**U.S.
      SECURITIES AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-KSB**





x
            **Annual
                report under Section 13 or 15(d) of the Securities Exchange Act of
                1934.**
              **For
                the
                fiscal year ended: December 31, 2005.**




o
            **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**





**ENTROPIN,
      INC.**


**(Name
      of Small Business Issuer in Its Charter)**





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





**13314
      Lost Key Place, Bradenton, FL. 34202**


**(Address
      of Principal Executive Offices; Zip Code)**




**(941)
        388-9512**


**(Issuer’s
      telephone number)**





**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**
            **OTC
                Bulletin Board**









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,and (2) has been subject
      to
      such filing requirements for the past 90 days.
      (1)    Yes x No o


(2)    Yes x No o





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.





Indicate
      by check mark whether the Registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act


Yes x No o





The
      Company’s revenues for its most recent fiscal year were $-0-.





The
      aggregate market value of the voting stock held by non-affiliates of the
      registrant was $734,136, computed by reference to the closing bid price of
      the
      registrant’s common stock on the OTC Bulletin Board on March 31, 2006. 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
      31,
      2006: 30,645,341.








**TABLE
      OF CONTENTS**




**Page****PART
                I**Item
                1.
            Description
                of Business
            1Item
                2.
            Description
                of Property
            10Item
                3.
            Legal
                Proceedings
            10Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            10**PART
                II**Item
                5.
            Market
                For Common Equity, Related Stockholder Matters and Purchases of Equity
                Securities
            10Item
                6.
            Management’s
                Discussion and Analysis of Financial Condition and Results of Operations
            12Item
                7.
            Financial
                Statements
            F1Item
                8.
            Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure
            15Item
                8A.
            Controls
                and Procedures
            15Item
                8B.
            Other
                Information
            15**PART III**Item
                9.
            Directors
                and Executive Officers
            16Item
                10.
            Executive
                Compensation
            16Item
                11
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            16Item
                12.
            Certain
                Relationships and Related Transactions
            16Item
                13.
            Exhibits,
                Lists and Reports on Form 8-K
            17Signatures
            18




1




**ENTROPIN,
      INC.**





**FORM
      10-KSB**





**PART
      I**





**SPECIAL
      NOTE REGARDING FORWARD-LOOKING STATEMENTS**








Information
      included or incorporated by reference in this filing may contain forward-looking
      statements within the meaning of Section 27A of the Securities Act and Section
      21E of the Exchange Act. This information may involve known and unknown risks,
      uncertainties and other factors which may cause our actual results, performance
      or achievements to be materially different from the future results, performance
      or achievements expressed or implied by any forward-looking statements.
      Forward-looking statements, which involve assumptions and describe our future
      plans, strategies and expectations, are generally identifiable by use of the
      words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,”
“intend” or “project” or the negative of these words or other variations on
      these words or comparable terminology.




This
      filing contains forward-looking statements, including statements regarding,
      among other things, (a) our Company’s growth strategies, (b) our Company’s
      future financing plans and (c) our Company’s anticipated needs for working
      capital. These statements may be found under “Management’s Discussion and
      Analysis of Financial Condition and Results of Operations” and “Business,” as
      well as in this prospectus generally. Actual events or results may differ
      materially from those discussed in forward-looking statements as a result of
      various factors, including, without limitation, the risks outlined under “Risk
      Factors” and matters described in this filing generally. In light of these risks
      and uncertainties, there can be no assurance that the forward-looking statements
      contained in this filing will in fact occur.




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..




**ITEM
      1. DESCRIPTION OF BUSINESS.**




**Business
      Overview**





Entropin
      was a pharmaceutical research and development company focused on the development
      of proprietary compounds for pain therapy. Its 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. As stated in our filings with the Securities and
      Exchange Commission, we have an immediate need to raise additional funds to
      resume our operations. As of December 31, 2005, we had total current assets
      of
      $112,841. 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.
      As we
      were unable to immediately obtain significant additional funds to support our
      operations, we were forced to cease our operations prior to the end of the
      second quarter of 2005.





**The
      History of the Discovery of ENT-103.**





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.




2




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.





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 the 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.




3




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.





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.




4




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 was
      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. As we were unable to immediately obtain significant additional funds
      to
      support our research and operations, we were forced to cease our research and
      operations prior to the end of the second quarter of 2005.




**Product
      Development Status**





As
      discussed above, the Company ceased operations in May of 2005. The Company
      is no
      longer seeking FDA approval for the ENT-103 due to a lack of capital.




**Intellectual
      Property**





At
      the
      end of 2004 the Company held 67 issued and pending patent applications
      worldwide, including 8 issued U.S. patents and 37 issued foreign patents.





**The
      Company ceased operations in the second quarter of 2005, and decided to write
      off the balance of the patents as of September 30, 2005, due to a lack of
      capital to fund the approval process for the patents.**




**Business
      Organization**





From
      the
      beginning of 2005 to the last operating day in the second quarter of 2005,
      we
      maintained 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. In May of 2005 we ceased operations due to a lack of funding and
      the Company is now a shell company.





5




**Government
      Regulation**





We
      were
      subject to two principal areas of governmental regulation, as described below,
      up to May of 2005.





***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.




6




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.








The
      Company is no longer seeking FDA approval for its products due to a lack of
      capital. The Company is currently seeking additional capital and evaluating
      the
      possibility of a merger with another company.








***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.








**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
      are subject to a going concern opinion and have ceased our business
      operations.**





Our
      independent auditors have added an explanatory paragraph in connection with
      the
      December 31, 2005 financial statements, which states that our Company is in
      the
      development stage and has incurred an accumulated deficit at December 31, 2005
      of approximately $38.5 million. These conditions give rise to substantial doubt
      about our Company’s ability to continue as a going concern. The Company is
      dependant on its ability to secure additional funding through the issuance
      of
      debt or equity instruments, corporate partnering or merger/acquisition
      arrangements. The Company ceased its business operations in the second quarter
      of 2005.





It
      is
      management’s plan to put all of its effort into settling the outstanding
      litigation against the Company in the immediate future. Once the litigation
      is
      resolved, the Company intends to seek a merger or acquisition with another
      strategic company. There can be no assurance that the litigation will be
      resolved or that a merger or acquisition will be consummated. Even
      if
      provided wih the capital necessary to continue the development of our products,
      we give no assurance that we would continue operations and seek FDA approval
      for
      our products.




**We
      need to raise additional funds immediately in order to resume our operations.**





As
      of
      December 31, 2005, we had total current assets of $112,841. We ceased our
      business operations in the second quarter of 2005. Our financial statements
      have
      been presented on a going concern basis.  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.  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. As we were unable to obtain significant additional funds
      to
      support our operations, we had to cease our operations prior to the end of
      the
      second quarter of 2005.




7




We
      do not
      have capital sufficient to meet our cash needs, including the cost of compliance
      with the continuing reporting requirements of the Securities Exchange Act of
      1934. We will have to seek loans or funds from equity placements to cover such
      cash needs. Lack of existing capital may be sufficient impediment to prevent
      us
      from conducting our business activities in the next twelve months.





At
      this
      time, we have no commitments to provide funds. Accordingly, there can be no
      assurances that any funds will be available to us to allow us to cover our
      expenses as they are incurred.




**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. From our
      inception through December 31, 2005, we have incurred cumulative net losses
      applicable to common stockholders of $38.5 million. We ceased operations in
      the
      second quarter of 2005.





**T** **he
      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.**





Entropin
      and two of its former directors and officers are currently defendants in two
      securities fraud lawsuits that concern the Company’s March 2000 public offering.
      The first of these lawsuits, *Deveny
      et al. v. Entropin Inc., et al* .(“ *Deveny* ”),
      was
      filed in the California Superior Court in January 2003. The second of these
      lawsuits, *In
      re: Entropin Securities Litigation* ,
      was
      filed in the United States District Court for the Central District of California
      in August 2004. In both lawsuits, the central allegation is that Entropin,
      in
      its March 2000 registration statement, made false and misleading statements
      regarding: (1) the results of Entropin’s Phase II clinical studies on the
      Company’s experimental drug Esterom; (2) Entropin’s Phase IIIA clinical studies
      on Esterom; and (3) Entropin’s ability to file a new drug application (“NDA”)
      for Esterom in 2001.




With
      respect to the *Deveny* lawsuit,
      in June 2004, Judge Christopher Sheldon of the California Superior Court granted
      Entropin’s summary judgment motion and dismissed Plaintiffs’ complaint after
      finding that it had been filed after the pertinent statutes of limitations
      had
      expired. Plaintiffs are currently appealing this ruling to the California
      Appellate Court. The appeal has been fully briefed and the Parties are awaiting
      a decision from the California Appellate Court. While the Company feels that
      Judge Sheldon’s decision to dismiss the *Deveny* lawsuit
      was correct and should be sustained on appeal, it cannot predict how the
      California Appellate Court will rule.




The
      Parties in *In
      re: Entropin Securities Litigation* are
      currently undertaking substantial discovery in support of their claims and/or
      defenses. On May 23, 2005, Judge Richard S. Lew issued a scheduling order
      setting a tentative trial date for June 20, 2006. At the direction of the United
      States District Court, the Parties are actively considering the possibility
      of a
      negotiated settlement. However, the Company feels that its March 2000
      registration statement was neither false nor misleading and intends, if
      necessary, to vigorously defend itself against Plaintiffs’ allegations to the
      contrary. We cannot predict the outcome at this time.




**We
      have appointed two new Board members and our other Board directors and executive
      employees have resigned**





On
      May
      13, 2005, the Board of Directors of the Company appointed Mr. Jeffrey Ploen
      and
      Mr. David Norris to the Board.





Following
      these appointments, Drs. Higgins D. Bailey, Randall L. Carpenter and Thomas
      G.
      Tachovsky and Messrs. David M. Chapman, Joseph R. Ianelli, Paul V. Maier and
      Bruce R. Manning resigned from the Board, with each resignation to be effective
      immediately following the Board Meeting held on May 13, 2005.




8




We
      lost
      the services of our only two full-time executive employees, Thomas Tachovsky
      and
      Patricia Kriss, our Chief Executive Officer and Chief Financial Officer,
      respectively. Dr. Carpenter served on the Company’s Sceintific Committee. Dr.
      Tachovsky served on the Company’s Executive and Scientific Committees.





**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. .





The
      Company ceased operations in the second quarter of 2005, and decided to write
      off the balance of the patents as of September 30, 2005, due to a lack of
      capital to fund the approval process for the patents.




**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.





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
      March 31, 2006, there were 30,645,341 shares of common stock issued and
      outstanding and 3,210,487 shares of Series A’ preferred stock issued and
      outstanding.





**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.





9




**ITEM
      2. DESCRIPTION OF PROPERTY.**





At
      the
      end of the second quarter of 2005 the Company ceased operations and no longer
      leased any property.








**ITEM
      3.**  **LEGAL
      PROCEEDINGS.**





Entropin
      and two of its former directors and officers are currently defendants in two
      securities fraud lawsuits that concern the Company’s March 2000 public offering.
      The first of these lawsuits, *Deveny
      et al. v. Entropin Inc., et al* .(“ *Deveny* ”),
      was
      filed in the California Superior Court in January 2003. The second of these
      lawsuits, *In
      re: Entropin Securities Litigation* ,
      was
      filed in the United States District Court for the Central District of California
      in August 2004. In both lawsuits, the central allegation is that Entropin,
      in
      its March 2000 registration statement, made false and misleading statements
      regarding: (1) the results of Entropin’s Phase II clinical studies on the
      Company’s experimental drug Esterom; (2) Entropin’s Phase IIIA clinical studies
      on Esterom; and (3) Entropin’s ability to file a new drug application (“NDA”)
      for Esterom in 2001.




With
      respect to the *Deveny* lawsuit,
      in June 2004, Judge Christopher Sheldon of the California Superior Court granted
      Entropin’s summary judgment motion and dismissed Plaintiffs’ complaint after
      finding that it had been filed after the pertinent statutes of limitations
      had
      expired. Plaintiffs are currently appealing this ruling to the California
      Appellate Court. The appeal has been fully briefed and the Parties are awaiting
      a decision from the California Appellate Court. While the Company feels that
      Judge Sheldon’s decision to dismiss the *Deveny* lawsuit
      was correct and should be sustained on appeal, it cannot predict how the
      California Appellate Court will rule.




The
      Parties in *In
      re: Entropin Securities Litigation* are
      currently undertaking substantial discovery in support of their claims and/or
      defenses. On May 23, 2005, Judge Richard S. Lew issued a scheduling order
      setting a tentative trial date for June 20, 2006. At the direction of the United
      States District Court, the Parties are actively considering the possibility
      of a
      negotiated settlement. However, the Company feels that its March 2000
      registration statement was neither false nor misleading and intends, if
      necessary, to vigorously defend itself against Plaintiffs’ allegations to the
      contrary. We cannot predict the outcome at this time.




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





None.




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




10




**Year
                ending December 31, 2005**
            
            **High**
            
            **Low**First
                Quarter
            
            $
            0.151
            
            $
            0.12Second
                Quarter
            
            $
            0.135
            
            $
            0.027Third
                Quarter
            
            $
            0.06
            
            $
            0.03Fourth
                Quarter
            
            $
            0.026
            
            $
            0.013




On
      March
      31, 2006, the closing price of our common stock on the OTC Bulletin Board was
      $0.025 per share.





**Stockholders
      and Warrantholders**





As
      of
      March 31, 2006, approximately 350 holders of record owned approximately
      30,645,341 of our common stock with the remaining shares held in street name
      through registered brokers.  As
      of
      March 31, 2006, five holders of record owned approximately 3,210,487 shares
      of
      our Series A’ preferred stock. As of March 31, 2006, 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.




**Securities
      Authorized for Issuance under Equity Compensation Plans**





The
      following table provides information as of December 31, 2005 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**
              **Outstanding**
              **Options,
                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)
            
            
            —
            
            $
            —
            
            
            314,269Equity
                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 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.





11





**Purchases
      of Equity Securities by the Company and Affiliated Purchasers.**





None.








**ITEM
      6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
      OPERATION**





**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., old (“Entropin”), and in
      1998 completed a merger with and into Vanden Capital Group, Inc. (“Vanden”),
      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, 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 with 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 were
      attempting to develop. As of December 31, 2005, our accumulated deficit was
      approximately $38.5 million.





As
      of
      December 31, 2005, we had total current assets of $112,841. 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 application with the FDA or to
      commence human clinical trials for ENT-103. As we were unable to immediately
      obtain significant additional funds to support our operations, we were forced
      to
      cease our operations prior to the end of the second quarter of
      2005.





We
      do not
      have capital sufficient to meet our cash needs, including the cost of compliance
      with the continuing reporting requirements of the Securities Exchange Act of
      1934. We will have to seek loans or funds through equity placements to cover
      such cash needs. Lack of existing capital may be sufficient impediment to
      prevent us from conducting our business activities in the next twelve
      months.





At
      this
      time, we have no commitments to provide funds. Accordingly, there can be no
      assurances that any funds will be available to us to allow us to cover our
      expenses as they are incurred.





**Going
      Concern:**





Our
      independent auditors have added an explanatory paragraph in connection with
      the
      December 31, 2005 financial statements, which states that our Company is in
      the
      development stage and has incurred an accumulated deficit at December 31, 2005
      of $38,509,247. These conditions give rise to substantial doubt about our
      Company’s ability to continue as a going concern. The Company is dependant on
      its ability to secure additional funding through the issuance of debt or equity
      instruments, corporate partnering or merger/acquisition arrangements. The
      Company ceased its business operations in the second quarter of
      2005.





It
      is
      management’s plan to put all of its effort into settling the outstanding
      litigation against the Company. Once the litigation is resolved, the Company
      intends to seek a merger or acquisition with another strategic company. There
      can be no assurance that the litigation will be resolved or that a merger or
      acquisition will be consummated.





12




**Plan
      of Operation**





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 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. As we were unable to obtain the significant additional
      funds to support our operations, we had to cease our operations prior to the
      end
      of the second quarter of 2005.





We
      do not
      have capital sufficient to meet our cash needs, including the cost of compliance
      with the continuing reporting requirements of the Securities Exchange Act of
      1934. We will have to seek loans or funds from equity placements to cover such
      cash needs. Lack of existing capital may be a sufficient impediment to prevent
      us from accomplishing the goal of successfully executing a new business
      strategy. We will need to raise additional funds to conduct our business
      activities in the next twelve months.





At
      this
      time, we have no commitments to provide funds. Accordingly, there can be no
      assurances that any additional funds will be available to us to allow us to
      cover our expenses as they are incurred.





**Results
      of Operations For the Year Ended December 31, 2005, As Compared To The Year
      Ended December 31, 2004.**




The
      net
      loss for the year ended December 31, 2005 was approximately $2.8 million, or
      $0.09 per share on approximately 30.6 million weighted average shares
      outstanding. This loss included the impairment of patent costs of approximately
      $696,000. In comparison, the net loss for the year ended December 31, 2004
      was
      approximately $3 million, or $0.11 per share on approximately 27.6 million
      weighted average shares outstanding.





Total
      research and development expenses were $131,000 for the year ended December
      31,
      2005, as compared to approximately $496,000 for the same period in 2004, a
      decrease of $365,000 or 74%.





Total
      general and administrative expenses were approximately $2 million for the year
      ended December 31, 2005, as compared to approximately $2.5 million for the
      same
      period in 2004, a decrease of $0.5 million or 20%.





Interest
      income during the year ended December 31, 2005 was approximately $20,800 as
      compared to approximately $19,500 during the same period in 2004, an increase
      of
      $1,300 or 7%.





**Liquidity
      and Capital Resources**





As
      of
      December 31, 2005, we had total current assets of $112,841. Our financial
      statements have been presented on a going concern basis. 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. As we were unable to obtain the significant
      additional funds to support our operations, we had to cease our operations
      prior
      to the end of the second quarter of 2005.





We
      are in
      the development stage and have been primarily involved in research and
      development activities. This has resulted in significant operating losses and
      an
      accumulated deficit at December 31, 2005 of approximately $38.5 million. Our
      management anticipates additional operating losses for the foreseeable future.
      These factors, among others, indicate that we will be unable to continue as
      a
      going concern unless it can immediately obtain significant additional funds
      to
      support its operations. 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, 2005, we have received net cash proceeds from financing activities
      aggregating approximately $23.7 million. As of December 31, 2005, we had a
      negative working capital of approximately $476,000 .




13




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 $1.6  million
      during the year ended December 31, 2005, compared with approximately $2.5
      million during the same period of 2004. The cash used in operations was
      primarily related to conducting preclinical research studies and maintaining
      our
      administrative infrastructure.





**We
      have appointed two new Board members and our other Board directors and executive
      employees have resigned**





On
      May
      13, 2005, the Board of Directors of the Company appointed Mr. Jeffrey Ploen
      and
      Mr. David Norris to the Board.





Following
      these appointments, Drs. Higgins D. Bailey, Randall L. Carpenter and Thomas
      G.
      Tachovsky and Messrs. David M. Chapman, Joseph R. Ianelli, Paul V. Maier and
      Bruce R. Manning resigned from the Board, with each resignation to be effective
      immediately following the Board Meeting held on May 13, 2005.





We
      lost
      the services of our only two full-time executive employees, Thomas Tachovsky
      and
      Patricia Kriss, our Chief Executive Officer and Chief Financial Officer,
      respectively. Dr. Carpenter served on the Company’s Sceintific Committee. Dr.
      Tachovsky served on the Company’s Executive and Scientific Committees.





**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.





**New
      accounting pronouncements** :





SFAS
      144
      establishes a single accounting model for the impairment or disposal of
      long-lived assets, including discontinued operations. SFAS 144 superseded
      Statement of Financial Accounting Standards No. 121, Accounting for the
      Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of
      (SFAS 121), and APB Opinion No. 30, Reporting the Results of Operations -
      Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
      Unusual and Infrequently Occurring Events and Transactions. The provisions
      of
      SFAS 144 are effective in fiscal years beginning after December 15, 2001, with
      early adoption permitted, and in general are to be applied prospectively.





Financial
      Accounting Standards Board Interpretation No. 46, Consolidation of Variable
      Interest Entities, an interpretation of Accounting Research Bulletin No. 51,
      Financial Statements, addresses consolidation by business enterprises of
      variable interest entities. It is effective immediately for variable interest
      entities created after January 31, 2003. It applies in the first fiscal year
      or
      interim period beginning after 15, 2003, to variable interest entities acquired
      before February 1, 2003. The Company does not expect the adoption of this
      interpretation to have any impact on its financial statements.




SFAS
      No.
      149, Amendment of Statement 133 on Derivative Instruments and Hedging
      Activities, amends and clarifies accounting for derivative instruments under
      SFAS No. 133. It is effective for contracts entered into after June 30, 2003.
      The impact of adoption of this statement is not expected to be
      significant.





SFAS
      No.
      150, Accounting for Certain Financial Instruments with Characteristics of both
      Liabilities and Equity, establishes standards for how an issuer classifies
      and
      measures certain financial instruments with characteristics of both liability
      and equity. It requires that an issuer classify a financial instrument that
      is
      within its scope as liability (or an asset in some circumstances). This
      statement is effective for financial instruments entered into or modified after
      May 31, 2003, and otherwise is effective at the beginning of the first interim
      period beginning after June 15, 2003. The adoption of SFAS No. 150, effective
      July 1, 2003, did not have a material effect on our results of operations or
      financial position.




14




SFAS
      No.
      151, Inventory Costs, amends the guidance in ARB No. 43, Chapter 4, to clarify
      the accounting for abnormal amounts of idle facility expense, freight, handling
      costs, and wasted material (spoilage). This statement requires that these items
      be recognized as current-period charges regardless of whether they meet the
      criterion of “so abnormal.” In addition, this Statement requires that allocation
      of fixed production overheads to the costs of conversion be based on the normal
      capacity of the production facilities. The impact of adoption of this statement
      is not expected to be significant.




In
      December 2004, the FASB issued SFAS 153, Exchanges of Nonmonetary Assets, an
      amendment of APB No. 29, Accounting for Nonmonetary Transactions. SFAS 153
      requires exchanges of productive assets to be accounted for at fair value,
      rather than at carryover basis, unless (1) neither the asset received nor the
      asset surrendered has a fair value that is determinable within reasonable limits
      or (2) the transactions lack commercial substance. SFAS 153 is effective for
      nonmonetary asset exchanges occurring is fiscal periods beginning after June
      15,
      2005. The Company does not expect the adoption of this standard to have a
      material effect on its financial position, results of operations or cash
      flows.




SFAS
      No.
      154, Accounting Changes, replaces APB Opinion No. 20, *Accounting
      Changes* ,
      and
      FASB Statement No. 3, *Reporting
      Accounting Changes in Interim Financial Statements* ,
      and
      changes the requirements for the accounting for and reporting of a change in
      accounting principle. This Statement applies to all voluntary changes in
      accounting principle. The impact of adoption of this statement is not expected
      to be significant.




In
      December 2004, the FASB issued Statement 123 (revised 2004) which is a revision
      of FASB Statement No. 123, Accounting for Stock-Based Compensation. This
      Statement supersedes APB Opinion No. 25, Accounting for Stock Issued to
      Employees, and its related implementation guidance. This Statement establishes
      standards for the accounting for transactions in which an entity exchanges
      its
      equity instruments for goods or services. It also addresses transactions in
      which an entity incurs liabilities in exchange for goods or services that are
      based on the fair value of the entity’s equity accounting for transactions in
      which an entity obtains employee services in share-based payment transactions.
      This Statement requires a public entity to measure the cost of employee services
      received in exchange for an award of equity instruments based on the grant-date
      fair value of the award (with limited exceptions). That cost will be recognized
      over the period during which an employee is required to provide service in
      exchange for the award—the requisite service period (usually the vesting
      period). The Company files as a small business issuer and must meet the
      requirements of this Statement for accounting periods after December 15,
      2005.




**ITEM
      7. FINANCIAL STATEMENTS**





The Financial Statements are set forth on pages F-1 to F22.





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





On
      July
      7, 2005, we notified Causey Demgen & Moore, Inc. (“CDM”) 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 L. L. Bradford
      & Company, LLC (“LL Bradford & Company”) for the fiscal year ending
      December 31, 2005 as our new independent registered public accounting firm.
      The
      change of independent accountants was approved by the Board of Directors on
      July
      7, 2005.





CDM’s
      report on our financial statements for the year ended December 31, 2004 did
      not
      contain any adverse opinion, or a disclaimer of opinion, and was not qualified
      as to uncertainty, audit scope or accounting principles. However, the report
      was
      modified to include an explanatory paragraph wherein CDM expressed substantial
      doubt about our ability to continue as a going concern.





In
      connection with its audit of our financial statements for the year ended
      December 31, 2004, and during the interim period through July 7, 2005, there
      were no disagreements with CDM 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 CDM, would have caused
      them to make reference in its report. There were no “reportable events” as that
      term is defined in Item 304(a)(1)(v) of Regulation S-K.





15




**ITEM
      8A. CONTROLS AND PROCEDURES.**





**(A)**
            **Evaluation
                of Disclosure Controls and Procedures**





As
      of the
      end of the period covered by this report, the Company carried out an evaluation,
      under the supervision and with the participation of the Company’s Principal
      Executive Officer/Principal Financial Officer of the effectiveness of the design
      and operation of the Company’s disclosure controls and procedures. The Company’s
      disclosure controls and procedures are designed to provide a reasonable level
      of
      assurance of achieving the Company’s disclosure control objectives. The
      Company’s Principal Executive Officer/Principal Financial Officer has concluded
      that the Company’s disclosure controls and procedures are, in fact, effective at
      this reasonable assurance level as of the period covered. In addition, the
      Company reviewed its internal controls, and there have been no significant
      changes in its internal controls or in other factors that could significantly
      affect those controls subsequent to the date of their last evaluation or from
      the end of the reporting period to the date of this
      Form 10-KSB.




**(B)**
            **Changes
                in Internal Controls Over Financial
                Reporting**





In
      connection with the evaluation of the Company’s internal controls during the
      Company’s fourth fiscal quarter ended December 31, 2005, the Company’s Principal
      Executive Officer/Principal Financial Officer has determined that there are
      no
      changes to the Company’s internal controls over financial reporting that has
      materially affected, or is reasonably likely to materially effect, the Company’s
      internal controls over financial reporting.




**ITEM
      8B. OTHER INFORMATION.**





None





**PART
      III**








**ITEM
      9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.**





On
      May
      13, 2005, the Board of Directors of Entropin, Inc. appointed to the Board Mr.
      David L. Norris as President, Chief Executive Officer, Chief Financial Officer
      and Director, and Mr. Jeffrey Ploen as Director.





Mr.
      Norris is the Executive Vice President of Bottom Line Advisors is a private
      consulting firm that offers a variety of consulting, management and financing
      services. Bottom Line specializes in Corporate Governance, Mergers &
Acquisitions and Sarbanes-Oxley compliance. Mr. Norris served as a Director
      of
      Alliance Towers, Inc., a publicly traded company from September 2003 until
      March
      23, 2005. Mr. Norris received his B.A. degree from SUNY at Oneonta and is a
      graduate of the Stonier Graduate School of Banking at Rutgers
      University.





Mr.
      Jeffrey Ploen has been President of J. Paul Consulting, a firm specializing
      in
      financing for small and micro cap companies, for the past ten years. Mr. Ploen
      served as Director of Navidec Corporation from January 2003 - December 2004,
      a
      public company and as President and Director of Paradigm Holdings, Inc. from
      July of 2004 until November of 2004, also a public company. Mr. Ploen has a
      B.S.
      degree from the University of Wyoming.





Following
      these appointments, Dr. Higgins D. Bailey, Chairman of the Board, and the entire
      Board of Directors resigned on May 13, 2005.





**ITEM
      10. EXECUTIVE COMPENSATION.**




For
      the
      year ended December 31, 2005, Higgins D. Bailey, Chairman of the Board, received
      a salary of $25,000. Thomas G. Tachovsky, President, Director and Chief
      Executive Officer, received a salary of $80,667. Patricia G. Kriss, Chief
      Financial Officer of the Company, received a salary of $94,531.





No
      options were granted to any executive or director in 2005.




16




Compensation
      and other information of the “Named Executive Officers” in 2003 and 2004 were
      listed in the Form 10-KSB for the fiscal year ended December 31,
      2004.







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





**** None







**ITEM
      12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.**





None.








**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 Officer31.2
            Certification
                of Chief Financing Officer32.1
            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.







17


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


(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
      May
      13, 2005, we filed on Form 8-K (under Item 5.02) the appointments of Mr. Jeffrey
      Ploen and Mr. David Norris to the Board of Directors; and the resignation of
      the
      entire Board.



















**SIGNATURES**




In
      accordance with the requirements of the Exchange Act, the registrant caused
      this
      report to be signed on its behalf by the undersigned, thereunto duly
      authorized.




**ENTROPIN,
                INC.**Date: April
              10, 2006
            By:
            /s/David
                L. NorrisPresident,
                Chief Executive Officer,
              and
                  Chief Financial Officer




18




**ENTROPIN,
      INC.**


**(A
      DEVELOPMENT STAGE COMPANY)**





**INDEX
      TO FINANCIAL STATEMENTS**




**Page**Report
                of Independent Registered Public Accounting Firm
            F-2Report
                of Independent Registered Public Accounting Firm
            F-3Balance
                Sheets as of December 31, 2004 and 2005
            F-4Statements
                of Operations for the Years Ended December 31, 2004 and 2005 and
                for the
                Period from August 27, 1984 (Inception) Through December 31,
                2005
            F-5Statements
                of Changes in Stockholders’ Equity for the Years Ended December 31, 2004
                and 2005 and for the Period from August 27, 1984 (Inception) Through
                December 31, 2005
            F-6Statements
                of Cash Flows for the Years Ended December 31, 2004 and 2005 and
                for the
                Period from August 27, 1984 (Inception) Through December 31, 2005
            F-8Notes
                to Financial Statements
            F-10




F-1




**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**











To
      the
      Board of Directors and Stockholders


Entropin,
      Inc.


Bradenton,
      Florida








We
      have
      audited the accompanying balance sheet of Entropin, Inc. as of December 31,
      2005, and the related statements of operations, stockholders’ equity, and cash
      flows for the year then ended December 31, 2005 and for the period from August
      27, 1984 (inception) through December 31, 2005. 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 financial
      statements of the Company for the period from August 27, 1984 (inception)
      through December 31, 2004 reflect net losses applicable to common stockholders
      of $35,686,178 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. The Company is not required to
      have, nor were we engaged to perform, an audit of its internal control over
      financial reporting. Our audit included consideration of internal control over
      financial reporting as a basis for designing audit procedures that are
      appropriate in the circumstances, but not for the purpose of expressing an
      opinion on the effectiveness of the Company’s internal control over financial
      reporting. Accordingly, we express no such opinion. 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 provides
      a
      reasonable basis for our opinion.





In
      our
      opinion, based on our audit 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, 2005, and the results of its activities and
      cash flows for the year ended December 31, 2005 and for the period from August
      27, 1984 (inception) through December 31, 2005, 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.







L.L.
      Bradford & Company, LLC


February
      2, 2006


Las
      Vegas, Nevada





F-2





**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, 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 year 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-3




**ENTROPIN,
          INC.**
 **(A
          DEVELOPMENT STAGE COMPANY)**


**BALANCE
      SHEETS**


**December
      31, 2004 and 2005**




**2004**
            
            **2005****ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            444,611
            
            $
            112,841Short-term
                investments
            
            
            1,273,000
            
            
            —Total
                current assets
            
            
            1,717,611
            
            
            112,841Patent
                costs, less accumulated amortization of $252,143 (2004)
            
            
            674,102
            
            
            —Property
                and equipment, net
            
            
            1,906
            
            
            —Total
                assets
            
            $
            2,393,619
            
            $
            112,841**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**Current
                liabilities:Accounts
                payable
            
            $
            46,823
            
            $
            589,114Commitments
                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
            
            
            3,210,487Common
                stock, $.0001 par value; 200,000,000 shares authorized; 30,645,341
                shares
                issued and outstanding
            
            
            3,065
            
            
            3,065Additional
                paid-in capital
            
            
            34,819,422
            
            
            34,819,422Deficit
                accumulated during the development stage
            
            
            (35,686,178
            )
            
            (38,509,247
            )Total
                stockholders’ equity
            
            
            2,346,796
            
            
            (476,273
            )Total
                liabilities and stockholders’ equity
            
            $
            2,393,619
            
            $
            112,841





See
      accompanying notes to financial statements.




F-4


**ENTROPIN,
          INC.**
 **(A
          DEVELOPMENT STAGE COMPANY)**


**STATEMENTS
      OF OPERATIONS**


**For
      the Years Ended December 31, 2004 and 2005**


**and
      for the Period from August 27, 1984 (Inception) Through December 31, 2005**




**2004**
            
            **2005**
            
            **Inception**
              **through**
              **December 31,**
              **2005**Costs
                and expenses:Research
                and development
            
            $
            496,017
            
            $
            131,006
            
            $
            16,043,819General
                and administrative
            
            
            2,514,088
            
            
            2,016,323
            
            
            21,841,063Impairment
                of patent costs
            
            
            —
            
            
            695,572
            
            
            695,572Operating
                loss
            
            
            (3,010,105
            )
            
            (2,842,901
            )
            
            (38,580,454
            )Other
                income (expense):Interest
                income
            
            
            19,462
            
            
            20,763
            
            
            1,529,259Interest
                expense
            
            
            —
            
            
            —
            
            
            (242,811
            )Other
                expense
            
            
            —
            
            
            (931
            )
            
            (931
            )Series
                B preferred stock redemption conversion incentive
            
            
            —
            
            
            —
            
            
            (126,310
            )Total
                other income (expense), net
            
            
            19,462
            
            
            19,832
            
            
            1,159,207Net
                loss
            
            
            (2,990,643
            )
            
            (2,823,069
            )
            
            (37,421,247
            )Dividends
                applicable to Series B preferred stockholders
            
            
            —
            
            
            —
            
            
            (1,103,184
            )Net
                loss applicable to common stockholders
            
            $
            (2,990,643
            )
            $
            (2,823,069
            )
            $
            (38,524,431
            )Basic
                and diluted net loss per common share
            
            $
            (.11
            )
            $
            (.09
            )
            $
            (4.57
            )Weighted
                average common shares outstanding
            
            
            27,614,000
            
            
            30,645,000
            
            
            8,435,000





See
      accompanying notes to financial statements.




F-5




****ENTROPIN,
      INC.****


**(A
          DEVELOPMENT STAGE COMPANY)**


**STATEMENTS
      OF CHANGES IN STOCKHOLDERS’ EQUITY**


**For
      the Years Ended December 31, 2004 and 2005**


**and
      for the Period from August 27, 1984 (Inception) Through December 31, 2005**




**Common stock******
            ****
            ****
            **Additional**
                    **paid-in**
            ****
            ****
            **Stock**
            ****
            ****
            **Unearned**
              **stock**
            ****
            ****
            **Deficit**
                    **accumulated**
                  **during
                    the**
                **development**
            ****
            ****
            **Total**
              **stockholders'**
            ********
            ****
            ****
            **Share**
            
            
            **Amount**
            
            
            **capital**
            
            
            **subscriptions**
            
            
            **compensation**
            
            
            **stage**
            
            
            **equity**Balance,
                August 27, 1984 (inception)
            
            
            —
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            —Cash
                contribution from stockholder
            
            
            —
            
            
            —
            
            
            50,000
            
            
            —
            
            
            —
            
            
            —
            
            
            50,000Cash
                received for common stock subscription
            
            
            —
            
            
            —
            
            
            —
            
            
            150,000
            
            
            —
            
            
            —
            
            
            150,000Stock
                contributions from stockholders
            
            
            —
            
            
            —
            
            
            927,000
            
            
            —
            
            
            —
            
            
            —
            
            
            927,000Shares
                issued pursuant to recapitalization
            
            
            480,051
            
            
            480
            
            
            219,620
            
            
            —
            
            
            —
            
            
            —
            
            
            220,100Shares
                issued pursuant to private placements
            
            
            1,508,700
            
            
            1,509
            
            
            4,163,931
            
            
            —
            
            
            —
            
            
            —
            
            
            4,165,440Shares
                and warrants issued pursuant to secondary offering
            
            
            2,180,000
            
            
            2,180
            
            
            13,678,154
            
            
            —
            
            
            —
            
            
            —
            
            
            13,680,334Conversion
                of promissory notes to common stock
            
            
            100,831
            
            
            100
            
            
            201,560
            
            
            —
            
            
            —
            
            
            —
            
            
            201,660Change
                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
            
            
            —
            
            
            8,637,527Shares
                issued from exercise of common stock options and warrants
            
            
            132,785
            
            
            133
            
            
            80,159
            
            
            —
            
            
            —
            
            
            —
            
            
            80,292Common
                stock warrants canceled in exchange for cash
            
            
            —
            
            
            —
            
            
            (330,000
            )
            
            —
            
            
            —
            
            
            —
            
            
            (330,000
            )Shares
                issued for cash
            
            
            1,252,802
            
            
            1,253
            
            
            303,747
            
            
            (150,000
            )
            
            —
            
            
            —
            
            
            155,000Shares
                issued for services
            
            
            4,073,418
            
            
            4,067
            
            
            334,303
            
            
            —
            
            
            —
            
            
            —
            
            
            338,370Issuance
                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
            
            
            —
            
            
            —
            
            
            —
            
            
            493,317Accretion
                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)




F-6




**ENTROPIN,
            INC.**
 **(A
            DEVELOPMENT STAGE COMPANY)**


**STATEMENTS
      OF CHANGES IN STOCKHOLDERS’ EQUITY**


**For
      the Years Ended December 31, 2004 and 2005**


**and
      for the Period from August 27, 1984 (Inception) Through December 31, 2005**





(Continued
      from preceding page)




**Series
                  A’ redeemable**
                **preferred
                  stock**
            
            **Common
                  stock**
            
            **Additional**
              **paid-in**
            
            **Unearned**
              **stock**
            
            **Deficit**
                **accumulated**
                **during
                  the**
                **development**
            
            **Total**
                **stockholders’****Shares**
            
            **Amount**
            
            **Shares**
            
            **Amount**
            
            **capital**
            
            **compensation**
            
            **stage**
            
            **equity**Conversion
                of Series A preferred stock to Series A’ preferred stock
            
            
            3,210,487
            
            
            3,210,487
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            3,210,487Amortization
                and valuation adjustment of unearned stock compensation
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            230
            
            
            72,479
            
            
            —
            
            
            72,709Shares
                issued for services
            
            
            —
            
            
            —
            
            
            356,000
            
            
            36
            
            
            147,324
            
            
            —
            
            
            —
            
            
            147,360Shares
                issued for costs incurred related to a planned issuance of common
                stock
            
            
            —
            
            
            —
            
            
            28,571
            
            
            3
            
            
            19,997
            
            
            —
            
            
            —
            
            
            20,000Conversion
                of Series B preferred stock to common stock
            
            
            —
            
            
            —
            
            
            1,235,333
            
            
            123
            
            
            843,169
            
            
            —
            
            
            —
            
            
            843,292Shares
                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
            )
            
            1,387,805Shares
                issued pursuant to secondary common stock offering
            
            
            —
            
            
            —
            
            
            19,250,000
            
            
            1,926
            
            
            3,429,270
            
            
            —
            
            
            —
            
            
            3,431,196Shares
                issued for services
            
            
            —
            
            
            —
            
            
            50,000
            
            
            5
            
            
            5,495
            
            
            —
            
            
            —
            
            
            5,500Stock
                compensation pursuant to the issuance of warrants
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            162,890
            
            
            —
            
            
            —
            
            
            162,890Repurchase
                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
            
            
            —
            
            
            390,048Net
                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
            )
            $
            2,346,796Net
                loss for the year
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (2,823,069
            )
            
            (2,823,069
            )Balance,
                December 31, 2005
            
            
            3,210,487
            
            $
            3,210,487
            
            
            30,645,341
            
            $
            3,065
            
            $
            34,819,422
            
            $
            —
            
            $
            (38,509,247
            )
            $
            (476,273
            )




See
      accompanying notes to financial statements.


F-7
  **ENTROPIN,
          INC.**
 **(A
          DEVELOPMENT STAGE COMPANY)**


**STATEMENTS
      OF CASH FLOWS**


**For
      the Years Ended December 31, 2004 and 2005**


**and
      for the Period from August 27, 1984 (Inception) Through December 31,
      2005**




**2004**
            
            **2005**
            
            **Inception**
              **through**
              **December
                31,**
              **2004**Cash
                flows from operating activities:Net
                loss
            
            $
            (2,990,643
            )
            $
            (2,823,069
            )
            $
            (37,421,247
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
                and amortization
            
            
            55,519
            
            
            30,624
            
            
            352,584Impairment
                of patent costs
            
            
            __
            
            
            695,572
            
            
            695,572Series
                B preferred stock redemption conversion incentive
            
            
            —
            
            
            —
            
            
            126,309Loss
                on disposal of assets
            
            
            —
            
            
            —
            
            
            1,837Services
                received in exchange for stock, stock options and warrants
            
            
            558,438
            
            
            —
            
            
            10,642,845Services
                received in exchange for compensation agreements
            
            
            —
            
            
            —
            
            
            2,231,678Decrease
                in accrued interest receivable
            
            
            —
            
            
            —
            
            
            —(Decrease)
                increase in accounts payable
            
            
            (161,633
            )
            
            542,291
            
            
            796,811Other
            
            
            —
            
            
            —
            
            
            58,610Net
                cash used in operating activities
            
            
            (2,538,319
            )
            
            (1,554,582
            )
            
            (22,515,001
            )Cash
                flows from investing activities:Maturities
                (purchase) of short-term investments, net
            
            
            (1,273,000
            )
            
            1,273,000
            
            
            —Patent
                costs
            
            
            (231,306
            )
            
            (50,188
            )
            
            (976,433
            )Purchase
                of property and equipment
            
            
            —
            
            
            —
            
            
            (130,515
            )Net
                cash provided by (used in) investing activities
            
            
            (1,504,306
            )
            
            1,222,812
            
            
            (1,106,948
            )Cash
                flows from financing activities:Proceeds
                from shares issued pursuant to recapitalization
            
            
            —
            
            
            —
            
            
            220,100Proceeds
                from issuance of common stock and warrants
            
            
            3,494,893
            
            
            —
            
            
            21,732,261Payments
                for deferred offering costs
            
            
            —
            
            
            —
            
            
            —Proceeds
                from issuance of preferred stock
            
            
            —
            
            
            —
            
            
            1,142,750Proceeds
                from stockholder loans
            
            
            —
            
            
            —
            
            
            809,679Proceeds
                from stockholder advances
            
            
            —
            
            
            —
            
            
            98,873Repayments
                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
            
            
            —
            
            
            —
            
            
            200,000Net
                cash (used in) provided by financing activities
            
            
            3,454,893
            
            
            —
            
            
            23,734,790Net
                (decrease) increase in cash and cash equivalents
            
            
            (587,732
            )
            
            (331,770
            )
            
            112,841Cash
                and cash equivalents at beginning of period
            
            
            1,032,343
            
            
            444,611
            
            
            —Cash
                and cash equivalents at end of period
            
            $
            444,611
            
            $
            112,841
            
            $
            112,841





(Continued
      on following page)




F-8


**ENTROPIN,
          INC.**
 **(A
          DEVELOPMENT STAGE COMPANY)**


**STATEMENTS
      OF CASH FLOWS**


**For
      the Years Ended December 31, 2004 and 2005**


**and
      for the Period from August 27, 1984 (Inception) Through December 31, 2005**


(Continued
      from preceding page)





Supplemental
      disclosure of cash flow information:




**2004**
            
            **2005**
            
            **Inception**
              **through**
              **December 31,**
              **2005**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, 2005, 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, 2005, 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, 2004 and 2005, and the period from August 27,
      1984
      (inception) through December 31, 2005, the Company issued none, 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, 2004 and 2005, and the period from August 27,
      1984
      (inception) through December 31, 2005, the Company issued none, none and
      1,337,333 shares of common stock totaling none, none and $1,336,609,
      respectively, for conversion of shares of Series B preferred stock.











See
      accompanying notes to financial statements.







F-9




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




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





Organisation
      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 is no longer seeking FDA approval for these products due to a lack
      of
      capital. The Company is currently seeking additional capital and evaluating
      the
      possibility of a merger with another company.





**Going
      Concern:**





Our
      independent auditors have added an explanatory paragraph in connection with
      the
      December 31, 2005 financial statements, which states that our Company is in
      the
      development stage and has incurred an accumulated deficit at December 31, 2005
      of $38,509,247. These conditions give rise to substantial doubt about our
      Company’s ability to continue as a going concern. The Company is dependant on
      its ability to secure additional funding through the issuance of debt or equity
      instruments, corporate partnering or merger/acquisition arrangements. The
      Company ceased its business operations in the second quarter of
      2005.





As
      of
      December 31, 2005, the Company had total current assets of $112,841. 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, 2005 of $38,509,247. 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. As the Company was unable to raise sufficient
      additional funds on a timely basis, it was forced to cease its operations prior
      to the end of the second quarter of 2005.





It
      is
      management’s plan to put all of its effort into settling the outstanding
      litigation against the Company in the immediate future. Once the litigation
      is
      resolved, the Company intends to seek a merger or acquisition with another
      strategic company. There can be no assurance that the litigation will be
      resolved or that a merger or acquisition will be consummated.





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.




F-10


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


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.





The
      Company does not have capital sufficient to meet the Company’s cash needs,
      including the cost of compliance with the continuing reporting requirements
      of
      the Securities Exchange Act of 1934. The Company will have to seek loans or
      equity placements to cover such cash needs. Lack of existing capital may be
      a
      sufficient impediment to prevent the Company from accomplishing the goal of
      successfully executing a new business strategy. The Company will need to raise
      additional funds to conduct its business activities in the next twelve
      months.





At
      this
      time the Company has no commitments to provide funds. Accordingly, there can
      be
      no assurances that any additional funds will be available to the Company to
      allow it to cover its expenses as they are incurred.





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”.





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.





F-11


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


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 $28,719 and $51,199 for the years
      ended December 31, 2005 and 2004, respectively, and approximately $1,000,000
      from inception through December 31, 2005. The Company decided to write off
      the
      balance of the patents as of September 30, 2005, due to a lack of capital to
      fund the approval process for the patents.





Impairment
      of long-lived assets:





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





Cash
      equivalents and short-term investments:





The
      Company considers cash equivalents to include only highly liquid securities
      with
      an original maturity of three months or less. Investments with an original
      maturity of more than three months are considered short-term investments and
      have been classified by management as held-to-maturity. The Company had no
      short-term investments at December 31, 2005.





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.





Fair
      value of financial instruments:





The
      carrying amounts of cash, cash equivalents, short-term investments 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, are added to net loss for the purpose
      of
      determining net loss and net loss per share amounts applicable to common
      stockholders.




F-12


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


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.




New
      accounting pronouncements:





SFAS
      144
      establishes a single accounting model for the impairment or disposal of
      long-lived assets, including discontinued operations. SFAS 144 superseded
      Statement of Financial Accounting Standards No. 121, Accounting for the
      Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of
      (SFAS 121), and APB Opinion No. 30, Reporting the Results of Operations -
      Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
      Unusual and Infrequently Occurring Events and Transactions. The provisions
      of
      SFAS 144 are effective in fiscal years beginning after December 15, 2001, with
      early adoption permitted, and in general are to be applied prospectively.





Financial
      Accounting Standards Board Interpretation No. 46, Consolidation of Variable
      Interest Entities, an interpretation of Accounting Research Bulletin No. 51,
      Financial Statements, addresses consolidation by business enterprises of
      variable interest entities. It is effective immediately for variable interest
      entities created after January 31, 2003. It applies in the first fiscal year
      or
      interim period beginning after 15, 2003, to variable interest entities acquired
      before February 1, 2003. The Company does not expect the adoption of this
      interpretation to have any impact on its financial statements.




SFAS
      No.
      149, Amendment of Statement 133 on Derivative Instruments and Hedging
      Activities, amends and clarifies accounting for derivative instruments under
      SFAS No. 133. It is effective for contracts entered into after June 30, 2003.
      The impact of adoption of this statement is not expected to be
      significant.





SFAS
      No.
      150, Accounting for Certain Financial Instruments with Characteristics of both
      Liabilities and Equity, establishes standards for how an issuer classifies
      and
      measures certain financial instruments with characteristics of both liability
      and equity. It requires that an issuer classify a financial instrument that
      is
      within its scope as liability (or an asset in some circumstances). This
      statement is effective for financial instruments entered into or modified after
      May 31, 2003, and otherwise is effective at the beginning of the first interim
      period beginning after June 15, 2003. The adoption of SFAS No. 150, effective
      July 1, 2003, did not have a material effect on our results of operations or
      financial position.




SFAS
      No.
      151, Inventory Costs, amends the guidance in ARB No. 43, Chapter 4, to clarify
      the accounting for abnormal amounts of idle facility expense, freight, handling
      costs, and wasted material (spoilage). This statement requires that these items
      be recognized as current-period charges regardless of whether they meet the
      criterion of “so abnormal.” In addition, this Statement requires that allocation
      of fixed production overheads to the costs of conversion be based on the normal
      capacity of the production facilities. The impact of adoption of this statement
      is not expected to be significant.




In
      December 2004, the FASB issued SFAS 153, Exchanges of Nonmonetary Assets, an
      amendment of APB No. 29, Accounting for Nonmonetary Transactions. SFAS 153
      requires exchanges of productive assets to be accounted for at fair value,
      rather than at carryover basis, unless (1) neither the asset received nor the
      asset surrendered has a fair value that is determinable within reasonable limits
      or (2) the transactions lack commercial substance. SFAS 153 is effective for
      nonmonetary asset exchanges occurring is fiscal periods beginning after June
      15,
      2005. The Company does not expect the adoption of this standard to have a
      material effect on its financial position, results of operations or cash
      flows.




SFAS
      No.
      154, Accounting Changes, replaces APB Opinion No. 20, *Accounting
      Changes* ,
      and
      FASB Statement No. 3, *Reporting
      Accounting Changes in Interim Financial Statements* ,
      and
      changes the requirements for the accounting for and reporting of a change in
      accounting principle. This Statement applies to all voluntary changes in
      accounting principle. The impact of adoption of this statement is not expected
      to be significant.




F-13


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


In
      December 2004, the FASB issued Statement 123 (revised 2004) which is a revision
      of FASB Statement No. 123, Accounting for Stock-Based Compensation. This
      Statement supersedes APB Opinion No. 25, Accounting for Stock Issued to
      Employees, and its related implementation guidance. This Statement establishes
      standards for the accounting for transactions in which an entity exchanges
      its
      equity instruments for goods or services. It also addresses transactions in
      which an entity incurs liabilities in exchange for goods or services that are
      based on the fair value of the entity’s equity accounting for transactions in
      which an entity obtains employee services in share-based payment transactions.
      This Statement requires a public entity to measure the cost of employee services
      received in exchange for an award of equity instruments based on the grant-date
      fair value of the award (with limited exceptions). That cost will be recognized
      over the period during which an employee is required to provide service in
      exchange for the award—the requisite service period (usually the vesting
      period). The Company files as a small business issuer and must meet the
      requirements of this Statement for accounting periods after December 15, 2005.




**2.
      Related party transactions**





Lease
      agreement:





The
      Company subleased 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, $4,000 and $70,314 for the years ended
      December 31, 2004 and 2005 and for the period from August 27, 1984 (inception)
      through December 31, 2005, 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, 2004 and 2005 and the period from August 27, 1984 (inception)
      through December 31, 2005. 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, 2005, the Company has net operating loss carryforwards of
      approximately $23,288,000  for
      federal purposes and $17,418,000 for state purposes. The federal and state
      net
      operating loss carryforwards begin to expire in  2018
      and
      2005, respectively. At December 31, 2004 and 2005, deferred income tax balances
      and the related valuation allowance are as follows:





**2004**
            
            **2005**Deferred
                income tax assets (liabilities) resulting from:Net
                operating loss carryforwards
            
            $
            7,806,000
            
            $
            8,934,000Research
                and development credit carryforwards
            
            
            512,000
            
            
            512,000Basis
                difference in patent costs and property and equipment
            
            
            (264,000
            )
            
            —Accrual
                to cash basis adjustments
            
            
            19,000
            
            
            235,000Unearned
                stock compensation
            
            
            3,745,000
            
            
            3,745,000Capitalized
                research and development costs
            
            
            68,000
            
            
            —Total
            
            
            11,886,000
            
            
            13,426,000Less
                valuation allowance
            
            
            (11,886,000
            )
            
            (13,426,000
            )$
            —
            
            $
            —




F-14


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


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.





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.




F-15


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


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.





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.




F-16


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


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




Secondary
      public 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.




F-17


**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.





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.





F-18


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


The
      following is a summary of stock option activity:




**Options
                Exercisable****Number
                of**
              **shares**
            
            **Option Price**
              **per share**
            
            **Wtd. avg.**
              **exercise**
              **price**
            
            **Number
                of**
              **shares**
            
            **Wtd. avg.**
              **exercise**
              **price**Balance,
                December 31, 1997
            
            —Granted
            
            
            1,505,002
            
            $.001
                to $4.00
            
            $
            2.26Canceled
            
            
            (180,001
            )
            $0.001
            
            $
            0.001Balance,
                December 31, 1998
            
            
            1,325,001
            
            
            
            $
            2.56
            
            
            713,528
            
            $
            3.31Granted
            
            
            1,371,000
            
            $3.00
                to $5.00
            
            $
            4.07Exercised
            
            
            (20,000
            )
            $4.00
            
            $
            4.00Canceled
            
            
            (55,000
            )
            $3.00
                to $4.00
            
            $
            3.36Balance,
                December 31, 1999
            
            
            2,621,001
            
            
            
            $
            3.43
            
            
            1,647,669
            
            $
            3.52Granted
            
            
            138,000
            
            $2.00
                to $6.00
            
            $
            3.49Exercised
            
            
            (95,000
            )
            $4.00
            
            $
            4.00Canceled
            
            
            (359,805
            )
            $1.50
            
            $
            1.50Balance,
                December 31, 2000
            
            
            2,304,196
            
            
            
            $
            3.14
            
            
            1,849,335
            
            $
            3.44Granted
            
            
            441,869
            
            $1.00
                to $2.05
            
            $
            1.78Exercised
            
            
            (195
            )
            $1.50
            
            $
            1.50Balance,
                December 31, 2001
            
            
            2,745,870
            
            
            
            $
            2.96
            
            
            2,210,859
            
            $
            3.32Granted
            
            
            365,750
            
            $1.00
                to $3.85
            
            $
            2.34Exercised
            
            
            (165,000
            )
            $1.50
                to $2.50
            
            $
            2.05Expired
            
            
            (180,001
            )
            $2.80
            
            $
            2.80Balance,
                December 31, 2002
            
            
            2,766,619
            
            
            
            $
            2.90
            
            
            2,356,619
            
            $
            3.20Expired
            
            
            (570,000
            )
            $4.00
                to $5.00
            
            $
            4.10Balance,
                December 31, 2003
            
            
            2,196,619
            
            
            
            $
            1.83
            
            
            1,826,619
            
            $
            2.93Granted
            
            
            2,078,009
            
            $0.20
            
            $
            0.20Expired
            
            
            (301,000
            )
            $4.00
            
            $
            4.00Balance,
                December 31, 2004
            
            
            3,973,628
            
            
            
            $
            1.56
            
            
            3,603,628
            
            $
            1.27Expired
            
            
            (100,000
            )
            $0.75
                to $1.50
            
            $
            1.13Balance,
                December 31, 2005
            
            
            3,873,628
            
            
            
            $
            1.56
            
            
            3,503,628
            
            $
            1.27




F-19


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




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
            
            $
            3.17Canceled
            
            
            (205,000
            )
            $3.00
                to $4.00
            
            $
            3.02Balance,
                December 31, 1999
            
            
            995,181
            
            
            
            $
            3.20Granted
            
            
            2,500,000
            
            $8.75
                to $10.50
            
            $
            10.36Exercised
            
            
            (10,000
            )
            $4.00
            
            $
            4.00Canceled
            
            
            (101,681
            )
            $4.00
            
            $
            4.00Balance,
                December 31, 2000
            
            
            3,383,500
            
            
            
            $
            8.46Canceled
            
            
            (100,000
            )
            $3.00
            
            $
            3.00Balance,
                December 31, 2001, 2002 and 2003
            
            
            3,283,500
            
            
            
            $
            8.63Granted
            
            
            1,219,000
            
            $0.20
                to $0.25
            
            $
            0.24Expired
            
            
            (783,500
            )
            $3.00
                to $4.00
            
            $
            3.11Balance,
                December 31, 2004
            
            
            3,719,000
            
            
            
            $
            7.04Expired
            
            
            (2,500,000
            )
            $8.75
                to $10.50
            
            $
            10.36Balance,
                December 31, 2005
            
            
            1,219,000
            
            
            
            $
            .24







The
      following is additional information with respect to those options and warrants
      outstanding at December 31, 2005:




**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
            
            
            8.34$1.00
            
            
            107,700
            
            
            107,700
            
            
            .13$1.05
            
            
            70,000
            
            
            70,000
            
            
            1.00$1.50
            
            
            15,000
            
            
            15,000
            
            
            2.48$2.00
            
            
            147,169
            
            
            147,169
            
            
            .09$2.05
            
            
            230,750
            
            
            160,750
            
            
            1.35$3.00
            
            
            625,000
            
            
            625,000
            
            
            2.09$3.05
            
            
            20,000
            
            
            20,000
            
            
            1.45$3.85
            
            
            140,000
            
            
            140,000
            
            
            1.25$5.00
            
            
            400,000
            
            
            100,000
            
            
            .05$6.00
            
            
            40,000
            
            
            40,000
            
            
            .083,873,628
            
            
            3,503,628
            
            
            1.87




**Warrant exercise**
              **price
                per share**
            
            **Number
                of**
              **shares**
            
            **Warrants**
              **exercisable**
            
            **Wtd.
                avg.**
              **remaining**
              **contractual**
              **life in years**$0.20
            
            
            119,000
            
            
            119,000
            
            
            3.08$0.22
            
            
            1,000,000
            
            
            1,000,000
            
            
            3.08$0.25
            
            
            100,000
            
            
            100,000
            
            
            3.461,219,000
            
            
            1,219,000
            
            
            3.11






F-20


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


At
      December 31, 2005 outstanding options and warrants aggregating 300,000 shares
      have certain registration rights and options and warrants aggregating 3,573,628
      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**
            
            
            **2005**
            
            
            **2005**Research
                and development
            
            $
            
            
            $
            —
            
            $
            899,139General
                and administrative
            
            
            552,938
            
            
            —
            
            
            8,363,805$
            552,938
            
            $
            —
            
            $
            9,262,944





**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, 2005, 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





Entropin
      and two of its former directors and officers are currently defendants in two
      securities fraud lawsuits that concern the Company’s March 2000 public offering.
      The first of these lawsuits, *Deveny
      et al. v. Entropin Inc., et al* .(“ *Deveny* ”),
      was
      filed in the California Superior Court in January 2003. The second of these
      lawsuits, *In
      re: Entropin Securities Litigation* ,
      was
      filed in the United States District Court for the Central District of California
      in August 2004. In both lawsuits, the central allegation is that Entropin,
      in
      its March 2000 registration statement, made false and misleading statements
      regarding: (1) the results of Entropin’s Phase II clinical studies on the
      Company’s experimental drug Esterom; (2) Entropin’s Phase IIIA clinical studies
      on Esterom; and (3) Entropin’s ability to file a new drug application (“NDA”)
      for Esterom in 2001.




F-21


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


With
      respect to the *Deveny* lawsuit,
      in June 2004, Judge Christopher Sheldon of the California Superior Court granted
      Entropin’s summary judgment motion and dismissed Plaintiffs’ complaint after
      finding that it had been filed after the pertinent statutes of limitations
      had
      expired. Plaintiffs are currently appealing this ruling to the California
      Appellate Court. The appeal has been fully briefed and the parties are awaiting
      a decision from the California Appellate Court. While the Company feels that
      Judge Sheldon’s decision to dismiss the *Deveny* lawsuit
      was correct and should be sustained on appeal, it cannot predict how the
      California Appellate Court will rule.




The
      parties in *In
      re: Entropin Securities Litigation* are
      currently undertaking substantial discovery in support of their claims and/or
      defenses. On May 23, 2005, Judge Richard S. Lew issued a scheduling order
      setting a tentative trial date for June 20, 2006. At the direction of the United
      States District Court, the parties are actively considering the possibility
      of a
      negotiated settlement. However, the Company feels that its March 2000
      registration statement was neither false nor misleading and intends, if
      necessary, to vigorously defend itself against Plaintiffs’ allegations to the
      contrary. We cannot predict the outcome at this time.




F-22