month each for the period March through June
1999; and 15,000 shares per month each for the period July through November
1999. The Registrant claims the exemption from registration provided by Section
4(2) of the 1933 Act for this transaction. No broker/dealers were involved in
the sale and no commissions were paid. The option certificates were impressed
with a restrictive legend advising that the shares represented by the
certificate may not be sold, transferred, pledged or hypothecated without having
first been registered or the availability of an exemption from registration
established.

                                       15


<PAGE>

                                       II.

In March 1999, the Registrant entered into an agreement with J. Paul Consulting
Corporation ("JPC"). As partial consideration for JPC's services under the
agreement, the Registrant issued JPC an option to purchase 175,000 shares of the
Registrant's common stock, exercisable at $3.00 per share. The option would
become exercisable the earlier of January 1, 2000, or when the shares become
registered. The exercise period is five years from the date the shares become
freely tradable. The issuance of the option to JPC was made in reliance upon the
exemption from registration provided by Section 4(2) of the 1933 Act. No
broker/dealers were involved in the sale and no commissions were paid. JPC
represented that they acquired the option for investment and not with a view to
distribution.

                                      III.

In March 1999, the Registrant entered into an agreement with GJM Trading
Partners, Ltd. ("GJM"). As partial consideration for GJM's services under the
agreement, the Registrant issued GJM an option to purchase 125,000 shares of the
Registrant's common stock, exercisable at $3.00 per share. The option would
become exercisable the earlier of January 1, 2000, or when the shares become
registered. The exercise period is five years from the date the shares become
freely tradable. The issuance of the option to GJM was made in reliance upon the
exemption from registration provided by Section 4(2) of the 1933 Act. No
broker/dealers were involved in the sale and no commissions were paid. GJM
represented that they acquired the option for investment and not with a view to
distribution.

                                       IV.

In March 1999, the Registrant entered into an agreement with Transition
Partners, Limited ("TPL"). The agreement terminated in July 1999. As part of the
termination, TPL surrendered for cancellation a previously issued warrant to
acquire 300,000 shares of the Registrant's common stock at $4.50 per share for
five years, in exchange for a warrant to purchase 50,000 shares of the
Registrant's common stock at $4.00 per share. The issuance of the warrant to TPL
was made in reliance upon the exemption from registration provided by Section
4(2) of the 1933 Act. No broker/dealers were involved in the sale and no
commissions were paid. TPL represented that they acquired the option for
investment and not with a view to distribution.

                                       V.

In March 1999, the Registrant entered into an agreement with Grayson &
Associates, Inc. ("Grayson"). As partial consideration for Grayson's services
under the agreement, the Registrant issued Grayson a warrant to purchase up to
300,000 shares of the Registrant's common stock at $3.00 per share, provided
however, if the average of the closing bid/ask price for the Registrant's common
stock for the 20 consecutive trading days prior to March 30, 2000 is less than
$3.00 per share, the exercise price for the first 100,000 shares represented by
the warrant would be adjusted down to reflect a 25% discount from the average of
the closing bid/ask price for such period, exercisable as follows: 100,000
shares exercisable immediately; an additional 100,000 shares shall become
exercisable provided that the Registrant received $2 million in funding on or
before May 15, 1999; and, the remaining 100,000 shares would become exercisable
provided that the Registrant received an additional $4 million in funding on or
before August 31, 1999, subject to ratable reductions to the extent that any of
the funding is not attributable to Grayson. The warrant's expiration date was
March 22, 2004. The issuance of the warrant to Grayson was made in reliance upon
the exemption from registration provided by Section 4(2) of the 1933 Act. No
broker/dealers were involved in the sale and no commissions were paid. Grayson
represented that they acquired the option for investment and not with a view to
distribution. Grayson performed no services on behalf of the Registrant and the
warrants were subsequently cancelled.

                                       16


<PAGE>

                                       VI.

In March 1999, the Registrant conducted a private offering of its 10% 90-Day
Promissory Notes, as amended (Notes), convertible at the election of the note
holders into shares of the Registrant's common stock, at $2.00 per share. The
participants received three and one-half warrants exercisable over a five-year
period from the date the shares become freely trading at $3.00 per share, for
each $1.00 of Promissory Notes purchased. The Registrant generated proceeds of
$200,000 and issued 700,000 warrants.

The offers and sales set forth above were made in reliance upon the exemption
from registration provided by Section 4(2) of the 1933 Act and/or Regulation D
and Rule 506 adopted thereunder. Based upon information known to the Registrant,
and representations made by each of the purchasers, the Registrant believes that
all of the purchasers were Accredited Investors as that term is defined in Rule
501 of Regulation D. No broker/dealers were involved in the sale and no
commissions were paid. All of such purchasers represented that they purchased
the securities for investment, and all Notes and warrants issued to the
purchasers were impressed with a restrictive legend advising that the Notes and
warrants may not be sold, transferred, pledged or hypothecated without having
first been registered or the availability of an exemption from registration
established.

                                      VII.

In April 1999, the Registrant issued 100,831 shares of Registrant's common stock
at $2.00 per share, in exchange for the surrender of its 10% 90-Day Convertible
Promissory Notes, as amended (Notes), plus the unpaid accrued interest on such
Notes generating total proceeds of $201,662.

The offers and sales set forth above were made in reliance upon the exemption
from registration provided by Section 4(2) of the 1933 Act and/or Regulation D
and Rule 506 adopted thereunder. Based upon information known to the Registrant,
and representations made by each of the purchasers, the Registrant believes that
all of the purchasers were Accredited Investors as that term is defined in Rule
501 of Regulation D. No broker/dealers were involved in the sale and no
commissions were paid. All of such purchasers represented that they purchased
the securities for investment, and all certificates issued to the purchasers
were impressed with a restrictive legend advising that the shares represented by
the certificates may not be sold, transferred, pledged or hypothecated without
having first been registered or the availability of an exemption from
registration established. Stop transfer instructions have been placed against
the transfer of these certificates by the Registrant's Transfer Agent.

                                      VIII.

In April 1999, the Registrant completed a private placement of 497,500 shares of
its common stock at $2.00 per share for proceeds of $995,000.

The offers and sales set forth above were made in reliance upon the exemption
from registration provided by Section 4(2) of the 1933 Act and/or Regulation D
and Rule 506 adopted thereunder. Based upon information known to the Registrant,
and representations made by each of the purchasers, the Registrant believes that
all of the purchasers were Accredited Investors as that term is defined in Rule
501 of Regulation D. No broker/dealers were involved in the sale and no
commissions were paid. All of such purchasers represented that they purchased
the securities for investment, and all certificates issued to the purchasers
were impressed with a restrictive legend advising that the shares represented by
the certificates may not be sold, transferred, pledged or hypothecated without
having first been registered or the availability of an exemption from
registration established. Stop transfer instructions have been placed against
the transfer of these certificates by the Registrant's Transfer Agent.

                                       17


<PAGE>

                                       IX.

In May 1999, C.C.R.I. Corporation, a consultant to the Registrant exercised
options for an aggregate of 8,000 shares of the Registrant's common stock at
$4.00 per share. The Registrant claims the exemption from registration provided
by Section 4(2) of the 1933 Act. The certificate issued to the consultant was
impressed with a restrictive legend advising that the shares represented by
certificate may not be sold, transferred, pledged or hypothecated without having
first been registered or the availability of an exemption from registration
established. No brokers or dealers received compensation in connection with the
sale of these shares.

                                       X.

In June 1999, the Registrant completed a private placement of 304,750 shares of
its common stock at $4.00 per share for proceeds of $1,219,000.

The Registrant claims the exemption from registration provided by Section 4(2)
of the Securities Act of 1933, as amended, and/or Rule 506 of Regulation D
adopted thereunder for the transactions described above. All of the purchasers
were either known to the Registrant, or were referred to the Registrant by a
consultant to the Registrant. Based upon the written representations made by the
purchasers and other information known to the Registrant, the Registrant
believes all of the purchasers were Accredited Investors as that term is defined
in Rule 501 of Regulation D. All purchasers represented that they purchased the
securities for investment, and all certificates issued to the purchasers were
impressed with a restrictive legend advising that the shares represented by
certificates may not be sold, transferred, pledged or hypothecated without
having first been registered or the availability of an exemption from
registration established. Stop transfer instructions have been placed against
the transfer of these certificates by the Registrant's Transfer Agent. No
brokers or dealers received compensation in connection with the sale of these
shares.

                                       XI.

In June 1999, the Registrant granted options to acquire 20,000 shares of the
Registrant's common stock to Wellington Ewen, the Registrant's Chief Financial
Officer, at an exercise price of $4.00 per share for five years from the dates
the options become exercisable. The shares shall vest ratably over a 12-month
period from date of grant. The issuance of the options was made in reliance upon
claims the exemption from registration provided by Section 4(2) of the 1933 Act
for this transaction. No broker/dealers were involved in the sale and no
commissions were paid. The option certificate was impressed with a restrictive
legend advising that the shares represented by the certificate may not be sold,
transferred, pledged or hypothecated without having first been registered or the
availability of an exemption from registration established.

                                      XII.

In June 1999, the Registrant granted options to acquire 60,000 shares of the
Registrant's common stock to Wendy Rieder, a consultant of the Registrant, at an
exercise price of $5.00 per share for five years from the date the options
become exercisable. The shares vest as follows: 20,000 shares as of May 1, 2000,
with the remaining shares vesting on a pro rata basis monthly through May 1,
2002. The Registrant claims the exemption from registration provided by Section
4(2) of the 1933 Act for this transaction. No broker/dealers were involved in
the sale and no commissions were paid. The option certificate was impressed with
a restrictive legend advising that the shares represented by the certificate may
not be sold, transferred, pledged or hypothecated without having first been
registered or the availability of an exemption from registration established.

                                       18


<PAGE>

                                      XIII.

In June 1999, the Registrant granted options to acquire 60,000 shares of the
Registrant's common stock to LMU & Company, a consultant of the Registrant. The
options are exercisable at $3.00 per share for nine years and vest as to 20,000
shares covered hereby on February 1, 1999. Thereafter, the option shall vest as
to the remaining 40,000 shares covered hereby on a pro rata basis monthly
commencing March 1, 1999, and ending February 1, 2001. The issuance of the
options was made in reliance upon claims the exemption from registration
provided by Section 4(2) of the 1933 Act for this transaction. No broker/dealers
were involved in the sale and no commissions were paid. The option certificate
was impressed with a restrictive legend advising that the shares represented by
the certificate may not be sold, transferred, pledged or hypothecated without
having first been registered or the availability of an exemption from
registration established.

                                      XIV.

In July 1999, the Registrant issued an aggregate of 24,550 shares of its common
stock to the holders of the Registrant's Series B Preferred Stock as a dividend,
valued at $5.00 per share. The issuance of the dividend shares was exempt from
registration in that there was no sale of the shares by the Registrant. Each
holder of the Registrant's Series B Preferred Stock represented that he received
the shares for investment and not with a view to distribution. All certificates
were endorsed with a legend restricting the sale or transfer of the securities
except in accordance with federal securities laws. Stop transfer instructions
have been placed against the transfer of these certificates by the Registrant's
Transfer Agent.

                                       XV.

In July 1999, C.C.R.I. Corporation, a consultant to the Registrant exercised
options for an aggregate of 12,000 shares of the Registrant's common stock at
$4.00 per share. The Registrant claims the exemption from registration provided
by Section 4(2) of the 1933 Act. The certificate issued to the consultant was
impressed with a restrictive legend advising that the shares represented by
certificate may not be sold, transferred, pledged or hypothecated without having
first been registered or the availability of an exemption from registration
established. No brokers or dealers received compensation in connection with the
sale of these shares.

                                      XVI.

In July 1999, the Registrant granted options to acquire 60,000 shares of the
Registrant's common stock to LMU & Company, a consultant of the Registrant. The
options are exercisable at $4.00 per share for five years from the dates they
become exercisable and vest as follows: 20,000 shares at August 5, 1999, and the
remaining 40,000 shares ratably over a four month period through December 5,
1999. The Registrant claims the exemption from registration provided by Section
4(2) of the 1933 Act for this transaction. No broker/dealers were involved in
the sale and no commissions were paid. The option certificate was impressed with
a restrictive legend advising that the shares represented by the certificate may
not be sold, transferred, pledged or hypothecated without having first been
registered or the availability of an exemption from registration established.

                                      XVII.

In July 1999, the Registrant granted performance bonus options to purchase
120,000 shares of the Registrant's common stock to each of the following
executive officers of the Registrants: Higgins D. Bailey and Donald Hunter. The
options are fully vested upon grant and exercisable at $4.00 per share for five
years. The Registrant claims the exemption from registration provided by Section
4(2) of the 1933 Act for this transaction. No broker/dealers were involved in
the sale and no commissions were paid. The option certificate was impressed with

                                       19


<PAGE>

a restrictive legend advising that the shares represented by the certificate may
not be sold, transferred, pledged or hypothecated without having first been
registered or the availability of an exemption from registration established.

                                     XVIII.

In September 1999, the Registrant granted a warrant to purchase 23,500 shares of
the Registrant's common stock to CCRI, a consultant of the Registrant at an
exercise price of $4.00 per share. The warrants are exercisable at any time
within five years of the grant date and are fully vested. The Registrant claims
the exemption from registration provided by Section 4(2) of the 1933 Act for
this transaction. No broker/dealers were involved in the sale and no commissions
were paid. The warrant certificate was impressed with a restrictive legend
advising that the shares represented by the certificate may not be sold,
transferred, pledged or hypothecated without having first been registered or the
availability of an exemption from registration established.

                                      XIX.

In September 1999, the Registrant completed a private placement of 406,450
shares of its common stock at $4.00 per share for proceeds of $1,625,800.

The Registrant claims the exemption from registration provided by Section 4(2)
of the Securities Act of 1933, as amended, and/or Rule 506 of Regulation D
adopted thereunder for the transactions described above. All of the purchasers
were either known to the Registrant, or were referred to the Registrant by a
consultant to the Registrant. Based upon the written representations made by the
purchasers and other information known to the Registrant, the Registrant
believes all of the purchasers were Accredited Investors as that term is defined
in Rule 501 of Regulation D. All purchasers represented that they purchased the
securities for investment, and all certificates issued to the purchasers were
impressed with a restrictive legend advising that the shares represented by
certificates may not be sold, transferred, pledged or hypothecated without
having first been registered or the availability of an exemption from
registration established. Stop transfer instructions have been placed against
the transfer of these certificates by the Registrant's Transfer Agent. No
brokers or dealers received compensation in connection with the sale of these
shares.

                                       XX.

In September 1999, as partial consideration for consulting services the
Registrant issued Neidiger, Tucker, Bruner, Inc. a warrant to purchase up to
101,681 shares of the Registrant's common stock, exercisable at $4.00 per share
for five years. The Registrant claims the exemption from registration provided
by Section 4(2) of the 1933 Act for this transaction. No broker/dealers were
involved in the sale and no commissions were paid. The warrant certificate was
impressed with a restrictive legend advising that the shares represented by the
certificate may not be sold, transferred, pledged or hypothecated without having
first been registered or the availability of an exemption from registration
established.

                                      XXI.

As of September 1999, the holders of 15,000 shares of the Registrant's Series B
Preferred Stock converted their shares into 15,000 shares of the Registrant's
common stock. The issuance of the shares of common stock upon the conversion is
exempt from registration in that there was no sale of the shares by the
Registrant. Each holder of the Registrant's Series B Preferred Stock represented
that he received the shares for investment and not with a view to distribution.
All certificates were endorsed with a legend restricting the sale or transfer of
the securities except in accordance with federal securities laws. Stop transfer
instructions have been placed against the transfer of these certificates by the
Registrant's Transfer Agent.

                                       20


<PAGE>

                                      XXII.

In November 1999, as partial consideration for consulting services, the
Registrant issued ATO Ram 2, Ltd. a warrant to purchase up to 25,000 shares of
the Registrant's common stock, exercisable at $4.00 per share for five years.
The Registrant claims the exemption from registration provided by Section 4(2)
of the 1933 Act for this transaction. No broker/dealers were involved in the
sale and no commissions were paid. The warrant certificate was impressed with a
restrictive legend advising that the shares represented by the certificate may
not be sold, transferred, pledged or hypothecated without having first been
registered or the availability of an exemption from registration established.

                                     XXIII.

In November 1999, the Registrant granted an option to purchase 400,000 shares of
the Registrant's common stock to Thomas G. Tachovsky, a Director, President and
Chief Executive Officer of the Registrant, at an exercise price of $5.00 per
share. The shares vest as follows: 100,000 shares upon completion of the first
Phase III trial; 150,000 shares upon submission of the NDA; and, 150,000 shares
upon approval of the NDA. The options expire five years from the dates they
become exercisable. The Registrant claims the exemption from registration
provided by Section 4(2) of the 1933 Act for this transaction. No broker/dealers
were involved in the sale and no commissions were paid. The option certificate
was impressed with a restrictive legend advising that the shares represented by
the certificate may not be sold, transferred, pledged or hypothecated without
having first been registered or the availability of an exemption from
registration established.

                                      XXIV.

In February 2000, the Registrant granted options to acquire 20,000 shares of the
Registrant's common stock to each of the following directors: Wilson Benjamin
and Joseph R. Ianelli at an exercise price of $6.00 per share from the dates the
options become exercisable. The shares vest ratably over a 12-month period from
date of grant. The Registrant claims the exemption from registration provided by
Section 4(2) of the 1933 Act for this transaction. No broker/dealers were
involved in the sale and no commissions were paid. The option certificate was
impressed with a restrictive legend advising that the shares represented by the
certificate may not be sold, transferred, pledged or hypothecated without having
first been registered or the availability of an exemption from registration
established.

                                      XXV.

In July 2000, Wellington Ewen, a former officer of the Registrant exercised
options for an aggregate of 5,778 shares of the Registrant's common stock at
$4.00 per share. The Registrant claims the exemption from registration provided
by Section 4(2) of the 1933 Act.

                                      XXVI.

In July 2000, the Registrant issued an aggregate of 22,550 shares of its common
stock to the holders of the Registrant's Series B Preferred Stock as a dividend,
valued at $5.00 per share. The issuance of the dividend shares was exempt from
registration in that there was no sale of the shares by the Registrant. Each
holder of the Registrant's Series B Preferred Stock represented that he received
the shares for investment and not with a view to distribution. All certificates
were endorsed with a legend restricting the sale or transfer of the securities
except in accordance with federal securities laws. Stop transfer instructions
have been placed against the transfer of these certificates by the Registrant's
Transfer Agent.

                                       21


<PAGE>

                                     XXVII.

In July 2000, the Registrant terminated its agreement with Western Center for
Clinical Studies ("WCCS"). As part of the termination, WCCS surrendered for
cancellation a previously issued option to acquire 358,333 shares of the
Registrant's common stock at $1.50 per share and retained a fully vested option
to acquire 75,000 shares of the Registrant's common stock at an exercise price
of $1.50 for five years. In conjunction with the termination, the Registrant
granted WCCS a fully vested option to acquire 90,000 shares of the Registrant's
common stock at an exercise price of $2.50 for five years. The issuance of the
options to WCCS was made in reliance upon the exemption from registration
provided by Section 4(2) of the 1933 Act. No broker/dealers were involved in the
sale and no commissions were paid. WCCS represented that they acquired the
option for investment and not with a view to distribution.

                                     XXVIII.

In August 2000, W. Terrance Schreier, a consultant to the Registrant exercised
warrants for an aggregate of 4,208 shares of the Registrant's common stock at
$4.00 per share. The Registrant claims the exemption from registration provided
by Section 4(2) of the 1933 Act. The certificate issued to the consultant was
impressed with a restrictive legend advising that the shares represented by
certificate may not be sold, transferred, pledged or hypothecated without having
first been registered or the availability of an exemption from registration
established. No brokers or dealers received compensation in connection with the
sale of these shares.

                                      XXIX.

In September 2000, C.C.R.I. Corporation, a consultant to the Registrant
exercised options for an aggregate of 43,000 shares of the Registrant's common
stock at $4.00 per share. The Registrant claims the exemption from registration
provided by Section 4(2) of the 1933 Act.

                                      XXX.

In December 2000, the Registrant granted options to purchase an aggregate of
8,000 shares of the Registrant's common stock to the members of its Scientific
and Medical Advisory Board at an exercise price of $2.00 per share for five
years from the dates the shares become exercisable. The shares vest as follows:
50% on December 29, 2001, and 50% on December 29, 2002. The Registrant claims
the exemption from registration provided by Section 4(2) of the 1933 Act for
this transaction. No broker/dealers were involved in the sale and no commissions
were paid. The option certificates were impressed with a restrictive legend
advising that the shares represented by the certificate may not be sold,
transferred, pledged or hypothecated without having first been registered or the
availability of an exemption from registration established.

                                      XXXI.

As of December 31, 2000, the holders of 40,000 shares of the Registrant's Series
B Preferred Stock had converted their shares into 40,000 shares of the
Registrant's common stock. The issuance of the shares of common stock upon the
conversion is exempt from registration in that there was no sale of the shares
by the Registrant.

                                     XXXII.

In February 2000, the Registrant provided stock option agreements to two
directors to purchase 20,000 shares of the Registrant's common stock exercisable

                                       22


<PAGE>

for five years at $6.00 per share. The options vest ratably on a monthly basis
commencing February 1, 2000, and ending upon the earlier of February 1, 2001, or
the termination of the recipient's term as a director. The issuance of the
options was made in reliance upon claims the exemption from registration
provided by Section 4(2) of the 1933 Act for this transaction. No broker/dealers
were involved in the sale and no commissions were paid. The option certificate
was impressed with a restrictive legend advising that the shares represented by
the certificate may not be sold, transferred, pledged or hypothecated without
having first been registered or the availability of an exemption from
registration established.

                                     XXXIII.

In April 1998, the Registrant provided a stock option agreement to purchase
450,000 shares of the Registrant's common stock at $1.50 per share to Western
Center for Clinical Studies, an organization retained to provide assistance in
taking Esterom(R) through the clinical trial and New Drug Application approval
process. In July 2000, upon completion of enrollment in the initial Phase III
clinical trial, the Registrant terminated its agreements with this organization.
The termination agreement allowed the organization to retain fully vested
options to purchase 75,000 shares of the Registrant's common stock at $1.50 per
share and options to purchase 15,195 shares at $1.50 that the organization had
previously assigned to its employees and advisors. In addition, the Registrant
granted the organization fully vested options to purchase 90,000 shares at $2.50
per share. Previously issued options to purchase 359,805 shares of the
Registrant's common stock at $1.50 per share were canceled. The issuance of the
options was made in reliance upon claims the exemption from registration
provided by Section 4(2) of the 1933 Act for this transaction. No broker/dealers
were involved in the sale and no commissions were paid. The option certificate
was impressed with a restrictive legend advising that the shares represented by
the certificate may not be sold, transferred, pledged or hypothecated without
having first been registered or the availability of an exemption from
registration established.

                                     XXXIV.

In December 2000, the Board of Directors approved a compensation plan for the
four members of the Registrant's Scientific and Medical Advisory Board, which
included stock options aggregating 8,000 shares in exchange for services. The
options are exercisable at $2.00 per share and vest in equal portions in
December 2001 and 2002. The options expire five years from the dates they become
exercisable. The issuance of the options was made in reliance upon claims the
exemption from registration provided by Section 4(2) of the 1933 Act for this
transaction. No broker/dealers were involved in the sale and no commissions were
paid. The option certificate was impressed with a restrictive legend advising
that the shares represented by the certificate may not be sold, transferred,
pledged or hypothecated without having first been registered or the availability
of an exemption from registration established.

                                      XXXV.

In 2001, the Registrant provided stock option agreements to each of its
directors (with the exception of the Registrant's president and chief operating
officer) to purchase 1,666.67 shares of its common stock for each month of
service as a director exercisable until February 1, 2006, at $2.00 per share.
The options vest ratably on a monthly basis commencing February 1, April 1, or
July 1, 2001, based on each director's service period, and ending upon the
earlier of April 1, 2002 or the termination of the recipient's term as a
director. The issuance of the options was made in reliance upon claims the
exemption from registration provided by Section 4(2) of the 1933 Act for this
transaction. No broker/dealers were involved in the sale and no commissions were
paid. The option certificate was impressed with a restrictive legend advising
that the shares represented by the certificate may not be sold, transferred,
pledged or hypothecated without having first been registered or the availability
of an exemption from registration established.

                                       23


<PAGE>

                                     XXXVI.

In 2001, the Board of Directors approved a compensation plan for the Chairman
and Vice Chairman of the Board for services provided to the Registrant, to be
paid in stock options with market values of $40,000 and $30,000, respectively.
The options are exercisable until January 1, 2006, at $1.00 per share and vested
ratably over a twelve month period. The issuance of the options was made in
reliance upon claims the exemption from registration provided by Section 4(2) of
the 1933 Act for this transaction. No broker/dealers were involved in the sale
and no commissions were paid. The option certificate was impressed with a
restrictive legend advising that the shares represented by the certificate may
not be sold, transferred, pledged or hypothecated without having first been
registered or the availability of an exemption from registration established.

                                     XXXVII.

In 2001, the Registrant provided a stock option agreement to purchase 100,000
shares of common stock to its president and chief operating officer for services
provided to the Registrant, at an exercise price of $2.05 per share. The options
vest upon completion of the Phase II/III trial and submission of the trial
results to the FDA. The options expire five years from the date they become
exercisable. The issuance of the options was made in reliance upon claims the
exemption from registration provided by Section 4(2) of the 1933 Act for this
transaction. No broker/dealers were involved in the sale and no commissions were
paid. The option certificate was impressed with a restrictive legend advising
that the shares represented by the certificate may not be sold, transferred,
pledged or hypothecated without having first been registered or the availability
of an exemption from registration established.

                                    XXXVIII.

In 2001, the Registrant provided a stock option agreement to purchase 95,000
shares of common stock to its vice president and chief financial officer for
services provided to the Registrant, at an exercise price of $2.05 per share.
The options vest as follows: 25,000 shares upon completion of the Phase II/III
trial and submission of the trial results to the FDA; 35,000 shares upon
submission of the New Drug Application (NDA); and, 35,000 shares upon approval
of the NDA. The options expire five years from the date they become exercisable.
The issuance of the options was made in reliance upon claims the exemption from
registration provided by Section 4(2) of the 1933 Act for this transaction. No
broker/dealers were involved in the sale and no commissions were paid. The
option certificate was impressed with a restrictive legend advising that the
shares represented by the certificate may not be sold, transferred, pledged or
hypothecated without having first been registered or the availability of an
exemption from registration established.

                                     XXXIX.

In 2001, the Registrant provided a stock option agreement to purchase 23,200
shares of common stock to its president and chief operating officer for services
provided to the Registrant, exercisable at $1.00 per share for a period of five
years. The issuance of the options was made in reliance upon claims the
exemption from registration provided by Section 4(2) of the 1933 Act for this
transaction. No broker/dealers were involved in the sale and no commissions were
paid. The option certificate was impressed with a restrictive legend advising
that the shares represented by the certificate may not be sold, transferred,
pledged or hypothecated without having first been registered or the availability
of an exemption from registration established.

                                       24


<PAGE>

                                      XXXX.

In 2001, the Registrant provided a stock option agreement to purchase 14,500
shares of common stock to its vice president and chief financial officer for
services provided to the Registrant, at an exercisable at $1.00 per share for a
period of five years. The issuance of the options was made in reliance upon
claims the exemption from registration provided by Section 4(2) of the 1933 Act
for this transaction. No broker/dealers were involved in the sale and no
commissions were paid. The option certificate was impressed with a restrictive
legend advising that the shares represented by the certificate may not be sold,
transferred, pledged or hypothecated without having first been registered or the
availability of an exemption from registration established.

                                     XXXXI.

In 2001, the Registrant provided a stock option agreement to a new director to
purchase 1,666.67 shares of its common stock for each month of service as a
director exercisable until February 1, 2006, at $2.00 per share. The options
vest ratably on a monthly basis commencing January 1, 2002 and ending upon the
earlier of April 1, 2002 or the termination of the recipient's term as a
director. The issuance of the options was made in reliance upon claims the
exemption from registration provided by Section 4(2) of the 1933 Act for this
transaction. No broker/dealers were involved in the sale and no commissions were
paid. The option certificate was impressed with a restrictive legend advising
that the shares represented by the certificate may not be sold, transferred,
pledged or hypothecated without having first been registered or the availability
of an exemption from registration established.

                                     XXXXII.

In 2002, the Board of Directors approved a compensation plan for the Chairman
and Vice Chairman of the Board for services provided to the Registrant. The
Chairman and Vice Chairman were granted stock options with market values of
$40,000 and $30,000 per year, respectively. The Chairman and Vice Chairman's
compensation is payable in an option to purchase the Company's common stock. The
options are exercisable until January 1, 2007, at $1.05 per share and vested
ratably over a twelve month period. The issuance of the options was made in
reliance upon claims the exemption from registration provided by Section 4(2) of
the 1933 Act for this transaction. No broker/dealers were involved in the sale
and no commissions were paid. The option certificate was impressed with a
restrictive legend advising that the shares represented by the certificate may
not be sold, transferred, pledged or hypothecated without having first been
registered or the availability of an exemption from registration established.

                                    XXXXIII.

In 2002, the Registrant provided stock option agreements to each of its
directors (except the Registrant's president and chief executive officer) to
purchase 1,666.67 shares of its common stock for each month of service as a
director exercisable until April 1, 2007, at $3.85 per share. The options vest
ratably on a monthly basis commencing April 1, 2002, and ending upon the earlier
of April 1, 2003 or the termination of the recipient's term as a director. The
issuance of the options was made in reliance upon claims the exemption from
registration provided by Section 4(2) of the 1933 Act for this transaction. No
broker/dealers were involved in the sale and no commissions were paid. The
option certificate was impressed with a restrictive legend advising that the
shares represented by the certificate may not be sold, transferred, pledged or
hypothecated without having first been registered or the availability of an
exemption from registration established.

                                       25


<PAGE>

                                     XXXXIV.

In 2002, the Registrant provided a stock option agreement to purchase 40,000
shares of common stock to its president and chief operating officer for services
provided to the Registrant, 20,000 exercisable at $2.05 per share for a period
of five years, and 20,000 exercisable at $3.05 per share for a period of five
years. The issuance of the options was made in reliance upon claims the
exemption from registration provided by Section 4(2) of the 1933 Act for this
transaction. No broker/dealers were involved in the sale and no commissions were
paid. The option certificate was impressed with a restrictive legend advising
that the shares represented by the certificate may not be sold, transferred,
pledged or hypothecated without having first been registered or the availability
of an exemption from registration established.

                                     XXXXV.

In 2002, the Registrant provided a stock option agreement to purchase 13,750
shares of common stock to its vice president and chief financial officer for
services provided to the Registrant, at an exercisable at $2.05 per share for a
period of five years. The issuance of the options was made in reliance upon
claims the exemption from registration provided by Section 4(2) of the 1933 Act
for this transaction. No broker/dealers were involved in the sale and no
commissions were paid. The option certificate was impressed with a restrictive
legend advising that the shares represented by the certificate may not be sold,
transferred, pledged or hypothecated without having first been registered or the
availability of an exemption from registration established.

                                     XXXXVI.

In December 2002, the Registrant granted options to acquire 100,000 shares of
the Registrant's common stock to Mirador Consulting, a consulting organization
retained to provide investor relations services to the Registrant. 50,000 of the
options are exercisable at $0.75 per share and 50,000 of the options are
exercisable at $1.50 per share until December 1, 2005. The Registrant claims the
exemption from registration provided by Section 4(2) of the 1933 Act for this
transaction. No broker/dealers were involved in the sale and no commissions were
paid. The option certificate was impressed with a restrictive legend advising
that the shares represented by the certificate may not be sold, transferred,
pledged or hypothecated without having first been registered or the availability
of an exemption from registration established.


ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

We were incorporated in California in 1984 as Entropin, Inc., or old Entropin,
and in 1998, completed an agreement and plan of merger with Vanden Capital
Group, Inc., or Vanden, to exchange all of the issued and outstanding common
shares of old Entropin for 5,220,000 shares of Vanden's common stock. As a
result, old Entropin was merged into Vanden, and Vanden then changed its name to
Entropin, Inc. For accounting purposes, the acquisition was treated as a
recapitalization of old Entropin based upon historical cost, with old Entropin
as the acquirer. In conjunction with the merger, Entropin, Inc. became a
Colorado corporation. In June 2002, we changed our state of incorporation from
Colorado to Delaware. The reincorporation received approval of the holders of a
majority of our outstanding shares. The reincorporation was accomplished by
merging with and into Entropin, Inc., a Delaware corporation and our formerly
wholly-owned subsidiary. Each share of common stock of the Colorado corporation

                                       26


<PAGE>

was converted into one share of common stock of the Delaware corporation. Each
share of Series A preferred stock of the Colorado corporation was converted into
one share of Series A preferred stock of the Delaware corporation. Each share of
Series B preferred stock of the Colorado corporation was converted into one
share of Series B preferred stock of the Delaware corporation.

From our inception in August 1984, we have devoted our resources primarily to
funding our research and development efforts and conducting clinical trials on
our compounds. We have been unprofitable since inception and have had no revenue
from the sale of products, and do not expect revenue for the foreseeable future,
or until we have received FDA approval for one of the proprietary compounds we
attempting to develop. We expect to continue to incur losses for the foreseeable
future through the completion of our preclinical and clinical trials and the FDA
approval process. As of December 31, 2002, our accumulated deficit was
approximately $29.4 million.

RESEARCH AND DEVELOPMENT

In February 2003, we met with our key scientific advisors to review the progress
of the preclinical studies being performed at Harvard Medical School and the
University of Arizona. Based on our review of these preclinical studies, ENT-103
continues to perform as an active pain reliever in preclinical models for
post-incisional pain and neuropathic pain. Demonstrating preclinical
pharmacology is the essential first step in the development of a drug and the
data reviewed at this recent meeting continues to support the activity of
ENT-103 as a potential new pain therapeutic. The key scientific observations
from our review of these preclinical studies include:

         o        ENT-103 is effective in acute pain states
         o        ENT-103 is effective against the consequences of acute
                  inflammatory pain
         o        ENT-103 is effective against experimental neuropathic pain
         o        ENT-103 suppresses the abnormal pain to tactile stimulation
                  that occurs after an incision

The laboratory of Dr. Frank Porreca at the University of Arizona evaluated the
effects of ENT-103 in three pain models: (1) acute pain representative of
post-operative pain; (2) pain associated with acute and chronic inflammatory
pain; and (3) neuropathic pain. Our review of the results from this preclinical
research indicates that ENT-103 is an active compound that is effective in acute
pain states, acute inflammatory pain, and neuropathic pain, but did not alter
chronic inflammatory pain at the dose tested. Assuming the use if a delivery
system that will effectively get the drug to the site of action, ENT-103 appears
to be effective in the treatment of pain.

The laboratory of Dr. Gary Strichartz, Harvard Medical School, reported expanded
studies of ENT-103 to treat the elevated pain, or hyperalgesia, that follows a
surgical incision. Our review of these preclinical studies indicates that
ENT-103 demonstrates complete anesthesia of the skin for two hours after
injection. Post-incisional pain in animals, particularly pain that occurs from
tactile stimulation of the skin that is normally not painful, is usually
elevated for one to two weeks following an incision. Pre-incisional injections
of ENT-103 produce a decline in this pain with almost complete suppression of
the pain by 48 hours.

PLAN OF OPERATION

Based on our current operating budget, we believe our existing resource will
fund our operations for the next twelve months. We intend to use our remaining
funds to continue to finance the development and preclinical studies of our
proprietary compound, ENT-103. We anticipate that we will complete the necessary
preclinical research and toxicology studies for ENT-103 by the end of 2003. We
recognize our need to obtain additional funds to support our operations. We are
currently exploring our funding options as well as pursuing funding support
through a corporate partnership, licensing arrangement, or merger. We cannot

                                       27


<PAGE>

guarantee that we will be able to accomplish these tasks. Moreover, our actual
expenses, obligations and liabilities may exceed those estimated in our budget,
which would significantly shorten the time in which we could maintain our
operations without obtaining additional funds.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2002, COMPARED TO YEAR ENDED DECEMBER 31, 2001. The net
loss for the year 2002 was approximately $5.4 million, or $0.54 per basic and
diluted share on approximately 9.9 million weighted average shares outstanding.
In comparison, the net loss for the year 2001 was approximately $3.9 million, or
$0.40 per share on approximately 9.7 million weighted average shares
outstanding. The net loss incurred during 2002 exceeds the net loss incurred
during 2001, primarily because of the costs associated with conducting and
closing our clinical trial for Esterom(R) solution during 2002.

Total research and development expenses were $3,048,063 for 2002, as compared to
$2,315,076 for 2001. Total general and administrative expenses were $2,403,835
for 2002, as compared to $1,973,401 for 2001. These expenses include non-cash
compensation expense associated with stock issued and stock options granted in
exchange for services.

Research and development expense, excluding non-cash compensation charges, was
$3,044,988 in 2002, compared with $2,297,319 in 2001. This increase reflects the
fact that the Company was actively involved in clinical trials during most of
2002.

General and administrative expense, excluding non-cash compensation charges, was
$1,858,560 in 2002, compared with $1,394,168 in 2001. This increase relates
primarily to increased costs for professional services including consultants,
attorneys and insurance.

Non-cash compensation charged to research and development was $3,075 in 2002,
compared with $17,757 in 2001. Non-cash compensation charged to general and
administrative expense was $545,275 in 2002, compared with $579,233 in 2001. The
decrease in non-cash compensation reflects the declining value of stock options
granted in exchange for services as the underlying stock price declined and the
options vested and were fully expensed.

Our interest income was $190,102 in 2002, as compared to $497,462 in 2001. This
decrease reflects lower balances and declining interest rates for cash, cash
equivalents and short-term investments during 2002.

LIQUIDITY AND CAPITAL RESOURCES

We have financed our operations since inception primarily through the net
proceeds generated from the sale of our common and preferred stock, and through
loans and advances from stockholders that were subsequently converted into
equity securities. From inception through December 31, 2002, we have received
net cash proceeds from financing activities aggregating approximately $20.3
million. As of December 31, 2002, our working capital was approximately $3.8
million.

Our liquidity and capital needs relate primarily to working capital, research
and development of ENT-103, and other general corporate requirements. We have
not received any cash from operations since inception. Based on our current
plans, we believe that our available resources will provide sufficient capital
resources for the next twelve months. Expectations about our long-term liquidity
may prove inaccurate if development progress for our proprietary compounds is
delayed, or if our expenses are greater than currently anticipated. We will not
generate revenue from sales of any products in the foreseeable future.

                                       28


<PAGE>

On July 15, 2003, we must redeem all outstanding shares of our Series B
preferred stock at the original purchase price of $5.00 per share, along with
all accrued and unpaid dividends. As of December 31, 2002, 143,500 shares of
Series B preferred stock remained outstanding. If these shares have not been
converted to shares of common stock prior to the mandatory redemption date, we
will be required to redeem them at a cost of approximately $717,500.

Net cash used in operating activities was approximately $4.7 million in 2002,
compared with $3.1 million in 2001. The cash used in operations was primarily
related to funding clinical trials, expanding research and development
activities and maintaining our administrative infrastructure.

As of December 31, 2002, our principal source of liquidity was approximately
$3.9 million in cash, cash equivalents and short-term investments.

On July 15, 2002 and 2001, we issued 22,550 shares and 16,850 shares,
respectively, of common stock as payment of the annual dividends accrued on our
Series B preferred stock in accordance with the terms of our July 1998 private
placement of 245,000 shares of Series B preferred stock at $5.00 per share. The
Series B preferred stock is designated as redeemable 10% cumulative non-voting
convertible preferred stock with $.001 par value. Dividends accrue at the rate
of $.50 per share per annum and are to be paid annually in arrears commencing
July 15, 1998. At our election, annual dividends may be paid in cash and/or
shares of our common stock at $5.00 per share.

We believe that our operating expenses will remain relatively low until we
complete our preclinical research and will increase as we proceed with clinical
trials, the new drug application, or NDA, process and other activities related
to the FDA approval process. The estimated period for which we expect available
sources of cash to be sufficient to meet our funding needs is a forward-looking
statement that involves risks and uncertainties. We will need to raise
additional capital to fund future clinical trials and continue other research
and development activities. Our future liquidity and capital funding
requirements will depend on numerous factors, including the success or failure
of our preclinical research and studies on ENT-103, the timing of future
clinical trials and other activities related to the FDA approval process, the
decision of the holders of Series B Preferred Stock to convert their outstanding
shares into shares of our common stock, the cost and timing of sales, marketing
and manufacturing activities, the extent to which our products, if any, gain
market acceptance, and the impact of competitors' products. There can be no
assurance that such additional capital will be available on terms acceptable to
us, if at all. If adequate funds are not available, we may be forced to
significantly curtail our operations or to obtain funds through entering into
collaborative agreements or other arrangements that may be on unfavorable terms.
Our failure to raise sufficient additional funds on favorable terms, or at all,
would have a material adverse effect on our business, results of operations and
financial position.

CRITICAL ACCOUNTING POLICIES

We routinely grant stock options to compensate officers, directors and employees
for their services. This practice allows us to conserve our cash resources for
our drug development program. We have adopted the fair value accounting
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation". Under these provisions, stock based compensation
is measured based on the fair value of the options granted using the
Black-Scholes option pricing model. Amounts recorded for options granted to
non-employees are determined in accordance with Statement of Financial
Accounting Standards No. 123 and EITF 96-18 based on the fair value of the
consideration or the fair value of the equity instruments issued, whichever is
more reliably measured. Deferred charges related to options granted to
non-employees are periodically remeasured as the underlying options vest and are
included as unearned stock compensation in the stockholders' equity section of
the balance sheet.

                                       29


<PAGE>

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations".
SFAS No. 141 requires the use of the purchase method of accounting for all
business combinations initiated after September 30, 2001 and eliminates the
pooling-of-interests method. The adoption of SFAS No. 141 did not have a
material effect on the Company's results of operations or financial position.

In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 142 requires that goodwill and other intangible assets with
indefinite lives no longer be amortized, but instead tested for impairment at
least annually. In addition, the standard addresses how intangible assets that
are acquired individually or with a group of other assets, other than as part of
a business combination, should be accounted for upon their acquisition. The
adoption of SFAS No. 142 effective January 1, 2002 did not have a material
effect on the Company's results of operations or financial position.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". This statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. This
statement supersedes FASB Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of a Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions", for the disposal of a segment of a business (as previously
defined in that Opinion). The adoption of SFAS No. 144 effective January 1, 2002
did not have a material effect on the Company's results of operations or
financial position.

In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others". FIN 45 requires that a liability
be recorded in the guarantor's balance sheet upon issuance of a guarantee. In
addition, FIN 45 requires certain disclosures about each of the entity's
guarantees. The disclosure provisions of FIN 45 are effective for annual and
interim periods that end after December 15, 2002. The recognition provisions of
FIN 45 are applicable prospectively to guarantees entered after December 31,
2002. The Company does not believe that the adoption of FIN 45 will have a
material effect on its results of operations or financial position.


ITEM 7.  FINANCIAL STATEMENTS.

The Financial Statements are set forth on pages F-1 to F-25 of this report.


ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

During our two most recent fiscal years, there have been no changes in, or
disagreements with, our accountants on accounting and financial disclosure.

                                       30


<PAGE>

                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.

The information required by this item will be contained in the definitive proxy
statement for our Annual Meeting of Stockholders on June 20, 2003, which is
incorporated herein by reference.


ITEM 10. EXECUTIVE COMPENSATION.

The information required by this item will be contained in the definitive proxy
statement for our Annual Meeting of Stockholders on June 20, 2003, which is
incorporated herein by reference.


ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.

The information required by this item concerning security ownership of certain
beneficial owners and management will be contained in the definitive proxy
statement for our Annual Meeting of Stockholders on June 20, 2003, which is
incorporated herein by reference.


ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information required by this item will be contained in the definitive proxy
statement for our Annual Meeting of Stockholders on June 20, 2003, which is
incorporated herein by reference.


ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.

         (a)      EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-B.

Exhibits required to be filed are listed below and, except where incorporated by
reference, immediately follow the Financial Statements.

Exhibit
Number   Description
------   -----------

2.1      Agreement of Plan of Merger, dated May 2, 2002, by and between
         Entropin, Inc., a Delaware Corporation and Entropin, Inc., a Colorado
         corporation (1)

3.1      Certificate of Incorporation of Entropin, Inc., a Delaware corporation
         (2)

3.2      Bylaws pf Entropin, Inc., a Delaware corporation (2)

3.3      Certificate of Designations of Series A' Preferred Stock of Entropin,
         Inc.

10.1     Stock Option Plan (3)

                                       31


<PAGE>

10.2     Agreement and Plan of Merger, dated December 9, 1997 between Vanden
         Capital Group, Inc. and Entropin, Inc. (4)

10.3     Lease Agreement, dated February 1, 1998, between the Registrant and
         Thomas T. Anderson (5)

10.4     Agreement Among Shareholders, dated June 29, 1998 (6)

10.5     1998 Compensatory Stock Plan (7)

10.6     Agreement Among Shareholders, dated March 3, 1999 (8)

99.1     Certification of President and Chief Executive Officer under Section
         906 of the Sarbanes-Oxley Act of 2002.

99.2     Certification of Chief Financial Officer under Section 906 of the
         Sarbanes-Oxley Act of 2002.

________________
(1)      Incorporated by reference from the like numbered exhibits as filed with
         Registrant's quarterly report on Form 10-QSB, dated August 14, 2002.
(2)      Incorporate by reference from the like numbered exhibits as filed with
         Registrant's Form 8-K on June 26, 2002.
(3)      Incorporated by reference from the like numbered exhibits filed with
         the Registrant's Registration Statement on Form S-1, No. 33-23693
         effective October 21, 1989.
(4)      Incorporated by reference from the like numbered exhibit filed with the
         Registrant's Current Report on Form 8-K, as amended, dated January 15,
         1998.
(5)      Incorporated by reference from the like numbered exhibits filed with
         the Registrant's Annual Report on Form 10-KSB, dated April 15, 1998, as
         amended.
(6)      Incorporated by reference from the like numbered exhibits filed with
         the Registrant's Registration Statement on Form S-1, No. 333-51737
         effective August 21, 1998.
(7)      Incorporated by reference from the like numbered exhibit as filed with
         the Registrant's Registration Statement on Form S-8 as filed on
         December 30, 1998.
(8)      Incorporated by reference from the like numbered exhibits as filed with
         the Registrant's Pre-Effective Amendment No. 1 to Form SB-2
         Registration Statement, Reg. No. 333-11308, dated March 9, 2000.

         (b)      REPORTS ON FORM 8-K.

         We did not file any reports on Form 8-K during the quarter ended
December 31, 2002.


ITEM 14. CONTROLS AND PROCEDURES.

         (a)      EVALUATION OF CONTROLS AND PROCEDURES

Within 90 days before the filing of this report, our President and Chief
Executive Officer, Dr. Thomas G. Tachovsky, and our Chief Financial Officer,
Patricia G. Kriss, carried out an evaluation of the effectiveness of the design
and operation of our disclosure controls and procedures. Based on that
evaluation, Dr. Tachovsky and Ms. Kriss concluded that our disclosure controls
and procedures are effective in causing material information to be collected,
communicated and analyzed by management of the Company on a timely basis and to
ensure that the quality and timeliness of our public disclosures comply with SEC
disclosure obligations.

                                       32


<PAGE>

         (b)      CHANGES IN INTERNAL CONTROLS

There were no significant changes in our internal controls or in other factors
that could significantly affect these controls after the date of our most recent
evaluation.


                                   SIGNATURES
                                   ----------

Pursuant to the requirements of Section 13 or 15(d) 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.

Date:  March 28, 2003                                ENTROPIN, INC.

                                                     By \s\ Higgins D. Bailey
                                                       ----------------------
                                                     Higgins D. Bailey,
                                                     Chairman of the Board

                                       33


<PAGE>

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
Signatures                                  Title                               Date
----------                                  -----                               ----
<S>                                         <C>                                 <C>

\s\ Higgins D. Bailey, Ed.D.                Chairman of the Board               March 28, 2003
--------------------------------
Higgins D. Bailey, Ed.D.


\s\ Thomas G. Tachovsky, Ph.D.              President, Director and             March 28, 2003
--------------------------------            Chief Executive Officer
Thomas G. Tachovsky, Ph.D.


\s\ Patricia G. Kriss                       Chief Financial Officer,            March 28, 2003
--------------------------------            Vice President of Finance and
Patricia G. Kriss                           Administration, Secretary/
                                            Treasurer and (Principal Financial
                                            and Accounting Officer)


\s\ Wilson S. Benjamin                      Director                            March 28, 2003
--------------------------------
Wilson S. Benjamin


\s\ Randall L. Carpenter, M.D.              Director                            March 28, 2003
--------------------------------
Randall L. Carpenter, M.D.


\s\ Joseph R. Ianelli                       Director                            March 28, 2003
--------------------------------
Joseph R. Ianelli


\s\ Paul V. Maier                           Director                            March 28, 2003
--------------------------------
Paul V. Maier


\s\ Bruce R. Manning                        Director                            March 28, 2003
--------------------------------
Bruce R. Manning


\s\Dennis K. Metzler                        Director                            March 28, 2003
--------------------------------
Dennis K. Metzler
</TABLE>

                                              34


<PAGE>

                                 CERTIFICATIONS

I, Thomas G. Tachovsky, certify that:

1. I have reviewed this annual report on Form 10-KSB of Entropin, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

         a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;

         b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and

         c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors:

         a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

         b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officer and I have indicated in this annual
report whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.

Date: March 28, 2003

/s/ Thomas G. Tachovsky, Ph.D.
-------------------------------------
Thomas G. Tachovsky, Ph.D.
President and Chief Executive Officer

                                       35


<PAGE>

I, Patricia G. Kriss, certify that:

1. I have reviewed this annual report on Form 10-KSB of Entropin, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

         a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;

         b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and

         c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors:

         a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

         b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officer and I have indicated in this annual
report whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.

Date: March 28, 2003

/s/ Patricia G. Kriss
-----------------------
Patricia G. Kriss
Chief Financial Officer

                                       36


<PAGE>

<TABLE>
                                          ENTROPIN, INC.
                                  (A DEVELOPMENT STAGE COMPANY)


                                  INDEX TO FINANCIAL STATEMENTS
<CAPTION>


<S>                                                                                          <C>
     Independent Auditors' Report                                                             F-2

     Report of Independent Certified Public Accountants                                       F-3

     Balance Sheets as of December 31, 2001 and 2002                                          F-4

     Statements of Operations for the Years Ended December 31, 2001 and 2002 and
     for the Period from August 27, 1984 (Inception) Through December 31, 2002                F-5

     Statements of Changes in Stockholders' Equity (Deficit) for the Years Ended
     December 31, 2001 and 2002 and for the Period from August 27, 1984
     (Inception)
     Through December 31, 2000                                                                F-6

     Statements of Cash Flows for the Years Ended December 31, 2001 and 2002 and
     for the Period from August 27, 1984 (Inception) Through December 31, 2002                F-9

     Notes to Financial Statements                                                           F-11

                                               F-1
</TABLE>


<PAGE>

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of Entropin, Inc.

We have audited the accompanying balance sheets of Entropin, Inc. (a development
stage company) as of December 31, 2001 and 2002, and the related statements of
operations, changes in stockholders' equity (deficit), and cash flows for the
years then ended, and for the period from August 27, 1984 (inception) through
December 31, 2002. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. The Company's financial statements for
the period from August 27, 1984 (inception) through December 31, 1999 were
audited by other auditors whose report, dated February 4, 2000, expressed an
unqualified opinion on those statements. The financial statements for the period
from August 27, 1984 (inception) through December 31, 1999 reflect a net loss
applicable to common stockholders of $14,993,971 of the related total. The other
auditors' report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for such prior period, is based solely on the
report of such other auditors.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the report of
other auditors provide a reasonable basis for our opinion.

In our opinion, based on our audits and the report of other auditors, such
financial statements present fairly, in all material respects, the financial
position of Entropin, Inc. as of December 31, 2001 and 2002, and the results of
its operations and its cash flows for the years then ended and for the period
from August 27, 1984 (inception) through December 31, 2002, in conformity with
accounting principles generally accepted in the United States of America.

The accompanying financial statements for the year ended December 31, 2002 have
been prepared assuming that the Company will continue as a going concern. As
discussed in Note 1 to the financial statements, the Company's recurring losses
from operations and requirement for additional funding raise substantial doubt
about its ability to continue as a going concern. Management's plans concerning
these matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.

DELOITTE & TOUCHE LLP

San Diego, California
March 4, 2003

                                       F-2


<PAGE>

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


The Board of Directors and Stockholders
Entropin, Inc.


We have audited the statements of operations, changes in stockholders' equity
(deficit) and cash flows for the period from August 27, 1984 (inception) through
December 31, 1999 of Entropin, Inc. (a development stage company) none of which
are presented separately herein. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations of Entropin, Inc. and its cash
flows for the period from August 27, 1984 (inception) through December 31, 1999,
in conformity with accounting principles generally accepted in the United States
of America.


CAUSEY DEMGEN & MOORE INC.

Denver, Colorado
February 4, 2000

                                      F-3


<PAGE>

<TABLE>
                                          ENTROPIN, INC.
                                  (A DEVELOPMENT STAGE COMPANY)
                                          BALANCE SHEETS
                                    December 31, 2001 and 2002
<CAPTION>

ASSETS                                                                 2001              2002
------                                                            -------------     -------------
<S>                                                               <C>               <C>
Current assets:
    Cash and cash equivalents                                     $  4,609,562      $  2,906,853
    Short-term investments                                           4,098,692           990,000
    Accrued interest receivable                                         33,327             5,954
                                                                  -------------     -------------
       Total current assets                                          8,741,581         3,902,807

Patent costs, less accumulated amortization of
    $132,997 (2001) and $155,428 (2002)                                329,035           410,641
Property and equipment, net                                             11,197            12,210
Prepaid assets and deposits                                             40,954             3,126
                                                                  -------------     -------------

                                                                  $  9,122,767      $  4,328,784
                                                                  =============     =============

LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
    Accounts payable                                              $    142,986      $     62,450

Series A redeemable preferred stock, $.001 (2001) and $.0001
    (2002) par value, 3,210,487 shares authorized, issued and
    outstanding, $1.00 per share redemption value                    3,210,487         3,210,487

Series B redeemable convertible preferred stock, $.001 (2001)
    and $.0001 (2002) par value, 400,000 shares authorized,
    168,500 (2001) and 143,500 (2002) shares issued and
    outstanding, $5.00 per share redemption value                      825,049           712,547

Commitments and contingencies (Note 6)

Stockholders' equity:
    Common stock, $.001 (2001) and $.0001 (2002) par value,
       50,000,000 shares authorized, 9,798,480 (2001) and
       9,912,587 (2002) shares issued and outstanding                    9,798               991
    Additional paid-in capital                                      29,037,558        29,801,165
    Unearned stock compensation                                        (62,780)          (72,479)
    Deficit accumulated during the development stage               (24,040,331)      (29,386,377)
                                                                  -------------     -------------
       Total stockholders' equity                                    4,944,245           343,300
                                                                  -------------     -------------

                                                                  $  9,122,767      $  4,328,784
                                                                  =============     =============

                         See accompanying notes to financial statements.
                                               F-4
</TABLE>


<PAGE>

<TABLE>
                                           ENTROPIN, INC.
                                    (A DEVELOPMENT STAGE COMPANY)
                                      STATEMENTS OF OPERATIONS
                           For the Years Ended December 31, 2001 and 2002
            and for the Period from August 27, 1984 (Inception) Through December 31, 2002
<CAPTION>

                                                                                    Inception through
                                                    2001               2002         December 31, 2002
                                                -------------     -------------     -----------------
<S>                                             <C>               <C>                  <C>
Costs and expenses:
   Research and development                     $  2,315,076      $  3,048,063         $ 14,693,578
   General and administrative                      1,973,401         2,403,835           14,892,366
                                                -------------     -------------        -------------

     Operating loss                               (4,288,477)       (5,451,898)         (29,585,944)
                                                -------------     -------------        -------------

Other income (expense):
   Interest income                                   497,462           190,102            1,466,128
   Interest expense                                       --                --             (242,811)
                                                -------------     -------------        -------------

     Total other income, net                         497,462           190,102            1,223,317

Net loss                                          (3,791,015)       (5,261,796)         (28,362,627)

Dividends applicable to Series B
   preferred stockholders                            (96,384)          (91,033)          (1,068,145)
                                                -------------     -------------        -------------
Net loss applicable to common stockholders      $ (3,887,399)     $ (5,352,829)        $(29,430,772)
                                                =============     =============        =============

Basic and diluted net loss per common share     $       (.40)     $       (.54)        $      (4.86)
                                                =============     =============        =============

Weighted average common shares outstanding         9,739,000         9,874,000            6,057,000
                                                =============     =============        =============

                           See accompanying notes to financial statements.
                                                F-5
</TABLE>


<PAGE>
<TABLE>
                                                           ENTROPIN, INC.
                                                    (A DEVELOPMENT STAGE COMPANY)
                                       STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
                                           For the Years Ended December 31, 2001 and 2002
                            and for the Period from August 27, 1984 (Inception) Through December 31, 2002
<CAPTION>
                                                                                                          Deficit
                                                                                                        accumulated        Total
                                                             Additional                  Unearned       during the     stockholders'
                                         Common stock         paid-in        Stock         stock        development        equity
                                        Shares    Amount      capital    subscriptions  compensation       stage         (deficit)
                                     -----------  -------   ------------   ----------   ------------   -------------   -------------
<S>                                   <C>          <C>       <C>            <C>             <C>         <C>               <C>
Balance, August 27, 1984
  (inception)                                --   $   --   $         --    $      --    $        --    $         --    $         --

   Cash contribution from
     stockholder                             --       --         50,000           --             --              --          50,000

   Cash received for common
     stock subscription                      --       --        150,000           --             --         150,000

   Stock contributions from
     stockholders                            --       --        927,000           --             --              --         927,000

   Shares issued pursuant to
     recapitalization                   480,051      480        219,620           --             --              --         220,100

   Shares issued pursuant to
     private placements               1,508,700    1,509      4,163,931           --             --              --       4,165,440

   Shares and warrants issued
     pursuant to secondary
     offering                         2,180,000    2,180     13,678,154           --             --              --      13,680,334

   Conversion of promissory
     notes to common stock              100,831      101        201,561           --             --              --         201,662

   Unearned stock compensation
     pursuant to issuance of
     common stock options                    --       --      7,734,722           --     (7,734,722)             --              --

   Amortization and valuation
     adjustment of unearned
     stock compensation                      --       --             --           --      7,647,286              --       7,647,286

   Shares issued from exercise
     of common stock options
     and warrants                        72,986       73         79,927           --             --              --          80,000

   Common stock warrants canceled
     in exchange for cash                    --       --       (330,000)          --             --              --        (330,000)

   Shares issued for cash             1,252,802    1,253        303,747     (150,000)            --              --         155,000

   Shares issued for services         3,990,954    3,989        140,723           --             --              --         144,712

   Issuance of Series B preferred
     stock with a beneficial
     conversion feature                      --       --        613,750           --             --        (613,750)             --

   Shares issued for Series B
     preferred stock dividend            47,100       48        235,452           --             --        (235,500)             --

   Conversion of Series B
    preferred stock to common
    stock                                55,000       55        264,649           --             --              --         264,704

   Accretion to mandatory
     redemption amount for
     Series B preferred stock                --       --        (41,571)          --             --              --         (41,571)

   Net loss for the period from
     August 27, 1984 (inception)
     through December 31, 2000               --       --             --           --             --     (19,309,816)    (19,309,816)
                                     -----------  -------   ------------   ----------   ------------   -------------   -------------
Balance, December 31, 2000            9,688,424    9,688     28,241,665           --        (87,436)    (20,159,066)      8,004,851

                                                   (Continued on following page)
                                           See accompanying notes to financial statements.
                                                                F-6
</TABLE>


<PAGE>

<TABLE>
                                                           ENTROPIN, INC.
                                                    (A DEVELOPMENT STAGE COMPANY)
                                       STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
                                           For the Years Ended December 31, 2001 and 2002
                            and for the Period from August 27, 1984 (Inception) Through December 31, 2002
                                                  (Continued from prededing page)
<CAPTION>
                                                                                                        Deficit
                                                                                                      accumulated         Total
                                                                         Additional     Unearned       during the      stockholders'
                                                    Common stock          paid-in         stock        development        equity
                                                   Shares     Amount      capital      compensation       stage         (deficit)
                                                -----------   -------   -------------   -----------   --------------   -------------
<S>                                              <C>           <C>        <C>              <C>          <C>               <C>
  Unearned stock compensation
    pursuant to issuance of
    common stock options                                --        --         435,322      (435,322)              --              --

  Amortization and valuation
    adjustment of unearned
    stock compensation                                  --        --              --       459,978               --         459,978

  Shares issued from exercise
    of common stock options                            195        --             292            --               --             292

  Shares issued for services                        69,811        70         175,500            --               --         175,570

  Conversion of Series B
    preferred stock to common
    stock                                           22,000        22         106,181            --               --         106,203

  Shares issued for Series B
    preferred stock dividend                        18,050        18          90,232            --          (90,250)             --

  Accretion to mandatory
    redemption amount for
    Series B preferred stock                            --        --         (11,634)           --               --         (11,634)

  Net loss for the year                                 --        --              --            --       (3,791,015)     (3,791,015)
                                                -----------   -------   -------------   -----------   --------------   -------------
Balance, December 31, 2001                       9,798,480     9,797      29,037,558       (62,780)     (24,040,331)      4,944,245

                                                   (Continued on following page)
                                           See accompanying notes to financial statements.
                                                                F-7
</TABLE>


<PAGE>

<TABLE>
                                                           ENTROPIN, INC.
                                                    (A DEVELOPMENT STAGE COMPANY)
                                       STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
                                           For the Years Ended December 31, 2001 and 2002
                            and for the Period from August 27, 1984 (Inception) Through December 31, 2002
                                                  (Continued from prededing page)
<CAPTION>
                                                                                                          Deficit
                                                                                                        accumulated        Total
                                                                            Additional     Unearned      during the    stockholders'
                                                        Common stock         paid-in         stock       development      equity
                                                      Shares     Amount      capital      compensation      stage        (deficit)
                                                   -----------  --------   -------------   ----------   -------------   ------------
<S>                                                 <C>         <C>        <C>             <C>          <C>             <C>
  Change in par value of
    common stock in connection
    with reincorporation in Delaware                       --    (8,878)          8,878           --              --             --

  Unearned stock compensation
    pursuant to issuance of
    common stock options                                   --        --         539,962     (539,962)             --             --

  Amortization and valuation
    adjustment of unearned
    stock compensation                                     --        --              --      530,263              --        530,263

  Shares issued from exercise
    of common stock options                            59,604        60             (60)          --              --             --

  Shares issued for services                           12,653         7          18,080           --              --         18,087

  Conversion of Series B
    preferred stock to common
    stock                                              25,000         3         122,407           --              --        122,410

  Shares issued for Series B
    preferred stock dividend                           16,850         2          84,248           --         (84,250)            --

  Accretion to mandatory
    redemption amount for
    Series B preferred stock                               --        --          (9,908)          --              --         (9,908)

  Net loss for the year                                    --        --              --           --      (5,261,796)    (5,261,796)
                                                   -----------  --------   -------------   ----------   -------------   ------------
Balance, December 31, 2002                          9,912,587   $   991    $ 29,801,165    $ (72,479)   $(29,386,377)   $   343,301

                                           See accompanying notes to financial statements.
                                                                F-8
</TABLE>


<PAGE>

<TABLE>
                                                        ENTROPIN, INC.
                                                 (A DEVELOPMENT STAGE COMPANY)
                                                   STATEMENTS OF CASH FLOWS
                                        For the Years Ended December 31, 2001 and 2002
                         and for the Period From August 27, 1984 (Inception) Through December 31, 2002
<CAPTION>

                                                                                                              Inception through
                                                                         2001                  2002           December 31, 2002
                                                                     ------------          ------------       -----------------
<S>                                                                  <C>                   <C>                   <C>
Cash flows from operating activities:
   Net loss                                                          $(3,791,015)          $(5,261,796)          $(28,362,627)
   Adjustments to reconcile net loss to net
     cash used in operating activities:
       Depreciation and amortization                                      30,761                28,115                223,380
       Loss on disposal of assets                                             --                 1,837                  1,837
       Services received in exchange for stock,
         stock options and warrants                                      596,990               548,350              9,864,338
       Services received in exchange for
         compensation agreements                                              --                    --              2,231,678
       (Increase) decrease in accrued interest receivable                198,312                27,373                 (5,954)
       (Decrease) increase in accounts payable                           (89,491)              (80,536)               270,147
       Other                                                             (37,955)               47,736                 55,487
                                                                     ------------          ------------          -------------
       Net cash used in operating activities                          (3,092,398)           (4,688,921)           (15,721,714)
                                                                     ------------          ------------          -------------

Cash flows from investing activities:
   Maturities (purchases) of short-term investments, net               1,722,377             3,108,692               (990,000)
   Patent costs                                                          (30,866)             (112,478)              (574,510)
   Purchase of property and equipment                                     (8,030)              (10,002)              (130,516)
                                                                     ------------          ------------          -------------
       Net cash provided by (used in) investing activities             1,683,481             2,986,212             (1,695,026)
                                                                     ------------          ------------          -------------

Cash flows from financing activities:
   Proceeds from shares issued pursuant to recapitalization                   --                    --                220,100
   Proceeds from issuance of common stock and warrants                       292                    --             18,281,066
   Proceeds from issuance of preferred stock                                  --                    --              1,142,750
   Proceeds from stockholder loans                                            --                    --                809,677
   Proceeds from stockholder advances                                         --                    --                 98,873
   Repayments of stockholder advances                                         --                    --                (98,873)
   Payment for cancellation of common stock warrant                           --                    --               (330,000)
   Proceeds from convertible notes payable                                    --                    --                200,000
                                                                     ------------          ------------          -------------
       Net cash provided by financing activities                             292                    --             20,323,593
                                                                     ------------          ------------          -------------
Net (decrease) increase in cash                                       (1,408,625)           (1,702,709)             2,906,853

Cash and cash equivalents at beginning of period                       6,018,187             4,609,562                     --
                                                                     ------------          ------------          -------------
Cash and cash equivalents at end of period                           $ 4,609,562           $ 2,906,853           $  2,906,853
                                                                     ============          ============          =============

                                                 (Continued on following page)
                                        See accompanying notes to financial statements.
                                                             F-9
</TABLE>


<PAGE>

                                 ENTROPIN, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                            STATEMENTS OF CASH FLOWS
                 For the Years Ended December 31, 2001 and 2002
  and for the Period From August 27, 1984 (Inception) Through December 31, 2002
                         (Continued from preceding page)


     Supplemental disclosure of cash flow information:

                                                               Inception through
                                            2001      2002     December 31, 2002
                                            ----      ----     -----------------

                Cash paid for interest      $ -       $ -         $ 242,811

     Supplemental disclosure of non-cash investing and financing activities:

                During the year ended December 31, 1998, the Company issued
                3,210,487 shares of Series A preferred stock in exchange for an
                aggregate $1,710,487 of notes payable to stockholders plus
                accrued interest and a $1,500,000 compensation agreement.

                During the year ended December 31, 1999, the Company converted
                promissory notes payable with outstanding principal and interest
                balances totaling $201,662 into 100,831 shares of common stock.

                During the years ended December 31, 2001 and 2002 and the period
                from August 27, 1984 (inception) through December 31, 2002, the
                Company issued 69,811, 12,653 and 4,073,418 shares of common
                stock for services totaling $175,570, $18,087 and $338,369,
                respectively.

                During the years ended December 31, 2001 and 2002 and the period
                from August 27, 1984 (inception) through December 31, 2002, the
                Company issued 18,050, 16,850 and 82,000 shares, respectively,
                of common stock at $5.00 per share as payment of accrued
                dividends on Series B preferred stock.

                During the years ended December 31, 2001 and 2002 and the period
                from August 27, 1984 (inception) through December 31, 2002, the
                Company issued 22,000, 25,000 and 102,000 shares of common stock
                for conversion of an equal number of shares of Series B
                preferred stock totaling $106,203, $122,410 and $493,317,
                respectively.

                 See accompanying notes to financial statements.
                                      F-10


<PAGE>

                                 ENTROPIN, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                          NOTES TO FINANCIAL STATEMENTS


1.   Organization and summary of significant accounting policies
     -----------------------------------------------------------

     Organization and basis of presentation:

     Entropin, Inc. (the "Company"), a Delaware corporation, was organized as a
     California corporation in August 1984. The Company is a pharmaceutical
     research and development company focused on the development of its
     proprietary compound ENT-103(R) as a potent therapy for pain. Activities
     from inception include research and development, seeking the U.S. Food and
     Drug Administration, or FDA, approval for its proprietary compounds,
     including its current drug, ENT-103, as well as fund raising.

     The Company's financial statements have been presented on a going concern
     basis which contemplates the realization of assets and the satisfaction of
     liabilities in the normal course of business. The Company is in the
     development stage and has been primarily involved in research and
     development activities. This has resulted in significant operating losses
     and an accumulated deficit at December 31, 2002 of $29,386,377. Management
     anticipates additional operating losses for the foreseeable future. In
     addition, if the Company's outstanding Series B preferred shares have not
     been converted to shares of common stock prior to their July 15, 2003
     mandatory redemption date, the Company will be required to redeem them at
     an approximate cost of $717,500. These factors among others may indicate
     that the Company will be unable to continue as a going concern for a
     reasonable period of time. The financial statements do not include any
     adjustments related to the recoverability of recorded asset amounts that
     may be necessary should the Company be unable to continue as a going
     concern. The Company will need to raise significant additional funds to
     continue its planned development activities. In the absence of positive
     cash flows from operations, the Company is highly dependent on its ability
     to secure additional funding through the issuance of debt or equity
     instruments or corporate partnering arrangements. If adequate funds are not
     available, the Company may be forced to significantly curtail its
     operations or to obtain funds through entering into collaborative
     agreements or other arrangements that may be on unfavorable terms. The
     Company's failure to raise sufficient additional funds on favorable terms,
     or at all, would have a material adverse effect on its business, results of
     operations and financial position. The Company's ultimate continued
     existence is currently dependent on its ability to complete development of,
     obtain approval for, and successfully market its proprietary compound
     ENT-103.

     Because the Company has not yet completed product development, obtained
     regulatory approval, or verified the market acceptance and demand for any
     products it may develop, its activities have been accounted for as those of
     a "development stage enterprise" as set forth in Statement of Financial
     Accounting Standards No. 7, "Accounting and Reporting by Development Stage
     Enterprises".

     During 1998, the Company consummated an agreement and plan of merger with
     Vanden Capital Group, Inc. ("Vanden"), a Colorado corporation, under which
     Vanden acquired all of the issued and outstanding common shares of the
     Company (see Note 5). The Company was merged into Vanden, and Vanden
     changed its name to Entropin, Inc. For accounting purposes, the acquisition
     has been treated as a recapitalization of the Company, based upon
     historical cost, and a reverse acquisition with the Company as the
     acquirer.

                                      F-11


<PAGE>

                                 ENTROPIN, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                          NOTES TO FINANCIAL STATEMENTS


     The Company completed a recapitalization during 1998. The Company also
     completed private offerings of 245,500 shares of Series B convertible
     preferred stock for gross proceeds of $1,227,500, $200,000 of convertible
     notes payable, and 1,508,700 shares of common stock for gross proceeds of
     $4,664,800. In addition, the Company raised approximately $13,700,000
     through a secondary offering and sale of the underwriter's over-allotment
     during the first half of 2000.

     Use of estimates:

     The preparation of financial statements in conformity with accounting
     principles generally accepted in the United States of America requires
     management to make estimates and assumptions that affect the reported
     amounts of assets and liabilities and disclosure of contingent assets and
     liabilities at the date of the financial statements and the reported
     amounts of revenues and expenses during the reporting period. Actual
     results could differ from those estimates.

     Income taxes:

     The Company provides for income taxes utilizing the asset and liability
     approach under which deferred income taxes are recognized based upon
     currently enacted tax laws and rates applicable to the periods in which the
     taxes are expected to become payable. A valuation allowance is established
     for deferred income tax assets when their realization is not reasonably
     assured.

     Property and equipment:

     Office furniture and equipment is recorded at cost. Depreciation commences
     as items are placed in service and is computed using the straight-line
     method over their estimated useful lives of three years.

     Leasehold improvements are recorded at cost and amortized using the
     straight-line method over the shorter of their estimated useful life or the
     related lease term.

     Research and development costs:

     Research and development costs are expensed as incurred.

     Patents:

     Patents are stated at cost less accumulated amortization which is
     calculated on a straight-line basis over their useful lives, estimated by
     management to average 16 years. Costs associated with internally developed
     patents (with the exception of legal costs) are expensed in the period
     incurred.

                                      F-12


<PAGE>

                                 ENTROPIN, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                          NOTES TO FINANCIAL STATEMENTS


     The Company currently holds fifty six issued and pending patent
     applications worldwide, including seven issued U.S. patents and 37 foreign
     patents and has three patents pending. The issued patents include two
     material composition patents covering the molecules contained in Esterom(R)
     solution (including ENT-102) which expire in 2012 and 2013. The Company has
     also filed a patent application with the United States Patent Office along
     with international counterparts that describes a method for the enrichment
     of the compounds covered in our composition of matter patents. This patent
     application describes a method for the production of Esterom(R) solution
     and its components, including ENT-102

     In August 2002, the Company filed a patent describing the manufacturing
     process for ENT-102. This patent application describes the preparation of
     commercial quantities of ENT-102 and other related compounds. In December
     2002, the Company filed a composition of matter patent application for
     ENT-103.

     Impairment of long-lived assets:

     The Company evaluates its long-lived assets for impairment whenever events
     or changes in circumstances indicate that the carrying amount of such
     assets or intangibles may not be recoverable. Recoverability of assets to
     be held and used is measured by a comparison of the carrying amount of an
     asset to future undiscounted net cash flows expected to be generated by the
     asset. If such assets are considered to be impaired, the impairment to be
     recognized is measured by the amount by which the carrying amount of the
     assets exceeds the fair value of the assets. Assets to be disposed of are
     reported at the lower of the carrying amount or fair value less costs to
     sell.

     Cash equivalents and short-term investments:

     The Company considers cash equivalents to include only highly liquid
     securities with an original maturity of three months or less. Investments
     with an original maturity of more than three months are considered
     short-term investments and have been classified by management as
     held-to-maturity. At December 31, 2002, the Company's short-term
     investments consisted entirely of certificates of deposit that are carried
     at amortized cost with an average remaining maturity period of 64 days.

     Concentrations of credit risk:

     The Company invests its excess cash principally in certificates of deposit.
     The Company has established guidelines relative to diversification and
     maturities that maintain safety and liquidity. These guidelines are
     periodically reviewed and modified to take advantage of trends in yields
     and interest rates. The Company has not experienced any losses on its cash
     equivalents or short-term investments.

     Stock-based compensation:

     The Company follows the fair value method of accounting for employee stock
     based compensation provided for in Statement of Financial Accounting
     Standards No. 123, "Accounting for Stock-Based Compensation". Compensation
     cost for stock option grants is measured as the fair value of the options
     using the Black-Scholes option pricing model. Amounts recorded for options
     granted to non-employees are determined in accordance with Statement of
     Financial Accounting Standards No. 123 and EITF 96-18 based on the fair
     value of the consideration or the fair value of the equity instruments

                                      F-13


<PAGE>

                                 ENTROPIN, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                          NOTES TO FINANCIAL STATEMENTS


     issued, whichever is more reliably measured. Deferred charges related to
     options granted to non-employees are periodically remeasured as the
     underlying options vest and are included as unearned stock compensation in
     the stockholders' equity section of the balance sheet.

     Fair value of financial instruments:

     The carrying amounts of cash, cash equivalents, short-term investments,
     receivables and accounts payable are considered to be representative of
     their respective fair values because of their short-term nature. The
     Company believes that it is not practical to estimate the fair market value
     of its Series A and Series B preferred stock because of the numerous
     features unique to these securities, as described in Note 4, without
     incurring excessive costs.

     Loss per share:

     Net loss per common share is computed using the weighted average number of
     common shares outstanding. Basic and diluted net loss per common share
     amounts are equivalent for the periods presented as the inclusion of common
     stock equivalents in the number of shares used for the diluted computation
     would be anti-dilutive. Dividends on preferred stock, consisting of 10%
     cumulative dividends and deemed dividends related to the beneficial
     conversion feature and mandatory redemption accretion of Series B preferred
     stock, are added to net loss for the purpose of determining net loss and
     net loss per share amounts applicable to common stockholders.

     Segment reporting:

     The Company currently operates in a single segment. In addition, financial
     results are prepared and reviewed by management as a single operating
     segment. The Company continually evaluates its operating activities and the
     method utilized by management to evaluate such activities and will report
     on a segment basis when appropriate to do so.

     Recent accounting pronouncements:

     In June 2001, the Financial Accounting Standards Board ("FASB") issued
     Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
     Combinations". SFAS No. 141 requires the use of the purchase method of
     accounting for all business combinations initiated after June 30, 2001 and
     eliminates the pooling-of-interests method. The adoption of SFAS No. 141
     did not have a material effect on the Company's results of operations or
     financial position.

     In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
     Assets". SFAS No. 142 requires that goodwill and other intangible assets
     with indefinite lives no longer be amortized, but instead tested for
     impairment at least annually. In addition, the standard addresses how
     intangible assets that are acquired individually or with a group of other
     assets, other than as part of a business combination, should be accounted
     for upon their acquisition. The adoption of SFAS No. 142 effective January
     1, 2002 did not have a material effect on the Company's results of
     operations or financial position.

                                      F-14


<PAGE>

                                 ENTROPIN, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                          NOTES TO FINANCIAL STATEMENTS


     In August 2001, the FASB issued SFAS No. 144, "Accounting for the
     Impairment or Disposal of Long-Lived Assets". This statement addresses
     financial accounting and reporting for the impairment or disposal of
     long-lived assets. This statement supersedes FASB Statement No. 121,
     "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
     Assets to Be Disposed Of", and the accounting and reporting provisions of
     APB Opinion No. 30, "Reporting the Results of Operations - Reporting the
     Effects of a Disposal of a Segment of a Business, and Extraordinary,
     Unusual and Infrequently Occurring Events and Transactions", for the
     disposal of a segment of a business (as previously defined in that
     Opinion). The adoption of SFAS No. 144 effective January 1, 2002 did not
     have a material effect on the Company's results of operations or financial
     position.

     In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
     "Guarantor's Accounting and Disclosure Requirements for Guarantees,
     Including Indirect Guarantees of Indebtedness of Others". FIN 45 requires
     that a liability be recorded in the guarantor's balance sheet upon issuance
     of a guarantee. In addition, FIN 45 requires certain disclosures about each
     of the entity's guarantees. The disclosure provisions of FIN 45 are
     effective for annual and interim periods that end after December 15, 2002.
     The recognition provisions of FIN 45 are applicable prospectively to
     guarantees entered after December 31, 2002. The Company does not believe
     that the adoption of FIN 45 will have a material effect on its results of
     operations or financial position.

2.   Related party transactions
     --------------------------

     Lease agreement:

     The Company subleases on a month-to-month basis approximately 800 square
     feet of office space from a principal stockholder, at $800 per month. Rent
     expense related to the sublease was $9,600, $9,600 and $47,114 for the
     years ended December 31, 2001 and 2002 and for the period from August 27,
     1984 (inception) through December 31, 2002, respectively.

     Conversion of long-term debt - stockholders:

     During January 1998, the Company converted $1,710,487 of long-term debt and
     accrued interest, incurred for cash advances and past services associated
     with research and development, into 1,710,487 shares of 8% non-voting,
     non-cumulative Series A preferred stock at $1.00 per share (see Note 4).
     The debt was owed to significant stockholders.

3.   Income taxes
     ------------

     The Company has not recorded income tax expense or benefit for the years
     ended December 31, 2001 and 2002 and the period from August 27, 1984
     (inception) through December 31, 2002. This differs from the income tax
     benefit that would result from applying the federal statutory rate of 34%
     to net loss for these periods primarily as a result of a valuation
     allowance provided for deferred income tax assets and losses incurred
     through 1998 while the Company was reporting as an S Corporation for income
     tax purposes.

                                      F-15


<PAGE>

                                 ENTROPIN, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                          NOTES TO FINANCIAL STATEMENTS


     At December 31, 2002, the Company has net operating loss carryforwards of
     approximately $15,482,000 for federal purposes and $13,612,000 for state
     purposes. The federal and state net operating loss carryforwards begin to
     expire in 2018 and 2004, respectively. At December 31, 2001 and 2002,
     deferred income tax balances and the related valuation allowance are as
     follows:

<TABLE>
<CAPTION>
                                                                     2001             2002
                                                                 ------------     ------------
<S>                                                              <C>              <C>
        Deferred income tax assets (liabilities) resulting from:

               Net operating loss carryforwards                  $ 4,397,000      $ 6,034,000

               Research and development credit carryforwards         583,000          457,000

               Basis difference in patent costs and
                property and equipment                              (117,000)        (152,000)

               Accrual to cash basis adjustments                      11,000           21,000

               Unearned stock compensation                         3,473,000        3,454,000

               Capital loss contribution                              28,000               --

               Capitalized research and development costs                 --           49,000
                                                                 ------------     ------------

               Total                                               8,375,000        9,863,000

         Less valuation allowance                                 (8,375,000)      (9,863,000)
                                                                 ------------     ------------
                                                                 $        --      $        --
                                                                 ============     ============
</TABLE>

     A full valuation allowance has been established for deferred income tax
     assets, as utilization of the loss carryforwards and realization of other
     deferred income tax assets is not reasonably assured.

4.   Redeemable preferred stock
     --------------------------

     In December 1997, the Board of Directors approved an amendment to the
     Company's articles of incorporation to authorize the issuance of 10,000,000
     shares of $.001 par value preferred stock in various series. In June 2002,
     the Company reincorporated in Delaware and changed the par value of its
     preferred stock from $.001 to $.0001 per share.

     In January 1998, the Company issued 3,210,487 shares of its Series A
     redeemable, non-voting, non-cumulative 8% preferred stock in exchange for
     an aggregate $1,710,487 of notes payable to stockholders, accrued interest,
     and a $1,500,000 compensation agreement. The annual 8% dividend is based
     upon a $1.00 per share value and is only payable out of earnings. The
     Series A preferred stock is redeemable from 20% to 50% of annual earnings,

                                      F-16


<PAGE>

                                 ENTROPIN, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                          NOTES TO FINANCIAL STATEMENTS


     as long as redemption amounts do not exceed net cash flow from operating
     activities. Prior to February 14, 2003, the Series A preferred stock
     agreement required any redemption by the Company to be in the form of cash
     at a value of $1.00 per share and was to be automatically cancelled on
     January 16, 2005. On February 14, 2003, the Company entered into separate
     agreements with each of the holders of its Series A preferred stock, in
     which these stockholders agreed to exchange each outstanding share of
     Series A preferred stock for one share of Series A' preferred stock. The
     terms of the Series A' preferred stock are the same as the terms of the
     Series A preferred stock except the redemption provision of the Series A'
     preferred stock allows us to redeem the Series A' preferred stock in cash,
     common stock or any combination thereof and extends the redemption period
     to January 15, 2015. Because the Company can redeem the Series A' preferred
     stock with common stock at its discretion, the Company can include the
     outstanding Series A' preferred stock balance in the Company's
     stockholders' equity effective February 14, 2003. Had the exchange been
     completed effective as of December 31, 2002, the resulting inclusion of the
     outstanding Series A' preferred stock balance in the Company's
     stockholders' equity would have increased total stockholders' equity as of
     December 31, 2002 to $3,553,787.

     In July 1998, the Company completed a private placement of 245,500 shares
     of Series B preferred stock at $5.00 per share, for total net proceeds of
     $1,142,750. The Series B preferred stock is designated as redeemable 10%
     cumulative non-voting convertible preferred stock with $.0001 par value.
     The shares are convertible on a one-for-one basis into common stock. The
     $613,750 intrinsic value of this beneficial conversion feature was recorded
     by allocating this portion of the total net proceeds to additional paid-in
     capital, with an equal amount treated as an immediate deemed dividend to
     the preferred stockholders. The dividends accrue at the rate of $.50 per
     share per annum and are paid annually commencing July 15, 1999. At the
     Company's election, annual dividends were paid in shares of the Company's
     common stock at $5.00 per share at July 15, 1999, 2000, 2001 and 2002. A
     total of 102,000 Series B preferred shares have been converted as of
     December 31, 2002. All unconverted shares are subject to mandatory
     redemption at $5.00 per share on or before July 15, 2003. As of December
     31, 2002, 143,500 shares of Series B preferred stock remained outstanding.
     If these shares have not been converted to shares of common stock prior to
     the mandatory redemption date, we will be required to redeem them at a cost
     of approximately $717,500.The Company is accreting its Series B preferred
     stock up to the mandatory redemption amount. Such accretion amounts are
     treated as deemed dividends to preferred stockholders.

5.   Stockholders' equity
     --------------------

     Recapitalization:

     In December 1997, the Company entered into an agreement and plan of merger
     with Vanden to exchange all of the issued and outstanding common shares of
     the Company, in exchange for 5,220,000 shares of Vanden's $.001 par value
     common stock, in a reverse acquisition.

     Pursuant to the agreement, Vanden agreed to have cash of $220,000 and no
     unpaid liabilities at the effective date of the transaction. The exchange
     was consummated during January 1998 and is presented on the statement of
     changes in stockholders' equity as an issuance of 480,051 shares of common
     stock for cash proceeds of $220,100 pursuant to recapitalization. In
     connection with the recapitalization, the Company issued options to
     purchase 180,001 shares of its $.001 par value common stock for cash of
     $100 and options to purchase an additional 180,001 shares of common stock

                                      F-17


<PAGE>

                                 ENTROPIN, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                          NOTES TO FINANCIAL STATEMENTS


     for $2.80 per share, as required by a management advisory services contract
     as compensation for arranging the merger. The difference between the fair
     value of the stock, estimated by the Company to be $2.75 per share, and the
     purchase price for the initial 180,001 shares was treated as additional
     cost of the merger and charged to capital, consistent with accounting for
     the reverse acquisition as a recapitalization. The net effect of this
     transaction was to record an increase and related decrease to additional
     paid-in capital of $495,000. The remaining options to acquire 180,001
     shares were exercisable for a five-year period and expired in October 2002.

     Following the exchange, the Company's stockholders owned approximately 95%
     of the outstanding common stock of Vanden. The reverse acquisition has been
     accounted for as a recapitalization of the Company based upon historical
     cost. Accordingly, the common stock and additional paid-in capital amounts
     have been restated on the statements of changes in stockholders' equity to
     give retroactive effect to the recapitalization.

     Reincorporation:

     In June 2002, the Company changed its state of incorporation from Colorado
     to Delaware. The reincorporation was approved by the holders of a majority
     of its outstanding shares. The reincorporation was accomplished by merging
     with and into Entropin, Inc., a Delaware corporation and our formerly
     wholly-owned subsidiary. Each share of common stock of the Colorado
     corporation was converted into one share of common stock of the Delaware
     corporation. Each share of Series A preferred stock of the Colorado
     corporation was converted into one share of Series A preferred stock of the
     Delaware corporation. Each share of Series B preferred stock of the
     Colorado corporation was converted into one share of Series B preferred
     stock of the Delaware corporation.

     Private placements:

     In January 1998, the Company completed a private placement of 300,000
     shares of its common stock at $2.75 per share for proceeds of $825,000.

     In April 1999, the Company completed a private placement of 497,500 shares
     of its common stock at $2.00 per share for proceeds of $995,000.

     In June 1999, the Company completed a private placement of 304,750 shares
     of its common stock at $4.00 per share for proceeds of $1,219,000.

     In September 1999, the Company completed a private placement of 406,450
     shares of its common stock at $4.00 per share for proceeds of $1,625,800.

     Secondary public offering:

     On March 20, 2000, the Company completed a secondary public offering. The
     Company received net proceeds of approximately $12,500,000 (net of offering
     costs of approximately $2,000,000) from the sale of 2,000,000 shares of

                                      F-18


<PAGE>

     common stock and 2,000,000 redeemable common stock purchase warrants. The
     warrants are exercisable at $10.50 per share at any time until March 14,
     2005. After March 14, 2001, under certain conditions, the Company may
     redeem the warrants at $.25 per warrant. The Company also issued to the
     underwriter warrants to purchase up to 200,000 shares at an exercise price
     of $8.25 per share and an option to purchase up to 200,000 warrants to
     purchase 200,000 shares at $.30 per warrant. On May 1, 2000, the Company
     received net proceeds of $1,185,000 from the over-allotment sale of 180,000
     shares of common stock and 300,000 warrants. The warrants carry the same
     terms as those sold in the public offering.

     Stock options and warrants:

     In 2000, the Company provided stock option agreements to two directors to
     purchase 20,000 shares of the Company's common stock exercisable for five
     years at $6.00 per share. The options vested ratably on a monthly basis
     commencing February 1, 2000, and ending on February 1, 2001.

     In 1998, the Company provided a stock option agreement to purchase 450,000
     shares of the Company's common stock at $1.50 per share to an organization
     retained to provide assistance in taking Esterom(R) through the clinical
     trial and NDA approval process. In July 2000, upon completion of enrollment
     in the initial Phase III clinical trial, the Company terminated its
     agreements with this organization. The termination agreement allowed the
     organization to retain fully vested options to purchase 75,000 shares of
     the Company's common stock at $1.50 per share and options to purchase
     15,195 shares at $1.50 that the organization had previously assigned to its
     employees and advisors. In addition, the Company granted the organization
     fully vested options to purchase 90,000 shares at $2.50 per share. The
     Company canceled previously issued options to purchase 359,805 shares of
     its common stock at $1.50 per share. The organization invoked its cashless
     exercise provision to exercise its option to purchase 75,000 shares at
     $1.50 in January 2001.

     In 2000, the Board of Directors approved a compensation plan for members of
     the Company's Scientific and Medical Advisory Board, which included stock
     options aggregating 8,000 shares in exchange for services. The options are
     exercisable at $2.00 per share and vested in equal portions in December
     2001 and 2002. The options expire five years from the dates they became
     exercisable.

     In 2001, the Company provided stock option agreements to each of its
     directors to purchase 1,666.67 shares of its common stock for each month of
     service as a director exercisable until February 1, 2006, at $2.00 per
     share. The options vest ratably on a monthly basis commencing February 1,
     April 1, or July 1, 2001, based on each director's service period, and
     ending upon the earlier of April 1, 2002 or the termination of the
     recipient's term as a director.

     In 2001, the Board of Directors approved a compensation plan for the
     Chairman and Vice Chairman of the Board for services provided to the
     Company, to be paid in stock options with market values of $40,000 and
     $30,000, respectively. The options are exercisable until January 1, 2006,
     at $1.00 per share and vested ratably over a twelve month period.

     In 2001, the Company provided a stock option agreement to purchase 100,000
     shares of common stock to its president and chief operating officer at an
     exercise price of $2.05 per share. The options vest upon completion of
     specific performance milestones and expire five years from the date they
     become exercisable.

                                      F-19


<PAGE>

                                 ENTROPIN, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                          NOTES TO FINANCIAL STATEMENTS


     In 2001, the Company provided a stock option agreement to purchase 95,000
     shares of common stock to its vice president and chief financial officer at
     an exercise price of $2.05 per share. The options vest upon completion of
     specific milestones and expire five years from the date they become
     exercisable.

     In 2001, the Company provided a stock option agreement to purchase 23,200
     shares of common stock to its president and chief operating officer
     exercisable at $1.00 per share for a period of five years.

     In 2001, the Company provided a stock option agreement to purchase 14,500
     shares of common stock to its vice president and chief financial officer
     exercisable at $1.00 per share for a period of five years.

     In 2001, the Company provided a stock option agreement to a new director to
     purchase 1,666.67 shares of its common stock for each month of service as a
     director, exercisable until February 1, 2006, at $2.00 per share. The
     options vested and became exercisable ratably on a monthly basis from
     January 1, 2002 to April 1, 2002.

     In 2002, the Board of Directors approved a compensation plan for the
     Chairman and Vice Chairman of the Board for services provided to the
     Company, to be paid in stock options with market values of $40,000 and
     $30,000, respectively. The options are exercisable until January 1, 2007,
     at $1.05 per share and vested ratably over a twelve month period.

     In 2002, the Company provided stock option agreements to each of its
     directors (except the Company's president and chief executive officer) to
     purchase 1,666.67 shares of its common stock for each month of service
     (20,000 shares per each year of service) as a director exercisable until
     April 1, 2007, at $3.85 per share. The options vest ratably on a monthly
     basis commencing April 1, 2002, and ending upon the earlier of April 1,
     2003 or the termination of the recipient's term as a director.

     In 2002, the Company provided a stock option agreement to purchase 40,000
     shares of common stock to its president and chief executive officer for
     services provided to the Company. The 40,000 options were fully vested at
     grant and exercisable for a period of five years with 20,000 exercisable at
     $2.05 per share and 20,000 exercisable at $3.05 per share.

     In 2002, the Company provided a stock option agreement to purchase 13,750
     shares of common stock to its vice president and chief financial officer
     for services provided to the Company. The options were fully vested at
     grant and exercisable at $2.05 per share for a period of five years.
     In December 2002, the Company granted options to acquire 100,000 shares of
     the Company's common stock to a consulting organization retained to provide
     investor relations services to the Company. The options were fully vested
     at grant with 50,000 options exercisable at $0.75 per share and 50,000
     options exercisable at $1.50 per share until December 1, 2005.

                                      F-20


<PAGE>

                                 ENTROPIN, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                          NOTES TO FINANCIAL STATEMENTS

<TABLE>
     The following is a summary of stock option activity:
<CAPTION>
                                                                                                  Options Exercisable
                                                                                                  -------------------
                                                                Option          Wtd. avg.                        Wtd. avg.
                                             Number           price per         exercise          Number          exercise
                                            of shares           share             price          of shares         price
                                            ---------           -----             -----          ---------         -----
<S>                                           <C>           <C>                   <C>           <C>                <C>
   Balance, December 31, 1997                         -
   Granted                                    1,505,002     $.001 to $4.00        $2.26
   Canceled                                    (180,001)        $0.001           $0.001
                                             -----------                        --------

   Balance, December 31, 1998                 1,325,001                           $2.56            713,528         $3.31

   Granted                                    1,371,000     $3.00 to $5.00        $4.07
   Exercised                                    (20,000)        $4.00             $4.00
   Canceled                                     (55,000)    $3.00 to $4.00        $3.36
                                             -----------                        --------

   Balance, December 31, 1999                 2,621,001                           $3.43         1,647,669          $3.52

   Granted                                      138,000     $2.00 to $6.00        $3.49
   Exercised                                    (95,000)        $4.00             $4.00
   Canceled                                    (359,805)        $1.50             $1.50
                                             -----------                        --------

   Balance, December 31, 2000                 2,304,196                           $3.14         1,849,335          $3.44

   Granted                                      441,869     $1.00 to $2.05        $1.78
   Exercised                                       (195)        $1.50             $1.50
                                             -----------                        --------

   Balance, December 31, 2001                 2,745,870                           $2.96         2,210,859          $3.32

   Granted                                      365,750     $1.00 to $3.85        $2.34
   Exercised                                   (165,000)    $1.50 to $2.50        $2.05
   Expired                                     (180,001)        $2.80             $2.80
                                             -----------                        --------

   Balance, December 31, 2002                 2,766,619                           $2.90         2,356,619          $3.20
                                             ===========                        ========
</TABLE>

                                                          F-21


<PAGE>

                                     ENTROPIN, INC.
                             (A DEVELOPMENT STAGE COMPANY)
                             NOTES TO FINANCIAL STATEMENTS

<TABLE>
     The following is a summary of stock warrant activity:
<CAPTION>

                                                                              Wtd. avg.
                                             Number        Warrant price      exercise
                                           of shares         per share          price
                                           ---------         ---------          -----
<S>                                        <C>            <C>                 <C>
   Balance, December 31, 1998                      -

   Granted                                 1,200,181      $3.00 to $4.00       $3.17
   Canceled                                 (205,000)     $3.00 to $4.00       $3.02
                                          -----------                         -------

   Balance, December 31, 1999                995,181                           $3.20

   Granted                                 2,500,000      $8.75 to $10.50     $10.36
   Exercised                                 (10,000)         $4.00            $4.00
   Canceled                                 (101,681)         $4.00            $4.00
                                          -----------                         -------

   Balance, December 31, 2000              3,383,500                           $8.46

   Canceled                                 (100,000)         $3.00            $3.00
                                          -----------                         -------

   Balance, December 31, 2001
   and December 31, 2002                   3,283,500                           $8.63
                                          ===========                         =======
</TABLE>

                                         F-22


<PAGE>

                                 ENTROPIN, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                          NOTES TO FINANCIAL STATEMENTS


     The following is additional information with respect to those options and
     warrants outstanding at December 31, 2002:

                                                                       Wtd.
                                                                       avg.
                                                                    remaining
         Option exercise         Number           Options          contractual
         price per share        of shares        exercisable       life in years
         ---------------        ---------        -----------       -------------

             $0.75                50,000            50,000              2.92
             $1.00               177,700           137,700              3.50
             $1.50                65,000            65,000              3.51
             $2.00               147,169           142,169              3.21
             $2.05               230,750           160,750              3.21
             $3.00               625,000           625,000              3.41
             $3.05                20,000            20,000              4.45
             $3.85               140,000           105,000              4.25
             $4.00               811,000           811,000              1.04
             $5.00               460,000           160,000              2.57
             $6.00                40,000            40,000              3.09
                              -----------       -----------
                               2,766,619         2,356,619              2.61
                              ===========       ===========

                                                                       Wtd.
                                                                       avg.
                                                                    remaining
         Warrant exercise        Number          Warrants          contractual
         price per share       of shares        exercisable       life in years
         ---------------       ---------        -----------       -------------

              $3.00              700,000           700,000           1.40
              $4.00               83,500            83,500           1.42
              $8.75              200,000           200,000           2.22
              $10.50           2,300,000         2,300,000           2.22
                              -----------       -----------
                               3,283,500         3,283,500           2.02
                              ===========       ===========

     At December 31, 2002, outstanding options and warrants aggregating
     3,588,500 shares have certain registration rights and options and warrants
     aggregating 6,010,119 shares contain certain cashless exercise provisions.

                                      F-23


<PAGE>

                                 ENTROPIN, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                          NOTES TO FINANCIAL STATEMENTS


     The fair value of issued but unearned options has been recorded as
     additional paid-in capital and unearned stock compensation. Unearned stock
     compensation was amortized to research and development and general and
     administrative expense over the term of the related agreements, as follows:

<TABLE>
<CAPTION>
                                                Year ended December 31,          Inception through
                                                  2001            2002           December 31, 2002
                                                  ----            ----           -----------------
<S>                                           <C>              <C>                <C>
     Research and development                 $  15,597        $   2,866          $     897,765

     General and administrative                 444,381          527,397              7,739,762
                                              ----------       ----------         --------------

                                              $ 459,978        $ 530,263          $   8,637,527
                                              ==========       ==========         ==============
</TABLE>

6.   Commitments and contingencies
     -----------------------------

     Compensation agreements:

     In 1993, the Company entered into a thirty-year compensation agreement with
     certain limited partners owning 64.28% of the I.B.C. Limited Partnership
     ("I.B.C."). The limited partnership participated in the early development
     of Esterom(R) and owned the rights to three patents and certain
     intellectual property rights. Under the terms of the agreement, the Company
     acquired these patents and intellectual property rights in exchange for
     certain compensation to the limited partners, which is dependent upon the
     Company's receipt of a marketing partner's technological access fee and
     royalty payments. The limited partnership was subsequently dissolved.
     Compensation under the agreement includes a bonus payment of $96,420 to be
     paid at the time the Company is reimbursed by a pharmaceutical company for
     past expenses paid for development of Esterom(R) and/or products derived
     from the acquired patents and developed by the Company, as well as 64.28%
     of a decreasing payment rate (3% to 1%) on cumulative annual royalties
     received by the Company. As of December 31, 2002, no amounts have been
     earned or accrued with respect to this agreement.

     In a separate agreement with certain former I.B.C. limited partners, the
     Company has agreed to pay the partners 35.72% of a decreasing earned
     payment (3% to 1% on cumulative annual sales of Esterom(R) and/or products
     derived from the acquired patents and developed by the Company) until
     October 10, 2004. From October 10, 2004 until October 10, 2014, the Company
     will pay the partners 17.86% of the earned payment. In accordance with the
     agreement, the Company has agreed to pay these former limited partners the
     amount of $40,000 and a minimum earned payment of $3,572 per calendar
     quarter beginning on December 1, 1989. Such minimum payment is payable when
     the Company is either reimbursed for expenditures for the development of
     Esterom(R) and/or products derived from the acquired patents and developed
     by the Company, or from the first revenue received by the Company from net
     sales of Esterom(R) and/or products derived from the acquired patents and
     developed by the Company. The quarterly payments are to be applied against
     the earned payment due the limited partners. The Company will receive a
     credit against the earned payments of 50% of monies expended in connection
     with preparing, filing, obtaining, and maintaining patents involved with
     the acquired rights.

                                      F-24


<PAGE>

                                 ENTROPIN, INC.
                          (A DEVELOPMENT STAGE COMPANY)
                          NOTES TO FINANCIAL STATEMENTS


     Development and supply agreements:

     In July 2000, the Company entered into an agreement with a clinical
     research organization to assist in the clinical and regulatory processes
     for the preparation, submission, filing and approval of a NDA. The Company
     agreed to compensate the organization on an hourly basis at pre-approved
     consulting rates, plus reasonable and necessary expenses. The agreement may
     be terminated at any time by mutual written consent of the parties.

     In addition, the Company contracts with various organizations to provide
     research, development, manufacturing and packaging services on an as needed
     basis.

     Litigation:

     In February 2003, a complaint was filed in the Superior Court of the State
     of California against the Company and certain of its executive officers
     seeking unspecified damages and alleging that the defendants violated
     federal and state securities laws. The Company believes the claims are
     without merit and intends to defend the action vigorously. However, there
     can be no assurance that the Company will succeed in defending or settling
     this action. Additionally, there can be no assurance that the action will
     not have a material adverse effect on the Company's business. As of the
     date of this report, the Company is not a party to any other material legal
     proceedings.

                                      F-25