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

                                 FORM 10-KSB/A-2

[ X ]    Annual report under Section 13 or 15(d) of the Securities Exchange Act
         of 1934 [Fee Required] for the fiscal year ended:  December 31, 1997
                                                            -----------------
[   ]    Transition  report  under  Section  13 or  15(d)  of the  Securities
         Exchange Act of 1934 [No Fee Required] for the  transition  period from
                     to
         -----------    ----------

 Commission file number:   33-23693

                                 ENTROPIN, INC.
                 ----------------------------------------------
                 (Name of small business issuer in its charter)

           Colorado                                              84-1090424
-------------------------------                              -------------------
(State or other jurisdiction of                              (I.R.S. Employer
incorporation or organization)                               Identification No.)


                               45926 Oasis Street
                             Indio, California 92201
                    ----------------------------------------
                    (Address of principal executive offices)
                                   (Zip Code)

Issuer's telephone number:  (760) 775-8333
                            --------------

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

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

Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter  period that the Registrant was required to file such reports),
and (2) has been  subject to such filing  requirements  for at least the past 90
days. Yes X   No
         ---     ---
Check if there is no  disclosure of  delinquent  filers  pursuant to Item 405 of
Regulation  S-B  contained  herein,  and will not be  contained,  to the best of
Registrant's   knowledge,   in  definitive   proxy  or  information   statements
incorporated  by reference  in Part III of this Form 10-KSB or any  amendment to
this Form 10-KSB. [X]

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

Aggregate  market  value of voting stock held by  non-affiliates  as of April 6,
1998:  $5,495,868
       ----------

Shares of  Common  Stock,  $.001 par  value,  outstanding  as of April 6,  1998:
6,000,051
---------

Documents incorporated by reference: See Part III, Item 13-"Exhibits and Reports
on Form 8-K" for a listing of  documents  incorporated  by  reference  into this
annual report on Form 10-KSB.
<PAGE>
<TABLE>
<CAPTION>
                                               TABLE OF CONTENTS
<S>      <C>                                                                                       <C>
PART I


Item 1.  Description of Business....................................................................1

Item 2.  Description of Property....................................................................9

Item 3.  Legal Proceedings..........................................................................9

Item 4.  Submission of Matters to a Vote of Security Holders........................................9


PART II

Item 5.  Market Price of the Registrant's Common Stock and Related Security Holder
         Matters...................................................................................10

Item 6.  Management's Discussion and Analysis of Financial Condition and
         Results of Operations.....................................................................10

Item 7.  Financial Statements......................................................................13

Item 8.  Changes in and Disagreements with Accountants on Accounting and Financial
         Disclosure................................................................................13


PART III

Item 9.  Directors and Executive Officers, Promoters and Control Persons; Compliance
         With Section 16(a) of the Exchange Act....................................................15

Item 10.  Executive Compensation...................................................................18

Item 11.  Security Ownership of Certain Beneficial Owners and Management...........................21

Item 12.  Certain Relationships and Related Transactions...........................................22

Item 13.  Exhibits, Financial Statements and Reports on Form 8-K...................................25

</TABLE>
                                                        -2-

<PAGE>

                                 ENTROPIN, INC.

                                 FORM 10-KSB/A-1

                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS.

BACKGROUND

         Entropin,  Inc.  (the  "Company")  was  incorporated  in the  State  of
Colorado in 1987 as Vanden  Capital  Group,  Inc.,  for the  primary  purpose of
providing business and management  advisory services.  The Company also had been
considering  business  acquisitions.  The Company commenced  operations after it
completed its initial public offering of securities in December 1988. On January
15,  1998,  the Company and  Entropin,  Inc., a  California  corporation,  ("Old
Entropin")   consummated   an  Agreement  and  Plan  of  Merger  (  the  "Merger
Agreement"),  whereby the  Company  acquired  all of the issued and  outstanding
shares of Old Entropin which  consisted of 5,700,001  shares of Common Stock and
3,210,487  shares of Series A  non-voting  preferred  stock in exchange  for the
issuance of 5,700,001  shares of the Company's Common Stock and 3,210,487 shares
of Series A non-voting  preferred  stock.  In  connection  with the Merger,  the
Company  changed  its name to  Entropin,  Inc.  and  succeeded  to the  business
activity of Old Entropin.  The Company has accounted  for the  transaction  as a
recapitalization  of Old  Entropin  and assets and  liabilities  are combined at
historical cost.

BUSINESS OF THE ISSUER

         The Company is currently engaged in pharmaceutical research and will be
developing a patented medicinal  preparation known as Esterom(R) for sale to the
public.  The  Company  is the  beneficiary  of more  than 19 years of  extensive
research and development with respect to the product, Esterom(R),  undertaken by
Lowell M. Somers, MD, the inventor of the product, and James E. Wynn, Ph.D., the
Company's  scientific advisor. The present formulation of Esterom(R) is based on
early  chemical  and clinical  studies  performed  by Drs.  Somers and Wynn,  in
conjunction with other doctors.

         The Company is currently pursuing approval of the product with the U.S.
Food and Drug  Administration  ("FDA").  Esterom(R)  is a medicinal  preparation
formulated for the treatment of impaired range of motion  associated  with acute
lower back sprain and acute  painful  shoulder.  The  Company has been  assigned
seven patents issued by the U.S.  Patent  Office.  The Company has a current and
open  Investigational  New Drug  ("IND") file with the FDA and is in Phase II of
the approval process.

         The two indications  tested with the topical  application of Esterom(R)
were acute lower back sprain and acute painful shoulder.  The range of motion of
each condition was improved  significantly when compared with patients receiving
a placebo.  The Company  believes that these two  conditions  affect about sixty
million Americans each year and represent a substantial domestic market. While

                                       -1-

<PAGE>

palliative treatment is available, there is no effective drug therapy recognized
for acute back strain today.  There is no estimate available for the size of the
international  market, which also appears to have potential.  Additional markets
that  will be  considered  in the  future  are the  domestic  and  international
veterinary market.

THE PRODUCT - ESTEROM(R)

         Dr. Somers originally discovered  Esterom(R),  a medicinal preparation,
in 1979.  The product  name is derived  from its  chemical  identity and medical
purpose since it is an ester that improves the range of motion (ROM) of patients
suffering from a painful shoulder or back sprain/strain.

         In 1979, Drs. Somers and Wynn initiated a collaborative effort to study
the chemical  composition  of Esterom(R)  and its clinical  effects which effort
continues  today under the  Company's  aegis.  As Chairman of the  Department of
Pharmaceutical  Sciences,  College  of  Pharmacy,  Medical  University  of South
Carolina,  Dr. Wynn  developed a  manufacturing  method that  produced a product
which could satisfy FDA  requirements  for testing  purposes.  The  reproducible
hydrolytic  process that Dr. Wynn  developed  led to the  discovery of three new
molecules in 1993.  The three newly  discovered  molecules  are a novel class of
benzoylecgonine ("BE"), ecgonine ("EC") and ecgonidine derivatives.

GOVERNMENTAL REGULATIONS

         GENERAL.  The  manufacturing  and marketing of the  Company's  proposed
products and its research and development activities are and will continue to be
subject to regulation by federal,  state and local  governmental  authorities in
the United States and other countries. In the United States, pharmaceuticals are
subject to  rigorous  regulation  by the FDA's  Center for Drug  Evaluation  and
Research,  which reviews and approves marketing of drugs. The Federal Food, Drug
and Cosmetic Act, the regulations promulgated thereunder,  and other federal and
state  statutes  and  regulations  govern,  among  other  things,  the  testing,
manufacture, labeling, storage, record keeping, advertising and promotion of the
Company's potential products. Since the Company's product, Esterom(R),  contains
chemicals  that  currently  are  considered  to have abuse  potential,  the Drug
Enforcement Agency (DEA) in conjunction with the FDA will determine Esterom(R)'s
level of scheduling as a controlled substance.

         APPROVAL PROCESS.  The process of obtaining FDA approval for a new drug
takes  several  years and  generally  involves the  expenditure  of  substantial
resources. The steps required before a new drug can be produced and marketed for
human use include  clinical trials and the approval of the New Drug  Application
("NDA").

         PRE-CLINICAL TESTING. The compound is subjected to extensive laboratory
and animal testing to determine if the compound is biologically safe and has the
functionality  for which its  therapeutic  use is  intended.  All animal  safety
studies must be performed under current good laboratory practices ("GLP").

                                      -2-
<PAGE>

         INVESTIGATIONAL  NEW DRUG (IND). Before human tests can begin, the drug
sponsor must file an IND application  with the FDA, showing how the drug is made
and the results of animal  testing.  If the FDA does not reject the  application
within 30 days, IND status permits the Sponsor to undertake  initial  studies in
human volunteer subjects.

         HUMAN  TESTING  (CLINICAL).  Under an IND, the human  clinical  testing
program involves three phases.  Clinical trials are conducted in accordance with
protocols that detail the objectives of the study,  the parameters to be used to
monitor safety and the efficacy criteria to be evaluated,  including the type of
statistical analysis that will be done. Each protocol is submitted to the FDA as
part of the IND filing. At the present time, two well-controlled clinical trials
are required to establish  efficacy.  Each clinical study is conducted under the
auspices  of  an  independent   Institutional  Review  Board  ("IRB")  for  each
institution at which the study will be conducted.  The IRB will consider,  among
other things,  information on the product,  ethical  factors,  the risk to human
subjects, and the potential benefits of therapy relative to risk.

         In Phase I clinical  trials,  studies  usually are conducted on healthy
volunteers  to  determine  the  maximum  tolerated  dose,   adverse  events  and
pharmacokinetics of a product.  Efficacy endpoints,  even if surrogate measures,
are also obtained if possible. Phase II studies are conducted on a statistically
relevant  number of  patients  having a specific  disease to  determine  initial
efficacy in humans for a specific  disease,  and  possible  adverse  effects and
safety  risks.  Phase  III  normally  involves  the  pivotal  trials  of a drug,
consisting of wide-scale studies on patients with the disease for which the drug
is intended, in order to evaluate the overall benefits and risks of the drug for
the treated  disease.  In addition to a placebo,  these  studies may compare the
Company's  drug  product  with other  available  therapies.  Phase I, II and III
studies  are planned to  demonstrate  safety and  efficacy  as required  for FDA
approval.  The FDA continually  reviews the clinical trial plans and results and
may  suggest  design  changes  or may  discontinue  the  trials  at any  time if
significant safety or other issues arise.

         NEW DRUG  APPLICATION  (NDA).  Upon  completion  of Phase III, the drug
sponsor may file an NDA containing all pre-clinical, pharmacology and toxicology
information,  and  clinical  and  chemical,  manufacturing  and control  ("CMC")
information  that has been gathered,  as well as all other  information  that is
known from any other sources.  The information must include  essentially all the
data   collected   during   the  IND  phase   (e.g.   chemical   structure   and
characterization  of the drug, formula and manufacturing  process,  stability in
the proposed  packaging,  animal and  laboratory  studies,  results of all human
tests,  etc.) and  proposed  labeling.  Once  submitted,  the FDA has 90 days to
accept the application. If the application is accepted, the Company must pay the
FDA  approximately  $200,000 as a user fee in order to continue  with the review
process.

         APPROVAL.  Once a NDA is approved, the manufacturer is required to keep
the FDA  informed  at all  times  regarding  any  adverse  reactions.  Moreover,
contract  manufacturers  that the  Company  may use must  adhere at all times to
current Good  Manufacturing  Practices ("GMP")  regulations  enforced by the FDA
through its facilities  inspection  program.  These  facilities must pass a pre-
approval plant inspection before the FDA will issue a pre-market approval of the

                                      -3-
<PAGE>

product. The FDA may also require  post-marketing  testing (Phase IV) to support
the  conclusion  of  efficacy  and  safety of the  product,  which  can  involve
significant  expense.  After FDA approval is obtained  for initial  indications,
further  clinical  trials  are  necessary  to gain  approval  for the use of the
product for additional indications.


         The testing and approval process is likely to require  substantial time
and effort,  and there can be no assurance that any FDA approval will be granted
on a timely  basis,  if at all. The approval  process is affected by a number of
factors,  primarily the adverse effects of the drug (safety) and its therapeutic
benefits (efficacy).  Additional  preclinical or clinical trials may be required
during the FDA  review  period and may delay  marketing  approval.  A task force
established by the FDA has recently proposed  significant changes in the design,
analysis and reporting of clinical studies  conducted under INDs, in response to
the  results of a Phase III trial of a drug by another  company in which  severe
complications  and  death  occurred.   The  task  force  recommended   increased
requirements  for reporting  adverse  effects and new, more stringent rules that
would require clinical trial investigators to assume that toxicities reported by
patients are drug-related.  If these recommendations are implemented, the length
of time and costs  associated  with  obtaining  market  approval  by the FDA are
likely to be significantly increased.

         Outside  the  United  States,  the  Company  will be subject to foreign
regulatory  requirements  governing human clinical trials and marketing approval
for its products.  The  requirements  governing the conduct of clinical  trials,
product  licensing,  pricing and  reimbursements  vary  widely  from  country to
country.

FDA STATUS/CONTINUING RESEARCH AND DEVELOPMENT

         IND  APPLICATION.  Drs.  Somers and Wynn filed the IND  application  on
March 9, 1987. The results of four pre-clinical  animal studies with no toxicity
noted, were incorporated within the IND Application for FDA approval.

         HUMAN  TESTING.  The Phase I Clinical  Study  involving 24 healthy male
subjects, was concluded with little or no toxicity observed.

         Since  Esterom(R)  maintained a clear toxicity profile and was shown to
be safe in both animals and in healthy male volunteers  when applied  topically,
the FDA approved a protocol for a Phase II Clinical Study. The Phase II clinical
study  involved a  double-blind,  randomized,  placebo-controlled  investigation
designed to continue to look for adverse  effects and to determine  the efficacy
of Esterom(R) as compared to a placebo in patients who have an impaired range of
motion  resulting from acute lower back sprain and acute painful  shoulder.  The
Phase  II  Clinical  Study  involved  97  patients,  each of whom  received  two
applications  of  Esterom(R)  or  placebo,  with the  second  application  being
performed 24 hours after the first. Overall,  Esterom(R) provided relief in both
the back and  shoulders  which  was  sustained  for  seven  days.  There  was no
clinically  observed local anesthetic or analgesic  effect.  The range of motion
for each  condition  was improved  significantly  when  compared  with  patients
receiving  a  placebo.  Range of motion for the  shoulder  may be defined as the
number of degrees to which the  patient may move the arm away from the side in a
forward, backward or upward direction.

                                      -4-
<PAGE>

         The Company has designed  the Phase III Protocol and must  complete the
Phase III studies prior to completion  of the New Drug  Application  required by
the FDA for final approval of a new prescription drug. As currently planned, the
Phase III studies  will  include  multiple  trials in a number of clinical  site
study centers in differing  geographic areas of the U.S., with approximately 300
patients involved in the study of which  approximately 150 patients will receive
the active  drug and 150  patients  will  receive the  placebo.  The final study
design may change according to possible new FDA  requirements.  The studies will
be double-blind and placebo-controlled. Each study will include a regimen of two
applications,  with the second  application  being  performed 24 hours after the
first and a 30 day follow up.

         The Company is  negotiating  an agreement  with the Western  Center for
Clinical  Studies  ("WCCS"),  a California  corporation  experienced in managing
pharmaceutical  drug  products  which are at an early stage of  development  and
providing  assistance  to  companies  in the  process  of taking  pharmaceutical
products  to the FDA and  through  the IND and NDA  stages of  development  in a
timely and cost-efficient manner. The proposed WCCS agreement provides that WCCS
will  implement a business plan to  accomplish  the scope of its work and assist
the Company in implementing  its overall  business plan. In addition,  WCCS will
provide  additional  experienced  management  with the intent of  assisting  the
Company  in  developing  its  product,   Esterom(R),  to  be  able  to  be  used
commercially.  WCCS would be required to oversee  necessary studies and clinical
trials of  Esterom(R),  appoint  and utilize the  services of a  Scientific  and
Medical  Advisory  Board for the Company,  assist in  developing a  distribution
plan, and identify and propose  strategic  partners and/or  distributors for the
Company's product.  All work preformed by WCCS will be provided by employees and
consultants of WCCS, as the Company's  subcontractor.  The agreement is proposed
to have a 33 month term.

         Through Phase II, all CMC work was performed at the Medical  University
of South  Carolina's  Pharmaceutical  Development  Center,  College of Pharmacy.
Mallinckrodt,  Inc.  ("Mallinckrodt"),  a leading  manufacturer of chemicals and
drugs has  agreed to  continue  to  develop  Esterom(R)  to meet all FDA and GMP
requirements   and  develop  a  Drug  Master  File,  file  all  appropriate  CMC
documentation  with the FDA,  supply  Phase III  clinical  study  material,  and
manufacture  the product to be used  commercially.  The proposed WCCS  agreement
provides  that WCCS will advise the Company  concerning  appropriate  monitoring
procedures to manage the Company's  manufacturing contract with Mallinckrodt and
seek  alternative  companies  which have the  capability  of  manufacturing  the
Company's  product,  in an effort to minimize any potential  delays or setbacks.
See Proposed Manufacturing Plans.

SUMMARY OF PHASE I/II FINDINGS

         Based on its clinical studies, the Company believes that Esterom(R) may
involve a new and unique  mechanism  of action.  The Phase I Study  demonstrated
that the product did not cause detectable  systemic effects  including no effect
on the cardiovascular system. During the study, Esterom(R) caused no significant
adverse events and was observed to be safe. The Company  confirmed that in Phase
I and Phase II trials, no anesthetic activity or  vasoconstrictive  activity was
observed.

                                      -5-
<PAGE>

         Although  the  precise  functions  of  Esterom(R)  are not  known,  the
medicinal  preparation  is neither a local  anesthetic  nor  analgesic.  A local
anesthetic  relieves pain at rest and pain with movement.  An analgesic relieves
major pain at rest and provides minor pain relief with  movement.  In comparison
and according to patient  evaluations,  Esterom(R) provides minor relief of pain
at rest and major relief of pain during movement.

DEA STATUS

         Esterom(R) is presently a Schedule II controlled substance.  A Schedule
II  controlled  substance  is required to be stored and  shipped  under  secured
conditions.  A log must be kept to account for all of the manufactured  product,
with an entry  made  each  time  the  drug  changes  hands  listing  how much is
distributed to whom and how much is prescribed for each patient. The prescribing
health care provider must have a DEA controlled substance license, and depending
upon the State, may be required to use special  prescription pads. The number of
doses and refills is also  controlled,  depending upon the product's  controlled
substance schedule.

         Entropin  has  submitted a petition to the DEA to delist or  reclassify
Esterom(R)  from its current  schedule II status,  based on the data obtained in
Phase I and II clinical studies in human beings. The data provides evidence that
Esterom(R) by the route of administration and dose proposed for marketing has no
cardiovascular   or  central  nervous  system  effects.   The  Company  believes
Esterom(R) does not have the abuse potential of its precursor, cocaine, and does
not warrant scheduling as a controlled  substance.  The petition is under review
by the U.S.  Attorney  General to  determine  if it is  possible  to approve the
petition  without  violating  United States laws or United States  international
treaty obligations.  A change in controlled substance schedule would require FDA
concurrence  which is  unlikely to be given  before the product is approved  for
marketing.

PROPOSED MANUFACTURING PLANS

         Esterom(R)  is made by the  solvolysis  of  cocaine  base in  propylene
glycol and water.  The Company  believes that the  components of the medicine do
not cross the blood brain barrier,  and consequently,  it is expected that there
is no  propensity  for abuse.  Cocaine  is  controlled  by the DEA under  strict
importation  regulations  specified in law. To the Company's  knowledge,  Stepan
Company  ("Stepan")  is the only company that can import coca leaves and process
them for the extraction of cocaine bases.  This base is shipped to  Mallinckrodt
for  purification  and sale on the medical  and  scientific  market.  Stepan and
Mallinckrodt  work with the DEA to set  annual  quotas  for  importing  the coca
leaves  related to projected use and sale of the processed  cocaine.  Because of
federal  restrictions,  Esterom(R) can not be manufactured outside of the United
States for sale in the United States. As a result, Mallinckrodt is currently the
sole source for cocaine and for producing Esterom(R).

         Mallinckrodt  has  supplied  all  of  the  Company's  cocaine  for  the
laboratory  manufacture of the product for use in research and clinical  trials,
and has been aware of the  development of the drug since the IND application was
filed. The Company has entered into a ten (10) year manufacturing  contract with

                                      -6-
<PAGE>

Mallinckrodt.  Mallinckrodt has agreed to perform the CMC work necessary to meet
FDA  Drug  Master  File  requirements.  Although  Mallinckrodt  believes  it can
increase the coca leaf importation  quotas to supply the bulk active material as
required,  there is no  assurance  that  sufficient  importation  quotas  can be
maintained,  or that additional governmental  regulations are not imposed on the
Company or its suppliers,  which may affect the Company's  ability to market the
product.

PROPOSED MARKETING PLANS

         The Company is a startup company engaged in research and development of
pharmaceuticals  and has no plans to market  its  products.  The  proposed  WCCS
agreement  provides that WCCS will  implement a business plan to accomplish  the
scope of its work and assist the Company in  implementing  its overall  business
plan. In addition,  WCCS will provide for additional experienced management with
the intent of assisting the Company in developing its product, Esterom(R), to be
able to be used  commercially.  With the  assistance  of WCCS,  the Company will
develop a distribution plan and identify and propose  strategic  partners and/or
distributors for the Company's product.

ROYALTY COMMITMENTS

         In 1993, the Company entered into a 30 year compensation agreement with
the  limited  partners  of  I.B.C.,  a  California  limited  partnership,  which
comprised  64.28% of the limited  partnership.  The I.B.C.  Limited  Partnership
participated in the early  development of Esterom(R) and owned the patent rights
to three patents and all intellectual  property  rights.  Under the terms of the
compensation agreement,  the Company acquired all of the patent 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 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 drug  company  for past
expenses  paid for  development  of the drug,  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, 1997, no  liabilities  have been accrued with respect to this
agreement.

         In a separate  agreement  with a former  I.B.C.  limited  partner,  the
Company has agreed to pay the partner 35.72% of a decreasing  earned payment (3%
to 1% on cumulative  annual sales of products by the Company)  until October 10,
2004.  From October 10, 2004 until  October 10,  2014,  the Company will pay the
partner 17.86% of the earned  payment.  In accordance  with the  agreement,  the
Company has agreed to pay the former limited partner the amount of $40,000 and a
minimum earned payment of $3,572 per calendar  quarter  beginning on December 1,
1989. Such minimum earned payment is to be evidenced by a promissory note issued
each quarter and payable when the Company is either reimbursed for expenses paid
for the  development of the medicine or from the first income  received from the
Company from net sales of the medicine. The quarterly payments are to be applied
against the earned payment to be received by the limited partner. As of December
31, 1997, the total liability accrued with respect to this agreement  aggregated
$155,495. See Financial Statements, Note 6.

                                      -7-
<PAGE>

PATENTS

         Esterom(R) is protected by a U.S.  Composition  Patent granted December
27, 1994 which includes  safeguarding the discovery of three new molecules.  The
Company's patents are as follows:  Patent  #5,763,456  granted June 9, 1998 with
the Company as Assignee,  expiring  June 31,  2015;  Patent  #5,663,345  granted
September  2, 1997 with the Company as  Assignee,  expiring  September  2, 2014;
Patent  #5,559,123  granted  September  24, 1996 with the  Company as  Assignee,
expiring  September 24, 2013; Patent  #5,525,613  granted June 11, 1996 with the
Company as Assignee,  expiring June 16, 2014;  and,  Patent  #5,376,667  granted
December 27, 1994 with the Company as Assignee,  expiring  December 31, 2012. In
addition,  Dr. Lowell M. Somers obtained the following  initial patents which he
subsequently  assigned to the Company in  September,  1992:  #4,512,996  granted
April 1985,  expiring April 23, 2002; Patent #4,469,700  granted September 1984,
expiring  September 4, 2001;  and, Patent  #4,556,663  granted  December,  1985,
expiring December 3, 2001.

         Drs.  Wynn and Somers have  assigned to the  Company  their  respective
rights to the U. S. Patents and for foreign  countries.  In December,  1993,  an
International  Patent  Application was filed under the Patent Cooperation Treaty
in the  U.S.  Receiving  Officer,  whereby  the  Company's  technology  will  be
protected for a significant market worldwide.

EMPLOYEES

         As of December 31, 1997, the Company had no full time employees.  As of
the date  hereof,  the  Company  has two full time  employees  at its  corporate
headquarters in Indio,  California.  In addition,  the Company has subcontracted
with an individual for corporate financial  services.  The Company believes that
relations with its employees are good.

         The  proposed  WCCS  agreement  contemplates  a period of 33 months for
purposes of completing the testing  requirements  necessary for FDA approval for
the  Company's  product,  Esterom(R),  in exchange  for  $880,400 and options to
purchase an aggregate of 450,000  shares of the Company's  common stock at $1.50
per share,  exercisable over a five (5) year period. Officers of WCCS will serve
in the following  positions in the Company:  Dr. Daniel L. Azarnoff,  President;
Dr. Lois Rezler, Vice President of Science and Regulatory Affairs;  and, Dr. Roy
S. Azarnoff,  Chief Operating Officer.  Drs. Azarnoff,  Rezler and Azarnoff will
not receive  compensation in addition to the management fees paid to WCCS by the
Company,  for their  services  rendered  to the  Company  as its  officers.  The
proposed  WCCS  agreement  provides  that  Daniel  Azarnoff  will  serve  as the
Company's  President  until  such  time  as the  Company  hires  an  experienced
individual  to serve as its  President,  and Drs.  Rezler and Roy Azarnoff  will
serve in their respective capacities until the termination of the WCCS contract.

                                      -8-
<PAGE>

ITEM 2.  DESCRIPTION OF PROPERTY.

           The Company  leases 800 square feet of office space as its  corporate
headquarters in Indio, California from one of its principal stockholders, Thomas
T.  Anderson,  at a monthly  rent of $1,040,  for a two year term which  expires
February 1, 2000,  which the Company  believes to be market or below market rate
for comparable office space.

         Upon execution of the WCCS agreement,  the Company will seek additional
office space in Woodland  Hills,  California in order to provide  facilities for
the WCCS  office  staff.  The present  market rate for office  space in Woodland
Hills,  California  ranges from $1.80 to $2.00 per square foot per month and the
Company  anticipates  that it will  require  approximately  3,000 square feet of
office space.

ITEM 3.  LEGAL PROCEEDINGS.

         The Company is not a party to any legal  proceedings  which  management
believes to be material, and there are no such proceedings which are known to be
contemplated for which the Company anticipates a material risk of loss.

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

         No matters  were  submitted  to a vote of security  holders  during the
fiscal year ended December 31, 1997.  However, on January 15, 1998, the security
holders of the  Company  voted on and  approved:  (i) an  Agreement  and Plan of
Merger (the 'Merger")  pursuant to which the Company  acquired all of the issued
and  outstanding  shares of stock of Entropin,  Inc., a California  corporation;
(ii) an amendment to the Company's  Articles of Incorporation to change the name
from Vanden Capital  Group,  Inc. to Entropin,  Inc.;  (iii) an amendment to the
Company's  Articles of Incorporation  to effect a 1-for-300  reverse stock split
whereby each 300 currently  authorized and  outstanding  shares of the Company's
$.0001 par value  Common Stock (the "Old Common  Stock")  will be exchanged  and
converted  into one share of $.001  par  value  Common  Stock  (the "New  Common
Stock");  and, (iv) an amendment to the Company's  Articles of  Incorporation to
fix the number of  authorized  shares of capital stock of the Company at a total
of  60,000,000  shares,  50,000,000  of which shall be  designated as New Common
Stock ($.001 par value),  and  10,000,000  of which shall be classified as $.001
par  value  Preferred  Stock.  The  amendments  to  the  Company's  Articles  of
Incorporation  were approved by a majority of the  outstanding  shares of Common
Stock at a meeting of all of the  Company's  shareholders  held on  January  15,
1998,  pursuant to applicable  provisions of the Colorado  Business  Corporation
Act.


                                       -9-

<PAGE>

                                     PART II

ITEM 5. MARKET  PRICE OF THE  REGISTRANT'S  COMMON  STOCK AND  RELATED  SECURITY
HOLDER MATTERS.

MARKET INFORMATION

         The  Company's  Common Stock began trading on the  Electronic  Bulletin
Board on February 25, 1998, under the trading symbol "ETOP". The following table
sets forth the high and low bid prices for the  Company's  Common  Stock for the
past two years. The quotations reflect inter-dealer prices, with retail mark-up,
mark-down  or  commissions,  and  may not  represent  actual  transactions.  The
information  presented has been derived from the National Quotation Bureau, Inc.
Library.

                                              High                  Low
1998 Fiscal Year                               Bid                  Bid
----------------                              ----                  ---

First Quarter                                $3.375                $3.00
Second Quarter (through April 6, 1998)       $3.375                $3.375

         On April 6, 1998, the last reported bid and asked prices for the Common
Stock were $3.375 and $5.00, respectively.

HOLDERS

         As of April 6, 1998,  the  Company  had  approximately  217  holders of
record of the Company's  Common Stock,  and 5 holders of record of the Company's
Series A Preferred Stock.

DIVIDENDS

         The payment of dividends by the Company is within the discretion of its
Board of  Directors  and depends in part upon the  Company's  earnings,  capital
requirements,  debt covenants and financial condition.  Since its inception, the
Company has not paid any  dividends on its Common Stock and does not  anticipate
paying such dividends in the foreseeable  future.  The Company intends to retain
earnings, if any, to finance its operations.

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

PLAN OF OPERATION

         Entropin,  Inc. is a development stage  pharmaceutical  company and has
not  generated  any  revenues  for the period from  August 27, 1984  (inception)

                                      -10-
<PAGE>

through December 31, 1997. Entropin has devoted  substantially all its resources
to  acquisition  of patents,  research  and  development  of the  medicine,  and
expenses related to the startup of its business.

         Entropin has been  unprofitable  since  inception  and expects to incur
substantial  additional  operating losses for the next 12 months, as well as for
the next few years, as it increases expenditures on research and development and
begins to allocate  significant  and increasing  resources to clinical  testing,
marketing  and other  activities.  As described  below,  in 1998 the Company has
successfully  completed a private placement and a reverse acquisition  accounted
for as a recapitalization of the Company that will provide additional  liquidity
for the Company for current operations. The Company estimates,  however, that an
additional  private placement of $2,000,000 in equity and debt securities may be
required during 1998, as well as additional funding of up to $6,000,000 over the
next three years to successfully complete the FDA approval process.

         The Company  recently entered into an agreement with the Western Center
for Clinical  Studies,  Inc.  (WCCS),  a California  corporation  experienced in
managing pharmaceutical development.  During the 33 month term of the agreement,
WCCS  will  assist  the  Company  in  obtaining  FDA  approval  for its  product
Esterom(R),  implementing a business plan and providing experienced personnel to
bring  Esterom(R)  to  commercialization.  The  Company  will be required to pay
management  fees of  approximately  $880,400 over the term of the agreement,  as
well as provide  stock  options to purchase  450,000  shares of Entropin  common
stock over the 33 month period at an exercise price of $1.50 per share.

RESULTS OF OPERATIONS
   
         From inception until December 31, 1998,  Entropin has incurred expenses
of  $3,946,854  in  research  and  development  fees,  $570,255  in general  and
administrative  expenses  and  $239,698  in  interest  resulting  in a  loss  of
$4,814,175 for the period from inception (August 27, 1984) to December 31, 1997.
For the year ended December 31, 1997, Entropin incurred $877,209 in research and
development fees,  $328,853 in general and administrative  expenses and $127,386
in interest expense, resulting in a loss of $1,351,448. Research and development
fees incurred during 1997 were  approximately  $709,000 higher than in 1996. The
increase  related  primarily to recording  research and development  expense and
contributed   capital  for  the  estimated  value  of  common  stock  ($712,000)
contributed  by certain  shareholders  to an individual in exchange for research
and development  services  provided since inception of the Company.  General and
administrative  expenses incurred during 1997 were approximately $227,000 higher
than in 1996.  The increase  related  primarily to recording  legal  expense and
contributed   capital  for  the  estimated  value  of  common  stock  ($215,000)
contributed by certain  shareholders to an individual for business  advisory and
legal services.

         Entropin's activities to date are not as broad in depth or scope as the
activities it must undertake in the future, and Entropin's historical operations
and financial  information  are not  indicative of Entropin's  future  operating
results  or  financial  condition  or its  ability to  operate  profitably  as a
commercial enterprise when and if it succeeds in bringing any product to market.
    
                                      -11-
<PAGE>

CAPITAL RESOURCES AND LIQUIDITY

         In the years since  inception,  Entropin has  financed  its  operations
primarily  through  the sale of  shares  of  Entropin  common  stock,  loans and
advances from  shareholders.  At December 31, 1997,  outstanding  liabilities to
shareholders  aggregated $1,809,360,  including 8% notes payable to shareholders
in an aggregate  amount of $1,710,487,  including  accrued interest of $169,131,
which notes are due on December 31, 2000 and unsecured.

         On January 15, 1998,  the Company  completed a private  placement of 30
units  (10,000  shares of its $.001 par value  common stock per unit) at $27,500
per unit,  or $2.75 per share,  which  resulted in gross  proceeds of  $825,000.
Concurrent with the private  placement,  the Company  completed an agreement and
plan of merger with Vanden Capital Group, Inc. to exchange all of the issued and
outstanding  common shares of the Company for 5,220,000 shares of Vanden's $.001
par value common  stock.  Pursuant to the  agreement,  Vanden  provided  cash of
$220,000.  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  (a  reverse
acquisition), with the Company as the acquirer.

         On January 15, 1998,  the Company issued  3,210,487  shares of Series A
redeemable  non-voting,  noncumulative  8%  preferred  stock in exchange  for an
aggregate of $3,210,487 of notes payable to  shareholders  and accrued  interest
and for various other liabilities of the Company.

         In January  1997,  the  Company  entered  into  Development  and Supply
Agreements with Mallinckrodt,  Inc.  ("Mallinckrodt") for ten (10) year terms to
develop all of the  chemistry,  manufacturing  and controls  necessary to comply
with the drug  master  file of the FDA,  as well as to  supply  the bulk  active
product.  In exchange for these services,  Mallinckrodt  will receive  exclusive
rights as a supplier of the bulk active product to the Company in North America.
For the year ended  December 31, 1997,  the contract price of the ingredient was
fixed based on the number of liters ordered by the Company. In subsequent years,
the  cost per  liter  will be  adjusted  based on  changes  in the  price of the
components in the bulk active product.

EFFECT OF INFLATION AND FOREIGN CURRENCY EXCHANGE

         The Company has not  experienced  material  unfavorable  effects on its
results of operations  due to currency  exchange  fluctuations  with any foreign
suppliers or material  unfavorable  effects upon its results of  operations as a
result of domestic inflation.

YEAR 2000 ISSUE

         The  Company's  management  does not believe  that the Company  will be
materially  adversely  affected by the computer  software  Year 2000 issue.  The
Company does not have significant exposure to the Year 2000 issue. The Company's
vendors  and  suppliers  may have some  exposure  to the issue but at this time,
management  does not  anticipate  a  material  adverse  impact on the  Company's
operations.

                                      -12-
<PAGE>

FORWARD LOOKING INFORMATION

         Statements  of  the  Company's  or  management's  intentions,  beliefs,
anticipations,  expectations and similar  expressions  concerning  future events
contained in this document constitute "forward looking statements" as defined in
the Private Securities  Litigation Reform Act of 1995. As with any future event,
there  can  be no  assurance  that  the  events  described  in  forward  looking
statements  made in this  report  will  occur  or that  the  results  of  future
events\will  not vary  materially  from those  described in the forward  looking
statements  made in this  document.  Important  factors  that  could  cause  the
Company's actual performance and operating results to differ materially from the
forward looking statements  include,  but are not limited to, (i) the ability of
the Company to obtain  regulatory  approval  for its product  including  but not
limited  to the FDA,  (ii) the  ability  of the  Company  to  obtain  meaningful
consumer  acceptance  and a successful  market for the product on a national and
international basis at competitive  prices,  (iii) the ability of the Company to
develop and maintain an effective national and international  distribution plan,
(iv)  success of the  Company in  forecasting  demand for its  product,  (v) the
ability of the Company to maintain pricing and thereby maintain  adequate profit
margins,  (vi) the  ability  of the  Company to  achieve  adequate  intellectual
property protection.

ITEM 7.  FINANCIAL STATEMENTS.

         The Financial  Statements set forth on pages F-1 to F-21 of this Report
are incorporated herein by reference.

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

          As reported in the  Company's  Form 8-K/A  dated  March 24,  1998,  on
January 15, 1998, Entropin,  Inc. and Entropin,  Inc., a California corporation,
("Old  Entropin")  consummated  an Agreement  and Plan of Merger (the  'Merger")
pursuant to which the Company acquired all of the issued and outstanding  shares
of stock of Old Entropin. In connection with the Merger, the Company changed its
name to Entropin,  Inc. and succeeded to the business  activity of Old Entropin,
which  ceased to exist.  Further,  in  connection  with the Merger,  the Company
elected to change  its  accountants  to that of Old  Entropin.  As a result,  on
January 15, 1998,  the Company  dismissed  the  accounting  firm of Schumacher &
Associates, Inc., Englewood,  Colorado, who have acted as certifying accountants
for the Company for the year ending May 31, 1997.

          None of the prior  certifying  accountants'  reports on the  Company's
financial  statements  for the past two years  contained  an adverse  opinion or
disclaimer  of  opinion,  or was  modified  as to  uncertainty,  audit  scope or
accounting  principle.  The change of principal  accountants was approved by the
Company's Board of Directors on February 16, 1998. The Company is unaware of any
disagreement  with  Schumacher &  Associates,  Inc. on any matter of  accounting
principle or practice,  financial  statement  disclosure,  or auditing  scope or
procedure  which would have caused said  accountants  to make  reference  to the
subject matter in connection with any report issued by same.

                                      -13-
<PAGE>

         In connection with the Merger,  effective January 15, 1998, the Company
has  engaged  the  accounting  firm of  Causey  Demgen & Moore  Inc.,  to act as
certifying accountants for the year ending December 31, 1997. The application of
accounting principles to a specific completed or contemplated transaction, or to
the type of audit opinion that might be rendered was not an important  factor in
the decision to change accounting firms.


                                      -14-

<PAGE>

                                    PART III

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

IDENTIFICATION OF DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES

         The  following  sets  forth  certain  information  with  respect to the
officers and directors of the Company.
<TABLE>
<CAPTION>
         Name                   Age             Officer or Position              Director Since
         ----                   ---             -------------------              --------------
<S>                             <C>          <C>                                 <C>
Higgins D. Bailey               68           President, Chief                    July, 1992
                                             Executive Officer, and
                                             Chairman of the Board
   
Daniel L. Azarnoff, M.D.        71           Director                            February, 1998
Donald Hunter                   64           Secretary and Director              February, 1998
    
Dewey H. Crim                   61           Principal Accounting                February, 1998
                                             Officer, Treasurer and
                                             Director
James E. Wynn, Ph.D.            56           Director                            February, 1998
</TABLE>

         The  directors of the Company are elected to hold office until the next
annual meeting of shareholders and until their  respective  successors have been
elected and qualified. Officers of the Company are elected annually by the Board
of Directors and hold office until their successors are elected and qualified.

          The  following  sets forth  biographical  information  concerning  the
Company's directors and executive officers for at least the past five years.

         HIGGINS D. BAILEY has been an officer and director of the Company since
July 1992 serving as its President and Chief Executive  Officer and is currently
the  Chairman of the Board of the  Company.  From 1995 to 1996,  Mr.  Bailey was
serving as Interim President and Chief Executive Officer for the  Pharmaceutical
Educational  and  Development  Foundation  at the  Medical  University  of South
Carolina,   Charleston,   South  Carolina,  which  formulates  and  manufactures
pharmaceutical  products. From 1991 to present, he was also business manager for
Thomas T. Anderson Law Firm, Indio, California.  Prior to 1991, Mr. Bailey owned
and operated various travel and tour related companies which subsequently merged
into larger organizations.  In addition,  Mr. Bailey was an educator for over 25
years.  Mr.  Bailey  received a B.A.  degree in biology from Eastern  Washington
University,  a M.S.  degree in  program  planning  and  personnel  and Ed.D.  in
administration  and  management  from the  University of  California,  Berkeley,
California.

                                      -15-
<PAGE>

         DANIEL L.  AZARNOFF,  M.D.,  has been a director of the  Company  since
February 1998. From 1988 to present,  Dr. Azarnoff has served as President of D.
L.  Azarnoff   Associates,   a  company   engaged  in  consulting   for  various
pharmaceutical  and  biotechnology  companies  including  Sandoz,  Orion Pharma,
DeNovo, Inc., Cibus Pharmaceutical and Cellegy  Pharmaceuticals,  Inc. From 1978
to 1985, Dr. Azarnoff was Corporate  Senior Vice President of G.D. Searle & Co.,
an international  pharmaceutical  company,  and from 1978 through 1985 served as
President of Searle Research and  Development,  a division of G. D. Searle & Co.
Dr.  Azarnoff  was on the faculty of the  University  of Kansas  Medical  School
("KUMC")  from  1962  through  1978  rising  to the  rank of KUMC  Distinguished
Professor  of Medicine  and  Pharmacology.  Dr.  Azarnoff  has also held faculty
positions at Northwestern  University  Medical School, the University of Chicago
Medical  School,  St.  Louis  University  School of Medicine and was a Fulbright
Scholar at the  Karolinska  Institute in Stockholm,  Sweden.  Dr.  Azarnoff is a
member of various  medical and honorary  societies  including  the  Institute of
Medicine of the National Academy of Sciences. He has lectured extensively within
and outside the United States,  and published numerous  scientific  articles and
books on various  aspects of clinical  pharmacology.  Dr. Azarnoff has served on
various advisory committees, including the Endocrine and Metabolism and other Ad
Hoc  advisory  committees  of the  Food  and Drug  Administration,  World  Heath
Organization,  American Medical  Association,  National Institutes of Health and
National Research Council of the National Academy of Sciences.  Dr. Azarnoff has
served on the  Science  Advisory  Board of various  corporations  which  include
Neurobiological  Technology,  Inc.,  Gilead Science,  Inc.,  Oread,  Inc., Cibus
Pharmaceutical  and Sandoz  Research  Institute.  Dr.  Azarnoff has served or is
serving as a director on the following  privately held  pharmaceutical  drug and
development  companies:  Oread, Inc., Cibus  Pharmaceutical and DeNovo, Inc. Dr.
Azarnoff  serves  as Vice  President,  Medical/Regulatory  Affairs  for  Cellegy
Pharmaceutical, Inc. None of the above corporations are developing drugs similar
to the Company's products.  Dr. Azarnoff received a B.S. degree in biology and a
M.S. degree in zoology from Rutgers  University.  Dr. Azarnoff  received an M.D.
degree from the University of Kansas Medical School.
   
         DONALD  HUNTER has been a director  and the  Secretary  of the  Company
since  February  1998.  Since 1994,  Mr.  Hunter has served as a  consultant  to
Entergy   Corporation  as  well  as  other  industrial   concerns  dealing  with
mergers/acquisitions  and other  business  matters.  From  1991 to 1994,  he was
senior vice president of Entergy  Corporation and was responsible for the merger
activities with Gulf States  Utilities.  Prior to 1991, Mr. Hunter was president
and chief  operating  officer of Louisiana  Power & Light  Company and executive
vice president and chief operating  officer of New Orleans Public Service,  Inc.
In  addition,  he has served on the board of  directors of a number of companies
and service companies. His prior business affiliations include positions as vice
president for Yankee Atomic  Electric,  president and majority  owner of Pioneer
Steel  Company,   and  various   executive   positions  with  Helix   Technology
Corporation.  Mr. Hunter  received a B.S.  degree in chemical  engineering  from
Purdue University and a M.S. in nuclear engineering from Iowa State University.

         DEWEY H. CRIM has been a  director  and the  Treasurer  of the  Company
since February 1998. Mr. Crim currently  serves as President and Chief Executive
Officer of the Links Foundation,  Inc. From 1995 to 1997, he served as Executive
Vice  President  of the  Inspirational  Network,  a  national  cable  television
company. From 1980 to 1995, Mr. Crim was employed with BellSouth Corporation,  a
national  telecommunications  company,  where  he  served  as  President  of two
subsidiaries:  TechSouth,  Inc., and BellSouth Media  Technology,  Inc. Mr. Crim
later  served  as a senior  business  development  strategist  on the  BellSouth
Corporate  staff.  In addition,  his  responsibilities  included  negotiating an


                                      -16-
<PAGE>

alliance  between Walt Disney  Company and three  regional  telephone  companies
which subsequently became Americast  Corporation.  Mr. Crim was also founder and
President of Central Computer  Services,  Inc., a computer service company which
provided  support  services to more than 50 banks.  Mr. Crim began his career at
Electronic Data Systems Corp. in Dallas, Texas. Mr. Crim serves as a director on
the following  privately held companies:  Telecom  Wireless  Solutions,  Inc., a
wireless  telecommunications company, and Eastside Bank, a federal savings bank.
Mr. Crim received a B.S.  degree in business and accounting  from the University
of Alabama.
    
         JAMES E. WYNN,  PH.D. has been a director of the Company since February
1998.  Dr. Wynn has served as Professor and  Assistant  Dean for Research at the
Medical  University of South  Carolina.  His  responsibilities  include  faculty
development and research funding plans for the college which are currently being
implemented.  From 1969 to 1982 Dr. Wynn was a faculty  member at the University
of South  Carolina  College  where he rose to the rank of Professor of Medicinal
Chemistry.  In 1982 he assumed the  position of  Professor  and  Chairman of the
Department of Pharmaceutical Sciences,  College of Pharmacy,  Medical University
of South Carolina. In this position Dr. Wynn implemented a new Ph.D. program and
developed a viable research program in pharmaceutical  sciences.  He established
and operated  South  Carolina's  only Drug  Bioequivalence  Evaluation  Program,
serving  as  the  principal  investigator  on 25  drug  bioavailability/clinical
evaluation   trials.   Dr.  Wynn  led  the  development  of  the  Pharmaceutical
Development  Center  (PDC),  a contract  GMP facility  for the  formulation  and
manufacture of clinical supplies for the pharmaceutical  industry.  Dr. Wynn, as
the Company's scientific advisor,  co-authored the patents, supervised the final
process for laboratory  manufacturing of Esterom(R),  and the analytical work to
identify three newly  discovered  molecules.  Since 1984, Dr. Wynn has served as
co-principal  investigator for Entropin's Phase I and Phase II clinical studies.
Dr. Wynn has authored  numerous  articles  which have  appeared in scholarly and
professional  publications.  Recognized as an outstanding  educator in pharmacy,
Dr.  Wynn  received  45  teaching  awards  over  the  past 20  years,  including
recognition as the 1995 South Carolina  "Governor's  Professor of the Year". Dr.
Wynn received his B.S.  degree in pharmacy and his Ph.D. in medicinal  chemistry
with a minor in  analytical  chemistry  from the  Medical  College of  Virginia,
Virginia Commonwealth University, Richmond, Virginia.

FAMILY RELATIONSHIPS

          There are no family  relationships  between the Company's officers and
directors.

INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS

         No officer, director,  significant employee, promoter or control person
of the Company  has been  involved  in any event of the type  described  in Item
401(d) of Regulation S-B during the past five years.

COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

         Not applicable.

                                      -17-
<PAGE>

ITEM 10.  EXECUTIVE COMPENSATION

         The following table sets forth information regarding  compensation paid
to the Company's  CEO.  During the year ended December 31, 1997, no executive of
the Company received in excess of $100,000 in salary and/or bonuses.
<TABLE>
<CAPTION>
                                                                                            Long Term
                                                                                       Compensation Awards
                                                                            ----------------------------------------------
                                     Annual Compensation ($$)               Restricted
                                ------------------------------------          Stock                        Options & Other
  Name and Position             Year          Salary           Bonus         Awards(4)       SARs(4)       Compensation
  -----------------             ----          ------           -----        ----------       ----------    ---------------
<S>                             <C>            <C>              <C>             <C>            <C>              <C>
Higgins D. Bailey               1997           $-0-             $-0-            -0-            -0-              $-0-
President and Chief
Executive Officer               1996           $-0-             $-0-            -0-            -0-              $-0-

                                1995           $-0-             $-0-            -0-            -0-              $-0-

A. Thomas Tenenbaum,            1997           $-0-             $-0-            -0-            -0-              $-0-
Former President and
Chief Executive Officer         1996           $-0-             $-0-            -0-            -0-              $-0-
of Vanden
                                1995           $-0-             $-0-            -0-            -0-              $-0-
</TABLE>

COMPENSATION OF DIRECTORS

         STANDARD ARRANGEMENTS.  Members of the Company's Board of Directors are
not  compensated  in their  capacities as Board  Members.  However,  the Company
reimburses all of its officers, directors and employees for accountable expenses
incurred on behalf of the Company.

         OTHER ARRANGEMENTS.  The Company has no other arrangements  pursuant to
which any director of the Company was compensated during the year ended December
31, 1997, for services as a director.

EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS

         None of the Company's  officers  presently have  employment  agreements
with the Company.

REPORTING ON REPRICING OF OPTIONS/SARS

         Not applicable.

                                      -18-
<PAGE>

STOCK OPTION PLAN

         The  Company  has  adopted a stock  option  plan (the  "Plan")  for key
employees  reserving a total of 16,667  shares of the  Company's  Common  Stock,
adjusted in accordance with subsequent recapitalization in the capital structure
of the  Company,  for issuance  pursuant to the  exercise of stock  options (the
"Options") which may be granted to employees (including  officers),  consultants
and  directors  of the  Company.  The  plan  is  administered  by the  Board  of
Directors,  or at its discretion by a stock option  committee (the  "Committee")
consisting  of not less than  three  directors.  Members  of the  Committee  are
eligible to participate  in the Plan. The Committee may determine  which Options
may be options  intended  to qualify for special  treatment  under the  Internal
Revenue Code of 1986, as amended  ("Incentive  Stock Options") or  non-qualified
options  ("Non-Qualified  Stock  Options") which are not intended to so qualify.
Options  may be granted  to  employees  (including  officers),  consultants  and
directors   (whether  or  not  they  are   employees)  of  the  Company  or  its
subsidiaries.  The  Committee  may take  into  account  the  duties  of  persons
selected,  their  present  and  potential  contributions  to the  success of the
Company and such other  considerations  as the Committee  deems  relevant to the
purposes of the Plan.  Incentive Stock Options may not be granted to consultants
and  directors  who are not also  employees.  The Board is empowered to make all
other determinations deemed necessary or advisable for the administration of the
Plan.

         The  Committee  has broad  discretion to determine the number of shares
with  respect  to which  Options  may be granted to  participants.  The  maximum
aggregate  fair market value  (determined as of the date of grant) of the shares
as to which the Incentive  Stock Options become  exercisable  for the first time
during any calendar year may not exceed $100,000.

         The Plan provides that the purchase  price per share for each Incentive
Stock  Option on the date of grant may not be less than 100% of the fair  market
value of the  Common  Stock on the date of grant.  In  addition,  in the case of
Non-Qualified Stock Options,  the Option price of such Options shall be not less
than 80% of the fair market  value of the shares of Common  Stock of the Company
on the date of grant of the Option,  however,  any option granted under the Plan
to a person owning more than ten percent of the Common Stock shall be at a price
of at least 110% of such fair market value.

         If an  optionee  ceases  to be  employed  by  or  be a  director  of or
consultant to the Company or its divisions or subsidiaries  for any reason other
than death,  disability,  retirement or termination for cause,  the optionee may
exercise all Options within three months  following such cessation to the extent
exercisable on the date of cessation.  If an optionee's employment or consulting
relationship is terminated or a director is removed for cause,  all Options held
by him will  terminate  immediately.  If an optionee dies while a director of or
while  employed by, or a consultant  to the Company,  or during the  three-month
period  following  termination of the  optionee's  employment,  directorship  or
consulting  relationship  (other than for cause) or if the  optionee  retires or
becomes disabled, the optionee's Options,  unless previously terminated,  may be
exercised,  whether or not otherwise  exercisable,  by the optionee or his legal
representative  or the person who acquires the Options by bequest or inheritance
at any  time  within  one  year  following  the  date of  death,  disability  or
retirement of the optionee. An Option granted under the Plan is not transferable
by the  optionee  other than by will or by the laws of descent and  distribution

                                      -19-
<PAGE>

and,  during  the  lifetime  of the  Optionee,  may be  exer  cised  only by the
optionee,  his guardian or legal representative.  Unless sooner terminated,  the
Plan will expire on July 2, 1998.

         As of December 31, 1997, no options have been granted under the Plan.

STOCK BONUS PLAN

         As an incentive to attract and keep personnel of experience and ability
with the Company, the Board of Directors,  with shareholder approval,  adopted a
Stock  Bonus  Plan,  whereby  all  salaried  employees  of the  Company  and its
subsidiaries,  other than non-salaried  directors  ("eligible  employees"),  are
eligible to  periodically  receive  shares of the Common  Stock of the  Company.
Eligible  employees shall not be eligible to receive shares until they have been
employed by the Company for at least one year.  The aggregate  fair market value
of shares  which may be  allocated to an employee in any year may not exceed 20%
of his salary. The value of the shares allocated each year shall be based on the
bid price of the Company's  stock on the date of  allocation  or, if there is no
bid price  quotation on that date, on the most recent bid  quotation  within the
prior 90 days, and, if no bid quotation has been given in that period, the Stock
Bonus Plan Committee (the  "Committee")  shall determine the value of the shares
on the book value of the stock on the date of allocation.  A bonus share reserve
of 16,667  shares of Common Stock of the Company,  adjusted in  accordance  with
subsequent  recapitalization  in the capital structure of the Company,  has been
established  from which the  distributions  may be made at the discretion of the
Committee.  The  Committee is to be  appointed by the Board of Directors  and to
consist  of at least  three  members.  The Board of  Directors  shall act as the
Committee if no appointments are made.

         Pursuant  to the plan,  bonus  shares may be  allocated  to an eligible
employee at any time,  but delivery of the shares to the employee  does not take
place until the employee has  completed  two full years of  employment  with the
Company commencing from the date of allocation.  During the two-year period, the
Company  serves as custodian for the shares  allocated and the shares may not be
transferred,  sold, assigned or pledged (as collateral for a loan or as security
for the performance of an option or for any other purpose).  In addition, if the
employee leaves the employ of the Company for any reason (including  termination
of operations of the Company) during the two-year  period,  the shares allocated
are forfeited. Unless sooner terminated, the Plan will expire on July 2, 1998.

         As of December 31, 1997, no shares have been granted under the Plan.

                                      -20-
<PAGE>

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

         The following table sets forth, as of the date hereof, the ownership of
the Company's Common Stock and Series A Preferred Stock by (i) each director and
executive officer of the Company,  (ii) all executive  officers and directors of
the  Company  as a  group,  and  (iii)  all  persons  known  by the  Company  to
beneficially own more than 5% of the Company's Common Stock.
<TABLE>
<CAPTION>
                                               Common Stock                    Series A Preferred Stock
                                       -----------------------------         ----------------------------
                                       Amount and                            Amount and
                                       Nature of                             Nature of
Name and Address                       Beneficial           Percent          Beneficial          Percent
   of Shareholder                      Ownership(1)         of Class         Ownership(1)        of Class
---------------------                  ---------            --------         ---------           --------
<S>                                    <C>                    <C>           <C>                   <C>
Higgins D. Bailey                      1,404,093(2)           23.4%           178,000              5.6%
45926 Oasis Street
Indio, CA 92201

Thomas T. Anderson                     1,404,093(3)           23.4%           710,041(4)          22.1%
45926 Oasis Street
Indio, CA 92201

Milton D. McKenzie                     1,650,417(5)           27.5%                -0-              -0-
45926 Oasis Street
Indio, CA 92201

Caroline T. Somers                     1,005,793              16.8%           822,446(6)          25.6%
233 Paulin, No. 8512
Calexco, CA 92231

Lowell M. Somers                       1,005,793(7)           16.8%           822,446             25.6%
233 Paulin, No. 8512
Calexco, CA 92231

James E. Wynn                            518,085               8.6%         1,500,000             46.7%
306 Ayers Circle
Summerville, SC 29485

Daniel L. Azarnoff, MD                        -0-              -0-                -0-               -0-
433 Airport Blvd., Suite 419
Burlingame, CA 94010-2014

Donald Hunter                            150,000(8)            2.5%               -0-               -0-
598 Kinzie Island Court
Sanibel, FL 33957

Dewey H. Crim                             20,000(9)            0.3%               -0-               -0-
242 Southern Hills Drive
Duluth, GA 30039

All Directors and Executive            2,092,178              34.5%         1,678,000             52.3%
Officers as a group (5 persons)
</TABLE>
-------------------
(1)  Calculated  pursuant to Rule  13d-3(d) of the  Securities  Exchange  Act of
     1934.  Unless otherwise stated below,  each such person has sole voting and
     investment  power with  respect to all such  shares.  Under Rule  13d-3(d),
     shares not outstanding  which are subject to options,  warrants,  rights or
     conversion privileges exercisable within 60 days are deemed outstanding for
     the purpose of calculating the number and percentage  owned by such person,

                                      -21-
<PAGE>

     but  are  not  deemed  outstanding  for  the  purpose  of  calculating  the
     percentage owned by each other person listed.
(2)  Owned in joint  tenancy with  Shirley A.  Bailey,  the spouse of Higgins D.
     Bailey.
(3)  Held of record by  Higgins  D.  Bailey as  security  for a loan made by Mr.
     Bailey to Mr.  Anderson.  Milton D.  McKenzie  has sole  voting  power with
     respect to these shares.
(4)  Held of record by David M.  Chapman and Samuel F.  Trussell as security for
     deferred compensation owed to Messrs. Chapman and Trussell by Mr. Anderson.
(5)  Including  1,404,093  shares  held in the name of  Higgins  D.  Bailey,  as
     pledgee in  connection  with a loan made by Higgins D.  Bailey to Thomas T.
     Anderson which is collateralized by the shares, and over which Mr. McKenzie
     has sole voting power as a result of an  irrevocable  proxy  granted to Mr.
     McKenzie by Mr.  Anderson in connection with a loan made by Mr. McKenzie to
     Mr.  Anderson  which is  collateralized  by the same  shares.  In addition,
     includes  143,490  Shares  held of record by CapMac  Eighty-two,  a limited
     partnership  of which Mr.  McKenzie  is a  general  partner.
(6)  Includes  822,446  shares of Series A  Preferred  Stock  owned by Lowell M.
     Somers, the spouse of Caroline T. Somers.
(7)  Includes  1,005,793 shares of Common Stock owned by Caroline T. Somers, the
     spouse of Lowell M. Somers.
(8)  Of these  shares,  10,000  shares  are held in the name of  Deloras  Decker
     Hunter,  Trustee of the Deloras Decker Hunter  Generation  Skipping  Trust.
     Deloras  Decker Hunter is the spouse of Mr. Hunter and Mr. Hunter is deemed
     to have voting control over these 10,000 shares. In addition,  these shares
     include  60,000  shares  underlying  an option  assigned  to Mr.  Hunter in
     January, 1998.
(9)  These shares are owned in joint tenancy with Virginia  Crim,  the spouse of
     Dewey H. Crim.

CHANGES IN CONTROL

         There  are no  understandings,  arrangements  or  agreements  known  by
management  at this  time  which  would  result in a change  in  control  of the
Company.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

TRANSACTIONS WITH MANAGEMENT AND OTHERS

        During 1997, the Company received  advances totaling $15,000 from Milton
D. McKenzie,  a stockholder  in the Company.  The advances did not bear interest
and were payable upon demand. In addition, during 1996 and 1997, the Company was
advanced an aggregate of $73,873 by Higgins D. Bailey,  the Company's  President
and a stockholder  from his personal line of credit.  In January 1998, the above
referenced debts were paid in full.

         The  Company  had  accrued  the  following  long-term  debt owed to the
following stockholders at December 31, 1996 and 1997:
<TABLE>
<CAPTION>
                                                                                  1996                  1997
                                                                                  ----                  ----
<S>                                                                           <C>                   <C>
8% Note payable - Thomas T. Anderson, a stockholder,
issued for cash advances, principal plus accrued interest
due December 31, 2000, unsecured                                              $  631,678            $  631,678
</TABLE>

                                      -22-
<PAGE>
<TABLE>
<CAPTION>

<S>                                                                           <C>                    <C>
8% Note payable - Higgins D. Bailey, the Company's
President and a stockholder , issued for cash advances,
principal plus accrued interest due December 31, 2000,                           178,000               178,000
unsecured
   
8% Note payable - Lowell M. Somers, a stockholder,
issued for past services, principal plus accrued interest
due December 31, 2000, unsecured                                                 731,678               731,678

Accrued interest payable to Thomas T. Anderson and
Lowell M. Somers, stockholders of the Company                                     60,341               169,131
                                                                              ----------            ----------
                                                                              $1,601,697            $1,710,487
                                                                              ==========            ==========
</TABLE>

         On January 15, 1998,  the Company  converted all above noted  long-term
debt plus accrued  interest to 1,710,487  shares of the Company's  redeemable 8%
non-voting, non-cumulative Series A Preferred Stock at $1 per share, for a total
of $1,710,487.

         During November 1997, the Company began  negotiating with James E. Wynn
regarding  compensation for research and development services provided since the
inception  of the  Company.  In exchange  for these past  services,  the Company
agreed to issue an 8% note payable to the individual in the principal  amount of
$1,500,000  maturing  December  31,  2000.  Subsequent  to year end, the Company
converted this obligation to 1,500,000 shares of its non-voting,  non-cumulative
redeemable  Series A preferred  stock,  at $1.00 per share.  In December,  1997,
certain  shareholders of the Company contributed a portion of their common stock
to Dr. Wynn as partial settlement for research and development services (259,042
shares  valued at  $712,000,  approximately  $2.75 per  share).  The expense and
related capital  contributions were reflected at December 31, 1997. Dr. Wynn was
subsequently appointed a Director to the Company's Board in February, 1998.

         In January 1998,  the Company  entered into an agreement  with James E.
Wynn,  a director  of the  Company,  whereby  the  Company  granted  Dr.  Wynn a
non-exclusive  right to  develop  new  products  that  contain  the same  active
ingredients as Esterom(R),  but are  formulated  differently.  All rights to the
improved products will remain the exclusive property of the Company and Dr. Wynn
will  receive two (2%)  percent  royalties  on the net sales of all new improved
products. The expiration date of this agreement is January 1, 2003.

         On January  29,  1998,  the Company  obtained  Directors  and  Officers
indemnity liability insurance coverage,  including securities coverages,  in the
amount of $3,000,000  which  indemnifies the Company against claims,  as well as
provides  coverage  against any claims against the officers and directors of the
Company  which (i) the  Company is not legally  permitted  or required to pay or
(ii) when the  Company  is legally  required  or  permitted  to pay such loss as
indemnity  to the  Directors  and  Officers but cannot in fact pay such loss due
solely to the financial insolvency of the Company.

                                      -23-
<PAGE>

         There is no pending  litigation  or  proceeding  involving  a director,
officer,  employee or other agent of the Company as to which  indemnification is
being or may be sought,  and the  Company  is not aware of any other  pending or
threatened  litigation  that may  result in claims  for  indemnification  by any
director, officer, employee or other agent.

         Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Act") may be permitted to directors,  officers and
controlling  persons of the Company  pursuant to the  foregoing  provisions,  or
otherwise,  the Company has been advised  that in the opinion of the  Securities
and  Exchange  Commission  such  indemnification  is  against  public  policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for  indemnification  against  such  liabilities  (other than the payment by the
small  business  issuer of expenses  incurred or paid by a director,  officer or
controlling person of the Company in the successful defense of any action,  suit
or proceeding) is asserted by such  director,  officer or controlling  person in
connection with the securities being registered, the Company will, unless in the
opinion of its counsel  the matter has been  settled by  controlling  precedent,
submit  to a  court  of  appropriate  jurisdiction  the  question  whether  such
indemnification  by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.

         In February 1998, the Company entered into a lease arrangement with one
of its principal  shareholders,  Thomas T. Anderson.  The lease  encompasses 800
square feet of office space at a monthly rate of $1,040.

         On February  16, 1998,  the  Company's  Board of  Directors  approved a
contract  between the Company and Dr. Wynn,  whereby Dr. Wynn will manufacture a
duplicate sample of the Phase II clinical material necessary for quality control
of the clinical supply manufactured in the Mallinckrodt laboratories.

         The Company is currently  negotiating  an  agreement  with WCCS whereby
WCCS will assist the Company in completing  successfully the Phase III study and
NDA Phase for FDA approval of the Company's product, Esterom(R), in exchange for
$880,400 and options to purchase an aggregate of 450,000 shares of the Company's
common  stock at $1.50  per  share  over a five (5) year  period.  The  proposed
agreement  contemplates  a term of 33  months  and  will  provide  that  certain
officers of WCCS will serve in the following positions in the Company: Daniel L.
Azarnoff,  President;  Lois Rezler,  Vice  President  of Science and  Regulatory
Affairs;  and, Roy S. Azarnoff,  Chief Operating Officer. Dr. Daniel Azarnoff is
an officer of WCCS and has served as a Director  on the  Company's  Board  since
February, 1998.

TRANSACTIONS WITH PROMOTERS

         Not applicable.

                                      -24-
<PAGE>

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

         (a)   The following documents are filed as a part of this Form 10-KSB:

               Index to Financial Statements

               Report of Independent Certified Public Accountants

               Balance Sheets - December 31, 1997 and 1996

               Statements  of  Operations  - Years ended  December  31, 1997 and
               1996, and for the Period from August 27, 1984 (Inception) Through
               December 31, 1997

               Statements  of Changes in  Stockholders'  Equity - For the Period
               from August 27, 1984 (Inception) Through December 31, 1997

               Statements  of Cash Flows - Years  ended  December  31,  1997 and
               1996, and for the Period from August 27, 1984 (Inception) Through
               December 31, 1997

               Notes  to  Financial  Statements  -  December  31,  1997 and 1996
 
         Exhibits  required  to be filed are  listed  below  and,  except  where
incorporated by reference, immediately follow the Financial Statements.

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

3.1            Articles of Incorporation(1)

3.2            Bylaws(1)

3.3            Articles of Merger, as filed with the Colorado Secretary of State
               on January 15, 1998.(2)

3.4            Amended and Restated Articles of Incorporation, as filed with the
               Colorado Secretary of State on January 15, 1998, as correct.(2)

4.3            Specimen copy of stock  certificate  for Common  Stock,$.001  par
               value;  Specimen copy of stock certificate for Series A Preferred
               Stock,$.001 par value(2)

10.1           Stock Option Plan(1)

10.2           Stock Bonus Plan(1)

10.3           Agreement  and Plan of Merger,  dated  December  9, 1997  between
               Vanden Capital Group, Inc. and Entropin, Inc.(2)

10.4           Agreement  dated  January 1, 1997,  between  the  Registrant  and
               Mallinckrodt, Inc. (Development and Supply Agreement)(4)

                                      -25-
<PAGE>

10.5           Lease Agreement,  dated February 1, 1998,  between the Registrant
               and Thomas T. Anderson (4)

10.6           License  Agreement dated January 1, 1998,  between the Registrant
               and Dr. James E. Wynn (4)

10.7           Assignment  of Patent  #4,556,663  dated  September  24, 1992, by
               Lowell M. Somers, M.D. to Entropin, Inc.(4)

10.8           Assignment  of Patent  #4,512,996  dated  September  24, 1992, by
               Lowell M. Somers, M.D. to Entropin, Inc.(4)

10.9           Assignment  of Patent  #4,469,700  dated  September  24, 1992, by
               Lowell M. Somers, M.D. to Entropin, Inc.(4)

10.10          Assignment of rights in the  application for Letters Patent under
               Serial Number 07/999,307 by Lowell M. Somers and James E. Wynn to
               Entropin, Inc., dated February 16, 1993 (4)

10.11          Assignment of rights in the  application for Letters Patent under
               Serial Number 08/260,054 by Lowell M. Somers and James E. Wynn to
               Entropin, Inc., dated July 29, 1994 (4)

16.0           Statement  from  Schumacher &  Associates,  the prior  certifying
               accountant  in  response  to  the  information  disclosed  in the
               Company's  Form 8-K dated March 25, 1998,  captioned  "Changes in
               Registrant's Certifying Accountant".(3)

27             Financial Data Schedule

--------------

(1)  Incorporated  by reference  from the like numbered  exhibits filed with the
     Registrant's  Registration  Statement on Form S-1, No.  33-23693  effective
     October 21, 1989.
(2)  Incorporated  by reference  from the like numbered  exhibits filed with the
     Registrant's Current Report on Form 8-K, dated January 15, 1998
(3)  Incorporated  by reference  from an exhibit  numbered 4.0 as filed with the
     Registrant's Current Report on Form 8-K, dated March 25, 1998
(4)  Incorporated  by reference  from the like numbered  exhibits filed with the
     Registrant's original Form 10-KSB filing for the fiscal year ended December
     31, 1997, filed with the SEC on April 15, 1998.


         During the quarter  ended  December  31,  1997,  the  Company  filed no
Current Reports on Form 8-K.  However,  during the quarter ended March 31, 1998,
the Company filed Current Reports on Form 8-K as follows:

                                      -26-
<PAGE>

         (i)   Form 8-K,  dated  January 15,  1998,  as amended,  reporting  the
               consummation  of  the  acquisition  of  all  of  the  issued  and
               outstanding  shares of Entropin,  Inc. by the Company pursuant to
               Items 1 and 2 thereof.

         (ii)  Form 8-K, dated January 22, 1998,  reporting  developments in the
               Company's business under Item 5 thereof.

         (iii) Form 8-K, dated February 25, 1998, reporting  developments in the
               Company's business under Item 5 thereof.

         (iv)  Form 8-K, dated March 25, 1998, reporting Changes in Registrant's
               Certifying  Accountants under Item 4, and reporting change of the
               Company' fiscal year under Item 8.

               Required  exhibits are  attached  hereto or are  incorporated  by
               reference and are listed in Item 13(a)(3) of this Report.

               Required financial  statements are attached hereto and are listed
               in Item 13 of this Report.


                                      -27-

<PAGE>

                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.

                                          ENTROPIN, INC.

Date: August 27, 1998                    By /s/ Higgins D. Bailey
                                            ------------------------------------
                                            Higgins D. Bailey,
                                            Chairman of the Board

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  report has been  signed  below by the  following  persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures                                         Title                                    Date
----------                                         -----                                    ----
<S>                                         <C>                                         <C>

 /s/ Higgins D. Bailey                      President, Chief Executive Officer          August 27, 1998
---------------------------                 and Chairman of the Board
Higgins D. Bailey


  /s/  Wellington A. Ewen                   Chief Financial Officer                     August 27, 1998
-------------------------
Wellington A. Ewen


 /s/ Daniel L. Azarnoff                     Director                                    August 27, 1998
---------------------------
Daniel L. Azarnoff


/s/ Donald Hunter                           Secretary and Director                      August 27, 1998
---------------------------
Donald Hunter


/s/ Dewey H. Crim                           Treasury, Director and                      August 27, 1998
---------------------------                 Principal Accounting
Dewey H. Crim                               Officer


/s/ James E. Wynn                           Director                                    August 27, 1998
---------------------------
James E. Wynn
</TABLE>

                                      -27-

<PAGE>
<TABLE>
<CAPTION>
                                           Index to Financial Statements
                                           -----------------------------

                                                   ENTROPIN, INC.


<S>                                                                                                             <C>
Report of Causey Demgen & Moore Inc. Independent Certified Public Accountants...................................F-2

Balance Sheets As of December 31, 1997 and 1996.................................................................F-3

Statements of Operations
         For Years Ended  December  31,  1997 and 1996,  and for the Period from
         August 27, 1984 (Inception) Through December 31, 1997..................................................F-4

Statements of Changes in Stockholders' Equity
         For the Years  Period from August 27, 1984 (Inception) Through
         December 31, 1997......................................................................................F-5

Statements of Cash Flows
         For Years Ended  December  31,  1997 and 1996,  and for the Period from
         August 27, 1984 (Inception) Through December 31, 1997..................................................F-6

Notes to Financial Statements
         December 31, 1997 and 1996.............................................................................F-8
</TABLE>

                                                        F-1

<PAGE>

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



The Board of Directors and Stockholders
Entropin, Inc.


We have audited the accompanying balance sheet of Entropin,  Inc. (a development
stage company) as of December 31, 1996 and 1997,  and the related  statements of
operations,  changes in  stockholders'  equity  (deficit) and cash flows for the
years then ended and for the period  from August 27,  1984  (inception)  through
December 31, 1997.  These  financial  statements are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial statements based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial position of Entropin,  Inc. as of December
31, 1996 and 1997 and the results of its  operations  and its cash flows for the
years then ended and for the period  from August 27,  1984  (inception)  through
December 31, 1997, in conformity with generally accepted accounting principles.

As  discussed in Note 10 to the  financial  statements,  the Company  determined
during the  current  year that the fair value of common  shares  contributed  in
December  1997  by  certain  shareholders  of the  Company  were  under  valued.
Accordingly,  the December 31, 1997 financial  statements  have been restated to
reflect the re-valuation.

Denver, Colorado
February 22, 1998, except
for Note 9, as to which the
date is March 19, 1998 and
Note 10, as to which the date
is August 12, 1998                         CAUSEY DEMGEN & MOORE INC.

                                     F-2


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

                                 BALANCE SHEET

                           December 31, 1996 and 1997

                                     ASSETS
                                     ------
                                                          1996         1997
                                                          ----         ----
Current assets:
   Cash                                                $    1,677   $      291
   Accounts receivable - stockholder (Note 2)               5,000        5,000
                                                       ----------   ----------
     Total current assets                                   6,677        5,291

Deferred stock offering costs (Notes 4 and 8)                   -       10,746

Patent costs, less accumulated amortization of
   $22,300 (1996) and $40,300 (1997)                      218,326      266,456
                                                       ----------   ----------
                                                       $  225,003   $  282,493
                                                       ==========   ==========

                 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
                 ----------------------------------------------

Current liabilities:
   Accounts payable                                    $  148,557   $  329,813
   Advances - stockholders (Note 2)                        21,036       98,873
                                                       ----------   ----------
     Total current liabilities                            169,593      428,686

Long-term debt:
   Stockholders (Note 2)                                1,601,697    1,710,487
   Deferred royalty agreement (Note 6)                    111,440      155,495
   Compensation agreement (Note 6)                      1,430,000    1,500,000
                                                       ----------   ----------
     Total long-term debt                               3,143,137    3,365,982

Commitments and contingencies (Notes 6 and 8)

Series A redeemable preferred stock, $.001 par value,
   3,210,487 shares authorized, no shares issued
   and outstanding (Notes 3 and 8)                              -            -

Stockholders' equity (deficit) (Notes 4 and 8):
   Preferred stock, $.001 par value; 10,000,000 shares
     authorized, Series A reported above (Note 3)               -            -
   Common stock, $.001 par value; 50,000,000
     shares authorized, 5,220,000 shares issued
     and outstanding                                        5,220        5,220
   Additional paid-in capital                             369,780    1,296,780
   Deficit accumulated during the development stage    (3,462,727)  (4,814,175)
                                                       ----------   ----------
     Total stockholders' equity (deficit)              (3,087,727)  (3,512,175)
                                                       ----------   ----------
                                                       $  225,003   $  282,493
                                                       ==========   ==========


                            See accompanying notes.
                                      F-3

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

                            STATEMENT OF OPERATIONS

                 For the Years Ended December 31, 1996 and 1997
    and for the Period from August 27, 1984 (inception) to December 31, 1997


                                                                   Cumulative
                                                                  amounts from
                                             1996         1997      inception
                                             ----         ----    ------------

Costs and expenses:
   Research and development                $ 167,818  $   877,209  $ 3,946,854
   General and administrative                101,894      328,853      570,255
   Depreciation and amortization              10,550       18,000       57,368
                                           ---------  -----------  -----------
     Operating loss                         (280,262)  (1,224,062)  (4,574,477)

Other income (expense):
   Interest expense                          (94,876)    (127,386)    (239,698)
                                           ---------  -----------  -----------

Net loss (Note 10)                         $(375,138) $(1,351,448) $(4,814,175)
                                           =========  ===========  ===========
Basic loss per common share (Note 5)       $    (.07) $      (.26) $      (.92)
                                           =========  ===========  ===========



                            See accompanying notes.
                                      F-4
<PAGE>
<TABLE>
<CAPTION>
                                                 ENTROPIN, INC.
                                         (A DEVELOPMENT STAGE COMPANY)

                             STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

                      For the Period from August 27, 1984 (inception) to December 31, 1997
                                                                                                            Deficit
                                                                                                           accumulated
                                                           Common Stock       Additional                   during the
                                                        ------------------     paid-in       Stock         development
                                                        Shares      Amount     capital    subscriptions      stage
                                                        ------      ------    ----------  -------------    -----------
<S>                                                    <C>          <C>      <C>            <C>           <C>
Balance at August 27, 1984 (inception)                         -    $    -   $        -     $      -      $         -

   Sale of common stock for cash
     in 1984 ($.005 per share)                           991,800       992        4,008            -                -

   Issuance of common stock in exchange for
      services in 1991 ($.005 per share)               3,967,198     3,967       16,033            -                -

   Cash contribution from shareholder in 1991                  -         -       50,000            -                -

   Net loss for the period from inception through
     December 31, 1994                                         -         -            -            -       (2,824,221)
                                                       ---------    ------   ----------     --------      -----------
Balance, December 31, 1994                             4,958,998     4,959       70,041            -       (2,824,221)

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

   Net loss for the year                                       -         -            -            -         (263,368)
                                                       ---------    ------   ----------     --------      -----------
Balance, December 31, 1995                             4,958,998     4,959       70,041      150,000       (3,087,589)

   Sale of common stock for cash ($1.15 per share)       261,002       261      299,739     (150,000)               -

   Net loss for the year                                       -         -            -            -         (375,138)
                                                       ---------    ------   ----------     --------      -----------
Balance, December 31, 1996                             5,220,000     5,220      369,780            -       (3,462,727)

   Capital contributions (Note 4 and 10)                       -         -      927,000            -                -

   Net loss for the year (Note 10)                             -         -            -            -       (1,351,448)
                                                       ---------    ------   ----------     --------      -----------
Balance, December 31, 1997                             5,220,000    $5,220   $1,296,780     $      -      $(4,814,175)
                                                       =========    ======   ==========     ========      ===========
</TABLE>
                                                    See accompanying notes.
                                                              F-5
<PAGE>
                                 ENTROPIN, INC.
                          (A DEVELOPMENT STAGE COMPANY)

                             STATEMENT OF CASH FLOWS

                 For the Years Ended December 31, 1996 and 1997
    and for the Period from August 27, 1984 (inception) to December 31, 1997

                                                                     Cumulative
                                                                      amounts
                                                                       from
                                              1996         1997      inception
                                              ----         ----      ---------
Cash flows from operating activities:
   Net loss                                 $(375,138) $(1,351,448) $(4,814,175)
   Adjustments to reconcile net loss to
     net cash used in operating
     activities:
      Depreciation and amortization            10,550       18,000       57,368
      IBC partner royalty agreement                 -       44,055      155,495
      Services contributed in exchange
        for stock                                   -      927,000      947,000
      Services contributed in exchange for
        compensation agreements               110,000       70,000    2,231,678
      Increase in accounts receivable -
        shareholder                                 -            -       (5,000)
      Increase in accounts payable             33,418      181,256      329,813
      Increase in accrued interest             60,341      108,790      169,139
      Other                                         -           -           131
                                            ---------  -----------  -----------
      Total adjustments                       214,309    1,349,101    3,885,624
                                            ---------  -----------  -----------
      Net cash used in operations            (160,829)      (2,347)    (928,551)

Cash flows from investing activities:
   Purchase of equipment                            -            -      (17,207)
   Patent costs                               (54,564)     (66,130)    (306,756)
                                            ---------  -----------  -----------
      Net cash used in investing activities   (54,564)     (66,130)    (323,963)

Cash flows from financing activities:
   Deferred stock offering costs                    -      (10,746)     (10,746)
   Proceeds from sale of common stock         150,000            -      355,000
   Proceeds from stockholder loans             19,972            -      809,678
   Proceeds from stockholder advances          21,035       77,837       98,873
                                            ---------  -----------  -----------
      Net cash provided by financing
         activities                           191,007       67,091    1,252,805
                                            ---------  -----------  -----------
Net increase (decrease) in cash               (24,386)      (1,386)         291

Cash at beginning of period                    26,063        1,677            -
                                            ---------  -----------  -----------
Cash at end of period                       $   1,677  $       291  $       291
                                            =========  ===========  ===========

                         (Continued on following page)
                            See accompanying notes.
                                      F-6
<PAGE>

                                 ENTROPIN, INC.
                          (A DEVELOPMENT STAGE COMPANY)

                             STATEMENT OF CASH FLOWS

           For the years ended December 31, 1996 and 1997 and for the
          Period from August 27, 1984 (inception) to December 31, 1997




                         (Continued from preceding page)

Supplemental disclosure of cash flow information:

                                                               Cumulative
                                                                 amounts
                                                                 from
                              1996              1997           inception
                              ----              ----           ---------

Cash paid during period
for interest                $6,372            $15,598           $59,855


Supplemental disclosure of non-cash financing activities:

During 1996, the Company  entered into a compensation  agreement with the spouse
of a shareholder for $731,678 in exchange for services performed for the Company
in prior years (see Note 2).

Pursuant to an agreement with an IBC limited partner,  the Company has accrued a
liability  totaling  $155,495 at December 31, 1997 for advance  royalties due to
the individual (see Note 6).

In November of 1997,  the Company  reached an agreement  with an  individual  to
enter into a compensation  agreement in exchange for services the individual has
provided the Company since  inception  (see Note 6). The Company has reflected a
liability of $1,430,000 and $1,500,000 in 1996 and 1997,  respectively,  related
to this agreement.



                            See accompanying notes.
                                     F-7


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

                         NOTES TO FINANCIAL STATEMENTS

                           December 31, 1996 and 1997


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

     Organization:

     Entropin, Inc., a Colorado corporation,  was organized in August 1984, as a
     pharmaceutical research company developing Esterom(R),  a topically applied
     compound for the  treatment  of impaired  range of motion  associated  with
     acute  lower  back  sprain  and acute  painful  shoulder.  The  Company  is
     considered  to be a development  stage  enterprise as more fully defined in
     Statement No. 7 of the Financial  Accounting  Standards  Board.  Activities
     from inception  include  research and development  activities,  seeking the
     U.S. Food and Drug Administration (FDA) approval for Esterom(R), as well as
     fund raising.

     Basis of presentation and management's plans:

     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  losses and an
     accumulated  deficit  at  December 31, 1997 of  $4,814,175.  The  Company's
     continued  existence is  dependent on its ability to obtain the  additional
     funding  necessary to complete the FDA approval  process for Esterom(R) and
     market the product.

     As  described in Note 8, the Company has  successfully  completed a private
     placement  and  a  recapitalization  of  the  Company  which  will  provide
     additional  liquidity for the Company for current operations.  However, the
     Company  estimates it will require  additional  funding of up to $8,000,000
     over the  next  three  years  to  successfully  complete  the FDA  approval
     process. The financial statements do not include any adjustment relating to
     the  recoverability  and  classification  of recorded  asset amounts or the
     amount and classification of liabilities or other adjustments that might be
     necessary  should the Company be unable to  continue as a going  concern in
     its present form.

     Use of estimates:

     The  preparation  of financial  statements  in  conformity  with  generally
     accepted  accounting  principles  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  has  elected  under the  Internal  Revenue  Code to be an 'S'
     corporation.  In lieu of corporation  income taxes,  the shareholders of an
     'S' corporation include their respective shares of the Company's net income
     or loss in their individual income tax returns.

                                      F-8

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

                         NOTES TO FINANCIAL STATEMENTS

                           December 31, 1996 and 1997

1.   Organization and summary of significant accounting policies (continued)
     -----------------------------------------------------------------------

     Deferred stock offering costs:

     Deferred  stock  offering  costs  represent  costs incurred to December 31,
     1997, in connection with the private  placement of common stock, more fully
     discussed in Note 6. Costs  incurred as of December 31, 1997 and additional
     costs incurred  subsequent to that date,  were charged against the proceeds
     of the offering.

     Patents:

     Patents  are  stated  at  cost  less  accumulated   amortization  which  is
     calculated  on a  straight-line  basis over the useful lives of the assets,
     estimated by management to average 17 years. Research and development costs
     and any  costs  associated  with  internally  developed  patents  (with the
     exception of legal costs) are expensed in the year incurred.

     Impairment of long-lived assets:

     The Company  evaluates  the potential  impairment  of long-lived  assets in
     accordance  with  Statement  of  Financial  Accounting  Standards  No. 121,
     Accounting  for the  Impairment  of  Long-Lived  Assets and for  Long-Lived
     Assets to be  Disposed  of.  The  Company  annually  reviews  the amount of
     recorded long-lived assets for impairment.  If the sum of the expected cash
     flows from these assets is less than the carrying amount,  the Company will
     recognize an impairment loss in such period.

     Cash equivalents:

     For the purposes of the statement of cash flows, the Company  considers all
     highly liquid debt instruments purchased with a maturity of three months or
     less to be cash equivalents.

     Concentrations of credit risk:

     Financial   instruments   which   potentially   subject   the   Company  to
     concentrations  of credit risk  consist  principally  of cash.  The Company
     places its cash with high quality financial  institutions.  At times during
     the years,  the balance at any one  financial  institution  may exceed FDIC
     limits.

     Reclassifications:

     Certain  reclassifications  have been made to the 1996 financial statements
     to conform to the 1997 financial statement presentation.


                                      F-9
<PAGE>
                                 ENTROPIN, INC.
                         (A DEVELOPMENT STAGE COMPANY)

                         NOTES TO FINANCIAL STATEMENTS

                           December 31, 1996 and 1997


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

     Office Space:

     The Company  presently uses part of an office  facility and  administrative
     services provided by a director and stockholder of the Company at no cost.

     Accounts receivable - stockholder:

     During 1994, the Company advanced $5,000 to a stockholder. The advance does
     not bear interest and is due on demand.  The Company expects the advance to
     be paid in full.

     Advances - stockholders:

     During 1996 and 1997, the Company was advanced an aggregate of $83,873 by a
     stockholder from the  stockholder's  personal line of credit.  The advances
     are non-interest bearing and due on demand.

     During 1997,  the Company  received  advances from a  stockholder  totaling
     $15,000. The advances do not bear interest and are payable upon demand. The
     stockholders'  advances  have been  repaid  from  proceeds  of the  private
     placement on January 22, 1998 (see Note 4).

     Long-term debt - stockholders:

     Long-term  debt -  stockholders  consisted of the following at December 31,
     1996 and 1997:
<TABLE>
<CAPTION>
                                                                      1996        1997
                                                                      ----        ----
     <S>                                                          <C>           <C>
     8% Note payable - stockholder, issued for cash advances,
         principal plus accrued interest due December 31,
         2000, unsecured                                          $  631,678    $  631,678

     8% Note payable - stockholder, issued for cash advances,
         principal plus accrued interest due December 31,
         2000, unsecured                                             178,000       178,000

     8% Note  payable -  stockholder, issued for past services,
         principal plus accrued interest due December 31,
         2000, unsecured                                             731,678       731,678

     Accrued interest payable                                         60,341       169,131
                                                                  ----------    ----------
                                                                  $1,601,697    $1,710,487
                                                                  ==========    ==========
</TABLE>

       As  described  in Note 6,  effective  January 15,  1998,  all above noted
   long-term debt plus accrued interest was converted to 1,710,487 shares of the
   Company's redeemable 8% non-voting,  non-cumulative  Series A Preferred Stock
   at $1 per share,  for a total of  $1,720,487  which  represents  the recorded
   amount of the  liability  at December  31,  1997 and fair value of  preferred
   stock issued.

                                      F-10
<PAGE>
                                 ENTROPIN, INC.
                         (A DEVELOPMENT STAGE COMPANY)

                         NOTES TO FINANCIAL STATEMENTS

                           December 31, 1996 and 1997

3.   Redeemable preferred stock
     --------------------------

     In December  1997,  the Board of  Directors  approved an  amendment  to the
     Articles of Incorporation to authorize 10,000,000 shares of $.001 par value
     preferred  stock.  3,210,487  shares of the Company's  preferred stock were
     designated as redeemable, non-voting,  non-cumulative 8% Series A Preferred
     Stock (see Note 8). 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 will be subject to mandatory  redemption.  The
     funds available for redemption will be equal to more than 20% but less than
     50% of annual earnings,  as determined  annually by the Board of Directors,
     but not exceeding cash flow from operations and will  automatically  cancel
     in seven years if not fully redeemed.  The Company may  voluntarily  redeem
     outstanding shares of preferred stock at $1 per share.

4.   Stockholders' equity
     --------------------

     Buy-sell agreement:

     On August 11, 1993, the Company entered into a buy-sell  agreement with the
     existing stockholders which, among other provisions,  requires stockholders
     desiring  to sell or  transfer  shares to a person or entity  other than an
     immediate  family member to first submit a proposal of the sale or transfer
     and its terms to the  Company.  Pursuant to the  agreement,  the Company is
     entitled to a first right  option to purchase  some or all of the shares on
     the terms and price  offered to the buyer after  which,  subject to certain
     provisions,  all  other  individual  shareholders  may  then  purchase  any
     remaining shares not purchased by the Company.  The buy-sell  agreement was
     cancelled January 15, 1998.

     Authorized capital:

     Pursuant  to the  recapitalization  more  fully  described  in  Note  8, in
     December 1997, the Board of Directors approved an amendment to the Articles
     of  Incorporation  to increase  the  authorized  common  stock to 7,000,000
     shares and to establish its par value at $.001 per share.

     Stock split:

     On December 10,  1997,  the Board of  Directors  approved a  198.36-for-one
     stock split.  Accordingly,  all  references to common shares  including the
     number of shares (except shares authorized),  stock option data, additional
     paid-in capital, and per share information have been retroactively restated
     to reflect the stock  split,  which  presentation  is  consistent  with the
     recapitalization of the Company (see Note 8).


                                      F-11

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

                         NOTES TO FINANCIAL STATEMENTS

                           December 31, 1996 and 1997

4.   Stockholders' equity (continued)
     --------------------------------

     Private placement:

     As of December 31, 1997,  the Company had commenced a private  placement of
     30 units  (10,000  shares of its $.001 par value  common stock per unit) at
     $27,500 per unit,  $2.75 per share,  which  closed on January 15, 1998 with
     gross proceeds of $825,000 (see Note 8).

     Capital contributions:

     In December 1997, certain shareholders of the Company contributed a portion
     of their  common stock to an  individual  providing  business  advisory and
     legal services to the Company (78,300 shares valued at $215,000) and to the
     Chairman of the  Pharmaceutical  Sciences  Department  of a  university  as
     partial  settlement for research and development  services  (259,042 shares
     valued at $712,000).  The  transactions  were  accounted for based upon the
     fair value of the common shares contributed, approximately $2.75 per share.
     The expense and related capital contributions are reflected at December 31,
     1997.

5.   Basic net loss per share
     ------------------------

     Basic net loss per share is based on the weighted  average number of shares
     outstanding during the periods, 5,220,000 shares. Shares issued for nominal
     consideration are considered outstanding since inception.  Diluted loss per
     share has not been presented as exercise of the  outstanding  stock options
     would have an anti-dilative effect.

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

     Compensation agreements:

     In 1993,  the Company  entered into a 30 year  compensation  agreement with
     I.B.C.  limited  partners  owning  64.28% of the limited  partnership.  The
     I.B.C.  Limited  Partnership  participated  in  the  early  development  of
     Estrom(R)  (the  medicine) and owned the patent rights to three patents and
     all  intellectual  property rights.  Under the terms of the Agreement,  the
     Company  acquired  all of the patent and  intellectual  property  rights in
     exchange  for  certain  compensation  to the  limited  partners,  which  is
     dependent upon the Company's receipt of a marketing partners  technological
     access  fee  and  royalty   payments.   The  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 drug company
     for past expenses paid for  development of the medicine,  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, 1996 and 1997, no  liabilities
     have been accrued with respect to this agreement.


                                      F-12
<PAGE>
                                 ENTROPIN, INC.
                         (A DEVELOPMENT STAGE COMPANY)

                         NOTES TO FINANCIAL STATEMENTS

                           December 31, 1996 and 1997

6.   Commitments and contingencies (continued)
     -----------------------------------------

     In a separate agreement with a former I.B.C.  limited partner,  the Company
     has agreed to pay the partner 35.72% of a decreasing  earned payment (3% to
     1% on cumulative annual sales of products by the Company) until October 10,
     2004.  From October 10, 2004 until  October 10, 2014,  the Company will pay
     the partner 17.86% of the earned payment. In accordance with the agreement,
     the  Company  has agreed to pay the former  limited  partner  the amount of
     $40,000  and a minimum  earned  payment  of  $3,572  per  calendar  quarter
     beginning  on  December  1,  1989.  Such  minimum  earned  payment is to be
     evidenced  by a  promissory  note issued each  quarter and payable when the
     Company is either  reimbursed for expenses paid for the  development of the
     medicine or from the first income  received from the Company from net sales
     of the  medicine.  The  quarterly  payments  are to be applied  against the
     earned  payment to be received by the limited  partner.  As of December 31,
     1996, and 1997, the total liability  accrued with respect to this agreement
     totaled $111,440 and $155,495, respectively.

     Consulting Agreement:

     On March 12, 1996, the Company  entered into a Consulting  Agreement with a
     firm  whereby the  Company has to pay the firm up to a $50,000  success fee
     concurrent  with the  Company's  signing of any  agreement  establishing  a
     corporate partnership,  product license, or any other agreement relating to
     the marketing of the medicine.  As of December 31, 1997 50% of this fee had
     been earned and $25,000 had been recorded as a liability and expense.

     Development of New Products Agreement:

     On January 26, 1987, the Company entered into a Development of New Products
     Agreement  with  a  university  whereby  the  university  provides  various
     services  including  research and development,  product  formulations,  and
     clinical supply for the Company relating to its development of the medicine
     on a project by project basis.  Prior to the  commencement of each project,
     the Company and the university will mutually agree on the nature, type, and
     timing of each special  project as well as the terms of compensation to the
     university.  Under the agreement, the university is required to disclose to
     the Company all inventions,  discoveries, or improvements conceived or made
     by the  university  and has  agreed  to  assign  all its  interests  to the
     Company.


                                      F-13


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

                         NOTES TO FINANCIAL STATEMENTS

                           December 31, 1996 and 1997

6.   Commitments and contingencies (continued)
     -----------------------------------------

     Compensation Agreement:

     During  November  1997,  the Company began  negotiating  with an individual
     regarding compensation for research and development services provided since
     the inception of the Company.  In exchange for these services,  the Company
     agreed  to issue an 8% note  payable  to the  individual  in the  principal
     amount of $1,500,000  maturing  December 31, 2000.  The Company has accrued
     related costs of $1,430,000 as of December 31, 1996, and accrued additional
     liability of $70,000 during the year ended December 31, 1997. Subsequent to
     year end, the Company  converted this obligation to 1,500,000 shares of its
     non-voting,  non-cumulative redeemable 8% Series "A" preferred stock, at $1
     per share,  which was considered to be fair value of the services  received
     by the Company (see Note 8). In addition, effective December 15, 1997 three
     stockholders  of the Company  agreed to transfer a portion of their  common
     stock to provide the individual  with  approximately  5% of the outstanding
     common shares (see Note 4).

     Development and Supply Agreement:

     On January 1, 1997, the Company entered into 10 year Development and Supply
     Agreements  with  Mallinckrodt,  Inc.  to  develop  all of  the  chemistry,
     manufacturing  and controls to comply with the drug master file of the Food
     and Drug  Administration  as well as supply  the bulk  active  product  for
     marketing.  In  exchange  for these  services,  Mallinckrodt  will  receive
     exclusive rights as a supplier of the bulk active product to the Company in
     North  America.  For the first year ended  December 31, 1997,  the contract
     price of the ingredient will be fixed based on the number of liters ordered
     by the Company. Subsequent to December 31, 1997, the cost per liter will be
     adjusted based on changes in the price of the components in the bulk active
     product.

     In  addition,   pursuant  to  the   agreement,   the  Company  has  granted
     Mallinckrodt a right of first refusal to supply the Company's  requirements
     of the bulk active product in all other parts of the world outside of North
     America.

     Management advisory services agreement:

     On October 28, 1997,  the Company  entered into a 3-year  agreement with an
     organization  providing  management  advisory services to the Company.  The
     organization provides assistance in developing and implementing a strategic
     plan of merger or  acquisition  and for  business and  financial  community
     relations.  The agreement provides compensation,  for arranging a merger or
     acquisition acceptable to the Company,  through the issuance of two options
     to  acquire  180,001  shares  of the  Company's  common  stock for $100 and
     $504,000,  respectively,  simultaneous  with the closing of the merger (see
     Note 8). The options are exercisable for a five-year  period.  In addition,
     the organization received registration rights for the shares underlying the
     options.  The  difference  between  the  fair  value of the  stock  and the
     exercise  price  will be  treated  as  additional  costs of the  merger and
     charged to capital.

                                      F-14
<PAGE>
                                 ENTROPIN, INC.
                         (A DEVELOPMENT STAGE COMPANY)

                         NOTES TO FINANCIAL STATEMENTS

                           December 31, 1996 and 1997

7.   Financial instruments
     ---------------------

     The  carrying  values of cash,  accounts  receivable-shareholder,  accounts
     payable  and  advances-shareholders  approximated  fair  value  due  to the
     short-term maturities of these instruments.

     The Company  believes  that it is not  practical  to estimate a fair market
     value different from the carrying value of long-term debt.  Long-term debt,
     excluding the deferred  royalty  agreement,  was converted into  redeemable
     preferred  stock on January 15, 1998.  Both the redeemable  preferred stock
     and the deferred royalty  agreement have numerous  features unique to these
     securities and agreements as described in Notes 3 and 6.

8.   Subsequent events
     -----------------

     Recapitalization:

     On December 9, 1997,  the Company  entered  into an  agreement  and plan of
     merger with Vanden  Capital  Group,  Inc.  (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.

     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  on January  15,  1998.  As a condition  precedent  to the
     exchange,  the  Company  successfully  raised  gross  proceeds  of $825,000
     through a private placement of its common stock (see Note 3).

     Following the exchange, the Company's shareholders own approximately 95% of
     the outstanding  common stock of Vanden. The acquisition has been accounted
     for as a  recapitalization  of the  Company  based  upon  historical  cost.
     Accordingly,  the number authorized and issued common shares,  par value of
     common  stock and  additional  paid-in  capital  have been  restated on the
     balance sheet and the statement of stockholders' equity to give retroactive
     effect to the recapitalization.

     Issuance of preferred stock:

     On January 15, 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 shareholders and accrued interest,
     and the $1,500,000 compensation agreement (see Notes 2 and 6).

                                      F-15

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

                         NOTES TO FINANCIAL STATEMENTS

                           December 31, 1996 and 1997

8.   Subsequent events (continued)
     -----------------------------

     Issuance of common stock:

     In connection with the  recapitalization  effected on January 15, 1998, the
     Company  issued  180,001  shares of its $.001 par value  common stock to an
     unrelated  entity for cash of $100 as required by the  management  advisory
     services  contract (see Note 6). The  difference  between the fair value of
     the stock, estimated by the Company to be $2.75 per share, and the exercise
     price was  treated  as  additional  cost of the  transaction  (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.

     License agreement:

     In January 1998,  the Company  entered into an agreement with a director of
     the Company, whereby the Company granted the director a non-exclusive right
     to make,  import  and use the  Company's  product,  Esterom(R),  under  the
     Company's   licensed   patents  and  to  use  the  Company's   confidential
     information   to  develop  new  products   that  contain  the  same  active
     ingredients as Esterom(R),  but are formulated  differently.  All rights to
     the improved products will remain the exclusive property of the Company and
     the  director  will  receive a two percent  royalty on the net sales of all
     improved products, and a negotiated royalty on new products. The expiration
     date of this agreement is January 1, 2003.

     Change in tax status:

     The  consummation  of the stock  exchange  with Vanden and the  issuance of
     preferred stock in January 1998,  resulted in a change in the Company's tax
     status from an S corporation  to a taxable  corporation.  The effect of the
     change  would be to provide for income tax based upon  reported  results of
     operations, and to provide deferred tax assets and liabilities on temporary
     differences between reported earnings and taxable income. Since the Company
     has had losses  since  inception,  no change in the  results of  operations
     would  have  occurred,  assuming  the  change  in  status  occurred  at the
     beginning of the periods presented.

     Unaudited pro forma combined balance sheet:

     The following table presents the unaudited pro forma combined balance sheet
     of the  Company  and  Vanden as though  the  combination  had  occurred  on
     December  31,  1997,  giving  effect to the  recapitalization,  the private
     placement and the other subsequent events described above.


                                      F-16


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

                         NOTES TO FINANCIAL STATEMENTS

                           December 31, 1996 and 1997

8.   Subsequent events (continued)
     -----------------------------
     Assets:
         Current assets                             $1,034,247
         Other assets                                  266,456
                                                    ----------
                                                    $1,300,703
                                                    ==========
     Liabilities and stockholders' equity:
         Current liabilities                          $428,686
         Other liabilities                             155,495
         Redeemable preferred stock                  3,210,487
         Stockholders' equity (deficit)             (2,493,965)
                                                    ----------
                                                    $1,300,703
                                                    ==========

9.   Proposed management agreement
     -----------------------------

     During March 1998,  the Company has been  negotiating  an agreement  with a
     company  experienced  in managing  pharmaceutical  development  , including
     providing  assistance  in  taking  pharmaceutical  products  to the FDA and
     through the clinical trials and New Drug Application stages of development.
     The  agreement is proposed to have a 33 month term, at the end of which the
     Company's primary product,  Esterom(R),  may be approved for marketing. The
     Company would be required to pay management fees of approximately  $900,000
     over  the term of the  agreement,  as well as grant  stock  options  to the
     company  within  thirty days after  execution of the  agreement to purchase
     450,000  shares of Entropin  common stock.  The options will have a term of
     five years from the grant date and an exercise price of $1.50.  The options
     will be exercisable in varying amounts on dates ranging from August 1998 to
     December 2000.

     The  difference  between the fair value of the options at date of grant and
     the exercise  price,  estimated to be  approximately  $1,950,000  using the
     Black-Scholes option- pricing model, will be recorded as additional paid-in
     capital and unearned stock  compensation.  The unearned stock  compensation
     will be  amortized  to expense on a  straight-line  basis over the 33 month
     term of the agreement.

10.  Restatement of financial statements
     -----------------------------------

     The Company determined that the fair value of the common shares contributed
     in December 1997 by certain shareholders of the Company for services should
     be approximately $2.75 per share (see Note 4). The services were originally
     recorded at $2.00 per share.  The  accompanying  financial  statements have
     been restated to reflect the revaluation.  The effect of the change for the
     year ended December 31, 1997 is to increase net loss by $253,000,  increase
     net loss per  share by $.05 and  increase  additional  paid-in  capital  by
     $253,000, as follows:

                                     Year ended December 31, 1997
                                  -------------------------------------
                                  As previously reported    As restated     
                                  ----------------------    -----------     

     Net loss                           $(1,098,448)        $(1,351,448)
     Net loss per share                       $(.21)              $(.26) 
     Additional paid-in capital         $ 1,043,780         $ 1,296,780


                                 From Inception Through December 31, 1997
                                 ----------------------------------------
                                  As previously reported    As restated     
                                  ----------------------    -----------

     Net loss                           $(4,561,175)        $(4,814,175)
     Net loss per share                       $(.87)              $(.92)


                                      F-17
<PAGE>