##### Table of Contents

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U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-KSB



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|x | Annual report under Section 13 or 15(d) of the Securities Exchange Act of 1934.
|- | -------------------------------------------------------------------------------



For the fiscal year ended: December 31, 2004.



| ̈ | Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934.
|- | -----------------------------------------------------------------------------------



For the transition period from              to



Commission File Number: 000-29807



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ENTROPIN, INC.

(Name of Small Business Issuer in Its Charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 68-0510827                          
|(State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification No.)



45926 Oasis Street

Indio, California 92201

760-775-8333

(Address of Principal Executive Offices; Zip Code; Telephone Number, Including Area Code)



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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 Warrants to Purchase Common Stock |  | OTC Bulletin Board OTC Bulletin Board



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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.  x



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



The aggregate market value of
the voting stock held by non-affiliates of the registrant was $4,178,024, computed by reference to the closing bid price of the registrants common stock on the OTC Bulletin Board on March 28, 2005. 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, $.0001 par value, outstanding as of March 28, 2005: 30,645,341.



Documents Incorporated by Reference



Portions of the Proxy Statement to be delivered to the registrants
stockholders in connection with the Annual Meeting of Stockholders to be held on June 28, 2005 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 by reference into Part III of this report.



Transitional Small Business Disclosure Format (Check one):    Yes ̈Nox



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##### Table of Contents

TABLE OF CONTENTS



|         |  |                                                                                                |  |     
|-------- |  | ---------------------------------------------------------------------------------------------- |  | ----
|         |  |                                                                                                |  | Page
|PART I   |  |                                                                                                |  |     
|         |  |                                                                                               
|Item 1.  |  | Description of Business                                                                        |  | 1   
|         |  |                                                                                               
|Item 2.  |  | Description of Property                                                                        |  | 17  
|         |  |                                                                                               
|Item 3.  |  | Legal Proceedings                                                                              |  | 17  
|         |  |                                                                                               
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                            |  | 18  
|         |  |                                                                                               
|PART II  |  |                                                                                                |  |     
|         |  |                                                                                               
|Item 5.  |  | Market For Common Equity, Related Stockholder Matters and Purchases of Equity Securities       |  | 19  
|         |  |                                                                                               
|Item 6.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations          |  | 24  
|         |  |                                                                                               
|Item 7.  |  | Financial Statements                                                                           |  | 27  
|         |  |                                                                                               
|Item 8.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           |  | 28  
|         |  |                                                                                               
|Item 8A. |  | Controls and Procedures                                                                        |  | 28  
|         |  |                                                                                               
|Item 8B. |  | Other Information                                                                              |  | 28  
|         |  |                                                                                               
|PART III |  |                                                                                                |  |     
|         |  |                                                                                               
|Item 9.  |  | Directors and Executive Officers of the Registrant                                             |  | 29  
|         |  |                                                                                               
|Item 10. |  | Executive Compensation                                                                         |  | 29  
|         |  |                                                                                               
|Item 11  |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |  | 29  
|         |  |                                                                                               
|Item 12. |  | Certain Relationships and Related Transactions                                                 |  | 29  
|         |  |                                                                                               
|Item 13. |  | Exhibits, Lists and Reports on Form 8-K                                                        |  | 29  
|         |  |                                                                                               
|Item 14. |  | Principal Accountant Fees and Services                                                         |  | 30  
|         |  |                                                                                               
|         |  | Signatures                                                                                     |  | 31  



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##### Table of Contents

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.



Business
Overview



We are a pharmaceutical research and development
company focused on the development of proprietary compounds for pain therapy. Our primary activities since inception have been research and development, including preclinical studies, and tests focused on securing U.S. Food and Drug Administration
(FDA) approval for our proprietary compounds. We believe that our current compound, ENT-103, has the potential to effectively treat a number of medical conditions using various delivery systems. At present, we are focusing on a topical delivery
system for ENT-103. As stated in our filings with the Securities and Exchange Commission, we have an immediate need to raise additional funds to continue our operations. As of December 31, 2004, we had total current assets of $1,717,611. Our
available funds are not sufficient to allow us to pursue any further development of our proprietary drug candidate, ENT-103, including the preclinical work necessary to prepare and file an Investigational New Drug (IND) application with the FDA or
to commence human clinical trials for ENT-103. If we are unable to immediately obtain significant additional funds to support our operations, we will be forced to cease our operations prior to the end of the second quarter of 2005, and our existing
stockholders may lose their entire investment in the Company.



The discovery of ENT-103 began in Northern California in August of 1984. Lowell M. Somers, M.D., a general practitioner, had identical twin brothers as patients. The genetically identical twins were 35 years old and appeared to be in good
physical health until one developed severe rheumatoid arthritis. Dr. Somers began to research how one twin could be symptom-free and the other incapacitated and struggling to survive as a result of the disease. Dr. Somers investigation led to
the discovery that the symptom-free twin was addicted to cocaine (chemically known as benzoylmethylecgonine or BME). Based on this knowledge, Dr. Somers began to look beyond the abusive characteristics of cocaine to research the drugs
potential medicinal characteristics. He began to explore the potential of BME in his laboratory and developed a rudimentary mixture of a drug later called Esterom. Dr. Somers administered the mixture to the affected twin over a two-week period with
remarkable results. Signs of active arthritis began to disappear and the previously bed-ridden twin became more mobile. Subsequent testing revealed that the previously debilitating rheumatoid arthritis was in remission. Following this discovery,
more rheumatoid arthritis patients were treated with the Esterom solution for two weeks each to validate the initial results. All patients treated showed significant improvement.



Cocaine (BME) has been used for over a century as a potent pain reliever. Its use, however, was limited because of the
potential for addiction following repeated use of the drug. Although the Esterom solution is derived from cocaine, we believe the results of our clinical studies indicate that the Esterom solution does not demonstrate any of the adverse clinical
effects of cocaine, such as euphoria, rapid heart beat, or elevated blood pressure and is non-addictive. We believe that our proprietary development process allows us to capture the positive medical benefits of cocaine and avoid the negative side
effects, potentially representing a major breakthrough in the treatment of pain.



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In the late 1980s, we filed an Investigational New Drug (IND) application with the Federal Drug
Administration (FDA) seeking approval of Esterom solution as a topical application. Based on our successful completion of four preclinical animal studies with no material adverse events, the FDA approved the application permitting us to proceed with
human testing. In 1991, we began a Phase I clinical study of Esterom as a topically applied solution to determine the drugs safety profile. We believe the results of the study returned the following positive findings:



| |  |  | No significant changes in diastolic or systolic blood pressure;
| | - |  | ---------------------------------------------------------------



| |  |  | No significant differences in blood pressure between active and placebo;
| | - |  | ------------------------------------------------------------------------



| |  |  | No significant differences in pulse rate between active and placebo;
| | - |  | --------------------------------------------------------------------



| |  |  | No cardiovascular effects;
| | - |  | --------------------------



| |  |  | No irritation attributed to Esterom;
| | - |  | ------------------------------------



| |  |  | No central nervous system effects (including euphoria); and
| | - |  | -----------------------------------------------------------



| |  |  | No change in blood chemistry.
| | - |  | -----------------------------



A small number of patients reported mild pruritus (itching) and redness (skin irritation) after the fifth day of application in both the drug and placebo
groups. A post study patch test performed on all subjects revealed no evidence of allergic sensitization and suggested that this side effect was likely related to the irritant effect of propylene glycol which was in both Esterom and the placebo.



Phase I results were submitted to the FDA and Entropin was
allowed to proceed with a Phase II clinical study to continue testing for any toxic effects and to begin determining the efficacy of Esterom. Improvement in range of motion was measured in two separate patient groups (acute back sprain and painful
shoulders) to determine the drugs efficacy. Entropin reported in January 1996 that the Phase II clinical trials showed statistically significant improvement in range of motion was achieved in both groups within ten minutes of application,
which was sustained for the length of the study (seven days). No significant toxicity was observed.



Following the submission of the Phase II results, the FDA permitted us to proceed with a Phase III clinical study with primary endpoints measuring
shoulder range of motion and, at the FDAs request, quality of life improvement, as measured by a subjective questionnaire. The results of this Phase III study, released in October of 2000, indicated that Esterom showed some degree of efficacy,
although not at the statistically significant levels required by the FDA, which meant that we would need to conduct one or more additional clinical studies to be able to obtain the needed regulatory approval. No significant adverse events (side
effects) were observed.



Based on the positive dose trending
and lack of toxicity observed in our Phase III trials, we designed, and received FDA approval for, a Phase II/III clinical study using a different subjective questionnaire to measure quality of life improvement, as required by the FDA. Results of
this trial were released in September of 2002 and were similar to our earlier Phase III trial; Esterom demonstrated safety, but did not demonstrate the levels of efficacy required by the FDA for approval, thereby requiring additional clinical trial
data if the Company wished to continue the development of the solution.



Discovery and Development of ENT-102 and ENT-103



In an effort to understand Esteroms mechanism of action (MOA), and to identify and quantify each component of our Esterom solution, we contracted for the synthesis of each of the chemical entities in the Esterom solution and began MOA
studies with researchers from Brigham & Womens Hospital at Harvard Medical School and the University of Arizona Medical Center.



From these studies, we discovered that Esterom works by effectively blocking nerve impulse conduction, resulting in anesthetic and potentially
long-lasting analgesic properties. Having both anesthetic and analgesic properties makes Esterom unique. Testing the individual components that comprise the Esterom solution, we discovered the hydroxypropyl esters of benzoylecgonine, which we named
ENT-102, are very potent and comprise the active molecules in the mixture. In preclinical animal models, these molecules were shown to be 30- to 50-times more potent as analgesics than their non-ester parent compounds, and 5-times more potent than
lidocaine, a commonly used anesthetic for local analgesia (pain suppression). Subsequently, we discovered a method of synthetically preparing ENT-102 and have U.S. and foreign patents pending for this method.



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Based on the discovery of ENT-102 and the preclinical research findings at Harvard and the University of
Arizona using ENT-102, coupled with the results of our Phase II/III clinical study with Esterom solution, we decided to halt further development of Esterom and pursue development of ENT-102. In January 2003, these development efforts yielded 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. Based on 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 elected to focus on the development of ENT-103 as a therapy for treatment of acute pain.
Because ENT-103 is significantly different on a molecular level from Esterom solution, which has eighteen molecules compared to ENT-103s single molecule, we cannot use any of the Esterom clinical trial data for ENT-103.



In February 2003, our executive management team and Board of Directors met
with our key scientific advisors to review the progress of the preclinical studies. Following that meeting, we assembled a committee of independent pain experts to critique the work performed by our collaborators. The committee performed an in-depth
review of the research and the preclinical studies and concluded, among other things, that ENT-103 appeared to demonstrate performance as an active pain reliever in preclinical models for post-incisional pain and neuropathic pain. Based on these
conclusions, we were encouraged to continue our preclinical research with ENT-103. Accordingly, we began actively investigating two delivery systems, injectable and topical, for administering ENT-103. We believe that ENT-103 may be effective for
treating a number of medical conditions using various delivery systems.



In October 2003, we expanded the preclinical evaluation of ENT-103 by initiating studies at the University of Miami. These studies were undertaken as a follow-up to our previous studies performed at Harvard Medical School and the University
of Arizona. The University of Miami investigators evaluated the effects of ENT-103 administered topically as well as by injection in treating inflammatory neurogenic pain. In January 2004, the Company announced that these studies demonstrated that
ENT-103, when delivered by injection, exhibited analgesic (pain suppressing) activity for acute and neurogenic pain. By comparison, lidocaine, a widely used anesthetic, was effective only on acute pain and its analgesic effects did not last as long
as those exhibited by ENT-103. These studies also demonstrated that ENT-103, when formulated with a third-party excipient and administered topically, reduced the severity of pain in a dose-dependent fashion comparable to EMLA®, an FDA-approved topical anesthetic.



In July 2004, we completed the initial phase in the selection of a topical
formulation of ENT-103 to be used in human clinical studies. Dow Pharmaceutical Sciences (DPS) conducted in vitro studies to evaluate the absorption rate of ENT-103 into and through human skin when incorporated with a variety of prototype
formulations. Through these studies, we identified several formulations that significantly improve ENT-103 delivery into human skin and penetration of ENT-103 through the skin. The DPS studies were conducted using procedures described in the FDA and
AAPS Report of the Workshop on Principles and Practices of In Vitro Percutaneous Penetration Studies: Relevance to Bioavailability and Bioequivalence. The DPS studies concluded that ENT-103 offers a promising drug candidate for topical
product delivery when formulated with approved topical formulation enhancers. In September 2004, we completed the second phase in the development and selection of the ENT-103 formulation for use in future human clinical trials. The second series of
studies by DPS tested selected formulations developed in phase one and evaluated different concentrations of ENT-103 to further refine the formulation to be carried forward into human clinical trials.



We then engaged Dr. Joel L. Zatz, Professor of Pharmaceutics at Rutgers
University, to review the results of both DPS studies as well as the results of the animal studies of ENT-103 previously conducted at the University of Miami. In October 2004, Dr. Zatz, a topical formulation expert, concluded that the percutaneous
studies performed at DPS supported the continued development of ENT-103 as a topical product. Dr. Zatz reported that all three studies reviewed indicated that ENT-103, when injected locally, is capable of exerting a meaningful analgesic effect. He
also found that the studies indicated that it is possible to deliver significant quantities of ENT-103 through the skin to the underlying tissues, which represent the target area for this compound. Dr. Zatz concluded that Entropin is justified in
pursuing further development of a product containing ENT-103.



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In November 2004, Dr. Jacqueline Sagen, Professor of Neurosurgery at University of Miami School of
Medicines Miami Project to Cure Paralysis, and her colleagues presented the results of their preclinical testing of Entropins drug candidate, ENT-103, in the formalin model for neurogenic inflammatory pain at the Society for Neuroscience
conference held October 27, 2004 in San Diego. Their report stated that they had found a significant dose-related antinociceptive activity of ENT-103, which attenuated both phase 1 (acute pain) and phase 2 (tonic pain) of the formalin response when
administered subcutaneously (under the skin) and concluded that these results indicate that the analgesic effects of ENT-103 are more robust and prolonged when compared with lidocaine.



The formalin test is a model of neurogenic (nervous system related) inflammation that consists of pharmacologically distinct
phases. There is a reproducible biphasic response to an intraplantar (in the foot) injection of formalin consisting of an early acute or phasic interval (Phase 1, 0-5 min), followed by a quiescent period (5-15 min), and then a prolonged tonic phase
(Phase 2, from approximately 20-45 min). The initial phase is thought to reflect acute pain responses due to the direct activation of nociceptors (pain receptors), while the second phase is thought to reflect tonic pain which may involve central
neuroplastic mechanisms, including activation of spinal NMDA receptors, and may reflect a progression to chronic pain. Local anesthetics, notably lidocaine and quarternized derivatives, have been reported to reduce formalin pain responses following
local intraplantar injections.



The goal of Dr. Sagens
formalin studies, which were conducted from September 2003 to January 2004, was to evaluate effective dose ranges and local routes of administration of ENT-103 in reducing neurogenic inflammatory pain. And although topical administration did not
reduce pain responses at statistically significant levels in the Miami studies, ENT-103 did show a trend in increasing effectiveness at higher dose rates. Based on these results, we turned our focus to determining whether increasing ENT-103
absorption at the site of inflammation may result in more robust suppression of inflammatory pain. Our next step, currently in process, is testing the newly developed topical formulation of ENT-103 from DPS in Dr. Sagens formalin model to
expand our understanding of the pharmacology of ENT-103. However, our available funds are not sufficient to allow us to pursue any further development of ENT-103 at this time. If we are unable to immediately obtain significant additional funds to
support our operations, we will be forced to cease our operations prior to the end of the second quarter of 2005.



Related Products



Our research has not only led to the discovery of ENT-103, but also to the discovery of potential new therapeutic compounds using our proprietary
Structural Activity Relationship, or SAR, technology. We believe that this technology could allow us to develop new pharmaceutical compounds by treating compounds like building blocks. By combining different compounds in novel ways, new products can
be developed that are safer and more effective. For example, minor chemical modifications have produced new non-steroidal anti-inflammatory compounds that have fewer gastrointestinal side effects than the existing base product currently on the
market.



Two of Entropins issued patents describe the SAR
technology that forms the basis for systematically developing New Chemical Entities, or NCEs, which may expand our product pipeline. These NCEs have the potential for different safety and efficacy profiles, as well as the potential for treating new
and different disease indications as compared to ENT-103. The following table identifies existing drugs currently on the market that we believe can be combined with ENT-103 to form an NCE. We expect that the resulting NCEs will combine the pain
killing properties of ENT-103 with each of these well-known anti-inflammatory compounds, resulting in potentially more potent anti-inflammatory/analgesic products.



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##### Table of Contents

|                      |  |            |  | 
|--------------------- |  | ---------- |  | 
|Generic Compound Name |  | Trade Name |  | 
|Acetylsalicylic acid  |  | Aspirin    |  | 
|Ibuprofen             |  | Advil      |  | 
|Piroxicam             |  | Feldene    |  | 
|Naproxen              |  | Naprosyn   |  | 
|Indomethacin          |  | Indocin    |  | 
|Fenoprofen            |  | Nalfon     |  | 
|Acetaminophen         |  | Excedrin   |  | 
|Mefenamic acid        |  | Ponstel    |  | 



We have no commercial
relationships with the companies that currently market these products under the trade names identified above. Although we have not commenced any preclinical or clinical trials testing the safety or efficacy of these NCEs, we believe that the
clinical properties of the component parts will not be adversely affected by combining the generic anti-inflammatory / analgesic product with ENT-103. Because all of these compounds are generic and are not protected by third party patents, we
believe we could produce and market ENT-103 variants of these compounds without any need for third party consents or licenses.



Scientific Overview



When BME (cocaine) is mixed with a pharmaceutical solvent called propylene glycol and heated under defined conditions, the addictive potential of the BME
is essentially eliminated. In our clinical studies using the Esterom solution prepared in this manner, there was no evidence of any of the physiological effects associated with the use of BME.



Our preclinical studies have shown that the removal of the chemical structure
called methyl from benzoylMETHYLecgonine and the substitution of a propylene structure to give HYDROXYPROPYLbenzoylecgonine, results in the generation of a potent anesthetic/analgesic. As noted above, both our clinical studies with Esterom solution
and a study performed by our collaborators at Research Triangle Institute indicate that little, if any, HYDROXYPROPYLbenzoylecgonine is likely to pass into the brain.



There are two forms of propylene glycol  1,2 and 1,3 propylene glycol  that can be used to prepare
HYDROXYPROPYLbenzoylecgonine. We have called the drug prepared using 1,2 propylene glycol ENT-102; and we have called the drug prepared with 1,3 propylene glycol ENT-103. Both of these chemicals have been shown to be active in preclinical testing in
models for pain and both are potent anesthetics/analgesics. The difference between the two compounds has to do with the chemical structures and how they react with benzoylecgonine to form the HYDROXYPROPYLbenzoylecgonine. We believe that the
relative chemical simplicity of ENT-103 will help reduce the time and cost of obtaining regulatory approval for this compound.



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. These preclinical studies indicate that ENT-103 performs 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 meeting continues to support the activity of ENT-103 as a potential new pain therapeutic. In the studies at Harvard and the University of Miami, side effects observed in animals injected with
ENT-103 included skin irritation and hyperalgesia (pain sensitivity). The key scientific observations from our review of these preclinical studies include:



| |  |  | ENT-103 is effective in acute pain states;
| | - |  | ------------------------------------------



| |  |  | ENT-103 is effective against the consequences of acute inflammatory pain;
| | - |  | -------------------------------------------------------------------------



| |  |  | ENT-103 is effective against experimental neuropathic pain; and
| | - |  | ---------------------------------------------------------------



| |  |  | ENT-103 suppresses the abnormal pain to tactile stimulation that occurs after an incision.
| | - |  | ------------------------------------------------------------------------------------------



Preclinical research conducted 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. 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 does not alter chronic inflammatory pain at the dose tested. Assuming the use of a delivery system that will effectively deliver the drug to the site of action, ENT-103 has demonstrated preclinical
efficacy in the treatment of pain.



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Research conducted at Harvard Medical School expanded studies of ENT-103 to treat the elevated pain, or
hyperalgesia, which follows a surgical incision. These preclinical studies indicated that ENT-103 demonstrates complete anesthesia of the skin for up to two hours after injection.



Our preclinical studies also revealed that ENT-103 has at least a 3-fold greater safety profile for cardiotoxic reactions
over bupivacaine, and is approximately 4-fold safer than bupivacaine with regard to neurotoxicity. Additionally, through in silico (computerized prediction of chemical activity) modeling, we have concluded that ENT-103 is expected to have
little blood-brain barrier penetration potential, suggesting that ENT-103 is unlikely to pass from the bloodstream into the brain in any significant amount.



Product Development Status



As discussed above, our current resources are not sufficient to allow us to complete the preclinical work necessary to prepare and file an Investigational
New Drug (IND) application with the FDA, or to commence human clinical trials for ENT-103. Prior to submitting an IND application, we need to complete additional preclinical testing on ENT-103, including an additional assessment of pharmacologic
activity, assessment of cardiotoxic and neurotoxic potential, as well as other potential toxicology studies required by the FDA, and studies to address the absorption, distribution, metabolism and elimination of ENT-103 in a variety of formulations.
See, Factors That May Affect Our Future Results and the Trading Price of Our Common StockIf we fail to obtain regulatory approval to commercialize 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.



Production Process



The ENT series of
compounds are manufactured from a readily available source, pharmaceutical-grade cocaine. We obtain the starting material from our manufacturing partner, Macfarlan Smith of Edinburgh, Scotland. Macfarlan Smith is a 100+-year-old company recognized
as one of the premier active pharmaceutical ingredient manufacturers and they are regarded as particularly expert at the production of controlled substances. We believe that we would be able to obtain, on commercially reasonable terms, adequate
supplies of the ENT series compounds from another supplier if there was any significant disruption of our supply relationship with Macfarlan Smith. See, Factors That May Affect Our Future Results and the Trading Price of Our Common
StockWe are dependent on contract manufacturers for the production of ENT-103 and our failure to obtain or retain these contract manufacturers would negatively impact our business and results of operations.



The production process, for which we have filed a manufacturing patent, is a
simple, straightforward three-step process that typically has yields in excess of 95%. We have also prepared the free-base form and several salts of ENT-103 that facilitate the development of various potential delivery forms of ENT-103, such as a
topical and/or injectable form of the drug.



Market Overview



Pain is common to nearly all medical conditions. The type and severity of
the pain determines the treatment. For this reason, the pharmaceutical market for pain is divided into two main categories, acute and chronic pain, and then further segregated by the underlying disease causing the pain.



The characteristics of the pain market have been defined by Frontline
Strategic Management in a 2001 study entitled, Pain Management: A Strategic Market Analysis. The key market characteristics identified are:



| |  |  | Total sales worldwide in 2000 for prescription drugs to treat pain$21.6 billion;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | U.S. prevalence (total number of patients with the medical problem) of chronic pain  85.1 million; and
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | U.S. incidence (total number of occurrences of a medical problem) of acute pain  192.7 million.
| | - |  | ------------------------------------------------------------------------------------------------



There are two major classes of compounds to treat pain: non-steroidal anti-inflammatory drugs (NSAIDs) and narcotics.
According to Frontline, these two classes of pain relievers had sales of more than $10 billion in the U.S. alone in 2000. These drugs, however, often have significant side effects associated with their use. A new product for the treatment of pain
that does not have the associated side effects, or less severe side effects, could be expected to capture a significant segment of this very large market.



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##### Table of Contents

We retained MEDACorp, a division of the investment bank Leerink Swan, to identify the segments of the
pain market with major unmet needs. MEDACorps medical consultants concluded that a product with the characteristics of ENT-103 may have the potential to become a significant new medical product in the treatment of a variety of significant
indications, including the following:



| |  |  | Herpes zoster (shingles);
| | - |  | -------------------------



| |  |  | Post-operative pain;
| | - |  | --------------------



| |  |  | Lower-back pain;
| | - |  | ----------------



| |  |  | Fibromyalgia;
| | - |  | -------------



| |  |  | Sprains and strains;
| | - |  | --------------------



| |  |  | Atopic dermatitis;
| | - |  | ------------------



| |  |  | Mucositis;
| | - |  | ----------



| |  |  | Herpes simplex virus II;
| | - |  | ------------------------



| |  |  | Minor dermatological procedures;
| | - |  | --------------------------------



| |  |  | Trigeminal neuralgia;
| | - |  | ---------------------



| |  |  | Nerve entrapment syndromes;
| | - |  | ---------------------------



| |  |  | Intra-muscular injections;
| | - |  | --------------------------



| |  |  | Oral & esophageal candidiasis; and
| | - |  | ----------------------------------



| |  |  | Phelbotomy and IV placement.
| | - |  | ----------------------------



We believe that the market for pharmaceutical products to treat pain has substantial unmet needs and presents a substantial opportunity for Entropin.
Because ENT-103 can be formulated for topical and injectable delivery, we believe our compound has the potential to address many unmet needs in this market, such as an injected product for the treatment of post-operative pain and a topical product
for the treatment of a variety of localized painful conditions including Herpes zoster (shingles), dermatologic/cosmetic procedures, and Herpes simplex type II. Each of these indications represent large markets in the U.S. and abroad and we believe
that ENT-103 and related products discovered through our SAR technology potentially represent significant advances in the treatment of patients in each market.



Competition



The pharmaceutical industry is characterized by rapidly evolving technology and intense competition. Many companies of all sizes, including major
pharmaceutical companies and specialized biotechnology companies, may currently be engaged in activities similar to our activities. Many of our competitors have substantially greater financial and other resources and larger research and development
and clinical and regulatory affairs staffs. In addition, colleges, universities, governmental agencies and other public and private research organizations continue to conduct research and are becoming more active in seeking patent protection and
licensing arrangements to collect royalties for use of technologies that they have developed, some of which may be in direct competition with our proposed products. We also must compete with these institutions in recruiting highly qualified
scientific personnel. We do not have the resources to compete with major pharmaceutical companies on a wide-scale basis in the areas of preclinical and clinical testing, regulatory approvals, manufacturing and marketing. 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.



The
PhRMA 2003 Survey: Medicines In Development For Older Americans lists 29 products in various stages of development for the treatment of pain. The products under development include new chemical entities, as well as extensions of existing
products. The existing products that we would principally compete with today include injectable pain relievers based on lidocaine and bupivacaine that are marketed under various trade names by AstraZeneca, Endo Pharmaceuticals and Abbott
Laboratories, among others, a topical pain reliever based on lidocaine and prilocaine marketed by AstraZeneca, and a topical lidocaine patch marketed by Endo Pharmaceuticals. Based on the preclinical studies we have conducted to date, we believe
that ENT-103 may have a competitive advantage over these existing products in that ENT-103 has demonstrated both anesthetic and analgesic properties and appears to act longer and more quickly than lidocaine-based products. However, ENT-103 may
exhibit side effects in clinical trials, including toxicity to humans, and, because ENT-103 is derived from cocaine and thus is a Schedule II drug that is subject to stricter regulatory control, we believe that ENT-103 will not be available without
a prescription and may trigger false positive results in drug tests, both of which are competitive disadvantages. Because we have only undertaken limited preclinical development efforts to date for ENT-103, our understanding of the competitive
advantages and disadvantages of the compound may change and competitors may develop new products that reduce the potential market for ENT-103.



Both large and small biotechnology and pharmaceutical companies are supporting development of pain products. To the best of our knowledge, none of these
companies are developing products based upon cocaine. In light of our patent portfolio, the tight import controls and regulatory restrictions on cocaine and coca leaves (from which cocaine is derived), and the fact that the active compound in
cocaine cannot be synthesized in the laboratory, we believe that there is a relatively small risk that another pharmaceutical company will be able to successfully develop a pain product derived from cocaine, although we do expect our competitors to
continue developing competing products derived from other sources. See, Factors That May Affect Our Future Results and the Trading Price of Our Common StockThe pharmaceutical industry is highly competitive and most of our competitors are
larger and have more experience, as well as greater technical and financial resources.



7



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##### Table of Contents

Intellectual Property



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. In general, our patents relate to novel, active ingredients that are useful in preventing and treating a number of important diseases and disorders. These include immunoregulatory disorders, neuromuscular disorders,
joint disorders (including arthritis, osteoarthritis and related inflammatory disorders), connective tissue disorders, circulatory disorders and pain indications. We also have issued patents covering processes for producing these compounds and for
methods of treating or preventing multiple diseases and disorders using these compounds.



As described in our patent portfolio table set forth below, we currently hold 67 issued and pending patent applications worldwide, including 8 issued U.S. patents and 37 issued foreign patents; we have four patents
pending in the U.S. The expiration dates for our key patents range from 2012 to 2016. Four non-key patents, which related to the use of Esterom solution for the treatment of rheumatoid arthritis, expired in 2004. The reduction in total and foreign
issued patents from our prior period largely reflects our decision to abandon a number of foreign patents covering covalently coupled benzoylecgonine, ecgonine and ecgonidine derivatives.



|                                                                        |  |               |  |         |  |        |  |        
|----------------------------------------------------------------------- |  | ------------- |  | ------- |  | ------ |  | -------
|Patents and Patent Applications                                         |  | United States |  | Foreign
|Description                                                             |  | Issued        |  | Pending |  | Issued |  | Pending
|Novel Benzoylecgonine, Ecgonine and Ecgonidine Derivatives              |  | 3             |  |        |  | 30     |  |       
|Covalently Coupled Benzoylecgonine, Ecgonine and Ecgonidine Derivatives |  | 4             |  |        |  | 7      |  | 2      
|Methods For Producing 1,2-Hydroxyalkyl Tropane Esters (Esterom)         |  | 1             |  |        |  |       |  | 5      
|Methods for Producing Hydroxyalkyl Tropane Esters                       |  |              |  | 1       |  |       |  | 9      
|Novel 1,3-Propanediol Tropane Esters and Related Compounds              |  |              |  | 1       |  |       |  | 2      
|Topical Formulations of Tropanes                                        |  |              |  | 1       |  |       |  |       
|                                                                        |  |               |  |         |  |        |  |        
|TOTALS                                                                  |  | 8             |  | 4       |  | 37     |  | 18     
|                                                                        |  |               |  |         |  |        |  |        



The issued U.S.
patents include two composition-of-matter patents covering the molecules contained in Esterom solution (including ENT-102) that expire in 2012 and 2013, respectively. 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 that will extend the protection of ENT-102. This patent application describes a method for the production of
Esterom solution and its components, including ENT-102.



In
August 2002, we filed a patent describing the manufacturing process for ENT-102. This application describes the preparation of commercial quantities of ENT-102 and other related compounds (including ENT-103). The patent application is currently in
the process of being filed abroad. In December 2002, we filed a composition of matter patent application for ENT-103. We believe that composition-of-matter patents provide the strongest protection available. 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 foundational framework for the discovery of additional new
chemical entities using our SAR technology, resulting in new and different products.



In September 2004, our patent, U.S. 6,790,857, entitled, Novel Benzoylecgonine Compositions and Methods for Producing Them, was issued by the United States Patent and Trademark Office. The patent claims
define a method for the manufacture of a family of chemical structures built around the chemical building blocks, benzoylecgonine, ecgonine and ecgonidine. We believe this patent is important because it covers the manufacturing method we use to
produce the active ingredient in our product and expands our patent portfolio.



Also in September 2004, we filed a provisional U.S. patent application describing and claiming topical formulations of ENT-102, ENT-103 and related chemical entities. The resulting patent (if issued) may extend our
patent protection for these topical formulations until 2025.



We also rely on trade secret protection of our intellectual property. We regularly enter into confidentiality agreements with third parties, employees and consultants. We believe that these agreements generally protect our intellectual
property rights by providing assignment of interests in patents and other intellectual property to Entropin arising from work done and restricting the disclosure and misuse of confidential information. However, trade secrets may be lawfully
reverse-engineered by competitors and generally provide less protection than patents.



8



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##### Table of Contents

Business Organization



We maintain a limited management team and support structure comprised of three full-time employees and have historically contracted with professional
organizations and third parties who have provided services and expertise in areas such as research and development, preclinical and toxicology studies, clinical trial organization and management, regulatory matters, clinical supply and manufacturing
of our products, product packaging, and enhanced drug formulation.



We have employed this virtual outsourcing business model since the late eighties. This model has effectively kept costs low and allowed us to maximize our limited resources. We believe outsourcing allows us to secure the most qualified
individuals and institutions without encumbering us with heavy fixed costs. By employing this business model, we believe that we can more effectively control the cost of bringing a drug to market. It is estimated that major pharmaceutical companies
spend more than $800 million dollars to secure FDA approval and bring a new product to market. We estimate we can bring ENT-103 to market for less than $100 million, assuming that the compound proves to be safe and effective in clinical trials.



The primary organizations and third party providers with whom
we have contracted, and intend to contract with in the future, for professional services are identified below along with the services they have provided. Although each of these relationships is important to us, we believe that we would be able to
arrange for another party to provide similar services on substantially the same economic terms if we were to lose any of these relationships. However, this may delay our operations and cause us to incur additional costs. See, Factors That May
Affect Our Future Results and the Trading Price of Our Common Stock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.



|                                                                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Party                                                                       |  | Relationship                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Macfarlan Smith                                                             |  | Macfarlan Smith, a wholly owned subsidiary of Johnson Matthey plc, manufactures active pharmaceutical ingredients and initially manufactured the Esterom solution used in our clinical trials.
Their scientists also developed a method for manufacturing scale-up of ENT-103.                                                                                                                                                                                                                                                                            
|                                                                            | 
|RTI International                                                           |  | RTI International, a research institute affiliated with Research Triangle Park (a collaboration among North Carolina State University, Duke University and the University of North Carolina at
Chapel Hill), prepared as analytical reference standards each of the components in the Esterom solution, providing us with the tool to determine the active ingredient and proceed with the development of ENT-103. We expect that we will continue to
collaborate with researchers at RTI on the development of additional compounds using SAR technology.
|                                                                            | 
|Brigham & Womens Hospital, Harvard
Medical School                          |  | In 2001, we entered into collaboration with Gary Strichartz, Ph.D., Professor of Anesthesiology and Director of the Pain Research Center to study the effects of Esterom Solution and its
components in various preclinical pain models. Through this work we identified ENT-102/103 as the active component. We expect that we will continue to collaborate with researchers at Harvard Medical School on future development of
ENT-103.                                                                                                                 
|                                                                            | 
|University of Arizona School of Medicine                                    |  | To expand and corroborate the work done by Dr. Strichartz, we entered into collaboration with Frank Porreca, Ph.D., Professor of Pharmacology, University of Arizona School of Medicine to
evaluate the effects of Esterom and its various components in preclinical models of inflammatory and neuropathic pain. We expect that we will continue to collaborate with researchers at the University of Arizona School of Medicine on the future
development of ENT-103.                                                                                   
|                                                                            | 
|The Miami Project to Cure Paralysis, University of Miami School of Medicine |  | We have commenced additional preclinical pharmacology and the evaluation of new formulations of ENT-103 in collaboration with Jacqueline Sagen, Ph.D., Professor of Neurological Surgery. Dr.
Sagen has tested injectable and topical formulations of ENT-103 in an inflammatory neurogenic pain model. We expect that we will continue to collaborate with researchers at the University of Miami School of Medicine on the future development of
ENT-103.                                                                                               
|                                                                            | 
|Dow Pharmaceutical Sciences                                                 |  | We have entered into an arrangement with a specialty pharmaceutical company pursuant to which we have combined ENT-103 with various excipients to develop a topical formulation to be used in
future human trials. We expect that we will continue to collaborate with the researchers at Dow Pharmaceutical Sciences as needed in the future.                                                                                                                                                                                                            



Government Regulation



We are subject to two principal areas of governmental
regulation, as described below.



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U.S. Food and Drug Administration



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 Food and Drug Administration, or 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:



| |  |  | preclinical safety studies in animals and formulation studies;
| | - |  | --------------------------------------------------------------



| |  |  | 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;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | adequate and well-controlled clinical trials to establish the safety and efficacy of the drug for each medical indication;
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | submission of a New Drug Application, or NDA, to the FDA; and
| | - |  | -------------------------------------------------------------



| |  |  | 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 and/or allow 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 to healthy human subjects, the drug is tested to assess how it is handled in the body and to measure the level of the drug in the body over time, as well as any 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.



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 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, or NDA, 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 NDA and authorization of
commercial marketing of the drug for certain indications. The FDA may refuse to approve the NDA 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 over 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. Although the requirements governing the conduct of clinical trials and marketing authorization vary widely from country to country, the
foreign regulatory approval process includes all of the risks associated with the FDA approval set forth above. 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 member state.



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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.



U.S. Drug Enforcement
Administration



The DEA has designated Esterom
solution as a Schedule II controlled substance. Because ENT-103 is a derivative component of Esterom solution, and also contains benzoylecgonine, this compound is also considered a Schedule II controlled substance. The manufacture, storage, shipment
and use of a Schedule II controlled substance are subject to stringent government regulations.



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, and one full-time administrative
employee. Our executive management team is augmented by Higgins D. Bailey, Chairman of the Board, and Joseph R. Ianelli, Vice Chairman of the Board. The Chairman of the Board receives a cash salary and stock options and the other members of our
Board of Directors, including the Vice Chairman, are compensated with stock options.



Factors That May Affect Our Future Results and the Trading Price of Our Common Stock



An 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 to raise additional funds immediately to support our operations. If we are unable to raise these funds, we will be forced to
cease our operations.



We have an immediate need to raise
additional funds to continue our operations. As of December 31, 2004, we had total current assets of $1,717,611. Our available funds are not sufficient to allow us to begin any further development of our proprietary drug candidate, ENT-103,
including the preclinical work necessary to prepare and file an Investigational New Drug (IND) application with the FDA or to commence human clinical trials for ENT-103. We are actively seeking additional funding through potential merger/acquisition
transactions coupled with public or private sales of our equity or debt securities. We also intend to seek additional funding from corporate partnerships or licensing arrangements or through public or private sales of our equity or debt securities.
Any such transactions may require us to relinquish rights to some of our technologies or products, and will be dilutive to our existing stockholders. We cannot guarantee that we will be able to complete any such transaction or secure additional
funds on a timely basis, or at all, and we cannot assure that such transaction will be on reasonable terms. If we are unable to obtain significant additional funds to support our operations, we will need to cease our operations prior to the end of
the second quarter of 2005, and you may lose your entire investment in our company.



We expect the development of ENT-103 (topical and injectable formulations) and the FDA approval process will cost at least $45 million beyond our total expenditures to date and will take at least an additional four to
five years. Our future funding requirements will depend on many factors, including:



| |  |  | progress with preclinical and toxicology studies of ENT-103;
| | - |  | ------------------------------------------------------------



| |  |  | the costs of clinical tests and obtaining regulatory approval for ENT-103;
| | - |  | --------------------------------------------------------------------------



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##### Table of Contents

| |  |  | the costs and expenses associated with defending against the securities lawsuits filed against us;
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | the magnitude of our research and development programs;
| | - |  | -------------------------------------------------------



| |  |  | the costs involved in obtaining and maintaining patent and other intellectual property rights; and
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | the cost of commercial manufacturing.
| | - |  | -------------------------------------



It is possible that our actual expenditures could exceed our estimates. In addition, any significant delay in the completion of preclinical studies could
significantly harm our prospects



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 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. From our inception through December 31, 2004, we have incurred cumulative net losses applicable to common stockholders of $35.7 million. We will not be
able to pursue generating revenues from sales of ENT-103 unless it is approved by the FDA for marketing. FDA approval will take several years, if ENT-103 is approved at all, and we may never achieve profitable operations.



If we fail to obtain regulatory approval to commercialize 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 sole current drug candidate, ENT-103, has undergone only limited preclinical development and we cannot complete any further development of ENT-103
given our limited resources. Furthermore, even if we obtain additional funds, we can give no assurances as to the results of or the time to complete the preclinical studies required to commence clinical studies. We have not yet filed an application
to commence human clinical trials, known as an Investigational New Drug, or IND, application, nor have we 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. Any delay in the timing of the preclinical studies will adversely affect our ability to complete the necessary clinical
trials, which could significantly harm our prospects.



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 preclinical studies and 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.



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In addition, interim results do not necessarily predict final results, as was the case with our Esterom
clinical trials. Negative or inconclusive results generated during preclinical or toxicology studies, or any future clinical studies, will have an immediate negative impact on our operations and future prospects.



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 effective 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 that we will be able to secure 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 negatively impact our business and results of operations. In addition, as a controlled substance, ENT-103 will be subject to expensive and burdensome
administrative requirements that will increase our costs.



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:



| |  |  | conducting preclinical research and toxicology studies;
| | - |  | -------------------------------------------------------



| |  |  | conducting clinical trials and obtaining regulatory approvals;
| | - |  | --------------------------------------------------------------



| |  |  | process and analytical methods development;
| | - |  | -------------------------------------------



| |  |  | clinical supply and commercial manufacturing;
| | - |  | ---------------------------------------------



| |  |  | product packaging;
| | - |  | ------------------



| |  |  | research; and
| | - |  | -------------



| |  |  | enhanced drug formulation(s).
| | - |  | -----------------------------



Our existing contractual relationships place substantial responsibility on these third parties, which could result in delays or termination if they fail
to perform as predicted. Although we believe that we could replace these contractual relationships if necessary, we may not be able to do so in a timely manner or on favorable terms, if at all. If these third parties fail to perform their
contractual obligations, it could have a negative impact on our business and results of operations.



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The securities lawsuits filed against the Company and two of its directors are diverting the Companys resources
and attention, and if the Company is required to continue to defend against these lawsuits, its business and financial condition will continue to be harmed.



We are currently defending two securities lawsuits: one filed in the Superior Court of the State of California (hereinafter,
the State Action) and the other in the U.S. District Court for the Central District of California (hereinafter, the Federal Action). The allegations in the Federal Action are similar to the allegations made by the plaintiffs
in the State Action. The Superior Court formally dismissed the State Action and entered judgment in favor of the Company and its two directors on August 13, 2004. The plaintiffs, however, filed a notice of appeal with the Superior Court on August
24, 2004. The plaintiffs opening brief is due on or before April 8, 2005. Upon receipt of the plaintiffs brief, we will submit a responsive brief requesting that the Superior Courts earlier dismissal ruling in this action is
upheld.



In the Federal Action, we filed a motion for summary
judgment on March 7, 2005. The plaintiffs opposition brief is due on March 28, 2005, and the hearing date for our summary judgment motion is scheduled for April 11, 2005. We are also attempting to schedule a mediation conference with the
plaintiffs.



We have recently learned that a complaint has been
filed in the District Court for the State of Colorado against Entropin, two of its directors and an underwriter that participated in the Companys offering in February 2000. The complaint contends that Colorado securities laws have been
violated and consists of allegations that are similar to those alleged in the federal and California state court actions discussed above. We have not yet been served with this complaint.



There is no guarantee that we will be successful in opposing the plaintiffs appeal in the State Action, or that the
U.S. District Court will grant our motion for summary judgment in the Federal Action. If we are unsuccessful in one or both of these actions, we will need to continue to divert resources and attention away from the development of ENT-103 and the
other operations of the Company. Moreover, the existence of the lawsuits, irrespective of the merits, makes it more difficult for us to complete any transaction that will allow us to raise the additional funds needed to support our continued
operations.



We are dependent on contract manufacturers for the production
of ENT-103 and our failure to obtain or retain these contract manufacturers would negatively impact our business and results of operations.



We have utilized, and intend to continue utilizing, third party manufacturers to produce the supplies of ENT-103 needed for our preclinical studies. We
have no experience in manufacturing and do not have any manufacturing facilities. Consequently, we are solely dependent on Macfarlan Smith, our contract manufacturer, for all production of ENT-103 for development and commercialization purposes.
Although there are several other contract manufacturers with whom we could contract for the supply of ENT-103, any disruption of our supply through Macfarlan Smith could result in delays and additional costs that could harm our operations.



14



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We depend on key personnel who would be difficult to replace and our business will likely be harmed if we lose their
services.



We have only two full-time executive employees,
Thomas Tachovsky and Patricia Kriss, our Chief Executive Officer and Chief Financial Officer, respectively. Although we have an employment agreement with Mr. Tachovsky, his employment relationship is at-will, which means that either party can
terminate the employment relationship at any time and for any reason. We do not have an employment contract with Ms. Kriss and her employment relationship is also at-will. Although we maintain key person life insurance for both of our executive
employees, the loss of either person would materially harm our operations. In addition, we rely on the members of the Scientific Committee of the Board of Directors, our Scientific and Medical Advisory Board and a number of other specialty
consultants to assist in formulating our research and development strategy. The loss of either of our key executives or primary consultants could impede the achievement of our objectives and our business would likely be harmed.



The scope and validity of patents and proprietary rights is particularly important in our
industry and the loss of any such rights could harm our business and prospects.



Patents, trademarks and other intellectual property rights are important in our industry and important to our success. Others may challenge, seek to invalidate, infringe or circumvent any patents we own, and the
rights we have under those patents may not provide competitive advantages to us. If we are unable to successfully prosecute our patent applications, defend our existing patents or if others develop similar products beyond the protection of our
existing patents, our business could be impaired.



In addition,
the manufacture, use or sale of our products may infringe on the patent rights of others. Competitors and other third parties may initiate patent litigation against us in the United States or in foreign countries based on existing patents or patents
that may be granted in the future. Many of our competitors have obtained patents covering competing products and processes and they may assert these patents against us. Patent litigation can be extremely expensive and time consuming.



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. Any such litigation 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.



Pharmaceutical companies may be exposed to
significant product liability claims that can be very costly. Given our limited financial resources, any such claims could harm our business.



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 currently have no product liability insurance and very limited financial resources that could be used to satisfy any such claims, although
we anticipate purchasing product liability insurance in reasonable and



15



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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. An inability to maintain insurance or to otherwise protect against potential product liability could prevent or inhibit the
commercialization of ENT-103 products. Moreover, a product liability claim in excess of our insurance coverage limits or product recall could significantly diminish our limited financial resources and harm our business and results of operations.



The pharmaceutical industry is highly competitive and most of our
competitors are larger and have more experience, as well as greater technical and financial resources. As a result, we face significant competitive hurdles.



The pharmaceutical industry is characterized by intense competition and is subject to rapid and significant technological
change. There are currently many successful products marketed for the treatment of pain and our competitors have new products and product candidates in all stages of development that will compete with ENT-103 if it is commercialized. Our competitors
include major pharmaceutical companies, biotechnology firms, universities and other research institutions, both in the United States and abroad. 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 obtain
regulatory approval for their products more rapidly than we are able to. If we commence 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.



Rapid technological change could make our products
obsolete.



Pharmaceutical technologies have undergone
rapid and significant change. We expect that pharmaceutical technologies will continue to develop rapidly. Our future will depend in large part on our ability to maintain a competitive position with respect to these technologies. Even if ENT-103 is
approved for marketing, rapid technological development in our industry may render it obsolete before we can recoup all or any portion of our development expenses. If this were to happen, we may be forced to write off development costs, abandon
ENT-103 or other drug candidates and seek new drug candidates for regulatory approval and commercialization, all of which could materially adversely affect our business, financial condition and results of operations.



The existing trading market for our securities is limited, which affects the price and
liquidity of our securities.



On June 26, 2003, our common
stock was delisted from the Nasdaq SmallCap Market and now trades on the OTC Bulletin Board. Securities trading on the OTC Bulletin Board typically suffer from lower liquidity, which may lead to depressed trading prices, greater price volatility and
difficultly in buying or selling shares, particularly in large quantities. Currently, there is a limited trading market for our common stock and we cannot predict when, if ever, a fully developed public market for the common stock will occur. If a
developed public trading market for the common stock does develop at a future time, there are no assurances that it will be sustained for any period of time. Any sales of shares by stockholders in substantial amounts in the public market could
adversely affect the prevailing market price and could impair our future ability to raise capital through the sale of equity securities.



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In addition, the SEC has adopted regulations which generally define penny stock to be any
listed, trading equity security that has a market price less than $5.00 per share or an exercise price of less than $5.00 per share. These requirements may restrict the ability of broker-dealers to sell our common stock and may affect the ability of
purchasers in this offering to sell our securities in the secondary market.



We may sell additional shares of capital stock in the future, which could dilute your investment.



Our Board of Directors approved an amendment to the Companys Certificate of Incorporation on August 31, 2004, to increase the number of authorized
shares of common stock from 50,000,000 shares to 200,000,000 shares. Our stockholders approved the proposal to increase the number authorized shares of common stock at a special meeting held on November 19, 2004. The approval of this proposal by the
Companys stockholders provides the Board of Directors with a significant number of additional shares of common stock to issue in fund raising activities and for other corporate purposes. Our Certificate of Incorporation also provides for the
issuance of up to 10,000,000 shares of preferred stock. The issuance of these additional shares of common stock and/or preferred stock will have a dilutive effect on the equity and voting power of the existing holders of our common stock. It may
also adversely affect the market price of our common stock. As of December 31, 2004, there were 30,645,341 shares of common stock issued and outstanding and 3,210,487 shares of Series A preferred stock.



The price of common stock has fluctuated greatly over the past several years and we expect
this volatility to continue.



The market prices and
trading volumes for the securities of development stage companies in general, and for our securities in particular, have historically been highly volatile and have experienced significant price and volume fluctuations. These fluctuations may or may
not be related to our operating performance, and the announcement of developments regarding our products, regulatory approval status, competition, government regulation or other matters that are material to our business or prospects may cause
significant swings in our stock prices.



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 believe this lease is at or below market prices for
comparable office space. We believe that this space is adequate for our current and identified future needs.



ITEM 3. LEGAL PROCEEDINGS.



We
are currently defending two securities lawsuits: one filed in the Superior Court of the State of California (hereinafter, the State Action) and the other in the U.S. District Court for the Central District of California (hereinafter, the
Federal Action). The allegations in the Federal Action are similar to the allegations made by the plaintiffs in the State Action. The Superior Court formally dismissed the State Action and entered judgment in favor of the Company and its
two directors on August 13, 2004. The plaintiffs, however, filed a notice of appeal with the Superior Court on August 24, 2004. The plaintiffs opening brief is due on or before April 8, 2005. Upon receipt of the plaintiffs brief, we will
file an opposing brief requesting that the Superior Courts earlier dismissal ruling in this action is upheld.



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In the Federal Action, we filed a motion for summary judgment on March 7, 2005. The plaintiffs
opposition brief is due on March 28, 2005, and the hearing date for our summary judgment motion is set for April 11, 2005. We are also attempting to schedule a mediation conference with the plaintiffs.



We have recently learned that a complaint has been filed in the District
Court for the State of Colorado against Entropin, two of its directors and an underwriter that participated in the Companys offering in February 2000. The complaint contends that Colorado securities laws have been violated and consists of
allegations that are similar to those alleged in the federal and California state court actions discussed above. We have not yet been served with this complaint.



There is no guarantee that we will be successful in opposing the plaintiffs appeal in the State Action, or that the
U.S. District Court will grant our motion for summary judgment in the Federal Action. If we are unsuccessful in one or both of these actions, we will need to continue to divert resources and attention away from the development of ENT-103 and the
other operations of the Company. Moreover, the existence of the lawsuits, irrespective of the merits, makes it more difficult for us to complete any transaction that will allow us to raise the additional funds needed to support our continued
operations.



As of the date of this report, we are not party to
any other material legal proceedings.



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



A Special Meeting of our stockholders was held in San Diego, California on November 19, 2004. At this meeting, the stockholders were asked to consider and approve a proposal to amend the Companys Certificate of
Incorporation to increase the number of authorized shares of Common Stock from 50,000,000 shares to 200,000,000 shares. 25,936,971 shares voted for the proposal, 2,695,579 against, and 42,303 abstained.



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PART II



ITEM 5. MARKET FOR COMMON STOCK, RELATED STOCKHOLDER MATTERS AND PURCHASES OF EQUITY SECURITIES.



Price Range of Common Stock



From February 25, 1998 until March 13, 2000, our common stock traded on the OTC Bulletin Board under the trading symbol ETOP. From March 14,
2000 to June 25, 2003, our common stock was traded on the Nasdaq SmallCap Market under the trading symbol ETOP. Since June 26, 2003, our common stock has been traded on the OTC Bulletin Board under the trading symbol ETOP.
Although quotations for shares of our common stock may be obtained through the OTC Bulletin Board, because secondary market activity for shares of our common stock has been limited and sporadic, such quotations may not accurately reflect the price
or prices at which purchasers or sellers would currently be willing to purchase or sell such shares. The quotations on the OTC Bulletin Board reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily
represent actual transactions. 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, 2003 |  | High |      | Low
|First Quarter                |  | $    | 0.92 |     | $ | 0.25
|Second Quarter               |  | $    | 1.10 |     | $ | 0.33
|Third Quarter                |  | $    | 0.80 |     | $ | 0.45
|Fourth Quarter               |  | $    | 0.45 |     | $ | 0.20



|                              |  |      |      |     |   |     
|----------------------------- |  | ---- | ---- | --- | - | ----
|Year ending December 31, 2004 |  | High |      | Low
|First Quarter                 |  | $    | 0.32 |     | $ | 0.20
|Second Quarter                |  | $    | 0.25 |     | $ | 0.15
|Third Quarter                 |  | $    | 0.19 |     | $ | 0.11
|Fourth Quarter                |  | $    | 0.14 |     | $ | 0.08



On March 28, 2005, the
closing price of our common stock on the OTC Bulletin Board was $0.15 per share.



Stockholders and Warrantholders



As of March
28, 2005, approximately 418 holders of record owned approximately 4,540,000 shares of our common stock with the remaining shares held in street name through registered brokers. As of March 28, 2005, five holders of record owned approximately
3,210,487 shares of our Series A preferred stock. As of March 28, 2005, three holders of record owned warrants to purchase a total of 1,219,000 shares of our common stock.



Dividends



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
intend to retain any earnings to finance the expansion of our business and for general corporate purposes. Any payment of dividends on the common stock is subject to the prior dividend rights of the outstanding Series A preferred stock.



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.



I.



In 2004, the Registrant
issued a warrant to acquire 1,000,000 shares of the Registrants common stock to Navidec Financial Services, Inc., a consulting organization retained to provide business and financial advisory services to the Registrant. The warrant vested and
became exercisable with respect to 500,000 of the underlying shares on January 31, 2004 and the remaining 500,000 shares vested on March 31, 2004. The warrant is exercisable at a price of $0.25 per share until its expiration on January 28, 2009. The
warrant contains a cashless exercise provision and provides certain registration rights to the holder. The fair value of the warrant was estimated at $152,600 on the date of grant using the Black-Scholes option-pricing model. The fair value of the
warrant was charged to general and administrative expense. The issuance of the warrant was made in reliance upon the



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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 will be 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.



II.



In 2004, the Registrant
issued a warrant to acquire 119,000 shares of the Registrants common stock to InvestLinc Securities, Inc., pursuant to the Amended and Restated Investment Banking Agreement, dated December 11, 2003 between the parties. The warrant is
exercisable at a price of $0.20 per share until its expiration on January 28, 2009. The warrant contains a cashless exercise provision and provides certain registration rights to the holder. The fair value of the warrant, as determined using the
Black-Scholes valuation method, was treated as additional cost of the Companys common stock offering and charged to paid-in capital. The net effect of this transaction was to record an increase and related decrease to additional paid-in
capital of approximately $19,500. The issuance of the warrant was made in reliance upon 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 will be 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.



III.



In 2004, the Registrant provided stock option agreements to each of its
non-salaried directors to purchase 1,666.67 shares of its common stock for each month of service as a director from January 1, 2000 through December 31, 2004. Option grants to acquire an aggregate of 381,667 shares of common stock for services
provided prior to January 1, 2004, were fully vested at the grant date. Option grants to acquire an aggregate of 101,667 shares of common stock for services provided during 2004, vested ratably on a monthly basis commencing January 1, 2004 through
December 31, 2004. All vested options are exercisable at $0.20 per share until the earlier of May 1, 2014, or the close of business on the five year anniversary of the date the recipient ceases to provide services to the Registrant. The issuance of
the options was made in reliance upon 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.



IV.



In 2004, the Registrant provided a stock option agreement to purchase 789,800 shares of common stock to its president and
chief operating officer for services provided to the Registrant, exercisable at $0.20 per share until the earlier of May 1, 2014, or the close of business on the five year anniversary of the date the recipient ceases to provide services to the
Registrant. The issuance of the options was made in reliance upon 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.



V.



In 2004, the Registrant provided a stock option agreement to purchase 394,875
shares of common stock to its vice president and chief financial officer for services provided to the Registrant, at an exercisable at $0.20 per share until the earlier of May 1, 2014, or the close of business on the five year anniversary of the
date the recipient ceases to provide services to the Registrant. The issuance of the options was made in reliance upon 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.



VI.



In 2004, the Registrant provided stock option
agreements to purchase 120,000 and 90,000 shares of common stock to its Chairman and Vice Chairman of the Board, respectively, for services provided to the Registrant from January 1, 2001 through December 31, 2003. The options are fully vested and
exercisable at $0.20 per share until May 1, 2014, or the close of business on the five year anniversary of the date the recipient ceases to provide services to the Registrant. The issuance of the options was made in reliance upon the exemption from
registration provided by Section 4(2) of the 1933 Act for this transaction. No



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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.



VII.



In 2004, the Registrant provided stock option agreements to purchase 40,000 and 30,000 shares of common stock to its Chairman and Vice
Chairman of the Board, respectively, for services provided to the Registrant during 2004. These options vest ratably on a monthly basis commencing January 1, 2004, through the earlier of December 31, 2004, or the termination of the recipients
term as a Chairman or Vice Chairman and, once vested, are exercisable at $0.20 per share until May 1, 2014, or the close of business on the five year anniversary of the date the recipient ceases to provide services to the Registrant. The issuance of
the options was made in reliance upon 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.



VIII.



In 2004, the Registrant provided a stock option agreement to purchase 125,000 shares of common stock to its Chairman for
services provided to the Registrant, exercisable at $.20 per share until the earlier of May 1, 2014, or the close of business on the five year anniversary of the date the recipient ceases to provide services to the Registrant. The issuance of the
options was made in reliance upon 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.



IX.



In 2004, the Registrant provided a stock option agreement to purchase 5,000 shares of common stock to its Assistant Vice
President services provided to the Registrant, exercisable at $.20 per share until the earlier of May 1, 2014, or the close of business on the five year anniversary of the date the recipient ceases to provide services to the Registrant. The issuance
of the options was made in reliance upon 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.



X.



In 2004, the Registrant agreed to grant a stock option to purchase up to
550,000 shares of common stock to its President and Chief Executive Officer. The stock options will be issued upon the satisfaction of certain milestone events related to the development of ENT-103 or upon the execution of a licensing agreement or
upon a change of control of the Registrant. These options will be priced at fair market value on the grant date, will be fully vested upon grant and will expire ten years from the grant date. The issuance of the options was made in reliance upon 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.



XI.



In 2004, the Registrant agreed to grant a stock option to purchase up to 195,000 shares of common stock to its Vice
President and Chief Financial Officer. The stock options will be issued upon the satisfaction of certain milestone events related to the development of ENT-103 or upon the execution of a licensing agreement or upon a change of control of the



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Registrant. These options will be priced at fair market value on the grant date, will be fully vested upon grant and will
expire ten years from the grant date. The issuance of the options was made in reliance upon 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 2004, the Registrant issued a warrant to acquire 100,000 shares of its
common stock to Barry Kaplan Associates, a consulting organization retained to provide public relations services. The warrant is exercisable at a price of $0.22 per share until its expiration on June 18, 2009. The fair value of the warrant was
estimated at $10,300 on the date of grant using the Black-Scholes option-pricing model. The fair value of the warrant was charged to general and administrative expense. The issuance of the warrant was made in reliance upon 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.



XIII.



In 2004, the Registrant issued 50,000 shares of its common stock to Broadstreet Marketing, Inc., a marketing organization
retained to conduct a financial markets exposure program. The issuance of the stock was made in reliance upon the exemption from registration provided by Section 4(2) of the 1933 Act for this transaction. No broker/dealers were involved in the
transaction and no commissions were paid. The $5,500 fair value of the common stock was charged to general and administrative expense. The stock 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.



Securities Authorized for Issuance under Equity Compensation Plans



The following table provides information as of December 31, 2004 with respect to the shares of our common stock that may be
issued under our existing equity compensation plans:



Equity
Compensation Plan Information



|                                                               |  |                                                                                                |  |                                                                                 |      |                                                                                                                                                 |        
|-------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------- | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------- | -------
|Plan Category                                                  |  | (a) Number of Securities to be Issued Upon Exercise of OutstandingOptions, Warrants and Rights |  | (b) Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights |      | (c) Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a))
|Equity Compensation Plans Approved by Security Holders (1)     |  |                                                                                               |  | $                                                                               |     |                                                                                                                                                 | 314,269
|Equity Compensation Plans not Approved by Security Holders (2) |  | 3,217,294                                                                                      |  |                                                                                 | 1.28 |                                                                                                                                                 |       
|                                                               |  |                                                                                                |  |                                                                                 |      |                                                                                                                                                 |        
|Total                                                          |  | 3,217,294                                                                                      |  | $                                                                               | 1.28 |                                                                                                                                                 | 314,269
|                                                               |  |                                                                                                |  |                                                                                 |      |                                                                                                                                                 |        

---

|(1) | Consists solely of the 1998 Compensatory Stock Plan.
|--- | ----------------------------------------------------

|(2) | Consists of option grants to officers, directors and employees pursuant to individual non-qualified stock option agreements. These option grants have exercise prices ranging from
$0.20 per share to $6.00 per share. Each option generally vests in installments over the optionees period of service, although some options vest upon the achievement of certain milestones
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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related to the development of our products and some options are fully vested on the date of grant. The
options will vest on an accelerated basis in the case of any merger or consolidation of the Company with or into another corporation or any other type of reorganization which results in a change of control whereby the Companys board of
directors prior to the reorganization represents less than a majority of the Companys board of directors after the reorganization. Each option generally has a maximum term of five to ten years. In addition, upon the death of an optionee, any
options that the optionee was entitled to exercise on the date of death will be exercisable until the stated expiration date of the optionees option by the person or persons to whom the optionees rights pass under a will or by the laws
of descent and distribution. All of the options are non-statutory options under the Federal tax laws.



Purchases of Equity Securities by the Company and Affiliated Purchasers.



None.



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



Forward-Looking Information



The following Managements Discussion and Analysis of Financial Condition and Results of Operations and other portions of this prospectus contain
forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the Safe Harbor provisions created by that statute. 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 these terms or other comparable terminology. Our business and results of operations are subject to various risks and uncertainties as disclosed under the caption Factors That May Affect Our Future
Results and the Trading Price of Our Common Stock in Item 1 of this Form 10-KSB. These risks and uncertainties include our need and ability to raise significant additional capital; our history of significant operating losses; the ability to
successfully complete formulation, development and preclinical studies for our sole drug candidate, ENT-103; the time, cost and uncertainty of obtaining regulatory approvals; and the ability to successfully commercialize products. The actual results
that we achieve may differ materially from any forward-looking statements due to these risks and uncertainties and we undertake no obligation to update any such forward-looking statements.



Overview



THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE AUDITED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED IN
THIS FORM 10-KSB.



We were incorporated in California in
1984 as Entropin, Inc., or old Entropin, and in 1998 completed a merger with and into Vanden Capital Group, Inc. pursuant to which all of the issued and outstanding common shares of old Entropin were converted into a majority of Vandens common
stock. Vanden subsequently 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.



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 products. 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 until we have received FDA approval for one of the proprietary compounds we are
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, 2004, our accumulated deficit was approximately
$35.7 million.



We have an immediate need to raise additional
funds to continue our operations. As of December 31, 2004, we had total current assets of $1,717,611. Our available funds are not sufficient to allow us to pursue any further development of our proprietary drug candidate, ENT-103, including the
preclinical work necessary to prepare and file an Investigational New Drug (IND) application with the FDA or to commence human clinical trials for ENT-103. If we are unable to immediately obtain significant additional funds to support our
operations, we will be forced to cease our operations prior to the end of the second quarter of 2005, and our existing stockholders may lose their entire investment in the Company.



Research and Development



Prior to our current focus on ENT-103, we completed four preclinical animal studies, Phase I, Phase II and Phase II/III human clinical trials for our
first product, known as Esterom solution. In January 2002, we reported that our researchers at Harvard Medical School had identified the active ingredient in Esterom solution, which we named ENT-102. 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 solution, we decided to forego further development of Esterom
solution and pursue development of ENT-102. In January 2003, we announced the discovery of a new chemical entity, ENT-103, a simplified derivative 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.



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The following table provides certain information regarding our research and development expenditures for
ENT-103 and its predecessor compound (ENT-102) during fiscal years 2003 and 2004.



|                                      |  |              |         |      |   |        
|------------------------------------- |  | ------------ | ------- | ---- | - | -------
|                                      |  | Fiscal years
|                                      |  | 2003         |         | 2004
|Research and development expenditures |  | $            | 723,218 |      | $ | 496,017



Our current resources
are not sufficient to complete the required preclinical testing nor to begin or complete a Phase I clinical trial for ENT-103. Assuming that we can raise funds to support our operations and our clinical trials are successful and we do not experience
unexpected delays, we estimate that it will take at least an additional four to five years to complete the preclinical and clinical development and testing of ENT-103 so that it can be commercialized. Any significant delays in our preclinical
development, clinical trials or regulatory approval will affect our ability to generate revenue and may harm our ability to continue to raise the capital needed to complete the commercialization of ENT-103. We estimate that an additional $45 million
will be required to complete development and FDA approval of ENT-103. These expenditures primarily represent research, clinical trials and general and administrative costs. As of December 31, 2004, we have spent a total of approximately $35.7
million developing ENT-103 and its predecessor products, ENT-102 and Esterom solution.



Plan of Operation



We have an immediate need to raise
additional funds to continue our operations. Our available funds are not sufficient to allow us to pursue any further development of our proprietary drug candidate, ENT-103, including the preclinical work necessary to prepare and file an
Investigational New Drug (IND) application with the FDA or to commence human clinical trials for ENT-103. We are actively seeking additional funding through potential merger/acquisition transactions coupled with public or private sales of our equity
or debt securities. We also intend to seek additional funding from corporate partnerships or licensing arrangements or through public or private sales of our equity or debt securities. Any such transactions may require us to relinquish rights to
some of our technologies or products, and will be dilutive to our existing stockholders. We cannot guarantee that we will be able to complete any such transaction or secure additional funds on a timely basis, or at all, and we cannot assure that
such transaction will be on reasonable terms. If we are unable to obtain the significant additional funds to support our operations, we will need to cease our operations prior to the end of the second quarter of 2005.



Results of Operations



Year ended December 31, 2004, compared to year ended December 31, 2003.



The net loss for the year 2004 was approximately $3.0 million, or $0.11 per
basic and diluted share on approximately 27.6 million weighted average shares outstanding. In comparison, the net loss for the year 2003 was approximately $3.3 million, or $0.31 per share on approximately 10.7 million weighted average shares
outstanding.



Total research and development expenses were
approximately $496,000 for 2004, as compared to approximately $723,000 for 2003. The decrease in research and development expenses during 2004 compared with 2003 primarily reflects the additional cost of the mechanism of action studies and other
costly preclinical studies that were conducted in 2003 and not repeated in 2004.



Total general and administrative expenses were approximately $2.5 million for 2004, as compared to approximately $2.4 million for 2003. Although total general and administrative expenses were approximately equal for
2004 and 2003, the composition of these expenses differed. The 2004 expenses included a non-cash charge of approximately $553,000 related to the issuance of stock options, compared to the 2003 expenses included higher legal fees attributable to the
class action suit filed against the Company in early 2003.



Our
interest income was approximately $19,500 in 2004, as compared to approximately $22,900 in 2003. This decrease reflects lower balances for cash, cash equivalents and short-term investments during 2004.



25



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##### Table of Contents

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, 2004, we have received net cash proceeds from financing activities aggregating
approximately $23.7 million. As of December 31, 2004, our working capital was approximately $1.7 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.



Net cash used in operating activities was approximately $2.5 million during fiscal 2004, compared with approximately $2.7 million during fiscal 2003. The cash used in operations was primarily related to funding clinical trials, conducting
mechanism of action studies, expanding research and development activities and maintaining our administrative infrastructure. As of December 31, 2004, our principal source of liquidity was approximately $1.7 million in cash and short-term
investments. We have an immediate need to raise additional funds to continue our operations. There can be no assurance that such additional capital will be available on a timely basis or on terms acceptable to us, if at all. If we are unable to
obtain the significant additional funds to support our operations, we will need to cease our operations prior to the end of the second quarter of 2005.



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. 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 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.



On August 11, 2003, the holders of all outstanding shares of
Series B preferred stock exchanged each share of Series B preferred stock for 9.4967 shares of common stock pursuant to a recapitalization agreement with the Company. As a result, there are no shares of Series B preferred stock outstanding
subsequent to August 11, 2003.



As of June 26, 2003, our common
stock and warrants were delisted from the Nasdaq SmallCap Market for failure to comply with the $1.00 minimum bid price requirement. Our common stock and warrants now trade on the OTC Bulletin Board under the symbols ETOP and
ETOPW, respectively. Trading on the OTC Bulletin Board 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.



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.



Recent Accounting Pronouncements



In June 2003, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 150, Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and Equity (SFAS No. 150). This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of
both liabilities and equity. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective for the first interim period beginning after June 15, 2003, with certain exceptions. The
adoption of SFAS No. 150, effective July 1, 2003, did not have a material effect on our results of operations or financial position.



26



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##### Table of Contents

In December 2003, the FASB issued a revised Interpretation No. 46, Consolidation of Variable
Interest Entities. The interpretation clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain types of variable interest entities. The Company does not expect the adoption of
this interpretation to have any impact on its financial statements.



ITEM 7. FINANCIAL STATEMENTS.



The Financial Statements are set forth on pages F-1 to F-21 of this report.



27



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##### Table of Contents

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



On November 17, 2004, we notified Deloitte & Touche LLP (D&T) of its dismissal in connection with our decision to engage new auditors
as the Companys independent registered public accounting firm. On that date, we appointed Causey Demgen & Moore Inc. (CDM) for the fiscal year ending December 31, 2004 as our new independent registered public accounting firm.
The decision to engage CDM was made by the Audit Committee on November 17, 2004. The appointment was effective as of such date.



The reports of D&T on our financial statements for the years ended December 31, 2002 and 2003 did not contain any adverse opinion, or disclaimer of
opinion, nor were they qualified or modified as to audit scope or accounting principles. However, D&Ts reports for the years ended December 31, 2002 and 2003 included an explanatory paragraph noting our recurring losses from operations and
our requirement for additional funding, which raised substantial doubt about our ability to continue as a going concern.



In connection with its audits of our financial statements for the years ended December 31, 2002 and 2003, and during the interim period through November
17, 2004, there were no disagreements with D&T on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedures, which disagreements, if not resolved to the satisfaction of D&T, would have
caused it to make reference thereto in its reports. There were no reportable events as that term is defined in Item 304(a)(1)(v) of Regulation S-K.



During our two most recent fiscal years and the period from the end of the most recent fiscal year to the date of appointment of CDM, neither we nor
anyone acting on our behalf consulted with CDM with respect to the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on our financial statements, or any
other matters or events set forth in Items 304(a)(2)(i) and (ii) of Regulation S-K.



ITEM 8A. CONTROLS AND PROCEDURES.



Disclosure Controls and Procedures. We maintain controls and procedures designed to ensure that we are able to collect the information we are required to disclose in the reports we file with the SEC, and to process, summarize and
disclose this information within the time periods specified in the rules of the SEC. Based on an evaluation of our disclosure controls and procedures as of the end of the period covered by this report conducted by our management, our Chief Executive
and Chief Financial Officers believe that these controls and procedures are effective to ensure that we are able to collect, process and disclose the information we are required to disclose in the reports we file with the SEC within the required
time periods.



Internal Control over Financial
Reporting. During the period covered by this report, there have been no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal control over financial
reporting.



ITEM 8B. OTHER INFORMATION.



None.



28



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##### Table of Contents

PART III



ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.



The information required by this item will be contained in the definitive Proxy Statement for our Annual Meeting of Stockholders to be held on June 28, 2005, and 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 to be held on June 28, 2005, and 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 will be contained in the definitive Proxy Statement for our Annual Meeting of Stockholders to be held on June 28,
2005, and 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 to be held on June 28, 2005, and 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 of Entropin, Inc., a Delaware corporation (2)                                                                                                
|               | 
|3.3            |  | Certificate of Designations of Series A Preferred Stock of Entropin, Inc. (3)                                                                      
|               | 
|3.4            |  | Certificate of Amendment to Certificate of Incorporation (4)                                                                                        
|               | 
|4.1            |  | Form of Common Stock Purchase Warrant (5)                                                                                                           
|               | 
|4.2            |  | Warrant for Common Stock issued to Navidec Financial Services, Inc. (6)                                                                             
|               | 
|10.1           |  | Agreement and Plan of Merger, dated December 9, 1997 between Vanden Capital Group, Inc. and Entropin, Inc. (7)                                      
|               | 
|10.2           |  | Lease Agreement, dated February 1, 1998, between the Registrant and Thomas T. Anderson (8)                                                          
|               | 
|10.3           |  | 1998 Compensatory Stock Plan (9)                                                                                                                    
|               | 
|10.4           |  | Employment Agreement, dated December 1, 1999, between Entropin, Inc. and Thomas Tachovsky. (10)                                                     
|               | 
|10.5           |  | Amended and Restated Investment Banking Agreement, dated December 11, 2003, between Entropin, Inc. and InvestLinc Securities, LLC. (10)             
|               | 
|10.6           |  | Form of Indemnification Agreement for the officers and directors (11)                                                                               
|               | 
|31.1           |  | Certification of President and Chief Executive Officer                                                                                              
|               | 
|31.2           |  | Certification of Chief Financing Officer                                                                                                            
|               | 
|32.1           |  | Certification of President and Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002.                                         
|               | 
|32.2           |  | Certification of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002.                                                       

---

|(1) | Incorporated by reference to the like numbered exhibit filed with the Registrants quarterly report on Form 10-QSB on August 14, 2002.
|--- | --------------------------------------------------------------------------------------------------------------------------------------



29



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##### Table of Contents

|(2) | Incorporated by reference from the like numbered exhibits as filed with the Registrants Current Report on Form 8-K on June 26, 2002.
|--- | -------------------------------------------------------------------------------------------------------------------------------------

|(3) | Incorporated by reference from the like numbered exhibit as filed with the Registrants annual report on Form 10-KSB/A on April 30, 2003.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------

|(4) | Incorporated by reference from Exhibit A filed with the Registrants Proxy Statement on October 1, 2004.
|--- | --------------------------------------------------------------------------------------------------------

|(5) | Incorporated by reference to the exhibit filed with the Registrants Registration Statement on Form SB-2/A, No. 333-11308, on March 15, 2000.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Incorporated by reference from the exhibit as filed with the Registrants annual report on Form 10-KSB on March 30, 2004.
|--- | -------------------------------------------------------------------------------------------------------------------------

|(7) | Incorporated by reference from the exhibit filed with the Registrants Current Report on Form 8-K, as amended, on January 15, 1998.
|--- | -----------------------------------------------------------------------------------------------------------------------------------

|(8) | Incorporated by reference from the exhibit filed with the Registrants Annual Report on Form 10-KSB, on April 15, 1998, as amended.
|--- | -----------------------------------------------------------------------------------------------------------------------------------

|(9) | Incorporated by reference from exhibit filed with the Registrants Registration Statement on Form S-8 on December 30, 1998.
|--- | ---------------------------------------------------------------------------------------------------------------------------

|(10) | Incorporated by reference to the exhibit filed with the Registrants Registration Statement on Form SB-2/A, No. 333-110159, on December 17, 2003.
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------

|(11) | Incorporated by reference from Exhibit 10.1 as filed with the Registrants Current Report on Form 8-K filed on September 17, 2004.
|---- | ----------------------------------------------------------------------------------------------------------------------------------



(b) Reports on Form 8 K.



On October 27, 2004, we furnished on Form 8-K a copy of our press release
announcing (under Item 5.02) the appointment of David M. Chapman to our Board of Directors.



On November 22, 2004, we furnished a report on Form 8-K announcing (under Item 4.01) dismissal of Deloitte & Touche LLP in connection with the engagement of new auditors, Causey Demgen & Moore Inc. as our
independent registered public accounting firm, for the fiscal year ending December 31, 2004.



On November 27, 2004, we furnished a report on Form 8-K announcing (under Item 3.03) a filing of our Certificate of Amendment to Certificate of Incorporation with the Secretary of State of the State of Delaware to
increase the number of our authorized shares of common stock from 50,000,000 to 200,000,000 shares.



ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES



The information required by this item will be contained in the definitive Proxy Statement for our Annual Meeting of Stockholders to be held on June 28, 2005, and is incorporated herein by reference.



30



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##### Table of Contents

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, 2005 |  | ENTROPIN, INC.
|                     |  |               
|                     |  | By:            |  | /s/ HIGGINS D. BAILEY                   
|                     |  |                |  | Higgins D. Bailey, Chairman of the Board



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.



|                                                         |  |                                                                                                                                             |  |               
|-------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------
|Signatures                                               |  | Title                                                                                                                                       |  | Date          
|/s/ HIGGINS D. BAILEY, ED.D.Higgins D. Bailey, Ed.D.     |  | Chairman of the Board                                                                                                                       |  | March 28, 2005
|                                                         |  |                                                                                                                                            
|/s/ THOMAS G. TACHOVSKY, PH.D.Thomas G. Tachovsky, Ph.D. |  | President, Director and Chief Executive
Officer                                                                                             |  | March 28, 2005
|                                                         |  |                                                                                                                                            
|/s/ PATRICIA G. KRISSPatricia G. Kriss                   |  | Chief Financial Officer, Vice President of Finance
and Administration, Secretary/Treasurer and (Principal
Financial and Accounting Officer) |  | March 28, 2005
|                                                         |  |                                                                                                                                            
|/s/ RANDALL L. CARPENTER, M.D.Randall L. Carpenter, M.D. |  | Director                                                                                                                                    |  | March 28, 2005
|                                                         |  |                                                                                                                                            
|/s/ JOSEPH R. IANELLIJoseph R. Ianelli                   |  | Director                                                                                                                                    |  | March 28, 2005
|                                                         |  |                                                                                                                                            
|/s/ PAUL V. MAIERPaul V. Maier                           |  | Director                                                                                                                                    |  | March 28, 2005
|                                                         |  |                                                                                                                                            
|/s/ BRUCE R. MANNINGBruce R. Manning                     |  | Director                                                                                                                                    |  | March 28, 2005
|                                                         |  |                                                                                                                                            
|/s/ DAVID M. CHAPMANDavid M. Chapman                     |  | Director                                                                                                                                    |  | March 28, 2005



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##### Table of Contents

ENTROPIN, INC.

(A DEVELOPMENT STAGE COMPANY)



INDEX TO FINANCIAL STATEMENTS



|                                                                                                                                                                           |  |     
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                                                                           |  | Page
|Report of Independent Registered Public Accounting Firm                                                                                                                    |  | F-2 
|                                                                                                                                                                           | 
|Report of Independent Registered Public Accounting Firm                                                                                                                    |  | F-3 
|                                                                                                                                                                           | 
|Balance Sheets as of December 31, 2003 and 2004                                                                                                                            |  | F-4 
|                                                                                                                                                                           | 
|Statements of Operations for the Years Ended December 31, 2003 and 2004 and for the Period from August 27, 1984 (Inception) Through December 31, 2004                      |  | F-5 
|                                                                                                                                                                           | 
|Statements of Changes in Stockholders Equity for the Years Ended December 31, 2003 and 2004 and for the Period from August 27, 1984 (Inception) Through December 31, 2002 |  | F-6 
|                                                                                                                                                                           | 
|Statements of Cash Flows for the Years Ended December 31, 2003 and 2004 and for the Period from August 27, 1984 (Inception) Through December 31, 2004                      |  | F-9 
|                                                                                                                                                                           | 
|Notes to Financial Statements                                                                                                                                              |  | F-11



F-1



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##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



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, 2004, and the related statements of operations, changes in stockholders equity and cash flows for the year then ended,
and for the period from August 27, 1984 (inception) through December 31, 2004. 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
audit. The Companys financial statements for the period from January 1, 2000 through December 31, 2003 were audited by other auditors whose report, dated March 8, 2004, included an explanatory paragraph relating to a going concern uncertainty
as described in the last paragraph below. The financial statements for the period from January 1, 2000 through December 31, 2003 reflect a net loss applicable to common stockholders of $17,716,748 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 audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
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 audit 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, 2004, 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, 2004, in conformity with accounting principles generally accepted in the United States of America.



The accompanying financial statements 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.



CAUSEY DEMGEN & MOORE INC.



Denver, Colorado

March 8, 2005



F-2



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##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



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



We have audited the accompanying balance sheet of Entropin, Inc. (a development stage company) as of December 31, 2003, and the related statements of operations, changes in stockholders equity and cash flows for the year then ended,
and for the period from January 1, 2000 through December 31, 2003. 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 standards of the
Public Company Accounting Oversight Board (United States). 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 provide a reasonable basis for our opinion.



In our opinion, such financial statements present fairly, in all material respects, the financial position of Entropin, Inc. as of December 31, 2003, and
the results of its operations and its cash flows for the year then ended and for the period from January 1, 2000 through December 31, 2003, in conformity with accounting principles generally accepted in the United States of America.



The accompanying financial statements 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 8, 2004



F-3



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##### Table of Contents

ENTROPIN, INC.

(A DEVELOPMENT STAGE COMPANY)



BALANCE SHEETS

December 31, 2003 and 2004



|                                                                                                                                                                   |  |      |             |   |      |   |             |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---- | ----------- | - | ---- | - | ----------- | -
|                                                                                                                                                                   |  | 2003 |             |   | 2004 |  
|ASSETS                                                                                                                                                             |  |      |             |   |      |   |             |  
|Current assets:                                                                                                                                                    |  |      |             |   |      |   |             |  
|Cash and cash equivalents                                                                                                                                          |  | $    | 1,032,343   |   |      | $ | 444,611     |  
|Short-term investments                                                                                                                                             |  |      |            |   |      |   | 1,273,000   |  
|                                                                                                                                                                   |  |      |             |   |      |   |             |  
|Total current assets                                                                                                                                               |  |      | 1,032,343   |   |      |   | 1,717,611   |  
|Patent costs, less accumulated amortization of $200,944 (2003) and $252,143 (2004)                                                                                 |  |      | 493,995     |   |      |   | 674,102     |  
|Property and equipment, net                                                                                                                                        |  |      | 6,226       |   |      |   | 1,906       |  
|Deferred offering costs                                                                                                                                            |  |      | 63,697      |   |      |   |            |  
|                                                                                                                                                                   |  |      |             |   |      |   |             |  
|Total assets                                                                                                                                                       |  | $    | 1,596,261   |   |      | $ | 2,393,619   |  
|                                                                                                                                                                   |  |      |             |   |      |   |             |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                               |  |      |             |   |      |   |             |  
|Current liabilities:                                                                                                                                               |  |      |             |   |      |   |             |  
|Accounts payable                                                                                                                                                   |  | $    | 208,456     |   |      | $ | 46,823      |  
|Commitments and contingencies (Note 6)                                                                                                                             |  |      |             |   |      |   |             |  
|Stockholders equity:                                                                                                                                              |  |      |             |   |      |   |             |  
|Series A redeemable preferred stock, $.0001 par value; 3,210,487 shares authorized, and 3,210,487 shares issued and outstanding, $1.00
per share redemption value |  |      | 3,210,487   |   |      |   | 3,210,487   |  
|Common stock, $.0001 par value; 200,000,000 shares authorized; 11,545,341 (2003) and 30,645,341 (2004) shares issued and
outstanding                               |  |      | 1,154       |   |      |   | 3,065       |  
|Additional paid-in capital                                                                                                                                         |  |      | 30,871,699  |   |      |   | 34,819,422  |  
|Deficit accumulated during the development stage                                                                                                                   |  |      | (32,695,535 | ) |      |   | (35,686,178 | )
|                                                                                                                                                                   |  |      |             |   |      |   |             |  
|Total stockholders equity                                                                                                                                         |  |      | 1,387,805   |   |      |   | 2,346,796   |  
|                                                                                                                                                                   |  |      |             |   |      |   |             |  
|Total liabilities and stockholders equity                                                                                                                         |  | $    | 1,596,261   |   |      | $ | 2,393,619   |  
|                                                                                                                                                                   |  |      |             |   |      |   |             |  



See accompanying notes
to financial statements.



F-4



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##### Table of Contents

ENTROPIN, INC.

(A DEVELOPMENT STAGE COMPANY)



STATEMENTS OF OPERATIONS

For the Years Ended December 31, 2003 and 2004

and for the Period from August 27, 1984 (Inception) Through December 31, 2004



|                                                         |  |      |            |   |      |   |            |                                     |  |   |             |  
|-------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | ----------------------------------- |  | - | ----------- | -
|                                                         |  | 2003 |            |   | 2004 |   |            | Inception through December 31, 2004 | 
|Costs and expenses:                                      |  |      |            |   |      |   |            |                                     |  |   |             |  
|Research and development                                 |  | $    | 723,218    |   |      | $ | 496,017    |                                     |  | $ | 15,912,813  |  
|General and administrative                               |  |      | 2,418,286  |   |      |   | 2,514,088  |                                     |  |   | 19,824,740  |  
|                                                         |  |      |            |   |      |   |            |                                     |  |   |             |  
|Operating loss                                           |  |      | (3,141,504 | ) |      |   | (3,010,105 | )                                   |  |   | (35,737,553 | )
|                                                         |  |      |            |   |      |   |            |                                     |  |   |             |  
|Other income (expense):                                  |  |      |            |   |      |   |            |                                     |  |   |             |  
|Interest income                                          |  |      | 22,906     |   |      |   | 19,462     |                                     |  |   | 1,508,496   |  
|Interest expense                                         |  |      |           |   |      |   |           |                                     |  |   | (242,811    | )
|Series B preferred stock redemption conversion incentive |  |      | (126,310   | ) |      |   |           |                                     |  |   | (126,310    | )
|                                                         |  |      |            |   |      |   |            |                                     |  |   |             |  
|Total other income (expense), net                        |  |      | (103,404   | ) |      |   | 19,462     |                                     |  |   | 1,139,375   |  
|                                                         |  |      |            |   |      |   |            |                                     |  |   |             |  
|Net loss                                                 |  |      | (3,244,908 | ) |      |   | (2,990,643 | )                                   |  |   | (34,598,178 | )
|Dividends applicable to Series B preferred stockholders  |  |      | (35,039    | ) |      |   |           |                                     |  |   | (1,103,184  | )
|                                                         |  |      |            |   |      |   |            |                                     |  |   |             |  
|Net loss applicable to common stockholders               |  | $    | (3,279,947 | ) |      | $ | (2,990,643 | )                                   |  | $ | (35,701,362 | )
|                                                         |  |      |            |   |      |   |            |                                     |  |   |             |  
|Basic and diluted net loss per common share              |  | $    | (.31       | ) |      | $ | (.11       | )                                   |  | $ | (4.86       | )
|                                                         |  |      |            |   |      |   |            |                                     |  |   |             |  
|Weighted average common shares outstanding               |  |      | 10,695,000 |   |      |   | 27,614,000 |                                     |  |   | 7,344,000   |  
|                                                         |  |      |            |   |      |   |            |                                     |  |   |             |  



See accompanying notes
to financial statements.



F-5



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##### Table of Contents

ENTROPIN, INC.

(A DEVELOPMENT STAGE COMPANY)



STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY

For the Years Ended December 31, 2003 and 2004

and for the Period from August 27, 1984 (Inception) Through December 31, 2002



|                                                                                   |  |              |  |        |                            |   |  |                     |            |   |                             |   |          |                                                  |  |   |                            |   |  |   |             |   |  |   |             |  
|---------------------------------------------------------------------------------- |  | ------------ |  | ------ | -------------------------- | - |  | ------------------- | ---------- | - | --------------------------- | - | -------- | ------------------------------------------------ |  | - | -------------------------- | - |  | - | ----------- | - |  | - | ----------- | -
|                                                                                   |  | Common stock |  |        | Additional paid-in capital |   |  | Stock subscriptions |            |   | Unearned stock compensation |   |          | Deficit accumulated during the development stage |  |   | Total stockholders equity |  
|                                                                                   |  | Shares       |  | Amount |                            |   |  |                     |            |  
|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      |  |        | 100                        |   |  |                     | 201,560    |   |                             |   |         |                                                  |  |   |                           |   |  |   |            |   |  |   | 201,660     |  
|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           |  |             |  |        |                           |   |  |                     | 8,710,006  |   |                             |   |         |                                                  |  |   | (8,710,006                 | ) |  |   |            |   |  |   |            |  
|Amortization and valuation adjustment of unearned stock compensation               |  |             |  |        |                           |   |  |                     |           |   |                             |   |         |                                                  |  |   | 8,637,527                  |   |  |   |            |   |  |   | 8,637,527   |  
|Shares issued from exercise of common stock options and warrants                   |  | 132,785      |  |        | 133                        |   |  |                     | 80,159     |   |                             |   |         |                                                  |  |   |                           |   |  |   |            |   |  |   | 80,292      |  
|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                                                         |  | 4,073,418    |  |        | 4,067                      |   |  |                     | 334,303    |   |                             |   |         |                                                  |  |   |                           |   |  |   |            |   |  |   | 338,370     |  
|Issuance of Series B preferred stock with a beneficial conversion feature          |  |             |  |        |                           |   |  |                     | 613,750    |   |                             |   |         |                                                  |  |   |                           |   |  |   | (613,750    | ) |  |   |            |  
|Shares issued for Series B preferred stock dividend                                |  | 82,000       |  |        | 67                         |   |  |                     | 409,933    |   |                             |   |         |                                                  |  |   |                           |   |  |   | (410,000    | ) |  |   |            |  
|Conversion of Series B preferred stock to common stock                             |  | 102,000      |  |        | 80                         |   |  |                     | 493,237    |   |                             |   |         |                                                  |  |   |                           |   |  |   |            |   |  |   | 493,317     |  
|Accretion to mandatory redemption amount for Series B preferred stock              |  |             |  |        |                           |   |  |                     | (63,113    | ) |                             |   |         |                                                  |  |   |                           |   |  |   |            |   |  |   | (63,113     | )
|Net loss for the period from August 27, 1984 (inception) through December 31, 2002 |  |             |  |        |                           |   |  |                     |           |   |                             |   |         |                                                  |  |   |                           |   |  |   | (28,362,627 | ) |  |   | (28,362,627 | )
|                                                                                   |  |              |  |        |                            |   |  |                     |            |   |                             |   |          |                                                  |  |   |                            |   |  |   |             |   |  |   |             |  
|                                                                                   |  | 9,912,587    |  |        | 991                        |   |  |                     | 29,801,165 |   |                             |   |         |                                                  |  |   | (72,479                    | ) |  |   | (29,386,377 | ) |  |   | 343,300     |  



(Continued on following
page)

See accompanying notes to financial statements.



F-6



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##### Table of Contents

ENTROPIN, INC.

(A DEVELOPMENT STAGE COMPANY)



STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY

For the Years Ended December 31, 2003 and 2004

and for the Period from August 27, 1984 (Inception) Through December 31, 2002

(Continued from preceding page)



|                                                                               |  |                                      |  |              |  |                            |  |        |                             |            |                                                  |  |        |                            |             |   |  |            |  
|------------------------------------------------------------------------------ |  | ------------------------------------ |  | ------------ |  | -------------------------- |  | ------ | --------------------------- | ---------- | ------------------------------------------------ |  | ------ | -------------------------- | ----------- | - |  | ---------- | -
|                                                                               |  | Series A redeemable preferred stock |  | Common stock |  | Additional paid-in capital |  |        | Unearned stock compensation |            | Deficit accumulated during the development stage |  |        | Total stockholders equity |            
|                                                                               |  | Shares                               |  | Amount       |  | Shares                     |  | Amount |                             |            |                                                  | 
|Conversion of Series A preferred stock to Series A preferred stock            |  | 3,210,487                            |  | 3,210,487    |  |                           |  |       |                             |           |                                                  |  |       |                            |            |   |  | 3,210,487  |  
|Amortization and valuation adjustment of unearned stock compensation           |  |                                     |  |             |  |                           |  |       |                             | 230        |                                                  |  | 72,479 |                            |            |   |  | 72,709     |  
|Shares issued for services                                                     |  |                                     |  |             |  | 356,000                    |  | 36     |                             | 147,324    |                                                  |  |       |                            |            |   |  | 147,360    |  
|Shares issued for costs incurred related to a planned issuance of common stock |  |                                     |  |             |  | 28,571                     |  | 3      |                             | 19,997     |                                                  |  |       |                            |            |   |  | 20,000     |  
|Conversion of Series B preferred stock to common stock                         |  |                                     |  |             |  | 1,235,333                  |  | 123    |                             | 843,169    |                                                  |  |       |                            |            |   |  | 843,292    |  
|Shares issued for Series B preferred stock dividend                            |  |                                     |  |             |  | 12,850                     |  | 1      |                             | 64,249     |                                                  |  |       |                            | (64,250     | ) |  |           |  
|Accretion to mandatory redemption amount for Series B preferred stock          |  |                                     |  |             |  |                           |  |       |                             | (4,435     | )                                                |  |       |                            |             |   |  | (4,435     | )
|Net loss for the year                                                          |  |                                     |  |             |  |                           |  |       |                             |           |                                                  |  |       |                            | (3,244,908  | ) |  | (3,244,908 | )
|                                                                               |  |                                      |  |              |  |                            |  |        |                             |            |                                                  |  |        |                            |             |   |  |            |  
|Balance, December 31, 2003                                                     |  | 3,210,487                            |  | 3,210,487    |  | 11,545,341                 |  | 1,154  |                             | 30,871,699 |                                                  |  |       |                            | (32,695,535 | ) |  | 1,387,805  |  



(Continued on following
page)

See accompanying notes to financial statements.



F-7



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##### Table of Contents

ENTROPIN, INC.

(A DEVELOPMENT STAGE COMPANY)



STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY

For the Years Ended December 31, 2003 and 2004

and for the Period from August 27, 1984 (Inception) Through December 31, 2002

(Continued from preceding page)



|                                                                         |  |                                     |  |              |           |        |                            |   |        |                             |       |   |                                                  |   |            |                            |  |   |          |   |  |   |             |   |  |   |            |  
|------------------------------------------------------------------------ |  | ----------------------------------- |  | ------------ | --------- | ------ | -------------------------- | - | ------ | --------------------------- | ----- | - | ------------------------------------------------ | - | ---------- | -------------------------- |  | - | -------- | - |  | - | ----------- | - |  | - | ---------- | -
|                                                                         |  | Series A redeemablepreferred stock |  | Common stock |           |        | Additional paid-in capital |   |        | Unearned stock compensation |       |   | Deficit accumulated during the development stage |   |            | Total stockholders equity | 
|                                                                         |  | Shares                              |  | Amount       |           | Shares |                            |   | Amount |                             |       |   |                                                  |  
|Shares issued pursuant to secondary common stock offering                |  |                                    |  |              |          |        | 19,250,000                 |   |        |                             | 1,926 |   |                                                  |   | 3,429,270  |                            |  |   |         |   |  |   |            |   |  |   | 3,431,196  |  
|Shares issued for services                                               |  |                                    |  |              |          |        | 50,000                     |   |        |                             | 5     |   |                                                  |   | 5,495      |                            |  |   |         |   |  |   |            |   |  |   | 5,500      |  
|Stock compensation pursuant to the issuance of warrants                  |  |                                    |  |              |          |        |                           |   |        |                             |      |   |                                                  |   | 162,890    |                            |  |   |         |   |  |   |            |   |  |   | 162,890    |  
|Repurchase of shares form secondary common stock offering                |  |                                    |  |              |          |        | (200,000                   | ) |        |                             | (20   | ) |                                                  |   | (39,980    | )                          |  |   |         |   |  |   |            |   |  |   | (40,000    | )
|Unearned stock compensation pursuant to issuance of common stock options |  |                                    |  |              |          |        |                           |   |        |                             |      |   |                                                  |   | 390,048    |                            |  |   | (390,048 | ) |  |   |            |   |  |   |           |  
|Amortization and valuation adjustment of unearned stock compensation     |  |                                    |  |              |          |        |                           |   |        |                             |      |   |                                                  |   |           |                            |  |   | 390,048  |   |  |   |            |   |  |   | 390,048    |  
|Net loss for the year                                                    |  |                                    |  |              |          |        |                           |   |        |                             |      |   |                                                  |   |           |                            |  |   |         |   |  |   | (2,990,643  | ) |  |   | (2,990,643 | )
|                                                                         |  |                                     |  |              |           |        |                            |   |        |                             |       |   |                                                  |   |            |                            |  |   |          |   |  |   |             |   |  |   |            |  
|Balance, December 31, 2004                                               |  | 3,210,487                           |  | $            | 3,210,487 |        | 30,645,341                 |   |        | $                           | 3,065 |   |                                                  | $ | 34,819,422 |                            |  | $ |         |   |  | $ | (35,686,178 | ) |  | $ | 2,346,796  |  
|                                                                         |  |                                     |  |              |           |        |                            |   |        |                             |       |   |                                                  |   |            |                            |  |   |          |   |  |   |             |   |  |   |            |  



See accompanying notes
to financial statements.



F-8



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##### Table of Contents

ENTROPIN, INC.

(A DEVELOPMENT STAGE COMPANY)



STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2003 and 2004

and for the Period from August 27, 1984 (Inception) Through December 31, 2004



|                                                                            |  |      |            |   |      |   |            |                                     |  |   |             |  
|--------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | ----------------------------------- |  | - | ----------- | -
|                                                                            |  | 2003 |            |   | 2004 |   |            | Inception through December 31, 2004 | 
|Cash flows from operating activities:                                       |  |      |            |   |      |   |            |                                     |  |   |             |  
|Net loss                                                                    |  | $    | (3,244,908 | ) |      | $ | (2,990,643 | )                                   |  | $ | (34,598,178 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |      |            |   |      |   |            |                                     |  |   |             |  
|Depreciation and amortization                                               |  |      | 43,061     |   |      |   | 55,519     |                                     |  |   | 321,960     |  
|Series B preferred stock redemption conversion incentive                    |  |      | 126,309    |   |      |   |           |                                     |  |   | 126,309     |  
|Loss on disposal of assets                                                  |  |      |           |   |      |   |           |                                     |  |   | 1,837       |  
|Services received in exchange for stock, stock options and warrants         |  |      | 220,069    |   |      |   | 558,438    |                                     |  |   | 10,642,845  |  
|Services received in exchange for compensation agreements                   |  |      |           |   |      |   |           |                                     |  |   | 2,231,678   |  
|Decrease in accrued interest receivable                                     |  |      | 5,954      |   |      |   |           |                                     |  |   |            |  
|(Decrease) increase in accounts payable                                     |  |      | 146,006    |   |      |   | (161,633   | )                                   |  |   | 254,520     |  
|Other                                                                       |  |      | 3,126      |   |      |   |           |                                     |  |   | 58,613      |  
|                                                                            |  |      |            |   |      |   |            |                                     |  |   |             |  
|Net cash used in operating activities                                       |  |      | (2,700,383 | ) |      |   | (2,538,319 | )                                   |  |   | (20,960,416 | )
|                                                                            |  |      |            |   |      |   |            |                                     |  |   |             |  
|Cash flows from investing activities:                                       |  |      |            |   |      |   |            |                                     |  |   |             |  
|Maturities (purchase) of short-term investments, net                        |  |      | 990,000    |   |      |   | (1,273,000 | )                                   |  |   | (1,273,000  | )
|Patent costs                                                                |  |      | (120,429   | ) |      |   | (231,306   | )                                   |  |   | (926,245    | )
|Purchase of property and equipment                                          |  |      |           |   |      |   |           |                                     |  |   | (130,516    | )
|                                                                            |  |      |            |   |      |   |            |                                     |  |   |             |  
|Net cash provided by (used in) investing activities                         |  |      | 869,571    |   |      |   | (1,504,306 | )                                   |  |   | (2,329,761  | )
|                                                                            |  |      |            |   |      |   |            |                                     |  |   |             |  
|Cash flows from financing activities:                                       |  |      |            |   |      |   |            |                                     |  |   |             |  
|Proceeds from shares issued pursuant to recapitalization                    |  |      |           |   |      |   |           |                                     |  |   | 220,100     |  
|Proceeds from issuance of common stock and warrants                         |  |      |           |   |      |   | 3,494,893  |                                     |  |   | 21,732,261  |  
|Payments for deferred offering costs                                        |  |      | (43,698    | ) |      |   |           |                                     |  |   |            |  
|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     | )
|Repurchase of common stock                                                  |  |      |           |   |      |   | (40,000    | )                                   |  |   | (40,000     | )
|Payment for cancellation of common stock warrant                            |  |      |           |   |      |   |           |                                     |  |   | (330,000    | )
|Proceeds from convertible notes payable                                     |  |      |           |   |      |   |           |                                     |  |   | 200,000     |  
|                                                                            |  |      |            |   |      |   |            |                                     |  |   |             |  
|Net cash (used in) provided by financing activities                         |  |      | (43,698    | ) |      |   | 3,454,893  |                                     |  |   | 23,734,788  |  
|                                                                            |  |      |            |   |      |   |            |                                     |  |   |             |  
|Net (decrease) increase in cash and cash equivalents                        |  |      | (1,874,510 | ) |      |   | (587,732   | )                                   |  |   | 444,611     |  
|Cash and cash equivalents at beginning of period                            |  |      | 2,906,853  |   |      |   | 1,032,343  |                                     |  |   |            |  
|                                                                            |  |      |            |   |      |   |            |                                     |  |   |             |  
|Cash and cash equivalents at end of period                                  |  | $    | 1,032,343  |   |      | $ | 444,611    |                                     |  | $ | 444,611     |  
|                                                                            |  |      |            |   |      |   |            |                                     |  |   |             |  



(Continued on following
page)

See accompanying notes to financial statements.



F-9



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##### Table of Contents

ENTROPIN, INC.

(A DEVELOPMENT STAGE COMPANY)



STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2003 and 2004

and for the Period from August 27, 1984 (Inception) Through December 31, 2004

(Continued from preceding page)



Supplemental disclosure of cash flow information:



|                                         |  |      |   |      |   |                                     |  |   |        
|---------------------------------------- |  | ---- | - | ---- | - | ----------------------------------- |  | - | -------
|                                         |  | 2003 |   | 2004 |   | Inception through December 31, 2004
|Cash paid for interest during the period |  | $    |  |      | $ |                                    |  | $ | 242,811



Supplemental
disclosure of non-cash investing and financing activities:



During the period from August 27, 1984 (inception) through December 31, 2004, 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 period from August 27, 1984 (inception) through December 31, 2004, the Company converted promissory notes payable with outstanding principal and interest balances totaling $201,660 into 100,831 shares of
common stock.



During the years ended December
31, 2003 and 2004, and the period from August 27, 1984 (inception) through December 31, 2004, the Company issued 12,850, none and 94,850 shares, respectively, of common stock at $5.00 per share as payment of accrued dividends on the Series B
preferred stock.



During the years ended
December 31, 2003 and 2004, and the period from August 27, 1984 (inception) through December 31, 2004, the Company issued 1,235,333, none and 1,337,333 shares of common stock totaling $843,292, none and $1,336,609, respectively, for conversion of
shares of Series B preferred stock.



During
the year ended December 31, 2003, the Company incurred costs of $20,000 related to a planned issuance of its common stock which were paid through the issuance of 28,571 shares of common stock.



See accompanying notes to financial statements.



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##### Table of Contents

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, as a pain therapy. 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 candidate, 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, 2004 of $35,686,178. Management anticipates additional operating losses for the foreseeable future. These factors, among others, indicate that the Company will be unable to continue as a going concern unless it can immediately obtain significant
additional funds to support its operations. 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. In the
absence of positive cash flows from operations which the Company expects will not be possible for several years, if at all, the Company is and will remain highly dependent on its ability to secure additional funding through the issuance of debt or
equity instruments, corporate partnering or merger/acquisition arrangements. If the Company is unable to raise sufficient additional funds on a timely basis, or at all, it will be forced to cease its operations prior to the end of the second quarter
of 2005.



Effective June 26, 2003, the Companys common
stock and warrants were delisted from the Nasdaq SmallCap Market for failure to comply with the $1.00 minimum bid price requirement. The Companys common stock and warrants now trade on the OTC Bulletin Board under the symbols ETOP
and ETOPW, respectively. Trading on the OTC Bulletin Board has resulted in a less liquid market available for existing and potential investors to trade shares of the Companys common stock and warrants and could ultimately further
depress the trading price of the Companys common stock and warrants. In addition, the Company may have more difficulty in raising necessary additional funds as a result of not trading on the Nasdaq SmallCap Market.



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. 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.



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. During the first half of 2000, the Company raised approximately $13,700,000 through a secondary offering.



On October 31, 2003, the Company filed a registration
statement with the Securities and Exchange Commission (SEC) on Form SB-2 registering 20 million shares of common stock for sale in an offering. On January 20, 2004, the Company received approval from the Securities Exchange Commission to
begin its best efforts offering to raise a minimum of $750,000 and a maximum of $3.5 million, plus a 10% over-allotment through the sale of shares of the Companys common stock at $0.20 per share. During the first quarter of 2004, the Company
completed the offering, raising net proceeds of approximately $3.4 million.



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.



F-11



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##### Table of Contents

ENTROPIN, INC.

(A DEVELOPMENT STAGE COMPANY)



NOTES TO FINANCIAL STATEMENTS  (Continued)



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:



The Company believes that patents and other proprietary rights are important to its business. It is the Companys policy to file patent applications to protect its technology, inventions and improvements to
inventions that are considered important to the development of its business. Patent costs are capitalized and amortized on a straight-line basis over an estimated useful life of 16 years.



Amortization expense related to amortizable patents was approximately $51,199 and $37,075 for the twelve months ended
December 31, 2004 and 2003, respectively and $252,143 from inception. Based solely on the amortizable patents as of December 31, 2004, the estimated annual amortization expense of patents for the fiscal years ending December 31 is shown in the
following table. Actual amortization expense to be reported in future periods could differ from these estimates as a result of acquisitions, divestitures, and other relevant factors.



Estimated Amortization Expense



|                                |  |   |        
|------------------------------- |  | - | -------
|Fiscal year ending December 31, |  |   |        
|2005                            |  | $ | 54,485 
|2006                            |  |   | 54,485 
|2007                            |  |   | 54,485 
|2008                            |  |   | 54,485 
|2009                            |  |   | 54,485 
|Thereafter                      |  |   | 401,677
|                                |  |   |        
|Total                           |  | $ | 674,102
|                                |  |   |        



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.



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##### Table of Contents

ENTROPIN, INC.

(A DEVELOPMENT STAGE COMPANY)



NOTES TO FINANCIAL STATEMENTS  (Continued)



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, 2003, the Company had no short-term investments. At December 31, 2004, the Companys short-term investments consisted entirely of certificates of deposit carried at amortized cost with an average remaining
maturity period of 71 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 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.



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, were 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 2003, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity (SFAS No. 150). This statement establishes standards for how an
issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective for the
first interim period beginning after June 15, 2003, with certain exceptions. The adoption of SFAS No. 150, effective July 1, 2003, did not have a material effect on our results of operations or financial position.



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##### Table of Contents

ENTROPIN, INC.

(A DEVELOPMENT STAGE COMPANY)



NOTES TO FINANCIAL STATEMENTS  (Continued)



In
December 2003, the FASB issued a revised Interpretation No. 46, Consolidation of Variable Interest Entities. The interpretation clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial
Statements, to certain types of variable interest entities. The Company does not expect the adoption of this interpretation to have any impact on its financial statements.



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 $66,314 for the years ended December 31, 2003 and 2004 and for the period from August 27, 1984 (inception) through December 31, 2004, 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. 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, 2003 and 2004 and the period from August 27, 1984 (inception) through December 31, 2004. 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.



At December 31, 2004, the Company has net operating loss carryforwards of
approximately $20,880,000 for federal purposes and $12,108,000 for state purposes. The federal and state net operating loss carryforwards begin to expire in 2018 and 2004, respectively. At December 31, 2003 and 2004, deferred income tax balances and
the related valuation allowance are as follows:



|                                                            |  |      |             |   |      |   |             |  
|----------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | -
|                                                            |  | 2003 |             |   | 2004 |  
|Deferred income tax assets (liabilities) resulting from:    |  |      |             |   |      |   |             |  
|Net operating loss carryforwards                            |  | $    | 6,985,000   |   |      | $ | 7,806,000   |  
|Research and development credit carryforwards               |  |      | 497,000     |   |      |   | 512,000     |  
|Basis difference in patent costs and property and equipment |  |      | (182,000    | ) |      |   | (264,000    | )
|Accrual to cash basis adjustments                           |  |      | 83,000      |   |      |   | 19,000      |  
|Unearned stock compensation                                 |  |      | 3,523,000   |   |      |   | 3,745,000   |  
|Capitalized research and development costs                  |  |      | 50,000      |   |      |   | 68,000      |  
|                                                            |  |      |             |   |      |   |             |  
|Total                                                       |  |      | 10,956,000  |   |      |   | 11,886,000  |  
|Less valuation allowance                                    |  |      | (10,956,000 | ) |      |   | (11,886,000 | )
|                                                            |  |      |             |   |      |   |             |  
|                                                            |  | $    |            |   |      | $ |            |  
|                                                            |  |      |             |   |      |   |             |  



A full valuation
allowance has been established for deferred income tax assets, as it is more likely than not that the deferred tax assets will not be realized.



4. Redeemable preferred stock



In December 1997, the Board of Directors approved an amendment to the Companys articles of incorporation to authorize 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. At the time, the Companys certificate of incorporation authorized
50,000,000 shares of common stock and 10,000,000 shares of preferred stock. In November 2004, the Company filed an amendment to its certificate of incorporation, increasing the authorized shares of common stock to 200,000,000 shares.



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##### Table of Contents

ENTROPIN, INC.

(A DEVELOPMENT STAGE COMPANY)



NOTES TO FINANCIAL STATEMENTS  (Continued)



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, 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 the Company 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 has included the outstanding Series A preferred stock balance in
the Companys stockholders equity effective February 14, 2003.



On July 15, 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.



On July 15, 2003, all outstanding shares of our Series B preferred stock were
subject to redemption at the original purchase price of $5.00 per share, along with all accrued and unpaid dividends. As of August 11, 2003, the holders of all outstanding shares of Series B preferred stock exchanged their shares of Series B
preferred stock for common stock at a ratio of 9.4967 shares of common stock issued for each share of Series B preferred stock tendered, pursuant to a recapitalization agreement with the Company. Accordingly, the Company issued 1,220,333 shares of
common stock at a market price of $0.63 and recorded a redemption conversion incentive of $126,310 reflecting the excess of the value of the common stock issued over the redemption obligation. There are no longer any shares of Series B preferred
stock outstanding as of August 11, 2003, and the Companys redemption obligation to the prior holders of Series B preferred stock has terminated.



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 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.



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##### Table of Contents

ENTROPIN, INC.

(A DEVELOPMENT STAGE COMPANY)



NOTES TO FINANCIAL STATEMENTS  (Continued)



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.



Authorized Shares:



On November 23, 2004, the Company filed a Certificate of Amendment to Certificate of Incorporation with the Secretary of State of the State of Delaware.
The Certificate of Amendment increased the number of authorized shares of the Companys common stock from 50,000,000 to 200,000,000 shares. The Certificate of Amendment was approved by the Companys Board of Directors on August 31, 2004
and by the Companys stockholders at a special meeting of stockholders held on November 19, 2004.



The purpose of the Certificate of Amendment is to provide the Company with a sufficient number of authorized shares of common stock for future issuances
and for other valid corporate purposes recommended and authorized by the Board of Directors. The newly authorized shares of common stock will have the same rights, preferences and privileges as the previously authorized shares of common stock.
Current holders of the Companys common stock, however, do not have preemptive rights, which means that they do not have a right to purchase a proportionate share of any new issuances of the Companys common stock in order to maintain
their proportionate ownership of the Company. Therefore, the issuance of any additional shares of common stock by the Company will have a dilutive effect on the equity and voting power of existing stockholders. Issuing additional shares of common
stock may also adversely affect the market price of the Companys common stock. In addition, the availability of authorized common stock for issuance could render it more difficult or discourage a merger, tender offer, proxy contest or other
attempt to obtain control of the Company.



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.



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##### Table of Contents

ENTROPIN, INC.

(A DEVELOPMENT STAGE COMPANY)



NOTES TO FINANCIAL STATEMENTS  (Continued)



Secondary public
offerings:



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 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. In accordance with their terms, all of the 2,500,000 warrants issued in conjunction with the March
2000 secondary offering expired unexercised on March 14, 2005.



During the first quarter of 2004, the Company completed a secondary public offering. The Company received net proceeds of $3.4 million from the sale of 19,250,000 shares of its common stock at $0.20 per share.



Stock options and warrants:



In 2004, the Company issued a warrant to acquire 1,000,000 shares of the Companys common stock to Navidec, Inc., a
consulting organization retained to provide business and financial advisory services to the Company. The warrant vested and became exercisable with respect to 500,000 of the underlying shares on January 31, 2004 and vested and became exercisable
with respect to the remaining 500,000 shares on March 31, 2004. The warrant is exercisable at a price of $0.25 per share until its expiration on January 1, 2009 and contains a cashless exercise provision and provides certain registration rights to
the holder. The fair value of the warrant was estimated at $152,600 on the date of grant using the Black-Scholes option-pricing model. The fair value of the warrant was charged to general and administrative expense.



In 2004, the Company issued a warrant to acquire 119,000 shares of the
Companys common stock to InvestLinc Securities, Inc., pursuant to the Amended and Restated Investment Banking Agreement, dated December 11, 2003 between the parties. The warrant is exercisable at a price of $0.20 per share until its expiration
on January 28, 2009 and contains a cashless exercise provision and provides certain registration rights to the holder. The fair value of the warrant, as determined using the Black-Scholes valuation method, was treated as additional cost of the
Companys common stock offering and charged to paid-in capital. The net effect of this transaction was to record an increase and related decrease to additional paid-in capital of approximately $19,500.



In 2004, the Company granted stock options to each of its non-salaried
directors to purchase 1,666.67 shares of common stock for each month of service as a director from January 1, 2000 through December 31, 2004. Option grants to acquire an aggregate of 381,667 shares of common stock for services prior to January 1,
2004 were fully vested at the grant date. Option grants to acquire an aggregate of 101,667 shares of common stock for services during 2004, vest ratably on a monthly basis commencing January 1, 2004, through the earlier of December 31, 2004, or the
termination of the recipients term as a director. All options, once vested, are exercisable at $0.20 per share until May 1, 2014.



In 2004, the Company granted stock options to purchase 120,000 and 90,000 shares of common stock to its Chairman and Vice Chairman of the Board,
respectively, for services provided to the Company from January 1, 2001 through December 31, 2003. The options are fully vested and exercisable at $0.20 per share until May 1, 2014.



In 2004, the Company granted stock options to purchase 40,000 and 30,000 shares of common stock to its Chairman and Vice
Chairman of the Board, respectively, for services provided to the Company during 2004. These options vest ratably on a monthly basis commencing January 1, 2004, through the earlier of December 31, 2004, or the termination of the recipients
term as a Chairman or Vice Chairman and, once vested, are exercisable at $0.20 per share until May 1, 2014.



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##### Table of Contents

ENTROPIN, INC.

(A DEVELOPMENT STAGE COMPANY)



NOTES TO FINANCIAL STATEMENTS  (Continued)



In
2004, the Company granted a stock option to purchase 125,000 shares of common stock to its Chairman of the Board for services rendered to the Company. The option is fully vested and exercisable at $0.20 per share until May 1, 2014.



In 2004, the Company granted a stock option to purchase 789,800 shares of
common stock to its President and Chief Executive Officer for services rendered to the Company. The option is fully vested and exercisable at $0.20 per share until May 1, 2014.



In 2004, the Company granted a stock option to purchase 394,875 shares of common stock to its Vice President and Chief
Financial Officer for services rendered to the Company. The option is fully vested and exercisable at $0.20 per share until May 1, 2014.



In 2004, the Company granted a stock option to purchase 5,000 shares of common stock to its Assistant Vice President for services rendered to the Company.
The option is fully vested and exercisable at $0.20 per share until May 1, 2014.



In 2004, the Company agreed to grant stock options to purchase up to 550,000 shares of common stock to its President and Chief Executive Officer. The stock options will be issued upon the satisfaction of certain
milestone events related to the development of ENT-103 or upon the execution of a licensing agreement or upon a change of control of the Company. These options will be priced at fair market value on the grant date, will be fully vested upon grant
and will expire ten years from the grant date.



In 2004, the
Company agreed to grant stock options to purchase up to 195,000 shares of common stock to its Vice President and Chief Financial Officer. The stock options will be issued upon the satisfaction of certain milestone events related to the development
of ENT-103 or upon the execution of a licensing agreement or upon a change of control of the Company. These options will be priced at fair market value on the grant date, will be fully vested upon grant and will expire ten years from the grant date.



In 2004, the Company issued a warrant to acquire 100,000
shares of its common stock to Barry Kaplan Associates, a consulting organization retained to provide public relations services. The warrant is exercisable at a price of $0.22 per share until its expiration on June 18, 2009. The fair value of the
warrant was estimated at $10,300 on the date of grant using the Black-Scholes option-pricing model. The fair value of the warrant was charged to general and administrative expense.



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##### Table of Contents

ENTROPIN, INC.

(A DEVELOPMENT STAGE COMPANY)



NOTES TO FINANCIAL STATEMENTS  (Continued)



In
2004, the Company issued 50,000 shares of its common stock to Broadstreet Marketing, Inc., a marketing organization retained to conduct a financial markets exposure program. The issuance of the stock was made in reliance upon the exemption from
registration provided by Section 4(2) of the 1933 Act for this transaction. No broker/dealers were involved in the transaction and no commissions were paid. The $5,500 fair value of the common stock was charged to general and administrative expense.



The following is a summary of stock option activity:



|                           |  |                  |   |  |                        |  |                        |       |                     |           |                          |   |     
|-------------------------- |  | ---------------- | - |  | ---------------------- |  | ---------------------- | ----- | ------------------- | --------- | ------------------------ | - | ----
|                           |  |                  |   |  |                        |  |                        |       | Options Exercisable
|                           |  | Number of shares |   |  | Option Price per share |  | Wtd. avg.exerciseprice |       | Number of shares    |           | Wtd. avg. exercise price
|                           |  |                  |   | 
|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
|Expired                    |  | (570,000         | ) |  | $4.00 to $5.00         |  | $                      | 4.10  |                     |           |                          |   |     
|                           |  |                  |   |  |                        |  |                        |       |                     |           |                          |   |     
|Balance, December 31, 2003 |  | 2,196,619        |   |  |                        |  | $                      | 1.83  |                     | 1,826,619 |                          | $ | 2.93
|Granted                    |  | 2,078,009        |   |  | $0.20                  |  | $                      | 0.20  |                     |           |                          |   |     
|Expired                    |  | (301,000         | ) |  | $4.00                  |  | $                      | 4.00  |                     |           |                          |   |     
|                           |  |                  |   |  |                        |  |                        |       |                     |           |                          |   |     
|Balance, December 31, 2004 |  | 3,973,628        |   |  |                        |  | $                      | 1.56  |                     | 3,603,628 |                          | $ | 1.27
|                           |  |                  |   |  |                        |  |                        |       |                     |           |                          |   |     



The following is a
summary of stock warrant activity:



|                                          |  |                  |   |  |                         |  |                          |      
|----------------------------------------- |  | ---------------- | - |  | ----------------------- |  | ------------------------ | -----
|                                          |  | Number of shares |   |  | Warrant price per share |  | Wtd. avg. exercise price
|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, 2002 and 2003 |  | 3,283,500        |   |  |                         |  | $                        | 8.63 
|Granted                                   |  | 1,219,000        |   |  | $0.20 to $0.25          |  | $                        | 0.24 
|Expired                                   |  | (783,500         | ) |  | $3.00 to $4.00          |  | $                        | 3.11 
|                                          |  |                  |   |  |                         |  |                          |      
|Balance, December 31, 2004                |  | 3,719,000        |   |  |                         |  | $                        | 7.04 
|                                          |  |                  |   |  |                         |  |                          |      



F-19



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##### Table of Contents

ENTROPIN, INC.

(A DEVELOPMENT STAGE COMPANY)



NOTES TO FINANCIAL STATEMENTS  (Continued)



The
following is additional information with respect to those options and warrants outstanding at December 31, 2004:



|                                |      |                  |           |                     |           |                                               |     
|------------------------------- | ---- | ---------------- | --------- | ------------------- | --------- | --------------------------------------------- | ----
|Option exercise price per
share |      | Number of shares |           | Options exercisable |           | Wtd. avg. remaining contractual life in years
|$                               | 0.20 |                  | 2,078,009 |                     | 2,078,009 |                                               | 9.34
|$                               | 0.75 |                  | 50,000    |                     | 50,000    |                                               | .92 
|$                               | 1.00 |                  | 107,700   |                     | 107,700   |                                               | 1.18
|$                               | 1.05 |                  | 70,000    |                     | 70,000    |                                               | 2.00
|$                               | 1.50 |                  | 65,000    |                     | 65,000    |                                               | 1.51
|$                               | 2.00 |                  | 147,169   |                     | 147,169   |                                               | 1.20
|$                               | 2.05 |                  | 230,750   |                     | 160,750   |                                               | 1.60
|$                               | 3.00 |                  | 625,000   |                     | 625,000   |                                               | 3.09
|$                               | 3.05 |                  | 20,000    |                     | 20,000    |                                               | 2.45
|$                               | 3.85 |                  | 140,000   |                     | 140,000   |                                               | 2.25
|$                               | 5.00 |                  | 400,000   |                     | 100,000   |                                               | 0.48
|$                               | 6.00 |                  | 40,000    |                     | 40,000    |                                               | 1.09
|                                |      |                  |           |                     |           |                                               |     
|                                |      |                  | 3,973,628 |                     | 3,603,628 |                                               | 6.35
|                                |      |                  |           |                     |           |                                               |     



|                                 |       |                  |           |                      |           |                                               |     
|-------------------------------- | ----- | ---------------- | --------- | -------------------- | --------- | --------------------------------------------- | ----
|Warrant exercise price per share |       | Number of shares |           | Warrants exercisable |           | Wtd. avg. remaining contractual life in years
|$                                | 0.20  |                  | 119,000   |                      | 119,000   |                                               | 4.08
|$                                | 0.22  |                  | 1,000,000 |                      | 1,000,000 |                                               | 4.08
|$                                | 0.25  |                  | 100,000   |                      | 100,000   |                                               | 4.46
|$                                | 8.75  |                  | 200,000   |                      | 200,000   |                                               | .21 
|$                                | 10.50 |                  | 2,300,000 |                      | 2,300,000 |                                               | .21 
|                                 |       |                  |           |                      |           |                                               |     
|                                 |       |                  | 3,719,000 |                      | 3,719,000 |                                               | 1.49
|                                 |       |                  |           |                      |           |                                               |     



At December 31, 2004,
outstanding options and warrants aggregating 2,800,000 shares have certain registration rights and options and warrants aggregating 4,693,286 shares contain certain cashless exercise provisions.



The fair value of options issued during 2004 was calculated using the
Black-Scholes option-pricing model with the following assumptions: no dividend yield, 83% volatility rate, risk free interest rate of 3.9% and expected life of ten years. 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:



|                           |  |                         |        |                                     |   |         |  |   |          
|-------------------------- |  | ----------------------- | ------ | ----------------------------------- | - | ------- |  | - | ---------
|                           |  | Year ended December 31, |        | Inception through December 31, 2004
|                           |  | 2003                    |        | 2004                                |  
|Research and development   |  | $                       | 1,374  |                                     | $ |        |  | $ | 899,139  
|General and administrative |  |                         | 71,105 |                                     |   | 552,938 |  |   | 8,363,805
|                           |  |                         |        |                                     |   |         |  |   |          
|                           |  | $                       | 72,479 |                                     | $ | 552,938 |  | $ | 9,262,944
|                           |  |                         |        |                                     |   |         |  |   |          



F-20



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##### Table of Contents

ENTROPIN, INC.

(A DEVELOPMENT STAGE COMPANY)



NOTES TO FINANCIAL STATEMENTS  (Continued)



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® 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® 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, 2004, 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® 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® 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® 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.



Development and supply agreements:



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



Litigation:



The Company is currently defending two securities lawsuits: one filed in the Superior Court of the State of California (hereinafter, the State Action) and the other in the U.S. District Court for the
Central District of California (hereinafter, the Federal Action). The allegations in the Federal Action are similar to the allegations made by the plaintiffs in the State Action. The Superior Court formally dismissed the State Action and
entered judgment in favor of the Company and its two directors on August 13, 2004. The plaintiffs, however, filed a notice of appeal with the Superior Court on August 24, 2004. The plaintiffs opening brief is due on or before April 8, 2005.
Upon receipt of the plaintiffs brief, the Company intends to file a brief requesting that the Superior Courts earlier dismissal of this action is upheld.



In the Federal Action, the Company filed a motion for summary judgment on March 7, 2005. The plaintiffs opposition
brief is due on March 28, 2005, and the hearing date for the Companys summary judgment motion is set for April 11, 2005. The Company is also attempting to schedule a mediation conference with the plaintiffs.



The Company has recently learned that a complaint has been filed in the
District Court for the State of Colorado against the Company, two of its directors and an underwriter that participated in the Companys offering in February 2000. The complaint contends that Colorado securities laws have been violated and
consists of allegations that are similar to those alleged in the federal and California state court actions discussed above. The Company has not yet been served with this complaint.



There is no guarantee that the Company will be successful in defeating the plaintiffs appeal in the State Action, or
that the U.S. District Court will grant the Companys motion to dismiss the Federal Action. If the Company is unsuccessful in one or both of these actions, it will need to continue to divert resources and attention away from the development of



F-21



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##### Table of Contents

ENTROPIN, INC.

(A DEVELOPMENT STAGE COMPANY)



NOTES TO FINANCIAL STATEMENTS  (Continued)



ENT-103 and the
other operations of the Company. Moreover, the existence of the lawsuits, irrespective of the merits, makes it more difficult for the Company to raise the additional funds needed to support its continued operations. As of the date of this report,
the Company is not party to any other material legal proceedings.



F-22